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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended: DECEMBER 31, 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)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
-------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements or any amendment to this Form 10-K.
Yes [X] No [ ]
As of March 7, 2003, the registrant had 231,276,600 shares of common
stock, $0.01 par value, issued and 192,191,522 shares outstanding. Of such
shares outstanding, 122,576,600 shares were held by Hudson City, MHC, the
registrant's mutual holding company, and 69,614,922 shares were held by the
public and directors, officers and employees of the registrant. The aggregate
market value of voting stock held by non-affiliates of the registrant as of
March 7, 2003 was $1,082,544,000. This figure was based on the closing price by
the Nasdaq National Market for a share of the registrant's common stock, which
was $19.11 as reported in the Wall Street Journal on March 10, 2003.
Documents Incorporated by Reference: Portions of the definitive Proxy
Statement dated April 2, 2003 in connection with the Annual Meeting of
Stockholders to be held on May 2, 2003 and any adjournment thereof and which is
expected to be filed with the Securities and Exchange Commission on or about
April 2, 2003, are incorporated by reference into Part III.
HUDSON CITY BANCORP, INC.
2002 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
----
PART I
Item 1 Business.................................................................... 2
Item 2 Properties.................................................................. 45
Item 3 Legal Proceedings........................................................... 46
Item 4 Submission of Matters to a Vote of Security Holders......................... 46
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters....... 47
Item 6 Selected Financial Data..................................................... 48
Item 7 Management's Discussion and Analysis of Financial Condition and Results
Of Operations............................................................... 50
Item 7a Quantitative and Qualitative Disclosures About Market Risk.................. 77
Item 8 Financial Statements and Supplementary Data................................. 78
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................................ 111
PART III
Item 10 Directors and Executive Officers of the Company............................. 112
Item 11 Executive Compensation...................................................... 112
Item 12 Security Ownership of Certain Beneficial Owners and Management.............. 112
Item 13 Certain Relationships and Related Transactions.............................. 113
Item 14 Controls and Procedures..................................................... 114
Item 15 Principal Accountant Fees and Services...................................... 114
PART IV
Item 16 Exhibits, Financial Statement Schedules and Reports on Form 8-K............. 115
SIGNATURES............................................................................................. 119
Page 1
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
This Annual Report on Form 10-K contains certain "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, and may be identified by the use of such words as "believe," "expect,"
"anticipate," "should," "planned," "estimated" and "potential." Examples of
forward looking statements include, but are not limited to, estimates with
respect to the financial condition, results of operations and business of Hudson
City Bancorp, Inc. that are subject to various factors which could cause actual
results to differ materially from these estimates. These factors include:
changes in economic and market conditions, changes in legislative and regulatory
conditions, or the development of an interest rate environment that adversely
affects Hudson City Bancorp's interest rate spread or other income anticipated
from operations and investments. As used in this Form 10-K, "we" and "us" and
"our" refer to Hudson City Bancorp, Inc. and its consolidated subsidiary, Hudson
City Savings Bank, depending on the context.
PART I
ITEM 1. BUSINESS.
Hudson City Bancorp is a Delaware corporation organized in 1999 and is
registered as a bank holding company with the Federal Reserve Board ("FRB").
Hudson City Bancorp serves as the holding company of its only subsidiary, Hudson
City Savings Bank. A majority of the outstanding shares of Hudson City Bancorp's
common stock are owned by Hudson City, MHC. Hudson City Bancorp's executive
offices are located at West 80 Century Road, Paramus, New Jersey 07652 and our
telephone number is (201) 967-1900.
In 1999, Hudson City Savings converted and reorganized from a New
Jersey chartered mutual savings bank into a two-tiered mutual savings bank
holding company structure and became a wholly-owned subsidiary of Hudson City
Bancorp. Hudson City Bancorp sold 47% of the then outstanding shares of its
common stock to the public at $10.00 per share and received net proceeds of
$527.6 million. Hudson City Bancorp contributed 50% of the net proceeds from the
initial public offering to Hudson City Savings. Hudson City Bancorp issued 53%
of the then outstanding shares of its common stock to Hudson City, MHC. At
December 31, 2002, as a result of stock repurchases, Hudson City, MHC owned
63.85% of Hudson City Bancorp.
As part of our reorganization in structure, Hudson City Savings
organized Hudson City, MHC as a New Jersey chartered mutual savings bank holding
company which is registered as a bank holding company with the FRB. Hudson City,
MHC's principal assets are the shares of common stock of Hudson City Bancorp it
received in the reorganization, the $200,000 it received as its initial
capitalization and the cash dividends it receives on the shares of Hudson City
Bancorp common stock it owns. Hudson City, MHC does not engage in any business
activity other than its investment in a majority of the common stock of Hudson
City Bancorp and the management of any cash dividends received from Hudson City
Bancorp. Federal and state law and regulations require that as long as Hudson
City, MHC is in existence it must own a majority of Hudson City Bancorp's common
stock.
Hudson City Savings is a New Jersey chartered stock savings bank,
serving the customers of New Jersey since 1868. We are the largest savings bank
by asset size headquartered in New Jersey. Our deposits are insured by the
Federal Deposit Insurance Corporation ("FDIC.") We are examined and regulated by
the Department of Banking and Insurance of the State of New Jersey and the FDIC.
Page 2
Hudson City Savings is a community and customer-oriented retail savings
bank offering traditional deposit products, residential real estate mortgage
loans and consumer loans. In addition, Hudson City Savings purchases mortgages,
mortgage-backed securities, securities issued by the U.S. government and
agencies and other investments permitted by applicable laws and regulations.
Except for community-related investments, we have not recently originated or
invested in commercial real estate loans, loans secured by multi-family
residences or commercial/industrial business loans, although we have the legal
authority to make such loans. We retain substantially all of the loans we
originate.
Our revenues are derived principally from interest on our mortgage
loans and mortgage-backed securities and interest and dividends on our
investment securities. Our primary sources of funds are deposits, borrowings,
scheduled amortization and prepayments of loan principal and mortgage-backed
securities, maturities and calls of investment securities and funds provided by
operations.
AVAILABLE INFORMATION
Hudson City Bancorp, Inc.'s periodic and current reports, and any
amendments thereto, are made available free of charge on our website,
www.hcbk.com, as soon as reasonably practicable after such reports are
electronically filed with, or furnished to, the Securities and Exchange
Commission. Such reports are also available on the Securities and Exchange
Commission's website at www.sec.gov.
MARKET AREA
We conduct our operations out of our executive office in Paramus,
Bergen County, New Jersey, and 81 branches located in 14 counties throughout the
State of New Jersey: Atlantic, Bergen, Burlington, Camden, Essex, Gloucester,
Hudson, Middlesex, Monmouth, Morris, Ocean, Passaic, Union and Warren. We
operate in three primary markets: northern New Jersey, the New Jersey shore, and
southwestern New Jersey in the suburbs of Philadelphia. Overall, the counties in
which we operate reflect approximately 80% of the entire population of New
Jersey, providing us with access to a large base of potential customers.
Our market areas provide distinct differences in demographics and
economic characteristics. The northern New Jersey market (including Bergen,
Essex, Hudson, Middlesex, Morris, Passaic, Union and Warren Counties) represents
the greatest concentration of population, deposits and income in the State. The
combination of these counties represents more than half of the entire New Jersey
population and more than half of New Jersey households. The northern New Jersey
market also represents the greatest concentration of Hudson City Savings retail
operations - both lending and deposit gathering - and based on its high level of
economic activity, we believe that the northern New Jersey market provides
significant opportunities for future growth. The New Jersey shore market
(including Atlantic, Monmouth and Ocean counties) represents a strong
concentration of population and income, and is an increasingly popular resort
and retirement economy - providing healthy opportunities for deposit growth and
residential lending. The southwestern New Jersey market (including Burlington,
Camden and Gloucester counties) consists of communities adjacent to the
Philadelphia metropolitan area and represents the smallest concentration of
deposits for Hudson City Savings.
Our future growth opportunities will be influenced by the growth and
stability of the statewide and regional economies, other demographic population
trends and the competitive environment within the State of New Jersey. The
slower economic conditions experienced during 2002, characterized by higher
unemployment and a declining equity market, did not impact our recent loan
demand or growth opportunities, but have moderately affected our loan
delinquencies. We believe that we have developed
Page 3
lending products and marketing strategies to address the diverse credit-related
needs of the residents in our market area.
COMPETITION
We face intense competition both in making loans and attracting
deposits. New Jersey has a high concentration of financial institutions, many of
which are branches of large money center and regional banks which have resulted
from the consolidation of the banking industry in New Jersey and surrounding
states. Some of these competitors have greater resources than we do and may
offer services that we do not provide such as insurance products, trust services
or investment services. Customers who seek "one stop shopping" may be drawn to
these institutions.
Our competition for loans comes principally from commercial banks,
savings institutions, mortgage banking firms, credit unions, finance companies,
mutual funds, insurance companies and brokerage and investment banking firms.
Our most direct competition for deposits has historically come from commercial
banks, savings banks, savings and loan associations and credit unions. We face
additional competition for deposits from short-term money market funds and other
corporate and government securities funds and from brokerage firms and insurance
companies.
LENDING ACTIVITIES
Loan Portfolio Composition. Our loan portfolio primarily consists of
one- to four-family residential first mortgage loans. To a lesser degree, the
loan portfolio includes consumer and other loans, which primarily consist of
home equity credit lines and fixed-rate second mortgage loans. We have not
originated commercial real estate loans or loans secured by multi-family
residences since the early 1980's and we do not originate construction loans. We
stopped originating commercial/industrial business loans in 1993, although we
have the legal authority to make such loans. From time to time, we purchase
participation interests in multi-family and commercial first mortgage loans, and
commercial loans through community-based organizations. These loans amounted to
$2.6 million at December 31, 2002.
At December 31, 2002, we had total loans of $6.97 billion, of which
$6.84 billion, or 98.2%, were first mortgage loans. Of residential mortgage
loans outstanding at that date, 86.5% were fixed-rate mortgage loans and 13.5%
were variable-rate, or ARM, loans. At December 31, 2002, consumer and other
loans, primarily fixed-rate second mortgage loans and home equity credit lines,
amounted to $128.2 million, or 1.8%, of total loans. We also offer guaranteed
student loans through the Student Loan Marketing Association ("SallieMae") "Loan
Referral Program."
Our loans are subject to federal and state laws and regulations. The
interest rates we charge on loans are affected principally by the demand for
loans, the supply of money available for lending purposes and the interest rates
offered by our competitors. These factors are, in turn, affected by general and
local economic conditions, monetary policies of the federal government,
including the FRB, legislative tax policies and governmental budgetary matters.
Page 4
The following table presents the composition of our loan portfolio in
dollar amounts and in percentages of the total portfolio at the dates indicated.
AT DECEMBER 31,
-------------------------------------------------------------------------------
2002 2001 2000
------------------------ ------------------------ ------------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
------------ --------- ------------ --------- ------------- --------
(DOLLARS IN THOUSANDS)
FIRST MORTGAGE LOANS:
One- to four-family..... $ 6,708,806 96.25% $ 5,664,973 94.93% $ 4,607,891 94.56%
FHA/VA.................. 131,209 1.88 151,203 2.53 112,937 2.32
Multi-family and
commercial.......... 2,668 0.04 2,548 0.04 2,380 0.05
------------ --------- ------------ --------- ------------- --------
Total first mortgage
loans............ 6,842,683 98.17 5,818,724 97.50 4,723,208 96.93
------------ --------- ------------ --------- ------------- --------
CONSUMER AND OTHER LOANS:
Fixed-rate second
mortgages........... 93,691 1.34 115,244 1.93 118,319 2.43
Home equity credit
lines............... 33,543 0.48 32,715 0.55 29,119 0.60
Other................... 983 0.01 1,488 0.02 2,094 0.04
------------ --------- ------------ --------- ------------- --------
Total consumer and
other loans...... 128,217 1.83 149,447 2.50 149,532 3.07
------------ --------- ------------ --------- ------------- --------
Total loans...... 6,970,900 100.00% 5,968,171 100.00% 4,872,740 100.00%
========= ========= ========
LESS:
Deferred loan fees...... 13,508 12,060 9,555
Allowance for loan
losses.............. 25,501 24,010 22,144
------------ ------------ -------------
Net loans........... $ 6,931,891 $ 5,932,101 $ 4,841,041
============ ============ =============
AT DECEMBER 31,
---------------------------------------------------
1999 1998
------------------------ ------------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
------------ --------- ------------ ---------
(DOLLARS IN THOUSANDS)
FIRST MORTGAGE LOANS:
One- to four-family..... $ 4,126,153 95.82% $ 3,516,947 96.10%
FHA/VA.................. 66,150 1.54 52,958 1.45
Multi-family and
commercial.......... 2,131 0.05 2,911 0.08
------------ --------- ------------ ---------
Total first mortgage
loans............ 4,194,434 97.41 3,572,816 97.63
------------ --------- ------------ ---------
CONSUMER AND OTHER LOANS:
Fixed-rate second
mortgages........... 82,913 1.93 56,118 1.53
Home equity credit
lines............... 26,321 0.61 28,045 0.77
Other................... 2,207 0.05 2,428 0.07
------------ --------- ------------ ---------
Total consumer and
other loans...... 111,441 2.59 86,591 2.37
------------ --------- ------------ ---------
Total loans...... 4,305,875 100.00% 3,659,407 100.00%
========= =========
LESS:
Deferred loan fees...... 10,631 11,146
Allowance for loan
losses.............. 20,010 17,712
------------ ------------
Net loans........... $ 4,275,234 $ 3,630,549
============ ============
Page 5
Loan Maturity. The following table presents the contractual maturity of
our loans at December 31, 2002. The table does not include the effect of
prepayments or scheduled principal amortization. Prepayments and scheduled
principal amortization on first mortgage loans totaled $2.53 billion for 2002,
$1.28 billion for 2001 and $475.9 million for 2000.
AT DECEMBER 31, 2002
---------------------------------------------
FIRST CONSUMER
MORTGAGE AND
LOANS OTHER LOANS TOTAL
------------- ------------ --------------
(IN THOUSANDS)
AMOUNTS DUE:
One year or less..................... $ 1,373 $ 851 $ 2,224
------------- ------------ --------------
After one year:
One to three years............... 4,166 5,447 9,613
Three to five years.............. 40,233 13,505 53,738
Five to ten years................ 296,047 34,259 330,306
Ten to twenty years.............. 1,492,492 74,155 1,566,647
Over twenty years................ 5,008,372 - 5,008,372
------------- ------------ --------------
Total due after one year...... 6,841,310 127,366 6,968,676
------------- ------------ --------------
Total loans................... $ 6,842,683 $ 128,217 6,970,900
============= ============
LESS:
Deferred loan fees................... 13,508
Allowance for loan losses............ 25,501
--------------
Net loans..................... $ 6,931,891
==============
The following table presents, as of December 31, 2002, the dollar
amount of all loans due after December 31, 2003, and whether these loans have
fixed interest rates or adjustable interest rates.
DUE AFTER DECEMBER 31, 2003
-------------------------------------
FIXED ADJUSTABLE TOTAL
----------- ---------- -----------
(IN THOUSANDS)
First mortgage loans....................... $ 5,921,536 $ 919,774 $ 6,841,310
Consumer and other loans................... 93,324 34,042 127,366
----------- ---------- -----------
Total loans due after one year... $ 6,014,860 $ 953,816 $ 6,968,676
=========== ========== ===========
Page 6
The following table presents our loan originations, purchases, sales
and principal payments for the periods indicated.
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------
2002 2001 2000
----------- ----------- -----------
(IN THOUSANDS)
TOTAL LOANS:
Balance outstanding at beginning of period.... $ 5,968,171 $4,872,740 $ 4,305,875
----------- ----------- -----------
ORIGINATIONS:
First mortgage loans.......................... 1,840,857 1,523,192 895,074
Consumer and other loans...................... 66,441 64,238 73,799
----------- ----------- -----------
Total originations........................ 1,907,298 1,587,430 968,873
----------- ----------- -----------
PURCHASES:
One- to four-family first mortgage loans...... 1,684,368 794,881 55,372
FHA/VA first mortgage loans................... 32,819 62,356 54,931
Other first mortgage loans.................... 219 401 430
----------- ----------- -----------
Total purchases........................... 1,717,406 857,638 110,733
----------- ----------- -----------
LESS:
Principal payments:
First mortgage loans...................... 2,533,047 1,281,989 475,905
Consumer and other loans.................. 87,671 64,323 35,447
----------- ----------- -----------
Total principal payments............... 2,620,718 1,346,312 511,352
----------- ----------- -----------
Transfers to foreclosed real estate........... 1,257 747 1,126
Loan sales.................................... - 2,578 263
----------- ----------- -----------
Balance outstanding at end of period...... $ 6,970,900 $ 5,968,171 $ 4,872,740
=========== =========== ===========
Residential Mortgage Lending. Our primary lending emphasis is the
origination of first mortgage loans secured by one- to four-family properties
that serve as the primary or secondary residence of the owner. We do not allow
any borrower to have more than two outstanding first mortgage loans with us at
any one time. We do not offer loans secured by cooperative apartment units or
interests therein. Since the early 1980's, we have originated and purchased
substantially all of our one- to four-family first mortgage loans for retention
in our portfolio.
Late in 2000, we established a wholesale loan purchase program designed
principally to supplement our retail loan origination production, which is
currently being done solely within the state of New Jersey. The purchase of
whole loans enables us to diversify assets outside our local market area, thus
providing a safeguard against economic trends that might affect one particular
area of the nation. Through this program, we expect to obtain assets with a
relatively low overhead cost, minimize related servicing costs, and supplement
loan demand in our local lending areas. We have developed written standard
operating guidelines relating to the purchasing of these assets. These
guidelines include the evaluation and approval process of the various sellers,
primarily large national mortgage loan seller/servicers, from whom we choose to
buy whole loans, the types of whole loans, acceptable property locations and
maximum interest rate variances. The purchasing agreements, as established with
each
Page 7
servicer/seller, contain parameters as to the loans that can be included in
each package. These parameters, such as maximum loan size and maximum
loan-to-value ratio, conform to parameters utilized by us to originate mortgage
loans. Purchased loan packages are subject to internal due diligence procedures,
which may include review of individual loan files. This review subjects the
purchased loan file to 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 east coast corridor states
between Boston and Washington, D.C., and in Michigan and Illinois.
The servicing of purchased loans are governed by the servicing
agreement entered into with each servicer. Oversight of the servicer is
maintained by us through review of all reports, remittances and non-performing
loan ratios with appropriate further action taken as required. These operating
guidelines should provide a means of evaluating and monitoring the quality of
mortgage loan purchases and the servicing abilities of the loan servicers. We
purchased first mortgage loans of $1.72 billion in 2002. The average size of our
one-to-four family mortgage loans purchased during 2002 was approximately
$408,000.
Most of our loan originations are from existing or past customers,
members of our local communities or referrals from local real estate agents,
attorneys and builders. We believe that our extensive branch network is a
significant source of new loan generation. We also employ a small staff of
representatives who call on real estate professionals to disseminate information
regarding our loan programs and take applications directly from their clients.
These representatives are paid for each origination. In addition, we use the
services of licensed mortgage bankers and brokers for mortgage loan
originations.
We currently offer loans that conform to underwriting standards that
are based on standards specified by FannieMae ("conforming loans"),
non-conforming loans, and loans processed as limited documentation loans, as
described below. These loans may be fixed-rate one- to four-family mortgage
loans or adjustable-rate one- to four-family mortgage loans with maturities up
to 30 years. The non-conforming loans generally follow FannieMae guidelines
except for the loan amount. FannieMae guidelines limit loans to $322,700; our
non-conforming loans may exceed such limits. The average size of our one- to
four-family mortgage loans originated in 2002 was approximately $292,000. The
overall average size of our one- to four-family first mortgage loans was
approximately $212,000 at December 31, 2002. We are an approved seller/servicer
for FannieMae and an approved servicer for FreddieMac. We generally hold loans
for our portfolio but have, from time to time, sold loans in the secondary
market.
Our originations of first mortgage loans amounted to $1.84 billion in
2002, $1.52 billion in 2001 and $895.1 million in 2000. In 2002 and 2001, a
significant number of our first mortgage loan originations were the result of
refinancing of our existing loans due to the relatively low interest rate levels
during those times. In 2000, with relatively higher interest rates, refinancing
of existing mortgages were lower. Total refinancing of our existing first
mortgage loans were as follows:
PERCENT OF
FIRST MORTGAGE
AMOUNT LOAN ORIGINATIONS
------------- -------------------
(IN MILLIONS)
2002........ $ 496.8 27.0%
2001........ 272.4 17.9
2000........ 20.1 2.2
Page 8
In April 2001, we began to allow certain customers to modify their
existing mortgage loans with the intent of maintaining customer relationships in
periods of extensive refinancing due to a low interest rate environment. The
modification allows adjustment of the existing interest rate to the currently
offered fixed interest rate product with a similar or reduced term, for a fee,
after past payment performance is reviewed. In general, all other terms and
conditions of the existing mortgage remain the same. In 2002 and 2001, we
modified $866.3 and $169.5 million of existing mortgage loans, respectively.
We offer a variety of variable-rate and fixed-rate one- to four-family
mortgage loans with maximum loan-to-value ratios that depend on the type of
property and the size of loan involved. The loan-to-value ratio is the loan
amount divided by the appraised value of the property. The loan-to-value ratio
is a measure commonly used by financial institutions to determine exposure to
risk. Except for loans to low- and moderate-income home mortgage applicants,
described below, loans on owner-occupied one- to four-family homes of up to
$500,000 are subject to a maximum loan-to-value ratio of 80%. However, we make
loans in amounts up to $400,000 with a 95% loan-to-value ratio and loans in
excess of $400,000 and less than $500,000 with a 90% loan-to-value ratio if the
borrower obtains private mortgage insurance. Loan-to-value ratios of 80% or less
are also required for one- to four-family loans in excess of $500,000 and less
than $750,000. Loans in excess of $750,000 and up to $1,000,000 are subject to a
maximum 70% loan-to-value ratio. Loan-to-value ratios of 60% or less are
required for one- to four-family loans in excess of $1,000,000 and less than
$1,500,000.
We currently offer fixed-rate mortgage loans in amounts generally up to
$1.5 million with a maximum term of 30 years secured by one- to four-family
residences. We price our interest rates on fixed-rate loans to be competitive in
light of market conditions.
We currently offer a variety of ARM loans secured by one- to
four-family residential properties that initially adjust after one year, five
years or ten years, in amounts generally up to $1.5 million. After the initial
adjustment period, ARM loans adjust on an annual basis. The ARM loans that we
currently originate have a maximum 30-year amortization period and are subject
to the same loan-to-value ratios applicable to fixed-rate mortgage loans
described above. The interest rates on ARM loans fluctuate based upon a fixed
spread above the monthly average yield on United States treasury securities,
adjusted to a constant maturity of one year ("constant treasury maturity index")
and generally are subject to a maximum increase of 2% per adjustment period and
a limitation on the aggregate adjustment of 5% over the life of the loan. In the
current rate environment, where the yield curve is relatively steep, the ARM
loans we offer have initial interest rates above the fully indexed rate. The
loans originated with initial interest rates above the fully indexed rate may
reprice down at their initial interest reset date, which could adversely effect
our net interest income. As of December 31, 2002, the initial offered rate on
these loans was 113 to 175 basis points above the current fully indexed rate. We
originated $168.5 million of one- to four-family ARM loans in 2002. At December
31, 2002, 13.5% of our one- to four-family mortgage loans consisted of ARM
loans.
The retention of ARM loans helps reduce exposure to increases in
interest rates. However, ARM loans can pose credit risks different from the
risks inherent in fixed-rate loans, primarily because as interest rates rise,
the underlying payments of the borrower may rise, which increases the potential
for default. The marketability of the underlying property also may be adversely
affected. In order to minimize risks, we evaluate borrowers of one-year ARM
loans based on their ability to repay the loans at the higher of the initial
interest rate or the fully indexed rate. All other loan products are evaluated
at the offered rate. In an effort to further reduce interest rate risk, we have
not in the past, nor do we currently, originate ARM loans which provide for
negative amortization of principal.
Page 9
In addition to our full documentation loan program, we process some
loans as limited documentation loans. We have originated these loans for over 10
years. Loans eligible for limited documentation processing are ARM loans and
15-, 20- and 30-year fixed-rate loans to owner-occupied primary and second home
applicants. These loans are available in amounts up to 75% of the lower of the
appraised value or purchase price of the property. The maximum loan amount for
limited documentation loans is $500,000. We do not charge borrowers additional
fees for limited documentation loans. We require applicants for limited
documentation loans to complete a FreddieMac/FannieMae loan application and
request income, assets and credit history information from the borrower.
Additionally, we obtain credit reports from outside vendors on all borrowers. We
also look at other information to ascertain the credit history of the borrower.
Applicants with delinquent credit histories usually do not qualify for the
limited documentation processing, although relatively minor delinquencies which
are adequately explained will not prohibit processing as a limited documentation
loan. We reserve the right to verify income, asset information and other
information where we believe circumstances warrant.
Limited documentation loans involve higher risks compared to loans with
full documentation as there is a greater opportunity for borrowers to falsify
their income and ability to service their debt. We believe that the limited
documentation program has not had a material adverse effect on our asset
quality. See "-- Asset Quality." Unseasoned limited documentation loans are not
readily salable in the secondary market as whole loans. In addition, these loans
may not readily be pooled or securitized. We do not believe that an inability to
sell such loans will have a material adverse impact on our liquidity needs,
because internally generated sources of liquidity are expected to be sufficient
to meet our liquidity needs. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "-- Sources of Funds."
In addition to our standard mortgage and consumer credit products,
since 1992, we have developed mortgage programs designed to address the credit
needs of low- and moderate-income home mortgage applicants, first-time home
buyers and low- and moderate-income home improvement loan applicants. We define
low- and moderate-income applicants as borrowers residing in low- and
moderate-income census tracts or households with income not greater than 80% of
the median income in the county where the subject property is located. Our low-
and moderate-income home improvement loans are discussed under "-- Consumer
Loans." Among the features of the low- and moderate-income home mortgage and
first-time home buyer's programs are reduced rates, lower down payments, reduced
fees and closing costs, and generally less restrictive requirements for
qualification compared with our traditional one- to four-family mortgage loans.
For instance, certain of these programs currently provide for loans with up to
95% loan-to-value ratios and rates which are 25 to 50 basis points lower than
our traditional mortgage loans. In 2002, we provided $86.1 million in mortgage
loans to home buyers under these programs.
Consumer Loans. At December 31, 2002, $128.2 million, or 1.8%, of our
total loans consisted of consumer and other loans, primarily home equity credit
lines and fixed-rate second mortgage loans. Consumer loans generally have
shorter terms to maturity, which reduces our exposure to changes in interest
rates. Consumer loans also carry higher rates of interest than do one- to
four-family residential mortgage loans. In addition, we believe that offering
consumer loan products helps to expand and create stronger ties to our existing
customer base by increasing the number of customer relationships and providing
cross-marketing opportunities.
We offer fixed-rate second mortgage loans in amounts up to $200,000
secured by owner-occupied one- to four-family residences located in the state of
New Jersey for terms of up to 20 years. At December 31, 2002 these loans totaled
$93.7 million, or 1.3% of total loans. Interest rates on fixed-rate second
mortgage loans are periodically set by our Consumer Loan Department based on
market conditions. The
Page 10
underwriting standards applicable to these loans generally are the same as one-
to four-family first mortgage loans, except that the combined loan-to-value
ratio, including the balance of the first mortgage, cannot exceed 80% of the
appraised value of the property.
We also offer fixed-rate second mortgage loans to low- and
moderate-income borrowers in amounts up to $20,000. The borrower must use a
portion of the loan proceeds for home improvements or the satisfaction of an
existing obligation. The underwriting standards under this program are similar
to those for standard second mortgage loans, except that the combined maximum
loan-to-value ratio is 90%.
Our home equity credit line loans, which totaled $33.5 million, or 0.5%
of total loans at December 31, 2002, are adjustable-rate loans secured by a
second mortgage on owner-occupied one- to four-family residences located in the
State of New Jersey. Current interest rates on home equity credit lines are
based on the "prime rate" as published in the "Money Rates" section of The Wall
Street Journal (the "Index") subject to certain interest rate limitations.
Interest rates on home equity credit lines are adjusted monthly based upon
changes in the Index. Minimum monthly principal payments on currently offered
home equity lines of credit are based on 1/240th of the outstanding principal
balance or $100 whichever is greater. The maximum credit line available is
$200,000. The underwriting terms and procedures applicable to these loans are
substantially the same as for our fixed-rate second mortgage loans.
Other loans totaled $983,000 at December 31, 2002 and consisted of
collateralized passbook loans, overdraft protection loans, automobile loans,
unsecured personal loans and commercial loans made to community-based
organizations. We no longer originate student loans, but offer guaranteed
student loans through the SallieMae "Loan Referral Program."
Loan Approval Procedures and Authority. Our lending policies provide
that loans up to $500,000 can be approved by two officers of the Mortgage
Origination Department, one of whom must have the title of at least Vice
President. Loans in excess of $500,000 require the approval of two officers, one
of whom must have the title of at least Vice President, as well as our Senior
Vice President-Lending, Chief Executive Officer or Chief Operating Officer. Home
equity credit lines and fixed-rate second mortgage loans in principal amounts of
$25,000 or less are approved by one of our designated loan underwriters. Home
equity loans in excess of $25,000, up to the $200,000 maximum, are approved by
an underwriter and either our Consumer Loan Officer, Senior Vice
President-Lending, Chief Executive Officer or Chief Operating Officer.
The following describes our current lending procedures. Upon receipt of
a completed loan application from a prospective borrower, we order a credit
report and, except for loans originated as limited documentation loans, we
verify certain other information. If necessary, we obtain additional financial
or credit-related information. We require an appraisal for all mortgage loans,
except for some loans made to refinance existing mortgage loans. Appraisals may
be performed by our in-house Appraisal Department or by licensed or certified
third-party appraisal firms. Currently most appraisals are performed by
third-party appraisers and are reviewed by our in-house Appraisal Department. We
require title insurance on all mortgage loans, except for home equity credit
lines and fixed-rate second mortgage loans. For these loans, we require evidence
of previous title insurance. We require borrowers to obtain hazard insurance and
we may require borrowers to obtain flood insurance prior to closing. We require
borrowers to advance funds on a monthly basis together with each payment of
principal and interest to a mortgage escrow account from which we make
disbursements for items such as real estate taxes, flood insurance and private
mortgage insurance premiums, if required.
Page 11
ASSET QUALITY
One of our key operating objectives has been and continues to be to
maintain a high level of asset quality. Through a variety of strategies,
including, but not limited to, borrower workout arrangements and aggressive
marketing of owned properties, we have been proactive in addressing problem and
non-performing assets. These strategies, as well as our concentration on one- to
four-family mortgage lending, our maintenance of sound credit standards for new
loan originations and relatively favorable real estate market conditions have
resulted in relatively low delinquency ratios. These factors have helped
strengthen our financial condition.
Delinquent Loans and Foreclosed Assets. When a borrower fails to make
required payments on a loan, we take a number of steps to induce the borrower to
cure the delinquency and restore the loan to a current status. In the case of
mortgage loans, our mortgage servicing department is responsible for collection
procedures from the 15th day up to the 90th day of delinquency. Specific
procedures include a late charge notice being sent at the time a payment is over
15 days past due. Telephone contact is attempted on approximately the 20th day
of the month to avoid a 30 day delinquency. A second written notice is sent at
the time the payment becomes 30 days past due. We send additional letters if no
contact is established by approximately the 45th day of delinquency. On the 60th
day of delinquency, we send another letter followed by continued telephone
contact. Between the 30th and the 60th day of delinquency, if telephone contact
has not been established, an independent contractor makes a physical inspection
of the property. When contact is made with the borrower at any time prior to
foreclosure, we attempt to obtain full payment or work out a repayment schedule
with the borrower in order to avoid foreclosure. It has been our experience that
most loan delinquencies are cured within 90 days and no legal action is taken.
We send foreclosure notices when a loan is 90 days delinquent and we
transfer the loan to the foreclosure/bankruptcy section for referral to legal
counsel. We commence foreclosure proceedings if the loan is not brought current
between the 90th and 120th day of delinquency unless specific limited
circumstances warrant an exception. We hold property foreclosed upon as
foreclosed real estate. We carry foreclosed real estate at the lower of fair
market value less estimated selling costs, or at cost. If a foreclosure action
is commenced and the loan is not brought current, paid in full or refinanced
before the foreclosure sale, we either sell the real property securing the loan
by a foreclosure sale, or sell the property as soon thereafter as practicable.
The collection procedures for Federal Housing Administration (FHA) and Veterans'
Administration (VA) one- to four-family mortgage loans follow the collection
guidelines outlined by those agencies.
The collection procedures for consumer and other loans include our
sending periodic late notices to a borrower once a loan is past due. We attempt
to make direct contact with a borrower once a loan becomes 30 days past due.
Supervisory personnel in our Consumer Loan Collection Department review loans 60
days or more delinquent on a regular basis. If collection activity is
unsuccessful after 90 days, we may refer the matter to our legal counsel for
further collection effort or charge-off the loan. Loans we deem to be
uncollectible are proposed for charge-off by our Collection Department.
Charge-offs of consumer loans require the approval of our Consumer Loan Officer
and either the Senior Vice President-Lending, our Chief Executive Officer or
Chief Operating Officer.
Our policies require that management continuously monitor the status of
the loan portfolio and report to the Board of Directors on a monthly basis.
These reports include information on delinquent loans and foreclosed real
estate.
Page 12
At December 31, 2002, 2001 and 2000, loans delinquent 60 days to 89
days and 90 days or more were as follows:
2002 2001
------------------------------------------- -----------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
------------------- ------------------- ------------------- -------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NO. OF BALANCE NO. OF BALANCE NO. OF BALANCE NO. OF BALANCE
LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS
------ --------- ------ --------- ------ --------- ------ ---------
(DOLLARS IN THOUSANDS)
One- to four-family
first mortgages........... 46 $ 6,701 62 $ 10,670 58 $ 7,289 72 $ 10,556
FHA/VA first mortgages........ 27 2,591 77 9,506 36 2,402 55 5,007
Consumer and other loans...... 3 10 2 19 - - 3 85
------ --------- ------ --------- ------ --------- ------ ---------
Total delinquent loans
(60 days and over)........ 76 $ 9,302 141 $ 20,195 94 $ 9,691 130 $ 15,648
====== ========= ====== ========= ====== ========= ====== =========
Delinquent loans (60 days
and over) to total loans.. 0.13% 0.29% 0.16% 0.26%
2000
-------------------------------------------
60-89 DAYS 90 DAYS OR MORE
------------------- -------------------
PRINCIPAL PRINCIPAL
NO. OF BALANCE NO. OF BALANCE
LOANS OF LOANS LOANS OF LOANS
------ --------- ------ ---------
(DOLLARS IN THOUSANDS)
One- to four-family
first mortgages........... 53 $ 5,552 89 $ 11,004
FHA/VA first mortgages........ 28 1,544 36 1,941
Consumer and other loans...... 4 10 2 30
------ --------- ------- ---------
Total delinquent loans
(60 days and over)........ 85 $ 7,106 127 $ 12,975
====== ========= ======= =========
Delinquent loans (60 days
and over) to total loans.. 0.15% 0.27%
Page 13
Non-performing assets, which include foreclosed real estate, net,
non-accrual loans and accruing loans delinquent 90 days or more, increased $5.6
million, or 35.2%, to $21.5 million at December 31, 2002 from $15.9 million at
December 31, 2001 primarily due to the growth of the loan portfolio and the
slower economy during 2002, which was characterized by higher unemployment. The
increase in accruing loans delinquent 90 days or more was primarily due to the
increase in delinquencies in our purchased FHA/VA loan portfolio of $4.5
million. The accrual of income on FHA/VA loans is generally not discontinued as
they are guaranteed by a federal agency. Our $20.2 million in loans delinquent
90 days or more at December 31, 2002 were comprised primarily of 139 one- to
four-family first mortgage loans (including FHA/VA first mortgage loans). At
December 31, 2002, our largest loan delinquent 90 days or more had a balance of
$484,000.
The following table presents information regarding non-accrual mortgage
and consumer and other loans, accruing loans delinquent 90 days or more, and
foreclosed real estate as of the dates indicated.
AT DECEMBER 31,
--------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
Non-accrual first mortgage loans................. $ 6,053 $ 8,177 $ 10,422 $ 11,301 $ 13,212
Non-accrual consumer and other loans............. 19 85 30 2 4
Accruing loans delinquent 90 days or more........ 14,123 7,386 2,523 2,724 2,123
--------- --------- --------- -------- ---------
Total non-performing loans................. 20,195 15,648 12,975 14,027 15,339
Foreclosed real estate, net...................... 1,276 250 438 367 1,026
--------- --------- --------- -------- ---------
Total non-performing assets................ $ 21,471 $ 15,898 $ 13,413 $ 14,394 $ 16,365
========= ========= ========= ======== =========
Non-performing loans to total loans.............. 0.29% 0.26% 0.27% 0.33% 0.42%
Non-performing assets to total assets............ 0.15 0.14 0.14 0.17 0.21
The total amount of interest income received during the year on
non-accrual loans outstanding at December 31, 2002, 2001 and 2000 amounted to
$109,000, $154,000 and $179,000, respectively. Additional interest income
totaling $319,000, $483,000 and $652,000 on non-accrual loans would have been
recognized in 2002, 2001 and 2000, respectively, if interest on all such loans
had been recorded based upon original contract terms. We are not committed to
lend additional funds to borrowers on non-accrual status.
With the exception of first mortgage loans insured or guaranteed by the
FHA or VA or for which the borrower has obtained private mortgage insurance, we
stop accruing income on loans when interest or principal payments are 90 days in
arrears or earlier when the timely collectibility of such interest or principal
is doubtful. We designate loans on which we stop accruing income as non-accrual
loans and we reverse outstanding interest that we previously credited to income.
We may recognize income in the period that we collect it when the ultimate
collectibility of principal is no longer in doubt. We return a non-accrual loan
to accrual status when factors indicating doubtful collection no longer exist.
We define the population of impaired loans to be all non-accrual
commercial real estate and multi-family loans. Impaired loans are individually
assessed to determine whether a loan's carrying value is not in excess of the
fair value of the collateral or the present value of the loan's cash flows.
Smaller balance homogeneous loans that are collectively evaluated for
impairment, such as residential mortgage loans and consumer loans, are
specifically excluded from the impaired loan portfolio. We had no loans
classified as
Page 14
impaired at December 31, 2002 and 2001. In addition, at December 31, 2002 and
2001, we had no loans classified as troubled debt restructurings, as defined in
SFAS No. 15.
Foreclosed real estate consists of property we acquired through
foreclosure or deed in lieu of foreclosure. After foreclosure, foreclosed
properties held for sale are carried at the lower of fair value minus estimated
cost to sell, or at cost. A valuation allowance account is established through
provisions charged to income, which results from the ongoing periodic valuations
of foreclosed real estate properties. Fair market value is generally based on
recent appraisals.
Allowance for Loan Losses. The following table presents the activity in
our allowance for loan losses at or for the periods indicated.
AT OR FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ---------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
Balance at beginning of period.......... $ 24,010 $ 22,144 $ 20,010 $ 17,712 $ 15,625
----------- ---------- ---------- --------- ---------
Provision for loan losses............... 1,500 1,875 2,130 2,350 2,400
----------- ---------- ---------- --------- ---------
Charge-offs:
First mortgage loans.............. (3) (6) (18) (64) (283)
Consumer and other loans.......... (10) (14) - (9) (53)
----------- ---------- ---------- --------- ---------
Total charge-offs............. (13) (20) (18) (73) (336)
Recoveries.............................. 4 11 22 21 23
----------- ---------- ---------- --------- ---------
Net (charge-offs) recoveries..... (9) (9) 4 (52) (313)
----------- ---------- ---------- --------- ---------
Balance at end of period................ $ 25,501 $ 24,010 $ 22,144 $ 20,010 $ 17,712
=========== ========== ========== ========= =========
Net charge-offs to average loans........ -% -% -% 0.001% 0.01%
Allowance for loan losses to
total loans....................... 0.37 0.40 0.45 0.46 0.48
Allowance for loan losses to
non-performing loans.............. 126.27 153.44 170.67 142.65 115.47
The allowance for loan losses has been determined in accordance with
accounting principles generally accepted in the United States of America, under
which we are required to maintain adequate allowances for loan losses. We are
responsible for the timely and periodic determination of the amount of the
allowance required. We believe that our allowance for loan losses is adequate to
cover specifically identifiable loan losses, as well as estimated losses
inherent in our portfolio for which certain losses are probable but not
specifically identifiable.
As part of our evaluation of the adequacy of our allowance for loan
losses, each month we prepare a worksheet. This worksheet categorizes the entire
loan portfolio by certain risk characteristics such as loan type (one- to
four-family, multi-family, etc.) and payment status (i.e., current or number of
days delinquent). Loans with known potential losses are categorized separately.
We assign potential loss factors to the payment status categories on the basis
of our assessment of the potential risk inherent in each loan type. We use this
worksheet, together with loan portfolio balances and delinquency reports, to
Page 15
evaluate the adequacy of the allowance for loan losses. Other key factors we
consider in this process are current real estate market conditions, changes in
the trend of non-performing loans, the current state of the local and national
economy and loan portfolio growth.
We maintain the allowance for loan losses through provisions for loan
losses that we charge to income. We charge losses on loans against the allowance
for loan losses when we believe the collection of loan principal is unlikely. We
establish the provision for loan losses after considering the results of our
review of delinquency and charge-off trends, the allowance for loan loss
worksheet, the amount of the allowance for loan losses in relation to the total
loan balance, loan portfolio growth, accounting principles generally accepted in
the United States of America and regulatory guidance. We have applied this
process consistently and we have made minimal changes in the estimation methods
and assumptions that we have used.
Our primary lending emphasis is the origination of one- to four-family
first mortgage loans on residential properties and, to a lesser extent, second
mortgage loans on one- to four-family residential properties. As a result of our
lending emphasis, we had a loan concentration in residential first mortgage
loans at December 31, 2002, the majority of which are secured by real property
located in New Jersey. Of residential first mortgage loans outstanding at
December 31, 2002, 13.5%, or $921.4 million, were adjustable-rate mortgages. The
ability of borrowers to make payments on their adjustable-rate mortgages may
decrease if interest rates rise.
Based on the composition of our loan portfolio and the growth in our
loan portfolio over the past five years, we believe the primary risks inherent
in our portfolio are possible increases in interest rates, a further decline in
the economy, generally, and a possible decline in real estate market values. Any
one or a combination of these events may adversely affect our loan portfolio
resulting in increased delinquencies and loan losses. Accordingly, we have
maintained our provision for loan losses at the current level to primarily
address the actual growth in our loan portfolio. We consider it important to
maintain the ratio of our allowance for loan losses to total loans within an
acceptable range. At December 31, 2002, the allowance for loan losses as a
percentage of total loans was 0.37% compared with 0.48% at December 31, 1998.
Because of the primary emphasis of our lending practices and the current market
conditions, we consider 0.37% to be within an acceptable range. Furthermore, the
increase in the allowance for loan losses each year from 1998 to 2002 reflected
the continued growth in the loan portfolio, the relatively low levels of loan
charge-offs, the stability in the real estate market during those years and the
resulting stability in our overall loan quality.
Although we believe that we have established and maintained the
allowance for loan losses at adequate levels, additions may be necessary if
future economic and other conditions differ substantially from the current
operating environment. Although management uses the best information available,
the level of the allowance for loan losses remains an estimate that is subject
to significant judgement and short-term change.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Comparison of Operating Results for the Years Ended
December 31, 2002 and 2001-- Provision for Loan Losses."
Page 16
The following table presents our allocation of the allowance for loan
losses by loan category and the percentage of loans in each category to total
loans at December 31, 2002, 2001, 2000, 1999, and 1998.
AT DECEMBER 31,
-------------------------------------------------------------------------------------------
2002 2001 2000
-------------------------- --------------------------- --------------------------
PERCENTAGE PERCENTAGE PERCENTAGE
OF LOANS IN OF LOANS IN OF LOANS IN
CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
--------- ----------- --------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
First mortgage loans:
One- to four-family
conventional.......... $ 23,040 96.25% $ 18,114 94.93% $ 13,628 94.56%
Other first mortgages..... 26 1.92 28 2.57 24 2.37
--------- ----------- --------- ----------- --------- -----------
Total first mortgage
loans............. 23,066 98.17 18,142 97.50 13,652 96.93
Consumer and other loans...... 1,097 1.83 1,247 2.50 1,233 3.07
Unallocated................... 1,338 - 4,621 - 7,259 -
--------- ----------- --------- ----------- --------- -----------
Total allowance for
loan losses........... $ 25,501 100.00% $ 24,010 100.00% $ 22,144 100.00%
========= =========== ========= =========== ========= ===========
AT DECEMBER 31,
-----------------------------------------------------------
1999 1998
-------------------------- ---------------------------
PERCENTAGE PERCENTAGE
OF LOANS IN OF LOANS IN
CATEGORY CATEGORY
TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS
--------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
First mortgage loans:
One- to four-family
conventional.......... $ 12,340 95.82% $ 11,168 96.10%
Other first mortgages..... 21 1.59 29 1.53
--------- ----------- --------- -----------
Total first mortgage
loans............. 12,361 97.41 11,197 97.63
Consumer and other loans...... 957 2.59 656 2.37
Unallocated................... 6,692 - 5,859 -
--------- ----------- --------- -----------
Total allowance for
loan losses........... $ 20,010 100.00% $ 17,712 100.00%
========= =========== ========= ===========
Page 17
INVESTMENT ACTIVITIES
Investment Securities. The Board of Directors reviews and approves our
investment policy on an annual basis. The Chief Executive Officer, Chief
Operating Officer and Investment Officer, as authorized by the Board of
Directors, implement this policy. The Board of Directors reviews our investment
activity on a monthly basis.
Our investment policy is designed primarily to manage the interest rate
sensitivity of our assets and liabilities, to generate a favorable return
without incurring undue interest rate and credit risk, to complement our lending
activities and to provide and maintain liquidity within established guidelines.
In establishing our investment strategies, we consider our interest rate
sensitivity position, the types of securities to be held, liquidity and other
factors. New Jersey chartered savings banks have authority to invest in various
types of assets, including U.S. Treasury obligations, securities of various
federal agencies, mortgage-backed securities, certain time deposits of insured
banks and savings institutions, certain bankers' acceptances, repurchase
agreements, loans of federal funds, and, subject to certain limits, corporate
debt and equity securities, commercial paper and mutual funds.
Our investment policy currently does not authorize participation in
hedging programs, options or futures transactions or interest rate swaps and
also prohibits the purchase of non-investment grade bonds. In the future we may
amend our policy to allow us to engage in hedging transactions. Our investment
policy also provides that we will not engage in any practice that the Federal
Financial Institutions Examination Council ("FFIEC") considers to be an
unsuitable investment practice. In addition, the policy provides that we shall
attempt to maintain primary liquidity, which consists of investments in cash,
cash in banks, money market investments, securities with remaining maturities of
less than five years and GNMA mortgage-backed securities classified as available
for sale, in an amount equal to 4% of total deposits and short-term borrowings.
At December 31, 2002, our primary liquidity ratio was 18.1%. For information
regarding the carrying values, yields and maturities of our investment
securities and mortgage-backed securities, see "-- Carrying Values, Yields and
Maturities."
We classify securities as held to maturity or available for sale at the
date of purchase. Held to maturity securities are reported at cost, adjusted for
amortization of premium and accretion of discount. Available for sale securities
are reported at fair market value. We classify obligations of the U.S.
government and federal agencies, corporate bonds and equity securities as
available for sale. We classify municipal bonds as held to maturity. We have
both the ability and positive intent to hold these investments to maturity. We
currently have no securities classified as trading.
Mortgage-backed Securities. All of our mortgage-backed securities are
directly or indirectly insured or guaranteed by GNMA, FannieMae or FreddieMac.
We classify mortgage-backed securities as held to maturity or available for sale
at the date of purchase based on our assessment of our internal liquidity
requirements. Held to maturity mortgage-backed securities are reported at cost,
adjusted for amortization of premium and accretion of discount. We have both the
ability and positive intent to hold these investments to maturity. Available for
sale mortgage-backed securities are reported at fair market value. We currently
have no mortgage-backed securities classified as trading.
At December 31, 2002, mortgage-backed securities classified as held to
maturity totaled $4.73 billion, or 33.5% of total assets, while $1.39 billion,
or 9.8% of total assets, were classified as available for sale. At December 31,
2002, the mortgage-backed securities portfolio had a weighted average rate of
5.72% and a market value of approximately $6.22 billion. Of the mortgage-backed
securities we held at December 31, 2002, $3.72 billion, or 60.7% of total
mortgage-backed securities, had fixed rates and $2.41 billion, or 39.3% of total
mortgage-backed securities, had adjustable-rates. Mortgage-backed securities at
Page 18
December 31, 2002 included real estate mortgage investment conduits ("REMICs"),
which are securities derived by reallocating cash flows from mortgage
pass-through securities or from pools of mortgage loans held by a trust. REMICs
are a form of, and are often referred to as, collateralized mortgage obligations
("CMOs"). The volume of our mortgage-backed security purchases increased during
2002, compared to 2001, due to the lower interest rate environment which caused
an increase in prepayment activity.
Of the mortgage-backed securities purchased in 2002, $1.44 billion were
REMICs. The REMIC purchases in 2002 had fixed interest rates and generally had
shorter average lives compared with alternate mortgage-backed security
investments available at the time of purchase. Our REMICs have fixed coupon
rates ranging from 5.00% to 6.50% and a weighted average rate of 6.16% at
December 31, 2002. At December 31, 2002, REMICs totaled $2.27 billion, which
constituted 37.1% of the mortgage-backed securities portfolio. Our REMICs had an
expected average life of 1.36 years at December 31, 2002. Purchases of
mortgage-backed securities may decline in the future to offset any significant
increase in demand for one- to four-family mortgage loans.
Mortgage-backed securities generally yield less than the loans that
underlie such securities because of the cost of payment guarantees or credit
enhancements that reduce credit risk. However, mortgage-backed securities are
more liquid than individual mortgage loans and are used to collateralize certain
borrowings. In general, mortgage-backed securities issued or guaranteed by GNMA,
FannieMae and FreddieMac are weighted at no more than 20% for risk-based capital
purposes, compared to the 50% risk-weighting assigned to most non-securitized
residential mortgage loans.
While mortgage-backed securities carry a reduced credit risk as
compared to whole loans, they remain subject to the risk of a fluctuating
interest rate environment. Along with other factors, such as the geographic
distribution of the underlying mortgage loans, changes in interest rates may
alter the prepayment rate of those mortgage loans and affect both the prepayment
rates and value of mortgage-backed securities.
Page 19
The following table presents our investment securities activity for the
periods indicated.
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
2002 2001 2000
--------- --------- ---------
(IN THOUSANDS)
INVESTMENT SECURITIES:
Carrying value at beginning of period ............ $ 168,868 $ 878,148 $ 813,437
--------- --------- ---------
Purchases:
Held to maturity ...................... - - 252
Available for sale .................... 598,358 130,430 25,000
Equity securities ..................... 189 10,000 -
Calls:
Held to maturity ...................... (35) (40) (150)
Available for sale .................... (202,687) (855,614) (211)
Maturities:
Available for sale .................... (651) - (325)
Sales:
Available for sale .................... (9,919) - -
Premium amortization and discount accretion, net.. (346) - 39
Change in unrealized gain or loss ................ 8,561 5,944 40,106
--------- --------- ---------
Net increase (decrease) in investment securities.. 393,470 (709,280) 64,711
--------- --------- ---------
Carrying value at end of period .................. $ 562,338 $ 168,868 $ 878,148
========= ========= =========
The following table presents our mortgage-backed securities activity
for the periods indicated.
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------
2002 2001 2000
----------- ----------- -----------
(IN THOUSANDS)
MORTGAGE-BACKED SECURITIES:
Carrying value at beginning of period ............ $ 5,009,178 $ 3,262,035 $ 3,097,072
----------- ----------- -----------
Purchases:
Held to maturity ........................ 2,400,445 2,804,215 862,546
Available for sale ...................... 1,168,106 560,228 -
Principal payments:
Held to maturity ........................ (2,133,902) (1,584,372) (693,241)
Available for sale ...................... (250,244) (35,996) -
Sales:
Available for sale ...................... (76,683) - -
Premium amortization and discount accretion, net.. (13,542) (3,797) (4,342)
Change in unrealized gain or loss ................ 22,803 6,865 -
----------- ----------- -----------
Net increase in mortgage-backed securities ....... 1,116,983 1,747,143 164,963
----------- ----------- -----------
Carrying value at end of period .................. $ 6,126,161 $ 5,009,178 $ 3,262,035
=========== =========== ===========
Page 20
The following table presents the composition of our money market
investments, investment securities and mortgage-backed securities portfolios in
dollar amount and in percentage of each investment type at the dates indicated.
It also presents the coupon type for the mortgage-backed securities portfolio.
AT DECEMBER 31,
------------------------------------------------------------------------------
2002 2001
------------------------------------- --------------------------------------
CARRYING PERCENT OF FAIR CARRYING PERCENT OF FAIR
VALUE TOTAL (1) VALUE VALUE TOTAL (1) VALUE
---------- ---------- ---------- ----------- ---------- ----------
(DOLLARS IN THOUSANDS)
MONEY MARKET INVESTMENTS:
Federal funds sold.................. $ 87,700 100.00% $ 87,700 $ 17,600 100.00% $ 17,600
========== ========== ========== =========== ========== ==========
INVESTMENT SECURITIES:
HELD TO MATURITY:
Municipal bonds................... $ 1,406 0.25% $ 1,497 $ 1,441 0.85% $ 1,474
---------- ---------- ---------- ----------- ---------- ----------
AVAILABLE FOR SALE:
United States government
agencies...................... 549,505 97.72 549,505 156,408 92.62 156,408
Corporate bonds................... 334 0.06 334 1,044 0.62 1,044
Equity securities................. 11,093 1.97 11,093 9,975 5.91 9,975
---------- ---------- ---------- ----------- ---------- ----------
Total available for sale.......... 560,932 99.75 560,932 167,427 99.15 167,427
---------- ---------- ---------- ----------- ---------- ----------
Total investment securities....... $ 562,338 100.00% $ 562,429 $ 168,868 100.00% $ 168,901
========== ========== ========== =========== ========== ==========
MORTGAGE-BACKED SECURITIES:
BY ISSUER:
HELD TO MATURITY:
GNMA pass-through certificates.... $1,059,848 17.30% $1,088,541 $ 1,704,584 34.03% $1,730,296
FNMA pass-through certificates.... 1,186,247 19.36 1,221,835 642,457 12.83 656,063
FHLMC pass-through certificates... 213,686 3.49 219,564 139,149 2.78 142,856
FHLMC, FNMA and
GNMA REMICs................... 2,274,485 37.13 2,298,999 1,992,298 39.77 2,001,477
---------- ---------- ---------- ----------- ---------- ----------
Total held to maturity............ 4,734,266 77.28 4,828,939 4,478,488 89.41 4,530,692
AVAILABLE FOR SALE:
GNMA pass-through certificates.... 1,391,895 22.72 1,391,895 530,690 10.59 530,690
---------- ---------- ---------- ----------- ---------- ----------
Total mortgage-backed securities.. $6,126,161 100.00% $6,220,834 $ 5,009,178 100.00% $5,061,382
========== ========== ========== =========== ========== ==========
BY COUPON TYPE:
Adjustable-rate................... $2,409,746 39.34% $2,433,191 $ 2,131,492 42.55% $2,151,018
Fixed-rate ....................... 3,716,415 60.66 3,787,643 2,877,686 57.45 2,910,364
---------- ---------- ---------- ----------- ---------- ----------
Total mortgage-backed securities.. $6,126,161 100.00% $6,220,834 $ 5,009,178 100.00% $5,061,382
========== ========== ========== =========== ========== ==========
TOTAL INVESTMENT PORTFOLIO............ $6,776,199 $6,870,963 $ 5,195,646 $5,247,883
========== ========== =========== ==========
AT DECEMBER 31,
-------------------------------------
2000
-------------------------------------
CARRYING PERCENT OF FAIR
VALUE TOTAL (1) VALUE
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
MONEY MARKET INVESTMENTS:
Federal funds sold................ $ 121,700 100.00% $ 121,700
========== ========== ==========
INVESTMENT SECURITIES:
HELD TO MATURITY:
Municipal bonds .................. $ 1,481 0.17% $ 1,496
---------- ---------- ----------
AVAILABLE FOR SALE:
United States government
agencies ..................... 875,202 99.66 875,202
Corporate bonds .................. 1,465 0.17 1,465
Equity securities ................ - - -
---------- ---------- ----------
Total available for sale.......... 876,667 99.83 876,667
---------- ---------- ----------
Total investment securities....... $ 878,148 100.00% $ 878,163
========== ========== ==========
MORTGAGE-BACKED SECURITIES:
BY ISSUER:
HELD TO MATURITY:
GNMA pass-through certificates.... $2,457,168 75.32% $2,474,259
FNMA pass-through certificates.... 635,691 19.49 641,715
FHLMC pass-through certificates... 161,684 4.96 164,099
FHLMC, FNMA and
GNMA REMICs................... 7,492 0.23 7,431
---------- ---------- ----------
Total held to maturity............ 3,262,035 100.00 3,287,504
AVAILABLE FOR SALE:
GNMA pass-through certificates.... - - -
---------- ---------- ----------
Total mortgage-backed securities.. $3,262,035 100.00% $3,287,504
========== ========== ==========
BY COUPON TYPE:
Adjustable-rate................... $2,391,200 73.30% $2,401,842
Fixed-rate........................ 870,835 26.70 885,662
---------- ---------- ----------
Total mortgage-backed securities.. $3,262,035 100.00% $3,287,504
========== ========== ==========
TOTAL INVESTMENT PORTFOLIO............ $4,261,883 $4,287,367
========== ==========
- -----------------------------------
(1) Based on carrying value for each investment type.
Page 21
Carrying Values, Rates and Maturities. The table below presents
information regarding the carrying values, weighted average rates and
contractual maturities of our money market investments, investment securities
and mortgage-backed securities at December 31, 2002. Mortgage-backed securities
are presented by issuer and by coupon type. Equity securities have been excluded
from this table.
AT DECEMBER 31, 2002
-----------------------------------------------------------------------------------
MORE THAN ONE YEAR MORE THAN FIVE YEARS
ONE YEAR OR LESS TO FIVE YEARS TO TEN YEARS
----------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE RATE VALUE RATE VALUE RATE
---------- --------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
MONEY MARKET INVESTMENTS:
Federal funds sold................ $ 87,700 1.25% $ - -% $ - -%
========== ========== ==========
INVESTMENT SECURITIES:
HELD TO MATURITY:
Municipal bonds................... $ - - $ 250 5.98 $ 600 6.50
---------- ---------- ----------
AVAILABLE FOR SALE:
United States government
agencies....................... - - - - 91,367 6.08
Corporate bonds................... 148 3.48 162 5.29 24 3.79
---------- ---------- ----------
Total available for sale.......... 148 3.48 162 5.29 91,391 6.08
---------- ---------- ----------
Total investment securities....... $ 148 3.48 $ 412 5.71 $ 91,991 6.08
========== ========== ==========
MORTGAGE-BACKED SECURITIES:
BY ISSUER:
HELD TO MATURITY:
GNMA pass-through certificates.... $ 11 7.04 $ 3,803 8.05 $ 5,201 8.97
FNMA pass-through certificates.... - - 6,513 7.09 54,623 6.68
FHLMC pass-through certificates... 58 9.41 1,626 9.34 23,141 7.30
FHLMC, FNMA and
GNMA REMICs................... - - - - - -
---------- ---------- ----------
Total held to maturity............ 69 9.03 11,942 7.71 82,965 7.00
AVAILABLE FOR SALE:
GNMA pass-through certificates.... - - - - - -
---------- ---------- ----------
Total mortgage-backed securities.. $ 69 9.03 $ 11,942 7.71 $ 82,965 7.00
========== ========== ==========
BY COUPON TYPE:
Adjustable-rate................... $ - - $ 146 5.93 $ - -
Fixed-rate........................ 69 9.03 11,796 7.73 82,965 7.00
---------- ---------- ----------
Total mortgage-backed securities.. $ 69 9.03 $ 11,942 7.71 $ 82,965 7.00
========== ========== ==========
TOTAL INVESTMENT PORTFOLIO............. $ 87,917 1.26 $ 12,354 7.64 $ 174,956 6.52
========== ========== ==========
AT DECEMBER 31, 2002
------------------------------------------------------
MORE THAN TEN YEARS TOTAL
---------------------- ----------------------
WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE
VALUE RATE VALUE RATE
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
MONEY MARKET INVESTMENTS:
Federal funds sold................ $ - -% $ 87,700 1.25%
========== ==========
INVESTMENT SECURITIES:
HELD TO MATURITY:
Municipal bonds................... $ 556 6.18 $ 1,406 6.28
---------- ----------
AVAILABLE FOR SALE:
United States government
agencies....................... 458,138 6.27 549,505 6.24
Corporate bonds................... -- -- 334 4.38
---------- ----------
Total available for sale.......... 458,138 6.27 549,839 6.24
---------- ----------
Total investment securities....... $ 458,694 6.27 $ 551,245 6.24
========== ==========
MORTGAGE-BACKED SECURITIES:
BY ISSUER:
HELD TO MATURITY:
GNMA pass-through certificates.... $1,050,833 5.52 $1,059,848 5.55
FNMA pass-through certificates.... 1,125,111 5.99 1,186,247 6.03
FHLMC pass-through certificates... 188,861 5.75 213,686 5.95
FHLMC, FNMA and
GNMA REMICs................... 2,274,485 6.16 2,274,485 6.16
---------- ----------
Total held to maturity............ 4,639,290 5.96 4,734,266 5.98
AVAILABLE FOR SALE:
GNMA pass-through certificates.... 1,391,895 4.83 1,391,895 4.83
---------- ----------
Total mortgage-backed securities.. $6,031,185 5.70 $6,126,161 5.72
========== ==========
BY COUPON TYPE:
Adjustable-rate................... $2,409,600 5.07 $2,409,746 5.07
Fixed-rate........................ 3,621,585 6.12 3,716,415 6.14
---------- ----------
Total mortgage-backed securities.. $6,031,185 5.70 $6,126,161 5.72
========== ==========
TOTAL INVESTMENT PORTFOLIO............. $6,489,879 5.74 $6,765,106 5.71
========== ==========
Page 22
SOURCES OF FUNDS
General. Deposits, borrowings, scheduled amortization and prepayments
of loan principal and mortgage-backed securities, maturities and calls of
investment securities and funds provided by operations are our primary sources
of funds for use in lending, investing and for other general purposes. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Deposits. We offer a variety of deposit accounts having a range of
interest rates and terms. We currently offer regular savings deposits, NOW
accounts, checking accounts, money market accounts and time deposits. We also
offer IRA accounts and qualified retirement plans.
In April 2002, we introduced our interest-bearing High Value Checking
account, which we view as an attractive alternative to cash management accounts
offered by brokerage firms. This account offers unlimited checking, on-line
banking and debit card availability as part of the product, and pays an interest
rate generally above competitive market rates. We attracted over $925 million in
deposits into this account during the nine months of 2002 that this product was
offered.
Deposit flows are influenced significantly by general and local
economic conditions, changes in prevailing interest rates, pricing of deposits
and competition. Our deposits are primarily obtained from market areas
surrounding our offices. We rely primarily on paying competitive rates,
providing strong customer service and maintaining long-standing relationships
with customers to attract and retain these deposits. We do not use brokers to
obtain deposits. We believe the increase in the interest-bearing deposits in
2002 was due primarily to our consistent offering of competitive rates on our
deposit products, the introduction of our interest-bearing High Value Checking
account and an overall decrease in investor confidence in the equity markets.
When we determine our deposit rates, we consider local competition,
U.S. Treasury securities offerings and the rates charged on other sources of
funds. Core deposits (defined as regular savings deposits, money market accounts
and noninterest-bearing transaction accounts) represented 20.9% of total
deposits on December 31, 2002. At December 31, 2002, time deposits with
remaining terms to maturity of less than one year amounted to $5.12 billion. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Analysis of Net Interest Income" for information relating to the
average balances and costs of our deposit accounts for the years ended December
31, 2002, 2001 and 2000.
Page 23
The following table presents our deposit activity for the periods
indicated:
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
2002 2001 2000
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Total deposits at beginning of period... $ 7,912,762 $ 6,604,121 $ 6,688,044
Net deposits ........................... 970,092 1,001,634 (394,436)
Interest credited, net penalties ....... 255,775 307,007 310,513
----------- ----------- -----------
Total deposits at end of period ........ $ 9,138,629 $ 7,912,762 $ 6,604,121
=========== =========== ===========
Net increase (decrease) ................ $ 1,225,867 $ 1,308,641 $ (83,923)
=========== =========== ===========
Percent increase (decrease) ............ 15.49% 19.82% (1.25)%
At December 31, 2002, we had $968.0 million in time deposits with
balances of $100,000 and over maturing as follows:
MATURITY PERIOD AMOUNT
- --------------------------------------- --------------
(IN THOUSANDS)
Three months or less .................. $369,148
Over three months through six months... 224,063
Over six months through 12 months...... 211,986
Over 12 months ........................ 162,786
--------
Total .................. $967,983
========
Page 24
The following table presents the distribution of our deposit accounts
at the dates indicated by dollar amount and percent of portfolio, and the
weighted average nominal interest rate on each category of deposits.
AT DECEMBER 31,
------------------------------------------------------------------
2002 2001
--------------------------------- -------------------------------
WEIGHTED WEIGHTED
PERCENT AVERAGE PERCENT AVERAGE
OF TOTAL NOMINAL OF TOTAL NOMINAL
AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE
---------- -------- -------- ---------- -------- --------
(DOLLARS IN THOUSANDS)
Savings .......................... $ 892,678 9.77% 1.61% $ 814,367 10.29% 2.05%
Interest-bearing demand .......... 1,040,614 11.39 2.80 102,185 1.29 1.24
Money market ..................... 629,042 6.88 1.56 516,700 6.53 2.12
Noninterest-bearing demand ....... 388,465 4.25 - 375,659 4.75 -
---------- ------- ---------- ------
Total ........................ 2,950,799 32.29 1.81 1,808,911 22.86 1.60
---------- ------- ---------- ------
Time deposits:
Time deposits $100,000
and over .................. 967,983 10.59 2.83 923,830 11.68 4.07
Time deposits less than
$100,000 with original
maturities of:
Three months or less....... 619,953 6.78 2.10 709,409 8.97 3.33
Over three months to
twelve months .......... 1,668,926 18.26 2.54 2,114,885 26.73 4.03
Over twelve months
to twenty-four months... 1,723,400 18.86 3.03 1,382,543 17.47 4.37
Over twenty-four months
to thirty-six months.... 456,832 5.00 3.79 324,533 4.10 5.22
Over thirty-six months
to forty-eight months... 73,431 0.80 4.16 56,831 0.72 5.04
Over forty-eight months
to sixty months......... 15,419 0.17 4.19 8,878 0.11 4.60
Over sixty months.......... 37,018 0.41 4.33 15,891 0.20 4.88
IRA and Keogh
accounts ............... 624,868 6.84 3.28 567,051 7.16 4.59
---------- ------- ---------- ------
Total time deposits........ 6,187,830 67.71 2.88 6,103,851 77.14 4.16
---------- ------- ---------- ------
Total deposits ............ $9,138,629 100.00% 2.53 $7,912,762 100.00% 3.57
========== ======= ========== ======
AT DECEMBER 31,
-----------------------------------
2000
---------------------------------
WEIGHTED
PERCENT AVERAGE
OF TOTAL NOMINAL
AMOUNT DEPOSITS RATE
---------- -------- --------
(DOLLARS IN THOUSANDS)
Savings .......................... $ 757,607 11.47% 2.29%
Interest-bearing demand .......... 96,611 1.46 1.49
Money market ..................... 448,860 6.80 2.40
Noninterest-bearing demand ....... 332,177 5.03 -
---------- ------
Total ........................ 1,635,255 24.76 1.81
---------- ------
Time deposits:
Time deposits $100,000
and over .................. 600,605 9.09 5.99
Time deposits less than
$100,000 with original
maturities of:
Three months or less....... 567,746 8.60 6.06
Over three months to
twelve months .......... 1,929,952 29.22 6.11
Over twelve months to
twenty-four months...... 1,049,847 15.90 5.56
Over twenty-four months
to thirty-six months.... 263,955 4.00 5.82
Over thirty-six months to
forty-eight months ..... 31,350 0.47 5.53
Over forty-eight months
to sixty months......... 2,989 0.05 5.29
Over sixty months.......... 11,547 0.17 5.11
IRA and Keogh
accounts ............... 510,875 7.74 5.84
---------- ------
Total time deposits........ 4,968,866 75.24 5.92
---------- ------
Total deposits ............ $6,604,121 100.00% 4.90
========== ======
Page 25
The following table presents, by rate category, the amount of our time
deposit accounts outstanding at December 31, 2002, 2001 and 2000.
AT DECEMBER 31,
------------------------------------
2002 2001 2000
---------- ---------- ----------
(IN THOUSANDS)
TIME DEPOSIT ACCOUNTS:
2.00% or less..... $ 205,817 $ - $ -
2.01% to 2.50%.... 1,767,200 1,441 1,479
2.51% to 3.00%.... 2,185,898 - -
3.01% to 3.50%.... 1,236,782 1,670,805 -
3.51% to 4.00%.... 324,299 1,022,767 -
4.01% to 4.50%.... 161,592 1,149,054 -
Over 4.50%........ 306,242 2,259,784 4,967,387
---------- ---------- ----------
Total........ $6,187,830 $6,103,851 $4,968,866
========== ========== ==========
The following table presents, by rate category, the remaining period to
maturity of time deposit accounts outstanding as of December 31, 2002.
PERIOD TO MATURITY FROM DECEMBER 31, 2002
------------------------------------------------------------------------------
WITHIN OVER THREE OVER SIX OVER ONE OVER TWO OVER
THREE TO SIX MONTHS TO TO TWO TO THREE THREE
MONTHS MONTHS ONE YEAR YEARS YEARS YEARS TOTAL
----------- ---------- ----------- --------- -------- ------- ----------
(IN THOUSANDS)
TIME DEPOSIT ACCOUNTS:
2.00% or less......... $ 192,355 $ 11,106 $ 962 $ 1,394 $ - $ - $ 205,817
2.01% to 2.50%........ 729,907 582,639 444,433 10,221 - - 1,767,200
2.51% to 3.00%........ 840,795 377,013 595,461 372,279 350 - 2,185,898
3.01% to 3.50%........ 194,489 417,328 273,615 322,921 28,045 384 1,236,782
3.51% to 4.00%........ 141 53,425 48,961 152,646 29,191 39,935 324,299
4.01% to 4.50%........ 72,117 8,705 30,136 7,995 1,599 41,040 161,592
Over 4.50%............ 85,819 75,480 82,706 48,436 9,828 3,973 306,242
----------- ---------- ----------- --------- -------- ------- ----------
Total.............. $ 2,115,623 $1,525,696 $ 1,476,274 $ 915,892 $ 69,013 $85,332 $6,187,830
=========== ========== =========== ========= ======== ======= ==========
Borrowings. Hudson City enters into sales of securities under
agreements to repurchase with selected brokers and the Federal Home Loan Bank of
New York ("FHLB"). These agreements are recorded as financing transactions as
Hudson City maintains effective control over the transferred securities. The
dollar amount of the securities underlying the agreements continues to be
carried in Hudson City's securities portfolio. The obligations to repurchase the
securities are reported as a liability in the consolidated statements of
financial condition.
The securities underlying the agreements are delivered to the party
with whom each transaction is executed. They agree to resell to Hudson City the
same securities at the maturity or call of the agreement. Hudson City retains
the right of substitution of the underlying securities throughout the terms of
the agreements.
Page 26
Hudson City has also obtained advances from the FHLB, which are
generally secured by a blanket lien against our mortgage portfolio. Borrowings
with the FHLB are generally limited to twenty times the amount of FHLB stock
owned.
Borrowed funds at December 31 are summarized as follows:
2002 2001
-------------------------- --------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
PRINCIPAL RATE PRINCIPAL RATE
--------- -------- --------- --------
(DOLLARS IN THOUSANDS)
Securities sold under agreements to repurchase:
FHLB ................................... $1,000,000 4.90% $ 700,000 5.22%
Other brokers .......................... 850,000 5.05 850,000 5.17
---------- ----------
Total securities sold under
agreements to repurchase ..... 1,850,000 4.97 1,550,000 5.19
Advances from the FHLB ........................ 1,750,000 3.92 600,000 4.48
---------- ----------
Total borrowed funds ........ $3,600,000 4.46 $2,150,000 4.99
========== ==========
At December 31, 2002, borrowed funds had scheduled maturities and
potential call dates as follows:
BORROWINGS BY SCHEDULED BORROWINGS BY NEXT
MATURITY DATE POTENTIAL CALL DATE
--------------------------- ------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
YEAR PRINCIPAL RATE PRINCIPAL RATE
---- --------- -------- --------- --------
2003......... $ 50,000 4.73% $ 550,000 5.61%
2004......... 50,000 5.00 550,000 4.66
2005......... 50,000 4.35 825,000 4.10
2006......... - - 875,000 4.30
2007......... - - 800,000 4.09
2009......... 200,000 5.71 - -
2010......... 350,000 5.58 - -
2011......... 1,200,000 4.71 - -
2012......... 1,700,000 3.89 - -
---------- -----------
Total.... $3,600,000 4.46 $ 3,600,000 4.46
========== ===========
Page 27
The amortized cost and fair value of the underlying securities used as
collateral for securities sold under agreements to repurchase, the average
balances and the maximum outstanding at any month-end at or for the years ended
December 31, 2002 and 2001 are as follows:
AT OR FOR THE YEAR ENDED
DECEMBER 31,
----------------------------
2002 2001
---------- ----------
(In thousands)
Amortized cost of collateral:
United States government agency securities.. $ 108,245 $ 75,012
Mortgage-backed securities ................. 1,071,529 1,237,740
REMICs ..................................... 730,353 315,193
---------- ----------
Total amortized cost of collateral..... $1,910,127 $1,627,945
========== ==========
Fair value of collateral:
United States government agency securities.. $ 110,471 $ 75,864
Mortgage-backed securities ................. 1,101,884 1,253,531
REMICs ..................................... 747,425 321,140
---------- ----------
Total fair value of collateral ........ $1,959,780 $1,650,535
========== ==========
Average balance of outstanding repurchase
agreements during the year ................. $1,734,384 $1,594,521
========== ==========
Maximum balance of outstanding repurchase
agreements at any month-end during the year $1,850,000 $1,550,000
========== ==========
The average balance of our advances from the FHLB during 2002 was $1.12 billion
and the maximum FHLB advances outstanding during 2002 was $1.75 billion.
SUBSIDIARIES
Hudson City Savings has one wholly owned and consolidated subsidiary:
HudCiti Service Corporation. HudCiti Service Corporation, which qualifies as a
New Jersey investment company, has one wholly owned and consolidated subsidiary:
Hudson City Preferred Funding Corp. Hudson City Preferred Funding qualifies as a
real estate investment trust, pursuant to the Internal Revenue Code of 1986, as
amended, and had $5.22 billion of mortgage loans outstanding at December 31,
2002.
PERSONNEL
As of December 31, 2002, we had 966 full-time employees and 90
part-time employees. The employees are not represented by a collective
bargaining unit and we consider our relationship with our employees to be good.
Page 28
REGULATION OF HUDSON CITY SAVINGS BANK AND HUDSON CITY BANCORP
GENERAL
Hudson City Savings is a New Jersey chartered savings bank, and its
deposit accounts are insured up to applicable limits by the Federal Deposit
Insurance Corporation ("FDIC") under the Bank Insurance Fund ("BIF"). Hudson
City Savings is subject to extensive regulation, examination and supervision by
the Commissioner of the New Jersey Department of Banking and Insurance (the
"Department") as its chartering agency, and by the FDIC as the deposit insurer.
Hudson City Savings must file reports with the Commissioner and the FDIC
concerning its activities and financial condition, and it must obtain regulatory
approval prior to entering into certain transactions, such as mergers with, or
acquisitions of, other depository institutions and opening or acquiring branch
offices. The Commissioner and the FDIC conduct periodic examinations to assess
Hudson City Savings Bank's compliance with various regulatory requirements. This
regulation and supervision establishes a comprehensive framework of activities
in which a savings bank can engage and is intended primarily for the protection
of the deposit insurance fund and depositors. The regulatory structure also
gives the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes.
Hudson City, MHC and Hudson City Bancorp, as bank holding companies
controlling Hudson City Savings, are subject to the Bank Holding Company Act of
1956, as amended, ("BHCA") and the rules and regulations of the Federal Reserve
Board under the BHCA and to the provisions of the New Jersey Banking Act of 1948
(the "New Jersey Banking Act") and the regulations of the Department under the
New Jersey Banking Act applicable to bank holding companies. Hudson City, MHC
and Hudson City Bancorp are required to file reports with, and otherwise comply
with the rules and regulations of the Federal Reserve Board ("FRB") and the
Department. Hudson City Bancorp is required to file certain reports with, and
otherwise comply with, the rules and regulations of the Securities and Exchange
Commission under the federal securities laws.
Any change in such laws and regulations, whether by the Department, the
FDIC, the FRB or through legislation, could have a material adverse impact on
Hudson City, MHC, Hudson City Bancorp and Hudson City Savings and their
operations and stockholders.
NEW JERSEY BANKING REGULATION
Activity Powers. Hudson City Savings derives its lending, investment
and other activity powers primarily from the applicable provisions of the New
Jersey Banking Act and its related regulations. Under these laws and
regulations, savings banks, including Hudson City Savings, generally may invest
in:
- real estate mortgages;
- consumer and commercial loans;
- specific types of debt securities, including certain corporate
debt securities and obligations of federal, state and local
governments and agencies;
- certain types of corporate equity securities; and
Page 29
- certain other assets.
A savings bank may also invest pursuant to a "leeway" power that permits
investments not otherwise permitted by the New Jersey Banking Act. "Leeway"
investments must comply with a number of limitations on the individual and
aggregate amounts of "leeway" investments. A savings bank may also exercise
trust powers upon approval of the Department. New Jersey savings banks may also
exercise any power authorized for federally chartered savings banks unless the
Department determines otherwise. The exercise of these lending, investment and
activity powers are limited by federal law and the related regulations. See "--
Federal Banking Regulation -- Activity Restrictions on State-Chartered Banks"
below.
Loans-to-One-Borrower Limitations. With certain specified exceptions, a
New Jersey chartered savings bank may not make loans or extend credit to a
single borrower and to entities related to the borrower in an aggregate amount
that would exceed 15% of the bank's capital funds. A savings bank may lend an
additional 10% of the bank's capital funds if secured by collateral meeting the
requirements of the New Jersey Banking Act. Hudson City Savings currently
complies with applicable loans-to-one-borrower limitations.
Dividends. Under the New Jersey Banking Act, a stock savings bank may
declare and pay a dividend on its capital stock only to the extent that the
payment of the dividend would not impair the capital stock of the savings bank.
In addition, a stock savings bank may not pay a dividend if the surplus of the
savings bank would, after the payment of the dividend, be reduced unless after
such reduction the surplus was 50% or more of the bank's capital stock. Federal
law may also limit the amount of dividends that may be paid by Hudson City
Savings. See "-- Federal Banking Regulation -- Prompt Corrective Action" below.
Minimum Capital Requirements. Regulations of the Department impose on
New Jersey chartered depository institutions, including Hudson City Savings,
minimum capital requirements similar to those imposed by the FDIC on insured
state banks. See "-- Federal Banking Regulation -- Capital Requirements" below.
Examination and Enforcement. The Department may examine Hudson City
Savings whenever it deems an examination advisable. The Commissioner examines
Hudson City Savings at least every two years. The Department may order any
savings bank to discontinue any violation of law or unsafe or unsound business
practice and may direct any director, officer, attorney or employee of a savings
bank engaged in an objectionable activity, after the Department has ordered the
activity to be terminated, to show cause at a hearing before the Department why
such person should not be removed.
FEDERAL BANKING REGULATION
Capital Requirements. FDIC regulations require BIF-insured banks, such
as Hudson City Savings, to maintain minimum levels of capital. The FDIC
regulations define two Tiers, or classes, of capital. Tier 1 capital is
comprised of the sum of common stockholders' equity (excluding the net
unrealized appreciation or depreciation, net of tax, from available for sale
securities), non-cumulative perpetual preferred stock (including any related
surplus) and minority interests in consolidated subsidiaries, minus all
intangible assets (other than qualifying servicing rights), and any net
unrealized loss on marketable equity securities. The components of Tier 2
capital currently include cumulative perpetual preferred stock, certain
perpetual preferred stock for which the dividend rate may be reset periodically,
mandatory convertible securities, subordinated debt, intermediate preferred
stock and
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allowance for possible loan losses. Allowance for possible loan losses included
in Tier 2 capital is limited to a maximum of 1.25% of risk-weighted assets.
Overall, the amount of Tier 2 capital that may be included in total capital
cannot exceed 100% of Tier 1 capital.
The FDIC regulations establish a minimum leverage capital requirement
for banks in the strongest financial and managerial condition, with a rating of
1 (the highest examination rating of the FDIC for banks) under the Uniform
Financial Institutions Rating System, and that are not experiencing or
anticipating significant growth, of a ratio of Tier 1 capital to total average
assets of not less than 3%. For all other banks, the minimum leverage capital
requirement is 4.0%, unless a higher leverage capital ratio is warranted by the
particular circumstances or risk profile of the depository institution. The FDIC
regulations also require that savings banks meet a risk-based capital standard.
The risk-based capital standard requires the maintenance of a ratio of total
capital (which is defined as the sum of Tier 1 capital and Tier 2 capital) to
risk-weighted assets of at least 8% and a ratio of Tier 1 capital to
risk-weighted assets of at least 4%. In determining the amount of risk-weighted
assets, all assets, plus certain off-balance sheet items, are multiplied by a
risk-weight of 0% to 100%, based on the risks the FDIC believes are inherent in
the type of asset or item.
The federal banking agencies, including the FDIC, have also adopted
regulations to require an assessment of an institution's exposure to declines in
the economic value of a bank's capital due to changes in interest rates when
assessing the bank's capital adequacy. Under such a risk assessment, examiners
will evaluate a bank's capital for interest rate risk on a case-by-case basis,
with consideration of both quantitative and qualitative factors. According to
the agencies, applicable considerations include the quality of the bank's
interest rate risk management process, the overall financial condition of the
bank and the level of other risks at the bank for which capital is needed.
Institutions with significant interest rate risk may be required to hold
additional capital. The agencies also issued a joint policy statement providing
guidance on interest rate risk management, including a discussion of the
critical factors affecting the agencies' evaluation of interest rate risk in
connection with capital adequacy.
The FDIC adopted a regulation, effective April 1, 2002, establishing
minimum regulatory capital requirements for equity investments in non-financial
companies. The regulation applies a series of marginal capital charges that
range from 8% to 25% depending upon the size of the aggregate equity investment
portfolio of the banking organization relative to its Tier 1 capital. The
capital charge would be applied by making a deduction, which would be based on
the adjusted carrying value of the equity investment from the organization's
Tier 1 capital. This new capital requirement has not had a material adverse
effect upon our operations. However, we will have to take this requirement into
consideration should we, at some point in the future, decide to invest in
non-financial companies.
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The following table shows Hudson City Savings Bank's leverage ratio,
its Tier 1 risk-based capital ratio, and its total risk-based capital ratio, at
December 31:
FDIC REQUIREMENTS
-------------------------------------------
MINIMUM CAPITAL FOR CLASSIFICATION AS
BANK ACTUAL ADEQUACY WELL-CAPITALIZED
----------------------- ------------------ --------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- --------- ---------- ----- --------- -----
(DOLLARS IN THOUSANDS)
DECEMBER 31, 2002
Leverage (Tier 1) capital.. $1,206,754 8.85% $ 545,340 4.00% $ 681,675 5.00%
Risk-based capital:
Tier 1 ............. 1,206,754 26.26 183,816 4.00 275,724 6.00
Total .............. 1,232,255 26.81 367,632 8.00 459,540 10.00
DECEMBER 31, 2001
Leverage (Tier 1) capital.. $1,182,130 10.64% $ 444,566 4.00% $ 555,707 5.00%
Risk-based capital:
Tier 1 ............. 1,182,130 31.32 150,964 4.00 226,446 6.00
Total .............. 1,206,140 31.96 301,927 8.00 377,409 10.00
As the table shows, Hudson City Savings Bank exceeded the minimum
capital adequacy requirements at the date indicated.
Activity Restrictions on State-chartered Banks. Section 24 of the
Federal Deposit Insurance Act, as amended (FDIA), which was added by the Federal
Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), generally limits
the activities and investments of state-chartered FDIC insured banks and their
subsidiaries to those permissible for federally chartered national banks and
their subsidiaries, unless such activities and investments are specifically
exempted by Section 24 or consented to by the FDIC.
Section 24 provides an exception for investments by a bank in common
and preferred stocks listed on a national securities exchange or the shares of
registered investment companies if:
- the bank held such types of investments during the 14-month period
from September 30, 1990 through November 26, 1991;
- the state in which the bank is chartered permitted such
investments as of September 30, 1991; and
- the bank notifies the FDIC and obtains approval from the FDIC to
make or retain such investments. Upon receiving such FDIC
approval, an institution's investment in such equity securities
will be subject to an aggregate limit up to the amount of its Tier
1 capital.
Hudson City Savings received approval from the FDIC to retain and acquire such
equity investments subject to a maximum permissible investment equal to the
lesser of 100% of Hudson City Savings' Tier 1 capital or the maximum permissible
amount specified by the New Jersey Banking Act. Section 24 also provides an
exception for majority-owned subsidiaries of a bank, but Section 24 limits the
activities of such subsidiaries to those permissible for a national bank under
Section 24 of the FDIA and the FDIC regulations issued pursuant thereto, or as
approved by the FDIC.
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Before making a new investment or engaging in a new activity not
permissible for a national bank or otherwise permissible under Section 24 of the
FDIC regulations thereunder, an insured bank must seek approval from the FDIC to
make such investment or engage in such activity. The FDIC will not approve the
activity unless the bank meets its minimum capital requirements and the FDIC
determines that the activity does not present a significant risk to the FDIC
insurance funds.
The Gramm-Leach Bliley Act ("Gramm-Leach") permits a state-chartered
savings bank to engage, through financial subsidiaries, in any activity in which
a national bank may engage through a financial subsidiary and on substantially
the same terms and conditions. In general, Gramm-Leach permits a national bank
that is well-capitalized and well-managed to conduct, through a financial
subsidiary, any activity permitted for a financial holding company other than
insurance underwriting, insurance investments, real estate investment or
development or merchant banking. The total assets of all such financial
subsidiaries may not exceed the lesser of 45% of the bank's total assets or $50
billion. The bank must have policies and procedures to assess the financial
subsidiary's risk and protect the bank from such risk and potential liability,
must not consolidate the financial subsidiary's assets with the bank's and must
exclude from its own assets and equity all equity investments, including
retained earnings, in the financial subsidiary. State-chartered savings banks
may retain subsidiaries in existence as of March 11, 2000 and may engage in
activities that are not authorized under Gramm-Leach; otherwise, Gramm-Leach
will preempt all state laws regarding the permissibility of certain activities
for state-chartered banks if such state law is in conflict with the provisions
of Gramm-Leach (with the exception of certain insurance activities), regardless
of whether the state law would authorize broader or more restrictive activities.
Although Hudson City Savings meets all conditions necessary to establish and
engage in permitted activities through financial subsidiaries, it has not yet
determined whether or the extent to which it will seek to engage in such
activities.
Federal Home Loan Bank System. Hudson City Savings is a member of the
FHLB system, which consists of twelve regional FHLBs, each subject to
supervision and regulation by the Federal Housing Finance Board ("FHFB"). The
FHLB provides a central credit facility primarily for member thrift institutions
as well as other entities involved in home mortgage lending. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLBs. It makes loans to members (i.e., advances) in accordance with policies
and procedures, including collateral requirements, established by the respective
boards of directors of the FHLBs. These policies and procedures are subject to
the regulation and oversight of the FHFB. All long-term advances are required to
provide funds for residential home financing. The FHFB has also established
standards of community or investment service that members must meet to maintain
access to such long-term advances. Hudson City Savings, as a member of the FHLB
of New York, is currently required to purchase and hold shares of capital stock
in the FHLB of New York in an amount at least equal to the greater of (i) 1% of
the aggregate principal amount of its unpaid mortgage loans, home purchase
contracts and similar obligations at the beginning of each year; (ii) 0.3% of
its assets; or (iii) 5% (or such greater fraction as established by the FHLB) of
its advances from the FHLB as of December 31, 2002. Hudson City Savings is in
compliance with these requirements. Pursuant to regulations promulgated by the
FHFB, as required by Gramm-Leach, the FHLB of New York has adopted a capital
plan, which is expected to become effective during the second half of 2003, that
will change the foregoing minimum stock ownership requirements for FHLB of New
York stock. Under the new capital plan each member of the FHLB of New York must
maintain a minimum investment in FHLB of New York stock in an amount equal to
the sum of (i) the greater of $1,000 or 0.20% of the member's mortgage-related
assets and (ii) 4.50% of the dollar amount of any outstanding advances under
such member's Advances, Collateral Pledge and Security Agreement with the FHLB
of New York.
Enforcement. The FDIC has extensive enforcement authority over insured
savings banks, including Hudson City Savings. This enforcement authority
includes, among other things, the ability to
Page 33
assess civil money penalties, to issue cease and desist orders and to remove
directors and officers, to order divestitures and withhold approval of the
acquisition of business or the exercise of powers, to terminate deposit
insurance coverage and to place a depository institution in receivership. In
general, these enforcement actions may be initiated in response to violations of
laws and regulations and to unsafe or unsound practices.
The FDIC is required, with certain exceptions, to appoint a receiver or
conservator for an insured state bank if that bank is "critically
undercapitalized." For this purpose, "critically undercapitalized" means having
a ratio of tangible capital to total assets of less than 2%. The FDIC may also
appoint a conservator or receiver for a state bank on the basis of the
institution's financial condition or upon the occurrence of certain events,
including:
- insolvency (whereby the assets of the bank are less than its
liabilities to depositors and others);
- substantial dissipation of assets or earnings through violations
of law or unsafe or unsound practices;
- existence of an unsafe or unsound condition to transact business;
- likelihood that the bank will be unable to meet the demands of its
depositors or to pay its obligations in the normal course of
business; and
- insufficient capital, or the incurring or likely incurring of
losses that will deplete substantially all of the institution's
capital with no reasonable prospect of replenishment of capital
without federal assistance.
Safety and Soundness Standards. Pursuant to the requirements of FDICIA,
as amended by the Riegle Community Development and Regulatory Improvement Act of
1994, each federal banking agency, including the FDIC, has adopted guidelines
establishing general standards relating to internal controls, information and
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, asset quality, earnings and compensation, fees and
benefits. In general, the guidelines require, among other things, appropriate
systems and practices to identify and manage the risks and exposures specified
in the guidelines. The guidelines prohibit excessive compensation as an unsafe
and unsound practice and describe compensation as excessive when the amounts
paid are unreasonable or disproportionate to the services performed by an
executive officer, employee, director, or principal stockholder.
In addition, the FDIC adopted regulations to require a bank that is
given notice by the FDIC that it is not satisfying any of such safety and
soundness standards to submit a compliance plan to the FDIC. If, after being so
notified, a bank fails to submit an acceptable compliance plan or fails in any
material respect to implement an accepted compliance plan, the FDIC may issue an
order directing corrective and other actions of the types to which a
significantly undercapitalized institution is subject under the "prompt
corrective action" provisions of FDICIA. If a bank fails to comply with such an
order, the FDIC may seek to enforce such an order in judicial proceedings and to
impose civil monetary penalties.
Prompt Corrective Action. FDICIA also established a system of prompt
corrective action to resolve the problems of undercapitalized institutions.
Under this system, the bank regulators are required to take certain, and
authorized to take other, supervisory actions against undercapitalized
institutions, based upon five categories of capitalization which FDICIA created:
"well-capitalized," "adequately
Page 34
capitalized," "undercapitalized," significantly undercapitalized" and
"critically capitalized." The severity of the action authorized or required to
be taken under the prompt corrective action regulations increases as a bank's
capital decreases within the three undercapitalized categories. All banks are
prohibited from paying dividends or other capital distributions or paying
management fees to any controlling person if, following such distribution, the
bank would be undercapitalized. The FDIC is required to monitor closely the
condition of an undercapitalized bank and to restrict the growth of its assets.
An undercapitalized bank is required to file a capital restoration plan within
45 days of the date the bank receives notice that it is within any of the three
undercapitalized categories, and the plan must be guaranteed by any parent
holding company. The aggregate liability of a parent holding company is limited
to the lesser of:
(1) an amount equal to five percent of the bank's total assets at
the time it became "undercapitalized"; and
(2) the amount that is necessary (or would have been necessary) to
bring the bank into compliance with all capital standards
applicable with respect to such bank as of the time it fails
to comply with the plan.
If a bank fails to submit an acceptable plan, it is treated as if it were
"significantly undercapitalized." Banks that are significantly or critically
undercapitalized are subject to a wider range of regulatory requirements and
restrictions.
Insurance Activities. The federal banking agencies have adopted
regulations prohibiting depository institutions from conditioning the extension
of credit to individuals upon either the purchase of an insurance product or
annuity or an agreement by the consumer not to purchase an insurance product or
annuity from an entity that is not affiliated with the depository institution.
The regulations also require prior disclosure of this prohibition to potential
insurance product or annuity customers.
Deposit Insurance. Pursuant to FDICIA, the FDIC established a system
for setting deposit insurance premiums based upon the risks a particular bank or
savings association posed to its deposit insurance funds. Under the risk-based
deposit insurance assessment system, the FDIC assigns an institution to one of
three capital categories based on the institution's financial information as of
its most recent quarterly financial report filed with the applicable bank
regulatory agency prior to the commencement of the assessment period. The three
capital categories are (1) well-capitalized, (2) adequately capitalized and (3)
undercapitalized. The FDIC also assigns an institution to one of three
supervisory subcategories within each capital group. With respect to the capital
ratios, institutions are classified as well-capitalized, adequately capitalized
or undercapitalized, using ratios that are substantially similar to the prompt
corrective action capital ratios discussed below. The FDIC also assigns an
institution to a supervisory subgroup based on a supervisory evaluation provided
to the FDIC by the institution's primary federal regulator and information that
the FDIC determines to be relevant to the institution's financial condition and
the risk posed to the deposit insurance funds (which may include, if applicable,
information provided by the institution's state supervisor).
An institution's assessment rate depends on the capital category and
supervisory category to which it is assigned. Under the final risk-based
assessment system, there are nine assessment risk classifications (i.e.,
combinations of capital groups and supervisory subgroups) to which different
assessment rates are applied. Assessment rates for deposit insurance currently
range from 0 basis points to 27 basis points. The capital and supervisory
subgroup to which an institution is assigned by the FDIC is confidential and may
not be disclosed. The assessment rates for our BIF assessable deposits are zero
basis points. If the FDIC determines that assessment rates should be increased,
institutions in all risk categories could be affected. The FDIC has exercised
this authority several times in the past and could raise insurance
Page 35
assessment rates in the future.
Under the Deposit Insurance Funds Act of 1996 ("Funds Act"), the
assessment base for the payments on the bonds ("FICO bonds") issued in the late
1980's by the Financing Corporation to recapitalize the now defunct Federal
Savings and Loan Insurance Corporation was expanded to include, beginning
January 1, 1997, the deposits of BIF-insured institutions, such as Hudson City
Savings. Our total expense in 2002 for the assessment for deposit insurance and
the FICO payments was $1,415,000.
Under the FDIA, the FDIC may terminate the insurance of an
institution's deposits upon a finding that the institution has engaged in unsafe
or unsound practices, is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC. The management of Hudson City Savings does not
know of any practice, condition or violation that might lead to termination of
deposit insurance.
Transactions with Affiliates of Hudson City Savings. Hudson City
Savings is subject to the affiliate and insider transaction rules set forth in
Sections 23A, 23B, 22(g) and 22(h) of the Federal Reserve Act ("FRA"), and the
regulations of the FRB promulgated thereunder. These provisions, among other
things, prohibit or limit a savings banks from extending credit to, or entering
into certain transactions with, its affiliates (which for Hudson City Savings
would include Hudson City Bancorp and Hudson City, MHC) and principal
stockholders, directors and executive officers of Hudson City Savings.
Effective April 1, 2003, the Federal Reserve Board ("FRB"), is
rescinding its interpretations of Sections 23A and 23B of the FRA and is
replacing these interpretations with Regulation W. Regulation W makes various
changes to existing law regarding Sections 23A and 23B, including expanding the
definition of what constitutes an affiliate subject to Sections 23A and 23B and
exempting certain subsidiaries of state-chartered banks from the restrictions of
Sections 23A and 23B.
Under Regulation W, all transactions entered into on or before December
12, 2002, which either became subject to Sections 23A and 23B solely because of
Regulation W, and all transactions covered by Sections 23A and 23B, the
treatment of which will change solely because of Regulation W, will become
subject to Regulation W on July 1, 2003. All other covered affiliate
transactions become subject to Regulation W on April 1, 2003. The Federal
Reserve Board expects each depository institution that is subject to Sections
23A and 23B to implement policies and procedures to ensure compliance with
Regulation W. We do not expect that the changes made by Regulation W will have a
material adverse effect on our business.
In addition, provisions of the BHCA prohibit extensions of credit to a
bank's insiders and their related interests by any other institution that has a
correspondent banking relationship with the bank, unless such extension of
credit is on substantially the same terms as those prevailing at the time for
comparable transactions with other persons and does not involve more than the
normal risk of repayment or present other unfavorable features.
Section 402 of the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley")
prohibits the extension of personal loans to directors and executive officers of
issuers (as defined in Sarbanes-Oxley). The prohibition, however, does not apply
to mortgages advanced by an insured depository institution, such as Hudson City
Savings, that are subject to the insider lending restrictions of Section 22(h)
of the FRA.
Provisions of the New Jersey Banking Act impose conditions and
limitations on the liabilities to a savings bank of its directors and executive
officers and of corporations and partnerships controlled by such persons that
are comparable in many respects to the conditions and limitations imposed on the
loans
Page 36
and extensions of credit to insiders and their related interests under federal
law and regulation, as discussed above. The New Jersey Banking Act also provides
that a savings bank that is in compliance with the applicable federal laws and
regulations is deemed to be in compliance with such provisions of the New Jersey
Banking Act.
Privacy Standards. Hudson City Bancorp and Hudson City Savings are
subject to FDIC regulations implementing the privacy protection provisions of
Gramm-Leach. These regulations require Hudson City Bancorp and Hudson City
Savings to disclose their privacy policy, including identifying with whom they
share "non-public personal information," to customers at the time of
establishing the customer relationship and annually thereafter.
The regulations also require Hudson City Bancorp and Hudson City
Savings to provide their customers with initial and annual notices that
accurately reflect its privacy policies and practices. In addition, Hudson City
Bancorp and Hudson City Savings are required to provide their customers with the
ability to "opt-out" of having Hudson City Bancorp and Hudson City Savings share
their non-public personal information with unaffiliated third parties before
they can disclose such information, subject to certain exceptions. The
implementation of these regulations did not have a material adverse effect on
Hudson City Bancorp or Hudson City Savings.
Community Reinvestment Act. Under the Community Reinvestment Act
("CRA"), any insured depository institution, including Hudson City Savings, has
a continuing and affirmative obligation consistent with its safe and sound
operation to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community. The CRA requires the FDIC,
in connection with its examination of a savings bank, to assess the depository
institution's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications by such
institution, including applications for branch relocations, additional branches
and acquisitions.
Current CRA regulations rate an institution based on its actual
performance in meeting community needs. In particular, the evaluation system
focuses on three tests:
- a lending test, to evaluate the institution's record of making
loans in its service areas;
- an investment test, to evaluate the institution's record of
investing in community development projects, affordable housing,
and programs benefitting low or moderate income individuals and
businesses; and
- a service test, to evaluate the institution's delivery of services
through its branches, ATMs and other offices.
The CRA requires the FDIC to provide a written evaluation of an
institution's CRA performance utilizing a four-tiered descriptive rating system
and requires public disclosure of an institution's CRA rating. Hudson City
Savings has received a "satisfactory" rating in its most recent CRA examination.
The federal banking agencies adopted regulations implementing the requirements
under Gramm-Leach that insured depository institutions publicly disclose certain
agreements that are in fulfillment of the CRA. Hudson City Savings has no such
agreements in place at this time.
Page 37
Internet Banking. Technological developments are dramatically altering
the ways in which most companies, including financial institutions, conduct
their business. The growth of the Internet is prompting banks to reconsider
business strategies and adopt alternative distribution and marketing systems.
The federal bank regulatory agencies have conducted seminars and published
materials targeted to various aspects of internet banking, and have indicated
their intention to reevaluate their regulations to ensure that they encourage
banks' efficiency and competitiveness consistent with safe and sound banking
practices. We cannot assure you that the federal bank regulatory agencies will
adopt new regulations that will not materially affect the Hudson City Savings'
internet operations or restrict any such further operations.
FEDERAL RESERVE SYSTEM
Under FRB regulations, Hudson City Savings is required to maintain
non-interest earning reserves against its transaction accounts (primarily NOW
and regular checking accounts). The FRB regulations generally require that
reserves of 3% must be maintained against aggregate transaction accounts of
$42.1 million or less (subject to adjustment by the FRB) and an initial reserve
of $1.083 million plus 10% (subject to adjustment by the FRB between 8% and 14%)
against that portion of total transaction accounts in excess of $42.1 million.
The first $6.0 million of otherwise reservable balances (subject to adjustments
by the FRB) are exempted from the reserve requirements. Hudson City Savings is
in compliance with the foregoing requirements. Because required reserves must be
maintained in the form of either vault cash, a non-interest bearing account at a
FRB or a pass-through account as defined by the FRB, the effect of this reserve
requirement is to reduce Hudson City Savings' interest earning assets.
THE USA PATRIOT ACT
In response to the events of September 11th, President George W. Bush
signed into law the Uniting and Strengthening America by Providing Appropriate
Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the USA
PATRIOT Act, on October 26, 2001. The USA PATRIOT Act gives the federal
government new powers to address terrorist threats through enhanced domestic
security measures, expanded surveillance powers, increased information sharing,
and broadened anti-money laundering requirements. By way of amendments to the
Bank Secrecy Act, Title III of the USA PATRIOT Act takes measures intended to
encourage information sharing among bank regulatory agencies and law enforcement
bodies. Further, certain provisions of Title III impose affirmative obligations
on a broad range of financial institutions, including banks, thrifts, brokers,
dealers, credit unions, money transfer agents and parties registered under the
Commodity Exchange Act.
Among other requirements, Title III of the USA PATRIOT Act imposes the
following requirements with respect to financial institutions:
- Pursuant to Section 352, all financial institutions must establish
anti-money laundering programs that include, at minimum: (i)
internal policies, procedures, and controls, (ii) specific
designation of an anti-money laundering compliance officer, (iii)
ongoing employee training programs, and (iv) an independent audit
function to test the anti-money laundering program. Interim final
rules implementing Section 352 were issued by the Treasury
Department on April 29, 2002. Such rules state that a financial
institution is in compliance with Section 352 if it implements and
maintains an anti-money laundering program that complies with the
anti-money laundering regulations of its federal functional
regulator. Hudson City Savings is in compliance with the FDIC's
anti-money laundering regulations.
Page 38
- Section 326 of the Act authorizes the Secretary of the Department
of Treasury, in conjunction with other bank regulators, to issue
regulations that provide for minimum standards with respect to
customer identification at the time new accounts are opened. On
July 23, 2002, the FDIC and the other federal bank regulators
jointly issued proposed rules to implement Section 326. The
proposed rules require financial institutions to establish a
program specifying procedures for obtaining identifying
information from customers seeking to open new accounts. This
identifying information would be essentially the same information
currently obtained by most financial institutions for individual
customers generally. A financial institution's program would also
have to contain procedures to verify the identity of customers
within a reasonable period of time, generally through the use of
the same forms of identity verification currently in use, such as
through driver's licenses, passports, credit reports and other
similar means.
- Section 312 of the Act requires financial institutions that
establish, maintain, administer, or manage private banking
accounts or correspondent accounts in the United States for
non-United States persons or their representatives (including
foreign individuals visiting the United States) to establish
appropriate, specific, and, where necessary, enhanced due
diligence policies, procedures, and controls designed to detect
and report money laundering. Interim rules under Section 312 were
issued by the Treasury Department on July 23, 2002. The interim
rules state that a due diligence program is reasonable if it
comports with existing best practices standards for banks that
maintain correspondent accounts for foreign banks and evidences
good faith efforts to incorporate due diligence procedures for
accounts posing increased risk of money laundering. In addition,
an enhanced due diligence program is reasonable if it comports
with best practices standards and focuses enhanced due diligence
measures on those correspondent accounts posing a particularly
high risk of money laundering based on the bank's overall
assessment of the risk posed by the foreign correspondent bank.
Finally, a private banking due diligence program must be
reasonably designed to detect and report money laundering and the
existence of proceeds of foreign corruption. Such a program is
reasonable if it focuses on those private banking accounts that
present a high risk of money laundering.
Financial institutions are prohibited from establishing, maintaining,
administering or managing correspondent accounts for foreign shell banks
(foreign banks that do not have a physical presence in any country), and will be
subject to certain recordkeeping obligations with respect to correspondent
accounts of foreign banks.
Bank regulators are directed to consider a holding company's
effectiveness in combating money laundering when ruling on Federal Reserve Act
and Bank Merger Act applications.
Compliance with the regulations adopted under the USA PATRIOT Act is
not expected to have a material adverse effect on Hudson City Bancorp or Hudson
City Savings.
FEDERAL BANK HOLDING COMPANY REGULATION
General. Hudson City, MHC and Hudson City Bancorp are bank holding
companies subject to examination, regulation and periodic reporting under the
BHCA, as administered by the FRB.
Page 39
Activity Restrictions. The BHCA generally limits Hudson City Bancorp's
activities to managing or controlling banks, furnishing services to or
performing services for its subsidiaries and engaging in other activities that
the FRB determines to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. In determining whether a
particular activity is permissible, the FRB must consider whether the
performance of such an activity reasonably can be expected to produce benefits
to the public that outweigh possible adverse effects. Possible benefits include
greater convenience, increased competition and gains in efficiency. Possible
adverse effects include undue concentration of resources, decreased or unfair
competition, conflicts of interest and unsound banking practices. Some of the
principal activities that the FRB has determined by regulation to be so closely
related to banking as to be a proper incident thereto are:
- making or servicing loans;
- performing certain data processing services;
- providing certain brokerage services;
- acting as fiduciary, investment or financial advisor;
- leasing personal or real property;
- making investments in corporations or projects designed primarily
to promote community welfare; and
- acquiring a savings and loan association.
The FRB may require that Hudson City Bancorp terminate an activity or
terminate control of or liquidate or divest certain subsidiaries or affiliates
when the FRB believes the activity or the control of the subsidiary or affiliate
constitutes a significant risk to the financial safety, soundness or stability
of any of its banking subsidiaries. The FRB also has the authority to regulate
provisions of certain bank holding company debt, including authority to impose
interest ceilings and reserve requirements on such debt.
Gramm-Leach expands the range of permitted activities of certain bank
holding companies to include the offering of virtually any type of service that
is financial in nature or incidental thereto, including banking, securities
underwriting, insurance (both underwriting and agency), merchant banking,
acquisitions of and combinations with insurance companies and securities firms
and additional activities that the FRB, in consultation with the Secretary of
the Treasury, determines to be financial in nature, incidental to such financial
activities, or complementary activities that do not pose a substantial risk to
the safety and soundness of depository institutions or the financial system
generally. In order to engage in these new activities, a bank holding company
must qualify and register with the FRB as a financial holding company. To
qualify as a financial holding company, a bank holding company must file a
certification with the FRB electing to become a financial holding company, must
demonstrate that each of its bank subsidiaries is well-capitalized and
well-managed and must have received a rating of "satisfactory" or better at its
most recent examination under the Community Reinvestment Act of 1977. Certain of
the additional activities authorized under Gramm-Leach may also be undertaken by
a financial subsidiary of a bank. Under Gramm-Leach, a functional system of
regulation will apply to financial holding companies under which banking
activities will be regulated by the federal banking regulators, securities
activities will be regulated by the federal securities regulators, and insurance
activities will be subject to regulation by the appropriate state insurance
authorities.
Page 40
Although Hudson City Bancorp currently meets all standards required for
qualification as a financial holding company, it has not yet determined whether
it will seek to qualify as, or engage in any of the additional activities
authorized for, a financial holding company. At this time, Hudson City Bancorp
has no plans to utilize any of the expanded powers permitted by Gramm-Leach.
Acquisition and Sale of Control. Under the federal Change in Bank
Control Act ("CBCA"), any person (including a company), or group acting in
concert, seeking to acquire 10% or more of the outstanding shares of Hudson City
Bancorp's common stock will be required to submit prior notice to the FRB,
unless the FRB has found that the acquisition of such shares will not result in
a change in control of Hudson City Bancorp. Under the CBCA, the FRB has 60 days
within which to act on such notices, taking into consideration certain factors,
including the financial and managerial resources of the acquiror, the
convenience and needs of the communities served by Hudson City Bancorp and
Hudson City Savings, and the antitrust effects of the acquisition. Under the
BHCA, any company would be required to obtain prior approval from the FRB before
it may obtain "control" of Hudson City Bancorp within the meaning of the BHCA.
Control generally is defined under the BHCA to mean the ownership or power to
vote 25% or more of any class of voting securities of Hudson City Bancorp or the
ability to control in any manner the election of a majority of Hudson City
Bancorp's directors.
As bank holding companies, Hudson City, MHC and Hudson City Bancorp
will be required to obtain the prior approval of the FRB to acquire all, or
substantially all, of the assets of any bank or bank holding company. Prior FRB
approval will be required for Hudson City, MHC or Hudson City Bancorp to acquire
direct or indirect ownership or control of any voting securities of any bank or
bank holding company if, after giving effect to such acquisition, it would,
directly or indirectly, own or control more than 5% of any class of voting
shares of such bank or bank holding company.
Capital; Dividends; Share Repurchases; Source of Strength. The FRB
imposes certain capital requirements on Hudson City Bancorp under the BHCA,
including a minimum leverage ratio and a minimum ratio of "qualifying" capital
to risk-weighted assets. These minimum requirements are substantially the same
as the Bank's minimum capital requirements described above under "Federal
Banking Regulation -- Capital Requirements". Subject to its capital requirements
and certain other restrictions, Hudson City Bancorp is able to borrow money to
make a capital contribution to Hudson City Savings, and such loans may be repaid
from dividends paid from Hudson City Savings to Hudson City Bancorp. Hudson City
Bancorp is also able to raise capital for contribution to Hudson City Savings by
issuing securities without having to receive regulatory approval, subject to
compliance with federal and state securities laws.
Page 41
The following table shows Hudson City Bancorp's leverage ratio, its
Tier 1 risk-based capital ratio, and its total risk-based capital ratio, at
December 31:
FEDERAL RESERVE BANK REQUIREMENTS
----------------------------------------------------------
MINIMUM CAPITAL FOR CLASSIFICATION AS
BANCORP ACTUAL ADEQUACY WELL-CAPITALIZED
--------------------------- ------------------------- ------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------------- -------- -------------- -------- ------------ --------
(DOLLARS IN THOUSANDS)
DECEMBER 31, 2002
Leverage (Tier 1) capital....... $ 1,291,910 9.48% $ 545,367 4.00% $ 681,709 5.00%
Risk-based capital:
Tier 1................... 1,291,910 28.11 183,819 4.00 275,728 6.00
Total.................... 1,317,411 28.67 367,637 8.00 459,546 10.00
DECEMBER 31, 2001
Leverage (Tier 1) capital....... $ 1,284,009 11.55% $ 444,585 4.00% $ 555,731 5.00%
Risk-based capital:
Tier 1................... 1,284,009 34.02 150,964 4.00 226,446 6.00
Total.................... 1,308,019 34.66 301,929 8.00 377,411 10.00
As the table shows, Hudson City Bancorp exceeded the minimum capital
adequacy requirements at the date indicated.
A bank holding company is required to give the FRB prior written notice
of any purchase or redemption of its outstanding equity securities if the gross
consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding 12
months, will be equal to 10% or more of the company's consolidated net worth.
The FRB may disapprove such a purchase or redemption if it determines that the
proposal would constitute an unsafe and unsound practice, or would violate any
law, regulation, FRB order or directive, or any condition imposed by, or written
agreement with, the FRB. Such notice and approval is not required for a bank
holding company that would be treated as "well-capitalized" under applicable
regulations of the FRB, that has received a composite "1" or "2" rating at its
most recent bank holding company examination by the FRB, and that is not the
subject of any unresolved supervisory issues.
Regulations of the FRB provide that a bank holding company must serve
as a source of strength to any of its subsidiary banks and must not conduct its
activities in an unsafe or unsound manner. A bank holding company should stand
ready to use available resources to provide adequate capital funds to its
subsidiary banks during periods of financial stress or adversity and should
maintain the financial flexibility and capital-raising capacity to obtain
additional resources for assisting its subsidiary banks. Under the prompt
corrective action provisions of FDICIA, a bank holding company parent of an
undercapitalized subsidiary bank would be directed to guarantee, within
limitations, the capital restoration plan that is required of such an
undercapitalized bank. See "Federal Banking Regulation -- Prompt Corrective
Action" above. If the undercapitalized bank fails to file an acceptable capital
restoration plan or fails to implement an accepted plan, the FRB may prohibit
the bank holding company parent of the undercapitalized bank from paying any
dividend or making any other form of capital distribution without the prior
approval of the FRB.
General. Under the FDIA, depository institutions are liable to the FDIC
for losses suffered or anticipated by the FDIC in connection with the default of
a commonly controlled depository institution or any assistance provided by the
FDIC to such an institution in danger of default. This law would have potential
applicability if Hudson City, MHC or Hudson City Bancorp ever acquired, as a
separate
Page 42
subsidiary, a depository institution in addition to Hudson City Savings.
Dividend Waivers By Hudson City, MHC. It has been the policy of a
number of mutual holding companies to waive the receipt of dividends declared by
its savings institution subsidiary. In connection with its approval of the
reorganization the FRB required that Hudson City, MHC obtain the prior approval
of the FRB before Hudson City, MHC may waive any dividends from Hudson City
Bancorp. As of the date hereof, we are not aware that the FRB has given its
approval to any waiver of dividends by any mutual holding company that has
requested such approval, and we have been informally advised by the staff of the
FRB that the FRB will not approve any such request.
In addition, the FDIC required that the amount of any dividends waived
by Hudson City, MHC will not be available for payment to its public stockholders
of Hudson City Bancorp (i.e., stockholders except for Hudson City, MHC) and that
such amount will be excluded from Hudson City Bancorp's capital for purposes of
calculating dividends payable to the public stockholders. Moreover, Hudson City
Savings is required to maintain the cumulative amount of dividends waived by
Hudson City, MHC in a restricted capital account that would be added to the
liquidation account established in the reorganization. This amount would not be
available for distribution to public stockholders. The restricted capital
account and liquidation account amounts are not reflected in our financial
statements, but are considered as a notational or memorandum account. These
accounts are maintained in accordance with the laws, rules, regulations and
policies of the Commissioner and our plan of reorganization.
NEW JERSEY HOLDING COMPANY REGULATION
General. Under the New Jersey Banking Act, a company owning or
controlling a savings bank is regulated as a bank holding company. The New
Jersey Banking Act defines the terms "company" and "bank holding company" as
such terms are defined under the BHCA. Each bank holding company controlling a
New Jersey chartered bank or savings bank must file certain reports with the
Commissioner and is subject to examination by the Commissioner.
Acquisition of Control. The New Jersey Banking Act requires prior
approval of the Commissioner before any person may acquire a New Jersey bank
holding company, such as Hudson City Bancorp. For this purpose, the term
"person" is defined broadly to mean a natural person or a corporation, company,
partnership, or other forms of organized entities. The term "acquire" is defined
differently for an existing bank holding company and for other companies or
persons. A bank holding company will be treated as "acquiring" a New Jersey bank
holding company if the bank holding company acquires more than 5% of any class
of the voting shares of the bank holding company. Any other person will be
treated as "acquiring" a New Jersey bank holding company if it acquires
ownership or control of more than 25% of any class of the voting shares of the
bank holding company.
FEDERAL SECURITIES LAW
Hudson City Bancorp's securities are registered with the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). As such, Hudson City Bancorp is subject to the information,
proxy solicitation, insider trading, and other requirements and restrictions of
the Exchange Act.
DELAWARE CORPORATION LAW
Hudson City Bancorp is incorporated under the laws of the State of
Delaware, and is therefore subject to regulation by the State of Delaware. In
addition, the rights of Hudson City Bancorp's shareholders are governed by the
Delaware General Corporation Law.
Page 43
TAXATION
FEDERAL
General. The following discussion is intended only as a summary and
does not purport to be a comprehensive description of the tax rules applicable
to Hudson City Savings, Hudson City, MHC or Hudson City Bancorp. For federal
income tax purposes, Hudson City Savings reports its income on the basis of a
taxable year ending December 31, using the accrual method of accounting, and is
generally subject to federal income taxation in the same manner as other
corporations. Because Hudson City Savings and Hudson City Bancorp constitute an
affiliated group of corporations, they are eligible to report their income on a
consolidated basis. However, because Hudson City, MHC owns less than 80% of the
common stock of Hudson City Bancorp, it will not be a member of such affiliated
group and will report its income on a separate return. Hudson City Savings is
not currently under audit by the Internal Revenue Service and has not been
audited by the IRS during the past five years.
Bad Debt Reserves. Pursuant to the Small Business Job Protection Act of
1996, Hudson City Savings is no longer permitted to use the reserve method of
accounting for bad debts, and is now recapturing (taking into income) over a
multi-year period a portion of the balance of its tax bad debt reserve as of
December 31, 1995. Since Hudson City Savings has already provided a deferred tax
liability equal to the amount of such recapture, the recapture will not
adversely impact Hudson City Savings' financial condition or results of
operations.
Distributions. To the extent that Hudson City Savings makes
"non-dividend distributions" to stockholders, such distributions will be
considered to result in distributions from Hudson City Savings' unrecaptured tax
bad debt reserve "base year reserve," i.e., its reserve as of December 31, 1987,
to the extent thereof and then from its supplemental reserve for losses on
loans, and an amount based on the amount distributed will be included in Hudson
City Savings' taxable income. Non-dividend distributions include distributions
in excess of Hudson City Savings' current and accumulated earnings and profits,
distributions in redemption of stock and distributions in partial or complete
liquidation. However, dividends paid out of Hudson City Savings' current or
accumulated earnings and profits, as calculated for federal income tax purposes,
will not constitute non-dividend distributions and, therefore, will not be
included in Hudson City Savings' income.
The amount of additional taxable income created from a non-dividend
distribution is equal to the lesser of Hudson City Savings' base year reserve
and supplemental reserve for losses on loans or an amount that, when reduced by
the tax attributable to the income, is equal to the amount of the distribution.
Thus, in certain situations, approximately one and one-half times the
non-dividend distribution would be included in gross income for federal income
tax purposes, assuming a 35% federal corporate income tax rate. Hudson City
Savings does not intend to pay dividends that would result in the recapture of
any portion of its bad debt reserve.
Corporate Alternative Minimum Tax. The Internal Revenue Code of 1986,
as amended, imposes a tax ("AMT") on alternative minimum taxable income ("AMTI")
at a rate of 20%. Only 90% of AMTI can be offset by net operating loss
carryovers of which Hudson City Savings currently has none. AMTI is also
adjusted by determining the tax treatment of certain items in a manner that
negates the deferral of income resulting from the regular tax treatment of those
items. Thus, Hudson City Savings' AMTI is increased by an amount equal to 75% of
the amount by which Hudson City Savings' adjusted current earnings exceeds its
AMTI (determined without regard to this adjustment and prior to reduction for
net operating losses.)
Page 44
Elimination of Dividends; Dividends Received Deduction. Hudson City
Bancorp may exclude from its income 100% of dividends received from Hudson City
Savings as a member of the same affiliated group of corporations. Because Hudson
City, MHC will not be a member of such affiliated group, it will not qualify for
such 100% dividends exclusion, but will be entitled to deduct 80% of the
dividends it receives from Hudson City Bancorp so long as it owns more than 20%
of the common stock.
STATE
New Jersey State Taxation. Hudson City Savings files New Jersey
Corporate Business income tax returns. Generally, the income of savings
institutions in New Jersey, which is calculated based on federal taxable income,
subject to certain adjustments, is subject to New Jersey tax. In July of 2002,
the State of New Jersey enacted legislation retroactive to January 1, 2002,
which impacts Hudson City Savings. The tax rate has been increased from 3% to
9%. The State also introduced a new tax, the Alternative Minimum Assessment
("AMA"), which for Hudson City Savings is based on New Jersey gross receipts.
Hudson City Savings, under the new legislation, must calculate its corporate
business tax and the AMA, then pay the higher amount. In future years, if the
corporate business tax is greater than the AMA paid in prior years, Hudson City
Savings may apply the prepaid AMA against its corporate business taxes (up to
50% of the corporate business tax, subject to certain limitations). Hudson City
Savings is not currently under audit with respect to its New Jersey income tax
returns and Hudson City Savings' state tax returns have not been audited for the
past five years.
Hudson City Bancorp is required to file a New Jersey income tax return
and will generally be subject to a state income tax at a 9% rate. However, if
Hudson City Bancorp meets certain requirements, it may be eligible to elect to
be taxed as a New Jersey Investment Company, which would allow it to be taxed at
a rate of 3.6%. The new tax legislation increased the income tax rate for
qualifying New Jersey investment companies from 2.25% to 3.6%. Further,
investment companies are not subject to the AMA. If Hudson City Bancorp does not
qualify as an investment company, it would be subject to taxation at the higher
of the 9% corporate business rate on taxable income or the AMA.
Delaware State Taxation. As a Delaware holding company not earning
income in Delaware, Hudson City Bancorp is exempted from Delaware corporate
income tax but is required to file annual returns and pay annual fees and a
franchise tax to the State of Delaware.
ITEM 2. PROPERTIES
During 2002, we conducted our business through our executive office,
our operations center and 81 branch offices. At December 31, 2002, we owned 29
of our locations and leased the remaining 54. Our lease arrangements are
typically long-term arrangements with third-parties that generally contain
several options to renew at the expiration date of the lease.
For additional information regarding our lease obligations, see Note 7
of Notes to Consolidated Financial Statements in Item 8 "Financial Statements
and Supplementary Data."
Page 45
ITEM 3. LEGAL PROCEEDINGS
We are not involved in any pending legal proceedings other than routine
legal proceedings occurring in the ordinary course of business. We believe that
these routine legal proceedings, in the aggregate, are immaterial to our
financial condition and results of operation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the quarter ended December 31, 2002 to a
vote of security holders of Hudson City Bancorp through the solicitation of
proxies or otherwise.
Page 46
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
On July 13, 1999, Hudson City Bancorp, Inc. common stock commenced
trading on the Nasdaq National Market under the symbol "HCBK." The table below
shows the reported high and low sales prices of the common stock during the
periods indicated. Certain share, per share and dividend information reflects
the 100% stock dividend that was effective June 17, 2002.
SALES PRICE DIVIDEND INFORMATION
------------------------- -----------------------------------
AMOUNT
HIGH LOW PER SHARE DATE OF PAYMENT
---------- ---------- ---------- ------------------
2001
First quarter........ $ 10.19 $ 8.72 $ 0.050 March 1, 2001
Second quarter....... 11.57 9.66 0.055 June 1, 2001
Third quarter........ 13.22 10.71 0.060 September 4, 2001
Fourth quarter....... 13.28 11.00 0.070 December 3, 2001
2002
First quarter........ 16.30 12.95 0.075 March 1, 2002
Second quarter....... 21.50 15.70 0.080 June 3, 2002
Third quarter........ 19.75 13.34 0.090 September 3, 2002
Fourth quarter....... 20.00 15.67 0.100 December 2, 2002
On January 14, 2003, the Board of Directors of Hudson City Bancorp
declared a quarterly cash dividend of eleven cents ($0.11) per common share
outstanding that was paid on March 3, 2003 to stockholders of record as of the
close of business on February 7, 2003. The Board of Directors intends to review
the payment of dividends quarterly and plans to continue to maintain a regular
quarterly dividend in the future, dependent upon our earnings, financial
condition and other relevant factors.
Hudson City Bancorp is subject to the requirements of Delaware law that
generally limits dividends to an amount equal to the difference between the
amount by which total assets exceed total liabilities and the amount equal to
the aggregate par value of the outstanding shares of capital stock. If there is
no difference between these amounts, dividends are limited to net income for the
current and/or immediately preceding year.
As the principal asset of Hudson City Bancorp, Hudson City Savings will
provide the principal source of funds for the payment of dividends by Hudson
City Bancorp. New Jersey law provides that dividends may be paid by Hudson City
Savings only out of net income, earned surplus or undivided profits. However,
Hudson City Savings will not be permitted to pay dividends on its capital stock
if, among other things, its stockholders' equity would be reduced below the
amount required for the liquidation account established in connection with the
reorganization.
As of March 7, 2003, there were approximately 17,800 holders of record
of Hudson City Bancorp common stock.
Page 47
ITEM 6. SELECTED FINANCIAL DATA
The summary information presented below under "Selected Financial
Condition Data," "Selected Operating Data" and "Selected Financial Ratios and
Other Data" at or for each of the years presented is derived in part from the
audited financial statements of Hudson City Bancorp and Hudson City Savings. The
following information is only a summary and you should read it in conjunction
with our audited consolidated financial statements in Item 8 of this document.
Certain share, per share and dividend information reflects the 100% stock
dividend that was effective June 17, 2002.
AT DECEMBER 31,
---------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------ ----------- ------------ -----------
(IN THOUSANDS)
SELECTED FINANCIAL CONDITION DATA:
Total assets.................................... $ 14,144,604 $ 11,426,768 $ 9,380,373 $ 8,518,865 $ 7,752,260
Loans........................................... 6,970,900 5,968,171 4,872,740 4,305,875 3,659,407
Federal Home Loan Bank of New York stock........ 137,500 81,149 73,629 - -
Investment securities available for sale........ 560,932 167,427 876,667 812,058 785,031
Mortgage-backed securities held to maturity..... 4,734,266 4,478,488 3,262,035 3,097,072 3,070,931
Mortgage-backed securities available for sale... 1,391,895 530,690 - - -
Total cash and cash equivalents................. 240,796 101,814 187,111 200,839 156,875
Foreclosed real estate, net..................... 1,276 250 438 367 1,026
Total deposits.................................. 9,138,629 7,912,762 6,604,121 6,688,044 6,807,339
Total borrowed funds............................ 3,600,000 2,150,000 1,250,000 300,000 -
Total stockholders' equity...................... 1,316,083 1,288,736 1,464,569 1,479,040 900,606
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------ ----------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED OPERATING DATA:
Total interest and dividend income................... $ 784,217 $ 690,498 $ 614,041 $ 536,081 $ 520,791
Total interest expense............................... 395,774 403,427 360,039 298,832 311,084
------------ ------------ ----------- ------------ -----------
Net interest income............................. 388,443 287,071 254,002 237,249 209,707
Provision for loan losses............................ 1,500 1,875 2,130 2,350 2,400
------------ ------------ ----------- ------------ -----------
Net interest income after provision
for loan losses............................. 386,943 285,196 251,872 234,899 207,307
------------ ------------ ----------- ------------ -----------
Non-interest income:
Service charges and other income................ 5,947 4,694 4,541 4,752 4,930
Gains (losses) on securities
transactions, net..... 2,066 - - (7) 24
------------ ------------ ----------- ------------ -----------
Total non-interest income................... 8,013 4,694 4,541 4,745 4,954
------------ ------------ ----------- ------------ -----------
Total non-interest expense.................. 93,541 81,824 78,997 68,408 63,492
------------ ------------ ----------- ------------ -----------
Income before income tax expense..................... 301,415 208,066 177,416 171,236 148,769
Income tax expense.......................... 109,382 73,517 62,590 63,850 55,500
------------ ------------ ----------- ------------ -----------
Net income........................................... $ 192,033 $ 134,549 $ 114,826 $ 107,386 $ 93,269
============ ============ =========== ============ ===========
Basic earnings per share (1)......................... $ 1.04 $ 0.69 $ 0.52 $ 0.24 $ -
============ ============ =========== ============ ===========
Diluted earnings per share (1)....................... $ 1.01 $ 0.68 $ 0.52 $ 0.24 $ -
============ ============ =========== ============ ===========
- -----------------------------
(1) The 1999 earnings per share data is from the date of reorganization (July
13, 1999).
Page 48
At or for the Year Ended December 31,
---------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------ ----------- ------------ -----------
SELECTED FINANCIAL RATIOS AND OTHER DATA:
PERFORMANCE RATIOS:
Return on average assets............................. 1.50% 1.32% 1.29% 1.32% 1.24%
Return on average stockholders' equity............... 14.84 10.09 7.87 9.05 10.90
Net interest rate spread (1)......................... 2.66 2.12 1.91 2.18 2.16
Net interest margin (2).............................. 3.10 2.87 2.90 2.98 2.85
Non-interest expense to average assets............... 0.73 0.80 0.89 0.84 0.84
Efficiency ratio (3)................................. 23.72 28.04 30.55 28.27 29.58
Dividend pay-out ratio (4)........................... 33.17 34.06 27.88 10.42 -
Cash dividends paid per common share (4)............. $ 0.345 $ 0.235 $ 0.145 $ 0.025 $ -
Average interest-earning assets to
average interest-bearing liabilities............ 1.14x 1.19x 1.24x 1.21x 1.16x
CAPITAL RATIOS:
Average stockholders' equity to average assets....... 10.12% 13.05% 16.35% 14.60% 11.35%
Stockholders' equity to assets....................... 9.30 11.28 15.61 17.36 11.62
Stockholders' equity per common share................ $ 7.22 $ 6.87 $ 6.89 $ 6.50 $ -
REGULATORY CAPITAL RATIOS:
BANK:
Leverage capital..................................... 8.85% 10.64% 14.16% 15.27% 11.93%
Total risk-based capital............................. 26.81 31.96 43.06 47.16 39.23
BANCORP:
Leverage capital..................................... 9.48% 11.55% 16.45% 18.54% -%
Total risk-based capital............................. 28.67 34.66 49.90 57.06 -
ASSET QUALITY RATIOS:
Non-performing loans to total loans.................. 0.29% 0.26% 0.27% 0.33% 0.42%
Non-performing assets to total assets................ 0.15 0.14 0.14 0.17 0.21
Allowance for loan losses to non-performing loans.... 126.27 153.44 170.67 142.65 115.47
Allowance for loan losses to total loans............. 0.37 0.40 0.45 0.46 0.48
OTHER DATA:
Weighted average number of common
shares outstanding:
basic....................................... 184,928,344 195,862,296 219,014,380 229,534,662 -
diluted..................................... 190,005,378 198,987,520 219,937,552 229,534,662 -
Number of deposit accounts........................... 503,998 495,871 463,369 470,815 484,991
Branches............................................. 81 80 79 75 75
- ----------------------------------
(1) Determined by subtracting the weighted average cost of average total
interest-bearing liabilities from the weighted average yield on average
total interest-earning assets.
(2) Determined by dividing net interest income by average total
interest-earning assets.
(3) Determined by dividing total non-interest expense by the sum of net
interest income and total non-interest income (adjusted to exclude net
gains (losses) on securities transactions of $2,066,000 for 2002, $0 for
2001, $0 for 2000, $(7,000) for 1999, and $24,000 for 1998.)
(4) The 1999 data is from the date of reorganization (July 13, 1999).
Page 49
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion and analysis should be read in conjunction with Hudson
City Bancorp's Consolidated Financial Statements and accompanying Notes to
Consolidated Financial Statements in Item 8, and the other statistical data
provided elsewhere in this document.
GENERAL
Our results of operations depend primarily on net interest income. Net
interest income is the difference between the interest income we earn on our
interest-earning assets, primarily mortgage loans, mortgage-backed securities
and investment securities, and the interest we pay on our interest-bearing
liabilities, primarily time deposits, interest-bearing demand deposits and
borrowed funds. Our results of operations are also affected by our provision for
loan losses, non-interest income, and non-interest expense. Non-interest expense
consists primarily of salaries and employee benefits, occupancy expenses and
other general and administrative expenses. Non-interest income generally
consists of service charges and fees and may include gains on the disposition of
assets.
Our results of operations may also be affected significantly by general
and local economic and competitive conditions, particularly those with respect
to changes in market interest rates, government policies and actions of
regulatory authorities. Future changes in applicable law, regulations or
government policies may materially impact us. Additionally, our lending activity
is concentrated in loans secured by real estate primarily located in New Jersey.
Accordingly, our results of operations may be affected by regional market and
economic conditions.
MUTUAL HOLDING COMPANY STRUCTURE
In 1999, Hudson City Savings converted and reorganized from a New
Jersey chartered mutual savings bank into a two-tiered mutual savings bank
holding company structure and became a wholly-owned subsidiary of Hudson City
Bancorp. Hudson City Bancorp sold 47% of the then outstanding shares of its
common stock to the public at $10.00 per share and received net proceeds of
$527.6 million. Hudson City Bancorp contributed 50% of the net proceeds from the
initial public offering to Hudson City Savings. Hudson City Bancorp issued 53%
of the then outstanding shares of its common stock to Hudson City, MHC. At
December 31, 2002, as a result of stock repurchases, Hudson City, MHC owned
63.85% of Hudson City Bancorp.
GROWTH INITIATIVES
In accordance with our business plan, we have developed and employed
several initiatives, including a program to purchase whole mortgage loans and
the introduction of our interest-bearing High Value Checking account, to
effectively and prudently utilize our capital through internally generated
growth. During 2002, these initiatives helped us to increase our core
investments in mortgage-related assets, increase our deposit customer base and
grow our assets by 23.8%, or over $2.7 billion. We expect to continue to grow
through internal expansion using borrowed funds to supplement our deposit
initiatives as a funding source, as well as by adding new branch offices, a
strategy that has been successful for us in the past.
Page 50
MANAGEMENT OF INTEREST RATE RISK
As a financial institution, our primary component of market risk is
interest rate volatility. Net interest income is the primary component of our
net income, and fluctuations in interest rates will ultimately impact the level
of both income and expense recorded on a large portion of our assets and
liabilities. Fluctuations in interest rates will also affect the market value of
all interest-earning assets, other than those that possess a short term to
maturity.
A decreasing interest rate environment, such as experienced during 2001
and 2002, 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, where the spread between long-term interest rates and
short-term interest rates widens, can also be beneficial to our net interest
income as our interest-bearing liabilities generally price off short-term market
rates while our mortgage loan products, particularly those with initial terms to
maturity or repricing greater than one year, generally price off long-term
market rates. Conversely, a narrowing or flattening 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.
Also impacting our net interest income and net interest rate spread is
the level of prepayment activity on our mortgage-related assets. The actual
amount of time before mortgage loans and mortgage-backed securities are repaid
can be significantly impacted by changes in market interest rates and mortgage
prepayment rates. Mortgage prepayment rates will vary due to a number of
factors, including the regional economy in the area where the underlying
mortgages were originated, seasonal factors, demographic variables and the
assumability of the underlying mortgages. However, the major factors affecting
prepayment rates are prevailing interest rates, related mortgage refinancing
opportunities and competition. The historically low market interest rates
experienced during 2001 and 2002 increased prepayment activity on our
mortgage-related assets, which may have an adverse impact on our net interest
income and interest rate spread in future periods.
General market interest rates declined during 2001 and 2002, reflecting
reductions of rates by the Federal Open Market Committee ("FOMC") of the Federal
Reserve Bank. The overall market yield curve steepened during 2001 as interest
rates on short-term maturities declined faster than the interest rates on
long-term maturities. Market interest rates on short-term maturities remained
relatively stable through the first nine months of 2002, then declined slightly
due to a further FOMC rate reduction in the fourth quarter of 2002. Long-term
market interest rates continued to steadily decline in 2002, thus narrowing the
overall market yield curve. In the interest rate environment experienced in
2002, our net interest rate spread increased 54 basis points to 2.66% from 2.12%
for 2001. It has been because of our ability to grow our business with low cost
interest-bearing liabilities that we have been able to increase our net interest
income during 2002. However, the current narrower yield curve may have an
adverse impact on our future net interest income and net interest rate spread.
The primary objectives of our interest rate risk management strategy
are to:
- evaluate the interest rate risk inherent in certain balance sheet
accounts;
- determine the appropriate level of interest rate risk given our
business plan, the current business environment and our capital
and liquidity requirements; and
- manage interest rate risk in a manner consistent with the approved
guidelines and policies set by our Board of Directors.
Page 51
We seek to coordinate asset and liability decisions so that, under changing
interest rate scenarios, earnings will remain within an acceptable range.
To achieve the objectives of managing interest rate risk, our
Asset/Liability Committee meets weekly to discuss and monitor the market
interest rate environment compared to interest rates that are offered on our
products. This committee consists of the Chief Executive Officer, the Chief
Operating Officer and the Investment Officer. The Asset/Liability Committee
presents periodic reports to the Board of Directors at its regular meetings, as
well as a comprehensive quarterly report to the Asset Management Committee of
the Board of Directors. The quarterly reports address the results of activities
and strategies and the effect that changes in interest rates will have on our
results of operations and the present value of our equity.
Historically, our lending activities have emphasized one- to
four-family first and second mortgage loans. We believe that the frequent
repricing of adjustable-rate mortgage loans and adjustable-rate securities,
which reduces the exposure to interest rate fluctuations, would benefit our
long-term profitability. However, the prevailing interest rate environment in
recent years has resulted in increased demand for fixed-rate first mortgage
loans. The result has been an increase in the proportion of fixed-rate loans in
our portfolio. This may have an adverse impact on our net interest income,
particularly in a rising interest rate environment.
The purchase of real estate mortgage investment conduits ("REMIC") to
supplement our purchases of adjustable-rate mortgage-backed securities has given
us additional interest rate risk protection. At the date of purchase, these
REMIC securities generally had shorter weighted-average lives than traditional
mortgage-backed security purchases due to their prepayment schedules. However,
since the REMIC purchases have fixed interest rates, the weighted-average life
will vary with changes in market interest rates.
Our primary source of funds has been deposits, consisting primarily of
time deposits, which have substantially shorter terms to maturity than the loan
portfolio. We use securities sold under agreements to repurchase and FHLB
advances as additional sources of funds. These borrowings are generally
long-term, in an effort to offset our short-term deposit liabilities and assist
in managing our interest rate risk. Certain of these borrowings have call
options that could shorten their maturities in a rising interest rate
environment.
Due to the nature of our operations, we are not subject to foreign
currency exchange or commodity price risk. Instead, our real estate loan
portfolio, primarily 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 2002 and did not have any such hedging transactions in
place at December 31, 2002. In the future, we may, with approval of our Board of
Directors, engage in hedging transactions utilizing derivative instruments.
Gap Analysis. The matching of the repricing characteristics of assets
and liabilities may be analyzed by examining the extent to which such assets and
liabilities are "interest rate-sensitive" and by monitoring a financial
institution's interest rate sensitivity "gap." An asset or liability is said to
be "interest rate-sensitive" within a specific time period if it will mature or
reprice within that time period. The interest rate sensitivity gap is defined as
the difference between the amount of interest-earning assets maturing or
repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within that same time period.
Page 52
A gap is considered positive when the amount of interest-earning assets
maturing or repricing within a specific time period exceeds the amount of
interest-bearing liabilities maturing or repricing within that specific time
period. A gap is considered negative when the amount of interest-bearing
liabilities maturing or repricing within a specific time period exceeds the
amount of interest-earning assets maturing or repricing within the same period.
During a period of rising interest rates, a financial institution with a
negative gap position would be expected, absent the effects of other factors, to
experience a greater increase in the costs of its liabilities relative to the
yields of its assets and thus a decrease in the institution's net interest
income. An institution with a positive gap position would be expected, absent
the effect of other factors, to experience the opposite result. Conversely,
during a period of falling interest rates, a negative gap would tend to result
in an increase in net interest income while a positive gap would tend to reduce
net interest income.
The following table, referred to as the gap table, presents the amounts
of our interest-earning assets and interest-bearing liabilities outstanding at
December 31, 2002, which we anticipate to reprice or mature in each of the
future time periods shown. Except as stated below, we determined the amounts of
assets and liabilities shown which reprice or mature during a particular period
in accordance with the earlier of the term to repricing or the contractual
maturity of the asset or liability. The information presented in the gap table
is also based on the following assumptions:
- we assumed an annual prepayment rate of 30.0% for mortgage loans
repricing or maturing after one year;
- we assumed an annual prepayment rate of 30.0% for mortgage-backed
securities repricing or maturing after one year;
- we reported savings accounts that had no stated maturity using
decay rates of: 2.5% in less than six months, 2.5% in six months
to one year, 25% in one year to two years, 30% in two years to
three years, 20% in three years to five years, and 20% in over
five years;
- we reported the $943.2 million balance in our High Value Checking
account, which is a component of interest-bearing demand accounts,
that had no stated maturity using decay rates of : 12.5% in less
than six months, 12.5% in six months to one year, 25% in one to
two years, 25% in two to three years, and 25% in three years to
five years;
- we reported the $97.4 million balance in our traditional NOW
accounts, which is a component of interest-bearing demand
accounts, that had no stated maturity using decay rates of: 2.5%
in less than six months, 2.5% in six months to one year, 25% in
one year to two years, 30% in two years to three years, 20% in
three years to five years, and 20% in over five years;
- we reported money market accounts using decay rates of: 25% in
less than six months, 25% in six months to one year, 25% in one
year to two years, and 25% in two years to three years.
In 2001, prepayment assumptions on mortgage loans and mortgage-backed securities
were 20.0% and 25.0%, respectively. The change in the prepayment assumptions for
2002 was due to the increase in prepayments experienced during the year on these
investments resulting from the lower interest rate environment.
Page 53
Our determination of deposit decay rates is based on regulatory
guidance, as modified by our historical experience. The initial decay rates on
our High Value Checking account 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. The initial decay rates will be
monitored closely and adjusted as required in future periods. Deposit decay
rates, prepayment rates and anticipated bond or borrowing calls can have a
significant impact on the estimated interest sensitivity gap. While we believe
that our assumptions are reasonable, they may not be indicative of actual future
deposit decay activity, mortgage and mortgage-backed securities prepayments, and
the actual timing of calls of federal agency bonds or borrowed funds. We have
excluded non-accrual loans totaling $6,072,000 from the table.
As indicated in the gap table at December 31, 2002, our
interest-bearing liabilities maturing or repricing within one year exceeded our
interest-earning assets maturing or repricing within the same period by $15.4
million compared with $1.63 billion at December 31, 2001. This represented a
cumulative one-year interest rate sensitivity gap as a percent of total assets
of negative 0.1% at December 31, 2002 compared with negative 14.3% at December
31, 2001. However, if current mortgage loan and mortgage-backed security
prepayment assumptions were used at December 31, 2001, and all other assumptions
remained the same for that analysis, the cumulative interest sensitivity gap as
a percentage of total assets would have been approximately negative 8.0%. The
ratio of interest-earning assets maturing or repricing within one year to
interest-bearing liabilities maturing or repricing within one year was 99.7% at
December 31, 2002 compared with 71.9% at December 31, 2001.
The change in these ratios, year-to-year, was primarily due to the
accelerated prepayment assumptions for mortgage loans and mortgage-backed
securities used during the current lower interest rate environment and the
overall growth in our assets during 2002. The change also reflected the growth
of borrowed funds in the current year with maturities in excess of one year, the
shift of time deposit maturities to over one year due to pricing strategies, and
the growth of our High Value Checking account, which we estimate to have a decay
rate in excess of one year of 75%.
Page 54
AT DECEMBER 31, 2002
---------------------------------------------------------------------------
MORE THAN MORE THAN
MORE THAN MORE THAN TWO YEARS THREE YEARS
SIX MONTHS SIX MONTHS ONE YEAR TO TO THREE TO FIVE
OR LESS TO ONE YEAR TWO YEARS YEARS YEARS
------------ ------------ ----------- ------------ -----------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
First mortgage loans.......................... $ 1,078,715 $ 1,102,401 $ 1,430,295 $ 999,696 $ 832,239
Consumer and other loans...................... 33,597 743 2,534 2,833 13,508
Federal funds sold............................ 87,700 - - - -
Mortgage-backed securities.................... 1,564,766 1,698,446 1,120,637 523,608 372,733
FHLB stock.................................... 137,500 - - - -
Investment securities......................... 11,241 - 100 180 132
------------ ------------ ---------- ------------ -----------
Total interest-earning assets.............. 2,913,519 2,801,590 2,553,566 1,526,317 1,218,612
------------ ------------ ---------- ------------ -----------
Interest-bearing liabilities:
Savings accounts.............................. 22,987 23,640 222,645 267,174 178,116
Interest-bearing demand accounts.............. 120,335 120,335 260,153 265,025 255,282
Money market accounts......................... 137,829 137,830 157,261 161,578 17,272
Time deposits................................. 3,641,319 1,476,274 915,892 69,013 85,332
Borrowed funds................................ 50,000 - 50,000 50,000 -
------------ ------------ ----------- ------------ -----------
Total interest-bearing liabilities......... 3,972,470 1,758,079 1,605,951 812,790 536,002
------------ ------------ ----------- ------------ -----------
Interest rate sensitivity gap....................... $ (1,058,951) $ 1,043,511 $ 947,615 $ 713,527 $ 682,610
============ ============ =========== ============ ===========
Cumulative interest rate sensitivity gap............ $ (1,058,951) $ (15,440) $ 932,175 $ 1,645,702 $ 2,328,312
============ ============ =========== ============ ===========
Cumulative interest rate sensitivity gap
as a percent of total assets.................. (7.49)% (0.11)% 6.59% 11.63% 16.46%
Cumulative interest-earning assets
as a percent of interest-bearing liabilities.. 73.34% 99.73% 112.71% 120.19% 126.81%
AT DECEMBER 31, 2002
---------------------------
MORE THAN
FIVE YEARS TOTAL
------------ ------------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
First mortgage loans.......................... $ 1,393,284 $ 6,836,630
Consumer and other loans...................... 74,983 128,198
Federal funds sold............................ - 87,700
Mortgage-backed securities.................... 845,971 6,126,161
FHLB stock.................................... - 137,500
Investment securities......................... 550,685 562,338
------------ ------------
Total interest-earning assets.............. 2,864,923 13,878,527
------------ ------------
Interest-bearing liabilities:
Savings accounts.............................. 178,116 892,678
Interest-bearing demand accounts.............. 19,484 1,040,614
Money market accounts......................... 17,272 629,042
Time deposits................................. - 6,187,830
Borrowed funds................................ 3,450,000 3,600,000
------------ ------------
Total interest-bearing liabilities......... 3,664,872 12,350,164
------------ ------------
Interest rate sensitivity gap....................... $ (799,949) $ 1,528,363
============ ============
Cumulative interest rate sensitivity gap............ $ 1,528,363
============
Cumulative interest rate sensitivity gap
as a percent of total assets.................. 10.81%
Cumulative interest-earning assets
as a percent of interest-bearing liabilities.. 112.38%
Page 55
The methods used in the gap table are inherently imprecise. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates. Certain assets, such as
adjustable-rate loans and mortgage-backed securities, have features that limit
changes in interest rates on a short-term basis and over the life of the loan.
If interest rates change, prepayment and early withdrawal levels would likely
deviate significantly from those assumed in calculating the table. Finally, the
ability of borrowers to make payments on their adjustable-rate loans may
decrease if interest rates increase.
Present Value of Equity. In addition to the gap analysis, we also use
a simulation model to monitor interest rate risk. This model reports the present
value of equity in different interest rate environments, assuming an
instantaneous and permanent interest rate shock to all interest rate-sensitive
assets and liabilities. The present value of equity is the difference between
the estimated fair value of interest rate-sensitive assets and liabilities. The
changes in market value of assets and liabilities due to changes in interest
rates reflect the interest sensitivity of those assets and liabilities as their
values are derived from the characteristics of the asset or liability (i.e.,
fixed-rate, adjustable-rate, caps, floors) relative to the current interest rate
environment. For example, in a rising interest rate environment the fair market
value of a fixed-rate asset will decline, whereas the fair market value of an
adjustable-rate asset, depending on its repricing characteristics, may not
decline. Increases in the market value of assets will increase the present value
of equity whereas decreases in market value of assets will decrease the present
value of equity. Conversely, increases in the market value of liabilities will
decrease the present value of equity whereas decreases in the market value of
liabilities will increase the present value of equity.
Our policy sets a maximum percentage change in the present value of
equity of 55% from the current, or zero basis point, present value of equity,
given an instantaneous and parallel increase or decrease of 200 basis points.
Although the percent change in the present value of equity at December 31, 2002
was within the December 31, 2001 maximum percent change limit of 40%, the
maximum percent change was increased in 2002 to 55% to allow for more
flexibility in managing our asset/liability mix.
Page 56
The following table presents the estimated present value of equity over
a range of interest rate change scenarios at December 31, 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.
For purposes of this table, we have made assumptions such as prepayment rates
and decay rates similar to those used for the gap analysis table.
PRESENT VALUE OF EQUITY
AS PERCENT OF PRESENT
PRESENT VALUE OF EQUITY VALUE OF ASSETS
------------------------------------------------------ --------------------------------
CHANGE IN DOLLAR DOLLAR PERCENT PRESENT VALUE PERCENT
INTEREST RATES AMOUNT CHANGE CHANGE RATIO CHANGE
- -------------- ---------------- ------------- -------- ------------- ----------
(BASIS POINTS) (DOLLARS IN THOUSANDS)
200 $ 1,074,506 $ (284,364) (20.93)% 7.91% (16.03)%
150 1,217,874 (140,996) (10.38) 8.79 (6.69)
100 1,350,015 (8,855) (0.65) 9.58 1.70
50 1,392,313 33,443 2.46 9.74 3.40
0 1,358,870 - - 9.42 -
(50) 1,280,274 (78,596) (5.78) 8.83 (6.26)
(100) 1,187,129 (171,741) (12.64) 8.14 (13.59)
(150) 1,094,206 (264,664) (19.48) 7.45 (20.91)
(200) 970,332 (388,538) (28.59) 6.56 (30.36)
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 decreases in the present value of equity and the percent change in
the present value of equity in the increasing rate scenarios in the December 31,
2002 analysis were primarily due to the growth of our fixed-rate mortgage loans
and mortgage-backed securities. Generally, these assets will not reprice in a
rising rate environment. The overall decrease in the present value of equity and
the percent change in the present value of equity in the decreasing rate
scenarios in the December 31, 2002 analysis was primarily due to the growth of
our fixed-rate borrowed funds in this low interest rate environment. Fixed-rate
borrowed funds, even those with call options, generally do not reprice in a
decreasing 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.
As in the case of the gap table, the methods we used in the previous
table are also inherently imprecise. This type of modeling requires that we make
assumptions that may not reflect the manner in which actual yields and costs
respond to changes in market interest rates. For example, we assume the
composition of the interest rate-sensitive assets and liabilities will remain
constant over the period being measured and that all interest rate shocks will
be uniformly reflected across the yield curve, regardless of the duration to
maturity or repricing. The table assumes that we will take no action in response
to the changes in interest rates. In addition, prepayment estimates and other
assumptions within the model are subjective in nature, involve uncertainties,
and, therefore, cannot be determined with precision. Accordingly, although the
present value of equity model may provide an estimate of our interest rate risk
at a particular point in time, such measurements are not intended to and do not
provide a precise forecast of the effect of changes in interest rates on our
present value of equity.
Page 57
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between the interest
income we earn on our interest-earning assets, such as mortgage loans,
mortgage-backed securities and investment securities, and the expense we pay on
interest-bearing liabilities, such as time deposits and borrowed funds. Net
interest income depends on our volume of interest-earning assets and
interest-bearing liabilities and the interest rates we earned or paid on them.
Average Balance Sheet. The following table presents certain information
regarding our financial condition and net interest income for 2002, 2001 and
2000. The table presents the average yield on interest-earning assets and the
average cost of interest-bearing liabilities for the periods indicated. We
derived the yields and costs by dividing income or expense by the average
balance of interest-earning assets or interest-bearing liabilities,
respectively, for the periods shown. We derived average balances from daily
balances over the periods indicated. Interest income includes fees that we
considered adjustments to yields. Yields on tax-exempt obligations were not
computed on a tax equivalent basis.
Page 58
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
2002 2001
------------------------------------- -----------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
------------ ---------- --------- ------------- ----------- -------
(DOLLARS IN THOUSANDS)
ASSETS:
INTEREST-EARNINGS ASSETS:
First mortgage loans, net (1)................. $ 6,352,764 $ 440,073 6.93% $ 5,204,953 $ 381,135 7.32%
Consumer and other loans...................... 139,432 10,027 7.19 153,978 11,959 7.77
Federal funds sold............................ 153,773 2,427 1.58 153,495 5,436 3.54
Mortgage-backed securities,
at amortized cost.......................... 5,461,673 307,743 5.63 4,036,100 262,914 6.51
Federal Home Loan Bank stock.................. 101,591 5,002 4.92 79,418 4,536 5.71
Investment securities at amortized cost....... 315,153 18,945 6.01 389,472 24,518 6.30
------------ ---------- ------------- ----------
Total interest-earning assets.............. 12,524,386 784,217 6.26 10,017,416 690,498 6.89
NONINTEREST-EARNING ASSETS......................... 263,718 ---------- 203,567 ----------
------------ -------------
TOTAL ASSETS........................... $ 12,788,104 $ 10,220,983
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY:
INTEREST-BEARING LIABILITIES:
Savings accounts.............................. $ 869,823 17,212 1.98 $ 776,388 17,497 2.25
Interest-bearing demand accounts.............. 370,843 9,450 2.55 94,197 1,486 1.58
Money market accounts......................... 593,021 11,697 1.97 465,021 10,731 2.31
Time deposits................................. 6,311,562 217,416 3.44 5,381,517 277,293 5.15
------------ ---------- ------------- ----------
Total deposits............................ 8,145,249 255,775 3.14 6,717,123 307,007 4.57
Borrowed funds................................ 2,854,658 139,999 4.90 1,731,918 96,420 5.57
------------ ---------- ------------- ----------
Total interest-bearing liabilities........ 10,999,907 395,774 3.60 8,449,041 403,427 4.77
------------ ---------- ------------- ----------
NONINTEREST-BEARING LIABILITIES:
Noninterest-bearing deposits.................. 391,865 351,970
Other noninterest-bearing liabilities......... 102,001 86,494
------------ -------------
Total noninterest-bearing liabilities..... 493,866 438,464
------------ -------------
Total liabilities...................... 11,493,773 8,887,505
Stockholders' equity................... 1,294,331 1,333,478
------------ -------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY............................. $ 12,788,104 $ 10,220,983
============ =============
Net interest income................................ $ 388,443 $ 287,071
========== ==========
Net interest rate spread (2)....................... 2.66% 2.12%
Net interest-earning assets........................ $ 1,524,479 $ 1,568,375
============ =============
Net interest margin (3)............................ 3.10% 2.87%
Ratio of interest-earning assets to
interest-bearing liabilities.................. 1.14x 1.19x
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------
2000
----------------------------------
AVERAGE
AVERAGE YIELD/
BALANCE INTEREST COST
------------ --------- -------
(DOLLARS IN THOUSANDS)
ASSETS:
INTEREST-EARNINGS ASSETS:
First mortgage loans, net (1)................. $ 4,456,451 $ 327,458 7.35%
Consumer and other loans...................... 130,806 10,640 8.13
Federal funds sold............................ 80,449 4,972 6.18
Mortgage-backed securities,
at amortized cost.......................... 3,196,889 214,435 6.71
Federal Home Loan Bank stock.................. 23,955 1,698 7.09
Investment securities at amortized cost....... 882,166 54,838 6.22
------------ ---------
Total interest-earning assets............. 8,770,716 614,041 7.00
NONINTEREST-EARNING ASSETS......................... 152,583
------------ ---------
TOTAL ASSETS........................... $ 8,923,299
============
LIABILITIES AND STOCKHOLDERS' EQUITY:
INTEREST-BEARING LIABILITIES:
Savings accounts.............................. $ 782,125 19,143 2.45
Interest-bearing demand accounts.............. 95,385 1,819 1.91
Money market accounts......................... 463,818 11,909 2.57
Time deposits................................. 4,932,154 277,642 5.63
------------ ---------
Total deposits............................ 6,273,482 310,513 4.95
Borrowed funds................................ 797,966 49,526 6.21
------------ ---------
Total interest-bearing liabilities........ 7,071,448 360,039 5.09
------------ ---------
NONINTEREST-BEARING LIABILITIES:
Noninterest-bearing deposits.................. 319,499
Other noninterest-bearing liabilities......... 73,025
------------
Total noninterest-bearing liabilities..... 392,524
------------
Total liabilities...................... 7,463,972
Stockholders' equity................... 1,459,327
------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY............................. $ 8,923,299
============
Net interest income................................ $ 254,002
=========
Net interest rate spread (2)....................... 1.91%
Net interest-earning assets........................ $ 1,699,268
============
Net interest margin (3)............................ 2.90%
Ratio of interest-earning assets to
interest-bearing liabilities.................. 1.24x
- ----------------------------------------------
(1) Amount is net of deferred loan fees and allowance for loan losses and
includes non-performing loans.
(2) Determined by subtracting the weighted average cost of average total
interest-bearing liabilities from the weighted average yield on average total
interest-earning assets.
(3) Determined by dividing net interest income by average total
interest-earning assets.
Page 59
Rate/Volume Analysis. The following table presents the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have affected our interest income and interest
expense during the periods indicated. Information is provided in each category
with respect to:
- changes attributable to changes in volume (changes in volume
multiplied by prior rate);
- changes attributable to changes in rate (changes in rate
multiplied by prior volume); and
- the net change.
The changes attributable to the combined impact of volume and rate have been
allocated proportionately to the changes due to volume and the changes due to
rate.
2002 COMPARED TO 2001 2001 COMPARED TO 2000
------------------------------------------ ---------------------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
------------------------------------------ ---------------------------------------
VOLUME RATE NET VOLUME RATE NET
------------ ------------ ----------- ----------- ----------- ----------
(IN THOUSANDS)
INTEREST-EARNING ASSETS:
First mortgage loans, net.............. $ 80,168 $ (21,230) $ 58,938 $ 55,014 $ (1,337) $ 53,677
Consumer and other loans............... (1,079) (853) (1,932) 1,809 (490) 1,319
Federal funds sold..................... 10 (3,019) (3,009) 3,204 (2,740) 464
Mortgage-backed securities............. 83,795 (38,966) 44,829 55,020 (6,541) 48,479
Federal Home Loan Bank stock........... 1,150 (684) 466 3,228 (390) 2,838
Investment securities.................. (4,490) (1,083) (5,573) (31,017) 697 (30,320)
------------ ------------ ----------- ----------- ----------- ----------
Total.............................. 159,554 (65,835) 93,719 87,258 (10,801) 76,457
------------ ------------ ----------- ----------- ----------- ----------
INTEREST-BEARING LIABILITIES:
Savings accounts....................... 1,956 (2,241) (285) (136) (1,510) (1,646)
Interest-bearing demand accounts....... 6,587 1,377 7,964 (23) (310) (333)
Money market accounts.................. 2,690 (1,724) 966 31 (1,209) (1,178)
Time deposits.......................... 42,506 (102,383) (59,877) 24,279 (24,628) (349)
Borrowed funds......................... 56,334 (12,755) 43,579 52,486 (5,592) 46,894
------------ ------------ ----------- ----------- ----------- ----------
Total.............................. 110,073 (117,726) (7,653) 76,637 (33,249) 43,388
------------ ------------ ----------- ----------- ----------- ----------
Net change in net interest income.. $ 49,481 $ 51,891 $ 101,372 $ 10,621 $ 22,448 $ 33,069
============ ============ =========== =========== =========== ==========
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COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2002 AND DECEMBER 31, 2001
During the year ended December 31, 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. As a result, our
total assets increased $2.72 billion, or 23.8%, to $14.14 billion at December
31, 2002 from $11.42 billion at December 31, 2001.
Loans increased $1.00 billion, or 16.8%, to $6.97 billion at December
31, 2002 from $5.97 billion at December 31, 2001. For the year ended December
31, 2002, we originated first mortgage loans of $1.84 billion and purchased
first mortgage loans of $1.72 billion, compared with $1.52 billion and $857.6
million, respectively, for the corresponding 2001 period. These first mortgage
loan originations and purchases were exclusively in one-to four-family mortgage
loans and were primarily fixed-rate loans. At December 31, 2002, fixed-rate
mortgage loans accounted for 86.5% 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 as would adjustable-rate
loans. The increase in loan originations and purchases reflected the low
long-term market interest rate environment experienced in 2002, which caused
increases in loan prepayments and refinancings. The increase in mortgage loan
purchases also reflected our internal growth strategy.
The loan purchases were made pursuant to our wholesale loan purchase
program established to supplement our retail loan originations. The purchasing
agreements, as established with each seller/servicer, contain parameters as to
the loans that can be included in each package. These parameters, such as
maximum loan size and maximum loan-to-value ratio, conform to parameters
utilized by us to originate mortgage loans. Purchased loan packages are subject
to internal due diligence procedures that may include review of individual loan
files. This review subjects the purchased loan file to 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
east coast corridor states between Boston and Washington D.C., and in Michigan
and Illinois.
In 2002, due to the low long-term interest rate environment,
approximately $496.8 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
lower interest rates. 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. Approximately $866.3 million of
existing mortgage loans were modified during the year ended December 31, 2002.
This total is not included in total loan originations.
Mortgage-backed securities increased $1.12 billion, or 22.4%, to $6.13
billion at December 31, 2002 from $5.01 billion at December 31, 2001. This
increase includes a $861.2 million increase in mortgage-backed securities
available for sale. In addition to purchases of mortgage-backed securities as
part of our internal growth strategy, purchases also increased due to the low
market interest rate environment experienced during 2002, which caused increased
prepayment activity. Investment securities available for sale increased $393.5
million to $560.9 million at December 31, 2002 from $167.4 million at December
31, 2001. The increase in investment securities primarily reflected the
investment of part of the excess cash flows from mortgage-related prepayment
activity. These increases in interest-earning assets reflected our continued
emphasis on the origination and purchase of one-to four-family
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mortgage loans as our primary growth strategy, supplemented by the purchase of
mortgage-backed securities and investment securities to help manage interest
rate risk.
Cash and due from banks increased $68.9 million to $153.1 million at
December 31, 2002 from $84.2 million at December 31, 2001. Of the cash and due
from banks balance at December 31, 2002, $54.5 million was held at the Federal
Home Loan Bank. This balance receives interest credits equivalent to the current
federal funds overnight borrowing rate. Federal funds sold increased $70.1
million to $87.7 million at December 31, 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
prepayment activity and excess liquidity received late in the period having been
temporarily invested in federal funds sold. FHLB stock increased $56.4 million,
or 69.5%, to $137.5 million at December 31, 2002, which was the amount of stock
we were required by the FHLB to hold. The growth in accrued interest receivable
of $7.4 million to $69.2 million at December 31, 2002 was primarily due to the
growth of our interest-earning assets.
At December 31, 2002, total liabilities were $12.83 billion, an
increase of 26.5%, or $2.69 billion, compared with $10.14 billion at December
31, 2001. Borrowed funds increased $1.45 billion, or 67.4%, to $3.60 billion at
December 31, 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
$1.75 billion of Federal Home Loan Bank advances. Securities pledged as
collateral against our securities sold under agreements to repurchase had a
market value at December 31, 2002 of approximately $1.96 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 call options
starting 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 manage
interest expense in future periods.
Total deposits increased $1.23 billion, or 15.5%, to $9.14 billion at
December 31, 2002 from $7.91 billion at December 31, 2001. Interest-bearing
deposits increased $1.21 billion, or 16.0%, to $8.75 billion at December 31,
2002 from $7.54 billion at December 31, 2001. The increase in interest-bearing
deposits was primarily due to growth in interest-bearing demand accounts of
$938.4 million due to the introduction of our interest-bearing High Value
Checking account. The balance in the High Value Checking account at December 31,
2002 was $943.2 million. In April 2002, we introduced our interest-bearing High
Value Checking account, which we view as an attractive alternative to cash
management accounts offered by brokerage firms. This account offers unlimited
checking, on-line banking and debit card availability as part of the product,
and pays an interest rate generally above market competitive rates.
The growth in interest-bearing deposits was also due to a $112.3
million, or 21.7% increase in money market deposits to $629.0 million, an $84.0
million, or 1.4%, increase in time deposits to $6.19 billion, and a $78.3
million, or 9.6%, increase in regular savings deposits to $892.7 million at
December 31, 2002. Non-interest bearing deposits increased $12.8 million, or
3.4%, to $388.5 million at December 31, 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 deposit
products, the introduction of our interest-bearing High Value Checking account
and an overall decrease in investor confidence in the equity markets.
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Accrued expenses and other liabilities increased $14.6 million, or
19.4%, to $89.9 million at December 31, 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 and an increase in our accrued income tax payable
due to timing of tax payments.
Total stockholders' equity increased $27.3 million, or 2.1%, to $1.32
billion at December 31, 2002 from $1.29 billion at December 31, 2001. The
increase was primarily the result of net income of $192.0 million, an increase
of $19.4 million in accumulated other comprehensive income, net of tax, an
increase of $9.9 million due to the exercise of 1,410,330 stock options, and an
increase of $12.5 million due to the allocation of stock-related employee
benefit plans. The increase in accumulated other comprehensive income was
primarily due to the growth in our portfolio of mortgage-backed securities
available for sale and increases in the value of our investment securities
available for sale. Partially offsetting these increases in stockholders' equity
were repurchases of 7,754,472 shares of our common stock at an aggregate cost of
$140.2 million and cash dividends declared and paid to common stockholders of
$64.5 million. As of December 31, 2002, there remained 1,808,796 shares
authorized to be purchased under our current stock repurchase program.
At December 31, 2002, the ratio of total stockholders' equity to total
assets was 9.30% compared with 11.28% at December 31, 2001. For the year ended
December 31, 2002, the ratio of average stockholders' equity to average assets
was 10.12% compared with 13.05% for the year ended December 31, 2001. The
decrease in these ratios was primarily due to our capital management strategy of
planned internal asset growth, and a slower percentage growth in stockholders'
equity as compared to the percentage growth in assets due to payment of cash
dividends and stock repurchases. Stockholders' equity per common share was $7.22
and $6.87 at December 31, 2002 and December 31, 2001, respectively.
COMPARISON OF OPERATING RESULTS FOR THE YEAR ENDED DECEMBER 31, 2002 AND 2001
General. Net income was $192.0 million for the year ended December 31,
2002, an increase of $57.5 million, or 42.8%, compared with net income of $134.5
million for the year ended December 31, 2001. Basic and diluted earnings per
common share were $1.04 and $1.01, respectively, for the year ended December 31,
2002 compared with basic and diluted earnings per share of $0.69 and $0.68,
respectively, for the year ended December 31, 2001. For the year ended December
31, 2002 our return on average stockholders' equity was 14.84% compared with
10.09% for the year ended December 31, 2001. Our return on average assets for
the year ended December 31, 2002 was 1.50% compared with 1.32% for the year
ended December 31, 2001. These increases reflected our improved profitability
due to increased interest rate spreads that we experienced in the low interest
rate environment and our ability to grow our business with low cost
interest-bearing liabilities.
Interest and Dividend Income. Total interest and dividend income
increased $93.7 million, or 13.6%, to $784.2 million for the year ended December
31, 2002 compared with $690.5 million for the year ended December 31, 2001. The
increase in total interest income was primarily due to the average balance of
total interest-earning assets increasing $2.50 billion, or 25.0%, to $12.52
billion for the year ended December 31, 2002 compared with $10.02 billion for
the year ended December 31, 2001. This increase was due in part to a $1.15
billion, or 22.1%, increase in the average balance of first mortgage loans, net
to $6.35 billion for the year ended December 31, 2002 compared with $5.20
billion for 2001. The average balance of mortgage-backed securities increased
$1.42 billion, or 35.1%, to $5.46 billion for the year ended December 31, 2002
compared with $4.04 billion for 2001. These increases were slightly offset by a
decrease in the average balance of investment securities for the year ended
December 31, 2002 of $74.3 million, or 19.1%, to $315.2 million from $389.5
million for 2001. The increase in the average
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balance of FHLB stock of $22.2 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
as our primary growth strategy, 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 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 63 basis point decrease in
the average yield on interest-earning assets to 6.26% for the year ended
December 31, 2002 from 6.89% for the year ended December 31, 2001. The average
yield on first mortgage loans, net decreased 39 basis points to 6.93% for the
year ended December 31, 2002 from 7.32% for 2001. The average yield on
mortgage-backed securities decreased 88 basis points to 5.63% for the year ended
December 31, 2002 from 6.51% for 2001.
The decrease in the 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 2002. The decrease in the average yield on
mortgage-backed securities reflected the large volume of purchases and the
downward repricing of our adjustable-rate securities during the low interest
rate environment of 2001 and 2002. The larger decrease in the 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 adjustable-rate securities in the
mortgage-backed security portfolio as compared to our mortgage loan 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 that are part
of the terms of the security, which have limited the extent our adjustable-rate
securities may have adjusted in prior periods.
Interest Expense. Total interest expense, comprised of interest on
deposits and interest on borrowed funds, decreased $7.6 million, or 1.9%, to
$395.8 million for the year ended December 31, 2002 from $403.4 million for the
year ended December 31, 2001, notwithstanding an overall increase in
interest-bearing liabilities. Interest expense on borrowed funds increased $43.6
million, or 45.2%, to $140.0 million for the year ended December 31, 2002 from
$96.4 million for 2001. Interest expense on deposits decreased $51.2 million, or
16.7%, to $255.8 million for the year ended December 31, 2002 from $307.0
million for 2001. The decrease in total interest expense reflected the impact of
a 117 basis point decrease in the average cost of interest-bearing liabilities
to 3.60% for the year ended December 31, 2002 from 4.77% for 2001. The decrease
in interest expense was offset, in part, by an increase in the average balance
of interest-bearing liabilities of $2.55 billion, or 30.2%, to $11.00 billion
for the year ended December 31, 2002 from $8.45 billion for the year ended
December 31, 2001.
The increase in interest expense on borrowed funds was primarily due to
a $1.12 billion, or 64.7%, increase in the average balance of borrowed funds to
$2.85 billion for the year ended December 31, 2002 from $1.73 billion for 2001.
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 67 basis point
decrease in the average cost of borrowed funds to 4.90% for the year ended
December 31, 2002 from 5.57% for 2001.
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The growth of borrowed funds has been used to fund internal asset
growth consistent with our capital management and growth strategies. The funds
borrowed during 2002 had 10-year terms to maturity with call options starting 3
to 5 years from the borrowing date. Although these borrowings generally had
higher costs than short-term borrowings, 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 manage interest expense in future
periods. The decrease in the average cost of borrowed funds reflected the
continued growth of our borrowed funds in the low interest rate environment that
existed during 2001 and 2002 and the restructuring of certain of our borrowed
funds to obtain lower interest rates.
The $51.2 million decrease in interest expense on deposits was
primarily due to a 143 basis point decrease in the average cost of
interest-bearing deposits to 3.14% for the year ended December 31, 2002 from
4.57% for 2001. The decrease in the average cost of interest-bearing deposits
was primarily due to a 171 basis point decrease in the average cost of our time
deposits to 3.44% for 2002 from 5.15% for 2001. The average cost of regular
savings accounts decreased 27 basis points to 1.98% for 2002 and the average
cost of money market deposits decreased 34 basis points to 1.97% for 2002.
Partially offsetting these decreases, the average cost of interest-bearing
demand accounts increased 97 basis points to 2.55% for 2002 from 1.58% for 2001
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 2002. The impact on the average cost of
interest-bearing liabilities due to possible further decreases in market
interest rates may not be as favorable in future periods as short-term market
rates are currently at historically low levels.
The impact on interest expense on deposits due to the decrease in the
average cost of interest-bearing deposits was offset, in part, by a $1.43
billion, or 21.3%, increase in the average balance of interest-bearing deposits
to $8.15 billion for the year ended December 31, 2002 from $6.72 billion for
2001. The average balance of time deposits increased $930.0 million, or 17.3%,
to $6.31 billion for 2002 from $5.38 billion for 2001. The average balance of
interest-bearing demand accounts increased $276.6 million to $370.8 million for
2002 from $94.2 million for 2001 due to the introduction of our High Value
Checking account in the second quarter of 2002. The average balance of money
market accounts increased $128.0 million to $593.0 million for 2002 from $465.0
million for 2001 and the average balance of regular savings accounts increased
$93.4 million to $869.8 million for 2002 from $776.4 million for 2001. We
believe the increase in the interest-bearing deposits was due primarily to our
consistent offering of competitive rates on our deposit products, the
introduction of our interest-bearing High Value Checking account and an overall
decrease in investor confidence in the equity markets.
Net Interest Income. Net interest income increased $101.3 million, or
35.3%, to $388.4 million for the year ended December 31, 2002 compared with
$287.1 million for the year ended December 31, 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 average yield on total
interest-earning assets and the average cost of total interest-bearing
liabilities, increased 54 basis points to 2.66% for the year ended December 31,
2002 from 2.12% for 2001. Our net interest margin, represented by net interest
income divided by average total interest-earning assets, increased 23 basis
points to 3.10% for the year December 31, 2002 from 2.87% for 2001.
These increases reflected our improved profitability due to the
declining interest rate environment experienced during 2001 and 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
Page 65
low cost 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. However,
during 2002, long-term interest rates generally declined, while short-term
interest rates remained relatively stable, thus narrowing the yield curve. The
narrower yield curve and the increased prepayment activity on our
mortgage-related assets, due to the historically low market interest rates, may
have a negative impact on our net interest income, net interest rate spread and
net interest margin in future periods.
Provision for Loan Losses. Our provision for loan losses for the year
December 31, 2002 was $1.5 million, a decrease of $0.4 million, or 21.1%,
compared with $1.9 million for the year ended December 31, 2001. Net charge-offs
for the year ended December 31, 2002 were $9,000 compared with net charge-offs
of $9,000 for 2001. The decrease in the provision reflected our recent low
charge-off history given the relative stability of the housing market. The
allowance for loan losses increased $1.5 million, or 6.3%, to $25.5 million at
December 31, 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 $4.6 million, or 29.5%, to $20.2 million
at December 31, 2002 from $15.6 million at December 31, 2001. The increase in
the dollar amount of our non-performing loans, which was primarily due to an
increase of our non-performing purchased FHA/VA loan portfolio of $4.5 million,
was due to the slow economic conditions during 2002, characterized by higher
unemployment. The ratio of non-performing loans to total loans was 0.29% at
December 31, 2002 compared with 0.26% at December 31, 2001. The ratio of the
allowance for loan losses to non-performing loans was 126.27% at December 31,
2002 compared with 153.44% at December 31, 2001. The ratio of the allowance for
loan losses to total loans was 0.37% at December 31, 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, additions may be necessary if
future economic and other conditions 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 judgment and short-term change. See "Critical Accounting Policies."
Non-Interest Income. Total non-interest income, consisting generally of
service charges and fees on customer accounts, was $8.0 million and $4.7
million, respectively, for the years ended December 31, 2002 and 2001. The
increase in service fees and other income of $1.2 million was primarily due to a
$760,000 gain on the sale of a commercial property not deemed to be a strategic
part of our business plan.
The $2.1 million gain on securities transactions, net, which occurred
in the fourth quarter of 2002, resulted from an opportunity to restructure
certain assets and liabilities to allow us to be better positioned for future
changes in interest rates. The cash flow of $88.7 million from the sale of the
securities was reinvested in higher yielding securities at a slightly longer
duration. To match this duration extension, we restructured certain of our
borrowed funds to extend their maturity and lower the contract rate.
Non-Interest Expense. Total non-interest expense increased $11.7
million, or 14.3%, to $93.5 million for the year ended December 31, 2002 from
$81.8 million for the year ended December 31, 2001. The increase was primarily
due to an increase in salaries and employee benefits of $8.4 million, or 16.1%,
to $60.7 million for the year ended December 31, 2002 from $52.3 million for
2001. 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
Page 66
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 a $3.7 million increase in stock-related compensation expense.
Other expenses increased $3.2 million, or 24.4%, to $16.3 million for the year
ended December 31, 2002 compared with $13.1 million for 2001. 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 23.72% for the year ended December 31, 2002
compared with 28.04% for the year ended December 31, 2001. Our ratio of
non-interest expense to average assets for the year ended December 31, 2002 was
0.73% compared with 0.80% for the year ended December 31, 2001.
Income Taxes. Income tax expense increased $35.9 million, or 48.8%, to
$109.4 million for the year ended December 31, 2002 from $73.5 million for the
year ended December 31, 2001. This increase was primarily due to the $93.3
million, or 44.8% increase in income before income tax expense and changes to
the New Jersey corporate business tax code. In July 2002, the New Jersey State
Legislature passed the Business Tax Reform Act. This new legislation, which was
retroactive to January 1, 2002, has increased our annual effective tax rate to
approximately 36.5%. The overall change in income tax expense, due to the new
state tax structure, was approximately $2.9 million. Our effective tax rate for
2002 was 36.29% compared with 35.33% for 2001.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2001 AND DECEMBER 31, 2000
Our total assets increased $2.05 billion, or 21.9%, to $11.43 billion
at December 31, 2001 from $9.38 billion at December 31, 2000. This increase was
generally reflected in increases in mortgage loans and mortgage-backed
securities, partially offset by decreases in investment securities.
Loans increased $1.10 billion, or 22.6%, to $5.97 billion at December
31, 2001 from $4.87 billion at December 31, 2000. For the year ended December
31, 2001, we originated and purchased first mortgage loans of approximately
$1.52 billion and $857.6 million, respectively, compared with $895.1 million and
$110.7 million, respectively, for the corresponding 2000 period. These
originations and purchases were concentrated in one- to four-family residential
mortgage loans. The increase in loan originations, a part of our growth
strategy, was also due to the lower market interest rate environment during 2001
that caused an increase in prepayments and refinancings. To supplement our loan
originations we began, late in 2000, to purchase a higher volume of first
mortgage loans than were purchased in previous periods. See "Business of Hudson
City Savings Bank - Lending Activities - Residential Mortgage Lending" for a
discussion of loan purchases. We also originated for the years ended December
31, 2001 and 2000, home equity loans of approximately $62.0 million and $71.4
million, respectively.
Mortgage-backed securities increased $1.75 billion, or 53.6%, to $5.01
billion at December 31, 2001 from $3.26 billion at December 31, 2000. Investment
securities available for sale decreased $709.2 million, or 80.9%, to $167.5
million at December 31, 2001 from $876.7 million at December 31, 2000. The
increase in mortgage-backed securities, a part of our growth strategy, was also
due to the reinvestment of $855.7 million of calls of investment securities into
adjustable-rate or higher yielding fixed-rate mortgage-backed securities during
2001. The large amount of calls of investment securities was due to the lower
interest rate environment that existed during 2001. These increases in
interest-earning assets continue to reflect our emphasis on the origination and
purchase of one- to four-family
Page 67
mortgage loans supplemented by the purchase of mortgage-backed securities as
part of our growth strategy. We began classifying certain mortgage-backed
security purchases as available for sale during 2001 to maintain internal
liquidity requirements.
Federal funds sold decreased $104.1 million, or 85.5%, to $17.6 million
at December 31, 2001 from $121.7 million at December 31, 2000. The higher levels
of federal funds sold at December 31, 2000 resulted from calls of investment
securities, the proceeds from which had not yet been fully invested at year end.
FHLB stock increased $7.5 million to $81.1 million at December 31, 2001, which
was the amount of stock we were required to hold.
At December 31, 2001, total liabilities were $10.14 billion, an
increase of 28.0%, or $2.22 billion, compared with $7.92 billion at December 31,
2000. Borrowed funds increased $900.0 million, or 72.0%, to $2.15 billion at
December 31, 2001 from $1.25 billion at December 31, 2000. Borrowed funds at
December 31, 2001 were comprised of $1.55 billion of securities sold under
agreements to repurchase and $600.0 million of FHLB advances. Advances from the
FHLB utilize our mortgage portfolio as collateral. The increase in borrowed
funds was primarily used to fund asset growth consistent with our capital
management strategy. Funding asset growth with borrowed funds generated
additional earnings through a positive interest rate spread.
Total deposits increased $1.31 billion, or 19.8%, to $7.91 billion at
December 31, 2001 from $6.60 billion at December 31, 2000. Interest-bearing
deposits increased $1.27 billion, or 20.3%, to $7.54 billion at December 31,
2001 from $6.27 billion at December 31, 2000. The increase in interest-bearing
deposits was primarily due to a $1.13 billion, or 22.7%, increase in time
deposits to $6.10 billion at December 31, 2001 from $4.97 billion at December
31, 2000. Noninterest-bearing deposits increased $43.5 million, or 13.1%, to
$375.7 million at December 31, 2001 from $332.2 million at December 31, 2000.
The increase in total deposits was primarily used to fund asset growth
consistent with our capital management strategy. We believe the increase in
interest-bearing deposits was due in part to the volatility in the equity
markets, our offering competitive rates on our time deposit products, and
deposit movement among financial institutions due to consolidation within our
industry.
Accrued expenses and other liabilities increased $13.6 million, or
22.0%, to $75.3 million at December 31, 2001 from $61.7 million at December 31,
2000. This increase was primarily due to an increase in accrued interest payable
because of the growth of our borrowed funds and an increase in accrued expenses
related to certain employee benefit plans, primarily postretirement benefits.
Total stockholders' equity decreased $175.8 million, or 12.0%, to $1.29
billion at December 31, 2001 from $1.46 billion at December 31, 2000. Hudson
City repurchased 25,966,800 dividend-adjusted shares of our common stock during
2001, which decreased stockholders' equity by $278.5 million. As of December 31,
2001, there were 9,563,268 dividend-adjusted shares authorized to be purchased
under our current stock repurchase program. Offsetting the effect of repurchases
on stockholders' equity was net income of $134.5 million for the year ended
December 31, 2001 and an increase in accumulated other comprehensive income, net
of tax, of $7.9 million. This increase was due to increases in the market values
of our investment securities available for sale due to the lower interest rate
environment. Stockholders' equity was also decreased during 2001 by the
declarations of cash dividends to common stockholders totaling $46.5 million and
the purchase of 374,836 dividend-adjusted shares of common stock for the
recognition and retention plans at an aggregate cost of $4.2 million. The
exercise of 285,600 dividend-adjusted options during 2001 increased
stockholders' equity by $2.0 million.
At December 31, 2001, the ratio of total stockholders' equity to total
assets was 11.28% compared with 15.61% at December 31, 2000. For the year ended
December 31, 2001, the ratio of average
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stockholders' equity to average assets was 13.05% compared with 16.35% for the
year ended December 31, 2000. Stockholders' equity per common share was $6.87 at
December 31, 2001 compared with $6.89 at December 31, 2000. The decrease in
these ratios was primarily due to the decrease in stockholders' equity and the
growth in assets as discussed above.
COMPARISON OF OPERATING RESULTS FOR THE YEAR ENDED DECEMBER 31, 2001 AND 2000
General. Net income was $134.5 million for the year ended December 31,
2001, an increase of $19.7 million, or 17.2%, from net income of $114.8 million
for the year ended December 31, 2000. Basic and diluted earnings per common
share were $0.69 and $0.68, respectively, for 2001 compared with basic and
diluted earnings per common share of $0.52 for 2000. Our return on average
stockholders' equity and return on average assets for 2001 was 10.09% and 1.32%,
respectively, compared with 7.87% and 1.29%, respectively, for 2000. The
increase in the return on average stockholders' equity reflected the growth in
net income and the decrease in stockholders' equity.
Interest and Dividend Income. Total interest and dividend income
increased $76.5 million, or 12.5%, to $690.5 million for year ended December 31,
2001 compared with $614.0 million for the corresponding 2000 period. The
increase in total interest and dividend income was primarily due to the average
balance of total interest-earning assets increasing $1.25 billion, or 14.3%, to
$10.02 billion for the year ended December 31, 2001 compared with $8.77 billion
for the year ended December 31, 2000. The average balance of first mortgage
loans, net increased $748.5 million, or 16.8%, to $5.20 billion for 2001
compared with $4.46 billion for 2000. The average balance of consumer and other
loans increased $23.2 million, or 17.7%, to $154.0 million for 2001 compared
with $130.8 million for 2000. The average balance of mortgage-backed securities
increased $839.2 million, or 26.2%, to $4.04 billion for 2001 compared with
$3.20 billion for 2000. These increases were offset in part by a decrease in the
average balance of investment securities for 2001 of $492.7 million, or 55.8%,
to $389.5 million from $882.2 million for 2000. The average balance of Federal
funds sold increased $73.1 million, or 90.9%, to $153.5 million for 2001
compared with $80.4 million for 2000. The average balance of FHLB stock
increased $55.4 million to $79.4 million for 2001 from $24.0 million for 2000.
The above increases in the average balances of interest-earning assets
reflected internal growth that was consistent with our capital management
strategy to originate and purchase first mortgage loans and consumer and other
loans, while purchasing mortgage-backed securities to supplement loan
originations and manage interest rate risk. The increase in the average balance
of first mortgage loans also reflected the program we established late in 2000
to supplement our loan originations by purchasing a higher volume of first
mortgage loans than in previous periods. The growth in the average balance of
mortgage-backed securities and the decline in the average balance of investment
securities reflected the calls of investment securities during 2001 due to the
lower interest rate environment. The growth in the average balance of
mortgage-backed securities was also due to the investment of other funds in
mortage-backed securities as part of our capital management strategy. The
increase in the average balance of federal funds sold reflected the initial
investment of the proceeds of the calls of investment securities, and the
initial investment of the large volume of mortgage loan and mortgage-backed
security prepayments. These funds were subsequently invested in adjustable-rate
or higher yielding fixed-rate mortgage-backed securities or mortgage loans. The
increase in the average balance of FHLB stock reflected the increase in the
amount of FHLB stock required to be held by us based on our asset size.
The increase in interest income due to the growth of average total
interest-earning assets was partially offset by an 11 basis point decrease in
the average yield on interest-earning assets to 6.89% for year ended December
31, 2001 compared with 7.00% for the year ended December 31, 2000. The average
yield on first mortgage loans, net, decreased 3 basis points to 7.32% for 2001
compared with
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7.35% for 2000. The average yield on mortgage-backed securities decreased 20
basis points to 6.51% for 2001 compared with 6.71% for 2000.
The slight decrease in the average yield on first mortgage loans, net,
reflected the relative stability of our offered mortgage interest rates, which
are based on long-term market rates, in the lower short-term interest rate
environment during 2001. The decrease in the average yield on mortgage-backed
securities reflected the repricing of our variable-rate mortgage-backed
securities in the lower interest rate environment. The decrease in the average
yield on mortgage-backed securities also reflected the large volume of purchases
made in the lower rate environment due to the calls of investment securities and
the large prepayment volume on our mortgage-backed security portfolio.
Interest Expense. Total interest expense increased $43.4 million, or
12.1%, to $403.4 million for the year ended December 31, 2001 compared with
$360.0 million for the year ended December 31, 2000. Interest expense on
borrowed funds increased $46.9 million, or 94.7%, to $96.4 million for the year
ended December 31, 2001 compared with $49.5 million for the corresponding 2000
period. Interest expense on deposits decreased $3.5 million, or 1.1%, to $307.0
million for the year ended December 31, 2001 compared with $310.5 million for
the corresponding 2000 period.
The increase in total interest expense was attributable to an increase
in the average balance of total interest-bearing liabilities of $1.38 billion,
or 19.5%, to $8.45 billion for the year ended December 31, 2001 compared with
$7.07 billion for the year ended December 31, 2000. The increase in the average
balance of total interest-bearing liabilities primarily resulted from an
increase in the average balance of borrowed funds of $934.0 million, or 117.0%,
to $1.73 billion for 2001 compared with $798.0 million for 2000. The use of
borrowed funds has accelerated over the past year to fund asset growth. The
increase also reflected our decision to assist in managing our interest rate
risk by using long-term borrowings to match our long-term assets.
The average balance of interest-bearing deposits increased $443.6
million, or 7.1%, to $6.72 billion for 2001 compared with $6.27 billion for
2000. The increase in the average balance of interest-bearing deposits was
attributable to an increase in the average balance of time deposits of $449.4
million, or 9.1%, to $5.38 billion for 2001 compared with $4.93 billion for
2000. We believe the overall increase in total interest-bearing deposits was due
in part to the volatility in the equity markets, our offering competitive rates
on our time deposit products and deposit movement among financial institutions
due to consolidation within our industry.
The increase in interest expense due to the growth of total
interest-bearing liabilities was partially offset by a 32 basis point decrease
in the average cost of total interest-bearing liabilities to 4.77% for the year
ended December 31, 2001 from 5.09% for the year ended December 31, 2000. The
average cost of total interest-bearing deposits decreased 38 basis points to
4.57% for 2001 compared with 4.95% for 2000. Within the interest-bearing deposit
mix, the average cost of time deposits decreased 48 basis points to 5.15% for
2001 compared with 5.63% for 2000. The decrease in the average cost of
interest-bearing deposits reflected the lower market interest rate environment
in 2001.
The average cost of borrowed funds decreased 64 basis points to 5.57%
for the year ended December 31, 2001 compared with 6.21% for the corresponding
2000 period. The decrease in the average cost of borrowed funds reflected the
continued growth in borrowings during the lower interest rate environment of
2001, and the maturing and refunding in 2001 of higher costing short-term
borrowings originated in 2000. The decreases in the average costs of the
individual components of interest-bearing liabilities reflected the lower
interest rate environment experienced during 2001. However, the lower basis
point decrease in the overall cost of total average interest-bearing
liabilities,
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when compared to the individual components, reflected the larger percentage of
borrowed funds in our interest-bearing liability mix. These borrowed funds had
higher costs than our existing deposit portfolio.
Net Interest Income. Net interest income increased $33.1 million, or
13.0%, to $287.1 million for the year ended December 31, 2001 compared with
$254.0 million for the year ended December 31, 2000. This increase primarily
reflected increases in the average balance of both interest-earning assets and
interest-bearing liabilities, and the net interest rate spread earned on this
growth. Our net interest rate spread, the difference between the average yield
on average total interest-earning assets and the average cost of average total
interest-bearing liabilities, increased 21 basis points to 2.12% for the year
ended December 31, 2001 compared with 1.91% for the corresponding 2000 period.
The increase in the net interest spread was primarily due to the lower interest
rate environment experienced during 2001 and the fact that our interest-bearing
liabilities repriced faster than our interest-earning assets.
Our net interest margin, represented by net interest income divided by
average total interest-earning assets, decreased 3 basis points to 2.87% for the
year ended December 31, 2001 compared with 2.90% for the corresponding 2000
period. The decrease in the net interest margin reflected the fact that the
average balance of our interest-bearing liabilities grew at a higher rate than
the average balance of our interest-earning assets. This was due, in part, to
the use of funds, which could have been otherwise invested, to purchase our
common stock. This use of funds caused our net interest income to grow at a
lesser rate than did our average interest-earning assets.
Provision for Loan Losses. Our provision for loan losses for the year
ended December 31, 2001 was $1.9 million, a decrease of $0.2 million, or 9.5%,
compared with $2.1 million for the year ended December 31, 2000. Net loan
charge-offs for 2001 were $9,000 compared with net recoveries of $4,000 during
2000. As a result, the allowance for loan losses increased $1.9 million, or
8.6%, to $24.0 million at December 31, 2001 from $22.1 million at December 31,
2000. The increase in the allowance for loan losses to its current level,
through the continued provision for loan losses, reflected the overall growth of
the loan portfolio, the level of delinquent and non-performing loans and real
estate market conditions during 2001.
Non-performing loans, defined as non-accruing loans and accruing loans
delinquent 90 days or more, increased $2.6 million, or 20.0%, to $15.6 million
at December 31, 2001 from $13.0 million at December 31, 2000, primarily due to
the continued growth in the loan portfolio and the slow economic conditions in
2001. Although non-performing loans increased during 2001, the ratio of
non-performing loans to total loans decreased to 0.26% at December 31, 2001
compared with 0.27% at December 31, 2000. The ratio of the allowance for loan
losses to non-performing loans was 153.4% at December 31, 2001 compared with
170.7% at December 31, 2000. The ratio of the allowance for loan losses to total
loans was 0.40% at December 31, 2001 compared with 0.45% at December 31, 2000.
Non-Interest Income. Total non-interest income, consisting primarily of
service fees, was $4.7 million for the year ended December 31, 2001 compared
with $4.5 million for the year ended December 31, 2000.
Non-Interest Expense. Total non-interest expense increased $2.8
million, or 3.5%, to $81.8 million for the year ended December 31, 2001 compared
with $79.0 million for the year ended December 31, 2000. The increase was
primarily due to an increase in salaries and employee benefits of $2.4 million,
or 4.8%, to $52.3 million for 2001 compared with $49.9 million for 2000. The
increase in salaries and employee benefits reflected routine salary increases
and included additional expense of our ESOP which is based on the market price
of our common stock in accordance with the provisions of Statement of Position
93-6, "Employer Accounting for Employee Stock Ownership Plans."
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Our efficiency ratio, determined by dividing non-interest expense by
the sum of net interest income and non-interest income, excluding net gains on
securities transactions, was 28.0% for 2001 compared with 30.6% for 2000. Our
ratio of non-interest expense to average assets for 2001 was 0.80% compared with
0.89% for 2000. The decrease in these ratios reflected our efforts to control
non-interest expense while growing assets consistent with our capital management
strategy.
Income Taxes. Income tax expense increased $10.9 million, or 17.4%, to
$73.5 million for the year ended December 31, 2001 compared with $62.6 million
for year ended December 31, 2000. The increase in income tax expense was due to
the increase in income before income tax expense. Our effective tax rate for
2001 and 2000 was 35.3%.
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 $2.63 billion during 2002 compared
with $1.35 billion for 2001. Principal payments received on mortgage-backed
securities totaled $2.38 billion during 2002 compared to $1.62 billion during
2001. The increase in payments on loans and mortgage-backed securities reflected
the low market interest rate environment during 2001 and 2002, which caused an
increase in prepayment activity when compared with the prior period. 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
$203.4 million during 2002 compared with maturities and calls of $855.7 million
during 2001. The higher amount of calls during 2001 was due to the declining
interest rate environment that began early in 2001 and the larger 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 years ended December 31, 2002 and 2001, we borrowed funds of
$1.45 billion and $1.55 billion, respectively. The $1.45 billion of new
long-term borrowed funds in 2002 consisted primarily of borrowings with 10-year
terms to maturity with call options starting from 3 to 5 years from the
borrowing date. There were no principal payments on borrowed funds during 2002,
but there were $650.0 million of principal payments during 2001.
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The $1.45 billion increase in borrowed funds during 2002 funded planned
internal 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
December 31, 2002, there were $50.0 million of borrowed funds scheduled to
mature within one year.
Total deposits increased $1.23 billion during 2002 compared with an
increase of $1.31 billion during 2001. Deposit flows are affected by the level
of market interest rates, the interest rates and products offered by
competitors, the volatility of equity markets, and other factors. We believe the
increase in interest-bearing deposits was due primarily to our consistent
offering of competitive rates on our deposit products, the introduction of our
interest-bearing High Value Checking account and an overall decrease in investor
confidence in the equity markets. Time deposit accounts scheduled to mature
within one year were $5.12 billion at December 31, 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
$1.91 billion and $1.72 billion, respectively, during 2002 compared with $1.59
billion and $857.6 million, respectively, during 2001. The increase was
primarily due to planned balance sheet growth and the low market interest rate
environment during 2001 and 2002, which caused an increase in prepayment and
loan refinancing activity. 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 2002 were $3.57 billion
compared with $3.36 billion during 2001. Of the mortgage-backed securities
purchased in 2002, $1.44 billion were real estate mortgage investment conduits
("REMIC") compared with $2.17 billion purchased in 2001. The REMIC purchases in
2002 and 2001 had fixed interest rates and generally had shorter average lives
compared with alternate mortgage-backed security investments available at the
time of purchase. Generally, these purchases experienced faster prepayment
speeds during 2002 than other mortgage-backed securities. 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 2002 and the internal growth strategies employed by us during these periods.
During 2002, we purchased $598.5 million of investment securities
compared with purchases of $140.4 million during 2001. These purchases were made
with excess cash flows from payments on our mortgage-related assets. As part of
the membership requirements of the FHLB, we are required to purchase a certain
dollar amount of FHLB common stock. During 2002, we purchased $56.4 million of
FHLB common stock compared with purchases of $7.5 million during 2001. The
purchases in 2002 bring our total investment in FHLB stock to $137.5 million,
the amount we are currently required to hold.
On April 16, 2002, a 100 percent stock dividend was declared, having
the effect of a two-for-one stock split. Stockholders of record on May 24, 2002
received one additional share of common stock for every share of common stock
held on that date. The stock dividend was paid on June 17, 2002. The effect of
the 100% stock dividend has been retroactively reflected in the presentation of
this document.
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During 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 2002. As of December 31,
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
2002, we purchased 7,754,472 dividend-adjusted shares of our common stock at an
aggregate cost of $140.2 million. During 2001, we purchased 25,966,800
dividend-adjusted shares of our common stock at an aggregate cost of $278.5
million. At December 31, 2002, there were 1,808,796 shares remaining to be
repurchased under the existing stock repurchase program.
At December 31, 2002, Hudson City Savings had outstanding loan
commitments to borrowers of approximately $213.0 million, commitments to
purchase loans of approximately $261.6 million, commitments to purchase
mortgage-backed securities of $263.2 million and available home equity and
overdraft lines of credit of approximately $83.3 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 2002 were $64.5 million
compared with $46.5 million during 2001. The dividend pay-out ratio for the
years ended December 31, 2002 and 2001 was 33.17% and 34.06%, respectively. On
January 14, 2003, the Board of Directors declared a quarterly cash dividend of
eleven cents ($0.11) per common share. The dividend was paid on March 3, 2003 to
stockholders of record at the close of business on February 7, 2003.
We opened one new branch during 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 December 31, 2002, Hudson City Bancorp and Hudson City Savings
exceeded all regulatory capital requirements. Hudson City Bancorp's leverage
capital ratio, tier 1 risk-based capital ratio and total risk-based capital
ratio were 9.48%, 28.11% and 28.67%, respectively. Hudson City Savings' leverage
capital ratio, tier 1 risk-based capital ratio and total risk-based capital
ratio were 8.85%, 26.26% and 26.81%, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("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
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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 provisions 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 did not have any
impact on our consolidated financial statements.
In December, 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation, Transition and Disclosure." SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. SFAS No. 148 also
requires that disclosures of the pro forma effect of using the fair value method
of accounting for stock-based employee compensation be displayed more
prominently and in a tabular format. Additionally, SFAS No. 148 requires
disclosure of the pro forma effect in interim financial statements. The
additional disclosure requirements of SFAS No. 148 are effective for fiscal
years ended after December 15, 2002. We have adopted the expanded disclosure
provisions of this statement effective December 31, 2002.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and accompanying Notes to
Consolidated Financial Statements of Hudson City Bancorp have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP"). GAAP generally requires the measurement of financial position
and operating results in terms of historical dollars without consideration for
changes in the relative purchasing power of money over time due to inflation.
The impact of inflation is reflected in the increased cost of our operations.
Unlike industrial companies, our assets and liabilities are primarily monetary
in nature. As a result, changes in market interest rates have a greater impact
on performance than do the effects of inflation.
CRITICAL ACCOUNTING POLICIES
Note 1 to our Audited Consolidated Financial Statements for the year
ended December 31, 2002, included in Item 8, "Financial Statements and
Supplementary Data," of this Annual Report on Form 10-K
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for the year ended December 31, 2002, 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.
Allowance for Loan Losses. The allowance for loan losses has been
determined in accordance with accounting principles generally accepted in the
United States of America, under which we are required to maintain adequate
allowances for loan losses. We are responsible for the timely and periodic
determination of the amount of the allowance required. We believe that our
allowance for loan losses is adequate to cover specifically identifiable loan
losses, as well as estimated losses inherent in our portfolio for which certain
losses are probable but not specifically identifiable.
As part of our evaluation of the adequacy of our allowance for loan
losses, each month we prepare a worksheet. This worksheet categorizes the entire
loan portfolio by certain risk characteristics such as loan type (one- to
four-family, multi-family, etc.) and payment status (i.e., current or number of
days delinquent). Loans with known potential losses are categorized separately.
We assign potential loss factors to the payment status categories on the basis
of our assessment of the potential risk inherent in each loan type. We use this
worksheet, together with loan portfolio balances and delinquency reports, to
evaluate the adequacy of the allowance for loan losses. Other key factors we
consider in this process are current real estate market conditions, changes in
the trend of non-performing loans, the current state of the local and national
economy and loan portfolio growth.
We maintain the allowance for loan losses through provisions for loan
losses that we charge to income. We charge losses on loans against the allowance
for loan losses when we believe the collection of loan principal is unlikely. We
establish the provision for loan losses after considering the results of our
review of delinquency and charge-off trends, the allowance for loan loss
worksheet, the amount of the allowance for loan losses in relation to the total
loan balance, loan portfolio growth, accounting principles generally accepted in
the United States of America and regulatory guidance. We have applied this
process consistently and we have made minimal changes in the estimation methods
and assumptions that we have used.
Our primary lending emphasis is the origination of one- to four-family
first mortgage loans on residential properties and, to a lesser extent, second
mortgage loans on one- to four-family residential properties. As a result of our
lending emphasis, we had a loan concentration in residential first mortgage
loans at December 31, 2002, the majority of which are secured by real property
located in New Jersey.
Based on the composition of our loan portfolio and the growth in our
loan portfolio, we believe the primary risks inherent in our portfolio are
possible increases in interest rates, a further decline in the economy,
generally, and a possible decline in real estate market values. Any one or a
combination of these events may adversely affect our loan portfolio resulting in
increased delinquencies, loan losses and future levels of provisions. We have
maintained our provision for loan losses at the current level to primarily
address the actual growth in our loan portfolio.
Although we believe that we have established and maintained the
allowance for loan losses at adequate levels, additions may be necessary if
future economic and other conditions differ substantially from the current
operating environment. Although management uses the best information available,
the
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level of the allowance for loan losses remains an estimate that is subject to
significant judgment and short-term change.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Comparison of Operating Results for the Years Ended
December 31, 2002 and 2001 -- Provision for Loan Losses."
Asset Impairment Judgments. Certain of our assets are carried in our
consolidated statements of financial condition at fair value or at the lower of
cost or fair value. Valuation allowances are established when necessary to
recognize impairment of such assets. We periodically perform analyses to test
for impairment of various assets. In addition to our impairment analyses related
to loans discussed above, another significant impairment analysis relates to the
value of other than temporary declines in the value of our securities.
Our available for sale portfolio is carried at estimated fair value,
with any unrealized gains and losses, net of taxes, reported as accumulated
other comprehensive income in stockholders' equity. The securities which we have
the positive intent and ability to hold to maturity are classified as held to
maturity and are carried at amortized cost. We conduct a periodic review and
evaluation of the securities portfolio to determine if the value of any security
has declined below its carrying value and whether such decline is other than
temporary. If such decline is deemed other than temporary, we would adjust the
carrying amount of the security through a valuation allowance. The market values
of our securities are significantly affected by changes in interest rates. In
general, as interest rates rise, the market value of fixed-rate securities will
decrease; as interest rates fall, the market value of fixed-rate securities will
increase. Estimated fair values for securities are based on published or
securities dealers' market values.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Information regarding quantitative and qualitative disclosures about
market risk appear under Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Management of Interest Rate
Risk.
Page 77
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Stockholders of
Hudson City Bancorp, Inc.:
We have audited the accompanying consolidated statements of financial
condition of Hudson City Bancorp, Inc. and subsidiary as of December 31, 2002
and 2001, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2002. These consolidated financial statements are the
responsibility of management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Hudson City
Bancorp, Inc. and subsidiary as of December 31, 2002 and 2001, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America.
/s/ KPMG LLP
January 14, 2003
Short Hills, New Jersey
Page 78
Hudson City Bancorp, Inc. and Subsidiary
Consolidated Statements of Financial Condition
DECEMBER 31, DECEMBER 31,
2002 2001
-------------- --------------
(IN THOUSANDS)
Assets:
Cash and due from banks (note 3) ............................................... $ 153,096 $ 84,214
Federal funds sold ............................................................. 87,700 17,600
-------------- --------------
Total cash and cash equivalents ................................ 240,796 101,814
Investment securities held to maturity, market value of $ 1,497 at
December 31, 2002 and $1,474 at December 31, 2001 (note 4) .............. 1,406 1,441
Investment securities available for sale, at market value (notes 4 and
9) .......................................................................... 560,932 167,427
Federal Home Loan Bank of New York stock ....................................... 137,500 81,149
Mortgage-backed securities held to maturity, market value of $ 4,828,939 at
December 31, 2002 and $4,530,692 at December 31, 2001
(notes 5 and 9) ......................................................... 4,734,266 4,478,488
Mortgage-backed securities available for sale, at market value
(notes 5 and 9) ......................................................... 1,391,895 530,690
Loans (note 6) ................................................................. 6,970,900 5,968,171
Less:
Deferred loan fees .................................................. 13,508 12,060
Allowance for loan losses (note 6) .................................. 25,501 24,010
-------------- --------------
Net loans ...................................................... 6,931,891 5,932,101
Foreclosed real estate, net .................................................... 1,276 250
Accrued interest receivable .................................................... 69,248 61,808
Banking premises and equipment, net (note 7) ................................... 32,732 31,363
Other assets (notes 10 and 11) ................................................. 42,662 40,237
-------------- --------------
Total Assets ................................................... $ 14,144,604 $ 11,426,768
============== ==============
Liabilities and Stockholders' Equity:
Deposits (note 8):
Interest-bearing ........................................................ $ 8,750,164 $ 7,537,103
Noninterest-bearing ..................................................... 388,465 375,659
-------------- --------------
Total deposits ................................................. 9,138,629 7,912,762
Borrowed funds (note 9) ........................................................ 3,600,000 2,150,000
Accrued expenses and other liabilities (notes 10 and 11) ....................... 89,892 75,270
-------------- --------------
Total liabilities .............................................. 12,828,521 10,138,032
-------------- --------------
Common stock, $0.01 par value, 800,000,000 shares authorized; 231,276,600 shares
issued, 191,973,258 shares outstanding at December 31, 2002,
198,317,400 shares issued and outstanding at December 31, 2001 .......... 2,313 2,313
Additional paid-in capital ..................................................... 530,496 527,724
Retained earnings (notes 11 and 13) ............................................ 1,291,960 1,170,138
Treasury stock, at cost; 39,303,342 shares at December 31, 2002 and
32,959,200 shares at December 31, 2001 .................................. (465,249) (340,716)
Unallocated common stock held by the employee stock
ownership plan (note 10) ................................................ (51,474) (53,435)
Unearned common stock held by the recognition and
retention plan (note 10) ................................................ (16,253) (22,132)
Accumulated other comprehensive income, net of tax ............................. 24,290 4,844
-------------- --------------
Total stockholders' equity ..................................... 1,316,083 1,288,736
-------------- --------------
Commitments and contingencies (notes 7 and 14)
Total Liabilities and Stockholders' Equity ............... $ 14,144,604 $ 11,426,768
============== ==============
See accompanying notes to consolidated financial statements.
Page 79
Hudson City Bancorp, Inc. and Subsidiary
Consolidated Statements of Income
YEAR ENDED DECEMBER 31,
------------------------------------
2002 2001 2000
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest and Dividend Income:
Interest and fees on first mortgage loans (note 6) ........... $ 440,073 $ 381,135 $ 327,458
Interest and fees on consumer and other loans ................ 10,027 11,959 10,640
Interest on mortgage-backed securities held to maturity ...... 265,144 254,610 214,435
Interest on mortgage-backed securities available for sale .... 42,599 8,304 -
Interest on investment securities held to maturity (note 4):
Taxable .................................................. 68 68 67
Exempt from federal taxes ................................ 21 23 26
Interest and dividends on investment securities
available for sale - taxable (note 4) ................. 18,856 24,427 54,745
Dividends on Federal Home Loan Bank of New York stock ........ 5,002 4,536 1,698
Interest on federal funds sold ............................... 2,427 5,436 4,972
---------- ---------- ----------
Total interest and dividend income .................... 784,217 690,498 614,041
---------- ---------- ----------
Interest Expense:
Interest on deposits (note 8) ................................ 255,775 307,007 310,513
Interest on borrowed funds (note 9) .......................... 139,999 96,420 49,526
---------- ---------- ----------
Total interest expense ................................ 395,774 403,427 360,039
---------- ---------- ----------
Net interest income ............................... 388,443 287,071 254,002
Provision for Loan Losses (note 6) ................................. 1,500 1,875 2,130
---------- ---------- ----------
Net interest income after provision for loan losses 386,943 285,196 251,872
---------- ---------- ----------
Non-interest Income:
Service charges and other income ............................. 5,947 4,694 4,541
Gains on securities transactions, net (notes 4 and 5) ........ 2,066 - -
---------- ---------- ----------
Total non-interest income ............................. 8,013 4,694 4,541
---------- ---------- ----------
Non-interest Expense:
Salaries and employee benefits (note 10) ..................... 60,731 52,307 49,871
Net occupancy expense (note 7) ............................... 13,888 14,088 13,678
Federal deposit insurance assessment ......................... 1,415 1,292 1,414
Computer and related services ................................ 1,213 1,055 806
Other expense ................................................ 16,294 13,082 13,228
---------- ---------- ----------
Total non-interest expense ............................ 93,541 81,824 78,997
---------- ---------- ----------
Income before income tax expense .................. 301,415 208,066 177,416
Income Tax Expense (note 11) ....................................... 109,382 73,517 62,590
---------- ---------- ----------
Net income ........................................ $ 192,033 $ 134,549 $ 114,826
========== ========== ==========
Basic earnings per share (note 17) ................................ $ 1.04 $ 0.69 $ 0.52
========== ========== ==========
Diluted earnings per share (note 17) .............................. $ 1.01 $ 0.68 $ 0.52
========== ========== ==========
See accompanying notes to consolidated financial statements.
Page 80
Hudson City Bancorp, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
UNALLOCATED UNEARNED
ADDITIONAL COMMON COMMON
COMMON PAID-IN RETAINED STOCK HELD STOCK HELD
STOCK CAPITAL EARNINGS BY THE ESOP BY THE RRP
------------ ------------ ------------ ------------ ----------
(IN THOUSANDS)
Balance at December 31, 1999 .................... $ 2,313 $ 526,619 $ 1,000,180 $ (22,109) $ -
Comprehensive income:
Net income ............................... - - 114,826 - -
Other comprehensive income:
Unrealized holding gains arising during
period (net of tax of $15,240)....... - - - - -
Total comprehensive income ...............
Declaration of dividends ($0.145 per share).. - - (32,006) - -
Purchase of ESOP stock ...................... - - - (35,244) -
Allocation of ESOP stock .................... - 419 - 1,957 -
Purchase of RRP stock ....................... - - - - (28,638)
Vesting of RRP stock ........................ - (223) - - 4,680
Purchase of treasury stock .................. - - - - -
Exercise of stock options ................... - - (97) - -
------------ ------------ ------------ ------------ ----------
Balance at December 31, 2000 .................... 2,313 526,815 1,082,903 (55,396) (23,958)
Comprehensive income:
Net income ............................... - - 134,549 - -
Other comprehensive income :
Unrealized holding gains arising during
period (net of tax of $4,868)....... - - - - -
Total comprehensive income ...............
Declaration of dividends ($0.235 per share).. - - (46,542) - -
Allocation of ESOP stock .................... - 1,277 - 1,961 -
Purchase of RRP stock ....................... - - - - (4,184)
Vesting of RRP stock ........................ - (368) - - 6,010
Purchase of treasury stock .................. - - - - -
Exercise of stock options ................... - - (772) - -
------------ ------------ ------------ ------------- ----------
Balance at December 31, 2001 .................... 2,313 527,724 1,170,138 (53,435) (22,132)
Comprehensive income:
Net income ............................... - - 192,033 - -
Other comprehensive income:
Unrealized holding gains arising during
period (net of tax of $11,918)....... - - - - -
Total comprehensive income ............... -
Declaration of dividends ($0.345 per share).. - - (64,504) - -
Allocation of ESOP stock .................... - 3,144 - 1,961 -
Purchase of RRP stock ....................... - - - - (1,854)
Vesting of RRP stock ........................ - (372) - - 7,733
Purchase of treasury stock .................. - - - - -
Exercise of stock options ................... - - (5,707) - -
------------ ------------ ------------ ------------ ----------
Balance at December 31, 2002 .................... $ 2,313 $ 530,496 $ 1,291,960 $ (51,474) $ (16,253)
============ ============ ============ ============ ==========
ACCUMULATED
OTHER TOTAL
TREASURY COMPREHENSIVE STOCKHOLDERS'
STOCK INCOME (LOSS) EQUITY
---------- ------------- -------------
(IN THOUSANDS)
Balance at December 31, 1999 .................... $ - $ (27,963) $ 1,479,040
------------
Comprehensive income:
Net income ............................... - - 114,826
Other comprehensive income:
Unrealized holding gains arising during
period (net of tax of $15,240)....... - 24,866 24,866
------------
Total comprehensive income ............... 139,692
------------
Declaration of dividends ($0.145 per share).. - - (32,006)
Purchase of ESOP stock ...................... - - (35,244)
Allocation of ESOP stock .................... - - 2,376
Purchase of RRP stock ....................... - - (28,638)
Vesting of RRP stock ........................ - - 4,457
Purchase of treasury stock .................. (65,456) - (65,456)
Exercise of stock options ................... 445 - 348
---------- ------------ ------------
Balance at December 31, 2000 .................... (65,011) (3,097) 1,464,569
------------
Comprehensive income:
Net income ............................... - - 134,549
Other comprehensive income :
Unrealized holding gains arising during
period (net of tax of $4,868)........ - 7,941 7,941
------------
Total comprehensive income ............... 142,490
------------
Declaration of dividends ($0.235 per share).. - - (46,542)
Allocation of ESOP stock .................... - - 3,238
Purchase of RRP stock ....................... - - (4,184)
Vesting of RRP stock ........................ - - 5,642
Purchase of treasury stock .................. (278,458) - (278,458)
Exercise of stock options ................... 2,753 - 1,981
---------- ------------ ------------
Balance at December 31, 2001 .................... (340,716) 4,844 1,288,736
------------
Comprehensive income:
Net income ............................... - - 192,033
Other comprehensive income:
Unrealized holding gains arising during
period (net of tax of $11,918)....... - 19,446 19,446
------------
Total comprehensive income ............... 211,479
------------
Declaration of dividends ($0.345 per share).. - - (64,504)
Allocation of ESOP stock .................... - - 5,105
Purchase of RRP stock ....................... - - (1,854)
Vesting of RRP stock ........................ - - 7,361
Purchase of treasury stock .................. (140,173) - (140,173)
Exercise of stock options ................... 15,640 - 9,933
---------- ------------ ------------
Balance at December 31, 2002 .................... $ (465,249) $ 24,290 $ 1,316,083
========== ============ ============
See accompanying notes to consolidated financial statements.
Page 81
Hudson City Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31,
2002 2001 2000
---------- ---------- ----------
(IN THOUSANDS)
Cash Flows from Operating Activities:
Net income...................................................................... $ 192,033 $ 134,549 $ 114,826
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, accretion and amortization expense .......................... 14,269 5,167 5,755
Provision for loan losses ................................................. 1,500 1,875 2,130
Gains on net securities transactions ...................................... (2,066) - -
Allocation of stock for employee benefit plans ............................ 12,466 8,880 6,833
Deferred tax benefit ...................................................... (4,756) (2,857) (5,174)
Net proceeds from sale of foreclosed real estate .......................... 231 940 1,048
(Increase) decrease in accrued interest receivable ........................ (7,440) 452 (10,290)
(Increase) decrease in other assets ....................................... (9,587) 2,154 (5,722)
Increase in accrued expenses and other liabilities ........................ 14,622 13,587 9,902
---------- ---------- ----------
Net Cash Provided by Operating Activities ............................................. 211,272 164,747 119,308
---------- ---------- ----------
Cash Flows from Investing Activities:
Originations of loans .......................................................... (1,907,298) (1,587,430) (968,873)
Purchases of loans ............................................................. (1,717,406) (857,638) (110,733)
Payments on loans .............................................................. 2,625,551 1,353,923 512,697
Principal collection of mortgage-backed securities held to maturity ............ 2,133,902 1,584,372 693,241
Purchases of mortgage-backed securities held to maturity ....................... (2,400,445) (2,804,215) (862,546)
Principal collection of mortgage-backed securities available for sale .......... 250,244 35,996 -
Proceeds from sales of mortgage-backed securities available for sale ........... 78,164 - -
Purchases of mortgage-backed securities available for sale ..................... (1,168,106) (560,228) -
Proceeds from maturities and calls of investment securities held to maturity ... 35 40 150
Purchases of investment securities held to maturity ............................ - - (252)
Proceeds from maturities and calls of investment securities available for sale.. 203,338 855,614 536
Proceeds from sales of investment securities available for sale ................ 10,504 - -
Purchases of investment securities available for sale .......................... (598,547) (140,430) (25,000)
Purchases of Federal Home Loan Bank of New York stock .......................... (56,351) (7,520) (73,629)
Purchases of premises and equipment, net ....................................... (5,144) (3,966) (3,708)
---------- ---------- ----------
Net Cash Used in Investment Activities ................................................ (2,551,559) (2,131,482) (838,117)
---------- ---------- ----------
Cash Flows from Financing Activities:
Net increase (decrease) in deposits ............................................ 1,225,867 1,308,641 (83,923)
Proceeds from borrowed funds ................................................... 1,450,000 1,550,000 2,450,000
Principal payments on borrowed funds ........................................... - (650,000) (1,500,000)
Dividends paid ................................................................. (64,504) (46,542) (32,006)
Purchases of stock by the ESOP ................................................. - - (35,244)
Purchases of stock by the RRP .................................................. (1,854) (4,184) (28,638)
Purchases of treasury stock .................................................... (140,173) (278,458) (65,456)
Exercise of stock options ...................................................... 9,933 1,981 348
---------- ---------- ----------
Net Cash Provided by Financing Activities ............................................. 2,479,269 1,881,438 705,081
---------- ---------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents .................................. 138,982 (85,297) (13,728)
Cash and Cash Equivalents at Beginning of Period ...................................... 101,814 187,111 200,839
---------- ---------- ----------
Cash and Cash Equivalents at End of Period............................................. $ 240,796 $ 101,814 $ 187,111
========== ========== ==========
Supplemental Disclosures:
Interest paid................................................................... $ 390,038 $ 399,401 $ 354,987
========== ========== ==========
Income taxes paid............................................................... $ 111,219 $ 70,205 $ 75,017
========== ========== ==========
See accompanying notes to consolidated financial statements.
Page 82
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) BASIS OF PRESENTATION
The following are the significant accounting and reporting policies
applied by Hudson City Bancorp, Inc. ("Hudson City Bancorp") and its
wholly-owned subsidiary Hudson City Savings Bank ("Hudson City Savings") in the
preparation of the accompanying consolidated financial statements. The
consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America. All
significant intercompany transactions and balances have been eliminated in
consolidation. Certain dollar and share amounts previously reported have been
reclassified to conform to the current year's presentation. As used in these
consolidated financial statements, "Hudson City" refers to Hudson City Bancorp,
Inc. and its consolidated subsidiary, depending on the context.
Hudson City Bancorp is a Delaware corporation organized in March 1999
by Hudson City Savings in connection with the conversion and reorganization of
Hudson City Savings from a New Jersey mutual savings bank into a two-tiered
mutual savings bank holding company structure, referred to as the
Reorganization.
In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the statements of financial condition
and income for the period. Actual results could differ from these estimates.
b) COMPREHENSIVE INCOME
Comprehensive income is comprised of net income and other comprehensive
income. Other comprehensive income includes items such as unrealized gains and
losses on securities available for sale, net of tax. Comprehensive income is
presented in the consolidated statements of changes in stockholders' equity.
c) STATEMENTS OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents
includes cash on hand, amounts due from banks and federal funds sold. Generally,
federal funds are sold for one-day periods.
Transfers of loans to foreclosed real estate of $1,257,000, $747,000
and $1,126,000 for the years ended December 31, 2002, 2001 and 2000,
respectively, did not result in cash receipts or cash payments.
d) INVESTMENT SECURITIES
Investment securities are classified as either held to maturity or
available for sale. Investment securities classified as held to maturity are
stated at cost, adjusted for amortization of premiums and accretion of
discounts, which are recognized as adjustments to interest income, using a
method that approximates level yield. Hudson City has both the ability and the
positive intent to hold these investment securities to maturity. Securities
available for sale are carried at fair value, with unrealized gains and losses,
net of tax, reported as a component of other comprehensive income, which is
included in stockholders' equity.
Page 83
Notes to Consolidated Financial Statements
Realized gains and losses are recognized when securities are sold or
called using the specific identification method. The estimated fair market value
of all investment securities is determined by use of quoted market prices.
e) MORTGAGE-BACKED SECURITIES
Mortgage-backed securities include pass-through certificates, which
represent participating interests in pools of long-term first mortgage loans
originated and serviced by third-party issuers of the securities, and real
estate mortgage investment conduits ("REMICs"), which are debt securities that
are secured by mortgage loans or other mortgage-backed securities.
Mortgage-backed securities are classified as either held to maturity or
available for sale. Mortgage-backed securities classified as held to maturity
are stated at cost, adjusted for amortization of premiums and accretion of
discounts, which are recognized as adjustments to interest income, using a
method that approximates level yield. Hudson City has both the ability and the
positive intent to hold these investment securities to maturity. Mortgage-backed
securities available for sale are carried at fair value, with unrealized gains
and losses, net of tax, reported as a component of other comprehensive income,
which is included in stockholders' equity. Realized gains and losses are
recognized when securities are sold using the specific identification method.
The estimated fair market value of these securities is determined by use of
quoted market prices.
f) LOANS
Loans are stated at their principal amounts outstanding. Interest
income on loans is accrued and credited to income as earned. Net loan
origination fees are deferred and amortized to interest income over the life of
the loan as an adjustment to the loan's yield, using the level yield method.
Purchased loans are stated at their principal amounts outstanding, adjusted for
amortization of premiums and accretion of discounts, which are recognized as
adjustments to interest income, using a method that approximates level yield.
The accrual of income on loans that do not carry private mortgage
insurance or are not guaranteed by a federal agency is generally discontinued
when interest or principal payments are 90-days in arrears or when the timely
collection of such income is doubtful. Loans on which the accrual of income has
been discontinued are designated as non-accrual loans and outstanding interest
previously credited is reversed. It is recognized subsequently in the period
collected only when the ultimate collection of principal is no longer in doubt.
A non-accrual loan is returned to accrual status when factors indicating
doubtful collection no longer exist.
Hudson City defines the population of impaired loans to be all
non-accrual commercial real estate and multi-family loans. Impaired loans are
individually assessed to determine that the loan's carrying value is not in
excess of the fair value of the collateral or the present value of the loan's
expected future cash flows. Smaller balance homogeneous loans that are
collectively evaluated for impairment, such as residential mortgage loans and
consumer loans, are specifically excluded from the impaired loan portfolio.
There were no loans classified as impaired at December 31, 2002 and 2001.
g) ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is a valuation account established
through a provision for loan losses charged to income. Losses on loans are
charged against the allowance when management believes the collection of the
principal is unlikely. Subsequent recoveries, if any, are generally credited to
the
Page 84
Notes to Consolidated Financial Statements
allowance. The determination of the amount of the allowance, 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
underlying collateral, current economic and real estate market trends, loan
portfolio growth and other factors which may warrant recognition.
Hudson City's objective is to maintain an allowance at a level
sufficient to cover specifically identifiable loan losses, as well as estimated
losses inherent in the loan portfolio which are probable but not specifically
identifiable. Although management uses the best information available, the level
of the allowance for loan losses remains an estimate which is subject to
significant judgement and short-term change.
h) FORECLOSED REAL ESTATE
Foreclosed real estate is property acquired through foreclosure and
deed in lieu of foreclosure. After foreclosure, foreclosed properties held for
sale are carried at the lower of fair value minus estimated cost to sell, or at
cost. Fair market value is generally based on recent appraisals. Subsequent
provisions, which may result from the ongoing periodic valuations of these
properties, are charged to income in the period in which they are identified and
credited to a valuation allowance account. Foreclosed real estate is reported
net of the valuation allowance. Carrying costs, such as maintenance and taxes,
are charged to operating expenses as incurred.
i) BANKING PREMISES AND EQUIPMENT
Land is carried at cost. Buildings, leasehold improvements and
furniture, fixtures and equipment are carried at cost, less accumulated
depreciation and leasehold amortization. Buildings are depreciated over their
estimated useful lives using the straight-line method. Furniture, fixtures and
equipment are depreciated over their estimated useful lives using the
double-declining balance method. Leasehold improvements are amortized over the
shorter of their estimated useful lives or the term of the respective leases.
The costs for major improvements and renovations are capitalized, while
maintenance, repairs and minor improvements are charged to operating expenses as
incurred. Gains and losses on dispositions are reflected currently as other
non-interest income or expense.
j) INCOME TAXES
We utilize the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
k) EMPLOYEE BENEFIT PLANS
Hudson City maintains certain noncontributory benefit plans which cover
all employees who have met the eligibility requirements of the plans. Certain
health care and life insurance benefits are provided for retired employees. The
expected cost of benefits provided for retired employees is actuarially
Page 85
Notes to Consolidated Financial Statements
determined and accrued ratably from the date of hire to the date the employee is
fully eligible to receive the benefits.
The employee stock ownership plan ("ESOP") is accounted for in
accordance with the provisions of Statement of Position 93-6, "Employer
Accounting for Employee Stock Ownership Plans." The funds borrowed by the ESOP
from Hudson City Bancorp to purchase Hudson City Bancorp common stock are being
repaid from Hudson City Savings' contributions and dividends paid on unallocated
ESOP shares over a period of up to 30 years. Hudson City common stock not
allocated to participants is recorded as a reduction of stockholders' equity at
cost. Compensation expense for the ESOP is based on the average price of our
stock during each quarter.
The Hudson City stock option plans and the recognition and retention
plans ("RRP") are accounted for in accordance with the provisions of APB Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related
Interpretations. Accordingly, no compensation expense has been recognized for
the stock option plans. The fair value pro forma disclosures required by
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation" are included in Note 10 - Employee Benefit Plans.
Expense for the RRP in the amount of the fair value of the common stock at the
date of grant is recognized ratably over the vesting period. Unvested and
unallocated RRP shares are recorded as a reduction of stockholders' equity at
cost.
Had expense for Hudson City's stock option plans been determined based
on the fair value at the grant date for our stock options consistent with the
method of SFAS No. 123, our net income and earnings per share for all expenses
related to stock options and stocks granted in our recognition and retention
plans would have been reduced to the pro forma amounts that follow:
2002 2001 2000
------------ ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income, as reported ................................. $ 192,033 $ 134,549 $ 114,826
Add: expense recognized for the recognition and
retention plans, net of related tax effect .... 4,690 3,648 2,885
Less: total stock option and recognition and
retention plans expense, determined under the
fair value method, net of related tax effect .. 7,038 5,845 4,913
------------ ------------- -------------
Pro forma net income .................................... $ 189,685 $ 132,352 $ 112,798
============ ============= =============
Basic earnings per share: As reported ...... $ 1.04 $ 0.69 $ 0.52
Pro forma ........ 1.03 0.68 0.52
Diluted earnings per share: As reported ...... $ 1.01 $ 0.68 $ 0.52
Pro forma ........ 1.00 0.67 0.52
Page 86
Notes to Consolidated Financial Statements
l) BORROWED FUNDS
Hudson City enters into sales of securities under agreements to
repurchase with selected brokers and the Federal Home Loan Bank ("FHLB.") These
agreements are recorded as financing transactions as Hudson City maintains
effective control over the transferred securities. The dollar amount of the
securities underlying the agreements continue to be carried in Hudson City's
securities portfolio. The obligations to repurchase the securities are reported
as a liability in the consolidated statements of financial condition.
The securities underlying the agreements are delivered to the party
with whom each transaction is executed. They agree to resell to Hudson City the
same securities at the maturity or call of the agreement. Hudson City retains
the right of substitution of the underlying securities throughout the terms of
the agreements.
Hudson City has also obtained advances from the FHLB, which are
generally secured by a blanket lien against our mortgage portfolio. Total
borrowings with the FHLB are generally limited to twenty times the amount of
FHLB stock owned or the fair value of our mortgage portfolio, whichever is
greater.
s) EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to
common stockholders by the weighted average number of shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock (such as stock
options) were exercised or resulted in the issuance of common stock. These
potentially dilutive shares would then be included in the weighted average
number of shares outstanding for the period using the treasury stock method.
Shares issued and shares reacquired during any period are weighted for the
portion of the period that they were outstanding.
In computing both basic and diluted earnings per share, the weighted
average number of common shares outstanding includes all 122,576,600 shares
issued to Hudson City, MHC. Also included are the ESOP shares previously
allocated to participants and shares committed to be released for allocation to
participants and the RRP shares which have vested or have been allocated to
participants. ESOP and RRP shares that have been purchased but have not been
committed to be released have not been considered in computing basic and diluted
earnings per share.
2. STOCKHOLDERS' EQUITY
Upon completion of the Reorganization, a "liquidation account" was
established in an amount equal to the total equity of Hudson City Savings as of
the latest practicable date prior to the Reorganization. The liquidation account
was established to provide a limited priority claim to the assets of Hudson City
Savings to "eligible account holders" and "supplemental eligible account
holders", as defined, who continue to maintain deposits in Hudson City Savings
after the Reorganization. In the unlikely event of a complete liquidation of
Hudson City Savings, and only in such event, each eligible account holder and
supplemental eligible account holder would receive a liquidation distribution,
prior to any payment to the holder of the Bank's common stock. This distribution
would be based upon each eligible account holder's and supplemental account
holder's proportionate share of the then total remaining qualifying deposits.
Page 87
Notes to Consolidated Financial Statements
3. RESTRICTIONS ON CASH AND DUE FROM BANKS
Cash reserves are required to be maintained on deposit with the Federal
Reserve Bank based on deposits. The average amount of the reserves on deposit
for the years ended December 31, 2002 and 2001 was approximately $8,456,000 and
$2,104,000, respectively.
4. INVESTMENT SECURITIES
The amortized cost and estimated fair market value of investment
securities at December 31 are as follows:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR MARKET
COST GAINS LOSSES VALUE
---------- ---------- ----------- -----------
(IN THOUSANDS)
2002
HELD TO MATURITY:
Municipal bonds ................. $ 1,406 $ 91 $ - $ 1,497
========== ========== =========== ==========
AVAILABLE FOR SALE:
United States government agencies $ 540,893 $ 8,612 $ - $ 549,505
Corporate bonds ................. 341 - (7) 334
Equity securities ............... 10,189 904 - 11,093
---------- ---------- ----------- ----------
Total available for sale .. $ 551,423 $ 9,516 $ (7) $ 560,932
========== ========== =========== ==========
2001
HELD TO MATURITY:
Municipal bonds ................. $ 1,441 $ 33 $ - $ 1,474
========== ========== =========== ==========
AVAILABLE FOR SALE:
United States government agencies $ 155,430 $ 1,417 $ (439) $ 156,408
Corporate bonds ................. 1,049 2 (7) 1,044
Equity securities ............... 10,000 - (25) 9,975
---------- ---------- ----------- ----------
Total available for sale .. $ 166,479 $ 1,419 $ (471) $ 167,427
========== ========== =========== ==========
Page 88
Notes to Consolidated Financial Statements
The amortized cost and estimated fair market value of investment
securities held to maturity and investment securities available for sale at
December 31, 2002, by contractual maturity, are shown below. The expected
maturity may differ from the contractual maturity because issuers may have the
right to call or prepay obligations. Equity securities have been excluded from
this table.
ESTIMATED
AMORTIZED FAIR MARKET
COST VALUE
----------- ----------
(IN THOUSANDS)
HELD TO MATURITY
Due after one year through five years $ 250 $ 262
Due after five years through ten years 600 631
Due after ten years .................. 556 604
---------- ----------
Total held to maturity ....... $ 1,406 $ 1,497
========== ==========
AVAILABLE FOR SALE
Due in one year or less .............. $ 150 $ 148
Due after one year through five years 167 162
Due after five years through ten years 89,587 91,391
Due after ten years .................. 451,330 458,138
---------- ----------
Total available for sale ..... $ 541,234 $ 549,839
========== ==========
Interest and dividend income for the years ended December 31, 2002,
2001 and 2000 consists of the following:
2002 2001 2000
--------- --------- ---------
(IN THOUSANDS)
United States government agencies ........ $ 18,258 $ 24,252 $ 54,637
Municipal bonds .......................... 89 91 93
Corporate bonds .......................... 30 78 108
Equity securities ........................ 568 97 -
--------- --------- ---------
Total interest and dividend income $ 18,945 $ 24,518 $ 54,838
========= ========= =========
Gross realized gains on sales of investment securities available for
sale during 2002 were $585,000. There were no gains or losses from investment
securities transactions during 2001 and 2000.
The carrying value of securities pledged as required security for
deposits and for other purposes required by law amounted to $10,966,000 and
$16,421,000 at December 31, 2002 and 2001, respectively.
Page 89
Notes to Consolidated Financial Statements
5. MORTGAGE-BACKED SECURITIES
The amortized cost and estimated fair market value of mortgage-backed
securities at December 31 are as follows:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR MARKET
COST GAINS LOSSES VALUE
------------ -------------- -------------- ---------------
(IN THOUSANDS)
2002
HELD TO MATURITY:
GNMA pass-through certificates................. $ 1,059,848 $ 28,693 $ - $ 1,088,541
FNMA pass-through certificates................. 1,186,247 35,588 - 1,221,835
FHLMC pass-through certificates................ 213,686 5,887 (9) 219,564
FHLMC, FNMA and GNMA-REMICs.................... 2,274,485 24,707 (193) 2,298,999
------------ -------------- -------------- ---------------
Total held to maturity................... $ 4,734,266 $ 94,875 $ (202) $ 4,828,939
============ ============== ============== ===============
AVAILABLE FOR SALE:
GNMA pass-through certificates........... $ 1,362,227 $ 29,668 $ - $ 1,391,895
============ ============== ============== ===============
2001
HELD TO MATURITY:
GNMA pass-through certificates................. $ 1,704,584 $ 25,712 $ - $ 1,730,296
FNMA pass-through certificates................. 642,457 13,621 (15) 656,063
FHLMC pass-through certificates................ 139,149 3,707 - 142,856
FHLMC and FNMA- REMICs......................... 1,992,298 10,300 (1,121) 2,001,477
------------ -------------- -------------- ---------------
Total held to maturity................... $ 4,478,488 $ 53,340 $ (1,136) $ 4,530,692
============ ============== ============== ===============
AVAILABLE FOR SALE:
GNMA pass-through certificates........... $ 523,825 $ 6,865 $ - $ 530,690
============ ============== ============== ===============
Gross realized gains on sales of mortgage-backed securities available
for sale during 2002 were $1,481,000. There were no gains or losses from
mortgage-backed securities transactions during 2001 and 2000.
Page 90
Notes to Consolidated Financial Statements
6. LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans at December 31 are summarized as follows:
2002 2001
---------- ----------
(IN THOUSANDS)
First mortgage loans:
One-to four-family ................ $6,708,806 $5,664,973
FHA/VA ............................ 131,209 151,203
Multi-family and commercial ....... 2,668 2,548
---------- ----------
Total first mortgage loans ... 6,842,683 5,818,724
---------- ----------
Consumer and other loans:
Fixed-rate second mortgages ....... 93,691 115,244
Home equity credit lines .......... 33,543 32,715
Other ............................. 983 1,488
---------- ----------
Total consumer and other loans 128,217 149,447
---------- ----------
Total loans ............. $6,970,900 $5,968,171
========== ==========
Substantially all of Hudson City's loans are secured by first or second
liens on real estate property, the majority of which are located in the State of
New Jersey. The ultimate ability to collect the loan portfolio and realize the
carrying value of real estate is subject to changes in the real estate market
and future economic conditions.
The following is a comparative summary of loans on which the accrual of
income has been discontinued and loans which are contractually past due 90 days
or more but have not been classified non- accrual at December 31:
2002 2001
---------- -----------
(IN THOUSANDS)
Non-accrual loans........................... $ 6,072 $ 8,262
Accruing loans delinquent 90 days or more... 14,123 7,386
---------- ----------
Total non-performing loans.......... $ 20,195 $ 15,648
========== ==========
The total amount of interest income received during the year on
non-accrual loans outstanding at December 31, 2002, 2001 and 2000 amounted to
$109,000, $154,000 and $179,000, respectively. Additional interest income
totaling $319,000, $483,000, and $652,000 on non-accrual loans would have been
recognized in 2002, 2001 and 2000, respectively, if interest on all such loans
had been recorded based upon original contract terms. Hudson City is not
committed to lend additional funds to borrowers on non-accrual status.
Page 91
Notes to Consolidated Financial Statements
An analysis of the allowance for loan losses at December 31 follows:
2002 2001 2000
---------- ------------ -----------
(IN THOUSANDS)
Balance at beginning of year............... $ 24,010 $ 22,144 $ 20,010
---------- ----------- -----------
Charge-offs........................ (13) (20) (18)
Recoveries......................... 4 11 22
---------- ----------- -----------
Net (charge-offs) recoveries.. (9) (9) 4
---------- ----------- -----------
Provision for loan losses..... 1,500 1,875 2,130
---------- ----------- -----------
Balance at end of year... $ 25,501 $ 24,010 $ 22,144
========== =========== ===========
7. BANKING PREMISES AND EQUIPMENT, NET
A summary of the net carrying value of banking premises and equipment
at December 31 is as follows:
2002 2001
---------- ----------
(IN THOUSANDS)
Land................................................. $ 5,353 $ 4,740
Buildings............................................ 33,972 31,208
Leasehold improvements............................... 12,507 12,139
Furniture, fixtures and equipment.................... 36,851 36,110
---------- ----------
Total acquisition value.................... 88,683 84,197
Accumulated depreciation and amortization............ (55,951) (52,834)
---------- ----------
Total banking premises and equipment, net.. $ 32,732 $ 31,363
========== ==========
Amounts charged to net occupancy expense for depreciation and
amortization of banking premises and equipment amounted to $3,775,000,
$3,912,000 and $3,599,000 in 2002, 2001 and 2000, respectively.
Page 92
Notes to Consolidated Financial Statements
Hudson City has entered into non-cancelable operating lease agreements
with respect to banking premises and equipment. It is expected that many
agreements will be renewed at expiration in the normal course of business.
Future minimum rental commitments required under operating leases that have
initial or remaining non-cancelable lease terms in excess of one year are as
follows:
YEAR AMOUNT
- ------------------------ ----------
(IN THOUSANDS)
2003................... $ 3,088
2004................... 2,900
2005................... 2,486
2006................... 2,065
2007................... 1,795
Thereafter............. 4,341
----------
Total.......... $ 16,675
==========
Net occupancy expense included gross rental expense for certain bank
premises of $3,531,000 in 2002, $3,459,000 in 2001 and $3,286,000 in 2000, and
rental income of $861,000, $620,000 and $569,000 for the respective years.
8. DEPOSITS
Deposits at December 31 are summarized as follows:
2002 2001
----------------------------- -----------------------------
BALANCE PERCENT BALANCE PERCENT
-------------- ----------- ------------- ----------
(DOLLARS IN THOUSANDS)
Savings........................ $ 892,678 9.77% $ 814,367 10.29%
Noninterest-bearing demand..... 388,465 4.25 375,659 4.75
Interest-bearing demand........ 1,040,614 11.39 102,185 1.29
Money market................... 629,042 6.88 516,700 6.53
Time deposits.................. 6,187,830 67.71 6,103,851 77.14
-------------- ---------- ------------- ----------
Total deposits....... $ 9,138,629 100.00% $ 7,912,762 100.00%
============== ========== ============= ==========
Time deposits $100,000 and over amounted to $967,983,000 and
$923,830,000 at December 31, 2002 and 2001, respectively. Interest expense on
time deposits $100,000 and over for the years ended December 31, 2002, 2001 and
2000 was $27,399,000, $34,202,000 and $29,671,000, respectively. Included in
noninterest-bearing demand accounts are mortgage escrow deposits of $47,730,000
and $48,917,000 at December 31, 2002 and 2001, respectively.
Page 93
Notes to Consolidated Financial Statements
Scheduled maturities of time deposits are as follows:
YEAR AMOUNT
- ------------------------ ------------
(IN THOUSANDS)
2003................... $ 5,117,593
2004................... 915,892
2005................... 69,013
2006................... 22,888
2007................... 62,444
------------
Total.......... $ 6,187,830
============
9. BORROWED FUNDS
Borrowed funds at December 31 are summarized as follows:
2002 2001
------------------------------ -----------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
PRINCIPAL RATE PRINCIPAL RATE
-------------- ----------- ------------ -----------
(DOLLARS IN THOUSANDS)
Securities sold under agreements to repurchase:
FHLB...................................... $ 1,000,000 4.90% $ 700,000 5.22%
Other brokers............................. 850,000 5.05 850,000 5.17
------------ ------------
Total securities sold under
agreements to repurchase........ 1,850,000 4.97 1,550,000 5.19
Advances from the FHLB........................... 1,750,000 3.92 600,000 4.48
------------ ------------
Total borrowed funds........... $ 3,600,000 4.46 $ 2,150,000 4.99
============ ============
At December 31, 2002, borrowed funds had scheduled maturities and
potential call dates as follows:
BORROWINGS BY SCHEDULED BORROWINGS BY NEXT
MATURITY DATE POTENTIAL CALL DATE
------------------------------- -------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
YEAR PRINCIPAL RATE PRINCIPAL RATE
- ----------------- ------------- ------------ ------------- -------------
2003............. $ 50,000 4.73% $ 550,000 5.61%
2004............. 50,000 5.00 550,000 4.66
2005............. 50,000 4.35 825,000 4.10
2006............. - - 875,000 4.30
2007............. - - 800,000 4.09
2009............. 200,000 5.71 - -
2010............. 350,000 5.58 - -
2011............. 1,200,000 4.71 - -
2012............. 1,700,000 3.89 - -
------------- -------------
Total... $ 3,600,000 4.46 $ 3,600,000 4.46
============= =============
Page 94
Notes to Consolidated Financial Statements
The amortized cost and fair value of the underlying securities used as
collateral for securities sold under agreements to repurchase, the average
balances and the maximum outstanding at any month-end at or for the years ended
December 31, 2002 and 2001 are as follows:
2002 2001
------------- -------------
(IN THOUSANDS)
Amortized cost of collateral:
United States government agency securities... $ 108,245 $ 75,012
Mortgage-backed securities................... 1,071,529 1,237,740
REMICs....................................... 730,353 315,193
------------- -------------
Total amortized cost of collateral...... $ 1,910,127 $ 1,627,945
============= =============
Fair value of collateral:
United States government agency securities... $ 110,471 $ 75,864
Mortgage-backed securities................... 1,101,884 1,253,531
REMICs....................................... 747,425 321,140
------------- -------------
Total fair value of collateral.......... $ 1,959,780 $ 1,650,535
============= =============
Average balance of outstanding repurchase
agreements during the year................... $ 1,734,384 $ 1,594,521
============= =============
Maximum balance of outstanding repurchase
agreements at any month-end during the year $ 1,850,000 $ 1,550,000
============= =============
The average balance of our advances from the FHLB during 2002 was $1.12 billion
and the maximum FHLB advances outstanding during 2002 was $1.75 billion.
10. EMPLOYEE BENEFIT PLANS
a) RETIREMENT AND OTHER POSTRETIREMENT BENEFITS
Non-contributory retirement and postretirement plans are maintained to
cover all employees, including retired employees, who have met the eligibility
requirements of the plans. Benefits under the qualified and non-qualified
defined benefit retirement plans are based primarily on years of service and
compensation. Funding of the qualified retirement plan is actuarially determined
on an annual basis. It is our policy to fund the qualified retirement plan
sufficiently to meet the minimum requirements set forth in the Employee
Retirement Income Security Act of 1974. The non-qualified retirement plan, for
certain executive officers, is unfunded and had a benefit obligation of
$3,983,000 at December 31, 2002 and $3,628,000 at December 31, 2001. Certain
health care and life insurance benefits are provided to eligible retired
employees ("other benefits"). Participants generally become eligible for retiree
health care and life insurance benefits after ten years of service.
Page 95
Notes to Consolidated Financial Statements
The following table shows the change in benefit obligation, the change
in plan assets, and the funded status for the retirement plans and other
benefits at December 31:
RETIREMENT PLANS OTHER BENEFITS
---------------------------------- --------------------------------
2002 2001 2002 2001
-------------- ------------- ------------- ------------
(IN THOUSANDS)
Change in Benefit Obligation:
Benefit obligation at beginning of year......... $ 58,749 $ 55,306 $ 29,788 $ 32,028
Service cost.................................... 2,351 2,135 1,393 1,409
Interest cost................................... 4,187 4,007 1,883 1,929
Participant contributions....................... - - 21 16
Actuarial loss (gain)........................... 3,547 (941) (2,412) (5,205)
Benefits paid................................... (1,700) (1,758) (638) (389)
-------------- ------------- ------------- ------------
Benefit obligation at end of year............... 67,134 58,749 30,035 29,788
-------------- ------------- ------------- ------------
Change in Plan Assets:
Fair value of plan assets at beginning of year.. 67,148 71,080 - -
Actual loss on plan assets...................... (6,349) (2,177) - -
Employer contribution........................... 3 3 617 373
Participant contributions....................... - - 21 16
Benefits paid................................... (1,700) (1,758) (638) (389)
-------------- ------------- ------------- ------------
Fair value of plan assets at end of year........ 59,102 67,148 - -
-------------- ------------- ------------- ------------
Funded Status.............................. (8,032) 8,399 (30,035) (29,788)
Unrecognized prior service cost................. (16) (31) - -
Unrecognized net actuarial loss (gain).......... 13,978 (1,836) (9,999) (8,086)
-------------- ------------- ------------- ------------
Prepaid (accrued) benefit cost............. $ 5,930 $ 6,532 $ (40,034) $ (37,874)
============== ============= ============= ============
Net periodic benefit (income) cost at December 31 included the
following components:
RETIREMENT PLANS OTHER BENEFITS
--------------------------------------- ----------------------------------------
2002 2001 2000 2002 2001 2000
---------- ---------- ---------- ---------- ----------- -----------
(IN THOUSANDS)
Service cost............................. $ 2,351 $ 2,135 $ 1,995 $ 1,393 $ 1,409 $ 1,524
Interest cost............................ 4,187 4,007 3,822 1,883 1,929 2,192
Expected return on assets................ (5,950) (6,307) (6,545) - - -
Amortization of:
Net loss (gain)..................... 33 (239) (912) (499) (359) (76)
Unrecognized prior service cost..... (16) 13 13 - - -
Unrecognized remaining net assets... - (399) (399) - - -
---------- ---------- ---------- ---------- ----------- -----------
Net periodic benefit (income)
cost............................ $ 605 $ (790) $ (2,026) $ 2,777 $ 2,979 $ 3,640
========== ========== ========== ========== =========== ===========
The following are the weighted average assumptions used in accounting
for the benefit plans at December 31:
RETIREMENT PLANS OTHER BENEFITS
--------------------------- ---------------------------
2002 2001 2002 2001
----------- ------------ ----------- -----------
Discount rate................... 6.50% 7.25% 6.50% 7.25%
Expected return on assets....... 9.00 9.00 - -
Rate of compensation increase... 5.00 6.00 - -
Page 96
Notes to Consolidated Financial Statements
The assumed health care cost trend rate used to measure the expected
cost of other benefits for 2002 was 7.50%. The rate was assumed to decrease
gradually to 5.00% for 2007 and remain at that level thereafter.
Assumed health care cost trend rates have a significant effect on the
amounts reported for health care plans. A 1% change in the assumed health care
cost trend rate would have the following effects on other benefits:
1% INCREASE 1% DECREASE
-------------- -------------
(IN THOUSANDS)
Effect on total service cost and interest cost... $ 689 $ (561)
Effect on other benefit obligations.............. 5,308 (4,452)
b) EMPLOYEE STOCK OWNERSHIP PLAN
The ESOP is a tax-qualified plan designed to invest primarily in Hudson
City common stock that provides employees with the opportunity to receive a
Hudson City-funded retirement benefit based primarily on the value of Hudson
City common stock. The ESOP was authorized to purchase, and did purchase,
8,696,000 shares of Hudson City common stock at an average price of $6.74 per
share with a loan from Hudson City Bancorp. The outstanding loan principal at
December 31, 2002 was $54.1 million. Those shares were pledged as collateral for
the loan and are released from the pledge for allocation to participants as loan
payments are made.
At December 31, 2002, shares allocated to participants were 1,014,533.
For the plan year ending September 30, 2003, there are 289,866 shares that are
committed to be released and will be allocated to participants at the end of the
plan year. Unallocated ESOP shares held in suspense totaled 7,681,467 at
December 31, 2002 and had a fair market value of $143.1 million. ESOP
compensation expense for the years ended December 31, 2002, 2001 and 2000 was
$5,105,000, $3,238,000 and $2,376,000, respectively.
The ESOP restoration plan is a non-qualified plan that provides
supplemental benefits to certain executives who are prevented from receiving the
full benefits contemplated by the employee stock ownership plan's benefit
formula. The supplemental payments consist of payments representing shares that
cannot be allocated to participants under the ESOP due to the legal limitations
imposed on tax-qualified plans and, in the case of participants who retire
before the repayment in full of the ESOP's loan, payments representing the
shares that would have been allocated if employment had continued through the
full term of the loan. Compensation expense related to this plan amounted to
$2,250,000 in 2002, $1,406,000 in 2001 and $1,959,000 in 2000.
c) RECOGNITION AND RETENTION PLANS
The purpose of the RRP is to promote the growth and profitability of
Hudson City Bancorp by providing directors, officers and employees with an
equity interest in Hudson City Bancorp as an incentive to achieve corporate
goals. The RRP have invested money primarily in shares of Hudson City common
stock that were used to make restricted stock awards. The RRP were authorized,
in the aggregate, to purchase not more than 4,548,000 shares of common stock,
and have purchased 4,407,616 shares on the open market at an average price of
$7.87 per share.
Page 97
Notes to Consolidated Financial Statements
As a general rule, restricted stock grants are held in escrow for the
benefit of the award recipient until vested. Awards outstanding generally vest
in five annual installments commencing one year from the date of the award. As
of December 31, 2002, common stock that had not been awarded totaled 205,700
shares. Expense attributable to the RRP amounted to $7,362,000 for the year
2002, $5,641,000 for 2001 and $4,457,000 for 2000.
A summary of the status of the granted, but unvested shares under the
RRP as of December 31, and changes during those years, is presented below:
RESTRICTED STOCK AWARDS
---------------- ----------------- -----------------
2002 2001 2000
---------------- ----------------- -----------------
Outstanding at beginning of year.... 3,341,560 3,903,200 -
Granted...................... 167,900 242,200 3,932,200
Vested....................... (947,940) (803,840) (29,000)
---------------- ----------------- -----------------
Outstanding at end of year.......... 2,561,520 3,341,560 3,903,200
================ ================= =================
d) STOCK OPTION PLANS
Each stock option granted entitles the holder to purchase one share of
Hudson City's common stock at an exercise price not less than the fair market
value of a share of common stock at the date of grant. Options granted generally
vest over a five year period from the date of grant and will expire no later
than 10 years following the grant date. Under the Hudson City stock option
plans, 11,190,000 shares of Hudson City Bancorp, Inc. common stock have been
reserved for issuance. Directors and employees have been granted 10,026,000
stock options.
Page 98
Notes to Consolidated Financial Statements
A summary of the status of the granted, but unexercised stock options
as of December 31, and changes during those years, is presented below:
2002 2001 2000
----------------------------- ------------------------------- -----------------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER OF AVERAGE NUMBER OF AVERAGE NUMBER OF AVERAGE
STOCK EXERCISE STOCK EXERCISE STOCK EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
-------------- ------------- --------------- ------------- -------------- ------------
Outstanding at beginning
of year.................... 9,214,400 $ 7.208 8,908,000 $ 6.938 - $ -
Granted............... 426,000 15.887 606,000 11.051 8,994,000 6.938
Exercised............. (1,410,330) 7.043 (285,600) 6.938 (50,000) 6.938
Forfeited............. - - (14,000) 6.938 (36,000) 6.938
-------------- --------------- --------------
Outstanding at end of year... 8,230,070 7.685 9,214,400 7.208 8,908,000 6.938
============== =============== ==============
The following table summarizes information about our stock options
outstanding at December 31, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- -----------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OF OPTIONS CONTRACTUAL EXERCISE OF OPTIONS EXERCISE
PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ------------ ------------- ------------- ---------- ------------- ----------
$ 6.938 7,236,470 7 years $ 6.938 2,114,870 $ 6.938
9.938 110,000 8 years 9.938 18,800 9.938
10.925 137,600 8 years 10.925 - -
11.515 320,000 8 years 11.515 64,000 11.515
13.495 186,000 9 years 13.495 - -
17.740 240,000 9 years 17.740 - -
------------- -------------
7.685 8,230,070 7.685 2,197,670 7.096
============= =============
Page 99
Notes to Consolidated Financial Statements
Hudson City Bancorp applies APB 25 and related Interpretations in
accounting for the stock option plans. Accordingly, no compensation expense has
been recognized in 2002, 2001 or 2000. Had compensation expense for Hudson
City's stock option plans been determined based on the fair value at the grant
date for our stock options consistent with the method of SFAS No. 123, our net
income and earnings per share would have been reduced to the pro forma amounts
indicated below:
2002 2001 2000
------------ ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income: As reported......... $ 192,033 $ 134,549 $ 114,826
Pro forma........... 189,685 132,352 112,798
Basic earnings per share: As reported......... 1.04 0.69 0.52
Pro forma........... 1.03 0.68 0.52
Diluted earnings per share: As reported......... 1.01 0.68 0.52
Pro forma........... 1.00 0.67 0.52
The fair value of the option grants was estimated on the date of grant
using the Black-Sholes option-pricing model with the following weighted average
assumptions:
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
2002 2001 2000
------------ ----------- ---------
Expected dividend yield 1.34% 2.39% 1.44%
Expected volatility ...... 17.94 21.35 16.25
Risk-free interest rate 4.40 3.96 6.53
Expected option life ..... 5 years 5 years 5 years
e) INCENTIVE PLANS
A tax-deferred profit incentive bonus savings plan is maintained based
on Hudson City's profitability. All employees are eligible after one year of
employment and the attainment of age 21. The expense was $1,230,000, $1,145,000
and $1,095,000 in 2002, 2001 and 2000, respectively.
Certain incentive plans are maintained to recognize key executives who
are able to make substantial contributions to the long-term success and
financial strength of Hudson City. At the end of each performance period, the
value of the award is determined in accordance with established criteria.
Participants can elect cash payment or elect to defer the award until
retirement. The expense related to these plans was $2,462,000 in 2002,
$2,489,000 in 2001 and $2,407,000 in 2000.
Page 100
Notes to Consolidated Financial Statements
11. INCOME TAXES
Income tax expense (benefit) for each of the years in the three-year
period ended December 31, 2002 is summarized as follows:
2002 2001 2000
---- ---- ----
(IN THOUSANDS)
FEDERAL:
- --------
Current ....................................... $ 108,916 $ 76,264 $ 67,197
Deferred ...................................... (3,007) (2,857) (4,759)
--------- --------- ---------
Total federal ......................... 105,909 73,407 62,438
--------- --------- ---------
STATE:
- ------
Current ....................................... 5,222 110 567
Deferred ...................................... (1,749) -- (415)
--------- --------- ---------
Total state ........................... 3,473 110 152
--------- --------- ---------
Total income tax expense .............. $ 109,382 $ 73,517 $ 62,590
========= ========= =========
Not included in the above table is deferred income tax expense of
$11,918,000, $4,868,000 and $15,240,000 for 2002 , 2001 and 2000, respectively,
which represents the deferred income tax expense on the net unrealized gains of
securities available for sale.
The amounts reported as income tax expense vary from the amounts that
would be reported by applying the statutory federal income tax rate to income
before income taxes due to the following:
2002 2001 2000
---- ---- ----
(DOLLARS IN THOUSANDS)
Income before income tax expense ......................... $ 301,415 $ 208,066 $ 177,416
Statutory income tax rate ................................ 35% 35% 35%
--------- --------- ---------
Computed expected income tax expense ..................... 105,495 72,823 62,096
State income taxes, net of federal income tax benefit .... 2,257 72 99
Tax-exempt interest ...................................... (106) (111) (111)
ESOP fair market value adjustment ........................ 1,100 447 304
Other, net ............................................... 636 286 202
--------- --------- ---------
Income tax expense ............................... $ 109,382 $ 73,517 $ 62,590
========= ========= =========
Page 101
Notes to Consolidated Financial Statements
The net deferred tax asset at December 31 consists of the following:
2002 2001
---- ----
(IN THOUSANDS)
Deferred tax asset:
Discount accretion ....................................... $ 55 $ 702
Deferred loan origination fees ........................... 304 935
Postretirement benefits .................................. 16,353 14,312
Book loan loss reserve ................................... 9,426 9,124
Mortgage premium amortization ............................ 5,898 4,481
Non-accrual interest income .............................. 210 266
Non-qualified benefit plans .............................. 5,294 4,147
Other .................................................... 5,301 4,206
------- -------
42,841 38,173
------- -------
Deferred tax liability:
Tax bad debt reserve ..................................... 2,236 4,159
Net unrealized gain on securities available for sale...... 14,887 2,969
Retirement plan .......................................... 4,048 3,860
Deferred REIT dividend ................................... 1,133 --
Other .................................................... 2,249 1,735
------- -------
24,553 12,723
------- -------
Net deferred tax asset .......................... $18,288 $25,450
======= =======
The net deferred tax asset represents the anticipated federal and state
tax benefits expected to be realized in future years upon the utilization of the
underlying tax attributes comprising this balance. In management's opinion, in
view of Hudson City's previous, current and projected future earnings trends,
such net deferred tax asset will more likely than not be fully realized.
Accordingly, no valuation allowance was deemed to be required at December 31,
2002 and 2001.
At December 31, 2002 and 2001, the bad debt reserve for federal income
tax reporting purposes was approximately $54,500,000 and $62,000,000,
respectively. Retained earnings at December 31, 2002 and 2001 included
approximately $49,000,000 for which no deferred income taxes have been provided.
This amount represents the base year allocation of income to bad debt deduction
for tax purposes. Under SFAS No. 109, this amount is treated as a permanent
difference and deferred taxes are not recognized unless it appears that it will
be reduced and result in taxable income in the foreseeable future. Events that
would result in taxation of these reserves include failure to qualify as a bank
for tax purposes or distributions in complete or partial liquidation.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments represents the estimated
amounts at which the asset or liability could be exchanged in a current
transaction between willing parties, other than in a forced liquidation sale.
These estimates are subjective in nature, involve uncertainties and matters of
judgment and, therefore, cannot be determined with precision. Changes in
assumptions could significantly affect the estimates. Further, certain tax
implications related to the realization of the unrealized gains and losses could
have a substantial impact on these fair value estimates and have not been
incorporated into any of the estimates.
Page 102
Notes to Consolidated Financial Statements
Carrying amounts of cash, due from banks and federal funds sold are
considered to approximate fair value. The fair value of one- to four-family
mortgages and home equity loans are generally estimated using the present value
of expected future cash flows. For time deposits and borrowed funds, the fair
value is estimated by discounting estimated future cash flows using currently
offered rates. For deposit liabilities payable on demand, the fair value is
estimated by discounting estimated future cash flows using a regulatory
borrowing rate most closely associated with maturity date ranges that were
established using Hudson City's history and regulatory guidelines. There is no
material difference between the fair value and the committed amounts of our
off-balance commitments.
Other important elements which are not deemed to be financial assets or
liabilities and therefore, not considered in these estimates include the value
of Hudson City's retail branch delivery system, its existing core deposit base
and banking premises and equipment.
The estimated fair value of Hudson City's financial instruments at
December 31 are summarized as follows:
2002 2001
--------------------------- ---------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
ASSETS:
Cash and due from banks ........................ $ 153,096 $ 153,096 $ 84,214 $ 84,214
Federal funds sold ............................. 87,700 87,700 17,600 17,600
Investment securities held to maturity ......... 1,406 1,497 1,441 1,474
Investment securities available for sale ....... 560,932 560,932 167,427 167,427
Federal Home Loan Bank of New York stock ....... 137,500 137,500 81,149 81,149
Mortgage-backed securities held to maturity .... 4,734,266 4,828,939 4,478,488 4,530,692
Mortgage-backed securities available for sale .. 1,391,895 1,391,895 530,690 530,690
Loans, net ..................................... 6,931,891 7,131,594 5,932,101 6,009,269
LIABILITIES:
Deposits .................................... 9,138,629 9,022,750 7,912,762 7,730,213
Borrowed funds .............................. 3,600,000 3,952,900 2,150,000 2,185,594
13. REGULATORY CAPITAL
Deposits at Hudson City Savings are insured up to standard limits of
coverage provided by the Bank Insurance Fund ("BIF") of the Federal Deposit
Insurance Corporation ("FDIC"). Hudson City Savings is a New Jersey
state-chartered savings bank and is subject to comprehensive regulation,
supervision and periodic examinations by the FDIC and by the New Jersey State
Department of Banking.
FDIC regulations require banks to maintain minimum levels of regulatory
capital. Under the regulations in effect at December 31, 2002, Hudson City
Savings was required to maintain (a) a minimum leverage ratio of Tier 1 capital
to total adjusted average assets of 4.0%, and (b) minimum ratios of Tier 1 and
total capital to risk-weighted assets of 4.0% and 8.0 %, respectively.
Under its prompt corrective action regulations, the FDIC is required to
take certain supervisory actions (and may take additional discretionary actions)
with respect to an undercapitalized institution. Such actions could have a
direct material effect on the institution's financial statements. The
regulations establish a framework for the classification of savings institutions
into five categories: well-capitalized, adequately-capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized.
Page 103
Notes to Consolidated Financial Statements
Generally, an institution is considered well-capitalized if it has a leverage
(Tier 1) capital ratio of at least 5.0%; a Tier 1 risk-based capital ratio of at
least 6.0%; and a total risk-based capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative
measures of assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the FDIC about
capital components, risk-weightings and other factors.
Management believes that, as of December 31, 2002, Hudson City Savings
meets all capital adequacy requirements to which it is subject. Further, the
most recent FDIC notification categorized Hudson City Savings as a
well-capitalized institution under the prompt corrective action regulations.
There have been no conditions or events since that notification that management
believes have changed Hudson City Savings' capital classification.
The following is a summary of Hudson City Savings' actual capital
amounts and ratios as of December 31, 2002 and 2001, compared to the FDIC
minimum capital adequacy requirements and the FDIC requirements for
classification as a well-capitalized institution:
FDIC REQUIREMENTS
---------------------------------------------------------
MINIMUM CAPITAL FOR CLASSIFICATION AS
BANK ACTUAL ADEQUACY WELL-CAPITALIZED
---------------------- ---------------------- ----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
DECEMBER 31, 2002
- -----------------
Leverage (Tier 1) capital $1,206,754 8.85% $ 545,340 4.00% $ 681,675 5.00%
Risk-based capital:
Tier 1 .............. 1,206,754 26.26 183,816 4.00 275,724 6.00
Total ............... 1,232,255 26.81 367,632 8.00 459,540 10.00
DECEMBER 31, 2001
- -----------------
Leverage (Tier 1) capital $1,182,130 10.64% $ 444,566 4.00% $ 555,707 5.00%
Risk-based capital:
Tier 1 .............. 1,182,130 31.32 150,964 4.00 226,446 6.00
Total ............... 1,206,140 31.96 301,927 8.00 377,409 10.00
The Federal Reserve Bank imposes certain capital requirements on Hudson
City Bancorp under the Bank Holding Company Act of 1956, including a minimum
leverage ratio and a minimum ratio of "qualifying" capital to risk-weighted
assets. These minimum requirements are substantially the same as Hudson City
Savings' minimum capital requirements described above. Subject to its capital
requirements and certain other restrictions, Hudson City Bancorp is able to
borrow money to make a capital contribution to Hudson City Savings, and such
loans may be repaid from dividends paid from Hudson City Savings to Hudson City
Bancorp. Hudson City Bancorp is also able to raise capital for contribution to
Hudson City Savings by issuing securities without having to receive regulatory
approval, subject to compliance with federal and state securities laws.
Page 104
Notes to Consolidated Financial Statements
The following table shows Hudson City Bancorp's leverage capital ratio,
its Tier 1 risk-based capital ratio, and its total risk-based capital ratio, at
December 31, 2002 and 2001:
FEDERAL RESERVE BANK REQUIREMENTS
---------------------------------------------------------
MINIMUM CAPITAL FOR CLASSIFICATION AS
BANCORP ACTUAL ADEQUACY WELL-CAPITALIZED
---------------------- ---------------------- ----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
DECEMBER 31, 2002
Leverage (Tier 1) capital $1,291,910 9.48% $ 545,367 4.00% $ 681,709 5.00%
Risk-based capital:
Tier 1 .............. 1,291,910 28.11 183,819 4.00 275,728 6.00
Total ............... 1,317,411 28.67 367,637 8.00 459,546 10.00
DECEMBER 31, 2001
Leverage (Tier 1) capital $1,284,009 11.55% $ 444,585 4.00% $ 555,731 5.00%
Risk-based capital:
Tier 1 .............. 1,284,009 34.02 150,964 4.00 226,446 6.00
Total ............... 1,308,019 34.66 301,929 8.00 377,411 10.00
14. OFF-BALANCE SHEET RISK AND CONTINGENCIES
Hudson City Savings is a party to commitments to extend credit in the
normal course of business to meet the financial needs of its customers.
Commitments to extend credit are agreements to lend money to a customer as long
as there is no violation of any condition established in the contract.
Commitments to fund first mortgage loans generally have fixed expiration dates
or other termination clauses, whereas home equity lines of credit have no
expiration date. Since some commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. Hudson City Savings evaluates each customer's
credit-worthiness on a case-by-case basis.
At December 31, 2002, Hudson City Savings had fixed- and variable-rate
first mortgage loan commitments to extend credit of approximately $174,103,000
and $38,917,000, respectively, commitments to purchase loans of $261,554,000,
commitments to purchase mortgage-backed securities of $263,200,000 and unused
home equity and overdraft lines of credit of approximately $83,291,000. No
commitments are included in the accompanying financial statements. There is no
exposure to credit loss in the event the other party to commitments to extend
credit does not exercise its rights to borrow under the commitment.
In the normal course of business, there are various outstanding legal
proceedings. In the opinion of management, the consolidated financial statements
of Hudson City will not be materially affected as a result of such legal
proceedings.
Page 105
Notes to Consolidated Financial Statements
15. PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed financial statements for Hudson City Bancorp,
Inc. (parent company only) reflect Hudson City Bancorp's investment in its
wholly-owned subsidiary, Hudson City Savings Bank, using the equity method of
accounting.
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, DECEMBER 31,
2002 2001
------------ ------------
(IN THOUSANDS)
ASSETS:
- -------
Cash and due from bank ..................................... $ 31,037 $ 47,152
Investment in subsidiary ................................... 1,230,927 1,186,857
ESOP loan receivable ....................................... 54,115 54,741
Other assets ............................................... 62 14
----------- -----------
Total Assets ....................................... $ 1,316,141 $ 1,288,764
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY:
- -------------------------------------
Accrued expenses ........................................... $ 58 $ 28
Total stockholder's equity ................................. 1,316,083 1,288,736
----------- -----------
Total Liabilities and Stockholder's Equity ......... $ 1,316,141 $ 1,288,764
=========== ===========
Page 106
Notes to Consolidated Financial Statements
STATEMENTS OF INCOME
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000
------------ ------------ ------------
(IN THOUSANDS)
Income:
Dividends received from subsidiary ................. $ 178,223 $ 219,846 $ 33,358
Interest on ESOP loan receivable ................... 4,230 4,276 3,848
Interest on deposit with subsidiary ................ 657 1,059 3,621
---------- ---------- ----------
Total income .................................. 183,110 225,181 40,827
Expenses ................................................... 844 613 899
---------- ---------- ----------
Income before income tax expense
and equity in undistributed
earnings/ (excess of distribution
over earnings) of
subsidiary .................................... 182,266 224,568 39,928
Income tax expense ......................................... 1,524 1,712 2,400
---------- ---------- ----------
Income before equity in undistributed
earnings/ (excess of distribution
over earnings) of
subsidiary .................................... 180,742 222,856 37,528
Equity in undistributed earnings/
(excess of distribution over earnings)
of subsidiary ...................................... 11,291 (88,307) 77,298
---------- ---------- ----------
Net Income ......................................... $ 192,033 $ 134,549 $ 114,826
========== ========== ==========
Page 107
Notes to Consolidated Financial Statements
STATEMENTS OF CASH FLOWS
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000
------------ ------------ ------------
(IN THOUSANDS)
Cash Flows from Operating Activities:
Net income ........................................... $ 192,033 $ 134,549 $ 114,826
Adjustments to reconcile net income
to cash provided by operating activities:
(Equity in undistributed earnings)/ excess of
distribution over earnings of subsidiary .. (11,291) 88,307 (77,298)
(Increase) decrease in other assets ............ (28) 67 (81)
Increase (decrease) in accrued expenses ........ 30 (45) (535)
---------- ---------- ----------
Net Cash Provided by Operating Activities .................. 180,744 222,878 36,912
---------- ---------- ----------
Cash Flows from Investing Activities:
Loan to ESOP ......................................... - - (35,244)
Principal collected on ESOP loan ..................... 626 580 1,802
---------- ---------- ----------
Net Cash Provided (Used) in Investing Activities ........... 626 580 (33,442)
---------- ---------- ----------
Cash Flows from Financing Activities:
Purchase of treasury stock ........................... (140,173) (278,458) (65,456)
Exercise of stock options ............................ 9,933 1,981 348
Cash dividends paid to unallocated ESOP shares ....... (2,741) (1,921) (1,241)
Cash dividends paid .................................. (64,504) (46,542) (32,006)
---------- ---------- ----------
Net Cash Used by Financing Activities ...................... (197,485) (324,940) (98,355)
---------- ---------- ----------
Net Decrease in Cash Due from Bank ......................... (16,115) (101,482) (94,885)
Cash Due from Bank at Beginning of Year .................... 47,152 148,634 243,519
---------- ---------- ----------
Cash Due from Bank at End of Year .......................... $ 31,037 $ 47,152 $ 148,634
========== ========== ==========
Page 108
Notes to Consolidated Financial Statements
16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables are a summary of certain quarterly financial data
for the years ended December 31, 2002 and 2001.
2002 QUARTER ENDED
----------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------- ---------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest income ............................................ $ 188,589 $ 196,487 $ 200,338 $ 198,803
Interest expense ........................................... 97,198 99,115 100,434 99,027
---------- ---------- ---------- ----------
Net interest income .................................. 91,391 97,372 99,904 99,776
Provision for loan losses .................................. 525 525 225 225
---------- ---------- ---------- ----------
Net interest income after
provision for loan losses ........................ 90,866 96,847 99,679 99,551
Non-interest income ........................................ 1,172 1,256 1,366 4,219
Non-interest expense ....................................... 24,169 23,069 22,963 23,340
---------- ---------- ---------- ----------
Income before income
tax expense ...................................... 67,869 75,034 78,082 80,430
Income tax expense ......................................... 24,283 26,860 28,464 29,775
---------- ---------- ---------- ----------
Net income ........................................... $ 43,586 $ 48,174 $ 49,618 $ 50,655
========== ========== ========== ==========
Basic earnings per share ................................... $ 0.23 $ 0.26 $ 0.27 $ 0.28
========== ========== ========== ==========
Diluted earnings per share ................................. $ 0.23 $ 0.25 $ 0.26 $ 0.27
========== ========== ========== ==========
2001 QUARTER ENDED
----------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------- ---------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest income ............................................ $ 167,301 $ 167,627 $ 173,897 $ 181,673
Interest expense ........................................... 100,508 99,897 102,111 100,911
---------- ---------- ---------- ----------
Net interest income .................................. 66,793 67,730 71,786 80,762
Provision for loan losses .................................. 450 450 450 525
---------- ---------- ---------- ----------
Net interest income after
provision for loan losses ........................ 66,343 67,280 71,336 80,237
Non-interest income ........................................ 1,052 1,220 1,214 1,208
Non-interest expense ....................................... 19,722 20,518 21,137 20,447
---------- ---------- ---------- ----------
Income before income
tax expense ...................................... 47,673 47,982 51,413 60,998
Income tax expense ......................................... 16,996 17,061 17,886 21,574
---------- ---------- ---------- ----------
Net income ........................................... $ 30,677 $ 30,921 $ 33,527 $ 39,424
========== ========== ========== ==========
Basic earnings per share ................................... $ 0.15 $ 0.16 $ 0.18 $ 0.21
========== ========== ========== ==========
Diluted earnings per share ................................. $ 0.15 $ 0.16 $ 0.17 $ 0.21
========== ========== ========== ==========
Page 109
Notes to Consolidated Financial Statements
17. EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share computations.
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
2002 2001 2000
-------------------------- -------------------------- --------------------------
PER PER PER
SHARE SHARE SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
--------- ------- ------ --------- ------- ------ --------- ------- ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income............................ $ 192,033 $ 134,549 $ 114,826
========= ========= =========
Basic earnings per share:
Income available to
common stockholders.............. $ 192,033 184,928 $ 1.04 $ 134,549 195,862 $ 0.69 $ 114,826 219,014 $ 0.52
====== ====== ======
Effect of dilutive common
stock equivalents................ - 5,077 - 3,126 - 924
--------- ------- --------- ------- --------- -------
Diluted earnings per share:
Income available to
common stockholders.............. $ 192,033 190,005 $ 1.01 $ 134,549 198,988 $ 0.68 $ 114,826 219,938 $ 0.52
========= ======= ====== ========= ======= ====== ========= ======= ======
18. RECENT ACCOUNTING PRONOUNCEMENTS
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 provisions of SFAS
Page 110
Notes to Consolidated Financial Statements
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 did not have any
impact on our consolidated financial statements.
In December, 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation, Transition and Disclosure." SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. SFAS No. 148 also
requires that disclosures of the pro forma effect of using the fair value method
of accounting for stock-based employee compensation be displayed more
prominently and in a tabular format. Additionally, SFAS No. 148 requires
disclosure of the pro forma effect in interim financial statements. The
additional disclosure requirements of SFAS No. 148 are effective for fiscal
years ended after December 15, 2002. We have adopted the expanded disclosure
provisions of this statement effective December 31, 2002.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
Page 111
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
Information regarding directors and executive officers of the Company
is presented under the headings "Proposal 1 - Election of Directors-General,"
"-Who Our Directors Are," "-Our Directors Backgrounds," "-Nominees for Election
as Directors," "-Continuing Directors," "-Meetings of the Board of Directors and
Its Committees," "-Executive Officers," "-Director Compensation," "-Executive
Officer Compensation," and "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Company's definitive Proxy Statement for the 2003 Annual
Meeting of Stockholders to be held on May 2, 2003, which will be filed with the
SEC on or about April 2, 2003, and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information regarding executive compensation is presented under the
headings "Election of Directors-Director Compensation," " -Executive Officer
Compensation," "-Summary Compensation Table," "Employment Agreements," "Change
of Control Agreements," and "Benefit Plans" in the Company's definitive Proxy
Statement for the 2003 Annual Meeting of Stockholders to be held May 2, 2003,
which will be filed with the SEC on or about April 2, 2003, and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information regarding security ownership of certain beneficial owners
and management is presented under the heading "Security Ownership of Certain
Beneficial Owners and Management" in the Company's definitive Proxy Statement
for the 2003 Annual Meeting of Stockholders to be held May 2, 2003, which will
be filed with the SEC on or about April 2, 2003, and is incorporated herein by
reference.
Page 112
The following table presents the equity compensation plan information as of
December 31, 2002.
EQUITY COMPENSATION PLAN INFORMATION
- ------------------------------------------------------------------------------------------------------------
NUMBER OF
SECURITIES
REMAINING
AVAILABLE FOR FUTURE
NUMBER OF ISSUANCE UNDER
SECURITIES TO BE EQUITY
ISSUED UPON WEIGHTED-AVERAGE COMPENSATION PLANS
EXERCISE OF EXERCISE PRICE OF (EXCLUDING
OUTSTANDING OUTSTANDING SECURITIES
OPTIONS, WARRANTS OPTIONS, WARRANTS REFLECTED IN COLUMN
AND RIGHTS AND RIGHTS (a))
PLAN CATEGORY (a) (b) (c) (1)
- ---------------------------------------------- ----------------- ----------------- --------------------
Equity compensation plans
approved by security holders ....... 7,910,070 $ 7.530 1,369,700
Equity compensation plans not
approved by security holders ....... 320,000 11.515 -
--------- ---------
Total ........................................ 8,230,070 7.685 1,369,700
========= =========
- ----------------------------------------------
(1) Of such 1,369,700 shares, 205,700 remain available for future
restricted stock awards under Hudson City Bancorp's 2000 Recognition and
Retention Plan. Hudson City's practice is to purchase outstanding common stock
to satisfy its obligations for restricted stock awards.
The Hudson City Bancorp, Inc. Denis J. Salamone Restricted Stock Award
Plan and the Hudson City Bancorp, Inc. Denis J. Salamone Stock Option Plan were
adopted in fiscal year 2001. Pursuant to the Denis J. Salamone Restricted Stock
Award Plan, Mr. Salamone was granted a restrictive stock award of 200,000
shares, which vest at the rate of 40,000 shares per year beginning April 20,
2002, with accelerated vesting in cases of death, disability, retirement or
change of control in Hudson City Bancorp. Pursuant to the Denis J. Salamone
Stock Option Plan, Mr. Salamone was granted an option to purchase 320,000
shares, which become exercisable at the rate of 64,000 shares per year beginning
January 13, 2002. These awards were granted as a recruitment incentive to induce
Mr. Salamone to leave his prior position and join Hudson City. In 2001, Hudson
City purchased outstanding common stock to meet its obligations under Mr.
Salamone's restricted stock award.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information regarding certain relationships and related transactions is
presented under the heading "Certain Transactions with Members of our Board of
Directors and Executive Officers" in the Company's definitive Proxy Statement
for the 2003 Annual Meeting of Stockholders to be held on May 2, 2003, which
will be filed with the SEC on or about April 2, 2003, and is incorporated herein
by reference.
Page 113
ITEM 14. 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 January 14, 2003. 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 January 14, 2003, and we
identified no significant deficiencies or material weaknesses requiring
corrective action with respect to those controls.
ITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information regarding principal accountant fees and services is
presented under the heading "Proposal 2 - Ratification of Appointment of
Independent Auditors" in Hudson City Bancorp's definitive Proxy Statement for
the 2003 Annual Meeting of Stockholders to be held on May 2, 2003, which will be
filed with the SEC on or about April 2, 2003 and is incorporated herein by
reference.
Page 114
PART IV
ITEM 16. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of Documents Filed as Part of this Annual Report on Form 10-K
(1) The following consolidated financial statements are in Item 8 of
this annual report:
Consolidated Financial Statements as of December 31, 2002, 2001 and
2000
- Independent Auditors' Report
- Consolidated Statements of Financial Condition as of December
31, 2002 and 2001
- Consolidated Statements of Income for the years ended December
31, 2002, 2001 and 2000
- Consolidated Statements of Changes in Stockholders' Equity for
the years ended December 31, 2002, 2001 and 2000
- Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000
- Notes to Consolidated Financial Statements
(2) Financial Statement Schedules have been omitted because they are
not applicable or the required information is shown in the
Consolidated Financial Statements or Notes thereto in Item 8 of
this annual report.
(b) Reports on Form 8-K. During the last quarter of 2002, no reports on
Form 8-K were required to be filed and as such, none were filed.
(c) Exhibits Required by Item 601 of Regulation S-K
Page 115
EXHIBIT DESCRIPTION
2.1 Amended and Restated Plan of Reorganization and Stock Issuance of Hudson City Savings Bank (1)
3.1 Certificate of Incorporation of Hudson City Bancorp, Inc. (1)
3.2 Amended and Restated Bylaws of Hudson City Bancorp, Inc. (2)
4.1 Certificate of Incorporation of Hudson City Bancorp, Inc. (See Exhibit 3.1)
4.2 Amended and Restated Bylaws of Hudson City Bancorp, Inc. (See Exhibit 3.2)
4.3 Form of Stock Certificate of Hudson City Bancorp, Inc. (1)
10.1 Employee Stock Ownership Plan of Hudson City Savings Bank (1)
10.2 Profit Incentive Bonus Plan of Hudson City Savings Bank (1)
10.3 Supplementary Savings Plan of Hudson City Savings Bank (1)
10.4 Form of ESOP Loan Commitment Letter and ESOP Loan Documents (1)
10.5 Form of Employment Agreement by and among Hudson City Savings Bank and Hudson City Bancorp,
Inc. and certain officers (1)
10.6 Form of One-Year Change in Control Agreement by and among Hudson City Savings Bank and Hudson City
Bancorp, Inc. and certain officers (1)
10.7 Form of Two-Year Change in Control Agreement by and among Hudson City Savings Bank and Hudson City
Bancorp, Inc. and certain officers (1)
10.8 Severance Pay Plan of Hudson City Savings Bank (1)
10.9 ESOP Restoration Plan of Hudson City Savings Bank (1)
10.10 Hudson City Savings Bank Outside Directors Consultation Plan (1)
10.11 Hudson City Savings Bank Supplemental Executive Retirement Plan (1)
10.12 Hudson City Savings Bank Annual Incentive Plan (1)
10.13 Hudson City Savings Bank Long-Term Incentive Plan (1)
10.14 Form of Postretirement Death Benefit for Senior Officers (1)
10.15 Hudson City Bancorp, Inc. 2000 Stock Option Plan (3)
10.16 Hudson City Bancorp, Inc. 2000 Recognition and Retention Plan (3)
10.17 Amendment No. 1 to the Employee Stock Ownership Plan of Hudson City Savings Bank (4)
10.18 Amendment No. 1 to the Profit Incentive Bonus Plan of Hudson City Savings Bank (4)
10.19 Amendment No. 2 to the Profit Incentive Bonus Plan of Hudson City Savings Bank (4)
10.20 Employment Agreement by and among Hudson City Savings Bank, Hudson City Bancorp, Inc.
and Leonard S. Gudelski (5)
10.21 Employment Agreement by and among Hudson City Savings Bank, Hudson City Bancorp, Inc.
and Denis J. Salamone (5)
10.22 Hudson City Bancorp, Inc. Denis J. Salamone Restricted Stock Award Plan (5)
10.23 Hudson City Bancorp, Inc. Denis J. Salamone Stock Option Plan (5)
11.1 Statement Re: Computation of Per Share Earnings
21.1 Subsidiaries of Hudson City Bancorp, Inc.
23.1 Consent of KPMG LLP (6)
- -----------------------
(1) Incorporated herein by reference to the Exhibits to the Registrant's
Registration Statement No. 333-74383 on Form S-1, filed with the Securities and
Exchange Commission on March 15, 1999, as amended.
(2) Incorporated herein by reference to the Exhibits to the Registrant's Current
Report on Form 8-K filed with the Securities and Exchange Commission on January
27, 2003.
(3) Incorporated herein by reference to the Exhibits to the Registrant's
Registration Statement No. 333-95193 on Form S-8, filed with the Securities and
Exchange Commission on January 21, 2000.
(4) Incorporated herein by reference to the Exhibits to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1999 filed with the
Securities and Exchange Commission on March 29, 2000.
(5) Incorporated herein by reference to the Exhibits to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 2001 filed with the
Securities and Exchange Commission on March 28, 2002.
(6) Submitted only with filing in electronic format.
Page 116
CERTIFICATION OF DISCLOSURE
I, Ronald E. Hermance, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of Hudson City Bancorp,
Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date");
and
c) presented in this annual 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
annual 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: March 20, 2003 By: /s/ Ronald E. Hermance, Jr.
-------------------------------------
Ronald E. Hermance, Jr.
President and Chief Executive Officer
Page 117
CERTIFICATION OF DISCLOSURE
I, Denis J. Salamone, certify that:
1. I have reviewed this annual report on Form 10-K of Hudson City Bancorp,
Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date");
and
c) presented in this annual 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
annual 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: March 20, 2003 By: /s/ Denis J. Salamone
-------------------------------------
Denis J. Salamone
Senior Executive Vice President
and Chief Operating Officer
Page 118
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant had duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in Paramus, New
Jersey, on March 20, 2003.
Hudson City Bancorp, Inc.
By: /s/ Ronald E. Hermance, Jr.
-------------------------------------
Ronald E. Hermance, Jr.
President and Chief Executive Officer
Page 119
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
NAME TITLE DATE
/s/ Leonard S. Gudelski Director, Chairman of the Board March 20, 2003
- -------------------------------------
Leonard S. Gudelski
/s/ Ronald E. Hermance, Jr. Director, President and Chief Executive Officer March 20, 2003
- -------------------------------------
Ronald E. Hermance, Jr. (principal executive officer)
/s/ Denis J. Salamone Director, Senior Executive Vice President and March 20, 2003
- -------------------------------------
Denis J. Salamone Chief Operating Officer (principal financial and
accounting officer)
/s/ Verne S. Atwater Director March 20, 2003
- -------------------------------------
Verne S. Atwater
/s/ Michael W. Azzara Director March 20, 2003
- -------------------------------------
Michael W. Azzara
/s/ William G. Bardel Director March 20, 2003
- -------------------------------------
William G. Bardel
/s/ John D. Birchby Director March 20, 2003
- -------------------------------------
John D. Birchby
/s/ Kenneth L. Birchby Director March 20, 2003
- -------------------------------------
Kenneth L. Birchby
/s/ Victoria H. Bruni Director March 20, 2003
- -------------------------------------
Victoria H. Bruni
/s/ William J. Cosgrove Director March 20, 2003
- -------------------------------------
William J. Cosgrove
/s/ Andrew J. Egner, Jr. Director March 20, 2003
- -------------------------------------
Andrew J. Egner, Jr.
/s/ John W. Klie Director March 20, 2003
- -------------------------------------
John W. Klie
/s/ Donald O. Quest Director March 20, 2003
- -------------------------------------
Donald O. Quest
/s/ Joseph G. Sponholz Director March 20, 2003
- -------------------------------------
Joseph G. Sponholz
Page 120