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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: SEPTEMBER 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _______________
Commission File Number: 0-26001
HUDSON CITY BANCORP, INC.
-------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-3640393
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
West 80 Century Road
Paramus, New Jersey 07652
-------------------- -----
(Address of Principal Executive Offices) (Zip Code)
(201)967-1900
-------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of November 7, 2003, the registrant had 190,794,197 shares of common
stock, $0.01 par value, outstanding. Of such shares outstanding, 122,576,600
shares were held by Hudson City, MHC, the registrant's mutual holding company,
and 68,217,597 shares were held by the public and directors, officers and
employees of the registrant.
Hudson City Bancorp, Inc.
Form 10-Q
Contents of Report
Page
Number
------
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
Consolidated Statements of Financial Condition -
September 30, 2003 (Unaudited) and December 31, 2002 ...................... 3
Consolidated Statements of Income (Unaudited) - For the three and nine
months ended September 30, 2003 and 2002 .................................. 4
Consolidated Statements of Cash Flows (Unaudited) - For the nine months
ended September 30, 2003 and 2002 ......................................... 5
Notes to Consolidated Financial Statements ................................ 6
Item 2. - Management's Discussion and Analysis of Financial Condition and Results of
Operations ......................................................................... 12
Item 3. - Quantitative and Qualitative Disclosures About Market Risk ............... 30
Item 4. - Controls and Procedures .................................................. 33
PART II - OTHER INFORMATION
Item 1. - Legal Proceedings ........................................................ 33
Item 2. - Changes in Securities and Use of Proceeds ................................ 33
Item 3. - Defaults Upon Senior Securities .......................................... 33
Item 4. - Submission of Matters to a Vote of Security Holders ...................... 33
Item 5. - Other Information ........................................................ 33
Item 6. - Exhibits and Reports on Form 8-K ......................................... 34
SIGNATURES ....................................................................................... 35
CERTIFICATION OF DISCLOSURE OF RONALD E. HERMANCE, JR ............................................ 36
CERTIFICATION OF DISCLOSURE OF DENIS J. SALAMONE ................................................. 37
EXHIBIT 32.1 ..................................................................................... 38
Explanatory Note: This Form 10-Q contains certain "forward looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995, and
may be identified by the use of such words as "believe," "expect," "anticipate,"
"should," "planned," "estimated" and "potential." Examples of forward looking
statements include, but are not limited to, estimates with respect to the
financial condition, results of operations and business of Hudson City Bancorp,
Inc. that are subject to various factors which could cause actual results to
differ materially from these estimates. These factors include: changes in
general, economic and market conditions, legislative and regulatory conditions,
or the development of an interest rate environment that adversely affects Hudson
City Bancorp's interest rate spread or other income anticipated from operations
and investments. As used in this Form 10-Q, "we" and "us" and "our" refer to
Hudson City Bancorp, Inc. and its consolidated subsidiary Hudson City Savings
Bank, depending on the context.
Page 2
PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
HUDSON CITY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
(UNAUDITED)
(IN THOUSANDS)
ASSETS
Cash and due from banks ........................................................ $ 117,346 $ 153,096
Federal funds sold ............................................................. 45,500 87,700
------------ ------------
Total cash and cash equivalents ................................ 162,846 240,796
Investment securities held to maturity, market value of $1,459 at
September 30, 2003 and $1,497 at December 31, 2002 ...................... 1,371 1,406
Investment securities available for sale, at market value ...................... 2,190,366 560,932
Federal Home Loan Bank of New York stock ....................................... 167,500 137,500
Mortgage-backed securities held to maturity, market value of $4,716,474
at September 30, 2003 and $4,828,939 at December 31, 2002 ............... 4,716,212 4,734,266
Mortgage-backed securities available for sale, at market value ................. 1,076,088 1,391,895
Loans .......................................................................... 7,467,450 6,970,900
Less:
Deferred loan fees .................................................. 16,149 13,508
Allowance for loan losses ........................................... 26,099 25,501
------------ ------------
Net loans ...................................................... 7,425,202 6,931,891
Foreclosed real estate, net .................................................... 2,057 1,276
Accrued interest receivable .................................................... 72,360 69,248
Banking premises and equipment, net ............................................ 31,019 32,732
Other assets ................................................................... 53,388 42,662
------------ ------------
Total Assets ................................................... $ 15,898,409 $ 14,144,604
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Interest-bearing ........................................................ $ 9,786,992 $ 8,750,164
Noninterest-bearing ..................................................... 461,072 388,465
------------ ------------
Total deposits ................................................. 10,248,064 9,138,629
Borrowed funds ................................................................. 4,200,000 3,600,000
Accrued expenses and other liabilities ......................................... 97,122 89,892
------------ ------------
Total liabilities .............................................. 14,545,186 12,828,521
------------ ------------
Common stock, $0.01 par value, 800,000,000 shares authorized; 231,276,600 shares
issued, 191,236,522 shares outstanding at September 30, 2003,
191,973,258 shares outstanding at December 31, 2002 ..................... 2,313 2,313
Additional paid-in capital ..................................................... 533,938 530,496
Retained earnings .............................................................. 1,372,063 1,291,960
Treasury stock, at cost; 40,040,078 shares at September 30, 2003 and
39,303,342 shares at December 31, 2002 .................................. (495,451) (465,249)
Unallocated common stock held by the employee stock ownership plan ............. (50,004) (51,474)
Unearned common stock held by the recognition and retention plan ............... (11,165) (16,253)
Accumulated other comprehensive income, net of tax ............................. 1,529 24,290
------------ ------------
Total stockholders' equity ..................................... 1,353,223 1,316,083
------------ ------------
Total Liabilities and Stockholders' Equity ..................... $ 15,898,409 $ 14,144,604
============ ============
See accompanying notes to consolidated financial statements.
Page 3
HUDSON CITY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------------- -----------------------------
2003 2002 2003 2002
------------ ------------ ------------ -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
Interest and Dividend Income:
Interest and fees on first mortgage loans ........... $ 96,950 $ 114,128 $ 304,477 $ 330,922
Interest and fees on consumer and other loans ....... 2,084 2,526 6,296 7,693
Interest on mortgage-backed securities held to
maturity ............................................ 51,554 64,925 167,352 202,330
Interest on mortgage-backed securities available for
sale ................................................ 12,857 11,520 38,881 28,808
Interest on investment securities held to maturity:
Taxable ......................................... 14 17 48 51
Exempt from federal taxes ....................... 7 5 17 16
Interest and dividend income on investment securities
available for sale-taxable ..................... 22,360 5,456 54,805 11,051
Dividends on Federal Home Loan Bank
of New York stock .............................. 340 916 4,399 2,787
Interest on federal funds sold ...................... 519 845 1,602 1,756
------------ ------------ ------------ ------------
Total interest and dividend income ........... 186,685 200,338 577,877 585,414
------------ ------------ ------------ ------------
Interest Expense:
Interest on deposits ................................ 50,444 63,619 159,804 195,835
Interest on borrowed funds .......................... 41,552 36,815 122,738 100,912
------------ ------------ ------------ ------------
Total interest expense ....................... 91,996 100,434 282,542 296,747
------------ ------------ ------------ ------------
Net interest income ....................... 94,689 99,904 295,335 288,667
Provision for Loan Losses ................................. 225 225 675 1,275
------------ ------------ ------------ ------------
Net interest income after provision
for loan losses ...................... 94,464 99,679 294,660 287,392
------------ ------------ ------------ ------------
Non-Interest Income:
Service charges and other income .................... 1,681 1,366 4,292 3,794
Gains on securities transactions, net ............... 7,750 - 20,549 -
------------ ------------ ------------ ------------
Total non-interest income .................... 9,431 1,366 24,841 3,794
------------ ------------ ------------ ------------
Non-Interest Expense:
Compensation and employee benefits .................. 17,598 14,313 50,795 45,495
Net occupancy expense ............................... 3,770 3,427 11,213 10,419
Federal deposit insurance assessment ................ 402 357 1,165 1,051
Computer and related services ....................... 509 284 1,190 891
Other expense ....................................... 3,332 4,582 11,682 12,345
------------ ------------ ------------ ------------
Total non-interest expense ................... 25,611 22,963 76,045 70,201
------------ ------------ ------------ ------------
Income before income tax expense .......... 78,284 78,082 243,456 220,985
Income Tax Expense ........................................ 28,021 28,464 88,446 79,607
------------ ------------ ------------ ------------
Net income ................................ $ 50,263 $ 49,618 $ 155,010 $ 141,378
============ ============ ============ ============
Basic Earnings Per Share .................................. $ 0.28 $ 0.27 $ 0.85 $ 0.76
============ ============ ============ ============
Diluted Earnings Per Share ................................ $ 0.27 $ 0.26 $ 0.83 $ 0.74
============ ============ ============ ============
Weighted Average Number of Common Shares Outstanding:
Basic ..................................... 182,576,472 183,669,980 182,666,536 185,612,422
Diluted ................................... 187,918,359 189,016,698 187,675,640 191,077,444
See accompanying notes to consolidated financial statements.
Page 4
HUDSON CITY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-------------------------------
2003 2002
----------- -----------
(IN THOUSANDS)
Cash Flows from Operating Activities:
Net income ................................................................. $ 155,010 $ 141,378
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, accretion and amortization expense ..................... 35,857 9,412
Provision for loan losses ............................................ 675 1,275
Gains on securities transactions, net ................................ (20,549) --
Allocation of stock for employee benefit plans ....................... 10,000 9,424
Deferred tax benefit ................................................. -- (2,363)
Net proceeds from sale of foreclosed real estate ..................... 2,089 120
Increase in accrued interest receivable .............................. (3,112) (5,950)
Decrease in other assets ............................................. 5,967 2,248
Increase in accrued expenses and other liabilities ................... 7,230 6,505
----------- -----------
Net Cash Provided by Operating Activities ......................................... 193,167 162,049
----------- -----------
Cash Flows from Investing Activities:
Originations of loans ...................................................... (1,855,221) (1,394,695)
Purchases of loans ......................................................... (1,794,287) (955,276)
Payments on loans .......................................................... 3,147,106 1,594,322
Principal collection of mortgage-backed securities held to maturity ........ 2,958,240 1,271,971
Proceeds from sales of mortgage-backed securities held to maturity ......... 54,549 --
Purchases of mortgage-backed securities held to maturity ................... (3,014,172) (1,244,612)
Principal collection of mortgage-backed securities available for sale ...... 356,531 156,712
Proceeds from sales of mortgage-backed securities available for sale ....... 943,614 --
Purchases of mortgage-backed securities available for sale ................. (995,172) (715,223)
Proceeds from maturities and calls of investment securities held to maturity 35 35
Proceeds from maturities and calls of investment securities available for
sale ....................................................................... 1,247,217 124,460
Proceeds from sales of investment securities available for sale ............ 50,531 --
Purchases of investment securities available for sale ...................... (2,940,682) (498,802)
Purchases of Federal Home Loan Bank of New York stock ...................... (30,000) (26,351)
Purchases of premises and equipment, net ................................... (870) (4,932)
----------- -----------
Net Cash Used in Investment Activities ............................................ (1,872,581) (1,692,391)
----------- -----------
Cash Flows from Financing Activities:
Net increase in deposits ................................................... 1,109,435 907,574
Proceeds from borrowed funds ............................................... 850,000 850,000
Principal payments on borrowed funds ....................................... (250,000) --
Dividends paid ............................................................. (70,984) (47,997)
Purchases of stock by the RRP .............................................. -- (1,854)
Purchases of treasury stock ................................................ (46,436) (107,915)
Exercise of stock options .................................................. 9,449 5,273
----------- -----------
Net Cash Provided by Financing Activities ......................................... 1,601,464 1,605,081
----------- -----------
Net (Decrease) Increase in Cash and Cash Equivalents .............................. (77,950) 74,739
Cash and Cash Equivalents at Beginning of Period .................................. 240,796 101,814
----------- -----------
Cash and Cash Equivalents at End of Period ........................................ $ 162,846 $ 176,553
=========== ===========
Supplemental Disclosures:
Interest paid .............................................................. $ 282,223 $ 292,478
=========== ===========
Income taxes paid .......................................................... $ 89,596 $ 81,477
=========== ===========
See accompanying notes to consolidated financial statements.
Page 5
Hudson City Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
1. - BASIS OF PRESENTATION
Hudson City Bancorp, Inc. is a Delaware corporation organized in 1999 by Hudson
City Savings Bank in connection with the conversion and reorganization of Hudson
City Savings from a mutual savings bank into a two-tiered mutual savings bank
holding company structure.
In our opinion, all the adjustments (consisting of normal and recurring
adjustments) necessary for a fair presentation of the consolidated financial
condition and consolidated results of operations for the unaudited periods
presented have been included. The results of operations and other data presented
for the three- and nine-month periods ended September 30, 2003 are not
necessarily indicative of the results of operations that may be expected for the
year ending December 31, 2003.
Certain information and note disclosures usually included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission for the
preparation of the Form 10-Q. The consolidated financial statements presented
should be read in conjunction with Hudson City Bancorp's audited consolidated
financial statements and notes to consolidated financial statements included in
Hudson City Bancorp's December 31, 2002 Annual Report on Form 10-K.
STATEMENTS OF CASH FLOW. For the purposes of reporting cash flows, cash and cash
equivalents includes cash on hand, amounts due from banks and federal funds
sold. Transfers of loans to foreclosed real estate of $3.0 million and $1.1
million for the nine month periods ended September 30, 2003 and 2002,
respectively, did not result in cash receipts or cash payments.
STOCK OPTION PLANS' FAIR VALUE DISCLOSURE. 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. 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.
Page 6
Hudson City Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
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 would have been reduced to
the pro forma amounts that follow.
FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
-------------------------------------
2003 2002
---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income, as reported ......................... $ 50,263 $ 49,618
Add: expense recognized for the recognition and
retention plans, net of related tax effect .. 1,046 1,283
Less: total stock option and recognition and
retention plans expense, determined under
the fair value method, net of
related tax effect .......................... (1,660) (1,869)
---------- ----------
Pro forma net income ............................ $ 49,649 $ 49,032
========== ==========
Basic earnings per share: As reported ....... $ 0.28 $ 0.27
Pro forma ......... 0.27 0.27
Diluted earnings per share: As reported ....... $ 0.27 $ 0.26
Pro forma ......... 0.26 0.26
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-------------------------------------
2003 2002
----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income, as reported .......................... $ 155,010 $ 141,378
Add: expense recognized for the recognition and
retention plans, net of related tax effect .. 3,085 3,617
Less: total stock option and recognition and
retention plans expense, determined under
the fair value method, net of
related tax effect ......................... (4,912) (5,386)
----------- -----------
Pro forma net income ............................ $ 153,183 $ 139,609
=========== ===========
Basic earnings per share: As reported ........ $ 0.85 $ 0.76
Pro forma .......... 0.84 0.75
Diluted earnings per share: As reported ........ $ 0.83 $ 0.74
Pro forma .......... 0.82 0.73
Page 7
Hudson City Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
The fair value of the option grants, for those grants issued during the
following periods, was estimated on the date of grant using the Black-Sholes
option-pricing model with the following weighted average assumptions:
FOR THE THREE AND NINE MONTHS
ENDED SEPTEMBER 30,
-----------------------------
2003 2002
-------- -------
Expected dividend yield .. 2.24% 1.34%
Expected volatility ...... 24.71 17.94
Risk-free interest rate .. 2.98 4.40
Expected option life ..... 5 years 5 years
2. - COMPREHENSIVE INCOME
Comprehensive income is comprised of net income and other comprehensive income.
Other comprehensive income includes unrealized holding gains and losses on
securities available for sale, net of tax. Total comprehensive income during the
periods indicated is as follows.
FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
-----------------------------
2003 2002
-------- --------
(IN THOUSANDS)
Net income ......................................... $ 50,263 $ 49,618
Other comprehensive income:
Unrealized holding (loss)gain on securities
available for sale, net of tax of $(11,319)
for 2003 and $1,091 for 2002 .............. (16,389) 1,580
Reclassification adjustment for gains
in net income, net of tax of ($3,166) ..... (4,584) --
-------- --------
Total comprehensive income ......................... $ 29,290 $ 51,198
======== ========
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-----------------------------
2003 2002
-------- --------
(IN THOUSANDS)
Net income ......................................... $155,010 $141,378
Other comprehensive income:
Unrealized holding (loss)gain on securities
available for sale, net of tax of $(7,325)
for 2003 and $2,765 for 2002 .............. (10,606) 4,004
Reclassification adjustment for gains
in net income, net of tax of ($8,394)...... (12,155) --
-------- --------
Total comprehensive income ......................... $132,249 $145,382
======== ========
Page 8
Hudson City Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
3. - EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations.
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------
2003 2002
---------------------------- ---------------------------
PER PER
SHARE SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
-------- -------- ------ -------- ------- ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income .................. $ 50,263 $ 49,618
======== ========
Basic earnings per share:
Income available to
common stockholders .. $ 50,263 182,576 $ 0.28 $ 49,618 183,670 $ 0.27
====== ======
Effect of dilutive common
stock equivalents .... -- 5,342 -- 5,347
-------- -------- -------- -------
Diluted earnings per share:
Income available to
common stockholders .. $ 50,263 187,918 $ 0.27 $ 49,618 189,017 $ 0.26
======== ======== ====== ======== ======= ======
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------
2003 2002
---------------------------- ---------------------------
PER PER
SHARE SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
-------- -------- ------ -------- ------- ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income .................. $155,010 $141,378
======== ========
Basic earnings per share:
Income available to
common stockholders .. $155,010 182,667 $ 0.85 $141,378 185,612 $ 0.76
====== ======
Effect of dilutive common
stock equivalents .... -- 5,009 -- 5,465
-------- -------- -------- -------
Diluted earnings per share:
Income available to
common stockholders .. $155,010 187,676 $ 0.83 $141,378 191,077 $ 0.74
======== ======== ====== ======== ======= ======
4. - SUBSEQUENT EVENTS
On October 16, 2003, the Board of Directors of Hudson City Bancorp declared a
quarterly cash dividend of fifteen cents ($0.15) per common share outstanding.
The dividend is payable on December 1, 2003 to stockholders of record at the
close of business on November 7, 2003.
Page 9
Hudson City Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
On October 16, 2003, the Board of Directors of Hudson City Savings Bank, the
wholly owned banking subsidiary of Hudson City Bancorp, authorized the filing of
an application with the Office of Thrift Supervision ("OTS") to convert to a
federally chartered savings bank. This application was filed October 17, 2003.
Under this new charter, the OTS would become the sole regulator of the Bank and
would regulate Hudson City Bancorp and Hudson City, MHC as savings association
holding companies.
5. - RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirement of Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN 45 addresses disclosures to be made
by a guarantor in its financial statements about its obligations under
guarantees. The interpretation also requires the recognition, at estimated fair
value, of a liability by the guarantor at the inception of certain guarantees
issued or modified after December 31, 2002. The disclosure requirements of FIN
45 were effective for financial statements of interim or annual periods ending
after December 15, 2002. The recognition and measurement provisions are
applicable prospectively to guarantees issued or modified after December 31,
2002. The adoption of this interpretation did not have a material impact on our
consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," which amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 149 is generally effective for contracts entered into or
modified after June 30, 2003, and for hedging relationships designated after
June 30, 2003, and should generally be applied prospectively. The provisions of
SFAS No. 149 that relate to SFAS No. 33 Implementation Issues that have been
effective for fiscal quarters that began prior to June 15, 2003, should continue
to be applied in accordance with their respective effective dates. In addition,
the provisions of SFAS No. 149 which relate to forward purchases or sales of
when-issued securities or other securities that do not yet exist, should be
applied to both existing contracts and new contracts entered into after June 30,
2003. The adoption of SFAS No. 149 did not have a material impact on our
financial condition or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity," which requires
issuers of certain financial instruments, falling within the scope of SFAS No.
150, with characteristics of both liabilities and equity to be classified and
measured as liabilities. SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. For
financial instruments created before the issuance date of SFAS No. 150 and still
existing at the beginning of the interim period of adoption, SFAS No. 150 is to
be implemented by reporting the cumulative effect of a change in an accounting
principle. Restatement is not permitted. The adoption of SFAS No. 150 did not
have a material impact on our financial condition or results of operations.
FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN
46"), issued in January 2003, applies immediately to enterprises that hold a
variable interest in variable interest entities created after January 31, 2003.
It applies in the first fiscal year or interim period beginning after June 15,
2003 to enterprises that hold a variable interest in variable interest entities
created before February 1, 2003. FIN 46 applies to public enterprises as of the
beginning of the applicable interim or annual period. FIN 46
Page 10
Hudson City Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
may be applied prospectively with a cumulative-effect adjustment as of the date
on which it is first applied or by restating previously issued financial
statements for one or more years with a cumulative-effect adjustment as of the
beginning of the first year restated. FIN 46 provides guidance on the
identification of entities controlled through means other than voting rights.
FIN 46 specifies how a business enterprise should evaluate its interest in a
variable interest entity to determine whether to consolidate that entity. A
variable interest entity must be consolidated by its primary beneficiary if the
entity does not effectively disperse risks among the parties involved.
On October 9, 2003, the effective date was deferred until the end of the first
interim or annual period ending after December 15, 2003, for certain interests
held by a public entity in certain variable interest entities or potential
variable interest entities created before February 1, 2003. The adoption of FIN
46 did not impact the Company's consolidated financial statements.
Page 11
Hudson City Bancorp, Inc.
Form 10-Q
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
During the first nine months of 2003 we have continued to experience the low
market interest rate environment that began in 2002, despite a modest increase
in long-term interest rates during the third quarter of 2003. The market
interest rate yield curve, though remaining relatively steep, flattened during
this nine-month period, as long-term interest rates generally declined, while
short-term interest rates remained relatively stable. A flatter yield curve
occurs when the spread between long-term interest rates and short-term interest
rates decreases. The flattening of the yield curve has had an adverse impact on
our earnings as the rates on our interest-earning assets are generally based
upon long-term interest rates while the rates paid on our interest-bearing
liabilities are generally based upon short-term rates. The impact on our
interest income due to rate decreases is generally felt in later periods than
the impact on our interest expense because our interest-earning assets generally
price off long-term interest rates while our interest-bearing liabilities
generally price off short-term interest rates. During July 2003, there was a
modest increase in the long-term interest rates, which caused a steepening of
the yield curve. An increase in long-term market rates and a steepening of the
yield curve could have a positive impact on our earnings in future periods as
the prepayment activity on our mortgage-related assets should slow and our
interest rate spread should improve.
The low long-term interest rate environment has caused an acceleration of
prepayments on our mortgage-backed securities, and an acceleration of
prepayments, loan refinancings and modifications on our mortgage loans during
the first nine months of 2003. The higher level of prepayment activity has
caused an acceleration of the amortization of the net premium on these
mortgage-related assets. The reinvestment of the proceeds from the accelerated
prepayment activity at the prevailing lower interest rates, the reset of the
contract interest rate caused by loan refinancings and modifications, the
acceleration of the amortization of the net premium, and the timing of the
impact on earnings of the market rate changes have resulted in the narrowing of
our interest rate spread and net interest margin, and a reduction in the growth
of our net interest income.
This same low interest rate environment has also afforded us the opportunity to
realize gains on certain of our mortgage-backed and investment securities prior
to interest rate changes, such as the long-term rate increase seen in July 2003,
which may have adversely affected their fair market value. The low market
interest rates caused increases in the fair market value of the variable-rate
portion of our mortgage-backed securities portfolio, as these variable-rate
securities had annual rate change limits. The sale of securities from the
held-to-maturity portfolio resulted from the disposition of seasoned amortizing
securities with remaining principal of less than fifteen percent of acquisition
value as allowed under SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." The cash flows from the sales of these securities were
reinvested in fixed-rate securities.
During the third quarter of 2003, we continued to grow our balance sheet
consistent with the capital management and growth strategies we have employed
during recent periods. We have been able to continue to report strong earnings
due to our long-term investment objectives and the relatively low cost financing
available. Our balance sheet growth, primarily due to increases in fixed-rate
callable government-sponsored agency securities and first mortgage loans, was
funded principally by customer deposits and, to a lesser extent, by borrowed
funds. The growth in our core investment of residential first mortgage loans was
due to our continued strong levels of loan originations and loan purchases,
despite the high level of prepayment activity.
Page 12
Hudson City Bancorp, Inc.
Form 10-Q
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2003 AND DECEMBER 31, 2002
During the nine-month period ended September 30, 2003, our total assets
increased $1.76 billion, or 12.4%, to $15.90 billion at September 30, 2003 from
$14.14 billion at December 31, 2002. Loans increased $496.6 million, or 7.1%, to
$7.47 billion at September 30, 2003 from $6.97 billion at December 31, 2002. The
increase in loans reflected our continued emphasis on the origination and
purchase of one- to four-family first mortgage loans, consistent with our
capital management and growth strategies. For the nine-month period ended
September 30, 2003, we originated first mortgage loans of $1.77 billion and
purchased first mortgage loans of $1.79 billion, compared with originations of
$1.35 billion and purchases of $955.3 million for the corresponding 2002 period.
These first mortgage loan originations and purchases were exclusively in one-to
four-family mortgage loans and were primarily fixed-rate loans. At September 30,
2003, fixed-rate mortgage loans accounted for 91.3% of our first mortgage loan
portfolio compared with 86.5% at December 31, 2002. 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 strong levels of loan originations and
purchases during the first nine months of 2003 reflected the continuation of the
impact of the low interest rate environment.
During the first nine months of 2003, due to the low long-term interest rate
environment, $419.3 million of our loan originations were the result of
refinancing of our existing mortgage loans. The amount of refinancing of
existing mortgage loans was included in total loan originations. We 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 low long-term 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. Modifications of our
existing mortgage loans during the first nine months of 2003 were approximately
$1.43 billion. These loan modifications were not reflected in loan origination
totals.
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
generally 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 Massachusetts and
Washington D.C., and in Michigan and Illinois.
Mortgage-backed securities decreased $333.9 million, or 5.4%, to $5.79 billion
at September 30, 2003 from $6.13 billion at December 31, 2002. This decrease was
primarily due to the high level of prepayment activity and sales of
approximately $998.2 million of our mortgage-backed securities during the first
nine months of 2003. Investment securities available for sale increased $1.63
billion to $2.19 billion at September 30, 2003 from $560.9 million at December
31, 2002. The increase in investment securities available for sale primarily
reflected the investment of part of the proceeds from the high level of
prepayment activity on our mortgage-related assets into investment securities.
The increase in investment securities also reflected our decision to shorten the
overall weighted-average life of our assets by investing in callable
government-sponsored agency securities with initial call dates of three months
to one year. Federal Home Loan Bank ("FHLB") stock increased $30.0 million, or
21.8%, to $167.5 million at September 30, 2003, which was the amount of stock we
were required by the FHLB to hold.
Page 13
Hudson City Bancorp, Inc.
Form 10-Q
Total liabilities increased $1.72 billion, or 13.4%, to $14.55 billion at
September 30, 2003 compared with $12.83 billion at December 31, 2002. Total
deposits increased $1.11 billion, or 12.1%, to $10.25 billion at September 30,
2003 from $9.14 billion at December 31, 2002. Interest-bearing deposits
increased $1.04 billion, or 11.9%, to $9.79 billion at September 30, 2003 from
$8.75 billion at December 31, 2002. The increase in interest-bearing deposits
was primarily due to an increase in interest-bearing demand accounts of $1.35
billion, or 129.8%, to $2.39 billion at September 30, 2003. This increase was
due to growth in our High Value Checking account. 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, no charge on-line banking, no charge bill payment and
debit card availability as part of the product, and pays an interest rate
generally above competitive market rates. The balance in the High Value Checking
account at September 30, 2003 was $2.29 billion compared with $943.2 million at
December 31, 2002.
The growth in interest-bearing deposits was also due to a $47.7 million, or
5.3%, increase in regular savings deposits to $940.4 million at September 30,
2003. These increases in interest-bearing deposits were partially offset by a
$357.7 million, or 5.8%, decrease in time deposits to $5.83 billion at September
30, 2003. Non-interest bearing deposits increased $72.6 million, or 18.7%, to
$461.1 million at September 30, 2003 from $388.5 million at December 31, 2002.
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,
primarily on our interest-bearing High Value Checking account. Although our time
deposit rates are competitive, we believe the decrease in time deposits was due,
in part, to transfers to our High Value Checking account. The increase in
non-interest bearing deposits primarily reflected increases in official bank
checks due to our high volume of first mortgage loan originations.
Borrowed funds increased $600.0 million, or 16.7%, to $4.20 billion at September
30, 2003 from $3.60 billion at December 31, 2002. The additional borrowed funds
were primarily used to fund asset growth consistent with our capital management
strategy. Borrowed funds were comprised of $2.25 billion of securities sold
under agreements to repurchase and $1.95 billion of FHLB advances. Securities
pledged as collateral against our securities sold under agreements to repurchase
had a market value at September 30, 2003 of approximately $2.20 billion.
Advances from the FHLB utilize our mortgage portfolio as collateral. The $850.0
million in new borrowings had initial call dates of three months to two years
from the date of borrowing. These short- and intermediate-term borrowed funds
complement the $3.60 billion of previously existing long-term borrowings. During
the first nine months of 2003, we also restructured certain of our borrowed
funds, which resulted in the extension of the weighted-average maturity and
lowered the contract interest rate.
Total stockholders' equity increased $37.1 million, or 2.8%, to $1.35 billion at
September 30, 2003 from $1.32 billion at December 31, 2002. The increase was
primarily the result of net income for the nine-month period ended September 30,
2003 of $155.0 million, an increase of $9.4 million due to the exercise of
approximately 1.4 million stock options, and an increase of $10.0 million due to
the allocation of stock-related employee benefit plans. Partially offsetting
these increases in stockholders' equity were repurchases of approximately 2.1
million shares of our common stock at an aggregate cost of $46.4 million, cash
dividends declared and paid to common stockholders of $71.0 million and a
decrease in accumulated other comprehensive income of $22.8 million. The
decrease in accumulated other comprehensive income was primarily due to the
decrease in the overall market value of our investment and mortgage-backed
securities available for sale.
Page 14
Hudson City Bancorp, Inc.
Form 10-Q
At September 30, 2003, the ratio of total stockholders' equity to total assets
was 8.51% compared with 9.30% at December 31, 2002. For the nine-month period
ended September 30, 2003, the ratio of average stockholders' equity to average
assets was 8.90% compared with 10.12% for the year ended December 31, 2002. The
decrease in these ratios was primarily due to our capital management strategy of
planned 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 $7.42 at
September 30, 2003 compared with $7.22 at December 31, 2002.
AVERAGE BALANCE SHEETS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003
AND 2002
The tables on the following pages present certain information regarding Hudson
City Bancorp's financial condition and net interest income for the three- and
nine-month periods ended September 30, 2003 and 2002. The tables present the
annualized average yield on interest-earning assets and the annualized average
cost of interest-bearing liabilities. We derived the yields and costs by
dividing annualized income or expense by the average balance of interest-earning
assets and interest-bearing liabilities, respectively, for the periods shown. We
derived average balances from daily balances over the periods indicated.
Interest income includes fees and net premium amortization that we considered
adjustments to yields. Yields on tax-exempt obligations were not computed on a
tax equivalent basis.
Page 15
Hudson City Bancorp, Inc.
Form 10-Q
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------
2003 2002
--------------------------------- -----------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
----------- ----------- ------- ----------- ----------- -------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
ASSETS:
Interest-earnings assets:
First mortgage loans, net (1) .................. $ 6,735,892 $ 96,950 5.76% $ 6,518,075 $ 114,128 7.00%
Consumer and other loans ....................... 130,102 2,084 6.41 139,774 2,526 7.23
Federal funds sold ............................. 220,115 519 0.94 192,035 845 1.75
Mortgage-backed securities at amortized cost ... 6,071,404 64,411 4.24 5,456,206 76,445 5.60
Federal Home Loan Bank of New York stock ....... 163,777 340 0.83 105,326 916 3.48
Investment securities at amortized cost ........ 2,035,486 22,381 4.40 356,973 5,478 6.14
----------- ----------- ----------- -----------
Total interest-earning assets .............. 15,356,776 186,685 4.86 12,768,389 200,338 6.28
----------- -----------
Noninterest-earnings assets ........................ 356,828 273,914
----------- -----------
Total Assets ............................... $15,713,604 $13,042,303
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Savings accounts ............................... $ 937,147 2,353 1.00 $ 885,006 4,400 1.97
Interest-bearing demand accounts ............... 2,198,166 11,536 2.08 412,888 2,706 2.60
Money market accounts .......................... 624,892 1,498 0.95 607,543 2,988 1.95
Time deposits .................................. 5,923,580 35,057 2.35 6,396,600 53,525 3.32
----------- ----------- ----------- -----------
Total interest-bearing deposits ............ 9,683,785 50,444 2.07 8,302,037 63,619 3.04
Borrowed funds ................................. 4,121,739 41,552 4.00 2,956,522 36,815 4.94
----------- ----------- ----------- -----------
Total interest-bearing liabilities ........... 13,805,524 91,996 2.64 11,258,559 100,434 3.54
----------- ----------- ----------- -----------
Noninterest-bearing liabilities:
Noninterest-bearing deposits ................... 433,480 392,180
Other noninterest-bearing liabilities .......... 110,725 103,141
----------- -----------
Total noninterest-bearing liabilities ........ 544,205 495,321
----------- -----------
Total liabilities .............................. 14,349,729 11,753,880
Stockholders' equity ........................... 1,363,875 1,288,423
----------- -----------
Total Liabilities and Stockholders' Equity ... $15,713,604 $13,042,303
=========== ===========
Net interest income/net interest rate spread (2) .... $ 94,689 2.22% $ 99,904 2.74%
=========== ===========
Net interest-earning assets/net interest
margin (3) ................................... $ 1,551,252 2.49% $ 1,509,830 3.16%
=========== ===========
Ratio of interest-earning assets to
interest-bearing liabilities ................... 1.11x 1.13x
- -----------------------
(1) Amount is net of deferred loan fees and allowance for loan losses and
includes non-performing loans.
(2) Determined by subtracting the annualized weighted average cost of total
interest-bearing liabilities from the annualized weighted average yield on
total interest-earning assets.
(3) Determined by dividing annualized net interest income by total average
interest-earning assets.
Page 16
Hudson City Bancorp, Inc.
Form 10-Q
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------
2003 2002
--------------------------------- -----------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
----------- ----------- ------- ----------- ----------- -------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
ASSETS:
Interest-earnings assets:
First mortgage loans, net (1) ................. $ 6,706,822 $ 304,477 6.05% $ 6,295,605 $ 330,922 7.01%
Consumer and other loans ...................... 127,423 6,296 6.59 142,045 7,693 7.22
Federal funds sold ............................ 199,275 1,602 1.07 140,885 1,756 1.67
Mortgage-backed securities at amortized cost .. 6,063,186 206,233 4.54 5,330,562 231,138 5.78
Federal Home Loan Bank of New York stock ...... 153,315 4,399 3.83 94,948 2,787 3.91
Investment securities at amortized cost ....... 1,552,987 54,870 4.71 245,837 11,118 6.03
----------- ----------- ----------- -----------
Total interest-earning assets ............. 14,803,008 577,877 5.21 12,249,882 585,414 6.37
----------- -----------
Noninterest-earnings assets ........................ 331,895 250,322
----------- -----------
Total Assets .............................. $15,134,903 $12,500,204
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Savings accounts .............................. $ 923,054 8,331 1.21 $ 863,865 13,174 2.04
Interest-bearing demand accounts .............. 1,756,908 29,745 2.26 226,131 3,848 2.28
Money market accounts ......................... 623,853 5,360 1.15 582,458 8,943 2.05
Time deposits ................................. 6,047,703 116,368 2.57 6,331,909 169,870 3.59
----------- ----------- ----------- -----------
Total interest-bearing deposits ........... 9,351,518 159,804 2.28 8,004,363 195,835 3.27
Borrowed funds ................................ 3,912,729 122,738 4.19 2,712,637 100,912 4.97
----------- ----------- ----------- -----------
Total interest-bearing liabilities ........ 13,264,247 282,542 2.85 10,717,000 296,747 3.70
----------- ----------- ----------- -----------
Noninterest-bearing liabilities:
Noninterest-bearing deposits .................. 409,759 388,495
Other noninterest-bearing liabilities ......... 113,179 101,196
----------- -----------
Total noninterest-bearing liabilities ..... 522,938 489,691
----------- -----------
Total liabilities ............................. 13,787,185 11,206,691
Stockholders' equity .......................... 1,347,718 1,293,513
----------- -----------
Total Liabilities and Stockholders' Equity .. $15,134,903 $12,500,204
=========== ===========
Net interest income/net interest rate spread (2) ... $ 295,335 2.36% $ 288,667 2.67%
=========== ===========
Net interest-earning assets/net interest
margin (3) .................................. $ 1,538,761 2.65% $ 1,532,882 3.13%
=========== ===========
Ratio of interest-earning assets to
interest-bearing liabilities .................. 1.12x 1.14x
- ---------------------------------
(1) Amount is net of deferred loan fees and allowance for loan losses and
includes non-performing loans.
(2) Determined by subtracting the annualized weighted average cost of total
interest-bearing liabilities from the annualized weighted average yield on
total interest-earning assets.
(3) Determined by dividing annualized net interest income by total average
interest-earning assets.
Page 17
Hudson City Bancorp, Inc.
Form 10-Q
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003
AND 2002
GENERAL. Net income was $50.3 million for the three-month period ended September
30, 2003, an increase of $700,000, or 1.4%, compared with net income of $49.6
million for the three-month period ended September 30, 2002. Basic and diluted
earnings per common share were $0.28 and $0.27, respectively, for the third
quarter of 2003 compared with basic and diluted earnings per share of $0.27 and
$0.26, respectively, for the third quarter of 2002. For the three-month period
ended September 30, 2003 our annualized return on average stockholders' equity
was 14.74% compared with 15.40% for the corresponding period in 2002. Our
annualized return on average assets for the three-month period ended September
30, 2003 was 1.28% compared with 1.52% for the corresponding period in 2002. The
decrease in these ratios was primarily due to the lower net interest margin due
to the low interest rate environment. The decline in the annualized return on
average assets also reflected our overall balance sheet growth.
INTEREST AND DIVIDEND INCOME. Total interest and dividend income decreased $13.6
million, or 6.8%, to $186.7 million for the three-month period ended September
30, 2003 compared with $200.3 million for the three-month period ended September
30, 2002. The decrease in total interest and dividend income was primarily due a
142 basis point decrease in the annualized average yield on interest-earning
assets to 4.86% for the three-month period ended September 30, 2003 from 6.28%
for the three-month period ended September 30, 2002, reflecting yield declines
to varying degrees in all asset categories.
The 124 basis point decrease in the annualized average yield on first mortgage
loans reflected the large volume of loan originations, purchases and
modifications during the low long-term interest rate environment of 2002 and the
first nine months of 2003. The 136 basis point decrease in the annualized
average yield on mortgage-backed securities reflected the significant turnover
in the portfolio and the downward repricing of our adjustable-rate securities
during the low interest rate environment of 2002 and the first nine months of
2003. If short-term 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 securities, which have limited
the extent our adjustable-rate securities may have adjusted in prior periods.
The decrease in the annualized average yield on our mortgage-related assets also
reflected the acceleration of the amortization of the net premium on these
assets. The 174 basis point decrease in the annualized average yield on our
investment securities reflected the large volume of purchases made during the
low interest rate environment of 2003. The decrease in dividend income from FHLB
stock, and the resulting low annualized weighted average yield, was due to the
recent announcement by the FHLB that it was not paying its dividend. We do not
anticipate reporting FHLB dividend income in the fourth quarter of 2003 due to
this announcement.
The impact on interest and dividend income from the above decreases in the
annualized weighted-average yield on our interest-earning assets was partially
off-set by an increase in the average balance of total interest-earning assets
of $2.59 billion, or 20.3%, to $15.36 billion for the three-month period ended
September 30, 2003 compared with $12.77 billion for the corresponding period in
2002. This increase was due in part to a $217.8 million, or 3.3%, increase in
the average balance of first mortgage loans, net to $6.74 billion for the
three-month period ended September 30, 2003 compared with $6.52 billion for the
corresponding period in 2002. The average balance of mortgage-backed securities
increased $615.2 million, or 11.3%, to $6.07 billion for the third quarter of
2003 compared with $5.46 billion for the third quarter of 2002. The increase in
interest-earning assets was also due to an increase in the average balance of
investment securities of $1.68 billion to $2.04 billion for the third quarter of
2003 compared with
Page 18
Hudson City Bancorp, Inc.
Form 10-Q
$357.0 million for the corresponding quarter in 2002. The increase in the
average balance of FHLB stock of $58.5 million reflected the increase in the
amount of FHLB stock we are required to hold.
The growth in the average balance of investment securities reflected the
investment of certain of the proceeds from the high level of prepayment activity
on our mortgage-related assets into investment securities, and the decision to
shorten the overall weighted-average life of our assets by investing in callable
securities with initial call dates of three months to one year. The increase in
the average balance 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.
INTEREST EXPENSE. Total interest expense, comprised of interest on deposits and
interest on borrowed funds, decreased $8.4 million, or 8.4%, to $92.0 million
for the three-month period ended September 30, 2003 from $100.4 million for the
three-month period ended September 30, 2002, notwithstanding an overall increase
in interest-bearing liabilities. Interest expense on borrowed funds increased
$4.8 million, or 13.0%, to $41.6 million for the three-month period ended
September 30, 2003 from $36.8 million for the corresponding period in 2002.
Interest expense on deposits decreased $13.2 million, or 20.8%, to $50.4 million
for the third quarter of 2003 from $63.6 million for the third quarter of 2002.
The decrease in total interest expense reflected the impact of a 90 basis point
decrease in the annualized average cost of total interest-bearing liabilities to
2.64% for the three-month period ended September 30, 2003 from 3.54% for the
three-month period ended September 30, 2002. The impact of the decline in the
annualized average cost of funds was offset, in part, by an increase in the
average balance of total interest-bearing liabilities of $2.55 billion, or
22.6%, to $13.81 billion for the three-month period ended September 30, 2003
from $11.26 billion for the corresponding period in 2002.
The increase in interest expense on borrowed funds was primarily due to a $1.16
billion, or 39.2%, increase in the average balance of borrowed funds to $4.12
billion for the third quarter of 2003 from $2.96 billion for the third quarter
of 2002. 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 94 basis point
decrease in the annualized average cost of borrowed funds to 4.00% for the third
quarter of 2003 from 4.94% for the third quarter of 2002.
The increase in borrowed funds has been used to fund asset growth consistent
with our capital management and growth strategies. The funds borrowed during the
first nine months of 2003 had initial reprice dates of three months to two years
from the date of borrowing. These short- and intermediate-term borrowed funds
complement the $3.60 billion of previously existing long-term borrowings. The
decrease in the annualized average cost of borrowed funds reflected the
continued growth of our borrowed funds in the low interest rate environment that
existed during 2002 and the first nine months of 2003. The decrease in the
annualized average cost of borrowed funds also reflected the restructuring of
certain of our borrowed funds during the first nine months of 2003, which
resulted in the extension of the weighted-average maturity and lowered the
contract rates.
The $13.2 million decrease in interest expense on deposits was primarily due to
a 97 basis point decrease in the annualized average cost of interest-bearing
deposits to 2.07% for the three-month period ended September 30, 2003 from 3.04%
for the corresponding period in 2002. The decrease in the annualized average
cost of interest-bearing deposits reflected a 97 basis point decrease in the
annualized average cost of our time deposits, a 97 basis point decrease in the
annualized average cost of savings accounts, a 100
Page 19
Hudson City Bancorp, Inc.
Form 10-Q
basis point decrease in the annualized average cost of money market deposits,
and a 52 basis point decrease in the annualized average cost of interest-bearing
demand accounts. These decreases reflected the low interest rate environment
experienced during 2002 and the first nine months of 2003. 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 since
short-term market rates are currently at historically low levels.
The impact on interest expense on deposits due to the decrease in the annualized
average cost of interest-bearing deposits was offset, in part, by a $1.38
billion, or 16.6%, increase in the average balance of interest-bearing deposits
to $9.68 billion for the three-month period ended September 30, 2003 from $8.30
billion for the three-month period ended September 30, 2002, primarily due to
our offering of competitive rates on our deposit products. The average balance
of interest-bearing demand accounts increased $1.79 billion to $2.20 billion for
the third quarter of 2003 from $412.9 million for the corresponding period in
2002, primarily reflecting growth in our interest-bearing High Value Checking
account. Although our time deposit rates are competitive, we believe the $473.0
million decrease in the average balance of time deposits primarily reflected
transfers to our High Value Checking account.
NET INTEREST INCOME. Net interest income decreased $5.2 million, or 5.2% to
$94.7 million for the three-month period ended September 30, 2003 compared with
$99.9 million for the three-month period ended September 30, 2002. Our net
interest rate spread, the difference between the annualized average yield on
total interest-earning assets and the annualized average cost of total
interest-bearing liabilities, decreased 52 basis points to 2.22% for the third
quarter of 2003 from 2.74% for the third quarter of 2002. Our net interest
margin, represented by annualized net interest income divided by average total
interest-earning assets, decreased 67 basis points to 2.49% for the third
quarter of 2003 from 3.16% for the third quarter of 2002.
These decreases reflected the larger decrease in the annualized yield on
interest-earning assets compared with the decrease in the annualized cost of
interest-bearing liabilities due to the continued decline in long-term market
interest rates during 2002 and the first nine months of 2003 and the timing of
the impact on earnings of the market rate changes. The decrease also reflected
the increased amortization of the net premium on our mortgage loans and
mortgage-backed securities due to the high level of prepayment activity on these
mortgage-related assets.
PROVISION FOR LOAN LOSSES. Our provision for loan losses for the three-month
periods ended September 30, 2003 and 2002 was $225,000. Net charge-offs were
$77,000 for the first nine months of 2003 compared with net charge-offs of
$5,000 for the first nine months of 2002. The allowance for loan losses
increased $600,000, or 2.4%, to $26.1 million at September 30, 2003 from $25.5
million at December 31, 2002.
Non-performing loans, defined as non-accruing loans and accruing loans
delinquent 90 days or more, increased $2.4 million, or 11.9%, to $22.6 million
at September 30, 2003 from $20.2 million at December 31, 2002. This increase was
primarily reflected in our purchased conventional loan portfolio. The ratio of
non-performing loans to total loans was 0.30% at September 30, 2003 compared
with 0.29% at December 31, 2002. The ratio of the allowance for loan losses to
total non-performing loans was 115.71% at September 30, 2003 compared with
126.27% at December 31, 2002. The ratio of the allowance for loan losses to
total loans was 0.35% at September 30, 2003 compared with 0.37% at December 31,
2002.
Page 20
Hudson City Bancorp, Inc.
Form 10-Q
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 increased $8.0 million to $9.4
million for the third quarter of 2003 from $1.4 million for the third quarter of
2002, primarily reflecting gains on securities transactions, net during that
period. Service charges and other income, which generally consist of service
charges and fees on deposit accounts, was $1.7 million for the third quarter of
2003 compared with $1.4 million for the third quarter of 2002.
The $7.8 million gain on securities transactions, net, in the third quarter of
2003, resulted from an opportunity to realize gains from the sale of certain
mortgage-backed and investment securities prior to an interest rate change which
would have had an adverse impact on their fair market value, as interest rates
have since increased. The gain also reflected the disposition of certain of our
held to maturity mortgage-backed securities whose amortized principal was less
than fifteen percent of the purchased principal, as allowed under SFAS No. 115.
The cash flow of $444.6 million from the sale of the securities was generally
reinvested in fixed-rate investment securities.
NON-INTEREST EXPENSE. Total non-interest expense increased $2.6 million, or
11.3%, to $25.6 million for the three-month period ended September 30, 2003 from
$23.0 million for the three-month period ended September 30, 2002. The increase
was primarily due to an increase in compensation and employee benefits of $3.3
million, or 23.1%, to $17.6 million for the third quarter of 2003 from $14.3
million for the third quarter of 2002. The increase in compensation and employee
benefits reflected routine salary increases, increases in stock-related
compensation expense and increases in pension expense. The increases in our
stock-related compensation expense are due to increases in the average market
price of our common stock.
Our efficiency ratio, determined by dividing total non-interest expense by the
sum of net interest income and non-interest income was 24.60% for the
three-month period ended September 30, 2003 compared with 22.68% for the
corresponding period in 2002. The increase in this ratio primarily reflects the
decrease in our net interest income. Our ratio of annualized non-interest
expense to total average assets for the third quarter of 2003 was 0.65% compared
with 0.70% for the third quarter of 2002.
INCOME TAXES. Income tax expense decreased $500,000, or 1.8%, to $28.0 million
for the third quarter of 2003 from $28.5 million for the third quarter of 2002.
This decrease reflected the additional income tax expense in the third quarter
of 2002 due to changes to the New Jersey corporate business tax code passed in
July 2002 and made retroactive to January 2002, and the resulting catch-up of
tax expense for the first six months of 2002. Our effective tax rate for the
third quarter of 2003 was 35.79% compared with 36.45% for the third quarter of
2002.
Page 21
Hudson City Bancorp, Inc.
Form 10-Q
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND
2002
GENERAL. Net income was $155.0 million for the nine-month period ended September
30, 2003, an increase of $13.6 million, or 9.6%, compared with net income of
$141.4 million for the nine-month period ended September 30, 2002. Basic and
diluted earnings per common share were $0.85 and $0.83, respectively, for the
first nine months of 2003 compared with basic and diluted earnings per share of
$0.76 and $0.74, respectively, for the first nine months of 2002. For the
nine-month period ended September 30, 2003 our annualized return on average
stockholders' equity was 15.34% compared with 14.57% for the corresponding
period in 2002. The increase in the return on average stockholders' equity was
primarily due to the growth of our net income 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. Our annualized return on
average assets for the nine-month period ended September 30, 2003 was 1.37%
compared with 1.51% for the corresponding period in 2002. The decrease in the
return on average assets was primarily due to the lower net interest margin due
to the low interest rate environment. The decline in the annualized return on
average assets also reflected our overall balance sheet growth.
INTEREST AND DIVIDEND INCOME. Total interest and dividend income decreased $7.5
million, or 1.3%, to $577.9 million for the nine-month period ended September
30, 2003 compared with $585.4 million for the nine-month period ended September
30, 2002. The decrease in total interest and dividend income was primarily due
to a 116 basis point decrease in the annualized average yield on
interest-earning assets to 5.21% for the nine-month period ended September 30,
2003 from 6.37% for the nine-month period ended September 30, 2002, reflecting
yield declines to varying degrees in all asset categories.
The 96 basis point decrease in the annualized average yield on first mortgage
loans reflected the large volume of loan originations, purchases and
modifications during the low long-term interest rate environment of 2002 and the
first nine months of 2003. The 124 basis point decrease in the annualized
average yield on mortgage-backed securities reflected the significant turnover
in the portfolio and the downward repricing of our adjustable-rate securities
during the low interest rate environment of 2002 and the first nine months of
2003. If short-term 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 securities, which have limited
the extent our adjustable-rate securities may have adjusted in prior periods.
The decrease in the annualized average yield on our mortgage-related assets also
reflected the acceleration of the amortization of the net premium on these
assets. The 132 basis point decrease in the annualized average yield on our
investment securities reflected the large volume of purchases made during the
low interest rate environment of 2003.
The impact on interest and dividend income from the above decreases in the
annualized weighted-average yield on our interest-earning assets was partially
off-set by an increase in the average balance of total interest-earning assets
of $2.55 billion, or 20.8%, to $14.80 billion for the nine-month period ended
September 30, 2003 compared with $12.25 billion for the corresponding period in
2002. This increase was due in part to a $411.2 million, or 6.5%, increase in
the average balance of first mortgage loans, net to $6.71 billion for the
nine-month period ended September 30, 2003 compared with $6.30 billion for the
corresponding period in 2002. The average balance of mortgage-backed securities
increased $732.6 million, or 13.7%, to $6.06 billion for the first nine months
of 2003 compared with $5.33 billion for the first nine months of 2002. The
increase in interest-earning assets was also due to an increase in the average
balance of investment securities of $1.31 billion to $1.55 billion for the first
nine months of 2003 compared with $245.8 million for the corresponding quarter
in 2002. The increase in the average balance
Page 22
Hudson City Bancorp, Inc.
Form 10-Q
of FHLB stock of $58.4 million reflected the increase in the amount of FHLB
stock we are required to hold.
The growth in the average balance of investment securities reflected the
investment of certain of the proceeds from the high level of prepayment activity
on our mortgage-related assets into investment securities, and the decision to
shorten the overall weighted-average life of our assets by investing in callable
securities with initial call dates of three months to one year. The increase in
the average balance 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.
INTEREST EXPENSE. Total interest expense, comprised of interest on deposits and
interest on borrowed funds, decreased $14.2 million, or 4.8%, to $282.5 million
for the nine-month period ended September 30, 2003 from $296.7 million for the
nine-month period ended September 30, 2002, notwithstanding an overall increase
in average interest-bearing liabilities. Interest expense on borrowed funds
increased $21.8 million, or 21.6%, to $122.7 million for the nine-month period
ended September 30, 2003 from $100.9 million for the corresponding period in
2002. Interest expense on deposits decreased $36.0 million, or 18.4%, to $159.8
million for the first nine months of 2003 from $195.8 million for the first nine
months of 2002. The decrease in total interest expense reflected the impact of
an 85 basis point decrease in the annualized average cost of total
interest-bearing liabilities to 2.85% for the nine-month period ended September
30, 2003 from 3.70% for the nine-month period ended September 30, 2002. The
impact of the decline in the annualized average cost of funds was offset, in
part, by an increase in the average balance of total interest-bearing
liabilities of $2.54 billion, or 23.7%, to $13.26 billion for the nine-month
period ended September 30, 2003 from $10.72 billion for the corresponding period
in 2002.
The increase in interest expense on borrowed funds was primarily due to a $1.20
billion, or 44.3%, increase in the average balance of borrowed funds to $3.91
billion for the first nine months of 2003 from $2.71 billion for the first nine
months of 2002. 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 78
basis point decrease in the annualized average cost of borrowed funds to 4.19%
for the first nine months of 2003 from 4.97% for the first nine months 2002.
The increase in borrowed funds has been used to fund asset growth consistent
with our capital management and growth strategies. The funds borrowed during the
first nine months of 2003 had initial reprice dates of three months to two years
from the date of borrowing. These short- and intermediate-term borrowed funds
complement the $3.60 billion of previously existing long-term borrowings. The
decrease in the annualized average cost of borrowed funds reflected the
continued growth of our borrowed funds in the low interest rate environment that
existed during 2002 and the first nine months of 2003. The decrease in the
annualized average cost of borrowed funds also reflected the restructuring of
certain of our borrowed funds during the first nine months of 2003, which
resulted in the extension of the weighted-average maturity and lowered the
contract rates.
The $36.0 million decrease in interest expense on deposits was primarily due to
a 99 basis point decrease in the annualized average cost of interest-bearing
deposits to 2.28% for the nine-month period ended September 30, 2003 from 3.27%
for the corresponding period in 2002. The decrease in the annualized average
cost of interest-bearing deposits reflected a 102 basis point decrease in the
annualized average cost of our time deposits, an 83 basis point decrease in the
annualized average cost of savings accounts,
Page 23
Hudson City Bancorp, Inc.
Form 10-Q
and a 90 basis point decrease in the annualized average cost of money market
deposits. These decreases in the annualized average cost of interest-bearing
deposits reflected the low interest rate environment experienced during 2002 and
the first nine months of 2003. 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 annualized
average cost of interest-bearing deposits was offset, in part, by a $1.35
billion, or 16.9%, increase in the average balance of interest-bearing deposits
to $9.35 billion for the nine-month period ended September 30, 2003 from $8.00
billion for the nine-month period ended September 30, 2002, primarily due to our
consistent offering of competitive rates on our deposit products. The average
balance of interest-bearing demand accounts increased $1.53 billion to $1.76
billion for the first nine months of 2003 primarily reflecting growth in our
interest-bearing High Value Checking account. Although our time deposit rates
are competitive, we believe the decrease of $284.2 million, or 4.5%, in the
average balance of time deposits was primarily due to transfers to our High
Value Checking account.
NET INTEREST INCOME. Net interest income increased $6.6 million, or 2.3%, to
$295.3 million for the nine-month period ended September 30, 2003 compared with
$288.7 million for the nine-month period ended September 30, 2002. 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 net interest rate spread earned on this
growth. Our net interest rate spread, the difference between the annualized
average yield on total interest-earning assets and the annualized average cost
of total interest-bearing liabilities, decreased 31 basis points to 2.36% for
the first nine months of 2003 from 2.67% for the first nine months of 2002. Our
net interest margin, represented by annualized net interest income divided by
average total interest-earning assets, decreased 48 basis points to 2.65% for
the first nine months of 2003 from 3.13% for the first nine months of 2002.
These decreases reflected the larger decrease in our annualized yield on
interest-earning assets compared with the decrease in the annualized cost of
interest-bearing liabilities due to the continued decline in long-term market
interest rates during 2002 and the first nine months of 2003 and the timing of
the impact on earnings of the market rate changes. The decrease also reflected
the increased amortization of the net premium on our mortgage loans and
mortgage-backed securities due to the high level of prepayment activity on these
mortgage-related assets.
PROVISION FOR LOAN LOSSES. Our provision for loan losses for the nine-month
period ended September 30, 2003 was $675,000, a decrease of $600,000, or 46.2%,
compared with $1.3 million for the nine-month period ended September 30, 2002.
The decrease in the provision reflected our low charge-off history given the
relative stability of the housing market.
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 increased $21.0 million to $24.8
million for the first nine months of 2003 from $3.8 million for the first nine
months of 2002, primarily reflecting gains on securities transactions, net
during that period. Service charges and other income, which generally consist
Page 24
Hudson City Bancorp, Inc.
Form 10-Q
of service charges and fees on deposit accounts, were $4.3 million for the first
nine months of 2003 compared with $3.8 million for the corresponding period in
2002.
The $20.5 million gain on securities transactions, net, in the first nine months
of 2003, resulted from an opportunity to realize gains from the sale of certain
available for sale mortgage-backed and investment securities prior to an
interest rate change which would have had an adverse impact on their fair market
value, as interest rates have since increased. The gain also reflected the
disposition of certain of our held to maturity mortgage-backed securities whose
amortized principal was less than fifteen percent of the purchased principal, as
allowed under SFAS No. 115. The cash flow of $1.05 billion from the sale of the
securities was reinvested in fixed-rate investment securities.
NON-INTEREST EXPENSE. Total non-interest expense increased $5.8 million, or
8.3%, to $76.0 million for the nine-month period ended September 30, 2003 from
$70.2 million for the nine-month period ended September 30, 2002. The increase
was primarily due to an increase in compensation and employee benefits of $5.3
million, or 11.6%, to $50.8 million for the first nine months of 2003 from $45.5
million for the first nine months of 2002. The increase in compensation and
employee benefits reflected routine salary increases, increases in stock-related
compensation expense and increases in pension expense. The increases in our
stock-related compensation expense are due to increases in the average market
price of our common stock.
Our efficiency ratio, determined by dividing total non-interest expense by the
sum of net interest income and non-interest income was 23.75% for the nine-month
period ended September 30, 2003 compared with 24.00% for the corresponding
period in 2002. Our ratio of annualized non-interest expense to average total
assets for the first nine months of 2003 was 0.67% compared with 0.75% for the
first nine months of 2002.
INCOME TAXES. Income tax expense increased $8.8 million, or 11.1%, to $88.4
million for the first nine months of 2003 from $79.6 million for the first nine
months of 2002, primarily due to the $22.5 million, or 10.2%, increase in income
before income tax expense. Our effective tax rate for the first nine months of
2003 was 36.33% compared with 36.02% for the first nine months of 2002.
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.
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
Page 25
Hudson City Bancorp, Inc.
Form 10-Q
becomes increasingly dependent on the strength of our residential real estate
market, home purchase and new construction activity.
Principal repayments on loans were $3.15 billion during the nine-month period
ended September 30, 2003 compared with $1.59 billion for nine-month period ended
September 30, 2002. Principal payments received on mortgage-backed securities
totaled $3.31 billion during the first nine months of 2003 compared to $1.43
billion during the first nine months of 2002. The increase in payments on loans
and mortgage-backed securities reflected the low market interest rate
environment during 2002 and the first nine months of 2003, which caused an
increase in prepayment activity. Maturities and calls of investment securities
totaled $1.25 billion during the first nine months of 2003 compared with
maturities and calls of $124.5 million during the first nine months of 2002. The
higher amount of calls during 2003 was due to the continuing declining interest
rate environment experienced during the first nine months of 2003 and the larger
balance of callable investment securities held at the beginning of 2003 compared
with the amount of callable investment securities held at the beginning of 2002.
Total deposits increased $1.11 billion during the first nine months of 2003
compared with an increase of $907.6 million during the first nine months of
2002. 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, primarily on our interest-bearing High Value Checking account. Time
deposit accounts scheduled to mature within one year were $4.69 billion at
September 30, 2003. 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.
For the nine-month periods ended September 30, 2003 and 2002 we borrowed $850.0
million. Principal payments on borrowed funds during the first nine months of
2003 were $250.0 million. There were no principal payments on borrowed funds
during the first nine months of 2002. The funds borrowed during the first nine
months of 2003 had initial call dates of three months to two years from the date
of borrowing. These short- and intermediate-term borrowed funds complement the
$3.60 billion of previously existing long-term borrowings. At September 30,
2003, there were $50.0 million of borrowed funds scheduled to mature within one
year.
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 the purchase of investment securities. We
originated total loans of $1.86 billion during the first nine months of 2003
compared with $1.39 billion during the first nine months of 2002. We purchased
total loans of $1.79 billion during the first nine months of 2003 compared with
$955.3 million during the first nine months of 2002. The increase in loan
originations and purchases reflected the investment of the proceeds from the
accelerated prepayment activity during the first nine months of 2003, due to the
low interest rate environment. The increase also reflected the growth strategies
we have employed during recent periods.
Purchases of mortgage-backed securities during the first nine months of 2003
were $4.01 billion compared with $1.96 billion during the first nine months of
2002. Of the mortgage-backed securities purchased in the first nine months of
2003, $1.58 billion were real estate mortgage investment conduits ("REMIC"). The
REMIC purchases in the first nine months of 2003 had fixed interest rates and
generally had shorter average lives compared with alternate mortgage-backed
security investments available at the
Page 26
Hudson City Bancorp, Inc.
Form 10-Q
time of purchase. Of the mortgage-backed securities purchased in the first nine
months of 2003, $995.2 million were classified as available for sale. Of these
available for sale purchases, $878.8 million had fixed interest rates. The
increase in purchases of mortgage-backed securities was related to the increase
in prepayment activity due to the low market interest rate environment
experienced during 2002 and the first nine months of 2003.
During the first nine months of 2003 we purchased $2.94 billion of investment
securities compared with purchases of $498.8 million during the first nine
months of 2002. These purchases were made with cash flows from payments on our
mortgage-related assets to shorten the overall weighted-average life of our
assets. As part of the membership requirements of the FHLB, we are required to
purchase a certain dollar amount of FHLB common stock. During the first nine
months of 2003, we purchased $30.0 million of FHLB common stock compared with
purchases of $26.4 million during the first nine months of 2002. The purchases
during the first nine months of 2003 bring our total investment in FHLB stock to
$167.5 million, the amount we are currently required to hold.
Under our stock repurchase programs, shares of Hudson City Bancorp common stock
may be purchased in the open market and through other privately negotiated
transactions, from time-to-time, depending on market conditions. The repurchased
shares are held as treasury stock for general corporate use. During the first
nine months of 2003, we purchased 2,091,400 shares of our common stock at an
aggregate cost of $46.4 million. During the first quarter of 2003, the Board of
Directors approved our fifth stock repurchase program. This program authorized
the repurchase of up to 9,525,000 shares of common stock. At September 30, 2003,
there were 9,242,396 shares remaining to be repurchased under the existing stock
repurchase program.
At September 30, 2003, Hudson City Savings had outstanding loan commitments to
borrowers of approximately $301.4 million, commitments to purchase loans of
approximately $1.19 billion, commitments to purchase mortgage-backed securities
of $153.6 million and available home equity and overdraft lines of credit of
approximately $87.9 million. We anticipate we will have sufficient funds
available to meet our current commitments in the normal course of business.
Cash dividends declared and paid during the first nine months of 2003 were $71.0
million compared with $48.0 million during the first nine months of 2002. The
dividend pay-out ratio for the first nine months of 2003 was 43.53% compared
with 32.24% for the first nine months of 2002. On October 16, 2003, the Board of
Directors declared a quarterly cash dividend of fifteen cents ($0.15) per common
share. The dividend is payable on December 1, 2003 to stockholders of record at
the close of business on November 7, 2003.
Page 27
Hudson City Bancorp, Inc.
Form 10-Q
At September 30, 2003, we exceeded each of the applicable regulatory capital
requirements of the Federal Reserve Bank and the Federal Deposit Insurance
Corporation. The following table presents the regulatory ratios of Hudson City
Savings Bank and Hudson City Bancorp.
REGULATORY REQUIREMENTS
--------------------------------------------------
ACTUAL AT MINIMUM CAPITAL CLASSIFICATION AS
SEPTEMBER 30, 2003 ADEQUACY WELL-CAPITALIZED
------------------------ ------------------------ -----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------- ----- ---------- ----- ---------- -----
(DOLLARS IN THOUSANDS)
Bank
Leverage (Tier 1)
Capital ......... $ 1,219,141 7.77% $ 627,603 4.00% $ 784,504 5.00%
Risk-based capital:
Tier 1 .......... 1,219,141 22.64 215,367 4.00 323,050 6.00
Total ........... 1,245,240 23.13 430,734 8.00 538,417 10.00
Bancorp
Leverage (Tier 1)
Capital ......... $ 1,351,811 8.62% $ 627,653 4.00% $ 784,567 5.00%
Risk-based capital:
Tier 1 .......... 1,351,811 25.11 215,370 4.00 323,056 6.00
Total ........... 1,377,910 25.59 430,741 8.00 538,426 10.00
CRITICAL ACCOUNTING POLICIES
Note 1 to our Audited Consolidated Financial Statements for the year ended
December 31, 2002 in our Annual Report on Form 10-K 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
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Hudson City Bancorp, Inc.
Form 10-Q
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 and purchase 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 September 30, 2003, 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.
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 judgment and short-term change.
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.
Page 29
Hudson City Bancorp, Inc.
Form 10-Q
ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosure about market risk is presented as of
December 31, 2002 in Hudson City Bancorp's Annual Report on Form 10-K. The
following is an update of the discussion provided therein.
GENERAL. As a financial institution, our primary component of market risk is
interest rate volatility. Due to the nature of our operations, we are not
subject to foreign currency exchange or commodity price risk. Our real estate
loan portfolio, substantially located in New Jersey, is subject to risks
associated with the local economy. We do not own any trading assets. We did not
engage in any hedging transactions that use derivative instruments (such as
interest rate swaps and caps) during the first nine months of 2003 and did not
have any such hedging transactions in place at September 30, 2003. In the
future, we may, with approval of our Board of Directors, engage in hedging
transactions utilizing derivative instruments.
INTEREST RATE RISK COMPLIANCE. Hudson City Bancorp continues to monitor the
impact of interest rate volatility upon the present value of equity in the same
manner as at December 31, 2002. The following table presents the estimated
present value of equity over a range of interest rate change scenarios at
September 30, 2003. 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. We believe the 150 and 200 basis point decrease
scenarios are not meaningful given the prevailing low market interest rate
environment and accordingly they are not presented in the table.
PRESENT VALUE OF EQUITY
AS PERCENT OF PRESENT
PRESENT VALUE OF EQUITY VALUE OF ASSETS
----------------------------------------------- --------------------------
CHANGE IN DOLLAR DOLLAR PERCENT PRESENT PERCENT
INTEREST RATES AMOUNT CHANGE CHANGE VALUE RATIO CHANGE
- -------------- ----------- ---------- ------- ----------- -------
(BASIS POINTS) (DOLLARS IN THOUSANDS)
200 $ 804,592 $ (923,040) (53.43)% 5.54% (48.56)%
150 1,076,660 (650,972) (37.68) 7.21 (33.05)
100 1,350,452 (377,180) (21.83) 8.82 (18.11)
50 1,581,287 (146,345) (8.47) 10.07 (6.50)
0 1,727,632 - - 10.77 -
(50) 1,713,743 (13,889) (0.80) 10.57 (1.86)
(100) 1,594,789 (132,843) (7.69) 9.78 (9.19)
The percent change in the present value of equity in the 200 basis point
increase scenario was negative 53.43% at September 30, 2003 compared with
negative 20.93% at December 31, 2002. This increase in the negative percent
change in the present value of equity, and the overall decrease in the present
value of equity and the percent change in the present value of equity in the
increasing rate scenarios was primarily due to the growth of our fixed-rate
mortgage loans, the growth of our fixed-rate securities, and the fixed-rate
callable borrowings made in this current low market interest rate environment.
The percent change in the present value of equity in the 100 basis point
decrease was negative 7.69% at September 30, 2003 compared with negative 12.64%
at December 31, 2002. The overall decrease in the present value of equity and
the percent change in the present value of equity in the decreasing rate
scenarios was primarily due to the amount of our long-term fixed rate borrowed
funds. Our current policy sets a maximum percent change in the present value of
equity at 55% from the current, or zero basis point scenario, present value of
equity, given an instantaneous and parallel increase or decrease of 200 basis
points.
Page 30
Hudson City Bancorp, Inc.
Form 10-Q
GAP ANALYSIS. The table on the following page presents the amounts of our
interest-earning assets and interest-bearing liabilities outstanding at
September 30, 2003, which we anticipate to reprice or mature in each of the
future time periods shown. The prepayment speeds on our mortgage loans and
mortgage-backed securities, and the decay rates applied to our non-maturity
deposits, except our savings accounts and High Value Checking accounts, are the
same as those reported in our Annual Report on Form 10-K for the year ended
December 31, 2002. The decay rate on our savings accounts was adjusted as
follows: 2.5% in less than six months, 2.5% in six months to one year, 5% in one
year to two years, 5% in two years to three years, 10% in three years to five
years, and 75% in over five years. The decay rate on our High Value Checking
accounts was adjusted as follows: 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. The
adjustments in these decay rates reflected the current experience of growth in
our savings and High Value Checking accounts. Also, the adjustment in the High
Value Checking decay rate conforms it to the decay rate we use on other
interest-bearing demand accounts. At September 30, 2003, we have reported no
callable bonds or callable borrowings at their call date. We have excluded
non-accrual loans of $5,411,000 from the table.
The cumulative one-year gap as a percent of total assets was negative 0.71% at
September 30, 2003 compared with negative 0.11% at December 31, 2002. Had the
adjusted decay rates been applied to our December 31, 2002 gap analysis, the
cumulative one-year gap as a percent of total assets would have been positive
1.22%. This increase in the negative cumulative one-year gap primarily reflected
the reporting, at their maturity date, of the growth of our callable investment
securities.
Page 31
Hudson City Bancorp, Inc.
Form 10-Q
AT SEPTEMBER 30, 2003
--------------------------------------------------------------------
MORE THAN
MORE THAN MORE THAN TWO YEARS
SIX MONTHS SIX MONTHS ONE YEAR TO TO THREE
OR LESS TO ONE YEAR TWO YEARS YEARS
----------- ----------- ----------- ---------------------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
First mortgage loans .................... $ 1,144,062 $ 1,161,864 $ 1,518,205 $ 1,070,056
Consumer and other loans ................ 28,390 567 1,530 2,302
Federal funds sold ...................... 45,500 - - -
Mortgage-backed securities .............. 1,216,506 1,279,219 989,478 692,626
FHLB stock .............................. 167,500 - - -
Investment securities ................... 10,567 - 195 -
----------- ----------- ----------- -----------
Total interest-earning assets ........ 2,612,525 2,441,650 2,509,408 1,764,984
----------- ----------- ----------- -----------
Interest-bearing liabilities:
Savings accounts ........................ 28,983 23,830 46,716 46,716
Interest-bearing demand accounts ........ 59,728 59,728 597,286 716,743
Money market accounts ................... 127,912 127,912 156,828 163,256
Time deposits ........................... 3,089,573 1,599,119 848,304 126,078
Borrowed funds .......................... - 50,000 - 450,000
----------- ----------- ----------- -----------
Total interest-bearing liabilities ... 3,306,196 1,860,589 1,649,134 1,502,793
----------- ----------- ----------- -----------
Interest rate sensitivity gap .............. $ (693,671) $ 581,061 $ 860,274 $ 262,191
=========== =========== =========== ===========
Cumulative interest rate sensitivity
Gap ..................................... $ (693,671) $ (112,610) $ 747,664 $ 1,009,855
=========== =========== =========== ===========
Cumulative interest rate sensitivity gap
as a percent of total assets ............ (4.36)% (0.71)% 4.70% 6.35%
Cumulative interest-earning assets
as a percent of interest-bearing
liabilities ............................. 79.02% 97.82% 110.97% 112.14%
AT SEPTEMBER 30, 2003
-----------------------------------------
MORE THAN
THREE YEARS
TO FIVE MORE THAN
YEARS FIVE YEARS TOTAL
----------- ----------- -----------
Interest-earning assets:
First mortgage loans .................... $ 862,081 $ 1,573,279 $ 7,329,547
Consumer and other loans ................ 17,215 82,488 132,492
Federal funds sold ...................... - - 45,500
Mortgage-backed securities .............. 496,164 1,118,307 5,792,300
FHLB stock .............................. - - 167,500
Investment securities ................... 106 2,180,869 2,191,737
----------- ----------- -----------
Total interest-earning assets ........ 1,375,566 4,954,943 15,659,076
----------- ----------- -----------
Interest-bearing liabilities:
Savings accounts ........................ 93,432 700,739 940,416
Interest-bearing demand accounts ........ 477,829 477,830 2,389,144
Money market accounts ................... 25,703 25,704 627,315
Time deposits ........................... 167,043 - 5,830,117
Borrowed funds .......................... 50,000 3,650,000 4,200,000
----------- ----------- -----------
Total interest-bearing liabilities ... 814,007 4,854,273 13,986,992
----------- ----------- -----------
Interest rate sensitivity gap .............. $ 561,559 $ 100,670 $ 1,672,084
=========== =========== ===========
Cumulative interest rate sensitivity
Gap ..................................... $ 1,571,414 $ 1,672,084
=========== ===========
Cumulative interest rate sensitivity gap
as a percent of total assets ............ 9.88% 10.52%
Cumulative interest-earning assets
as a percent of interest-bearing
liabilities ............................. 117.21% 111.95%
Page 32
Hudson City Bancorp, Inc.
Form 10-Q
ITEM 4. - CONTROLS AND PROCEDURES
Ronald E. Hermance, Jr., our President and Chief Executive Officer, and Denis J.
Salamone, our Senior Executive Vice President and Chief Operating Officer,
conducted an evaluation of the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934, as amended) as of September 30, 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 changes in our internal control over financial reporting that
occurred during the period covered by this report that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
PART II - OTHER INFORMATION
ITEM 1. - LEGAL PROCEEDINGS
We are not involved in any pending legal proceedings other than routine legal
proceedings occurring in the ordinary course of business. We believe that these
routine legal proceedings, in the aggregate, are immaterial to our financial
condition and results of operations.
ITEM 2. - CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. - DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the quarter ended September 30, 2003 to a vote of
security holders of Hudson City Bancorp through the solicitation of proxies or
otherwise.
ITEM 5. - OTHER INFORMATION
Not applicable.
Page 33
Hudson City Bancorp, Inc.
Form 10-Q
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Exhibit
- -------------- --------------------------------------------------------------
31.1 Certifications of Chief Executive Officer
31.2 Certifications of Chief Financial Officer
32.1 Written Statement of Chief Executive Officer and Chief
Financial Officer furnished pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. *
- -------------------
* Pursuant to SEC rules, this exhibit will not be deemed filed for purposes of
Section 18 of the Exchange Act or otherwise subject to the liability of that
section.
(b) Hudson City Bancorp, Inc. filed one Current Report on Form 8-K during
the quarter ended September 30, 2003 detailed as follows.
1. On July 15, 2003, a Form 8-K was filed following the issuance
of a press release announcing second quarter financial results
for the period ended June 30, 2003. A copy of the press
release was filed as an exhibit.
Page 34
Hudson City Bancorp, Inc.
Form 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Hudson City Bancorp, Inc.
Date: November 10, 2003 By: /s/ Ronald E. Hermance, Jr.
---------------------------------------
Ronald E. Hermance, Jr.
President and Chief Executive Officer
(principal executive officer)
Date: November 10, 2003 By: /s/ Denis J. Salamone
---------------------------------------------
Denis J. Salamone
Senior Executive Vice President and
Chief Operating Officer
(principal financial and accounting officer)
Page 35