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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: JUNE 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________ to ______________________
Commission File Number: 0-26001
HUDSON CITY BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3640393
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
West 80 Century Road
Paramus, New Jersey 07652
(Address of Principal Executive Offices) (Zip Code)
(201)967-1900
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of August 7, 2002, the registrant had 193,461,458 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 70,884,858 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
PART I - FINANCIAL INFORMATION Number
------
Item 1. - Financial Statements
Consolidated Statements of Financial Condition -
June 30, 2002 (Unaudited) and December 31, 2001 ............. 3
Consolidated Statements of Income (Unaudited) - For the three
and six months ended June 30, 2002 and 2001 ................. 4
Consolidated Statements of Cash Flows (Unaudited) - For the
six months ended June 30, 2002 and 2001 ..................... 5
Notes to Consolidated Financial Statements .................. 6
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................ 10
Item 3. - Quantitative and Qualitative Disclosures About Market Risk 26
PART II - OTHER INFORMATION
Item 1. - Legal Proceedings ........................................ 29
Item 2. - Changes in Securities and Use of Proceeds ................ 29
Item 3. - Defaults Upon Senior Securities .......................... 29
Item 4. - Submission of Matters to a Vote of Security Holders ...... 29
Item 5. - Other Information ........................................ 30
Item 6. - Exhibits and Reports on Form 8-K ......................... 30
SIGNATURES ................................................................. 31
EXHIBIT .................................................................... 32
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
JUNE 30, DECEMBER 31,
2002 2001
------------ ------------
(UNAUDITED)
(IN THOUSANDS)
ASSETS
Cash and due from banks ...................................................... $ 97,967 $ 84,214
Federal funds sold ........................................................... 40,200 17,600
------------ ------------
Total cash and cash equivalents ......................... 138,167 101,814
Investment securities held to maturity, market value of $1,458 at
June 30, 2002 and $1,474 at December 31, 2001 ....................... 1,406 1,441
Investment securities available for sale, at market value .................... 265,760 167,427
Federal Home Loan Bank of New York stock ..................................... 105,000 81,149
Mortgage-backed securities held to maturity, market value of $4,677,036
at June 30, 2002 and $4,530,692 at December 31, 2001 ................ 4,576,004 4,478,488
Mortgage-backed securities available for sale, at market value ............... 942,318 530,690
Loans ........................................................................ 6,704,937 5,968,171
Less:
Deferred loan fees ............................................ 10,556 12,060
Allowance for loan losses ..................................... 25,055 24,010
------------ ------------
Net loans ............................................... 6,669,326 5,932,101
Foreclosed real estate, net .................................................. 1,038 250
Accrued interest receivable .................................................. 68,895 61,808
Banking premises and equipment, net .......................................... 33,970 31,363
Other assets ................................................................. 40,680 40,237
------------ ------------
Total Assets ............................................ $ 12,842,564 $ 11,426,768
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Interest-bearing .................................................... $ 8,134,494 $ 7,537,103
Noninterest-bearing ................................................. 402,790 375,659
------------ ------------
Total deposits .......................................... 8,537,284 7,912,762
Borrowed funds ............................................................... 2,950,000 2,150,000
Accrued expenses and other liabilities ....................................... 82,166 75,270
------------ ------------
Total liabilities ....................................... 11,569,450 10,138,032
------------ ------------
Common stock, $0.01 par value, 800,000,000 shares authorized; 231,276,600
shares issued, 194,032,908 shares outstanding at June 30, 2002,
198,317,400 shares outstanding at December 31, 2001 (note 1) ........ 2,313 2,313
Additional paid-in capital ................................................... 525,934 526,855
Retained earnings (notes 1 and 4) ............................................ 1,233,422 1,171,007
Treasury stock, at cost; 37,243,692 shares at June 30, 2002 and
32,959,200 shares at December 31, 2001 .............................. (423,099) (340,716)
Unallocated common stock held by the employee stock ownership plan ........... (52,455) (53,435)
Unearned common stock held by the recognition and retention plan ............. (20,269) (22,132)
Accumulated other comprehensive income, net of tax ........................... 7,268 4,844
------------ ------------
Total stockholders' equity .............................. 1,273,114 1,288,736
------------ ------------
Total Liabilities and Stockholders' Equity .............. $ 12,842,564 $ 11,426,768
============ ============
See accompanying notes to consolidated financial statements.
Page 3
HUDSON CITY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
Interest and Dividend Income:
Interest and fees on first mortgage loans ................. $ 111,237 $ 92,220 $ 216,794 $ 180,931
Interest and fees on consumer and other loans ............. 2,559 3,040 5,167 6,047
Interest on mortgage-backed securities held to maturity ... 68,410 63,447 137,405 123,296
Interest on mortgage-backed securities available for sale . 9,842 526 17,288 526
Interest on investment securities held to maturity:
Taxable .............................................. 17 17 34 34
Exempt from federal taxes ............................ 5 6 11 12
Interest on investment securities available
for sale-taxable ..................................... 3,024 5,804 5,595 18,496
Dividends on Federal Home Loan Bank
of New York stock .................................... 962 1,179 1,871 2,471
Interest on federal funds sold ............................ 431 1,388 911 3,115
------------ ------------ ------------ ------------
Total interest and dividend income .............. 196,487 167,627 385,076 334,928
------------ ------------ ------------ ------------
Interest Expense:
Interest on deposits ...................................... 64,678 77,378 132,216 157,260
Interest on borrowed funds ................................ 34,437 22,519 64,097 43,145
------------ ------------ ------------ ------------
Total interest expense .......................... 99,115 99,897 196,313 200,405
------------ ------------ ------------ ------------
Net interest income ......................... 97,372 67,730 188,763 134,523
Provision for Loan Losses ........................................ 525 450 1,050 900
------------ ------------ ------------ ------------
Net interest income after provision
for loan losses ........................ 96,847 67,280 187,713 133,623
------------ ------------ ------------ ------------
Non-Interest Income:
Service charges and other income .......................... 1,256 1,220 2,428 2,272
------------ ------------ ------------ ------------
Total non-interest income ....................... 1,256 1,220 2,428 2,272
------------ ------------ ------------ ------------
Non-Interest Expense:
Salaries and employee benefits ............................ 14,996 12,882 31,182 25,823
Net occupancy expense ..................................... 3,419 3,345 6,992 6,808
Federal deposit insurance assessment ...................... 352 317 694 646
Computer and related services ............................. 297 230 607 480
Other expense ............................................. 4,005 3,744 7,763 6,483
------------ ------------ ------------ ------------
Total non-interest expense ...................... 23,069 20,518 47,238 40,240
------------ ------------ ------------ ------------
Income before income tax expense ............ 75,034 47,982 142,903 95,655
Income Tax Expense ............................................... 26,860 17,061 51,143 34,057
============ ============ ============ ============
Net income .................................. $ 48,174 $ 30,921 $ 91,760 $ 61,598
============ ============ ============ ============
Basic Earnings Per Share ......................................... $ 0.26 $ 0.16 $ 0.49 $ 0.31
============ ============ ============ ============
Diluted Earnings Per Share ....................................... $ 0.25 $ 0.16 $ 0.48 $ 0.30
============ ============ ============ ============
Weighted Average Number of Common Shares Outstanding:
Basic ....................................... 186,085,877 195,861,934 186,599,740 201,880,800
Diluted ..................................... 191,585,334 198,784,984 191,559,145 204,599,944
See accompanying notes to consolidated financial statements.
Page 4
HUDSON CITY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS
ENDED JUNE 30,
-------------------------------
2002 2001
------------ ------------
(IN THOUSANDS)
Cash Flows from Operating Activities:
Net income ................................................................... $ 91,760 $ 61,598
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, accretion and amortization expense ...................... 6,036 1,558
Provision for loan losses ............................................. 1,050 900
Allocation of stock for employee benefit plans ........................ 6,112 4,022
Deferred tax expense .................................................. (1,141) (1,795)
Net proceeds from sale of foreclosed real estate ...................... 59 364
(Increase) decrease in accrued interest receivable .................... (7,087) 3,664
Decrease in other assets .............................................. 456 3,167
Increase in accrued expenses and other liabilities .................... 6,896 6,918
------------ ------------
Net Cash Provided by Operating Activities ............................................. 104,141 80,396
------------ ------------
Cash Flows from Investing Activities:
Net increase in loans ........................................................ (60,490) (257,156)
Purchases of loans ........................................................... (677,452) (257,533)
Principal collection of mortgage-backed securities held to maturity .......... 815,261 726,979
Purchases of mortgage-backed securities held to maturity ..................... (917,009) (1,425,606)
Principal collection of mortgage-backed securities available for sale ........ 77,962 2,495
Purchases of mortgage-backed securities available for sale ................... (488,419) (150,867)
Proceeds from maturities and calls of investment securities held to maturity . 35 35
Proceeds from maturities and calls of investment securities available for sale 25,651 640,602
Purchases of investment securities available for sale ........................ (122,390) --
Purchases of Federal Home Loan Bank of New York stock ........................ (23,851) (7,520)
Purchases of premises and equipment, net ..................................... (4,447) (844)
------------ ------------
Net Cash Used in Investment Activities ................................................ (1,375,149) (729,415)
------------ ------------
Cash Flows from Financing Activities:
Net increase in deposits ..................................................... 624,522 307,018
Proceeds from borrowed funds ................................................. 800,000 750,000
Principal payments on borrowed funds ......................................... -- (250,000)
Dividends paid ............................................................... (30,588) (21,574)
Purchases of stock by the recognition and retention plan ..................... (1,854) (1,163)
Purchases of treasury stock .................................................. (89,281) (198,413)
Exercise of stock options .................................................... 4,562 1,507
------------ ------------
Net Cash Provided by Financing Activities ............................................. 1,307,361 587,375
------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents .................................. 36,353 (61,644)
Cash and Cash Equivalents at Beginning of Period ...................................... 101,814 187,111
------------ ------------
Cash and Cash Equivalents at End of Period ............................................ $ 138,167 $ 125,467
============ ============
Supplemental Disclosures:
Interest paid ................................................................ $ 190,719 $ 197,296
============ ============
Income taxes paid ............................................................ $ 50,449 $ 31,591
============ ============
See accompanying notes to consolidated financial statements.
Page 5
Hudson City Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
1. - BASIS OF PRESENTATION
Hudson City Bancorp, Inc. is a Delaware corporation organized in March
1999 by Hudson City Savings Bank in connection with the conversion and
reorganization of Hudson City Savings from a New Jersey mutual savings bank into
a two-tiered mutual savings bank holding company structure. Prior to July 13,
1999, Hudson City Bancorp had not issued any stock, had no assets and no
liabilities and had not conducted any business other than of an organizational
nature.
In our opinion, all the adjustments (consisting of normal and recurring
adjustments) necessary for a fair presentation of the consolidated financial
condition and consolidated results of operations for the unaudited periods
presented have been included. The results of operations and other data presented
for the three-month and six-month periods ended June 30, 2002 are not
necessarily indicative of the results of operations that may be expected for the
year ending December 31, 2002.
Capital accounts, share and per share data included in the consolidated
financial statements and the notes thereto, and all such data at period-end
dates and for periods prior to June 30, 2002, have been retroactively adjusted
to reflect the 100 percent common stock dividend declared on April 16, 2002,
having the effect of a two-for-one stock split. The 100% stock dividend was paid
on June 17, 2002 to shareholders of record as of May 24, 2002.
Certain information and note disclosures usually included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission for the
preparation of the Form 10-Q. The consolidated financial statements presented
should be read in conjunction with Hudson City Bancorp's audited consolidated
financial statements and notes to consolidated financial statements included in
Hudson City Bancorp's December 31, 2001 Annual Report on Form 10-K.
Statements of Cash Flow. For the purposes of reporting cash flows, cash
and cash equivalents includes cash on hand, amounts due from banks and federal
funds sold. Transfers of loans to foreclosed real estate of $847,000 and
$747,000 for the six-month periods ended June 30, 2002 and 2001, respectively,
did not result in cash receipts or cash payments.
Page 6
Hudson City Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
2. - COMPREHENSIVE INCOME
Comprehensive income is comprised of net income and other comprehensive
income. Other comprehensive income includes unrealized holding gains and losses
on securities available for sale, net of tax.
Total comprehensive income during the periods indicated is as follows.
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------- ----------------------
2002 2001 2002 2001
-------- -------- -------- --------
(IN THOUSANDS)
Net income ............................... $ 48,174 $ 30,921 $ 91,760 $ 61,598
Other comprehensive income:
Unrealized holding gain on securities
available for sale, net of tax ... 6,337 709 2,424 3,515
-------- -------- -------- --------
Total comprehensive income ............... $ 54,511 $ 31,630 $ 94,184 $ 65,113
======== ======== ======== ========
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 JUNE 30,
-----------------------------------------------------------------------------
2002 2001
------------------------------------ -----------------------------------
PER PER
SHARE SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
-------- -------- -------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income ................ $ 48,174 $ 30,921
======== ========
Basic earnings per share:
Income available to
common stockholders . $ 48,174 186,086 $ 0.26 $ 30,921 195,862 $ 0.16
======== =======
Effect of dilutive common
stock equivalents ... -- 5,499 -- 2,923
-------- -------- -------- --------
Diluted earnings per share:
Income available to
common stockholders . $ 48,174 191,585 $ 0.25 $ 30,921 198,785 $ 0.16
======== ======== ======== ======== ======== =======
Page 7
Hudson City Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
FOR THE SIX MONTHS ENDED JUNE 30,
------------------------------------------------------------------------------------
2002 2001
--------------------------------------- ---------------------------------------
PER PER
SHARE SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income ................ $ 91,760 $ 61,598
========= =========
Basic earnings per share:
Income available to
common stockholders . $ 91,760 186,600 $ 0.49 $ 61,598 201,881 $ 0.31
========= =========
Effect of dilutive common
stock equivalents ... -- 4,959 -- 2,719
--------- --------- --------- ---------
Diluted earnings per share:
Income available to
common stockholders . $ 91,760 191,559 $ 0.48 $ 61,598 204,600 $ 0.30
========= ========= ========= ========= ========= =========
4. - SUBSEQUENT EVENT
On July 16, 2002, the Board of Directors of Hudson City Bancorp declared a
quarterly cash dividend of nine cents ($0.09) per common share outstanding. The
dividend is payable on September 3, 2002 to stockholders of record at the close
of business on August 9, 2002.
5. - RECENT ACCOUNTING PRONOUNCEMENTS
On July 20, 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 requires that, after December 31, 2001,
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually in accordance
with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible
assets with definite useful lives be amortized over their respective estimated
useful lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of."
We were required to adopt SFAS No. 142 effective January 1, 2002. We
currently have no recorded goodwill or intangible assets and the initial
adoption of SFAS No. 142 did not have a significant impact on our consolidated
financial statements.
On October 3, 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," it retains many
of the fundamental provisions of that Statement. The Statement is effective for
fiscal years beginning after December 15, 2001. The initial adoption of SFAS No.
144 did not have a significant impact on our consolidated financial statements.
Page 8
Hudson City Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This Statement rescinds FASB No. 4, "Reporting Gains and Losses
from Extinguishment of Debt," and an amendment of that Statement, SFAS No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." This
Statement also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor
Carriers." This Statement amends SFAS No. 13, "Accounting for Leases," to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. This
Statement also amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings, or describe their applicability
under change conditions. SFAS No. 145 is effective for fiscal years beginning
after May 15, 2002. Management does not anticipate that the initial adoption of
SFAS No. 145 will have a significant impact on our consolidated financial
statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." This Statement is to be
applied prospectively to exit or disposal activities initiated after December
31, 2002.
Page 9
Hudson City Bancorp, Inc.
Form 10-Q
Item 2. - Management's Discussion and Analysis of Financial Condition and
Results of Operations
GENERAL
During the first six months of 2002, we continued to grow our operating
subsidiary, Hudson City Savings Bank, primarily through our core investments of
residential mortgage loans and mortgage-backed securities. Customer deposits and
long-term borrowings funded the growth. The decline in short-term interest rates
and the steepening of the yield curve, which occurred in 2001, resulted in a low
interest rate environment that has continued through the first six months of
2002. This environment has improved our interest rate spread, contributing to
increased net interest income.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2002 AND DECEMBER 31, 2001
Our total assets increased $1.41 billion, or 12.3%, to $12.84 billion at
June 30, 2002 from $11.43 billion at December 31, 2001. This increase was
generally reflected in increases in mortgage loans and mortgage-backed
securities.
Loans increased $736.8 million, or 12.3%, to $6.70 billion at June 30,
2002 from $5.97 billion at December 31, 2001. For the six-month period ended
June 30, 2002, we originated and purchased first mortgage loans of approximately
$974.3 million and $677.5 million, respectively, compared with $718.6 million
and $257.5 million, respectively, for the corresponding 2001 period. These
originations and purchases were concentrated in one-to four-family residential
mortgage loans. The purchases were made pursuant to our wholesale loan purchase
program established to supplement our retail loan originations. Along with
increased mortgage loan purchases as part of our growth strategy, the low market
interest rate environment in 2001 and the first six months of 2002, which caused
increased prepayments and loan refinancings, has accelerated our loan
originations. Purchased loans are subject to comprehensive due diligence
procedures, which include substantially the same underwriting standards used in
our own loan origination process. Loan packages purchased include mortgage loans
secured by properties located primarily in the Northeastern quadrant of the
United States.
In 2002, due to the relatively low interest rate environment,
approximately $283 million of our loan originations were the result of
refinancing of our existing mortgage loans. These refinancings of existing loans
are included in total loan originations. Last year we began to allow certain
customers to modify their existing mortgage loans with the intent of maintaining
customer relationships in periods of extensive refinancing due to a low interest
rate environment. In general, all terms and conditions of the existing mortgage
loan remain the same except the adjustment of the interest rate to the currently
offered fixed-rate product with a similar term to maturity. Modifications of
existing mortgage loans during the first six months of 2002 amounted to
approximately $112 million. This total is not included in total loan
originations.
Mortgage-backed securities increased $509.1 million, or 10.2%, to $5.52
billion at June 30, 2002 from $5.01 billion at December 31, 2001, including a
$411.6 million increase in mortgage-backed securities available for sale. In
addition to purchases of mortgage-backed securities as part of our growth
strategy, purchases of mortgage-backed securities also increased due to the low
market interest rate environment during 2001 and the first six months of 2002,
which caused increased prepayments and loan refinancings. Investment securities
available for sale increased $98.4 million, or 58.8%, to $265.8 million at June
30, 2002 from $167.4 million at December 31, 2001. These increases in
interest-earning assets
Page 10
Hudson City Bancorp, Inc.
Form 10-Q
reflected our continued emphasis on the origination and purchase of one-to
four-family mortgage loans supplemented by the purchase of mortgage-backed
securities and investment securities using excess cash flows.
Cash and due from banks increased $13.8 million to $98.0 million at June
30, 2002 from $84.2 million at December 31, 2001. Federal funds sold increased
$22.6 million to $40.2 million at June 30, 2002 from $17.6 million at December
31, 2001. These increases in cash and cash equivalents were primarily due to the
overall growth in assets and excess liquidity received late in the period having
been temporarily invested in federal funds sold. Federal Home Loan Bank of New
York ("FHLB") stock increased $23.9 million, or 29.5%, to $105.0 million at June
30, 2002, which was the amount of stock we were required by the FHLB to hold.
At June 30, 2002, total liabilities were $11.57 billion, an increase of
14.1%, or $1.43 billion, compared with $10.14 billion at December 31, 2001.
Borrowed funds increased $800.0 million, or 37.2%, to $2.95 billion at June 30,
2002 from $2.15 billion at December 31, 2001. The additional borrowed funds were
primarily used to fund asset growth consistent with our capital management
strategy. Funding asset growth with borrowed funds generated additional earnings
through a positive interest rate spread. Borrowed funds were comprised of $1.85
billion of securities sold under agreements to repurchase and $1.10 billion of
Federal Home Loan Bank advances. Securities pledged as collateral against our
securities sold under agreements to repurchase had a market value at June 30,
2002 of approximately $2.03 billion. Advances from the FHLB utilize our mortgage
portfolio as collateral. Our borrowed funds consisted primarily of 10-year terms
with one-time call options, generally from 3 to 5 years from the borrowing date.
The use of long-term borrowed funds has allowed us to better manage our interest
rate risk by matching our long-term assets with long-term liabilities. Borrowing
long-term in this low interest rate environment should also allow us to better
control interest expense in future periods.
Total deposits increased $624.5 million, or 7.9%, to $8.54 billion at June
30, 2002 from $7.91 billion at December 31, 2001. Interest-bearing deposits
increased $597.4 million, or 7.9%, to $8.13 billion at June 30, 2002 from $7.54
billion at December 31, 2001. The increase in interest-bearing deposits was due,
in part, to a $290.0 million, or 4.8%, increase in time deposits to $6.39
billion at June 30, 2002 from $6.10 billion at December 31, 2001. Included in
the growth of interest-bearing deposits was growth in interest-bearing demand
accounts of $155.8 million due to the introduction during the second quarter of
our interest-bearing High Value Checking account. Additionally, regular savings
deposits increased $69.3 million, or 8.5%, to $883.7 million and money market
deposits increased $85.4 million, or 16.5%, to $602.1 million at June 30, 2002.
Non-interest bearing deposits increased $27.1 million, or 7.2%, to $402.8
million at June 30, 2002 from $375.7 million at December 31, 2001. The increase
in total deposits was primarily used to fund our planned asset growth. We
believe the increase in interest-bearing deposits was due, in part, to our
consistent offering of competitive rates on our time deposit products,
promotions for our High Value Checking account and cash inflows due to the
current volatility in the equity markets.
Accrued expenses and other liabilities increased $6.9 million, or 9.2%, to
$82.2 million at June 30, 2002 from $75.3 million at December 31, 2001 primarily
due to an increase in accrued interest payable because of the growth in our
borrowed funds.
Total stockholders' equity decreased $15.6 million, or 1.2%, to $1.27
billion at June 30, 2002 from $1.29 billion at December 31, 2001. The decrease
was primarily the result of repurchases of 4,940,772 shares of our common stock
at an aggregate cost of $89.3 million and cash dividends declared
Page 11
Hudson City Bancorp, Inc.
Form 10-Q
and paid to common stockholders of $30.6 million. As of June 30, 2002, there
remain 4,622,496 shares authorized to be purchased under our current stock
repurchase program. Partially offsetting these uses of stockholders' equity was
net income of $91.8 million, an increase of $2.4 million in accumulated other
comprehensive income, net of tax, and $4.6 million due to the exercise of
656,280 stock options. The increase in accumulated other comprehensive income
was due to the increase in the market value of our securities portfolios due to
the lower interest rate environment and the growth in our mortgage-backed
securities available for sale.
At June 30, 2002, the ratio of total stockholders' equity to total assets
was 9.91% compared with 11.28% at December 31, 2001. For the six-month period
ended June 30, 2002, the ratio of average stockholders' equity to average assets
was 10.60% compared with 13.05% for the year ended December 31, 2001. The
decrease in these ratios was primarily due to planned asset growth and the
decrease in stockholders' equity as discussed above. Stockholders' equity per
common share was $6.93 and $6.87 at June 30, 2002 and December 31, 2001,
respectively.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2002 AND
2001
Average Balance Sheets. The tables on the following pages present certain
information regarding Hudson City Bancorp's financial condition and net interest
income for the three-month and six-month periods ended June 30, 2002 and 2001.
The tables present the annualized average yield on interest-earning assets and
the annualized average cost of interest-bearing liabilities. We derived the
yields and costs by dividing annualized income or expense by the average balance
of interest-earning assets and interest-bearing liabilities, respectively, for
the periods shown. We derived average balances from daily balances over the
periods indicated. Interest income includes fees that we considered adjustments
to yields. Yields on tax-exempt obligations were not computed on a tax
equivalent basis.
Page 12
Hudson City Bancorp, Inc.
Form 10-Q
FOR THE THREE MONTHS ENDED JUNE 30,
---------------------------------------------------------------------------
2002 2001
---------------------------------- ---------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
----------- ----------- ------- ----------- ----------- ----
(DOLLARS IN THOUSANDS)
ASSETS:
Interest-earnings assets:
First mortgage loans, net(1) ................. $ 6,365,109 $ 111,237 6.99% $ 5,011,716 $ 92,220 7.36%
Consumer and other loans ..................... 141,714 2,559 7.22 155,095 3,040 7.84
Federal funds sold ........................... 104,744 431 1.65 129,900 1,388 4.29
Mortgage-backed securities at amortized cost . 5,392,992 78,252 5.80 3,843,488 63,973 6.66
Federal Home Loan Bank stock ................. 96,429 962 3.99 81,149 1,179 5.81
Investment securities at amortized cost ...... 204,279 3,046 5.96 367,400 5,827 6.34
----------- ----------- ----------- -----------
Total interest-earning assets ............ 12,305,267 196,487 6.39 9,588,748 167,627 6.99
----------- -----------
Noninterest-earnings assets ....................... 238,597 196,650
----------- -----------
Total Assets ............................. $12,543,864 $ 9,785,398
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Savings accounts ............................. $ 873,548 4,517 2.07 $ 767,155 4,431 2.32
Interest-bearing demand accounts ............. 160,584 795 1.99 92,639 379 1.64
Money market accounts ........................ 592,340 3,098 2.10 450,265 2,675 2.38
Time deposits ................................ 6,347,142 56,268 3.56 5,131,784 69,893 5.46
----------- ----------- ----------- -----------
Total interest-bearing deposits .......... 7,973,614 64,678 3.25 6,441,843 77,378 4.82
Borrowed funds ............................... 2,778,571 34,437 4.97 1,575,824 22,519 5.73
----------- ----------- ----------- -----------
Total interest-bearing liabilities ....... 10,752,185 99,115 3.70 8,017,667 99,897 5.00
----------- ----------- ----------- -----------
Noninterest-bearing liabilities:
Noninterest-bearing deposits ................. 390,988 357,618
Other noninterest-bearing liabilities ........ 101,597 83,104
----------- -----------
Total noninterest-bearing liabilities .... 492,585 440,722
----------- -----------
Total liabilities ............................ 11,244,770 8,458,389
Stockholders' equity ......................... 1,299,094 1,327,009
----------- -----------
Total Liabilities and Stockholders' Equity $12,543,864 $ 9,785,398
----------- -----------
Net interest income/net interest rate spread (2) .. $ 97,372 2.69% $ 67,730 1.99%
----------- -----------
Net interest-earning assets/net interest margin (3) $ 1,553,082 3.16% $ 1,571,081 2.81%
----------- -----------
Ratio of interest-earning assets to
interest-bearing liabilities ................. 1.14x 1.20x
- --------------
(1) Amount is net of deferred loan fees and allowance for loan losses and
includes non-performing loans.
(2) Determined by subtracting the annualized weighted average cost of total
interest-bearing liabilities from the annualized weighted average yield
on total interest-earning assets.
(3) Determined by dividing annualized net interest income by total average
interest-earning assets.
Page 13
Hudson City Bancorp, Inc.
Form 10-Q
FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------------------
2002 2001
--------------------------------- --------------------------------
AVERAGE/ AVERAGE
AVERAGE YIELD AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
----------- ----------- ------- ----------- ----------- ----
(DOLLARS IN THOUSANDS)
ASSETS:
Interest-earnings assets:
First mortgage loans, net(1) ................. $ 6,181,584 $ 216,794 7.01% $ 4,882,155 $ 180,931 7.41%
Consumer and other loans ..................... 143,201 5,167 7.22 153,035 6,047 7.90
Federal funds sold ........................... 114,886 911 1.60 131,172 3,115 4.79
Mortgage-backed securities at amortized cost . 5,266,696 154,693 5.87 3,629,578 123,822 6.82
Federal Home Loan Bank stock ................. 89,672 1,871 4.17 77,659 2,471 6.36
Investment securities at amortized cost ...... 189,350 5,640 5.96 591,589 18,542 6.27
----------- ----------- ----------- ----------
Total interest-earning assets ............ 11,985,389 385,076 6.43 9,465,188 334,928 7.08
----------- ----------
Noninterest-earnings assets ....................... 238,400 189,717
----------- -----------
Total Assets ............................. $12,223,789 $ 9,654,905
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Savings accounts ............................. $ 853,119 8,774 2.07 $ 762,000 8,752 2.32
Interest-bearing demand accounts ............. 131,205 1,142 1.76 93,245 752 1.63
Money market accounts ........................ 569,708 5,955 2.11 448,639 5,311 2.39
Time deposits ................................ 6,299,028 116,345 3.72 5,071,138 142,445 5.66
----------- ----------- ----------- -----------
Total interest-bearing deposits .......... 7,853,060 132,216 3.40 6,375,022 157,260 4.97
Borrowed funds ............................... 2,588,674 64,097 4.99 1,478,729 43,145 5.88
----------- ----------- ----------- -----------
Total interest-bearing liabilities ....... 10,441,734 196,313 3.79 7,853,751 200,405 5.15
----------- ----------- ----------- -----------
Noninterest-bearing liabilities:
Noninterest-bearing deposits ................. 386,623 342,800
Other noninterest-bearing liabilities ........ 99,332 81,769
----------- -----------
Total noninterest-bearing liabilities .... 485,955 424,569
----------- -----------
Total liabilities ............................ 10,927,689 8,278,320
Stockholders' equity ......................... 1,296,100 1,376,585
----------- -----------
Total Liabilities and Stockholders' Equity $12,223,789 $ 9,654,905
=========== ===========
Net interest income/net interest rate spread (2) .. $ 188,763 2.64% $ 134,523 1.93%
----------- -----------
Net interest-earning assets/net interest margin (3) $ 1,543,655 3.12% $ 1,611,437 2.81%
----------- -----------
Ratio of interest-earning assets to
interest-bearing liabilities ................. 1.15x 1.21x
- --------------
(1) Amount is net of deferred loan fees and allowance for loan losses and
includes non-performing loans.
(2) Determined by subtracting the annualized weighted average cost of total
interest-bearing liabilities from the annualized weighted average yield
on total interest-earning assets.
(3) Determined by dividing annualized net interest income by total average
interest-earning assets.
Page 14
Hudson City Bancorp, Inc.
Form 10-Q
General. Net income was $48.2 million for the three-month period ended
June 30, 2002, an increase of $17.3 million, or 56.0%, compared with net income
of $30.9 million for the corresponding prior year period. Basic and diluted
earnings per common share were $0.26 and $0.25, respectively, for the quarter
ended June 30, 2002 compared with basic and diluted earnings per share of $0.16
for the quarter ended June 30, 2001. For the quarter ended June 30, 2002 our
annualized return on average stockholders' equity was 14.83% compared with 9.32%
for the quarter ended June 30, 2001. Our annualized return on average assets for
the second quarter of 2002 was 1.54% compared with 1.26% for the second quarter
of 2001. These increases reflected our improved profitability due to the
declining interest rate environment experienced during 2001 and the resulting
low interest rate environment that has continued through the first six months of
2002.
During 2001, the Federal Open Market Committee reduced the federal
funds rate on eleven successive occasions by a total of 475 basis points. These
reductions, along with the economic recession experienced during 2001, have
created a significantly different interest rate environment than that which
existed at the beginning of 2001. General market interest rates, particularly on
short-term maturities, decreased during 2001 as the overall yield curve
steepened. The Federal Open Market Committee has neither reduced nor increased
the federal funds rate in 2002 and the overall interest rate structure and yield
curve have remained relatively stable during the first six months of this year.
A decreasing rate environment can be beneficial to our net interest income as
our interest-bearing liabilities generally reprice faster than our
interest-earning assets. A steepening yield curve is where the spread between
long-term interest rates and short-term interest rates widens. A steep yield
curve can also be beneficial to our net interest income as our interest-bearing
liabilities generally are priced based on short-term market rates while our
mortgage loan products, particularly those with initial terms to maturity or
repricing greater than one year, generally are priced based on long-term market
rates. In the low interest rate environment that continued through the first six
months of 2002, our annualized net interest rate spread increased 70 basis
points to 2.69% for the second quarter of 2002 from 1.99% for the second quarter
of 2001.
Interest and Dividend Income. Total interest and dividend income
increased $28.9 million, or 17.2%, to $196.5 million for the three-month period
ended June 30, 2002 compared with $167.6 million for the corresponding 2001
period. The increase in total interest income was primarily due to the average
balance of total interest-earning assets increasing $2.72 billion, or 28.4%, to
$12.31 billion for the three-month period ended June 30, 2002 compared with
$9.59 billion for the three-month period ended June 30, 2001. This increase was
due in part to a $1.35 billion, or 26.9%, increase in the average balance of
first mortgage loans, net to $6.36 billion for the three-month period ended June
30, 2002 compared with $5.01 billion for the corresponding 2001 period. The
average balance of mortgage-backed securities increased $1.55 billion, or 40.4%,
to $5.39 billion for the three-month period ended June 30, 2002 compared with
$3.84 billion for the corresponding 2001 period. These increases were offset in
part by a decrease in the average balance of investment securities for the
three-month period ended June 30, 2002 of $163.1 million, or 44.4%, to $204.3
million from $367.4 million for the corresponding 2001 period.
The above increases in the average balances of first mortgage loans and
mortgage-backed securities reflected internal growth that was consistent with
our capital management strategy to originate and purchase first mortgage loans,
while purchasing mortgage-backed securities to supplement loan originations and
purchases, and assist in the management of interest rate risk. The growth in the
average balance of mortgage-backed securities and the decline in the average
balance of investment securities reflected, in part, the calls of investment
securities during 2001 due to the low interest rate environment and the
reinvestment of the proceeds of those calls in mortgage-backed securities. The
growth in the average balance of mortgage-backed securities also reflected the
investment of excess cash flows into
Page 15
Hudson City Bancorp, Inc.
Form 10-Q
mortgage-backed securities, which supplemented loan originations and purchases.
Although the increase in the average balance of loans was somewhat less than the
increase in the average balance of mortgage-backed securities, the impact of the
loan growth was more significant in terms of interest income because our first
mortgage loans are generally higher yielding assets than our mortgage-backed
securities. The increase in the average balance of FHLB stock of $15.3 million
reflected the increase in the amount of FHLB stock required to be held by us.
The impact on interest income due to the growth in the average balance
of interest-earning assets, was partially offset by a 60 basis point decrease in
the annualized average yield on interest-earning assets to 6.39% for the quarter
ended June 30, 2002 from 6.99% for the quarter ended June 30, 2001. The
annualized average yield on first mortgage loans, net decreased 37 basis points
to 6.99% for the second quarter of 2002, from 7.36% for the corresponding 2001
period. The annualized average yield on mortgage-backed securities decreased 86
basis points to 5.80% for the second quarter of 2002 from 6.66% for the
corresponding 2001 period.
The decrease in the annualized average yield on first mortgage loans
reflected the large volume of loan originations and purchases during the low
interest rate environment of 2001 and the first six months of 2002. The decrease
in the annualized average yield on mortgage-backed securities reflected the
large volume of purchases, and the downward repricing of our variable-rate
securities, during the low interest rate environment of 2001 and the first six
months of 2002. If market interest rates remain low, the yield on our
mortgage-backed securities may continue to adjust downward due to annual rate
change limits, which have limited the extent our variable-rate securities may
have adjusted in prior periods.
Interest Expense. Total interest expense, comprised of interest on
deposits and interest on borrowed funds, decreased $0.8 million, or 0.8%, to
$99.1 million for the three-month period ended June 30, 2002 from $99.9 million
for the three-month period ended June 30, 2001. Interest expense on borrowed
funds increased $11.9 million, or 52.9%, to $34.4 million for the second quarter
of 2002 from $22.5 million for the corresponding 2001 period, while interest
expense on deposits decreased $12.7 million, or 16.4%, to $64.7 million for the
second quarter of 2002 from $77.4 million for the corresponding 2001 period. The
slight decrease in total interest expense reflected the impact of a 130 basis
point decrease in the annualized average cost of interest-bearing liabilities to
3.70% for the quarter ended June 30, 2002 from 5.00% for the corresponding 2001
period, offset by an increase in the average balance of interest-bearing
liabilities of $2.73 billion, or 34.0%, to $10.75 billion for the quarter ended
June 30, 2002 from $8.02 billion for the quarter ended June 30, 2001.
The increase in interest expense on borrowed funds was primarily due to
a $1.20 billion, or 75.9%, increase in the average balance of borrowed funds to
$2.78 billion for the three-month period ended June 30, 2002 from $1.58 billion
for the corresponding 2001 period. The impact on interest expense on borrowed
funds due to the increase in the average balance of borrowed funds was offset,
in part, by a 76 basis point decrease in the annualized average cost of borrowed
funds to 4.97% for the second quarter of 2002 from 5.73% for the second quarter
of 2001.
The use of borrowed funds has accelerated over the past year to fund
asset growth consistent with our capital management and growth strategies. The
use of long-term borrowed funds has allowed us to better manage our interest
rate risk by matching long-term assets with long-term liabilities. Borrowing
long-term in the prevailing low interest rate environment should also allow us
to better control interest expense in future periods. The decrease in the
annualized average cost of borrowed funds reflected the continued growth of our
borrowed funds in the low interest rate environment that existed during 2001 and
Page 16
Hudson City Bancorp, Inc.
Form 10-Q
the first six months of 2002. It also reflected the maturing of higher costing
short-term borrowed funds and the subsequent refinancing with long-term
borrowings during the low interest rate environment of 2001.
The $12.7 million decrease in interest expense on deposits was
primarily due to a 157 basis point decrease in the annualized average cost of
interest-bearing deposits to 3.25% for the three-month period ended June 30,
2002 from 4.82% during the corresponding 2001 period. The decrease in the
annualized average cost of interest-bearing deposits was primarily due to a 190
basis point decrease in the annualized average cost of our time deposits to
3.56% for the second quarter of 2002 from 5.46% for the second quarter of 2001.
The annualized average cost of interest-bearing demand accounts increased due to
the introduction during the second quarter of 2002 of our 3% interest-bearing
High Value Checking account. The decrease in the annualized average cost of
interest-bearing deposits reflected the low interest rate environment
experienced during 2001 and the first six months of 2002. The impact on the
annualized average cost of interest-bearing liabilities due to decreases in
interest rates may not be as favorable in future periods as short-term market
rates have stabilized during 2002.
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
$1.53 billion, or 23.8%, increase in the average balance of interest-bearing
deposits to $7.97 billion for the three-month period ended June 30, 2002 from
$6.44 billion for the corresponding 2001 period. The increase in the average
balance of interest-bearing deposits occurred primarily in the average balance
of time deposits, which increased $1.22 billion, or 23.8%, to $6.35 billion for
the second quarter of 2002 from $5.13 billion for the second quarter of 2001.
When comparing the second quarter of 2002 to the second quarter of 2001, the
average balance of money market accounts increased $142.0 million, the average
balance of savings accounts increased $106.3 million, and the average balance of
interest-bearing demand deposits, including our new interest-bearing High Value
Checking account, increased $68.0 million. We believe the increase in
interest-bearing deposits was due, in part, to our consistent offering of
competitive rates on our time deposit products, promotions for our High Value
Checking account and to cash inflows due to the current volatility in the equity
markets.
Net Interest Income. Net interest income increased $29.7 million, or
43.9%, to $97.4 million for the three-month period ended June 30, 2002 compared
with $67.7 million for the three-month period ended June 30, 2001. This increase
primarily reflected our planned balance sheet growth, which resulted in
increases in the average balance of both interest-earning assets and
interest-bearing liabilities, and the improved net interest rate spread earned
on this growth. Our net interest rate spread, the difference between the
annualized average yield on total interest-earning assets and the annualized
average cost of total interest-bearing liabilities, increased 70 basis points to
2.69% for the three-month period ended June 30, 2002 from 1.99% for the
corresponding 2001 period. Our net interest margin, represented by annualized
net interest income divided by average total interest-earning assets, increased
35 basis points to 3.16% for the three-month period ended June 30, 2002 from
2.81% for the corresponding 2001 period. The increases in these ratios were
primarily due to the declining interest rate environment experienced during 2001
and the resulting low interest rate environment that has continued through the
first six months of 2002, and the fact that our interest-bearing liabilities
repriced faster than our interest-earning assets in the declining interest rate
environment.
Provision for Loan Losses. Our provision for loan losses for the
quarter ended June 30, 2002 was $525,000, an increase of $75,000, or 16.7%,
compared with $450,000 for the quarter ended June 30, 2001. Net charge-offs for
the first six months of 2002 were $5,000 compared with net charge-offs of
Page 17
Hudson City Bancorp, Inc.
Form 10-Q
$8,000 for the first six months of 2001. The allowance for loan losses increased
$1.1 million, or 4.6%, to $25.1 million at June 30, 2002 from $24.0 million at
December 31, 2001. The increase in the allowance for loan losses, through the
provision for loan losses, reflected the overall growth of the loan portfolio,
the level of delinquent and non-performing loans and the slow economic
conditions during the first six months of 2002.
Non-performing loans, defined as non-accruing loans and accruing loans
delinquent 90 days or more, increased $2.0 million, or 12.8%, to $17.6 million
at June 30, 2002 from $15.6 million at December 31, 2001. The increase in the
dollar amount of our non-performing loans, which was primarily in our purchased
loan portfolio, was due to the overall growth of loans and slow economic
conditions during the first six months of 2002. The ratio of non-performing
loans to total loans was 0.26% at June 30, 2002 and December 31, 2001. The ratio
of the allowance for loan losses to non-performing loans was 142.28% at June 30,
2002 compared with 153.44% at December 31, 2001. The ratio of the allowance for
loan losses to total loans was 0.37% at June 30, 2002 compared with 0.40% at
December 31, 2001. The decrease in the ratio of the allowance for loan losses to
non-performing loans and the decrease in the ratio of the allowance for loan
losses to total loans was due to the allowance for loan losses, through the
provision for loan losses, growing at a lesser rate than the percentage growth
in non-performing loans and total loans due to low net charge-offs.
Although we believe that we have established and maintained the
allowance for loan losses at adequate levels, future additions may be necessary
if economic and other conditions in the future differ substantially from the
current operating environment. Although we use the best information available,
the level of the allowance for loan losses remains an estimate that is subject
to significant judgement and short-term change.
Non-Interest Income. Total non-interest income, consisting primarily of
service fees, was $1.3 million and $1.2 million, respectively, for the
three-month periods ended June 30, 2002 and 2001.
Non-Interest Expense. Total non-interest expense increased $2.6
million, or 12.7%, to $23.1 million for the quarter ended June 30, 2002 from
$20.5 million for the quarter ended June 30, 2001. The increase was primarily
due to an increase in salaries and employee benefits of $2.1 million, or 16.3%,
to $15.0 million for the second quarter of 2002 from $12.9 million for the
corresponding 2001 period. The increase in salaries and employee benefits
reflected routine salary increases and senior level promotions, increases in
stock-related compensation plans and increases in pension expense. Certain of
the stock-related plans are based on the average market price of our common
stock in accordance with the provisions of Statement of Position 93-6, "Employer
Accounting for Employee Stock Ownership Plans." Other expenses increased $0.3
million primarily due to increases in expenses related to new marketing
initiatives.
Our efficiency ratio, determined by dividing non-interest expense by
the sum of net interest income and non-interest income, excluding net gains on
securities transactions, was 23.39% for the second quarter of 2002 compared with
29.76% for the second quarter of 2001. Our ratio of annualized non-interest
expense to average assets for the second quarter of 2002 was 0.74% compared with
0.84% for the second quarter of 2001.
Income Taxes. Income tax expense increased $9.8 million, or 57.3%, to
$26.9 million for the three-month period ended June 30, 2002 from $17.1 million
for the corresponding 2001 period. This increase was primarily due to the $27.0
million increase in income before income tax expense. Our
Page 18
Hudson City Bancorp, Inc.
Form 10-Q
effective tax rate for the second quarter of 2002 was 35.80% compared with
35.56% for the second quarter of 2001.
In July 2002, the New Jersey State Legislature passed the Business Tax
Reform Act. We estimate that this new legislation, which is retroactive to
January 1, 2002, will increase our annual effective tax rate to approximately
37.3% for 2002. The "catch-up" adjustment in income tax expense for the first
six months of 2002 will be included in the quarter ending September 30, 2002 as
required by accounting principles generally accepted in the United States of
America. Due to this accounting treatment, our effective tax rate for the third
quarter of 2002 will be slightly higher than the overall effective tax rate for
the year 2002.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
General. Net income was $91.8 million for the six-month period ended
June 30, 2002, an increase of $30.2 million, or 49.0%, compared with net income
of $61.6 million for the corresponding prior year period. Basic and diluted
earnings per common share were $0.49 and $0.48, respectively, for the six-month
period ended June 30, 2002 compared with basic and diluted earnings per share of
$0.31 and $0.30, respectively, for the six-month period ended June 30, 2001. For
the six-month period ended June 30, 2002 our annualized return on average
stockholders' equity was 14.16% compared with 8.95% for the six-month period
ended June 30, 2001. Our annualized return on average assets for the first six
months of 2002 was 1.50% compared with 1.28% for the first six months of 2001.
These increases reflected our improved profitability due to the declining
interest rate environment experienced during 2001 and the resulting low interest
rate environment that has continued through the first six months of 2002.
During 2001, the Federal Open Market Committee reduced the federal
funds rate on eleven successive occasions by a total of 475 basis points. These
reductions, along with the economic recession experienced during 2001, have
created a significantly different interest rate environment than that which
existed at the beginning of 2001. General market interest rates, particularly on
short-term maturities, decreased during 2001 as the overall yield curve
steepened. The Federal Open Market Committee has neither reduced nor increased
the federal funds rate in 2002 and the overall interest rate structure and yield
curve have remained relatively stable during the first six months of this year.
A decreasing rate environment can be beneficial to our net interest income as
our interest-bearing liabilities generally reprice faster than our
interest-earning assets. A steepening yield curve is where the spread between
long-term interest rates and short-term interest rates widens. A steep yield
curve can also be beneficial to our net interest income as our interest-bearing
liabilities generally are priced based on short-term market rates while our
mortgage loan products, particularly those with initial terms to maturity or
repricing greater than one year, generally are priced based on long-term market
rates. In the low interest rate environment that continued through the first six
months of 2002, our annualized net interest rate spread increased 71 basis
points to 2.64% for the first six months of 2002 from 1.93% for the first six
months 2001.
Interest and Dividend Income. Total interest and dividend income
increased $50.2 million, or 15.0%, to $385.1 million for the six-month period
ended June 30, 2002 compared with $334.9 million for the corresponding 2001
period. The increase in total interest income was primarily due to the average
balance of total interest-earning assets increasing $2.52 billion, or 26.6%, to
$11.99 billion for the six-month period ended June 30, 2002 compared with $9.47
billion for the six-month period ended June 30, 2001. This increase was due in
part to a $1.30 billion, or 26.6%, increase in the average balance of first
mortgage loans, net to $6.18 billion for the six-month period ended June 30,
2002 compared with $4.88
Page 19
Hudson City Bancorp, Inc.
Form 10-Q
billion for the corresponding 2001 period. The average balance of
mortgage-backed securities increased $1.64 billion, or 45.2%, to $5.27 billion
for the six-month period ended June 30, 2002 compared with $3.63 billion for the
corresponding 2001 period. These increases were offset in part by a decrease in
the average balance of investment securities for the six-month period ended June
30, 2002 of $402.2 million, or 68.0%, to $189.4 million from $591.6 million for
the corresponding 2001 period.
The above increases in the average balances of first mortgage loans and
mortgage-backed securities reflected internal growth that was consistent with
our capital management strategy to originate and purchase first mortgage loans,
while purchasing mortgage-backed securities to supplement loan originations and
purchases, and assist in the management of interest rate risk. The growth in the
average balance of mortgage-backed securities and the decline in the average
balance of investment securities reflected, in part, the calls of investment
securities during 2001 due to the low interest rate environment and the
reinvestment of the proceeds of those calls in mortgage-backed securities. The
growth in the average balance of mortgage-backed securities also reflected the
investment of excess cash flows into mortgage-backed securities, which
supplemented loan originations and purchases. Although the increase in the
average balance of loans was somewhat less than the increase in the average
balance of mortgage-backed securities, the impact of the loan growth was more
significant in terms of interest income because our first mortgage loans are
generally higher yielding assets than our mortgage-backed securities. The
increase in the average balance of FHLB stock of $12.0 million reflected the
increase in the amount of FHLB stock required to be held by us.
The impact on interest income due to the growth in the average balance
of interest-earning assets, was partially offset by a 65 basis point decrease in
the annualized average yield on interest-earning assets to 6.43% for the
six-month period ended June 30, 2002 from 7.08% for the six-month period ended
June 30, 2001. The annualized average yield on first mortgage loans, net
decreased 40 basis points to 7.01% for the six-month period ended June 30, 2002
from 7.41% for the corresponding 2001 period. The annualized average yield on
mortgage-backed securities decreased 95 basis points to 5.87% for the six-month
period ended June 30, 2002 from 6.82% for the corresponding 2001 period.
The decrease in the annualized average yield on first mortgage loans
reflected the large volume of loan originations and purchases during the low
interest rate environment of 2001 and the first six months of 2002. The decrease
in the annualized average yield on mortgage-backed securities reflected the
large volume of purchases, and the downward repricing of our variable-rate
securities, during the low interest rate environment of 2001 and the first six
months of 2002. If market interest rates remain low, the yield on our
mortgage-backed securities may continue to adjust downward due to annual rate
change limits, which have limited the extent our variable-rate securities may
have adjusted in prior periods.
Interest Expense. Total interest expense, comprised of interest on
deposits and interest on borrowed funds, decreased $4.1 million, or 2.0%, to
$196.3 million for the six-month period ended June 30, 2002 from $200.4 million
for the six-month period ended June 30, 2001. Interest expense on borrowed funds
increased $21.0 million, or 48.7%, to $64.1 million for the six-month period
ended June 30, 2002 from $43.1 million for the corresponding 2001 period, while
interest expense on deposits decreased $25.1 million, or 16.0%, to $132.2
million for the six-month period ended June 30, 2002 from $157.3 million for the
corresponding 2001 period. The decrease in total interest expense reflected the
impact of a 136 basis point decrease in the annualized average cost of
interest-bearing liabilities to 3.79% for the six-month period ended June 30,
2002 from 5.15% for the corresponding 2001 period, offset by an increase in the
average balance of interest-bearing liabilities of $2.59 billion, or 33.0%, to
$10.44 billion
Page 20
Hudson City Bancorp, Inc.
Form 10-Q
for the six-month period ended June 30, 2002 from $7.85 billion for the
six-month period ended June 30, 2001.
The increase in interest expense on borrowed funds was primarily due to
a $1.11 billion, or 75.0%, increase in the average balance of borrowed funds to
$2.59 billion for the six-month period ended June 30, 2002 from $1.48 billion
for the corresponding 2001 period. The impact on interest expense on borrowed
funds due to the increase in the average balance of borrowed funds was offset,
in part, by a 89 basis point decrease in the annualized average cost of borrowed
funds to 4.99% for the first six months of 2002 from 5.88% for the first six
months of 2001.
The use of borrowed funds has accelerated over the past year to fund
asset growth consistent with our capital management and growth strategies. The
use of long-term borrowed funds has allowed us to better manage our interest
rate risk by matching long-term assets with long-term liabilities. Borrowing
long-term in the prevailing interest rate environment should also allow us to
better control interest expense in future periods. The decrease in the
annualized average cost of borrowed funds reflected the continued growth of our
borrowed funds in the low interest rate environment that existed during 2001 and
the first six months of 2002. It also reflected the maturing of higher costing
short-term borrowed funds and the subsequent refinancing with long-term
borrowings during the low interest rate environment of 2001.
The $25.1 million decrease in interest expense on deposits was
primarily due to a 157 basis point decrease in the annualized average cost of
interest-bearing deposits to 3.40% for the six-month period ended June 30, 2002
from 4.97% during the corresponding 2001 period. The decrease in the annualized
average cost of interest-bearing deposits was primarily due to a 194 basis point
decrease in the annualized average cost of our time deposits to 3.72% for the
first six months of 2002 from 5.66% for the first six months of 2001. The
annualized average cost of interest-bearing demand accounts increased due to the
introduction during the second quarter of 2002 of our 3% interest-bearing High
Value Checking account. The decrease in the annualized average cost of
interest-bearing deposits reflected the low interest rate environment
experienced during 2001 and the first six months of 2002. The impact on the
annualized average cost of interest-bearing liabilities due to decreases in
interest rates may not be as favorable in future periods as short-term market
rates have stabilized during 2002.
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
$1.47 billion, or 23.0%, increase in the average balance of interest-bearing
deposits to $7.85 billion for the six-month period ended June 30, 2002 from
$6.38 billion for the corresponding 2001 period. The increase in the average
balance of interest-bearing deposits occurred primarily in the average balance
of time deposits, which increased $1.23 billion, or 24.3%, to $6.30 billion for
the first six months of 2002 from $5.07 billion for the first six months of
2001. When comparing the first six months of 2002 to the first six months of
2001, the average balance of money market accounts increased $121.1 million, the
average balance of savings accounts increased $91.1 million, and the average
balance of interest-bearing demand deposits, including our new interest-bearing
High Value Checking account, increased $38.0 million. We believe the increase in
interest-bearing deposits was due, in part, to our consistent offering of
competitive rates on our time deposit products, promotions for our High Value
Checking account and to cash inflows due to the current volatility in the equity
markets.
Net Interest Income. Net interest income increased $54.3 million, or
40.4%, to $188.8 million for the six-month period
Page 21
Hudson City Bancorp, Inc.
Form 10-Q
ended June 30, 2002 compared with $134.5 million for the six-month period ended
June 30, 2001. This increase primarily reflected our planned balance sheet
growth, which resulted in increases in the average balance of both
interest-earning assets and interest-bearing liabilities, and the improved net
interest rate spread earned on this growth. Our net interest rate spread, the
difference between the annualized average yield on total interest-earning assets
and the annualized average cost of total interest-bearing liabilities, increased
71 basis points to 2.64% for the six-month period ended June 30, 2002 from 1.93%
for the corresponding 2001 period. Our net interest margin, represented by
annualized net interest income divided by average total interest-earning assets,
increased 31 basis points to 3.12% for the six-month period ended June 30, 2002
from 2.81% for the corresponding 2001 period. The increases in these ratios were
primarily due to the declining interest rate environment experienced during 2001
and the resulting low interest rate environment that has continued through the
first six months of 2002, and the fact that our interest-bearing liabilities
repriced faster than our interest-earning assets in the declining interest rate
environment.
Provision for Loan Losses. Our provision for loan losses for the
six-month period ended June 30, 2002 was $1.05 million, an increase of $150,000,
or 16.7%, compared with $900,000 for the six-month period ended June 30, 2001.
Net charge-offs for the first six months of 2002 were $5,000 compared with net
charge-offs of $8,000 for the first six months of 2001. The increase in the
allowance for loan losses, through the provision for loan losses, reflected the
overall growth of the loan portfolio, the level of delinquent and non-performing
loans and the slow economic conditions during the first six months of 2002.
Although we believe that we have established and maintained the
allowance for loan losses at adequate levels, future additions may be necessary
if economic and other conditions in the future differ substantially from the
current operating environment. Although we use the best information available,
the level of the allowance for loan losses remains an estimate that is subject
to significant judgement and short-term change.
Non-Interest Income. Total non-interest income, consisting primarily of
service fees, was $2.4 million and $2.3 million, respectively, for the six-month
periods ended June 30, 2002 and 2001.
Non-Interest Expense. Total non-interest expense increased $7.0
million, or 17.4%, to $47.2 million for the six-month period ended June 30, 2002
from $40.2 million for the six-month period ended June 30, 2001. The increase
was primarily due to an increase in salaries and employee benefits of $5.4
million, or 20.9%, to $31.2 million for the six-month period ended June 30, 2002
from $25.8 million for the corresponding 2001 period. The increase in salaries
and employee benefits reflected routine salary increases and senior level
promotions, increases in stock-related compensation plans and increases in
pension expense. Certain of the stock-related plans are based on the average
market price of our common stock in accordance with the provisions of Statement
of Position 93-6, "Employer Accounting for Employee Stock Ownership Plans."
Other expenses increased $1.3 million, or 20.0%, to $7.8 million for the
six-month period ended June 30, 2002 compared with $6.5 million for the
corresponding 2001 period, primarily due to increases in expenses related to a
greater volume of loan production and new marketing initiatives.
Our efficiency ratio, determined by dividing non-interest expense by
the sum of net interest income and non-interest income, excluding net gains on
securities transactions, was 24.71% for the first six months of 2002 compared
with 29.42% for the first six months of 2001. Our ratio of annualized
non-interest expense to average assets for the first six months of 2002 was
0.77% compared with 0.83% for the first six months of 2001.
Page 22
Hudson City Bancorp, Inc.
Form 10-Q
Income Taxes. Income tax expense increased $17.0 million, or 49.9%, to
$51.1 million for the six-month period ended June 30, 2002 from $34.1 million
for the corresponding 2001 period. This increase was primarily due to the $47.2
million increase in income before income tax expense. Our effective tax rate for
the first six months of 2002 was 35.79% compared with 35.60% for the first six
months of 2001.
LIQUIDITY AND CAPITAL RESOURCES
The term "liquidity" refers to our ability to generate adequate amounts
of cash to fund loan originations, loan purchases, deposit withdrawals and
operating expenses. Our primary sources of funds are scheduled amortization and
prepayments of loan principal and mortgage-backed securities, deposits, borrowed
funds, maturities and calls of investment securities and funds provided by our
operations. Our membership in the FHLB provides us access to additional sources
of borrowed funds, which is generally limited to twenty times the amount of FHLB
stock owned.
Scheduled loan repayments and maturing investment securities are a
relatively predictable source of funds. However, deposit flows, calls of
investment securities and borrowed funds, and prepayments of loans and
mortgage-backed securities are strongly influenced by interest rates, general
and local economic conditions and competition in the marketplace. These factors
reduce the predictability of the timing of these sources of funds. As mortgage
interest rates decline, customer-refinancing activity tends to accelerate
causing an increase in cash flow from both our mortgage loan and mortgage-backed
security portfolios. If our pricing is competitive, the demand for mortgage
originations also accelerates. When mortgage rates increase, the opposite effect
tends to occur and our loan origination and purchase activity becomes
increasingly dependent on the strength of our residential real estate market,
home purchase and new construction activity.
Principal repayments on loans were $947.0 million during the first six
months of 2002 compared with $492.0 million for the corresponding 2001 period.
Principal payments received on mortgage-backed securities totaled $893.2 million
during the first six months of 2002 compared to $729.5 million during the
corresponding 2001 period. The increase in payments on loans and mortgage-backed
securities reflected the low market interest rate environment during 2001 and
the first six months of 2002, which caused an increase in prepayment activity
when compared with the prior corresponding periods. The increase also reflected
the growth in those portfolios, thus a larger base from which to receive
payments. Maturities and calls of investment securities totaled $25.7 million
during the first six months of 2002 compared with maturities and calls of $640.6
million during the corresponding 2001 period. The higher amount of calls during
the first six months of 2001 was due to the declining interest rate environment
that began early in 2001 and the large balance of callable investment securities
held at the beginning of 2001 compared with the amount of callable investment
securities held at the beginning of 2002.
For the six-month periods ended June 30, 2002 and 2001, we borrowed
funds of $800.0 million and $750.0 million, respectively. The $800.0 million of
new long-term borrowed funds consisted of 10-year terms with one-time call
options of between 3 and 5 years from the borrowing date. There were no
principal payments on borrowed funds during the first six months of 2002, but
there were $250.0 million of principal payments during the corresponding 2001
period.
The $800.0 million increase in borrowed funds during the first six
months of 2002 funded asset growth and generated additional earnings through a
positive interest rate spread. The use of long-term
Page 23
Hudson City Bancorp, Inc.
Form 10-Q
borrowed funds has allowed us to better manage our interest rate risk by
matching long-term assets with long-term liabilities. Borrowing long-term funds
in this low interest rate environment should also allow us to better control
interest expense in future periods. At June 30, 2002, there were $50.0 million
of borrowed funds scheduled to mature within one year.
Total deposits increased $624.5 million during the first six months of
2002 compared with an increase of $307.0 million during the first six months of
2001. Deposit flows are affected by the level of market interest rates, the
interest rates and products offered by competitors, and other factors. We
believe the increase in interest-bearing deposits was due, in part, to our
consistent offering of competitive rates on our time deposit products,
promotions for our high Value Checking account and to cash inflows due to the
current volatility in the equity markets. Time deposit accounts scheduled to
mature within one year were $5.82 billion at June 30, 2002. Based on our deposit
retention experience and current pricing strategy, we anticipate that a
significant portion of these time deposits will remain with Hudson City Savings.
We are committed to maintaining a strong liquidity position; therefore, we
monitor our liquidity position on a daily basis. We anticipate that we will have
sufficient funds to meet our current funding commitments.
Our primary investing activities are the origination and purchase of
one-to four-family real estate loans and consumer and other loans, the purchase
of mortgage-backed securities, and to a lesser extent, the purchase of
investment securities. We originated and purchased total loans of approximately
$1.01 billion and $677.5 million, respectively, during the first six months of
2002 compared with $751.6 million and $257.5 million, respectively, during the
corresponding 2001 period. The increase was primarily due to the low market
interest rate environment during 2001 and the first six months of 2002, which
caused an increase in prepayments and loan refinancings. Additionally, to
supplement our loan originations, we purchased a higher volume of first mortgage
loans than in previous periods.
Purchases of mortgage-backed securities during the first six months of
2002 were $1.41 billion compared with $1.58 billion during the first six months
of 2001. The volume of purchases of mortgage-backed securities was related to
the increase in prepayment activity due to the low market interest rate
environment during 2001 and the first six months of 2002 and the growth
strategies employed by us during these periods. The slight decrease in
mortgage-backed securities purchases is due to the large volume of purchases
during the first six months of 2001 due to the calls of investment securities
during that period. During the first six months of 2002, we purchased $122.4
million of investment securities. There were no such purchases of investment
securities during the first six months of 2001. As part of the membership
requirements of the FHLB, we are required to purchase a certain dollar amount of
FHLB common stock. During the first six months of 2002, we purchased $23.9
million of FHLB common stock compared with purchases of $7.5 million during the
first six months of 2001. The purchases in 2002 bring our total investment in
FHLB stock to $105.0 million, the amount we are currently required to hold.
During the first six months of 2002, our recognition and retention plan
purchased 100,580 shares of common stock at an aggregate cost of $1.9 million.
167,900 shares were awarded to plan participants during the first six months of
2002. As of June 30, 2002 we had 65,316 shares purchased and unallocated for the
recognition and retention plan.
Under our stock repurchase programs, shares of Hudson City Bancorp
common stock may be purchased in the open market and through other privately
negotiated transactions, from time-to-time, depending on market conditions. The
repurchased shares are held as treasury stock for general corporate use. During
the first six months of 2002, we purchased 4,940,772 dividend-adjusted shares of
our common stock at an aggregate cost of $89.3 million. During the first six
months of 2001, we purchased
Page 24
Hudson City Bancorp, Inc.
Form 10-Q
19,460,200 million dividend-adjusted shares of our common stock at an aggregate
cost of $198.4 million. At June 30, 2002, there were 4,622,496 shares remaining
to be repurchased under the existing stock repurchase program.
At June 30, 2002, Hudson City Savings had outstanding loan commitments
to borrowers of approximately $186.9 million, commitments to purchase loans of
approximately $142.1 million and available home equity and overdraft lines of
credit of approximately $79.3 million. We anticipate we will have sufficient
funds available to meet our current commitments in the normal course of
business.
Cash dividends declared and paid during the first six months of 2002
were $30.6 million compared with $21.6 million during the first six months of
2001. The dividend pay-out ratio for the six-month periods ended June 30, 2002
and 2001 was 31.63% and 34.43%, respectively. On July 16, 2002, the Board of
Directors declared a quarterly cash dividend of nine cents ($0.09) per common
share. The dividend is payable on September 3, 2002 to stockholders of record at
the close of business on August 9, 2002. We anticipate we will have sufficient
funds available to meet our dividend payment obligation.
We opened one new branch during the first six months of 2002 in Midland
Park, NJ. We also purchased, for future use, an office building near our
corporate headquarters at a cost of approximately $2.8 million. We do not
anticipate any other material capital expenditures nor do we have any balloon or
other payments due on any long-term obligations or any off-balance sheet items
other than the commitments and unused lines of credit noted above.
At June 30, 2002, we exceeded each of the applicable regulatory capital
requirements of the Federal Reserve Bank and the Federal Deposit Insurance
Corporation. The following table presents the regulatory ratios of Hudson City
Savings Bank and Hudson City Bancorp.
REGULATORY REQUIREMENTS
-------------------------------------------------------
ACTUAL AT MINIMUM CAPITAL CLASSIFICATION AS
JUNE 30, 2002 ADEQUACY WELL-CAPITALIZED
----------------------- ----------------------- -----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
Bank
Leverage (Tier 1)
Capital .... $1,196,471 9.54% $ 501,732 4.00% $ 627,165 5.00%
Risk-based capital:
Tier 1 ..... 1,196,471 27.98 171,042 4.00 256,563 6.00
Total ...... 1,221,526 28.57 342,084 8.00 427,605 10.00
Bancorp
Leverage (Tier 1)
Capital .... $1,265,963 10.09% $ 501,755 4.00% $ 627,193 5.00%
Risk-based capital:
Tier 1 ..... 1,265,963 29.61 171,043 4.00 256,564 6.00
Total ...... 1,291,018 30.19 342,086 8.00 427,607 10.00
Page 25
Hudson City Bancorp, Inc.
Form 10-Q
CRITICAL ACCOUNTING POLICIES
Note 1 to our Audited Consolidated Financial Statements for the year
ended December 31, 2001, included in our Annual Report on Form 10-K for the year
ended December 31, 2001, as supplemented by our Quarterly Report on Form 10-Q
for the quarter ended March 31, 2002 and this report, contains a summary of our
significant account 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.
Item 3. - Quantitative and Qualitative Disclosures About Market Risk
Quantitative and qualitative disclosure about market risk is presented
as of December 31, 2001 in Hudson City Bancorp's Annual Report on Form 10-K. The
following is an update of the discussion provided therein.
General. As a financial institution, our primary component of market
risk is interest rate volatility. 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 six months of 2002 and did not
have any such hedging transactions in place at June 30, 2002. 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, 2001. The following table presents the estimated
present value of equity over a range of interest rate change scenarios at June
30, 2002. The present value ratio shown in the table is the present value of
equity as a percent of the present value of total assets in each of the
different rate environments.
PRESENT VALUE OF EQUITY
AS PERCENT OF PRESENT
PRESENT VALUE OF EQUITY VALUE OF ASSETS
-------------------------------------------------- ----------------------------
CHANGE IN DOLLAR DOLLAR PERCENT PRESENT PERCENT
INTEREST RATES AMOUNT CHANGE CHANGE VALUE RATIO CHANGE
-------------- ------------- ------------ ------- ----------- -------
(BASIS POINTS) (DOLLARS IN THOUSANDS)
200 $ 1,046,225 $ (572,146) (35.35)% 8.61% (30.40)%
150 1,218,839 (399,532) (24.69) 9.83 (20.53)
100 1,364,860 (253,511) (15.66) 10.80 (12.69)
50 1,511,732 (106,639) (6.59) 11.74 (5.09)
0 1,618,371 - - 12.37 -
(50) 1,617,557 (814) (0.05) 12.26 (0.89)
(100) 1,515,326 (103,045) (6.37) 11.46 (7.36)
(150) 1,431,448 (186,923) (11.55) 10.77 (12.93)
(200) 1,327,638 (290,733) (17.96) 9.94 (19.64)
Page 26
Hudson City Bancorp, Inc.
Form 10-Q
At December 31, 2001, the percent change in the present value of equity
in the 200 basis point increase scenario was negative 35.67% and in the 100
basis point decrease scenario it was positive 3.16% compared with the table
above. The overall decrease in the present value of equity and the percent
change in the present value of equity in the increasing rate scenarios were
primarily due to the growth of our fixed-rate mortgage loan and mortgage-backed
security portfolios. The overall decrease in the present value of equity and the
percent change in the present value of equity in the decreasing rate scenarios
were primarily due to the growth of our fixed-rate borrowed funds in this low
interest rate environment. We believe the 150 and 200 basis point decrease
scenarios presented above, may not be meaningful given the prevailing low market
interest rate environment.
Our current policy sets a maximum percent change in the present value
of equity at 55% from the current, or zero basis point scenario, present value
of equity, given an instantaneous and parallel increase or decrease of 200 basis
points. Due to our high level of present value of equity as a percent of the
present value of assets in the zero basis point scenario, the maximum percent
change was increased in 2002 to 55% from 40% at year end to allow for more
flexibility in managing our asset/liability mix.
GAP Analysis. The table on the following page presents the amounts of
our interest-earning assets and interest-bearing liabilities outstanding at June
30, 2002, which we anticipate to reprice or mature in each of the future time
periods shown. We have excluded non-accrual loans of $8,073,000 from the table.
The interest-bearing High Value Checking account, introduced during the second
quarter of 2002, is reported in the interest-bearing demand totals using decay
rates of: 12.5% in less than six months, 12.5% in six months to one year, 25% in
one year to two years, 25% in two years to three years and 25% in three years to
five years. These initial decay rates are based on our initial assessment of the
volatility of the product given its current interest rate in relation to the
overall market interest rate environment. These initial decay rates will be
monitored closely and adjusted as required in future periods.
The cumulative one-year gap as a percent of total assets was negative
13.4% at June 30, 2002 compared with negative 14.3% at December 31, 2001. The
decrease in our negative one-year gap position was primarily due to the overall
growth in our assets during the first six months of 2002 and the continued use
of long-term borrowed funds as a funding source, creating a more positive
asset/liability mix.
Page 27
Hudson City Bancorp, Inc.
Form 10-Q
AT JUNE 30, 2002
-----------------------------------------------------------------------------------------------
MORE THAN MORE THAN
MORE THAN MORE THAN TWO YEARS THREE YEARS
SIX MONTHS SIX MONTHS ONE YEAR TO TO THREE TO FIVE MORE THAN
OR LESS TO ONE YEAR TWO YEARS YEARS YEARS FIVE YEARS TOTAL
----------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
First mortgage loans ........ $ 741,341 $ 733,441 $ 1,064,696 $ 862,915 $ 844,647 $ 2,308,179 $ 6,555,219
Consumer and other loans .... 33,662 659 2,574 4,150 14,589 86,011 141,645
Federal funds sold .......... 40,200 -- -- -- -- -- 40,200
Mortgage-backed securities .. 1,324,516 1,527,020 847,285 455,634 343,682 1,020,185 5,518,322
FHLB stock ................. 105,000 -- -- -- -- -- 105,000
Investment securities ....... 10,000 146 -- 230 170 256,620 267,166
--------- --------- --------- --------- --------- --------- ----------
Total interest-earning
assets . ............... 2,254,719 2,261,266 1,914,555 1,322,929 1,203,088 3,670,995 12,627,552
--------- --------- --------- --------- --------- --------- ----------
Interest-bearing liabilities:
Savings accounts ............ 26,314 22,246 219,777 263,733 175,822 175,822 883,714
Interest-bearing demand
accounts . 21,946 21,948 63,702 68,653 58,751 19,806 254,806
Money market accounts ....... 136,047 136,048 150,520 153,735 12,864 12,864 602,078
Time deposits ............... 4,593,860 1,229,884 460,974 63,045 46,133 -- 6,393,896
Borrowed funds .............. -- 50,000 50,000 -- 200,000 2,650,000 2,950,000
--------- --------- --------- --------- --------- --------- ----------
Total interest-bearing
liabilities .............. 4,778,167 1,460,126 944,973 549,166 493,570 2,858,492 11,084,494
--------- --------- --------- --------- --------- --------- ----------
Interest rate sensitivity gap ..... $(2,523,448) $ 801,140 $ 969,582 $ 773,763 $ 709,518 $ 812,503 $ 1,543,058
========= ========= ========= ========= ========= ========= ==========
Cumulative interest rate
sensitivity Gap .... $(2,523,448) $(1,722,308) $ (752,726) $ 21,037 $ 730,555 $ 1,543,058
========= ========= ========= ========= ========= =========
Cumulative interest rate
sensitivity gap as a
percent of total assets .. (19.65)% (13.41)% (5.86)% 0.16% 5.69% 12.02%
Cumulative interest-earning assets
as a percent of
interest-bearing
liabilities .............. 47.19% 72.39% 89.52% 100.27% 108.88% 113.92%
Page 28
Hudson City Bancorp, Inc.
Form 10-Q
PART II - OTHER INFORMATION
Item 1. - Legal Proceedings
We are not involved in any pending legal proceedings other than routine
legal proceedings occurring in the ordinary course of business. We believe that
these routine legal proceedings, in the aggregate, are immaterial to our
financial condition and results of operations.
Item 2. - Changes in Securities and Use of Proceeds
Not applicable.
Item 3. - Defaults Upon Senior Securities
Not applicable.
Item 4. - Submission of Matters to a Vote of Security Holders
On May 10, 2002, the annual meeting of stockholders of Hudson City
Bancorp, Inc. was held to consider and vote on certain matters. The results are
indicated below.
Proposal 1 - Election of four directors for terms of three years each.
Votes cast for Verne S. Atwater:
For: 93,018,820
Withheld: 168,564
Votes cast for Ronald E. Hermance, Jr.:
For: 93,077,786
Withheld: 109,598
Votes cast for John W. Klie:
For: 93,018,980
Withheld: 168,404
Votes cast for Arthur V. Wynne, Jr.:
For: 93,077,223
Withheld: 110,161
Page 29
Hudson City Bancorp, Inc.
Form 10-Q
Proposal 2 - Ratification of the appointment of KPMG LLP as Hudson City
Bancorp's independent auditors for the year ending December 31, 2002.
For: 92,901,444
Against: 105,695
Abstain: 180,245
There were no broker held non-voted shares represented at the meeting with
respect to the above matters.
Item 5. - Other Information
Not applicable.
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibit 99.1: Statement furnished pursuant to Section 906 of
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
(b) Hudson City Bancorp, Inc. filed two reports on Form 8-K during the
second quarter of 2002. The first was filed April 16, 2002 describing the 100%
stock dividend, having the effect of a two-for-one stock split, declared by the
Company. The filing contained, as an exhibit, the press release dated April 16,
2002 describing the stock dividend and first quarter 2002 earnings.
The second report on Form 8-K was filed May 10, 2002 regarding the
"State of the Company" presentation that was made during the Annual Meeting of
Shareholders of Hudson City Bancorp. The filing contained, as an exhibit, the
text of the slides used during this presentation.
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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: August 9, 2002 By: /s/ Ronald E. Hermance, Jr.
-------------------------------
Ronald E. Hermance, Jr.
President and Chief Executive
Officer (principal executive
officer)
Date: August 9, 2002 By: /s/ Denis J. Salamone
-------------------------------
Denis J. Salamone
Senior Executive Vice President
and Chief Operating Officer
(principal financial and
accounting officer)
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