<PAGE> 1
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: MARCH 31, 1999
[ ] 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)
<TABLE>
<S> <C>
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)
</TABLE>
(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 / / No /X/
As of March 31, 1999, there were -0- shares of common stock, $0.01 par
value, outstanding.
<PAGE> 2
HUDSON CITY BANCORP, INC.
FORM 10-Q
CONTENTS OF REPORT
<TABLE>
<CAPTION>
Page No.
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements of Hudson City Savings Bank
Statements of Condition (Unaudited) - March 31, 1999 and December 31, 1998 ............... 3
Statements of Income (Unaudited) - Three months ended March 31, 1999 and 1998 ............ 4
Statements of Cash Flows (Unaudited) - Three months ended March 31, 1999 and 1998 ........ 5
Notes to the Financial Statements ........................................................ 6
Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations... 8
Item 3. - Quantitative and Qualitative Disclosures About Market Risk ............................. 15
PART II - OTHER INFORMATION
Item 1. - Legal Proceedings ...................................................................... 16
Item 2. - Changes in Securities and Use of Proceeds .............................................. 17
Item 3. - Defaults Upon Senior Securities ........................................................ 17
Item 4. - Submission of Matters to a Vote of Security Holders .................................... 17
Item 5. - Other Information ...................................................................... 17
Item 6. - Exhibits and Reports on Form 8-K ....................................................... 17
SIGNATURES ................................................................................................. 18
</TABLE>
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 Savings Bank that are subject to various factors which could cause actual
results to differ materially from these estimates. These factors include:
changes in general, economic and market conditions, and legislative and
regulatory conditions, or the development of an adverse interest rate
environment that adversely affects the interest rate spread or other income
anticipated from Hudson City Savings Bank's operations and investments.
2
<PAGE> 3
PART 1 - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
Hudson City Savings Bank
Statements of Condition
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
(In thousands)
<S> <C> <C>
Assets:
Cash and due from banks .............................................. $ 55,349 $ 87,075
Federal funds sold ................................................... 30,500 69,800
----------- ----------
Total cash and cash equivalents ............................... 85,849 156,875
Investment securities held to maturity, market value of $1,431 at
March 31, 1999 and $1,420 at December 31, 1998 ..................... 1,394 1,393
Investment securities available for sale, at market value ............ 860,517 785,031
Mortgage-backed securities held to maturity, market value of
$3,139,467 at March 31, 1999 and $3,106,369 at December 31, 1998 ... 3,106,592 3,070,931
Loans ................................................................ 3,744,975 3,659,407
Less:
Deferred loan fees ....................................... 10,654 11,146
Allowance for loan losses ................................ 18,295 17,712
----------- ----------
Net loans ............................................. 3,716,026 3,630,549
Foreclosed real estate, net .......................................... 1,293 1,026
Accrued interest receivable .......................................... 48,394 49,041
Banking premises and equipment, net .................................. 28,693 29,064
Other assets ......................................................... 31,150 28,350
----------- ----------
Total Assets ................................................ $ 7,879,908 $7,752,260
=========== ==========
Liabilities and Equity:
Deposits:
Interest-bearing .................................................. $ 6,602,299 $6,494,278
Non-interest-bearing .............................................. 298,830 313,061
----------- ----------
Total deposits ................................................ 6,901,129 6,807,339
Accrued expenses and other liabilities ............................... 57,889 44,315
----------- ----------
Total liabilities ............................................. 6,959,018 6,851,654
----------- ----------
Retained earnings ................................................... 924,190 899,933
Accumulated other comprehensive (loss) income ........................ (3,300) 673
----------- ----------
Total equity .................................................. 920,890 900,606
----------- ----------
Total Liabilities and Equity ................................ $ 7,879,908 $7,752,260
=========== ==========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 4
Hudson City Savings Bank
Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
March 31,
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Interest income:
Interest and fees on first mortgage loans .................. $ 65,933 $ 64,227
Interest and fees on consumer and other loans .............. 1,725 1,865
Interest on mortgage-backed securities ..................... 48,234 50,839
Interest on investment securities held to maturity:
Taxable .............................................. 15 10
Exempt from federal taxes ............................ 7 15
Interest and dividends on investment securities available
for sale - taxable ........................................ 13,489 12,067
Interest on federal funds sold ............................. 665 761
-------- --------
Total interest income ........................... 130,068 129,784
Interest expense on deposits .................................... 74,790 76,752
-------- --------
Net interest income .................................. 55,278 53,032
Provision for loan losses ....................................... 600 600
-------- --------
Net interest income after provision for loan losses... 54,678 52,432
-------- --------
Non-interest income:
Service charges and other income ..................... 1,206 1,153
Gains on net securities transactions ................. -- --
-------- --------
Total non-interest income ....................... 1,206 1,153
-------- --------
Non-interest expense:
Salaries and employee benefits ....................... 10,915 10,704
Net occupancy expense ................................ 2,946 2,739
Federal deposit insurance assessment ................. 200 197
Amortization of goodwill ............................ 360 403
Computer and related services ........................ 287 274
Other expense ........................................ 2,519 2,338
-------- --------
Total non-interest expense ...................... 17,227 16,655
-------- --------
Income before income tax expense ................ 38,657 36,930
Income tax expense .............................................. 14,400 13,175
-------- --------
Net income ...................................... $ 24,257 $ 23,755
======== ========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 5
Hudson City Savings Bank
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
March 31,
1999 1998
--------- ---------
(In thousands)
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income .......................................................... $ 24,257 $ 23,755
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation, accretion and amortization
expense ........................................................ 1,943 1,209
Provision for loan losses ........................................ 600 600
Net proceeds from sales of foreclosed real estate ................ 593 1,234
Decrease in accrued interest receivable ......................... 647 2,451
(Increase) decrease in other assets .............................. (725) 321
Increase in accrued expenses and other liabilities ............... 13,574 15,096
--------- ---------
Net Cash Provided by Operating Activities .................................. 40,889 44,666
--------- ---------
Cash Flows from Investing Activities:
Net increase in loans ............................................... (41,484) (25,294)
Purchases of loans .................................................. (44,561) (2,640)
Principal collection of mortgage-backed securities .................. 327,025 234,279
Purchases of mortgage-backed securities ............................. (364,488) (206,518)
Purchases of investment securities held to maturity ................. -- (303)
Proceeds from maturities and calls of
investment securities available for sale ....................... 374,023 165,761
Purchases of investment securities available for sale ............... (455,749) (316,973)
Purchases of premises and equipment, net ............................ (471) (868)
--------- ---------
Net Cash Used in Investing Activities ...................................... (205,705) (152,556)
--------- ---------
Cash Flows from Financing Activities:
Net increase in deposits ............................................ 93,790 133,883
--------- ---------
Net Cash Provided by Financing Activities ................................. 93,790 133,883
--------- ---------
Net (Decrease) Increase in Cash and Cash Equivalents ....................... (71,026) 25,993
Cash and Cash Equivalents at Beginning of Period ........................... 156,875 95,674
--------- ---------
Cash and Cash Equivalents at End of Period ................................. $ 85,849 $ 121,667
========= =========
Supplemental Disclosures:
Interest paid ....................................................... $ 74,992 $ 76,955
========= =========
Income taxes paid ................................................... $ 361 $ --
========= =========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 6
HUDSON CITY SAVINGS BANK
NOTES TO THE FINANCIAL STATEMENTS
1. - BASIS OF PRESENTATION
Hudson City Bancorp, Inc. ("Company") is a Delaware corporation
organized in March 1999 by Hudson City Savings Bank ("Bank") in connection with
the conversion and reorganization of the Bank from a New Jersey mutual savings
bank into a two-tiered mutual savings bank holding company structure
("Reorganization"), as described more fully in Note 2. As of March 31, 1999 the
Company had not yet issued any stock, had no assets and no liabilities and had
not conducted any business other than of an organizational nature. Accordingly,
the unaudited financial statements, notes to the financial statements and the
Management's Discussion and Analysis of Financial Condition and Results of
Operations presented are for the Bank. No pro forma effect has been given to the
sale of the Company's common stock in the Reorganization.
In our opinion, all the adjustments (consisting of normal and recurring
adjustments) necessary for a fair presentation of the financial condition and
results of operations for the unaudited periods presented have been included.
The results of operations and other data presented for the three months ended
March 31, 1999 are not necessarily indicative of the results of operations that
may be expected for the year ending December 31, 1999. Certain information and
note disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principals 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 financial statements
presented should be read in conjunction with the Bank's audited December 31,
1998 financial statements and notes to the financial statements included in the
Company's Prospectus dated May 14, 1999, which is a part of the Company's
Registration Statement on Form S-1, as amended (Registration No. 333-74383).
2. - PLAN OF REORGANIZATION
On February 11, 1999, the Board of Managers of the Bank adopted a Plan
of Reorganization and Stock Issuance ("Plan"), whereby the Bank will convert and
reorganize from a New Jersey-chartered mutual savings bank into a two-tiered
mutual savings bank holding company structure. Under the terms of the Plan,
Hudson City Savings Bank will become a wholly-owned subsidiary of the Company.
The Company will become a majority-owned subsidiary of Hudson City, MHC, a New
Jersey-chartered mutual savings bank holding company ("MHC").
In connection with the Reorganization, the Company is offering for sale
to its depositors and the public 47% of its common stock. The number of shares
of common stock to be sold and the price for such shares will be determined by
the Board of Managers based upon an appraisal of the Bank to be made by an
independent appraisal firm.
The Plan provides that when the Reorganization is completed, a
"liquidation account" will be established in an amount equal to the total equity
of the Bank as of the latest practicable date prior to the Reorganization. The
liquidation account is established to provide a limited priority claim to the
assets of the Bank to "eligible account holders" and "supplemental eligible
account holders", as defined in the Plan, who continue to maintain deposits in
the Bank after the Reorganization. In the unlikely event of a complete
liquidation of the Bank, and only in such event, each eligible account holder
and
6
<PAGE> 7
HUDSON CITY SAVINGS BANK
NOTES TO THE FINANCIAL STATEMENTS
supplemental eligible account holder would receive a liquidation
distribution, prior to any payment to the holder of the Bank's common stock.
This distribution would be based upon each eligible account holder's and
supplemental account holder's proportionate share of the then total remaining
qualifying deposits.
Direct costs of the Reorganization will be deferred and will reduce the
proceeds of the offering. If the Reorganization is not completed, all costs will
be charged to expense.
3. - COMPREHENSIVE INCOME
Comprehensive income is comprised of net income and other comprehensive
income. Other comprehensive income includes unrealized gains and losses on
securities available for sale.
Total comprehensive income during the periods is as follows:
<TABLE>
<CAPTION>
For the three months ended March 31,
1999 1998
-------------- --------------
<S> <C> <C>
Net income ............................................................ $ 24,257 $ 23,755
Other comprehensive income:
Unrealized holding loss on securities available for sale... (3,973) (414)
-------- --------
Total comprehensive income ............................................ $ 20,284 $ 23,341
======== ========
</TABLE>
7
<PAGE> 8
HUDSON CITY BANCORP, INC.
FORM 10-Q
Item 2. - Management's Discussion and Analysis of Financial Condition
and Results of Operations
At March 31, 1999, Hudson City Bancorp, Inc. had not yet issued any
stock, had no assets and no liabilities and had not conducted any business other
than of an organizational nature. Upon the closing of the reorganization of
Hudson City Savings Bank described in Note 2 to the unaudited financial
statements, Hudson City Bancorp will own all of the issued and outstanding
capital stock of Hudson City Savings. Accordingly, the following discussion
relates to the financial statements of Hudson City Savings included herein.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1999 AND DECEMBER 31,
1998
Hudson City Savings' total assets increased $127.6 million, or 1.6%, to
$7.88 billion at March 31, 1999 from $7.75 billion at December 31, 1998.
At March 31, 1999, loans increased $85.6 million, or 2.3%, to $3.74
billion, while investment securities available for sale increased $75.5 million,
or 9.6%, to $860.5 million. Mortgage-backed securities, which amounted to 39.4%
of total assets at March 31, 1999, increased $35.7 million, or 1.2%, to $3.11
billion at March 31, 1999 from $3.07 billion at December 31, 1998. These
increases reflect our continued strategy of emphasizing the origination of one-
to four-family residential loans, supplemented by the purchase of investment
securities and mortgage-backed securities. Additionally, there was a shift of
funds from total cash and cash equivalents to higher-yielding loans and
securities as cash and due from banks decreased $31.8 million, or 36.5%, to
$55.3 million and federal funds sold decreased $39.3 million, or 56.3%, to $30.5
million at March 31, 1999. We believe that the decline in cash and cash
equivalents did not adversely impact our overall liquidity position at March 31,
1999.
The growth in total assets was funded primarily by an increase of $93.8
million, or 1.4%, in total deposits to $6.90 billion at March 31, 1999 from
$6.81 billion at December 31, 1998. Within the mix of total deposits,
interest-bearing deposits, primarily short-term time deposits, increased $108.0
million, or 1.7%, to $6.60 billion at March 31, 1999. The growth in
interest-bearing deposits reflects our strategy of offering competitive interest
rates on time deposits. Partially offsetting the increase in interest-bearing
deposits was a $14.3 million, or 4.6%, decrease in non-interest-bearing
deposits, particularly demand accounts and official checks, to $298.8 million at
March 31, 1999 from $313.1 million at December 31, 1998, reflecting normal
fluctuations in demand type accounts and an increase in customer direct deposits
at year end.
Total equity increased $20.3 million, or 2.3%, to $920.9 million at
March 31, 1999 from $900.6 million at December 31, 1998. The increase resulted
from net income of $24.3 million for the three months ended March 31, 1999,
partially offset by a $4.0 million decrease in accumulated other comprehensive
income due to a decline in the market value of investment securities available
for sale.
8
<PAGE> 9
HUDSON CITY BANCORP, INC.
FORM 10-Q
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1999
AND 1998
General. Net income for the quarter ended March 31, 1999 was $24.3
million compared with $23.8 million for the quarter ended March 31, 1998. The
$0.5 million, or 2.1%, increase is primarily attributable to a $2.0 million
decrease in interest expense on deposits which was offset in part by a $1.2
million increase in income tax expense, and a $0.5 million increase in
non-interest expense.
Interest Income. Total interest income remained relatively stable,
increasing $0.3 million, or 0.2%, to $130.1 million for the quarter ended March
31, 1999 compared with $129.8 million for the quarter ended March 31, 1998.
Interest and fees on first mortgage loans increased $1.7 million, or 2.6%, to
$65.9 million and interest and dividends on investment securities available for
sale-taxable increased $1.4 million, or 11.6%, to $13.5 million for the three
months ended March 31, 1999 compared with the corresponding prior year quarter.
These increases were offset by a $2.6 million, or 5.1%, decrease in interest on
mortgage-backed securities to $48.2 million for the quarter ended March 31, 1999
compared with $50.8 million for the quarter ended March 31, 1998.
The average balance of total interest-earning assets increased $411.6
million, or 5.7%, to $7.64 billion for the three months ended March 31, 1999
compared with $7.22 billion for the corresponding quarter of the prior year.
This increase was primarily attributable to a $201.8 million, or 6.0%, increase
in the average balance of first mortgage loans, net to $3.57 billion, a $144.2
million, or 20.4%, increase to $852.4 million in the average balance of
investment securities, and a $63.1 million, or 2.1%, increase to $3.07 billion
in the average balance of mortgage-backed securities. These increases reflect
our strategy of controlled internal growth and increasing interest income while
managing our interest rate risk.
For the three months ended March 31, 1999, the impact on interest
income from the increase in the average balance of total interest-earning assets
was offset by a 38 basis point decrease in the annualized average yield on total
interest-earning assets to 6.81% compared with 7.19% for the corresponding
quarter in the prior year. The sustained low interest rate environment continued
to result in the downward repricing of our interest-earning assets for the three
months ended March 31, 1999. Additionally, the average yield on our first
mortgage loans in the first quarter of 1999 was impacted by the refinancing of
our customers' existing loans to loans with lower interest rates during 1998,
which activity continued during the first quarter of 1999.
Interest Expense. Interest expense on deposits decreased $2.0 million,
or 2.6%, to $74.8 million for the first quarter of 1999 from $76.8 million for
the first quarter of 1998. Interest on time deposits, which accounted for 87.5%
of interest on deposits for the quarter ended March 31, 1999, decreased $1.5
million, or 2.3%, to $65.5 million from the corresponding period of the prior
year.
The average balance of total interest-bearing liabilities increased
$287.8 million, or 4.6%, to $6.53 billion for the quarter ended March 31, 1999
compared with the corresponding quarter of 1998. Of that increase, $278.8
million, or 96.9%, can be attributed to an increase to $5.10 billion in the
average balance of time deposits . The impact on interest expense from the
increase in the average balance of total interest-bearing liabilities was
offset, however, by a 34 basis point decrease in the annualized average cost of
total interest-bearing liabilities to 4.64% compared with 4.98% for the first
9
<PAGE> 10
HUDSON CITY BANCORP, INC.
FORM 10-Q
quarter of 1998. Among our various deposit account types, the largest decrease
in the annualized average cost occurred in time deposits, which decreased to
5.20% for the quarter ended March 31, 1999 from 5.63% for the quarter ended
March 31, 1998. The decrease in the annualized average cost of total
interest-bearing liabilities reflects the downward repricing of our
interest-bearing liabilities as a result of the lower interest rate environment.
Net Interest Income. Net interest income increased 4.3%, or $2.3
million, to $55.3 million for the first quarter of 1999 compared with $53.0
million for the first quarter of 1998 primarily due to decreased interest
expense. On an annualized basis, our net interest spread declined slightly to
2.17% for the quarter ended March 31, 1999 from 2.20% for the comparable quarter
of 1998. Additionally, our annualized net interest margin decreased slightly to
2.84% from 2.88%.
Provision for Loan Losses. Our provision for loan losses was $0.6
million for each of the quarters ended March 31, 1999 and 1998. The allowance
for loan losses at March 31, 1999 was $18.3 million compared with $16.1 million
at March 31, 1998. The allowance for loan losses at December 31, 1998 was $17.7
million. Non-performing loans at March 31, 1999 were $13.5 million compared with
$15.3 million at December 31, 1998 and $15.8 million at March 31, 1998. The
current level of the provision for loan losses and the increase in the allowance
for loan losses were primarily due to the continued growth in the loan portfolio
and the overall stability of our loan quality.
Non-Interest Income and Non-Interest Expense. Total non-interest
income, consisting of service fees and other income, was $1.2 million for both
of the quarters ended March 31, 1999 and 1998. Total non-interest expense,
consisting primarily of salaries and employee benefits, net occupancy expense
and other operating expenses, increased $0.5 million, to $17.2 million, for the
quarter ended March 31, 1999 compared with $16.7 million for the quarter ended
March 31, 1998. The increase in non-interest expense is primarily attributable
to normal increases in salaries and employee benefits and occupancy expense.
Our efficiency ratio for the first quarter of 1999 was 31.1% compared
with 31.4% for the corresponding period in 1998. Our ratio of non-interest
expense to average assets was 0.88% for the three months ended March 31, 1999
and 0.90% for the three months ended March 31, 1998.
Income Taxes. Income tax expense increased $1.2 million, or 9.1 %, to
$14.4 million for the three months ended March 31, 1999 compared with $13.2
million for the three months ended March 31, 1998, due to an increase in income
before income tax expense and a higher effective tax rate in the first quarter
of 1999 compared to the first quarter of 1998.
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 deposits, scheduled
amortization and prepayments of loan principal and mortgage-backed securities,
maturities and calls of investment securities and funds provided by our
operations. We also have a written agreement that allows us to borrow up to
$25.0 million in federal funds from a
10
<PAGE> 11
HUDSON CITY BANCORP, INC.
FORM 10-Q
correspondent bank. In addition, we may enter into reverse repurchase agreements
with approved broker-dealers. Reverse repurchase agreements are agreements which
allow us to borrow money using our securities as collateral. At March 31, 1999,
we had no outstanding borrowings.
Loan repayments and maturing investment securities are a relatively
predictable source of funds. However, deposit flows, calls of investment
securities 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.
Our primary investing activities are the origination and purchase of
one- to four-family real estate loans, the purchase of mortgage-backed
securities, and to a lesser extent, the purchase of investment securities. For
the quarters ended March 31, 1999 and 1998, we originated and purchased loans of
approximately $332.8 million and $190.3 million, respectively. Purchases of
mortgage-backed securities through March 31, 1999 were $364.5 million and
through March 31, 1998 were $206.5 million, while purchases of investment
securities through March 31, 1999 were $455.7 million and through March 31, 1998
were $317.3 million.
These investing activities were funded by deposit growth, principal
payments on mortgage loans and mortgage-backed securities, calls and maturities
on investment securities, and funds provided by our operating activities.
Principal repayments on loans and mortgage-backed securities totaled $573.3
million for the quarter ended March 31, 1999 compared to $392.3 million for the
quarter ended March 31, 1998. Maturities and calls of investment securities
totaled $374.0 million through March 31, 1999 compared to $165.8 through March
31, 1998.
At March 31, 1999, Hudson City Savings had outstanding loan commitments
to borrowers of approximately $177.6 million and available home equity and
overdraft lines of credit of approximately $54.3 million. Commitments to
purchase mortgage-backed securities were approximately $198.8 million at March
31, 1999. Time deposit accounts scheduled to mature within one year were $4.87
billion at March 31, 1999. 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 monitor our liquidity position on a daily basis. We anticipate that
we will have sufficient funds to meet current funding commitments. We do not
anticipate any material capital expenditures, nor do we have any balloon or
other payments due on any long-term obligations or any off-balance sheet items
other than the commitments and unused lines of credit noted above.
At March 31, 1999, we exceeded each of the applicable regulatory
capital requirements. Our leverage (tier 1) capital was $923.1 million, or
11.83%, at March 31, 1999. In order to be classified as "well-capitalized" by
the FDIC we were required to have leverage (tier 1) capital of $390.1 million,
or 5.00%. To be classified as a well-capitalized bank by the FDIC, we must also
have a risk-based total capital ratio of 10.00%. At March 31, 1999, we had a
risk-based total capital ratio of 39.73%.
11
<PAGE> 12
HUDSON CITY BANCORP, INC.
FORM 10-Q
YEAR 2000 ISSUES
General. A significant challenge that is confronting the business
community, including the Bank and its competitors, centers on the inability of
many computer systems and software applications to recognize the Year 2000
(referred to as the "Y2K issue"). Many existing computer systems and software
applications originally were programmed to provide only two digits to identify
the calendar year. With the Year 2000 ("Y2K") approaching, these systems and
applications may recognize "00" as 1900 rather than the Year 2000.
Failure by federally-regulated institutions, such as us, to adequately
address the Y2K issue may result in supervisory action, including the reduction
of the institution's supervisory rating, the denial of applications for approval
of mergers or acquisitions, the denial of applications for approval of new
branch openings, or the imposition of civil money penalties.
Risk. Similar to other financial institutions and companies that
utilize computer technology, our operations may be significantly affected by the
Y2K issue because of its reliance on electronic data processing technology and
date-sensitive information. The Y2K issue also impacts other aspects of our
non-technical business processes. If the Y2K issue is not adequately addressed,
and systems are not modified to properly identify the Year 2000, computer
systems and software applications may fail or create erroneous information.
We may not be able to process withdrawals or deposits, prepare bank
statements, or engage in any of the many transactions that constitute our normal
operations. Our inability to adequately address the Y2K issue could also have a
significant adverse affect on our suppliers and service providers. Should we
experience a Y2K failure that cannot readily be fixed, it may result in a
significant adverse impact on our financial condition and results of operations.
State of Readiness. The Board of Managers and senior management have
consistently supported investment in established and proven technologies.
Because of this philosophy, the Board of Managers and senior management have
been actively engaged in managing the Year 2000 project. Management has
consistently allocated both human and fiscal resources to this project to
achieve the objectives and time frames mandated by FFIEC. As discussed below, we
believe that we have considered all material Y2K issues and that we are taking
proper action to address them.
Our Action Plan for the Year 2000, in accordance with regulatory
guidance, outlines our plans to achieve a successful transition to the Year
2000. The following summarizes the various phases of the Y2K plan.
Awareness Phase - This initial phase of the Y2K project involved the
appointment of the Y2K review team in August 1996 and the subsequent development
of a formal Action Plan in June 1997. The review team, through the development
of the Action Plan, identified the issues to be resolved, defined objectives to
be achieved and outlined an approach to resolve our Y2K issues.
Assessment Phase - During this phase, the review team, with significant
input from department leaders, developed an inventory listing of all internal
computer systems and software
12
<PAGE> 13
HUDSON CITY BANCORP, INC.
FORM 10-Q
applications, as well as third-party vendors and suppliers upon whom we rely for
goods and services. The Compliance Control Sheet identifies and monitors Y2K
readiness for all systems and applications identified during this phase.
Initially, we prioritized these items based on their perceived business impact
on our operations. For all systems or applications identified as having Y2K
issues, we decided to fix, upgrade, replace or abandon them. Although we update
the Compliance Control Sheet as we acquire new items, and the status of
individual items changes as systems go through subsequent phases, the assessment
phase of the project is substantially complete.
We have also reviewed our customer base to determine whether they pose
any significant Y2K risks. Our customer base consists primarily of individual
depositors and residential mortgage loan borrowers. We do not anticipate any
significant Y2K risks posed by our potential borrowers as they are individuals
or families seeking residential mortgage loans which would be collateralized by
the underlying property. However, it is not possible at this time to evaluate
the indirect risks which could be faced if the employers of our individual
customers encounter unresolved Y2K issues.
Renovation Phase - As previously discussed, our most mission critical
system is an integrated financial systems software package that includes our
loans, savings, general ledger, and other miscellaneous applications. This
integrated mainframe software system was developed by, and is currently
maintained and supported by, a recognized provider. The mainframe computer
system was also manufactured by, and is currently maintained by, a well-known
national computer hardware company.
By July 1998, the Y2K upgrade for this package was put into current
production without Y2K-related problems. Other significant systems have
generally been upgraded to Y2K compliant versions of vendor-supported software.
In certain situations, we have replaced existing non-compliant systems with new
Y2K compliant hardware and software. We have relatively few data transmission
interfaces with third-party servicers and substantially all of these systems
have been renovated for Year 2000 compliance. We have no mission critical
systems that we have developed on our own.
The review team continues to monitor the Y2K progress of those
third-parties who provide us with services or products to ensure that they are
taking adequate measures in addressing the Y2K issue. We are seeking assurances
from these third-parties as to their current Year 2000 compliance or that they
are in the process of addressing the Y2K issue. However, we cannot assure you
that these third-parties will be prepared for the Y2K issue. The failure of
these third-parties to achieve Y2K compliance may have an adverse impact on our
operations.
Validation/Implementation Phases - In July 1998, after the Y2K
compliant version of the integrated financial systems software package was put
into current production, Y2K testing commenced by creating a separate test
environment dedicated to this task. After initial testing by our information
services department, we undertook a bank-wide testing initiative. The validation
phase of this mission critical system was completed by December 31, 1998 and it
will continue throughout 1999 as new, more routine, upgrades are received.
During the testing process to date, we have not identified any significant Y2K
problems relating to any upgraded system. All Y2K compliant upgraded systems
have been installed and put into production.
13
<PAGE> 14
HUDSON CITY BANCORP, INC.
FORM 10-Q
Use of Resources. Managing the Year 2000 project has resulted in
additional direct and indirect costs. The costs of the Y2K project have not been
significant to date, and we believe that the total cost of the project will not
be material to our results of operations or financial condition in any one year.
Although we currently estimate that the total cost of the Y2K project, excluding
the reallocation of internal resources, will be approximately $1.0 million, of
which we have already incurred $0.8 million, we cannot guarantee that such costs
would not become material in the future.
Contingency Planning. Regulatory guidance provides that if a mission
critical application or system has been remediated, tested and implemented, a
remediation contingency plan is not required. Based on the overall progress of
our Y2K project, specifically the testing and implementation results relative to
the integrated financial systems software package, our review team has concluded
that a remediation contingency plan is not required for mission critical
applications.
While we expect to complete our Y2K project in a timely manner, we
cannot guarantee that the systems of other companies with whom we conduct
business will also be completed in a timely manner. The failure of these
entities to adequately address the Y2K issue could adversely affect our ability
to conduct business.
To address the risks associated with the failure of mission-critical
systems at critical dates, we have developed a business resumption contingency
plan. We have developed contingency or alternate plans for our mission-critical
systems on a department-by-department basis in anticipation of potential
unplanned system difficulties or third-party failures at January 1, 2000 or
dates beyond. However, the review team understands that certain events beyond
our control may diminish our ability to provide minimum levels of service.
Management considers the worst-case scenario to be extended power outages and
loss of telecommunications. Failure of these services will affect companies,
individuals and the government, and cannot be remedied by anyone other than the
responsible party. We are preparing to provide minimum levels of service during
sporadic power outages and temporary telecommunications. However, during
extensive losses of power and/or telecommunications, we may temporarily close
our operations. In accordance with regulatory guidance, we have completed our
business resumption contingency plan in a timely manner. We do not anticipate
any adverse material impact on our operations as a result of the Y2K issue.
14
<PAGE> 15
HUDSON CITY BANCORP, INC.
FORM 10-Q
Item 3. - Quantitative and Qualitative Disclosures About Market Risk.
Quantitative and qualitative disclosure about market risk is presented
at December 31, 1998 in Hudson City Bancorp's Registration Statement on Form
S-1, as amended (Registration No. 333-74383) filed with the Securities and
Exchange Commission on May 7, 1999. 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. Instead, our
real estate loan portfolio, concentrated in New Jersey, is subject to risks
associated with the local economy. We do not own any trading assets. We did not
engage in any hedging transactions that use derivative instruments (such as
interest rate swaps and caps) during this three month period and did not have
any such hedging transactions in place at March 31, 1999. In the future, we may,
with approval of our Board of Directors, engage in hedging transactions
utilizing derivative instruments.
GAP Analysis. At March 31, 1999, our interest-bearing liabilities
maturing or repricing within one year exceeded our interest-earning assets
maturing or repricing within the same period by $1.73 billion which represented
a negative cumulative one-year interest rate sensitivity gap as a percent of
assets of 22.0%. At December 31, 1998, our interest-bearing liabilities maturing
or repricing within one year exceeded our interest-earning assets maturing or
repricing within the same period by $1.29 billion which represented a negative
cumulative one-year interest rate sensitivity gap as a percent of assets of
16.6%.
Interest Rate Risk Compliance. Hudson City Savings continues to monitor
the impact of interest rate volatility upon the present value of equity in the
same manner as at December 31, 1998. Assuming a 100 basis point interest rate
increase, the present value of equity would decrease $121.3 million, or 10.82%,
at March 31, 1999 relative to the base (no rate change) scenario, compared with
a $102.7 million, or 9.08%, decrease at December 31, 1998 relative to the base
scenario. Assuming a 100 basis point interest rate decrease, the present value
of equity would increase $30.5 million, or 2.72%, at March 31, 1999 relative to
the base scenario, compared with a $12.7 million, or 1.13%, decrease at December
31, 1998 relative to the base scenario.
15
<PAGE> 16
HUDSON CITY BANCORP, INC.
FORM 10-Q
PART II - OTHER INFORMATION
Item 1. - Legal Proceedings
Except for the cases described below, 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.
On October 2, 1997, a purported class action entitled James W. Smith,
et al. v. Hudson City Savings Bank (L-11184-97) was commenced in the Law
Division of the Superior Court of New Jersey, Essex County against Hudson City
Savings on behalf of persons who obtained loans from Hudson City Savings secured
by residential real property in New Jersey, and who paid an attorney review fee
to Hudson City Savings in connection with their loans. Plaintiffs allege that
the potential class includes thousands of borrowers and involves millions of
dollars in review fees. Plaintiffs claim that the attorney fees paid to Hudson
City Savings violate a provision of New Jersey law which prescribes
circumstances under which such fees can be charged by a lender and a provision
of New Jersey law prohibiting consumer fraud. Plaintiffs seek an injunction, an
order requiring a form of warning or public notice, compensatory damages, treble
damages, costs, attorneys' fees, an order requiring disgorgement, interest and
punitive damages. Hudson City Savings filed an answer denying liability. This
suit was voluntarily stayed by the parties on or about September 9, 1998 pending
the outcome of an appeal (the "Appeal") in certain other New Jersey attorney
review fee lawsuits involving different parties.
The Appeal, heard on a consolidated basis in the cases of Kelly v.
Chase Manhattan Mortgage Corp., Iverson v. Collective Bank and Turner v. First
Union, was decided by the Appellate Division of the Superior Court of New Jersey
on or about July 9, 1998. The Appellate Division ruled, among other things, that
lenders are permitted to charge attorney review fees for the review of loan
documents submitted by a borrower or by the borrower's attorney and clarified
the interpretation of part of the statute's language.
Following the Appellate Division's decision in the Appeal, the Supreme
Court of New Jersey granted a motion for leave to appeal on or about November
18, 1998 and a motion for leave to cross-appeal on or about January 27, 1999.
The Supreme Court of New Jersey will review the Appellate Division's ruling in
the Appeal. Meanwhile, the Smith action remains stayed.
16
<PAGE> 17
HUDSON CITY BANCORP, INC.
FORM 10-Q
On or about April 30, 1998, a purported class action was commenced
against Hudson City Savings in the Law Division of Superior Court of New Jersey,
Bergen County entitled Elizabeth C. Bogdanowicz, et al. v. Hudson City Savings
Bank (L-4110-98) on behalf of a putative class of persons who borrowed funds
from Hudson City from and after January 29, 1993. Plaintiffs allege that the
putative class consists of thousands of borrowers who were charged attorney
review fees by Hudson City Savings. Plaintiffs claim that the attorney review
fee violated the New Jersey fee statute. Plaintiffs also assert claims for
unjust enrichment. Plaintiffs seek compensatory damages, costs, fees, injunctive
relief and treble damages. This action has also been stayed voluntarily by the
parties pending the outcome of the Appeal.
We believe that these two lawsuits are without merit and we intend to
aggressively defend our interest.
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
Not applicable.
Item 5. - Other Information
Not applicable.
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Hudson City Savings Bank Financial Data
Schedule - March 31, 1999.
(b) No reports on Form 8-K were filed during the quarter
ended March 31, 1999
17
<PAGE> 18
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.
Registrant: Hudson City Bancorp, Inc.
Date: June 28, 1999 By: /s/ Leonard S. Gudelski
----------------------------------------
Leonard S. Gudelski
Chairman and Chief Executive Officer
Date: June 28, 1999 By: /s/ Ronald E. Hermance, Jr.
----------------------------------------
Ronald E. Hermance, Jr.
President and Chief Operating Officer
(Principal Financial Officer)
18
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS STATEMENT CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED STATEMENT OF CONDITION AND CONSOLIDATED CONDENSED
STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 55,349
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 30,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 860,517
<INVESTMENTS-CARRYING> 3,107,986
<INVESTMENTS-MARKET> 3,140,898
<LOANS> 3,744,975
<ALLOWANCE> 18,295
<TOTAL-ASSETS> 7,879,908
<DEPOSITS> 6,901,129
<SHORT-TERM> 0
<LIABILITIES-OTHER> 57,889
<LONG-TERM> 0
0
0
<COMMON> 0
<OTHER-SE> 920,890
<TOTAL-LIABILITIES-AND-EQUITY> 7,879,908
<INTEREST-LOAN> 67,658
<INTEREST-INVEST> 61,745
<INTEREST-OTHER> 665
<INTEREST-TOTAL> 130,068
<INTEREST-DEPOSIT> 74,790
<INTEREST-EXPENSE> 74,790
<INTEREST-INCOME-NET> 55,278
<LOAN-LOSSES> 600
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 17,227
<INCOME-PRETAX> 38,657
<INCOME-PRE-EXTRAORDINARY> 38,657
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,257
<EPS-BASIC> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 6.81
<LOANS-NON> 12,685
<LOANS-PAST> 778
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 17,712
<CHARGE-OFFS> 22
<RECOVERIES> 5
<ALLOWANCE-CLOSE> 18,295
<ALLOWANCE-DOMESTIC> 12,065
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 6,230
</TABLE>
