<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 : SEPTEMBER 30, 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)
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 October 31, 1999, the registrant had 115,638,300 shares of
common stock, $0.01 par value, outstanding. Of such shares, 61,288,300 shares
were issued to Hudson City, MHC, the registrant's mutual holding company and
54,350,000 shares were sold to the public and directors, officers and employees
of the registrant.
<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
Consolidated Statements of Condition -
September 30, 1999 (Unaudited) and December 31, 1998................................................... 3
Consolidated Statements of Income (Unaudited) - For the three and nine months ended September 30, 1999
and 1998................. 4
Consolidated Statements of Cash Flows (Unaudited) - Nine months ended September 30, 1999 and
1998............................... 5
Notes to the 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.. 25
PART II - OTHER INFORMATION
Item 1. - Legal Proceedings..................................................................................... 28
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..................................................................................... 29
Item 6. - Exhibits and Reports on Form 8-K...................................................................... 29
SIGNATURES.................................................................................................................. 30
</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 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, and 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,
depending on the context.
2
<PAGE> 3
PART 1 - FINANCIAL INFORMATION
Item 1. - Financial Statements
Hudson City Bancorp, Inc. and Subsidiary
Consolidated Statements of Condition
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---------------------- -----------------------
(Unaudited)
(In thousands)
Assets:
-------
<S> <C> <C>
Cash and due from banks................................................... $ 61,973 $ 87,075
Federal funds sold........................................................ 44,100 69,800
---------------------- -----------------------
Total cash and cash equivalents.................................. 106,073 156,875
Investment securities held to maturity, market value of $1,365 at
September 30, 1999 and $1,402 at December 31, 1998...................... 1,379 1,393
Investment securities available for sale, at market value ................ 838,460 785,031
Mortgage-backed securities held to maturity, market value of $3,191,949
at September 30, 1999 and $3,106,369 at December 31, 1998............... 3,192,588 3,070,931
Loans..................................................................... 4,141,678 3,659,407
Less:
Deferred loan fees.......................................... 10,837 11,146
Allowance for loan losses................................... 19,441 17,712
---------------------- -----------------------
Net loans................................................ 4,111,400 3,630,549
Foreclosed real estate, net............... ............................... 429 1,026
Accrued interest receivable .............................................. 49,491 49,041
Banking premises and equipment, net....................................... 28,324 29,064
Other assets.............................................................. 39,798 28,350
---------------------- -----------------------
Total Assets..................................................... $ 8,367,942 $ 7,752,260
====================== =======================
Liabilities and Stockholders' Equity:
-------------------------------------
Deposits:
Interest-bearing....................................................... $ 6,421,027 $ 6,494,278
Noninterest-bearing.................................................... 321,483 313,061
---------------------- -----------------------
Total deposits..................................................... 6,742,510 6,807,339
Borrowed funds............................................................ 100,000 -
Accrued expenses and other liabilities.................................... 48,384 44,315
------------------- --------------------
Total liabilities.................................................. 6,890,894 6,851,654
------------------- --------------------
Common stock, $0.01 par value, 800,000,000 shares authorized,
115,638,300 issued and outstanding at September 30, 1999.......... 1,156 -
Additional paid-in capital................................................ 526,278 -
Retained earnings........................................................ 977,705 899,933
Unallocated common stock purchased for the employee stock
ownership plan.................................................... (10,651) -
Accumulated other comprehensive (loss) income............................. (17,440) 673
---------------------- -----------------------
Total stockholders' equity......................................... 1,477,048 900,606
---------------------- -----------------------
Total Liabilities and Stockholders' Equity....................... $ 8,367,942 $ 7,752,260
====================== =======================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
Hudson City Bancorp, Inc. and Subsidiary
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
For the three months
ended September 30,
1999 1998
-------------------- --------------------
(In thousands)
<S> <C> <C>
Interest Income:
Interest and fees on first mortgage loans.......................$ 69,929 $ 65,002
Interest and fees on consumer and other loans................... 1,947 1,819
Interest on mortgage-backed securities.......................... 47,679 50,876
Interest on investment securities held to maturity:
Taxable.............................................. 15 10
Exempt from federal taxes............................ 7 17
Interest and dividends on investment securities available
for sale - taxable................................... 15,111 11,938
Interest on federal funds sold.................................. 773 701
-------------------- --------------------
Total interest income........................... 135,461 130,363
Interest expense on deposits........................................... 72,874 78,565
Interest expense borrowed funds........................................ 102 -
-------------------- --------------------
Total interest expense.......................... 72,976 78,565
-------------------- --------------------
Net interest income.................................. 62,485 51,798
Provision for loan losses.............................................. 600 600
-------------------------- -------------------------
Net interest income after provision for loan losses.. 61,885 51,198
-------------------------- -------------------------
Non-interest income:
Service charges and other income..................... 1,208 1,369
(Losses) gains on net securities transactions........ (8) 24
-------------------------- ---- --------------------
Total non-interest income....................... 1,200 1,393
-------------------------- -------------------------
Non-interest expense:
Salaries and employee benefits....................... 10,659 8,590
Net occupancy expense................................ 3,057 3,050
Federal deposit insurance assessment................. 198 198
Amortization of goodwill............................ 360 403
Computer and related services........................ 298 322
Other expense........................................ 2,448 2,103
-------------------------- -------------------------
Total non-interest expense...................... 17,020 14,666
-------------------------- -------------------------
Income before income tax expense................ 46,065 37,925
Income tax expense..................................................... 17,285 14,650
-------------------------- -------------------------
Net income......................................$ 28,780 $ 23,275
========================== =========================
Basic and diluted earnings per share
from date of Reorganization (July 13, 1999).....................$ 0.22 $ -
========================== =========================
</TABLE>
<TABLE>
<CAPTION>
For the nine months
ended September 30,
1999 1998
-------------------- ---------------------
(In thousands)
<S> <C> <C>
Interest Income:
Interest and fees on first mortgage loans...................... $ 202,967 $ 193,759
Interest and fees on consumer and other loans.................. 5,437 5,471
Interest on mortgage-backed securities......................... 143,555 151,605
Interest on investment securities held to maturity:
Taxable............................................. 45 39
Exempt from federal taxes........................... 21 41
Interest and dividends on investment securities available
for sale - taxable.................................. 42,267 37,544
Interest on federal funds sold................................. 2,036 2,018
-------------------- ---------------------
Total interest income.......................... 396,328 390,477
Interest expense on deposits.......................................... 222,575 233,390
Interest expense borrowed funds....................................... 102 -
-------------------- ---------------------
Total interest expense......................... 222,677 233,390
-------------------- ---------------------
Net interest income................................. 173,651 157,087
Provision for loan losses............................................. 1,750 1,800
-------------------------- ---------------------
Net interest income after provision for loan losses. 171,901 155,287
-------------------------- ---------------------
Non-interest income:
Service charges and other income.................... 3,555 3,708
(Losses) gains on net securities transactions....... (7) 24
-------------------------- ---------------------
Total non-interest income...................... 3,548 3,732
-------------------------- ---------------------
Non-interest expense:
Salaries and employee benefits...................... 32,381 29,452
Net occupancy expense............................... 8,933 8,632
Federal deposit insurance assessment................ 595 593
Amortization of goodwill........................... 1,080 1,208
Computer and related services....................... 904 853
Other expense....................................... 7,299 6,584
-------------------------- ---------------------
Total non-interest expense..................... 51,192 47,322
-------------------------- ---------------------
Income before income tax expense............... 124,257 111,697
Income tax expense.................................................... 46,285 41,600
----- -------------------- ---------------------
Net income..................................... $ 77,972 $ 70,097
========================== =====================
Basic and diluted earnings per share
from date of Reorganization (July 13, 1999).................... $ 0.22 $ -
========================== ==========================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
Hudson City Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the nine months ended
September 30,
1999 1998
-------------------- -------------------
(In thousands)
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income........................................................$ 77,972 $ 70,097
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, accretion and amortization expense............... 5,160 4,176
Provision for loan losses...................................... 1,750 1,800
Losses (gains) on net securities transactions.................. 7 (24)
Compensation expense of employee stock ownership plan...... 940 -
Deferred tax benefit........................................... (1,920) (1,766)
Net proceeds from sale of foreclosed real estate .............. 1,898 2,086
(Increase) decrease in accrued interest receivable............ (450) 2,975
Decrease (increase) in other assets............................ 491 (2,031)
Increase in accrued expenses and other liabilities... 4,069 3,787
---------------------- ---------------------
Net Cash Provided by Operating Activities.................................... 89,917 81,100
---------------------- ---------------------
Cash Flows from Investing Activities:
Net increase in loans............................................. (421,822) (111,954)
Purchases of loans................................................ (59,655) (11,880)
Principal collection of mortgage-backed securities................ 873,561 817,124
Purchases of mortgage-backed securities........................... (1,001,299) (920,523)
Proceeds from maturities and calls of
investment securities held to maturity..................... 14 484
Purchases of investment securities held to maturity............... - (403)
Proceeds from maturities and calls of
investment securities available for sale................... 723,647 452,343
Proceeds from sales of investment securities available for sale... 109,766 -
Purchases of investment securities available for sale............. (913,976) (495,286)
Purchases of premises and equipment, net.......................... (1,769) (2,582)
---------------------- ---------------------
Net Cash Used in Investing Activities........................................ (691,533) (272,677)
---------------------- ---------------------
Cash Flows from Financing Activities:
Net (decrease) increase in deposits............................... (64,829) 202,196
Proceeds from borrowed funds...................................... 100,000 -
Proceeds from sale of stock....................................... 527,335 -
Capitalization of Hudson City, MHC................................ (200) -
Purchase of stock for employee stock ownership plan............... (11,492) -
---------------------- ---------------------
Net Cash Provided by Financing Activities................................... 550,814 202,196
---------------------- ---------------------
Net (Decrease) Increase in Cash and Cash Equivalents....................... (50,802) 10,619
Cash and Cash Equivalents at Beginning of Period............................. 156,875 95,674
---------------------- ---------------------
Cash and Cash Equivalents at End of Period...................................$ 106,073 $ 106,293
====================== =====================
Supplemental Disclosures:
Interest paid.....................................................$ 223,144 $ 234,022
====================== =====================
Income taxes paid.................................................$ 46,994 $ 45,091
====================== =====================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
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 the Hudson City Savings from a New Jersey mutual savings bank
into a two-tiered mutual savings bank holding company structure, referred to as
the Reorganization, as described more fully in Note 2. 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.
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 for periods prior to July 13, 1999 are
solely for Hudson City Savings.
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
and nine month periods ended September 30, 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 usually 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 Hudson City
Savings' audited December 31, 1998 financial statements and notes to the
financial statements included in Hudson City Bancorp's Prospectus dated May 14,
1999, which is a part of Hudson City Bancorp'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 Hudson City
Savings adopted a Plan of Reorganization and Stock Issuance, referred to as the
Plan, whereby Hudson City Savings converted and reorganized from a New
Jersey-chartered mutual savings bank into a two-tiered mutual savings bank
holding company structure. The transactions contemplated by the Plan were
completed on July 13, 1999. Under the terms of the Plan, Hudson City Savings
became a wholly-owned subsidiary of Hudson City Bancorp and received 50% of the
net proceeds from the initial public offering of Hudson City Bancorp's common
stock. Hudson City Bancorp became a majority-owned subsidiary of Hudson City,
MHC, a New Jersey-chartered mutual savings bank holding company, referred to as
the MHC.
Hudson City Bancorp sold 54,350,000 shares of its common stock
to the public, representing 47% of the outstanding shares, at $10.00 per share.
Hudson City Bancorp received net proceeds of $527,335,022. The number of shares
of common stock sold and the price for such shares was determined by the Board
of Directors based upon an appraisal of Hudson City Savings made by an
independent appraisal firm. An additional 61,288,300 shares, or 53% of the
outstanding shares of Hudson City Bancorp, were issued to Hudson City, MHC.
Hudson City Bancorp's common stock commenced trading on July 13, 1999 on the
Nasdaq National Market under the symbol "HCBK."
6
<PAGE> 7
3. - COMPREHENSIVE INCOME
Comprehensive income is comprised of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available for sale.
Total comprehensive income during the periods indicated is as
follows:
<TABLE>
<CAPTION>
For the three months
ended September 30,
-------------------
1999 1998
-------------------------- ---------------------------
(In thousands)
<S> <C> <C>
Net income.....................................$ 28,780 $ 23,275
Other comprehensive income:
Unrealized holding (loss) gain on
securities available for sale.. (7,487) 459
-------------------------- ---------------------------
Total comprehensive income.....................$ 21,293 $ 23,734
========================== ===========================
</TABLE>
<TABLE>
<CAPTION>
For the nine months
ended September 30,
-------------------
1999 1998
------------------------- --------------------------
(In thousands)
<S> <C> <C>
Net income..................................... $ 77,972 $ 70,097
Other comprehensive income:
Unrealized holding (loss) gain on
securities available for sale.. (18,113) 51
------------------------- --------------------------
Total comprehensive income..................... $ 59,859 $ 70,148
========================= ==========================
</TABLE>
4. - EARNINGS PER SHARE
Basic earnings per share is computed by dividing income
available to common stockholders by the weighted average number of shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
(such as stock options) were exercised or resulted in the issuance of common
stock. These potentially dilutive shares would then be included in the weighted
average number of shares outstanding for the period using the treasury stock
method. At September 30, 1999, there were no potentially dilutive shares. Shares
issued during the period and shares reacquired during the period are weighted
for the portion of the period that they were outstanding.
In computing both basic and diluted earnings per share, the
weighted average number of common shares outstanding includes all shares issued
to Hudson City, MHC. Also included are the Employee Stock Ownership Plan, or
ESOP, shares committed to be released for allocation to participants as of the
date of the financial statements. ESOP shares that have been purchased but have
not been committed to be released have not been considered in computing basic
and diluted earnings per share. Basic and diluted earnings per share presented
were calculated using net income and the weighted average number of common
shares outstanding from the date of completion of the Reorganization (July 13,
1999) to the end of the period. Basic and diluted weighted average common shares
outstanding were 115,087,330 from the date of the Reorganization (July 13, 1999)
to the end of the period.
5. - EMPLOYEE STOCK OWNERSHIP PLAN
In connection with the Reorganization, Hudson City Savings
established an ESOP for all employees who have completed at least one year of
service and have attained 21 years of age. The ESOP is a
7
<PAGE> 8
tax-qualified plan designed to invest primarily in Hudson City Bancorp's common
stock that provides employees with the opportunity to receive a Hudson City
Savings-funded retirement benefit based primarily on the value of Hudson City
Bancorp's common stock.
The ESOP is authorized to purchase up to 8%, or 4,348,000
shares, of the Hudson City Bancorp common stock that was sold to the public in
the Reorganization. On July 13, 1999, the date of the Reorganization, the ESOP
purchased 500,000 common shares. The remaining shares will be purchased through
open market transactions. To purchase the ESOP shares, the ESOP borrowed the
funds from Hudson City Bancorp. Through September 30, 1999, the ESOP had
purchased 990,000 shares.
The ESOP loan is being repaid principally from Hudson City
Savings' contributions to the ESOP over a period of up to 30 years. Dividends
declared on common stock held by the ESOP and not allocated to the account of a
participant, can be used to repay the loan. At September 30, 1999, 72,467 shares
were legally released for allocation to participants. Compensation expense
totaled $940,000 for the period ended September 30, 1999 and is recognized in
accordance with Statement of Position 93-6, Employers' Accounting for Employee
Stock Ownership Plans. The number of shares released annually is based upon the
ratio that the current principal and interest payment bears to the current and
all remaining scheduled future principal and interest payments.
All shares that have not been released for allocation to
participants are held in a suspense account by the ESOP for future allocation as
the loan is repaid. Unallocated common stock purchased by the ESOP is recorded
as a reduction of stockholders' equity. This reduction is calculated as the cost
of the shares purchased by the ESOP. At September 30, 1999, unallocated ESOP
shares totaled 917,533 and had a fair value of approximately $12.6 million.
6. - BORROWED FUNDS
Borrowed funds were as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---------------------------- ---------------------------------
(In thousands)
<S> <C> <C>
Securities sold under agreements to repurchase: $ 100,000 $ -
============================ =================================
</TABLE>
Hudson City Bancorp borrowed funds by entering into sales of
securities under agreements to repurchase with broker/dealers. These agreements
are recorded as financing transactions as Hudson City Bancorp maintains
effective control over the transferred securities. The dollar amount of the
securities underlying the agreements continue to be carried in Hudson City
Bancorp's securities portfolio. The obligations to repurchase the securities are
reported as a liability in the consolidated statements of condition.
8
<PAGE> 9
The securities underlying the agreements are delivered to the
broker/dealer with whom each transaction is executed. The broker/dealers agree
to resell to Hudson City Bancorp the same securities at the maturity or call of
the agreement. Hudson City Bancorp retains the right of substitution of the
underlying securities throughout the terms of the agreements. All of the
underlying securities were U.S. Government agency securities with an estimated
fair market value of $109.1 million at September 30, 1999.
At September 30, 1999, securities sold under agreements to
repurchase had maturities ranging from 2001 to 2009 with a weighted-average
interest rate of 5.63%. Certain agreements are callable beginning in 2001, while
other agreements can be extended by the broker/dealer beyond maturity through
2009. During the three and nine month periods ended September 30, 1999,
securities sold under agreements to repurchase averaged $7.1 million and $2.4
million, respectively. The maximum amount outstanding at any month-end during
the period was $100.0 million.
7. - RECENT DEVELOPMENTS
On October 14, 1999, the Board of Directors of Hudson City
Bancorp declared a quarterly cash dividend of five cents ($0.05) per common
share outstanding. The dividend is payable on December 1, 1999 to shareholders
of record at the close of business on November 12, 1999.
9
<PAGE> 10
HUDSON CITY BANCORP, INC.
FORM 10-Q
Item 2. - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Hudson City Savings completed the Reorganization, as described
in Note 2 to the unaudited financial statements, on July 13, 1999. Prior to July
13, 1999, Hudson City Bancorp 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, comparative information prior to the Reorganization relates
to the financial statements of Hudson City Savings included herein. Effective
upon the closing of the Reorganization, Hudson City Bancorp acquired all of the
issued and outstanding capital stock of Hudson City Savings.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
Our total assets increased $615.7 million, or 7.9%, to $8.37
billion at September 30, 1999 from $7.75 billion at December 31, 1998. This
increase primarily reflects the receipt of approximately $418.0 million of new
cash from the sale of our common stock as part of the Reorganization,
$100.0 million of borrowed funds, and an increase in retained earnings due
to net income of $78.0 million.
Loans increased $482.3 million, or 13.2%, to $4.14 billion at
September 30, 1999 from $3.66 billion at December 31, 1998. Mortgage-backed
securities, which represented 38.1% of total assets at September 30, 1999,
increased $121.7 million, or 4.0%, to $3.19 billion from $3.07 billion at
December 31, 1998. Investment securities available for sale increased $53.5
million, or 6.8%, to $838.5 million at September 30, 1999 from $785.0 million at
December 31, 1998. These increases reflected our emphasis on the origination of
one- to four-family mortgage loans supplemented by the purchase of investment
securities, mortgage-backed securities and mortgage loans. This growth was
primarily funded by the proceeds from the sale of common stock in the
Reorganization. These increases were also partially funded by a shift from total
cash and cash equivalents to these higher-yielding assets as cash and due from
banks decreased $25.1 million, or 28.8%, to $62.0 million at September 30, 1999
from $87.1 million at December 31, 1998. Federal funds sold decreased $25.7
million, or 36.8%, to $44.1 million at September 30, 1999 from $69.8 million at
December 31, 1998. We believe the decline in cash and cash equivalents did not
adversely impact our overall liquidity position at September 30, 1999.
Total deposits decreased $64.8 million, or 1.0%, to $6.74
billion at September 30, 1999 from $6.81 billion at December 31, 1998. This
decrease was due to a $73.3 million decrease, or 1.1%, of interest-bearing
deposits to $6.42 billion at September 30, 1999 from $6.49 billion at December
31, 1998 off-set by an $8.4 million, or 2.7%, increase in noninterest-bearing
deposits to $321.5 million at September 30, 1999 from $313.1 million at December
31, 1998. The decrease in interest-bearing deposits included a $37.2 million, or
0.7%, decrease in time deposits to $5.02 billion at September 30, 1999 from
$5.06 billion at December 31, 1998 and a $17.0 million, or 2.0%, decrease in
regular savings deposits to $815.8 million at September 30, 1999 from $832.8
million at December 31, 1998. The decrease in total deposits was primarily due
to the funding of our depositors' stock purchases in the Reorganization with
approximately $110.0 million of interest-bearing funds on deposit with Hudson
City Savings.
10
<PAGE> 11
At September 30, 1999, Hudson City Bancorp had borrowed funds,
consisting entirely of securities sold under agreements to repurchase, totaling
$100.0 million. At December 31, 1998, there were no borrowed funds outstanding.
Hudson City Savings' capital level significantly exceeded all regulatory
requirements and further increased as a result of the Reorganization. A portion
of the excess capital has been deployed through the use of a capital leverage
strategy where we invest in one- to four-family residential mortgages and
mortgage-backed securities. This strategy was funded by borrowings from various
third party broker/dealers using securities sold under agreements to repurchase.
This strategy generated additional earnings through a positive interest rate
spread between the yield on the interest-earning assets and the cost of the
borrowings.
Total stockholders' equity increased $576.4 million, or 64.0%,
to $1.48 billion at September 30, 1999 from $900.6 million at December 31, 1998,
primarily due to net proceeds of $527.3 million from the Reorganization and net
income of $78.0 million for the nine months ended September 30, 1999. These
increases were partially offset by a decrease of $18.1 million in accumulated
other comprehensive income due to a decline in the market value of investment
securities available for sale and by $10.6 million in unallocated common stock
for the ESOP.
Average Balance Sheet. The tables on the following pages
present certain information regarding Hudson City Bancorp's financial condition
and net interest income for the three and nine month periods ended September 30,
1999 and 1998. 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-earnings 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
which we considered adjustments to yields.
11
<PAGE> 12
HUDSON CITY BANCORP, INC. - FORM 10-Q
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------
1999
-------------------------------------------------------------------
Average
Balance Interest
------- --------
ASSETS: (Dollars in thousands)
<S> <C> <C>
INTEREST-EARNING ASSETS:
First mortgage loans, net (1)..................... $ 3,857,853 $ 69,929
Consumer and other loans.......................... 97,157 1,947
Federal funds sold................................ 62,171 773
Mortgage-backed securities........................ 3,125,958 47,679
Investment securities............................. 995,777 15,133
--------------------------- -------------------------
Total interest-earning assets................ 8,138,916 135,461
-------------------------
NONINTEREST-EARNING ASSETS................................. 152,033
---------------------------
TOTAL ASSETS................................. $ 8,290,949
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY:
INTEREST-BEARING LIABILITIES:
Savings accounts.................................. $ 871,713 $ 5,637
Interest-bearing demand accounts.................. 96,410 519
Money market accounts............................. 498,222 3,405
Time deposits..................................... 5,031,243 63,313
--------------------------- -------------------------
Total deposits............................... 6,497,588 72,874
Borrowed funds.................................... 7,065 102
--------------------------- -------------------------
Total interest-bearing liabilities........... 6,504,653 72,976
--------------------------- -------------------------
NONINTEREST-BEARING LIABILITIES:
Noninterest-bearing deposits...................... 319,848
Other noninterest-bearing liabilities............. 59,389
---------------------------
Total noninterest-bearing liabilities........ 379,237
---------------------------
Total liabilities................................. 6,883,890
Stockholders' equity.............................. 1,407,059
---------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY... $ 8,290,949
===========================
Net interest income/net interest rate spread (2)......... $ 62,485
=========================
Net interest-earning assets/net interest margin (3)..... $ 1,634,263
===========================
Ratio of interest-earning assets to
interest-bearing liabilities......................
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------
1999 1998
------------------------------ ----------------------------------
Average Average
Yield/Cost Balance
---------- -------
ASSETS: (Dollars in thousands)
<S> <C> <C>
INTEREST-EARNING ASSETS:
First mortgage loans, net (1)..................... 7.25 % $ 3,445,325
Consumer and other loans.......................... 8.02 84,628
Federal funds sold................................ 4.93 52,337
Mortgage-backed securities........................ 6.10 3,099,095
Investment securities............................. 6.08 715,333
-----------------------------
Total interest-earning assets................ 6.66 7,396,718
NONINTEREST-EARNING ASSETS................................. 173,028
-----------------------------
TOTAL ASSETS................................. $ 7,569,746
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY:
INTEREST-BEARING LIABILITIES:
Savings accounts.................................. 2.57 $ 838,433
Interest-bearing demand accounts.................. 2.14 93,771
Money market accounts............................. 2.71 498,855
Time deposits..................................... 4.99 4,928,077
-----------------------------
Total deposits............................... 4.45 6,359,136
Borrowed funds.................................... 5.73 -
-----------------------------
Total interest-bearing liabilities........... 4.45 6,359,136
-----------------------------
NONINTEREST-BEARING LIABILITIES:
Noninterest-bearing deposits...................... 288,748
Other noninterest-bearing liabilities............. 55,487
-----------------------------
Total noninterest-bearing liabilities........ 344,235
-----------------------------
Total liabilities................................. 6,703,371
Stockholders' equity.............................. 866,375
-----------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY... $ 7,569,746
=============================
Net interest income/net interest rate spread (2)......... 2.21 %
Net interest-earning assets/net interest margin (3)..... 3.10 % $ 1,037,582
=============================
Ratio of interest-earning assets to
interest-bearing liabilities...................... 1.25 x
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------
1998
-------------------------------------------------------------
Average
Interest Yield/Cost
------------------------------ ----------------------------
ASSETS: (Dollars in thousands)
<S> <C> <C>
INTEREST-EARNING ASSETS:
First mortgage loans, net (1)..................... $ 65,002 7.55 %
Consumer and other loans.......................... 1,819 8.60
Federal funds sold................................ 701 5.31
Mortgage-backed securities........................ 50,876 6.57
Investment securities............................. 11,965 6.69
--------------------------
Total interest-earning assets................ 130,363 7.05
--------------------------
NONINTEREST-EARNING ASSETS..................................
TOTAL ASSETS.................................
LIABILITIES AND STOCKHOLDERS' EQUITY:
INTEREST-BEARING LIABILITIES:
Savings accounts.................................. $ 5,771 2.73
Interest-bearing demand accounts.................. 502 2.12
Money market accounts............................. 3,615 2.88
Time deposits..................................... 68,677 5.53
--------------------------
Total deposits............................... 78,565 4.90
Borrowed funds.................................... - -
--------------------------
Total interest-bearing liabilities........... 78,565 4.90
--------------------------
NONINTEREST-BEARING LIABILITIES:
Noninterest-bearing deposits......................
Other noninterest-bearing liabilities.............
Total noninterest-bearing liabilities........
Total liabilities.................................
Stockholders' equity..............................
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...
Net interest income/net interest rate spread (2)......... $ 51,798 2.15 %
==========================
Net interest-earning assets/net interest margin (3)..... 2.84 %
Ratio of interest-earning assets to
interest-bearing liabilities...................... 1.16 x
</TABLE>
- -------------------------------------------------
(1) Amount is net of deferred loan fees and allowance for loan losses and
includes non-performing loans.
(2) We determined net interest spread by subtracting the annualized weighted
average cost of average interest-bearing liabilities from the annualized
weighted average yield on average interest-earning assets.
(3) We determined net interest margin by dividing annualized net interest income
by average interest-earning assets.
12
<PAGE> 13
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------------
1999
---------------------------------------------------------------------
Average
Balance Interest
------- --------
ASSETS: (Dollars in thousands)
<S> <C> <C>
INTEREST-EARNING ASSETS:
First mortgage loans, net (1)..................$ 3,697,876 $ 202,967
Consumer and other loans....................... 90,508 5,437
Federal funds sold............................. 58,634 2,036
Mortgage-backed securities..................... 3,095,786 143,555
Investment securities.......................... 909,851 42,333
---------------------------- -------------------------
Total interest-earning assets.............. 7,852,655 396,328
-------------------------
NONINTEREST-EARNING ASSETS................................. 160,037
----------------------------
TOTAL ASSETS...............................$ 8,012,692
============================
LIABILITIES AND STOCKHOLDERS' EQUITY:
INTEREST-BEARING LIABILITIES:
Savings accounts...............................$ 862,494 $ 16,828
Interest-bearing demand accounts............... 97,331 1,544
Money market accounts.......................... 501,515 10,332
Time deposits.................................. 5,095,581 193,871
---------------------------- -------------------------
Total deposits............................. 6,556,921 222,575
Borrowed funds................................. 2,381 102
---------------------------- -------------------------
Total interest-bearing liabilities......... 6,559,302 222,677
---------------------------- -------------------------
NONINTEREST-BEARING LIABILITIES:
Noninterest-bearing deposits................... 309,125
Other noninterest-bearing liabilities.......... 57,378
----------------------------
Total noninterest-bearing liabilities...... 366,503
----------------------------
Total liabilities.............................. 6,925,805
Stockholders' equity........................... 1,086,887
----------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.$ 8,012,692
============================
Net interest income/net interest rate spread (2)......... $ 173,651
=========================
Net interest-earning assets/net interest margin (3)..... $ 1,293,353
============================
Ratio of interest-earning assets to
interest-bearing liabilities...................
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------
1999 1998
----------------------------- ------------------------------------
Average Average
Yield/Cost Balance
---------- -------
ASSETS: (Dollars in thousands)
<S> <C> <C>
INTEREST-EARNING ASSETS:
First mortgage loans, net (1).................. 7.32 % $ 3,402,602
Consumer and other loans....................... 8.01 84,237
Federal funds sold............................. 4.64 50,401
Mortgage-backed securities..................... 6.18 3,038,404
Investment securities.......................... 6.20 743,028
------------------------------
Total interest-earning assets.............. 6.73 7,318,672
NONINTEREST-EARNING ASSETS................................. 172,193
------------------------------
TOTAL ASSETS............................... $ 7,490,865
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY:
INTEREST-BEARING LIABILITIES:
Savings accounts............................... 2.61 $ 837,565
Interest-bearing demand accounts............... 2.12 91,870
Money market accounts.......................... 2.75 498,509
Time deposits.................................. 5.09 4,879,427
------------------------------
Total deposits............................. 4.54 6,307,371
Borrowed funds................................. 5.75 -
------------------------------
Total interest-bearing liabilities......... 4.54 6,307,371
------------------------------
NONINTEREST-BEARING LIABILITIES:
Noninterest-bearing deposits................... 284,276
Other noninterest-bearing liabilities.......... 55,640
------------------------------
Total noninterest-bearing liabilities...... 339,916
------------------------------
Total liabilities.............................. 6,647,287
Stockholders' equity........................... 843,578
------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY. $ 7,490,865
==============================
Net interest income/net interest rate spread (2)......... 2.19 %
Net interest-earning assets/net interest margin (3)..... $ 2.94 % $ 1,011,301
==============================
Ratio of interest-earning assets to
interest-bearing liabilities................... 1.20 x
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------
1998
---------------------------------------------------------------
Average
Interest Yield/Cost
-------- ----------
<S> <C> <C>
ASSETS: (Dollars in thousands)
INTEREST-EARNING ASSETS:
First mortgage loans, net (1).................. $ 193,759 7.59 %
Consumer and other loans....................... 5,471 8.66
Federal funds sold............................. 2,018 5.35
Mortgage-backed securities..................... 151,605 6.65
Investment securities.......................... 37,624 6.75
-------------------------
Total interest-earning assets.............. 390,477 7.11
-------------------------
NONINTEREST-EARNING ASSETS.................................
TOTAL ASSETS...............................
LIABILITIES AND STOCKHOLDERS' EQUITY:
INTEREST-BEARING LIABILITIES:
Savings accounts............................... $ 17,314 2.76
Interest-bearing demand accounts............... 1,458 2.12
Money market accounts.......................... 10,841 2.91
Time deposits.................................. 203,777 5.58
-------------------------
Total deposits............................. 233,390 4.95
Borrowed funds................................. - -
-------------------------
Total interest-bearing liabilities......... 233,390 4.95
-------------------------
NONINTEREST-BEARING LIABILITIES:
Noninterest-bearing deposits...................
Other noninterest-bearing liabilities..........
Total noninterest-bearing liabilities......
Total liabilities..............................
Stockholders' equity...........................
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.
Net interest income/net interest rate spread (2)......... $ 157,087 2.16 %
=========================
Net interest-earning assets/net interest margin (3)..... 2.85 %
Ratio of interest-earning assets to
interest-bearing liabilities................... 1.16 x
</TABLE>
- -----------------------------------------------
(1) Amount is net of deferred loan fees and allowance for loan losses and
includes non-performing loans.
(2) We determined net interest spread by subtracting the annualized weighted
average cost of average interest-bearing liabilities from the annualized
weighted average yield on average interest-earning assets.
(3) We determined net interest margin by dividing annualized net interest
income by average interest-earning assets.
13
<PAGE> 14
HUDSON CITY BANCORP, INC.
FORM 10-Q
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
AND 1998
General. Net income for the quarter ended September 30, 1999
was $28.8 million, an increase of $5.5 million, or 23.6%, compared to $23.3
million for the quarter ended September 30, 1998. Basic and diluted earnings
were $0.22 per share from the date of Reorganization (July 13, 1999) to the end
of the period. Basic and diluted earnings were $0.25 per share, assuming that
the Reorganization was completed on July 1, 1999. The increase in net income was
attributable to an increase of $10.7 million in net interest income partially
off-set by an increase of $2.3 million in total non-interest expense and an
increase of $2.6 million in income tax expense. Our return on average assets for
the quarter ended September 30, 1999 was 1.39% compared to 1.23% for the quarter
ended September 30, 1998. Our return on average equity for the quarter ended
September 30, 1999 was 8.18% compared to 10.75% for the quarter ended September
30, 1998 reflecting the additional equity received in connection with the
Reorganization.
Interest Income. Total interest income increased $5.1 million,
or 3.9%, to $135.5 million for the quarter ended September 30, 1999 compared to
$130.4 million for the corresponding prior year quarter. Interest and fees on
first mortgage loans increased $4.9 million, or 7.5%, to $69.9 million from
$65.0 million for the quarters ended September 30, 1999 and 1998, respectively.
Interest and dividends on investment securities available for sale increased
$3.2 million, or 26.9%, to $15.1 million from $11.9 million for the quarters
ended September 30, 1999 and 1998, respectively. Offsetting these increases,
interest on mortgage-backed securities decreased $3.2 million, or 6.3%, to $47.7
million for the quarter ended September 30, 1999 compared to $50.9 million for
the corresponding quarter in the prior year.
The average balance of total interest-earning assets increased
$742.2 million, or 10.0%, to $8.14 billion for the quarter ended September 30,
1999 compared to $7.40 billion for the corresponding quarter of the prior year.
This increase was primarily attributable to a $412.5 million, or 12.0%, increase
in the average balance of first mortgage loans, net, to $3.86 billion for the
third quarter of 1999 compared to $3.45 billion for the third quarter of 1998.
The average balance of investment securities increased $280.5 million, or 39.2%,
to $995.8 million from $715.3 million for the third quarters of 1999 and 1998,
respectively. Also, for the quarter ended September 30, 1999, the average
balance of mortgage-backed securities increased $26.9 million, or 0.9%, to $3.13
billion. The net cash proceeds from the Reorganization were initially deployed
in short-term investment securities and were later shifted to fund the
origination and purchase of first mortgage loans. Also reflected in the growth
of total interest-earning assets was internal growth, primarily the origination
of first mortgage loans supplemented by purchases of mortgage-backed securities
and investment securities to manage interest rate risk. For the three months
ended September 30, 1999, we originated and purchased mortgage loans of
approximately $415.0 million, compared to $218.0 million for the corresponding
1998 period.
The impact on interest income due to the growth in the average
balance of total interest-earning assets was offset in part by a decrease in the
annualized average yield on interest-earning assets of 39 basis points to 6.66%
for the quarter ended September 30, 1999 from 7.05% for the corresponding prior
year quarter. The annualized average yield on first mortgage loans decreased 30
basis points to 7.25% from 7.55% for the quarters ended September 30, 1999 and
1998, respectively. For mortgage-backed securities, the annualized average yield
decreased 47 basis points to 6.10% for the quarter ended September 30, 1999 from
6.57% for the corresponding prior year period. The annualized average yield on
investment securities decreased 61 basis points to 6.08% from 6.69% for the
quarters ended September 30, 1999 and 1998, respectively. The decreases in the
annualized average yields on our interest-earning assets reflect the downward
repricing of those assets during the lower interest rate environment from
September 30, 1998 through early 1999. Over
14
<PAGE> 15
the past several months, market interest rates have generally increased.
Although this general increase did not materially impact our results of
operations in the recent quarter, we expect it to impact the yields on our
interest-earning assets in future periods. The decrease in the yield on
investment securities also reflects the initial investment of the proceeds from
the Reorganization into lower yielding short-term securities.
Interest Expense. Interest expense on deposits decreased $5.7
million, or 7.3%, to $72.9 million for the quarter ended September 30, 1999
compared to $78.6 million for the quarter ended September 30, 1998. Interest
expense on time deposits, which represented 87.4% of interest expense on
deposits and 94.7% of the decrease for the quarter, decreased $5.4 million, or
7.9%, to $63.3 million for the quarter ended September 30, 1999 from $68.7
million for the quarter ended September 30, 1998. Interest expense on borrowed
funds was $0.1 million for the quarter ended September 30, 1999. There was no
interest expense on borrowed funds for the quarter ended September 30, 1998.
The decrease in interest expense was primarily due to a 45
basis point decrease in the annualized average cost of total interest-bearing
liabilities to 4.45% for the quarter ended September 30, 1999 compared to 4.90%
for the corresponding prior year quarter. Among the various deposit account
types, the largest decrease in the annualized average cost occurred in time
deposits which decreased 54 basis points to 4.99% from 5.53% for the quarters
ended September 30, 1999 and 1998, respectively. The decreases in the annualized
average cost on our interest-bearing liabilities reflect the downward repricing
of those liabilities due to the lower interest rate environment from September
30, 1998 through early 1999. Over the past several months, market interest rates
have generally increased. Although this general increase did not materially
impact our results of operations in the recent quarter, we expect it to impact
the costs of our interest-bearing liabilities in future periods.
The impact of the decrease in the annualized average cost of
total interest-bearing liabilities was partially offset by an increase in the
average balance of such liabilities. The average balance of total
interest-bearing liabilities increased $145.5 million, or 2.3%, to $6.50 billion
for the quarter ended September 30, 1999 compared to $6.36 billion for the
quarter ended September 30, 1998. Of this increase, $103.2 million, or 70.9% of
the increase, resulted from a 2.1% increase in the average balance of time
deposits to $5.03 billion for the quarter ended September 30, 1999 from $4.93
billion for the quarter ended September 30, 1998. The average balance of regular
savings deposits increased $33.3 million, or 4.0%, to $871.7 million for the
quarter ended September 30, 1999. We believe that the increase in the average
balance of total interest-bearing liabilities reflects our offering of
competitive rates to depositors. The average balance of borrowed funds for the
quarter ended September 30, 1999 was $7.1 million. We expect to increase
borrowed funds in the future. Borrowed funds generally have higher interest
costs than retail deposits and may result in an increase in the cost of our
interest bearing liabilities.
Net Interest Income. Net interest income increased $10.7
million, or 20.7%, to $62.5 million for the quarter ended September 30, 1999
compared to $51.8 million for the quarter ended September 30, 1998. This
increase reflects the increase in the average balance of first mortgage loans
and investment securities, and the decrease in the annualized average cost of
deposits. Our annualized net interest spread increased 6 basis points to 2.21%
for the quarter ended September 30, 1999 compared to 2.15% for the corresponding
prior year quarter. This increase was primarily due to our interest-bearing
liabilities repricing more quickly, over the past twelve months, than our
interest-earning assets. The annualized net interest margin increased 26 basis
points to 3.10% for the quarter ended September 30, 1999 compared to 2.84% for
the quarter ended September 30, 1998, primarily due to the investment of the
proceeds from the Reorganization.
Provision for Loan Losses. Our provision for loan losses was
$0.6 million for each of the quarters ended September 30, 1999 and 1998. The
current level of the provision for loan losses reflects the
15
<PAGE> 16
continued growth in the loan portfolio even though there has been a decrease in
non-performing loans. The allowance for loan losses at September 30, 1999
increased $1.7 million, or 9.6%, to $19.4 million compared to $17.7 million at
December 31, 1998. The increase in the allowance for loan losses reflects the
continued growth in the loan portfolio and the low levels of loan charge-offs.
Non-performing loans were $13.4 million at September 30, 1999, a decrease of
$1.9 million, or 12.4%, compared to $15.3 million at December 31, 1998,
primarily due to the continued strong economy resulting in lower unemployment.
At September 30, 1999, the ratio of non-performing loans to
total loans was 0.32% compared to 0.42% at December 31, 1998. The ratio of the
allowance for loan losses to non-performing loans was 144.80% at September 30,
1999 compared to 115.47% at December 31, 1998, while the allowance for loan
losses to total loans was 0.47% and 0.48% at September 30, 1999 and December 31,
1998, respectively.
Non-Interest Income. Total non-interest income, consisting of
service fees and other income, decreased $0.2 million, or 14.3%, to $1.2 million
for the quarter ended September 30, 1999 compared to $1.4 million for the
corresponding prior year quarter.
Non-Interest Expense. Total non-interest expense, consisting
primarily of salaries and employee benefits and net occupancy expense, increased
$2.3 million, or 15.6%, to $17.0 million from $14.7 million for the quarters
ended September 30, 1999 and 1998, respectively. Salaries and employee benefits
increased $2.1 million, or 24.4%, to $10.7 million for the quarter ended
September 30, 1999. This increase primarily reflects the recognition of
compensation expense associated with the ESOP that was adopted in the
Reorganization and routine increases in salaries and employee benefits.
Our efficiency ratio for the third quarter of 1999 was 26.7%
compared to 27.6% for the third quarter of 1998. Our annualized ratio of
non-interest expense to average assets was 0.82% and 0.77% for the quarters
ended September 30, 1999 and 1998, respectively.
Income Taxes. Income tax expense increased $2.6 million, or
17.7%, to $17.3 million for the quarter ended September 30, 1999 compared to
$14.7 million for the quarter ended September 30, 1998. This increase is due
primarily to an increase in income before income tax expense.
16
<PAGE> 17
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND
1998
General. Net income was $78.0 million for the nine months
ended September 30, 1999, an increase of $7.9 million, or 11.3%, compared to
$70.1 million for the nine months ended September 30, 1998. The increase was
primarily attributable to a $16.6 million increase in net interest income
partially off-set by a $3.9 million increase in total non-interest expense and a
$4.7 million increase in income tax expense. Our return on average assets for
the first nine months of 1999 was 1.30% compared to 1.25% for the first nine
months of 1998. Our return on average equity for the first nine months of 1999
was 9.57% compared to 11.08% for the first nine months of 1998 reflecting the
additional equity received in connection with the Reorganization.
Interest Income. Total interest income increased $5.8 million,
or 1.5%, to $396.3 million for the nine months ended September 30, 1999 compared
to $390.5 million for the corresponding period in 1998. Interest and fees on
first mortgage loans for the nine months ended September 30, 1999 was $203.0
million, an increase of $9.2 million, or 4.7%, compared to $193.8 million for
the nine months ended September 30, 1998. Interest on investment securities
available for sale increased $4.8 million, or 12.8%, to $42.3 million for the
nine months ended September 30, 1999 compared to $37.5 million for the
corresponding period in 1998. Offsetting these increases in total interest
income was a decrease in interest income on mortgage-backed securities of $8.0
million, or 5.3%, to $143.6 million for the nine month period ended September
30, 1999 compared to $151.6 million for the nine month period ended September
30, 1998.
The average balance of total interest-earning assets increased
$534.0 million, or 7.3%, to $7.85 billion for the nine month period ended
September 30, 1999 compared to $7.32 billion for the corresponding period of
1998. This increase was primarily attributable to a $295.3 million, or 8.7%,
increase in first mortgage loans, net, to $3.70 billion for the nine months
ended September 30, 1999 compared to $3.40 billion for the corresponding prior
year period. The average balance of investment securities increased $166.9
million, or 22.5%, to $909.9 million for the nine months ended September 30,
1999 compared to $743.0 million for the nine months ended September 30, 1998. In
addition, the average balance of mortgage-backed securities increased $57.4
million, or 1.9%, to $3.10 billion for the nine month period ended September 30,
1999 compared to $3.04 billion for the corresponding prior year period. The
increase in the average balance of investment securities was due in part to the
initial deployment into short-term securities of the net cash proceeds from the
Reorganization. The increase in the average balance of first mortgage loans was
due in part to the eventual use of the proceeds from the Reorganization for the
origination and purchase of first mortgage loans. These increases also reflected
internal growth by originating first mortgage loans, while using purchases of
investment securities and mortgage-backed securities to manage interest rate
risk. For the nine months ended September 30, 1999, we originated and purchased
mortgage loans of approximately $1.06 billion compared to $644.0 million for
the corresponding 1998 period.
The impact on interest income from the growth in the average
balance of total interest-earning assets was offset in part by a 38 basis point
decrease in the annualized average yield of interest-earning assets to 6.73% for
the nine months ended September 30, 1999 compared to 7.11% for the nine months
ended September 30, 1998. The annualized average yield on first mortgage loans,
net, decreased 27 basis points to 7.32% for the nine months ended September 30,
1999 compared to 7.59% for the corresponding prior year period. The annualized
average yield on investment securities decreased 55 basis points to 6.20% from
6.75% for the nine month periods ended September 30, 1999 and 1998,
respectively. The annualized average yield on mortgage-backed securities
decreased 47 basis points to 6.18% for the nine months ended
17
<PAGE> 18
HUDSON CITY BANCORP, INC.
FORM 10-Q
September 30, 1999 compared to 6.65% for the nine months ended September 30,
1998. The decreases in the annualized average yields on our interest-earning
assets reflect the downward repricing of those assets during a lower interest
rate environment from September 30, 1998 through early 1999. Over the past
several months, market interest rates have generally increased. Although this
general increase did not materially impact our results of operations in the
recent period, we expect it to impact the yields on our interest-earning assets
in future periods. The decrease in the yield on investment securities also
reflects the initial investment of the proceeds from the Reorganization into
lower yielding short-term securities.
Interest Expense. Interest expense on deposits decreased $10.8
million, or 4.6%, to $222.6 million for the nine months ended September 30, 1999
compared to $233.4 million for the corresponding prior year period. Interest
expense on time deposits, which accounted for 87.1% of total interest expense on
deposits, decreased $9.9 million, or 4.9%, to $193.9 million for the nine months
ended September 30, 1999 compared to $203.8 million for the nine months ended
September 30, 1998. Interest expense on borrowed funds was $0.1 million for the
nine months ended September 30, 1999. There was no interest expense on borrowed
funds for the nine months ended September 30, 1998.
The decrease in interest expense was primarily due to a
decrease of 41 basis points in the annualized average cost of total
interest-bearing liabilities to 4.54% for the nine months ended September 30,
1999 from 4.95% for the nine months ended September 30, 1998. Among the
interest-bearing liability mix, the largest decrease was a 49 basis point
decline in the annualized average cost of time deposits to 5.09% from 5.58% for
the nine month periods ended September 30, 1999 and 1998, respectively. The
decreases in the annualized average cost on our interest-bearing liabilities
reflect the downward repricing of those liabilities due to the lower interest
rate environment from September 30, 1998 through early 1999. Over the past
several months, market interest rates have generally increased. Although this
general increase did not materially impact our results of operations in the
recent period, we expect it to impact the costs of our interest-bearing
liabilities in future periods.
The impact of the decrease in the annualized average cost of
total interest-bearing liabilities was partially offset by an increase in the
average balance of such liabilities. The average balance of total
interest-bearing liabilities increased $251.9 million, or 4.0%, to $6.56 billion
for the nine months ended September 30, 1999 compared to $6.31 billion for the
corresponding period of the prior year. Of the increase in the average balance
of total interest-bearing liabilities, $216.2 million, or 85.8% of the increase,
resulted from a 4.4% increase in the average balance of time deposits to $5.10
billion from $4.88 billion for the nine month periods ended September 30, 1999
and 1998, respectively. The average balance of regular savings deposits
increased $24.9 million, or 3.0%, to $862.5 million for the nine months ended
September 30, 1999. We believe that the increase in the average balance of total
interest-bearing liabilities reflects our offering of competitive rates to our
depositors. The average balance of borrowed funds for the nine months ended
September 30, 1999 was $2.4 million.
Net Interest Income. Net interest income for the first nine
months of 1999 increased $16.6 million, or 10.6%, to $173.7 million from $157.1
million for the first nine months of 1998. This increase reflects the increase
in the average balance of first mortgage loans and investment securities, and a
decrease in the annualized average cost of total interest-bearing liabilities.
Our annualized net interest spread increased to 2.19% for the nine month period
ended September 30, 1999 compared to 2.16% for the corresponding prior year
period. The annualized net interest margin increased to 2.94% from 2.85% for the
nine months ended September 30, 1999 and 1998, respectively, primarily due to
the investment of the proceeds from the Reorganization.
18
<PAGE> 19
Provision for Loan Losses. Our provision for loan losses was
$1.75 million for the nine months ended September 30, 1999 compared to $1.80
million for the corresponding prior year period. The current level of the
provision for loan losses is reflective of the continued growth in the loan
portfolio even though there has been a decrease in non-performing loans.
Non-Interest Income. Total non-interest income, consisting of
service fees and other income, decreased $0.1 million, or 2.7%, to $3.6 million
from $3.7 million for the nine month periods ended September 30, 1999 and 1998,
respectively.
Non-Interest Expense. Total non-interest expense increased
$3.9 million, or 8.2%, to $51.2 million for the nine month period ended
September 30, 1999 compared to $47.3 million for the corresponding prior year
period. Salaries and employee benefits increased $2.9 million, or 9.8%, to $32.4
million from $29.5 million for the nine months ended September 30, 1999 and
1998, respectively, primarily due to the recognition of compensation expense
associated with the ESOP and routine salary and employee benefit increases.
Other expense increased $0.7 million, or 10.6%, to $7.3 million for the nine
month period ended September 30, 1999 compared to $6.6 million for the
corresponding prior year period. This increase primarily reflects additional
operating expenses related to the increased volume of our first mortgage loan
originations.
Our efficiency ratio for the nine month period ended September
30, 1999 was 28.9% compared to 29.4% for the corresponding prior year period.
Our annualized ratio of non-interest expense to average assets was 0.85% and
0.84% for the nine months ended September 30, 1999 and 1998, respectively.
Income Taxes. Income tax expense increased $4.7 million, or
11.3%, to $46.3 million for the nine month period ended September 30, 1999
compared to $41.6 million for the nine month period ended September 30, 1998.
This increase was primarily due to an increase in income before income tax
expense for the first nine months of 1999 compared to the first nine months of
1998.
19
<PAGE> 20
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 correspondent bank. In addition, we may
enter into repurchase agreements with approved broker-dealers. Repurchase
agreements are agreements which allow us to borrow money using our securities as
collateral.
Scheduled 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 three and nine months ended September 30, 1999, we
originated and purchased mortgage loans of approximately $415.0 million and
$1.06 billion, respectively, compared to $218.0 million and $644.0 million,
respectively, for the corresponding 1998 periods. Purchases of mortgage-backed
securities for the nine months ended September 30, 1999 were $1.00 billion and
for the nine months ended September 30, 1998 were $920.5 million, while
purchases of investment securities for the nine months ended September 30, 1999
were $914.0 million and for the nine months ended September 30, 1998 were $495.7
million.
These investing activities were funded by principal payments
on mortgage loans and mortgage-backed securities, calls and maturities on
investment securities, borrowings, funds provided by our operating activities,
and the sale of Hudson City Bancorp's common stock in the Reorganization.
Principal repayments on loans and mortgage-backed securities totaled $1.51
billion for the nine month period ended September 30, 1999 compared to $1.39
billion for the nine month period ended September 30, 1998. Maturities and calls
of investment securities totaled $723.7 million for the nine months ended
September 30, 1999 compared to $452.8 for the nine months ended September 30,
1998. Sales of investment securities for the nine months ended September 30,
1999 were $109.8 million. There were no sales of investment securities for the
corresponding prior year period. Hudson City Bancorp had borrowed funds,
consisting entirely of securities sold under agreements to repurchase, of $100.0
million at September 30, 1999.
At September 30, 1999, Hudson City Savings had outstanding
loan commitments to borrowers of approximately $186.7 million and available home
equity and overdraft lines of credit of approximately $54.4 million. Commitments
to purchase mortgage-backed securities were approximately $98.9 million at
September 30, 1999. Time deposit accounts scheduled to mature within one year
were $4.57 billion at September 30, 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
20
<PAGE> 21
have any balloon payment due on any long-term obligations or any off-balance
sheet items other than the commitments and unused lines of credit noted above
that would impact our liquidity position. Currently, we are planning to open
four new branch locations of which three have received full regulatory approval
to date. We plan to open all four branches during 2000. The expenditures related
to their establishment are not expected to have a material impact on our
financial position or results of operations.
Hudson City Bancorp sold 54,350,000 shares of its common stock
to the public as part of the Reorganization at $10.00 per share resulting in net
proceeds of $527.3 million. Hudson City Bancorp also issued 61,288,300 shares
to Hudson City, MHC. Excluding the use of deposits by subscription-eligible
depositors to purchase stock, net proceeds funded by cash were approximately
$418.0 million. On October 14, 1999, the Board of Directors of Hudson
City Bancorp declared a quarterly cash dividend of five cents ($0.05) per common
share outstanding. The dividend is payable on December 1, 1999 to shareholders
of record at the close of business on November 12, 1999.
At September 30, 1999, we exceeded each of the applicable
regulatory capital requirements. Our leverage (tier 1) capital was $1.49
billion, or 18.65%, at September 30, 1999. In order to be classified as
"well-capitalized" by the FDIC we were required to have leverage (tier 1)
capital of $400.6 million, or 5.00%. To be classified as a well-capitalized bank
by the FDIC, we must also have a tier 1 risk-based capital ratio of 6.00% and a
total risk-based capital ratio of 10.00%. At September 30, 1999, we had a tier 1
risk-based capital ratio of 57.92% and a total risk-based capital ratio of
58.68%.
YEAR 2000 ISSUES
General. A significant challenge that is confronting the
business community, including Hudson City Savings 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 the Year 1900 rather than the
Year 2000.
Failure by federally-regulated institutions, such as Hudson
City Savings, to adequately address the Y2K issue may result in supervisory
action by bank regulatory authorities, 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 our 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.
On July 20, 1999, the federal government enacted the Year
2000 Readiness and Responsibility Act P.L.106-37. Among the goals of the
legislation are: (1) to establish uniform legal standards that give businesses
and users of technology products reasonable incentives to solve the Year 2000
problems before they develop, (2) to encourage remediation and testing efforts,
(3) to promote alternative dispute resolution, and (4) to discourage
insubstantial lawsuits while preserving remedies of plaintiffs who suffer
genuine injury. No assurance can be given at this time that the legislation
will have the effect of limiting any of our potential liability.
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<PAGE> 22
State of Readiness. The Board of Directors and senior
management have consistently supported investment in established and proven
technologies. Because of this philosophy, the Board of Directors 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 Federal Financial
Institutions Examination Council (FFIEC). As discussed below, we believe that we
have considered all material Y2K issues and that we have taken proper action to
address them.
The core of our computer processing system is an in-house,
vendor-maintained and supported main frame computer and a vendor-maintained and
supported integrated financial systems software package. We completed our
conversion to the current system in 1993. We believe that many of our
applications critical to daily operations have been Y2K compliant for some time.
Calculations involving dates for maturities beyond 1999 on both savings and
mortgage instruments have been in place and functioning since the systems'
conversion in 1993.
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 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 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
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<PAGE> 23
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 our integrated financial
systems software package was put into current production without Y2K-related
problems. Other significant systems have 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 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 have received
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 to be tested 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.
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 $0.9 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 results 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 are in the process of completing our Y2K project in a
timely manner, we cannot guarantee that the Y2K projects 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.
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<PAGE> 24
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
interruptions. However, during extensive losses of power and/or
telecommunications, we may temporarily halt our operations.
Additionally, public concerns over the Year 2000 issue could
adversely impact Hudson City Bancorp's deposit flows near the end of 1999.
Although we have made every effort to inform our customers of the efforts taken
in order to ensure that our mission critical computer systems will not be
adversely effected by the Year 2000 issue, there still exists a likelihood that
some customers will remove their deposit funds as a precautionary measure. While
we believe that deposit outflows related solely to the Year 2000 issue will
likely be both minimal and short-term in nature, we have planned for potential
alternative funding sources in the event that such deposit outflows occur.
In September 1999, Tropical Storm Floyd sporadically disrupted
telecommunications and power throughout New Jersey for several days. Certain
aspects of Hudson City Bancorp's business resumption contingency plan were
successfully implemented to provide continued service with little or no
inconvenience to our customers.
Overall, we do not anticipate any adverse material impact on
our operations as a result of the Y2K issue.
IMPACT OF PROPOSED LEGISLATION
As of the date of this document, the U.S. Congress passed
legislation intended to modernize the financial services industry by
establishing a comprehensive framework to permit affiliations among commercial
banks, insurance companies and other financial service providers. The
legislation is being forwarded to the President for his approval. Generally, the
legislation would (1) repeal the historical restrictions and eliminate many
federal and state law barriers to affiliations among banks and securities firms,
insurance companies and other financial service providers, (2) provide a uniform
framework for the activities of banks, savings institutions and their holding
companies, (3) broaden the activities that may be conducted by national banks
and banking subsidiaries of bank holding companies, (4) provide an enhanced
framework for protecting the privacy of consumer's information, (5) adopt a
number of provisions related to the capitalization, membership, corporate
governance and other measures designed to modernize the Federal Home Loan Bank
system, (6) modify the laws governing the implementation of the Community
Reinvestment Act and (7) address a variety of other legal and regulatory issues
affecting both day-to-day operations and long-term activities of financial
institutions, including the functional regulation of bank securities activities.
In particular, the pending legislation would restrict certain
of the powers that unitary savings and loan association holding companies
currently have. Unitary savings and loan holding companies that are
24
<PAGE> 25
"grandfathered," i.e., became a unitary savings and loan holding company
pursuant to an application filed with the OTS before May 4, 1999 would retain
their authority under current law. All other savings and loan companies would be
limited to financially related activities permissible for bank holding
companies, as defined under the new law. The proposed legislation would also
prohibit non-financial companies from acquiring savings and loan association
holding companies.
Bank holding companies, like Hudson City Bancorp, would be
permitted to engage in a wider variety of financial activities than permitted
under current law, particularly with respect to insurance and securities
activities. In addition, in a change from current law, bank holding companies
will be in a position to be owned, controlled or acquired by any company engaged
in financially related activities.
We do not believe that the proposed legislation, as publicly
reported, would have a material adverse affect on our operations in the near
term. However, to the extent the legislation permits banks, securities firms and
insurance companies to affiliate, the financial services industry may experience
further consolidation. This could result in a growing number of larger financial
institutions that offer a wider variety of financial services than we currently
offer and that can aggressively compete in the markets we currently serve.
Item 3. - Quantitative and Qualitative Disclosures About Market Risk
Quantitative and qualitative disclosure about market risk is
presented as of December 31, 1998 in Hudson City Bancorp's Registration
Statement on Form S-1, as amended (Registration No. 333-74383). 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, 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 1999 and did not have any such hedging
transactions in place at September 30, 1999. 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, 1998. Assuming a 100 basis point
interest rate increase, the present value of equity would decrease $144.1
million, or 8.90%, at September 30, 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 $123.7 million, or 7.64%,
at September 30, 1999 relative to the base scenario, compared with a $12.7
million, or 1.13%, decrease at December 31, 1998 relative to the base scenario.
GAP Analysis. The following table presents the amounts of our
interest-earning assets and interest-bearing liabilities outstanding at
September 30, 1999 which we anticipate to reprice or mature in each of the
future time periods shown.
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<PAGE> 26
HUDSON CITY BANCORP, INC.
FORM 10-Q
<TABLE>
<CAPTION>
At September 30, 1999
------------------------------------------------------------------------
More than
Six months six months
or less to one year
------------------------------- --------------------------------
(Dollars in thousands)
<S> <C> <C>
INTEREST-EARNING ASSETS:
First mortgage loans........................$ 444,855 $ 459,602
Consumer and other loans.................... 27,314 909
Federal funds sold.......................... 44,100 -
Mortgage-backed securities.................. 1,258,532 1,244,469
Investment securities....................... 147 247
-------------------------- ---------------------------
Total interest-earning assets......... 1,774,948 1,705,227
-------------------------- ---------------------------
INTEREST-BEARING LIABILITIES:
Savings accounts............................ 26,501 20,650
Interest-bearing demand accounts........ 2,346 2,346
Money market accounts....................... 123,161 123,162
Time deposits............................... 3,452,420 1,113,203
Borrowed funds.............................. - -
-------------------------- ---------------------------
Total interest-bearing liabilities.... 3,604,428 1,259,361
-------------------------- ---------------------------
Interest rate sensitivity gap....................$ (1,829,480) $ 445,866
========================== ===========================
Cumulative interest rate sensitivity gap... $ (1,829,480) $ (1,383,614)
========================== ===========================
Cumulative interest rate sensitivity gap
as a percent of total assets................ (21.86) % (16.53) %
Cumulative interest-earning assets
as a percentage of interest-
bearing liabilities......................... 49.24 % 71.55 %
</TABLE>
<TABLE>
<CAPTION>
At September 30, 1999
----------------------------------------------------------------------------
More than More than
one year two years
to two years to three years
------------------------------ --------------------------------
(Dollars in thousands)
<S> <C> <C>
INTEREST-EARNING ASSETS:
First mortgage loans........................ $ 562,607 $ 470,234
Consumer and other loans.................... 1,806 2,321
Federal funds sold.......................... - -
Mortgage-backed securities.................. 145,898 109,055
Investment securities....................... 514 709
------------------------- ---------------------------
Total interest-earning assets......... 710,825 582,319
------------------------- ---------------------------
INTEREST-BEARING LIABILITIES:
Savings accounts............................ 202,288 242,746
Interest-bearing demand accounts........ 23,460 28,152
Money market accounts....................... 123,162 123,161
Time deposits............................... 393,100 37,465
Borrowed funds.............................. - -
------------------------- ---------------------------
Total interest-bearing liabilities.... 742,010 431,524
------------------------- ---------------------------
Interest rate sensitivity gap.................... $ (31,185) $ 150,795
========================= ===========================
Cumulative interest rate sensitivity gap... $ (1,414,799) $ (1,264,004)
========================= ===========================
Cumulative interest rate sensitivity gap
as a percent of total assets................ (16.91) % (15.11) %
Cumulative interest-earning assets
as a percentage of interest-
bearing liabilities......................... 74.76 % 79.06 %
</TABLE>
<TABLE>
<CAPTION>
At September 30, 1999
--------------------------------------------------------------------------
More than
three years More than
to five years five years
------------------------------ ------------------------------
(Dollars in thousands)
<S> <C> <C>
INTEREST-EARNING ASSETS:
First mortgage loans........................ $ 540,343 $ 1,549,523
Consumer and other loans.................... 17,834 52,648
Federal funds sold.......................... - -
Mortgage-backed securities.................. 88,516 346,118
Investment securities....................... 437,440 400,782
------------------------ -------------------------
Total interest-earning assets......... 1,084,133 2,349,071
------------------------ -------------------------
INTEREST-BEARING LIABILITIES:
Savings accounts............................ 161,831 161,830
Interest-bearing demand accounts........ 18,768 18,768
Money market accounts....................... - -
Time deposits............................... 22,507 -
Borrowed funds.............................. - 100,000
------------------------ -------------------------
Total interest-bearing liabilities.... 203,106 280,598
------------------------ -------------------------
Interest rate sensitivity gap.................... $ 881,027 $ 2,068,473
======================== =========================
Cumulative interest rate sensitivity gap... $ (382,977) $ 1,685,496
======================== =========================
Cumulative interest rate sensitivity gap
as a percent of total assets................ (4.58) % 20.14 %
Cumulative interest-earning assets
as a percentage of interest-
bearing liabilities......................... 93.86 % 125.85 %
</TABLE>
<TABLE>
<CAPTION>
At September 30, 1999
-------------------------------
Total
-----------------------------
(Dollars in thousands)
<S> <C>
INTEREST-EARNING ASSETS:
First mortgage loans........................ $ 4,027,164
Consumer and other loans.................... 102,832
Federal funds sold.......................... 44,100
Mortgage-backed securities.................. 3,192,588
Investment securities....................... 839,839
------------------------
Total interest-earning assets......... 8,206,523
------------------------
INTEREST-BEARING LIABILITIES:
Savings accounts............................ 815,846
Interest-bearing demand accounts........ 93,840
Money market accounts....................... 492,646
Time deposits............................... 5,018,695
Borrowed funds.............................. 100,000
------------------------
Total interest-bearing liabilities.... 6,521,027
------------------------
Interest rate sensitivity gap.................... $ 1,685,496
========================
Cumulative interest rate sensitivity gap...
Cumulative interest rate sensitivity gap
as a percent of total assets................
Cumulative interest-earning assets
as a percentage of interest-
bearing liabilities.........................
</TABLE>
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<PAGE> 27
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
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 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 heard oral arguments on September 27, 1999
on the Appeal but has not yet issued a decision in the matter. Meanwhile, the
Smith action remains stayed. We believe that this lawsuit is without merit and
we intend to aggressively defend our interest.
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 Savings 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 been dismissed with prejudice.
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<PAGE> 28
Item 2. - Changes in Securities and Use of Proceeds
Hudson City Bancorp's initial registration statement (No.
333-74383) on Form S-1 was declared effective on May 14, 1999. In connection
with the issuance and distribution of Hudson City Bancorp's common stock, par
value $0.01 per share (the "Common Stock"), the subscription offering to
depositors of Hudson City Savings and the community offering to certain members
of the community served by Hudson City Savings commenced on May 21, 1999. The
subscription and community offerings terminated on June 23, 1999 except that
those individuals subscribing for the maximum number of shares in the
subscription offering were given the opportunity to increase their orders to a
new, higher maximum. This limited extension of the subscription offering
terminated on July 2. A syndicated community offering commenced on June 28, 1999
and was terminated on July 8, 1999. Ryan, Beck & Co., Inc., agreed to use its
best efforts to assist Hudson City Bancorp with the solicitation of
subscriptions and orders for shares of common stock in the offerings. A total of
82,358,687 shares of common stock were registered for an aggregate price of
$823,586,870. The offerings resulted in the sale of 54,350,000 of Common Stock
to the public at an aggregate price of $543,500,000. Through September 30, 1999,
Hudson City Bancorp incurred, in connection with the issuance and distribution
of securities registered, underwriting commissions of $10,998,520.,
miscellaneous underwriting expenses of $241,192. and other expenses of
$4,925,266. resulting in total expenses of $16,164,978. Hudson City Bancorp
received net proceeds of $527,335,022. Of such proceeds, $258,667,511. was
retained by Hudson City Bancorp, $263,667,511. was contributed as capital to
Hudson City Savings and, as of September 30, 1999, $9,969,000. was loaned to
Hudson City Savings' ESOP by Hudson City Bancorp. The proceeds retained by
Hudson City Bancorp, and deposited with Hudson City Savings, were initially used
to purchase short term securities and were eventually used to originate and
purchase first mortgage loans or invest in mortgage-backed securities. The
foregoing information as to expenses and net proceeds are reasonable estimates
of such items.
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 Number 27 - Financial Data Schedule.
(b) No reports on Form 8-K were filed during the quarter ended
September 30, 1999.
28
<PAGE> 29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Hudson City Bancorp, Inc.
Date: November 12, 1999 By: /s/ Leonard S. Gudelski
--------------------------------------
Leonard S. Gudelski
Chairman and Chief Executive Officer
Date: November 12, 1999 By: /s/ Ronald E. Hermance, Jr.
--------------------------------------
Ronald E. Hermance, Jr.
President and Chief Operating Officer
29
<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 61,973
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 44,100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 838,460
<INVESTMENTS-CARRYING> 3,193,967
<INVESTMENTS-MARKET> 3,193,314
<LOANS> 4,141,678
<ALLOWANCE> 19,441
<TOTAL-ASSETS> 8,367,942
<DEPOSITS> 6,742,510
<SHORT-TERM> 0
<LIABILITIES-OTHER> 48,384
<LONG-TERM> 100,000
0
0
<COMMON> 1,156
<OTHER-SE> 1,475,892
<TOTAL-LIABILITIES-AND-EQUITY> 8,367,942
<INTEREST-LOAN> 208,404
<INTEREST-INVEST> 185,888
<INTEREST-OTHER> 2,036
<INTEREST-TOTAL> 396,328
<INTEREST-DEPOSIT> 222,575
<INTEREST-EXPENSE> 222,677
<INTEREST-INCOME-NET> 173,651
<LOAN-LOSSES> 1,750
<SECURITIES-GAINS> (7)
<EXPENSE-OTHER> 51,192
<INCOME-PRETAX> 124,257
<INCOME-PRE-EXTRAORDINARY> 124,257
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 77,972
<EPS-BASIC> 0.22
<EPS-DILUTED> 0.22
<YIELD-ACTUAL> 2.94
<LOANS-NON> 11,682
<LOANS-PAST> 1,744
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 17,712
<CHARGE-OFFS> 38
<RECOVERIES> 17
<ALLOWANCE-CLOSE> 19,441
<ALLOWANCE-DOMESTIC> 12,982
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 6,459
</TABLE>
