<PAGE> 1
REGISTRATION NO. 333-74383
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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PRE-EFFECTIVE AMENDMENT NO. 2 TO THE
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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HUDSON CITY BANCORP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CERTIFICATE OF INCORPORATION)
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<TABLE>
<S> <C> <C>
DELAWARE 6035 22-3640393
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD (IRS EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER)
</TABLE>
WEST 80 CENTURY ROAD
PARAMUS, NEW JERSEY 07652
(201) 967-1900
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
LEONARD S. GUDELSKI
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
HUDSON CITY SAVINGS BANK
WEST 80 CENTURY ROAD
PARAMUS, NEW JERSEY 07652
(201) 967-1900
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
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COPIES TO:
ROBERT C. AZAROW, ESQ.
OMER S. J. WILLIAMS, ESQ.
THACHER PROFFITT & WOOD
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(212) 912-7400
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective. If any of the
securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) REGISTRATION FEE
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<S> <C> <C> <C> <C>
Common Stock, $.01 par
value..................... 82,358,687 $10.00 $823,586,870 $241,917(3)
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</TABLE>
(1) Includes the maximum number of shares that may be issued in connection with
this offering.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) Previously paid upon filing of the Registration Statement on March 15, 1999.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION ON SUCH DATE OR DATES AS MAY BE
NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER
AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL
THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES
ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH
DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
PROSPECTUS
[HUDSON CITY BANCORP, INC. LOGO]
PROPOSED HOLDING COMPANY FOR HUDSON CITY SAVINGS BANK
UP TO 82,358,687 SHARES OF COMMON STOCK
Hudson City Bancorp, Inc. is a new corporation that is offering shares of its
common stock. The shares we are offering represent less than half of the
outstanding common stock of Hudson City Bancorp. Hudson City Savings Bank formed
Hudson City Bancorp to own Hudson City Savings Bank as part of a reorganization
of our structure. More than half of the outstanding common stock of Hudson City
Bancorp will be owned by Hudson City, MHC, a mutual savings bank holding
company. The common stock of Hudson City Bancorp will be listed for trading on
the Nasdaq National Market System under the symbol "HCBK."
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TERMS OF THE OFFERING
PRICE: $10.00 PER SHARE
<TABLE>
<CAPTION>
MINIMUM MAXIMUM
------------ ------------
<S> <C> <C>
Number of shares................................ 52,933,750 71,616,250
Underwriting commissions and expenses........... $ 9,624,000 $ 11,687,000
Net proceeds to Hudson City Bancorp............. $519,714,000 $704,476,000
Net proceeds per share to Hudson City Bancorp... $ 9.82 $ 9.84
</TABLE>
We may sell up to 82,358,687 shares because of regulatory
considerations or changes in market or economic conditions.
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PLEASE READ THE RISK FACTORS BEGINNING ON PAGE [ ].
These securities are not deposits or accounts and are not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other governmental agency.
Neither the Securities and Exchange Commission, the Federal Deposit Insurance
Corporation, the Commissioner of Banking and Insurance of the State of New
Jersey nor any state securities regulator has approved or disapproved these
securities or determined if this prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
[ ], 1999
[RYAN,BECK & CO. LOGO]
<PAGE> 3
[MAP OF NEW JERSEY DIVIDED BY COUNTY AND SHOWING NUMBER OF
HUDSON CITY SAVINGS BANK BRANCH OFFICES PER COUNTY]
[MAP OF NEW JERSEY]
2
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SUMMARY
To more fully understand the offering, you should read this entire document
carefully, including the financial statements and the notes to the financial
statements.
OUR REORGANIZATION AND STOCK OFFERING
Hudson City Savings Bank is reorganizing into the mutual holding company
structure. As part of the reorganization, Hudson City Bancorp is offering shares
of its common stock to the public. After the reorganization, Hudson City Bancorp
will own Hudson City Savings.
THE COMPANIES
HUDSON CITY SAVINGS BANK
Hudson City Savings is a community and customer-oriented savings bank that
provides financial services primarily to individuals and families. We seek to
differentiate ourselves from our competitors by providing high quality service
while maintaining low operating costs. Our assets are almost evenly divided
between residential mortgage loans and mortgage-backed and other investment
securities. Deposits provide the funds for the loans and investments we make.
Hudson City Savings has 75 branches located in Bergen, Burlington, Camden,
Essex, Gloucester, Hudson, Middlesex, Monmouth, Morris, Ocean, Passaic, Union
and Warren counties in New Jersey. At December 31, 1998, we had assets of $7.75
billion, deposits of $6.81 billion and equity of $901 million. By asset size, we
are the largest savings bank headquartered in New Jersey and the largest mutual
savings bank in the country.
HUDSON CITY BANCORP, INC.
Hudson City Bancorp, Inc. will become the holding company by owning all of
the common stock of Hudson City Savings Bank after the reorganization. Hudson
City Bancorp has not engaged in any business to date.
HUDSON CITY, MHC
Hudson City, MHC will own more than half of the outstanding common stock of
Hudson City Bancorp after the reorganization. We do not expect that Hudson City,
MHC will engage in any business activity other than owning a majority of the
common stock of Hudson City Bancorp and managing dividends it receives from
Hudson City Bancorp. We do not expect that Hudson City, MHC will waive the
receipt of dividends declared by Hudson City Bancorp.
FINANCIAL HIGHLIGHTS OF HUDSON CITY SAVINGS INCLUDE:
- Residential Lending.
Hudson City Savings is the third largest originator of residential
mortgage loans in our market area. We originate the majority of these
loans for our own portfolio, rather than for sale, and we service the
loans we originate. At December 31, 1998, we had $3.57 billion of
residential mortgage loans, representing 97.6% of our total loan
portfolio.
- Commitment to Cost Control.
We have been effective at controlling our costs of operations. As a
result of these efforts, our ratio of operating expenses to average
assets was 0.84% for 1998. Our efficiency ratio, a commonly used industry
ratio that measures the cost of producing each dollar of revenue, was
29.58% for 1998. These ratios are favorable compared to other savings
institutions.
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- Interest Rate Strategy.
To reduce the risk that our earnings will be hurt if interest rates
change, we have invested in adjustable-rate mortgage-backed securities
that are guaranteed by U.S. government agencies. At December 31, 1998, we
had $2.17 billion of these securities. As part of our interest rate
management strategy, we also originate adjustable-rate residential
mortgage loans. At December 31, 1998, we had $1.85 billion of these
loans.
- Asset Quality.
Through our commitment to residential lending and investment in
mortgage-backed securities, we have had low levels of losses on loans and
late payments. At December 31, 1998, our ratio of non-performing assets
to total assets was 0.21% and our ratio of allowance for loan losses to
non-performing loans was 115.47%. These ratios are favorable compared to
those of most other savings institutions.
- Capital Strength and Profitability.
Our policy has been to maintain the financial strength of Hudson City
Savings through conservative risk management, a sound financial
condition, consistent earnings and efficient operations. At December 31,
1998, our ratio of equity to assets was 11.62%, our return on average
assets was 1.24% and our return on average equity was 10.90%.
DESCRIPTION OF OUR STRUCTURE AFTER THE REORGANIZATION
This chart shows our new structure, which is commonly referred to as a
mutual holding company structure, after the reorganization:
[HUDSON CITY'S SAVINGS BANK FLOW CHART]
PERSONS WHO CAN ORDER STOCK IN THE OFFERING
We are offering the shares of common stock of Hudson City Bancorp in what
we call a "subscription offering" in the order of priority listed below:
(1) Depositors with accounts at Hudson City Savings with total balances of
at least $100 on December 31, 1997;
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(2) Our employee stock ownership plan, and our profit incentive bonus plan,
both of which will provide retirement benefits to our employees; and
(3) Depositors with accounts at Hudson City Savings with total balances of
at least $100 on March 31, 1999.
The shares of common stock not purchased in the subscription offering will
be offered in what we call a "community offering" in the order of priority
listed below:
(1) Depositors with accounts at Hudson City Savings with total balances of
at least $100 on April 30, 1999;
(2) Individuals who are "residents" of New Jersey;
(3) Corporations, partnerships, trusts and other entities who are residents
of New Jersey; and
(4) Other members of the public to whom we deliver a prospectus.
In order to assure a successful offering, we have the right to grant an
overriding priority for institutional investors over purchasers in the community
offering, except for depositors as of April 30, 1999, for up to 25% of the
shares we sell in the offering. We may offer shares of common stock not
purchased in either the subscription offering or community offering to the
public through a selling group of brokers on a best efforts basis or in an
underwritten public offering.
TERMS OF THE OFFERING
We are offering for sale between 52,933,750 and 71,616,250 shares of common
stock of Hudson City Bancorp. The number of shares we sell in the offering may
increase by 15% to 82,358,687 shares as a result of regulatory considerations or
changes in financial markets. If we increase the number of shares we issue, you
will not have the opportunity to change or cancel your stock order. The offering
price is $10.00 per share. Ryan, Beck & Co., Inc. will use its best efforts to
assist us in selling our stock. Ryan, Beck is not obligated to take or purchase
any shares of common stock in the offering.
HOW WE DETERMINED THE OFFERING RANGE AND THE $10.00 PRICE PER SHARE
The offering range is based on an independent appraisal of Hudson City
Savings by RP Financial, LC., an appraisal firm experienced in appraisals of
savings institutions. RP Financial has estimated that our market value as of
April 30, 1999, is between $1.13 billion and $1.52 billion. This results in an
offering of between 52,933,750 and 71,616,250 shares of stock at an offering
price of $10.00 per share because we are only offering 47% of our stock to the
public. RP Financial's estimate of our market value was based in part upon our
financial condition and results of operations and the effect of the additional
capital to be raised in this offering. RP Financial's independent appraisal will
be updated before we complete our reorganization.
Two of the factors that RP Financial considered in determining our market
value were the price-to-book ratio and the price-to-earnings ratio or P/E ratio.
The price-to-book ratio represents the price per share of stock divided by its
book value or equity per share. Assuming we completed the reorganization at
December 31, 1998, each share of Hudson City Bancorp common stock, including the
shares we issue to Hudson City, MHC, would have had a book value of $9.96,
assuming we sell 71,616,250 shares. This means that the price you pay for each
share in this offering will be 100.40% of the book value.
The P/E ratio represents the price per share of stock divided by earnings
or net income per share. In our case, for 1998, our P/E ratio would have been
13.51x, assuming we sold 71,616,250 shares of stock.
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The P/E ratio and the price-to-book ratio constitute pro forma information
calculated using the assumptions under "Pro Forma Data."
The $10.00 price per share was determined by our Board of Managers and is
the price per share most commonly used in stock offerings involving conversions
and reorganizations of savings institutions.
LIMITS ON YOUR PURCHASE OF THE COMMON STOCK
Your orders for common stock will be limited in the following ways:
(1) the minimum order is 25 shares;
(2) in the subscription offering, the maximum amount that an individual may
purchase is $500,000;
(3) in the community offering, the maximum amount that an individual, alone
or acting together with others may purchase is $500,000; if you
purchase $500,000 of common stock in the subscription offering you may
still purchase up to $500,000 of common stock in the community
offering;
(4) in all categories of the offering combined the total amount that an
individual may purchase, acting together with others, is $2,500,000;
and
(5) if we receive orders for a greater number of shares than we are
offering, we will allocate the shares that we issue as described in
"The Reorganization and The Offering--Limitations on Common Stock
Purchases;" this may result in your receiving a smaller number of
shares than you ordered.
We may increase both the $500,000 and $2.5 million purchase limitations at our
discretion, if we do not receive orders for at least 52,933,750 shares. For
additional information on these purchase limitations, see "The Reorganization
and The Offering -- Limitations on Common Stock Purchases."
HOW YOU MAY PAY FOR YOUR SHARES
In the subscription offering and the community offering, you may only pay
for your shares by:
(1) personal check, official bank check or money order; or
(2) authorizing us to withdraw money from your deposit accounts maintained
with Hudson City Savings.
See "The Reorganization and The Offering -- Procedure for Purchasing Shares in
Subscription and Community Offerings -- Payment for Shares" for additional
information on how you may pay for your shares.
YOU MAY NOT SELL OR TRANSFER YOUR SUBSCRIPTION RIGHTS
If you order stock in the subscription offering, you will be required to
state that you are purchasing the stock for yourself and that you have no
agreement or understanding to sell or transfer your rights. We intend to take
legal action against anyone who sells or gives away their subscription rights.
We will not accept your order if we have reason to believe that you sold or
transferred your subscription rights. If anyone offers to give you money to buy
stock in your name, in exchange for later transferring the stock, or if someone
requests to share in proceeds upon your future sale of Hudson City Bancorp
stock, please inform our Stock Information Center at (800) 541-3187.
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DEADLINE FOR ORDERS OF COMMON STOCK
If you wish to purchase shares, you must submit, by mail or by overnight
courier, a properly completed stock order form, together with payment for the
shares, to the Stock Information Center at the address indicated on the enclosed
Stock Order Form, by 10:00 a.m., Eastern Time, on [ ], 1999, unless
we extend this deadline. You must submit your order forms by mail or overnight
courier. You may not drop off your order forms at any of our branch offices.
TERMINATION OF THE OFFERING
The subscription offering will terminate at 10:00 a.m., Eastern Time, on
[ ], 1999. We expect that the community offering will terminate at the
same time. We may extend this expiration date without notice to you, until
[ ], 1999, unless regulators approve a later date. All further
extensions, in the aggregate, may not last beyond [ ].
MARKET FOR THE COMMON STOCK
We expect the common stock to trade on the Nasdaq National Market System of
The Nasdaq Stock Market under the symbol "HCBK." Ryan, Beck intends to make a
market in the common stock but it is under no obligation to do so.
HOW WE INTEND TO USE THE PROCEEDS WE RAISE FROM THE OFFERING
Assuming we sell 71,616,250 shares in the subscription offering, we intend
to distribute the net proceeds from the offering as follows:
- $352.2 million will be contributed to Hudson City Savings;
- $57.3 million will be loaned to the employee stock ownership plan of
Hudson City Savings to fund its purchase of common stock (assuming the
purchase of the shares at $10.00 per share); and
- $294.9 million will be retained by Hudson City Bancorp.
Hudson City Bancorp may use the net proceeds retained from the offering as
a possible source of funds to pay dividends to stockholders, to repurchase
common stock, to finance the possible acquisition of other financial
institutions and other businesses that are related to banking, to invest in
securities or for other general corporate purposes. Hudson City Savings may use
the proceeds it receives to fund new loans, to purchase mortgage-backed
securities and investment securities or for general corporate purposes,
including the possible establishment or acquisition of branch offices.
OUR POLICY REGARDING DIVIDENDS
We currently plan to pay an annual cash dividend of $0.20 per share,
payable quarterly at $0.05 per share starting the first quarter after we
complete the reorganization. We do not guarantee that we will pay dividends, or
that we will not reduce or eliminate dividends in future periods.
OUR DIRECTORS, OFFICERS AND EMPLOYEES WILL HAVE ADDITIONAL COMPENSATION AND
BENEFIT PROGRAMS AFTER THE REORGANIZATION
We are adding two new benefit plans for our officers and employees at no
cost to them:
- Employee Stock Ownership Plan. This plan will cover most of our salaried
employees. We will lend it money to buy up to 8% of the shares we sell in
the offering. It will buy them either in the offering or in the open
market. The plan will allocate the stock to employees over a thirty-year
period as additional compensation for their services.
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- ESOP Restoration Plan. This plan will provide selected executive
officers additional benefits if the tax laws limit their benefits or if
they retire before the allocation of all stock under the employee stock
ownership plan.
We are also adding the following termination pay arrangements:
- Employment Agreements and Change of Control Agreements. Upon completion
of the reorganization, we will enter into employment agreements with Mr.
Gudelski, our Chairman and Chief Executive Officer, Mr. Hermance, our
President and Chief Operating Officer, and Mr. Tassillo, our Executive
Vice President and Treasurer. If we discharge one of them without cause,
or if one of them resigns because we do not meet our obligations under
these agreements, we must make a termination payment. We are also
entering into change of control agreements with four First Vice
Presidents. These agreements have termination provisions similar to those
in the employment agreements, but they apply only if there is a change of
control. The employment agreements and change of control agreements will
provide these officers with rights they do not currently have to receive
severance benefits in the event of their actual or constructive discharge
without cause.
- Outside Directors Consultation Plan. We have added change of control
protections to this plan. The protections will assure that each of our
outside directors receives benefits if a change of control prematurely
ends his or her service.
We also plan to add the following stock-based benefit plans for our
directors, officers and employees:
- Stock Option Plan. Under this plan, we may grant our officers, directors
and employees options to purchase our stock at a price that is set on the
date we grant the option. The price that we set cannot be less than our
stock's current trading price when we grant the options, so the options
will have value only if our stock price increases. Recipients of options
will have up to ten years to exercise their options.
- Management Recognition Plan. This plan will allow selected officers,
directors and employees to receive shares of our stock, without making
any payment at all, if they work for us until the end of a specified
service period or attain other performance goals.
Assuming we sell 71,616,250 shares, we expect to ask our stockholders for
approval to grant options to purchase up to 7,161,625 of our shares and make
stock grants under a management recognition plan of up to 2,864,650 shares under
the plans described above. We will not implement a stock option plan or
management recognition plan unless our stockholders approve them. We do not
expect to ask our stockholders to approve these plans until at least six months
after we complete the offering. We expect to obtain the shares we would need for
these plans through stock repurchases.
The following table presents the dollar value of the shares that we expect
to grant under the employee stock ownership plan and the contemplated management
recognition plan and of those underlying options to be granted under the stock
option plan, and the percentage of Hudson City Bancorp's outstanding common
stock that will be represented by these shares. We based the value of
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the shares for the employee stock ownership plan and management recognition plan
on a price of $10.00 per share and the issuance of 71,616,250 shares of common
stock.
<TABLE>
<CAPTION>
PERCENTAGE OF
VALUE OF COMMON STOCK SOLD
BENEFIT PLAN SHARES GRANTED IN THE OFFERING
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(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Employee stock ownership plan............................ $57,293 8%
Management recognition plan.............................. 28,647 4
Stock option plan........................................ -- 10
------- --
$85,940 22%
======= ==
</TABLE>
POSSIBLE CONVERSION OF HUDSON CITY, MHC TO STOCK FORM
In the future, Hudson City, MHC may convert from the mutual to capital
stock form, in a transaction commonly known as a "second-step conversion." If
Hudson City, MHC were to undertake a second-step conversion, Hudson City
Bancorp's public stockholders would own approximately the same percentage of the
resulting entity as they owned prior to the second-step conversion. This
percentage would be adjusted to reflect the assets owned by Hudson City, MHC and
any dividends waived by Hudson City, MHC. The Board of Managers have no current
plan to undertake a "second-step conversion transaction." For a description of
this possible second-step conversion, see "The Reorganization and The
Offering -- Possible Conversion of Hudson City, MHC to Stock Form."
HOW YOU MAY OBTAIN ADDITIONAL INFORMATION REGARDING THE OFFERING
If you have any questions regarding the offering or the reorganization,
please call the Stock Information Center at (800) 541-3187, Monday through
Friday, between 9:00 a.m. and 4:00 p.m. Eastern Time.
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RISK FACTORS
You should consider carefully the following risk factors before deciding whether
to invest in our common stock.
RISING INTEREST RATES MAY HURT OUR PROFITS.
To be profitable, we have to earn more money in interest and fees than we
pay as interest and other expenses. Of our residential mortgage loans, 48.1%
have interest rates that are fixed for the term of the loan. We originate loans
with terms of up to 30 years, while 70.0% of our deposit accounts consist of
time deposit accounts with remaining terms to maturity of less than one year. If
interest rates rise, the amount of interest we pay on deposits is likely to
increase more quickly than the amount of interest we receive on our loans,
mortgage-backed securities and investment securities. This would cause our
profits to decrease. Rising interest rates may also reduce the value of our
mortgage-backed securities and investment securities. For additional information
on our exposure to interest rates, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Management of Interest Rate
Risk."
LOW DEMAND FOR MORTGAGE LOANS MAY LOWER OUR PROFITABILITY.
Making residential mortgage loans is our primary business and primary
source of profits. If customer demand for residential mortgage loans decreases,
our profits may decrease because our alternative investments earn less revenue
for us than residential mortgage loans. Customer demand for residential mortgage
loans could be reduced by a weaker economy, an increase in unemployment, a
decrease in real estate values or an increase in interest rates.
AFTER THE REORGANIZATION OUR RETURN ON AVERAGE EQUITY WILL BE LOW COMPARED TO
OTHER COMPANIES. THIS COULD HURT THE PRICE OF OUR COMMON STOCK.
We will not be able to deploy the increased capital from this offering
immediately. Our ability to profitably leverage our new capital will be
significantly affected by industry competition for loans and deposits.
Initially, we intend to invest the net proceeds in short term investments which
generally have lower yields than residential mortgage loans. This will reduce
our return on average equity to a level that will be lower than our historical
ratios. For 1998, our return on average equity was 10.90%. Until we can leverage
our increased capital and grow interest-earning assets, we expect our return on
equity to be below the industry average, which may negatively impact the value
of your stock.
STRONG COMPETITION WITHIN OUR MARKET AREA MAY REDUCE OUR CUSTOMER BASE.
Competition in the banking and financial services industry is intense. We
have competed for customers by offering excellent service and competitive rates
on our loans and deposit products. We compete with commercial banks, savings
institutions, mortgage banking firms, credit unions, finance companies, mutual
funds, insurance companies, and brokerage and investment banking firms. Some of
these competitors have greater resources than we do and may offer services that
we do not provide. For example, we do not provide insurance products, trust or
investment services, telephonic banking, banking services through home computers
or other technologically advanced services. Customers who seek "one stop
shopping" may be drawn to these institutions. Our profitability depends upon our
continued ability to successfully compete in our market area.
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THE IMPLEMENTATION OF STOCK-BASED BENEFITS WILL INCREASE OUR FUTURE
COMPENSATION EXPENSE AND REDUCE OUR EARNINGS.
We intend to adopt a stock option plan which will provide for the granting
of options to purchase common stock, to adopt a management recognition plan that
will provide for awards of common stock to our eligible officers, employees and
directors and to have an employee stock ownership plan which will purchase
shares in the reorganization. In addition, we intend to adopt a restoration plan
that will supplement the benefits to select executive officers under the
employee stock ownership plan. These plans will increase our future costs of
compensating our directors and employees. The cost of these plans will vary
based on our stock price.
THE YEAR 2000 ISSUE COULD HURT OUR OPERATIONS AND OUR PROFITS AND COULD LOWER
THE VALUE OF YOUR STOCK.
We rely upon computers to conduct our daily business. Failure of any of our
computer systems, those of the parties we do business with or the public
infrastructure, including the electric and telephone companies, to process the
new year may disrupt our ability to do routine business and to service our
customers. For example, we may not be able to process withdrawals or deposits,
prepare account statements or engage in any of the transactions that constitute
our normal operations. This could hurt our profits. For additional information
regarding the "Year 2000 Issue," see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Issues for the Year 2000."
HUDSON CITY, MHC'S VOTING CONTROL OVER HUDSON CITY BANCORP MAY PREVENT
TRANSACTIONS YOU WOULD LIKE.
Hudson City, MHC will own a majority of Hudson City Bancorp's common stock
after the reorganization. Hudson City, MHC will be managed by the same directors
and officers who manage Hudson City Savings. The board of directors of Hudson
City, MHC will control the outcome of most matters put to a vote of stockholders
of Hudson City Bancorp. We cannot assure you that the votes cast by Hudson City,
MHC will be in your personal best interests as a stockholder. For more
information regarding your lack of voting control over Hudson City Bancorp, see
"Hudson City, MHC" and "Restrictions on Acquisition of Hudson City Bancorp and
Hudson City Savings."
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SELECTED FINANCIAL AND OTHER DATA
The summary information presented below under "Selected Financial Condition
Data," "Selected Operating Data" and "Selected Financial Ratios and Other Data"
at or for each of the years presented is derived in part from the audited
financial statements of Hudson City Savings. The following information is only a
summary and you should read it in conjunction with our financial statements and
notes beginning on Page F-1.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION
DATA:
Total assets.................... $7,752,260 $7,313,999 $6,672,429 $5,429,142 $4,891,555
Loans........................... 3,659,407 3,463,803 3,171,458 2,791,802 2,606,059
Investment securities available
for sale...................... 785,031 654,726 595,870 563,655 263,685
Mortgage-backed securities held
to maturity................... 3,070,931 3,022,225 2,710,078 1,865,930 1,642,927
Total cash and cash
equivalents................... 156,875 95,674 121,601 133,032 86,431
Foreclosed real estate, net..... 1,026 1,410 2,385 3,440 1,942
Total deposits.................. 6,807,339 6,465,956 5,918,971 4,757,813 4,296,932
Total equity.................... 900,606 807,713 719,077 638,944 565,941
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Total interest income................... $520,791 $500,442 $429,278 $363,102 $310,048
Interest expense on deposits............ 311,084 297,484 242,667 195,543 133,746
-------- -------- -------- -------- --------
Net interest income................... 209,707 202,958 186,611 167,559 176,302
Provision for loans losses.............. 2,400 2,850 2,275 1,000 789
-------- -------- -------- -------- --------
Net interest income after provision
for loan losses.................... 207,307 200,108 184,336 166,559 175,513
-------- -------- -------- -------- --------
Non-interest income:
Service charges and other income...... 4,930 4,710 3,896 4,212 3,864
Gains on net securities
transactions....................... 24 1,594 152 307 482
-------- -------- -------- -------- --------
Total non-interest income.......... 4,954 6,304 4,048 4,519 4,346
-------- -------- -------- -------- --------
Total non-interest expense......... 63,492 62,919 60,958 61,054 65,056
-------- -------- -------- -------- --------
Income before income tax expense........ 148,769 143,493 127,426 110,024 114,803
Income tax expense.................... 55,500 53,500 46,595 42,250 41,778
-------- -------- -------- -------- --------
Net income.............................. $ 93,269 $ 89,993 $ 80,831 $ 67,774 $ 73,025
======== ======== ======== ======== ========
</TABLE>
12
<PAGE> 14
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA:
PERFORMANCE RATIOS:
Return on average assets..................... 1.24% 1.27% 1.33% 1.32% 1.55%
Return on average equity..................... 10.90 11.79 11.93 11.24 13.71
Net interest rate spread(1).................. 2.16 2.28 2.50 2.70 3.39
Net interest margin(2)....................... 2.85 2.94 3.14 3.35 3.86
Non-interest expense to average assets....... 0.84 0.89 1.00 1.19 1.38
Efficiency ratio(3).......................... 29.58 30.30 32.00 35.54 36.11
Average interest-earning assets to average
interest bearing liabilities............... 1.16x 1.15x 1.16x 1.17x 1.16x
CAPITAL RATIOS:
Average equity to average assets............. 11.35% 10.79% 11.11% 11.72% 11.32%
Equity to assets............................. 11.62 11.04 10.78 11.77 11.57
REGULATORY CAPITAL RATIOS:
Leverage capital............................. 11.93 11.37 11.69 12.24 11.91
Total risk-based capital..................... 39.23 37.60 35.15 33.77 30.73
ASSET QUALITY RATIOS:
Non-performing loans to total loans.......... 0.42 0.47 0.53 0.75 0.84
Non-performing assets to total assets........ 0.21 0.24 0.29 0.45 0.49
Allowance for loan losses to non-performing
loans...................................... 115.47 96.85 76.89 56.91 52.89
Allowance for loan losses to total loans..... 0.48 0.45 0.41 0.43 0.44
OTHER DATA:
Number of deposit accounts................... 484,991 480,414 456,847 397,210 368,271
Branches..................................... 75 75 74 71 69
</TABLE>
- -------------------------
(1) We determined this number by subtracting the weighted average cost of
average interest-bearing liabilities from the weighted average yield on
average interest-earning assets.
(2) We determined this ratio by dividing net interest income by average
interest-earning assets.
(3) We determined this ratio by dividing total non-interest expense by the sum
of net interest income and total non-interest income (adjusted to exclude
net gains on securities transactions of $24,000 for 1998, $1,594,000 for
1997, $152,000 for 1996, $307,000 for 1995 and $482,000 for 1994).
13
<PAGE> 15
RECENT DEVELOPMENTS
The summary information presented below under "Selected Financial Condition
Data," "Selected Operating Data" and "Selected Financial Ratios and Other Data"
at or for each of the three months ended March 31, 1999 and 1998 is taken from
the unaudited financial statements of Hudson City Savings. In our opinion, all
adjustments (consisting of normal recurring adjustments) necessary for a fair
presentation of the financial condition and results of operations for the
unaudited periods presented have been included. The results of operations and
other data presented for the three months ended March 31, 1999 are not
necessarily indicative of the results of operations for the fiscal year ended
December 31, 1999. The following information is only a summary and you should
read it in conjunction with our audited December 31, 1998 financial statements
and notes beginning on page F-1. See also "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Forward Looking Statements."
<TABLE>
<CAPTION>
AT
------------------------------------
MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets........................................... $7,879,908 $7,752,260
Loans.................................................. 3,744,975 3,659,407
Investment securities available for sale............... 860,517 785,031
Mortgage-backed securities held to maturity............ 3,106,592 3,070,931
Total cash and cash equivalents........................ 85,849 156,875
Foreclosed real estate, net............................ 1,293 1,026
Total deposits......................................... 6,901,129 6,807,339
Total equity........................................... 920,890 900,606
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
1999 1998
-------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
SELECTED OPERATING DATA:
Total interest income.................................. $130,068 $129,784
Interest expense on deposits........................... 74,790 76,752
-------- --------
Net interest income.................................... 55,278 53,032
Provision for loan losses.............................. 600 600
-------- --------
Net interest income after provision for loan losses.... 54,678 52,432
-------- --------
Total non-interest income.............................. 1,206 1,153
Total non-interest expense............................. 17,227 16,655
-------- --------
Income before income tax expense....................... 38,657 36,930
Income tax expense..................................... 14,400 13,175
-------- --------
Net income............................................. $ 24,257 $ 23,755
======== ========
</TABLE>
14
<PAGE> 16
<TABLE>
<CAPTION>
AT OR FOR THE
THREE MONTHS ENDED MARCH 31,
---------------------------------------
1999 1998
-------------- -----------------
<S> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA(1):
PERFORMANCE RATIOS:
Return on average assets............................ 1.24% 1.28%
Return on average equity............................ 10.62 11.58
Net interest rate spread(2)......................... 2.17 2.20
Net interest margin(3).............................. 2.84 2.88
Non-interest expense to average assets.............. 0.88 0.90
Efficiency ratio(4)................................. 31.07 31.35
Average interest-earning assets to average
interest-bearing liabilities...................... 1.17x 1.16x
CAPITAL RATIOS:
Average equity to average assets.................... 11.71% 11.09%
Equity to assets.................................... 11.69 11.10
REGULATORY CAPITAL RATIOS:
Leverage capital.................................... 11.83 11.19
Total risk-based capital............................ 39.73 37.99
ASSET QUALITY RATIOS:
Non-performing loans to total loans................. 0.36 0.45
Non-performing assets to total assets............... 0.19 0.23
Allowance for loan losses to non-performing loans... 135.89 101.89
Allowance for loan losses to total loans............ 0.49 0.46
OTHER DATA:
Number of deposit accounts.......................... 488,050 485,396
Branches............................................ 75 75
</TABLE>
- -------------------------
(1) With the exception of end of period ratios, all other ratios are based on
average daily balances during periods indicated and are annualized where
appropriate.
(2) We determined this number by subtracting the weighted average cost of
average interest-bearing liabilities from the weighted average yield on
average interest-earning assets.
(3) We determined this ratio by dividing net interest income by average
interest-earning assets.
(4) We determined this ratio by dividing total non-interest expense by the sum
of net interest income and total non-interest income.
15
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RECENT DEVELOPMENTS
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1999 AND DECEMBER 31, 1998
Hudson City Savings' total assets increased $127.6 million, or 1.6%, to
$7.88 billion at March 31, 1999 from $7.75 billion at December 31, 1998.
At March 31, 1999, loans increased $85.6 million, or 2.3%, to $3.74
billion, while investment securities available for sale increased $75.5 million,
or 9.6%, to $860.5 million. Mortgage-backed securities, which amounted to 39.4%
of total assets at March 31, 1999, increased $35.7 million, or 1.2%, to $3.11
billion at March 31, 1999 from $3.07 billion at December 31, 1998. These
increases reflect our continued strategy of emphasizing the origination of one-
to four-family residential loans, supplemented by the purchase of investment
securities and mortgage-backed securities. Additionally, there was a shift of
funds from total cash and cash equivalents to higher-yielding loans and
securities as cash and due from banks decreased $31.8 million, or 36.5%, to
$55.3 million and federal funds sold decreased $39.3 million, or 56.3%, to $30.5
million at March 31, 1999. We believe that the decline in cash and cash
equivalents did not adversely impact our overall liquidity position at March 31,
1999.
The growth in total assets was funded primarily by an increase of $93.8
million, or 1.4%, in total deposits to $6.90 billion at March 31, 1999 from
$6.81 billion at December 31, 1998. Within the mix of total deposits,
interest-bearing deposits, primarily short-term time deposits, increased $108.0
million, or 1.7%, to $6.60 billion at March 31, 1999. The growth in
interest-bearing deposits reflects our strategy of offering competitive interest
rates on time deposits. Partially offsetting the increase in interest-bearing
deposits was a $14.3 million, or 4.6%, decrease in non-interest-bearing
deposits, particularly demand accounts and official checks, to $298.8 million at
March 31, 1999 from $313.1 million at December 31, 1998, reflecting normal
fluctuations in demand type accounts and an increase in customer direct deposits
at year end.
Total equity increased $20.3 million, or 2.3%, to $920.9 million at March
31, 1999 from $900.6 million at December 31, 1998. The increase resulted from
net income of $24.3 million for the three months ended March 31, 1999, partially
offset by a $4.0 million decrease in accumulated other comprehensive income.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND
1998
GENERAL
Net income for the quarter ended March 31, 1999 was $24.3 million compared
with $23.8 million for the quarter ended March 31, 1998. The $0.5 million, or
2.1%, increase is primarily attributable to a $2.0 million decrease in interest
expense on deposits which was offset in part by a $1.2 million increase in
income tax expense and an increase in non-interest expense.
INTEREST INCOME
Total interest income remained relatively stable, increasing $0.3 million,
or 0.2%, to $130.1 million for the quarter ended March 31, 1999 compared with
$129.8 million for the quarter ended March 31, 1998. Interest and fees on first
mortgage loans increased $1.7 million, or 2.6%, to $65.9 million and interest
and dividends on investment securities available for sale-taxable increased $1.4
million, or 11.6%, to $13.5 million for the three months ended March 31, 1999
compared with the corresponding prior year quarter. These increases were offset
by a $2.6 million, or 5.1%, decrease in interest on mortgage-backed securities
to $48.2 million for the quarter ended March 31, 1999 compared with $50.8
million for the quarter ended March 31, 1998.
The average balance of total interest-earning assets increased $411.6
million, or 5.7%, to $7.64 billion for the three months ended March 31, 1999
compared with $7.22 billion for the corresponding
16
<PAGE> 18
quarter of the prior year. This increase was primarily attributable to a $201.8
million, or 6.0% increase in the average balance of first mortgage loans, net to
$3.57 billion, an $144.2 million, or 20.4% increase, to $852.4 million in the
average balance of investment securities, and a $63.1 million, or 2.1% increase,
to $3.07 billion in the average balance of mortgage-backed securities. These
increases reflect our strategy of controlled internal growth and increasing
interest income while managing our interest rate risk.
For the three months ended March 31, 1999, the increase in the average
balance of total interest-earning assets was offset by a 38 basis point decrease
in the annualized average yield on total interest-earning assets to 6.81%
compared with 7.19% for the corresponding quarter in the prior year. The
sustained low interest rate environment continues to result in the downward
repricing of our interest-earning assets. Additionally, the average yield on our
first mortgage loans in the first quarter of 1999 was impacted by the
refinancing of our customers' existing loans to loans with lower interest rates
during 1998, which activity continued during the first quarter of 1999.
INTEREST EXPENSE
Interest expense on deposits decreased $2.0 million, or 2.6%, to $74.8
million for the first quarter of 1999 from $76.8 million for the first quarter
of 1998. Interest on time deposits, which accounted for 87.5% of interest on
deposits for the quarter ended March 31, 1999, decreased $1.5 million, or 2.3%,
to $65.5 million from the corresponding period of the prior year.
The average balance of total interest-bearing liabilities increased $287.8
million, or 4.6%, to $6.53 billion for the quarter ended March 31, 1999 compared
with the corresponding quarter of 1998. Of that increase, $278.8 million, or
96.9%, can be attributed to an increase to $5.10 billion in the average balance
of time deposits. The impact on interest expense from the increase in the
average balance of total interest-bearing liabilities was offset, however, by a
34 basis point decrease in the annualized average cost of total interest-bearing
liabilities to 4.64% compared with 4.98% for the first quarter of 1998. Among
our various deposit account types, the largest decrease in the annualized
average cost occurred in time deposits, which decreased to 5.20% for the quarter
ended March 31, 1999 from 5.63% for the quarter ended March 31, 1998. The
decrease in the annualized average cost of total interest-bearing liabilities
reflects the downward repricing of our interest-bearing liabilities as a result
of the lower interest rate environment.
NET INTEREST INCOME
Net interest income increased 4.3%, or $2.3 million, to $55.3 million for
the first quarter of 1999 compared with $53.0 million for the first quarter of
1998 primarily due to decreased interest expense. On an annualized basis, our
net interest spread declined slightly to 2.17% for the quarter ended March 31,
1999 from 2.20% for the comparable quarter of 1998. Additionally, our annualized
net interest margin decreased slightly to 2.84% from 2.88%.
PROVISION FOR LOAN LOSSES
Our provision for loan losses was $0.6 million for each of the quarters
ended March 31, 1999 and 1998. The allowance for loan losses at March 31, 1999
was $18.3 million compared with $16.1 million at March 31, 1998. The allowance
for loan losses at December 31, 1998 was $17.7 million. Non-performing loans at
March 31, 1999 were $13.5 million compared with $15.3 million at December 31,
1998 and $15.8 million at March 31, 1998. The current level of the provision for
loan losses and the increase in the allowance for loan losses were primarily due
to the continued growth in the loan portfolio and the overall stability of our
loan quality.
17
<PAGE> 19
NON-INTEREST INCOME AND NON-INTEREST EXPENSE
Total non-interest income, consisting of service fees and other income, was
$1.2 million for both of the quarters ended March 31, 1999 and 1998. Total
non-interest expense, consisting primarily of salaries and employee benefits,
net occupancy expense and other operating expenses, increased $0.5 million, to
$17.2 million, for the quarter ended March 31, 1999 compared with $16.7 million
for the quarter ended March 31, 1998. The increase in non-interest expense is
primarily attributable to normal increases in salaries and employee benefits and
occupancy expense.
Our efficiency ratio for the first quarter of 1999 was 31.1% compared with
31.3% for the same period a year earlier. Our ratio of non-interest expense to
average assets was 0.88% for the three months ended March 31, 1999 and 0.90% for
the three months ended March 31, 1998.
INCOME TAXES
Income tax expense increased $1.2 million, or 9.1%, to $14.4 million for
the three months ended March 31, 1999 compared with $13.2 million for the three
months ended March 31, 1998, due to an increase in income before income tax
expense and a higher effective tax rate in the first quarter of 1999 compared to
the first quarter of 1998.
18
<PAGE> 20
HUDSON CITY SAVINGS BANK
Hudson City Savings is a New Jersey chartered mutual savings bank,
chartered in 1868. We are the largest savings bank by asset size headquartered
in New Jersey. We are the largest mutual savings bank in the country by asset
size. Our deposits are insured by the FDIC. We are examined and regulated by the
Department of Banking and Insurance of the State of New Jersey and the FDIC.
Hudson City Savings Bank's executive offices are located at West 80 Century
Road, Paramus, New Jersey 07652 and our telephone number is (201) 967-1900.
Hudson City Savings is a community and customer oriented-retail savings
bank offering traditional deposit products, residential real estate mortgage
loans and, to a lesser extent, consumer loans. Hudson City Savings operates
through 75 full service banking offices located in Bergen, Burlington, Camden,
Essex, Gloucester, Hudson, Middlesex, Monmouth, Morris, Ocean, Passaic, Union
and Warren counties in New Jersey. As of June 30, 1998, Hudson City maintained a
5.0% share of all New Jersey deposits, and ranked fifth in the size of deposits
overall. In 1997, our deposit base represented 6% of our market area's total
reported deposits, positioning us as the fifth largest (in dollar volume)
depository institution in the area. On a state-wide level, we also ranked as the
fifth largest depository institution with a 4.6% share of all reported funds on
deposit at the end of 1997. At December 31, 1998, we had total assets of $7.75
billion, total deposits of $6.81 billion and total equity of $901 million.
At December 31, 1998, we had total loans of $3.66 billion, of which $3.57
billion, or 97.6%, were first mortgage loans. Of the residential mortgage loans
outstanding at that date, 51.9% were adjustable-rate mortgage loans and 48.1%
were fixed-rate loans. We retain substantially all of the loans that we
originate. We also invest in mortgage-backed and investment securities,
consisting primarily of U.S. government and government agency securities.
Mortgage-backed securities equaled $3.07 billion or 39.6% of our total assets at
December 31, 1998. For further information on our operations and financial
condition, see "Business of Hudson City Savings Bank."
HUDSON CITY BANCORP, INC.
Hudson City Bancorp is a newly organized Delaware corporation organized in
March, 1999. Hudson City Bancorp has not engaged in any business to date, and,
upon completion of the reorganization will serve as the holding company of
Hudson City Savings. A majority of the outstanding shares of Hudson City
Bancorp's common stock will be owned by Hudson City, MHC. Hudson City Bancorp's
executive offices are located at West 80 Century Road, Paramus, New Jersey 07652
and our telephone number is (201) 967-1900.
HUDSON CITY, MHC
As part of our reorganization in structure, Hudson City Savings will
organize Hudson City, MHC as a New Jersey chartered mutual savings bank holding
company which will be registered as a bank holding company with the Federal
Reserve Board. Persons who had liquidation rights with respect to Hudson City
Savings as of the date of the reorganization will continue to have liquidation
rights solely with respect to Hudson City, MHC. Their liquidation rights in
Hudson City, MHC will exist as long as they maintain a deposit account at Hudson
City Savings. Hudson City, MHC's executive offices are located at West 80
Century Road, Paramus, New Jersey 07652 and its telephone number is (201)
967-1900.
Hudson City, MHC's principal assets will be the shares of common stock of
Hudson City Bancorp it receives in the reorganization and approximately $200,000
it receives as its initial capitalization. At the present time, we expect that
Hudson City, MHC will not engage in any
19
<PAGE> 21
business activity other than its investment in a majority of the common stock of
Hudson City Bancorp and the management of any cash dividends received from
Hudson City Bancorp. Federal and state law and regulations require that as long
as Hudson City, MHC is in existence it must own a majority of Hudson City
Bancorp's common stock. Federal and state law, regulations, and the plan of
reorganization, permit Hudson City, MHC to convert to the stock form of
organization. For additional information regarding a stock conversion, see "The
Reorganization and The Offering -- Possible Conversion of Hudson City, MHC to
Stock Form."
HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING
The net proceeds will depend on the total number of shares of common stock
we sell in the offering, which in turn will depend on RP Financial's appraisal,
regulatory and market considerations, and the expenses incurred in connection
with the offering. Although we will not be able to determine the actual net
proceeds from the sale of the common stock until we complete the offering, we
estimate the net proceeds to be between $519.7 million and $704.5 million.
HUDSON CITY BANCORP INTENDS TO DISTRIBUTE THE NET PROCEEDS FROM THE
OFFERING AS FOLLOWS:
<TABLE>
<CAPTION>
NUMBER OF SHARES SOLD
--------------------------------------------
52,933,750 71,616,250 82,358,687
------------ ------------ ------------
<S> <C> <C> <C>
Offering proceeds........................... $529,338,000 $716,163,000 $823,587,000
Offering expenses........................... 9,624,000 11,687,000 12,873,000
------------ ------------ ------------
Net offering proceeds....................... 519,714,000 704,476,000 810,714,000
Less:
Proceeds contributed to Hudson City
Savings................................ 259,857,000 352,238,000 405,357,000
Proceeds used for loan to employee stock
ownership plan(1)...................... 42,347,000 57,293,000 65,887,000
------------ ------------ ------------
Proceeds remaining for general corporate
purposes.................................. $217,510,000 $294,945,000 $339,470,000
============ ============ ============
</TABLE>
- -------------------------
(1) If the employee stock ownership plan buys shares in the market after the
reorganization, the purchase price of those shares may be less or more than
the $10 per share offering price, which will vary the amount of proceeds
used for this purpose.
The net proceeds may vary because total expenses relating to the
reorganization may be more or less than our estimates. For example, our expenses
would increase if a syndicated community offering or underwritten public
offering is used to sell shares not purchased in the subscription offering and
community offering. The net proceeds will also vary if the number of shares to
be sold in the offering is adjusted to reflect a change in the estimated pro
forma market value of Hudson City Bancorp and Hudson City Savings. Payments for
shares made through withdrawals from existing deposit accounts will not result
in the receipt of new funds for investment by Hudson City Savings, but will
result in a reduction of Hudson City Savings' deposits and interest expense as
funds are transferred from interest-bearing time deposits or other deposit
accounts.
20
<PAGE> 22
HUDSON CITY BANCORP MAY USE THE PROCEEDS IT RETAINS FROM THE OFFERING:
(1) to pay dividends to stockholders;
(2) to repurchase shares of common stock issued in the offering;
(3) to finance the possible acquisition of financial institutions or other
businesses that are related to banking;
(4) to invest in securities; and
(5) for general corporate purposes.
HUDSON CITY SAVINGS MAY USE THE PROCEEDS IT RECEIVES FROM THE OFFERING:
(1) to fund new loans;
(2) to purchase mortgage-backed securities and investment securities;
(3) to finance the possible establishment or acquisition of branch offices;
and
(4) for general corporate purposes.
We currently plan to open as many as six new branch offices per year. We
are currently evaluating a number of locations within our market area for
prospective sites. Additionally, we will continue to consider growth through
acquisition of branches or whole institutions if such opportunities should
arise. Since the unique characteristics of branch or whole institution
acquisition transactions are currently unknown, we cannot determine the
anticipated cost of these types of transactions. We may need regulatory
approvals to engage in some of the transactions listed above. For a discussion
of these regulatory requirements, see Regulation of Hudson City Savings Bank and
Hudson City Bancorp.
21
<PAGE> 23
OUR POLICY REGARDING DIVIDENDS
Hudson City Bancorp currently plans to pay a cash dividend at an annual
rate of $0.20 per share. The dividend would be declared and payable quarterly at
a rate of $0.05 per share starting with the first quarter after the
reorganization. The payment of dividends will be subject to the determination of
our board of directors, which will take into account, among other factors, our
financial condition, results of operations, tax considerations, industry
standards, economic conditions and regulatory restrictions that affect the
payment of dividends by Hudson City Savings to Hudson City Bancorp. We cannot
guarantee that we will pay dividends or that, if paid, that we will not reduce
or eliminate dividends in the future.
If Hudson City Bancorp pays dividends to its stockholders, it will be
required to pay dividends to Hudson City, MHC, unless Hudson City, MHC elects to
waive dividends. We do not currently anticipate that Hudson City, MHC will waive
dividends paid by Hudson City Bancorp. Any decision to waive dividends will be
subject to regulatory approval. See "Regulation of Hudson City Savings Bank and
Hudson City Bancorp -- Dividend Waivers by Hudson City, MHC."
As the principal asset of Hudson City Bancorp, Hudson City Savings will
provide the principal source of funds for the payment of dividends by Hudson
City Bancorp. New Jersey law provides that dividends may be paid by Hudson City
Savings only out of net income, earned surplus or undivided profits. However,
Hudson City Savings will not be permitted to pay dividends on its capital stock
if, among other things, its stockholders' equity would be reduced below the
amount required for the liquidation account. See "The Reorganization and The
Offering -- Effects of the Reorganization -- Depositors' Rights if We Liquidate;
Liquidation Account."
Hudson City Bancorp is subject to the requirements of Delaware law which
generally limits dividends to an amount equal to the difference between the
amount by which total assets exceed total liabilities and the amount equal to
the aggregate par value of the outstanding shares of capital stock. If there is
no difference between these amounts, dividends are limited to net income for the
current and/or immediately preceding year.
Any payment of dividends by Hudson City Savings to Hudson City Bancorp,
which would be deemed to be drawn out of Hudson City Savings' bad debt reserves,
would require a payment of taxes at the then-current tax rate by Hudson City
Savings on the amount of earnings deemed to be removed from bad debt reserves
for such distribution. Hudson City Savings does not intend to make any
distribution to Hudson City Bancorp that would create this type of a tax
liability. See "Taxation."
Additionally, in connection with the reorganization, Hudson City Bancorp
and Hudson City Savings have committed to the FDIC that during the one-year
period following the consummation of the reorganization, Hudson City Bancorp
will not declare an extraordinary dividend to stockholders which would be
treated by recipient stockholders as a tax-free return of capital for federal
income tax purposes without prior approval of the FDIC.
22
<PAGE> 24
MARKET FOR THE COMMON STOCK
We have not previously issued common stock, and there is currently no
established market for the common stock. We have received conditional approval
from The Nasdaq Stock Market to have our common stock quoted on the National
Market System of The Nasdaq Stock Market under the symbol "HCBK" after the
reorganization. One of the requirements for continued quotation of the common
stock on The Nasdaq Stock Market is that there be at least three market makers
for the common stock. Ryan, Beck has advised us that it intends to make a market
in the common stock following the reorganization, but is under no obligation to
do so. We will seek to encourage and assist at least two additional market
makers to make a market in our common stock.
Making a market involves maintaining bid and asked quotations and being
able, as principal, to effect transactions in reasonable quantities at those
quoted prices. Various securities laws and other regulatory requirements apply
to these activities. While we believe that there will be other broker-dealers to
act as market makers for our common stock, we cannot guarantee you that there
will be three or more market makers for the common stock.
Additionally, the development of a liquid public market depends on the
existence of willing buyers and sellers, the presence of which is not within our
control, or any market maker. The number of active buyers and sellers of the
common stock at any particular time may be limited. Under such circumstances,
you could have difficulty selling your shares on short notice and therefore you
should not view the common stock as a short-term investment. We cannot assure
you that an active and liquid trading market for the common stock will develop
or that, if it develops, it will continue, nor can we assure you that if you
purchase shares you will be able to sell them at or above $10.00 per share or
that quotations will be available on The Nasdaq Stock Market as contemplated.
23
<PAGE> 25
REGULATORY CAPITAL COMPLIANCE
At December 31, 1998, we Hudson City Savings exceeded all regulatory
capital requirements. Set forth below is a summary of our capital computed under
generally accepted accounting principles and our compliance with regulatory
capital standards at December 31, 1998, on a historical and pro forma basis. We
have assumed that the indicated number of shares were sold as of December 31,
1998 and that Hudson City Savings received 50% of the net proceeds from the
offering. For purposes of the table below, the amount expected to be loaned to
the employee stock ownership plan and the cost of the shares expected to be
acquired by the restricted stock plan are deducted from pro forma regulatory
capital. The table below does not reflect the capital requirements applicable to
Hudson City Bancorp. After the reorganization we believe that Hudson City
Bancorp will exceed all applicable regulatory capital requirements. For a
discussion of the capital requirements applicable to Hudson City Savings and
Hudson City Bancorp, see "Regulation of Hudson City Savings Bank and Hudson City
Bancorp -- Federal Banking Regulation -- Capital Requirements."
<TABLE>
<CAPTION>
PRO FORMA AT DECEMBER 31, 1998 BASED UPON THE SALE AT $10.00 PER SHARE
----------------------------------------------------------------------
52,933,750 62,275,000
SHARES SHARES
HISTORICAL AT (MINIMUM OF THE (MIDPOINT OF THE
DECEMBER 31, 1998 RANGE) RANGE)
-------------------- ---------------------- ----------------------
PERCENT PERCENT PERCENT
OF OF OF
AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2)
-------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
GAAP Capital(3)....... $900,606 11.62% $1,096,792 13.80% $1,131,723 14.18%
======== ===== ========== ===== ========== =====
Leverage Capital:
Capital Level(4).... $898,494 11.93% $1,094,630 14.16% $1,129,611 14.55%
Requirement(5)...... 301,314 4.00% 309,167 4.00% 310,566 4.00%
-------- ----- ---------- ----- ---------- -----
Excess.............. $597,180 7.93% $ 785,463 10.16% $ 819,045 10.55%
======== ===== ========== ===== ========== =====
Tier I Risk-Based
Capital:
Capital
Level(4)(6)....... $898,494 38.48% $1,094,630 45.72% $1,129,611 46.97%
Requirement......... 93,409 4.00% 95,771 4.00% 96,191 4.00%
-------- ----- ---------- ----- ---------- -----
Excess.............. $805,085 34.48% $ 998,859 41.72% $1,033,420 42.97%
======== ===== ========== ===== ========== =====
Total Risk-Based
Capital:
Capital
Level(4)(6)....... $916,206 39.23% $1,112,342 46.46% $1,147,323 47.71%
Requirement(5)...... 186,818 8.00% 191,542 8.00% 192,383 8.00%
-------- ----- ---------- ----- ---------- -----
Excess.............. $729,388 31.23% $ 920,800 38.46% $ 954,940 39.71%
======== ===== ========== ===== ========== =====
<CAPTION>
PRO FORMA AT DECEMBER 31, 1998 BASED UPON THE SALE AT $10.00 PER SHARE
-----------------------------------------------
82,358,687
71,616,250 SHARES
SHARES (15% ABOVE
(MAXIMUM OF THE MAXIMUM OF THE
RANGE) RANGE)(1)
---------------------- ----------------------
PERCENT PERCENT
OF OF
AMOUNT ASSETS(2) AMOUNT ASSETS(2)
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
GAAP Capital(3)....... $1,166,704 14.55% $1,206,933 14.98%
========== ===== ========== =====
Leverage Capital:
Capital Level(4).... $1,164,592 14.93% $1,204,821 15.37%
Requirement(5)...... 311,965 4.00% 313,575 4.00%
---------- ----- ---------- -----
Excess.............. $ 852,627 10.93% $ 891,246 11.37%
========== ===== ========== =====
Tier I Risk-Based
Capital:
Capital
Level(4)(6)....... $1,164,592 48.22% $1,204,821 49.63%
Requirement......... 96,612 4.00% 97,095 4.00%
---------- ----- ---------- -----
Excess.............. $1,067,980 44.22% $1,107,726 45.63%
========== ===== ========== =====
Total Risk-Based
Capital:
Capital
Level(4)(6)....... $1,182,304 48.95% $1,222,533 50.36%
Requirement(5)...... 193,224 8.00% 194,191 8.00%
---------- ----- ---------- -----
Excess.............. $ 989,080 40.95% $1,028,342 42.36%
========== ===== ========== =====
</TABLE>
- -------------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the estimated price range of up to 15% as
a result of changes in market conditions or general financial and economic
conditions following the commencement of the offering.
(2) Leverage capital levels are shown as a percentage of "average assets," and
risk-based capital levels are calculated on the basis of a percentage of
"risk-weighted assets," each as defined in the FDIC Regulations.
(3) GAAP is defined as Generally Accepted Accounting Principles.
(4) Pro forma capital levels assume receipt by Hudson City Savings of 50% of the
net proceeds from the shares of common stock sold at the minimum, midpoint,
maximum and at 15% above the maximum of the offering range. These levels
assume funding by Hudson City Savings of the restricted stock plan equal to
4% of the common stock issued, including repayment of Hudson City Bancorp's
loan to the employee stock ownership plan to enable the plan to purchase 8%
of the common stock issued.
(5) The current leverage capital requirement for savings banks is 3% of total
adjusted assets for savings banks that receive the highest supervisory
ratings for safety and soundness and that are not experiencing or
anticipating significant growth. The current leverage capital ratio
applicable to all other savings banks is 4% to 5%.
(6) Assumes net proceeds are invested in assets that carry risk-weighting equal
to the actual risk-weighting of Hudson City Savings' assets as of December
31, 1998.
24
<PAGE> 26
CAPITALIZATION
The following table presents the historical deposits and capitalization of
Hudson City Savings at December 31, 1998, and the pro forma consolidated
capitalization of Hudson City Bancorp after giving effect to the reorganization,
based upon the sale of the number of shares shown below and the other
assumptions set forth under "Pro Forma Data." A change in the number of shares
sold in the offering may affect materially the capitalization.
<TABLE>
<CAPTION>
PRO FORMA CAPITALIZATION AT DECEMBER 31, 1998
-----------------------------------------------------------
82,358,687
52,933,750 62,275,000 71,616,250 SHARES
SHARES SHARES SHARES (15% ABOVE
(MINIMUM OF MIDPOINT OF (MAXIMUM OF (MAXIMUM OF
HISTORICAL RANGE) RANGE) RANGE) RANGE)(1)
---------- ----------- ----------- ----------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Deposits(2)........................ $6,807,339 $6,807,339 $6,807,339 $6,807,339 $6,807,339
========== ========== ========== ========== ==========
Stockholders' equity:
Preferred stock, $.01 par value,
200,000,000 shares authorized;
none to be issued.............. $ -- $ -- $ -- $ -- $ --
Common stock, $.01 par value,
800,000,000 shares authorized;
to be issued as reflected(3)... -- 1,126 1,325 1,524 1,752
Additional paid-in capital(4).... -- 518,588 610,769 702,952 808,962
Retained earnings(5)............. 899,933 899,733 899,733 899,733 899,733
Plus:
Accumulated other comprehensive
income......................... 673 673 673 673 673
Less:
Common stock acquired by the
employee stock ownership
plan(6)........................ -- 42,347 49,820 57,293 65,887
---------- ---------- ---------- ---------- ----------
Common stock acquired by the
restricted stock plan(7)....... -- 21,174 24,910 28,647 32,943
---------- ---------- ---------- ---------- ----------
Total stockholders' equity......... $ 900,606 $1,356,599 $1,437,770 $1,518,942 $1,612,290
========== ========== ========== ========== ==========
</TABLE>
- -------------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the offering range of up to 15% as a
result of changes in market or general financial and economic conditions
following the commencement of the offering.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
common stock in the offering. Withdrawals from deposit accounts would reduce
pro forma deposits by the amount of such withdrawals.
(3) Reflects shares to be issued to Hudson City, MHC as follows: 59,691,250
shares at the minimum of the estimated valuation range, 70,225,000 shares at
the midpoint, 80,758,750 at the maximum and 92,872,563 at 15% above the
maximum.
(4) Reflects the issuance of shares sold in the offering at a value of $10.00
per share. No effect has been given to the issuance of additional shares of
common stock pursuant to Hudson City Bancorp's proposed stock option plan
intended to be adopted by Hudson City Bancorp and
25
<PAGE> 27
presented for approval of stockholders at a meeting of stockholders to be
held at least six months following completion of the offering.
(5) The retained earnings of Hudson City Savings will be substantially
restricted after the offering. The reduction in historical retained earnings
of Hudson City Savings reflects the retention by Hudson City, MHC of
$200,000 upon completion of the reorganization as its initial
capitalization.
(6) Assumes that 8% of the shares sold in connection with the offering will be
purchased by the employee stock ownership plan and the funds used to acquire
the employee stock ownership plan shares will be borrowed from Hudson City
Bancorp. The common stock acquired by the employee stock ownership plan is
reflected as a reduction of stockholders' equity. If the employee stock
ownership plan buys shares in the market after the reorganization, the
purchase price of those shares may be less or more than the $10 per share
offering price, which will vary the amount of proceeds used for this
purpose.
(7) Assumes that, subsequent to the offering, an amount equal to 4% of the
shares of common stock issued in the offering is purchased by a management
recognition plan through open market purchases. The proposed management
recognition plan is intended to be adopted by Hudson City Bancorp and
presented for approval of stockholders at a meeting of stockholders to be
held at least six months following completion of the offering. The common
stock purchased by the management recognition plan is reflected as a
reduction of stockholders' equity.
26
<PAGE> 28
PRO FORMA DATA
We cannot determine the actual net proceeds from the sale of the common
stock until the offering is completed. However, we estimate that net proceeds
will be between $519.7 million and $704.5 million, or $810.7 million if the
offering range is increased by 15%, based upon the following assumptions:
- we will sell all shares of common stock in the subscription offering;
- we will pay Ryan, Beck a fee equal to 1.20% of the aggregate purchase
price for sales in the subscription offering except for shares sold to
the employee stock ownership plan, employee benefit plans, and officers,
directors and their immediate families, which fee is estimated to be
$5.76 million if we sell 52,933,750 shares, $6.79 million if we sell
62,275,000 shares, $7.83 million if we sell 71,616,250 shares and $9.01
million if we sell 82,358,687 shares; and
- in addition to the fees we will pay to Ryan, Beck, we estimate that our
expenses (including printing, postage, regulatory filing, legal fees and
accounting fees) will be $3.86 million.
We calculated the pro forma consolidated net income and stockholders'
equity of Hudson City Bancorp for 1998, as if the common stock had been sold at
the beginning of the year and the net proceeds had been invested at 4.52%. We
chose this yield because it represents the yield on one-year U.S. Government
securities at December 31, 1998. In light of changes in interest rates in recent
periods, Hudson City Bancorp and Hudson City Savings believe this rate more
accurately reflects pro forma reinvestment rates than the arithmetic average
method. We assumed a tax rate of 37.3% for the period. This results in an
after-tax yield of 2.83% for 1998.
We calculated historical and pro forma per share amounts by dividing
historical and pro forma consolidated net income and stockholders' equity by the
indicated number of shares of common stock. We adjusted these figures to give
effect to the shares purchased by the employee stock ownership plan. We computed
per share amounts for each period as if the common stock was outstanding at the
beginning of the periods, but we did not adjust per share historical or pro
forma stockholders' equity to reflect the earnings on the estimated net
proceeds. Hudson City Bancorp intends to retain 50% of the net proceeds from the
offering and intends to make a loan to the employee stock ownership plan to fund
the employee stock ownership plan's purchase of up to 8% of the common stock.
The table below gives effect to the management recognition plan, which we
expect to adopt following the reorganization and present, along with the stock
option plan, to stockholders for approval at an annual or special meeting of
stockholders to be held at least six months following the completion of the
reorganization. If the management recognition plan is approved by stockholders,
the restricted stock plan will acquire an amount of common stock equal to 4% of
the shares of common stock sold in the offering, either through open market
purchases or from authorized but unissued shares of common stock, if
permissible. In preparing the table below, we assumed that stockholder approval
has been obtained and that the shares acquired by the restricted stock plan are
purchased in the open market at the purchase price.
The table below does not give effect to:
(1) the shares to be reserved for issuance under the stock option plan,
which requires stockholder approval at a meeting following the
reorganization;
(2) withdrawals from deposit accounts for the purpose of purchasing common
stock in the reorganization;
(3) Hudson City Bancorp's results of operations after the reorganization;
or
27
<PAGE> 29
(4) the market price of the common stock after the reorganization.
The following pro forma information may not represent the financial effects
of the reorganization at the date on which the reorganization actually occurs
and you should not use the table to indicate future results of operations. Pro
forma stockholders' equity represents the difference between the stated amount
of assets and liabilities of Hudson City Bancorp computed in accordance with
generally accepted accounting principles. We did not increase or decrease
stockholders' equity to reflect the difference between the carrying value of
loans and other assets and market value. Pro forma stockholders' equity is not
intended to represent the fair market value of the common stock and may be
different than amounts that would be available for distribution to stockholders
if we liquidated.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31, 1998
-------------------------------------------------------------------------
82,358,687
52,933,750 62,275,000 71,616,250 SHARES SOLD AT
SHARES SOLD AT SHARES SOLD AT SHARES SOLD AT $10.00 PER SHARE
$10.00 PER SHARE $10.00 PER SHARE $10.00 PER SHARE (15% ABOVE
(MINIMUM OF (MIDPOINT OF (MAXIMUM OF MAXIMUM OF
RANGE) RANGE) RANGE) RANGE)(7)
---------------- ---------------- ---------------- ----------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross proceeds............................... $ 529,338 $ 622,750 $ 716,163 $ 823,587
Less: offering expenses and commissions...... 9,624 10,656 11,687 12,873
------------ ------------ ------------ ------------
Estimated net proceeds....................... 519,714 612,094 704,476 810,714
Less:
Common stock purchased by the employee
stock ownership plan(1).................. 42,347 49,820 57,293 65,887
Common stock purchased by the management
recognition plan(2)...................... 21,174 24,910 28,647 32,943
------------ ------------ ------------ ------------
Estimated net proceeds, as adjusted........ $ 456,193 $ 537,364 $ 618,536 $ 711,884
============ ============ ============ ============
Net income:
Historical................................... $ 93,269 $ 93,269 $ 93,269 $ 93,269
Pro forma income on net proceeds, as
adjusted................................... 12,910 15,207 17,505 20,146
Pro forma employee stock ownership plan
adjustment(1)............................ (885) (1,041) (1,197) (1,377)
Pro forma management recognition plan
adjustment(2)............................ (2,655) (3,124) (3,592) (4,131)
------------ ------------ ------------ ------------
Pro forma net income......................... $ 102,639 $ 104,311 $ 105,985 $ 107,907
============ ============ ============ ============
Per share net income(3):
Historical................................. $ 0.87 $ 0.74 $ 0.65 $ 0.56
Pro forma income on net proceeds, as
adjusted................................. 0.12 0.12 0.12 0.12
Pro forma employee stock ownership plan
adjustment(1)............................ (0.01) (0.01) (0.01) (0.01)
Pro forma management recognition plan
adjustment(2)............................ (0.02) (0.02) (0.02) (0.02)
------------ ------------ ------------ ------------
Pro forma net income per share............... $ 0.96 $ 0.83 $ 0.74 $ 0.65
============ ============ ============ ============
Number of shares outstanding for pro forma
net income per share calculations(1)....... 106,837,577 125,691,267 144,544,957 166,226,700
</TABLE>
28
<PAGE> 30
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31, 1998
-------------------------------------------------------------------------
82,358,687
52,933,750 62,275,000 71,616,250 SHARES SOLD AT
SHARES SOLD AT SHARES SOLD AT SHARES SOLD AT $10.00 PER SHARE
$10.00 PER SHARE $10.00 PER SHARE $10.00 PER SHARE (15% ABOVE
(MINIMUM OF (MIDPOINT OF (MAXIMUM OF MAXIMUM OF
RANGE) RANGE) RANGE) RANGE)(7)
---------------- ---------------- ---------------- ----------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Stockholders' equity:
Historical................................. $ 900,406 $ 900,406 $ 900,406 $ 900,406
Estimated net proceeds..................... 519,714 612,094 704,476 810,714
Less: Common stock acquired by employee
stock ownership plan(1).................. (42,347) (49,820) (57,293) (65,887)
Less: Common stock acquired by management
recognition plan(2)...................... (21,174) (24,910) (28,647) (32,943)
------------ ------------ ------------ ------------
Pro forma stockholders' equity(2)(4)(5)...... $ 1,356,599 $ 1,437,770 $ 1,518,942 $ 1,612,290
============ ============ ============ ============
Stockholders' equity per share(3):
Historical................................. $ 7.99 $ 6.80 $ 5.91 $ 5.14
Estimated net proceeds..................... 4.61 4.62 4.62 4.63
Less: Common stock acquired by employee
stock ownership plan(1).................. (0.38) (0.38) (0.38) (0.38)
Less: Common stock acquired by management
recognition plan(2)...................... (0.19) (0.19) (0.19) (0.19)
------------ ------------ ------------ ------------
Pro forma stockholders' equity per
share(5)................................... $ 12.03 $ 10.85 $ 9.96 $ 9.20
============ ============ ============ ============
Offering price as a percentage of pro forma
stockholders' equity per share(6).......... 83.13% 92.17% 100.40% 108.70%
============ ============ ============ ============
Offering price to pro forma net income per
share(6)................................... 10.42x 12.05x 13.51x 15.38x
============ ============ ============ ============
</TABLE>
- -------------------------
(1) It is assumed that 8% of the shares of common stock sold in connection with
our reorganization will be purchased by the employee stock ownership plan.
For purposes of this table, the funds used to acquire such shares are
assumed to have been borrowed by the employee stock ownership plan from
Hudson City Bancorp. If the employee stock ownership plan buys shares in the
market after the reorganization, the purchase price of those shares may be
less or more than $10 per share offering price, which will vary the amount
of proceeds used for this purpose. The amount to be borrowed is reflected as
a reduction of stockholders' equity. Hudson City Savings intends to make
annual contributions to the employee stock ownership plan in an amount at
least equal to the principal and interest requirement of the debt. Hudson
City Savings' total annual payment of the employee stock ownership plan debt
is based upon 30 equal annual installments of principal, with an assumed
interest rate at 7.75%. The pro forma net income assumes: (i) that Hudson
City Savings' contribution to the employee stock ownership plan is
equivalent to the debt service requirement for the year ended December 31,
1998, and was made at the end of the period; (ii) that 141,157 shares at the
minimum of the offering range, 166,067 shares at the midpoint of the
offering range, 190,977 shares at the maximum of the offering range and
219,623 shares at 15% above the maximum of the offering range, were
committed to be released during the year ended December 31, 1998 at an
average fair value of $10.00 per share in accordance with SOP 93-6; and
(iii) only the employee stock ownership plan shares committed to be released
were considered outstanding for purposes of the net income per share
calculations.
29
<PAGE> 31
(2) Gives effect to the management recognition plan expected to be adopted by
Hudson City Bancorp following the offering and presented for approval at a
meeting of stockholders. The management recognition stock plan intends to
acquire an amount of common stock equal to 4% of the shares of common stock
issued in connection with the offering, or 2,117,350 shares at the minimum
of the offering range, 2,491,000 shares at the midpoint of the offering
range, 2,864,650 shares at the maximum of the offering range and 3,294,348
shares at 15% above the maximum of the offering range, either through open
market purchases, if permissible, or from authorized but unissued shares of
common stock or treasury stock of Hudson City Bancorp, if any. In
calculating the pro forma effect of the management recognition plan, it is
assumed that the shares were acquired by the management recognition plan at
the beginning of the period presented in open market purchases at the
purchase price and that 20% of the amount contributed was an amortized
expense during such period. The issuance of authorized but unissued shares
of Hudson City Bancorp's common stock to the restricted stock plans instead
of open market purchases would dilute the voting interests of existing
stockholders by approximately 0.87% and pro forma net income per share would
be $0.94 at the minimum of the offering range, $0.81 at the midpoint of the
offering range, $0.72 at the maximum of the offering range and $0.64 at 15%
above the maximum of the offering range. There can be no assurance that the
actual purchase price of the shares granted under the restricted stock plan
will be equal to the purchase price.
(3) Assumes at December 31, 1998 that 112,625,000 shares of common stock are
outstanding at the minimum of the offering range, 132,500,000 shares of
common stock are outstanding at the midpoint of the offering range,
152,375,000 shares of common stock are outstanding at the maximum of the
offering range and 175,231,250 shares of common stock are outstanding at 15%
above the maximum of the offering range. These shares are determined by
adding the number of shares assumed to be issued to Hudson City, MHC and the
shares sold in the offering. The number of shares used for purposes of
calculating net income per share is determined by taking the number of
shares outstanding above and subtracting 4,093,543 shares at the minimum of
the offering range, 4,815,933 shares at the midpoint of the offering range,
5,538,323 shares at the maximum of the offering range and 6,369,072 shares
at 15% above the maximum of the offering range. These shares represent the
employee stock ownership plan shares which have not been committed for
release during the year ended December 31, 1998. Also subtracted from the
number of shares outstanding are 1,693,880 shares at the minimum of the
offering range, 1,992,800 shares at the midpoint of the offering range,
2,291,720 shares at the maximum of the offering range and 2,635,478 shares
at 15% above the maximum of the offering range. These shares represent the
shares of the management recognition plan not vested during the year ended
December 31, 1998.
Assuming the employee stock ownership plan did not purchase shares of common
stock in the offering, and such shares were not subtracted from the number
of shares of common stock outstanding at December 31, 1998, pro forma net
income per share would be $0.94 at the minimum of the offering range, $0.82
at the midpoint of the offering range, $0.72 at the maximum of the offering
range and $0.64 at 15% above the maximum of the offering range and the
offering price as a multiple of pro forma net income per share would be
$10.64 at the minimum of the offering range, $12.20 at the midpoint of the
offering range, $13.89 at the maximum of the offering range and $15.63 at
15% above the maximum of the offering range.
Assumes that all of the shares were outstanding at December 31, 1998 for
purposes of calculating pro forma stockholders' equity per share.
(4) No effect has been given to the issuance of additional shares of common
stock pursuant to the stock option plan expected to be adopted by Hudson
City Bancorp following the offering.
30
<PAGE> 32
Hudson City Bancorp expects to present the stock option plan for approval at
a meeting of stockholders. Under the stock option plan, an amount equal to
10% of the common stock issued in connection with the offering, or 5,293,375
shares at the minimum of the offering range, 6,227,500 shares at the
midpoint of the offering range, 7,161,625 shares at the maximum of the
offering range and 8,235,869 shares at 15% above the maximum of the offering
range, will be reserved for future issuance upon the exercise of options to
be granted under the stock option plan. The issuance of common stock
pursuant to the exercise of options under the stock option plan will result
in the dilution of existing stockholders' interests. Assuming all options
were exercised at the beginning of the period at an exercise price of $10.00
per share, the pro forma net income per share would be $0.93 at the minimum
of the offering range, $0.80 at the midpoint of the offering range, $0.71 at
the maximum of the offering range and $0.63 at 15% above the maximum of the
offering range, and pro forma stockholders' equity per share would be $11.97
at the minimum of the offering range, $10.83 at the midpoint of the offering
range, $9.98 at the maximum of the offering range and $9.25 at 15% above the
maximum of the offering range.
(5) The retained earnings of Hudson City Savings will continue to be
substantially restricted after the offering. Pro forma retained earnings
have been reduced by $200,000 to reflect the initial capitalization of
Hudson City, MHC.
(6) Assuming 100% of the outstanding common stock of Hudson City Bancorp is
issued to the public rather than 47%, the offering price as a percentage of
pro forma stockholders' equity per share would be 60.06% at the minimum of
the offering range, 64.68% at the midpoint of the offering range, 68.63% at
the maximum of the offering range and 72.41% at 15% above the maximum of the
offering range and the ratio of the offering price to pro forma net income
per share would be 8.85x at the minimum of the offering range, 10.10x at the
midpoint of the offering range, 11.24x at the maximum of the offering range
and 12.50x at 15% above the maximum of the offering range.
(7) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the offering range of up to 15% as a
result of changes in market or general regulatory considerations or changes
in market or general financial and economic conditions following the
commencement of the offering.
31
<PAGE> 33
HUDSON CITY SAVINGS BANK
STATEMENTS OF INCOME
These Statements of Income of Hudson City Savings for the years ended
December 31, 1998, 1997 and 1996 have been audited by KPMG LLP, independent
certified public accountants. The Independent Auditors' Report thereon appears
on page F-2 of this prospectus. These Statements of Income should be read in
conjunction with the Financial Statements and accompanying Notes to Financial
Statements beginning on page F-7 of this prospectus and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest income:
Interest and fees on first mortgage loans................ $259,320 $245,432 $221,930
Interest and fees on consumer and other loans............ 7,272 7,685 8,135
Interest on mortgage-backed securities................... 201,592 201,323 157,050
Interest on investment securities held to maturity:
Taxable............................................... 54 -- --
Exempt from federal taxes................................ 48 61 112
Interest and dividends on investment securities available
for sale -- taxable................................... 49,666 43,140 37,587
Interest on federal funds sold........................... 2,839 2,801 4,464
-------- -------- --------
Total interest income................................. 520,791 500,442 429,278
Interest expense on deposits............................... 311,084 297,484 242,667
-------- -------- --------
Net interest income........................................ 209,707 202,958 186,611
Provision for loan losses.................................. 2,400 2,850 2,275
-------- -------- --------
Net interest income after provision for loan losses...... 207,307 200,108 184,336
-------- -------- --------
Non-interest income:
Service charges and other income......................... 4,930 4,710 3,896
Gains on net securities transactions..................... 24 1,594 152
-------- -------- --------
Total non-interest income............................. 4,954 6,304 4,048
-------- -------- --------
Non-interest expense:
Salaries and employee benefits........................... 39,260 38,781 37,034
Net occupancy expense.................................... 11,753 11,888 11,941
Federal deposit insurance assessment..................... 783 757 43
Amortization of goodwill................................. 1,610 1,771 2,030
Computer and related services............................ 1,212 1,104 1,150
Other expense............................................ 8,874 8,618 8,760
-------- -------- --------
Total non-interest expense............................ 63,492 62,919 60,958
-------- -------- --------
Income before income tax expense........................... 148,769 143,493 127,426
Income tax expense......................................... 55,500 53,500 46,595
-------- -------- --------
Net income................................................. $ 93,269 $ 89,993 $ 80,831
======== ======== ========
</TABLE>
32
<PAGE> 34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis reflects Hudson City Savings' financial statements
and other relevant statistical data and is intended to enhance your
understanding of our financial condition and results of operations. You should
read the information in this section in conjunction with Hudson City Savings'
Financial Statements and accompanying Notes to Financial Statements beginning on
page F-1 of this prospectus, and the other statistical data provided elsewhere
in this prospectus.
GENERAL
Hudson City Savings' results of operations depend primarily on net interest
income. Net interest income is the difference between the interest income we
earn on our interest-earning assets, primarily mortgage loans, mortgage-backed
securities and investment securities, and the interest we pay on our
interest-bearing liabilities, primarily time deposits and savings deposits. Our
results of operations are also affected by our provision for loan losses,
non-interest income, and non-interest expense. Non-interest expense consists
primarily of salaries and employee benefits, occupancy expenses and other
general and administrative expenses. Non-interest income consists mainly of
service fees and charges.
Our results of operations may also be affected significantly by general and
local economic and competitive conditions, particularly those with respect to
changes in market interest rates, government policies and actions of regulatory
authorities. Future changes in applicable law, regulations or government
policies may materially impact us. Additionally, our lending activity is
concentrated in loans secured by real estate located in New Jersey. Accordingly,
our results of operations are affected by regional market and economic
conditions.
FORWARD LOOKING STATEMENTS
This prospectus contains certain "forward-looking statements" which 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 our
financial condition, results of operations and business that are subject to
various factors which could cause actual results to differ materially from these
estimates. These factors include, but are not limited to, general and local
economic conditions, changes in interest rates, deposit flows, demand for
mortgage and other loans, real estate values, and competition; changes in
accounting principles, policies, or guidelines; changes in legislation or
regulation; and other economic, competitive, governmental, regulatory, and
technological factors affecting our operations, pricing, products and services.
MANAGEMENT STRATEGY
Our primary management strategy has been to offer savings deposits and
residential mortgage loans to increase earnings and manage growth. We seek to
differentiate ourselves by providing high quality service to our customers while
maintaining low costs. We also try to limit our exposure to changes in interest
rates by monitoring and managing our interest rate-sensitive assets and
liabilities. To accomplish these strategies, we:
(1) emphasize the origination of one- to four-family residential mortgage
loans;
(2) purchase adjustable-rate mortgage-backed securities to supplement loan
originations and to assist in the management of interest rate risk;
33
<PAGE> 35
(3) offer competitive rates to attract new deposits and to maintain our
existing deposit base;
(4) seek to be a low cost provider of financial services by controlling
operating expenses;
(5) manage growth primarily through internal expansion; and
(6) provide attentive service to customers.
After completion of the reorganization, we expect to continue to grow
through expansion using borrowings to supplement deposits as a funding source.
We may increase our borrowings to $900 million over the three years following
the reorganization, which we expect to use to purchase mortgage-backed and other
securities. See "Business of Hudson City Savings Bank -- Sources of
Funds -- Borrowings" for a discussion of possible borrowings. We also intend to
grow by adding new branch offices. This strategy has been successful for us in
the past. We may also use proceeds from the offering to acquire branch offices
and make other acquisitions. See "How We Intend to Use the Proceeds from the
Offering."
MANAGEMENT OF INTEREST RATE RISK
As a financial institution, our primary component of market risk is
interest rate volatility. Fluctuations in interest rates will ultimately impact
both our level of income and expense recorded on a large portion of our assets
and liabilities. Fluctuations in interest rates will also affect the market
value of all interest-earning assets, other than those which possess a short
term to maturity.
During 1998, we operated under a "flat yield curve" in a low interest rate
environment. A flat yield curve environment features little difference in
interest rates offered on short-term and long-term investments. In that
environment, we experienced both increased interest rate competition related to
loan originations and above-average prepayment rates related to mortgage loans
and mortgage-backed securities, both of which adversely impact long-term
profitability. The flat yield curve environment and modest declines in market
interest rates experienced during 1998 reduced our interest rate spread compared
to the prior year. Recent troubled economic conditions in several nations
throughout Europe, Asia, and South and Central America have created interest
rate volatility for U.S. government and agency obligations. We cannot predict at
this time what, if any, effect these conditions will have on the local and
regional economy, and real estate market.
Due to the nature of our operations, we are not subject to foreign currency
exchange or commodity price risk. Instead, our real estate loan portfolio,
concentrated in New Jersey, is subject to risks associated with the local
economy. We do not own any trading assets. We did not engage in any hedging
transactions that use derivative instruments (such as interest rate swaps and
caps) during 1998 and did not have any such hedging transactions in place at
December 31, 1998. In the future, we may, with approval of our board of
directors, engage in hedging transactions utilizing derivative instruments.
The primary objectives of our interest rate management strategy are to:
(1) evaluate the interest rate risk inherent in certain balance sheet
accounts;
(2) determine the appropriate level of interest rate risk given our
business plan, the current business environment and our capital and
liquidity requirements; and
(3) manage interest rate risk in a manner consistent with the approved
guidelines and policies set by our Board of Managers.
We seek to coordinate asset and liability decisions so that, under changing
interest rate scenarios, earnings will remain within an acceptable range.
34
<PAGE> 36
To achieve the objectives of managing interest rate risk, our Asset
Liability Committee meets weekly to discuss and monitor the market interest rate
environment compared to interest rates that are offered on our products. This
committee consists of the Chief Executive Officer, the Chief Operating Officer
and the Investment Officer. The Asset Liability Committee presents periodic
reports to the Board of Managers at its regular meetings, as well as a
comprehensive quarterly report to the Asset Management Committee of the Board of
Managers. The quarterly reports address the results of activities and strategies
and the effect that changes in interest rates will have on our results of
operations and the present value of our equity.
Historically, our lending activities have emphasized one- to four-family
first and second mortgage loans. Our primary source of funds has been deposits,
consisting primarily of time deposits, which have substantially shorter terms to
maturity than the loan portfolio. We have employed certain strategies to manage
the interest rate risk inherent in the asset/liability mix, including:
(1) purchasing mortgage-backed securities with adjustable-rate features;
(2) purchasing shorter-term federal agency securities with call options;
and
(3) emphasizing the origination of 15 year fixed-rate and adjustable-rate
first mortgage loans.
We believe that the frequent repricing of our adjustable-rate mortgage loans and
adjustable-rate securities, which reduces the exposure to interest rate
fluctuations, will benefit our long-term profitability. Although we have
emphasized the origination of variable-rate mortgage products, the prevailing
low interest rate environment has resulted in the increased demand for
fixed-rate first mortgage loans. The result has been an increase in the
proportion of fixed-rate loans in our portfolio. This may have an adverse impact
on our net interest income, particularly in a rising interest rate environment.
In addition, the actual amount of time before mortgage loans and
mortgage-backed securities are repaid can be significantly impacted by changes
in mortgage prepayment rates and market interest rates. Mortgage prepayment
rates will vary due to a number of factors, including the regional economy in
the area where the underlying mortgages were originated, seasonal factors,
demographic variables and the assumability of the underlying mortgages. However,
the major factors affecting prepayment rates are prevailing interest rates,
related mortgage refinancing opportunities and competition. We monitor interest
rate sensitivity so that we can make adjustments to our asset and liability mix
on a timely basis.
Gap Analysis. The matching of the repricing characteristics of assets and
liabilities may be analyzed by examining the extent to which such assets and
liabilities are "interest rate sensitive" and by monitoring a financial
institution's interest rate sensitivity "gap." An asset or liability is said to
be "interest rate sensitive" within a specific time period if it will mature or
reprice within that time period. The interest rate sensitivity gap is defined as
the difference between the amount of interest-earning assets maturing or
repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within that same time period.
A gap is considered positive when the amount of interest-earning assets
maturing or repricing within a specific time period exceeds the amount of
interest-bearing liabilities maturing or repricing within that specific time
period. A gap is considered negative when the amount of interest-bearing
liabilities maturing or repricing within a specific time period exceeds the
amount of interest-earning assets maturing or repricing within the same period.
During a period of rising interest rates, a financial institution with a
negative gap position would be expected, absent the effects of other factors, to
experience a greater increase in the costs of its liabilities relative to the
yields of its assets and thus a decrease in the institution's net interest
income. An institution with a positive gap position would be expected, absent
the effect of other factors, to experience the opposite result. Conversely,
35
<PAGE> 37
during a period of falling interest rates, a negative gap would tend to result
in an increase in net interest income while a positive gap would tend to reduce
net interest income.
At December 31, 1998, based on the assumptions below, our interest-bearing
liabilities maturing or repricing within one year exceeded our interest-earning
assets maturing or repricing within the same period by $1.29 billion. This
represented a negative cumulative one-year interest rate sensitivity gap of
16.6%, and a ratio of interest-earning assets maturing or repricing within one
year to interest-bearing liabilities maturing or repricing within one year of
74.6%. Our negative gap position could more adversely impact our net interest
income in a rising rate environment than if we had a positive gap position. Our
policy sets a maximum negative cumulative one-year gap as a percent of total
assets at 22%, and a maximum positive cumulative one-year gap as a percent of
total assets at 5%. Our policy also sets the ratio of interest-earning assets
maturing or repricing within one year to interest-bearing liabilities at one
year to a minimum of 65% and a maximum of 107%.
The following table presents the amounts of our interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1998, which we
anticipate to reprice or mature in each of the future time periods shown. Except
as stated below, we determined the amounts of assets and liabilities shown which
reprice or mature during a particular period in accordance with the earlier of
the term to repricing or the contractual maturity of the asset or liability. The
information presented in the following table is also based on the following
assumptions:
(1) we assumed an annual prepayment rate of 16.0% for mortgage loans
repricing or maturing after one year;
(2) we assumed an annual prepayment rate of 20.0% for mortgage-backed
securities repricing or maturing after one year;
(3) we reported federal agency securities with call options, that we
believed would be called, at the earlier of the next call date or
contractual maturity date;
(4) we reported savings and interest-bearing demand accounts that had no
stated maturity using decay rates of: 2.5% in less than six months,
2.5% in six months to one year, 25% in one year to two years, 30% in
two years to three years, 20% in three years to five years, and 20% in
over five years; and
(5) we reported money market accounts using decay rates of: 25% in less
than six months, 25% in six months to one year, 25% in one year to two
years, and 25% in two years to three years.
Deposit decay rates, as reflected in items 4 and 5 above, are based on
regulatory guidance, as modified by our historical experience. Deposit decay
rates, prepayment rates and anticipated call dates can have a significant impact
on the estimated interest sensitivity gap. While we believe that our assumptions
are reasonable, they may not be indicative of actual future deposit decay
activity, mortgage and mortgage-backed securities prepayments, and the actual
timing of federal agency calls. We have excluded non-accrual loans from the
table.
36
<PAGE> 38
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
-------------------------------------------------------------------------------------------------
MORE THAN MORE THAN MORE THAN MORE THAN
SIX MONTHS SIX MONTHS ONE YEAR TWO YEARS TO THREE YEARS MORE THAN
OR LESS TO ONE YEAR TO TWO YEARS THREE YEARS TO FIVE YEARS FIVE YEARS TOTAL
----------- ----------- ------------ ------------ ------------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
First mortgage loans........ $ 429,749 $ 460,492 $ 474,957 $ 439,691 $ 456,614 $1,298,101 $3,559,604
Consumer and other loans.... 28,347 952 1,783 2,731 13,883 38,891 86,587
Federal funds sold.......... 69,800 -- -- -- -- -- 69,800
Mortgage-backed
securities................ 1,228,497 1,127,667 143,131 115,710 92,862 363,064 3,070,931
Investment securities(1).... 401,027 34,716 419 1,105 194,127 155,030 786,424
----------- ----------- ----------- ----------- --------- ---------- ----------
Total interest-earning
assets.................. 2,157,420 1,623,827 620,290 559,237 757,486 1,855,086 7,573,346
----------- ----------- ----------- ----------- --------- ---------- ----------
INTEREST-BEARING LIABILITIES:
Savings accounts............ 21,453 22,346 207,621 249,145 166,097 166,097 832,759
Interest-bearing demand
accounts.................. 2,511 2,511 25,109 30,131 20,087 20,087 100,436
Money market accounts....... 126,300 126,300 126,300 126,301 -- -- 505,201
Time deposits............... 3,345,325 1,419,844 254,084 22,331 14,298 -- 5,055,882
----------- ----------- ----------- ----------- --------- ---------- ----------
Total interest-bearing
liabilities............. 3,495,589 1,571,001 613,114 427,908 200,482 186,184 6,494,278
----------- ----------- ----------- ----------- --------- ---------- ----------
Interest sensitivity gap...... $(1,338,169) $ 52,826 $ 7,176 $ 131,329 $ 557,004 $1,668,902 $1,079,068
=========== =========== =========== =========== ========= ========== ==========
Cumulative interest
sensitivity gap............. $(1,338,169) $(1,285,343) $(1,278,167) $(1,146,838) $(589,834) $1,079,068
=========== =========== =========== =========== ========= ==========
Cumulative interest
sensitivity gap as a
percentage of total assets.. (17.26)% (16.58)% (16.49)% (14.79)% (7.61)% 13.92%
Cumulative interest-earning
assets as a percentage of
interest-bearing
liabilities................. 61.72% 74.63% 77.50% 81.22% 90.65% 116.62%
</TABLE>
- -------------------------
(1) If we classified our investment securities available for sale at December
31, 1998 within the one-year maturing or repricing category, net
interest-bearing liabilities maturing or repricing within one year would
have exceeded interest-earning assets maturing or repricing within the same
time period by $936.1 million, representing a cumulative one-year gap of
negative 12.07% of total assets.
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<PAGE> 39
The methods used in the previous table have some shortcomings. For example,
although certain assets and liabilities may have similar maturities or periods
to repricing, they may react in different degrees to changes in market interest
rates. Interest rates on certain types of assets and liabilities may fluctuate
in advance of changes in market interest rates, while interest rates on other
types may lag behind changes in market rates. Certain assets, such as
adjustable-rate loans, have features which limit changes in interest rates on a
short-term basis and over the life of the loan. If interest rates change,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. Finally, the ability of borrowers to
make payments on their adjustable-rate loans may decrease if interest rates
increase.
Present Value of Equity. In addition to the gap analysis table, we also
use a simulation model to monitor interest rate risk. This model reports the
present value of equity in different interest rate environments, assuming an
instantaneous and permanent interest rate shock to all interest rate-sensitive
assets and liabilities. The present value of equity is the difference between
the present value of expected cash flows of interest rate-sensitive assets and
liabilities. The changes in market value of assets and liabilities due to
changes in interest rates reflect the interest sensitivity of those assets and
liabilities as their values are derived from the characteristics of the asset or
liability (i.e., fixed rate, adjustable-rate, caps, floors) relative to the
current interest rate environment. For example, in a rising interest rate
environment the fair market value of a fixed rate asset will decline, whereas
the fair market value of an adjustable-rate asset, depending on its repricing
characteristics, may not decline. Increases in the market value of assets will
increase the present value of equity whereas decreases in market value of assets
will decrease the present value of equity. Conversely, increases in the market
value of liabilities will decrease the present value of equity whereas decreases
in the market value of liabilities will increase the present value of equity.
The following table presents the estimated present value of equity over a
range of interest rate change scenarios at December 31, 1998. The present value
ratio shown in the table is the present value of equity as a percent of the
present value of total assets in each of the different rate environments. For
purposes of this table, we have made assumptions such as prepayment rates and
decay rates similar to those used for the gap analysis table.
<TABLE>
<CAPTION>
PRESENT VALUE OF EQUITY AS
PERCENT OF PRESENT
PRESENT VALUE OF EQUITY VALUE OF ASSETS
CHANGE IN -------------------------------- ---------------------------
INTEREST RATES DOLLAR DOLLAR PERCENT PRESENT VALUE PERCENT
(BASIS POINTS) AMOUNT CHANGE CHANGE RATIO CHANGE
- -------------- ---------- --------- ------- --------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
200 $ 892,561 $(239,291) (21.14)% 11.92% (17.45)%
150 961,328 (170,524) (15.07) 12.68 (12.19)
100 1,029,126 (102,726) (9.08) 13.40 (7.20)
50 1,085,211 (46,641) (4.12) 13.98 (3.19)
0 1,131,852 -- -- 14.44 --
(50) 1,132,983 1,131 0.10 14.40 (0.28)
(100) 1,119,106 (12,746) (1.13) 14.20 (1.66)
(150) 1,108,808 (23,044) (2.04) 14.03 (2.84)
(200) 1,092,321 (39,531) (3.49) 13.80 (4.43)
</TABLE>
As in the case of the gap analysis table, the methods we used in the
previous table have some shortcomings. This type of modeling requires that we
make assumptions which may not reflect the manner in which actual yields and
costs respond to changes in market interest rates. For example, we
38
<PAGE> 40
assume the composition of the interest rate-sensitive assets and liabilities
will remain constant over the period being measured and that all interest rate
shocks will be uniformly reflected across the yield curve, regardless of the
duration to maturity or repricing. The table assumes that we will take no action
in response to the changes in interest rates. In addition, prepayment estimates
and other assumptions within the model are subjective in nature, involve
uncertainties, and, therefore, cannot be determined with precision. Accordingly,
although the present value of equity model may provide an estimate of our
interest rate risk at a particular point in time, such measurements are not
intended to and do not provide a precise forecast of the effect of changes in
interest rates on our present value of equity.
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between the interest income
we earn on our interest-earning assets, such as mortgage loans, mortgage-backed
securities and investment securities, and the expense we pay on interest-bearing
liabilities, such as time deposits. Net interest income depends on our volume of
interest-earning assets and interest-bearing liabilities and the interest rates
we earned or paid on them.
Average Balance Sheet. The following table presents certain information
regarding Hudson City Savings' financial condition and net interest income for
1998, 1997 and 1996. The table presents the average yield on interest-earning
assets and the average cost of interest-bearing liabilities for the periods
indicated. We derived the yields and costs by dividing income or expense by the
average balance of interest-earning assets or interest-bearing liabilities,
respectively, for the periods shown. We derived average balances from daily
balances over the periods indicated. Interest income includes fees which we
considered adjustments to yields.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------- ------------------------------- -------------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
---------- -------- ------- ---------- -------- ------- ---------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
INTEREST-EARNING ASSETS:
First mortgage loans,
net(1)................... $3,426,309 $259,320 7.57% $3,193,099 $245,432 7.69% $2,858,926 $221,930 7.76%
Consumer and other loans... 84,782 7,272 8.58 86,476 7,685 8.89 90,045 8,135 9.03
Federal funds sold......... 55,264 2,839 5.14 52,760 2,801 5.31 86,551 4,464 5.16
Mortgage-backed
securities............... 3,053,628 201,592 6.60 2,949,557 201,323 6.83 2,336,817 157,050 6.72
Investment securities...... 743,151 49,768 6.70 629,050 43,201 6.87 566,784 37,699 6.65
---------- -------- ---------- -------- ---------- --------
Total interest-earning
assets................. 7,363,134 520,791 7.07 6,910,942 500,442 7.24 5,939,123 429,278 7.23
-------- -------- --------
Non-interest-earning
assets................... 172,142 164,203 156,815
---------- ---------- ----------
Total assets............. $7,535,276 $7,075,145 $6,095,938
========== ========== ==========
LIABILITIES AND EQUITY:
INTEREST-BEARING
LIABILITIES:
Savings accounts........... $ 834,057 $ 22,777 2.73% $ 845,600 $ 23,837 2.82% $ 881,291 $ 25,209 2.86%
Interest-bearing demand
accounts................. 92,276 1,959 2.12 88,924 1,868 2.10 85,031 1,820 2.14
Money market accounts...... 498,337 14,329 2.88 508,218 14,859 2.92 534,558 15,825 2.96
Time deposits.............. 4,913,089 272,019 5.54 4,556,812 256,920 5.64 3,631,959 199,813 5.50
---------- -------- ---------- -------- ---------- --------
Total interest-bearing
liabilities............ 6,337,759 311,084 4.91 5,999,554 297,484 4.96 5,132,839 242,667 4.73
---------- -------- ---------- -------- ---------- --------
NON-INTEREST-BEARING
LIABILITIES:
Non-interest-bearing
deposits................. 286,322 262,072 242,615
Other non-interest-bearing
liabilities.............. 55,667 50,117 43,191
---------- ---------- ----------
Total non-interest-bearing
liabilities................ 341,989 312,189 285,806
---------- ---------- ----------
Total liabilities........ 6,679,748 6,311,743 5,418,645
Equity..................... 855,528 763,402 677,293
---------- ---------- ----------
Total liabilities and
equity................. $7,535,276 $7,075,145 $6,095,938
========== ========== ==========
Net interest income/net
interest rate spread(2).... $209,707 2.16% $202,958 2.28% $186,611 2.50%
======== ======== ========
Net interest-earning
assets/net interest
margin(3).................. $1,025,375 2.85% $ 911,388 2.94% $ 806,284 3.14%
========== ========== ==========
Ratio of interest-earning
assets to interest-bearing
liabilities................ 1.16X 1.15X 1.16X
</TABLE>
39
<PAGE> 41
- -------------------------
(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 weighted average cost
of average interest-bearing liabilities from the weighted average yield on
average interest-earning assets.
(3) We determined net interest margin by dividing net interest income by average
interest-earning assets.
Rate/Volume Analysis. The following table presents the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have affected our interest income and interest
expense during the periods indicated. Information is provided in each category
with respect to:
(1) changes attributable to changes in volume (changes in volume multiplied
by prior rate);
(2) changes attributable to changes in rate (changes in rate multiplied by
prior volume); and
(3) the net change.
The changes attributable to the combined impact of volume and rate have been
allocated proportionately to the changes due to volume and the changes due to
rate.
<TABLE>
<CAPTION>
1998 COMPARED TO 1997 1997 COMPARED TO 1996
------------------------------- -------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
IN NET INTEREST INCOME DUE TO IN NET INTEREST INCOME DUE TO
------------------------------- -------------------------------
VOLUME RATE NET VOLUME RATE NET
-------- --------- -------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
First mortgage loans, net....... $17,698 $ (3,810) $13,888 $25,705 $ (2,203) $23,502
Consumer and other loans........ (149) (264) (413) (319) (131) (450)
Federal funds sold.............. 130 (92) 38 (1,790) 127 (1,663)
Mortgage-backed securities...... 6,983 (6,714) 269 41,787 2,486 44,273
Investment securities........... 7,665 (1,098) 6,567 4,245 1,257 5,502
------- -------- ------- ------- -------- -------
Total........................ 32,327 (11,978) 20,349 69,628 1,536 71,164
------- -------- ------- ------- -------- -------
INTEREST-BEARING LIABILITIES:
Savings accounts................ (322) (738) (1,060) (1,010) (362) (1,372)
Interest-bearing demand
accounts..................... 71 20 91 82 (34) 48
Money market accounts........... (286) (244) (530) (772) (194) (966)
Time deposits................... 19,793 (4,694) 15,099 52,032 5,075 57,107
------- -------- ------- ------- -------- -------
Total........................ 19,256 (5,656) 13,600 50,332 4,485 54,817
------- -------- ------- ------- -------- -------
Net change in net interest
income....................... $13,071 $ (6,322) $ 6,749 $19,296 $ (2,949) $16,347
======= ======== ======= ======= ======== =======
</TABLE>
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1998 AND DECEMBER 31, 1997
Hudson City Savings' total assets increased $438.3 million, or 6.0%, to
$7.75 billion at December 31, 1998 from $7.31 billion at December 31, 1997.
At December 31, 1998, loans increased $195.6 million, or 5.7%, to $3.66
billion, while investment securities available for sale increased $130.3
million, or 19.9%, to $785.0 million. Mortgage-backed securities held to
maturity, which amounted to 39.6% of total assets at December 31, 1998,
increased $48.7 million, or 1.6%, to $3.07 billion at December 31, 1998 from
$3.02 billion at December 31, 1997. These increases reflect our strategy of
emphasizing the
40
<PAGE> 42
origination of one- to four-family residential mortgage loans, supplemented by
the purchase of investment securities and mortgage-backed securities.
Additionally, federal funds sold which are overnight investments, increased
$45.2 million, or 183.7%, to $69.8 million at December 31, 1998 from $24.6
million at December 31, 1997. Levels of federal funds sold may vary
significantly as they represent our daily investment of excess liquidity.
The growth in total assets was funded primarily by an increase of $341.4
million, or 5.3%, in total deposits to $6.81 billion at December 31, 1998,
compared with $6.47 billion at December 31, 1997. Interest-bearing deposits
accounted for $300.6 million, or 88.0%, of the growth in total deposits and were
$6.49 billion at December 31, 1998, an increase of 4.9% from $6.19 billion at
December 31, 1997. Of our interest-bearing deposits, time deposits increased
$288.2 million, or 6.0%, to $5.06 billion at December 31, 1998 from $4.77
billion at December 31, 1997. The increase in time deposits primarily reflects
an increase in time deposits with original maturities of less than twenty-four
months. The growth in interest-bearing deposits primarily reflects our strategy
of offering competitive interest rates on time deposits and the relative
stability of the remainder of the deposit base.
Total equity increased $92.9 million, or 11.5%, to $900.6 million at
December 31, 1998, from $807.7 million at December 31, 1997, primarily due to
$93.3 million of net income for 1998.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
GENERAL
Net income was $93.3 million for 1998, an increase of $3.3 million, or
3.7%, compared with net income of $90.0 million for 1997. The increase was
primarily attributable to a $6.7 million increase in net interest income offset
by a $1.4 million decrease in total non-interest income and a $2.0 million
increase in income tax expense.
INTEREST INCOME
Total interest income increased $20.4 million, or 4.1%, to $520.8 million
for 1998 compared with $500.4 million for 1997. Interest and fees on first
mortgage loans accounted for $13.9 million, or 68.1%, of the increase in total
interest income as it increased to $259.3 million for 1998. This represents a
5.7% increase over interest and fees on first mortgage loans of $245.4 million
for 1997. Interest and dividends on investment securities available for
sale -- taxable increased $6.6 million, or 15.3%, to $49.7 million for 1998
compared with $43.1 million for 1997.
The increase in total interest income was due to a $452.2 million, or 6.5%,
increase in the average balance of total interest-earning assets to $7.36
billion for 1998 compared with $6.91 billion for 1997. The average balance of
first mortgage loans, net, increased $233.2 million, or 7.3%, to $3.43 billion
for 1998 compared with $3.19 billion for 1997. This increase primarily reflects
our continued emphasis on one- to four-family mortgage loan originations, which
increased $268.1 million, or 39.6%, to $944.9 million during 1998 from $676.8
million in 1997. The average balance of mortgage-backed securities increased
$104.1 million, or 3.5%, to $3.05 billion for 1998 compared with $2.95 billion
for 1997. The average balance of investment securities increased $114.1 million,
or 18.1%, to $743.2 million for 1998 compared with $629.1 million for 1997.
These increases reflect our continued strategy of controlled internal growth and
the use of our investments to increase interest income while managing interest
rate risk.
The increase in total interest-earning assets was partially offset by a 17
basis point decrease in the average yield on interest-earning assets to 7.07%
for 1998 from 7.24% for 1997. The average yield on first mortgage loans, net,
decreased 12 basis points to 7.57% for 1998 compared with 7.69% for the prior
year. The average yield on mortgage-backed securities decreased 23 basis points
to 6.60% for 1998 compared with 6.83% for 1997. The average yield on investment
securities decreased 17 basis
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points to 6.70% for 1998 compared with 6.87% for 1997. The lower interest rate
environment along with the relatively flat yield curve that prevailed during
1998 and the end of 1997 resulted in the downward repricing of our interest
rate-sensitive assets. In addition, the average yield on our assets was affected
by the refinancing of many of our existing loans to loans with lower interest
rates.
INTEREST EXPENSE
Interest expense on deposits increased $13.6 million, or 4.6%, to $311.1
million for 1998 compared with $297.5 million for 1997. Interest expense on time
deposits, which accounted for 87.4% of interest expense on deposits, increased
$15.1 million, or 5.9%, to $272.0 million for 1998 from $256.9 million for 1997.
The increase of $15.1 million in interest expense on time deposits was partially
offset by a $1.0 million, or 4.2%, decrease in interest expense on savings
accounts to $22.8 million for 1998 from $23.8 million for 1997.
The overall increase in interest expense was attributable to an increase of
$338.2 million, or 5.6%, in the average balance of total interest-bearing
liabilities to $6.34 billion for 1998 compared with $6.00 billion for 1997. The
major component of the increase in the average balance of interest-bearing
liabilities was a $356.3 million, or 7.8%, increase to $4.91 billion in the
average balance of time deposits during 1998 compared with an average balance of
time deposits of $4.56 billion during 1997. This increase reflects our strategy
of funding asset growth through competitive pricing of our time deposit
products. The impact of the increase in the average balance of total
interest-bearing liabilities was slightly offset by a 5 basis point decrease in
the average cost of total interest-bearing liabilities to 4.91% for 1998
compared with 4.96% for 1997. This decrease reflects the overall lower interest
rate environment that prevailed during 1998 and the end of 1997.
NET INTEREST INCOME
Net interest income for 1998 increased $6.7 million, or 3.3%, to $209.7
million compared with $203.0 million for 1997. Net interest rate spread, the
difference between the average yield on average total interest-earning assets
and the average cost of average total interest-bearing liabilities, decreased 12
basis points to 2.16% for 1998 from 2.28% for the prior year. Net interest
margin, represented by net interest income divided by average total
interest-earning assets, decreased 9 basis points to 2.85% for 1998 compared
with 2.94 % for 1997. These decreases were primarily due to slight declines in
interest rates we paid on our interest-bearing deposits, while interest-earning
assets continued to reprice downward more significantly in 1998.
PROVISION FOR LOAN LOSSES
During 1998 we provided $2.4 million for loan losses, compared to $2.9
million for 1997. Net loan charge-offs were approximately $0.3 million for both
1998 and 1997. This resulted in the allowance for loan losses, which is
established through a provision for loan losses charged against income,
increasing by $2.1 million, or 13.5%, to $17.7 million at December 31, 1998,
from $15.6 million at December 31, 1997.
The decrease in the provision for loan losses reflects a decline in
non-performing loans. The increase in the allowance for loan losses reflects the
continued growth in the loan portfolio. At December 31, 1998, the allowance for
loan losses as a percentage of loans was 0.48% compared with 0.45% at December
31, 1997. As a percentage of non-performing loans at December 31, 1998, the
allowance for loan losses was 115.5%, compared with 96.9% for 1997.
Non-performing loans, which we defined as non-accruing loans and accruing loans
delinquent 90 days or more, decreased $0.8 million, or 5.0%, to $15.3 million at
December 31, 1998 from $16.1 million at December 31, 1997.
Future provisions for loan losses will continue to be based upon our
assessment of the overall loan portfolio and the underlying collateral, trends
in non-performing loans, current economic
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conditions and other relevant factors in order to maintain the allowance for
loan losses at adequate levels to provide for estimated losses.
NON-INTEREST INCOME
Non-interest income includes service fees on deposit accounts, other
service charges and net gains on sales of securities. Total non-interest income
decreased $1.3 million, or 20.6%, to $5.0 million for 1998 compared with $6.3
million for 1997. The decrease is primarily due to a $1.6 million decrease in
the gain on net securities transactions from the prior year. In 1997,
substantially all of our gain on net securities transactions was from the sale
of common stock of a federal government agency.
NON-INTEREST EXPENSE
Total non-interest expense increased $0.6 million, or 1.0%, to $63.5
million during 1998 compared with $62.9 million for the prior year. Salaries and
employee benefits and net occupancy expense comprised 80.4% of total
non-interest expense for 1998. Salaries and employee benefits increased $0.5
million, or 1.3%, to $39.3 million for 1998 compared with $38.8 million for
1997, reflecting routine salary increases partially offset by a decrease in
benefits expense. Non-interest expense also includes amortization of goodwill of
$1.6 million for 1998. We expect to fully amortize the remaining goodwill during
1999.
Our efficiency ratio (determined by dividing non-interest expense by the
sum of net interest income and non-interest income, excluding gains on
securities transactions) was 29.6% for 1998 compared with 30.3% for 1997. The
efficiency ratio reflects our efforts to control operating expenses by
increasing operating efficiencies. The ratio of non-interest expense to average
assets was 0.84% for 1998 and 0.89% for 1997.
INCOME TAXES
Income tax expense increased $2.0 million, or 3.7%, to $55.5 million for
1998 compared with $53.5 million for 1997, resulting in a stable effective tax
rate of 37.3% for both 1998 and 1997.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1997 AND 1996
Hudson City Savings' total assets increased $641.6 million, or 9.6%, to
$7.31 billion at December 31, 1997 from $6.67 billion at December 31, 1996.
At December 31, 1997, loans increased $292.3 million, or 9.2%, to $3.46
billion, while investment securities available for sale increased $58.8 million,
or 9.9%, to $654.7 million. Mortgage-backed securities held to maturity, which
comprised 41.3% of total assets at December 31, 1997, increased $312.1 million,
or 11.5%, to $3.02 billion at December 31, 1997. Federal funds sold decreased
$27.6 million, or 52.9%, to $24.6 million at December 31, 1997 from $52.2
million at December 31, 1996.
The growth in total assets was funded primarily by an increase of $547.0
million, or 9.2%, in total deposits to $6.47 billion at December 31, 1997
compared with $5.92 billion at December 31, 1996. Interest-bearing deposits
accounted for $524.5 million, or 95.9%, of the growth in total deposits and were
$6.19 billion at December 31, 1997, an increase of 9.3% from $5.67 billion at
December 31, 1996. Of our interest-bearing deposits, time deposits increased
$565.0 million, or 13.5%, to $4.77 billion at December 31, 1997 from $4.20
billion at December 31, 1996. Slightly offsetting the increase in time deposits
at December 31, 1997 was a decrease in savings deposits of $22.6 million, or
2.6%, to $835.1 million compared with $857.7 million at December 31, 1996. Money
market deposits at December 31, 1997 were $500.0 million, reflecting a decrease
of $20.1 million, or 3.9%, from $520.1
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million at December 31, 1996. Demand deposits increased to $272.3 million at
December 31, 1997, an increase of $22.5 million, or 9.0%, compared with $249.8
million at December 31, 1996.
Our total equity increased $88.6 million, or 12.3%, to $807.7 million at
December 31, 1997, from $719.1 million at December 31, 1996, primarily due to
$90.0 million of net income for 1997, partially offset by $1.4 million of
accumulated other comprehensive income related to unrealized losses on
investment securities available for sale.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
GENERAL
Net income was $90.0 million for 1997, an increase of $9.2 million, or
11.4%, compared with net income of $80.8 million for 1996. The increase was
primarily attributable to a $16.4 million increase in net interest income and an
increase of $2.3 million in total non-interest income offset by an increase in
total non-interest expense and income tax expense of $2.0 million and $6.9
million, respectively.
INTEREST INCOME
Total interest income increased $71.1 million, or 16.6%, to $500.4 million
for 1997 compared with $429.3 million for 1996. Interest on mortgage-backed
securities accounted for $44.2 million, or 62.2%, of the 1997 increase in total
interest income. The increase of $44.2 million in interest on mortgage-backed
securities represented a 28.1% increase to $201.3 million for 1997 compared with
$157.1 million for 1996. Interest and fees on first mortgage loans increased
$23.5 million, or 10.6%, to $245.4 million for 1997, compared with $221.9
million for the prior year. Additionally, interest and dividends on investment
securities available for sale-taxable increased $5.5 million, or 14.6%, to $43.1
million for 1997 from $37.6 million for 1996, while interest on federal funds
sold decreased $1.7 million, or 37.8% to $2.8 million for 1997.
The increase in total interest income was primarily due to a $971.8
million, or 16.4 %, increase in the average balance of total interest-earning
assets to $6.91 billion for 1997 compared with $5.94 billion for 1996. During
1996 and 1997 it was our strategy to significantly increase our size through
internal growth. The focus of this growth was increasing our deposit base and
deploying the funds generated by increasing loan originations and investments in
mortgage-backed securities. The significant increase in the average balance of
total interest-earning assets in 1997 was the result of our deployment of the
funds we generated by deposit growth during 1996 and 1997. The average balance
of first mortgage loans, net, increased $334.2 million, or 11.7%, to $3.19
billion for 1997 compared with $2.86 billion for 1996, while the average balance
of mortgage-backed securities increased $612.7 million, or 26.2%, to $2.95
billion for 1997 compared with $2.34 billion for 1996. In addition, the average
balance of investment securities increased by $62.3 million, or 11.0%, to $629.1
million in 1997 compared with $566.8 million in 1996, reflecting the deployment
of excess funding from the increase in deposits.
The average yield on interest-earning assets remained constant at 7.24% for
1997 compared with 7.23% for 1996. The average yield on first mortgage loans,
net, decreased 7 basis points, to 7.69% for 1997 from 7.76% for the prior year.
The average yield on mortgage-backed securities increased 11 basis points to
6.83% for 1997 from 6.72% for 1996. The average yield on investment securities
increased 22 basis points to 6.87% for 1997 from 6.65% for 1996. A slight upward
trend in overall market interest rates during 1996 allowed us to invest deposits
in higher-yielding mortgage-backed securities and investment securities. This
resulted in higher yields on mortgage-backed securities and investment
securities for 1997.
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INTEREST EXPENSE
Interest expense on deposits increased $54.8 million, or 22.6%, to $297.5
million for 1997 compared with $242.7 million for 1996. Interest expense on time
deposits, which accounted for 86.4% of interest expense on deposits, increased
$57.1 million, or 28.6%, to $256.9 million for 1997 from $199.8 million for
1996. The $57.1 million increase in interest expense on time deposits was
partially offset by a $1.4 million, or 5.6 %, decrease in interest expense on
savings accounts to $23.8 million for 1997 from $25.2 million for 1996.
The overall increase in interest expense on deposits was attributable to an
increase of $866.7 million, or 16.9%, in the average balance of total
interest-bearing liabilities to $6.00 billion for 1997 compared with $5.13
billion for 1996. The increase reflects our intent in 1996 and 1997 to
significantly increase our deposit base by aggressively pricing our time
deposits. Accordingly, the major component of the net increase in the average
balance of interest-bearing liabilities was a $924.9 million, or 25.5%, increase
to $4.56 billion in the average balance of time deposits during 1997 compared
with $3.63 billion during 1996. The average balance of interest-bearing demand
accounts increased $3.9 million, or 4.6%, to $88.9 million for 1997 from $85.0
million for 1996. The increases in the average balance of time deposits and
interest-bearing demand accounts during 1997 were partially offset by a $35.7
million, or 4.1%, decrease in the average balance of lower-costing savings
accounts to $845.6 million during 1997 from $881.3 million during 1996.
Additionally, the average balance of lower-costing money market accounts
decreased $26.4 million, or 4.9%, to $508.2 million during 1997 compared with
$534.6 million for 1996.
The average cost of total interest-bearing deposits increased to 4.96% for
1997 compared with 4.73% for 1996, primarily due to our aggressive pricing
strategy and the resulting shift in the deposit mix to higher-costing time
deposits.
NET INTEREST INCOME
Net interest income for 1997 increased $16.4 million, or 8.8%, to $203.0
million compared with $186.6 million for 1996. Net interest rate spread
decreased 22 basis points to 2.28% for 1997 from 2.50% for the prior year. Net
interest margin decreased 20 basis points to 2.94% for 1997 compared with 3.14%
for 1996. While we grew significantly during 1996, the cost of that growth, in
terms of a flat average yield on interest-earning assets and an overall increase
in the cost of interest-bearing deposits, resulted in a lower net interest
spread and net interest margin.
PROVISION FOR LOAN LOSSES
During 1997 and 1996, we provided $2.9 million and $2.3 million,
respectively, for loan losses. Net loan charge-offs were $0.3 million for 1997
and $1.1 million for 1996. This resulted in the allowance for loan losses
increasing $2.6 million, or 20.0%, to $15.6 million at December 31, 1997, from
$13.0 million at December 31, 1996. The increase in the provision reflects the
continued increase in the loan portfolio during 1997. At December 31, 1997, the
allowance for loan losses as a percentage of loans was 0.45% compared with 0.41%
at December 31, 1996. As a percentage of non-performing loans at December 31,
1997, the allowance for loan losses was 96.9% compared with 76.9% at December
31, 1996. Non-performing loans, defined as non-accruing loans and accruing loans
delinquent 90 days or more, decreased $0.9 million, or 5.3%, to $16.1 million at
December 31, 1997 from $17.0 million at December 31, 1996.
Historically, the majority of the loans we originated have been one- to
four-family mortgage loans. At December 31, 1997, 97.5% of our total loan
portfolio was comprised of first mortgage loans, substantially all of which were
secured by properties located in the state of New Jersey.
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NON-INTEREST INCOME
Total non-interest income for 1997 was $6.3 million, an increase of $2.3
million, or 57.5%, from $4.0 million for 1996. The increase was primarily due to
a $1.4 million increase in gain on net securities transactions from the sale of
common stock of a federal government agency. Additionally, service fees and
other income were $4.7 million, an increase of $0.8 million, or 20.5%, from $3.9
million for 1996. The increase was primarily due to service fees generated from
increased levels of deposits.
NON-INTEREST EXPENSE
Total non-interest expense increased $1.9 million, or 3.1%, to $62.9
million during 1997 compared with $61.0 million for the prior year. Salaries and
employee benefits and net occupancy expense comprised 80.5% of total
non-interest expense for 1997. Salaries and employee benefits increased $1.8
million, or 4.9%, to $38.8 million for 1997 compared with $37.0 million for
1996, primarily due to routine salary increases. Net occupancy expense remained
stable at $11.9 million for both 1997 and 1996.
The ratio of non-interest expense to average assets was 0.89% for 1997 and
1.00% for 1996. Our efficiency ratio was 30.3% for 1997 compared with 32.0% for
1996.
INCOME TAXES
Income tax expense increased $6.9 million, or 14.8%, to $53.5 million for
1997 compared with $46.6 million for 1996, resulting in effective tax rates of
37.3% and 36.6% for 1997 and 1996, respectively.
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 reverse repurchase agreements with approved broker-dealers. Reverse
repurchase agreements are agreements which allow us to borrow money using our
securities as collateral. At December 31, 1998, we had no outstanding
borrowings.
Loan repayments and maturing investment securities are a relatively
predictable source of funds. However, deposit flows, calls of investment
securities and prepayments of loans and mortgage-backed securities are strongly
influenced by interest rates, general and local economic conditions and
competition in the marketplace. These factors reduce the predictability of the
timing of these sources of funds.
Our primary investing activities are the origination and purchase of one-
to four-family real estate loans, the purchase of mortgage-backed securities,
and to a lesser extent, the purchase of investment securities. During 1998 we
originated and purchased loans of approximately $1.02 billion and during 1997 we
originated and purchased loans of approximately $722.1 million. Purchases of
mortgage-backed securities were $1.22 billion for 1998 and $883.5 million for
1997, while purchases of investment securities were $790.0 million for 1998 and
$522.1 million for 1997.
These investing activities were funded by deposit growth, principal
payments on mortgage loans and mortgage-backed securities, calls and maturities
on investment securities, and funds provided by our operating activities.
Principal repayments on loans and mortgage-backed securities totaled $1.99
billion during 1998, compared to $995.0 million during 1997. Maturities and
calls of investment
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securities totaled $659.7 million during 1998 and $418.5 million during 1997.
Sales of loans and investment securities provided cash flows of $4.1 million
during 1998 and $43.8 million during 1997.
At December 31, 1998, Hudson City Savings had loan commitments to borrowers
of approximately $161.5 million, and available home equity and overdraft lines
of credit of approximately $53.4 million. Commitments to purchase
mortgage-backed securities were approximately $256.7 million at December 31,
1998. Total deposits increased $341.4 million during 1998 and $547.0 million
during 1997. Deposit flows are affected by the level of interest rates, the
interest rates and products offered by competitors and other factors. Time
deposit accounts scheduled to mature within one year were $4.77 billion at
December 31, 1998. Based on our deposit retention experience and current pricing
strategy, we anticipate that a significant portion of these time deposits will
remain with Hudson City Savings. We are committed to maintaining a strong
liquidity position; therefore, we monitor our liquidity position on a daily
basis. We anticipate that we will have sufficient funds to meet our current
funding commitments.
At December 31, 1998, we exceeded each of the applicable regulatory capital
requirements. Our leverage (tier 1) capital was $898.5 million, or 11.93%, at
December 31, 1998. In order to be classified as "well-capitalized" by the FDIC
we were required to have leverage (tier 1) capital of $376.6 million, or 5.00%.
To be classified as a well-capitalized bank by the FDIC, we must also have a
risk-based total capital ratio of 10.00%. At December 31, 1998, we had a
risk-based total capital ratio of 39.23%. See "Regulation of Hudson City Savings
Bank and Hudson City Bancorp" for a discussion of the regulatory capital
requirements applicable to Hudson City Savings and see "Regulatory Capital
Compliance" for information regarding the impact of the offering on our capital
position.
We do not anticipate any material capital expenditures, nor do we have any
balloon or other payments due on any long-term obligations or any off-balance
sheet items other than the commitments and unused lines of credit noted above.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." Under SFAS No. 123, an entity
may elect to recognize stock-based compensation expense based on the fair value
of the awards, or they may elect to account for stock-based compensation under
APB Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB No. 25").
If an entity elects to account for stock-based compensation under APB No. 25, it
is not required to recognize expense based on the fair value of the awards.
However, the entity must disclose in the financial statements the effects of
SFAS No. 123, as if the recognition provisions of SFAS No. 123 were adopted.
Currently, Hudson City Savings does not provide stock-based compensation to
its employees. Upon completion of the reorganization, subject to stockholder
approval, we will establish certain stock-based compensation plans. If
established, we have evaluated the alternatives available under the provisions
of SFAS No. 123 and currently expect that we will not adopt the recognition
provisions of the statement, but will provide the required footnote disclosures.
Therefore, we do not expect that the adoption of SFAS No. 123 will have a
material impact on our financial position or results of operations.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share." This statement established standards for computing
and presenting earnings per share (EPS) and applies to entities with publicly
held common stock or potential common stock. SFAS No. 128 simplifies the
standards for computing EPS previously found in APB Opinion No. 15, "Earnings
Per Share," and makes them more comparable with international EPS standards.
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Hudson City Savings, as a mutual savings bank does not have common stock
authorized, issued or outstanding and we do not calculate or present EPS. Upon
completion of the reorganization, we will calculate and present EPS in
accordance with SFAS No. 128.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value.
SFAS No. 133 is effective for all quarters of those years beginning after
June 15, 1999. This statement should not be applied retroactively to financial
statements of prior periods. We do not expect that our adoption of SFAS No. 133
will have a material impact on our financial position or results of operations.
In October 1998, the Financial Accounting Standards Board issued SFAS No.
134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise." This statement is an amendment of SFAS No. 65, "Accounting for
Certain Mortgage Banking Activities" and requires that after the securitization
of mortgage loans held for sale, an entity engaged in mortgage banking
activities classify the resulting mortgage-backed securities or other retained
interests on the basis of its ability and intent to sell or hold those
investments. This statement is effective for the first quarter beginning after
December 15, 1998. Our adoption of SFAS No. 134 will not have a material impact
on our financial position or results of operations.
ISSUES FOR THE YEAR 2000
Background. 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 1900 rather than the Year 2000. If the
Y2K issue is not resolved, our operations could be adversely affected due to the
date-sensitive nature of much of our financial information.
Financial institution regulators have focused on Y2K compliance in recent
years and have issued guidance concerning the responsibilities of our management
and our Board of Managers. The Federal Financial Institutions Examination
Council (FFIEC), a group comprised of representatives from the various financial
institution regulators, has issued several interagency statements on Y2K issues.
These statements have required financial institutions to evaluate their Y2K
exposure, measure their risk to Y2K issues and prepare a plan to remedy the Y2K
issue. Financial institutions also are required to examine the Y2K implications
of their reliance on third-party vendors and the potential impact of Y2K issues
on customers, borrowers and suppliers.
Federal banking regulators have also issued safety and soundness guidelines
to be used in conjunction with routine regulatory examinations. Failure by
federally-regulated institutions to adequately address the Y2K issue may result
in supervisory action, including the reduction of the institution's supervisory
rating, the denial of applications for approval of mergers or acquisitions, the
denial of applications for approval of new branch openings, or the imposition of
civil money penalties.
Risk. Similar to other financial institutions and companies that utilize
computer technology, our operations may be significantly affected by the Y2K
issue because of our reliance on electronic data processing technology and
date-sensitive information. The Y2K issue also impacts other aspects of
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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.
If we are affected by the Y2K issue, information that relies on dates, such
as interest calculations, loan payment schedules and other operating functions,
could be significantly incorrect. We may not be able to process withdrawals or
deposits, prepare account 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 effect on our suppliers and
service providers. Should we experience a Y2K failure that cannot readily be
fixed, it may result in a significant adverse impact on our financial condition
and results of operations.
State of Readiness. We believe that technology plays a critical role in
our overall business strategy. We have consistently attempted to stay current
with technological advances in the industry. In this regard, the Board of
Managers and senior management have consistently supported investment in
established and proven technologies. Because of this philosophy, the Board of
Managers and senior management have been actively engaged in managing our Year
2000 project. Management has consistently allocated both human and financial
resources to this project to achieve the objectives and time frames mandated by
the FFIEC. As discussed below, we believe that we have considered all material
Year 2000 issues and that we are taking the proper action to correct 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 our 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 the items based on their perceived business impact on our
operations. We decided to fix, upgrade, replace or abandon any systems that
we identified as having Y2K issues. Although we update the Compliance
Control Sheet as we acquire new technology, and the status of individual
items changes as systems go through subsequent phases, this assessment
phase of the project is substantially complete.
We also have 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 have no
major multi-family or commercial 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. These customers are not likely
to pose significant Y2K risks to our operations. However, it is not
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<PAGE> 51
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 the integrated financial systems software package that includes
our loans, deposits, general ledger and other miscellaneous applications.
This integrated mainframe software system was developed by, and is
currently maintained and supported by, a recognized provider. The mainframe
computer system was also manufactured by, and is currently maintained by, a
well-known national computer hardware company.
Our information services department is actively involved with both of
these providers as large customers of each. We were a test-site for the Y2K
compliant upgrade that was received in May 1998 for the integrated
financial systems software package. By July 1998, the Y2K upgrade for this
package was put into current production without Y2K-related problems. Other
significant systems have generally been upgraded to Y2K compliant versions
of vendor-supported software. In certain situations, we replaced existing
non-compliant systems with new Y2K compliant hardware and software. We have
relatively few data transmission interfaces with third-party servicers and
substantially all of these systems have been renovated for Year 2000
compliance. We have no mission-critical systems that we developed on our
own.
The review team continues to monitor the Y2K progress of those
third-parties who provide us with services or products to ensure that they
are taking adequate measures in addressing the Y2K issue. We are seeking
written 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 -- The validation phase is considered
to be the most critical stage of the Y2K readiness process. It is designed
to test the ability of the renovated systems to accurately process
date-sensitive data. In July 1998, after the Y2K compliant version of our
integrated financial systems software package was put into current
production, we commenced Y2K testing 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. Individual department personnel, the Training Department and
the Internal Audit Department, all became involved in the testing of this
operationally critical software. 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. Direct costs include charges by
third-party software vendors for product replacements, upgrades and
enhancements, costs involved in testing for Y2K compliance, costs for customer
awareness programs, etc. Indirect costs consist primarily of time devoted to the
project by existing employees for project development and implementation, the
testing of systems, monitoring third-party vendor and service provider progress,
and the development of contingency plans. The costs of the Y2K project have not
been significant to date, and we believe that the total cost of the project will
not be material to our results of operations or financial condition in any one
year. Although we currently estimate that the total cost of the Y2K project,
excluding the reallocation of internal resources, will be approximately $1.0
million, of which we have already incurred $0.8 million, we cannot guarantee
that such costs would not become material in the future.
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<PAGE> 52
Contingency Planning. Regulatory guidance requires that we consider two
types of contingency planning:
(1) remediation contingency planning, which addresses the failure of an
institution to successfully fix, test or implement its Y2K readiness
plan; and
(2) business resumption contingency planning, which addresses the risks
associated with the failure of systems at critical dates, such as
January 1, 2000.
The regulatory guidance provides that if a mission-critical application or
system has been remediated, tested and implemented, a remediation contingency
plan is not required. Based on the overall progress of our Y2K project,
specifically the testing and implementation results relative to the integrated
financial systems software package, our review team has concluded that a
remediation contingency plan is not required for mission-critical applications.
While we expect to complete our Y2K project in a timely manner, we cannot
guarantee that the systems of companies with whom we conduct business will also
be completed in a timely manner. The failure of these entities to adequately
address the Y2K issue could adversely affect our ability to conduct business.
To address the risks associated with the failure of mission-critical
systems at critical dates, we are currently developing a business resumption
contingency plan. We are developing 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 loss of telecommunications.
However, during extensive losses of power and/or telecommunications, we may
temporarily close our operations.
For some systems, contingency plans will consist of using or reverting to
manual systems until the problems can be corrected. Consistent with regulatory
guidance, we expect to complete our business resumption contingency plan by June
30, 1999. We do not anticipate any adverse material impact on our operations as
a result of the Y2K issue.
IMPACT OF INFLATION AND CHANGING PRICES
The Financial Statements and accompanying Notes of Hudson City Savings have
been prepared in accordance with generally accepted accounting principles
(GAAP). GAAP generally requires the measurement of financial position and
operating results in terms of historical dollars without consideration for
changes in the relative purchasing power of money over time due to inflation.
The impact of inflation is reflected in the increased cost of our operations.
Unlike industrial companies, our assets and liabilities are primarily monetary
in nature. As a result, changes in market interest rates have a greater impact
on performance than do the effects of inflation.
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<PAGE> 53
BUSINESS OF HUDSON CITY SAVINGS BANK
GENERAL
Hudson City Savings is a community and customer-oriented retail savings
bank offering traditional deposit products, residential real estate mortgage
loans and, to a lesser extent, consumer loans. In addition, Hudson City Savings
purchases mortgage-backed securities, securities issued by the U.S. Government
and agencies and other investments permitted by applicable laws and regulations.
Except for community-related investments, we have not recently originated or
invested in commercial real estate loans or loans secured by multi-family
residences or commercial/industrial business loans, although we have the legal
authority to make such loans. We retain substantially all of the loans we
originate.
Our revenues are derived principally from interest on our mortgage loans
and mortgage-backed securities and interest and dividends on our investment
securities. Our primary sources of funds are deposits, scheduled amortization
and prepayments of loan principal and mortgage-backed securities, maturities and
calls of investment securities and funds provided by operations. We have not
borrowed funds in recent years, although we expect to do so in the future. See
"-- Sources of Funds."
MARKET AREA
We conduct our operations out of our executive office in Paramus, Bergen
County, New Jersey, and 75 branches located in 13 counties throughout the state
of New Jersey. As of June 30, 1998, we had a 5.0% share of all New Jersey
deposits and we ranked fifth in size of deposits overall. We operate in three
primary markets: northern New Jersey, the New Jersey shore, and southwestern New
Jersey in the suburbs outside of Philadelphia. Overall, the counties in which we
operate reflect 82% of the entire population of New Jersey, providing us with
access to a large base of potential customers.
Our market areas provide distinct differences in demographics and economic
characteristics. The northern New Jersey market (including Bergen, Essex,
Hudson, Middlesex, Morris, Passaic, Union and Warren Counties) represents the
greatest concentration of population, deposits and income in the State. The
combination of these counties represents 54% of the entire New Jersey population
and 55% of New Jersey households. The northern New Jersey market also represents
the greatest concentration of Hudson City Savings retail operations -- both
lending and deposit gathering -- and based on its high level of economic
activity, we believe that the northern New Jersey markets provide the most
significant opportunities for future growth. The New Jersey shore market
(including Monmouth and Ocean counties) represents a strong concentration of
population and income, and is an increasingly popular resort and retirement
economy -- providing healthy opportunities for deposit growth and residential
lending. The southwestern New Jersey market (including Burlington, Camden and
Gloucester counties) consists of communities adjacent to the Philadelphia
metropolitan area and represents the smallest concentration of deposits for
Hudson City Savings.
Our future growth opportunities will be influenced by the growth and
stability of the statewide and regional economies, other demographic population
trends and the competitive environment. We believe that we have developed
lending products and marketing strategies to address the diverse credit-related
needs of the residents in our market area.
COMPETITION
We face intense competition both in making loans and attracting deposits.
New Jersey has a high concentration of financial institutions, many of which are
branches of large money center and regional banks which have resulted from the
consolidation of the banking industry in New Jersey and surrounding states. Some
of these competitors have greater resources than we do and may offer
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<PAGE> 54
services that we do not provide. For example, we do not provide insurance
products, trust or investment services, telephonic banking, banking services
through home computers or other technologically advanced services. Customers who
seek "one stop shopping" may be drawn to these institutions.
Our competition for loans comes principally from commercial banks, savings
institutions, mortgage banking firms, credit unions, finance companies, mutual
funds, insurance companies and brokerage and investment banking firms. Our most
direct competition for deposits has historically come from commercial banks,
savings banks, savings and loan associations and credit unions. We face
additional competition for deposits from short-term money market funds and other
corporate and government securities funds and from brokerage firms and insurance
companies.
LENDING ACTIVITIES
Loan Portfolio Composition. Our loan portfolio primarily consists of
one-to four-family residential first mortgage loans. To a lesser degree, the
loan portfolio includes consumer and other loans, including home equity credit
lines and fixed-rate second mortgage loans. We have not originated commercial
real estate loans or loans secured by multi-family residences since the early
1980's and we do not originate construction loans. We stopped originating
commercial/industrial business loans in 1993, although we have the legal
authority to make such loans. In 1998, we purchased participation interests in
multi-family and commercial first mortgage loans through community-based
organizations amounting to $0.8 million.
At December 31, 1998, we had total loans of $3.66 billion, of which $3.57
billion, or 97.6%, were first mortgage loans. Of residential mortgage loans
outstanding at that date, 51.9% were adjustable-rate mortgage or ARM loans and
48.1% were fixed-rate loans. The remainder of our loans at December 31, 1998,
amounting to $86.6 million, or 2.4% of total loans, consisted of consumer and
other loans, primarily home equity credit lines and fixed-rate second mortgage
loans. Commercial real estate and multi-family mortgage loans outstanding at
December 31, 1998 totaled $2.9 million, or 0.1% of total loans. We also
originate guaranteed student loans.
Our loans are subject to federal and state law and regulations. The
interest rates we charge on loans are affected principally by the demand for
loans, the supply of money available for lending purposes and the interest rates
offered by our competitors. These factors are, in turn, affected by general and
local economic conditions, monetary policies of the federal government,
including the Federal Reserve Board, legislative tax policies and governmental
budgetary matters.
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The following table presents the composition of our loan portfolio in
dollar amounts and in percentages of the total portfolio at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------------------------
1998 1997 1996 1995
-------------------- -------------------- -------------------- ----------
PERCENT PERCENT PERCENT
OF OF OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT
---------- ------- ---------- ------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
FIRST MORTGAGE LOANS:
One- to four-family................... $3,516,947 96.10% $3,327,371 96.07% $3,039,412 95.84% $2,642,117
FHA/VA................................ 52,958 1.45 45,868 1.32 37,541 1.18 46,365
Multi-family and commercial........... 2,911 0.08 3,553 0.10 6,517 0.21 11,163
---------- ------ ---------- ------ ---------- ------ ----------
Total first mortgage loans.......... 3,572,816 97.63 3,376,792 97.49 3,083,470 97.23 2,699,645
---------- ------ ---------- ------ ---------- ------ ----------
CONSUMER AND OTHER LOANS:
Fixed-rate second mortgages........... 56,118 1.53 50,198 1.45 45,808 1.44 42,508
Home equity credit lines.............. 28,045 0.77 30,211 0.87 33,511 1.06 37,960
Guaranteed student.................... 216 0.01 4,315 0.12 6,085 0.19 7,990
Other................................. 2,212 0.06 2,287 0.07 2,584 0.08 3,699
---------- ------ ---------- ------ ---------- ------ ----------
Total consumer and other loans...... 86,591 2.37 87,011 2.51 87,988 2.77 92,157
---------- ------ ---------- ------ ---------- ------ ----------
Total loans....................... 3,659,407 100.00% 3,463,803 100.00% 3,171,458 100.00% 2,791,802
====== ====== ======
LESS:
Deferred loan fees.................... 11,146 12,076 11,622 11,170
Allowance for loan losses............. 17,712 15,625 13,045 11,906
---------- ---------- ---------- ----------
Net loans........................... $3,630,549 $3,436,102 $3,146,791 $2,768,726
========== ========== ========== ==========
<CAPTION>
AT DECEMBER 31,
------------------------------
1995 1994
------- --------------------
PERCENT PERCENT
OF OF
TOTAL AMOUNT TOTAL
------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FIRST MORTGAGE LOANS:
One- to four-family................... 94.64% $2,433,987 93.40%
FHA/VA................................ 1.66 57,142 2.19
Multi-family and commercial........... 0.40 16,396 0.63
------ ---------- ------
Total first mortgage loans.......... 96.70 2,507,525 96.22
------ ---------- ------
CONSUMER AND OTHER LOANS:
Fixed-rate second mortgages........... 1.52 41,394 1.59
Home equity credit lines.............. 1.36 42,856 1.64
Guaranteed student.................... 0.29 9,691 0.37
Other................................. 0.13 4,593 0.18
------ ---------- ------
Total consumer and other loans...... 3.30 98,534 3.78
------ ---------- ------
Total loans....................... 100.00% 2,606,059 100.00%
====== ======
LESS:
Deferred loan fees.................... 11,269
Allowance for loan losses............. 11,566
----------
Net loans........................... $2,583,224
==========
</TABLE>
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Loan Maturity. The following table presents the contractual maturity of
our loans at December 31, 1998. The table does not include the effect of
prepayments or scheduled principal amortization. Prepayments and scheduled
principal amortization on first mortgage loans totaled $784.3 million for 1998,
$396.9 million for 1997 and $376.6 million for 1996.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
---------------------------------------------
FIRST MORTGAGE CONSUMER
LOANS AND OTHER LOANS TOTAL
-------------- --------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
AMOUNTS DUE:
Within one year.............................. $ 441 $ 1,773 $ 2,214
---------- ------- ----------
After one year:
One to three years........................ 7,701 3,611 11,312
Three to five years....................... 28,048 14,511 42,559
Five to ten years......................... 443,963 22,965 466,928
Ten to twenty years....................... 863,049 43,731 906,780
Over twenty years......................... 2,229,614 -- 2,229,614
---------- ------- ----------
Total due after one year................ 3,572,375 84,818 3,657,193
---------- ------- ----------
Total loans............................. $3,572,816 $86,591 3,659,407
========== =======
LESS:
Deferred loan fees........................... 11,146
Allowance for loan losses.................... 17,712
----------
Net loans................................. $3,630,549
==========
</TABLE>
The following table presents, as of December 31, 1998, the dollar amount of
all loans, due after December 31, 1999, and whether these loans have fixed
interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER DECEMBER 31, 1999
----------------------------------------
FIXED ADJUSTABLE TOTAL
---------- -------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
First mortgage loans.............................. $1,719,680 $1,852,695 $3,572,375
Consumer and other loans.......................... 56,773 28,045 84,818
---------- ---------- ----------
Total loans due after one year............... $1,776,453 $1,880,740 $3,657,193
========== ========== ==========
</TABLE>
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The following table presents our loan originations, purchases, sales and
principal payments for the periods indicated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
---------- -------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Total loans:
Balance outstanding at beginning of period....... $3,463,803 $3,171,458 $2,791,802
---------- ---------- ----------
Originations:
First mortgage loans............................. 944,911 676,831 756,141
Consumer and other loans......................... 41,375 29,037 28,224
---------- ---------- ----------
Total originations............................ 986,286 705,868 784,365
---------- ---------- ----------
Purchases:
One- to four-family first mortgage loans......... 22,900 -- 8,558
FHA/VA first mortgage loans...................... 14,952 15,948 --
Other first mortgage loans....................... 787 250 --
---------- ---------- ----------
Total purchases............................... 38,639 16,198 8,558
---------- ---------- ----------
Less:
Principal repayments:
First mortgage loans............................. 784,289 396,906 376,633
Consumer and other loans......................... 37,546 28,913 31,249
---------- ---------- ----------
Total principal payments...................... 821,835 425,819 407,882
---------- ---------- ----------
Transfers to foreclosed real estate................ 3,353 2,801 4,241
---------- ---------- ----------
Loan sales -- guaranteed student loans............. 4,133 1,101 1,144
---------- ---------- ----------
Balance outstanding at end of period............. $3,659,407 $3,463,803 $3,171,458
========== ========== ==========
</TABLE>
Residential Mortgage Lending. Our primary lending emphasis is the
origination of first mortgage loans secured by one- to four-family properties
that serve as the primary or secondary residence of the owner. We do not allow
any borrower to have more than two outstanding first mortgage loans with us at
any one time. We do not offer loans secured by cooperative apartment units or
interests therein. In addition to our loan originations, we have purchased one-
to four-family first mortgage loans in recent years including purchases of $37.9
million in 1998. Since the early 1980's, we have originated substantially all of
our one- to four-family first mortgage loans for retention in our portfolio.
Most of our loan originations are from existing or past customers, members
of our local communities or referrals from local real estate agents, attorneys
and builders. We believe that our extensive branch network is a significant
source of new loan generation. We also employ a small staff of representatives
who call on real estate professionals to disseminate information regarding our
loan programs and take applications directly from their clients. These
representatives are paid for each origination. In addition, we use the services
of licensed mortgage bankers and brokers for mortgage loan originations.
We currently offer loans that conform to underwriting standards that are
based on standards specified by FannieMae ("conforming loans") and also
originate non-conforming loans, as described
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<PAGE> 58
below. These loans may be fixed-rate one- to four-family mortgage loans or
adjustable-rate one- to four-family mortgage loans with maturities of between 5
and 30 years. The non-conforming loans generally follow FannieMae guidelines
except for the loan amounts and the loans processed as limited documentation
loans, as discussed below. FannieMae guidelines limit loans to $240,000; our
non-conforming loans may exceed such limits. The average size of our one- to
four-family mortgage loans originated in 1998 was approximately $207,000. The
overall average size of our one- to four-family first mortgage loans was
approximately $139,000 at December 31, 1998. We are an approved seller/servicer
for FannieMae and an approved servicer for FreddieMac. From time to time we have
sold loans in the secondary market although we have not done so recently.
Our originations of first mortgage loans amounted to $944.9 million in
1998, $676.8 million in 1997 and $756.1 million in 1996. A significant number of
our first mortgage loan originations have been the result of refinancing of our
existing loans due to the relatively low interest rate levels over the past
three years. Total refinancings of our existing first mortgage loans were as
follows:
<TABLE>
<CAPTION>
PERCENTAGE OF FIRST
MORTGAGE LOAN
AMOUNT ORIGINATIONS
------------- -------------------
(IN MILLIONS)
<S> <C> <C>
1998.................................................... $204.0 21.6%
1997.................................................... 50.0 7.4
1996.................................................... 77.8 10.3
</TABLE>
We offer a variety of ARMs and fixed-rate one- to four-family mortgage
loans with maximum loan-to-value ratios that depend on the type of property and
the size of loan involved. The loan-to-value ratio is the loan amount divided by
the appraised value of the property. The loan-to-value ratio is a measure
commonly used by financial institutions to determine exposure to risk. Except
for loans to low to moderate income home mortgage applicants, described below,
loans on owner-occupied one-to four-family homes of up to $500,000 are subject
to a maximum loan-to-value ratio of 80%. However, we make loans in amounts up to
$400,000 with a 90% loan-to-value ratio if the borrower obtains private mortgage
insurance. Loans secured by single family investment properties are subject to a
maximum loan-to-value ratio of 75%. Loan-to-value ratios of 75% or less are also
required for one- to four-family loans in excess of $500,000 and less than
$750,000. Loans in excess of $750,000 and up to $1,000,000 are subject to a
maximum 70% loan-to-value ratio.
We currently offer fixed-rate mortgage loans in amounts up to $1.0 million
with a maximum term of 30 years secured by one- to four-family residences. We
price our interest rates on fixed rate loans to be competitive in light of
market conditions.
We currently offer a variety of ARM loans secured by one- to four-family
residential properties that initially adjust after one year, five years or ten
years. After the initial adjustment period, ARM loans adjust on an annual basis.
The ARM loans that we currently originate have a maximum 30-year amortization
period and are subject to the same loan-to-value ratios applicable to fixed-rate
mortgage loans described above. The interest rates on ARM loans fluctuate based
upon a fixed spread above the monthly average yield on United States treasury
securities, adjusted to a constant maturity of one year ("constant treasury
maturity index") and generally are subject to a maximum increase of 2% per
adjustment period and a limitation on the aggregate adjustment of either 5% or
6% over the life of the loan, depending upon the type of loan. We offer ARM
loans with initial interest rates below the interest rate that we determine by a
fixed spread above the monthly constant treasury maturity index ("fully indexed
rate"). As of December 31, 1998, the initial discounted rate on these loans was
75 to 288 basis points below the current fully indexed rate. We originated
$294.0 million of
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one- to four-family ARM loans in 1998. At December 31, 1998, 51.9% of our one-
to four-family mortgage loans consisted of ARM loans.
The volume and types of ARM loans we originate have been affected by the
level of market interest rates, competition, consumer preferences and the
availability of funds. During 1998, we experienced a decreased demand for ARM
loans due to the continued low interest rate environment. Although we will
continue to offer ARM loans, we cannot guarantee that we will be able to
originate a sufficient volume of ARM loans to increase or maintain the
proportion that these loans bear to our total loans.
The retention of ARM loans in our loan portfolio helps reduce our exposure
to increases in interest rates. However, ARM loans can pose credit risks
different from the risks inherent in fixed-rate loans, primarily because as
interest rates rise, the underlying payments of the borrower may rise. This
increases the potential for default. The marketability of the underlying
property also may be adversely affected. In order to minimize risks, we evaluate
borrowers of one-year ARM loans based on their ability to repay the loans at the
fully indexed rate. In an effort to further reduce interest rate risk, we have
not in the past, nor do we currently, originate ARM loans which provide for
negative amortization of principal.
In addition to our full documentation loan program, we process some loans
as limited documentation loans. We have originated these loans for 10 years.
Loans eligible for limited documentation processing are ARM loans and 15- and
30-year fixed-rate loans to owner-occupied primary and second home applicants.
These loans are available in amounts up to 75% of the lower of the appraised
value or purchase price of the property. The maximum loan amount for limited
documentation loans is $500,000. We do not charge borrowers additional fees for
limited documentation loans. We require applicants for limited documentation
loans to complete a Freddie Mac/Fannie Mae loan application and request income,
assets and credit history information from the borrower. Additionally, we obtain
credit reports from outside vendors on all borrowers. We also look at other
information to ascertain the credit history of the borrower. Applicants with
delinquent credit histories usually do not qualify for the limited documentation
processing, although relatively minor delinquencies which are adequately
explained will not prohibit processing as a limited documentation loan. We
reserve the right to verify income and asset information and verify such
information where we believe circumstances require verification.
Limited documentation loans involve higher risks compared to loans with
full documentation as there is a greater opportunity for borrowers to falsify
their income and ability to service their debt. We believe that the limited
documentation program has not had a material adverse effect on our asset
quality. See "-- Asset Quality." Unseasoned limited documentation loans are not
readily salable in the secondary market as whole loans. In addition, these loans
may not readily be pooled or securitized. We do not believe that an inability to
sell such loans will have a material adverse impact on our liquidity needs,
because internally generated sources of liquidity are expected to be sufficient
to meet our liquidity needs. See "Managements' Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "-- Sources of Funds."
In addition to our standard mortgage and consumer credit products, since
1992, we have developed mortgage programs designed to address the credit needs
of low- to moderate-income home mortgage applicants, first-time home buyers and
low- to moderate-income home improvement loan applicants. We define low- to
moderate-income applicants as borrowers residing in low- to moderate-income
census tracts or households with income not greater than 80% of the median
income in the county where the subject property is located. Our low- to
moderate-income home improvement loans are discussed under "-- Consumer Loans."
Among the features of the low- to moderate-income home mortgage and first-time
home buyer's programs are reduced rates, lower down payments, reduced fees and
closing costs, and generally less restrictive requirements for qualification
compared
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with our traditional one- to four-family mortgage loans. For instance, certain
of these programs currently provide for loans with up to 95% loan-to-value
ratios and rates which are 25 to 75 basis points lower than our traditional
mortgage loans. In 1998, we provided $69.8 million in mortgage loans to home
buyers under these programs.
Consumer Loans. At December 31, 1998, $86.6 million, or 2.4%, of our total
loans consisted of consumer and other loans, primarily home equity credit lines
and fixed-rate second mortgage loans. Consumer loans generally have shorter
terms to maturity, which reduces our exposure to changes in interest rates.
Consumer loans also carry higher rates of interest than do one- to four-family
residential mortgage loans. In addition, we believe that offering consumer loan
products helps to expand and create stronger ties to our existing customer base
by increasing the number of customer relationships and providing cross-marketing
opportunities.
Our home equity credit line loans, which totaled $28.1 million, or 0.8% of
total loans at December 31, 1998, are adjustable-rate loans secured by a second
mortgage on owner-occupied one-to four-family residences located in the state of
New Jersey. Current interest rates on home equity credit lines are based on the
"prime rate" as published in the "Money Rates" section of The Wall Street
Journal (the "index"). Interest rates on home equity credit lines are adjusted
monthly based upon changes in the index. Minimum monthly principal payments on
currently offered home equity lines of credit are based on 1/240th of the
outstanding principal balance or $100 whichever is greater. The maximum credit
line available is $200,000. The underwriting standards applicable to these loans
generally are the same as one- to four-family first mortgage loans, except that
the combined loan-to-value ratio, including the balance of the first mortgage,
cannot exceed 80% of the appraised value of the property.
We also offer fixed-rate second mortgage loans in amounts up to $200,000
secured by owner-occupied one- to four-family residences for terms of up to 15
years. At December 31, 1998 these loans totaled $56.1 million, or 1.5% of total
loans. Interest rates on fixed-rate second mortgage loans are periodically set
by our Consumer Loan Department based on market conditions. The underwriting
terms and procedures applicable to these loans are substantially the same as for
our home equity credit line loans.
We also offer fixed-rate second mortgage loans to low- to-moderate income
borrowers in amounts up to $20,000. The borrower must use a portion of the loan
proceeds for home improvements or the satisfaction of an existing obligation.
The underwriting standards under this program are similar to those for standard
second mortgage loans, except that the combined maximum loan-to-value ratio is
90%.
At December 31, 1998, guaranteed student loans amounted to $0.2 million, as
a result of the sale of $4.1 million of our total student loan portfolio during
the year to the Student Loan Marketing Association (Sallie Mae). We currently
participate in a program sponsored by Sallie Mae through which we expect to sell
all future student loans to Sallie Mae. We will sell these loans after we
completely disburse loan proceeds. We originated total student loans of $0.4
million during 1998.
In the past, we offered commercial/industrial loans primarily for business
investment, business expansion and working capital requirements, generally to
businesses located within our market areas. We no longer make such loans, and at
December 31, 1998 we had three remaining commercial/industrial loans totaling
$0.7 million. Other consumer loans totaled $1.5 million at December 31, 1998 and
consisted of collateralized passbook loans, overdraft protection loans,
automobile loans and unsecured personal loans.
Multi-family and Commercial Real Estate Loans. In the past, we originated
loans secured by multi-family properties (primarily apartment buildings) and
commercial real estate properties (primarily warehouses and shopping centers)
and commercial business properties. We have not
59
<PAGE> 61
originated a multi-family mortgage loan or commercial real estate loan since the
early 1980's except for our purchase of participations in multi-family and
commercial first mortgage loans through community-based organizations, amounting
to $0.8 million in 1998.
Loans secured by multi-family and commercial real estate properties are
generally larger and involve a greater degree of credit risk than one- to
four-family residential mortgage loans. Such loans typically involve large
balances to single borrowers or groups of related borrowers. Because payments on
loans secured by multi-family and commercial real estate properties are often
dependent on the successful operation or management of the properties, repayment
of such loans may be subject to adverse conditions in the real estate market or
the economy. If the cash flow from the project decreases, or if leases are not
obtained or renewed, the borrower's ability to repay the loan may be impaired.
Loan Approval Procedures and Authority. Our lending policies provide that
our Mortgage Officer and Assistant Mortgage Officer have authority to approve
one- to four-family mortgage loans in amounts up to $500,000. Loans in excess of
$500,000 require the approval of either of the foregoing officers as well as our
Chief Executive Officer or Chief Operating Officer. Home equity credit lines and
fixed-rate second mortgage loans in principal amounts of $25,000 or less are
approved by one of our designated loan underwriters. Home equity loans in excess
of $25,000, up to the $200,000 maximum, are approved by an underwriter and
either our Consumer Loan Officer, Chief Executive Officer or Chief Operating
Officer. A weekly listing of loan approvals is entered into the minutes of the
Executive Committee of the board of managers.
The following describes our current lending procedures. Upon receipt of a
completed loan application from a prospective borrower, we order a credit report
and, except for loans originated as limited documentation loans, we verify
certain other information. If necessary, we obtain additional financial or
credit-related information. We require an appraisal for all mortgage loans,
except for some loans made to refinance existing mortgage loans. Appraisals are
performed by our in-house appraisal department or by licensed or certified
third-party appraisal firms. Currently most appraisals are performed by
third-party appraisers and are reviewed by our appraisal department. We require
title insurance on all mortgage loans, except for home equity credit lines and
fixed-rate second mortgage loans. For these loans, we require evidence of
previous title insurance. We require borrowers to obtain hazard insurance and we
may require borrowers to obtain flood insurance prior to closing. We require
borrowers to advance funds on a monthly basis together with each payment of
principal and interest to a mortgage escrow account from which we make
disbursements for items such as real estate taxes, flood insurance and private
mortgage insurance premiums, if required.
ASSET QUALITY
One of our key operating objectives has been and continues to be to
maintain a high level of asset quality. Through a variety of strategies,
including, but not limited to, borrower workout arrangements and aggressive
marketing of owned properties, we have been proactive in addressing problem and
non-performing assets. These strategies, as well as our concentration on one- to
four-family mortgage lending, our maintenance of sound credit standards for new
loan originations and relatively favorable economic and real estate market
conditions have resulted in historically low delinquency ratios and, in recent
years, a reduction in non-performing assets. These factors have helped
strengthen our financial condition.
Delinquent Loans and Foreclosed Assets. When a borrower fails to make
required payments on a loan, we take a number of steps to induce the borrower to
cure the delinquency and restore the loan to a current status. In the case of
mortgage loans, our mortgage servicing department is responsible for collection
procedures from the 15th day up to the 90th day of delinquency. Specific
procedures include a late charge notice being sent at the time a payment is over
15 days past due
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<PAGE> 62
with a second notice being sent at the time the payment becomes 30 days past
due. We also establish telephone contact at that time with the borrower. We send
additional letters if no contact is established by approximately the 45th day of
delinquency. On the 60th day of delinquency, we send another letter followed by
continued telephone contact. Between the 30th and the 60th day of delinquency,
if telephone contact has not been established, an independent contractor makes a
physical inspection of the property. When contact is made with the borrower at
any time prior to foreclosure, we attempt to obtain full payment or work out a
repayment schedule with the borrower in order to avoid foreclosure. It has been
our experience that most loan delinquencies are cured within 90 days and no
legal action is taken.
We send foreclosure notices when a loan is 90 days delinquent and we
transfer the loan to the foreclosure/bankruptcy section for referral to legal
counsel. We commence foreclosure proceedings if the loan is not brought current
between the 90th and 120th day of delinquency unless specific limited
circumstances warrant an exception. We hold property foreclosed upon as
foreclosed real estate. We carry foreclosed real estate at its fair market value
less estimated selling costs. If a foreclosure action is commenced and the loan
is not brought current, paid in full or refinanced before the foreclosure sale,
we either sell the real property securing the loan by a foreclosure sale, or
sell the property as soon thereafter as practicable. The collection procedures
for Federal Housing Association (FHA) and Veterans' Association (VA) one- to
four-family mortgage loans follow the collection guidelines outlined by those
agencies.
The collection procedures for consumer and other loans, excluding student
loans, include our sending periodic late notices to a borrower once a loan is
past due. We attempt to make direct contact with a borrower once a loan becomes
30 days past due. Supervisory personnel in our Consumer Loan Collection
Department review loans 60 days or more delinquent on a regular basis. If
collection activity is unsuccessful after 90 days, we may charge-off a loan or
refer the matter to our legal counsel for further collection effort. Loans we
deem to be uncollectible are proposed for charge-off by our Collection
Department. Charge-offs of consumer loans require the approval of our Consumer
Loan Officer and our Chief Executive Officer or Chief Operating Officer. The
collection procedures for guaranteed student loans follow those specified by
federal and state guidelines.
Our policies require that management continuously monitor the status of the
loan portfolio and report to the Board of Managers on a monthly basis. These
reports include information on delinquent loans and foreclosed real estate.
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<PAGE> 63
At December 31, 1998, 1997 and 1996, loans delinquent 60 days to 89 days
and 90 days or more were as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------------------- ---------------------------------------
90 DAYS 90 DAYS
60-89 DAYS OR MORE 60-89 DAYS OR MORE
------------------ ------------------ ------------------ ------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NO. OF BALANCE NO. OF BALANCE NO. OF BALANCE NO. OF BALANCE
LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS
------ --------- ------ --------- ------ --------- ------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family first
mortgages....................... 58 $5,660 116 $13,554 78 $9,095 126 $15,214
FHA/VA first mortgages............ 23 769 36 1,781 33 346 45 595
Consumer and other loans.......... 3 47 8 4 14 215 51 325
-- ------ --- ------- --- ------ --- -------
Total delinquent loans............ 84 $6,476 160 $15,339 125 $9,656 222 $16,134
== ====== === ======= === ====== === =======
Delinquent loans to total loans... 0.18% 0.42% 0.28% 0.47%
<CAPTION>
1996
---------------------------------------
90 DAYS
60-89 DAYS OR MORE
------------------ ------------------
PRINCIPAL PRINCIPAL
NO. OF BALANCE NO. OF BALANCE
LOANS OF LOANS LOANS OF LOANS
------ --------- ------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
One- to four-family first
mortgages....................... 83 $ 9,406 117 $15,715
FHA/VA first mortgages............ 38 497 51 758
Consumer and other loans.......... 40 186 70 493
--- ------- --- -------
Total delinquent loans............ 161 $10,089 238 $16,966
=== ======= === =======
Delinquent loans to total loans... 0.32% 0.53%
</TABLE>
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<PAGE> 64
Non-performing assets totaled $16.4 million at December 31, 1998 compared
with $17.5 million at December 31, 1997. Our $15.3 million in loans delinquent
90 days or more at December 31, 1998 were comprised primarily of 152 one- to
four-family first mortgage loans (including FHA/VA first mortgage loans) with an
average principal balance of approximately $101,000. At December 31, 1998, our
largest loan delinquent 90 days or more had a balance of $497,000.
The following table presents information regarding non-accrual mortgage and
consumer and other loans, accruing loans delinquent 90 days or more, and
foreclosed real estate as of the dates indicated. If all non-accrual loans had
been performing in accordance with their original terms and had been outstanding
from the earlier of the beginning of the period or origination, we would have
recorded interest income on these loans of approximately $0.8 million for 1998,
as compared to $0.2 million, which was included in interest income.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-accrual first mortgage loans........... $13,212 $15,103 $15,546 $19,226 $19,070
Non-accrual consumer and other loans....... 4 325 493 666 1,245
Accruing loans delinquent 90 days or
more..................................... 2,123 706 927 1,028 1,551
------- ------- ------- ------- -------
Total non-performing loans............ 15,339 16,134 16,966 20,920 21,866
Foreclosed real estate, net................ 1,026 1,410 2,385 3,440 1,942
------- ------- ------- ------- -------
Total non-performing assets........... $16,365 $17,544 $19,351 $24,360 $23,808
======= ======= ======= ======= =======
Non-performing loans to total loans........ 0.42% 0.47% 0.53% 0.75% 0.84%
Non-performing assets to total assets...... 0.21 0.24 0.29 0.45 0.49
</TABLE>
With the exception of first mortgage loans insured or guaranteed by the FHA
or VA or for which the borrower has obtained private mortgage insurance, we stop
accruing income on loans when interest or principal payments are 90 days in
arrears or earlier when the timely collectibility of such interest or principal
is doubtful. We designate loans on which we stop accruing income as non-accrual
loans and we reverse outstanding interest that we previously credited. We may
recognize income in the period that we collect it, when the ultimate
collectibility of principal is no longer in doubt. We return a non-accrual loan
to accrual status when factors indicating doubtful collection no longer exist.
We define the population of impaired loans to be all non-accrual commercial
real estate and multi-family loans. Impaired loans are individually assessed to
determine whether a loan's carrying value is not in excess of the fair value of
the collateral or the present value of the loan's cash flows. Smaller balance
homogeneous loans that are collectively evaluated for impairment, such as
residential mortgage loans and consumer loans, are specifically excluded from
the impaired loan portfolio. We had no loans classified as impaired at December
31, 1998 and 1997. In addition, at December 31, 1998 and 1997, we had no loans
classified as troubled debt restructurings, as defined in SFAS No. 15.
Foreclosed real estate consists of property we acquired through foreclosure
or deed in lieu of foreclosure. Foreclosed real estate properties are initially
recorded at the lower of the recorded investment in the loan or fair value.
Thereafter, we carry foreclosed real estate at fair value less estimated selling
costs, net of a valuation allowance account established through provisions
charged to income, which result from the ongoing periodic valuations of
foreclosed real estate properties.
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<PAGE> 65
Allowance for Loan Losses. The following table presents the activity in
our allowance for loan losses at or for the periods indicated.
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period........... $15,625 $13,045 $11,906 $11,566 $11,261
------- ------- ------- ------- -------
Provision for loan losses................ 2,400 2,850 2,275 1,000 789
------- ------- ------- ------- -------
Charge-offs:
First mortgage loans................... 283 288 1,002 652 466
Consumer and other loans............... 53 42 158 35 89
------- ------- ------- ------- -------
Total charge-offs................... 336 330 1,160 687 555
Recoveries............................... (23) (60) (24) (27) (71)
------- ------- ------- ------- -------
Net charge-offs........................ 313 270 1,136 660 484
------- ------- ------- ------- -------
Balance at end of period................. $17,712 $15,625 $13,045 $11,906 $11,566
======= ======= ======= ======= =======
Net charge-offs to average loans......... 0.01% 0.01% 0.04% 0.02% 0.02%
Allowance for loan losses to total
loans.................................. 0.48 0.45 0.41 0.43 0.44
Allowance for loan losses to
non-performing loans................... 115.47 96.85 76.89 56.91 52.89
</TABLE>
The allowance for loan losses is a valuation account that reflects our
evaluation of the losses inherent in our loan portfolio. We maintain the
allowance through provisions for loan losses that we charge to income. We charge
losses on loans against the allowance for loan losses when we believe the
collection of loan principal is unlikely.
We establish the provision for loan losses after considering the results of
our review of delinquency and charge-off trends, the amount of the allowance for
loan losses in relation to the total loan balance, loan portfolio growth,
generally accepted accounting principles and regulatory guidance. We have
applied this process consistently and we have made minimal changes in the
assumptions used.
As part of our analysis, each month we prepare an allowance for loan loss
worksheet. This worksheet categorizes the entire loan portfolio by certain risk
characteristics such as loan type, guarantees associated with a group of loans
and payment status. Loans with known potential losses are categorized
separately. We assign potential loss factors to the categories on the basis of
our assessment of each category's status and the potential risk inherent in that
type of lending. We use this worksheet, together with loan portfolio balances
and delinquency reports, to evaluate the adequacy of the allowance for loan
losses. Other key factors we consider in this process are current real estate
market conditions, changes in the trend of non-performing loans, the current
state of the local and national economy, and loan portfolio growth.
Our primary lending emphasis is the origination of one-to four-family first
mortgage loans on residential properties and, to a lesser extent, second
mortgage loans on one-to four-family residential properties. We currently do not
originate multi-family and commercial mortgage loans or commercial/industrial
loans. At December 31, 1998, multi-family and commercial mortgages amounted to
$2.9 million and commercial/industrial loans were $0.7 million. We view our
portfolio as smaller balance homogeneous loans which we evaluate collectively
for impairment. Accordingly, the
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<PAGE> 66
most significant factor in recent years impacting the evaluation of the
allowance for loan losses and the establishment of the provision for loan losses
has been growth of the loan portfolio.
Although we believe that we have established and maintained the allowance
for loan losses at adequate levels, future additions may be necessary if
economic and other conditions in the future differ substantially from the
current operating environment. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review our loan and
foreclosed real estate portfolios and the related allowance for loan losses and
valuation allowance for foreclosed real estate. These agencies, including the
FDIC, may require us to increase the allowance for loan losses or the valuation
allowance for foreclosed real estate based on their judgments of information
available to them at the time of their examination, thereby adversely affecting
our results of operations.
During 1998, we increased our allowance for loan losses through a $2.4
million provision for loan losses based on our evaluation of the items discussed
above. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Comparison of Operating Results for the Years Ended
December 31, 1998 and 1997 -- Provision for Loan Losses."
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<PAGE> 67
The following table presents our allocation of the allowance for loan
losses by loan category and the percentage of loans in each category to total
loans at December 31, 1998, 1997, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
1998 1997 1996 1995
-------------------- -------------------- -------------------- -------
PERCENTAGE PERCENTAGE PERCENTAGE
OF OF OF
LOANS IN LOANS IN LOANS IN
CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL
LOAN CATEGORY AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT
- ------------- ------- ---------- ------- ---------- ------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
First mortgage loans:
One-to four-family............................ $11,168 96.10% $ 9,409 96.07% $ 8,770 95.84% $ 9,076
Other......................................... 29 1.53 48 1.42 65 1.39 121
------- ------ ------- ------ ------- ------ -------
Total first mortgage loans.................. 11,197 97.63 9,457 97.49 8,835 97.23 9,197
Consumer and other loans........................ 656 2.37 662 2.51 675 2.77 715
Unallocated..................................... 5,859 -- 5,506 -- 3,535 -- 1,994
------- ------ ------- ------ ------- ------ -------
Total allowance for loan losses............. $17,712 100.00% $15,625 100.00% $13,045 100.00% $11,906
======= ====== ======= ====== ======= ====== =======
<CAPTION>
1995 1994
---------- --------------------
PERCENTAGE PERCENTAGE
OF OF
LOANS IN LOANS IN
CATEGORY CATEGORY
TO TOTAL TO TOTAL
LOAN CATEGORY LOANS AMOUNT LOANS
- ------------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
First mortgage loans:
One-to four-family............................ 94.64% $ 8,692 93.40%
Other......................................... 2.06 213 2.82
------ ------- ------
Total first mortgage loans.................. 96.70 8,905 96.22
Consumer and other loans........................ 3.30 821 3.78
Unallocated..................................... -- 1,840 --
------ ------- ------
Total allowance for loan losses............. 100.00% $11,566 100.00%
====== ======= ======
</TABLE>
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<PAGE> 68
INVESTMENT ACTIVITIES
Investment Securities. The Board of Managers reviews and approves our
investment policy on an annual basis. The Chief Executive Officer, Chief
Operating Officer and Investment Officer, as authorized by the board, implement
this policy. Management reports securities transactions to the Executive
Committee of the Board of Managers on a weekly basis. The Board of Managers
reviews our investment activity on a monthly basis.
Our investment policy is designed primarily to manage the interest rate
sensitivity of our assets and liabilities, to generate a favorable return
without incurring undue interest rate and credit risk, to complement our lending
activities and to provide and maintain liquidity within established guidelines.
In establishing our investment strategies, we consider our interest rate
sensitivity or "gap" position, the types of securities to be held, liquidity and
other factors. New Jersey chartered savings banks have authority to invest in
various types of assets, including U.S. Treasury obligations, securities of
various federal agencies, mortgage-backed securities, certain time deposits of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements, loans of federal funds, and, subject to certain limits, corporate
debt and equity securities, commercial paper and mutual funds.
Our investment policy prohibits participation in hedging programs, options
or futures transactions or interest rate swaps and also prohibits the purchase
of non-investment grade bonds. In the future we may amend our policy to allow us
to engage in hedging transactions. Our investment policy also provides that we
will not engage in any practice that the FFIEC considers to be an unsuitable
investment practice. In addition, the policy provides that we shall attempt to
maintain primary liquidity consisting of investments in cash, cash in banks,
money market investments and securities with remaining maturities of less than
five years in an amount equal to 5% of total deposits. At December 31, 1998, our
primary liquidity ratio was 7.1%. For information regarding the carrying values,
yields and maturities of our investment securities and mortgage-backed
securities, see "-- Carrying Values, Yields and Maturities."
We classify securities as trading, held to maturity, or available for sale
at the date of purchase. Held to maturity securities are reported at cost,
adjusted for amortization of premium and accretion of discount. Available for
sale securities are reported at fair market value. We currently have no
securities classified as trading. We classify obligations of the U.S. Government
and federal agencies, corporate bonds, and common stock as "available for sale."
We classify municipal bonds as held to maturity. We have both the ability and
positive intent to hold these investments to maturity. We did not sell any
investment securities during 1998.
Mortgage-backed Securities. All of our mortgage-backed securities are
directly or indirectly insured or guaranteed by FreddieMac, GNMA or FannieMae.
We classify our entire mortgage-backed securities portfolio as "held to
maturity" and we have both the ability and positive intent to hold these
securities to maturity.
At December 31, 1998, mortgage-backed securities held to maturity totaled
$3.07 billion, or 39.6% of total assets. At December 31, 1998, the
mortgage-backed securities portfolio had a weighted average yield of 6.82% and a
market value of approximately $3.11 billion. Of the mortgage-backed securities
we held at December 31, 1998, $897.2 million, or 29.2%, had fixed rates and
$2.17 billion, or 70.8%, had adjustable-rates. Mortgage-backed securities at
December 31, 1998 included real estate mortgage investment conduits (REMICs),
which are securities derived by reallocating cash flows from mortgage
pass-through securities or from pools of mortgage loans held by a trust. REMICS
are a form of, and are often referred to as, collateralized mortgage obligations
(CMOs). We classify all of these securities as held to maturity.
Our REMICs have fixed coupon rates ranging from 5.00% to 7.50% and had a
weighted average yield of 5.81% at December 31, 1998. At December 31, 1998,
REMICs totaled $62.9 million, which
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<PAGE> 69
constituted 2.1% of the mortgage-backed securities portfolio, or 0.8% of total
assets. Our REMICs had an expected average life of one year at December 31,
1998. For a further discussion of our investment policies, including those for
mortgage-backed securities, see "-- Investment Securities." Purchases of
mortgage-backed securities may decline in the future to offset any significant
increase in demand for one- to four-family mortgage loans. We did not sell any
of our mortgage-backed securities during 1998.
Mortgage-backed securities generally yield less than the loans that
underlie such securities because of the cost of payment guarantees or credit
enhancements that reduce credit risk. However, mortgage-backed securities are
more liquid than individual mortgage loans and may be used to collateralize our
borrowings. In general, mortgage-backed securities issued or guaranteed by GNMA,
FannieMae and FreddieMac are weighted at no more than 20% for risk-based capital
purposes, compared to the 50% risk weighting assigned to most non-securitized
residential mortgage loans.
While mortgage-backed securities carry a reduced credit risk as compared to
whole loans, they remain subject to the risk of a fluctuating interest rate
environment. Along with other factors, such as the geographic distribution of
the underlying mortgage loans, changes in interest rates may alter the
prepayment rate of those mortgage loans and affect both the prepayment rates and
value of mortgage-backed securities.
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<PAGE> 70
The following table presents our investment securities and mortgage-backed
securities activities for the periods indicated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
INVESTMENT SECURITIES:
Carrying value at beginning of period............ $ 656,192 $ 596,945 $ 565,967
----------- ---------- ----------
Purchases:
Held to maturity............................... 403 600 --
Available for sale............................. 789,577 521,529 404,929
Calls:
Held to maturity............................... (476) (209) (1,211)
Available for sale............................. (607,651) (337,547) (80,072)
Maturities:
Held to maturity............................... -- -- (25)
Available for sale............................. (51,550) (80,700) (288,463)
Sales:
Available for sale............................. -- (41,163) (55)
Premium and discount amortization, net........... 536 (1,074) (2,999)
Decrease in unrealized gains..................... (607) (2,189) (1,126)
----------- ---------- ----------
Net increase in investment securities............ 130,232 59,247 30,978
----------- ---------- ----------
Carrying value at end of period.................. $ 786,424 $ 656,192 $ 596,945
=========== ========== ==========
MORTGAGE-BACKED SECURITIES HELD TO MATURITY:
Carrying value at beginning of period............ $ 3,022,225 $2,710,078 $1,865,930
----------- ---------- ----------
Purchases........................................ 1,222,352 883,502 1,227,291
Principal payments............................... (1,168,674) (569,189) (382,631)
Premium and discount amortization, net........... (4,972) (2,166) (512)
----------- ---------- ----------
Net increase in mortgage-backed securities....... 48,706 312,147 844,148
----------- ---------- ----------
Carrying value at end of period.................. $ 3,070,931 $3,022,225 $2,710,078
=========== ========== ==========
</TABLE>
The following table presents the composition of our money market
investments, investment securities and mortgage-backed securities portfolios in
dollar amount and in percentage of each investment type at the dates indicated.
It also presents the coupon type for the mortgage-backed securities portfolio.
69
<PAGE> 71
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------------------------------------
1998 1997 1996
------------------------------------ ------------------------------------ ----------
CARRYING PERCENT OF FAIR CARRYING PERCENT OF FAIR CARRYING
VALUE TOTAL(1) VALUE VALUE TOTAL(1) VALUE VALUE
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
MONEY MARKET INVESTMENTS:
Federal funds sold....... $ 69,800 100.00% $ 69,800 $ 24,600 100.00% $ 24,600 $ 52,200
========== ====== ========== ========== ====== ========== ==========
INVESTMENT SECURITIES HELD
TO MATURITY:
Municipal bonds.......... $ 1,393 0.18% $ 1,420 $ 1,466 0.22% $ 1,503 $ 1,075
---------- ------ ---------- ---------- ------ ---------- ----------
AVAILABLE FOR SALE:
United States government
and agencies........... 782,436 99.49 782,436 650,014 99.06 650,014 556,442
Corporate bonds(2)....... 2,595 0.33 2,595 4,712 0.72 4,712 39,428
---------- ------ ---------- ---------- ------ ---------- ----------
Total available
for sale............... 785,031 99.82 785,031 654,726 99.78 654,726 595,870
---------- ------ ---------- ---------- ------ ---------- ----------
Total investment
securities............. $ 786,424 100.00% $ 786,451 $ 656,192 100.00% $ 656,229 $ 596,945
========== ====== ========== ========== ====== ========== ==========
MORTGAGE-BACKED SECURITIES
HELD TO MATURITY:
BY ISSUER:
GNMA pass-through
certificates........... $2,093,591 68.17% $2,111,219 $2,061,928 68.23% $2,114,789 $1,704,383
FNMA pass-through
certificates........... 674,061 21.95 686,275 568,479 18.81 577,930 540,087
FHLMC pass-through
certificates........... 240,414 7.83 245,995 293,802 9.72 301,632 313,044
FHLMC, FNMA and
GNMA-REMICs............ 62,865 2.05 62,880 98,016 3.24 97,385 152,564
---------- ------ ---------- ---------- ------ ---------- ----------
Total mortgage-backed
securities............. $3,070,931 100.00% $3,106,369 $3,022,225 100.00% $3,091,736 $2,710,078
========== ====== ========== ========== ====== ========== ==========
BY COUPON TYPE:
Adjustable-rate.......... $2,173,728 70.78% $2,187,054 $2,174,034 71.93% $2,223,690 $1,840,985
Fixed-rate............... 897,203 29.22 919,315 848,191 28.07 868,046 869,093
---------- ------ ---------- ---------- ------ ---------- ----------
Total mortgage-backed
securities............. $3,070,931 100.00% $3,106,369 $3,022,225 100.00% $3,091,736 $2,710,078
========== ====== ========== ========== ====== ========== ==========
TOTAL INVESTMENT
PORTFOLIO................ $3,927,155 $3,962,620 $3,703,017 $3,772,565 $3,359,223
========== ========== ========== ========== ==========
<CAPTION>
AT DECEMBER 31,
-----------------------
1996
-----------------------
PERCENT OF FAIR
TOTAL(1) VALUE
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
MONEY MARKET INVESTMENTS:
Federal funds sold....... 100.00% $ 52,200
====== ==========
INVESTMENT SECURITIES HELD
TO MATURITY:
Municipal bonds.......... 0.18% $ 1,110
------ ----------
AVAILABLE FOR SALE:
United States government
and agencies........... 93.21 556,442
Corporate bonds(2)....... 6.61 39,428
------ ----------
Total available
for sale............... 99.82 595,870
------ ----------
Total investment
securities............. 100.00% $ 596,980
====== ==========
MORTGAGE-BACKED SECURITIES
HELD TO MATURITY:
BY ISSUER:
GNMA pass-through
certificates........... 62.89% $1,744,977
FNMA pass-through
certificates........... 19.93 539,006
FHLMC pass-through
certificates........... 11.55 318,799
FHLMC, FNMA and
GNMA-REMICs............ 5.63 151,753
------ ----------
Total mortgage-backed
securities............. 100.00% $2,754,535
====== ==========
BY COUPON TYPE:
Adjustable-rate.......... 67.93% $1,877,097
Fixed-rate............... 32.07 877,438
------ ----------
Total mortgage-backed
securities............. 100.00% $2,754,535
====== ==========
TOTAL INVESTMENT
PORTFOLIO................ $3,403,715
==========
</TABLE>
- -------------------------
(1) Based on carrying value for each investment type.
(2) In 1996, includes common stock with a carrying and fair value of $1,335.
70
<PAGE> 72
Carrying Values, Yields and Maturities. The table below presents
information regarding the carrying values, weighted average yields and
contractual maturities of our money market investments, investment securities
and mortgage-backed securities at December 31, 1998. Mortgage-backed securities
are presented by issuer and by coupon type. Yields on tax exempt obligations
were not computed on a tax equivalent basis.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
-----------------------------------------------------------------
MORE THAN ONE YEAR MORE THAN FIVE YEARS
ONE YEAR OR LESS TO FIVE YEARS TO TEN YEARS
------------------- ------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD
-------- -------- -------- -------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
MONEY MARKET INVESTMENTS:
Federal funds sold......... $69,800 4.75% $ -- --% $ -- --%
======= ======== ========
INVESTMENT SECURITIES HELD
TO MATURITY:
Municipal bonds.......... $ -- -- $ 100 6.28 $ 390 6.22
------- -------- --------
AVAILABLE FOR SALE:
United States government
and agencies........... 10,169 4.78 306,156 6.02 466,111 6.54
Corporate bonds.......... 25 9.00 2,291 6.62 279 5.22
------- -------- --------
Total available for
sale................. 10,194 4.79 308,447 6.02 466,390 6.54
------- -------- --------
Total investment
securities........... $10,194 4.79 $308,547 6.02 $466,780 6.54
======= ======== ========
MORTGAGE-BACKED SECURITIES
HELD TO MATURITY:
BY ISSUER:
GNMA pass-through
certificates........... $ -- -- $ 735 7.92 $ 18,722 9.83
FNMA pass-through
certificates........... -- -- -- -- 132,047 6.73
FHLMC pass-through
certificates........... -- -- 3,179 9.65 14,607 9.16
FHLMC, FNMA and
GNMA-REMICs............ 3,743 6.21 -- -- 48,730 5.56
------- -------- --------
Total mortgage-backed
securities........... $ 3,743 6.21 $ 3,914 9.33 $214,106 6.90
======= ======== ========
BY COUPON TYPE:
Adjustable-rate.......... $ -- -- $ -- -- $ 934 7.21
Fixed-rate............... 3,743 6.21 3,914 9.33 213,172 6.90
------- -------- --------
Total mortgage-backed
securities........... $ 3,743 6.21 $ 3,914 9.33 $214,106 6.90
======= ======== ========
TOTAL INVESTMENT
PORTFOLIO............ $83,737 4.82% $312,461 6.07% $680,886 6.65%
======= ======== ========
<CAPTION>
AT DECEMBER 31, 1998
---------------------------------------------
MORE THAN TEN YEARS TOTAL
--------------------- ---------------------
WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD
---------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
MONEY MARKET INVESTMENTS:
Federal funds sold......... $ -- --% $ 69,800 4.75%
========== ==========
INVESTMENT SECURITIES HELD
TO MATURITY:
Municipal bonds.......... $ 903 6.43 $ 1,393 6.36
---------- ----------
AVAILABLE FOR SALE:
United States government
and agencies........... -- -- 782,436 6.31
Corporate bonds.......... -- -- 2,595 6.49
---------- ----------
Total available for
sale................. -- -- 785,031 6.31
---------- ----------
Total investment
securities........... $ 903 6.43 $ 786,424 6.31
========== ==========
MORTGAGE-BACKED SECURITIES
HELD TO MATURITY:
BY ISSUER:
GNMA pass-through
certificates........... $2,074,134 6.73 $2,093,591 6.76
FNMA pass-through
certificates........... 542,014 7.00 674,061 6.95
FHLMC pass-through
certificates........... 222,628 7.16 240,414 7.31
FHLMC, FNMA and
GNMA-REMICs............ 10,392 6.82 62,865 5.81
---------- ----------
Total mortgage-backed
securities........... $2,849,168 6.82 $3,070,931 6.82
========== ==========
BY COUPON TYPE:
Adjustable-rate.......... $2,172,794 6.73 $2,173,728 6.73
Fixed-rate............... 676,374 7.09 897,203 7.05
---------- ----------
Total mortgage-backed
securities........... $2,849,168 6.82 $3,070,931 6.82
========== ==========
TOTAL INVESTMENT
PORTFOLIO............ $2,850,071 6.82% $3,927,155 6.68%
========== ==========
</TABLE>
71
<PAGE> 73
SOURCES OF FUNDS
General. Deposits, scheduled amortization and prepayments of loan
principal and mortgage-backed securities, maturities and calls of investments
securities and funds provided by operations are our primary sources of funds for
use in lending, investing and for other general purposes. We currently do not
use borrowings or reverse repurchase agreements as sources of funds, although we
have the ability to purchase up to $25.0 million in federal funds from a
correspondent bank. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
Deposits. We offer a variety of deposit accounts having a range of
interest rates and terms. We currently offer regular savings deposits
(consisting of passbook and statement savings accounts), interest-bearing demand
accounts, non-interest-bearing demand accounts, money market accounts and time
deposits. We also offer IRA and Keogh accounts.
Deposit flows are influenced significantly by general and local economic
conditions, changes in prevailing interest rates, pricing of deposits and
competition. Our deposits are primarily obtained from areas surrounding our
offices and we rely primarily on paying competitive rates, service and long-
standing relationships with customers to attract and retain these deposits. We
do not use brokers to obtain deposits.
When we determine our deposit rates, we consider local competition, U.S.
Treasury securities offerings and the rates charged on other sources of funds.
Core deposits (defined as regular savings deposits, money market accounts and
demand accounts) represented 25.7% of total deposits on December 31, 1998. At
December 31, 1998 time deposits with remaining terms to maturity of less than
one year amounted to $4.77 billion. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Analysis of Net Interest
Income" for information relating to the average balances and costs of our
deposit accounts for the years ended December 31, 1998, 1997 and 1996.
The following table presents our deposit activity for the periods
indicated:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Total deposits at beginning of period..... $6,465,956 $5,918,971 $4,757,813
Net deposits.............................. 30,301 249,525 918,358
Interest credited, net penalties.......... 311,082 297,460 242,800
---------- ---------- ----------
Total deposits at end of period........... $6,807,339 $6,465,956 $5,918,971
========== ========== ==========
Net increase.............................. $ 341,383 $ 546,985 $1,161,158
========== ========== ==========
Percentage increase....................... 5.28% 9.24% 24.41%
</TABLE>
72
<PAGE> 74
At December 31, 1998, we had $516.1 million in time deposits with balances
of $100,000 and over maturing as follows:
<TABLE>
<CAPTION>
MATURITY PERIOD AMOUNT
--------------- --------------
(IN THOUSANDS)
<S> <C>
Three months or less........................................ $241,133
Over three months through six months........................ 133,512
Over six months through 12 months........................... 120,840
Over 12 months.............................................. 20,599
--------
Total....................................................... $516,084
========
</TABLE>
73
<PAGE> 75
The following table presents the distribution of our deposit accounts at
the dates indicated by dollar amount and percent of portfolio, and the weighted
average nominal interest rate on each category of deposits.
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------------- -------------------------------- --------------------------------
WEIGHTED WEIGHTED WEIGHTED
PERCENT AVERAGE PERCENT AVERAGE PERCENT AVERAGE
OF TOTAL NOMINAL OF TOTAL NOMINAL OF TOTAL NOMINAL
AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE
---------- -------- -------- ---------- -------- -------- ---------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Savings.................... $ 832,759 12.23% 2.60% $ 835,062 12.91% 2.75% $ 857,731 14.49% 2.80%
Interest-bearing demand.... 100,436 1.48 2.00 90,869 1.41 2.00 88,557 1.50 2.00
Money market............... 505,201 7.42 2.78 500,029 7.73 2.93 520,141 8.79 2.93
Demand..................... 313,061 4.60 -- 272,326 4.21 -- 249,857 4.22 --
---------- ------ ---------- ------ ---------- ------
Total.................. 1,751,457 25.73 2.15 1,698,286 26.26 2.32 1,716,286 29.00 2.39
---------- ------ ---------- ------ ---------- ------
Time Deposits:
Time deposits $100,000
and over............... 516,084 7.58 5.26 460,982 7.13 5.60 375,399 6.34 5.62
Time deposits less than
$100,000 with original
maturities of:
Three months or less... 436,186 6.41 4.88 473,105 7.32 5.27 474,269 8.01 5.54
Over three months to
twelve months........ 1,351,892 19.86 5.18 1,328,888 20.55 5.60 1,387,771 23.44 5.69
Twelve months to
twenty-four months... 1,942,691 28.54 5.37 1,695,908 26.24 5.72 1,189,676 20.10 5.47
Twenty-four months to
thirty-six months.... 238,792 3.51 5.54 232,782 3.60 5.68 215,375 3.64 5.76
Thirty-six months to
forty-eight months... 20,628 0.30 5.30 32,142 0.50 5.65 50,444 0.85 5.40
Forty-eight months to
sixty months......... 4,539 0.07 5.50 8,017 0.12 5.34 16,373 0.28 5.03
Sixty months and
over................. 39,140 0.57 5.51 58,362 0.90 5.36 61,517 1.04 5.35
IRA and Keogh
accounts............. 505,930 7.43 5.46 477,484 7.38 5.66 431,861 7.30 5.53
---------- ------ ---------- ------ ---------- ------
Total time deposits.... 5,055,882 74.27 5.29 4,767,670 73.74 5.62 4,202,685 71.00 5.58
---------- ------ ---------- ------ ---------- ------
Total deposits......... $6,807,339 100.00% 4.48% $6,465,956 100.00% 4.75% $5,918,971 100.00% 4.66%
========== ====== ========== ====== ========== ======
</TABLE>
74
<PAGE> 76
The following table presents, by rate category, the amount of our time
deposit accounts outstanding at December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
TIME DEPOSIT ACCOUNTS:
4.00% or less............................................. $ 1,530 $ 1,755 $ 1,712
4.01%-4.50%............................................... 4,335 8 4,314
4.51%-5.00%............................................... 1,501,902 39,212 62,513
5.01%-5.50%............................................... 2,342,518 659,235 715,937
5.51%-6.00%............................................... 1,196,373 4,040,522 3,321,591
over 6.01%................................................ 9,224 26,938 96,618
---------- ---------- ----------
Total................................................... $5,055,882 $4,767,670 $4,202,685
========== ========== ==========
</TABLE>
The following table presents, by rate category, the remaining period to
maturity of time deposit accounts outstanding as of December 31, 1998.
<TABLE>
<CAPTION>
PERIOD TO MATURITY FROM DECEMBER 31, 1998
---------------------------------------------------------------------------------------------
WITHIN THREE TO SIX MONTHS ONE TO TWO TWO TO THREE OVER THREE
THREE MONTHS SIX MONTHS TO ONE YEAR YEARS YEARS YEARS TOTAL
------------ ---------- ----------- ---------- ------------ ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
TIME DEPOSIT ACCOUNTS:
4.00% or less................ $ 1,530 $ -- $ -- $ -- $ -- $ -- $ 1,530
4.01%-4.50%.................. 349 684 1,397 1,905 -- -- 4,335
4.51%-5.00%.................. 531,874 483,845 439,690 38,393 4,326 3,774 1,501,902
5.01%-5.50%.................. 824,194 565,982 814,216 111,128 16,474 10,524 2,342,518
5.51%-6.00%.................. 646,646 288,947 160,304 99,088 1,388 -- 1,196,373
over 6.01%................... 502 772 4,237 3,570 143 -- 9,224
---------- ---------- ---------- -------- ------- ------- ----------
Total...................... $2,005,095 $1,340,230 $1,419,844 $254,084 $22,331 $14,298 $5,055,882
========== ========== ========== ======== ======= ======= ==========
</TABLE>
Borrowings. We do not currently borrow funds to finance our lending and
investing activities. We intend, however, to borrow funds in the future. We
currently expect to borrow up to $900 million in the three years following the
reorganization. These borrowings may take the form of reverse repurchase
agreements, whereby we sell an asset with an agreement to repurchase it at some
future date. We are not a member of the Federal Home Loan Bank System, however,
we may consider becoming a member in the future. Membership in the Federal Home
Loan Bank System would provide us with additional sources for borrowings.
75
<PAGE> 77
PROPERTIES
We conduct our business through our executive office, operations center and
75 banking offices, which had an aggregate net book value of $24.1 million as of
December 31, 1998. We are changing the location of our office in Garfield, New
Jersey. The lease at our current location in Garfield expires in 2000. We have
signed a lease at our new location which expires in 2009.
<TABLE>
<CAPTION>
ORIGINAL DATE
LEASED OR LEASED OR DATE OF LEASE
LOCATION OWNED ACQUIRED EXPIRATION
- -------- ---------- ------------- -------------
<S> <C> <C> <C>
EXECUTIVE OFFICE:
West 80 Century Road
Paramus, NJ.................................. Owned 1978 --
OPERATIONS CENTER:
161 Harristown Road
Glen Rock, NJ................................ Leased 1995 2010
BERGEN COUNTY:
680-684 Anderson Avenue
Cliffside Park, NJ........................... Owned 1973 --
80 Union Avenue
Cresskill, NJ................................ Owned 1974 --
408 East Madison Avenue
Dumont, NJ................................... Leased 1995 2015
330 Kinderkamack Road
Emerson, NJ.................................. Owned 1974 --
50 East Palisade Avenue
Englewood, NJ................................ Leased 1987 2006
303 Main Street
Fort Lee, NJ................................. Owned 1977 --
169 Lanza Avenue
Garfield, NJ................................. Leased 1981 2000
897 Prospect Street
Glen Rock, NJ................................ Owned 1972 --
304 Essex Street
Lodi, NJ..................................... Owned 1973 --
115 Franklin Turnpike
Mahwah, NJ................................... Leased 1997 2017
715 River Road
New Milford, NJ.............................. Owned 1978 --
379 Ramapo Valley Road
Oakland, NJ.................................. Owned 1976 --
249 Kinderkamack Road
Oradell, NJ.................................. Owned 1970 --
West 80 Century Road
Paramus, NJ.................................. Owned 1978 --
</TABLE>
76
<PAGE> 78
<TABLE>
<CAPTION>
ORIGINAL DATE
LEASED OR LEASED OR DATE OF LEASE
LOCATION OWNED ACQUIRED EXPIRATION
- -------- ---------- ------------- -------------
<S> <C> <C> <C>
57 West Main Street
Ramsey, NJ................................... Leased 1976 2016
89 Interstate Shopping Center
Ramsey, NJ................................... Leased 1995 2020
94 North Maple Avenue
Ridgewood, NJ................................ Leased 1976 2002
1070 Main Street
River Edge, NJ............................... Leased 1976 2020
632 Westwood Avenue
River Vale, NJ............................... Leased 1979 2009
790 Queen Anne Road
Teaneck, NJ.................................. Owned 1971 --
7 East Prospect Street
Waldwick, NJ................................. Owned 1969 --
261 Godwin Avenue
Wyckoff, NJ.................................. Leased 1971 2028
BURLINGTON COUNTY:
1406 Route 130
Cinnaminson, NJ.............................. Leased 1979 2014
CAMDEN COUNTY:
90 Barclay Center
Cherry Hill, NJ.............................. Leased 1974 2004
2335 Church Road
Cherry Hill, NJ.............................. Owned 1976 --
116 Kings Highway East
Haddonfield, NJ.............................. Owned 1975 --
ESSEX COUNTY:
232 South Livingston Avenue
Livingston, NJ............................... Owned 1975 --
277 Eisenhower Parkway
Livingston, NJ............................... Leased 1995 2020
62-64 Main Street
Millburn, NJ................................. Leased 1974 2005
157 Seventh Avenue
Newark, NJ................................... Leased 1950 2010
72 Mount Vernon Place
Newark, NJ................................... Leased 1955 2013
60 Park Place
Newark, NJ................................... Leased 1988 2007
313 Henry Street
Orange, NJ................................... Owned 1963 --
</TABLE>
77
<PAGE> 79
<TABLE>
<CAPTION>
ORIGINAL DATE
LEASED OR LEASED OR DATE OF LEASE
LOCATION OWNED ACQUIRED EXPIRATION
- -------- ---------- ------------- -------------
<S> <C> <C> <C>
288 Main Street
Orange, NJ................................... Leased 1954 2021
187 Eagle Rock Avenue
Roseland, NJ................................. Owned 1958 --
767 Bloomfield Avenue
West Caldwell, NJ............................ Leased 1975 2019
GLOUCESTER COUNTY:
1002 Mantua Pike
Woodbury Heights, NJ......................... Owned 1977 --
HUDSON COUNTY:
1018 Washington Street
Hoboken, NJ.................................. Leased 1996 2016
587 Summit Avenue
Jersey City, NJ.............................. Owned 1920 --
600 Summit Avenue (Drive-In)
Jersey City, NJ.............................. Owned 1977 --
2530 Kennedy Boulevard
Jersey City, NJ.............................. Owned 1928 --
532 Ocean Avenue
Jersey City, NJ.............................. Owned 1947 --
495 Manila Avenue
Jersey City, NJ.............................. Owned 1970 --
216 Passaic Avenue
Kearny, NJ................................... Leased 1980 2031
7533 Bergenline Avenue
North Bergen, NJ............................. Owned 1958 --
MIDDLESEX COUNTY:
355 Applegarth Road
Cranbury, NJ................................. Leased 1981 2010
MONMOUTH COUNTY:
351 West Main Street
Freehold, NJ................................. Leased 1977 2013
455 County Road
Marlboro, NJ................................. Leased 1996 2021
75 Highway 35
Middletown, NJ............................... Leased 1983 2002
1 Paddock Plaza
West Long Branch, NJ......................... Leased 1977 2017
MORRIS COUNTY:
641 Shunpike Road
Chatham, NJ.................................. Leased 1970 2020
</TABLE>
78
<PAGE> 80
<TABLE>
<CAPTION>
ORIGINAL DATE
LEASED OR LEASED OR DATE OF LEASE
LOCATION OWNED ACQUIRED EXPIRATION
- -------- ---------- ------------- -------------
<S> <C> <C> <C>
209 Route 206 South
Chester, NJ.................................. Leased 1982 2007
10 West Main Street
Denville, NJ................................. Leased 1981 2015
18 James Street
Florham Park, NJ............................. Leased 1974 2024
977 Valley Road
Gillette, NJ................................. Leased 1974 2009
340 Main Street
Madison, NJ.................................. Leased 1974 2015
240 Baldwin Road
Parsippany, NJ............................... Owned 1992 --
150 Newark-Pompton Turnpike
Pequannock, NJ............................... Leased 1969 2027
148 Center Grove Road
Randolph, NJ................................. Leased 1979 1999
OCEAN COUNTY:
335 Atlantic City Boulevard
Bayville, NJ................................. Leased 1991 2011
731 Brick Boulevard
Brick, NJ.................................... Owned 1974 --
55 Brick Boulevard
Brick, NJ.................................... Leased 1974 2014
782 Lacey Road
Forked River, NJ............................. Leased 1981 2000
2100 Route 70
Lakehurst, NJ................................ Owned 1981 --
167-169 Kennedy Boulevard
Lakewood, NJ................................. Leased 1976 2012
1328 River Avenue
Lakewood, NJ................................. Leased 1989 2009
1000 Route 70
Lakewood, NJ................................. Leased 1994 2014
577 Lakehurst Road
Toms River, NJ............................... Owned 1974 --
PASSAIC COUNTY:
887 Allwood Road
Clifton, NJ.................................. Land Lease 1974 2020
217 Berdan Avenue
Wayne, NJ.................................... Leased 1991 2009
35A Marshall Hill Road
West Milford, NJ............................. Leased 1981 2010
</TABLE>
79
<PAGE> 81
<TABLE>
<CAPTION>
ORIGINAL DATE
LEASED OR LEASED OR DATE OF LEASE
LOCATION OWNED ACQUIRED EXPIRATION
- -------- ---------- ------------- -------------
<S> <C> <C> <C>
UNION COUNTY:
341 Springfield Avenue
Summit, NJ................................... Owned 1979 --
365 Tucker Avenue
Union, NJ.................................... Owned 1975 --
119 Central Avenue
Westfield, NJ................................ Leased 1974 2007
WARREN COUNTY:
200 Grand Avenue
Hackettstown, NJ............................. Leased 1970 2027
1965 Route 57
Mansfield, NJ................................ Leased 1978 2028
</TABLE>
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 New Jersey Superior Court, Essex County against Hudson City Savings on behalf
of persons who obtained loans from Hudson City Savings secured by residential
real property in New Jersey, and who paid an attorney review fee to Hudson City
in connection with their loans. Plaintiff alleges further that the potential
class includes thousands of borrowers and involves millions of dollars in review
fees. Plaintiff claims that the attorney fees paid to Hudson City 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. Plaintiff seeks 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 New Jersey Superior Court 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 New Jersey Supreme Court will review the Appellate Division's ruling in the
appeal. Meanwhile, the Smith action remains stayed.
80
<PAGE> 82
On or about April 30, 1998, a purported class action was commenced against
Hudson City Savings, in the Law Division of New Jersey Superior Court, Bergen
County entitled Elizabeth C. Bogdanowicz, et al. v. Hudson City Savings Bank
(L-4110-98) on behalf of a putative class of persons who borrowed funds from
Hudson City from and after January 29, 1993. Plaintiffs allege that the putative
class consists of thousands of borrowers who were charged attorney review fees
by Hudson City Savings. Plaintiffs claim that the attorney review fee violated
the New Jersey fee statute. Plaintiffs also assert claims for unjust enrichment.
Plaintiffs seek compensatory damages, costs, fees, injunctive relief and treble
damages. This action has also been stayed voluntarily by the parties pending the
outcome of the Appeal.
We believe that these two lawsuits are without merit and we intend to
aggressively defend our interests.
PERSONNEL
As of December 31, 1998, we had 864 full-time employees and 100 part-time
employees. The employees are not represented by a collective bargaining unit and
we consider our relationship with our employees to be good.
BUSINESS OF HUDSON CITY BANCORP, INC.
Hudson City Bancorp has not engaged in any business to date. Upon
completion of the reorganization, Hudson City Bancorp will own Hudson City
Savings. Hudson City Bancorp will retain up to 50% of the net proceeds from the
offering. We will invest our initial capital as discussed in "How We Intend to
Use the Proceeds from the Offering."
In the future, Hudson City Bancorp may pursue other business activities,
including the acquisition of other financial institutions or other entities,
borrowing funds for investment in Hudson City Savings and diversification of
Hudson City Bancorp's operations. Hudson City Bancorp has no current plans for
such activities. Our cash flow will depend upon earnings from the investment of
the portion of net proceeds we retain and any dividends Hudson City Bancorp
receives from Hudson City Savings. Initially, Hudson City Bancorp will neither
own nor lease any property, but will instead use the premises, equipment and
furniture of Hudson City Savings. At the present time, we intend to employ only
persons who are officers of Hudson City Savings to serve as officers of Hudson
City Bancorp. However, we will use the support staff of Hudson City Savings from
time to time. These persons will not be separately compensated by Hudson City
Bancorp. Hudson City Bancorp will hire additional employees, as appropriate, to
the extent it expands its business in the future. See "How We Intend to Use the
Proceeds from the Offering."
REGULATION OF HUDSON CITY SAVINGS BANK AND
HUDSON CITY BANCORP
GENERAL
Hudson City Savings Bank is a New Jersey chartered savings bank, and its
deposit accounts are insured up to applicable limits by the Federal Deposit
Insurance Corporation (FDIC) under the Bank Insurance Fund (BIF). Hudson City
Savings is subject to extensive regulation, examination and supervision by the
Commissioner of the New Jersey Department of Banking and Insurance (the
"Department") as its chartering agency, and by the FDIC as the deposit insurer.
Hudson City Savings must file reports with the Commissioner and the FDIC
concerning its activities and financial condition, and it must obtain regulatory
approval prior to entering into certain transactions, such as mergers with, or
acquisitions of, other depository institutions and opening or acquiring branch
offices.
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The Commissioner and the FDIC conduct periodic examinations to assess Hudson
City Savings Bank's compliance with various regulatory requirements. This
regulation and supervision establishes a comprehensive framework of activities
in which a savings bank can engage and is intended primarily for the protection
of the deposit insurance fund and depositors. The regulatory structure also
gives the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes.
Hudson City, MHC and Hudson City Bancorp, as bank holding companies
controlling Hudson City Savings, will be subject to the Bank Holding Company Act
of 1956, as amended (BHCA), and the rules and regulations of the Federal Reserve
Board under the BHCA and to the provisions of the New Jersey Banking Act of 1948
(the "New Jersey Banking Act") and the regulations of the Department under the
New Jersey Banking Act applicable to bank holding companies. Hudson City, MHC
and Hudson City Bancorp will be required to file reports with, and otherwise
comply with the rules and regulations of the Federal Reserve Board and the
Department. Hudson City Bancorp will be required to file certain reports with,
and otherwise comply with, the rules and regulations of the Securities and
Exchange Commission under the federal securities laws.
Any change in such laws and regulations, whether by the Department, the
FDIC, the Federal Reserve Board or through legislation, could have a material
adverse impact on Hudson City, MHC, Hudson City Bancorp and Hudson City Savings
and their operations and stockholders.
Certain of the laws and regulations applicable to Hudson City, MHC, Hudson City
Bancorp and Hudson City Savings are summarized below or elsewhere in this
prospectus. These summaries do not purport to be complete and are qualified in
their entirety by reference to such laws and regulations.
NEW JERSEY BANKING REGULATION
Activity Powers. The Bank derives its lending, investment and other
activity powers primarily from the applicable provisions of the New Jersey
Banking Act and its related regulations. Under these laws and regulations,
savings banks, including Hudson City Savings Bank, generally may invest in:
(1) real estate mortgages;
(2) consumer and commercial loans;
(3) specific types of debt securities, including certain corporate debt
securities and obligations of federal, state and local governments and
agencies;
(4) certain types of corporate equity securities; and
(5) certain other assets.
A savings bank may also invest pursuant to a "leeway" power that permits
investments not otherwise permitted by the New Jersey Banking Act. "Leeway"
investments must comply with a number of limitations on the individual and
aggregate amounts of "leeway" investments. A savings bank may also exercise
trust powers upon approval of the Department. New Jersey savings banks may also
exercise any power authorized for federally chartered savings banks unless the
Department determines otherwise. The exercise of these lending, investment and
activity powers are limited by federal law and the related regulations. See
"-- Federal Banking Regulation -- Activity Restrictions on State-Chartered
Banks" below.
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Loans-to-One-Borrower Limitations. With certain specified exceptions, a
New Jersey chartered savings bank may not make loans or extend credit to a
single borrower and to entities related to the borrower in an aggregate amount
that would exceed 15% of the bank's capital funds. A savings bank may lend an
additional 10% of the bank's capital funds if secured by collateral meeting the
requirements of the New Jersey Banking Act. Hudson City Savings currently
complies with applicable loans-to-one-borrower limitations.
Dividends. Under the New Jersey Banking Act, a stock savings bank may
declare and pay a dividend on its capital stock only to the extent that the
payment of the dividend would not impair the capital stock of the savings bank.
In addition, a stock savings bank may not pay a dividend if the surplus of the
savings bank would, after the payment of the dividend, be reduced unless after
such reduction the surplus was 50% or more of the bank's capital stock. Federal
law may also limit the amount of dividends that may be paid by Hudson City
Savings. See "-- Federal Banking Regulation -- Prompt Corrective Action" below.
Minimum Capital Requirements. Regulations of the Department impose on New
Jersey chartered depository institutions, including Hudson City Savings, minimum
capital requirements similar to those imposed by the FDIC on insured state
banks. See "-- Federal Banking Regulation -- Capital Requirements."
Examination and Enforcement. The Department may examine Hudson City
Savings whenever it deems an examination advisable. The Commissioner examines
Hudson City Savings at least every two years. The Department may order any
savings bank to discontinue any violation of law or unsafe or unsound business
practice and may direct any director, officer, attorney or employee of a savings
bank engaged in an objectionable activity, after the Department has ordered the
activity to be terminated, to show cause at a hearing before the Department why
such person should not be removed.
FEDERAL BANKING REGULATION
Capital Requirements. FDIC regulations require BIF-insured banks, such as
Hudson City Savings, to maintain minimum levels of capital. The FDIC regulations
define two Tiers, or classes, of capital.
Tier 1 capital is comprised of the sum of common stockholders' equity
(excluding the net unrealized appreciation or depreciation, net of tax, from
available-for-sale securities), non-cumulative perpetual preferred stock
(including any related surplus) and minority interests in consolidated
subsidiaries, minus all intangible assets (other than qualifying servicing
rights), and any net unrealized loss on marketable equity securities.
The components of Tier 2 capital currently include cumulative perpetual
preferred stock, certain perpetual preferred stock for which the dividend rate
may be reset periodically, mandatory convertible securities, subordinated debt,
intermediate preferred stock and allowance for possible loan losses. Allowance
for possible loan losses includible in Tier 2 capital is limited to a maximum of
1.25% of risk-weighted assets. Overall, the amount of Tier 2 capital that may be
included in total capital cannot exceed 100% of Tier 1 capital.
The FDIC regulations establish a minimum leverage capital requirement for
banks in the strongest financial and managerial condition, with a rating of 1
(the highest examination rating of the FDIC for banks) under the Uniform
Financial Institutions Rating System, and that are not experiencing or
anticipating significant growth, of not less than a ratio of 3.0% of Tier 1
capital to total assets. For all other banks, the minimum leverage capital
requirement is 4.0%, unless a higher leverage capital ratio is warranted by the
particular circumstances or risk profile of the depository institution.
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The FDIC regulations also require that savings banks meet a risk-based
capital standard. The risk-based capital standard requires the maintenance of a
ratio of total capital (which is defined as the sum of Tier 1 capital and Tier 2
capital) to risk-weighted assets of at least 8% and a ratio of Tier 1 capital to
risk-weighted assets of at least 4%. In determining the amount of risk-weighted
assets, all assets, plus certain off balance sheet items, are multiplied by a
risk-weight of 0% to 100%, based on the risks the FDIC believes are inherent in
the type of asset or item.
The federal banking agencies, including the FDIC, have also adopted
regulations to require an assessment of an institution's exposure to declines in
the economic value of a bank's capital due to changes in interest rates when
assessing the bank's capital adequacy. Under such a risk assessment, examiners
will evaluate a bank's capital for interest rate risk on a case-by-case basis,
with consideration of both quantitative and qualitative factors. According to
the agencies, applicable considerations include the quality of the bank's
interest rate risk management process, the overall financial condition of the
bank and the level of other risks at the bank for which capital is needed.
Institutions with significant interest rate risk may be required to hold
additional capital. The agencies also issued a joint policy statement providing
guidance on interest rate risk management, including a discussion of the
critical factors affecting the agencies' evaluation of interest rate risk in
connection with capital adequacy.
The following table shows Hudson City Savings' leverage ratio, its Tier 1
risk-based capital ratio, and its total risk-based capital ratio, at December
31, 1998:
<TABLE>
<CAPTION>
MINIMUM CAPITAL FOR CLASSIFICATION AS
BANK ACTUAL ADEQUACY WELL-CAPITALIZED
----------------- ----------------- ---------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- -------- ----- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Leverage (Tier 1) capital..... $898,494 11.93% $301,314 4.00% $376,642 5.00%
Risk-based capital:
Tier 1...................... 898,494 38.48 93,409 4.00 140,114 6.00
Total....................... 916,206 39.23 186,818 8.00 233,523 10.00
</TABLE>
As the table shows, Hudson City Savings exceeded the minimum capital
adequacy requirements at the date indicated.
Activity Restrictions on State-Chartered Banks. Section 24 of the Federal
Deposit Insurance Act, as amended (FDIA), which was added by the Federal Deposit
Insurance Corporation Improvement Act of 1991 (FDICIA), generally limits the
activities and investments of state-chartered FDIC insured banks and their
subsidiaries to those permissible for federally chartered national banks and
their subsidiaries, unless such activities and investments are specifically
exempted by Section 24 or consented to by the FDIC.
Section 24 provides an exception for investments by a bank in common and
preferred stocks listed on a national securities exchange or the shares of
registered investment companies if:
(1) the bank held such types of investments during the 14-month period from
September 30, 1990 through November 26, 1991;
(2) the state in which the bank is chartered permitted such investments as
of September 30, 1991; and
(3) the bank notifies the FDIC and obtains approval from the FDIC to make
or retain such investments. Upon receiving such FDIC approval, an
institution's investment in such equity securities will be subject to
an aggregate limit up to the amount of its Tier 1 capital.
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Hudson City Savings received approval from the FDIC to retain and acquire such
equity investments subject to a maximum permissible investment equal to the
lesser of 100% of Hudson City Savings' Tier 1 capital or the maximum permissible
amount specified by the New Jersey Banking Act. Section 24 also provides an
exception for majority owned subsidiaries of a bank, but Section 24 limits the
activities of such subsidiaries to those permissible for a national bank under
Section 24 of the FDIA and the FDIC regulations issued pursuant thereto, or as
approved by the FDIC.
Before making a new investment or engaging in a new activity not
permissible for a national bank or otherwise permissible under Section 24 of the
FDIC regulations thereunder, an insured bank must seek approval from the FDIC to
make such investment or engage in such activity. The FDIC will not approve the
activity unless the bank meets its minimum capital requirements and the FDIC
determines that the activity does not present a significant risk to the FDIC
insurance funds.
Enforcement. The FDIC has extensive enforcement authority over insured
savings banks, including Hudson City Savings. This enforcement authority
includes, among other things, the ability to assess civil money penalties, to
issue cease and desist orders and to remove directors and officers. In general,
these enforcement actions may be initiated in response to violations of laws and
regulations and to unsafe or unsound practices.
The FDIC is required, with certain exceptions, to appoint a receiver or
conservator for an insured state bank if that bank is "critically
undercapitalized." For this purpose, "critically undercapitalized" means having
a ratio of tangible capital to total assets of less than 2%. The FDIC may also
appoint a conservator or receiver for a state bank on the basis of the
institution's financial condition or upon the occurrence of certain events,
including:
(1) insolvency (whereby the assets of the bank are less than its
liabilities to depositors and others);
(2) substantial dissipation of assets or earnings through violations of law
or unsafe or unsound practices;
(3) existence of an unsafe or unsound condition to transact business;
(4) likelihood that the bank will be unable to meet the demands of its
depositors or to pay its obligations in the normal course of business;
and
(5) insufficient capital, or the incurring or likely incurring of losses
that will deplete substantially all of the institution's capital with
no reasonable prospect of replenishment of capital without federal
assistance.
Deposit Insurance. Pursuant to FDICIA, the FDIC established a system for
setting deposit insurance premiums based upon the risks a particular bank or
savings association posed to its deposit insurance funds. Under the risk-based
deposit insurance assessment system, the FDIC assigns an institution to one of
three capital categories based on the institution's financial information, as of
the reporting period ending six months before the assessment period. The three
capital categories are (1) well capitalized, (2) adequately capitalized and (3)
undercapitalized. The FDIC also assigns an institution to one of three
supervisory subcategories within each capital group. With respect to the capital
ratios, institutions are classified as well capitalized, adequately capitalized
or undercapitalized using ratios that are substantially similar to the prompt
corrective action capital ratios discussed below. The FDIC also assigns an
institution to a supervisory subgroup based on a supervisory evaluation provided
to the FDIC by the institution's primary federal regulator and information that
the FDIC determines to be relevant to the institution's financial condition and
the risk posed to the deposit insurance funds (which may include, if applicable,
information provided by the institution's state supervisor).
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An institution's assessment rate depends on the capital category and
supervisory category to which it is assigned. Under the final risk-based
assessment system, there are nine assessment risk classifications (i.e.,
combinations of capital groups and supervisory subgroups) to which different
assessment rates are applied. Assessment rates for deposit insurance currently
range from 0 basis points to 27 basis points. The capital and supervisory
subgroup to which an institution is assigned by the FDIC is confidential and may
not be disclosed. A bank's rate of deposit insurance assessments will depend
upon the category and subcategory to which the bank is assigned by the FDIC. Any
increase in insurance assessments could have an adverse effect on the earnings
of insured institutions, including Hudson City Savings.
Under the Deposit Insurance Funds Act of 1996 ("Funds Act"), the assessment
base for the payments on the bonds ("FICO bonds") issued in the late 1980's by
the Financing Corporation to recapitalize the now defunct Federal Savings and
Loan Insurance Corporation was expanded to include, beginning January 1, 1997,
the deposits of BIF-insured institutions, such as Hudson City Savings. Until
December 31, 1999, or such earlier date on which the last savings association
ceases to exist, the rate of assessment for BIF-assessable deposits will be
one-fifth of the rate imposed on deposits insured by the Savings Association
Insurance Fund (SAIF). The annual rate of assessments for the payments on the
FICO bonds for the quarterly period beginning on October 1, 1998 was 0.01164%
for BIF-assessable deposits and 0.0582% for SAIF-assessable deposits and was
0.0122% for BIF-assessable deposits and 0.0610% for SAIF-assessable deposits for
the quarterly period beginning on January 1, 1999.
Under the FDIA, the FDIC may terminate the insurance of an institution's
deposits upon a finding that the institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or has
violated any applicable law, regulation, rule, order or condition imposed by the
FDIC. The management of Hudson City Savings does not know of any practice,
condition or violation that might lead to termination of deposit insurance.
Transactions with Affiliates of Hudson City Savings. Transactions between
an insured bank, such as Hudson City Savings, and any of its affiliates is
governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a
bank is any company or entity that controls, is controlled by or is under common
control with the bank. Currently, a subsidiary of a bank that is not also a
depository institution is not treated as an affiliate of the bank for purposes
of Sections 23A and 23B, but the Federal Reserve Board has proposed treating any
subsidiary of a bank that is engaged in activities not permissible for bank
holding companies under the Bank Holding Company Act of 1956, as amended (BHCA),
as an affiliate for purposes of Sections 23A and 23B. Sections 23A and 23B (1)
limit the extent to which the bank or its subsidiaries may engage in "covered
transactions" with any one affiliate to an amount equal to 10% of such bank's
capital stock and surplus, and limit all such transactions with all affiliates
to an amount equal to 20% of such capital stock and surplus and (2) require that
all such transactions be on terms that are consistent with safe and sound
banking practices. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of guarantees and other similar types of
transactions. Further, most loans by a bank to any of its affiliates must be
secured by collateral in amounts ranging from 100 to 130 percent of the loan
amounts. In addition, any covered transaction by a bank with an affiliate and
any purchase of assets or services by a bank from an affiliate must be on terms
that are substantially the same, or at least as favorable, to the bank as those
that would be provided to a non-affiliate.
Prohibitions Against Tying Arrangements. Banks are subject to the
prohibitions of 12 U.S.C. Section 1972 on certain tying arrangements. A
depository institution is prohibited, subject to certain exceptions, from
extending credit to or offering any other service, or fixing or varying the
consideration for such extension of credit or service, on the condition that the
customer obtain some
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additional service from the institution or certain of its affiliates or not
obtain services of a competitor of the institution.
Uniform Real Estate Lending Standards. Pursuant to FDICIA, the federal
banking agencies adopted uniform regulations prescribing standards for
extensions of credit that are secured by liens on interests in real estate or
made for the purpose of financing the construction of a building or other
improvements to real estate. Under the joint regulations adopted by the federal
banking agencies, all insured depository institutions must adopt and maintain
written policies that establish appropriate limits and standards for extensions
of credit that are secured by liens or interests in real estate or are made for
the purpose of financing permanent improvements to real estate. These policies
must establish loan portfolio diversification standards, prudent underwriting
standards (including loan-to-value limits) that are clear and measurable, loan
administration procedures, and documentation, approval and reporting
requirements. The real estate lending policies must reflect consideration of the
Interagency Guidelines for Real Estate Lending Policies that have been adopted
by the federal bank regulators.
The Interagency Guidelines, among other things, require a depository
institution to establish internal loan-to-value limits for real estate loans
that are not in excess of the following supervisory limits:
(1) for loans secured by raw land, the supervisory loan-to-value limit is
65% of the value of the collateral;
(2) for land development loans (i.e., loans for the purpose of improving
unimproved property prior to the erection of structures), the
supervisory limit is 75%;
(3) for loans for the construction of commercial, multi-family or other
non-residential property, the supervisory limit is 80%;
(4) for loans for the construction of one- to four-family properties, the
supervisory limit is 85%; and
(5) for loans secured by other improved property (e.g., farmland, completed
commercial property and other income-producing property, including
non-owner occupied, one- to four-family property), the limit is 85%.
Although no supervisory loan-to-value limit has been established for
owner-occupied, one to four-family and home equity loans, the Interagency
Guidelines state that for any such loan with a loan-to-value ratio that equals
or exceeds 90% at origination, an institution should require appropriate credit
enhancement in the form of either mortgage insurance or readily marketable
collateral.
Community Reinvestment Act. Under the Community Reinvestment Act (CRA),
any insured depository institution, including Hudson City Savings, has a
continuing and affirmative obligation consistent with its safe and sound
operation to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community. The CRA requires the FDIC,
in connection with its examination of a savings bank, to assess the depository
institution's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications by such
institution, including applications for additional branches and acquisitions.
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Among other things, current CRA regulations replace the prior process-based
assessment factors with a new evaluation system that would rate an institution
based on its actual performance in meeting community needs. In particular, the
new evaluation system focuses on three tests:
(1) a lending test, to evaluate the institution's record of making loans in
its service areas;
(2) an investment test, to evaluate the institution's record of investing
in community development projects, affordable housing, and programs
benefitting low or moderate income individuals and businesses; and
(3) a service test, to evaluate the institution's delivery of services
through its branches, ATMs and other offices.
The CRA requires the FDIC to provide a written evaluation of an
institution's CRA performance utilizing a four-tiered descriptive rating system
and requires public disclosure of an institution's CRA rating. Hudson City
Savings has received "satisfactory" ratings in its CRA examinations. However,
from September 23, 1996 to June 22, 1998, Hudson City Savings had a "needs to
improve" CRA rating. Hudson City Savings' latest CRA rating, dated June 22,
1998, was "satisfactory."
Safety and Soundness Standards. Pursuant to the requirements of FDICIA, as
amended by the Riegle Community Development and Regulatory Improvement Act of
1994, each federal banking agency, including the FDIC, has adopted guidelines
establishing general standards relating to internal controls, information and
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, asset quality, earnings and compensation, fees and
benefits. In general, the guidelines require, among other things, appropriate
systems and practices to identify and manage the risks and exposures specified
in the guidelines. The guidelines prohibit excessive compensation as an unsafe
and unsound practice and describe compensation as excessive when the amounts
paid are unreasonable or disproportionate to the services performed by an
executive officer, employee, director, or principal stockholder.
In addition, the FDIC adopted regulations to require a bank that is given
notice by the FDIC that it is not satisfying any of such safety and soundness
standards to submit a compliance plan to the FDIC. If, after being so notified,
a bank fails to submit an acceptable compliance plan or fails in any material
respect to implement an accepted compliance plan, the FDIC may issue an order
directing corrective and other actions of the types to which a significantly
undercapitalized institution is subject under the "prompt corrective action"
provisions of FDICIA. If a bank fails to comply with such an order, the FDIC may
seek to enforce such an order in judicial proceedings and to impose civil
monetary penalties.
Prompt Corrective Action. FDICIA also established a system of prompt
corrective action to resolve the problems of undercapitalized institutions. The
FDIC, as well as the other federal banking regulators, adopted regulations
governing the supervisory actions that may be taken against undercapitalized
institutions. The regulations establish five categories, consisting of "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized." The FDIC's regulations
define the five capital categories as follows: Generally, an institution will be
treated as "well capitalized" if its ratio of total capital to risk-weighted
assets is at least 10%, its ratio of Tier 1 capital to risk-weighted assets is
at least 6%, its ratio of Tier 1 capital to total assets is at least 5%, and it
is not subject to any order or directive by the FDIC to meet a specific capital
level. An institution will be treated as "adequately capitalized" if its ratio
of total capital to risk-weighted assets is at least 8%, its ratio of Tier 1
capital to risk-weighted assets is at least 4%, and its ratio of Tier 1 capital
to total assets is at least 4% (3% if the bank receives the highest rating under
the Uniform Financial Institutions Rating System) and it is not a well-
capitalized institution. An institution that has total risk-based capital of
less than 8%, Tier 1 risk-
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based-capital of less than 4% or a leverage ratio that is less than 4% (or less
than 3% if the institution is rated a composite "1" under the Uniform Financial
Institutions Rating System) would be considered to be "undercapitalized." An
institution that has total risk-based capital of less than 6%, Tier 1 capital of
less than 3% or a leverage ratio that is less than 3% would be considered to be
"significantly undercapitalized," and an institution that has a tangible capital
to assets ratio equal to or less than 2% would be deemed to be "critically
undercapitalized."
The severity of the action authorized or required to be taken under the
prompt corrective action regulations increases as a bank's capital decreases
within the three undercapitalized categories. All banks are prohibited from
paying dividends or other capital distributions or paying management fees to any
controlling person if, following such distribution, the bank would be
undercapitalized. The FDIC is required to monitor closely the condition of an
undercapitalized bank and to restrict the growth of its assets. An
undercapitalized bank is required to file a capital restoration plan within 45
days of the date the bank receives notice that it is within any of the three
undercapitalized categories, and the plan must be guaranteed by any parent
holding company. The aggregate liability of a parent holding company is limited
to the lesser of:
(1) an amount equal to five percent of the bank's total assets at the time
it became "undercapitalized"; and
(2) the amount that is necessary (or would have been necessary) to bring
the bank into compliance with all capital standards applicable with
respect to such bank as of the time it fails to comply with the plan.
If a bank fails to submit an acceptable plan, it is treated as if it were
"significantly undercapitalized." Banks that are significantly or critically
undercapitalized are subject to a wider range of regulatory requirements and
restrictions.
The FDIC has a broad range of grounds under which it may appoint a receiver
or conservator for an insured depositary bank. If one or more grounds exist for
appointing a conservator or receiver for a bank, the FDIC may require the bank
to issue additional debt or stock, sell assets, be acquired by a depository bank
holding company or combine with another depository bank. Under FDICIA, the FDIC
is required to appoint a receiver or a conservator for a critically
undercapitalized bank within 90 days after the bank becomes critically
undercapitalized or to take such other action that would better achieve the
purposes of the prompt corrective action provisions. Such alternative action can
be renewed for successive 90-day periods. However, if the bank continues to be
critically undercapitalized on average during the quarter that begins 270 days
after it first became critically undercapitalized, a receiver must be appointed,
unless the FDIC makes certain findings that the bank is viable.
LOANS TO A BANK'S INSIDERS
Federal Regulation. A bank's loans to its executive officers, directors,
any owner of 10% or more of its stock (each, an insider) and any of certain
entities affiliated to any such person (an insider's related interest) are
subject to the conditions and limitations imposed by Section 22(h) of the
Federal Reserve Act and the Federal Reserve Board's Regulation O thereunder.
Under these restrictions, the aggregate amount of the loans to any insider and
the insider's related interests may not exceed the loans-to-one-borrower limit
applicable to national banks, which is comparable to the loans-to-one-borrower
limit applicable to Hudson City Savings' loans. See "-- New Jersey Banking
Regulation -- Loans-to-One Borrower Limitations." All loans by a bank to all
insiders and insiders' related interests in the aggregate may not exceed the
bank's unimpaired capital and unimpaired surplus. With certain exceptions, loans
to an executive officer, other than loans for the education of the officer's
children and certain loans secured by the officer's residence, may not exceed
the lesser
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of; (1) $100,000 or (2) the greater of $25,000 or 2.5% of the bank's capital and
unimpaired surplus. Regulation O also requires that any proposed loan to an
insider or a related interest of that insider be approved in advance by a
majority of the board of directors of the bank, with any interested director not
participating in the voting, if such loan, when aggregated with any existing
loans to that insider and the insider's related interests, would exceed either;
(1) $500,000 or (2) the greater of $25,000 or 5% of the bank's unimpaired
capital and surplus. Generally, such loans must be made on substantially the
same terms as, and follow credit underwriting procedures that are not less
stringent than, those that are prevailing at the time for comparable
transactions with other persons.
An exception is made for extensions of credit made pursuant to a benefit or
compensation plan of a bank that is widely available to employees of the bank
and that does not give any preference to insiders of the bank over other
employees of the bank.
In addition, provisions of the BHCA prohibit extensions of credit to a
bank's insiders and their related interests by any other institution that has a
correspondent banking relationship with the bank, unless such extension of
credit is on substantially the same terms as those prevailing at the time for
comparable transactions with other persons and does not involve more than the
normal risk of repayment or present other unfavorable features.
New Jersey Regulation. Provisions of the New Jersey Banking Act impose
conditions and limitations on the liabilities to a savings bank of its directors
and executive officers and of corporations and partnerships controlled by such
persons that are comparable in many respects to the conditions and limitations
imposed on the loans and extensions of credit to insiders and their related
interests under Regulation O, as discussed above. The New Jersey Banking Act
also provides that a savings bank that is in compliance with Regulation O is
deemed to be in compliance with such provisions of the New Jersey Banking Act.
FEDERAL RESERVE SYSTEM
Under Federal Reserve Board regulations, Hudson City Savings is required to
maintain non-interest-earning reserves against its transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations generally require that reserves of 3% must be maintained against
aggregate transaction accounts of $46.5 million or less (subject to adjustment
by the Federal Reserve Board) and an initial reserve of $1.4 million plus 10%
(subject to adjustment by the Federal Reserve Board between 8% and 14%) against
that portion of total transaction accounts in excess of $46.5 million. The first
$4.9 million of otherwise reservable balances (subject to adjustments by the
Federal Reserve Board) are exempted from the reserve requirements. Hudson City
Savings is in compliance with the foregoing requirements. Because required
reserves must be maintained in the form of either vault cash, a
non-interest-bearing account at a Federal Reserve Bank or a pass-through account
as defined by the Federal Reserve Board, the effect of this reserve requirement
is to reduce Hudson City Savings' interest-earning assets.
HOLDING COMPANY REGULATION
Federal Regulation. After the reorganization, Hudson City, MHC and Hudson
City Bancorp will be governed as bank holding companies. Bank holding companies
are subject to examination, regulation and periodic reporting under the BHCA, as
administered by the Federal Reserve Board. The Federal Reserve Board has adopted
capital adequacy guidelines for bank holding companies on a consolidated basis
substantially similar to those of the FDIC for Hudson City Savings. As of
December 31, 1998, Hudson City Bancorp's total capital and Tier 1 capital ratios
for Hudson City, MHC and Hudson City Bancorp would, on a pro forma basis, exceed
these minimum capital requirements. See "Regulatory Capital Compliance."
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As bank holding companies, Hudson City, MHC and Hudson City Bancorp will be
required to obtain the prior approval of the Federal Reserve Board to acquire
all, or substantially all, of the assets of any bank or bank holding company.
Prior Federal Reserve Board approval will be required for Hudson City, MHC or
Hudson City Bancorp to acquire direct or indirect ownership or control of any
voting securities of any bank or bank holding company if, after giving effect to
such acquisition, it would, directly or indirectly, own or control more than 5%
of any class of voting shares of such bank or bank holding company.
A bank holding company is required to give the Federal Reserve Board prior
written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, will be equal to 10% or more of the company's
consolidated net worth. The Federal Reserve Board may disapprove such a purchase
or redemption if it determines that the proposal would constitute an unsafe and
unsound practice, or would violate any law, regulation, Federal Reserve Board
order or directive, or any condition imposed by, or written agreement with, the
Federal Reserve Board. Such notice and approval is not required for a bank
holding company that would be treated as "well capitalized" under applicable
regulations of the Federal Reserve Board, that has received a composite "1" or
"2" rating at its most recent bank holding company inspection by the Federal
Reserve Board, and that is not the subject of any unresolved supervisory issues.
In addition, a bank holding company is generally prohibited from engaging
in, or acquiring direct or indirect control of any company engaged in,
non-banking activities. One of the principal exceptions to this prohibition is
for activities found by the Federal Reserve Board to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
Some of the principal activities that the Federal Reserve Board has determined
by regulation to be so closely related to banking as to be a proper incident
thereto are:
(1) making or servicing loans;
(2) performing certain data processing services;
(3) providing discount brokerage services;
(4) acting as fiduciary, investment or financial advisor;
(5) leasing personal or real property;
(6) making investments in corporations or projects designed primarily to
promote community welfare; and
(7) acquiring a savings and loan association.
Regulations of the FRB provide that a bank holding company must serve as a
source of strength to any of its subsidiary banks and must not conduct its
activities in an unsafe or unsound manner. Under the prompt corrective action
provisions of FDICIA, a bank holding company parent of an undercapitalized
subsidiary bank would be directed to guarantee, within limitations, the capital
restoration plan that is required of such an undercapitalized bank. See Federal
Banking Regulation Prompt Corrective Action below. If the undercapitalized bank
fails to file an acceptable capital restoration plan or fails to implement an
accepted plan, the Federal Reserve Board may prohibit the bank holding company
parent of the undercapitalized bank from paying any dividend or making any other
form of capital distribution without the prior approval of the FRB.
Under the Federal Deposit Insurance Act, depository institutions are liable
to the FDIC for losses suffered or anticipated by the FDIC in connection with
the default of a commonly controlled depository institution or any assistance
provided by the FDIC to such an institution in danger of
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default. This law would have potential applicability if Hudson City, MHC or
Hudson City Bancorp ever acquired as a separate subsidiary a depository
institution in addition to Hudson City Savings.
New Jersey Regulation. Under the New Jersey Banking Act, a company owning
or controlling a savings bank is regulated as a bank holding company. The New
Jersey Banking Act defines the terms "company" and "bank holding company" as
such terms are defined under the BHCA. Each bank holding company controlling a
New Jersey chartered bank or savings bank must file certain reports with the
Commissioner and is subject to examination by the Commissioner.
ACQUISITION OF HUDSON CITY BANCORP
Under federal law and under the New Jersey Banking Act, no person may
acquire control of Hudson City Bancorp or Hudson City Savings without first
obtaining, as summarized below, approval of such acquisition of control by the
Federal Reserve Board and the Commissioner.
Federal Restrictions. Under the federal Change in Bank Control Act (CBCA),
any person (including a company), or group acting in concert, seeking to acquire
10% or more of the outstanding shares of Hudson City Bancorp's common stock will
be required to submit prior notice to the Federal Reserve Board, unless the
Federal Reserve Board has found that the acquisition of such shares will not
result in a change in control of Hudson City Bancorp. Under the CBCA, the
Federal Reserve Board has 60 days within which to act on such notices, taking
into consideration certain factors, including the financial and managerial
resources of the acquiror, the convenience and needs of the communities served
by Hudson City Bancorp and Hudson City Savings, and the antitrust effects of the
acquisition. Under the BHCA, any company would be required to obtain prior
approval from the Federal Reserve Board before it may obtain "control" of Hudson
City Bancorp within the meaning of the BHCA. Control generally is defined under
the BHCA to mean the ownership or power to vote 25% or more of any class of
voting securities of Hudson City Bancorp or the ability to control in any manner
the election of a majority of Hudson City Bancorp's directors.
New Jersey Restrictions. The New Jersey Banking Act requires prior
approval of the Commissioner before any person may acquire a New Jersey bank
holding company, such as Hudson City Bancorp. For this purpose, the term
"person" is defined broadly to mean a natural person or a corporation, company,
partnership, or other forms of organized entities. The term "acquire" is defined
differently for an existing bank holding company and for other companies or
persons. A bank holding company will be treated as "acquiring" a New Jersey bank
holding company if the bank holding company acquires more than 5% of any class
of the voting shares of the bank holding company. Any other person will be
treated as "acquiring" a New Jersey bank holding company if it acquires
ownership or control of more than 25% of any class of the voting shares of the
bank holding company.
DIVIDEND WAIVERS BY HUDSON CITY, MHC
It has been the policy of a number of mutual holding companies to waive the
receipt of dividends declared by its savings institution subsidiary. In
connection with its approval of the reorganization, however, it is expected that
the Federal Reserve Board will impose certain conditions on the waiver by Hudson
City, MHC of dividends paid on the common stock by Hudson City Bancorp. In
particular, the Federal Reserve Board is expected to require that Hudson City,
MHC obtain the prior approval of the Federal Reserve Board before Hudson City,
MHC may waive any dividends from Hudson City Bancorp. As of the date hereof, we
are not aware that the Federal Reserve Board has given its approval to any
waiver of dividends by any mutual holding company that has requested such
approval.
We also expect that the terms of the Federal Reserve Board approval of the
reorganization will require that the amount of any dividends waived by Hudson
City, MHC will not be available for
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payment to its public stockholders of Hudson City Bancorp (i.e., stockholders
except for Hudson City, MHC) and that such amount will be excluded from Hudson
City Bancorp's capital for purposes of calculating dividends payable to the
public stockholders. Moreover, Hudson City Savings is required to maintain the
cumulative amount of dividends waived by Hudson City, MHC in a restricted
capital account that would be added to the liquidation account established in
the reorganization. This amount would not be available for distribution to
public stockholders. See "The Reorganization and The Offering -- Effects of the
Reorganization -- Depositors' Rights If We Liquidate; Liquidation Account." The
restricted capital account and liquidation account amounts would not be
reflected in Hudson City Savings' financial statements, but would be considered
as a notational or memorandum account of Hudson City Savings. These accounts
would be maintained in accordance with the laws, rules, regulations and policies
of the Commissioner and the plan of reorganization. The plan of reorganization
also provides that if Hudson City, MHC converts to stock form in the future
(commonly referred to as a second step conversion), any waived dividends would
reduce the percentage of the converted company's shares of common stock issued
to public stockholders in connection with any such transaction. For additional
information regarding the possible second step conversion of Hudson City, MHC,
see "The Reorganization and The Offering -- Possible Conversion of Hudson City,
MHC to Stock Form."
Hudson City, MHC does not expect to initially waive dividends declared by
Hudson City Bancorp. If Hudson City, MHC decides that it is in its best interest
to waive a particular dividend to be paid by Hudson City Bancorp and the Federal
Reserve Board approves such waiver, then Hudson City Bancorp would pay such
dividend only to its public stockholders. The amount of the dividend waived by
Hudson City, MHC would be treated in the manner described above. Hudson City,
MHC's decision as to whether or not to waive a particular dividend will depend
on a number of factors, including Hudson City, MHC's capital needs, the
investment alternatives available to Hudson City, MHC as compared to those
available to Hudson City Bancorp, and the possibility of regulatory approvals.
We cannot guarantee:
- that after the reorganization, Hudson City, MHC will waive dividends paid
by Hudson City Bancorp;
- that if the application is made to waive a dividend, that the Federal
Reserve Board will approve such dividend waiver request; or
- what conditions may be imposed by the Federal Reserve Board on any
dividend waiver.
TAXATION
FEDERAL
General. The following discussion is intended only as a summary and does
not purport to be a comprehensive description of the tax rules applicable to
Hudson City Savings, Hudson City, MHC or Hudson City Bancorp. For federal income
tax purposes, Hudson City Savings reports its income on the basis of a taxable
year ending December 31, using the accrual method of accounting, and is
generally subject to federal income taxation in the same manner as other
corporations. Following the reorganization, Hudson City Savings and Hudson City
Bancorp will constitute an affiliated group of corporations and, therefore, will
be eligible to report their income on a consolidated basis. Because MHC will own
less than 80% of the common stock, it will not be a member of such affiliated
group and will report its income on a separate return. Hudson City Savings is
not currently under audit by the Internal Revenue Service and has not been
audited by the IRS during the past five years.
Bad Debt Reserves. Pursuant to the Small Business Job Protection Act of
1996, Hudson City Savings is no longer permitted to use the reserve method of
accounting for bad debts, and is now
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recapturing (taking into income) over a multi-year period a portion of the
balance of its tax bad debt reserve as of December 31, 1995. Since Hudson City
Savings has already provided a deferred tax liability equal to the amount of
such recapture, the recapture will not adversely impact Hudson City Savings'
financial condition or results of operations.
Distributions. To the extent that Hudson City Savings makes "non-dividend
distributions" to stockholders, such distributions will be considered to result
in distributions from Hudson City Savings' unrecaptured tax bad debt reserve
"base year reserve," i.e., its reserve as of December 31, 1987, to the extent
thereof and then from its supplemental reserve for losses on loans, and an
amount based on the amount distributed will be included in Hudson City Savings'
taxable income. Non-dividend distributions include distributions in excess of
Hudson City Savings' current and accumulated earnings and profits, distributions
in redemption of stock and distributions in partial or complete liquidation.
However, dividends paid out of Hudson City Savings' current or accumulated
earnings and profits, as calculated for federal income tax purposes, will not
constitute non-dividend distributions and, therefore, will not be included in
Hudson City Savings' income.
The amount of additional taxable income created from a non-dividend
distribution is equal to the lesser of Hudson City Savings' base year reserve
and supplemental reserve for losses on loans or an amount that, when reduced by
the tax attributable to the income, is equal to the amount of the distribution.
Thus, in certain situations, approximately one and one-half times the
non-dividend distribution would be includable in gross income for federal income
tax purposes, assuming a 35% federal corporate income tax rate. Hudson City
Savings does not intend to pay dividends that would result in the recapture of
any portion of its bad debt reserves.
Corporate Alternative Minimum Tax. The Internal Revenue Code of 1986, as
amended, imposes a tax ("AMT") on alternative minimum taxable income ("AMTI") at
a rate of 20%. Only 90% of AMTI can be offset by net operating loss carryovers
of which Hudson City Savings currently has none. AMTI is also adjusted by
determining the tax treatment of certain items in a manner that negates the
deferral of income resulting from the regular tax treatment of those items.
Thus, Hudson City Savings' AMTI is increased by an amount equal to 75% of the
amount by which Hudson City Savings' adjusted current earnings exceeds its AMTI
(determined without regard to this adjustment and prior to reduction for net
operating losses). Although the corporate environmental tax of 0.12% of the
excess of AMTI (with certain modifications) over $2.0 million has expired, under
current Administration proposals, such tax will be retroactively reinstated for
taxable years beginning after December 31, 1997 and before January 1, 2009.
Elimination of Dividends; Dividends Received Deduction. Hudson City
Bancorp may exclude from its income 100% of dividends received from Hudson City
Savings as a member of the same affiliated group of corporations. Because,
following the reorganization, Hudson City, MHC will not be a member of such
affiliated group, it will not qualify for such 100% dividends exclusion, but
will be entitled to deduct 80% of the dividends it receives from Hudson City
Bancorp so long as it owns more than 20% of the common stock.
STATE
New Jersey State Taxation. Hudson City Savings files New Jersey Savings
Institution income tax returns. Generally, the income of savings institutions in
New Jersey, which is calculated based on federal taxable income, subject to
certain adjustments, is subject to New Jersey tax. Hudson City Savings is not
currently under audit with respect to its New Jersey income tax returns and
Hudson City Savings' state tax returns have not been audited for the past five
years.
Hudson City Bancorp will be required to file a New Jersey income tax return
and will generally be subject to a state income tax rate that is currently
higher than income tax rates for savings
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institutions in New Jersey. However, if Hudson City Bancorp meets certain
requirements, it may be eligible to elect to be taxed as a New Jersey Investment
Company, which would allow Hudson City Bancorp to be taxed at a rate that is
currently lower than income tax rates for savings institutions in New Jersey.
Delaware State Taxation. As a Delaware holding company not earning income
in Delaware, Hudson City Bancorp is exempted from Delaware corporate income tax
but is required to file annual returns and pay annual fees and a franchise tax
to the State of Delaware.
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MANAGEMENT
SHARED MANAGEMENT STRUCTURE
Hudson City Bancorp's directors and executive officers are the same as
Hudson City Savings'. We expect that Hudson City Bancorp and Hudson City Savings
will continue to have common directors and common executive officers until there
is a business reason to establish separate management structures. Under Hudson
City Savings' current form of organization, we are governed by a Board of
Managers, which is equivalent to a board of directors. After the reorganization,
each of Hudson City Savings, Hudson City, MHC and Hudson City Bancorp will be
governed by a board of directors. For ease of reference we sometimes use the
term directors instead of managers when referring to members of our Board of
Managers.
To date, Hudson City Savings has compensated its directors and executive
officers for their services. Hudson City Bancorp does not pay any additional
compensation. We expect to continue this practice after the reorganization until
we have a business reason to establish separate compensation programs. Until
then, we expect Hudson City Bancorp to reimburse Hudson City Savings for a part
of the compensation paid to each director and executive officer that is
proportionate to the amount of time which he or she devotes to performing
services for Hudson City Bancorp.
DIRECTORS
Composition of Our Boards. We have 11 directors. Each belongs to one of
three classes with staggered 3-year terms of office. Four directors are in Class
One and have terms expiring in 2000. Three are in Class Two and have terms
expiring in 2001. Four are in Class Three and have terms expiring in 2002. At
each of Hudson City Bancorp's annual stockholder meetings, the stockholders
elect directors to fill the seats of the directors whose terms are expiring in
that year and any vacant seats. Hudson City Bancorp, as Hudson City Savings'
sole stockholder, elects Hudson City Savings' directors.
Who Our Directors Are. The following table states our directors' names,
their ages as of their birthdays in 1998, their positions, the years when they
began serving as directors (including time spent on the Board of Managers of
Hudson City Savings in mutual form before the reorganization) and the years when
their current terms of office as directors will expire:
<TABLE>
<CAPTION>
BANK BANCORP
DIRECTOR DIRECTOR TERM
NAME AGE POSITIONS SINCE SINCE EXPIRES
---- --- --------------------------------------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Verne S. Atwater........... 78 Director of the Bank and Bancorp 1983 1999 2002
John D. Birchby............ 52 Director of the Bank and Bancorp 1980 1999 2000
Kenneth L. Birchby......... 83 Chairman Emeritus and Director of the 1966 1999 2001
Bank and Bancorp
Victoria H. Bruni.......... 56 Director of the Bank and Bancorp 1996 1999 2000
William J. Cosgrove........ 65 Director of the Bank and Bancorp 1995 1999 2001
Andrew J. Egner, Jr........ 74 Director of the Bank and Bancorp 1984 1999 2000
Leonard S. Gudelski........ 64 Chairman, Chief Executive Officer and 1971 1999 2000
Director of the Bank and Bancorp
Ronald E. Hermance, Jr..... 51 President, Chief Operating Officer and 1988 1999 2002
Director of the Bank and Bancorp
John W. Klie............... 73 Director of the Bank and Bancorp 1970 1999 2002
Donald O. Quest............ 59 Director of the Bank and Bancorp 1983 1999 2001
Arthur V. Wynne, Jr........ 65 Director of the Bank and Bancorp 1984 1999 2002
</TABLE>
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Our Directors' Backgrounds. The business experience of each of our
directors is as follows:
LEONARD S. GUDELSKI is Chairman of the Board and Chief Executive Officer.
He joined the Bank as Vice President in 1969 after having been employed for 13
years at a savings bank in Connecticut. In 1971 he was elected Executive Vice
President and a member of the Board of Managers. Subsequent promotions were to
President and Chief Operating Officer in 1981, President and Chief Executive
Officer in 1989 and Chairman, President and Chief Executive Officer in 1996. He
became Chairman and Chief Executive Officer in 1997. He is a graduate of the
University of Connecticut with a degree in economics and has completed various
industry-related graduate level courses.
RONALD E. HERMANCE, JR. has served as President and Chief Operating Officer
of Hudson City Savings since January 1997. Mr. Hermance previously was Senior
Executive Vice President, Chief Operating Officer and has been a member of the
Board of Managers of Hudson City Savings since 1988. Prior to joining Hudson
City Savings, Mr. Hermance was Chief Financial Officer of Southold Savings Bank
on Long Island, New York. In addition to his most recent service, Mr. Hermance
served in various lending capacities in both a commercial bank and a thrift
institution.
VERNE S. ATWATER, PH. D. has served as an Instructor of the Executive
M.B.A. Program and a Professor of Finance, Emeritus in Residence at the Lubin
Business School of Pace University since 1982. He has also been a member of the
board of directors of Marcel Dekker, Inc. since 1997.
JOHN D. BIRCHBY, ESQ. has been a partner in the law firm of Dieffenbach,
Witt & Birchby since 1975. He was a member of the Supreme Court District Ethics
Committee for Bergen County of the State of New Jersey from 1990 to 1994. He is
the son of Kenneth L. Birchby.
KENNETH L. BIRCHBY has been the Chairman Emeritus of Hudson City Savings
since 1996. Mr. Birchby joined Hudson City Savings in 1966 as Executive Vice
President, became President and Chief Executive Officer in 1968 and retired from
this position in 1989. He became Chairman of Hudson City Savings in 1981 and
served in this capacity until 1996. He is the father of John D. Birchby, Esq.
VICTORIA H. BRUNI has been Vice President for Administration and Finance at
Ramapo College of New Jersey since 1993. From 1964 to 1993 she served in various
positions at New Jersey Bell Telephone Co., including attorney, Treasurer, and
Assistant Secretary.
WILLIAM J. COSGROVE has been employed as an Executive Vice President of
Marketing at Citadel Group Representatives, Inc., a reinsurance intermediary,
since 1993 and has served as Trustee of the John Hancock Funds since 1991.
ANDREW J. EGNER, JR. is retired, having been employed in various capacities
by Hudson City Savings from 1984 to his retirement in 1989.
JOHN W. KLIE is retired, having served as Vice President of Henry Klie,
Inc., an insurance agency, from 1950 to 1989 and as consultant to the Otterstedt
Agency, an insurance agency, from 1989 to 1996. Mr. Klie is a past President of
the New Jersey Association of Independent Insurance Agents.
DONALD O. QUEST, M.D. has been a neurological surgeon since 1976, a
professor at Columbia University since 1989 and an attending physician at Valley
Hospital and Columbia-Presbyterian Medical Center since 1978.
ARTHUR V. WYNNE, JR. has been a partner in Burrelle's Information Services,
a media research service company, since 1960, a partner in 3W Partners, a real
estate firm, since 1980, a Vice President of Video Monitoring Service of
America, a television transcripts company, since 1987 and a Vice President of
New England Newsclip Agency since 1972.
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MEETINGS OF THE BOARD OF DIRECTORS AND ITS COMMITTEES
Our boards of directors meet on a monthly basis except for August and may
hold additional special meetings. During 1998, Hudson City Savings' Board of
Managers held 11 regular meetings and 1 special meeting.
The Board of Directors of Hudson City Savings and the Board of Directors of
Hudson City Bancorp maintain Executive, Audit, Human Resources and Nominating
Committees with identical compositions. Hudson City Savings' Board of Directors
also maintains an Asset Management Committee. No committee of Hudson City
Bancorp's Board of Directors held any meetings in 1998.
The Executive Committee consists of Messrs. Atwater, K. Birchby, J.
Birchby, Gudelski, Hermance and Klie. Mr. Gudelski serves as Chairman. The
Executive Committee exercises the powers of the Board of Directors in between
its meetings. It met 52 times during 1998.
The Audit Committee consists of Messrs. Atwater, Klie and Wynne, with Mr.
Atwater serving as Chairman. This committee reviews the annual audit prepared by
the independent accountants, recommends the appointment of accountants and
receives reports from the internal audit department of Hudson City Savings. It
met 11 times during 1998.
The Human Resources Committee consists of Messrs. Gudelski, Hermance,
Cosgrove, Quest and Ms. Bruni with Mr. Quest serving as Chairman. This committee
provides advice and recommendations to the Board of Directors in the areas of
employee salaries and benefit programs. It met five times during 1998.
The Nominating Committee consists of Mr. Atwater who is Chairman and
Messrs. Cosgrove and Quest. This committee nominates individuals for election to
the Board of Directors and senior management. It met one time during 1998.
Hudson City Savings' Asset Management Committee consists of Messrs.
Gudelski, Hermance, K. Birchby, J. Birchby, Cosgrove and Egner, with Mr. Egner
serving as the Chairman. This committee has general oversight of Hudson City
Savings' investments and the management of its interest rate risk. It met four
times during 1998.
DIRECTOR COMPENSATION
Meeting Fees. Hudson City Savings pays a fee to each of its non-management
directors for attendance at each board meeting and each meeting of a committee
of which they are members. The following table sets forth the meeting fees in
effect for 1998 and 1999:
<TABLE>
<CAPTION>
POSITION 1998 1999
-------- ------ ------
<S> <C> <C> <C>
Board...................................................... $2,700 $3,000
Executive Committee........................................ Member 490 540
Audit Committee............................................ Member 440 490
Chair 500 550
Human Resources Committee.................................. Member 725 800
Chair 780 860
Asset Management Committee................................. Member 725 800
Chair 780 860
Nominating Committee....................................... Member 725 800
Chair 780 860
</TABLE>
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Hudson City Savings paid fees totaling $458,000 to its non-employee directors
for the year ended December 31, 1998.
Outside Directors Consultation Plan. This plan provides continued
compensation following termination of service as a director to eligible outside
directors who agree to serve as consultants to Hudson City Savings. A director
is eligible if he or she retires after attaining age 65 and completing 10 years
of service as an outside director. The monthly consulting fee is equal to 5% of
the fee for attendance at a meeting of the board of directors in effect at the
date of termination of service as a director multiplied by the number of full
years of service as an outside director, to a maximum of 20 years. A director's
consulting arrangement will continue for 120 months or until an earlier date
when the director withdraws from the performance of consulting services. If a
change of control occurs, this plan will terminate and all of its obligations
will be settled by lump sum payment. In computing these lump sums, each
non-employee director will be presumed to have attained age 65 and completed 20
years of service.
Agreements for the Deferral of Directors Fees. This plan allows the
deferral of fees for service on the board of directors and its committees.
Deferred amounts bear interest, credited quarterly, at the highest interest rate
which Hudson City Savings paid to its customers on savings and time deposits
during the quarter. Hudson City Savings pays the deferred amounts plus accrued
interest following the director's termination of service. These benefits are
general, unsecured obligations of Hudson City Savings and are not separately
funded.
EXECUTIVE OFFICERS
Executive Officers Who are Not Directors. In addition to Messrs. Gudelski
and Hermance, Hudson City Bancorp and Hudson City Savings have the following
executive officers:
JOHN M. TASSILLO has worked for Hudson City Savings since 1969 and has
served as Executive Vice President and Treasurer since 1989. Mr. Tassillo is
responsible for the accounting, data processing, purchasing, checking, ATM
control, and compliance areas of Hudson City Savings. Mr. Tassillo is a
Certified Public Accountant. He is a graduate of St. Peter's College in New
Jersey and the Graduate School of Savings Banking at Brown University.
V. BARRY CORRIDON has been First Vice President of Mortgage Servicing of
Hudson City Savings since 1995 and a Vice President from 1982 to 1995. He is
responsible for the administration of our mortgage portfolio, supervision of new
loan set-up, post-closing, payoffs, mortgage accounting, collections and
foreclosures. Mr. Corridon was President of the Mortgage Bankers Association of
New Jersey in 1995. He is the current Chairman of the Loan Servicing Committee
of the New Jersey League of Community and Savings Bankers and a member of the
Mortgage Steering Committee. Mr. Corridon also serves on the board of
WOODLEA/PATH Advisory Council of Children's Aid and Family Services. He earned
his undergraduate degree at Fairleigh Dickinson University and is also a
graduate of the Graduate School of Savings Banking at Brown University. He
joined Hudson City Savings in 1970.
JAMES C. KRANZ has been First Vice President and Investment Officer of
Hudson City Savings since 1989. He is responsible for investments, cash flow
management and management of interest rate risk. Mr. Kranz joined Hudson City
Savings in 1983. He formerly served as the Investment Officer of another New
Jersey savings bank for 12 years. Mr. Kranz is a member of the New Jersey Bond
club and serves on the Asset and Liability Management Committee of the New
Jersey League of Community and Savings Bankers. Mr. Kranz has an undergraduate
degree and a MBA from Lehigh University. He is a graduate of the Graduate School
of Savings Banking at Brown University.
THOMAS E. LAIRD joined the Bank in 1974 and presently serves as First Vice
President and Mortgage Officer. His primary area of responsibility is mortgage
lending and loan production.
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Mr. Laird holds an undergraduate degree from St. Peter's College and is a
graduate of the National School of Banking at Fairfield University. Mr. Laird
has been actively involved for the past ten years on the Wanaque Board of
Education, having served for two terms as Board President. He has also been
active in the Mortgage Bankers Association of New Jersey, the New Jersey League
of Community and Savings Bankers and presently is a board member of the Dover
Housing Development Corporation.
MICHAEL B. LEE has served as First Vice President and Secretary of Hudson
City Savings since 1989. He is responsible for branch administration, training
and customer retirement programs. He has an undergraduate degree in management
from St. Peter's College and a Masters Degree from New Jersey Institute of
Technology. He has also completed the National School of Finance and Management
at Fairfield University. Mr. Lee is a Past President of the Bergen Chapter of
the American Institute of Banking and has served on several committees of the
New Jersey League of Community and Savings Bankers. Mr. Lee joined Hudson City
Savings in 1971.
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EXECUTIVE OFFICER COMPENSATION
Summary Compensation Table. The following table provides information about
the compensation paid for 1998 to our Chief Executive Officer and to the four
other most highly compensated executive officers whose total annual salary and
bonus for 1998 was at least $100,000.
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------------------- -------------
NAME AND OTHER ANNUAL LTIP ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS($)(1) COMPENSATION($)(2) PAYOUTS($)(3) COMPENSATION(4)
- ------------------ ---- --------- ----------- ------------------ ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Leonard S. Gudelski....... 1998 $754,770 $286,435 -- $1,248,912 $68,165
Chairman and Chief
Executive Officer
Ronald E. Hermance, 1998 305,308 104,555 -- 425,796 23,438
Jr. ....................
President and Chief
Operating Officer
John M. Tassillo.......... 1998 203,231 61,462 -- 237,048 13,444
Executive Vice
President and Treasurer
James Kranz............... 1998 155,293 7,775 -- 111,258 8,439
First Vice President and
Investment Officer
Michael B. Lee............ 1998 109,908 5,420 -- 78,078 6,123
First Vice President
and Secretary
</TABLE>
- -------------------------
(1) Includes the following employer contributions to Hudson City Savings Bank
Profit Incentive Bonus Plan, a tax-qualified profit-sharing plan, which the
executive officer could have elected to receive in cash: Mr. Gudelski,
$8,000; Mr. Hermance, $8,000; Mr. Tassillo, $8,000; Mr. Kranz, $7,775; and
Mr. Lee, $5,420. Also includes the following bonuses under Hudson City
Savings Bank Annual Incentive Plan, a non-qualified performance-based
compensation plan, earned for 1998 and paid in 1999: Mr. Gudelski, $278,435;
Mr. Hermance, $96,555; and Mr. Tassillo, $53,462.
(2) The Bank provides its executive officers with certain non-cash benefits and
perquisites, such as the use of Bank-owned or leased automobiles. Management
of the Bank believes that the aggregate value of these benefits for 1998 did
not, in the case of any executive officer, exceed $50,000 or 10% of the
aggregate salary and annual bonus reported for him in the Summary
Compensation Table.
(3) Represents amounts payable in 1999 under Hudson City Savings Bank Long-Term
Incentive Plan, a non-qualified performance-based compensation plan, based
on achievement of performance goals established for the three-year period
ended December 31, 1998. This plan has been administered so that payments
have been made once every three years. Includes amounts which may have been
deferred by the executive officer pursuant to an individual non-qualified
deferred compensation arrangement.
(4) Includes the following components: (1) employer contributions to Hudson City
Savings Bank Profit Incentive Bonus Plan which the executive officer could
not elect to receive in cash -- Mr. Gudelski, $8,000; Mr. Hermance, $8,000;
Mr. Tassillo, $8,000; Mr. Kranz, $7,775; and Mr. Lee, $5,420; (2) amounts
accrued under Hudson City Savings Bank Supplemental Savings Plan, a
non-qualified deferred compensation plan -- Mr. Gudelski, $58,400; Mr.
Hermance, $14,100; and Mr. Tassillo, $4,000; and (3) the premium cost for
life insurance coverage under Hudson City Savings Bank Supplemental Death
Benefit Plan for Senior Officers -- Mr. Gudelski, $1,765; Mr. Hermance,
$1,338; Mr. Tassillo, $1,444; Mr. Kranz, $664; and Mr. Lee, $703.
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EMPLOYMENT AGREEMENTS
Hudson City Bancorp and Hudson City Savings will jointly enter into
employment agreements with Messrs. Gudelski, Hermance and Tassillo to secure
their services as Chairman and Chief Executive Officer, President and Chief
Operating Officer, and Executive Vice President and Treasurer. The employment
agreements will take effect on the effective date of the reorganization. For
purposes of Hudson City Bancorp's obligations, they have rolling three-year
terms which a decision of the executive or joint decision of Hudson City Bancorp
and Hudson City Savings may convert to a fixed three-year term. For purposes of
Hudson City Savings' obligations they have fixed terms of three years and may be
renewed annually after a review of the executive's performance. These agreements
provide for minimum annual salaries of $784,000, $317,000 and $212,000,
respectively, discretionary cash bonuses, and participation on generally
applicable terms and conditions in other compensation and fringe benefit plans
(including cash incentive compensation under the existing Annual Incentive Plan
and Long-Term Incentive Plan, to the extent that Hudson City Savings continues
those plans in the future). They also guarantee customary corporate
indemnification and errors and omissions insurance coverage throughout the
employment term and for six years after termination.
Hudson City Bancorp and Hudson City Savings may terminate each executive's
employment, and each executive may resign, at any time with or without cause.
However, in the event of termination during the term without cause, they will
owe the executive severance benefits generally equal to the value of the cash
compensation and fringe benefits that the executive would have received if he
had continued working for an additional three years. The same severance benefits
would be payable if the executive resigns during the term following: a loss of
title, office or membership on the board of directors; material reduction in
duties, functions or responsibilities; involuntary relocation of the executive's
principal place of employment to a location over 25 miles in distance from
Hudson City Savings' principal office in Paramus, New Jersey and over 25 miles
from the executive's principal residence; or other material breach of contract
by Hudson City Bancorp or Hudson City Savings which is not cured within 30 days.
For 60 days after a change of control, each executive may resign for any reason
and collect severance benefits as if he had been discharged without cause. The
employment agreements also provide certain uninsured death and disability
benefits.
If Hudson City Bancorp or Hudson City Savings experiences a change in
ownership, a change in effective ownership or control or a change in the
ownership of a substantial portion of their assets as contemplated by section
280G of the Internal Revenue Code, a portion of any severance payments under the
employment agreements might constitute an "excess parachute payment" under
current federal tax laws. Federal tax laws impose a 20% excise tax, payable by
the executive, on excess parachute payments. Under the employment agreements,
Hudson City Savings would reimburse the executive for the amount of this excise
tax and would make an additional gross-up payment so that, after payment of the
excise tax and all income and excise taxes imposed on the reimbursement and
gross-up payments, the executive will retain approximately the same net-after
tax amounts under the employment agreement that he would have retained if there
was no 20% excise tax. The effect of this provision is that Hudson City Bancorp,
rather than the executive, bears the financial cost of the excise tax. Neither
Hudson City Savings nor Hudson City Bancorp could claim a federal income tax
deduction for an excess parachute payment, excise tax reimbursement payment or
gross-up payment.
CHANGE OF CONTROL AGREEMENTS
Hudson City Bancorp and Hudson City Savings will jointly enter into
two-year change of control agreements with Messrs. Corridon, Kranz, Laird and
Lee. The term of these agreements is perpetual
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until Hudson City Savings gives notice of non-extension, at which time the term
is fixed for two years.
Generally, Hudson City Savings may terminate the employment of any officer
covered by these agreements, with or without cause, at any time prior to a
change of control without obligation for severance benefits. However, if Hudson
City Bancorp or Hudson City Savings signs a merger or other business combination
agreement, or if a third party makes a tender offer or initiates a proxy
contest, it could not terminate an officer's employment without cause without
liability for severance benefits. The severance benefits would generally be
equal to the value of the cash compensation and fringe benefits that the officer
would have received if he or she had continued working for an additional two
years. Hudson City Savings would pay the same severance benefits if the officer
resigns after a change of control following a loss of title, office or
membership on the Board of Directors, material reduction in duties, functions or
responsibilities, involuntary relocation of his or her principal place of
employment to a location over 25 miles from Hudson City Savings' principal
office on the day before the change of control and over 25 miles from the
officer's principal residence or other material breach of contract which is not
cured within 30 days. These agreements also provide certain uninsured death and
disability benefits.
If Hudson City Savings or Hudson City Bancorp experiences a change in
ownership, a change in effective ownership or control or a change in the
ownership of a substantial portion of their assets as contemplated by section
280G of the Internal Revenue Code, a portion of any severance payments under the
change of control agreements might constitute an "excess parachute payment"
under current federal tax laws. Any excess parachute payment would be subject to
a federal excise tax payable by the officer and would be non-deductible by
Hudson City Savings and Hudson City Bancorp for federal income tax purposes. The
change of control agreements do not provide a tax indemnity.
Similar change of control agreements providing severance benefits equal to
one year's compensation and benefits are in effect for the 31 Vice Presidents of
Hudson City Savings.
BENEFIT PLANS
Severance Pay Plan. This plan provides severance benefits to salaried
employees with one year of service who are not parties to individual employment
or change of control agreements and are discharged without cause due to a change
of control. Severance benefits include two weeks' base salary for each year of
service for officers and one week's base salary for each year of service for
non-officer employees. The minimum severance benefit is two weeks' base salary
and the maximum is 26 weeks' base salary. Employees entitled to severance also
receive continued employer-paid life and health insurance coverage for up to one
year after termination of employment as well as professional outplacement and
job assistance services. These same benefits are available to an employee who
resigns after a change of control following a material adverse change in title,
position or responsibilities, involuntary relocation to a worksite requiring
that the officer move his place of residence to avoid an unreasonable commute, a
reduction in base salary of more than 20%, or assignment to duties, offices or
working space involving unreasonable personal embarrassment.
Annual Incentive Plan. This plan provides an opportunity for officers with
titles of Senior Vice President and above to earn cash bonuses each year.
Currently only Messrs. Gudelski, Hermance and Tassillo are eligible for this
plan. The bonuses are a percentage of each officer's annual rate of base salary.
The percentage varies based on the officer's position and Hudson City Savings'
net operating income (before taxes and extraordinary items, but after interest
expense) relative to a target which the Board of Directors establishes during
the first quarter of the year. Hudson City Savings typically pays these bonuses
shortly after the end of the year, but payment may be deferred to a later date
at the election of the participant. Deferred amounts bear interest at prescribed
rates. Deferred amounts
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plus accrued interest are general, unsecured obligations of Hudson City Savings
and are not separately funded.
Long-Term Incentive Plan. This plan permits employees selected by the
Human Resources Committee to earn additional cash bonuses based on achievement
of performance goals set for periods longer than one year. Under this plan, the
Human Resources Committee grants participation units to selected employees. Each
unit represents a dollar amount that will be paid at the end of a three-year
performance period if specified performance targets are met. The Human Resources
Committee may also establish lower unit values for performance that exceeds a
minimum threshold but is below the target and higher unit values for performance
that exceeds the target. In 1999, Hudson City Savings made payments for units
granted for the three-year period beginning January 1, 1996 and ending December
31, 1998. Hudson City Savings' performance relative to target levels of asset
growth and return on assets for this period determined the value of these units.
This plan has been administered so that payments have been made only once every
three years.
Generally, participants must remain employed through the end of the
relevant performance period to receive payment for units. There are exceptions
for death, disability or retirement during the performance period. In addition,
in the event of a change of control, the terms of the plan abbreviate the
performance period for any outstanding units and provide for pro-rated payments
based on performance to the date of the change of control.
Pension Plans. The Hudson City Savings Bank Employees' Retirement Plan is
a tax-qualified plan that covers substantially all salaried employees who are
age 21 and have at least one year of service. The Supplemental Executive
Retirement Plan covers selected executive officers and currently covers Messrs.
Gudelski, Hermance and Tassillo. The following table shows the estimated
aggregate benefits payable under the Employees' Retirement Plan and the
Supplemental Executive Retirement Plan upon retirement at age 65 in 1998 with
various years of service and average final compensation combinations.
<TABLE>
<CAPTION>
YEARS OF SERVICE
AVERAGE FINAL ----------------------------------------------------
COMPENSATION(1) 15 20 25 30 35(2)
- --------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$ 100,000 $ 30,000 $ 40,000 $ 50,000 $ 60,000 $ 60,000
$ 125,000 $ 37,500 $ 50,000 $ 62,500 $ 75,000 $ 75,000
$ 150,000 $ 45,000 $ 60,000 $ 75,000 $ 90,000 $ 90,000
$ 160,000 $ 48,000 $ 64,000 $ 80,000 $ 96,000 $ 96,000
$ 175,000 $ 52,500 $ 70,000 $ 87,500 $105,000 $105,000
$ 200,000 $ 60,000 $ 80,000 $100,000 $120,000 $120,000
$ 300,000 $ 90,000 $120,000 $150,000 $180,000 $180,000
$ 400,000 $120,000 $160,000 $200,000 $240,000 $240,000
$ 500,000 $150,000 $200,000 $250,000 $300,000 $300,000
$ 750,000 $225,000 $300,000 $375,000 $450,000 $450,000
$1,000,000 $300,000 $400,000 $500,000 $600,000 $600,000
</TABLE>
- -------------------------
(1) Average final compensation is average base salary, as reported in the
"Salary" column of the Summary Compensation Table, for the highest three
consecutive years during the final 10 years of employment. Tax laws impose a
limit ($160,000 for individuals retiring in 1998) on the average final
compensation that may be counted in computing benefits under the Employees'
Retirement Plan. The Employees' Retirement Plan may also pay benefits
accrued as of January 1, 1994 based on tax law limits then in effect. For
Messrs. Gudelski, Hermance and
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Tassillo, benefits based on average final compensation in excess of this
limit are payable by the Supplemental Executive Retirement Plan.
(2) The Employees' Retirement Plan and the Supplemental Executive Retirement
Plan do not count service in excess of 30 years in the benefit formula.
Tax laws impose a limit ($130,000 for individuals retiring in 1998) on the
annual benefit that the Employees' Retirement Plan may pay. The Employees'
Retirement Plan may also pay additional benefits accrued as of January 1, 1983
based on tax laws then in effect. For Messrs. Gudelski, Hermance and Tassillo,
benefits based on average final compensation in excess of this limit are payable
by the Supplemental Executive Retirement Plan.
The benefits shown in the preceding table are annual benefits payable in
the form of a single life annuity and are not subject to any deduction for
Social Security benefits or other offset amounts. At December 31, 1998, the
average final compensation and estimated years of service of the executive
officers named in the Summary Compensation Table were: Mr. Gudelski: $708,923,
29 years of service; Mr. Hermance: $282,321, 10 years of service; Mr. Tassillo,
$188,417, 29 years of service; Mr. Kranz: $147,317, 15 years of service; and Mr.
Lee: $103,424, 27 years of service.
Savings Plans. The Profit Incentive Bonus Plan of Hudson City Savings Bank
is a tax-qualified defined contribution plan for substantially all salaried
employees who have attained age 21 and have at least one year of service. Each
year, Hudson City Savings makes a contribution to this plan equal to 10% of each
eligible employee's base salary. Participants may choose to receive up to 50% of
this contribution currently in cash. The plan holds the balance on a tax
deferred basis. Because it will begin contributing to an employee stock
ownership plan after the reorganization, Hudson City Savings has reduced its
contributions to this plan to 5% of base salary paid after March 31, 1999. It
will permit a cash election for the full amount of the reduced contribution.
This plan has an individual account for each participant's contributions
and allows each participant to direct the investment of his or her account. One
permitted investment is Hudson City Bancorp common stock. The plan itself is not
an eligible account holder. However, participants who are eligible account
holders may use their subscription rights to purchase stock for their plan
accounts. This plan will purchase common stock for other participants from the
initial offering, to the extent that shares are available to investors who are
not eligible account holders, and in open market transactions. Participants will
direct the voting of shares purchased for their plan accounts.
The Supplementary Savings Plan of Hudson City Savings Bank is a
non-qualified plan that provides additional benefits to certain participants
whose benefits under the Profit Incentive Bonus Plan are limited by tax law
limitations applicable to tax-qualified plans.
Employee Stock Ownership Plan. This plan is a tax-qualified plan that
covers substantially all salaried employees who have at least one year of
service and have attained age 21 and will take effect at the completion of the
reorganization.
Hudson City Bancorp intends to lend this plan enough money to purchase 8%
of the shares issued to investors other than Hudson City, MHC (3.76% of the
total number of shares issued in the reorganization). The plan may purchase all
or part of these shares from Hudson City Bancorp to the extent that shares are
available after filling the subscriptions of eligible account holders.
Alternatively, the plan may purchase all or part of these shares in private
transactions or on the open market after completion of the reorganization to the
extent that shares are available for purchase on reasonable terms. We have not
determined whether such funds would be available to the plan or that such
purchase would be made directly from Hudson City Bancorp in the offering, or
after completion of the reorganization. We expect to make such determination
immediately prior to the expiration date for submitting orders in the offering.
This determination would be made based on prevailing market
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conditions. For this reason, we cannot assure you that the employee stock
ownership plan will purchase shares in the offering after the reorganization, or
that such purchases will occur during any particular time period or at any
particular price.
Although contributions to this plan will be discretionary, Hudson City
Savings intends to contribute enough money each year to make the required
principal and interest payments on the loan from Hudson City Bancorp. It is
expected that this loan will be for a term of 30 years and will call for level
annual payments of principal and interest. The plan will initially pledge the
shares it purchases as collateral for the loan and hold them in a suspense
account.
The plan will not distribute the pledged shares right away. Instead, it
will release a portion of the pledged shares annually. Assuming we complete the
reorganization before September 30, 1999, if the plan repays its loan as
scheduled over a 30-year term, we expect that 1/60th of the shares will be
released in 1999, 1/30th of the shares will be released annually in 2000 through
2028, and the remaining 1/60th of the shares will be released in 2029. The plan
will allocate the shares released each year among the accounts of participants
in proportion to their base salary for the year. For example, if a participant's
base salary for a year represents 1% of the total base salaries of all
participants for the year, the plan would allocate to that participant 1% of the
shares released for the year. Participants direct the voting of shares allocated
to their accounts. Shares in the suspense account will usually be voted in a way
that mirrors the votes which participants cast for shares in their individual
accounts.
This plan may purchase additional shares in the future, and may do so using
borrowed funds, cash dividends, periodic employer contributions or other cash
flow.
ESOP Restoration Plan. The ESOP Restoration Plan of Hudson City Savings
Bank is a non-qualified plan that provides supplemental benefits to certain
executives who are prevented from receiving the full benefits contemplated by
the Employee Stock Ownership Plan's benefit formula. The supplemental payments
consist of payments representing shares that cannot be allocated to participants
under the Employee Stock Ownership Plan due to the legal limitations imposed on
tax-qualified plans and, in the case of participants who retire before the
repayment in full of the Employee Stock Ownership Plan's loan, payments
representing the shares that would have been allocated if employment had
continued through the full term of the loan.
Post-Retirement Death Benefit for Senior Officers. Hudson City Savings has
entered into approximately 89 post-retirement death benefit agreements with
officers at the assistant vice president level and higher. These agreements
provide a death benefit to each officer's beneficiary if the officer's
employment continues until retirement and he or she dies after retirement. The
amount of the death benefit ranges from $25,000 for assistant vice presidents to
$50,000 for the President or the Chairman. To finance this benefit, Hudson City
Savings has purchased whole life insurance policies on the lives of these
officers. This death benefit is in addition to the benefits provided under the
group life insurance plan generally applicable to all employees.
Effect of the Reorganization on Existing Compensation Plans; Effect of a
Second Step Conversion Transaction on Existing and Future Benefit Plans and
Compensation Agreements. Our employment agreements, change of control
agreements, Employee Stock Ownership Plan, ESOP Restoration Plan, Supplementary
Savings Plan, Supplemental Executive Retirement Plan and Outside Directors
Consultation Plan provide additional and accelerated benefits if we experience a
change of control. The reorganization will not trigger additional benefits or
accelerate benefits under any of the plans or agreements. However, a second step
conversion will accelerate benefits under the Supplemental Executive Retirement
Plan.
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FUTURE STOCK BENEFIT PLANS
Stock Option Plan. We intend to implement a stock option plan for our
directors and officers after the reorganization. Applicable regulations prohibit
us from implementing this plan until 6 months after the reorganization. If we
implement this plan within one year after the reorganization, applicable
regulations require that we first obtain the approval of the holders of a
majority of the outstanding shares of Hudson City Bancorp that are not owned by
Hudson City, MHC. We have not decided whether we will implement this plan before
or after the one-year anniversary of the reorganization.
We expect to adopt a stock option plan that will authorize the Human
Resources Committee to grant options to purchase up to 10% of the shares issued
to investors other than Hudson City, MHC (4.7% of the shares issued in the
reorganization) over a period of 10 years. The Human Resources Committee will
decide which directors and officers will receive options and what the terms of
those options will be. However, no stock option will permit its recipient to
purchase shares at a price that is less than the fair market value of a share on
the date the option is granted, and no option will have a term that is longer
than 10 years. If we implement a stock option plan before the first anniversary
of the reorganization, applicable regulations will require that we observe the
following restrictions:
- We must limit the total number of shares that are optioned to outside
directors to 30% of the shares authorized for the plan.
- We must also limit the number of shares that are optioned to any one
outside director to 5% of the shares authorized for the plan and the
number of shares that are optioned to any executive officer to 25% of the
shares that are authorized for the plan.
- We must not permit the options to become vested at a more rapid rate than
20% per year beginning on the first anniversary of stockholder approval
of the plan.
- We must not permit accelerated vesting for any reason other than death or
disability.
After the first anniversary of the reorganization, we may amend the plan to
change or remove these restrictions. If we adopt a stock option plan within one
year after the reorganization, we expect to amend the plan, subject to
stockholder approval, later to remove these restrictions and to provide for
accelerated vesting in cases of retirement and change of control. We expect that
any other amendment to this plan (whether adopted before or after the first
anniversary of the plan's initial effective date) will be subject to shareholder
approval if it would change the class of people eligible to receive benefits,
change the price they must pay for stock which they acquire under the plan, or
increase the number of shares available under the plan or increase the maximum
amount of stock that may be acquired by any one person under the plan.
We may obtain the shares needed for this plan by issuing additional shares
or through stock repurchases. Because we cannot issue new shares that would
reduce Hudson City, MHC's ownership position to less than a majority of Hudson
City Bancorp's outstanding shares, we expect to obtain most or all of the shares
for this plan through stock repurchases.
We expect the stock option plan will permit the Human Resources Committee
to grant either incentive stock options that qualify for special federal income
tax treatment or non-qualified stock options that do not qualify for special
treatment. Incentive stock options may be granted only to employees and will not
create federal income tax consequences when they are granted. If they are
exercised during employment or within three months after termination of
employment, the exercise will not create federal income tax consequences either.
When the shares acquired on exercise of an incentive stock option are resold,
the seller must pay federal income taxes on the amount by which the sales price
exceeds the purchase price. This amount will be taxed at capital gains rates if
the sale
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occurs at least two years after the option was granted and at least one year
after the option was exercised. Otherwise, it is taxed as ordinary income.
Non-qualified stock options may be granted to either employees or
non-employees such as directors, consultants and other service providers.
Incentive stock options that are exercised more than three months after
termination of employment are treated as non-qualified stock options. Non-
qualified stock options will not create federal income tax consequences when
they are granted. When they are exercised, federal income taxes must be paid on
the amount by which the fair market value of the shares acquired by exercising
the option exceeds the exercise price. When the shares acquired on exercise of a
non-qualified stock option are resold, the seller must pay federal income taxes
on the amount by which the sales price exceeds the purchase price plus the
amount included in ordinary income when the option was exercised. This amount
will be taxed at capital gains rates, which will vary depending upon the time
that has elapsed since the exercise of the option.
When a non-qualified stock option is exercised, Hudson City Bancorp and
Hudson City Savings may be allowed a federal income tax deduction for the same
amount that the option holder includes in his or her ordinary income. When an
incentive stock option is exercised, there is no tax deduction unless the shares
acquired are resold sooner than two years after the option was granted or one
year after the option was exercised.
Management Recognition Plan. We intend to implement a management
recognition plan for our directors and officers after the reorganization.
Applicable regulations prohibit us from implementing this plan until 6 months
after the reorganization. If we implement this plan within one year after the
reorganization, the regulations require that we first obtain the approval of the
holders of a majority of the outstanding shares of Hudson City Bancorp that are
not held by Hudson City, MHC. We have not decided whether we will implement this
plan before or after the one-year anniversary of the reorganization.
We expect to adopt a management recognition plan that will authorize the
Human Resources Committee to make restricted stock awards of up to 4% of the
shares issued to investors other than Hudson City, MHC (1.88% of the shares
issued in the reorganization). The Human Resources Committee will decide which
directors and officers will receive restricted stock and what the terms of those
awards will be. If we implement a management recognition plan before the first
anniversary of the reorganization, applicable regulations will require that we
observe the following restrictions:
- We must limit the total number of shares that are awarded to outside
directors to 30% of the shares authorized for the plan.
- We must also limit the number of shares that are awarded to any one
outside director to 5% of the shares authorized for the plan and the
number of shares that are awarded to any executive officer to 25% of the
shares that are authorized for the plan.
- We must not permit the awards to become vested at a more rapid rate than
20% per year beginning on the first anniversary of stockholder approval
of the plan.
- We must not permit accelerated vesting for any reason other than death or
disability.
After the first anniversary of the reorganization, we may amend the plan to
change or remove these restrictions. If we adopt a management recognition plan
within one year after the reorganization, we expect to amend the plan later to
remove these restrictions and to provide for accelerated vesting in cases of
retirement and change of control. We expect that any other amendment to this
plan (whether adopted before or after the first anniversary of the plan's
initial effective date) will be subject to shareholder approval if it would
change the class of people eligible to receive benefits, change the price they
must pay for stock which they acquire under the plan, or increase the number
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of shares available under the plan or increase the maximum amount of stock that
may be acquired by any one person under the plan.
We may obtain the shares needed for this plan by issuing additional shares
or through stock repurchases. Because we cannot issue new shares that would
reduce Hudson City, MHC's ownership position to less than a majority of Hudson
City Bancorp's outstanding shares, we expect to obtain most or all of the shares
for this plan through stock repurchases.
Restricted stock awards under this plan may feature employment restrictions
that require continued employment for a period of time for the award to be
vested. They may feature restrictions that require the achievement of specified
corporate or individual performance goals for the award to be vested. Or, they
may feature a combination of employment and performance restrictions. Awards are
not vested unless the specified employment restrictions and performance goals
are met. However, pending vesting, the award recipient may have voting and
dividend rights. When an award becomes vested, the recipient must include the
current fair market value of the vested shares in his income for federal income
tax purposes. Hudson City Bancorp and Hudson City Savings may be allowed a
federal income tax deduction in the same amount. Depending on the nature of the
restrictions attached to the restricted stock award, Hudson City Bancorp and
Hudson City Savings may have to recognize a compensation expense for accounting
purposes ratably over the vesting period or in a single charge when the
performance conditions are satisfied.
LIMITATIONS ON FEDERAL TAX DEDUCTIONS FOR EXECUTIVE OFFICER COMPENSATION
As a private entity, Hudson City Savings has been subject to federal tax
rules which permit it to claim a federal income tax deduction for a reasonable
allowance for salaries or other compensation for personal services actually
rendered. Following the reorganization, federal tax laws may limit this
deduction to $1 million each tax year for each executive officer named in the
summary compensation table in Hudson City Bancorp's proxy statement for that
year. This limit will not apply to non-taxable compensation under various
broad-based retirement and fringe benefit plans, to compensation that is
"qualified performance-based compensation" under applicable law or to
compensation that is paid in satisfaction of commitments that arose before the
reorganization. Hudson City Bancorp and Hudson City Savings expect that the
Human Resources Committee will take this deduction limitation into account with
other relevant factors in establishing the compensation levels of their
executive officers and in setting the terms of compensation programs. However,
there is no assurance that all compensation paid to our executive officers will
be deductible for federal income tax purposes. To the extent that compensation
paid to any executive officer is not deductible, the net after-tax cost of
providing the compensation will be higher and the net after-tax earnings of
Hudson City Bancorp and Hudson City Savings will be reduced.
CERTAIN TRANSACTIONS WITH MEMBERS OF OUR BOARD OF MANAGERS AND EXECUTIVE
OFFICERS
We do not make loans to our officers or members of our Board of Managers.
However, we do make residential mortgage loans to our other employees. These
loans bear interest at the same rate as loans offered to non-employee borrowers
minus one-quarter percent interest. The mortgage loans otherwise have the same
underwriting terms that apply to non-employee borrowers.
We retain the law firm of Dieffenbach Witt & Birchby. John D. Birchby, a
director of Hudson City Bancorp, Hudson City Savings and Hudson City, MHC, has
been a partner of Dieffenbach, Witt & Birchby since 1975. For 1998, we paid
$326,939 to the law firm under our retainer agreement. The firm also received
$905,000 from borrowers of Hudson City Savings to review loan documentation. We
also rent 2,450 square feet of office space to Dieffenbach Witt & Birchby at an
annual rate of $10.00 per square foot. We believe that the rent we received from
the law firm during 1998 was less than the rent we could have received from an
unrelated third party in the current real estate market.
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We have entered into a new lease with the law firm which increases the rent to
current market rates. The new lease agreement provides for a three-year term
with lease payments of $46,600, $47,775 and $49,000 for the periods beginning
May 1, 1999, 2000 and 2001, respectively.
PROPOSED PURCHASES OF COMMON STOCK BY MANAGEMENT
The following table presents, for each member of our Board of Managers and
executive officers, the amount of stock they wish to purchase in the offering.
We have assumed that a sufficient number of shares will be available to satisfy
their subscriptions. The amounts include shares that may be purchased through
individual retirement accounts, through individual accounts under Hudson City
Savings' Profit Incentive Bonus Plan and by associates of members of our Board
of Managers and executive officers. The table does not reflect the number of
shares which management may acquire under the employee stock ownership plan or
any non tax-qualified stock-based benefit plan. None of the members of our Board
of Managers or executive officers expect to purchase more than 0.2% of our
common stock. Collectively, the members of our Board of Managers and executive
officers expect to purchase a total of 680,000 shares, or 0.9% of shares we sell
in the offering (assuming the sale of 71,616,250 shares of common stock).
<TABLE>
<CAPTION>
NUMBER
NAME AMOUNT OF SHARES
---- ---------- ---------
<S> <C> <C>
DIRECTORS:
Verne S. Atwater............................................ $ 50,000 5,000
John D. Birchby............................................. 1,000,000 100,000
Kenneth L. Birchby.......................................... 1,000,000 100,000
Victoria H. Bruni........................................... 50,000 5,000
William J. Cosgrove......................................... 100,000 10,000
Andrew J. Egner, Jr......................................... 400,000 40,000
Leonard S. Gudelski......................................... 1,000,000 100,000
Ronald E. Hermance, Jr...................................... 800,000 80,000
John W. Klie................................................ 75,000 7,500
Donald O. Quest............................................. 200,000 20,000
Arthur V. Wynne, Jr......................................... 1,000,000 100,000
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS:
V. Barry Corridon........................................... 200,000 20,000
James C. Kranz.............................................. 250,000 25,000
Thomas E. Laird............................................. 275,000 27,500
Michael B. Lee.............................................. 100,000 10,000
John M. Tassillo............................................ 300,000 30,000
---------- -------
$6,800,000 680,000
========== =======
</TABLE>
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THE REORGANIZATION AND THE OFFERING
The Board of Managers of Hudson City Savings has adopted and the Commissioner of
the Department of Banking and Insurance of New Jersey has approved the plan of
reorganization, subject to approval by Hudson City Savings' depositors entitled
to vote on the plan and the satisfaction of certain other conditions.
Approval by the Commissioner does not constitute a recommendation or endorsement
of the reorganization by the Commissioner.
GENERAL
On February 11, 1999, Hudson City Savings' Board of Managers unanimously
adopted the plan of reorganization pursuant to which Hudson City Savings will
reorganize into a mutual savings bank holding company structure. This
reorganization includes the formation of an intermediate stock holding company,
Hudson City Bancorp, and the offering by Hudson City Bancorp of a minority of
its shares to depositors of Hudson City Savings and certain other persons. Under
the terms of the plan of reorganization, Hudson City Bancorp will own Hudson
City Savings and Hudson City, MHC will own more than half of Hudson City
Bancorp. The reorganization will be effected as described under "-- Effects of
the Reorganization -- Tax Aspects" or in any other manner that is permitted by
the Commissioner and the FDIC and is consistent with the intent of the plan of
reorganization. See "Description of Our Structure After the Reorganization" in
the Summary section of this prospectus for a chart which reflects our structure
after the reorganization.
Hudson City Bancorp and Hudson City, MHC have requested approval from the
Federal Reserve Bank of New York to become bank holding companies and to acquire
Hudson City Savings. The plan of reorganization was approved by the
Commissioner, and Hudson City Savings has received a notice of intent not to
object to the plan of reorganization from the FDIC, subject to, among other
things, approval of the plan of reorganization by Hudson City Savings
depositors.
Hudson City Savings has called a special meeting of depositors for this
purpose and that will be held on [ ], 1999. Depositors with deposit
accounts totaling at least $100 at Hudson City Savings on April 30, 1999 will be
entitled to vote at the special meeting. The plan of reorganization must be
approved by a majority of the amount of votes entitled to be cast at the special
meeting. We will complete the reorganization only upon completion of the sale of
the shares of common stock offered in this prospectus and approval of the plan
of reorganization by the voting depositors.
The aggregate price of the shares of common stock to be issued in the
reorganization will be within the offering range. The offering range has been
established by the Board of Managers to be between $529.3 million and $716.2
million and is based upon an independent appraisal of the estimated pro forma
market value of the common stock of Hudson City Bancorp. The appraisal was
prepared by RP Financial, a consulting firm experienced in the valuation and
appraisal of savings institutions. All shares of common stock to be issued and
sold in the reorganization will be sold at the same price ($10.00) per share.
The independent appraisal will be affirmed or, if necessary, updated at the
completion of the offering. See "-- How We Determined the Offering Range and the
$10.00 Price Per Share" for additional information as to the determination of
the estimated pro forma market value of the common stock.
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The following is a brief summary of pertinent aspects of the reorganization. The
summary is qualified in its entirety by reference to the provisions of the plan
of reorganization. A copy of the plan is available from Hudson City Savings upon
request and is available for inspection at the offices of Hudson City Savings
and at the office of the Commissioner. The plan is also filed as an exhibit to
the Registration Statement of which this prospectus is a part, copies of which
may be obtained from the SEC. See "Where You Can Find Additional Information."
REASONS FOR THE REORGANIZATION
Formation of Hudson City Savings as a capital stock savings bank subsidiary
of Hudson City Bancorp will permit Hudson City Bancorp to sell common stock,
which is a source of capital not available to mutual savings banks. After the
reorganization, under Hudson City Savings' Certificate of Incorporation, the
Bank will not be permitted to issue common stock or preferred stock to any
person except Hudson City Bancorp without amending its Certificate of
Incorporation and receiving the approval of the Commissioner.
Hudson City Savings' mutual form of ownership will be preserved in Hudson
City, MHC. Hudson City, MHC, as a mutual savings bank holding company, will own
at least a majority of the common stock of Hudson City Bancorp as long as Hudson
City, MHC remains in existence. The reorganization will allow Hudson City
Savings to achieve certain benefits of a stock company without a loss of control
that is possible in a full savings institution conversion from mutual to stock
form. In a standard conversion, a newly converted savings institution or its
newly formed holding company sells 100% of its common stock in a single stock
offering. The mutual holding company structure also will give Hudson City
Bancorp flexibility to issue its common stock at various times and in varying
amounts as market conditions permit, rather than in a single stock offering.
This makes the deployment of the capital that we raise more manageable.
The proceeds from the sale of common stock of Hudson City Bancorp will
provide Hudson City Savings with new capital, which will support future deposit
growth and expanded operations such as increased loan originations. The ability
of Hudson City Bancorp to sell additional common stock also will enable Hudson
City Bancorp and Hudson City Savings to increase their capital in response to
any future regulatory capital requirement levels. While Hudson City Savings
currently exceeds all regulatory capital requirements, the sale of common stock
in connection with the reorganization, will assist Hudson City Savings with the
orderly preservation and expansion of its capital base and will provide
flexibility to respond to sudden and unanticipated capital needs.
After completion of the reorganization, the unissued common and preferred
stock authorized by Hudson City Bancorp's Certificate of Incorporation will
permit Hudson City Bancorp to raise additional equity capital through further
sales of securities and to issue securities in connection with possible
acquisitions, subject to market conditions and any required regulatory approval
of an offering. Hudson City Bancorp currently has no plans with respect to
additional offerings of securities. Following the reorganization, Hudson City
Bancorp intends to use stock-related incentive programs to attract and retain
executive and other personnel for itself and its subsidiaries. See "Management."
The mutual holding company form of organization will provide additional
flexibility to diversify Hudson City Savings' business activities through
newly-formed subsidiaries, or through acquisitions of, or mergers with, both
mutual and stock savings institutions, as well as other companies. Although
there are no current arrangements, understandings or agreements, written or
oral, regarding any such opportunities, Hudson City Bancorp will be in a
position after the reorganization to take advantage of any such favorable
opportunities that may arise. See "How We Intend to Use the Proceeds from the
Offering" for a description of our intended use of proceeds.
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While there are benefits associated with the mutual holding company form of
organization, this form of organization involves additional costs associated
with its maintenance and regulation, including additional administrative
expenses, taxes and regulatory filings or examination fees.
After considering the advantages and disadvantages of the reorganization,
as well as applicable fiduciary duties, the Board of Managers of Hudson City
Savings unanimously approved the reorganization as being in the best interests
of Hudson City Savings, its depositors and the communities it serves.
EFFECTS OF THE REORGANIZATION
General. Each depositor in a mutual savings bank has both a deposit
account in the institution and a pro rata ownership interest in the equity of
the savings institution based upon the balance in the depositor's account. This
interest may only be realized in the event of a liquidation of the savings
institution. However, this ownership interest is tied to the depositor's account
and has no tangible market value separate from such deposit account. Any
depositor who opens a deposit account obtains a pro rata ownership interest in
the equity of the institution without any additional payment beyond the amount
of the deposit. A depositor who reduces or closes such depositor's account
receives the balance in the account but receives nothing for such depositor's
ownership interest in the equity of the institution, which is lost to the extent
that the balance in the account is reduced. Consequently, depositors of a mutual
savings bank have no way to realize the value of their ownership interest,
except in the unlikely event that the mutual savings bank is liquidated. In such
event, the depositors of record at that time would share pro rata in any
residual surplus and reserves after other claims, including claims of depositors
to the amounts of their deposits, are paid.
When a mutual savings bank converts to stock form, permanent
non-withdrawable capital stock is created to represent the ownership of the
institution's equity and the former pro rata ownership of depositors is
thereafter represented exclusively by their liquidation rights. SUCH CAPITAL
STOCK IS SEPARATE AND APART FROM DEPOSIT ACCOUNTS AND CANNOT BE AND IS NOT
INSURED BY THE FDIC OR ANY OTHER GOVERNMENTAL AGENCY. Certificates are issued to
evidence ownership of the capital stock sold in connection with the
reorganization. The stock certificates are transferable, and, therefore, the
stock may be sold or traded with no effect on any deposit account the seller may
hold in the institution.
Continuity. While the reorganization is being accomplished, and after
completion of the reorganization, the routine business of Hudson City Savings of
accepting deposits and making loans will continue without interruption. Hudson
City Savings will continue to be subject to regulation by the Commissioner and
the FDIC. After the reorganization, Hudson City Savings will continue to provide
services for depositors and borrowers under current policies by its management
and staff.
The Board of Managers serving Hudson City Savings immediately before the
reorganization will serve as directors of Hudson City Savings after the
reorganization. The directors of Hudson City Bancorp and Hudson City, MHC will
consist of all of the individuals currently serving on the Board of Managers of
Hudson City Savings. We anticipate that all officers of Hudson City Savings
serving immediately before the reorganization will retain their positions after
the reorganization. See "Management."
Deposit Accounts and Loans. Under the plan of reorganization, each
depositor in Hudson City Savings at the time of the reorganization will
automatically continue as a depositor after the reorganization. Each deposit
account will remain the same with respect to deposit balance, interest rate and
other terms, except to the extent affected by withdrawals made to purchase
common stock in the offering. See "-- Procedure for Purchasing Shares in
Subscription and Community Offerings." Each deposit account will be insured by
the FDIC to the same extent as before the reorganization
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<PAGE> 115
(i.e., up to $100,000 per depositor). Depositors will continue to hold their
existing certificates of deposit, passbooks and other evidences of their
accounts.
Furthermore, no loan outstanding from Hudson City Savings will be affected
by the reorganization, and the amount, interest rate, maturity and security for
each loan will remain as they were contractually fixed prior to the
reorganization.
Voting Rights of Depositors. Voting rights and control of Hudson City
Savings, as a mutual savings bank, are vested in the Board of Managers. After
the reorganization, direction of Hudson City Savings will be under the control
of the Board of Directors of Hudson City Savings. Hudson City Bancorp, as the
holder of all of the outstanding common stock of Hudson City Savings, will have
exclusive voting rights with respect to any matters concerning Hudson City
Savings requiring stockholder approval, including the election of directors of
Hudson City Savings.
After the reorganization, the holders of the common stock of Hudson City
Bancorp will have exclusive voting rights with respect to any matters concerning
Hudson City Bancorp. These voting rights will be exclusive except to the extent
Hudson City Bancorp in the future issues preferred stock with voting rights.
Each holder of common stock will be entitled to vote on any matters to be
considered by Hudson City Bancorp's stockholders, including the election of
directors of Hudson City Bancorp, subject to the restrictions and limitations
set forth in Hudson City Bancorp's Certificate of Incorporation discussed below.
By virtue of its ownership of a majority of the outstanding shares of
common stock, Hudson City, MHC will be able to elect all members of the Board of
Directors of Hudson City Bancorp and generally will be able to control the
outcome of most matters presented to the stockholders of Hudson City Bancorp for
resolution by vote. However, current regulations and regulatory policies require
that adoption of a stock option plan, restricted stock plan (such as a
management recognition plan) or second step conversion of Hudson City, MHC be
approved by a majority vote of the shares held by the public stockholders (i.e.,
all stockholders except Hudson City, MHC).
Hudson City, MHC will be controlled by its Board of Directors, which will
initially consist of the current members of the Board of Managers of Hudson City
Savings. Under the mutual form of ownership, existing directors elect new
directors, which can perpetuate existing management and control of Hudson City,
MHC, and thereby Hudson City Bancorp and Hudson City Savings.
Depositors' Rights if We Liquidate; Liquidation Account. In the unlikely
event of a complete liquidation of Hudson City Savings in its current mutual
form, each depositor would receive a pro rata share of any assets of Hudson City
Savings remaining after payment of claims of all creditors (including the claims
of all depositors to the withdrawable value of their accounts). Each depositor's
pro rata share of such liquidating distribution would be in the same proportion
as the value of such depositor's deposit account was to the total value of all
deposit accounts in Hudson City Savings at the time of liquidation.
Upon a complete liquidation of Hudson City Savings after the
reorganization, each depositor would have a claim as a creditor of the same
general priority as the claims of all other general creditors of Hudson City
Savings. However, except as described below, a depositor's claim would be solely
for the amount of the balance in such depositor's deposit account plus accrued
interest. Such depositor would not have an interest in the value or assets of
Hudson City Savings above that amount. Instead, the holder of Hudson City
Savings' common stock (i.e., Hudson City Bancorp) would be entitled to any
assets remaining upon a liquidation of Hudson City Savings.
The plan of reorganization provides for the establishment, upon the
completion of the reorganization, of a special "liquidation account" for the
benefit of eligible account holders and supplemental eligible account holders in
an amount equal to the net worth of Hudson City Savings as
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of the date of its latest balance sheet contained in this prospectus. Upon a
complete liquidation of Hudson City Savings after the reorganization, each
eligible account holder and supplemental eligible account holder, who continues
to maintain such account holder's deposit account at Hudson City Savings, would
be entitled to an interest in the liquidation account prior to any payment to
the holders of Hudson City Savings' capital stock. Each eligible account holder
and supplemental eligible account holder will have a pro rata interest in the
total liquidation account for the account holder's deposit accounts based on the
proportion that the aggregate balance of such person's qualifying deposit
accounts on December 31, 1997 (the eligibility record date) and March 31, 1999
(the supplemental eligibility record date), as applicable, bore to the aggregate
balance of all qualifying deposit accounts of all eligible account holders and
supplemental eligible account holders. For this purpose, qualifying deposit
accounts include all savings, time, demand, negotiable orders of withdrawal
(NOW), money market and passbook accounts maintained at Hudson City Savings
(excluding any escrow accounts).
If, however, on any annual closing date (i.e., the end of any period for
which Hudson City Savings has prepared audited financial statements subsequent
to the eligibility record date or supplemental eligibility record date, as
applicable) of Hudson City Savings, commencing on or after the effective date of
the reorganization, the amount in any deposit account is less than the amount in
such deposit account on December 31, 1997 (with respect to an eligible account
holder), or March 31, 1999 (with respect to a supplemental eligible account
holder) or any other annual closing date, then the interest in the liquidation
account relating to the deposit account would be reduced from time to time by
the proportion of any such reduction, and such interest will cease to exist if
such deposit account is closed. For purposes of the liquidation account, time
deposit accounts will be deemed to be closed upon maturity regardless of
renewal. In addition, no interest in the liquidation account would ever be
increased despite any subsequent increase in the related deposit account.
Any assets remaining after the above liquidation rights of eligible account
holders and supplemental eligible account holders are satisfied would be
distributed to Hudson City Bancorp as the sole stockholder of Hudson City
Savings.
Upon a complete liquidation of Hudson City Bancorp, each holder of shares
of the common stock of Hudson City Bancorp, including Hudson City, MHC, would be
entitled to receive a pro rata share of Hudson City Bancorp's assets, following
payment of all debts, liabilities and claims of greater priority of or against
Hudson City Bancorp including the rights of depositors in the liquidation
account of Hudson City Savings, if any.
If liquidation of Hudson City, MHC occurs following completion of the
reorganization, all depositors of Hudson City Savings at that time will be
entitled, pro rata to the value of their deposit accounts, to a distribution of
any assets of Hudson City, MHC remaining after payment of all debts and claims
of creditors.
Tax Aspects. The reorganization may be effected in any manner approved by
the Commissioner that is consistent with the purposes of the plan of
reorganization and applicable law, regulations and policies. However, Hudson
City Savings intends to consummate the reorganization using a series of
transactions as described below. This structure enables Hudson City Savings to
retain all of its historical tax attributes and produces significant savings to
Hudson City Savings because it simplifies regulatory approvals and conditions
associated with the completion of the reorganization.
The merger structure will be accomplished as follows:
(1) Hudson City Savings will organize Hudson City, MHC initially as an
interim New Jersey stock savings bank as its wholly owned subsidiary;
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(2) Hudson City, MHC will organize a capital stock corporation under
Delaware law (i.e., Hudson City Bancorp) as Hudson City Savings' wholly
owned subsidiary that will subsequently hold 100% of Hudson City
Savings' common stock;
(3) Hudson City, MHC will also organize an interim New Jersey stock savings
bank as its wholly owned subsidiary ("Interim"). The following
transactions will then occur simultaneously;
(4) Hudson City Savings will exchange its charter for a New Jersey stock
savings bank charter (the "conversion");
(5) Hudson City, MHC (while in its stock form) will cancel its outstanding
stock and exchange its charter for a New Jersey mutual savings bank
holding company charter;
(6) Interim will merge with and into Hudson City Savings with Hudson City
Savings being the surviving institution; and
(7) the initially issued stock of Hudson City Savings (which will be
constructively received by former Hudson City Savings depositors when
Hudson City Savings becomes a stock savings bank pursuant to step (4))
will be issued to Hudson City, MHC in exchange for liquidation
interests in Hudson City, MHC which will be held by Hudson City
Savings' depositors.
Hudson City, MHC will then contribute 100% of the stock of Hudson City Savings
to Hudson City Bancorp, which is a wholly owned subsidiary of Hudson City, MHC.
Hudson City Bancorp will concurrently offer for sale 47% of its common stock
pursuant to the plan of reorganization. As a result of these transactions, (a)
Hudson City Savings will be a wholly owned subsidiary of Hudson City Bancorp;
(b) Hudson City Bancorp will be a majority owned subsidiary of Hudson City, MHC;
and (c) the depositors of Hudson City Savings will hold liquidation interests in
Hudson City, MHC.
Under this structure: (i) the conversion is intended to be a tax-free
reorganization under Code section 368(a)(1)(F); and (ii) the exchange of the
shares of Hudson City Savings' initial common stock deemed constructively
received by depositors for liquidation interests in Hudson City, MHC is intended
to be a tax-free exchange under Code section 351.
Under the plan of reorganization, consummation of the reorganization is
conditioned upon, among other things, the prior receipt by Hudson City Savings
of either a private letter ruling from the IRS and from the New Jersey taxing
authorities or an opinion of Hudson City Savings' counsel as to the federal
income tax consequences and from KPMG LLP as to the New Jersey income tax
consequences of the reorganization to Hudson City Savings' (in both its mutual
and stock form), Hudson City Bancorp and the eligible account holders and
supplemental account holders. In Revenue Procedure 96-3, 1996-1 I.R.B. 82, the
IRS announced that it will not rule on whether a transaction qualifies as a
tax-free reorganization under Code section 368(a)(1)(F) or as a tax-free
exchange of stock for stock in the formation of a holding company under Code
section 351, but that it will rule on significant sub-issues that must be
resolved to determine whether the transaction qualifies under either of these
Code sections.
Based in part upon certain representations of Hudson City Savings or its
officers, Thacher Proffitt & Wood has issued its opinion regarding certain
federal income tax consequences of the reorganization. Hudson City Savings has
requested a private letter ruling from the IRS regarding certain significant
sub-issues associated with the reorganization.
In the following discussion, "Mutual Bank" refers to Hudson City Savings
before the reorganization and "Stock Bank" refers to Hudson City Savings after
the reorganization.
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With regard to the reorganization, Thacher Proffitt & Wood has issued its
opinion to the effect that:
(1) the conversion will constitute a "reorganization" under Code section
368(a)(1)(F), and Hudson City Savings (in either its status as Mutual
Bank or Stock Bank) will recognize no gain or loss as a result of the
conversion;
(2) the basis of each asset of Mutual Bank received by Stock Bank in the
conversion will be the same as Mutual Bank's basis for such asset
immediately prior to the conversion;
(3) the holding period of each asset of Mutual Bank received by Stock Bank
in the reorganization will include the period during which such asset
was held by Mutual Bank prior to the conversion;
(4) For purposes of Code section 381(b), Stock Bank will be treated as if
there had been no conversion and, accordingly, the taxable year of the
Mutual Bank will not end on the effective date of the conversion and
the tax attributes of Mutual Bank (subject to application of Code
sections 381, 382, and 384), including Mutual Bank's tax bad debt
reserves and earnings and profits, will be taken into account by Stock
Bank as if the conversion had not occurred;
(5) Mutual Bank's depositors will recognize no gain or loss upon their
constructive receipt of shares of Stock Bank common stock solely in
exchange for their interest (i.e., liquidation rights) in Mutual Bank;
(6) no gain or loss will be recognized by the depositors of Hudson City
Savings (formerly Mutual Bank) upon the transfer to Hudson City, MHC of
shares of Stock Bank common stock they constructively received in the
conversion in exchange for interests (i.e., liquidation rights) in
Hudson City, MHC; and
(7) no gain or loss will be recognized by depositors of Mutual Bank upon
the issuance to them of deposits in Stock Bank in the same dollar
amount as their deposits in the Mutual Bank.
Unlike private rulings of the IRS, an opinion of counsel is not binding on
the IRS and the IRS could disagree with conclusions reached in the opinion. If
there is a disagreement, we cannot guarantee that the IRS would not prevail in a
judicial or administrative proceeding.
KPMG LLP intends to opine, subject to the limitations and qualifications in
its opinion, that, for purposes of the New Jersey corporate income tax, the
reorganization will not become a taxable transaction to Hudson City Savings (in
either its status as Mutual Bank or Stock Bank), Hudson City, MHC, Hudson City
Bancorp, the stockholders of Hudson City Bancorp or the depositors of Hudson
City Savings.
Accounting Consequences. The reorganization will be accounted for in a
manner similar to a pooling-of-interests under generally accepted accounting
principles. Accordingly, the carrying value of our assets, liabilities, and
capital will be unaffected by the reorganization and will be reflected in Hudson
City Bancorp's and Hudson City Savings' consolidated financial statements based
on their historical amounts.
HOW WE DETERMINED THE OFFERING RANGE AND THE $10.00 PRICE PER SHARE
The plan of reorganization requires that the purchase price of the common
stock must be based on the appraised pro forma market value of the common stock,
as determined on the basis of an independent valuation. Hudson City Savings and
Hudson City Bancorp have retained RP Financial to make the independent
valuation. RP Financial's fees for its services in making such appraisal are
estimated to be $125,000. Hudson City Savings and Hudson City Bancorp will
indemnify RP
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Financial and its employees and affiliates against losses (including any losses
in connection with claims under the federal securities laws) arising out of its
services as appraiser, except where RP Financial's liability results from its
negligence or bad faith.
An appraisal has been made by RP Financial in reliance upon the information
contained in this prospectus, including the financial statements. RP Financial
also considered the following factors, among others:
- the present and projected operating results and financial condition of
Hudson City Bancorp and Hudson City Savings, and the economic and
demographic conditions in Hudson City Savings' existing market area;
- historical, financial and other information relating to Hudson City
Savings;
- a comparative evaluation of the operating and financial statistics of
Hudson City Savings with those of other similarly situated publicly
traded mutual holding companies, savings associations and savings
institutions located in Hudson City Savings' existing market area;
- the aggregate size of the offering of the common stock;
- the impact of the reorganization on Hudson City Savings' equity and
earnings potential;
- the proposed dividend policy of Hudson City Bancorp and Hudson City
Savings; and
- the trading market for securities of comparable institutions and general
conditions in the market for such securities.
Two of the factors that RP Financial considered in determining our market
value were the price-to-book ratio and the price-to-earnings ratio or P/E ratio.
The price-to-book ratio represents the price per share of stock divided by its
book value or equity per share. The P/E ratio represents the price per share of
stock divided by earnings or net income per share. RP Financial also considered
our P/E ratio and our price-to-book ratio on a fully converted basis, which is a
common standard used for evaluating the pricing of mutual holding companies. The
P/E ratio and the price-to-book ratio constitute pro forma information
calculated using the assumptions under "Pro Forma Data."
On the basis of the foregoing, RP Financial has advised Hudson City Bancorp
and Hudson City Savings that, in its opinion, dated as of April 30, 1999, the
estimated pro forma market value of the common stock on a fully converted basis
ranged from a minimum of $1.13 billion to a maximum of $1.52 billion with a
midpoint of $1.33 billion (the "estimated valuation range").
The Board of Managers of Hudson City Savings held meetings to review and
discuss the appraisal report prepared by RP Financial. Representatives of RP
Financial participated in the meetings to explain the contents of the appraisal
report. The Board of Managers reviewed the methods that RP Financial used to
determine the pro forma market value of the common stock and the appropriateness
of the assumptions that RP Financial used in determining this value. The Board
of Managers determined that 47% of the shares to be issued by Hudson City
Bancorp will be offered to the public. In addition the Board of Managers
determined that the common stock will be sold at $10.00 per share, which is the
price most commonly used in stock offerings involving converting and
reorganizing savings institutions.
The board of managers established an offering range of $529.3 million to
$716.2 million, with a midpoint of $622.8 million. Hudson City Bancorp expects
to issue between 52,933,750 and 71,616,250 shares of common stock. The offering
range takes into account that Hudson City Savings must be a majority-owned
subsidiary of Hudson City Bancorp or Hudson City, MHC as long as Hudson City,
MHC is in existence. The estimated valuation range and the offering range may be
amended with the approval of the Commissioner and FDIC (if required), due to
subsequent developments in the financial condition of Hudson City Savings or
market conditions generally.
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The valuation prepared by RP Financial is not intended, and must not be
construed, as a recommendation of any kind as to the advisability of purchasing
common stock. RP Financial did not independently verify the financial statements
and other information provided by Hudson City Savings, nor did RP Financial
value independently the assets or liabilities of Hudson City Savings. The
valuation considers Hudson City Savings as a going concern and should not be
considered as an indication of the liquidation value of Hudson City Savings.
Moreover, because such valuation is necessarily based upon estimates and
projections of a number of matters, all of which are subject to change from time
to time, no assurance can be given that persons purchasing such shares in the
reorganization will thereafter be able to sell such shares at prices at or above
the purchase price.
The maximum of the estimated valuation range may be increased up to 15% and
the number of shares of common stock to be issued in the reorganization may be
increased to 82,358,687 shares due to regulatory considerations, changes in the
market and general financial and economic conditions without the resolicitation
of subscribers. See "-- Limitations on Common Stock Purchases" as to the method
of distribution and allocation of additional shares that may be issued in the
event of an increase in the estimated valuation range to fill unfilled orders in
the subscription and community offerings.
We may not sell any shares of common stock unless RP Financial confirms to
Hudson City Savings, Hudson City Bancorp, the Commissioner and the FDIC that, to
the best of its knowledge, nothing of a material nature has occurred which,
taking into account all relevant factors, would cause RP Financial to conclude
that the aggregate value of the common stock is incompatible with its estimate
of the pro forma market value of the common stock at the conclusion of the
offering.
If RP Financial confirms at the conclusion of the offering that the pro
forma market value of the common stock is not more than the maximum and not less
than the minimum of the estimated valuation range then, with the approval of the
Commissioner and the FDIC, the number of shares of common stock to be issued in
the offering will be not more than 71,616,250 shares and not less than
52,933,750 shares. If RP Financial concludes that the pro forma market value of
the common stock is greater than the maximum of the estimated valuation range
but not more than 15% above the maximum of the estimated valuation range, then
the number of shares of common stock to be issued may be increased to not more
than 82,358,687 shares. In addition, all shares purchased in the offering will
be purchased for the purchase price of $10.00 per share. If the number of shares
issued in the reorganization is increased due to an increase of up to 15% in the
estimated valuation range to reflect changes in market or financial conditions,
persons who subscribed for the maximum number of shares will not be given the
opportunity to subscribe for any additional shares. See "-- Limitations on
Common Stock Purchases."
If RP Financial concludes that the pro forma market value of the common
stock is either more than 15% above the maximum of the estimated valuation range
or less than the minimum of the estimated valuation range, Hudson City Savings
and Hudson City Bancorp, after consulting with the Commissioner and the FDIC,
may:
(1) terminate the Plan, cancel account withdrawal authorizations and return
all funds promptly with interest at Hudson City Savings' passbook rate
of interest on payments made by check, bank check or money order;
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(2) establish a new estimated valuation range and either:
(a) hold new subscription and community offerings; or
(b) provide subscribers the opportunity to change or cancel their orders
(a "resolicitation"); or
(3) take such other actions as permitted by the Commissioner and the FDIC
in order to complete the reorganization.
If a resolicitation is commenced, unless an affirmative response is received
from a subscriber within a designated period of time, all funds will be promptly
returned to the subscriber as described above.
An increase in the number of shares to be issued in the reorganization as a
result of an increase in the estimated pro forma market value of common stock
would decrease both a subscriber's ownership interest and Hudson City Bancorp's
pro forma net earnings and stockholders' equity on a per share basis while
increasing pro forma net earnings and stockholders' equity on an aggregate
basis. A decrease in the number of shares to be issued in the reorganization
would increase both a subscriber's ownership interest and Hudson City Bancorp's
pro forma net earnings and stockholders' equity on a per share basis while
decreasing pro forma net earnings and stockholders' equity on an aggregate
basis. For a presentation of the effects of such changes see "Pro Forma Data."
If all shares of common stock are not sold through the subscription and
community offerings, then Hudson City Savings and Hudson City Bancorp may offer
the remaining shares in a syndicated community offering, which would commence
during or just after the community offering. See "-- Syndicated Community
Offering."
Copies of the appraisal report of RP Financial, including any amendments
thereto, and the detailed memorandum of the appraiser setting forth the method
and assumptions for such appraisal are available for inspection at the main
office of Hudson City Savings.
SUBSCRIPTION OFFERING AND SUBSCRIPTION RIGHTS
In accordance with the plan of reorganization, rights to subscribe for
common stock have been granted under the plan of reorganization to the following
persons in the following order of priority:
(1) depositors with deposits in Hudson City Savings with balances
aggregating $100 or more ("qualifying deposits") as of December 31,
1997 ("eligible account holders"); for this purpose, deposit accounts
include all savings, time, demand, negotiable orders of withdrawal
(NOW), money market and passbook accounts maintained at Hudson City
Savings (excluding any escrow accounts);
(2) tax-qualified employee benefit plans of Hudson City Bancorp, Hudson
City Savings or Hudson City, MHC, including the employee stock
ownership plan and the Profit Incentive Bonus Plan;
(3) depositors with qualifying deposits in Hudson City Savings on March 31,
1999, other than (i) those depositors who would otherwise qualify as
eligible account holders or (ii) members of our Board of Managers or
executive officers of Hudson City Savings or their associates
("supplemental eligible account holders").
All subscriptions received will be subject to the availability of common stock
after satisfaction of all subscriptions of all persons having prior rights in
the subscription offering and to the maximum and minimum purchase limitations
set forth in the plan of reorganization and as described below under "--
Limitations on Common Stock Purchases."
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Priority 1: Eligible Account Holders. Each eligible account holder will
receive, as first priority and without payment therefor, non-transferable rights
to subscribe for shares of common stock in the subscription offering.
Subscriptions by eligible account holders are subject to maximum and minimum
purchase limitations. See "-- Limitations on Common Stock Purchases."
If there are not sufficient shares available to satisfy all subscriptions,
shares first will be allocated so as to permit each subscribing eligible account
holder to purchase a number of shares sufficient to make such eligible account
holder's total allocation equal to the lesser of 100 shares or the number of
shares subscribed for. Thereafter, unallocated shares will be allocated among
the remaining subscribing eligible account holders whose subscriptions remain
unfilled in the proportion that the amounts of their respective aggregate
qualifying deposits bear to the total amount of qualifying deposits of all
remaining eligible account holders whose subscriptions remain unfilled. However,
no fractional shares shall be issued.
To ensure a proper allocation of stock, each eligible account holder must
list on his or her stock order form all deposit accounts in which such eligible
account holder had an ownership interest at December 31, 1997. Failure to list
an account could result in fewer shares being allocated than if all accounts had
been disclosed. The subscription rights of eligible account holders who are also
members of our Board of Managers or executive officers of Hudson City Savings or
their associates will be subordinated to the subscription rights of other
eligible account holders to the extent attributable to increased deposits in the
one-year period preceding December 31, 1997.
Priority 2: The Tax-Qualified Employee Benefit Plans. To the extent that
there are sufficient shares remaining after satisfaction of the subscriptions by
eligible account holders, the tax-qualified employee benefit plans, including
the employee stock ownership plan and the Profit Incentive Bonus Plan, will
receive, as a second priority and without payment therefor, non-transferable
subscription rights to purchase up to 10% of the common stock to be issued in
the offering. As a tax-qualified employee benefit plan, the profit incentive
bonus plan may purchase shares on behalf of participants who are not themselves
eligible account holders. As a tax-qualified employee benefit plan, the employee
stock ownership plan may purchase up to 8% of the shares to be issued in the
offering, or 4,234,700 shares, based on the issuance of 52,933,750 shares at the
minimum of the offering range or 5,729,300 shares, based on the issuance of
71,616,250 at the maximum of the offering range. Subscriptions by the employee
stock ownership plan will not be aggregated with shares of common stock
purchased directly by or which are otherwise attributable to any other
participants in the subscription and community offerings, including
subscriptions of any of Hudson City Savings' members of its Board of Managers,
officers, employees or associates thereof. To the extent the employee stock
ownership plan does not purchase shares in the offering, this plan intends to
purchase shares in private transactions or on the open market after completion
of the offering. See "Management -- Benefit Plans -- Employee Stock Ownership
Plan."
Priority 3: Supplemental Eligible Account Holders. Each supplemental
eligible account holder will receive, as a third priority and without payment
therefor, non-transferable rights to subscribe for shares of common stock in the
subscription offering. Subscriptions by supplemental eligible account holders
are subject to maximum and minimum purchase limitations. See "-- Limitations on
Common Stock Purchases."
If there are not sufficient shares available to satisfy all subscriptions
of all supplemental eligible account holders, after purchases by eligible
account holders and the tax-qualified employee benefit plans, available shares
first will be allocated among subscribing supplemental eligible account holders
so as to permit each supplemental eligible account holder to purchase a number
of shares sufficient to make such supplemental eligible account holder's total
allocation equal to the lesser of 100 shares or the number of shares subscribed
for. Thereafter, unallocated shares will be allocated among the remaining
subscribing supplemental eligible account holders whose subscriptions remain
unfilled in
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the proportion that the amounts of their respective aggregate qualifying
deposits bear to the total amount of qualifying deposits of all remaining
supplemental eligible account holders whose subscriptions remain unfilled.
However, no fractional shares shall be issued.
To ensure a proper allocation of stock, each supplemental eligible account
holder must list on his or her stock order form all deposit accounts in which
such supplemental eligible account holder had an ownership interest at March 31,
1999. Failure to list an account could result in fewer shares being allocated
than if all accounts had been disclosed.
Expiration Date for the Subscription Offering. The subscription offering
will expire at 10:00 a.m., Eastern Time, on [ ], 1999, unless we
extend this period for an initial period of up to 45 days. We may further extend
this period for additional 60 day periods with the approval of the Commissioner
and, if necessary, the FDIC. Subscription rights which have not been exercised
prior to the expiration date, as extended, will become void.
If all shares have not been subscribed for or sold by the expiration date,
as extended, all funds delivered to Hudson City Savings will be returned with
interest promptly to the subscribers and all withdrawal authorizations will be
canceled. If an extension beyond the 45-day period following the
[ ], 1999 is granted, Hudson City Savings will notify subscribers of
the extension of time and of any rights of subscribers to change or cancel their
orders. Each extension may not exceed 60 days, and all extensions, in the
aggregate, may not last beyond [ ].
Persons in Non-qualified States or Foreign Countries. Hudson City Bancorp
and Hudson City Savings will make reasonable efforts to comply with the
securities laws of all states in the United States in which persons entitled to
subscribe for stock pursuant to the plan of reorganization reside. However,
Hudson City Savings and Hudson City Bancorp will not offer stock in the offering
to any person who resides in a foreign country. Neither Hudson City Savings nor
Hudson City Bancorp will make any payment instead of granting subscription
rights to any depositors residing in foreign countries.
COMMUNITY OFFERING
To the extent that shares remain available for purchase after satisfaction
of all subscriptions received in the subscription offering, Hudson City Savings
may offer shares pursuant to the plan of reorganization in the community
offering to the following persons in the following order of priority:
(1) depositors in Hudson City Savings (other than an eligible account
holders or supplemental eligible account holders) with balances
aggregating $100 or more on April 30, 1999 (we refer to this group as
"other depositors");
(2) natural persons who are "residents" of New Jersey, which definition
includes persons who occupy a dwelling within New Jersey and establish
an ongoing physical presence within the State, together with an
indication that such presence is not merely transitory in nature;
(3) other persons, such as corporations, partnership and trusts, that are
residents of New Jersey;
(4) other persons to whom we deliver a prospectus.
The determination of resident status will be made by Hudson City Savings,
in its sole discretion. Orders received in the community offering are subject to
maximum and minimum purchase limitations. See "-- Limitations on Common Stock
Purchases." The community offering shall commence concurrently with or
subsequent to the commencement of the subscription offering and shall terminate
no later than 45 days after the expiration of the subscription offering unless
extended by Hudson City Savings and Hudson City Bancorp, with the approval of
the Commissioner and the FDIC, if necessary.
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The opportunity to subscribe for shares of common stock in the community
offering category is subject to the right of Hudson City Savings and Hudson City
Bancorp, in their discretion, to accept or reject any such orders in whole or in
part either at the time of receipt of an order or as soon as practicable
following the expiration date. If Hudson City Bancorp rejects a subscription in
part, the subscriber will not have the right to cancel the remainder of his or
her subscription.
In offering the unsubscribed for shares to the public in the community
offering, Hudson City Bancorp and Hudson City Savings may initially reserve
shares of common stock for sale to institutional investors, who need not be
other depositors or residents of New Jersey, up to the lesser of (1) 25% of the
shares we sell in the offering or (2) the number of shares not subscribed for in
the subscription offering or by "other depositors" in the community offering.
These institutional investors may purchase the reserved shares only after all
orders of other depositors have been filled.
If there is an oversubscription for shares in the community offering,
shares will be allocated on a priority basis in the following order: other
depositors of Hudson City Savings, institutional investors, natural persons who
are residents of New Jersey, other persons, such as corporations, partnerships
and trusts that are residents of New Jersey and other members of the general
public. If an oversubscription occurs in the other depositors category, shares
will be allocated first to each subscriber whose order is accepted by Hudson
City Savings in an amount equal to the lesser of 100 shares or the number of
shares subscribed for by each such subscriber, if possible. Thereafter, we will
allocate the unallocated shares among such subscribers whose order remains
unsatisfied on a pro rata basis, based on order size, until the remaining shares
have been allocated. If an oversubscription occurs among residents of New
Jersey, allocation of shares will be made in the same manner as for other
depositors.
MARKETING AND UNDERWRITING ARRANGEMENTS
Ryan, Beck & Co., Inc. Hudson City Savings, Hudson City Bancorp and Hudson
City, MHC have engaged Ryan, Beck & Co., Inc. as a financial and marketing
advisor in connection with the offering of the common stock. Ryan, Beck has
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
offering. Ryan, Beck is not obligated to take or purchase any shares of common
stock in the offering. Ryan, Beck has expressed no opinion as to the prices at
which the common stock may trade nor has Ryan, Beck provided any written report
or opinion to Hudson City Savings or Hudson City Bancorp as to the fairness of
the reorganization. Ryan, Beck has also agreed to assist with the solicitation
of votes for the special meeting of depositors.
Ryan, Beck will receive, as compensation, an advisory and management fee of
$150,000. Ryan, Beck will also receive fees for services provided in connection
with the offering equal to 1.20% of the aggregate purchase price of common stock
sold in the subscription offering and community offering. No fees will be paid
to Ryan, Beck with respect to any shares of common stock purchased by any
manager, manager emeritus, director, executive officer or employee of Hudson
City Savings or Hudson City Bancorp or members of their immediate families or
the ESOP. If there is a syndicated community offering, we will pay Ryan, Beck a
management fee equal to 1.20% of the aggregate purchase price of common stock
sold in the syndicated community offering. However, the aggregate fees payable
to Ryan, Beck and any selected dealers in connection with any syndicated
community offering will not exceed 6.00% of the aggregate purchase price of the
common stock sold in the syndicated community offering. Ryan, Beck will also be
reimbursed for its reasonable out-of-pocket expenses, including legal fees of up
to $125,000 and non-legal expenses up to a maximum of $50,000.
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If the event the offering is not consummated by December 31, 1999 or Ryan,
Beck ceases, under certain circumstances, to provide assistance to Hudson City
Bancorp, Ryan, Beck will be entitled to the $150,000 advisory and management fee
and reimbursement for its reasonable out-of-pocket expenses as described above.
Hudson City Bancorp and Hudson City Savings have agreed to indemnify Ryan, Beck
for costs and expenses in connection with certain claims or liabilities related
to or arising out of the services to be provided by Ryan, Beck pursuant to its
engagement by Hudson City Savings and Hudson City Bancorp as financial advisor
in connection with the reorganization, including certain liabilities under the
Securities Act. Total fees to Ryan, Beck are estimated to be $5.8 million and
$7.8 million at the minimum and the maximum of the offering range, respectively.
See "Pro Forma Data" for the assumptions used to arrive at these estimates.
Directors and Employees. Directors, members of the Board of Managers and
executive officers of Hudson City Bancorp and Hudson City Savings may
participate in the solicitation of offers to purchase common stock. Other
employees of Hudson City Savings may participate in the offering in ministerial
capacities or provide clerical work in effecting a sales transaction. Such other
employees have been instructed not to solicit offers to purchase common stock or
provide advice regarding the purchase of common stock. Hudson City Bancorp will
rely on Rule 3a4-1 under the Exchange Act, and sales of common stock will be
conducted within the requirements of Rule 3a4-1, so as to permit officers,
members of the Board of Managers, directors and employees to participate in the
sale of common stock. No officer, manager, director or employee of Hudson City
Bancorp or Hudson City Savings will be compensated in connection with his or her
participation by the payment of commissions or other remuneration based either
directly or indirectly on transactions in common stock.
PROCEDURE FOR PURCHASING SHARES IN SUBSCRIPTION AND COMMUNITY OFFERINGS
Use of Order Forms. To purchase shares in the subscription offering and
the community offering, an executed order form with the required payment for
each share subscribed for, or with appropriate authorization for withdrawal from
a subscriber's deposit account at Hudson City Savings (which may be given by
completing the appropriate sections in the stock order form), must be received
by Hudson City Savings by 10:00 a.m., Eastern Time, on [ ], 1999.
You must submit your order form by mail or overnight courier to the address set
forth on the stock order form. You may not drop off your order forms at any of
our branch offices. Stock order forms which are not received by such time or are
executed defectively or are received without full payment (or correct withdrawal
instructions) are not required to be accepted. In addition, we are not obligated
to accept orders submitted on photocopied or facsimiled order forms. We have the
power to waive or permit the correction of incomplete or improperly executed
forms, but do not represent that we will do so. Once received, an executed order
form may not be modified, amended or rescinded without our consent unless: (1)
the reorganization has not been completed within 45 days after the end of the
subscription offering, unless such 45-day period has been extended or (2)
subscribers are resolicited for any other reason. If we reject part of your
order in the community offering then you may not cancel the remainder of your
subscription.
In order to ensure that eligible account holders, supplemental eligible
account holders and other depositors are properly identified as to their stock
purchase eligibility and priority, depositors must list on the stock order form
all deposit accounts as of the applicable eligibility record date, giving all
names in each account and the account numbers.
To ensure that each purchaser receives a prospectus at least 48 hours prior
to the expiration date for the offering, in accordance with Rule 15c2-8 of the
Exchange Act, no prospectus will be mailed later than five days prior to such
date or hand delivered any later than two days prior to such date.
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Execution of the stock order form will confirm receipt or delivery in accordance
with Rule 15c2-8. Order forms will only be distributed when preceded or
accompanied by a prospectus.
Payment for Shares. Payment for subscriptions may be made by check, bank
check or money order or by authorization of withdrawal from your current Hudson
City Savings savings, club, money market (without check-writing privileges),
savings or certificate of deposit accounts, as specified on the order form.
Retirement accounts and checking or other check-writing accounts may not be
designated for withdrawal. Except as noted below, no cash or wire transfers will
be accepted. Interest will be paid on payments made by check, bank check or
money order at Hudson City Savings' passbook rate of interest from the date
payment is received until the completion or termination of the reorganization.
If payment is made by authorization of withdrawal from deposit accounts, the
funds authorized to be withdrawn will continue to accrue interest at the
contractual rates until completion or termination of the reorganization, but a
hold immediately will be placed on such funds, thereby making them unavailable
to the depositor.
If a subscriber validly authorizes Hudson City Savings to withdraw the
amount of the purchase price from a deposit account at Hudson City Savings, the
withdrawal will be made as of the completion of the reorganization. Hudson City
Savings will waive any applicable penalties for early withdrawal from time
deposit accounts. If the remaining balance in a certificate account is reduced
below the applicable minimum balance requirement at the time that the funds
actually are transferred under the authorization, the certificate will be
canceled at the time of the withdrawal, without penalty, and the remaining
balance will be converted into a statement savings account and will earn
interest at the passbook rate. If the certificate account matures and is renewed
prior to the termination or completion of the offering, then the hold will
remain in place. If the certificate account matures but is not renewed prior to
the completion of the termination or offering, then the funds placed on hold
will be converted into a statement savings account and will earn interest at the
passbook rate.
Hudson City Bancorp shall have the right, in its sole discretion, to permit
institutional investors to submit irrevocable orders together with a legally
binding commitment for payment and to thereafter pay for the shares of common
stock for which they subscribe in the community offering at any time prior to 48
hours before the completion of the reorganization. This payment may be made by
wire transfer.
The employee stock ownership plan will not be required to pay for the
shares subscribed for at the time it subscribes. Rather, the employee stock
ownership plan may pay for such shares of common stock subscribed for at the
purchase price upon completion of the offering; provided, that there is in force
from the time of its subscription until such time, a loan commitment acceptable
to Hudson City Bancorp from an unrelated financial institution or Hudson City
Bancorp to lend to the employee stock ownership plan the aggregate purchase
price of the shares for which it subscribed. Hudson City Bancorp intends to
provide such a loan to the employee stock ownership plan.
Owners of self-directed Individual Retirement Accounts ("IRAs") may use the
assets of such IRAs to purchase shares of common stock in the subscription and
community offerings, provided that such IRAs are not maintained at Hudson City
Savings. Persons with IRAs maintained at Hudson City Savings must have their
accounts transferred to an unaffiliated institution or broker to purchase shares
of common stock in the subscription and community offerings. In addition, the
provisions of ERISA and IRS regulations require that officers, trustees and ten
percent stockholders who use self-directed IRA funds to purchase shares of
common stock in the subscription and community offerings make such purchases for
the exclusive benefit of the IRAs. Assistance on how to transfer IRAs maintained
at Hudson City Savings can be obtained by calling the Stock Information Center.
Depositors interested in using funds in an IRA to purchase common stock should
contact the Stock Information Center as soon as possible.
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Certificates representing shares of common stock purchased will be mailed
to purchasers to the addresses specified in properly completed order forms, as
soon as practicable following completion of the sale of all shares of common
stock. Any certificates returned as undeliverable will be disposed of in
accordance with applicable law.
STOCK INFORMATION CENTER
If you have any questions regarding the offering or the reorganization,
please call the Stock Information Center at (800) 541-3187, from 9:00 a.m. to
4:00 p.m., Monday through Friday.
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES OF COMMON STOCK
Prior to the completion of the reorganization, regulations prohibit any
person with subscription rights from transferring or entering into any agreement
or understanding to transfer the legal or beneficial ownership of the
subscription rights issued under the plan of reorganization or the shares of
common stock to be issued upon their exercise. Such rights may be exercised only
by the person to whom they are granted and only for such person's account. Each
person exercising such subscription rights will be required to certify that such
person is purchasing shares solely for such person's own account and that such
person has no agreement or understanding regarding the sale or transfer of such
shares. The regulations also prohibit any person from offering or making an
announcement of an offer or an intent to make an offer to purchase such
subscription rights or shares of common stock prior to the completion of the
reorganization.
Hudson City Savings and Hudson City Bancorp will pursue any and all legal and
equitable remedies (including forfeiture) in the event they become aware of the
transfer of subscription rights and will not honor orders known by them to
involve the transfer of such rights.
SYNDICATED COMMUNITY OFFERING
The plan of reorganization provides that all shares of common stock not
purchased in the subscription offering or the community offering may be offered
for sale to the general public in a syndicated community offering on a best
efforts basis through a selling group of broker-dealers to be arranged by Ryan,
Beck acting as agent of Hudson City Bancorp. Ryan, Beck has not selected any
particular broker-dealers to participate in a syndicated community offering. As
an alternative to a syndicated community offering, Hudson City Bancorp and
Hudson City Savings may instead elect to offer for sale such remaining shares to
or through underwriters in a public offering, as described under "-- Public
Offering Alternative." Neither Ryan, Beck nor any registered broker-dealer shall
have any obligation to take or purchase any shares of the common stock in the
syndicated community offering. However, Ryan, Beck has agreed to use its best
efforts in the sale of shares in any syndicated community offering.
The syndicated community offering will terminate no more than 45 days
following the expiration date, unless extended by Hudson City Bancorp with the
approval of the Commissioner and FDIC. Such extensions may not be beyond
[ ]. See "-- Expiration Date for the Subscription Offering" above
for a discussion of rights of subscribers, if any, in the event an extension is
granted.
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The opportunity to subscribe for shares of common stock in the syndicated
community offering category is subject to the right of Hudson City Savings and
Hudson City Bancorp, in their discretion, to accept or reject any such orders in
whole or in part either at the time of receipt of an order or as soon as
practicable following the expiration date. If Hudson City Bancorp rejects a
subscription in part, the subscriber will not have the right to cancel the
remainder of his or her subscription.
PUBLIC OFFERING ALTERNATIVE
As an alternative to a syndicated community offering, we may offer for sale
shares of common stock not sold in the subscription offering or the community
offering to or through underwriters ("public offering"). Certain provisions
restricting the purchase and transfer of common stock shall not be applicable to
sales to underwriters for purposes of such public offering. Any underwriter
shall agree to purchase such shares from Hudson City Bancorp with a view to
reoffering them to the general public, subject to certain terms and conditions
described in the plan of reorganization. If the public offering is utilized,
then Hudson City Bancorp will amend the Registration Statement, of which this
prospectus is a part, to reflect the specific terms of such public offering
alternative, including, without limitation, the terms of any underwriting
agreements, commission structure and plan of distribution.
LIMITATIONS ON COMMON STOCK PURCHASES
The plan of reorganization includes the following limitations on the number
of shares of common stock which may be purchased during the reorganization:
(1) The aggregate amount of outstanding common stock of Hudson City Bancorp
owned or controlled by persons other than Hudson City, MHC, at the
close of the offering will not exceed 49% of Hudson City Bancorp's
total outstanding common stock;
(2) No subscription for fewer than 25 shares will be accepted;
(3) Except for the tax-qualified employee benefit plans, the maximum amount
of shares of common stock subscribed for or purchased in all categories
of the offering by any person, together with associates of, and groups
of persons acting in concert with, such person, shall not exceed
$2,500,000, subject to increase as described below;
(4) Each eligible account holder may subscribe for and purchase common
stock in the subscription offering in an amount up to $500,000, subject
to increase as described below;
(5) The tax-qualified employee benefit plans are permitted to purchase up
to 10% of the shares of common stock issued in the offering and, as a
tax-qualified employee benefit plan, the employee stock ownership plan
intends to purchase up to 8% of the shares of common stock issued in
the offering;
(6) Each supplemental eligible account holder may subscribe for common
stock in the subscription offering in an amount up to $500,000, subject
to increase as described below;
(7) Each person purchasing shares of common stock in the community
offering, together with associates of and groups of persons acting in
concert with such person, may purchase common stock in the community
offering in an amount up to $500,000, subject to increase as described
below;
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(8) Each person purchasing shares of common stock in the syndicated
community offering, together with associates of and groups of persons
acting in concert with such person, or the public offering (exclusive
of underwriters), may purchase common stock in the syndicated community
offering or the public offering in an amount up to $500,000, subject to
increase as described below; and
(9) The members of the Board of Managers and executive officers of Hudson
City Savings and their associates in the aggregate, excluding purchases
by the tax-qualified employee benefit plans, may purchase up to 25% of
shares we sell in the offering.
An eligible account holder or supplemental eligible account holder may not
purchase individually in the subscription offering more than $500,000 of common
stock. An eligible account holder or supplemental eligible account holder,
however, may acquire up to the overall maximum purchase limit of $2,500,000 by
also purchasing in the community offering and the syndicated community offering
or the public offering. The $2,500,000 limitation applies to the individual
purchases in the offering, aggregated with purchases by the person's associates
and those persons acting in concert with the purchaser.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the depositors
of Hudson City Savings, both the $500,000 individual amount permitted to be
subscribed for and the $2.5 million overall maximum purchase limitation may be
increased up to a maximum of 5% of the shares offered for sale in the offering,
exclusive of an increase in the total number of shares issued due to an increase
in the offering range of up to 15% (i.e., up to 3,580,813 shares), at the sole
discretion of Hudson City Bancorp and Hudson City Savings. It is currently
anticipated that the individual and overall maximum purchase limitations may be
increased if, during a community offering, Hudson City Bancorp has not received
subscriptions for an aggregate amount equal to at least the minimum of the
offering range. If the maximum purchase limitations are increased, subscribers
for the maximum amount will be, and certain other large subscribers in the sole
discretion of Hudson City Bancorp and Hudson City Savings may be, given the
opportunity to increase their subscriptions up to the then applicable limit.
Requests to purchase additional shares of common stock under this provision will
be determined by the Board of Directors of Hudson City Bancorp and the Board of
Managers of Hudson City Savings and, if approved, allocated on a pro rata basis,
giving priority in accordance with the priorities set forth in the plan of
reorganization and described herein.
If we sell more than 71,616,250 shares, the additional shares will
allocated in accordance with the priorities and procedures described in
"-- Subscription Offering and Subscription Rights" and "-- Community Offering."
The term "associate" of a person is defined to mean:
(1) any corporation or organization (other than Hudson City Bancorp, Hudson
City, MHC, Hudson City Savings or a majority-owned subsidiary of Hudson
City Savings) of which such person is an officer or a general or
limited partner or is directly or indirectly, either alone or with one
or more members of his or her immediate family, the beneficial owner of
10% or more of any class of equity securities;
(2) any trust or other estate in which such person has a substantial
beneficial interest or as to which such person serves as trustee or in
a similar fiduciary capacity, except that the term "associate" does not
include any employee stock benefit plan maintained by Hudson City
Bancorp or Hudson City Savings in which a person has a substantial
beneficial interest or serves as a trustee or in a similar fiduciary
capacity, and except that, for purposes of aggregating total shares
that may be acquired or held by officers and directors and their
associates; and
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(3) any relative or spouse of such person, or any relative of such spouse,
who has the same home as such person or who is a director, manager or
officer of Hudson City Bancorp, Hudson City, MHC or Hudson City
Savings.
We have the sole discretion to determine whether prospective purchasers are
"associates" or "acting in concert."
Members of the Board of Managers, directors and officers are not treated as
associates of each other solely by virtue of holding such positions.
CERTAIN RESTRICTIONS ON PURCHASE OR TRANSFER OF SHARES AFTER THE REORGANIZATION
All shares of common stock purchased in connection with the reorganization
by a manager, director or an executive officer of Hudson City Savings, Hudson
City, MHC or Hudson City Bancorp, or their associates, will be subject to a
restriction that the shares not be sold for a period of one year following the
reorganization, except in the event of the death or judicial declaration of
incompetence of such director or executive officer. Each certificate for
restricted shares will bear a legend giving notice of this restriction on
transfer, and instructions will be issued to the effect that any transfer within
such time period of any certificate or record ownership of such shares other
than as provided above is a violation of the restriction. Any shares of common
stock issued at a later date as a stock dividend, stock split, or otherwise,
with respect to such restricted stock will be subject to the same restrictions.
The members of the Board of Managers, directors and executive officers of Hudson
City Bancorp and Hudson City Savings will also be subject to the federal insider
trading rules and any other applicable requirements of the federal securities
laws.
Purchases of outstanding shares of common stock of Hudson City Bancorp by
members of the Board of Managers, directors, executive officers of Hudson City
Bancorp, Hudson City, MHC or Hudson City Savings (and any person who was an
executive officer or manager of Hudson City Savings or an executive officer or
director of Hudson City, MHC or Hudson City Bancorp at any time after the date
on which the Board of Managers of Hudson City Savings adopted the plan of
reorganization), and their associates during the three-year period following
reorganization may be made only through a broker or dealer registered with the
SEC, except with the prior written approval of the Commissioner. This
restriction does not apply, however, to the purchase of stock pursuant to (1)
the stock option plan or the restricted stock plan to be established after the
reorganization and (2) negotiated transactions involving more than one percent
of the outstanding capital stock of Hudson City Bancorp.
INTERPRETATION, AMENDMENT AND TERMINATION
All interpretations of the plan of reorganization by the Board of Hudson
City Savings will be final, subject to the authority of the Commissioner and
FDIC. The plan of reorganization provides that, if deemed necessary or desirable
by the Board of Managers of Hudson City Savings, the plan of reorganization may
be substantively amended prior to the solicitation of proxies from depositors by
a vote of the Board of Managers. Amendment of the plan of reorganization
thereafter requires the approval of the Commissioner and the FDIC. The plan of
reorganization will terminate if the sale of all shares of stock being offered
pursuant to the plan of reorganization is not completed within 24 months from
the date of the approval of the plan of reorganization at the special meeting of
the Bank's depositors. The plan of reorganization may be terminated by a vote of
the Board of Managers of Hudson City Savings at any time prior to the special
meeting of depositors, and thereafter by such a vote with the approval of the
Commissioner and the FDIC.
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POSSIBLE CONVERSION OF HUDSON CITY, MHC TO STOCK FORM
Federal and state regulations and the plan of reorganization permit Hudson
City, MHC to convert from mutual stock form. Such a transaction is commonly
known as a "second-step conversion". There can be no assurance when, if ever, a
second-step conversion will occur, and the Board of Managers has no current
intention or plan to undertake a second-step conversion. In a second-step
conversion, Hudson City, MHC would merge with and into Hudson City Savings or
Hudson City Bancorp, with Hudson City Savings or Hudson City Bancorp as the
resulting entity. Certain depositors of Hudson City Savings would receive the
right to subscribe for additional shares of the resulting entity. The additional
shares of common stock of the holding company issued in the second step
conversion would be sold at their aggregate pro forma market value.
In a second-step conversion, each share of common stock outstanding
immediately prior to the completion of the second-step conversion held by
persons other than Hudson City, MHC would be automatically converted into and
become the right to receive a number of shares of common stock of Hudson City
Bancorp determined pursuant to an exchange ratio. This exchange ratio would
ensure that after the second-step conversion, subject to the adjustments
described below (if required by the applicable banking regulators) and any
adjustment to reflect the receipt of cash in lieu of fractional shares, the
percentage of the to-be-outstanding shares of the resulting entity issued to
stockholders other than Hudson City, MHC in exchange for their common stock
would be equal to the percentage of the outstanding shares of common stock held
by public stockholders immediately prior to the second-step conversion.
As set forth in the plan of reorganization, the percentage of the
to-be-outstanding shares of the resulting entity issued in exchange for public
shares would be adjusted to reflect (i) the aggregate amount of dividends waived
by Hudson City, MHC, if any, and (ii) the market value of the assets of Hudson
City, MHC, other than common stock of Hudson City Bancorp. Pursuant to this
adjustment, the percentage of the to-be-outstanding shares of the resulting
entity issued to public stockholders in exchange for their minority shares is
equal to the percentage of the outstanding shares of common stock held by public
stockholders multiplied by the dividend waiver fraction. The dividend waiver
fraction is equal to the product of (a) a fraction, of which the numerator is
equal to Hudson City Bancorp's stockholders' equity at the time of the
second-step conversion less the aggregate amount of dividends waived by Hudson
City, MHC, and the denominator is equal to Hudson City Bancorp's stockholders'
equity at the time of the second-step conversion, and (b) a fraction, of which
the numerator is equal to the appraised pro forma market value of the resulting
entity in the second-step conversion minus the value of Hudson City, MHC's
assets other than common stock and the denominator is equal to the appraised pro
forma market value of the resulting entity in the second-step conversion.
RESTRICTIONS ON ACQUISITION OF HUDSON CITY BANCORP
AND HUDSON CITY SAVINGS
GENERAL
The plan of reorganization provides for the conversion of Hudson City
Savings from the mutual to the stock form of organization and the concurrent
formation of a holding company and a mutual holding company. See "The
Reorganization and The Offering -- General." Certain provisions in Hudson City
Bancorp's Certificate of Incorporation and Bylaws and in its benefit plans and
agreements entered into in connection with the reorganization, together with
provisions of the Delaware General Corporation Law (DGCL) and certain governing
regulatory restrictions, may have anti-takeover effects.
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MUTUAL HOLDING COMPANY STRUCTURE
The mutual holding company structure will restrict the ability of our
stockholders to effect a change of control of management because, as long as
Hudson City, MHC remains in existence as a mutual savings bank holding company,
it will control a majority of our voting stock. Moreover, the directors of
Hudson City, MHC will be the directors of Hudson City Bancorp and the directors
of Hudson City Savings. Hudson City, MHC will be able to elect all of the
members of the Board of Directors of Hudson City Bancorp, and as a general
matter, will be able to control the outcome of all matters presented to the
stockholders of Hudson City Bancorp for a vote. Therefore, a change in control
of Hudson City Bancorp or Hudson City Savings cannot occur unless Hudson City,
MHC, first converts to the stock form of organization or is dissolved. See "The
Reorganization and The Offering -- Possible Conversion of Hudson City, MHC to
Stock Form."
HUDSON CITY BANCORP'S CERTIFICATE OF INCORPORATION AND BYLAWS
Hudson City Bancorp's Certificate of Incorporation and Bylaws contain a
number of provisions, relating to corporate governance and certain rights of
stockholders, that might discourage future takeover attempts. As a result,
stockholders who might desire to participate in such transactions may not have
an opportunity to do so. In addition, such provisions will also render the
removal of the Board of Directors or management of Hudson City Bancorp more
difficult.
The following description is necessarily general and qualified by reference to
the Certificate of Incorporation and Bylaws. See "Where You Can Find Additional
Information" as to how to obtain a copy of these documents.
Limitation on Voting Rights. The Certificate of Incorporation of Hudson
City Bancorp provides that any person, other than Hudson City, MHC, who
beneficially owns more than 10% of the outstanding common stock shall be allowed
only one one-hundredth (1/100) of a vote with respect of each share held in
excess of such 10%. Beneficial ownership of shares includes shares beneficially
owned by such person or any of his affiliates, shares which such person or his
affiliates have the right to acquire upon the exercise of conversion rights or
options and shares as to which such person and his affiliates have or share
investment or voting power, but shall not include shares beneficially owned by
the employee stock ownership plan or shares that are subject to a revocable
proxy and that are not otherwise beneficially owned or deemed by Hudson City
Bancorp to be beneficially owned by such person and his affiliates. This
restriction on voting may only be amended by approval of the Board of Directors
and the affirmative vote of the holders of a majority of the outstanding shares
of capital stock who are eligible to vote on such matters. Higher votes may be
required to amend this provision as described under "-- Amendment of Certificate
of Incorporation and Bylaws."
Three Classes of Directors on the Board; Power of Directors to Fill
Vacancies. The board of directors of Hudson City Bancorp is required by the
Certificate of Incorporation to be divided into three classes which are as equal
in size as is possible. One class is required to be elected annually by
stockholders of Hudson City Bancorp for three-year terms. A classified board
promotes continuity and stability of management of Hudson City Bancorp but makes
it more difficult for stockholders to change a majority of the directors because
it generally takes at least two annual elections of directors for this to occur.
In addition, any vacancy occurring on the Board, including a vacancy created by
an increase in the number of directors or resulting from death, resignation,
retirement, disqualification, removal from office or other cause, shall be
filled for the remainder of the unexpired term exclusively by the directors then
in office.
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Removal of Directors. The Certificate of Incorporation of Hudson City
Bancorp provides that a director may be removed from the Board of Directors
prior to the expiration of his or her term only for cause, upon the affirmative
vote of a majority of the outstanding shares of voting stock, provided, however,
that in the event that Hudson City, MHC, is dissolved, a vote of at least 80% of
the outstanding voting stock will be required to remove a director. In the
absence of these provisions, the vote of the holders of a majority of the shares
of Hudson City Bancorp could remove the entire Board, with or without cause, and
replace it with persons of such holders' choice.
Votes of Stockholders. Hudson City Bancorp's Certificate of Incorporation
provides that there will not be cumulative voting of stockholders for the
election of Hudson City Bancorp's directors. No cumulative voting means that
Hudson City, MHC, as the holder of a majority of the shares voted at a meeting
of stockholders, may elect all directors of Hudson City Bancorp to be elected at
that meeting. This could prevent public stockholder representation on Hudson
City Bancorp's Board of Directors. In addition, the Certificate of Incorporation
also provides that any action required or permitted to be taken by the
stockholders of Hudson City Bancorp may be taken only at an annual or special
meeting and prohibits stockholder action by written consent in lieu of a
meeting.
Authorized but Unissued Shares of Capital Stock. Following the offering,
Hudson City Bancorp will have authorized but unissued shares of preferred stock
and common stock. See "Description of Capital Stock of Hudson City Bancorp."
Although these shares could be used by the Board of Directors of Hudson City
Bancorp to make it more difficult or to discourage an attempt to obtain control
of Hudson City Bancorp through a merger, tender offer, proxy contest or
otherwise, such uses will be unlikely since Hudson City, MHC owns a majority of
the common stock of Hudson City Bancorp.
Stockholder Vote Required to Approve Business Combinations with Principal
Stockholders. The Certificate of Incorporation requires the approval of the
holders of at least 80% of Hudson City Bancorp's outstanding shares of voting
stock, together with the affirmative vote of at least 50% of the outstanding
shares of voting stock not beneficially owned by an "Interested Stockholder" to
approve certain "Business Combinations" and related transactions. Under Delaware
law, absent this provision, Business Combinations, including mergers,
consolidations and sales of all or substantially all of the assets of a
corporation must, subject to certain exceptions, be approved by the vote of the
holders of only a majority of the outstanding shares of Common Stock and any
other affected class of stock.
The vote of at least 80% of the stockholders is required in connection with
any transaction involving an Interested Stockholder except (1) in cases where
the proposed transaction has been approved in advance by a majority of those
members of Hudson City Bancorp's Board of Directors who are unaffiliated with
the Interested Stockholder and were directors prior to the time when the
Interested Stockholder became an Interested Stockholder or (2) if the proposed
transaction meets certain conditions set forth therein which are designed to
afford the stockholders a fair price in consideration for their shares, in which
case, if a stockholder vote is required, approval of only a majority of the
outstanding shares of voting stock would be sufficient.
The term "Interested Stockholder" is defined to include any individual,
corporation, partnership or other entity (other than Hudson City, MHC, Hudson
City Bancorp or its subsidiary or any employee benefit plan maintained by Hudson
City Bancorp or its subsidiary) which owns beneficially or controls, directly or
indirectly, 10% or more of the outstanding shares of voting stock of Hudson City
Bancorp.
A "Business Combination" means:
(1) any merger or consolidation of Hudson City Bancorp or any of its
subsidiaries with or into any Interested Stockholder or its affiliate;
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(2) any sale, lease, exchange, mortgage, pledge, transfer, or other
disposition to or with any Interested Stockholder or its affiliate of
5% or more of the assets of Hudson City Bancorp (or any of its
subsidiaries);
(3) the issuance or transfer to any Interested Stockholder or its affiliate
by Hudson City Bancorp (or any subsidiary) of any securities of Hudson
City Bancorp other than on a pro rata basis to all stockholders;
(4) the adoption of any plan for the liquidation or dissolution of Hudson
City Bancorp proposed by or on behalf of any Interested Stockholder or
its affiliate;
(5) any reclassification of securities, recapitalization, merger or
consolidation of Hudson City Bancorp which has the effect of increasing
the proportionate share of Common Stock or any class of equity or
convertible securities of Hudson City Bancorp owned directly or
indirectly by an Interested Stockholder or its affiliate; and
(6) the acquisition by Hudson City Bancorp or its subsidiary of any
securities of an Interested Stockholder or its affiliates or
associates.
Evaluation of Offers. The Certificate of Incorporation of Hudson City
Bancorp further provides that the Board of Directors of Hudson City Bancorp,
when evaluating any offer to Hudson City Bancorp from another party to
- make a tender or exchange offer for any outstanding equity security of
Hudson City Bancorp;
- merge or consolidate Hudson City Bancorp with another corporation or
entity; or
- purchase or otherwise acquire all or substantially all of the properties
and assets of Hudson City Bancorp,
in connection with the exercise of its judgment in determining what is in the
best interest of Hudson City Bancorp and the stockholders of Hudson City
Bancorp, may give due consideration to the extent permitted by law to all
relevant factors, including, without limitation, the financial and managerial
resources and future prospects of the other party, the possible effects on the
business of Hudson City Bancorp and its subsidiaries and on the employees,
customers, suppliers and creditors of Hudson City Bancorp and its subsidiaries,
and the effects on the communities in which Hudson City Bancorp's and its
subsidiaries' facilities are located.
By having these standards in the Certificate of Incorporation of Hudson
City Bancorp, the Board of Directors may be in a stronger position to oppose
such a transaction if the Board concludes that the transaction would not be in
the best interests of Hudson City Bancorp, even if the price offered is
significantly greater than the then market price of any equity security of
Hudson City Bancorp.
Amendment of Certificate of Incorporation and Bylaws. The Certificate of
Incorporation provides that certain provisions of the Certificate of
Incorporation may not be altered, amended, repealed or rescinded without the
affirmative vote of either (1) not less than a majority of the authorized number
of directors and, if one or more Interested Stockholders exist, by not less than
a majority of the Disinterested Directors (as defined in the Certificate of
Incorporation) or (2) the holders of not less than two-thirds of the total votes
eligible to be cast by the holders of all outstanding shares of the capital
stock of Hudson City Bancorp entitled to vote thereon and, if the alteration,
amendment, repeal, or rescission is proposed by or on behalf of an Interested
Stockholder or a director who is an affiliate or associate of an Interested
Stockholder, by the affirmative vote of the holders of not less than a majority
of the total votes eligible to be cast by holders of all outstanding shares
entitled to vote thereon not beneficially owned by an Interested Stockholder or
an affiliate or associate thereof. Amendment of the provision relating to
business combinations must also be approved by either (i) a majority of the
Disinterested Directors, or (ii) the affirmative vote of not
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less than eighty percent (80%) of the total number of votes eligible to be cast
by the holders of all outstanding shares of the voting stock, voting together as
a single class, together with the affirmative vote of not less than fifty
percent (50%) of the total number of votes eligible to be cast by the holders of
all outstanding shares of the voting stock not beneficially owned by any
Interested Stockholder or affiliate or associate thereof, voting together as a
single class.
Furthermore, Hudson City Bancorp's Certificate of Incorporation provides
that provisions of the Bylaws that contain supermajority voting requirements may
not be altered, amended, repealed or rescinded without a vote of the Board or
holders of capital stock entitled to vote thereon that is not less than the
super majority specified in such provision. Absent these provisions, the DGCL
provides that a corporation's certificate of incorporation and bylaws may be
amended by the holders of a majority of the corporation's outstanding capital
stock. The Certificate of Incorporation also provides that the Board of
Directors is authorized to make, alter, amend, rescind or repeal any of Hudson
City Bancorp's Bylaws in accordance with the terms thereof, regardless of
whether the Bylaw was initially adopted by the stockholders. However, this
authorization neither divests the stockholders of their right, nor limits their
power to adopt, amend, rescind or repeal any Bylaw under the DGCL. These
provisions could have the effect of discouraging a tender offer or other
takeover attempt where the ability to make fundamental changes through Bylaw
amendments is an important element of the takeover strategy of the acquiror.
Stockholder Nominations and Proposals. The Bylaws of Hudson City Bancorp
also require a stockholder who intends to nominate a candidate for election to
the Board of Directors, or to raise new business at an annual stockholder
meeting to give approximately 90 days notice in advance of the anniversary of
the prior year's annual stockholders' meeting to the Secretary of Hudson City
Bancorp. The notice provision requires a stockholder who desires to raise new
business to provide certain information to Hudson City Bancorp concerning the
nature of the new business, the stockholder and the stockholder's interest in
the business matter. Similarly, a stockholder who wishes to nominate any person
for election as a director must provide Hudson City Bancorp with certain
information concerning the nominee and the proposing stockholder.
ANTI-TAKEOVER EFFECTS OF HUDSON CITY BANCORP'S CERTIFICATE OF INCORPORATION,
BYLAWS AND BENEFIT PLANS ADOPTED IN THE REORGANIZATION
The provisions described above are intended to reduce Hudson City Bancorp's
vulnerability to takeover attempts and certain other transactions which have not
been negotiated with and approved by members of its Board of Directors. The
provisions of the employment agreements, the change of control agreements, the
management recognition plan and the stock option plan to be established may also
discourage takeover attempts by increasing the costs to be incurred by Hudson
City Savings and Hudson City Bancorp in the event of a takeover. See
"Management -- Employment Agreements," and "-- Future Stock Benefit
Plans -- Stock Option Plan."
Hudson City Bancorp's Board of Directors believes that the provisions of
the Certificate of Incorporation, Bylaws and benefit plans to be established are
in the best interests of Hudson City Bancorp and its stockholders. An
unsolicited non-negotiated proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Accordingly, the Board
of Directors believes it is in the best interests of Hudson City Bancorp and its
stockholders to encourage potential acquirors to negotiate directly with
management and that these provisions will encourage such negotiations and
discourage non-negotiated takeover attempts. It is also the Board of Directors'
view that these provisions should not discourage persons from proposing a merger
or other transaction at a price that reflects the true value of Hudson City
Bancorp and that otherwise is in the best interests of all stockholders.
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DELAWARE CORPORATE LAW
The State of Delaware has a statute designed to provide Delaware
corporations with additional protection against hostile takeovers. The takeover
statute, which is codified in Section 203 of the DGCL, is intended to discourage
certain takeover practices by impeding the ability of a hostile acquiror to
engage in certain transactions with the target company.
In general, Section 203 provides that a "Person" who owns 15% or more of
the outstanding voting stock of a Delaware corporation may not consummate a
merger or other business combination transaction with such corporation at any
time during the three-year period following the date such "Person" acquired 15%
of the outstanding voting stock. The term "business combination" is defined
broadly to cover a wide range of corporate transactions, including mergers,
sales of assets, issuances of stock, transactions with subsidiaries and the
receipt of disproportionate financial benefits.
The statute exempts the following transactions from the requirements of
Section 203:
(1) any business combination if, prior to the date a person acquired 15% of
the voting stock, the Board of Directors approved either the business
combination or the transaction which resulted in the stockholder
acquiring 15%;
(2) any business combination involving a person who acquired at least 85%
of the outstanding voting stock in the same transaction in which 15%
was acquired (with the number of shares outstanding calculated without
regard to those shares owned by the corporation's directors who are
also officers and by certain employee stock plans);
(3) any business combination that is approved by the board of directors and
by a two-thirds vote of the outstanding voting stock not owned by the
interested party; and
(4) certain business combinations that are proposed after the corporation
had received other acquisition proposals and which are approved or not
opposed by a majority of certain continuing members of the board of
directors.
A corporation may exempt itself from the requirement of the statute by adopting
an amendment to its Certificate of Incorporation or Bylaws electing not to be
governed by Section 203 of the Delaware General Corporation Law. At the present
time, the Board of Directors does not intend to propose any such amendment.
REGULATORY RESTRICTIONS
Federal Change in Bank Control Act. Federal law provides that no person,
acting directly or indirectly or through or in concert with one or more other
persons, may acquire control of a bank unless the FDIC has been given 60 days
prior written notice. For this purpose, the term "control" means the acquisition
of the ownership, control or holding of the power to vote 25% or more of any
class of a bank holding company's voting stock, and the term "company" includes
an individual, corporation, partnership, and various other entities, acting
individually or in concert. In addition, an acquiring person is presumed to
acquire control if the person acquires the ownership, control or holding of the
power to vote of 10% or more of any class of the holding company's voting stock
if (a) Hudson City Bancorp's shares are registered pursuant to Section 12 of the
Exchange Act or (b) no other person will own, control or hold the power to vote
a greater percentage of that class of voting securities. The Federal Reserve
Board is authorized by the change in bank control act and its own regulations to
disapprove a proposed transaction on certain specified grounds. Accordingly, the
prior approval of the Federal Reserve Bank would be required before any person
could acquire 10% or more of the common stock of Hudson City Bancorp.
Federal Bank Holding Company Act. Federal law provides that no company may
acquire control of a bank holding company without the prior approval of the
Federal Reserve Board. Any
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company that acquires control becomes a "bank holding company" subject to
registration, examination and regulation by the Federal Reserve Board. Pursuant
to federal regulations, the term "company" is defined to include banks,
corporations, partnerships, associations, and certain trusts and other entities,
and the term "control" is deemed to exist if a company has voting control of at
least 25% of any class of a bank's voting stock, and may be found to exist if a
company controls in any manner the election of a majority of the directors of
the bank or has the power to exercise a controlling influence over the
management or policies of the bank. In addition, a bank holding company must
obtain Federal Reserve Board approval prior to acquiring voting control of more
than 5% of any class of voting stock of a bank or another bank holding company.
The foregoing restrictions do not apply to the acquisition of stock by one or
more tax-qualified employee stock benefit plans, provided that the plan or plans
do not have beneficial ownership in the aggregate of more than 25% of any class
of our common stock.
An acquisition of control of a bank that requires the prior approval of the
Federal Reserve Board under the BHCA is not subject to the notice requirements
of the Change in Bank Control Act. Accordingly, the prior approval of the
Federal Reserve Board under the BHCA would be required (a) before any bank
holding company could acquire 5% or more of the Common Stock of Hudson City
Bancorp and (b) before any other company could acquire 25% or more of the Common
Stock of Hudson City Bancorp.
The Federal Reserve Board may prohibit an acquisition of control if:
(1) it would result in a monopoly or substantially lessen competition;
(2) the financial condition of the acquiring person might jeopardize the
financial stability of the institution; or
(3) the competence, experience or integrity of the acquiring person
indicates that it would not be in the interest of the depositors or of
the public to permit the acquisition of control by such person.
DESCRIPTION OF CAPITAL STOCK OF HUDSON CITY BANCORP
GENERAL
Hudson City Bancorp is authorized to issue eight hundred million
(800,000,000) shares of common stock having a par value of $.01 per share and
two hundred million (200,000,000) shares of preferred stock having a par value
of $.01 per share. Hudson City Bancorp currently expects to sell 71,616,250
shares of common stock (or 82,358,687 in the event of an increase of 15% in the
Estimated Valuation Range) to purchasers of common stock in the offering. In
addition, Hudson City Bancorp expects to issue 80,758,750 shares of the common
stock to Hudson City, MHC (or 92,872,563 in the event of an increase of 15% in
the Estimated Valuation Range). Hudson City Bancorp will not issue any shares of
preferred stock in the offering. Except as discussed above in "Restrictions on
Acquisition of Hudson City Bancorp and Hudson City Savings," each share of
Hudson City Bancorp's common stock will have the same relative rights as, and
will be identical in all respects with, every other share of common stock. Upon
payment of the purchase price for the common stock in accordance with the plan
of reorganization, all such stock will be duly authorized, fully paid and
non-assessable.
The shares of common stock:
- are not deposit accounts and are subject to investment risk;
- are not insured or guaranteed by the FDIC, or any other government
agency; and
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- are not guaranteed by Hudson City Bancorp, Hudson City, MHC or Hudson
City Savings.
COMMON STOCK
Dividends. Hudson City Bancorp can pay dividends out of statutory surplus
or from net profits if, as and when declared by its Board of Directors. The
payment of dividends by Hudson City Bancorp is subject to limitations which are
imposed by law. See "Our Policy Regarding Dividends" and "Regulation of Hudson
City Savings Bank and Hudson City Bancorp." Hudson City, MHC currently does not
intend to waive any dividends paid by Hudson City Bancorp. The owners of common
stock of Hudson City Bancorp, including Hudson City, MHC, will be entitled to
receive and share equally in such dividends as may be declared by the Board of
Directors out of funds legally available therefor. If Hudson City Bancorp issues
preferred stock, the holders of the preferred stock may have a priority over the
holders of the common stock with respect to dividends.
Voting Rights. Upon the effective date of the reorganization, the holders
of common stock of Hudson City Bancorp will possess exclusive voting rights in
Hudson City Bancorp. They will elect Hudson City Bancorp's Board of Directors
and act on such other matters as are required to be presented to them under
Delaware law or Hudson City Bancorp's Certificate of Incorporation or as are
otherwise presented to them by the Board of Directors. Each holder of common
stock will be entitled to one vote per share and will not have any right to
cumulate votes in the election of directors. Under certain circumstances, shares
in excess of 10% of Hudson City Bancorp's common stock, exclusive of the shares
held by Hudson City, MHC, may be considered "excess shares" and may therefore
not be entitled to vote. See "Restrictions on Acquisition of Hudson City Bancorp
and Hudson City Savings." If Hudson City Bancorp issues preferred stock, holders
of the preferred stock may also possess voting rights. Certain matters,
including the removal of directors, the approval of business combinations and
amending the Certificate of Incorporation or Bylaws, may require an 80% or
two-thirds stockholder vote. See "Restrictions on Acquisition of Hudson City
Bancorp and Hudson City Savings."
Liquidation. In the event of any liquidation, dissolution or winding up of
Hudson City Savings, Hudson City Bancorp, as owner of Hudson City Savings'
capital stock, would be entitled to receive, after payment or provision for
payment of all debts and liabilities of Hudson City Savings (including all
deposit accounts and accrued interest thereon) and after distribution of the
balance in the special liquidation account to eligible account holders and the
supplemental eligible account holders (see "The Reorganization and The
Offering -- Effects of the Reorganization -- Depositors' Rights; Liquidation
Account"), all assets of Hudson City Savings available for distribution. In the
event of liquidation, dissolution or winding up of Hudson City Bancorp, the
holders of its common stock would be entitled to receive, after payment or
provision for payment of all its debts and liabilities, all of the assets of
Hudson City Bancorp available for distribution. If preferred stock is issued,
the holders thereof may have a priority over the holders of the common stock in
the event of the liquidation or dissolution.
Preemptive Rights; Redemption; Non-assessability. Holders of the common
stock of Hudson City Bancorp will not be entitled to preemptive rights with
respect to any shares which may be issued. The common stock is neither subject
to redemption nor subject to assessment by Hudson City Bancorp.
Limitation on Director Liability and Indemnification. Hudson City
Bancorp's Certificate of Incorporation provides that a director shall not be
personally liable to Hudson City Bancorp or its shareholders for damages for
breach of his fiduciary duty as a director, except to the extent such exemption
from liability or limitation thereof is expressly prohibited by the Delaware
General Corporation Law (DGCL). Hudson City Bancorp's Certificate of
Incorporation also requires Hudson City Bancorp, among other things, to
indemnify to the fullest extent permitted by the DGCL, any
137
<PAGE> 139
person who is or was or has agreed to become a director or officer of Hudson
City Bancorp, who was or is made a party to, or is threatened to be made a party
to, or has become a witness in, any threatened, pending or completed action,
suit or proceeding, including actions or suits by or in the right of Hudson City
Bancorp, by reason of such agreement or service or the fact that such person is,
was or has agreed to serve as a director, officer, employee or agent of another
corporation or organization at the request of Hudson City Bancorp.
PREFERRED STOCK
Hudson City Bancorp will not issue any shares of its authorized preferred
stock in the reorganization. We may issue stock with such preferences and
designations as the Board of Directors may from time to time determine. The
board of directors can, without stockholder approval, issue preferred stock with
voting, dividend, liquidation and conversion rights, which could dilute the
voting strength of the holders of the common stock and may assist management in
impeding an unfriendly takeover or attempted change in control.
LEGAL AND TAX OPINIONS
The legality of the issuance of the common stock being offered and certain
matters relating to the reorganization and federal taxation will be passed upon
for us by Thacher Proffitt & Wood, New York, New York and Jersey City, New
Jersey. Certain matters relating to state taxation will be passed upon for us by
KPMG LLP. Certain legal matters will be passed upon for Ryan, Beck & Co. by
Pitney, Hardin, Kipp & Szuch, Morristown, New Jersey.
EXPERTS
The statements of condition of Hudson City Savings as of December 31, 1998
and 1997 and statements of income, changes in equity and cash flows for each of
the years in the three years ended December 31, 1998 have been included in this
prospectus in reliance upon the report of KPMG LLP, independent certified public
accountants, appearing elsewhere in this prospectus, and upon the authority of
said firm as experts in accounting and auditing.
RP Financial has consented to the publication in this document of a summary
of its letter to Hudson City Savings setting forth its opinion as to the
estimated pro forma market value of Hudson City Savings in the converted form
and its opinion setting forth the value of subscription rights and to the use of
its name and statements with respect to it appearing in this document.
REGISTRATION REQUIREMENTS
Our common stock is registered pursuant to Section 12(g) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). We will be subject to the
information, proxy solicitation, insider trading restrictions, tender offer
rules, periodic reporting and other requirements of the SEC under the Exchange
Act. We may not deregister the common stock under the Exchange Act for a period
of at least three years following the reorganization.
138
<PAGE> 140
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We are subject to the informational requirements of the Exchange Act and
must file reports and other information with the SEC.
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act of 1933, as amended, with respect to the common stock offered in
this document. As permitted by the rules and regulations of the SEC, this
document does not contain all the information set forth in the registration
statement. You may examine this information without charge at the public
reference facilities of the SEC located at 450 Fifth Street, N.W., Washington,
D.C. 20549. You may obtain copies of this material from the SEC at prescribed
rates. You may obtain information on the operations of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet address
("web site") that contains reports, proxy and information statements and other
information regarding registrants, including Hudson City Bancorp, that file
electronically with the SEC. The address for this web site is
"http://www.sec.gov."
The statements contained in this document as to the contents of any
contract or other document filed as an exhibit to the Form S-1 are, of
necessity, brief descriptions and are not necessarily complete; each such
statement is qualified by reference to such contract or document.
Hudson City Savings has filed notice of mutual holding company
reorganization with the Department of Banking and Insurance of New Jersey. In
addition, Hudson City Savings has filed copies of that application with the
FDIC. Hudson City Bancorp and Hudson City, MHC has filed an application with the
Federal Reserve Board of New York to become bank holding companies with respect
to Hudson City Savings. This prospectus omits certain information contained in
those applications.
You may inspect copies of RP Financial's appraisal and any amendments
thereto at the main office of Hudson City Savings Bank.
A copy of Hudson City Bancorp's Certificate of Incorporation and Bylaws, as
well as those of Hudson City Savings and Hudson City, MHC, are available without
charge from Hudson City Savings. Copies of the plan of reorganization are also
available from Hudson City Savings without charge.
If you have any questions regarding the offering or the reorganization, or
would like copies of the documents listed above, please call the Stock
Information Center at (800) 541-3187, from 9:00 a.m. to 4:00 p.m., Eastern Time,
Monday through Friday. The Stock Information Center is located at West 80
Century Road, Paramus, New Jersey 07652.
139
<PAGE> 141
INDEX TO FINANCIAL STATEMENTS
HUDSON CITY SAVINGS BANK
<TABLE>
<S> <C>
Independent Auditors' Report................................ F-2
Statements of Financial Condition at December 31, 1998 and
1997...................................................... F-3
Statements of Income for each of the three years in the
period ended December 31, 1998............................ F-4
Statements of Changes in Equity for each of the three years
in the period ended December 31, 1998..................... F-5
Statements of Cash Flows for each of the three years in the
period ended December 31, 1998............................ F-6
Notes to Financial Statements............................... F-7
</TABLE>
Other schedules are omitted as they are not required or are not applicable or
the required information is shown in the financial statements or related notes.
Financial statements of Hudson City, MHC and Hudson City Bancorp, Inc. have not
been provided because they have conducted no operations. Hudson City, MHC has
not yet been organized and Hudson City Bancorp, Inc. has no assets and no
liabilities.
<PAGE> 142
[LETTERHEAD OF KPMG LLP, SHORT HILLS, NEW JERSEY]
INDEPENDENT AUDITORS' REPORT
The Board of Managers
Hudson City Savings Bank:
We have audited the statements of condition of Hudson City Savings Bank as of
December 31, 1998 and 1997, and the related statements of income, changes in
equity, and cash flows for each of the years in the three-year period ended
December 31, 1998. These financial statements are the responsibility of
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hudson City Savings Bank as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1998, in
conformity with generally accepted accounting principles.
KPMG LLP
Short Hills, New Jersey
February 12, 1999
F-2
<PAGE> 143
HUDSON CITY SAVINGS BANK
STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and due from banks (note 3)............................ $ 87,075 $ 71,074
Federal funds sold.......................................... 69,800 24,600
---------- ----------
Total cash and cash equivalents........................ 156,875 95,674
Investment securities held to maturity, market value of
$1,420 in 1998 and $1,503 in 1997 (note 4)................ 1,393 1,466
Investment securities available for sale, at market value
(note 4).................................................. 785,031 654,726
Mortgage-backed securities held to maturity, market value of
$3,106,369 in 1998 and $3,091,736 in 1997 (note 5)........ 3,070,931 3,022,225
Loans (note 6).............................................. 3,659,407 3,463,803
Less:
Deferred loan fees..................................... 11,146 12,076
Allowance for loan losses (note 6)..................... 17,712 15,625
---------- ----------
Net loans............................................ 3,630,549 3,436,102
Foreclosed real estate, net (note 7)........................ 1,026 1,410
Accrued interest receivable................................. 49,041 49,751
Banking premises and equipment, net (note 8)................ 29,064 29,197
Other assets (note 11)...................................... 28,350 23,448
---------- ----------
Total Assets........................................... $7,752,260 $7,313,999
========== ==========
LIABILITIES AND EQUITY
Deposits (note 9):
Interest-bearing.......................................... $6,494,278 $6,193,630
Noninterest-bearing....................................... 313,061 272,326
---------- ----------
Total deposits......................................... 6,807,339 6,465,956
Accrued expenses and other liabilities (note 10)............ 44,315 40,330
---------- ----------
Total liabilities...................................... 6,851,654 6,506,286
---------- ----------
Retained earnings (notes 11 and 14)......................... 899,933 806,664
Accumulated other comprehensive income...................... 673 1,049
---------- ----------
Total equity........................................... 900,606 807,713
---------- ----------
Commitments and contingencies (notes 8 and 12)
Total Liabilities and Equity........................... $7,752,260 $7,313,999
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 144
HUDSON CITY SAVINGS BANK
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest Income:
Interest and fees on first mortgage loans (note 6)....... $259,320 $245,432 $221,930
Interest and fees on consumer and other loans............ 7,272 7,685 8,135
Interest on mortgage-backed securities................... 201,592 201,323 157,050
Interest on investment securities held to maturity (note
4):
Taxable............................................... 54 -- --
Exempt from federal taxes............................. 48 61 112
Interest and dividends on investment securities available
for sale -- taxable (note 4).......................... 49,666 43,140 37,587
Interest on federal funds sold........................... 2,839 2,801 4,464
-------- -------- --------
Total interest income............................ 520,791 500,442 429,278
Interest expense on deposits (note 9)...................... 311,084 297,484 242,667
-------- -------- --------
Net interest income................................. 209,707 202,958 186,611
Provision for loan losses (note 6)......................... 2,400 2,850 2,275
-------- -------- --------
Net interest income after provision for loan
losses........................................... 207,307 200,108 184,336
-------- -------- --------
Non-interest income:
Service charges and other income......................... 4,930 4,710 3,896
Gains on net securities transactions (note 4)............ 24 1,594 152
-------- -------- --------
Total non-interest income........................ 4,954 6,304 4,048
-------- -------- --------
Non-interest expense:
Salaries and employee benefits (note 10)................. 39,260 38,781 37,034
Net occupancy expense (note 8)........................... 11,753 11,888 11,941
Federal deposit insurance assessment..................... 783 757 43
Amortization of goodwill (note 11)....................... 1,610 1,771 2,030
Computer and related services............................ 1,212 1,104 1,150
Other expense............................................ 8,874 8,618 8,760
-------- -------- --------
Total non-interest expense....................... 63,492 62,919 60,958
-------- -------- --------
Income before income tax expense................. 148,769 143,493 127,426
Income tax expense (note 11)............................... 55,500 53,500 46,595
-------- -------- --------
Net income.......................................... $ 93,269 $ 89,993 $ 80,831
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 145
HUDSON CITY SAVINGS BANK
STATEMENTS OF CHANGES IN EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
RETAINED COMPREHENSIVE TOTAL
EARNINGS INCOME EQUITY
-------- ------------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at December 31, 1995............................ $635,840 $3,104 $638,944
--------
Comprehensive Income:
Net Income......................................... 80,831 -- 80,831
Other comprehensive income:
Unrealized holding losses arising during period
(net of tax of $(370))........................ -- (604) (604)
Reclassification adjustment for gains in net
income (net of tax of $(58)).................. -- (94) (94)
-------- ------ --------
Total Comprehensive Income......................... 80,133
--------
Balance at December 31, 1996............................ 716,671 2,406 719,077
--------
Comprehensive Income:
Net Income......................................... 89,993 -- 89,993
Other comprehensive income:
Unrealized holding losses arising during period
(net of tax of $(225))........................ -- (369) (369)
Reclassification adjustment for gains in net
income (net of tax of $(606))................. -- (988) (988)
-------- ------ --------
Total Comprehensive Income......................... 88,636
--------
Balance at December 31, 1997............................ 806,664 1,049 807,713
--------
Comprehensive Income:
Net Income......................................... 93,269 -- 93,269
Other comprehensive income:
Unrealized holding losses arising during period
(net of tax of $(223))........................ -- (361) (361)
Reclassification adjustment for gains in net
income (net of tax of $(9))................... -- (15) (15)
-------- ------ --------
Total Comprehensive Income......................... 92,893
--------
Balance at December 31, 1998............................ $899,933 $ 673 $900,606
======== ====== ========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 146
HUDSON CITY SAVINGS BANK
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income......................................... $ 93,269 $ 89,993 $ 80,831
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, accretion and amortization
expense....................................... 6,052 5,505 5,761
Provision for loan losses....................... 2,400 2,850 2,275
Gains on net securities transactions............ (24) (1,594) (152)
Deferred tax (benefit) expense.................. (3,907) (1,695) 1,643
Net proceeds from foreclosed real estate........ 3,565 3,683 5,089
Decrease (increase) in accrued interest
receivable.................................... 710 (5,679) (3,124)
Increase in other assets........................ (2,374) (1,709) (2,717)
Increase in accrued expenses and other
liabilities................................... 3,985 5,949 1,996
----------- --------- -----------
Net Cash Provided by Operating Activities............ 103,676 97,303 91,602
----------- --------- -----------
Cash Flows from Investing Activities:
Net increase in loans.............................. (157,887) (275,675) (372,032)
Purchases of loans................................. (38,639) (16,198) (8,558)
Principal collection of mortgage-backed
securities...................................... 1,168,674 569,189 382,631
Purchases of mortgage-backed securities............ (1,222,352) (883,502) (1,227,291)
Proceeds from maturities and calls of investment
securities held to maturity..................... 489 209 1,302
Purchases of investment securities held to
maturity........................................ (403) (600) --
Proceeds from maturities and calls of investment
securities available for sale................... 659,212 418,269 368,538
Proceeds from sales of investment securities
available for sale.............................. -- 42,735 138
Purchases of investment securities available for
sale............................................ (789,577) (521,529) (404,929)
Purchases of premises and equipment, net........... (3,375) (3,113) (3,990)
----------- --------- -----------
Net Cash Used in Investing Activities................ (383,858) (670,215) (1,264,191)
----------- --------- -----------
Cash Flows from Financing Activities:
Net increase in deposits........................... 341,383 546,985 1,161,158
----------- --------- -----------
Net Cash Provided by Financing Activities............ 341,383 546,985 1,161,158
----------- --------- -----------
Net Increase (decrease) in Cash and Cash
Equivalents........................................ 61,201 (25,927) (11,431)
Cash and Cash Equivalents at Beginning of Year....... 95,674 121,601 133,032
----------- --------- -----------
Cash and Cash Equivalents at End of Year............. $ 156,875 $ 95,674 $ 121,601
=========== ========= ===========
Supplemental Disclosures:
Interest paid...................................... $ 312,004 $ 298,270 $ 243,447
=========== ========= ===========
Income taxes paid.................................. $ 59,101 $ 55,052 $ 45,391
=========== ========= ===========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 147
HUDSON CITY SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Basis of Presentation
The following are the significant accounting and reporting policies applied
by Hudson City Savings Bank (the "Bank"), which conform with generally accepted
accounting principles and general practices within the savings bank industry.
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the statements of condition and income for the
period. Actual results could differ from these estimates. A material estimate
that is particularly susceptible to significant change in the near term relates
to the determination of the allowance for loan losses.
b) Comprehensive Income
Effective January 1, 1998, the Bank adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and presentation of
comprehensive income and its components in a full set of financial statements.
Under SFAS No. 130, comprehensive income is divided into net income and other
comprehensive income. Other comprehensive income includes items previously
recorded directly to equity, such as unrealized gains and losses on securities
available for sale.
Comprehensive income is presented in the statements of changes in equity.
SFAS No. 130 requires only additional disclosures and does not affect the Bank's
financial position or results of operations. Prior year financial statements
have been reclassified to conform to the requirements of SFAS No. 130.
c) Statements of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents includes
cash on hand, amounts due from banks and federal funds sold. Generally, federal
funds are sold for one-day periods.
Transfers of loans to foreclosed real estate of $3,353,000, $2,801,000 and
$4,241,000 for the years ended December 31, 1998, 1997 and 1996, respectively,
did not result in cash receipts or cash payments.
d) Investment Securities
Investment securities are classified as either held to maturity or
available for sale. Investment securities classified as held to maturity are
stated at cost, adjusted for amortization of premiums and accretion of
discounts, which are recognized as adjustments to interest income, using a
method that approximates level yield. The Bank has both the ability and the
positive intent to hold these investment securities to maturity. Securities
available for sale are carried at fair value, with unrealized gains and losses,
net of tax, reported as a component of other comprehensive income, which is
included in equity.
Realized gains and losses are recognized when securities are sold or called
using the specific identification method. The estimated fair market value of all
investment securities is determined by use of quoted market prices.
F-7
<PAGE> 148
HUDSON CITY SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
e) Mortgage-Backed Securities
Mortgage-backed securities include pass-through certificates, which
represent participating interests in pools of long-term first mortgage loans
originated and serviced by third-party issuers of the securities, and real
estate mortgage conduits ("REMICs"), which are debt securities that are secured
by mortgage loans or other mortgage-backed securities.
These securities are classified as held to maturity and, accordingly, are
stated at cost, adjusted for amortization of premiums and accretion of
discounts. Such amortization and accretion is included in interest income based
on a method which approximates the level yield method. Premiums are amortized
and discounts are accreted over the estimated average life of the contract.
Gains and losses are recognized when securities are sold using the specific
identification method. The estimated fair market value of these securities is
determined by use of quoted market prices. The Bank has the positive intent and
ability to hold mortgage-backed securities to maturity.
Mortgage-backed securities are subject to prepayments. The level of
prepayments is related to the general level of interest rates. The higher the
rate of prepayments, the shorter the effective maturity of the security.
f) Loans
Loans are stated at their principal amounts outstanding. Interest income on
loans is accrued and credited to income as earned. Net loan origination fees are
deferred and amortized to interest income over the life of the loan as an
adjustment to the loan's yield, using the level yield method.
The accrual of income on loans is generally discontinued when interest or
principal payments are 90-days in arrears or when the timely collection of such
income is doubtful. Loans on which the accrual of income has been discontinued
are designated as nonaccrual loans and outstanding interest previously credited
is reversed. It is recognized subsequently in the period collected only when the
ultimate collection of principal is not in doubt. A nonaccrual loan is returned
to accrual status when factors indicating doubtful collection no longer exist.
The Bank defines the population of impaired loans to be all nonaccrual
commercial real estate and multi-family loans. Impaired loans are individually
assessed to determine that the loan's carrying value is not in excess of the
fair value of the collateral or the present value of the loan's expected future
cash flows. Smaller balance homogeneous loans that are collectively evaluated
for impairment, such as residential mortgage loans and consumer loans, are
specifically excluded from the impaired loan portfolio. There were no loans
classified as impaired by the Bank at December 31, 1998 and 1997.
g) Allowance for Loan Losses
The allowance for loan losses is a valuation account established through a
provision for loan losses charged to income. Losses on loans are charged against
the allowance when management believes the collection of the principal is
unlikely. Subsequent recoveries, if any, are generally credited to the
allowance. The allowance is based on such factors as the Bank's loan loss
experience, known and inherent risks in the loan portfolio, the estimated value
of underlying collateral, current economic and market trends, and other factors
which may warrant recognition in maintaining an allowance at a level sufficient
to provide for estimated loan losses.
F-8
<PAGE> 149
HUDSON CITY SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses.
Such agencies may require the Bank to recognize additions to the allowance based
on their judgments of information available to them at the time of their
examination.
h) Foreclosed Real Estate
Foreclosed real estate is property acquired through foreclosure and deed in
lieu of foreclosure. Foreclosed properties are initially recorded at the lower
of the recorded investment in the loan or fair market value. Thereafter, the
property is carried at fair market value less estimated selling costs. Fair
market value is generally based on recent appraisals.
Subsequent provisions, which may result from the ongoing periodic
valuations of these properties, are charged to income in the period in which
they are identified and credited to a valuation allowance account. Foreclosed
real estate is reported net of the valuation allowance. Carrying costs, such as
maintenance and taxes, are charged to operating expenses as incurred.
i) Banking Premises and Equipment
Land is carried at cost. Buildings, leasehold improvements and furniture,
fixtures and equipment are carried at cost, less accumulated depreciation and
leasehold amortization. Buildings are depreciated over their estimated useful
lives using the straight-line method. Furniture, fixtures and equipment are
depreciated over their estimated useful lives using the double-declining balance
method. Leasehold improvements are amortized over the shorter of their estimated
useful lives or the term of the respective leases. The costs for major
improvements and renovations are capitalized, while maintenance, repairs and
minor improvements are charged to operating expenses as incurred. Gains and
losses on dispositions are reflected currently as other non-interest income or
expense.
j) Income Taxes
The Bank files federal and New Jersey state tax returns on a calendar year
basis. Under the liability method of accounting for income taxes, a deferred tax
liability is recognized for all taxable temporary differences and a deferred tax
asset is recognized for all deductible temporary differences. The Bank takes
into account changes in the tax law and rates when valuing the deferred income
tax amounts.
For federal income tax reporting purposes, under tax law that existed prior
to 1996, the Bank reported its loan loss provisions by using the reserve method
allowed for qualified thrift lender institutions. The Bank's bad debts reserve
for income tax reporting purposes was increased by annual tax loan loss
provisions (tax return deductions) that were determined based on a percentage of
the Bank's reported annual taxable income. Actual net loan losses were charged
directly against the tax basis bad debts reserve. Legislation was enacted in
August 1996, which repealed for tax purposes the percentage of taxable income
bad debt reserve method. As a result, the Bank must instead use the specific
charge-off method to compute its bad debt deduction. The legislation also
requires the Bank to recapture its post-1987 net additions to its tax bad debt
reserves. The Bank has previously provided for this liability in the financial
statements.
F-9
<PAGE> 150
HUDSON CITY SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
k) Employee Benefit Plans
Effective January 1, 1998, the Bank adopted the provisions of SFAS No. 132,
"Employers Disclosures about Pensions and Other Postretirement Benefits." SFAS
No. 132 revises disclosures only and does not affect the Bank's financial
position or results of operations. Prior year financial statement disclosures
have been revised to conform to the requirements of SFAS No. 132.
The Bank maintains certain noncontributory benefit plans which cover all
employees who have met the eligibility requirements of the plans. Certain health
care and life insurance benefits are provided for retired employees. The
expected cost of benefits provided for retired employees is actuarially
determined and accrued ratably from the date of hire to the date the employee is
fully eligible to receive the benefits.
l) Goodwill
Goodwill, included in other assets, is being amortized to expense on a
straight-line basis over a 15-year period. Unamortized goodwill amounted to
$1,441,000 and $3,051,000 at December 31, 1998 and 1997, respectively.
2. PLAN OF REORGANIZATION (UNAUDITED)
On February 11, 1999, the board of managers of Hudson City Savings Bank
adopted a Plan of Reorganization and Stock Issuance (the "Plan"), where the Bank
will convert and reorganize from a New Jersey-chartered mutual savings bank into
a two-tiered mutual savings bank holding company structure (the
"Reorganization"). Under the terms of the Plan, Hudson City Savings Bank will be
a wholly-owned subsidiary of Hudson City Bancorp, Inc., a Delaware corporation
(the "Company"), and the Company will be a majority-owned subsidiary of Hudson
City, MHC, a New Jersey-chartered mutual savings bank holding company (the
"MHC").
In connection with the Reorganization, the Company will offer for sale to
its depositors and the public 47% of its common stock. The number of shares of
common stock to be offered and the price for such shares will be determined by
the board of managers based upon an appraisal of the Bank to be made by an
independent appraisal firm. At least the minimum number of shares offered in the
offering must be sold for the offering to be completed.
The Plan provides that when the Reorganization is completed, a "liquidation
account" will be established in an amount equal to the total equity of the Bank
as of the latest practicable date prior to the Reorganization. The liquidation
account is established to provide a limited priority claim to the assets of the
Bank to "eligible account holders" and "supplemental eligible account holders",
as defined in the Plan, who continue to maintain deposits in the Bank after the
Reorganization. In the unlikely event of a complete liquidation of the Bank, and
only in such event, each eligible account holder and supplemental eligible
account holder would receive a liquidation distribution, prior to any payment to
the holder of the Bank's common stock. This distribution would be based upon
each eligible account holder's and supplemental account holder's proportionate
share of the then total remaining qualifying deposits.
Direct costs of the Reorganization will be deferred and will reduce the
proceeds of the offering. If the Reorganization is not completed, all costs
would be charged to expense.
F-10
<PAGE> 151
HUDSON CITY SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
3. RESTRICTIONS ON CASH AND DUE FROM BANKS
The Bank is required to maintain cash reserves on deposit with the Federal
Reserve Bank based on deposits. The average amount of the reserves on deposit
for the years ended December 31, 1998 and 1997 was approximately $15,068,000 and
$14,011,000, respectively.
4. INVESTMENT SECURITIES
The amortized cost and estimated fair market value of investment securities
at December 31 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1998
HELD TO MATURITY
Municipal bonds................................ $ 1,393 $ 29 $ (2) $ 1,420
======== ====== ===== ========
AVAILABLE FOR SALE
United States government and agencies.......... $781,330 $1,772 $(666) $782,436
Corporate bonds................................ 2,617 11 (33) 2,595
-------- ------ ----- --------
Total available for sale.................. $783,947 $1,783 $(699) $785,031
======== ====== ===== ========
1997
HELD TO MATURITY
Municipal bonds................................ $ 1,466 $ 37 $ -- $ 1,503
======== ====== ===== ========
AVAILABLE FOR SALE
United States government and agencies.......... $648,277 $2,606 $(869) $650,014
Corporate bonds................................ 4,758 18 (64) 4,712
-------- ------ ----- --------
Total available for sale.................. $653,035 $2,624 $(933) $654,726
======== ====== ===== ========
</TABLE>
The amortized cost and estimated fair market value of investment securities
held to maturity and investment securities available for sale at December 31,
1998, by contractual maturity, are shown below. The expected maturity will
differ from the contractual maturity because issuers may have the right to call
or prepay obligations.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR MARKET
COST VALUE
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
HELD TO MATURITY
Due after one year through five years....................... $ 100 $ 98
Due after five years through ten years...................... 390 411
Due after ten years......................................... 903 911
-------- --------
Total held to maturity................................. $ 1,393 $ 1,420
======== ========
</TABLE>
F-11
<PAGE> 152
HUDSON CITY SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR MARKET
COST VALUE
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
AVAILABLE FOR SALE
Due in one year or less..................................... $ 10,194 $ 10,194
Due after one year through five years....................... 308,432 308,447
Due after five years through ten years...................... 465,321 466,390
-------- --------
Total available for sale............................... $783,947 $785,031
======== ========
</TABLE>
Interest and dividend income for the years ended December 31, 1998, 1997
and 1996 consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
United States government and agencies................ $49,429 $42,134 $31,937
Municipal bonds...................................... 102 61 112
Corporate bonds...................................... 237 1,006 5,625
Common stock......................................... -- -- 25
------- ------- -------
Total interest and dividend income.............. $49,768 $43,201 $37,699
======= ======= =======
</TABLE>
Gross realized gains on calls of investment securities available for sale
during 1998 were $11,000. Gross realized gains on calls of investment securities
held to maturity during 1998 were $13,000.
Gross realized gains on calls of investment securities available for sale
during 1997 were $22,000. Gross realized gains and losses on sales of investment
securities available for sale during 1997 were $1,577,000 and $5,000,
respectively.
Gross realized gains and losses on investment securities held to maturity
called by the issuer in 1996 were $75,000 and $9,000, respectively. Gross
realized gains and losses on investment securities available for sale called by
the issuer in 1996 were $6,000 and $3,000, respectively. During 1996, gross
realized gains on the sale of investment securities available for sale were
$83,000.
The carrying value of securities pledged as required security for deposits
and for other purposes required by law amounted to $5,142,000 and $4,090,000 at
December 31, 1998 and 1997, respectively.
F-12
<PAGE> 153
HUDSON CITY SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
5. MORTGAGE-BACKED SECURITIES
The amortized cost and estimated fair market value of mortgage-backed
securities held to maturity at December 31 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR MARKET
COST GAINS LOSSES VALUE
---------- ---------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1998
GNMA pass-through certificates............... $2,093,591 $19,610 $(1,982) $2,111,219
FNMA pass-through certificates............... 674,061 12,219 (5) 686,275
FHLMC pass-through certificates.............. 240,414 5,581 -- 245,995
FHLMC, FNMA and GNMA -- REMICs............... 62,865 91 (76) 62,880
---------- ------- ------- ----------
Total mortgage-backed securities........ $3,070,931 $37,501 $(2,063) $3,106,369
========== ======= ======= ==========
1997
GNMA pass-through certificates............... $2,061,928 $52,861 $ -- $2,114,789
FNMA pass-through certificates............... 568,479 9,451 -- 577,930
FHLMC pass-through certificates.............. 293,802 7,830 -- 301,632
FHLMC, FNMA and GNMA -- REMICs............... 98,016 79 (710) 97,385
---------- ------- ------- ----------
Total mortgage-backed securities........ $3,022,225 $70,221 $ (710) $3,091,736
========== ======= ======= ==========
</TABLE>
6. LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
First mortgage loans:
One-to four-family...................................... $3,516,947 $3,327,371
FHA/VA.................................................. 52,958 45,868
Multi-family and commercial............................. 2,911 3,553
---------- ----------
Total first mortgage loans........................... 3,572,816 3,376,792
---------- ----------
Consumer and other loans:
Fixed-rate second mortgages............................. 56,118 50,198
Home equity credit lines................................ 28,045 30,211
Guaranteed student...................................... 216 4,315
Other................................................... 2,212 2,287
---------- ----------
Total consumer and other loans....................... 86,591 87,011
---------- ----------
Total loans..................................... $3,659,407 $3,463,803
========== ==========
</TABLE>
Substantially all of the Bank's loans are secured by first or second liens
on real estate property located in the state of New Jersey. The ultimate ability
to collect the loan portfolio and realize the carrying value of real estate is
subject to changes in the region's real estate market and future economic
conditions.
F-13
<PAGE> 154
HUDSON CITY SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
The following is a comparative summary of (a) loans on which the accrual of
income has been discontinued and (b) loans which are contractually past due
90-days or more but have not been classified nonaccrual at December 31:
<TABLE>
<CAPTION>
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Non-accrual loans........................................ $13,216 $15,428
Accruing loans delinquent 90-days or more................ 2,123 706
------- -------
Total............................................... $15,339 $16,134
======= =======
</TABLE>
The total amount of interest income received during the year on nonaccrual
loans outstanding at December 31, 1998, 1997 and 1996 amounted to $178,000,
$186,000 and $198,000, respectively. Additional interest income totaling
$828,000, $996,000 and $1,050,000 on non-accrual loans would have been
recognized in 1998, 1997 and 1996, respectively, if interest on all such loans
had been recorded based upon original contract terms. The Bank is not committed
to lend additional funds to borrowers on non-accrual status.
An analysis of the allowance for loan losses at December 31 follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year.......................... $15,625 $13,045 $11,906
------- ------- -------
Charge-offs........................................... (336) (330) (1,160)
Less recoveries....................................... 23 60 24
------- ------- -------
Net charge-offs....................................... (313) (270) (1,136)
------- ------- -------
Provision for loan losses............................. 2,400 2,850 2,275
------- ------- -------
Balance at end of year................................ $17,712 $15,625 $13,045
======= ======= =======
</TABLE>
7. FORECLOSED REAL ESTATE, NET
Foreclosed real estate, net, at December 31 is summarized as follows:
<TABLE>
<CAPTION>
1998 1997
------ ------
(IN THOUSANDS)
<S> <C> <C>
Foreclosed real estate..................................... $1,058 $1,477
Valuation allowance........................................ (32) (67)
------ ------
Total foreclosed real estate, net..................... $1,026 $1,410
====== ======
</TABLE>
An analysis of the valuation allowance for foreclosed real estate at
December 31 follows:
<TABLE>
<CAPTION>
1998 1997
----- -----
(IN THOUSANDS)
<S> <C> <C>
Balance at beginning of year................................ $ 67 $ 83
Provision for write-downs................................... 148 87
Write-downs................................................. (183) (103)
----- -----
Balance at end of year...................................... $ 32 $ 67
===== =====
</TABLE>
F-14
<PAGE> 155
HUDSON CITY SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
8. BANKING PREMISES AND EQUIPMENT, NET
A summary of the net carrying value of banking premises and equipment at
December 31 is as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land................................................... $ 4,291 $ 4,291
Building............................................... 29,507 28,693
Leasehold improvements................................. 9,638 9,301
Furniture, fixtures and equipment...................... 27,758 25,534
-------- --------
71,194 67,819
Accumulated depreciation and amortization.............. (42,130) (38,622)
-------- --------
Total banking premises and equipment.............. $ 29,064 $ 29,197
======== ========
</TABLE>
Amounts charged to net occupancy expense for depreciation and amortization
of banking premises and equipment amounted to $3,508,000, $3,587,000 and
$3,809,000 in 1998, 1997 and 1996, respectively.
The Bank has entered into non-cancelable operating lease agreements with
respect to banking premises and equipment. It is expected that many agreements
will be renewed at expiration in the normal course of business. Future minimum
rental commitments required under operating leases that have initial or
remaining non-cancelable lease terms in excess of one year are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
- ---- -------
<S> <C>
1999............................................... $ 2,465
2000............................................... 2,357
2001............................................... 2,204
2002............................................... 1,911
2003............................................... 1,655
Thereafter......................................... 7,198
-------
Total......................................... $17,790
=======
</TABLE>
Net occupancy expense includes gross rental expense for certain bank
premises of $2,752,000 in 1998, $2,790,000 in 1997, and $2,622,000 in 1996, and
rental income of $608,000, $603,000 and $499,000 for the respective years.
F-15
<PAGE> 156
HUDSON CITY SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
9. DEPOSITS
Deposits at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------- ---------------------
BALANCE PERCENT BALANCE PERCENT
---------- ------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Savings.......................................... $ 832,759 12.23% $ 835,062 12.91%
Demand........................................... 313,061 4.60 272,326 4.21
Interest-bearing demand.......................... 100,436 1.48 90,869 1.41
Money market..................................... 505,201 7.42 500,029 7.73
Time deposits.................................... 5,055,882 74.27 4,767,670 73.74
---------- ------ ---------- ------
Total deposits.............................. $6,807,339 100.00% $6,465,956 100.00%
========== ====== ========== ======
</TABLE>
Time deposits $100,000 and over amounted to $516,084,000 and $460,982,000
at December 31, 1998 and 1997, respectively. Interest expense on time deposits
$100,000 and over for the years ended December 31, 1998, 1997 and 1996 was
$27,241,000, $24,279,000 and $16,729,000, respectively. Included in demand
accounts are mortgage escrow deposits of $39,098,000 and $38,662,000 at December
31, 1998 and 1997, respectively.
Scheduled maturities of time deposits are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ---- --------------
(IN THOUSANDS)
<S> <C>
1999........................................... $4,765,169
2000........................................... 254,084
2001........................................... 22,331
2002........................................... 4,305
2003........................................... 9,993
----------
Total..................................... $5,055,882
==========
</TABLE>
10. EMPLOYEE BENEFIT PLANS
The Bank maintains certain non-contributory benefit plans which cover all
employees, and retired employees, who have met eligibility requirements of the
plans. Benefits for the qualified and non-qualified defined benefit retirement
plans are based primarily on years of service and compensation. The Bank's
funding of the qualified retirement plan is actuarially determined on an annual
basis. It is the Bank's policy to fund the qualified retirement plan
sufficiently to meet the minimum requirements set forth in the Employee
Retirement Income Security Act of 1974. The non-qualified retirement plan, for
certain executive officers, is unfunded and has a benefit obligation of
$2,500,000 at December 31, 1998 and $2,100,000 at December 31, 1997. The Bank
provides certain health care and life insurance benefits to eligible retired
employees ("other benefits"). Participants generally become eligible for retiree
health care and life insurance benefits after ten years of service.
F-16
<PAGE> 157
HUDSON CITY SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
The following table shows the change in benefit obligation, the change in
plan assets, and the funded status for the retirement plans and other benefits
at December 31:
<TABLE>
<CAPTION>
RETIREMENT PLANS OTHER BENEFITS
------------------- --------------------
1998 1997 1998 1997
-------- ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Change in Benefit Obligation:
Benefit obligation at beginning of year........ $ 46,906 $41,427 $ 29,770 $ 29,458
Service cost................................... 2,267 2,057 1,452 1,468
Interest cost.................................. 3,178 3,041 1,865 1,979
Actuarial loss (gain).......................... 2,018 1,636 (2,431) (2,572)
Benefits paid.................................. (1,272) (1,255) (566) (563)
-------- ------- -------- --------
Benefit obligation at end of year.............. 53,097 46,906 30,090 29,770
-------- ------- -------- --------
Change in Plan Assets:
Fair value of plan assets at beginning of
year........................................ 58,116 47,583 -- --
Actual return on plan assets................... 10,446 10,037 -- --
Employer contribution.......................... 85 1,752 566 563
Benefits paid.................................. (1,272) (1,256) (566) (563)
-------- ------- -------- --------
Fair value of plan assets at end of year....... 67,375 58,116 -- --
-------- ------- -------- --------
Funded Status............................... 14,278 11,210 (30,090) (29,770)
Unrecognized transition asset.................. (1,197) (1,596) -- --
Unrecognized prior service cost................ 7 20 -- --
Unrecognized net actuarial (gain) loss......... (10,126) (6,990) 704 3,135
-------- ------- -------- --------
Prepaid (accrued) benefit cost.............. $ 2,962 $ 2,644 $(29,386) $(26,635)
======== ======= ======== ========
</TABLE>
Net periodic benefit (income) cost at December 31 included the following
components:
<TABLE>
<CAPTION>
RETIREMENT PLANS OTHER BENEFITS
----------------------------- --------------------------
1998 1997 1996 1998 1997 1996
------- ------- ------- ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Service cost...................... $ 2,267 $ 2,057 $ 2,193 $1,452 $1,468 $1,636
Interest cost..................... 3,178 3,041 2,829 1,865 1,979 2,000
Expected return on assets......... (5,167) (4,228) (3,701) -- -- --
Amortization of:
Net (gain) loss................. (124) 24 15 -- 43 300
Unrecognized prior service
cost......................... 13 13 13 -- -- --
Unrecognized remaining net
assets....................... (399) (399) (345) -- -- --
------- ------- ------- ------ ------ ------
Net periodic benefit (income)
cost....................... $ (232) $ 508 $ 1,004 $3,317 $3,490 $3,936
======= ======= ======= ====== ====== ======
</TABLE>
F-17
<PAGE> 158
HUDSON CITY SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
The following are the weighted average assumptions used in accounting for
the benefit plans at December 31:
<TABLE>
<CAPTION>
RETIREMENT
PLANS OTHER BENEFITS
------------ --------------
1998 1997 1998 1997
---- ---- ----- -----
<S> <C> <C> <C> <C>
Discount rate........................................... 6.50% 7.00% 6.50% 7.00%
Expected return on assets............................... 9.00 9.00 -- --
Rate of compensation increase........................... 5.75 6.25 -- --
</TABLE>
Assumed health care cost trend rates used to measure the expected cost of
other benefits for 1999 were 9.00% for Medicare-eligible retirees and 10.00% for
non-Medicare eligible retirees. The rates were assumed to decrease gradually to
4.50% for 2006 and remain at that level thereafter.
Assumed health care cost trend rates have a significant effect on the
amounts reported for health care plans. A 1% change in the assumed health care
cost trend rate would have the following effects on other benefits:
<TABLE>
<CAPTION>
1% INCREASE 1% DECREASE
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Effect on total service cost and interest cost....... $ 741 $ (556)
Effect on other benefit obligations.................. 5,312 (4,120)
</TABLE>
The Bank maintains a tax-deferred profit incentive bonus savings plan based
on the Bank's profitability. All employees are eligible after one year of
employment and the attainment of age 21. The expense amounted to $1,995,000,
$1,913,000 and $1,823,000 in 1998, 1997 and 1996, respectively.
The Bank also maintains certain incentive plans to recognize key executives
who are able to make substantial contributions to the long-term success and
financial strength of the Bank. At the end of each performance period, the value
of the award is determined in accordance with established criteria. Participants
can elect cash payment or elect to defer the award until retirement. The current
long-term performance period is January 1, 1996 to December 31, 1998. The
expense related to these plans amounted to $1,723,000 in 1998, $1,694,000 in
1997 and $1,542,000 in 1996.
F-18
<PAGE> 159
HUDSON CITY SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
11. INCOME TAXES
Income tax expense for each of the years in the three-year period ended
December 31, 1998 is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
FEDERAL:
- -------
Current............................................... $54,500 $50,706 $41,108
Deferred (benefit) expense............................ (3,600) (1,561) 1,513
------- ------- -------
Total Federal.................................... 50,900 49,145 42,621
------- ------- -------
STATE:
- -----
Current............................................... 4,907 4,489 3,844
Deferred (benefit) expense............................ (307) (134) 130
------- ------- -------
Total state...................................... 4,600 4,355 3,974
------- ------- -------
Total income tax expense......................... $55,500 $53,500 $46,595
======= ======= =======
</TABLE>
Not included in the above table is income tax benefit of $232,000, $831,000
and $428,000 for 1998, 1997 and 1996, respectively, which represents the income
tax benefit on the net unrealized losses of securities available for sale.
The amounts reported as income tax expense vary from the amounts that would
be reported by applying the statutory federal income tax rate to income before
income taxes due to the following:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Income before income tax expense................... $148,769 $143,493 $127,426
Statutory income tax rate.......................... 35% 35% 35%
-------- -------- --------
Computed expected income tax expense............... 52,069 50,223 44,599
State income taxes, net of federal income tax
benefit.......................................... 2,990 2,831 2,583
Amortization of goodwill........................... 564 620 710
Tax-exempt interest................................ (126) (125) (146)
Other, net......................................... 3 (49) (1,151)
-------- -------- --------
Income tax expense............................... $ 55,500 $ 53,500 $ 46,595
======== ======== ========
</TABLE>
F-19
<PAGE> 160
HUDSON CITY SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
The net deferred tax asset at December 31 consists of the following:
<TABLE>
<CAPTION>
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Discount accretion........................................ $ 2,867 $ 3,641
Deferred loan origination fees............................ 2,135 2,568
Postretirement benefits................................... 11,239 10,231
Book loan loss reserve.................................... 6,730 5,938
Mortgage premium amortization............................. 2,124 1,458
Nonaccrual interest income................................ 477 598
Other..................................................... 5,313 4,372
------- -------
30,885 28,806
------- -------
Deferred tax liabilities:
Tax bad debt reserve...................................... 10,399 12,478
Net unrealized gain on securities available for sale...... 411 643
Retirement Plan........................................... 2,073 1,804
Other..................................................... 1,198 1,216
------- -------
14,081 16,141
------- -------
Net deferred tax asset................................. $16,804 $12,665
======= =======
</TABLE>
The net deferred tax asset represents the anticipated federal and state tax
benefits expected to be realized in future years upon the utilization of the
underlying tax attributes comprising this balance. In management's opinion, in
view of the Bank's previous, current and projected future earnings trends, such
net deferred tax asset will more likely than not be fully realized. Accordingly,
no valuation allowance was deemed to be required at December 31, 1998 and 1997.
At December 31, 1998 and 1997, the Bank's bad debt reserve for federal
income tax reporting purposes was approximately $77,000,000 and $82,000,000,
respectively. Retained earnings at December 31, 1998 and 1997 included
approximately $49,000,000 for which no deferred income taxes have been provided.
This amount represents the base year allocation of income to bad debt deduction
for tax purposes. Under SFAS No. 109, this amount is treated as a permanent
difference and deferred taxes are not recognized unless it appears that it will
be reduced and result in taxable income in the foreseeable future. Events that
would result in taxation of these reserves include failure to qualify as a bank
for tax purposes or distributions in complete or partial liquidation.
12. OFF-BALANCE SHEET RISK AND CONTINGENCIES
The Bank is a party to commitments to extend credit in the normal course of
business to meet the financial needs of its customers. Commitments to extend
credit are agreements to lend money to a customer as long as there is no
violation of any condition established in the contract. Commitments to fund
first mortgage loans generally have fixed expiration dates or other termination
clauses, whereas home equity lines of credit have no expiration date. Since some
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Bank evaluates each customer's credit-worthiness on a case-by-case basis.
F-20
<PAGE> 161
HUDSON CITY SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
At December 31, 1998, the Bank had fixed and variable rate first mortgage
loan commitments to extend credit of approximately $124,557,000 and $36,925,000,
respectively, and unused home equity and overdraft lines of credit of
approximately $53,421,000. Commitments to purchase mortgage-backed securities
amounted to $256,667,000 at December 31, 1998. No commitments are included in
the accompanying financial statements. There is no exposure to credit loss in
the event the other party to commitments to extend credit does not exercise its
rights to borrow under the commitment.
In the normal course of business, there are various outstanding legal
proceedings. In the opinion of management, the financial statements of the Bank
will not be materially affected as a result of such legal proceedings.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments represents the estimated amounts at
which the asset or liability could be exchanged in a current transaction between
willing parties, other than in a forced liquidation sale. These estimates are
subjective in nature, involve uncertainties and matters of judgment and,
therefore, cannot be determined with precision. Changes in assumptions could
significantly affect the estimates. Further, certain tax implications related to
the realization of the unrealized gains and losses could have a substantial
impact on these fair value estimates and have not been incorporated into any of
the estimates.
Carrying amounts of cash, due from banks and Federal funds sold are
considered to approximate fair value. The fair value of fixed rate one- to
four-family mortgages and fixed rate home equity loans is generally estimated
using the present value of expected future cash flows. The fair value of
adjustable rate one- to four-family mortgages and home equity loans with
adjustable interest rates is estimated using market prices. For time deposits,
the fair value is estimated by discounting estimated future cash flows using
currently offered rates for deposits of a similar maturity. For deposit
liabilities payable on demand, the fair value is estimated by discounting
estimated future cash flows using a regulatory borrowing rate most closely
associated with maturity date ranges that were established using the Bank's
history and regulatory guidelines. The fair value of off-balance sheet
commitments is not material.
Other important elements which are not deemed to be financial assets or
liabilities and therefore, not considered in these estimates include the value
of the Bank's retail branch delivery system, its existing core deposit base,
banking premises and equipment, and goodwill.
F-21
<PAGE> 162
HUDSON CITY SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
The estimated fair value of the Bank's financial instruments at December 31
are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------ ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS:
Cash and due from banks................... $ 87,075 $ 87,075 $ 71,074 $ 71,074
Federal funds sold........................ 69,800 69,800 24,600 24,600
Investment securities held to maturity.... 1,393 1,420 1,466 1,503
Investment securities available for
sale.................................... 785,031 785,031 654,726 654,726
Mortgage-backed securities held to
maturity................................ 3,070,931 3,106,369 3,022,225 3,091,736
Loans..................................... 3,659,407 3,751,860 3,463,803 3,548,733
LIABILITIES:
Deposits.................................. 6,807,339 6,667,637 6,465,956 6,324,806
</TABLE>
14. REGULATORY CAPITAL
Deposits at the Bank are insured up to standard limits of coverage provided
by the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance Corporation
("FDIC"). The Bank is a New Jersey state chartered savings bank and is subject
to comprehensive regulation, supervision and periodic examinations by the FDIC
and by the New Jersey State Department of Banking.
FDIC regulations require banks to maintain minimum levels of regulatory
capital. Under the regulations in effect at December 31, 1998, the Bank was
required to maintain (a) a minimum leverage ratio of Tier 1 capital to total
adjusted assets of 4.0%, and (b) minimum ratios of Tier 1 and total capital to
risk-weighted assets of 4.0% and 8.0 %, respectively.
Under its prompt corrective action regulations, the FDIC is required to
take certain supervisory actions (and may take additional discretionary actions)
with respect to an undercapitalized institution. Such actions could have a
direct material effect on the institution's financial statements. The
regulations establish a framework for the classification of savings institutions
into five categories: well-capitalized, adequately-capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized. Generally, an institution is considered well-capitalized if it
has a leverage (Tier 1) capital ratio of at least 5.0%; a Tier 1 risk-based
capital ratio of at least 6.0%; and a total risk-based capital ratio of at least
10.0%.
The foregoing capital ratios are based in part on specific quantitative
measures of assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the FDIC about
capital components, risk weightings and other factors.
Management believes that, as of December 31, 1998, the Bank meets all
capital adequacy requirements to which it is subject. Further, the most recent
FDIC notification categorized the Bank as a well-capitalized institution under
the prompt corrective action regulations. There have been no conditions or
events since that notification that management believes have changed the Bank's
capital classification.
F-22
<PAGE> 163
HUDSON CITY SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
The following is a summary of the Bank's actual capital amounts and ratios
as of December 31, 1998 and 1997, compared to the FDIC minimum capital adequacy
requirements and the FDIC requirements for classification as a well-capitalized
institution:
<TABLE>
<CAPTION>
FDIC REQUIREMENTS
------------------------------------------
MINIMUM CAPITAL FOR CLASSIFICATION AS
BANK ACTUAL ADEQUACY WELL-CAPITALIZED
----------------- ----------------- ---------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- -------- ----- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1998
Leverage (Tier 1) capital.......... $898,494 11.93% $301,314 4.00% $376,642 5.00%
Risk-based capital:
Tier 1........................... 898,494 38.48 93,409 4.00 140,114 6.00
Total............................ 916,206 39.23 186,818 8.00 233,523 10.00
DECEMBER 31, 1997
Leverage (Tier 1) capital.......... $803,615 11.37% $282,836 4.00% $353,546 5.00%
Risk-based capital:
Tier 1........................... 803,615 36.88 87,160 4.00 130,740 6.00
Total............................ 819,240 37.60 174,320 8.00 217,901 10.00
</TABLE>
15. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. This statement should not be applied retroactively to
financial statements of prior periods. The adoption of the provisions of SFAS
No. 133 is not expected to have a material impact on the financial position or
results of operations of the Bank.
In October 1998, the Financial Accounting Standards Board issued SFAS No.
134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise." This statement is an amendment of SFAS No. 65, "Accounting for
Certain Mortgage Banking Activities," and requires that after the securitization
of mortgage loans held for sale, an entity engaged in mortgage banking
activities classify the resulting mortgage-backed securities or other retained
interests based on its ability and intent to sell or hold those investments.
This statement is effective for the first fiscal quarter beginning after
December 15, 1998. The adoption of the provisions of SFAS No. 134 is not
expected to have a material impact on the financial position or results of
operations of the Bank.
F-23
<PAGE> 164
------------------------------------------------------
------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR THAT TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT DOES NOT CONSTITUTE AN OFFER TO
SELL, OR THE SOLICITATION OF AN OFFER TO BUY, ANY OF THE SECURITIES OFFERED
HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
WOULD BE UNLAWFUL. THE AFFAIRS OF HUDSON CITY SAVINGS BANK OR HUDSON CITY
BANCORP, INC. MAY CHANGE AFTER THE DATE OF THIS PROSPECTUS. DELIVERY OF THIS
DOCUMENT AND THE SALES OF SHARES MADE HEREUNDER DOES NOT MEAN OTHERWISE.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary................................... 3
Risk Factors.............................. 10
Selected Financial and Other Data......... 12
Recent Developments....................... 14
Hudson City Savings Bank.................. 19
Hudson City Bancorp, Inc. ................ 19
Hudson City, MHC.......................... 19
How We Intend to Use the Proceeds From the
Offering................................ 20
Our Policy Regarding Dividends............ 22
Market For the Common Stock............... 23
Regulatory Capital Compliance............. 24
Capitalization............................ 25
Pro Forma Data............................ 27
Hudson City Savings Bank Statements of
Income.................................. 32
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 33
Business of Hudson City Savings Bank...... 52
Business of Hudson City Bancorp, Inc. .... 81
Regulation of Hudson City Savings Bank and
Hudson City Bancorp..................... 81
Taxation.................................. 93
Management................................ 96
The Reorganization and the Offering....... 111
Restrictions on Acquisition of Hudson City
Bancorp and Hudson City Savings......... 130
Description of Capital Stock of Hudson
City Bancorp............................ 136
Legal and Tax Opinions.................... 138
Experts................................... 138
Registration Requirements................. 138
Where You Can Find Additional
Information............................. 139
Index to Financial Statements............. F-1
</TABLE>
UNTIL THE LATER OF [ ], 1999 OR 25 DAYS AFTER COMMENCEMENT OF THE OFFERING,
ALL DEALERS EFFECTING TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
UP TO 82,358,687
SHARES OF
COMMON STOCK
HUDSON CITY BANCORP, INC.
PROPOSED HOLDING COMPANY
FOR HUDSON CITY SAVINGS BANK
PROSPECTUS
[RYAN,BECK & CO. LOGO]
[ ], 1999
------------------------------------------------------
------------------------------------------------------
<PAGE> 165
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
New Jersey State Banking Department application fee......... $ 10,000
SEC registration fee(1)..................................... 241,917
National Association of Securities Dealers filing fee(1).... 30,500
Nasdaq National Market Listing Fee(1)....................... 95,000
Printing, postage and mailing............................... 1,300,000
Legal fees and expenses..................................... 1,000,000
Marketing fees and selling commissions(1)................... 9,011,000
Financial advisor expenses (excluding legal fees)........... 150,000
Accounting fees and expenses................................ 185,000
Appraiser's fees and expenses (including preparing business
plan)..................................................... 165,000
Transfer agent and registrar fees and expenses.............. 25,000
Conversion agent fees and expenses.......................... 240,000
Certificate printing........................................ 11,000
Telephone, temporary help and other equipment............... 198,000
Blue Sky fees and expenses (including fees of counsel)...... 10,000
Miscellaneous............................................... 200,000
-----------
TOTAL....................................................... $12,872,417
===========
</TABLE>
- ---------------
(1) Actual expenses based upon the registration and sale of 82,358,687 at $10.00
per share. All other expenses are estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law ("DGCL"), inter alia,
empowers a Delaware corporation to indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding (other than an action by or in the right of the corporation)
by reason of the fact that such person is or was a director, officer, employee
or agent of another corporation or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interest of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. Similar indemnity is authorized for such person against expenses
(including attorneys' fees) actually and reasonably incurred in connection with
the defense or settlement of any such threatened, pending or completed action or
suit if such person acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the corporation, and provided
further that (unless a court of competent jurisdiction otherwise provides) such
person shall not have been adjudged liable to the corporation. Any such
indemnification may be made only as authorized in each specific case upon a
determination by the stockholders or disinterested directors or by independent
legal counsel in a written opinion that indemnification is proper because the
indemnitee has met the applicable standard of conduct.
Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation or
II-1
<PAGE> 166
enterprise, against any liability asserted against him, and incurred by him in
any such capacity, or arising out of his status as such, whether or not the
corporation would otherwise have the power to indemnify him under Section 145.
Article IX of the Certificate of Incorporation of Hudson City Bancorp, Inc.
(the "Company") provides that a director shall not be personally liable to the
Company or its shareholders for damages for breach of his fiduciary duty as a
director, except to the extent such exemption from liability or limitation
thereof is expressly prohibited by the DGCL. Article X of the Company's
Certificate of Incorporation requires the Company, among other things, to
indemnify to the fullest extent permitted by the DGCL, any person who is or was
or has agreed to become a director or officer of the Company, who was or is made
a party to, or is threatened to be made a party to, or has become a witness in,
any threatened, pending or completed action, suit or proceeding, including
actions or suits by or in the right of the Company, by reason of such agreement
or service or the fact that such person is, was or has agreed to serve as a
director, officer, employee or agent of another corporation or organization at
the request of the Company.
Article X also empowers the Company to purchase and maintain insurance to
protect itself and its directors and officers, and those who were or have agreed
to become directors or officers, against any liability, regardless of whether or
not the Company would have the power to indemnify those persons against such
liability under the law or the provisions set forth in the Certificate of
Incorporation. The Company is also authorized by its Certificate of
Incorporation to enter into individual indemnification contracts with directors
and officers. Hudson City Savings Bank currently maintains and the Company
expects to purchase directors' and officers' liability insurance consistent with
the provisions of the Certificate of Incorporation as soon as practicable.
The Company expects to enter into employment agreements with certain
executive officers, which agreements are expected to require that the Company
will obtain a directors' and officers' liability policy for the benefit of such
officers or that the Company will indemnify such officers to the fullest extent
provided by law.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Not Applicable.
II-2
<PAGE> 167
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The exhibits filed as a part of this Registration Statement are as follows:
(a). LIST OF EXHIBITS. (Filed herewith unless otherwise noted.)
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
1.1 Engagement Letter, dated January 27, 1999, between Hudson
City Savings Bank and Ryan Beck & Co.*
1.2 Form of Agency Agreement**
2.1 Amended and Restated Plan of Reorganization and Stock
Issuance of Hudson City Savings Bank**
3.1 Certificate of Incorporation of Hudson City Bancorp, Inc.*
3.2 Bylaws of Hudson City Bancorp, Inc.*
4.1 Certificate of Incorporation of Hudson City Bancorp, Inc.
(See Exhibit 3.1)
4.2 Bylaws of Hudson City Bancorp, Inc. (See Exhibit 3.2)
4.3 Form of Stock Certificate of Hudson City Bancorp, Inc.*
5.1 Opinion of Thacher Proffitt & Wood regarding legality of
shares*
8.1 Opinion of Thacher Proffitt & Wood regarding federal
taxation**
8.2 Letter of KPMG LLP regarding New Jersey State taxation**
8.3 Letter of RP Financial, LC. regarding Subscription Rights*
10.1 Employee Stock Ownership Plan of Hudson City Savings Bank*
10.2 Profit Incentive Bonus Plan of Hudson City Savings Bank*
10.3 Supplementary Savings Plan of Hudson City Savings Bank*
10.4 Form of ESOP Loan Documents**
10.5 Form of Employment Agreement by and among Hudson City
Savings Bank and Hudson City Bancorp, Inc. and certain
officers
10.6 Form of One-Year Change in Control Agreement by and among
Hudson City Savings Bank and Hudson City Bancorp, Inc. and
certain officers*
10.7 Form of Two-Year Change in Control Agreement by and among
Hudson City Savings Bank and Hudson City Bancorp, Inc. and
certain officers*
10.8 Severance Pay Plan of Hudson City Savings Bank*
10.9 ESOP Restoration Plan of Hudson City Savings Bank*
10.10 Hudson City Savings Bank Outside Directors Consultation
Plan*
10.11 Hudson City Savings Bank Supplemental Executive Retirement
Plan*
10.12 Hudson City Savings Bank Annual Incentive Plan*
10.13 Hudson City Savings Bank Long-Term Incentive Plan*
10.14 Form of Post-Retirement Death Benefit for Senior Officers*
10.15 Engagement Letter, dated February 3, 1999, between Hudson
City Savings Bank and RP Financial, LC. for conversion
appraisal services*
10.16 Engagement Letter, dated February 3, 1999, between Hudson
City Savings Bank and RP Financial, LC. for services related
to the preparation of the business plan*
21.1 Subsidiaries of Hudson City Bancorp, Inc.*
23.1 Consent of KPMG LLP
23.2 Consent of Thacher Proffitt & Wood (Included in Exhibits 5.1
and 8.1)
23.3 Consent of RP Financial, LC.*
24.1 Power of Attorney*
27.1 Financial Data Schedule (Submitted only with filing in
electronic format)*
</TABLE>
II-3
<PAGE> 168
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
99.1(a) Appraisal Report of RP Financial, LC. (P)**
99.1(b) Updated Appraisal Report of RP Financial, LC., dated April
16, 1999(P)**
99.1(c) Updated Appraisal Report of RP Financial, LC., dated April
30, 1999(P)
99.2 Form of Marketing Materials to be used in connection with
the Offerings**
</TABLE>
- ---------------
* Previously filed on March 15, 1999.
** Previously filed on April 28, 1999.
(P) Filed in paper format only.
(b). FINANCIAL STATEMENT SCHEDULES.
All schedules have been omitted as not applicable or not required under the
rules of Regulation S-X.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any Prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b)
if, in the aggregate, the changes in volume and price represent
no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table
in the effective Registration Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the Offering.
The undersigned Registrant hereby undertakes to provide to the agent at the
closing specified in the Agency Agreement, certificates in such denominations
and registered in such names as required by the agent to permit prompt delivery
to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the
II-4
<PAGE> 169
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-5
<PAGE> 170
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 2 to Registration Statement No. 333-74383 to
be signed on its behalf by the undersigned, thereunto duly authorized, in
Paramus, New Jersey, on May 7, 1999.
Hudson City Bancorp, Inc.
By: /s/ Leonard S. Gudelski
------------------------------------
Leonard S. Gudelski
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement No. 333-74383, has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ---- ----- ----
<S> <C> <C>
/s/ Leonard S. Gudelski Director, Chairman of the Board and Chief May 7, 1999
- ------------------------------------------ Executive Officer (Principal
Leonard S. Gudelski executive officer)
/s/ Ronald E. Hermance, Jr. Director, President and Chief Operating May 7, 1999
- ------------------------------------------ Officer (Principal financial officer)
Ronald E. Hermance, Jr.
* Director May 7, 1999
- ------------------------------------------
Verne S. Atwater
* Director May 7, 1999
- ------------------------------------------
John D. Birchby
* Director May 7, 1999
- ------------------------------------------
Kenneth L. Birchby
* Director May 7, 1999
- ------------------------------------------
Victoria H. Bruni
* Director May 7, 1999
- ------------------------------------------
William J. Cosgrove
* Director May 7, 1999
- ------------------------------------------
Andrew J. Egner, Jr.
* Director May 7, 1999
- ------------------------------------------
John W. Klie
* Director May 7, 1999
- ------------------------------------------
Donald O. Quest
* Director May 7, 1999
- ------------------------------------------
Arthur V. Wynne, Jr.
By: /s/ Ronald E. Hermance, Jr.
-------------------------------------
Ronald E. Hermance, Jr.
as Attorney-in-fact pursuant to a Power of
Attorney filed on March 15, 1999
</TABLE>
II-6
<PAGE> 171
EXHIBIT LIST
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
1.1 Engagement Letter, dated January 27, 1999, between Hudson
City Savings Bank and Ryan Beck & Co.*
1.2 Form of Agency Agreement**
2.1 Amended and Restated Plan of Reorganization and Stock
Issuance of Hudson City Savings Bank**
3.1 Certificate of Incorporation of Hudson City Bancorp, Inc.*
3.2 Bylaws of Hudson City Bancorp, Inc.*
4.1 Certificate of Incorporation of Hudson City Bancorp, Inc.
(See Exhibit 3.1)
4.2 Bylaws of Hudson City Bancorp, Inc. (See Exhibit 3.2)
4.3 Form of Stock Certificate of Hudson City Bancorp, Inc.*
5.1 Opinion of Thacher Proffitt & Wood regarding legality of
shares*
8.1 Opinion of Thacher Proffitt & Wood regarding federal
taxation**
8.2 Letter of KPMG LLP regarding New Jersey State taxation**
8.3 Letter of RP Financial, LC. regarding Subscription Rights*
10.1 Employee Stock Ownership Plan of Hudson City Savings Bank*
10.2 Profit Incentive Bonus Plan of Hudson City Savings Bank*
10.3 Supplementary Savings Plan of Hudson City Savings Bank*
10.4 Form of ESOP Loan Documents**
10.5 Form of Employment Agreement by and among Hudson City
Savings Bank and Hudson City Bancorp, Inc. and certain
officers
10.6 Form of One-Year Change in Control Agreement by and among
Hudson City Savings Bank and Hudson City Bancorp, Inc. and
certain officers*
10.7 Form of Two-Year Change in Control Agreement by and among
Hudson City Savings Bank and Hudson City Bancorp, Inc. and
certain officers*
10.8 Severance Pay Plan of Hudson City Savings Bank*
10.9 ESOP Restoration Plan of Hudson City Savings Bank*
10.10 Hudson City Savings Bank Outside Directors Consultation
Plan*
10.11 Hudson City Savings Bank Supplemental Executive Retirement
Plan*
10.12 Hudson City Savings Bank Annual Incentive Plan*
10.13 Hudson City Savings Bank Long-Term Incentive Plan*
10.14 Form of Post-Retirement Death Benefit for Senior Officers*
10.15 Engagement Letter, dated February 3, 1999, between Hudson
City Savings Bank and RP Financial, LC. for conversion
appraisal services*
10.16 Engagement Letter, dated February 3, 1999, between Hudson
City Savings Bank and RP Financial, LC. for services related
to the preparation of the business plan*
21.1 Subsidiaries of Hudson City Bancorp, Inc.*
23.1 Consent of KPMG LLP
23.2 Consent of Thacher Proffitt & Wood (Included in Exhibits 5.1
and 8.1)
23.3 Consent of RP Financial, LC.*
24.1 Power of Attorney*
27.1 Financial Data Schedule (Submitted only with filing in
electronic format)*
99.1(a) Appraisal Report of RP Financial, LC. (P)
99.1(b) Updated Appraisal Report of RP Financial, LC. dated April
16, 1999 (P)
99.1(c) Updated Appraisal Report of RP Financial, LC. dated April
30, 1999 (P)
99.2 Form of Marketing Materials to be used in connection with
the Offerings**
</TABLE>
- ---------------
* Previously filed on March 15, 1999.
** Previously filed on April 28, 1999.
(P) Filed in paper format only.
<PAGE> 1
EXHIBIT 10.5
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the "Agreement") is made and
entered into as of [______________], 1999 by and among HUDSON CITY SAVINGS BANK,
a savings bank organized and operating under the laws of the State of New Jersey
and having an office at West 80 Century Road, Paramus, New Jersey 07652-1473
(the "Bank"), HUDSON CITY BANCORP, INC., a business corporation organized and
existing under the laws of the State of Delaware and having an office at West 80
Century Road, Paramus, New Jersey 07652-1473 (the "Company") and
[________________], an individual residing at [______________________] (the
"Executive").
INTRODUCTORY STATEMENT
The Bank is undertaking a reorganization through which it will
convert from a mutual savings to a stock savings bank and become a wholly owned
subsidiary of the Company, and the Company will become a majority-owned
subsidiary of Hudson City, MHC, a New Jersey mutual holding company (the
"Reorganization"). At the same time, the Company will sell less than fifty
percent (50%) of its outstanding common stock to the public in an initial public
offering. The Executive has served the Bank in an executive capacity for many
years and is familiar with the Bank's operations.
The Board of Managers of the Bank and the Board of Directors
of the Company have concluded that it is in the best interests of the Bank, the
Company and their prospective shareholders to secure a continuity in management
following the Reorganization. They also consider it desirable to establish a
working environment for the Executive which minimizes the personal distractions
that might result from possible business combinations in which the Company or
the Bank might be involved. For these reasons, the Board of Managers of the Bank
and the Board of Directors of the Company have decided to offer to enter into a
contract with the Executive for his future services. The Executive has accepted
this offer.
The terms and conditions which the Bank, the Company and the
Executive have agreed to are as follows.
AGREEMENT
SECTION 1. EMPLOYMENT.
The Company and the Bank hereby continue to employ the
Executive, and the Executive hereby accepts such continued employment, during
the period and upon the terms and conditions set forth in this Agreement.
SECTION 2. EMPLOYMENT PERIOD; REMAINING UNEXPIRED EMPLOYMENT
PERIOD.
(a) The Company and the Bank shall employ the Executive during
an initial period of three (3) years beginning on the effective date of the
Reorganization (the "Employment Commencement Date") and ending on the day before
the third (3rd) anniversary of the
<PAGE> 2
Employment Commencement Date, and during the period of any additional extensions
described in section 2(b) (the "Employment Period").
(b) The Employment Period shall be subject to extension in
the following manner:
(i) For purposes of determining the rights and obligations of
the Executive and the Company with respect to each other, on the day
after the Employment Commencement Date and on each day thereafter, the
Employment Period shall be extended by one day, such that on any date
the Employment Period will expire on the day before the third (3rd)
anniversary of such date. These extensions shall continue in perpetuity
until discontinued by: (i) notice to the Executive given by the Company
that they have elected to discontinue the extensions; (ii) notice by
the Executive to the Company that he has elected to discontinue the
extensions; or (iii) termination of the Executive's employment with the
Company, whether by resignation, discharge or otherwise. On the date on
which such a notice is deemed given, or on the effective date of a
termination of the Executive's employment with the Company, the
Employment Period shall be converted to a fixed period of three (3)
years ending on the day before the third (3rd) anniversary of such
date.
(ii) For purposes of determining the rights and obligations of
the Executive and the Bank with respect to each other, the Board of
Directors of the Bank shall conduct an annual review of the
Executive's performance on or about each anniversary of the Employment
Commencement Date (each, an "Anniversary Date") and may, on the basis
of such review and by written notice to the Executive, offer to extend
the Employment Period through the day before the third (3rd)
anniversary of the relevant Anniversary Date. In such event, the
Employment Period shall be deemed extended in the absence of objection
from the Executive by written notice to Bank given within ten (10)
business days after his receipt of the Bank's offer of extension.
(c) Except as otherwise expressly provided in this Agreement,
any reference in this Agreement to the term "Remaining Unexpired Employment
Period" as of any date shall mean (i) for purposes of determining the rights and
obligations of the Company and the Executive to each other, the period beginning
on such date and ending on the day before the third (3rd) anniversary of the
earliest of the date in question, any earlier date on which the Executive or the
Company is deemed to have given a notice to discontinue extensions of the
Employment Period, and any earlier date on which the Executive's employment with
the Bank and the Company was terminated; and (ii) for purposes of determining
the rights and obligations of the Company and the Executive to each other, the
period beginning on such date and ending on the day before the third (3rd)
anniversary of the Employment Commencement Date or, if later, on the day before
the third (3rd) anniversary of the last Anniversary Date as of which the
Employment Period was extended pursuant to section 2(b)(ii).
(d) Nothing in this Agreement shall be deemed to prohibit the
Company or the Bank from terminating the Executive's employment before the end
of the Employment Period with or without notice for any reason. This Agreement
shall determine the relative rights and obligations of the Bank, the Company and
the Executive in the event of any such termination. In addition, nothing in this
Agreement shall require the termination of the Executive's employment at the
expiration of the Employment Period. Any such continuation shall be on an
"at-will" basis unless the Bank, the Company and the Executive agree otherwise.
SECTION 3. DUTIES.
The Executive shall serve as [___________________] of the
Company and as [__________________] of the Bank, having such power, authority
and responsibility and performing such duties as are prescribed by or under
their respective By-Laws and as are customarily associated with such positions.
The Executive shall devote his full business time and attention (other than
during weekends, holidays, approved vacation periods, and periods of illness or
approved leaves of absence) to the business and affairs of the Bank and the
Company and shall use his best efforts to advance their respective best
interests.
SECTION 4. CASH COMPENSATION.
In consideration for the services to be rendered by the
Executive hereunder, the Bank and the Company shall pay to him a salary at an
initial annual rate of [____________] ([__________]), payable in approximately
equal installments in accordance with their respective customary payroll
practices for senior officers. The Bank's and the Company's respective Boards
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of Directors shall review the Executive's annual rate of salary at such times
during the Employment Period as they deem appropriate, but not less frequently
than once every twelve (12) months, and may, in their discretion, approve a
salary increase. In addition to salary, the Executive may receive other cash
compensation from the Company or the Bank for services hereunder at such times,
in such amounts and on such terms and conditions as the Boards of Directors of
the Bank and the Company may determine. If the Executive is discharged or
suspended, or is subject to any regulatory prohibition or restriction with
respect to participation in the affairs of the Bank, he shall continue to
perform services for the Company in accordance with this Agreement but shall not
directly or indirectly provide services to or participate in the affairs of the
Bank in a manner inconsistent with the terms of such discharge or suspension or
any applicable regulatory order.
SECTION 5. EMPLOYEE BENEFIT PLANS AND PROGRAMS.
During the Employment Period, the Executive shall be treated
as an employee of the Company and the Bank and shall be entitled to participate
in and receive benefits under any and all qualified or non-qualified retirement,
pension, savings, profit-sharing or stock bonus plans, any and all group life,
health (including hospitalization, medical and major medical), dental, accident
and long-term disability insurance plans, and any other employee benefit and
compensation plans (including, but not limited to, any incentive compensation
plans or programs, stock option and appreciation rights plans and restricted
stock plans) as may from time to time be maintained by, or cover employees of,
the Company and the Bank, in accordance with the terms and conditions of such
employee benefit plans and programs and compensation plans and programs and
consistent with the Company's and the Bank's customary practices.
SECTION 6. INDEMNIFICATION AND INSURANCE.
(a) During the Employment Period and for a period of six years
thereafter, the Company and the Bank shall cause the Executive to be covered by
and named as an insured under any policy or contract of insurance obtained by
them to insure their directors and officers against personal liability for acts
or omissions in connection with service as an officer or director of the Company
or the Bank or service in other capacities at their request. The coverage
provided to the Executive pursuant to this section 6 shall be of the same scope
and on the same terms and conditions as the coverage (if any) provided to other
officers or directors of the Company and the Bank.
(b) To the maximum extent permitted under applicable law,
during the Employment Period and for a period of six years thereafter, the
Company and the Bank shall indemnify the Executive against and hold him harmless
from any costs, liabilities, losses and exposures to the fullest extent and on
the most favorable terms and conditions that similar indemnification is offered
to any director or officer of the Company and the Bank or any subsidiary or
affiliate thereof.
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SECTION 7. OUTSIDE ACTIVITIES.
The Executive may serve as a member of the boards of directors
of such business, community and charitable organizations as he may disclose to
and as may be approved by the Boards of Directors of the Company and the Bank
(which approval shall not be unreasonably withheld); provided, however, that
such service shall not materially interfere with the performance of his duties
under this Agreement. The Executive may also engage in personal business and
investment activities which do not materially interfere with the performance of
his duties hereunder; provided, however, that such activities are not prohibited
under any code of conduct or investment or securities trading policy established
by the Company or the Bank and generally applicable to all similarly situated
executives.
SECTION 8. WORKING FACILITIES AND EXPENSES.
The Executive's principal place of employment shall be at the
Bank's executive offices at the address first above written, or at such other
location as the Bank, the Company and the Executive may mutually agree upon. The
Bank and the Company shall provide the Executive at his principal place of
employment with a private office, secretarial services and other support
services and facilities suitable to his positions with the Company and the Bank
and necessary or appropriate in connection with the performance of his assigned
duties under this Agreement. The Company shall provide to the Executive for his
exclusive use an automobile owned or leased by the Company and appropriate to
his position, to be used in the performance of his duties hereunder, including
commuting to and from his personal residence. The Bank or the Company shall
reimburse the Executive for his ordinary and necessary business expenses,
including, without limitation, all expenses associated with his business use of
the aforementioned automobile, fees for memberships in such clubs and
organizations as the Executive and the Company shall mutually agree are
necessary and appropriate for business purposes, and his travel and
entertainment expenses incurred in connection with the performance of his duties
under this Agreement, in each case upon presentation to the payer of an itemized
account of such expenses in such form as the payer may reasonably require.
SECTION 9. TERMINATION OF EMPLOYMENT DUE TO DEATH.
The Executive's employment with the Bank and the Company shall
terminate, automatically and without any further action on the part of any party
to this Agreement, on the date of the Executive's death. In such event:
(a) The Bank and the Company shall pay to the Executive's
estate his earned but unpaid compensation (including, without
limitation, salary and all other items which constitute wages under
applicable law) as of the date of his termination of employment. This
payment shall be made at the time and in the manner prescribed by law
applicable to the payment of wages but in no event later than 30 days
after the date of the Executive's termination of employment.
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(b) The Company and the Bank shall provide the benefits, if
any, due to the Executive's estate, surviving dependents or his
designated beneficiaries under the employee benefit plans and programs
and compensation plans and pro grams maintained for the benefit of the
officers and employees of the Company and the Bank. The time and manner
of payment or other delivery of these benefits and the recipients of
such benefits shall be determined according to the terms and conditions
of the applicable plans and programs.
The payments and benefits described in sections 9(a) and (b) shall be referred
to in this Agreement as the "Standard Termination Entitlements."
SECTION 10. TERMINATION DUE TO DISABILITY.
The Bank and the Company may terminate the Executive's
employment upon a determination, by separate votes of a majority of the members
of the Boards of Directors of the Company and the Bank, acting in reliance on
the written advice of a medical professional acceptable to them, that the
Executive is suffering from a physical or mental impairment which, at the date
of the determination, has prevented the Executive from performing his assigned
duties on a substantially full-time basis for a period of at least one hundred
and eighty (180) days during the period of one (1) year ending with the date of
the determination or is likely to result in death or prevent the Executive from
performing his assigned duties on a substantially full-time basis for a period
of at least one hundred and eighty (180) days during the period of one (1) year
beginning with the date of the determination. In such event:
(a) The Bank and the Company shall pay and deliver to the
Executive (or in the event of his death before payment, to his estate
and surviving dependents and beneficiaries, as applicable) the Standard
Termination Entitlements.
(b) In addition to the Standard Termination Entitlements, the
Bank and the Company shall continue to pay the Executive his base
salary, at the annual rate in effect for him immediately prior to the
termination of his employment, during a period ending on the earliest
of: (i) the expiration of one hundred and eighty (180) days after the
date of termination of his employment; (ii) the date on which long-term
disability insurance benefits are first payable to him under any
long-term disability insurance plan covering employees of the Bank or
the Company (the "LTD Eligibility Date"); (iii) the date of his death;
and (iv) the expiration of the Remaining Unexpired Employment Period
(the "Initial Continuation Period"). If the end of the Initial
Continuation Period is neither the LTD Eligibility Date nor the date of
his death, the Company and the Bank shall continue to pay the Executive
his base salary, at an annual rate equal to sixty percent (60%) of the
annual rate in effect for him immediately prior to the termination of
his employment, during an additional period ending on the earliest of
the LTD Eligibility Date, the date of his death and the expiration of
the Remaining Unexpired Employment Period.
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A termination of employment due to disability under this section 10 shall be
effected by joint notice of termination given to the Executive by the Company
and the Bank and shall take effect on the later of the effective date of
termination specified in such notice or the date on which the notice of
termination is deemed given to the Executive.
SECTION 11. DISCHARGE WITH CAUSE.
(a) The Bank and the Company may terminate the Executive's
employment during the Employment Period, and such termination shall be deemed to
have occurred with "Cause" only if:
(i) the Board of Directors of the Bank and the Board of
Directors of the Company, by separate majority votes of their entire
membership, determine that the Executive (A) has willfully and
intentionally failed to perform his assigned duties under this
Agreement in any material respect (including, for these purposes, the
Executive's inability to perform such duties as a result of drug or
alcohol dependency); (B) has willfully and intentionally engaged in
dishonest or illegal conduct in connection with his performance of
services for the Company or the Bank or has been convicted of a felony;
(C) has willfully violated, in any material respect, any law, rule,
regulation, written agreement or final cease-and-desist order with
respect to his performance of services for the Company or the Bank; or
(D) has willfully and intentionally breached the material terms of this
Agreement in any material respect; and
(ii) at least forty-five (45) days prior to the votes
contemplated by section 11(a)(i), the Bank and the Company have
provided the Executive with notice of their intent to discharge the
Executive for Cause, detailing with particularity the facts and
circumstances which are alleged to constitute Cause (the "Notice of
Intent to Discharge"); and
(iii) after the giving of the Notice of Intent to Discharge
and before the taking of the votes contemplated by section 11(a)(i),
the Executive (together with his legal counsel, if he so desires) is
afforded a reasonable opportunity to make both written and oral
presentations before the Boards of Directors of the Company and the
Bank for the purpose of refuting the alleged grounds for Cause for his
discharge; and
(iv) after the votes contemplated by section 11(a)(i), the
Company and the Bank have furnished to the Executive a notice of
termination which shall specify the effective date of his termination
of employment (which shall in no event be earlier than the date on
which such notice is deemed given) and include a copy of a resolution
or resolutions adopted by the Board of Directors of the Bank and the
Board of Directors of the Company, certified by their corporate
secretaries and signed by each member of their respective Board of
Directors voting in favor of adoption of the resolution(s), authorizing
the termination of the Executive's
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<PAGE> 7
employment with Cause and stating with particularity the facts and
circumstances found to constitute Cause for his discharge (the "Final
Discharge Notice").
For purposes of this section 11, no act or failure to act, on the part of the
Executive, shall be considered "willful" unless it is done, or omitted to be
done, by the Executive in bad faith or without reasonable belief that the
Executive's action or omission was in the best interests of the Company and the
Bank. Any act, or failure to act, based upon authority given pursuant to a
resolution duly adopted by the Board and the Bank Board or based upon the
written advice of counsel for the Company or the Bank shall be conclusively
presumed to be done, or omitted to be done, by the Executive in good faith and
in the best interests of the Company and the Bank.
(b) If the Executive is discharged during the Employment
Period with Cause, the Company and the Bank shall pay and provide to him (or, in
the event of his death, to his estate, his surviving beneficiaries and his
dependents) the Standard Termination Entitlements only. Following the giving of
a Notice of Intent to Discharge, the Bank and the Company may temporarily
suspend the Executive's duties and authority and, in such event, may also
suspend the payment of salary and other cash compensation, but not the
Executive's participation in retirement, insurance and other employee benefit
plans. If the Executive is not discharged, or is discharged without Cause,
within forty-five (45) days after the giving of a Notice of Intent to Discharge,
payments of salary and cash compensation shall resume, and all payments withheld
during the period of suspension shall be promptly restored. If the Executive is
discharged with Cause not later than forty-five (45) days after the giving of
the Notice of Intent to Discharge, all payments withheld during the period of
suspension shall be deemed forfeited and shall not be included in the Standard
Termination Entitlements. If a Final Discharge Notice is given later than
forty-five (45) days, but sooner than ninety (90) days, after the giving of the
Notice of Intent to Discharge, all payments made to the Executive during the
period beginning with the giving of the Notice of Intent to Discharge and ending
with the Executive's discharge with Cause shall be retained by the Executive and
shall not be applied to offset the Standard Termination Entitlements. If the
Bank and the Company do not give a Final Discharge Notice to the Executive
within ninety (90) days after giving a Notice of Intent to Discharge, the Notice
of Intent to Discharge shall be deemed withdrawn and any future action to
discharge the Executive with Cause shall require the giving of a new Notice of
Intent to Discharge.
SECTION 12. DISCHARGE WITHOUT CAUSE.
The Bank and the Company may discharge the Executive at any
time during the Employment Period and, unless such discharge constitutes a
discharge with Cause:
(a) The Bank and the Company shall pay and deliver to the
Executive (or in the event of his death before payment, to his estate
and surviving dependents and beneficiaries, as applicable) the Standard
Termination Entitlements.
(b) In addition to the Standard Termination Entitlements:
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(i) During the Remaining Unexpired Employment Period,
the Bank and the Company shall provide for the Executive and
his dependents continued group life, health (including
hospitalization, medical and major medical), dental, accident
and long-term disability insurance benefits on substantially
the same terms and conditions (including any required
premium-sharing arrangements, co-payments and deductibles) in
effect for them immediately prior to the Executive's
termination. The coverage provided under this section 12(b)(i)
may, at the election of the Bank and the Company, be secondary
to the coverage provided as part of the Standard Termination
Entitlements and to any employer-paid coverage provided by a
subsequent employer or through Medicare, with the result that
benefits under the other coverages will offset the coverage
required by this section 12(b)(i).
(ii) The Bank and the Company shall make a lump sum
payment to the Executive (or, in the event of his death before
payment, to his estate), in an amount equal to the estimated
present value of the salary that the Executive would have
earned if he had continued working for the Company and the
Bank during the Remaining Unexpired Employment Period at the
highest annual rate of salary achieved during the period of
three (3) years ending immediately prior to the date of
termination (the "Salary Severance Payment"). The Salary
Severance Payment shall be computed using the following
formula:
(n) (BS/PR)
SSP = (Sigma) [-------------------------]
(1) [1 + (I / PR)](n)
where "SSP" is the amount of the Salary Severance Payment
(before the deduction of applicable federal, state and local
withholding taxes); "BS" is the highest annual rate of salary
achieved by the Executive during the period of three (3) years
ending immediately prior to the date of termination; "PR" is
the number of payroll periods that occur during a year under
the Company's and the Bank's normal payroll practices; "I"
equals the applicable federal short term rate established
under section 1274 of the Internal Revenue Code of 1986 (the
"Code") for the month in which the Executive's termination of
employment occurs (the "Short Term AFR") and "n" equals the
product of the Remaining Unexpired Employment Period at the
Executive's termination of employment (expressed in years and
fractions of years) multiplied by the number of payroll
periods that occur during a year under the Company's and the
Bank's normal payroll practices. The Salary Severance Payment
shall be made within five (5) business days after the
Executive's termination of employment and shall be in lieu of
any claim to a continuation of base salary which the Executive
might otherwise have and in lieu of cash severance benefits
under any
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<PAGE> 9
severance benefits program which may be in effect for officers
or employees of the Bank or the Company.
(iii) The Bank and the Company shall make a lump sum
payment to the Executive (or, in the event of his death before
payment, to his estate), in an amount equal to the estimated
present value of the annual bonuses that the Executive would
have earned if he had continued working for the Company and
the Bank during the Remaining Unexpired Employment Period at
the highest annual rate of salary achieved during the period
of three (3) years ending immediately prior to the date of
termination (the "Bonus Severance Payment"). The Bonus
Severance Payment shall be computed using the following
formula:
BSP = SSP x (ABP / ASP)
where "BSP" is the amount of the Bonus Severance Payment
(before the deduction of applicable federal, state and local
withholding taxes); "SSP" is the amount of the Salary
Severance Payment (before the deduction of applicable federal,
state and local withholding taxes); "ABP" is the aggregate of
the annual bonuses paid or declared (whether or not paid) for
the most recent period of three (3) calendar years to end on
or before the Executive's termination of employment; and "ASP"
is the aggregate base salary actually paid to the Executive
during such period of three (3) calendar years (excluding any
year for which no bonus was declared or paid). The Bonus
Severance Payment shall be made within five (5) business days
after the Executive's termination of employment and shall be
in lieu of any claim to a continuation of participation in
annual bonus plans of the Bank or the Company which the
Executive might otherwise have.
(iv) The Bank and the Company shall make a lump sum
payment to the Executive (or, in the event of his death before
payment, to his estate), in an amount equal to the estimated
present value of the long-term incentive bonuses that the
Executive would have earned if he had continued working for
the Company and the Bank during the Remaining Unexpired
Employment Period (the "Incentive Severance Payment"). The
Incentive Severance Payment shall be computed using the
following formula:
ISP = (SSP / RUP) x (ALTIP / ALTSP) x
Y
where "ISP" is the amount of the Incentive Severance Payment
(before the deduction of applicable federal, state and local
withholding taxes); "SSP" is the amount of the Salary
Severance Payment (before the deduction of applicable federal,
state and local withholding taxes); "ALTIP" is the
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<PAGE> 10
aggregate of the most recently paid or declared (whether or
not paid) long-term incentive compensation payments (but not
more than three (3) such payments) for performance periods
that end on or before the Executive's termination of
employment; and "ALTSP" is the aggregate base salary actually
paid to the Executive during the performance periods covered
by the payments included in "ALTIP" and excluding base salary
paid for any period for which no long-term incentive
compensation payment was declared or paid; "RUP" is the
Remaining Unexpired Employment Period, expressed in years and
fractions of years; and "Y" is the aggregate (expressed in
years and fractions of years) of the Remaining Unexpired
Employment Period plus the number of years and fraction of
years that have elapsed since the end of the last performance
period for which a long-term incentive payment has been
declared and paid. The Incentive Severance Payment shall be
made within five (5) business days after the Executive's
termination of employment and shall be in lieu of any claim to
a continuation of participation in long-term incentive
compensation plans of the Bank or the Company which the
Executive might otherwise have. Notwithstanding the foregoing,
the Incentive Severance Payment shall be zero if the
Executive's termination of employment occurs at a time when he
is not covered by any long-term incentive compensation plan.
(v) The Company and the Bank shall pay to the
Executive (or in the event of his death, to his estate), a
lump sum payment in an amount equal to the excess (if any) of:
(A) the present value of the aggregate benefits to which he
would be entitled under any and all tax-qualified and
non-tax-qualified defined benefit plans maintained by, or
covering employees of, the Company or the Bank (the "Pension
Plans") if he had continued working for the Company and the
Bank during the Remaining Unexpired Employment Period; over
(B) the present value of the benefits to which the Executive
and his spouse and/or designated beneficiaries are actually
entitled under such plans (the "Pension Severance Payment").
The Pension Severance Payment shall be computed according to
the following formula:
PSP = PPB - APB
where "PSP" is the amount of the Pension Severance Payment
(before deductions for applicable federal, state and local
withholding taxes); "APB" is the aggregate lump sum present
value of the actual vested pension benefits payable under the
Pension Plans in the form of a straight life annuity beginning
at the earliest date permitted under the Pension Plans,
computed on the basis of the Executive's life expectancy at
the earliest date on which payments under the Pension Plans
could begin, determined by reference to Table VI of section
1.72-9 of the Income Tax Regulations (the "Assumed Life
Expectancy"), and on the basis of an interest rate
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<PAGE> 11
assumption equal to the average bond-equivalent yield on
United States Treasury Securities with a Constant Maturity of
30 Years for the month prior to the month in which the
Executive's termination of employment occurs (the "30-Year
Treasury Rate"); and "PPB" is the lump sum present value of
the pension benefits (whether or not vested) that would be
payable under the Pension Plans in the form of a straight life
annuity beginning at the earliest date permitted under the
Pension Plans, computed on the basis that the Executive's
actual age at termination of employment is his attained age as
of his last birthday that would occur during the Remaining
Unexpired Employment Period, that his service for benefit
accrual purposes under the Pension Plans is equal to the
aggregate of his actual service plus the Remaining Unexpired
Employment Period, that his average compensation figure used
in determining his accrued benefit is equal to the highest
annual rate of salary achieved by the Executive during the
period of three (3) years ending immediately prior to the date
of termination, that the Executive's life expectancy at the
earliest date on which payments under the Pension Plans could
begin is the Assumed Life Expectancy and that the interest
rate assumption used is equal to the 30-Year Treasury Rate.
The Pension Severance Payment shall be made within five (5)
business days after the Executive's termination of employment
and shall be in lieu of any claim to any actual increase in
his accrued in the Pension Plans in respect of the Remaining
Unexpired Employment Period.
(vi) The Company and the Bank shall pay to the
Executive (or in the event of his death, to his estate) a lump
sum payment in an amount equal to the present value of the
additional employer contributions that would have been
credited directly to his account(s) under any and all
tax-qualified and non-tax qualified defined contribution plans
maintained by, or covering employees of, the Bank and the
Company (the "Non-ESOP DC Plans"), plus the fair market value
of the additional shares of employer securities or other
property that would have been allocated to his account as a
result of employer contributions or dividends under any
tax-qualified leveraged employee stock ownership plan and any
related non-tax-qualified supplemental plan maintained by, or
covering employees of, the Bank and the Company (the "ESOP
Plans") if he had continued in employment during the Remaining
Unexpired Employment Period (the "Defined Contribution
Severance Payment"). The Defined Contribution Severance
Payment shall be computed according to the following formula:
DCSP = [SSP x (EC / BS)] + [(STK + PROP) x Y]
where: "DCSP" is the amount of the Defined Contribution
Severance Payment (before deductions for applicable federal,
state and local withholding taxes); "SSP" is the amount of the
Salary Severance Payment (before deductions for applicable
federal, state and local withholding taxes);
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"EC" is the amount of employer contributions actually credited
to the Executive's accounts under the Non-ESOP Plans for the
last plan year to end before his termination of employment;
"BS" is the Executive's compensation taken into account in
computing EC; "Y" is the aggregate (expressed in years and
fractions of years) of the Remaining Unexpired Employment
Period and the number of years and fractions of years that
have elapsed between the end of plan year for which EC was
computed and the date of the Executive's termination of
employment; "STK" is the fair market value (determined by the
final reported sales price for stock of the same class on the
last trading day before the Executive's termination of
employment) of the employer securities actually allocated to
the Executive's accounts under the ESOP Plans in respect of
employer contributions and dividends applied to loan
amortization payments for the last plan year to end before his
termination of employment; and "PROP" is the fair market value
(determined as of the day before the Executive's termination
of employment using the same valuation methodology used to
value the assets of the ESOP Plans) of the property other than
employer securities actually allocated to the Executive's
accounts under the ESOP Plans in respect of employer
contributions and dividends applied to loan amortization
payments for the last plan year to end before his termination
of employment.
(vii) At the election of the Company made within 30
days following the Executive's termination of employment,
upon the surrender of options or appreciation rights issued to
the Executive under any stock option and appreciation rights
plan or program maintained by, or covering employees of, the
Company or the Bank, a lump sum payment in an amount equal to
the product of:
(A) the excess of (I) the fair market value of
a share of stock of the same class as the stock
subject to the option or appreciation right,
determined as of the date of termination of
employment, over (II) the exercise price per share
for such option or appreciation right, as specified
in or under the relevant plan or program; multiplied
by
(B) the number of shares with respect to which
options or appreciation rights are being surrendered.
For the purpose of computing this payment, the Executive shall
be deemed fully vested in all options and appreciation rights
under any stock option or appreciation rights plan or program
maintained by, or covering employees of, the Company or the
Bank, even if he is not vested under such plan or program.
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(viii) At the election of the Company made within 30
days following the Executive's termination of employment,
upon the surrender of any shares awarded to the Executive
under any restricted stock plan maintained by, or covering
employees of, the Company or the Bank, the Company and the
Bank shall make a lump sum payment in an amount equal to the
product of:
(A) the fair market value of a share of stock
of the same class of stock granted under such plan,
determined as of the date of the Executive's
termination of employment; multiplied by
(B) the number of shares which are being
surrendered.
For purposes of computing this payment, the Executive shall be
deemed fully vested in all shares awarded under any restricted
stock plan maintained by, or covering employees of, the
Company or the Bank, even if he is not vested under such plan.
The payments and benefits described in section 12(b) are referred to in this
Agreement as the "Additional Termination Entitlements".
SECTION 13. RESIGNATION.
(a) The Executive may resign from his employment with the Bank
and the Company at any time. A resignation under this section 13 shall be
effected by notice of resignation given by the Executive to the Company and the
Bank and shall take effect on the later of the effective date of termination
specified in such notice or the date on which the notice of termination is
deemed given to the Executive. The Executive's resignation of any of the
positions within the Bank or the Company to which he has been assigned shall be
deemed a resignation from all such positions.
(b) The Executive's resignation shall be deemed to be for
"Good Reason" if the effective date of resignation occurs within ninety (90)
days after any of the following:
(i) the failure of the Company or the Bank (whether by act or
omission of their respective Boards of Directors, or otherwise) to
appoint or re-appoint or elect or re-elect the Executive to the
position(s) with the Company and the Bank, specified in section 3 of
this Agreement or to a more senior office;
(ii) if the Executive is or becomes a member of the Board of
Directors of the Company or the Bank, the failure of their respective
shareholders (whether in an election in which the Executive stands as a
nominee or in an election where the Executive is not a nominee) to
elect or re-elect the Executive to membership at the expiration of his
term of membership, unless such failure is a result of the Executive's
refusal to stand for election;
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<PAGE> 14
(iii) a material failure by the Company or the Bank, whether
by amendment of their respective certificates of incorporation or
organization, by-laws, action of their respective Boards of Directors
or otherwise, to vest in the Executive the functions, duties, or
responsibilities prescribed in section 3 of this Agreement; provided
that the Executive shall have given notice of such failure to the
Company and the Bank, and the Company or the Bank have not fully cured
such failure within thirty (30) days after such notice is deemed given;
(iv) any reduction of the Executive's rate of base salary in
effect from time to time, whether or not material, or any failure
(other than due to reasonable administrative error that is cured
promptly upon notice) to pay any portion of the Executive's
compensation as and when due;
(v) any change in the terms and conditions of any compensation
or benefit program in which the Executive participates which, either
individually or together with other changes, has a material adverse
effect on the aggregate value of his total compensation package;
provided that the Executive shall have given notice of such material
adverse effect to the Company and the Bank, and the Company or the Bank
have not fully cured such failure within thirty (30) days after such
notice is deemed given;
(vi) any material breach by the Company or the Bank of any
material term, condition or covenant contained in this Agreement;
provided that the Executive shall have given notice of such material
adverse effect to the Company and the Bank, and the Company or the Bank
have not fully cured such failure within thirty (30) days after such
notice is deemed given; or
(vii) a change in the Executive's principal place of
employment to a place that is not the principal executive office of the
Bank, or a relocation of the Bank's principal executive office to a
location that is both more than twenty-five (25) miles away from the
Executive's principal residence and more than twenty-five (25) miles
away from the location of the Bank's principal executive office on the
date of this Agreement.
In all other cases, a resignation by the Executive shall be deemed to be without
Good Reason.
(c) In the event of the Executive's resignation before the
expiration of the Employment Period, the Company and the Bank shall pay and
deliver the Standard Termination Entitlements. In addition, if the Executive's
resignation is deemed to be a resignation with Good Reason, the Company and the
Bank shall also pay and deliver the Additional Termination Entitlements.
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<PAGE> 15
SECTION 14. TERMS AND CONDITIONS OF THE ADDITIONAL TERMINATION
ENTITLEMENTS.
The Company, the Bank and the Executive hereby stipulate that
the damages which may be incurred by the Executive following any termination of
employment are not capable of accurate measurement as of the date first above
written and that the Additional Termination Entitlements constitute reasonable
damages under the circumstances and shall be payable without any requirement of
proof of actual damage and without regard to the Executive's efforts, if any, to
mitigate damages. The Company, the Bank and the Executive further agree that the
Company and the Bank may condition the payment and delivery of the Additional
Termination Entitlements on the receipt of the Executive's resignation from any
and all positions which he holds as an officer, director or committee member
with respect to the Company, the Bank or any subsidiary or affiliate of either
of them.
SECTION 15. TERMINATION UPON OR FOLLOWING A CHANGE OF CONTROL.
(a) A "Change of Control" shall be deemed to have occurred
upon the happening of any of the following events:
(i) the consummation of a reorganization, merger or
consolidation of the Company with one or more other persons, other than
a transaction following which:
(A) at least 51% of the equity ownership interests of the
entity resulting from such transaction are beneficially owned
(within the meaning of Rule 13d-3 promulgated under the
Securities Exchange Act of 1934, as amended ("Exchange Act"))
in substantially the same relative proportions by persons who,
immediately prior to such transaction, beneficially owned
(within the meaning of Rule 13d-3 promulgated under the
Exchange Act) at least 51% of the outstanding equity ownership
interests in the Company; and
(B) at least 51% of the securities entitled to vote
generally in the election of directors of the entity resulting
from such transaction are beneficially owned (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) in
substantially the same relative proportions by persons who,
immediately prior to such transaction, beneficially owned
(within the meaning of Rule 13d-3 promulgated under the
Exchange Act) at least 51% of the securities entitled to vote
generally in the election of directors of the Company;
(ii) the acquisition of all or substantially all of the assets
of the Company or beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of 25% or more of the
outstanding securities of the Company
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<PAGE> 16
entitled to vote generally in the election of directors by any person
or by any persons acting in concert;
(iii) a complete liquidation or dissolution of the Company;
(iv) the occurrence of any event if, immediately following
such event, at least 50% of the members of the Board of Directors of
the Company do not belong to any of the following groups:
(A) individuals who were members of the Board of
Directors of the Company on the date of this Agreement; or
(B) individuals who first became members of the Board of
Directors of the Company after the date of this Agreement
either:
(1) upon election to serve as a member of the Board
of Directors of the Company by affirmative vote of
three-quarters of the members of such board, or of a
nominating committee thereof, in office at the time of
such first election; or
(2) upon election by the shareholders of the Board of
Directors of the Company to serve as a member of such
board, but only if nominated for election by affirmative
vote of three-quarters of the members of the Board of
Directors of the Company, or of a nominating committee
thereof, in office at the time of such first nomination;
provided, however, that such individual's election or
nomination did not result from an actual or threatened
election contest (within the meaning of Rule 14a-11 of
Regulation 14A promulgated under the Exchange Act) or other
actual or threatened solicitation of proxies or consents
(within the meaning of Rule 14a-11 of Regulation 14A
promulgated under the Exchange Act) other than by or on behalf
of the Board of Directors of the Company; or
(v) any event which would be described in section 15(a)(i),
(ii), (iii) or (iv) if the term "Bank" were substituted for the term
"Company" therein.
In no event, however, shall a Change of Control be deemed to have occurred as a
result of any acquisition of securities or assets of the Company, the Bank, or a
subsidiary of either of them, by the Company, the Bank, or any subsidiary of
either of them, or by any employee benefit plan maintained by any of them. For
purposes of this section 15(a), the term "person" shall have the meaning
assigned to it under sections 13(d)(3) or 14(d)(2) of the Exchange Act.
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<PAGE> 17
(b) For purposes of this Agreement, a "Pending Change of
Control" shall mean: (i) the signing of a definitive agreement for a transaction
which, if consummated, would result in a Change of Control; (ii) the
commencement of a tender offer which, if successful, would result in a Change of
Control; or (iii) the circulation of a proxy statement seeking proxies in
opposition to management in an election contest which, if successful, would
result in a Change of Control.
(c) Notwithstanding anything in this Agreement to the
contrary, if the Executive's employment with the Bank and the Company terminates
due to death or disability within one (1) year after the occurrence of a Pending
Change of Control and if a Change of Control occurs within two (2) years after
such termination of employment, he (or in the event of his death, his estate)
shall be entitled to receive the Standard Termination Entitlements and the
Additional Termination Entitlements that would have been payable if a Change of
Control had occurred on the date of his termination of employment and he had
resigned with Good Reason immediately thereafter; provided, that payment shall
be deferred without interest until, and shall be payable immediately upon, the
actual occurrence of a Change of Control.
(d) Notwithstanding anything in this Agreement to the
contrary: (i) in the event of the Executive's resignation within sixty (60) days
after the occurrence of a Change of Control, he shall be entitled to receive the
Standard Termination Entitlements and Additional Termination Entitlements that
would be payable if his resignation were a resignation for Good Reason, without
regard to the actual circumstances of his resignation; and (ii) for a period of
one (1) year after the occurrence of a Change of Control, no discharge of the
Executive shall be deemed a discharge with Cause unless the votes contemplated
by section 11(a) of this Agreement are supported by at least two-thirds of the
members of the Board of Directors of the Company and the Bank at the time the
vote is taken who were also members of the Board of Directors of the Company and
the Bank immediately prior to the Change of Control.
(e) Notwithstanding anything in this Agreement to the
contrary, for purposes of computing the Additional Termination Entitlements due
upon a termination of employment that occurs, or is deemed to have occurred,
after a Change of Control, the Remaining Unexpired Employment Period shall be
deemed to be three (3) full years.
SECTION 16. TAX INDEMNIFICATION.
(a) If the Executive's employment terminates under
circumstances entitling him (or in the event of his death, his estate) to the
Additional Termination Entitlements, the Company shall pay to the Executive (or
in the event of his death, his estate) an additional amount intended to
indemnify him against the financial effects of the excise tax imposed on excess
parachute payments under section 280G of the Code (the "Tax Indemnity Payment").
The Tax Indemnity Payment shall be determined under the following formula:
E x P
X = ------------------------------------
1 - [(FI x (1 - SLI)) + SLI + E + M]
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<PAGE> 18
where
E = the percentage rate at which an excise tax is
assessed under section 4999 of the Code;
P = the amount with respect to which such excise tax is
assessed, determined without regard to this section
16;
FI = the highest marginal rate of income tax applicable to
the Executive under the Code for the taxable year in
question;
SLI = the sum of the highest marginal rates of income tax
applicable to the Executive under all applicable
state and local laws for the taxable year in
question; and
M = the highest marginal rate of Medicare tax
applicable to the Executive under the Code for the
taxable year in question.
Such computation shall be made at the expense of the Company by an attorney or a
firm of independent certified public accountants selected by the Executive and
reasonably satisfactory to the Company (the "Tax Advisor") and shall be based on
the following assumptions: (i) that a change in ownership, a change in effective
ownership or control, or a change in the ownership of a substantial portion of
the assets, of the Bank or the Company has occurred within the meaning of
section 280G of the Code (a "280G Change of Control"); (ii) that all direct or
indirect payments made to or benefits conferred upon the Executive on account of
his termination of employment are "parachute payments" within the meaning of
section 280G of the Code; and (iii) that no portion of such payments is
reasonable compensation for services rendered prior to the Executive's
termination of employment.
(b) With respect to any payment that is presumed to be a
parachute payment for purposes of section 280G of the Code, the Tax Indemnity
Payment shall be made to the Executive on the earlier of the date the Company,
the Bank or any direct or indirect subsidiary or affiliate of the Company or the
Bank is required to withhold such tax or the date the tax is required to be paid
by the Executive, unless, prior to such date, the Company delivers to the
Executive the written opinion, in form and substance reasonably satisfactory to
the Executive, of the Tax Advisor or of an attorney or firm of independent
certified public accountants selected by the Company and reasonably satisfactory
to the Executive, to the effect that the Executive has a reasonable basis on
which to conclude that (i) no 280G Change in Control has occurred, or (ii) all
or part of the payment or benefit in question is not a parachute payment for
purposes of section 280G of the Code, or (iii) all or a part of such payment or
benefit constitutes reasonable compensation for services rendered prior to the
280G Change of Control, or (iv) for some other reason which shall be set forth
in detail in such letter, no excise tax is due under section 4999 of the Code
with respect to such payment or benefit (the "Opinion Letter"). If the Company
delivers an Opinion Letter, the Tax Advisor shall recompute, and the Company
shall make, the Tax Indemnity Payment in reliance on the information contained
in the Opinion Letter.
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<PAGE> 19
(c) In the event that the Executive's liability for the excise
tax under section 4999 of the Code for a taxable year is subsequently determined
to be different than the amount with respect to which the Tax Indemnity Payment
is made, the Executive or the Company, as the case may be, shall pay to the
other party at the time that the amount of such excise tax is finally
determined, an appropriate amount, plus interest, such that the payment made
under section 16(b), when increased by the amount of the payment made to the
Executive under this section 16(c), or when reduced by the amount of the payment
made to the Company under this section 16(c), equals the amount that should have
properly been paid to the Executive under section 16(a). The interest paid to
the Company under this section 16(c) shall be determined at the rate provided
under section 1274(b)(2)(B) of the Code. The payment made to the Executive shall
include such amount of interest as is necessary to satisfy any interest
assessment made by the Internal Revenue Service and an additional amount equal
to any monetary penalties assessed by the Internal Revenue Service on account of
an underpayment of the excise tax. To confirm that the proper amount, if any,
was paid to the Executive under this section 16, the Executive shall furnish to
the Company a copy of each tax return which reflects a liability for an excise
tax, at least 20 days before the date on which such return is required to be
filed with the Internal Revenue Service. Nothing in this Agreement shall give
the Company any right to control or otherwise participate in any action, suit or
proceeding to which the Executive is a party as a result of positions taken on
his federal income tax return with respect to his liability for excise taxes
under section 4999 of the Code.
SECTION 17. COVENANT NOT TO COMPETE.
The Executive hereby covenants and agrees that, in the event
of his termination of employment with the Company prior to the expiration of the
Employment Period, for a period of one year following the date of his
termination of employment with the Company or the Bank, he shall not, without
the written consent of the Company, become an officer, employee, consultant,
director or trustee of any savings bank, savings and loan association, savings
and loan holding company, bank or bank holding company, or any direct or
indirect subsidiary or affiliate of any such entity, that entails working within
any city or county in the State of New Jersey or any other county in which the
Company or the Bank maintains an office; provided, however, that this section 17
shall not apply if the Executive is entitled to the Additional Termination
Entitlements.
SECTION 18. CONFIDENTIALITY.
Unless he obtains the prior written consent of the Company,
the Executive shall keep confidential and shall refrain from using for the
benefit of himself, or any person or entity other than the Company or any entity
which is a subsidiary of the Company or of which the Company is a subsidiary,
any material document or information obtained from the Company, or from its
parent or subsidiaries, in the course of his employment with any of them
concerning their properties, operations or business (unless such document or
information is readily ascertainable from public or published information or
trade sources or has otherwise been made available to the public through no
fault of his own) until the same ceases to be material (or becomes so
ascertainable or available); provided, however, that nothing in this section 18
shall prevent the Executive, with or without the Company's consent, from
participating in or disclosing documents
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<PAGE> 20
or information in connection with any judicial or administrative investigation,
inquiry or proceeding to the extent that such participation or disclosure is
required under applicable law.
SECTION 19. SOLICITATION.
The Executive hereby covenants and agrees that, for a period
of one year following his termination of employment with the Company or the
Bank, he shall not, without the written consent of the Company and the Bank,
either directly or indirectly:
(a) solicit, offer employment to, or take any other action
intended, or that a reasonable person acting in like circumstances
would expect, to have the effect of causing any officer or employee of
the Company, the Bank or any of their respective subsidiaries or
affiliates to terminate his or her employment and accept employment or
become affiliated with, or provide services for compensation in any
capacity whatsoever to, any savings bank, savings and loan association,
bank, bank holding company, savings and loan holding company, or other
institution engaged in the business of accepting deposits, making loans
or doing business within the counties specified in section 17;
(b) provide any information, advice or recommendation with
respect to any such officer or employee of any savings bank, savings
and loan association, bank, bank holding company, savings and loan
holding company, or other institution engaged in the business of
accepting deposits, making loans or doing business within the counties
specified in section 17; that is intended, or that a reasonable person
acting in like circumstances would expect, to have the effect of
causing any officer or employee of the Company, the Bank, or any of
their respective subsidiaries or affiliates to terminate his employment
and accept employment or become affiliated with, or provide services
for compensation in any capacity whatsoever to, any savings bank,
savings and loan association, bank, bank holding company, savings and
loan holding company, or other institution engaged in the business of
accepting deposits, making loans or doing business within the counties
specified in section 17;
(c) solicit, provide any information, advice or recommendation
or take any other action intended, or that a reasonable person acting
in like circumstances would expect, to have the effect of causing any
customer of the Company to terminate an existing business or commercial
relationship with the Company.
SECTION 20. NO EFFECT ON EMPLOYEE BENEFIT PLANS OR PROGRAMS.
The termination of the Executive's employment during the term
of this Agreement or thereafter, whether by the Company, by the Bank or by the
Executive, shall have no effect on the rights and obligations of the parties
hereto under the Company's or the Bank's qualified or non-qualified retirement,
pension, savings, thrift, profit-sharing or stock bonus plans, group life,
health (including hospitalization, medical and major medical), dental, accident
and long term dis-
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<PAGE> 21
ability insurance plans or such other employee benefit plans or programs, or
compensation plans or programs, as may be maintained by, or cover employees of,
the Company or the Bank from time to time; provided, however, that nothing in
this Agreement shall be deemed to duplicate any compensation or benefits
provided under any agreement, plan or program covering the Executive to which
the Company is a party and any duplicative amount payable under any such
agreement, plan or program shall be applied as an offset to reduce the amounts
otherwise payable hereunder.
SECTION 21. SUCCESSORS AND ASSIGNS.
This Agreement will inure to the benefit of and be binding
upon the Executive, his legal representatives and testate or intestate
distributees, and the Company and the Bank and their respective successors and
assigns, including any successor by merger or consolidation or a statutory
receiver or any other person or firm or corporation to which all or
substantially all of the assets and business of the Company may be sold or
otherwise transferred. Failure of the Company to obtain from any successor its
express written assumption of the Company's obligations hereunder at least 60
days in advance of the scheduled effective date of any such succession shall be
deemed a material breach of this Agreement.
SECTION 22. NOTICES.
Any communication required or permitted to be given under this
Agreement, including any notice, direction, designation, consent, instruction,
objection or waiver, shall be in writing and shall be deemed to have been given
at such time as it is delivered personally, or five days after mailing if
mailed, postage prepaid, by registered or certified mail, return receipt
requested, addressed to such party at the address listed below or at such other
address as one such party may by written notice specify to the other party:
If to the Executive:
[Executive name and address]
If to the Company or the Bank:
Hudson City Bancorp, Inc.
West 80 Century Road
Paramus, New Jersey 07652-1473
Attention: Chairman, Human Resources Committee
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<PAGE> 22
with a copy to:
Thacher Proffitt & Wood
Two World Trade Center
New York, New York 10048
Attention: W. Edward Bright, Esq.
SECTION 23. INDEMNIFICATION FOR ATTORNEYS' FEES.
(a) The Company shall indemnify, hold harmless and defend the
Executive against reasonable costs, including legal fees and expenses, incurred
by him in connection with or arising out of any action, suit or proceeding
(including any tax controversy) in which he may be involved, as a result of his
efforts, in good faith, to defend or enforce the terms of this Agreement. For
purposes of this Agreement, any settlement agreement which provides for payment
of any amounts in settlement of the Company's or the Bank's obligations
hereunder shall be conclusive evidence of the Executive's entitlement to
indemnification hereunder, and any such indemnification payments shall be in
addition to amounts payable pursuant to such settlement agreement, unless such
settlement agreement expressly provides otherwise.
(b) The Company's obligation to make the payments provided for
in this Agreement and otherwise to perform its obligations hereunder shall not
be affected by any set-off, counterclaim, recoupment, defense or other claim,
right or action which the Company may have against the Executive or others. In
no event shall the Executive be obligated to seek other employment or take any
other action by way of mitigation of the amounts payable to the Executive under
any of the provisions of this Agreement and such amounts shall not be reduced
whether or not the Executive obtains other employment. Unless it is determined
that the Executive has acted frivolously or in bad faith, the Company shall pay
as incurred, to the full extent permitted by law, all legal fees and expenses
which the Executive may reasonably incur as a result of or in connection with
his consultation with legal counsel or arising out of any action, suit,
proceeding, tax controversy or contest (regardless of the outcome thereof) by
the Company, the Executive or others regarding the validity or enforceability
of, or liability under, any provision of this Agreement or any guarantee of
performance thereof (including as a result of any contest by the Executive about
the amount of any payment pursuant to this Agreement), plus in each case
interest on any delayed payment at the applicable Federal rate provided for in
section 7872(f)(2)(A) of the Code. This section 23(b) shall apply whether such
consultation, action, suit, proceeding or contest arises before, on, after or as
a result of a Change of Control.
SECTION 24. SEVERABILITY.
A determination that any provision of this Agreement is
invalid or unenforceable shall not affect the validity or enforceability of any
other provision hereof.
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<PAGE> 23
SECTION 25. WAIVER.
Failure to insist upon strict compliance with any of the
terms, covenants or conditions hereof shall not be deemed a waiver of such term,
covenant, or condition. A waiver of any provision of this Agreement must be made
in writing, designated as a waiver, and signed by the party against whom its
enforcement is sought. Any waiver or relinquishment of any right or power
hereunder at any one or more times shall not be deemed a waiver or
relinquishment of such right or power at any other time or times.
SECTION 26. COUNTERPARTS.
This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original, and all of which shall constitute one
and the same Agreement.
SECTION 27. GOVERNING LAW.
Except to the extent preempted by federal law, this Agreement
shall be governed by and construed and enforced in accordance with the laws of
the State of New Jersey applicable to contracts entered into and to be performed
entirely within the State of New Jersey.
SECTION 28. HEADINGS AND CONSTRUCTION.
The headings of sections in this Agreement are for convenience
of reference only and are not intended to qualify the meaning of any section.
Any reference to a section number shall refer to a section of this Agreement,
unless otherwise stated.
SECTION 29. ENTIRE AGREEMENT; MODIFICATIONS.
This instrument contains the entire agreement of the parties
relating to the subject matter hereof, and supersedes in its entirety any and
all prior agreements, understandings or representations relating to the subject
matter hereof. No modifications of this Agreement shall be valid unless made in
writing and signed by the parties hereto.
SECTION 30. NON-DUPLICATION.
In the event that the Executive shall perform services for the
Bank or any other direct or indirect subsidiary or affiliate of the Company or
the Bank, any compensation or benefits provided to the Executive by such other
employer shall be applied to offset the obligations of the Company hereunder, it
being intended that this Agreement set forth the aggregate compensation and
benefits payable to the Executive for all services to the Company, the Bank and
all of their respective direct or indirect subsidiaries and affiliates.
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<PAGE> 24
SECTION 31. RELATIVE OBLIGATIONS OF THE BANK AND THE COMPANY.
The Company shall, with respect to the Executive's services
hereunder and the compensation therefor and with respect to any termination of
the Executive's employment, have all of the obligations imposed on the Bank
under this Agreement to the same extent as though the name of the Company were
substituted for the name of the Bank herein and the Executive shall, with
respect to the services hereunder and the compensation therefor and with respect
to any termination of the Executive's employment, have all of the rights,
privileges and duties relative to the Company as though the name of the Company
were substituted for the name of the Bank herein. If the Executive performs
services for both the Bank and the Company, any entitlement of the Executive to
severance compensation and other termination benefits under this Agreement shall
be determined on the basis of the aggregate compensation payable to the
Executive by the Bank and the Company, and liability therefor shall be
apportioned between the Bank and the Company in the same manner as compensation
paid to the Executive for services to each of them; provided, however, that the
Company shall be jointly and severally liable with the Bank for all obligations
of the Bank under this Agreement; and provided, further, that in no event shall
the Bank bear any liability for actions of, or obligations undertaken by, the
Company under this Agreement and provided, further, that any payment otherwise
payable hereunder for which the Bank is not liable pursuant to Section 2(b)
shall be payable solely by the Company. It is the intent and purpose of this
section 31 that the Executive have the same legal and economic rights that he
would have if all of his services were rendered to and all of his compensation
were paid by the Company. This section 31 shall be construed and enforced to
give effect to such intent and purpose.
SECTION 32. REQUIRED REGULATORY PROVISIONS.
Notwithstanding anything herein contained to the contrary, any
payments to the Executive by the Company or the Bank, whether pursuant to this
Agreement or otherwise, are subject to and conditioned upon their compliance
with section 18(k) of the Federal Deposit Insurance Act, 12 U.S.C.
Section 1828(k), and any regulations promulgated thereunder.
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<PAGE> 25
IN WITNESS WHEREOF, the Bank and the Company have caused this
Agreement to be executed and the Executive has hereunto set his hand, all as of
the day and year first above written.
---------------------------------
[EXECUTIVE NAME]
HUDSON CITY SAVINGS BANK
Attest:
By By
---------------------------------- ------------------------------
Name: Name:
Title: Title:
[Seal]
HUDSON CITY BANCORP, INC.
Attest:
By By
---------------------------------- ------------------------------
Name: Name:
Title: Title:
[Seal]
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<PAGE> 1
INDEPENDENT AUDITORS' CONSENT
The Board of Managers
Hudson City Savings Bank:
We consent to the use of our report dated February 12, 1999 relating to the
statements of financial condition of Hudson City Savings Bank as of December 31,
1998 and 1997 and the related statements of income, changes in equity, and cash
flows for each of the years in the three-year period ended December 31, 1998,
and to the reference to our firm under the headings "Experts," "Legal and Tax
Opinions," and "Statements of Income" in the Pre-Effective Amendment No. 2 to
the registration statement/prospectus, which Pre-Effective Amendment No. 2 to
the registration statement/prospectus is also included in the Application for
Formation of Mutual Savings Bank Holding Company and related applications with
the Federal Deposit Insurance Corporation and the Federal Reserve Board.
KPMG LLP
Short Hills, New Jersey
May 7, 1999
