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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: DECEMBER 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________________________ to____________________
Commission File Number: 0-26001
HUDSON CITY BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3640393
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
West 80 Century Road
Paramus, New Jersey 07652
(Address of Principal Executive Offices) (Zip Code)
(201)967-1900
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
-------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements or any amendment to this Form 10-K.
Yes [X] No [ ]
As of March 23, 2000, the registrant had 115,638,300 shares of common
stock, $0.01 par value, outstanding. Of such shares, 61,288,300 shares were
issued to Hudson City, MHC, the registrant's mutual holding company and
54,350,000 shares were sold to the public and directors, officers and employees
of the registrant. The aggregate market value of voting stock held by
non-affiliates of the registrant as of March 23, 2000 was $658,950,020. This
figure was based on the closing price by the Nasdaq National Market for a share
of the registrant's common stock, which was $13.25 as reported in the Wall
Street Journal on March 24, 2000.
Documents Incorporated by Reference: NONE
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HUDSON CITY BANCORP, INC.
1999 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
<TABLE>
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PAGE
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PART I
Item 1 Business.................................................................. 2
Item 2 Properties............................................................... 41
Item 3 Legal Proceedings........................................................ 42
Item 4 Submission of Matters to a Vote of Security Holders...................... 43
PART II
Item 5 Market for Registrant's Common Stock and Related Stockholder Matters..... 43
Item 6 Selected Financial Data.................................................. 44
Item 7 Management's Discussion and Analysis of Financial Condition and Results
Of Operations............................................................ 47
Item 7a Quantitative and Qualitative Disclosures About Market Risk............... 66
Item 8 Financial Statements and Supplementary Data.............................. 67
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..................................................... 96
PART III
Item 10 Directors and Executive Officers of the Registrant....................... 96
Item 11 Executive Compensation...................................................109
Item 12 Security Ownership of Certain Beneficial Owners and Management...........109
Item 13 Certain Transactions with Members of Our Board of Directors and
Executive Officers.......................................................112
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K..........112
SIGNATURES..........................................................................................115
</TABLE>
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PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
This Annual Report on Form 10-K contains certain "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, and may be identified by the use of such words as "believe," "expect,"
"anticipate," "should," "planned," "estimated" and "potential." Examples of
forward looking statements include, but are not limited to, estimates with
respect to the financial condition, results of operations and business of Hudson
City Bancorp, Inc. that are subject to various factors which could cause actual
results to differ materially from these estimates. These factors include:
changes in general, economic and market conditions, and legislative and
regulatory conditions, or the development of an interest rate environment that
adversely affects Hudson City Bancorp's interest rate spread or other income
anticipated from operations and investments. As used in this Form 10-K, "we" and
"us" and "our" refer to Hudson City Bancorp, Inc. and its consolidated
subsidiary, Hudson City Savings Bank, depending on the context.
PART I
ITEM 1. BUSINESS.
Hudson City Bancorp is a Delaware corporation newly organized in March
1999. Hudson City Bancorp serves as the holding company of its only subsidiary,
Hudson City Savings. A majority of the outstanding shares of Hudson City
Bancorp's common stock are 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.
On July 13, 1999, Hudson City Savings converted and reorganized from a
New Jersey chartered mutual savings bank into a two-tiered mutual savings bank
holding company structure and became a wholly-owned subsidiary of Hudson City
Bancorp, Inc. Hudson City Bancorp sold 54,350,000 shares of its common stock to
the public, representing 47% of the outstanding shares, at $10.00 per share and
received net proceeds of $527.6 million. Hudson City Bancorp contributed 50% of
the net proceeds from the initial public offering to Hudson City Savings. An
additional 61,288,300 shares, or 53% of the outstanding shares of Hudson City
Bancorp, were issued to Hudson City, MHC.
As part of our reorganization in structure, Hudson City Savings
organized Hudson City, MHC as a New Jersey chartered mutual savings bank holding
company which is registered as a bank holding company with the Federal Reserve
Board. Hudson City, MHC's principal assets are the shares of common stock of
Hudson City Bancorp it received in the reorganization, the $200,000 it received
as its initial capitalization and the cash dividends it received on the shares
of Hudson City Bancorp common stock it owns. Hudson City, MHC does not engage in
any 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.
Hudson City Savings is a New Jersey chartered stock savings bank,
chartered in 1868. We are the largest savings bank by asset size headquartered
in New Jersey. 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.
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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.
In late 1999, we borrowed funds in the form of securities sold under agreements
to repurchase to supplement our lending and financing activities. We intend to
borrow additional funds in the future.
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: Bergen, Burlington, Camden, Essex, Glouchester, Hudson,
Middlesex, Monmouth, Morris, Ocean, Passaic, Union and Warren. 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 over 80% 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 more than half of the entire New Jersey
population and more than half 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 market provides
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 services that we do not provide. For example, we do not
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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. From time-to-time, we purchase participation
interests in multi-family and commercial first mortgage loans through
community-based organizations. These loans amounted to $1.2 million at December
31, 1999.
At December 31, 1999, we had total loans of $4.31 billion, of which
$4.19 billion, or 97.4%, were first mortgage loans. Of residential mortgage
loans outstanding at that date, 44.2% were adjustable-rate mortgage or ARM loans
and 55.8% were fixed-rate loans. The remainder of our loans at December 31,
1999, amounting to $111.4 million, or 2.6% 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, 1999 totaled $2.1 million, or 0.05% 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,
------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------- ------------------- ------------------- ------------------- ------------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
---------- -------- ---------- -------- ---------- -------- ---------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FIRST MORTGAGE LOANS:
One-to four-family........ $4,126,153 95.82% $3,516,947 96.10% $3,327,371 96.07% $3,039,412 95.84% $2,642,117 94.64%
FHA/VA.................... 66,150 1.54 52,958 1.45 45,868 1.32 37,541 1.18 46,365 1.66
Multi-family and
commercial.............. 2,131 0.05 2,911 0.08 3,553 0.10 6,517 0.21 11,163 0.40
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total first mortgage
loans................. 4,194,434 97.41 3,572,816 97.63 3,376,792 97.49 3,083,470 97.23 2,669,645 96.70
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
CONSUMER AND OTHER LOANS:
Fixed-rate second
mortgages............... 82,913 1.93 56,118 1.53 50,198 1.45 45,808 1.44 42,508 1.52
Home equity credit lines.. 26,321 0.61 28,045 0.77 30,211 0.87 33,511 1.06 37,960 1.36
Guaranteed student........ 146 -- 216 0.01 4,315 0.12 6,085 0.19 7,990 0.29
Other..................... 2,061 0.05 2,212 0.06 2,287 0.07 2,584 0.08 3,699 0.13
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total consumer and
other loans .......... 111,441 2.59 86,591 2.37 87,011 2.51 87,988 2.77 92,157 3.30
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total loans........... 4,305,875 100.00% 3,659,407 100.00% 3,463,803 100.00% 3,171,458 100.00% 2,791,802 100.00%
====== ====== ====== ====== ======
LESS:
Deferred loan fees........ 10,631 11,146 12,076 11,622 11,170
Allowance for loan
losses.................. 20,010 17,712 15,625 13,045 11,906
---------- ---------- ---------- ---------- ----------
Net loans............... $4,275,234 $3,630,549 $3,436,102 $3,146,791 $2,768,726
========== ========== ========== ========== ==========
</TABLE>
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Loan Maturity. The following table presents the contractual maturity of
our loans at December 31, 1999. The table does not include the effect of
prepayments or scheduled principal amortization. Prepayments and scheduled
principal amortization on first mortgage loans totaled $720.7 million for 1999,
$784.3 million for 1998 and $396.9 million for 1997.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999
---------------------------------------------------
FIRST MORTGAGE CONSUMER AND
LOANS OTHER LOANS TOTAL
-------------- ------------ ----------
(In thousands)
<S> <C> <C> <C>
AMOUNTS DUE:
One year or less....... $ 739 $ 1,127 $ 1,866
---------- --------- ----------
After on year:
One to three years.... 11,280 4,479 15,759
Three to five years... 18,119 19,575 37,694
Five to ten years..... 485,068 32,699 517,767
Ten to twenty years... 938,139 53,561 991,700
Over twenty years..... 2,741,089 - 2,741,089
---------- --------- ----------
Total due after
one year......... 4,193,695 110,314 4,304,009
---------- --------- ----------
Total loans....... $4,194,434 $ 111,441 $4,305,875
========== =========
LESS:
Deferred loan fees.... 10,631
Allowance for loan
losses............... 20,010
----------
Net loans........... $4,275,234
==========
</TABLE>
The following table presents, as of December 31, 1999, the dollar
amount of all loans, due after December 31, 2000, and whether these loans have
fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER DECEMBER 31, 2000
---------------------------------------------------
FIXED ADJUSTABLE TOTAL
---------- ----------- ----------
(In thousands)
<S> <C> <C> <C>
First mortgage loans.... $2,340,951 $1,852,744 $4,193,695
Consumer and other
loans................... 82,839 27,475 110,314
---------- ---------- ----------
Total loans due after
one year............. $2,423,790 $1,880,219 $4,304,009
========== ========== ==========
</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,
------------------------------------
1999 1998 1997
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
TOTAL LOANS:
Balance outstanding at beginning of period.... $3,659,407 $3,463,803 $3,171,458
---------- ---------- ----------
ORIGINATIONS:
First mortgage loans.......................... 1,268,875 944,911 676,831
Consumer and other loans...................... 59,687 41,375 29,037
---------- ---------- ----------
Total originations.......................... 1,328,562 986,286 705,868
---------- ---------- ----------
PURCHASES:
One- to four-family first mortgage loans...... 53,279 22,900 --
FHA/VA first mortgage loans................... 21,528 14,952 15,948
Other first mortgage loans.................... 162 787 250
---------- ---------- ----------
Total purchases............................. 74,969 38,639 16,198
---------- ---------- ----------
LESS:
Principal payments:
First mortgage loans........................ 720,671 784,289 396,906
Consumer and other loans.................... 34,468 37,546 28,913
---------- ---------- ----------
Total principal payments.................. 755,139 821,835 425,819
---------- ---------- ----------
Transfers to foreclosed real estate........... 1,555 3,353 2,801
Loan sales - guaranteed student loans......... 369 4,133 1,101
---------- ---------- ----------
Balance outstanding at end of period........ $4,305,875 $3,659,407 $3,463,803
========== ========== ==========
</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
$74.8 million in 1999. 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 below. These loans may be
fixed-rate one- to four-
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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 $252,700; our non-conforming loans
may exceed such limits. The average size of our one- to four-family mortgage
loans originated in 1999 was approximately $225,000. The overall average size of
our one- to four-family first mortgage loans was approximately $149,000 at
December 31, 1999. 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 $1.27 billion in
1999, $944.9 million in 1998 and $676.8 million in 1997. 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:
Percentage of
First Mortgage
Amount Loan Originations
------------- -----------------
(In millions)
1999................ $212.3 16.7%
1998................ 204.0 21.6
1997................ 50.0 7.4
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 5% over the life of the 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, 1999, the initial
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discounted rate on these loans was 75 to 150 basis points below the current
fully indexed rate. We originated $435.2 million of one- to four-family ARM
loans in 1999. At December 31, 1999, 44.2% 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 the first half of 1999, we experienced a decreased
demand for ARM loans due to the lower interest rate environment. As a result,
the proportion that ARM loans bear to our total loans decreased to 44.2% at
December 31, 1999 from 51.9% at December 31, 1998.
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 over 10
years. Loans eligible for limited documentation processing are ARM loans and
15-, 20- 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 FreddieMac/FannieMae 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 "Management's 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
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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 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 1999, we provided $79.8
million in mortgage loans to home buyers under these programs.
Consumer Loans. At December 31, 1999, $111.4 million, or 2.6%, 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 $26.3 million, or 0.6%
of total loans at December 31, 1999, 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 20 years. At December 31, 1999 these loans totaled $82.9 million, or 1.9%
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%.
We also originate guaranteed student loans for sale to the Student Loan
Marketing Association (Sallie Mae). We sell these loans after we completely
disburse loan proceeds. We originated total student loans of $0.4 million during
1999.
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, 1999 we had four remaining commercial/industrial
loans totaling $0.7 million. Other consumer loans totaled $1.3 million at
December 31, 1999 and consisted of collateralized passbook loans, overdraft
protection loans, automobile loans and unsecured personal loans.
Page 10
<PAGE> 12
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, the Mortgage Officer or the Assistant Mortgage Officer, 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 Directors.
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. Telephone contact is attempted on approximately the 20th day
of the month to avoid a 30 day delinquency. A second written notice is sent at
the time the payment becomes 30 days past due. 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.
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<PAGE> 13
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 Administration (FHA) and Veterans' Administration (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 Directors on a monthly basis.
These reports include information on delinquent loans and foreclosed real
estate.
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At December 31, 1999, 1998 and 1997, loans delinquent 60 days to 89
days and 90 days or more were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------ ----------------------------------- -----------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
----------------- ----------------- ----------------- ----------------- ---------------- -----------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NO. OF BALANCE NO. OF BALANCE NO. OF BALANCE NO. OF BALANCE NO. OF BALANCE NO. OF BALANCE
LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS
------ --------- ------ --------- ------ --------- ------ --------- ------ --------- ------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-
family first
mortgages........ 49 $5,565 99 $11,955 58 $5,660 116 $13,554 78 $9,095 126 $15,214
FHA/VA first
mortgages........ 23 732 46 2,070 23 769 36 1,781 33 346 45 595
Consumer and other
loans............ 2 8 1 2 3 47 8 4 14 215 51 325
-- ------ --- ------- -- ------ --- ------- --- ------ --- -------
Total delinquent
loans (60 days
and over)....... 74 $6,305 146 $14,027 84 $6,476 160 $15,339 125 $ 9,656 222 $16,134
== ====== === ======= == ====== === ======= === ======= === =======
Delinquent loans
(60 days and
over) to total
loans........... 0.15% 0.33% 0.18% 0.42% 0.28% 0.47%
</TABLE>
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<PAGE> 15
Non-performing assets, which includes foreclosed real estate, net,
non-performing loans and accruing loans delinquent 90 days or more, decreased to
$14.4 million at December 31, 1999 from $16.4 million at December 31, 1998
primarily due to the continued strong economy and New Jersey real estate market,
and lower unemployment. Our $14.0 million in loans delinquent 90 days or more at
December 31, 1999 were comprised primarily of 146 one- to four-family first
mortgage loans (including FHA/VA first mortgage loans). At December 31, 1999,
our largest loan delinquent 90 days or more had a balance of $439,000.
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.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual first mortgage loans................... $11,301 $13,212 $15,103 $15,546 $19,226
Non-accrual consumer and other loans............... 2 4 325 493 666
Accruing loans delinquent 90 days or more.......... 2,724 2,123 706 927 1,028
------- ------- ------- ------- -------
Total non-performing loans......................... 14,027 15,339 16,134 16,966 20,920
Foreclosed real estate, net........................ 367 1,026 1,410 2,385 3,440
------- ------- ------- ------- -------
Total non-performing assets........................ $14,394 $16,365 $17,544 $19,351 $24,360
======= ======= ======= ======= =======
Non-performing loans to total loans................ 0.33% 0.42% 0.47% 0.53% 0.75%
Non-performing assets to total assets.............. 0.17 0.21 0.24 0.29 0.05
</TABLE>
The total amount of interest income received during the year on
non-accrual loans outstanding at December 31, 1999, 1998 and 1997 amounted to
$242,000, $178,000 and $186,000, respectively. Additional interest income
totaling $625,000, $828,000 and $996,000 on non-accrual loans would have been
recognized in 1999, 1998 and 1997, respectively, if interest on all such loans
had been recorded based upon original contract terms. We are not committed to
lend additional funds to borrowers on non-accrual status.
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 to income.
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
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<PAGE> 16
impaired at December 31, 1999 and 1998. In addition, at December 31, 1999 and
1998, 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
its 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.
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,
------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period.... $ 17,712 $ 15,625 $ 13,045 $ 11,906 $ 11,566
-------- -------- -------- -------- --------
Provision for loan losses......... 2,350 2,400 2,850 2,275 1,000
-------- -------- -------- -------- --------
Charge-offs:
First mortgage loans............ (64) (283) (288) (1,002) (652)
Consumer and other loans........ (9) (53) (42) (158) (35)
-------- -------- -------- -------- --------
Total charge-offs............. (73) (336) (330) (1,160) (687)
Recoveries...................... 21 23 60 24 27
-------- -------- -------- -------- --------
Net charge-offs................... (52) (313) (270) (1,136) (660)
-------- -------- -------- -------- --------
Balance at end of period.......... $ 20,010 $ 17,712 $ 15,625 $ 13,045 $ 11,906
======== ======== ======== ======== ========
Net charge-offs to average loans.. 0.001% 0.01% 0.01% 0.04% 0.02%
Allowance for loan losses to
total loans..................... 0.46 0.48 0.45 0.41 0.43
Allowance for loan losses to
non-performing loans............ 142.65 115.47 96.85 76.89 56.91
</TABLE>
The allowance for loan losses has been determined in accordance with
generally accepted accounting principles, under which we are required to
maintain adequate allowances for loan losses. We are responsible for the timely
and periodic determination of the amount of the allowance required. We believe
that our allowance for loan losses is adequate to cover specifically
identifiable loan losses, as well as estimated losses inherent in our portfolio
for which certain losses are probable but not specifically identifiable.
As part of our evaluation of the adequacy of our allowance for loan
losses, each month we prepare a worksheet. This worksheet categorizes the entire
loan portfolio by certain risk characteristics such as loan type (one- to
four-family, multi-family, etc.) and payment status (i.e., current or number of
days delinquent). Loans with known potential losses are categorized separately.
We assign potential loss factors to the payment status categories on the basis
of our assessment of the potential risk inherent in each loan type. We use this
worksheet, together with loan portfolio balances and delinquency reports, to
evaluate the adequacy of the allowance for loan losses. Other key factors we
consider in this process are
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<PAGE> 17
current real estate market conditions, changes in the trend of non-performing
loans, the current state of the local and national economy and loan portfolio
growth.
We establish the provision for loan losses after considering the
results of our review of delinquency and charge-off trends, the allowance for
loan loss worksheet, the amount of the allowance for loan losses in relation to
the total loan balance, loan portfolio growth, generally accepted accounting
principles and regulatory guidance. We have applied this process consistently
and we have made minimal changes in the estimation methods and assumptions that
we have used. We maintain the allowance for loan losses through provisions for
loan losses that we charge to income. We charge losses on loans against the
allowance for loan losses when we believe the collection of loan principal is
unlikely.
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. As a result of our
lending emphasis, we had a loan concentration in residential first mortgage
loans at December 31, 1999, substantially all of which are secured by real
property located in New Jersey. These loans represented 97.4% of our total loan
portfolio at December 31, 1999. Of residential first mortgage loans outstanding
at December 31, 1999, 44.2% or $1.85 billion were adjustable-rate mortgages. The
ability of borrowers to make payments on their adjustable-rate mortgages may
decrease if interest rates rise.
Based on the composition of our loan portfolio and the growth in our
loan portfolio over the past five years, we believe the primary risks inherent
in our portfolio are possible increases in interest rates, a possible decline in
the economy, generally, and a possible decline in real estate market values. Any
one or a combination of these events may adversely affect our loan portfolio
resulting in increased delinquencies and loan losses. Accordingly, in the
current favorable economic environment, we have maintained our provision for
loan losses at their levels to primarily address the actual growth in our loan
portfolio. We consider it important to maintain the ratio of our allowance for
loan losses to total loans within an acceptable range. At December 31, 1999, the
allowance for loan losses as a percentage of total loans was 0.46% compared with
0.43% at December 31, 1995. Because of the primary emphasis of our lending
practices and the current market conditions, we consider 0.46% to be within an
acceptable range. Furthermore, the increase in the allowance for loan losses
each year from 1995 to 1999 reflects the continued growth in the loan portfolio,
the relatively low levels of loan charge-offs, the stability in the economy and
the resulting stability in our overall loan quality.
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.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Comparison of Operating Results for the Years Ended
December 31, 1999 and 1998 -- Provision for Loan Losses."
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<PAGE> 18
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, 1999, 1998, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
------------------- -------------------- ------------------- -------------------- ---------------------
Percentage Percentage Percentage Percentage Percentage
of Loans of Loans of Loans of Loans of Loans
in Category in Category in Category in Category in Category
to Total to Total to Total to Total to Total
Loan Category Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
- ----------------------- ------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First mortgage loans:
One- to four-family.. $12,340 95.82% $11,168 96.10% $ 9,409 96.07% $ 8,770 95.84% $ 9,076 94.64%
Multi-family/
commercial......... 21 1.59 29 1.53 48 1.42 65 1.39 121 2.06
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total first
mortgage loans... 12,361 97.41 11,197 97.63 9,457 97.49 8,835 97.23 9,197 96.70
Consumer and other
loans................ 957 2.59 656 2.37 662 2.51 675 2.77 715 3.30
Unallocated............ 6,692 -- 5,859 -- 5,506 -- 3,535 -- 1,994 --
------- ------- ------- ------- ------- ------- -------- ------- ------- -------
Total allowance
for loan losses.... $20,010 100.00% $17,712 100.00% $15,625 100.00% $13,045 100.00% $11,906 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
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<PAGE> 19
INVESTMENT ACTIVITIES
Investment Securities. The Board of Directors 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 of
Directors, implement this policy. Management reports securities transactions to
the Executive Committee of the Board of Directors on a weekly basis. The Board
of Directors 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,
1999, our primary liquidity ratio was 9.6%. 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.
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, 1999, mortgage-backed securities held to maturity
totaled $3.10 billion, or 36.4% of total assets. At December 31, 1999, the
mortgage-backed securities portfolio had a weighted average yield of 6.56% and a
market value of approximately $3.09 billion. Of the mortgage-backed securities
we held at December 31, 1999, $821.0 million, or 26.5%, had fixed rates and
$2.28 billion, or 73.5%, had adjustable-rates. Mortgage-backed securities at
December 31, 1999 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.
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<PAGE> 20
Our REMICs have fixed coupon rates ranging from 5.00% to 6.50% and a
weighted average yield of 5.68% at December 31, 1999. At December 31, 1999,
REMICs totaled $26.5 million, which constituted 0.9% of the mortgage-backed
securities portfolio, or 0.3% of total assets. Our REMICs had an expected
average life of 1.75 years at December 31, 1999. 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 1999.
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.
The following table presents our investment securities and
mortgage-backed securities activities for the periods indicated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
----------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
INVESTMENT SECURITIES:
Carrying value at beginning of period..................... $ 786,424 $ 656,192 $ 596,945
----------- ----------- ----------
Purchases:
Held to maturity........................................ -- 403 600
Available for sale...................................... 913,976 789,577 521,529
Calls:
Held to maturity........................................ (15) (476) (209)
Available for sale...................................... (433,141) (607,651) (337,547)
Maturities:
Available for sale...................................... (300,013) (51,550) (80,700)
Sales:
Available for sale...................................... (109,774) -- (41,163)
Premium amortization and discount accretion, net.......... 2,167 536 (1,074)
Decrease in unrealized gains.............................. (46,187) (607) (2,189)
----------- ----------- ----------
Net increase in investment securities..................... 27,013 130,232 59,247
----------- ----------- ----------
Carrying value at end of period........................... $ 813,437 $ 786,424 $ 656,192
=========== =========== ==========
MORTGAGE-BACKED SECURITIES HELD TO MATURITY:
Carrying value at beginning of period..................... $ 3,070,931 $ 3,022,225 $2,710,078
----------- ----------- ----------
Purchases................................................. 1,094,073 1,222,352 883,502
Principal payments........................................ (1,059,577) (1,168,674) (569,189)
Premium amortization and discount accretion, net.......... (8,355) (4,972) (2,166)
----------- ----------- ----------
Net increase in mortgage-backed securities................ 26,141 48,706 312,147
----------- ----------- ----------
Carrying value at end of period........................... $ 3,097,072 $ 3,070,931 $3,022,225
=========== =========== ==========
</TABLE>
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<PAGE> 21
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.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------------------------------------
1999 1998 1997
-------------------------------- ------------------------------- ------------------------------
Carrying Percent of Fair Carrying Percent of Fair Carrying Percent of Fair
Value Total(1) Value Value Total(1) Value Value Total(1) Value
----------- ----------- -------- ---------- ----------- -------- ---------- ----------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Money market investments:
Federal funds sold............. $ 116,000 100.00% $ 116,600 $ 69,800 100.00% $ 69,800 $ 24,600 100.00% $ 24,600
========= ====== ========= ========= ====== ========= ========= ====== =========
Investment securities:
Held to maturity
Municipal bonds................ $ 1,379 0.17% $ 1,348 $ 1,393 0.18% $ 1,420 $ 1,466 0.22% $ 1,503
--------- ----- --------- --------- ----- --------- --------- ----- --------
Available for sale:
United States government
and agencies................... 810,078 99.59 810,078 782,436 99.49 782,436 650,014 99.06 650,014
Corporate bonds................. 1,980 0.24 1,980 2,595 0.33 2,595 4,712 0.72 4,712
--------- ------ -------- -------- ----- --------- --------- ------ ---------
Total available for sale........ 812,058 99.83 812,058 785,031 99.82 785,031 654,726 99.78 654,726
--------- ------ --------- -------- ------ --------- --------- ------ ---------
Total investment securities.... $ 813,437 100.00% $ 813,406 $ 786,424 100.00% $786,451 $656,192 100.00% $656,229
======== ====== ======== ========= ====== ========= ========= ====== =========
Mortgage-backed securities
held to maturity:
By issuer:
GNMA pass-through
certificates................. $2,208,007 71.30% $2,216,980 $2,093,591 68.17% $2,111,219 $2,061,928 68.23% $2,114,789
FNMA pass-through
certificates................ 673,328 21.74 654,915 674,061 21.95 686,275 568,479 18.81 577,930
FHLMC pass-through
certificates................ 189,258 6.11 187,580 240,414 7.83 245,995 293,802 9.72 301,632
FHLMC, FNMA and GNMA-REMIC's.. 26,479 0.85 26,121 62,865 2.05 62,880 98,016 3.24 97,385
--------- ------ --------- --------- ------ --------- --------- ------ ---------
Total mortgage-backed
securities.................. $3,097,072 100.00% $3,085,596 $3,070,931 100.00% $3,106,369 $3,022,225 100.00% $3,091,736
========= ====== ========= ========= ====== ========= ========= ====== =========
By coupon type:
Adjustable-rate............... $2,276,037 73.49% $2,281,060 $2,173,728 70.78% $2,187,054 $2,174,034 71.93% $2,223,690
Fixed-rate.................... 821,035 26.51 804,536 897,203 29.22 919,315 848,191 28.07 868,046
--------- ------ --------- --------- ------ --------- --------- ------ ---------
Total mortgage-backed
securities.................. $3,097,072 100.00% $3,085,596 $3,070,931 100.00% $3,106,369 $3,022,225 100.00% $3,091,736
========= ====== ========= ========= ====== ========= ========= ====== =========
Total investment portfolio.... $4,027,109 $4,015,602 $3,927,155 $3,962,620 $3,703,017 $3,772,565
========= ========= ========= ========= ========= =========
</TABLE>
- --------------------------------
(1) Based on carrying value for each investment type.
Page 20
<PAGE> 22
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, 1999. 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, 1999
-------------------------------------------------------------------------------------------------
MORE THAN ONE YEAR MORE THAN FIVE YEARS
ONE YEAR OR LESS TO FIVE YEARS TO TEN YEARS MORE THAN TEN YEARS TOTAL
---------------- ------------------ -------------------- ------------------- -----------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MONEY MARKET INVESTMENTS:
Federal funds sold............ $116,600 5.50% $ - - % $ - - % $ - - % $ 116,600 5.50%
======== ======== ======== ========== ==========
INVESTMENT SECURITIES:
HELD TO MATURITY:
Municipal bonds............... $ 100 6.28 $ 100 5.20 $ 276 6.56 $ 903 6.43 $ 1,379 6.36
-------- -------- -------- ---------- ----------
AVAILABLE FOR SALE:
United States government
and agencies.................. - - 434,680 5.98 375,398 6.41 - - 810,078 6.18
Corporate bonds................ 322 4.26 1,429 6.88 229 5.17 - - 1,980 6.25
-------- -------- -------- ---------- ----------
Total available for sale....... 322 4.26 436,109 5.98 375,627 6.41 - - 812,058 6.18
-------- -------- -------- ---------- ----------
Total investment securities.... $ 422 4.74 $436,209 5.98 $375,903 6.41 $ 903 6.43 $ 813,437 6.18
======== ======== ======== ========== ==========
MORTGAGE-BACKED SECURITIES
HELD TO MATURITY:
BY ISSUER:
GNMA pass-through certificates $ - - $ 492 6.62 $ 17,435 8.40 $2,190,080 6.40 $2,208,007 6.42
FNMA pass-through certificates - - - - 147,993 6.75 525,335 6.96 673,328 6.91
FHLMC pass-through certificates 85 10.50 3,229 9.53 9,608 9.12 176,336 6.91 189,258 7.07
FHLMC, FNMA and
GNMA-REMIC's................. - - 800 5.50 25,679 5.69 - - 26,479 5.68
-------- -------- -------- ---------- ----------
Total mortgage-backed
securities................... $ 85 10.50 $ 4,521 8.45 $200,715 6.90 $2,891,751 6.54 $3,097,072 6.56
======== ======== ======== ========== ==========
BY COUPON TYPE:
Adjustable-rate............... $ - - $ - - $ 651 6.78 $2,275,386 6.41 $2,276,037 6.41
Fixed-rate.................... 85 10.50 4,521 8.45 200,064 6.90 616,365 7.01 821,035 6.99
-------- -------- -------- ---------- ----------
Total mortgage-backed
securities................... $ 85 10.50 $ 4,521 8.45 $200,715 6.90 $2,891,751 6.54 $3,097,072 6.56
======== ======== ======== ========== ==========
TOTAL INVESTMENT PORTFOLIO..... $117,107 5.50 $440,730 6.01 $576,618 6.58 $2,892,654 6.54 $4,027,109 6.45
======== ======== ======== ========== ==========
</TABLE>
Page 21
<PAGE> 23
SOURCES OF FUNDS
General. Deposits, scheduled amortization and prepayments of loan
principal and mortgage-backed securities, maturities and calls of investment
securities and funds provided by operations are our primary sources of funds for
use in lending, investing and for other general purposes. In late 1999, we began
borrowing funds in the form of securities sold under agreements to repurchase to
supplement our primary sources of funds. 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), NOW accounts, checking
accounts, money market accounts and time deposits. We also offer IRA accounts
and qualified retirement plans.
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 market areas
surrounding our offices. We rely primarily on paying competitive rates,
providing strong customer service and maintaining long-standing relationships
with customers to attract and retain these deposits. We do not use brokers to
obtain deposits. The decrease in total deposits in 1999 was primarily due to
many of our depositors choosing to fund their stock purchases in the
reorganization with approximately $110.0 million of interest-bearing funds which
were on deposit with Hudson City Savings.
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 transaction accounts) represented 23.9% of total deposits on December 31,
1999. At December 31, 1999, time deposits with remaining terms to maturity of
less than one year amounted to $4.20 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, 1999, 1998 and 1997.
Page 22
<PAGE> 24
The following table presents our deposit activity for the periods
indicated:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Total deposits at beginning of period.................... $6,807,339 $6,465,956 $5,918,971
Net deposits............................................. (415,012) 30,301 249,525
Interest credited, net penalties......................... 295,717 311,082 297,460
---------- ---------- ----------
Total deposits at end of period.......................... $6,688,044 $6,807,339 $6,465,956
========== ========== ==========
Net (decrease) increase.................................. $ (119,295) $ 341,383 $ 546,985
========== ========== ==========
Percent (decrease) increase.............................. (1.75)% 5.28% 9.24%
</TABLE>
At December 31, 1999, we had $536.7 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........................................ $267,110
Over three months through six months........................ 105,339
Over six months through 12 months........................... 86,970
Over 12 months.............................................. 77,245
--------
Total............................................. $536,664
========
</TABLE>
Page 23
<PAGE> 25
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>
At December 31,
-----------------------------------------------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------------------------------------------
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........................... $ 804,105 12.02% 2.50% $ 832,759 12.23% 2.60% $ 835,062 12.91% 2.75%
Interest-bearing demand........... 96,828 1.45 2.00 100,436 1.48 2.00 90,869 1.41 2.00
Money Market...................... 486,794 7.28 2.68 505,201 7.42 2.78 500,029 7.73 2.93
Noninterest-bearing demand........ 308,115 4.61 - 313,061 4.60 - 272,326 4.21 -
---------- ------ ---------- ------ ---------- ------
Total........................ 1,695,842 25.36 2.07 1,751,457 25.73 2.15 1,698,286 26.26 2.32
---------- ------ ---------- ------ ---------- ------
Time deposits:
Time deposits $100,000
and over................... 536,664 8.02 5.18 516,084 7.58 5.26 460,982 7.13 5.60
Time deposits less than
$100,00 with original
maturities of:
Three months or less....... 545,068 8.15 5.35 436,186 6.41 4.88 473,105 7.32 5.27
Over three months to
twelve months............ 1,178,064 17.61 5.06 1,351,892 19.86 5.18 1,328,888 20.55 5.60
Over twelve months to
twenty-four months....... 1,919,050 28.70 5.12 1,942,691 28.54 5.37 1,695,908 26.24 5.72
Over twenty-four months
to thirty-six months..... 242,325 3.62 5.38 238,792 3.51 5.54 232,782 3.60 5.68
Over thirty-six months
to forty-eight months.... 33,880 0.51 5.50 20,628 0.30 5.30 32,142 0.50 5.65
Over forty-eight months
to sixty months.......... 3,730 0.06 5.30 4,539 0.07 5.50 8,017 0.12 5.34
Over sixty months.......... 14,130 0.21 5.21 39,140 0.57 5.51 58,362 0.90 5.36
IRA and Keogh
accounts................. 519,291 7.76 5.22 505,930 7.43 5.46 477,484 7.38 5.66
---------- ------ ---------- ------ ---------- ------
Total time deposits........ 4,992,202 74.64 5.16 5,055,882 74.27 5.29 4,767,670 73.74 5.62
---------- ------ ---------- ------ ---------- ------
Total deposits............. $6,688,044 100.00% 4.38 $6,807,339 100.00% 4.48 $6,465,956 100.00% 4.75
========== ====== ========== ====== ========== ======
</TABLE>
Page 24
<PAGE> 26
The following table presents, by rate category, the amount of our
time deposit accounts outstanding at December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------
1999 1998 1997
------------- -------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
TIME DEPOSIT ACCOUNTS:
4.00% or less............................. $ 1,642 $ 1,530 $ 1,755
4.01% to 4.50%............................ 9 4,335 8
4.51% to 5.00%............................ 1,914,559 1,501,902 39,212
5.01% to 5.50%............................ 2,305,200 2,342,518 659,235
5.51% to 6.00%............................ 767,251 1,196,373 4,040,522
over 6.00%................................ 3,541 9,224 26,938
---------- ---------- ----------
Total................................. $4,992,202 $5,055,882 $4,767,670
========== ========== ==========
</TABLE>
The following table presents, by rate category, the remaining period
to maturity of time deposit accounts outstanding as of December 31, 1999.
<TABLE>
<CAPTION>
PERIOD TO MATURITY FROM DECEMBER 31, 1999
---------------------------------------------------------------------------------------------
WITHIN OVER THREE OVER SIX OVER ONE OVER TWO OVER
THREE TO SIX MONTHS TO TO TWO TO THREE THREE
MONTHS MONTHS ONE YEAR YEARS YEARS YEARS TOTAL
------- ---------- --------- -------- --------- ------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
TIME DEPOSIT ACCOUNTS:
4.00% or less............. $ 1,642 $ -- $ -- $ -- $ -- $ -- $ 1,642
4.01% TO 4.50%............ -- -- 9 -- -- -- 9
4.51% TO 5.00%............ 1,112,233 451,298 258,545 71,440 5,986 15,057 1,914,559
5.01% TO 5.50%............ 914,717 613,748 675,940 90,611 4,027 6,157 2,305,200
5.51% TO 6.00%............ 107,026 18,249 47,976 565,803 27,891 306 767,251
over 6.00%................ 2,163 1,134 88 156 -- -- 3,541
---------- ---------- -------- -------- ------- ------- ----------
Total................... $2,137,781 $1,084,429 $982,558 $728,010 $37,904 $21,520 $4,992,202
========== ========== ======== ======== ======= ======= ==========
</TABLE>
Borrowings. In late 1999, we began borrowing funds to supplement the
financing of our lending and investing activities. At December 31, 1999, we had
borrowed funds totaling $300.0 million in the form of securities sold under
agreements to repurchase with nationally recognized primary securities dealers.
These agreements are recorded as financing transactions as Hudson City Bancorp
maintains effective control over the transferred securities. The dollar amount
of the securities underlying the agreements continues to be carried in our
securities portfolio. The broker/dealer with whom each transaction is executed
agrees to resell to us the same securities at the maturity or call of the
agreement. At December 31, 1999, securities sold under agreements to repurchase
had maturities ranging from 2004 to 2009 with a weighted-average interest rate
of 5.76%. Certain agreements are callable beginning in 2000, while others are
callable at various times thereafter. During the year ended December 31, 1999,
securities sold under agreements to repurchase averaged $53.6 million. The
maximum amount outstanding at any month-end during the period was $300.0
million. All of the underlying securities were U.S. Government agency securities
with a fair market value of $318.8 million at December 31, 1999. There were no
borrowed funds during 1998.
Page 25
<PAGE> 27
We are not a member of the Federal Home Loan Bank System, however, we
intend to become a member in the first half of 2000. Membership in the Federal
Home Loan Bank System would provide us with additional sources for borrowings.
For additional information on borrowed funds, see Note 10 of Notes to
Consolidated Financial Statements in Item 8, "Financial Statements and
Supplementary Data."
PERSONNEL
As of December 31, 1999, we had 899 full-time employees and 91
part-time employees. The employees are not represented by a collective
bargaining unit and we consider our relationship with our employees to be good.
REGULATION OF HUDSON CITY SAVINGS BANK AND HUDSON CITY BANCORP
GENERAL
Hudson City Savings 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. 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, are 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 are required to file reports with, and otherwise comply
with the rules and regulations of the Federal Reserve Board ("FRB") and the
Department. Hudson City Bancorp is required to file certain reports with, and
otherwise comply with, the rules and regulations of the Securities and Exchange
Commission ("SEC") under the federal securities laws.
Any change in such laws and regulations, whether by the Department,
the FDIC, the FRB 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.
Page 26
<PAGE> 28
NEW JERSEY BANKING REGULATION
Activity Powers. Hudson City Savings 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, generally may invest
in:
-real estate mortgages;
-consumer and commercial loans;
-specific types of debt securities, including certain corporate debt
securities and obligations of federal, state and local governments
and agencies;
-certain types of corporate equity securities; and
-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.
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" below.
Page 27
<PAGE> 29
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 a ratio of Tier 1 capital to total assets of
not less than 3%. 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. 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.
Page 28
<PAGE> 30
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, 1999:
<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......... $1,242,213 15.27% $325,374 4.00% $406,717 5.00%
Risk-based capital:
Tier 1.......................... 1,242,213 46.42 107,051 4.00 160,576 6.00
Total........................... 1,262,223 47.16 214,102 8.00 267,627 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:
- the bank held such types of investments during the 14-month period
from September 30, 1990 through November 26, 1991;
- the state in which the bank is chartered permitted such
investments as of September 30, 1991; and
- 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.
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 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 or 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.
Page 29
<PAGE> 31
Effective March 11, 2000, the newly adopted Gramm-Leach Bliley Act
("Gramm-Leach") permits a state-chartered savings bank to engage, through
financial subsidiaries, in any activity in which a national bank may engage
through a financial subsidiary and on substantially the same terms and
conditions. In general, Gramm-Leach permits a national bank that is
well-capitalized and well-managed to conduct, through a financial subsidiary,
any activity permitted for a financial holding company other than insurance
underwriting, insurance investments, real estate investment or development or
merchant banking. The total assets of all such financial subsidiaries may not
exceed the lesser of 45% of the bank's total assets or $50 billion. The bank
must have policies and procedures to assess the financial subsidiary's risk and
protect the bank from such risk and potential liability, must not consolidate
the financial subsidiary's assets with the bank's and must exclude from its own
assets and equity all equity investments, including retained earnings, in the
financial subsidiary. State chartered savings banks may retain, after March 11,
2000, existing subsidiaries engaged in activities that are not authorized under
Gramm-Leach; otherwise, Gramm-Leach will preempt all state laws regarding the
permissibility of certain activities for state chartered banks if such state law
is in conflict with the provisions of Gramm Leach (with the exception of certain
insurance activities), regardless of whether the state law would authorize
broader or more restrictive activities. Although Hudson City Savings meets all
conditions necessary to establish and engage in permitted activities through
financial subsidiaries, it has not yet determined whether or the extent to which
it will seek to engage in such activities.
Federal Home Loan Bank System. Hudson City Savings has applied to
become a member of the FHLB system, which consists of twelve regional FHLBs,
each subject to supervision and regulation by the Federal Housing Finance Board
("FHFB"). The FHLB provides a central credit facility primarily for member
thrift institutions as well as other entities involved in home mortgage lending.
It is funded primarily from proceeds derived from the sale of consolidated
obligations of the FHLBs. It makes loans to members (i.e., advances) in
accordance with policies and procedures, including collateral requirements,
established by the respective boards of directors of the FHLBs. These policies
and procedures are subject to the regulation and oversight of the FHFB. All
long-term advances are required to provide funds for residential home financing.
The FHFB has also established standards of community or investment service that
members must meet to maintain access to such long-term advances. Hudson City
Savings, as a member of the FHLB of New York, would be required to purchase and
hold shares of capital stock in that FHLB in an amount at least equal to the
greater of (i) 1% of the aggregate principal amount of its unpaid mortgage
loans, home purchase contracts and similar obligations at the beginning of each
year; (ii) 0.3% of its assets; or (iii) 5% (or such greater fraction as
established by the FHLB) of its advances from the FHLB. Pursuant to Gramm-Leach,
the foregoing minimum share ownership requirements will be replaced by
regulations to be promulgated by the FHFB. Gramm-Leach specifically provides
that the minimum requirements in existence immediately prior to adoption of
Gramm-Leach shall remain in effect until such regulations are adopted. Hudson
City Savings is in compliance with these requirements.
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, to order
divestitures and withhold approval of the acquisition of business or the
exercise of powers, to terminate deposit insurance coverage and to place a
depository institution in receivership. 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
Page 30
<PAGE> 32
conservator or receiver for a state bank on the basis of the institution's
financial condition or upon the occurrence of certain events, including:
- insolvency (whereby the assets of the bank are less than its
liabilities to depositors and others);
- substantial dissipation of assets or earnings through violations
of law or unsafe or unsound practices;
- existence of an unsafe or unsound condition to transact business;
- 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
- 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.
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.
Under this system, the bank regulators are required to take certain supervisory
actions against undercapitalized institutions, based upon five categories of
capitalization which FDICIA created: "well capitalized," "adequately
capitalized," "undercapitalized," significantly undercapitalized" and
"critically capitalized." 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
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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:
- an amount equal to five percent of the bank's total assets at the
time it became "undercapitalized"; and
- 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.
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, in a manner that is substantially similar to the
classifications used for purposes of the prompt corrective action regulations
discussed above. The supervisory subgroup to which an institution is assigned is
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).
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. 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. Our total expense in 1999 for the assessment for deposit insurance and
the FICO payments was $806,000.
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
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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. Hudson City
Savings is subject to the affiliate and insider transaction rules set forth in
Sections 23A, 23B, 22(g) and 22(h) of the Federal Reserve Act, and the
regulations of the FRB promulgated thereunder. These provisions, among other
things, prohibit or limit a savings banks from extending credit to, or entering
into certain transactions with, its affiliates (which for Hudson City Savings
would include Hudson City Bancorp, Hudson City, MHC) and principal stockholders,
directors and executive officers of Hudson City Savings.
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.
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
federal law and regulation, as discussed above. The New Jersey Banking Act also
provides that a savings bank that is in compliance with the applicable federal
laws and regulations is deemed to be in compliance with such provisions of the
New Jersey Banking Act.
Prohibitions Against Tying Arrangements. Banks are subject to the
prohibitions of 12 U.S.C. Section 1972 on certain tying arrangements and
extensions of credit by correspondent banks. In general, 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 additional service from the institution or certain of its affiliates or not
obtain services of a competitor of the institution.
Privacy Standards. Pursuant to Gramm-Leach, financial institutions
are required to establish a policy governing the collection, use and protection
of non-public information about their customers and consumers, provide notice of
such policy to consumers and provide a mechanism for consumers to opt out of any
practice of the institution whereby nonpublic personal information would
otherwise be disclosed to unaffiliated third parties. The federal banking
agencies, jointly with the Federal Trade Commission and the Securities and
Exchange Commission, have published proposed regulations to implement the
privacy standards of Gramm-Leach. Under the regulations, Hudson City Bancorp and
Hudson City Savings will be required to adopt and implement a privacy policy no
later than November 13, 2000. Hudson City Bancorp and Hudson City Savings have
not yet determined the extent to which the privacy standards will affect their
operations.
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
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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:
- for loans secured by raw land, the supervisory loan-to-value limit
is 65% of the value of the collateral;
- 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%;
- for loans for the construction of commercial, multi-family or
other non-residential property, the supervisory limit is 80%;
- for loans for the construction of one- to four-family properties,
the supervisory limit is 85%; and
- 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.
Among other things, current CRA regulations replace the prior
process-based assessment factors with a new evaluation system that rates an
institution based on its actual performance in meeting community needs. In
particular, the new evaluation system focuses on three tests:
- a lending test, to evaluate the institution's record of making
loans in its service areas;
- an investment test, to evaluate the institution's record of
investing in community development projects, affordable housing,
and programs benefiting low or moderate income individuals and
businesses; and
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- 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 a "satisfactory" rating in its most recent CRA examination.
Internet Banking. Technological developments are dramatically
altering the ways in which most companies, including financial institutions,
conduct their business. The growth of the Internet is prompting banks to
reconsider business strategies and adopt alternative distribution and marketing
systems. The federal bank regulatory agencies have conducted seminars and
published materials targeted to various aspects of internet banking, and have
indicated their intention to reevaluate their regulations to ensure that they
encourage banks' efficiency and competitiveness consistent with safe and sound
banking practices. We cannot assure you that the federal bank regulatory
agencies will adopt new regulations that will not materially affect the Hudson
City Savings' internet operations or restrict any such further operations.
FEDERAL RESERVE SYSTEM
Under FRB regulations, Hudson City Savings is required to maintain
non-interest-earning reserves against its transaction accounts (primarily NOW
and regular checking accounts). The FRB 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 FRB) and an initial reserve
of $1.4 million plus 10% (subject to adjustment by the FRB 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 FRB) 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
FRB or a pass-through account as defined by the FRB, the effect of this reserve
requirement is to reduce Hudson City Savings' interest-earning assets.
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FEDERAL BANK HOLDING COMPANY REGULATION
General. Hudson City, MHC and Hudson City Bancorp are bank holding
companies subject to examination, regulation and periodic reporting under the
BHCA, as administered by the FRB.
Impact of Enactment of the Gramm-Leach-Bliley Act. On November 12,
1999, President Clinton signed Gramm-Leach, which among other things,
establishes a comprehensive- framework to permit affiliations among commercial
banks, insurance companies and securities firms. Generally, the new law (i)
repeals the historical restrictions and eliminates many federal and state law
barriers to affiliations among banks and securities firms, insurance companies
and other financial service providers, (ii) provides a uniform framework for the
activities of banks, savings institutions and their holding companies, (iii)
broadens the activities that may be conducted by subsidiaries of national banks
and state banks, (iv) provides an enhanced framework for protecting the privacy
of information gathered by financial institutions regarding their customers and
consumers, (v) adopts a number of provisions related to the capitalization,
membership, corporate governance and other measures designed to modernize the
Federal Home Loan Bank System, (vi) requires public disclosure of certain
agreements relating to funds expended in connection with an institution's
compliance with the Community Retirement Act, and (vii) addresses a variety of
other legal and regulatory issues affecting both day-to-day operations and
long-term activities of financial institutions, including the functional
regulation of bank securities and insurance activities.
Bank holding companies are now permitted to engage in a wider variety
of financial activities than permitted under the prior law, particularly with
respect to insurance and securities activities. In addition, in a change from
the prior law, bank holding companies are in a position to be owned, controlled
or acquired by any company engaged in financially related activities.
Activity Restrictions. The BHCA generally limits Hudson City
Bancorp's activities to managing or controlling banks, furnishing services to or
performing services for its subsidiaries and engaging in other activities that
the FRB determines to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. In determining whether a
particular activity is permissible, the FRB must consider whether the
performance of such an activity reasonably can be expected to produce benefits
to the public that outweigh possible adverse effects. Possible benefits include
greater convenience, increased competition and gains in efficiency. Possible
adverse effects include undue concentration of resources, decreased or unfair
competition, conflicts of interest and unsound banking practices. Some of the
principal activities that the FRB has determined by regulation to be so closely
related to banking as to be a proper incident thereto are:
- making or servicing loans;
- performing certain data processing services;
- providing discount brokerage services;
- acting as fiduciary, investment or financial advisor;
- leasing personal or real property;
- making investments in corporations or projects designed primarily
to promote community welfare; and
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- acquiring a savings and loan association.
The FRB may require that Hudson City Bancorp terminate an activity or
terminate control of or liquidate or divest certain subsidiaries or affiliates
when the FRB believes the activity or the control of the subsidiary or affiliate
constitutes a significant risk to the financial safety, soundness or stability
of any of its banking subsidiaries. The FRB also has the authority to regulate
provisions of certain bank holding company debt, including authority to impose
interest ceilings and reserve requirements on such debt.
Effective March 11, 2000, Gramm-Leach expands the range of permitted
activities of certain bank holding companies to include the offering of
virtually any type of service that is financial in nature or incidental thereto,
including banking, securities underwriting, insurance (both underwriting and
agency), merchant banking, acquisitions of and combinations with insurance
companies and securities firms and additional activities that the FRB, in
consultation with the Secretary of the Treasury, determines to be financial in
nature, incidental to such financial activities, or complementary activities
that do not pose a substantial risk to the safety and soundness of depository
institutions or the financial system generally. In order to engage in these new
activities, a bank holding company must qualify and register with the FRB as a
financial holding company. To qualify as a financial holding company, a bank
holding company must demonstrate that each of its bank subsidiaries is
well-capitalized and well-managed and has a rating of "satisfactory" or better
under the Community Reinvestment Act of 1977. Certain of the additional
activities authorized under Gramm-Leach may also be undertaken by a financial
subsidiary of a bank. Under Gramm-Leach, a functional system of regulation will
apply to financial holding companies under which banking activities will be
regulated by the federal banking regulators, securities activities will be
regulated by the federal securities regulators, and insurance activities will be
subject to regulation by the appropriate state insurance authorities.
Although Hudson City Bancorp currently meets all standards required
for qualification as a financial holding company, it has not yet determined
whether it will seek to qualify as, or engage in any of the additional
activities authorized for, a financial holding company. Hudson City Bancorp is
examining its business plan to determine whether, based on market conditions,
the financial condition of Hudson City Bancorp and its subsidiaries, regulatory
capital requirements, general economic conditions and other requirements, it
desires to utilize any of the expanded powers permitted by Gramm-Leach.
Acquisition and Sale of Control. 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 FRB,
unless the FRB has found that the acquisition of such shares will not result in
a change in control of Hudson City Bancorp. Under the CBCA, the FRB has 60 days
within which to act on such notices, taking into consideration certain factors,
including the financial and managerial resources of the acquirer, 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 FRB 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% 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.
As bank holding companies, Hudson City, MHC and Hudson City Bancorp
will be required to obtain the prior approval of the FRB to acquire all, or
substantially all, of the assets of any bank or bank holding company. Prior FRB
approval will be required for Hudson City, MHC or Hudson City Bancorp
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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.
Capital; Dividends; Share Repurchases; Source of Strength. The FRB
imposes certain capital requirements on Hudson City Bancorp under the BHCA,
including a minimum leverage ratio and a minimum ratio of "qualifying" capital
to risk-weighted assets. These minimum requirements are substantially the same
as the Bank's minimum capital requirements described above under "Federal
Banking Regulation -- Capital Requirements". Subject to its capital requirements
and certain other restrictions, Hudson City Bancorp is able to borrow money to
make a capital contribution to Hudson City Savings, and such loans may be repaid
from dividends paid from Hudson City Savings to Hudson City Bancorp. Hudson City
Bancorp is also able to raise capital for contribution to Hudson City Savings by
issuing securities without having to receive regulatory approval, subject to
compliance with federal and state securities laws.
The following table shows Hudson City Bancorp's leverage ratio, its
Tier 1 risk-based capital ratio, and its total risk-based capital ratio, at
December 31, 1999:
<TABLE>
<CAPTION>
Minimum Capital
Bancorp Actual Adequacy
-------------------- ---------------
Amount Ratio Amount Ratio
---------- ----- -------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Leverage (Tier 1) capital.... $1,507,003 18.54% $325,068 4.00%
Risk-based capital:
Tier 1.................. 1,507,003 56.31 107,051 4.00
Total................... 1,527,013 57.06 214,102 8.00
</TABLE>
As the table shows, Hudson City Bancorp exceeded the minimum capital
adequacy requirements at the date indicated.
A bank holding company is required to give the FRB 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 FRB 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, FRB order or directive, or any condition imposed by, or written
agreement with, the FRB. Such notice and approval is not required for a bank
holding company that would be treated as "well capitalized" under applicable
regulations of the FRB, that has received a composite "1" or "2" rating at its
most recent bank holding company examination by the FRB, and that is not the
subject of any unresolved supervisory issues.
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. A bank holding company should stand
ready to use available resources to provide adequate capital funds to its
subsidiary banks during periods of financial stress or adversity and should
maintain the financial flexibility and capital-raising capacity to obtain
additional resources for assisting its subsidiary banks. 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
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plan that is required of such an undercapitalized bank. See "Federal Banking
Regulation -- Prompt Corrective Action" above. If the undercapitalized bank
fails to file an acceptable capital restoration plan or fails to implement an
accepted plan, the FRB 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.
General. Under the FDIA, 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 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.
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 the FRB required that Hudson City, MHC obtain the prior approval
of the FRB before Hudson City, MHC may waive any dividends from Hudson City
Bancorp. As of the date hereof, we are not aware that the FRB has given its
approval to any waiver of dividends by any mutual holding company that has
requested such approval.
In addition, the FRB required that the amount of any dividends waived
by Hudson City, MHC will not be available for 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. The restricted capital
account and liquidation account amounts are not reflected in our financial
statements, but are considered as a notational or memorandum account. These
accounts are maintained in accordance with the laws, rules, regulations and
policies of the Commissioner and our plan of reorganization.
Hudson City, MHC does not expect to waive dividends declared by
Hudson City Bancorp, and did not do so in connection with dividends declared and
paid in 1999. 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 FRB
approves such waiver, then Hudson City Bancorp would pay such dividend only to
its public stockholders.
NEW JERSEY HOLDING COMPANY REGULATION.
General. 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 Control. 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
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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.
FEDERAL SECURITIES LAW
Hudson City Bancorp's securities are registered with the SEC under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). As such,
Hudson City Bancorp is subject to the information, proxy solicitation, insider
trading, and other requirements and restrictions of the Exchange Act.
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. Hudson City Savings and Hudson City Bancorp constitute an
affiliated group of corporations and, therefore, are 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 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
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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
reserve.
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 is 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 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.
ITEM 2. PROPERTIES
During 1999, we conducted our business through our executive office,
our operations center and 75 branch offices. At December 31, 1999, we owned 30
of our locations and leased the remaining 47. Our lease arrangements are
typically long-term arrangements with third-parties that generally contain
several options to renew at the expiration date of the lease.
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At December 31, 1999 we had executed leases to open four new branch
offices in New Jersey. We expect to open one branch in the first quarter, with
the other three offices expected to open by the end of the third quarter 2000.
For additional information regarding our lease obligations, see Note
8 of Notes to Consolidated Financial Statements in Item 8 "Financial Statements
and Supplementary Data."
ITEM 3. LEGAL PROCEEDINGS
Except for the cases described below, we are not involved in any
pending legal proceedings other than routine legal proceedings occurring in the
ordinary course of business. We believe that these routine legal proceedings, in
the aggregate, are immaterial to our financial condition and results of
operations.
On October 2, 1997, a purported class action entitled James W. Smith,
et al. v. Hudson City Savings Bank (L-11184-97) was commenced in the Law
Division of the Superior Court of New Jersey, Essex County against Hudson City
Savings on behalf of persons who obtained loans from Hudson City Savings secured
by residential real property in New Jersey, and who paid an attorney review fee
in connection with their loans. Plaintiffs allege that the potential class
includes thousands of borrowers and involves millions of dollars in review fees.
Plaintiffs claim that the attorney fees violate a provision of New Jersey law
which prescribes circumstances under which such fees can be charged by a lender
and a provision of New Jersey law prohibiting consumer fraud. Plaintiffs seek an
injunction, an order requiring a form of warning or public notice, compensatory
damages, treble damages, costs, attorneys' fees, an order requiring
disgorgement, interest and punitive damages. Hudson City Savings filed an answer
denying liability. This suit was voluntarily stayed by the parties on or about
September 9, 1998 pending the outcome of an appeal (the "Appeal") in certain
other New Jersey attorney review fee lawsuits involving different parties.
The Appeal, heard on a consolidated basis in the cases of Kelly v.
Chase Manhattan Mortgage Corp., Iverson v. Collective Bank and Turner v. First
Union, was decided by the Appellate Division of the Superior Court of New Jersey
on or about July 9, 1998. The Appellate Division ruled, among other things, that
lenders are permitted to charge attorney review fees for the review of loan
documents submitted by a borrower or by the borrower's attorney and clarified
the interpretation of part of the statute's language.
Following the Appellate Division's decision in the Appeal, the
Supreme Court of New Jersey granted a motion for leave to appeal on or about
November 18, 1998 and a motion for leave to cross-appeal on or about January 27,
1999. The Supreme Court of New Jersey heard oral arguments on September 27,
1999. On December 9, 1999, the Supreme Court of New Jersey unanimously ruled
that lenders may charge borrowers an attorney review fee with regard to loan
documents prepared, or submitted by, or at the direction of the borrowers'
attorneys or the borrowers, whether or not the borrowers are represented by
counsel and regardless of whether such review is "extra work" for the lenders.
In addition, the Court unanimously held that the New Jersey statute regulating
such attorney review fees is preempted in the case of federally chartered
institutions by federal banking regulations. Meanwhile, the Smith action remains
stayed. We believe that this lawsuit is without merit and we intend to
aggressively defend our interest.
On or about April 30, 1998, a purported class action was commenced
against Hudson City Savings in the Law Division of Superior Court of New Jersey,
Bergen County entitled Elizabeth C. Bogdanowicz, et al. v. Hudson City Savings
Bank (L-4110-98) on behalf of a putative class of persons who borrowed
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funds from Hudson City Savings from and after January 29, 1993. Plaintiffs
allege that the putative class consists of thousands of borrowers who were
charged attorney review fees by Hudson City Savings. Plaintiffs claim that the
attorney review fee violated the New Jersey fee statute.
Plaintiffs also assert claims for unjust enrichment. Plaintiffs seek
compensatory damages, costs, fees, injunctive relief and treble damages. This
action has been dismissed with prejudice.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the quarter ended December 31, 1999 to
a vote of security holders of Hudson City Bancorp through the solicitation of
proxies or otherwise.
The stockholders of Hudson City Bancorp, at a Special Meeting of
Stockholders held on January 13, 2000, approved the adoption of the Hudson City
Bancorp, Inc. 2000 Stock Option Plan and the Hudson City Bancorp, Inc. 2000
Recognition and Retention Plan. For additional information, see Note 18 of Notes
to Consolidated Financial Statements in Item 8 "Financial Statements and
Supplementary Data."
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
On the date of the reorganization, July 13, 1999, Hudson City
Bancorp, Inc. common stock commenced trading on the Nasdaq National Market under
the symbol "HCBK." The table below shows the reported high and low sales prices
of the common stock during the periods indicated.
<TABLE>
<CAPTION>
1999
----------------------
High Low
------- ---------
<S> <C> <C>
Third quarter(1).................. $14.13 $10.63
Fourth quarter.................... 14.13 13.00
</TABLE>
- ----------------
(1) from date of reorganization (July 13, 1999)
On October 14, 1999, the Board of Directors of Hudson City Bancorp
declared a quarterly cash dividend of five cents ($0.05) per common share
outstanding that was paid on December 1, 1999. On January 13, 2000, the Board of
Directors of Hudson City Bancorp declared a quarterly cash dividend of five
cents ($0.05) per common share outstanding that is payable on March 31, 2000 to
stockholders of record as of the close of business on March 17, 2000.
The Board of Directors intends to review the payment of dividends
quarterly and plans to continue to maintain a regular quarterly dividend in the
future, dependent upon our earnings, financial condition and other relevant
factors.
Hudson City Bancorp is subject to the requirements of Delaware law
that 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
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<PAGE> 45
there is no difference between these amounts, dividends are limited to net
income for the current and/or immediately preceding year.
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 established in connection
with the reorganization. See "Note 2 to Notes to Consolidated Financial
Statements."
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 that would be
treated by recipient stockholders as a tax-free return of capital for federal
income tax purposes without prior approval of the FDIC. We also have committed
to the FDIC that we will provide the FDIC with 30 days prior written notice
before implementing any such return of capital.
As of March 23, 2000, there were approximately 22,031 holders of
record of Hudson City Bancorp common stock.
ITEM 6. SELECTED FINANCIAL 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 Bancorp and Hudson City Savings. The
following information is only a summary and you should read it in conjunction
with our audited consolidated financial statements in Item 8 of this document.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets....................... $8,518,865 $7,752,260 $7,313,999 $6,672,429 $5,429,142
Loans.............................. 4,305,875 3,659,407 3,463,803 3,171,458 2,791,802
Investment securities available
for sale......................... 812,058 785,031 654,726 595,870 563,655
Mortgage-backed securities held
to maturity...................... 3,097,072 3,070,931 3,022,225 2,710,078 1,865,930
Total cash and cash equivalents.... 200,839 156,875 95,674 121,601 133,032
Foreclosed real estate, net........ 367 1,026 1,410 2,385 3,440
Total deposits..................... 6,688,044 6,807,339 6,465,956 5,918,971 4,757,813
Total borrowed funds............... 300,000 -- -- -- --
Total stockholders' equity......... 1,479,040 900,606 807,713 719,077 638,944
</TABLE>
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<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Total interest income ............................ $536,081 $520,791 $500,442 $429,278 $363,102
Total interest expense ........................... 298,832 311,084 297,484 242,667 195,543
-------- -------- -------- -------- --------
Net interest income ............................ 237,249 209,707 202,958 186,611 167,559
Provision for loan losses ........................ 2,350 2,400 2,850 2,275 1,000
-------- -------- -------- -------- --------
Net interest income after provision for loan
losses ....................................... 234,899 207,307 200,108 184,336 166,559
-------- -------- -------- -------- --------
Non-interest income:
Service charges and other income ............... 4,752 4,930 4,710 3,896 4,212
(Losses) gains on net securities transactions .. (7) 24 1,594 152 307
-------- -------- -------- -------- --------
Total non-interest income .................... 4,745 4,954 6,304 4,048 4,519
-------- -------- -------- -------- --------
Total non-interest expense ................... 68,408 63,492 62,919 60,958 61,054
-------- -------- -------- -------- --------
Income before income tax expense ................. 171,236 148,769 143,493 127,426 110,024
Income tax expense ............................. 63,850 55,500 53,500 46,595 42,250
-------- -------- -------- -------- --------
Net income ....................................... $107,386 $ 93,269 $ 89,993 $ 80,831 $ 67,774
======== ======== ======== ======== ========
Basic earnings per share ......................... $ 0.47(1) $ -- $ -- $ -- $ --
======== ======== ======== ======== ========
Diluted earnings per share ....................... $ 0.47(1) $ -- $ -- $ -- $ --
======== ======== ======== ======== ========
</TABLE>
- --------------------------------
(1) From date of reorganization (July 13, 1999)
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<PAGE> 47
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA:
PERFORMANCE RATIOS:
Return on average assets................. 1.32% 1.24% 1.27% 1.33% 1.32%
Return on average stockholders' equity... 9.05 10.90 11.79 11.93 11.24
Net interest rate spread(1).............. 2.18 2.16 2.28 2.50 2.70
Net interest margin(2)................... 2.98 2.85 2.94 3.14 3.35
Non-interest expense to average assets... 0.84 0.84 0.89 1.00 1.19
Efficiency ratio(3)...................... 28.27 29.58 30.30 32.00 35.54
Dividend payout ratio(4)................. 10.64 - - - -
Cash dividends paid per common share(4).. $ 0.05 $ - $ - $ - $ -
Average interest-earning assets to
average interest-bearing liabilities.... 1.21x 1.16x 1.15x 1.16x 1.17x
CAPITAL RATIOS:
Average stockholders' equity to
average assets.......................... 14.60% 11.35% 10.79% 11.11% 11.72%
Stockholders' equity to assets........... 17.36 11.62 11.04 10.78 11.77
Book value per common share.............. $12.99 $ - $ - $ - $ -
REGULATORY CAPITAL RATIOS:
BANK:
Leverage capital.......................... 15.27% 11.93% 11.37% 11.69% 12.24%
Total risk-based capital................. 47.16 39.23 37.60 35.15 33.77
BANCORP:
Leverage capital......................... 18.54 - - - -
Total risk-based capital................. 57.06 - - - -
ASSET QUALITY RATIOS:
Non-performing loans to total loans...... 0.33% 0.42% 0.47% 0.53% 0.75%
Non-performing assets to total assets..... 0.17 0.21 0.24 0.29 0.45
Allowance for loan losses to
non-performing loans.................... 142.65 115.47 96.85 76.89 56.91
Allowance for loan losses to
total loans............................. 0.46 0.48 0.45 0.41 0.43
OTHER DATA:
Weighted average number of common
shares outstanding (basic and diluted).. 114,767,331 - - - -
Number of deposit accounts............... 470,815 484,991 480,414 456,847 397,210
Branches................................. 75 75 75 74 71
</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 (losses) gains on securities transaction of $(7,000) for 1999, $24,000
for 1998, $1,594,000 for 1997, $152,000 for 1996 and $307,000 for 1995.
(4) From date of reorganization (July 13, 1999).
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion and analysis reflects Hudson City Bancorp's' audited
consolidated 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 Bancorp's' Consolidated Financial Statements and accompanying Notes
to Consolidated Financial Statements in Item 8, and the other statistical data
provided elsewhere in this document.
Hudson City Savings completed the reorganization, as described in
Note 2 to the consolidated financial statements, on July 13, 1999. Prior to July
13, 1999, Hudson City Bancorp had not yet issued any stock, had no assets and no
liabilities and had not conducted any business other than of an organizational
nature. Accordingly, comparative information prior to the reorganization relates
to the financial statements of Hudson City Savings included herein. Effective
upon the closing of the reorganization, Hudson City Bancorp acquired all of the
issued and outstanding capital stock of Hudson City Savings.
GENERAL
Our 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, savings deposits and borrowed funds. 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.
MUTUAL HOLDING COMPANY REORGANIZATION
On July 13, 1999, Hudson City Savings converted and reorganized from
a New Jersey chartered mutual savings bank into a two-tiered mutual savings bank
holding company structure and became a wholly-owned subsidiary of Hudson City
Bancorp. Hudson City Bancorp sold 54,350,000 shares of its common stock to the
public, representing 47% of the outstanding shares, at $10.00 per share and
received net proceeds of $527.6 million. Hudson City Bancorp contributed 50% of
the net proceeds from the initial public offering to Hudson City Savings. An
additional 61,288,300 shares, or 53% of the outstanding shares of Hudson City
Bancorp, were issued to Hudson City, MHC.
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GROWTH INITIATIVES
In accordance with our business plan adopted as part of the
reorganization, in 1999 we commenced several initiatives to effectively and
prudently utilize our capital through internally generated growth. We expect to
continue to grow through expansion using borrowings to supplement deposits as a
funding source. We plan to increase our borrowings to $900 million over the next
two years which we expect to use as an additional funding source to finance our
lending and investing activities. See "Business of Hudson City Savings Bank --
Sources of Funds -- Borrowings" for a discussion of borrowings. We also intend
to grow by adding new branch offices, a strategy that has been successful for us
in the past. We expect to open one new branch in the first quarter of 2000 and
three more new branches by the end of the third quarter of 2000.
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
our level of both 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 1999, general market interest rates increased from the lower
interest rate environment of 1998. The yield curve at the beginning of 1999 was
relatively flat, meaning there was little difference between short-term and
long-term interest rates. At the end of 1999, we operated in a slightly "inverse
yield curve" interest rate environment, where rates on longer-term investment
maturities yielded less than on shorter-term maturities. In this interest rate
environment, our net interest rate spread remained stable at 2.18% for 1999 and
2.16% for 1998. Since December 31, 1999, general market interest rates have
continued to increase. This increasing interest rate environment may have an
adverse impact on our net interest rate spread in future periods.
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 1999 and did not have any such hedging transactions in
place at December 31, 1999. 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:
- evaluate the interest rate risk inherent in certain balance sheet
accounts;
- determine the appropriate level of interest rate risk given our
business plan, the current business environment and our capital
and liquidity requirements; and
- manage interest rate risk in a manner consistent with the approved
guidelines and policies set by our Board of Directors.
We seek to coordinate asset and liability decisions so that, under changing
interest rate scenarios, earnings will remain within an acceptable range.
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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 Directors at its regular meetings, as well as a
comprehensive quarterly report to the Asset Management Committee of the Board of
Directors. 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:
- purchasing mortgage-backed securities with adjustable-rate
features;
- purchasing shorter-term federal agency securities with call
options;
- emphasizing the origination of 15 year fixed-rate and
adjustable-rate first mortgage loans; and
- emphasizing the borrowing of funds with maturities longer than one
year.
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
interest rate environment in recent years 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.
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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,
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, 1999, 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 $985.7
million compared with $1.29 billion at December 31, 1998. This represented a
negative cumulative one-year interest rate sensitivity gap as a percent of total
assets of 11.6% for 1999 compared with 16.6% for 1998, and a ratio of
interest-earning assets maturing or repricing within one year to
interest-bearing liabilities maturing or repricing within one year of 78.1% for
1999 compared with 74.6% for 1998. 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 25%, 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 60% and a maximum of
107%.
The following table presents the amounts of our interest-earning
assets and interest-bearing liabilities outstanding at December 31, 1999, 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:
- we assumed an annual prepayment rate of 16.0% for mortgage loans
repricing or maturing after one year;
- we assumed an annual prepayment rate of 20.0% for mortgage-backed
securities repricing or maturing after one year;
- 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;
- 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;
- 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; and
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- we reported borrowed funds with call options, that we believed
would be called, at the earlier of the next call date or
contractual maturity date.
Deposit decay rates, as noted 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 calls of
federal agency bonds or borrowed funds. We have excluded non-accrual loans from
the table.
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<TABLE>
<CAPTION>
At December 31, 1999
------------------------------------------------------------------------------------------------
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......... $ 456,599 $ 467,675 $ 583,524 $ 480,444 $ 574,228 $1,620,663 $4,183,133
Consumer and other loans..... 27,106 872 1,642 2,793 18,866 60,160 111,439
Federal funds sold........... 116,600 -- -- -- -- -- 116,600
Mortgage-backed securities... 1,187,513 1,252,800 131,917 105,256 86,753 332,833 3,097,072
Investment securities........ 248 174 549 721 434,939 376,806 813,437
----------- ---------- ----------- ----------- ---------- ---------- ----------
Total interest-earning
assets.................... 1,788,066 1,721,521 717,632 589,214 1,114,786 2,390,462 8,321,681
----------- ---------- ----------- ----------- ---------- ---------- ----------
Interest-bearing liabilities:
Savings accounts............. 20,715 21,561 200,481 240,577 160,385 160,386 804,105
Interest-bearing demand
accounts.................... 2,421 2,421 24,207 29,048 19,366 19,365 96,828
Money market accounts........ 121,698 121,698 121,698 121,700 -- -- 486,794
Time deposits................ 3,222,210 982,558 728,010 37,904 21,520 -- 4,992,202
Borrowed funds............... -- -- -- -- 50,000 250,000 300,000
----------- ---------- ----------- ----------- ---------- ---------- ----------
Total interest-bearing
liabilities............... 3,367,044 1,128,238 1,074,396 429,229 251,271 429,751 6,679,929
----------- ---------- ----------- ----------- ---------- ---------- ----------
Interest rate sensitivity gap.. $(1,578,978) $ 593,283 $ (356,764) $ 159,985 $ 863,515 $1,960,711 $1,641,752
=========== ========== =========== =========== ========== ========== ==========
Cumulative interest rate
sensitivity gap............... $(1,578,978) $ (985,695) $(1,342,459) $(1,182,474) $ (318,959) $1,641,752
=========== ========== =========== =========== ========== ==========
Cumulative interest rate
sensitivity gap as a percent
of total assets.............. (18.54)% (11.57)% (15.76)% (13.88)% (3.74)% 19.27%
Cumulative interest-earning
assets as a percent of
interest-bearing
liabilities.................. 53.10 % 78.07 % 75.90% 80.29 % 94.90 % 124.58%
</TABLE>
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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, 1999. 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 Dollar Dollar Percent Present Value Percent
Interest Rates Amount Change Change Ratio Change
- -------------- ---------- ---------- -------- ------------- --------
(Basis points) (Dollars in thousands)
<S> <C> <C> <C> <C> <C>
200 $1,237,576 $(327,641) (20.93)% 15.56% (16.48)%
150 1,334,149 (231,068) (14.76) 16.51 (11.38)
100 1,419,170 (146,047) (9.33) 17.32 (7.03)
50 1,484,673 (80,544) (5.15) 17.91 (3.86)
0 1,565,217 --- --- 18.63 ---
(50) 1,631,436 66,219 4.23 19.18 2.95
(100) 1,696,458 131,241 8.38 19.70 5.74
(150) 1,718,047 152,830 9.76 19.81 6.33
(200) 1,710,785 145,568 9.30 19.65 5.48
</TABLE>
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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 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 our financial condition and net interest income for 1999,
1998 and 1997. 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. Yields on tax-exempt obligations were not
computed on a tax equivalent basis.
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<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------------
1999 1998 1997
-------------------------------- ------------------------------ -------------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
---------- --------- ------- --------- -------- ------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
INTEREST-EARNING ASSETS:
First mortgage loans,
net(1)..................... $3,796,900 $277,391 7.31% $3,426,309 $ 259,320 7.57% $3,193,099 $245,432 7.69%
Consumer and other loans.... 94,705 7,583 8.01 84,782 7,272 8.58 86,476 7,685 8.89
Federal funds sold.......... 61,276 2,933 4.79 55,264 2,839 5.14 52,760 2,801 5.31
Mortgage-backed securities.. 3,116,320 192,390 6.17 3,053,628 201,592 6.60 2,949,557 201,323 6.83
Investment securities....... 898,063 55,784 6.21 743,151 49,768 6.70 629,050 43,201 6.87
---------- -------- --------- ------- --------- -------
Total interest-earning
assets................... 7,967,264 536,081 6.73 7,363,134 520,791 7.07 6,910,942 500,442 7.24
Noninterest-earning assets... 160,260 -------- 172,142 ------- 164,203 -------
--------- --------- ---------
Total assets........... $8,127,524 $7,535,276 $7,075,145
========== ========== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY:
INTEREST-BEARING LIABILITIES:
Savings accounts............$ 848,734 $ 21,982 2.59 $ 834,057 $ 22,777 2.73 $ 845,600 $ 23,837 2.82
Interest-bearing demand
accounts................... 97,304 2,065 2.12 92,276 1,959 2.12 88,924 1,868 2.10
Money market accounts....... 498,900 13,642 2.73 498,337 14,329 2.88 508,218 14,859 2.92
Time deposits............... 5,073,825 258,028 5.09 4,913,089 272,019 5.54 4,556,812 256,920 5.64
---------- -------- ---------- -------- ---------- --------
Total deposits............ 6,518,763 295,717 4.54 6,337,759 311,084 4.91 5,999,554 297,484 4.96
Borrowed funds.............. 53,552 3,115 5.82 - - - - - -
---------- -------- ---------- -------- ---------- --------
Total interest-bearing
liabilities.............. 6,572,315 298,832 4.55 6,337,759 311,084 4.91 5,999,554 297,484 4.96
---------- -------- ---------- -------- ---------- --------
NONINTEREST-BEARING
LIABILITIES:
Noninterest-bearing
deposits................... 309,676 286,322 262,072
Other noninterest-bearing
liabilities................ 59,260 55,667 50,117
---------- ---------- ----------
Total noninterest-bearing
liabilities.............. 368,936 341,989 312,189
---------- ---------- ----------
Total liabilities....... 6,941,251 6,679,748 6,311,743
Stockholders' equity.... 1,186,273 855,528 763,402
---------- ---------- ----------
Total liabilities and
stockholders' equity.. $8,127,524 $7,535,276 $7,075,145
========== ========== ==========
Net interest income.......... $237,249 $209,707 $202,958
======== ======== ========
Net interest rate spread(2).. 2.18% 2.16% 2.28%
Net interest-earning assets.. $1,394,949 $1,025,375 $ 911,388
========== ========== ==========
Net interest margin(3)....... 2.98% 2.85% 2.94%
Ratio of interest-earning
assets to interest-bearing
liabilities................. 1.21x 1.16x 1.15x
</TABLE>
___________________________
(1) Amount is net of deferred loan fees and allowance for loan losses and
includes non-performing loans.
(2) We determined net interest spread by subtracting the 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.
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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:
- changes attributable to changes in volume (changes in volume
multiplied by prior rate);
- changes attributable to changes in rate (changes in rate
multiplied by prior volume); and
- 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>
1999 COMPARED TO 1998 1998 COMPARED TO 1997
-------------------------- --------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
-------------------------- --------------------------
VOLUME RATE NET VOLUME RATE NET
------- -------- -------- ------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
First mortgage loans, net........... $27,238 $ (9,167) $ 18,071 $17,698 $ (3,810) $13,888
Consumer and other loans............ 815 (504) 311 (149) (264) (413)
Federal funds sold.................. 295 (201) 94 130 (92) 38
Mortgage-backed securities.......... 4,088 (13,290) (9,202) 6,983 (6,714) 269
Investment securities............... 9,845 (3,829) 6,016 7,665 (1,098) 6,567
------- -------- -------- ------- -------- -------
Total............................. 42,281 (26,991) 15,290 32,327 (11,978) 20,349
------- -------- -------- ------- -------- -------
Interest-bearing liabilities:
Savings accounts.................... 394 (1,189) (795) (322) (738) (1,060)
Interest-bearing demand accounts.... 106 - 106 71 20 91
Money market accounts............... 17 (704) (687) (286) (244) (530)
Time deposits....................... 8,679 (22,670) (13,991) 19,793 (4,694) 15,099
Borrowed funds...................... 3,115 - 3,115 - - -
------- -------- -------- ------- -------- -------
Total............................. 12,311 (24,563) (12,252) 19,256 (5,656) 13,600
------- -------- -------- ------- -------- -------
Net change in net interest income.. $29,970 $ (2,428) $ 27,542 $13,071 $ (6,322) $ 6,749
======= ======== ======== ======= ======== =======
</TABLE>
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1999 AND DECEMBER 31, 1998
Our total assets increased $766.6 million, or 9.9%, to $8.52 billion
at December 31, 1999 from $7.75 billion at December 31, 1998. This increase
primarily reflects the receipt of approximately $418.0 million of new cash from
the sale of our common stock as part of the reorganization, $300.0 million of
borrowed funds, and an increase in retained earnings due to net income of $107.4
million. Our objective of effectively deploying capital through asset growth
resulted in increases in the mortgage loan and mortgage-backed securities
portfolios.
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Loans increased $646.5 million, or 17.7%, to $4.31 billion at
December 31, 1999 from $3.66 billion at December 31, 1998. Mortgage-backed
securities increased $26.1 million, or 0.9%, to $3.10 billion at December 31,
1999 from $3.07 billion at December 31, 1998. Investment securities available
for sale increased $27.1 million, or 3.5%, to $812.1 million at December 31,
1999 from $785.0 million at the end of last year. These increases reflected our
emphasis on the origination of one- to four-family mortgage loans supplemented
by the purchase of investment securities, mortgage-backed securities and
mortgage loans. First mortgage loan originations and purchases for the year
ended December 31, 1999 were $1.34 billion compared to $983.5 million for 1998.
The growth in assets was primarily funded by the proceeds from the sale of
common stock in the reorganization, wholesale borrowing and net income from
operations. Due to a planned increase in liquidity related to possible deposit
outflows because of general public concern related to the Year 2000 issue, cash
and cash equivalents increased $43.9 million, or 28.0%, to $200.8 million at
December 31, 1999 from $156.9 million at December 31, 1998. Other assets
increased $20.3 million, or 71.5%, to $48.7 million at December 31, 1999 from
$28.4 million at December 31, 1998 primarily due to the deferred tax asset of
$17.1 million related to the net unrealized loss on investment securities
available for sale.
At December 31, 1999, total liabilities were $7.04 billion, an
increase of 2.7%, or $188.2 million compared with $6.85 billion at December 31,
1998. Within total liabilities, total deposits decreased $119.3 million, or
1.8%, to $6.69 billion at December 31, 1999 from $6.81 billion at December 31,
1998. This decrease reflects a $114.3 million, or 1.8%, decrease in
interest-bearing deposits to $6.38 billion at December 31, 1999 from $6.49
billion at December 31, 1998 and a decrease of $5.0 million, or 1.6%, in
noninterest-bearing deposits to $308.1 million at December 31, 1999. The
decrease in interest-bearing deposits included a $63.7 million, or 1.3%,
decrease in time deposits to $4.99 billion at December 31, 1999 from $5.06
billion at December 31, 1998 and a decrease of $28.7 million, or 3.4%, in
regular savings deposits to $804.1 million at December 31, 1999. The decrease in
total deposits was primarily due to many of our depositors choosing to fund
their stock purchases in the reorganization with approximately $110.0 million of
interest-bearing funds which were on deposit with Hudson City Savings.
At December 31, 1999, Hudson City Bancorp had borrowed funds,
consisting entirely of securities sold under agreements to repurchase, of $300.0
million. These borrowings were used to fund additional asset growth as part of
our capital deployment strategy as well as to off-set, in part, the decrease in
interest-bearing deposits. At December 31, 1998, there were no borrowed funds
outstanding. Our regulatory capital levels significantly exceeded all regulatory
requirements and further increased as a result of the reorganization. A portion
of the excess capital has been deployed through the use of a capital leverage
strategy where we invest in one- to four-family residential mortgages and
mortgage-backed securities. This strategy was funded by the remaining borrowings
from various third party broker/dealers using securities sold under agreements
to repurchase. This strategy generated additional earnings through a positive
interest rate spread between the yield on interest-earning assets and the cost
of the borrowings.
Accrued expenses and other liabilities increased $7.5 million, or
16.9%, to $51.8 million at December 31, 1999 from $44.3 million at December 31,
1998. This increase is primarily due to an increase in the liability for
post-retirement benefits and an increase in accrued income taxes.
Total stockholders' equity increased $578.4 million, or 64.2%, to
$1.48 billion at December 31, 1999 from $900.6 million at December 31, 1998,
primarily due to net proceeds of $527.6 million from the reorganization and net
income of $107.4 million for the year ended December 31, 1999. These increases
were partially offset by a $28.6 million decrease in accumulated other
comprehensive income due to a decline in the market value of investment
securities available for sale, $22.1 million in unallocated
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common stock for the employee stock ownership plan, and $5.8 million in
dividends paid to common stockholders during the fourth quarter of 1999.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
General. Net income for 1999 was $107.4 million, an increase of $14.1
million, or 15.1%, compared with net income of $93.3 million for 1998. Basic and
diluted earnings were $0.47 per common share from the date of the reorganization
(July 13, 1999) to December 31, 1999. The increase in net income was
attributable to an increase of $27.5 million in net interest income, partially
offset by an increase of $4.9 million in non-interest expense and an increase of
$8.4 million in income tax expense. Our return on average assets for the year
ended 1999 was 1.32% compared with 1.24% for 1998. Our return on average equity
for the year ended 1999 was 9.05% compared with 10.90% for 1998, reflecting the
additional equity received in connection with the reorganization.
Interest Income. Total interest income increased $15.3 million, or
2.9%, to $536.1 million for the year ended December 31,1999 compared with $520.8
million for 1998. Interest and fees on first mortgage loans increased $18.1
million, or 7.0%, to $277.4 million for 1999 compared with $259.3 million for
1998. Interest and dividends on investment securities available for sale
increased $6.0 million, or 12.1%, to $55.7 million for 1999 compared with $49.7
million for 1998. Offsetting these increases in total interest income was a
decrease in interest income on mortgage-backed securities of $9.2 million, or
4.6%, to $192.4 million for 1999 compared with $201.6 million for 1998.
The increase in total interest income was primarily due to the
average balance of total interest-earning assets increasing $604.1 million, or
8.2%, to $7.97 billion for 1999 compared with $7.36 billion for 1998. This
increase was primarily attributable to a $370.6 million, or 10.8%, increase in
the average balance of first mortgage loans to $3.80 billion for 1999 compared
with $3.43 billion for 1998. The average balance of investment securities
increased $154.9 million, or 20.8%, to $898.1 million for 1999 compared with
$743.2 million for 1998. In addition, the average balance of mortgage-backed
securities increased $62.7 million, or 2.1%, to $3.12 billion for 1999 compared
with $3.05 billion for 1998 but the increase was not enough to offset the
decrease in the average yield on mortgage-backed securities, resulting in lower
interest income, year-to-year, for such securities. The increase in the average
balance of investment securities was due in part to the initial deployment into
short-term securities of the net cash proceeds from the reorganization. The
increase in the average balance of first mortgage loans was due in part to the
eventual use of the net cash proceeds from the reorganization to fund the
origination and purchase of first mortgage loans while prepayment activity
declined, year-to-year, primarily due to the increase in interest rates
experienced during 1999. These increases also reflected growth, through the use
of borrowed funds to originate first mortgage loans, while purchasing investment
securities and mortgage-backed securities to manage interest rate risk.
The impact on interest income from the growth in the average balance
of total interest-earning assets was offset in part by a 34 basis point decrease
in the average yield of interest-earning assets to 6.73% for 1999 from 7.07% for
1998. The average yield on first mortgage loans, net, decreased 26 basis points
to 7.31% for 1999 from 7.57% for 1998. The average yield on investment
securities decreased 49 basis points to 6.21% for 1999 from 6.70% for 1998. The
average yield on mortgage-backed securities decreased 43 basis points to 6.17%
for 1999 from 6.60% for 1998. The decreases in the average yields on our
interest-earning assets reflect the downward repricing of those assets during a
lower interest rate environment from 1998 through early 1999. Over the last half
of 1999 market interest rates generally increased. Although this general
increase did not materially impact our results of operations in 1999, we expect
it to impact the yields on our interest-earning assets in future periods. The
decrease in the average
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yield on our investment securities also reflects the initial investment of the
net cash proceeds from the reorganization into lower yielding short-term
securities.
Interest Expense. Total interest expense decreased $12.3 million, or 4.0%,
to $298.8 million for the year ended December 31, 1999 compared with $311.1
million for the year ended December 31, 1998. Interest expense on deposits
decreased $15.4 million, or 5.0%, to $295.7 million for 1999 compared with
$311.1 million for 1998. Interest expense on time deposits, which accounted for
87.3% of total interest expense on deposits in 1999, decreased $14.0 million, or
5.1%, to $258.0 million for 1999 compared with $272.0 million for 1998. Interest
expense on borrowed funds was $3.1 million for 1999. There was no interest
expense on borrowed funds during 1998.
The decrease in total interest expense was primarily due to a decrease of
36 basis points in the average cost of interest-bearing liabilities to 4.55% for
1999 from 4.91% for 1998. The average cost of interest-bearing deposits
decreased 37 basis points to 4.54% for 1999 from 4.91% for 1998. Within the
interest-bearing deposit mix, the largest decrease was a 45 basis point decrease
in the average cost of time deposits to 5.09% for 1999 from 5.54% for 1998. The
decreases in the average cost on our interest-bearing deposits reflect the
downward repricing of those liabilities due to the lower interest rate
environment from 1998 through early 1999. Over the last half of 1999 market
interest rates generally increased. Although this general increase did not
materially impact our results of operations in 1999, we expect it to impact the
costs of our interest-bearing liabilities in future periods. The borrowing of
funds during 1999 placed slight upward pressure on the cost on the average
balance of our interest-bearing liabilities, as these borrowed funds had a
higher average cost compared with our deposits.
The impact of the decrease in the average cost of total interest-bearing
liabilities was partially offset by an increase in the average balance of such
liabilities. The average balance of total interest-bearing liabilities increased
$234.6 million, or 3.7%, to $6.57 billion for 1999 from $6.34 billion for 1998.
The average balance of interest-bearing deposits increased $181.0 million, or
2.9%, to $6.52 billion for 1999 from $6.34 billion for 1998. Although actual
deposits decreased year-to-year, the growth in the average balance of deposits
reflects growth in the portfolio over the first six months of 1999 before funds
were used by our depositors to purchase our common stock in the reorganization.
Within the mix of average interest-bearing deposits, the average balance of time
deposits increased $160.7 million, or 3.3%, to $5.07 billion for 1999 from $4.91
billion for 1998. The average balance of borrowed funds for 1999 was $53.6
million as we implemented a leveraged growth strategy to begin deployment of
capital received in the reorganization. There were no borrowed funds outstanding
in 1998.
Net Interest Income. Net interest income increased $27.5 million, or
13.1%, to $237.2 million for 1999 from $209.7 million for 1998. This increase
reflects the increase in the average balance of first mortgage loans and
investment securities, and a decrease in the average cost of total
interest-bearing liabilities. Our 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, increased to 2.18%
for 1999 compared with 2.16% for 1998. Our net interest margin, represented by
net interest income divided by average total interest-earning assets, increased
13 basis points to 2.98% for 1999 from 2.85% for 1998. The slight increase in
our net interest rate spread reflects the overall increasing interest rate
environment during 1999 compared with 1998, and the increase in interest-earning
assets. The increase in our net interest margin is primarily due to the
investment of the net cash proceeds from the reorganization.
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Provision for Loan Losses. Our provision for loan losses for 1999 was
$2.35 million, a decrease of $50,000, or 2.1%, from the 1998 provision. The
allowance for loan losses increased $2.3 million, or 13.0%, to $20.0 million at
December 31, 1999 from $17.7 million at December 31, 1998. The current level of
the provision for loan losses and the increase in the allowance for loan losses
reflects the continued growth in the loan portfolio even though we have
experienced low levels of charge-offs and a decline in non-performing loans
during 1999. Non-performing loans, which we define as non-accruing loans and
accruing loans delinquent 90 days or more, decreased $1.3 million, or 8.5%, to
$14.0 million at December 31, 1999 compared with $15.3 million at December 31,
1998 primarily due to the continued strong economy resulting in lower
unemployment, as well as adherence to our loan underwriting standards and
collection procedures.
At December 31, 1999, the ratio of non-performing loans to total loans was
0.33% compared with 0.42% at December 31, 1998. The ratio of the allowance for
loan losses to non-performing loans was 142.7% at December 31, 1999 compared
with 115.5% at December 31, 1998. The ratio of the allowance for loan losses to
total loans was 0.46% at December 31, 1999 compared with 0.48% at December 31,
1998.
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 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. Total non-interest income, consisting primarily of
service fees and other income, decreased $0.3 million, or 6.0%, to $4.7 million
for 1999 compared with $5.0 million for 1998.
Non-Interest Expense. Total non-interest expense increased $4.9 million,
or 7.7%, to $68.4 million for 1999 compared with $63.5 million for 1998. Within
total non-interest expense, salaries and employee benefits increased $2.8
million, or 7.1%, to $42.1 million for 1999 compared with $39.3 million for
1998. This increase was primarily attributable to the recognition of
compensation expense associated with the ESOP that was adopted in the
reorganization and routine increases in salaries and employee benefits. Other
expense increased $1.9 million, or 21.3%, to $10.8 million for 1999 compared
with $8.9 million for 1998 primarily due to additional professional services
incurred related to operating as a public company and additional expenses
related to the increased volume of our first mortgage loan originations.
Our efficiency ratio, which we determined by dividing non-interest expense
by the sum of net interest income and non-interest income, excluding net gains
on securities transactions, was 28.3% for 1999 compared with 29.6% for 1998. The
ratio of non-interest expense to average assets was 0.84% for both 1999 and
1998.
Income Taxes. Income tax expense increased $8.4 million, or 15.1%, to
$63.9 million for 1999 compared with $55.5 million for 1998. This increase is
primarily reflective of an increase in income before income tax expense of
15.1%. The effective tax rate was stable for both 1999 and 1998 at 37.3%.
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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 reflected our strategy of
emphasizing the 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.
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 reflected
an increase in time deposits with original maturities of less than twenty-four
months. The growth in interest-bearing deposits primarily reflected 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 $1.3 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 reflected
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
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compared with $629.1 million for 1997. These increases reflected 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 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 due 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 reflected 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 reflected 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 the 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 reflected a decline in
non-performing loans. The increase in the allowance for loan losses reflected
the continued growth in the loan portfolio. At
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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.
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 included amortization of goodwill of
$1.6 million for 1998.
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 reflected 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.
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, during
1999, we entered into sales of securities under agreements to repurchase with
approved broker-dealers totaling $300.0 million at December 31, 1999. These
agreements allow us to borrow money using our securities as collateral. At
December 31, 1998, we had no outstanding borrowings. We have recently applied
for membership in the FHLB-NY, which, if accepted, could provide us access to
additional sources of borrowed funds.
Hudson City Bancorp sold 54,350,000 shares of its common stock to the
public as part of the reorganization at $10.00 per share resulting in net
proceeds of $527.6 million. Hudson City Bancorp also issued 61,288,300 shares to
Hudson City, MHC. Excluding the use of deposits by subscription-eligible
depositors to purchase stock, net proceeds funded by cash were approximately
$418.0 million. On October 14, 1999, the Board of Directors of Hudson City
Bancorp declared a quarterly cash dividend of
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five cents ($0.05) per common share outstanding. The dividend was paid on
December 1, 1999 to stockholders of record at the close of business on November
12, 1999. On January 13, 2000, the Board of Directors declared a quarterly cash
dividend of five cents ($0.05) per common share outstanding. The dividend is
payable March 31, 2000 to stockholders of record at the close of business on
March 17, 2000.
Loan repayments and maturing investment securities are a relatively
predictable source of funds. However, deposit flows, calls of investment
securities and borrowed funds, and prepayments of loans and mortgage-backed
securities are strongly influenced by interest rates, general and local economic
conditions and competition in the marketplace. These factors reduce the
predictability of the timing of these sources of funds.
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 1999 we originated and purchased loans of approximately $1.40 billion and
during 1998 we originated and purchased loans of approximately $1.02 billion.
Purchases of mortgage-backed securities were $1.09 billion for 1999 and $1.22
billion for 1998, while purchases of investment securities were $914.0 million
for 1999 and $790.0 million for 1998.
These investing activities were funded by deposits, principal payments on
mortgage loans and mortgage-backed securities, calls and maturities on
investment securities, funds provided by our operating activities, borrowings
and the cash proceeds from the sale of our common stock in the reorganization.
Principal repayments on loans and mortgage-backed securities totaled $1.81
billion during 1999, compared to $1.99 billion during 1998. Maturities and calls
of investment securities totaled $733.2 million during 1999 and $659.7 million
during 1998. Sales of loans and investment securities provided cash flows of
$110.1 million during 1999 and $4.1 million during 1998.
Total deposits decreased $119.3 million during 1999 and increased $341.4
million during 1998. 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 $4.20 billion at
December 31, 1999. Based on our deposit retention experience and current pricing
strategy, we anticipate that a significant portion of these time deposits will
remain with Hudson City Savings. We 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, 1999, Hudson City Savings had loan commitments to
borrowers of approximately $159.7 million, and available home equity and
overdraft lines of credit of approximately $55.5 million. There were no
commitments to purchase mortgage-backed securities at December 31, 1999.
Currently, we plan to open four new branch locations during 2000. The
expenditures related to their establishment are not expected to have a material
impact on our financial position or results of operations. We do not anticipate
any material capital expenditures, nor do we have any balloon or other payments
due on any long-term obligations or any off-balance sheet items other than the
commitments and unused lines of credit noted above.
At December 31, 1999, we exceeded each of the applicable regulatory
capital requirements of the FRB and the FDIC. Hudson City Bancorp's leverage
(tier 1) capital was $1.51 billion, or 18.54%, at December 31, 1999. In
addition, Hudson City Savings' leverage (tier 1) capital was $1.24 billion, or
15.27%, and its risk-based total capital ratio was 47.16% at December 31, 1999.
In order to be classified as "well-capitalized" by the FDIC we were required to
have leverage (tier 1) capital of $406.7 million, or
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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%. See "Regulation of Hudson City
Savings Bank and Hudson City Bancorp" for a discussion of the regulatory capital
requirements applicable to us.
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 was to be effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. However, SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective Date
of FASB Statement No. 133," extended the adoption of SFAS No. 133 to fiscal
years beginning after June 15, 2000. This statement should not be applied
retroactively to financial statements of prior periods. The adoption of the
provision of SFAS No. 133 is not expected to have a material impact on the
financial position or results of operations of Hudson City Bancorp.
THE YEAR 2000 ISSUE
Over the past several quarters, we reported, on a regular basis, potential
concerns relating to the "Year 2000 Issue," which centered upon the possible
inability of computer systems to recognize the change into the year 2000. We did
not experience any significant interruptions in any computer operations related
to the Year 2000 Issue. Our loan and deposit functions were not affected by the
transition into the year 2000. We estimate that the total costs we incurred
related to the Year 2000 Issue, from inception to date, did not exceed $1.0
million, and we do not anticipate any additional costs to be incurred related to
this matter. Additionally, we did not encounter any significant delays in loan
payments from our borrowers due to difficulties they may have encountered as a
result of the Year 2000 Issue.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and accompanying Notes to
Consolidated Financial Statements of Hudson City Bancorp 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 performance than do the effects of
inflation.
IMPACT OF RECENT LEGISLATION
Impact of Enactment of the Gramm-Leach-Bliley Act. On November 12, 1999,
President Clinton signed Gramm-Leach, which among other things, establishes a
comprehensive framework to permit affiliations among commercial banks, insurance
companies and securities firms. Generally, the new law (i) repeals the
historical restrictions and eliminates many federal and state law barriers to
affiliations among banks and securities firms, insurance companies and other
financial service providers, (ii) provides a uniform framework for the
activities of banks, savings institutions and their holding
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companies, (iii) broadens the activities that may be conducted by subsidiaries
of national banks and state banks, (iv) provides an enhanced framework for
protecting the privacy of information gathered by financial institutions
regarding their customers and consumers, (v) adopts a number of provisions
related to the capitalization, membership, corporate governance and other
measures designed to modernize the Federal Home Loan Bank System, (vi) requires
public disclosure of certain agreements relating to funds expended in connection
with an institution's compliance with the Community Retirement Act, and (vii)
addresses a variety of other legal and regulatory issues affecting both
day-to-day operations and long-term activities of financial institutions,
including the functional regulation of bank securities and insurance activities.
Bank holding companies are now permitted to engage in a wider variety of
financial activities than permitted under the prior law, particularly with
respect to insurance and securities activities. In addition, in a change from
the prior law, bank holding companies are in a position to be owned, controlled
or acquired by any company engaged in financially related activities.
Effective March 11, 2000, Gramm-Leach expands the range of permitted
activities of certain bank holding companies to include the offering of
virtually any type of service that is financial in nature or incidental thereto,
including banking, securities underwriting, insurance (both underwriting and
agency), merchant banking, acquisitions of and combinations with insurance
companies and securities firms and additional activities that the FRB, in
consultation with the Secretary of the Treasury, determines to be financial in
nature, incidental to such financial activities, or complementary activities
that do not pose a substantial risk to the safety and soundness of depository
institutions or the financial system generally. In order to engage in these new
activities, a bank holding company must qualify and register with the FRB as a
financial holding company. To qualify as a financial holding company, a bank
holding company must demonstrate that each of its bank subsidiaries is
well-capitalized and well-managed and has a rating of "satisfactory" or better
under the Community Reinvestment Act of 1977. Certain of the additional
activities authorized under Gramm-Leach may also be undertaken by a financial
subsidiary of a bank. Under Gramm-Leach, a functional system of regulation will
apply to financial holding companies under which banking activities will be
regulated by the federal banking regulators, securities activities will be
regulated by the federal securities regulators, and insurance activities will be
subject to regulation by the appropriate state insurance authorities.
Although Hudson City Bancorp currently meets all standards required for
qualification as a financial holding company, it has not yet determined whether
it will seek to qualify as, or engage in any of the additional activities
authorized for, a financial holding company. Hudson City Bancorp is examining
its business plan to determine whether, based on market conditions, the
financial condition of Hudson City Bancorp and its subsidiaries, regulatory
capital requirements, general economic conditions and other requirements, it
desires to utilize any of the expanded powers permitted by Gramm-Leach.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Information regarding quantitative and qualitative disclosures about
market risk appear under Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Management of Interest Rate
Risk.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Stockholders of
Hudson City Bancorp, Inc.:
We have audited the accompanying consolidated statements of financial
condition of Hudson City Bancorp, Inc. and subsidiary as of December 31, 1999
and 1998, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1999. These consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Hudson City
Bancorp, Inc. and subsidiary as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
January 10, 2000
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HUDSON CITY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
----------- -----------
(In thousands)
<S> <C> <C>
Assets:
Cash and due from banks (note 3)............................................. $ 84,239 $ 87,075
Federal funds sold........................................................... 116,600 69,800
---------- ----------
Total cash and cash equivalents......................................... 200,839 156,875
Investment securities held to maturity, market value of $1,348 at
December 31, 1999 and $1,420 at December 31, 1998 (note 4)................. 1,379 1,393
Investment securities available for sale, at market value (note 4 and 10).... 812,058 785,031
Mortgage-backed securities held to maturity, market value of $3,085,596
at December 31, 1999 and $3,106,369 at December 31, 1998 (note 5).......... 3,097,072 3,070,931
Loan (note 6)................................................................ 4,305,875 3,659,407
Less: Deferred loan fees................................................ 10,631 11,146
Allowance for loan losses (note 6)................................ 20,010 17,712
---------- ----------
Net loans..................................................... 4,275,234 3,630,549
Foreclosed real estate, net (note 7)......................................... 367 1,026
Accrued interest receivable.................................................. 51,970 49,041
Banking premises and equipment, net (note 8)................................. 31,200 29,064
Other assets (note 11 and 12)................................................ 48,746 28,350
---------- ----------
Total Assets.................................................. $8,518,865 $7,752,260
========== ==========
Liabilities and Stockholders' Equity:
Deposits (note 9):
Interest-bearing........................................................ $6,379,929 $6,494,278
Noninterest-bearing..................................................... 308,115 313,061
---------- ----------
Total deposits..................................................... 6,688,044 6,807,339
Borrowed funds (note 10)..................................................... 300,000 -
Accrued expenses and other liabilities (note 11)............................. 51,781 44,315
---------- ----------
Total liabilities.................................................. 7,039,825 6,851,654
---------- ----------
Common stock, $0.01 par value, 800,000,000 shares authorized,
115,638,300 issued and outstanding at December 31, 1999................. 1,156 -
Additional paid-in-capital................................................... 526,619 -
Retained earnings (note 12 and 17)........................................... 1,001,337 899,933
Unallocated common stock held by the employee stock
ownership plan (note 11)................................................ (22,109) -
Accumulated other comprehensive (loss) income, net of tax.................... (27,963) 673
----------- ----------
Total stockholders' equity......................................... 1,479,040 900,606
---------- ----------
Commitments and contingencies (note 8 and 15) ---------- ----------
Total Liabilities and Stockholders' Equity.................... $8,518,865 $7,752,260
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
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HUDSON CITY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
----------- ----------- -----------
(In thousands, except for share data)
<S> <C> <C> <C>
Interest Income:
Interest and fees on first mortgage loans (note 6)..... $277,391 $259,320 $245,432
Interest and fees on consumer and other loans.......... 7,583 7,272 7,685
Interest on mortgage-backed securities................. 192,390 201,592 201,323
Interest on investment securities held to maturity
(note 4):
Taxable............................................. 60 54 -
Exempt from federal taxes........................... 28 48 61
Interest on investment securities available for sale -
taxable (note 4)...................................... 55,696 49,666 43,140
Interest on federal funds sold......................... 2,933 2,839 2,801
-------- -------- ---------
Total interest income............................. 536,081 520,791 500,442
Interest expense on deposits (note 9).................... 295,717 311,084 297,484
Interest expense on borrowed funds (note 10)............. 3,115 - -
-------- -------- ---------
Total interest expense............................ 298,832 311,084 297,484
-------- -------- ---------
Net interest income............................. 237,249 209,707 202,958
Provision for loan losses................................ 2,350 2,400 2,850
-------- -------- ---------
Net interest income after provision for loan
losses........................................ 234,899 207,307 200,108
-------- -------- ---------
Non-interest Income:
Service charges and other income.................... 4,752 4,930 4,710
(Losses) gains on securities transactions, net
(note 4).......................................... (7) 24 1,594
-------- -------- ---------
Total non-interest income........................ 4,745 4,954 6,304
-------- -------- ---------
Non-interest Expense:
Salaries and employee benefits (note 11)............ 42,117 39,260 38,781
Net occupancy expense (note 8)...................... 12,076 11,753 11,888
Federal deposit insurance assessment................ 806 783 757
Amortization of goodwill (note 12).................. 1,440 1,610 1,771
Computer and related services....................... 1,195 1,212 1,104
Other expense....................................... 10,774 8,874 8,618
-------- -------- --------
Total non-interest expense....................... 68,408 63,492 62,919
-------- -------- --------
Income before income tax expense................ 171,236 148,769 143,493
Income tax expense (note 12)............................. 63,850 55,500 53,500
-------- -------- --------
Net income...................................... $107,386 $ 93,269 $ 89,993
======== ======== ========
Basic earnings per share................................. $ 0.47(1) $ - $ -
======== ======== ========
Diluted earnings per share............................... $ 0.47(1) $ - $ -
======== ======== ========
</TABLE>
(1) From date of Reorganization (July 13, 1999)
See accompanying notes to consolidated financial statements.
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HUDSON CITY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
Unallocated Accumulated
Additional Common Stock Other Total
Common Paid-In Retained Held by Comprehensive Stockholders'
Stock Capital Earnings the ESOP (Loss) Income Equity
------- ---------- ---------- ------------ ------------- ------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996............ $ -- $ -- $ 716,671 $ -- $ 2,406 $ 719,077
----------
Comprehensive income:
Net income............................ -- -- 89,993 -- -- 89,993
Other comprehensive income (loss):
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 (loss):
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
----------
Comprehensive income:
Net income............................ -- -- 107,386 -- -- 107,386
Other comprehensive income (loss):
Unrealized holding losses arising
during period (net of tax
of $(17,552))....................... -- -- -- -- (28,641) (28,641)
Reclassification adjustment for
losses in net income (net of tax
of $2).............................. -- -- -- -- 5 5
----------
Total comprehensive income............ 78,750
----------
Proceeds from sale of common
stock, net............................ 1,156 526,485 -- -- -- 527,641
Capitalization of Hudson City, MHC..... -- -- (200) -- -- (200)
Declaration of dividends ($0.05
per share)............................ -- -- (5,782) -- -- (5,782)
Purchase of shares for ESOP............ -- -- -- (23,402) -- (23,402)
Allocation of shares for ESOP.......... -- 134 -- 1,293 -- 1,427
------ -------- ---------- -------- -------- ----------
Balance at December 31, 1999............ $1,156 $526,619 $1,001,337 $(22,109) $(27,963) $1,479,040
====== ======== ========== ======== ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
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HUDSON CITY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1999 1998 1997
--------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income....................................................... $ 107,386 $ 93,269 $ 89,993
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, accretion and amortization expense............... 8,005 6,052 5,505
Provision for loan losses...................................... 2,350 2,400 2,850
Losses (gains) on securities transactions, net................. 7 (24) (1,594)
Allocation of shares for ESOP.................................. 1,427 - -
Deferred tax benefit........................................... (3,173) (3,907) (1,695)
Net proceeds from sale of foreclosed real estate............... 2,170 3,565 3,683
(Increase) decrease in accrued interest receivable............. (2,929) 710 (5,679)
Increase in other assets....................................... (1,112) (2,374) (1,709)
Increase in accrued expenses and other liabilities............. 7,466 3,985 5,949
----------- --------- ---------
Net Cash Provided by Operating Activities.......................... 121,597 103,676 97,303
----------- --------- ---------
Cash Flows from Investing Activities:
Net increase in loans............................................ (570,605) (157,887) (275,675)
Purchases of loans............................................... (74,969) (38,639) (16,198)
Principal collection of mortgage-backed securities............... 1,059,577 1,168,674 569,189
Purchases of mortgage-backed securities.......................... (1,094,073) (1,222,352) (883,502)
Proceeds from maturities and calls of investment
securities held to maturity.................................... 15 489 209
Purchases of investment securities held to maturity.............. - (403) (600)
Proceeds from maturities and calls of investment
securities available for sale.................................. 733,155 659,212 418,269
Proceeds from sales of investment securities available for sale.. 109,766 - 42,735
Purchases of investment securities available for sale............ (913,976) (789,577) (521,529)
Purchases of premises and equipment, net......................... (5,485) (3,375) (3,113)
----------- ----------- ------------
Net Cash Used in Investing Activities.............................. (756,595) (383,858) (670,215)
------------ ----------- ------------
Cash Flows from Financing Activities:
Net (decrease) increase in deposits.............................. (119,295) 341,383 546,985
Proceeds from borrowed funds..................................... 300,000 - -
Proceeds from sale of stock, net................................. 527,641 - -
Capitalization of Hudson City, MHC............................... (200) - -
Dividends paid................................................... (5,782) - -
Purchase of stock for ESOP....................................... (23,402) - -
----------- ----------- ------------
Net Cash Provided by Financing Activities.......................... 678,962 341,383 546,985
----------- ----------- ------------
Net Increase (Decrease) in Cash and Cash Equivalents............... 43,964 61,201 (25,927)
Cash and Cash Equivalents at Beginning of Period................... 156,875 95,674 121,601
----------- ----------- ------------
Cash and Cash Equivalents at End of Period......................... $ 200,839 $ 156,875 $ 95,674
=========== =========== ============
Supplemental Disclosures:
Interest paid.................................................. $ 297,294 $ 312,004 $ 298,270
=========== =========== ============
Income taxes paid.............................................. $ 64,722 $ 59,101 $ 55,052
=========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
Page 71
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HUDSON CITY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) BASIS OF PRESENTATION
The following are the significant accounting and reporting policies
applied by Hudson City Bancorp, Inc. ("Hudson City Bancorp") and its
wholly-owned subsidiary Hudson City Savings Bank ("Hudson City Savings") in the
preparation of the accompanying consolidated financial statements. The
consolidated financial statements have been prepared in conformity with
generally accepted accounting principles and general practices within the
savings bank industry. All significant intercompany transactions and balances
have been eliminated in consolidation. As used in these consolidated financial
statements, "Hudson City" refers to Hudson City Bancorp, Inc. and its
consolidated subsidiary, depending on the context.
Hudson City Bancorp is a Delaware corporation organized in March 1999
by Hudson City Savings in connection with the conversion and reorganization of
Hudson City Savings from a New Jersey mutual savings bank into a two-tiered
mutual savings bank holding company structure, referred to as the
Reorganization, as described more fully in Note 2. Prior to July 13, 1999,
Hudson City Bancorp had not issued any stock, had no assets and no liabilities
and had not conducted any business other than of an organizational nature.
Accordingly, the financial statements and notes to the financial statements
presented for periods prior to July 13, 1999 are solely for Hudson City Savings.
In preparing the consolidated 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 financial 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
Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income" establishes standards for reporting and
presentation of comprehensive income and its components in a full set of
financial statements. 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, net of tax. Comprehensive income is presented in the
consolidated statements of changes in stockholders' equity.
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 $1,555,000, $3,353,000
and $2,801,000 for the years ended December 31, 1999, 1998 and 1997,
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. Hudson City has both the ability and the
positive intent to hold these
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HUDSON CITY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 stockholders'
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.
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 investment 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 security.
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. Hudson City has the ability and
positive intent to hold mortgage-backed securities to maturity.
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 no longer in doubt.
A nonaccrual loan is returned to accrual status when factors indicating doubtful
collection no longer exist.
Hudson City 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 at December 31, 1999 and 1998.
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 determination of the amount of the allowance, and the related
provision for loan losses, is based on such factors as loan loss experience,
known and inherent risks in the loan portfolio, the
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HUDSON CITY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
estimated value of underlying collateral, current economic and real estate
market trends, loan portfolio growth and other factors which may warrant
recognition. Hudson City's objective is to maintain an allowance at a level
sufficient to cover specifically identifiable loan losses, as well as estimated
losses inherent in the loan portfolio which are probable but not specifically
identifiable.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the allowance for loan losses. Such
agencies may require 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
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. Hudson City
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, Hudson City reported its loan loss provisions by using the
reserve method allowed for qualified thrift lender institutions. Hudson City'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 Hudson City'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, Hudson City
must instead use the specific charge-off method to compute its bad debt
deduction. The legislation also requires Hudson City to recapture its post-1987
net additions to its tax bad debt reserves. Hudson City has previously provided
for this liability.
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HUDSON CITY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
k) EMPLOYEE BENEFIT PLANS
Hudson City 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.
In connection with the Reorganization, Hudson City established an
employee stock ownership plan ("ESOP") for all employees who have completed at
least one year of service and have attained 21 years of age. The ESOP is a
tax-qualified plan designed to invest primarily in Hudson City Bancorp's common
stock that provides employees with the opportunity to receive a Hudson
City-funded retirement benefit based primarily on the value of Hudson City
Bancorp's common stock.
To purchase Hudson City Bancorp's common stock, the ESOP borrows the
funds from Hudson City Bancorp. The ESOP loan is being repaid principally from
Hudson City Savings' contributions to the ESOP over a period of up to 30 years.
Dividends declared on common stock held by the ESOP and not allocated to the
account of the participant can be used to repay the loan. Compensation expense
is recognized in accordance with Statement of Position 93-6, "Employers'
Accounting for Employee Stock Ownership Plans." The number of shares released
annually is based upon the ratio that the current principal and interest payment
bears to the current and all remaining scheduled future principal and interest
payments.
All shares that have not been released for allocation to participants
are held in a suspense account by the ESOP for future allocation as the loan is
repaid. Unallocated common stock purchased by the ESOP is recorded as a
reduction of stockholders' equity at cost.
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 $0
and $1,441,000 at December 31, 1999 and 1998, respectively.
m) EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to
common stockholders by the weighted average number of shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock (such as stock
options) were exercised or resulted in the issuance of common stock. These
potentially dilutive shares would then be included in the weighted average
number of shares outstanding for the period using the treasury stock method. At
December 31, 1999, there were no potentially dilutive shares. Shares issued and
shares reacquired during any period are weighted for the portion of the period
that they were outstanding.
In computing both basic and diluted earnings per share, the weighted
average number of common shares outstanding includes all 61,288,300 shares
issued to Hudson City, MHC. Also included are the ESOP shares previously
allocated to participants and shares committed to be released for allocation to
participants. ESOP shares that have been purchased but have not been committed
to be released have not been considered in computing basic and diluted earnings
per share.
Page 75
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HUDSON CITY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Basic and diluted earnings per share presented were calculated using
net income and the weighted average number of common shares outstanding from the
date of completion of the Reorganization (July 13, 1999) to the end of the
period. Basic and diluted weighted average common shares outstanding were
114,767,331 from the date of the Reorganization (July 13, 1999) to the end of
the period.
2. REORGANIZATION
On July 13, 1999, Hudson City Savings converted and reorganized from a
New Jersey-chartered mutual savings bank into a two-tiered mutual savings bank
holding company structure pursuant to a Plan of Reorganization and Stock
Issuance. Under the terms of the Plan, Hudson City Savings became a wholly-owned
subsidiary of Hudson City Bancorp and received 50% of the net proceeds from the
initial public offering of Hudson City Bancorp's common stock. Hudson City
Bancorp became a majority-owned subsidiary of Hudson City, MHC, a New
Jersey-chartered mutual savings bank holding company, referred to as the MHC.
Hudson City Bancorp sold 54,350,000 shares of its common stock to the
public, representing 47% of the outstanding shares, at $10.00 per share. Hudson
City Bancorp received net proceeds of $527.6 million. The number of shares of
common stock sold and the price for such shares was determined by the Board of
Directors based upon an appraisal of Hudson City Savings made by an independent
appraisal firm. An additional 61,288,300 shares, or 53% of the outstanding
shares of Hudson City Bancorp, were issued to Hudson City, MHC. Hudson City
Bancorp's common stock commenced trading on July 13, 1999 on the Nasdaq National
Market under the symbol "HCBK." Additionally, Hudson City Bancorp has
200,000,000 shares, $0.01 par value, of preferred stock authorized but none
issued.
Upon completion of the Plan, a "liquidation account" was established in
an amount equal to the total equity of Hudson City Savings as of the latest
practicable date prior to the Reorganization. The liquidation account was
established to provide a limited priority claim to the assets of Hudson City
Savings to "eligible account holders" and "supplemental eligible account
holders", as defined in the Plan, who continue to maintain deposits in Hudson
City Savings after the Reorganization. In the unlikely event of a complete
liquidation of Hudson City Savings, 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.
3. RESTRICTIONS ON CASH AND DUE FROM BANKS
Cash reserves are required to be maintained on deposit with the Federal
Reserve Bank based on deposits. The average amount of the reserves on deposit
for the years ended December 31, 1999 and 1998 was approximately $1,352,000 and
$15,068,000, respectively.
Page 76
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HUDSON CITY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
1999
- ----
HELD TO MATURITY
----------------
Municipal bonds................ $ 1,379 $ 8 $ (39) $ 1,348
========= ========== ========== ===========
AVAILABLE FOR SALE
------------------
United States government and
agencies..................... $ 855,132 $ -- $ (45,054) $ 810,078
Corporate bonds................ 2,028 7 (55) 1,980
--------- ---------- ---------- -----------
Total available for sale..... $ 857,160 $ 7 $ (45,109) $ 812,058
========= ========== ========== ===========
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
========= ========== ========== ===========
</TABLE>
The amortized cost and estimated fair market value of investment
securities held to maturity and investment securities available for sale at
December 31, 1999, 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 in one year or less.................. $ 100 $ 99
Due after one year through five years.... 100 100
Due after five years through ten years... 276 283
Due after ten years...................... 903 866
--------- --------
Total held to maturity................. $ 1,379 $ 1,348
========= ========
</TABLE>
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HUDSON CITY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR MARKET
COST VALUE
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
AVAILABLE FOR SALE
Due in one year or less................. $ 325 $ 322
Due after one year through five years... 453,387 436,109
Due after five years through ten years.. 403,448 375,627
--------- --------
Total available for sale........... $857,160 $812,058
========= ========
</TABLE>
Interest and dividend income for the years ended December 31, 1999,
1998 and 1997 consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
United States government and agencies.............. $55,560 $49,429 $42,134
Municipal bonds.................................... 88 102 61
Corporate bonds.................................... 136 237 1,006
------- ------- -------
Total interest income........................ $55,784 $49,768 $43,201
======= ======= =======
</TABLE>
Gross realized gains on calls of investment securities available for
sale during 1999 were $1,000. Gross realized losses on sales of investment
securities available for sale during 1999 were $8,000.
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.
The carrying value of securities pledged as required security for
deposits and for other purposes required by law amounted to $52,604,000 and
$5,142,000 at December 31, 1999 and 1998, respectively. In addition, Hudson City
had $318,800,000 of investment securities available for sale, at fair market
value, that were sold under agreements to repurchase.
Page 78
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HUDSON CITY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
1999
GNMA pass-through certificates........... $2,208,007 $ 9,047 $ (74) $2,216,980
FNMA pass-through certificates........... 673,328 505 (18,918) 654,915
FHLMC pass-through certificates.......... 189,258 378 (2,056) 187,580
FHLMC, FNMA and GNMA - REMICs............ 26,479 - (358) 26,121
---------- ------- -------- ----------
Total mortgage-backed securities.... $3,097,072 $ 9,930 $(21,406) $3,085,596
========== ======= ======== ==========
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
========== ======= ======== ==========
</TABLE>
6. LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
----------- ----------
(In thousands)
<S> <C> <C>
First Mortgage loans:
One- to four-family..................... $4,126,153 $3,516,947
FHA/VA.................................. 66,150 52,958
Multi-family and commercial............. 2,131 2,911
---------- ----------
Total first mortgage loans......... 4,194,434 3,572,816
---------- ----------
Consumer and other loans:
Fixed-rate second mortgages............. 82,913 56,118
Home equity credit lines................ 26,321 28,045
Guaranteed student...................... 146 216
Other................................... 2,061 2,212
---------- ----------
Total consumer and other loans..... 111,441 86,591
---------- ----------
Total loans................... $4,305,875 $3,659,407
========== ==========
</TABLE>
Page 79
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HUDSON CITY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Substantially all of Hudson City'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.
The following is a comparative summary of loans on which the accrual of
income has been discontinued and loans which are contractually past due 90-days
or more but have not been classified nonaccrual at December 31:
<TABLE>
<CAPTION>
1999 1998
------- -------
(In thousands)
<S> <C> <C>
Non-accrual loans........................... $11,303 $13,216
Accruing loan delinquent 90-days or more.... 2,724 2,123
------- -------
Total non-performing loans............. $14,027 $15,339
======= =======
</TABLE>
The total amount of interest income received during the year on
nonaccrual loans outstanding at December 31, 1999, 1998 and 1997 amounted to
$242,000, $178,000 and $186,000, respectively. Additional interest income
totaling $625,000, $828,000 and $996,000 on non-accrual loans would have been
recognized in 1999, 1998 and 1997, respectively, if interest on all such loans
had been recorded based upon original contract terms. Hudson City 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>
1999 1998 1997
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year.............. $17,712 $15,625 $13,045
------- ------- -------
Charge-offs.......................... (73) (336) (330)
Less recoveries...................... 21 23 60
------- ------- -------
Net charges-offs................ (52) (313) (270)
------- ------- -------
Provision for loan losses....... 2,350 2,400 2,850
------- ------- -------
Balance at end of year..... $20,010 $17,712 $15,625
======= ======= =======
</TABLE>
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HUDSON CITY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. FORECLOSED REAL ESTATE, NET
Foreclosed real estate, net, at December 31 is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---- ------
(In thousands)
<S> <C> <C>
Foreclosed real estate..................... $379 $1,058
Valuation allowance........................ (12) (32)
---- ------
Total foreclosed real estate, net...... $367 $1,026
==== ======
</TABLE>
An analysis of the valuation allowance for foreclosed real estate at
December 31 follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ----- -----
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year............... $ 32 $ 67 $ 83
Provisions for write-downs................. 52 148 87
Write-downs................................ (72) (183) (103)
---- ----- -----
Balance at end of year................. $ 12 $ 32 $ 67
==== ===== =====
</TABLE>
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>
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Land....................................... $ 4,291 $ 4,291
Building................................... 30,253 29,507
Leasehold improvements..................... 10,230 9,638
Furniture, fixtures and equipment.......... 31,870 27,758
-------- --------
76,644 71,194
Accumulated depreciation and amortization.. (45,444) (42,130)
-------- --------
Total banking premises and equipment... $ 31,200 $ 29,064
======== ========
</TABLE>
Amounts charged to net occupancy expense for depreciation and
amortization of banking premises and equipment amounted to $3,348,000,
$3,508,000 and $3,587,000 in 1999, 1998 and 1997, respectively.
Page 81
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HUDSON CITY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Hudson City 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:
<TABLE>
<CAPTION>
Year Amount
---- --------------
(In thousands)
<S> <C>
2000..................... $ 2,799
2001..................... 2,892
2002..................... 2,607
2003..................... 2,346
2004..................... 2,046
Thereafter............... 7,546
-------
Total................ $20,236
=======
</TABLE>
Net occupancy expense includes gross rental expense for certain bank
premises of $2,852,000 in 1999, $2,752,000 in 1998, and $2,790,000 in 1997, and
rental income of $586,000, $608,000 and $603,000 for the respective years.
9. DEPOSITS
Deposits at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
--------------------- ---------------------
Balance Percent Balance Percent
---------- ------- ---------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Savings..................... $ 804,105 12.02% $ 832,759 12.23%
Demand...................... 308,115 4.61 313,061 4.60
Interest-bearing demand..... 96,828 1.45 100,436 1.48
Money market................ 486,794 7.28 505,201 7.42
Time deposits............... 4,992,202 74.64 5,055,882 74.27
---------- ------ ---------- ------
Total deposits.......... $6,688,044 100.00% $6,807,339 100.00%
========== ====== ========== ======
</TABLE>
Time deposits $100,000 and over amounted to $536,664,000 and
$516,084,000 at December 31, 1999 and 1998, respectively. Interest expense on
time deposits $100,000 and over for the years ended December 31, 1999, 1998 and
1997 was $27,562,000, $27,241,000 and $24,279,000, respectively. Included in
demand accounts are mortgage escrow deposits of $44,730,000 and $39,098,000 at
December 31, 1999 and 1998, respectively.
Page 82
<PAGE> 84
HUDSON CITY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Scheduled maturities of time deposits are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- --------------
(IN THOUSANDS)
<S> <C>
2000.................... $4,204,768
2001.................... 728,010
2002.................... 37,904
2003.................... 10,317
2004.................... 11,203
----------
TOTAL............... $4,992,202
==========
</TABLE>
10. BORROWED FUNDS
Hudson City enters into sales of securities under agreements to
repurchase with selected broker/dealers. These agreements are recorded as
financing transactions as Hudson City maintains effective control over the
transferred securities. The dollar amount of the securities underlying the
agreements continue to be carried in Hudson City's securities portfolio. The
obligations to repurchase the securities are reported as a liability in the
consolidated statements of financial condition.
The securities underlying the agreements are delivered to the
broker/dealer with whom each transaction is executed. The broker/dealers agree
to resell to Hudson City the same securities at the maturity or call of the
agreement. Hudson City retains the right of substitution of the underlying
securities throughout the terms of the agreements.
Borrowed funds at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Securities sold under agreements to repurchase............ $300,000 $ --
======== ===========
</TABLE>
At December 31, 1999, securities sold under agreements to repurchase
had maturities ranging from 2004 to 2009 with a weighted-average interest rate
of 5.76%. Certain agreements are callable beginning in 2000, while others are
callable at various times thereafter. During the year ended December 31, 1999,
securities sold under agreements to repurchase averaged $53,600,000. The maximum
amount outstanding at any month-end during the period was $300,000,000. All of
the underlying securities were U.S. Government agency securities with a fair
market value of $318,800,000 at December 31, 1999. There were no borrowed funds
during 1998.
Page 83
<PAGE> 85
HUDSON CITY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. EMPLOYEE BENEFIT PLANS
a) RETIREMENT AND OTHER POSTRETIREMENT BENEFITS
Non-contributory retirement and postretirement plans are maintained to
cover all employees, and retired employees, who have met the 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. Funding of the qualified retirement plan is actuarially determined
on an annual basis. It is 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
$2,959,000 at December 31, 1999 and $2,500,000 at December 31, 1998. Certain
health care and life insurance benefits are provided to eligible retired
employees ("other benefits"). Participants generally become eligible for retiree
health care and life insurance benefits after ten years of service.
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
----------------------- --------------------
1999 1998 1999 1998
--------- --------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Change in Benefit Obligation:
Benefit obligation at beginning of year..... $53,097 $46,906 $30,090 $29,770
Service cost................................ 2,476 2,267 1,496 1,452
Interest cost............................... 3,379 3,178 1,864 1,865
Actuarial (gain) loss....................... (8,568) 2,018 (4,404) (2,431)
Benefits paid............................... (1,435) (1,272) (576) (566)
------ ------ ------- -------
Benefit obligation at end of year........... 48,949 53,097 28,470 30,090
------ ------ ------- -------
Change in Plan Assets:
Fair value of plan assets at
beginning of year......................... 67,375 58,116 -- --
Actual return on plan assets................ 7,714 10,446 -- --
Employer contribution....................... 3 85 576 566
Benefits paid............................... (1,435) (1,272) (576) (566)
------ ------ ------- -------
Fair value of plan assets at end of year.... 73,657 67,375 -- --
------ ------ ------- -------
Funded Status............................ 24,708 14,278 (28,470) (30,090)
Unrecognized transition asset............... (798) (1,197) -- --
Unrecognized prior service cost............. (6) 7 -- --
Unrecognized net actuarial (gain) loss...... (20,194) (10,126) (3,701) 704
------ ------ ------- -------
Prepaid (accrued) benefit cost........... $3,710 $2,962 $(32,171) $(29,386)
====== ====== ======= =======
</TABLE>
Page 84
<PAGE> 86
HUDSON CITY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net periodic benefit (income) cost at December 31 included the
following components:
<TABLE>
<CAPTION>
Retirement Plans Other Benefits
----------------------------- ------------------------
1999 1998 1997 1999 1998 1997
------- ------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
Service cost ............................ $ 2,476 $ 2,267 $ 2,057 $1,496 $1,452 $1,468
Interest cost ........................... 3,379 3,178 3,041 1,864 1,865 1,979
Expected return on assets ............... (5,993) (5,167) (4,228) - - -
Amortization of:
Net (gain) loss ....................... (221) (124) 24 - - 43
Unrecognized prior service cost ....... 13 13 13 - - -
Unrecognized remaining net assets ..... (399) (399) (399) - - -
------- ------- ------- ------ ------ ------
Net periodic benefit (income) cost .... $ (745) $ (232) $ (508) $3,360 $3,317 $3,490
======= ======= ======= ====== ====== ======
</TABLE>
The following are the weighted average assumptions used in accounting
for the benefit plans at December 31:
<TABLE>
<CAPTION>
Retirement Plans Other Benefits
------------------- -----------------
1999 1998 1999 1998
------- ------- ------ ------
<S> <C> <C> <C> <C>
Discount rate ........................... 8.00% 6.50% 8.00% 6.50%
Expected return on assets ............... 9.00 9.00 - -
Rate of compensation increase ........... 6.75 5.75 - -
</TABLE>
Assumed health care cost trend rates used to measure the expected cost
of other benefits for 2000 were 8.30% for Medicare-eligible retirees and 9.10%
for non-Medicare eligible retirees. The rates were assumed to decrease gradually
to 5.50% 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
----------- -----------
<S> <C> <C>
Effect on total service cost and interest cost... $ 674 $ (555)
Effect on other benefit obligations ............. 4,897 (4,137)
</TABLE>
b) EMPLOYEE STOCK OWNERSHIP PLAN
The ESOP plan is authorized to purchase up to 8%, or 4,348,000 shares,
of Hudson City Bancorp common stock that was sold in the Reorganization. On July
13, 1999, the date of the Reorganization, the ESOP purchased 500,000 common
shares. The remaining shares will be purchased through private transactions or
on the open market. Through December 31, 1999, the ESOP had purchased 1,877,500
shares at an average cost of $12.46 per share.
Page 85
<PAGE> 87
HUDSON CITY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1999, 72,467 shares had been allocated to participants.
ESOP compensation expense for the year ended December 31, 1999 was $1,427,000.
For the plan year ending September 30, 2000, there are 144,934 shares that are
committed-to-be-released and will be allocated to participants at the end of the
plan year. At December 31, 1999, unallocated ESOP shares held in suspense
totaled 1,805,033 and had a fair market value of $24.3 million.
The ESOP restoration plan 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.
Compensation expense related to this plan amounted to $731,000 in 1999.
c) INCENTIVE PLANS
A tax-deferred profit incentive bonus savings plan is maintained based
on Hudson City's profitability. All employees are eligible after one year of
employment and the attainment of age 21. The expense amounted to $1,320,000,
$1,995,000 and $1,913,000 in 1999, 1998 and 1997, respectively.
Certain incentive plans are maintained to recognize key executives who
are able to make substantial contributions to the long-term success and
financial strength of Hudson City. 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, 1999 to
December 31, 2001. The expense related to these plans amounted to $1,790,000 in
1999, $1,723,000 in 1998 and $1,694,000 in 1997.
12. INCOME TAXES
Income tax expense (benefit) for each of the years in the three-year
period ended December 31, 1999 is summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
FEDERAL:
Current..................................................... $61,578 $54,500 $50,706
Deferred.................................................... (2,923) (3,600) (1,561)
------- ------- -------
Total Federal.......................................... 58,655 50,900 49,145
------- ------- -------
STATE:
Current..................................................... 5,445 4,907 4,489
Deferred.................................................... (250) (307) (134)
------- ------- -------
Total state............................................ 5,195 4,600 4,355
------- ------- -------
Total income tax expense............................... $63,850 $55,500 $53,500
======= ======= =======
</TABLE>
Page 86
<PAGE> 88
HUDSON CITY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Not included in the above table is income tax benefit of $17,550,000,
$232,000 and $831,000 for 1999, 1998 and 1997, 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>
1999 1998 1997
--------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Income before income tax expense........... $171,236 $148,769 $143,493
Statutory income tax rate.................. 35% 35% 35%
--------- --------- ---------
Computed expected income tax expense....... 59,933 52,069 50,223
State income taxes, net of federal
income tax benefit....................... 3,377 2,990 2,831
Amortization of goodwill................... 504 564 620
Tax-exempt interest........................ (125) (126) (125)
Other, net................................. 161 3 (49)
--------- --------- ---------
Income tax expense..................... $ 63,850 $ 55,500 $ 53,500
========= ========= =========
</TABLE>
The net deferred tax asset at December 31 consists of the following:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
(In thousands)
<S> <C> <C>
Deferred tax asset:
Discount accretion....................... $ 2,185 $ 2,867
Deferred loan origination fees........... 1,706 2,135
Postretirement benefits.................. 12,230 11,239
Book loan loss reserve................... 7,604 6,730
Mortgage premium amortization............ 3,193 2,124
Non-accrual interest income.............. 347 477
Net unrealized loss on securities
available for sale..................... 17,139 --
Other.................................... 5,862 5,313
--------- ---------
50,266 30,885
--------- ---------
Deferred tax liabilities:
Tax bad debt reserve..................... 8,319 10,399
Net unrealized gain on securities
available for sale..................... -- 411
Retirement plan.......................... 2,529 2,073
Other.................................... 1,891 1,198
--------- ---------
12,739 14,081
--------- ---------
Net deferred tax asset................. $ 37,527 $ 16,804
========= =========
</TABLE>
Page 87
<PAGE> 89
HUDSON CITY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Hudson City'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,
1999 and 1998.
At December 31, 1999 and 1998, the bad debt reserve for federal income
tax reporting purposes was approximately $71,500,000 and $77,000,000,
respectively. Retained earnings at December 31, 1999 and 1998 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.
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 one- to four-family
mortgages and home equity loans are generally estimated using the present value
of expected future cash flows. 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 Hudson City'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 Hudson City's retail branch delivery system, its existing core deposit base
and banking premises and equipment.
Page 88
<PAGE> 90
HUDSON CITY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The estimated fair value of Hudson City's financial instruments at
December 31 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
----------------------- -----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
ASSETS:
Cash and due from banks......................... $ 84,239 $ 84,239 $ 87,075 $ 87,075
Federal funds sold.............................. 116,600 116,600 69,800 69,800
Investment securities held to maturity.......... 1,379 1,348 1,393 1,420
Investment securities available for sale........ 812,058 812,058 785,031 785,031
Mortgage-backed securities held to maturity..... 3,097,072 3,085,596 3,070,931 3,106,369
Loans........................................... 4,305,875 4,188,451 3,659,407 3,751,860
LIABILITIES:
Deposits........................................ 6,688,044 6,469,552 6,807,339 6,667,637
Borrowed funds.................................. 300,000 298,868 -- --
</TABLE>
14. REGULATORY CAPITAL
Deposits at Hudson City Savings are insured up to standard limits of
coverage provided by the Bank Insurance Fund ("BIF") of the Federal Deposit
Insurance Corporation ("FDIC"). Hudson City Savings 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, 1999, Hudson City
Savings was required to maintain (a) a minimum leverage ratio of Tier 1 capital
to total adjusted average 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, 1999, Hudson City Savings
meets all capital adequacy requirements to which it is subject. Further, the
most recent FDIC notification categorized Hudson City Savings as a
well-capitalized institution under the prompt corrective action regulations.
Page 89
<PAGE> 91
HUDSON CITY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
There have been no conditions or events since that notification that management
believes have changed Hudson City Savings' capital classification.
The following is a summary of Hudson City Savings' actual capital
amounts and ratios as of December 31, 1999 and 1998, compared to the FDIC
minimum capital adequacy requirements and the FDIC requirements for
classification as a well-capitalized institution:
<TABLE>
<CAPTION>
FDIC Requirements
For Classification
Minimum Capital as
Bank Actual Adequacy Well-Capitalized
------------------- ---------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ------ -------- ----- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1999
Leverage (Tier 1) Capital.. $1,242,213 15.27% $325,374 4.00% $406,717 5.00%
Risk-based capital:
Tier 1................... 1,242,213 46.42 107,051 4.00 160,576 6.00
Total.................... 1,262,223 47.16 214,102 8.00 267,627 10.00
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
</TABLE>
The Federal Reserve Bank imposes certain capital requirements on Hudson
City Bancorp under the Bank Holding Company Act of 1956, including a minimum
leverage ratio and a minimum ratio of "qualifying" capital to risk-weighted
assets. These minimum requirements are substantially the same as Hudson City
Savings' minimum capital requirements described above. Subject to its capital
requirements and certain other restrictions, Hudson City Bancorp is able to
borrow money to make a capital contribution to Hudson City Savings, and such
loans may be repaid from dividends paid from Hudson City Savings to Hudson City
Bancorp. Hudson City Bancorp is also able to raise capital for contribution to
Hudson City Savings by issuing securities without having to receive regulatory
approval, subject to compliance with federal and state securities laws.
The following table shows Hudson City Bancorp's leverage ratio, its
Tier 1 risk-based capital ratio, and its total risk-based capital ratio, at
December 31, 1999:
<TABLE>
<CAPTION>
Minimum Capital
Bancorp Actual Adequacy
------------------- -----------------
Amount Ratio Amount Ratio
---------- ------ -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Leverage (Tier 1) Capital... $1,507,003 18.54% $325,068 4.00%
Risk-based capital:
Tier 1.................... 1,507,003 56.31 107,051 4.00
Total..................... 1,527,013 57.06 214,102 8.00
</TABLE>
Page 90
<PAGE> 92
HUDSON CITY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. OFF-BALANCE SHEET RISK AND CONTINGENCIES
Hudson City Savings 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. Hudson City Savings evaluates each customer's
credit-worthiness on a case-by-case basis.
At December 31, 1999, Hudson City Savings had fixed and variable rate
first mortgage loan commitments to extend credit of approximately $93,833,000
and $65,899,000, respectively, and unused home equity and overdraft lines of
credit of approximately $55,524,000. There were no commitments to purchase
mortgage-backed securities at December 31, 1999. 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 consolidated financial statements
of Hudson City will not be materially affected as a result of such legal
proceedings.
16. PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed financial statements for Hudson City Bancorp,
Inc. (parent company only) reflect Hudson City Bancorp's investment in its
wholly owned subsidiary, Hudson City Savings Bank, using the equity method of
accounting.
CONDENSED STATEMENT OF CONDITION
<TABLE>
<CAPTION>
December 31,
1999
-------------
(In thousands)
<S> <C>
ASSETS:
Cash due from bank............................. $ 243,519
Investment in subsidiary....................... 1,214,250
ESOP loan receivable........................... 21,879
----------
Total Assets................................. $1,479,648
==========
LIABILITIES AND STOCKHOLDER'S EQUITY:
Accrued expenses............................... $ 608
Total stockholder's equity..................... 1,479,040
----------
Total Liabilities and Stockholder's Equity... $1,479,648
==========
</TABLE>
Page 91
<PAGE> 93
HUDSON CITY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Date of
Reorganization
(July 13, 1999)
to December 31,
1999
-------------
(In thousands)
<S> <C>
INCOME:
Dividends received from subsidiary................ $ 5,782
Interest on ESOP loan receivable ................. 404
Interest on deposit with subsidiary............... 1,257
-------
Total Income.................................... 7,443
Expenses.......................................... 127
-------
Income before income tax expense and
equity in undistributed earnings
of subsidiary................................... 7,316
Income tax expense................................ 565
-------
Income before equity in undistributed
earnings of subsidiary.......................... 6,751
Equity in undistributed earnings of subsidiary.... 48,089
-------
Net Income...................................... $54,840
=======
</TABLE>
Page 92
<PAGE> 94
HUDSON CITY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Date of
Reorganization
(July 13, 1999)
to December 31,
1999
---------------
(In thousands)
<S> <C>
Cash Flows from Operating Activities:
Net income.......................................... $ 54,840
Adjustments to reconcile net income to cash
provided by operating activities:
Equity in undistributed earnings of subsidiary.... (48,089)
Increase in accrued expenses...................... 608
---------
Net Cash Provided by Operating Activities............. 7,359
---------
Cash Flows from Investing Activities:
Loan to ESOP........................................ (23,402)
Investment in subsidiary............................ (263,820)
Principal collected on ESOP loan.................... 1,523
---------
Net Cash Used in Investing Activities................. (285,699)
---------
Cash Flows from Financing Activities:
Proceeds from the issuance of common stock.......... 527,641
Cash dividends...................................... (5,782)
---------
Net Cash Provided by Financing Activities............. 521,859
---------
Net Increase in Cash Due from Bank.................... 243,519
Cash Due from Bank at Beginning of Year............... --
---------
Cash Due from Bank at End of Year..................... $ 243,519
=========
</TABLE>
Page 93
<PAGE> 95
HUDSON CITY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table is a summary of certain quarterly financial data
for the years ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
1999 Quarter Ended
---------------------------------------------------------
March 31 June 30 September 30 December 31
------------ ------------ ------------ ------------
(In thousands, except for share data)
<S> <C> <C> <C> <C>
Interest income.......................... $130,068 $130,799 $135,461 $139,753
Interest expense......................... 74,790 74,911 72,976 76,155
-------- -------- -------- --------
Net interest income.................... 55,278 55,888 62,485 63,598
Provision for loan losses................ 600 550 600 600
-------- -------- -------- --------
Net interest income after provision
for loan losses...................... 54,678 55,338 61,885 62,998
Non-interest income...................... 1,206 1,142 1,200 1,197
Non-interest expense..................... 17,227 16,945 17,020 17,216
-------- -------- -------- --------
Income before income tax expense....... 38,657 39,535 46,065 46,979
Income tax expense....................... 14,400 14,600 17,285 17,565
-------- -------- -------- --------
Net Income............................. $ 24,257 $ 24,935 $ 28,780 $ 29,414
======== ======== ======== ========
Basic and diluted earnings per share..... $ -- $ -- $ 0.22(1) $ 0.25
======== ======== ======== ========
</TABLE>
(1) From date of Reorganization (July 13, 1999)
<TABLE>
<CAPTION>
1998 Quarter Ended
---------------------------------------------------------
March 31 June 30 September 30 December 31
------------ ------------ ------------ ------------
(In thousands, except for share data)
<S> <C> <C> <C> <C>
Interest income.......................... $129,784 $130,330 $130,363 $130,314
Interest expense......................... 76,752 78,073 78,565 77,694
-------- -------- -------- --------
Net interest income.................... 53,032 52,257 51,798 52,620
Provision for loan losses................ 600 600 600 600
-------- -------- -------- --------
Net interest income after provision
for loan losses...................... 52,432 51,657 51,198 52,020
Non-interest income...................... 1,153 1,186 1,393 1,222
Non-interest expense..................... 16,655 16,001 14,666 16,170
-------- -------- -------- --------
Income before income tax expense....... 36,930 36,842 37,925 37,072
Income tax expense....................... 13,175 13,775 14,650 13,900
-------- -------- -------- --------
Net Income............................. $ 23,755 $ 23,067 $ 23,275 $ 23,172
======== ======== ======== ========
Basic and diluted earnings per share..... $ -- $ -- $ -- $ --
======== ======== ======== ========
</TABLE>
Page 94
<PAGE> 96
HUDSON CITY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. SUBSEQUENT EVENTS (UNAUDITED)
The stockholders of Hudson City Bancorp, at a Special Meeting of
Stockholders held on January 13, 2000, approved the adoption of the Hudson City
Bancorp, Inc. 2000 Stock Option Plan and the Hudson City Bancorp, Inc. 2000
Recognition and Retention Plan.
Under the Stock Option Plan, Hudson City Bancorp has reserved 5,435,000
shares of Hudson City Bancorp common stock for issuance upon the exercise of
options under the plan. Options granted may be incentive stock options that
qualify for special federal income tax treatment or non-qualified stock options
that do not qualify for special federal income tax treatment. Incentive stock
options are subject to additional restrictions under the Internal Revenue Code
and the plan.
Each option granted entitles the holder to purchase one share of Hudson
City Bancorp's common stock at an exercise price equal to the fair market value
on the date of grant. There will be no compensation cost attributable to these
options as Hudson City will use the intrinsic value based method of accounting
as the exercise price equaled the common stock price at the date of grant. These
options will vest primarily over a five year period and will expire no later
than ten years following the grant date.
Under the Recognition and Retention Plan, Hudson City Bancorp will
establish a trust to which it will contribute certain amounts of money or
property. The trustee will invest the assets of the trust primarily in shares of
Hudson City Bancorp's common stock that will be used to make restricted stock
awards. It is anticipated that the stock purchases will be made on the open
market, or in private transactions. The trust is authorized to purchase not more
than 2,174,000 shares of Hudson City Bancorp common stock.
As a general rule, these restricted stock grants will be held in trust
for the benefit of the award recipient until vested. Compensation cost
attributable to these restricted stock awards will be determined on the grant
date of the awards. The compensation cost that is measured on the grant date
will generally be expensed ratably over the five year vesting period.
Any employee of Hudson City or any affiliate approved by the Board of
Directors may be selected to receive option grants and restricted stock awards.
Directors of Hudson City or any affiliate approved by the Board of Directors who
are not employees or officers may also be selected to receive option grants and
restricted stock awards. A committee of outside directors administers both the
stock option plan and the recognition and retention plan.
19. RECENT ACCOUNTING PRONOUNCEMENT
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 was to be effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. However, SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133," extended the adoption of SFAS No. 133 to fiscal
years beginning after June 15, 2000. This statement should not be applied
retroactively to financial
Page 95
<PAGE> 97
HUDSON CITY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Hudson City.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
MANAGEMENT
SHARED MANAGEMENT STRUCTURE
Hudson City Bancorp's directors and executive officers are the same as
the directors and executive officers of 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.
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 at the annual meeting of stockholders scheduled to
be held on July 13, 2000. Three directors are in Class Two and have terms
expiring at the annual meeting to be held in 2001. Four directors are in Class
Three and have terms expiring at the annual meeting to be held 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.
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<PAGE> 98
Who Our Directors Are. The following table states our directors' names,
their ages as of February 29, 2000, their positions, the years when they began
serving as directors (including time spent on the Board of Directors or Board of
Managers of Hudson City Savings prior to the incorporation of Hudson City
Bancorp on March 4, 1999) and the years when their current terms of office as
directors will expire:
<TABLE>
<CAPTION>
DIRECTOR TERM
NAME AGE POSITION SINCE EXPIRES
- --------------------------- --- --------------------------------------------- -------- -------
<S> <C> <C> <C>
Verne S. Atwater .......... 79 Director 1983 2002
John D. Birchby ........... 53 Director 1980 2000
Kenneth L. Birchby(1) ..... 85 Director 1966 2001
Victoria H. Bruni ......... 57 Director 1996 2000
William J. Cosgrove ....... 67 Director 1995 2001
Andrew J. Egner, Jr. ...... 75 Director 1984 2000
Leonard S. Gudelski ....... 65 Chairman, Chief Executive Officer and Director 1971 2000
Ronald E. Hermance, Jr. ... 52 President, Chief Operating Officer and Director 1988 2002
John W. Klie .............. 74 Director 1970 2002
Donald O. Quest ........... 60 Director 1983 2001
Arthur V. Wynne, Jr. ...... 66 Director 1984 2002
</TABLE>
- -----------------------
(1) Mr. Kenneth L. Birchby also serves as Chairman Emeritus of Hudson City
Savings.
Our Directors' Backgrounds. The business experience of each of our
directors is as follows:
LEONARD S. GUDELSKI has served as Chairman of the Board and Chief
Executive Officer of Hudson City Bancorp since its incorporation in 1999. He
joined Hudson City Savings 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 of Hudson City Savings 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 Bancorp since its incorporation in 1999 and 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.
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<PAGE> 99
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 served at Citibank, N.A. from 1963 to 1991 when
he retired as Vice President, Senior Banker, Senior Credit Officer. Since 1993,
he has been Executive Vice President of Citadel Group Representatives, Inc. 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, Secretary and Treasurer 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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<PAGE> 100
DIRECTOR COMPENSATION
Fee Arrangements. 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 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. Hudson City Savings pays a fee to each of its
non-management directors for attendance at each board meeting of Hudson City
Bancorp or Hudson City Savings and each meeting of a committee of which they are
members. A single fee is paid when Hudson City Bancorp and Hudson City Savings
hold joint board meetings. The following table sets forth the meeting fees in
effect for 1999:
<TABLE>
<CAPTION>
Position 1999
-------- ----
<S> <C> <C>
Board of Hudson City Bancorp and Hudson
City Savings................................... Member $3,000
Executive Committee of Hudson City
Bancorp and Hudson City Savings................ Member 540
Audit Committee of Hudson City Bancorp
and Hudson City Savings........................ Member 490
Chair 550
Compensation Committee of Hudson City
Bancorp........................................ Member 800
Chair 860
Human Resources Committee of Hudson
City Savings................................... Member 800
Chair 860
Asset Management Committee of Hudson
City Savings................................... Member 800
Chair 860
Nominating Committee of Hudson City
Bancorp and Hudson City Savings................ Member 800
Chair 860
</TABLE>
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
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<PAGE> 101
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, age 64, has served as Executive Vice President,
Treasurer and Secretary of Hudson City Bancorp since its incorporation in 1999.
He has worked for Hudson City Savings since 1969 and has served as Executive
Vice President and Treasurer of Hudson City Savings 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, age 51, has been Senior Vice President of Mortgage
Servicing of Hudson City Savings since January 2000. He previously served as
First Vice President of Mortgage Servicing of Hudson City Savings from 1995 to
2000 and as 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, age 51, has been Senior Vice President and Investment
Officer of Hudson City Savings since January 2000 and previously served as First
Vice President and Investment Officer from 1989 to 2000. 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, age 47, joined Hudson City Savings in 1974. He has
served as Senior Vice President and Mortgage Officer since January 2000 and
previously served as First Vice President and Mortgage Officer from 1991 to
2000. His primary area of responsibility is mortgage lending and loan
production. 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 from 1989 to 1999 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.
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<PAGE> 102
MICHAEL B. LEE, age 50, has served as Senior Vice President and
Secretary of Hudson City Savings since January 2000 and previously served as
First Vice President and Secretary of Hudson City Savings from 1989 to 2000. 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.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires Hudson City Bancorp's
executive officers and directors, and persons who own more than 10% of Hudson
City Bancorp common stock to file with the SEC reports of ownership and changes
of ownership. Officers, directors and greater than 10% stockholders are required
by SEC regulation to furnish Hudson City Bancorp with copies of all Section
16(a) forms they file. Based solely on its review of the copies of such forms
received by it, or written representations from certain reporting persons,
Hudson City Bancorp believes that all filing requirements applicable to its
executive officers, directors and greater than 10% beneficial owners were
complied with.
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<PAGE> 103
EXECUTIVE OFFICER COMPENSATION
Summary Compensation Table. The following table provides information
about the compensation paid for 1999 and 1998 to our Chief Executive Officer and
to the four other most highly compensated executive officers whose total annual
salary and bonus for 1999 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 ............ 1999 787,770 319,288 -- -- 88,288
Chairman and Chief 1998 754,770 286,435 -- 1,248,912 68,165
Executive Officer
Ronald E. Hermance, Jr. ........ 1999 339,346 117,194 -- -- 30,373
President and Chief 1998 305,308 104,555 -- 425,796 23,438
Operating Officer
John M. Tassillo ............... 1999 224,918 69,740 -- -- 17,549
Executive Vice President, 1998 203,231 61,462 -- 237,048 13,444
Treasurer and Secretary
James Kranz .................... 1999 164,551 10,000 -- -- 10,781
Senior Vice President and 1998 155,293 7,775 -- 111,258 8,439
Investment Officer of Hudson
City Savings
Michael B. Lee ................. 1999 123,154 8,550 -- -- 6,373
Senior Vice President and 1998 109,908 5,420 -- 78,078 6,123
Secretary of Hudson City Savings
</TABLE>
- ---------------------------
(1) The figures for 1998 include the following employer contributions to the
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 for 1998: Mr. Gudelski, $8,000; Mr. Hermance, $8,000; Mr.
Tassillo, $8,000; Mr. Kranz, $7,775; and Mr. Lee, $5,420. The figures for
1999 include the following employer contributions to the Hudson City Savings
Bank Profit Incentive Bonus Plan which the executive officer could have
elected to receive in cash for 1999: Mr. Gudelski, $10,000; Mr. Hermance,
$10,000; Mr. Tassillo, $10,000; Mr. Kranz, $10,000; and Mr. Lee, $8,550. For
the 1998 figures, included are the following bonuses under the Hudson City
Savings Bank Annual Incentive Plan, a non-qualified performance-based
compensation plan which were earned for 1998 and paid in 1999: Mr. Gudelski,
$278,435; Mr. Hermance, $96,555; and Mr. Tassillo, $53,462. The figures for
1999 also include the following bonuses under the Hudson City Savings Bank
Annual Incentive Plan which were earned for 1999 and paid in 2000: Mr.
Gudelski, $309,288; Mr. Hermance, $107,194; and Mr. Tassillo, $59,740.
(2) Hudson City Savings provides its executive officers with certain non-cash
benefits and perquisites, such as the use of Bank-owned or leased
automobiles. Management of Hudson City Savings believes that the aggregate
value of these benefits for each year included in the table 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) Represent amounts payable in 1999 under Hudson City Savings' 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. Includeds amounts which may have been
deferred by the executive officer pursuant to an individual non-qualified
deferred compensation arrangement.
(4) Included the following components: 1999-(1) amounts accrued under the Hudson
City Savings Bank Supplemental Savings Plan, a non-qualified deferred
compensation plan - Mr. Gudelski, $48,800; Mr. Hermance, $13,775; Mr.
Tassillo, $5,900; and Mr. Kranz, $2,052; (2) the premium cost for life
insurance coverage under the Hudson City Savings Bank Supplemental Death
Benefit Plan for Senior Officers - Mr. Gudelski, $1,776; Mr. Hermance,
$1,352; Mr. Tassillo, $1,454; Mr. Kranz, $713; and Mr. Lee, $653; and (3)
amounts under the ESOP and the ESOP Restoration Plan, respectively, based
upon the closing price of $13.75 of Hudson City Bancorp stock on September
30, 1999 - Mr. Gudelski, $8,016 and $29,696; Mr. Hermance, $8,016 and
$7,230; Mr. Tassillo, $8,016 and $2,179; Mr. Kranz, $8,016; and Mr. Lee,
$5,720. 1998-(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, $8,000; and Mr. Lee, $6,840; (2) amounts accrued under the
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 the 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.
Page 102
<PAGE> 104
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended December 31, 1999, the Compensation
Committee consisted of Ms. Bruni, Mr. Cosgrove and Dr. Quest. There were no
interlocks, as defined under the rules and regulations of the SEC, between
members of the Compensation Committee or executive officers of Hudson City
Bancorp and corporations with respect to which such persons are affiliated, or
otherwise.
EMPLOYMENT AGREEMENTS
Hudson City Bancorp and Hudson City Savings have jointly entered into
employment agreements with Messrs. Gudelski, Hermance and Tassillo to secure
their services as officers. The employment agreements became effective on July
13, 1999. 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. These agreements provide for minimum annual salaries of
$798,000, $400,000 and $260,000, 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 discharge each
executive, and each executive may resign, at any time with or without cause.
However, in the event of discharge without cause, Hudson City Bancorp and Hudson
City Savings 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 Bancorp 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 would 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.
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<PAGE> 105
CHANGE OF CONTROL AGREEMENTS
Hudson City Bancorp and Hudson City Savings have jointly entered into
two-year change of control agreements with Messrs. Corridon, Kranz, Laird and
Lee. The term of these agreements is perpetual 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 4 First Vice
Presidents and 27 Vice Presidents of Hudson City Savings.
BENEFIT PLANS
Annual Incentive Plan. This plan permits officers with titles of Senior
Vice President and above, who are selected by the Compensation Committee, to
earn cash bonuses each year. Currently only Messrs. Gudelski, Hermance,
Tassillo, Corridon, Kranz, Laird and Lee 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 plus accrued interest are general, unsecured obligations of
Hudson City Savings and are not separately funded.
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<PAGE> 106
Long-Term Incentive Plan. This plan permits employees selected by the
Compensation Committee to earn additional cash bonuses based on achievement of
performance goals set for periods longer than one year. Under this plan, the
Compensation 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 Compensation
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.
The following table sets forth information concerning the long-term
incentive awards made through December 31, 1999 relating to performance during
the three-year period ending December 31, 2001:
<TABLE>
<CAPTION>
Estimated Future Payouts
Under Non-Stock Price-Based Plans(1)
----------------------------------------------
Performance Threshold Target Maximum
Number period until ------------ ------------ ------------
Name of units payout $10 per unit $25 per unit $50 per unit
- ---- -------- ----------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Leonard S. Gudelski.......... 33,369 Three year $333,690 $834,225 $1,668,450
Chairman and Chief period ending
Executive Officer December 31, 2001
Ronald E. Hermance, Jr....... 13,653 Three year 136,530 341,325 682,650
President and Chief period ending
Operating Officer December 31, 2001
John M. Tassillo............. 7,440 Three year 74,400 186,000 372,000
Executive Vice period ending
President and Treasurer December 31, 2001
James Kranz.................. 3,086 Three year 30,860 77,150 154,300
Senior Vice President period ending
and Investment Officer December 31, 2001
Michael B. Lee............... 2,511 Three year 25,110 62,775 125,550
Senior Vice President period ending
and Secretary December 31, 2001
</TABLE>
- ------------------
(1) Actual payments will be determined on the basis of return on average assets
performance relative to prescribed target levels.
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<PAGE> 107
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 1999 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 1999) 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 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 1999) 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, 1999, the
average final compensation and estimated years of service of the executive
officers named in the Summary Compensation Table were: Mr. Gudelski: $752,436,
30 years of service; Mr. Hermance: $311,321, 11 years of service; Mr. Tassillo,
$206,095, 30 years of service; Mr. Kranz: $155,937, 16 years of service; and Mr.
Lee: $112,505, 28 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 adopted the Employee Stock Ownership Plan in
connection with the reorganization, Hudson City Savings reduced its
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<PAGE> 108
contributions to this plan to 5% of base salary paid after March 31, 1999, with
a cash election available 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 our common stock. 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. It was adopted in connection with the
reorganization.
Hudson City Bancorp has committed to lend this plan enough money to
purchase 4,348,000 of the shares issued to investors other than Hudson City, MHC
(or 3.76% of the total number of shares issued in the reorganization). The plan
has purchased 1,877,500 shares as of December 31, 1999.
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. The loan
is for a term of 30 years and calls for level annual payments of principal and
interest. The plan has pledged the shares it purchases as collateral for the
loan and holds them in a suspense account.
The plan released 72,467 of the pledged shares as of September 30,
1999. We expect that 144,934 of the shares will be released annually in the
years 2000 through 2028, and that the remaining 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
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
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<PAGE> 109
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.
Stock Option Plan. We intend to implement in 2000 the Hudson City
Bancorp, Inc. 2000 Stock Option Plan that was approved by stockholders on
January 13, 2000. A committee of outside directors administers this plan. We
have reserved 5,435,000 shares of common stock of Hudson City Bancorp for
issuance upon the exercise of options under the plan. Such shares may be
authorized and unissued shares or shares previously issued that Hudson City
Bancorp has reacquired. The administrative committee selects the people who
receive stock option grants. Any employee, and directors who are not also
employees or officers of Hudson City Bancorp, Hudson City Savings or any
affiliate approved by the Board of Directors may be selected to receive option
grants. No options were granted to eligible employees as of the fiscal year
ended December 31, 1999.
Recognition and Retention Plan. We intend to implement in 2000 the
Hudson City Bancorp, Inc. 2000 Recognition and Retention Plan that was approved
by stockholders on January 13, 2000. A committee of outside directors
administers this plan. We will establish a trust and will contribute certain
amounts of money or property to be determined by the Board of Directors of
Hudson City Bancorp, in its discretion. No contributions by participants will be
permitted. The trustee will invest the assets of the trust primarily in the
shares of our common stock that will be used to make restricted stock awards. It
is currently anticipated that the trust will purchase common stock on the open
market, or in private transactions. The trust will not purchase previously
authorized but unissued shares from Hudson City Bancorp. The trust is not
authorized to purchase more than 2,174,000 shares of common stock of Hudson City
Bancorp and cannot purchase more than this number. The administrative committee
of Hudson City Bancorp selects the people who receive restricted stock awards
under the plan. Any employee of Hudson City Bancorp, Hudson City Savings or any
affiliate approved by the Board of Directors may be selected to receive stock
awards. Directors of Hudson City Bancorp, Hudson City Savings or any affiliate
approved by the Board of Directors who are not also employees or officers may
also be selected by the committee to receive stock awards. No awards under the
Recognition and Retention Plan were made in the fiscal year ended December 31,
1999.
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.
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<PAGE> 110
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation appears under Item 10.
Directors and Executive Officers of the Registrant.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of December 31, 1999, certain
information as to common stock beneficially owned by persons owing in excess of
5% of the outstanding shares of our common stock. We know of no person, except
as listed below, who beneficially owned more than 5% of the outstanding shares
of our common stock as of December 31, 1999. Except as otherwise indicated, the
information provided in the following table was obtained from filings with the
Securities and Exchange Commission and with Hudson City Bancorp pursuant to the
Securities Exchange Act of 1934, as amended. Addresses provided are those listed
in the filings as the address of the person authorized to receive notices and
communications. For purposes of the table below and the table set forth under
"Security Ownership of Management" in accordance with Rule 13d-3 under the
Exchange Act, a person is deemed to be the beneficial owner, for purposes of
this table, of any shares of common stock (1) over which he has or shares,
directly or indirectly, voting or investment power, or (2) of which he has the
right to acquire beneficial ownership at any time within 60 days after December
31, 1999. As used herein, "voting power" is the power to vote or direct the
voting of shares and "investment power" includes the power to dispose or direct
the disposition of shares. Except as otherwise indicated, each stockholder shown
in the table has sole voting and investment power with respect to the shares of
common stock indicated.
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of
Beneficial Owner Beneficial Ownership Percent
- ------------------------------- -------------------- -------
<S> <C> <C>
Hudson City, MHC(1)............ 61,288,300 53.00%
West 80 Century Road
Paramus, NJ 06752
The Baupost Group, L.L.C.(2)... 6,352,500 5.49
SAK Corporation
Seth A. Klarman
44 Brattle Street - 5th Floor
Cambridge, MA 02138
</TABLE>
- --------------
(1) Based on the Schedule 13D filed with the SEC on August 2, 1999.
(2) Based on the Schedule 13G filed with the SEC on February 11, 2000. The
Baupost Group, L.L.C. is a registered investment adviser which may be
deemed to beneficially own 6,352,500 shares of Hudson City Bancorp. The
Baupost Group, L.L.C. has sole voting and investment power as to the shares
of Hudson City Bancorp. SAK Corporation is the Manager of Baupost. Seth A.
Klarman, as the sole Director of SAK Corporation and a controlling person of
Baupost, may be deemed to have beneficial ownership under Section 13D of the
securities beneficially owned by Baupost. Securities reported here as being
beneficially owned by Baupost include securities purchased on behalf of a
registered investment company and various limited partnerships. SAK
Corporation and Seth Klarman have no voting or investment power as to the
shares of Hudson City Bancorp.
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<PAGE> 111
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information about the shares of common
stock beneficially owned by each director of Hudson City Bancorp, by each named
executive officer of Hudson City Bancorp identified in the Summary Compensation
Table included elsewhere herein, and all directors and executive officers of
Hudson City Bancorp or Hudson City Bancorp's wholly owned subsidiary, Hudson
City Savings, as a group as of January 31, 2000. Except as otherwise indicated,
each person and each group shown in the table has sole voting and investment
power with respect to the shares of common stock indicated. See "Principal
Stockholders" for a definition of "Beneficial ownership."
<TABLE>
<CAPTION>
Amount and Nature Percent of
Position with of Beneficial Common Stock
Name the Company Ownership (1)(2)(3) Outstanding
- --------------------------- -------------------- ------------------- -------------
(shares)
<S> <C> <C> <C>
Leonard S. Gudelski........ Director, Chairman of the 550,584 (4) * %
Board and Chief Executive
Officer
Ronald E. Hermance, Jr. ... Director, President and 358,164 (5) *
Chief Operating Officer
Verne S. Atwater........... Director 60,000 *
John D. Birchby............ Director 745,500 (6) *
Kenneth L. Birchby......... Director 155,000 (7) *
Victoria H. Bruni.......... Director 60,000 *
William J. Cosgrove........ Director 65,000 *
Andrew J. Egner, Jr. ...... Director 95,000 (8) *
John W. Klie............... Director 65,000 (9) *
Donald O. Quest............ Director 75,500 (10) *
Arthur V. Wynne, Jr. ...... Director 185,350 (11) *
John M. Tassillo........... Executive Vice President, 151,237 *
Treasurer and Secretary
James C. Kranz............. Senior Vice President and 63,312 *
Investment Officer of
Hudson City Savings
Michael B. Lee............. Senior Vice President and 52,049 (12) *
Secretary of Hudson City
Savings
All directors and executive officers as a group (16 persons).... 4,617,923 4.0
</TABLE>
- ---------------------------------------------
* Less than one percent
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<PAGE> 112
(1) The figures shown include the following shares that have been allocated as
of December 31, 1999 to individual accounts of participants in Hudson City
Bancorp, Inc. Employee Stock Ownership Plan: Mr. Gudelski, 583 shares; Mr.
Hermance, 583 shares; Mr. Tassillo, 583 shares; Mr. Kranz, 583 shares; Mr.
Lee, 416 shares and all directors and executive officers as a group, 3,558
shares. Such persons have voting power (subject to the legal duties of the
ESOP Trustee) but no investment power, except in limited circumstances, as
to such shares. The figures shown for Messrs. Gudelski, Hermance, Tassillo,
Kranz and Lee do not include 1,805,033 shares held in trust pursuant to the
ESOP that have not been allocated as of December 31, 1999 to any
individual's account and as to which Messrs. Gudelski, Hermance, Tassillo,
Kranz and Lee share voting power with other ESOP participants. The figure
shown for all directors and executive officers as a group includes such
1,805,033 shares as to which the members of Hudson City Bancorp's
Compensation Committee (consisting of Ms. Bruni and Messrs. Cosgrove and
Quest) may be deemed to have sole investment power, except in limited
circumstances, thereby causing each such committee member to be deemed a
beneficial owner of such shares. Each of the members of the Compensation
Committee disclaims beneficial ownership of such shares and, accordingly,
such shares are not attributed to the members of the Compensation Committee
individually. See "Compensation of Directors and Officers -- Benefits --
Employee Stock Ownership Plan and Trust."
(2) The figures shown include the following shares held as of December 31, 1999
in individual accounts of participants in the Profit Incentive Bonus Plan
of Hudson City Savings Bank: Mr. Gudelski, 0 shares; Mr. Hermance, 49,611
shares; Mr. Tassillo, 28,153 shares; Mr. Kranz, 12,728 shares; Mr. Lee,
10,432 shares; and all directors and executive officers as a group, 134,731
shares. Such persons have sole voting power and sole investment power as to
such shares. See ""Compensation of Directors and Executive Officers --
Benefits -- Profit Incentive Bonus Plan."
(3) The figures shown include unvested shares held in trust pursuant to the RRP
that have been awarded as of January 13, 2000 to individuals as follows:
Mr. Gudelski, 430,000 shares; Mr. Hermance, 300,000 shares; each other
director, 55,000 shares; Mr. Tassillo, 120,000 shares; Mr. Kranz, 40,000
shares; Mr. Lee, 40,000 shares and all directors and executive officers as
a group, 1,505,000 shares. Such persons have sole voting power but no
investment power, except in limited circumstances, as to such shares.
(4) Includes 60,000 shares as to which Mr. Gudelski may be deemed to share
voting and investment power.
(5) Includes 7,500 shares as to which Mr. Hermance may be deemed to share
voting and investment power.
(6) Includes 330,540 shares as to which Mr. Birchby may be deemed to share
voting and investment power. Also includes 75,000 shares as to which Mr.
Birchby holds as custodian for his minor son and as to which he has sole
voting and investment power.
(7) Includes 50,000 shares as to which Mr. Birchby may be deemed to share
voting and investment power.
(8) Includes 20,000 shares as to which Mr. Egner may be deemed to share voting
and investment power.
(9) Includes 7,500 shares as to which Mr. Klie may be deemed to share voting
and investment power.
(10) Includes 8,500 shares as to which Dr. Quest may be deemed to share voting
and investment power.
(11) Includes 50,000 shares as to which Mr. Wynne may be deemed to share voting
and investment power.
(12) Includes 1,200 shares as to which Mr. Lee may be deemed to share voting
and investment power.
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<PAGE> 113
ITEM 13. CERTAIN TRANSACTIONS WITH MEMBERS OF OUR BOARD OF DIRECTORS AND
EXECUTIVE OFFICERS.
We do not make loans to our officers or members of our Board of
Directors. 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 1999, we paid
$305,000 to the law firm under our retainer agreement plus the balance of the
unbilled charges for 1998 in the amount of $6,800 for a total of $311,800. The
firm also received $1,114,000 in 1999 from borrowers of Hudson City Savings to
review loan documentation. We also rent 2,450 square feet of office space to
Dieffenbach Witt & Birchby. During 1999, 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, $47,770
and $49,000 for the periods beginning May 1, 1999, 2000 and 2001, respectively.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of Documents Filed as Part of this Annual Report on Form
10-K
(1) The following consolidated financial statements are
in Item 8 of this annual report:
Consolidated Financial Statements as of December 31, 1999, 1998 and 1997
- Independent Auditors' Report
- Consolidated Statements of Financial Condition as of
December 31, 1999 and 1998
- Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997
- Consolidated Statements of Changes in Stockholders'
Equity for the years ended December 31, 1999, 1998
and 1997
- Consolidated Statements of Cash Flows for the years
ended December 31, 1999, 1998 and 1997
- Notes to Consolidated Financial Statements
(2) Financial Statement Schedules have been omitted
because they are not applicable or the required
information is shown in the Consolidated Financial
Statements or Notes thereto in Item 8 of this annual
report.
(b) Reports on Form 8-K. During the last quarter of 1999, no
reports on Form 8-K were required to be filed and as such,
none were filed.
Page 112
<PAGE> 114
(c) Exhibits Required by Item 601 of Regulation S-K
EXHIBIT DESCRIPTION
2.1 Amended and Restated Plan of Reorganization and Stock Issuance of
Hudson City Savings Bank (1)
3.1 Certificate of Incorporation of Hudson City Bancorp, Inc. (1)
3.2 Bylaws of Hudson City Bancorp, Inc. (1)
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. (1)
10.1 Employee Stock Ownership Plan of Hudson City Savings Bank (1)
10.2 Profit Incentive Bonus Plan of Hudson City Savings Bank (1)
10.3 Supplementary Savings Plan of Hudson City Savings Bank (1)
10.4 Form of ESOP Loan Commitment Letter and ESOP Loan Documents (1)
10.5 Form of Employment Agreement by and among Hudson City Savings Bank and
Hudson City Bancorp, Inc. and certain officers (1)
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 (1)
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 (1)
10.8 Severance Pay Plan of Hudson City Savings Bank (1)
10.9 ESOP Restoration Plan of Hudson City Savings Bank (1)
10.10 Hudson City Savings Bank Outside Directors Consultation Plan (1)
10.11 Hudson City Savings Bank Supplemental Executive Retirement Plan (1)
10.12 Hudson City Savings Bank Annual Incentive Plan (1)
10.13 Hudson City Savings Bank Long-Term Incentive Plan (1)
10.14 Form of Post-Retirement Death Benefit for Senior Officers (1)
10.15 Hudson City Bancorp, Inc. 2000 Stock Option Plan (2)
10.16 Hudson City Bancorp, Inc. 2000 Recognition and Retention Plan (2)
10.17 Amendment No. 1 to the Employee Stock Ownership Plan of Hudson City
Savings Bank
10.18 Amendment No. 1 to the Profit Incentive Bonus Plan of Hudson City
Savings Bank
10.19 Amendment No. 2 to the Profit Incentive Bonus Plan of Hudson City
Savings Bank
11.1 Statement Re: Computation of Per Share Earnings
21.1 Subsidiaries of Hudson City Bancorp, Inc. (1)
23.1 Consent of KPMG LLP
27.1 Financial Data Schedule (Submitted only with filing in electronic
format)*
(1) Incorporated herein by reference to the Exhibits to the Registrant's
Registration Statement No. 333-74383 on Form S-1, filed with the Securities and
Exchange Commission on March 15, 1999, as amended.
(2) Incorporated herein by reference to the Exhibits to the Registrant's
registration Statement No. 333-95193 on Form S-8, filed with the Securities and
Exchange Commission on January 21, 2000.
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<PAGE> 115
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant had duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in Paramus, New
Jersey, on March 28, 2000.
Hudson City Bancorp, Inc
By: /s/ Leonard S. Gudelski
-------------------------------------------------
Leonard S. Gudelski
Chairman of the Board and
Chief Executive Officer
Page 114
<PAGE> 116
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and 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 March 28, 2000
- --------------------------------------- Executive Officer (Principal executive officer)
Leonard S. Gudelski
/s/ Ronald E. Hermance, Jr. Director, President and Chief Operating Officer March 28, 2000
- --------------------------------------- (Principal financial officer)
Ronald E. Hermance, Jr.
/s/ Verne S. Atwater Director March 28, 2000
- ---------------------------------------
Verne S. Atwater
/s/ John D. Birchby Director March 28, 2000
- ---------------------------------------
John D. Birchby
/s/ Kenneth L. Birchby Director March 28, 2000
- ---------------------------------------
Kenneth L. Birchby
/s/ Victoria H. Bruni Director March 28, 2000
- ---------------------------------------
Victoria H. Bruni
/s/ William J. Cosgrove Director March 28, 2000
- ---------------------------------------
William J. Cosgrove
/s/ Andrew J. Egner, Jr. Director March 28, 2000
- ---------------------------------------
Andrew J. Egner, Jr.
/s/ John W. Klie Director March 28, 2000
- ---------------------------------------
John W. Klie
</TABLE>
Page 115
<PAGE> 117
<TABLE>
<CAPTION>
NAME TITLE DATE
<S> <C> <C>
/s/ Donald O. Quest Director March 28, 2000
- ---------------------------------------
Donald O. Quest
/s/ Arthur V. Wynne, Jr. Director March 28, 2000
- ---------------------------------------
Arthur V. Wynne, Jr.
</TABLE>
Page 116
<PAGE> 118
(c) Exhibits Required by Item 601 of Regulation S-K
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
<S> <C>
2.1 Amended and Restated Plan of Reorganization and Stock Issuance of Hudson City Savings Bank (1)
3.1 Certificate of Incorporation of Hudson City Bancorp, Inc. (1)
3.2 Bylaws of Hudson City Bancorp, Inc. (1)
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. (1)
10.1 Employee Stock Ownership Plan of Hudson City Savings Bank (1)
10.2 Profit Incentive Bonus Plan of Hudson City Savings Bank (1)
10.3 Supplementary Savings Plan of Hudson City Savings Bank (1)
10.4 Form of ESOP Loan Commitment Letter and ESOP Loan Documents (1)
10.5 Form of Employment Agreement by and among Hudson City Savings Bank and Hudson City Bancorp, Inc. and
certain officers (1)
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 (1)
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 (1)
10.8 Severance Pay Plan of Hudson City Savings Bank (1)
10.9 ESOP Restoration Plan of Hudson City Savings Bank (1)
10.10 Hudson City Savings Bank Outside Directors Consultation Plan (1)
10.11 Hudson City Savings Bank Supplemental Executive Retirement Plan (1)
10.12 Hudson City Savings Bank Annual Incentive Plan (1)
10.13 Hudson City Savings Bank Long-Term Incentive Plan (1)
10.14 Form of Post-Retirement Death Benefit for Senior Officers (1)
10.15 Hudson City Bancorp, Inc. 2000 Stock Option Plan (2)
10.16 Hudson City Bancorp, Inc. 2000 Recognition and Retention Plan (2)
10.17 Amendment No. 1 to the Employee Stock Ownership Plan of Hudson City Savings Bank
10.18 Amendment No. 1 to the Profit Incentive Bonus Plan of Hudson City Savings Bank
10.19 Amendment No. 2 to the Profit Incentive Bonus Plan of Hudson City Savings Bank
11.1 Statement Re: Computation of Per Share Earnings
21.1 Subsidiaries of Hudson City Bancorp, Inc. (1)
23.1 Consent of KPMG LLP
27.1 Financial Data Schedule (Submitted only with filing in electronic format)*
</TABLE>
(1) Incorporated herein by reference to the Exhibits to the Registrant's
Registration Statement No. 333-74383 on Form S-1, filed with the
Securities and Exchange Commission on March 15, 1999, as amended.
(2) Incorporated herein by reference to the Exhibits to the Registrant's
registration Statement No. 333-95193 on Form S-8, filed with the
Securities and Exchange Commission on January 21, 2000.
<PAGE> 1
EMPLOYEE STOCK OWNERSHIP PLAN
OF
HUDSON CITY SAVINGS BANK
(Effective July 13, 1999)
AMENDMENT
1. Section 1 - Section 1.8 shall be amended to read in its entirety as follows:
SECTION 1.18 ELIGIBLE MEMBER means, for any Plan Year, an Employee who
is a Member during all or any part of such Plan Year and either remains a
Member on the last day of such Plan Year or terminated membership during
such Plan Year on account of termination of employment due to death,
Disability or Retirement; provided, however, that no Employee shall be an
Eligible Member for the Plan Year that includes the effective date of the
transaction pursuant to which the Bank becomes a wholly owned subsidiary of
Hudson City Bancorp, Inc. if he terminates employment for any reason with
all Participating Employers prior to such effective date.
2. Section 2 - Section 2.1 shall be amended to read in its entirety as follows:
SECTION 2.1 ELIGIBILITY FOR MEMBERSHIP.
(a) Only Eligible Employees may be or become Members of the Plan. An
Employee shall be an Eligible Employee if he (i) is employed by one or more
Participating Employers; (ii) is compensated primarily on a salaried basis or
hourly wage basis; (iii) has attained age 21; (iv) has completed at least one
Year of Eligibility Service; and (v) is not excluded under section 2.1(b).
(b) An Employee is not an Eligible Employee if he:
(i) does not receive Allocation Compensation from at least one
Participating Employer;
(ii) is an Employee who has waived any claim to participation in the
Plan;
(iii) is an Employee or in a unit of Employees covered by a collective
bargaining agreement with the Employer where retirement benefits were the
subject of good faith bargaining, unless such agreement expressly provides
that Employees such as he be covered under the Plan;
(iv) is a "leased employee" as defined in section 18.8(a);
(v) is compensated primarily on a daily, commission, fee or retainer
basis;
<PAGE> 2
(vi) is a building service Employee who is regularly required to spend
more than 50% of his working time servicing real estate other than offices of
Affiliated Employers;
(vii) is classified as an "independent contractor" by the Employer, even if
considered an employee under applicable law; or
(viii) is a mortgage field originator.
IN WITNESS WHEREOF, this Amendment has been executed by the undersigned
officer of Hudson City Savings Bank pursuant to authority given by resolution
of the Board of Directors.
HUDSON CITY SAVINGS BANK
By
----------------------------
Name:
Title:
<PAGE> 1
PROFIT INCENTIVE BONUS PLAN
OF
HUDSON CITY SAVINGS BANK
AMENDMENT
1. Article I - A new section 1.16 shall be inserted and the existing section
1.16 shall be renumbered section 1.17 with all sections and
cross-references renumbered accordingly, the new section 1.16 shall read in
its entirety as follows:
1.16 "CORPORATE INSIDER" means any person who is required to file reports
with the Securities and Exchange Commission with respect to Shares of
Hudson City Bancorp, Inc. pursuant to section 16 of the Securities
Exchange Act of 1934, as amended.
2. Article I - A new section 1.18 shall be inserted and the existing section
1.18 shall be renumbered section 1.19 with all sections and
cross-references renumbered accordingly, the new section 1.18 shall read in
its entirety as follows:
1.18 "DISCRETIONARY TRANSACTION" means a transaction pursuant to this Plan
or any other employee benefit plan maintained by the Bank or any
affiliate of the Bank that: (a) is effected at the volition of a
Corporate Insider; (b) results, directly or indirectly, in the
acquisition or disposition of beneficial ownership of Shares by the
Corporate Insider; (c) is not made in connection with the death,
disability, retirement or termination of employment of the Corporate
Insider; (d) is not required to be made available to the Corporate
Insider pursuant to any provision of the Code applicable to the Plan;
and (e) results in either intra-plan transfer involving Shares or an
investment fund which invests in Shares or a cash distribution or loan
funded by a volitional disposition of Shares or a beneficial interest
in Shares.
3. Article I - A new section 1.23 shall be inserted and the existing section
1.23 shall be renumbered section 1.24 with all sections and
cross-references renumbered accordingly, the new section 1.24 shall read in
its entirety as follows:
1.23 "EMPLOYER STOCK FUND" means an Investment Fund the purpose of which
is to invest primarily in Shares.
4. Article I - Section 1.30 shall be amended by deleting the first appearance
of the word "and" and inserting the phrase "and the Employer Stock Fund"
before the word "described".
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<PAGE> 2
5. Article I - A new section 1.47 shall be inserted and the existing section
1.47 shall be renumbered section 1.48 with all sections and
cross-references renumbered accordingly, the new section 1.47 shall read
in its entirety as follows:
1.47 "SHARE" means a share of common stock, par value $.01, of Hudson City
Bancorp, Inc.
6. Article IV - Section 4.01 shall be amended by adding new subsections (b)
and (c) to read in their entirety as follows:
(b) If, on or before September 30, 1999, the Bank consummates a
transaction whereby it becomes a wholly owned subsidiary of a
corporation which issues stock to the public, the Bank Contributions
for the Plan Year ending September 30, 1999 shall be an amount equal
to the lesser of:
(i) An amount that shall not reduce the amount of Income Available
for Surplus below $2,500 per $1,000,000 of Average Assets for the
Plan Year, or
(ii) the sum of (A) 10% of the Compensation while a Member during the
period beginning October 1, 1998 and ending March 31, 1999 and
(B) 5% of the Compensation while a Member during the period
beginning April 1, 1999 and ending September 30, 1999 of each
such Member in the Plan at the end of such Plan Year and each
such Member whose death, Disability of Retirement shall have
occurred during the Plan Year,
but not exceeding the maximum amount which would be deductible by the
Bank for income tax purposes under the provisions of Section 404 of
the Code. Notwithstanding the foregoing, the Board may, in its
discretion, waive the limitation under clause (i) for any Plan Year in
which it finds that there have been extraordinary charges against
income, including, but not limited to, nonrecurring expenses and
losses realized from the sales of securities, and may also, upon such
finding, direct that Bank Contributions for such Plan Year be paid
from accumulated earnings of the Bank.
(c) If, on or before the last day of any Plan Year that begins after
September 30, 1999, the Bank has consummated a transaction whereby it
has become a wholly owned subsidiary of a corporation which issues
stock to the public, the Bank Contributions for any Plan Year shall be
an amount equal to the lesser of:
(i) An amount that shall not reduce the amount of Income Available
for Surplus below $2,500 per $1,000,000 of Average Total Assets
for the Plan Year, or
(ii) 5% of the Compensation while a Member during such Plan Year, of
each such Member in the Plan at the end of such Plan Year and
each such Member whose death, Disability or Retirement shall have
occurred during such Plan Year,
but not exceeding the maximum amount which would be deductible by the
Bank for income tax purposes under the provisions of Section 404 of
the Code.
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<PAGE> 3
Notwithstanding the foregoing, the Board may, in its discretion, waive
the limitation under clause (i) above for any Plan Year in which it
finds that there have been extraordinary charges against income,
including, but not limited to, nonrecurring expenses and losses
realized from the sales of securities, and may also, upon such
finding, direct that the Bank Contributions for such Plan Year be paid
from accumulated earnings of the Bank.
7. Article IV - Section 4.03 shall be amended to read in its entirety as
follows:
4.03 PAYMENT OF BANK CONTRIBUTIONS
Subject to an election made by a Member pursuant to Section 4.04, the Bank
Contributions for any Plan Year shall be paid to the Trust Fund as of the
September Valuation Date for such Plan Year but before the due date of the
Bank's Federal income tax return for such year, including any extensions
thereof except for the Bank Contributions made pursuant to Section
4.01(b)(ii)(A) which shall be paid to the Trust Fund on May 31, 1999. These
amounts shall be credited to the accounts of Members pursuant to Article V.
8. Article IV - Section 4.04(a) shall be amended to read in its entirety as
follows:
(a) Subject to Section 4.07 and paragraph (b) below, each Member shall be
entitled to elect to receive in cash up to 50% (in multiples of 10%)
of his allocation of Bank Contributions for any Plan Year except in
the case of Bank Contributions made pursuant to Sections 4.01(b) and
4.01(c) in which case each Member shall be entitled to elect to
receive in cash up to 100% (in multiples of 10%) of such allocation.
An election pursuant to this Section 4.04 shall be made by filing
notice, in the form and manner prescribed by the Plan Administrator,
on or before August 15th of the Plan Year for which it is to be
effective. Any such election may be changed or revoked by further
notice given, in the form the manner prescribed by the Plan
Administrator, on or before August 15th of such Plan Year, but not
thereafter, except as provided in Section 4.07(a). Payments to Members
pursuant to such an election shall be made as promptly following the
end of such Plan Year as practicable, and in no event later than 2 1/2
months after the close of the Plan Year. Notwithstanding the
foregoing, in the case of Bank Contributions made pursuant to Section
4.01(b)(ii)(A), an election pursuant to this Section 4.04 shall be
made by filing notice, in the form and manner prescribed by the Plan
Administrator, on or before May 31, 1999 and any such election may be
changed or revoked by further notice given before such date, but not
thereafter, except as provided in Section 4.07(a). Payments to Members
pursuant to an election regarding Bank Contributions made pursuant to
Section 4.01(b)(ii)(A) shall be made no later that June 15, 1999. If a
Member fails to make an election pursuant to this Section 4.04(a) for
any Plan Year, the Plan Administrator shall act as if the Member had
not elected to receive a cash payment.
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<PAGE> 4
9. Article IV -- Section 4.09(a) shall be amended to read in its entirety as
follows:
(a) No amount shall be allocated to a Member's Accumulated Share for any
Plan Year commencing on or after January 1, 1987 to the extent that
such allocation, when added to the Member's annual addition for that
Plan Year under any other qualified defined contribution plan of the
Bank or an Affiliated Company, would result in an annual addition of
an amount greater than the lesser of (1) $30,000 (or one-quarter of
the dollar limitation in effect under Section 415(b)(1)(A) of the
Code, if greater) or (ii) 25% of the Member's aggregate remuneration.
For purposes of this Section 4.09, the term "annual addition" with
respect to each Member under this Plan or any other qualified defined
contribution plan maintained by the Bank or an Affiliated Company
means the sum for any Plan Year of:
(i) all contributions by the Bank and Affiliated Companies
(including contributions made under a salary reduction
agreement pursuant to sections 401(k), 408(k) or 403(b) of
the Code) under any qualified defined contribution plan
maintained by the Bank or any Affiliated Company, as well as
the Member's allocable share, if any, of any forfeitures
under such plans; plus
(ii)(A) for Plan Years that begin prior to January 1, 1987,
the lesser of (I) one-half of all nondeductible voluntary
contributions under any other qualified defined contribution
plan (whether or not terminated) maintained by the Bank or
any Affiliated Company, or (II) the amount of the
nondeductible voluntary contributions under a qualified
defined contribution plan (whether or not terminated)
maintained by the Bank or Affiliated Company in excess of 6%
of such Member's Statutory Compensation; and (B) for Plan
Years that begin after December 31, 1986, the sum of all of
the nondeductible voluntary contributions under any other
qualified defined contribution plan (whether or not
terminated) maintained by the Bank and all Affiliated
Companies,
that have been allocated to the Member's Accumulated Share under
this Plan or his accounts under any other such qualified defined
contribution plan. Any Elective Bank Contributions or Personal
Contributions which may have been distributed from the Plan under
the provisions of Section 4.07 shall be included in the annual
addition for the year allocated.
Notwithstanding the foregoing, if, for any Limitation Year, the
aggregate amount of employer contributions under a tax-qualified
employee stock ownership plan of the Bank or any Affiliated
Company that are allocated directly to the accounts of
individuals who are Highly Compensated Employees for that
Limitation Year plus such Highly Compensated Employees' allocable
shares of any employer contributions applied to the repayment of
a securities acquisition loan for such Limitation Year does not
exceed one-third of the aggregate of such employer contributions
for all participating employees for such Limitation Year, Annual
Additions shall not include any employer contributions used to
pay interest on a securities
4 of 10
<PAGE> 5
acquisition loan or any forfeitures of employer securities purchased
with the proceeds of a securities acquisition loan for such Limitation
Year.
10. Article V - Section 5.02 shall be amended by replacing the "." at the end
thereof with the phrase ", except in the case of Bank Contributions
made pursuant to Sections 4.01(b) and 4.01(c) which shall be credited
entirely to a Member's Optional Account.".
11. Article V - Section 5.03 shall be amended by replacing the "." at the end
thereof with the phrase ", except for Bank Contributions made pursuant to
Sections 4.01(b) and 4.01(c) which shall be credited to a Member's Optional
Account in their entirety.".
12. Article VII - Section 7.02 shall be amended to read in its entirety as
follows:
7.02 THE INVESTMENT FUNDS
The Trust Fund shall consist of the Savings Fund, the Equity Fund, the
Intermediate Bond Fund (effective as of July 1, 1994) and the Employer
Stock Fund (effective as of the date of the completion of the transaction
whereby the Bank becomes a wholly owned subsidiary of Hudson City Bancorp,
Inc.), each of which shall be administered and invested by the Trustee in
accordance with the provisions of the Plan and the Trust Agreement. The
Trust Agreement shall specify the types of investments which the Trustee is
authorized to make in the respective Investment Funds (or such other funds,
hereinafter provided for) to which reference should be made for a complete
description thereof. For identification purposes only, the Investment Funds
will consist primarily of:
(a) The Equity Fund: common stocks and investments convertible into common
stocks and stock of regulated investment companies and mutual funds
which themselves invest primarily in common stocks and investments
convertible into common stocks;
(b) The Savings Fund: savings accounts and time or other interest bearing
deposits in mutual savings banks, including the Bank;
(c) The Intermediate Bond Fund: U.S. government and corporate fixed-income
securities of varying maturities; and
(d) The Employer Stock Fund: Shares of Hudson City Bancorp, Inc.
The Trustee is also authorized to invest any amounts held or received by it
in any one or more of the Investment Funds, in short term obligations of
the U.S. Government, or agencies thereof, or in short term corporate
obligations or to retain uninvested, or sell investments to provide,
amounts of cash required for the purposes of any such Fund. The Trust Fund
shall also contain, in addition to or in place of one or more of the
Investment Funds described above, such other Investment Fund or Funds as
may, from time to time, be requested by the Bank and agreed to by the
Trustee.
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<PAGE> 6
13. Article IX - Article IX shall be renumbered as Article X with all section
numbers and cross-references renumbered accordingly and a new Article IX
shall be inserted to read in its entirety as follows:
ARTICLE IX
INVESTMENTS IN EMPLOYER STOCK FUND
9.01 IN GENERAL
The provisions of this Article IX shall apply to the Employer Stock
Fund and to any Member, Former Member or Beneficiary who has an interest in
the Employer Stock Fund.
9.02 RESTRICTIONS ON INVESTMENTS BY CORPORATE INSIDERS
Investment directions, investment direction changes, transfers among
investment funds, withdrawals during employment, distributions and loans
made pursuant to the terms of the Plan shall be subject to the following
restrictions:
(a) Any transfer among investment funds that results in an
increase in the portion of a Corporate Insider's Accumulated Share
that is invested in the Employer Stock Fund shall be given effect
only if effected pursuant to an election made at least six months
after the most recent prior election under this Plan or any other
employee benefit plan of the Bank or any affiliate of the Bank that
resulted in a Discretionary Transaction that constituted a
disposition of beneficial ownership of Shares;
(b) Any transfer among investment funds that results in a
decrease in the portion of a Corporate Insider's Accumulated Share
that is invested in the Employer Stock Fund shall be given effect
only if effected pursuant to an election made at least six months
after the most recent prior election under this Plan or any other
employee benefit plan of the Bank or any affiliate of the Bank that
resulted in a Discretionary Transaction that constituted an
acquisition of beneficial ownership of Shares;
(c) Any loan made under this Plan that is funded in whole or in
part through a disposition of any portion of the Corporate Insider's
interest in the Employer Stock Fund shall be made only if effected
pursuant to an election made at least six months after the most
recent prior election under this Plan or any other employee benefit
plan of the Bank or any affiliate of the Bank that resulted in a
Discretionary Transaction that constituted an acquisition of
beneficial ownership Shares; and
(d) Any cash distribution from a Corporate Insider's Accumulated
Share under the Plan (whether a withdrawal during service, a
distribution following termination of service or other type of
distributions that does not constitute a loan under the terms of the
Plan) shall be made only if: (i) effected pursuant to an election
made at least six months after the most recent
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<PAGE> 7
prior election under this Plan or any other employee benefit plan of the
Bank or any affiliate of the Bank that resulted in a Discretionary
Transaction that constituted an acquisition of Shares, or (ii)(A) not
effected at the volition of the Corporate Insider, or (B) effected in
connection with the Corporate Insider's death, disability, retirement or
termination of employment, or (C) required to be made available to the
Corporate Insider pursuant to any applicable requirement of the Code, or
(D) effected pursuant to a domestic relations order described in section
414(p) of the Code.
The restrictions set forth in this section 9.02 are intended to comply with the
requirements of Rule 16b-3 promulgated by the Securities and Exchange
Commission and shall be interpreted, applied and modified, in the discretion of
the Plan Administrator, to give effect to such intention.
9.03 COMPLIANCE WITH SECURITIES LAWS
To the extent that the Plan Administrator may determine necessary,
appropriate or advisable for the purpose of securing compliance with applicable
federal, state or local laws, rules or regulations applicable to trading in
Shares, the Plan Administrator may restrict the making or implementation of
investment or transfer directions by any individual with respect to the Employer
Stock Fund to those periods of time when such individual would, under the
Bank's securities trading policy, be permitted to buy or sell Shares directly
for his own account. The Plan Administrator may refuse to implement any such
direction that would result in a transaction that would be prohibited under
such policy if engaged in outside of the Plan.
9.04 VOTING RIGHTS
Each person with an interest in the Employer Stock Fund shall have the
right to participate confidentially in the exercise of voting rights
appurtenant to Shares held in the Employer Stock Fund; provided, however, that
such person has an interest in the Employer Stock Fund as of the most recent
Valuation Date coincident with or preceding the applicable record date for
which records are available. Such participation shall be achieved by completing
and filing with the inspector of elections, the Trustee or such other person
who shall be independent of the issuer of Shares as the Plan Administrator
shall designate, at least 10 days prior to the date of the meeting of holders
of Shares at which such voting rights will be exercised, a written direction in
the form and manner prescribed by the Plan Administrator. The inspector of
elections, the Trustee or such other person designated by the Plan
Administrator shall tabulate the directions given on a strictly confidential
basis, and shall provide the Plan Administrator with only the final results of
the tabulation. The final results of the tabulation shall be followed by the
Plan Administrator in directing the Trustee as to the manner in which such
voting rights shall be exercised. As to each matter in which the holders of
Shares are entitled to vote, a number of affirmative votes equal to the product
of:
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<PAGE> 8
(a) the total number of Shares then held in the Employer Stock Fund
as of the applicable record date; and
(b) a fraction, the numerator of which is the aggregate value (as of
the Valuation Date coincident with or immediately preceding the applicable
record date) of the interests in the Employer Stock Fund of all persons
directing that an affirmative vote be cast, and the denominator of which is
the aggregate value (as of the Valuation Date coincident with or
immediately preceding the applicable record date) of the interests in the
Employer Stock Fund of all persons directing that an affirmative vote or a
negative vote be cast;
shall be cast. A number of negative votes equal to the excess of the total
number of Shares held in the Employer Stock Fund as of the applicable record
date, over the designated number of affirmative votes, shall be cast. The Plan
Administrator shall furnish, or cause to be furnished, to each person with an
interest in the Employer Stock Fund, all annual reports, proxy materials and
other information known to have been furnished by the issuer of Shares or by any
proxy solicitor, to the holders of Shares.
9.05 TENDER RIGHTS
Each person with an interest in the Employer Stock Fund shall have the
right to participate confidentially in the response to a tender offer, or to any
other offer, made to the holders of Shares generally, to purchase, exchange,
redeem or otherwise transfer Shares; provided, however, that such person had an
interest in the Employer Stock Fund as of the Valuation Date coincident with or
immediately preceding the first day for delivering Shares or otherwise
responding to such tender or other offer. Such participation shall be achieved
by completing and filing with the inspector of elections, the Trustee or such
other person who shall be independent of the issuer of Shares as the Plan
Administrator shall designate, at least 30 days prior to the last day for
delivering Shares or otherwise responding to such tender or other offer, a
written direction in the form and manner prescribed by the Plan Administrator.
The inspector of elections, the Trustee or such other person designated by the
Plan Administrator shall tabulate the directions given on a strictly
confidential basis, and shall provide the Plan Administrator with only the final
results of the tabulation. The final results of the tabulation shall be followed
by the Plan Administrator in directing the Trustee as to the number of Shares to
be delivered. On the last day for delivering Shares or otherwise responding to
such a tender or other offer, a number of Shares equal to the product of:
(a) the total number of Shares then held in the Employer Stock Fund;
and
(b) a fraction, the numerator of which is the aggregate value (as of
the Valuation Date coincident with or immediately preceding the first day
of delivering Shares or otherwise responding to such tender or other offer)
of the interests in the Employer Stock Fund of all persons directing that
Shares be delivered in response to such tender or other offer, and the
denominator of which is the aggregate value (as of the Valuation Date
coincident with or immediately preceding the first day for delivering
Shares or otherwise
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<PAGE> 9
responding to such tender or other offer) of the interests in the Employer
Stock Fund of all persons directing that Shares be delivered or that the
delivery of Shares be withheld;
shall be delivered in response to such tender or other offer. Delivery of the
remaining Shares then held in the Employer Stock Fund shall be withheld. The
Plan Administrator shall furnish, or cause to be furnished, to each Member whose
Account is invested in whole or in part in the Employer Stock Fund, all
information concerning such tender or other offer furnished by the issuer of
Shares, or information furnished by or on behalf of the person making such
tender or other offer.
9.06 APPRAISAL RIGHTS
Each person with an interest in the Employer Stock Fund shall have the
right to participate confidentially in the exercise of dissent and appraisal
rights appurtenant to Shares held in the Employer Stock Fund; provided, however,
that such person has an interest in the Employer Stock Fund as of the most
recent Valuation Date coincident with or preceding the applicable record date
for which records are available. Such participation shall be achieved by
completing and filing with the inspector of elections, the Trustee or such other
person who shall be independent of the issuer of Shares as the Plan
Administrator shall designate, at least 10 days prior to the date of the meeting
of holders of Shares at which such voting rights will be exercised, a written
direction in the form and manner prescribed by the Plan Administrator. The
inspector of elections, the Trustee or such other person designated by the Plan
Administrator shall tabulate the directions given on a strictly confidential
basis, and shall provide the Plan Administrator with only the final results of
the tabulation. The final results of the tabulation shall be followed by the
Plan Administrator in directing the Trustee as to the manner in which such
dissent and appraisal rights shall be exercised. As to each matter giving rise
to dissent and appraisal rights, the Plan Administrator shall direct the Trustee
to exercise such rights as to a number of Shares equal to:
(a) the total number of Shares then held in the Employer Stock Funds
as of the applicable record date; and
(b) a fraction, the numerator of which is the aggregate value (as of
the Valuation Date coincident with or immediately preceding the applicable
record date) of the interests in the Employer Stock Fund of all persons
directing that dissent and appraisal rights be exercised be cast, and the
denominator of which is the aggregate value (as of the Valuation Date
coincident with or immediately preceding the applicable record date) of the
entirety of the Employer Stock Fund.
The Trustee shall not exercise dissent and appraisal rights with respect to the
remainder of the Shares held in the Employer Stock Fund. The Plan Administrator
shall furnish, or cause to be furnished, to each person with an interest in the
Employer Stock Fund, all annual reports, proxy materials and other information
known to have been furnished by the issuer of Shares or by any proxy solicitor,
to the holders of Shares with respect to availability, and consequences of
exercise, of dissent and appraisal rights.
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<PAGE> 10
14. Article X - A new section 10.07 shall be added and the existing section
10.07 shall be renumbered section 10.08 will all section numbers and
cross-references renumbered accordingly, such new section 10.07 shall read
in its entirety as follows:
10.07 DISTRIBUTION IN SHARES
Subject to such terms and conditions as may be established from
time to time by the Plan Administrator, the portion of any distribution
that is attributable to the interest of a Member, Former Member or
Beneficiary in the Employer Stock Fund shall, if the payment recipient so
requests, be paid wholly or partially in Shares. In such event, the maximum
number of Shares to be distributed shall be the number of whole Shares that
could have been purchased with the Member's, Former Member's or
Beneficiary's interest in the Employer Stock Fund on the basis of the value
of such interest as of the Valuation Date for the distribution and the fair
market value of a Share on such Valuation Date. Fair market value for this
purpose shall be determined in such uniform and nondiscriminatory manner as
the Plan Administrator may prescribe. Any remaining vested balance of the
Member, Former Member or Beneficiary in the Employer Stock Fund shall be
paid in cash or cash equivalents.
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PROFIT INCENTIVE BONUS PLAN
OF
HUDSON CITY SAVINGS BANK
AMENDMENT
---------
1. ARTICLE 1 -- Effective as of September 30, 1999, Section 1.41 shall be
amended in its entirety to read as follows:
1.41 "QUARTER" means, for periods ending before October 31, 1999,
the three month periods ending on the last day of December, March, June and
September and, for periods ending on and after October 31, 1999, the three
month periods ending on the last day of October, January, April and July.
The period from October 1, 1999 through and including October 31, 1999
shall be considered to be a Quarter.
2. ARTICLE IV -- Effective as of September 30, 1999, Section 4.03 is amended
to read in its entirety as follows:
4.03 PAYMENT OF BANK CONTRIBUTIONS
Subject to an election made by a Member pursuant to Section
4.04, the Bank Contributions for any Plan Year shall be paid to
the Trust Fund before the due date of the Bank's Federal income
tax return for such year, including any extensions thereof
except for the Bank Contributions made pursuant to Section
4.01(b)(ii)(A) which shall be paid to the Trust Fund on May 31,
1999. The Bank Contributions shall be credited to Member's
accounts as of the Valuation Date on or next following the date
paid into the Trust Fund.
3. ARTICLE IV -- Effective as of September 30, 1999, Section 4.04(a) shall be
amended to add the following sentence at the end thereof:
The Plan Administrator shall have the discretion to require elections to be
made on or before a date other than August 15th of a Plan Year if it
determines necessary or appropriate to comply with applicable securities
laws.
4. ARTICLE IV -- Effective as of September 30, 1999, Section 4.05 is amended
by deleting "September Valuation Date" and substituting "October Valuation
Date" therefor.
5. ARTICLE VI -- Effective as of September 30, 1999, Section 6.03 is amended
by deleting "September Valuation Date" and substituting "October Valuation
Date" therefor.
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6. Article VII - Effective as of September 30, 1999, the first sentence of
Section 8.02(a) shall be amended in its entirety to read as follows:
A Member may change his investment direction by filing a notice not less
than ten days (or such other dates as are prescribed by the Plan
Administrator from time to time) before any Valuation Date in the form and
manner prescribed by the Plan Administrator, which notice may be rescinded
(by written notice to the Plan Administrator) on or prior to the last date
by which notices must be received.
7. Article VIII - Effective as of September 30, 1999, the first sentence of
Section 8.03(a) shall be amended in its entirety to read as follows:
A Member may direct that multiples of 10% of the units in any Investment
Fund be redeemed and the proceeds applied to the purchase for him of units
in another Investment Fund or Funds, as the case may be, by filing a notice
not less than ten days (or such other dates as are prescribed by the Plan
Administrator from time to time) before any Valuation Date in the form and
manner prescribed by the Plan Administrator, which notice may be rescinded
(by written notice to the Plan Administrator) on or prior to the last date
by which notices must be received.
8. Article X - Effective as of September 30, 1999, Section 10.05 is amended by
deleting the words "September Valuation Date" and substituting "October
Valuation Date" therefor.
9. Article X - Effective as of September 30, 1997, Section 10.06(e) is amended
by deleting "$3,500" and substituting "$5,000" therefor.
10. Article X - Effective as of September 30, 1999, the first sentence of
Section 10.08(c) is amended in its entirety to read as follows:
A request for a loan shall be filed in the form and manner prescribed by
the Plan Administrator at least ten days (or such other dates as are
prescribed by the Plan Administrator from time to time) before the end of a
Quarter, which request may be rescinded (by written notice to the Plan
Administrator) on or prior to the last date by which requests must be
received; the loan, if approved by the Plan Administrator under such
uniform rules as it shall adopt, shall be effected as of the Valuation Date
for such Quarter, and the proceeds disbursed to the Member as soon
thereafter as practicable.
11. Article X - Effective as of September 30, 1997, Section 10.10 is amended by
deleting "$3,500" and substituting "$5,000" therefor.
12. Article XIII - Effective as of September 30, 1997, Section 13.05 is amended
by deleting "$3,500" wherever it appears and substituting "$5,000"
therefor.
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EXHIBIT 11.1
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
For the Year Ended December 31, 1999
<TABLE>
<S> <C>
1. Net income (from July 13, 1999).................... $ 54,440,000
2. Total weighted average common shares outstanding... 114,767,331
3. Basic earnings per share........................... $ 0.47
4. Diluted earnings per share......................... $ 0.47
</TABLE>
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EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Hudson City Bancorp, Inc.:
We consent to the incorporation by reference in Registration Statement No.
333-95193 on Form S-8 of Hudson City Bancorp, Inc. of our report dated January
10, 2000, relating to the consolidated statements of financial condition of
Hudson City Bancorp, Inc. and subsidiary as of December 31, 1999 and 1998, and
the related consolidated statements of income, changes in stockholders' equity,
and cash flows for each of the years in the three-year period ended December 31,
1999, which report appears in the Annual Report on Form 10-K of Hudson City
Bancorp, Inc. for the year ended December 31, 1999.
Short Hills, New Jersey /s/ KPMG LLP
March 28, 2000 --------------------------
KPMG LLP
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS STATEMENT CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED STATEMENT OF CONDITION AND CONSOLIDATED CONDENSED
STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 84,239
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 116,600
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 812,058
<INVESTMENTS-CARRYING> 3,098,451
<INVESTMENTS-MARKET> 3,086,944
<LOANS> 4,305,875
<ALLOWANCE> 20,010
<TOTAL-ASSETS> 8,518,865
<DEPOSITS> 6,688,044
<SHORT-TERM> 0
<LIABILITIES-OTHER> 51,781
<LONG-TERM> 300,000
0
0
<COMMON> 1,156
<OTHER-SE> 1,477,884
<TOTAL-LIABILITIES-AND-EQUITY> 8,518,865
<INTEREST-LOAN> 284,974
<INTEREST-INVEST> 248,174
<INTEREST-OTHER> 2,933
<INTEREST-TOTAL> 536,081
<INTEREST-DEPOSIT> 295,717
<INTEREST-EXPENSE> 298,832
<INTEREST-INCOME-NET> 237,249
<LOAN-LOSSES> 2,350
<SECURITIES-GAINS> (7)
<EXPENSE-OTHER> 68,408
<INCOME-PRETAX> 171,236
<INCOME-PRE-EXTRAORDINARY> 171,236
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 107,386
<EPS-BASIC> 0.47
<EPS-DILUTED> 0.47
<YIELD-ACTUAL> 2.94
<LOANS-NON> 11,303
<LOANS-PAST> 2,724
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 17,712
<CHARGE-OFFS> 73
<RECOVERIES> 21
<ALLOWANCE-CLOSE> 20,010
<ALLOWANCE-DOMESTIC> 13,318
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 6,692
</TABLE>
