HCBK (MM)

PARAMUS, N.J., April 21 /PRNewswire-FirstCall/ -- Hudson City Bancorp, Inc. (Nasdaq: HCBK), the holding company for Hudson City Savings Bank, reported today that net income for the first quarter of 2010 increased 16.6% to $148.9 million as compared to $127.7 million for the first quarter of 2009.  Diluted earnings per share increased 15.4% to $0.30 for the first quarter of 2010 as compared to $0.26 for the first quarter of 2009.  Net interest margin widened to 2.20% for the first quarter of 2010 as compared to 2.06% for the first quarter of 2009.  The Board of Directors declared a quarterly cash dividend of $0.15 per share payable on May 28, 2010 to shareholders of record on May 5, 2010.

Net income for the quarter included pre-tax securities gains of $30.8 million from the sale of $573.7 million of mortgage-backed securities partially offset by $8.5 million of accelerated premium amortization and loss of income on $1.13 billion of mortgage-backed securities repurchased by the Federal Home Loan Mortgage Corporation ("FHLMC"), a government-sponsored entity ("GSE").  See further discussion in the Statement of Financial Condition Summary.  The securities gains and the effects of the GSE repurchase increased diluted earnings per share by $0.03.

Ronald E. Hermance, Jr., Chairman, President and Chief Executive Officer commented, "We are very pleased to report first quarter diluted earnings per share of $0.30.  As we noted at the end of last quarter, we had $364.1 million of unrealized gains in our mortgage-backed securities available-for-sale portfolio.  We invest only in U.S. Government and GSE securities which minimizes credit risk from our securities portfolio.  This allows us to more easily analyze total return on our available for sale portfolio.  In periods of declining interest rates, our income on these securities decreases, but the market value increases.  We decided to take advantage of the current market conditions and capture some of the market gains because we believe principal prepayments will continue to remain high and interest rates will eventually increase."

Mr. Hermance continued, "Due primarily to the GSE repurchase mentioned above, our net interest margin decreased to 2.20% from 2.30% in the fourth quarter of 2009.  Also, repayments on our mortgage portfolio increased during 2009 and through the first quarter of 2010.  This increased level of repayments has caused our annual growth rate, which is the annualized increase in our total assets, to decrease to approximately 6.4% in the first quarter of 2010 from 11.3% in 2009.  However, we believe that the slower growth rate, while it may impact earnings in the short-term, is a better alternative to a higher growth rate at reduced yields.  We believe it is more prudent to preserve our capital until market conditions allow for more profitable and sustainable long-term growth."

Mr. Hermance further commented, "Non-performing loans increased $117.2 million during the first quarter to $744.9 million and our net charge-offs for the quarter were $24.2 million.  While there are signs that the economy and housing markets are stabilizing, the elevated level of unemployment and the extended length of time that it takes to complete a foreclosure may continue to result in higher levels of non-performing loans.  However, we believe that the relatively low loan-to-value ratios on our mortgage loans at the time of origination have moderated our losses."

Mr. Hermance concluded, "While an uncertain economy and the potential effects of the various government programs and regulatory proposals will make 2010 a challenging year, we believe that our strong balance sheet, capital position and our straightforward business model will continue to serve our shareholders well.  Our sights are set on our long-term goals. We are well-positioned for the eventual increase in interest rates and the growth opportunities that should accompany a stronger economy.  We enjoy a stronger competitive position in mortgage originations than we did before the economic crisis began, and we remain optimistic about the future."  

Financial highlights for the first quarter of 2010 are as follows:

• Basic and diluted earnings per share were both $0.30 for the first quarter of 2010 as compared to $0.26 for both basic and diluted earnings per share for the first quarter of 2009.
• The Board of Directors declared a quarterly cash dividend of $0.15 per share payable on May 28, 2010 to shareholders of record at the close of business on May 5, 2010.
• Net income amounted to $148.9 million for the first quarter of 2010, as compared to $127.7 million for the first quarter of 2009, an increase of 16.6%.  
• Net interest income increased 16.7% to $331.1 million for the first quarter of 2010 as compared to $283.8 million for the first quarter of 2009.
• The provision for loan losses amounted to $50.0 million for the first quarter of 2010 as compared to $45.0 million for the linked fourth quarter of 2009 and $20.0 million for the first quarter of 2009.  
• Our annualized return on average assets and annualized return on average shareholders' equity for the first quarter of 2010 were 0.98% and 10.96%, respectively, as compared to 0.93% and 10.21%, respectively, for the first quarter of 2009.
• Our net interest rate spread and net interest margin were 1.97% and 2.20%, respectively, for the first quarter of 2010 as compared to 1.75% and 2.06%, respectively, for the first quarter of 2009.
• Our efficiency ratio was 18.27% for the first quarter of 2010 compared with 19.15% for the first quarter of 2009.  The efficiency ratio is calculated by dividing non-interest expense by the sum of net interest income and non-interest income.  
• Our loan production was $1.80 billion for the first three months of 2010, which resulted in a net increase of $311.1 million in total loans to $32.09 billion at March 31, 2010 from $31.78 billion at December 31, 2009.  
• Deposits increased $810.8 million, or 3.3%, to $25.39 billion at March 31, 2010 from $24.58 billion at December 31, 2009.

Statement of Financial Condition Summary

Total assets increased $963.9 million, or 1.6%, to $61.23 billion at March 31, 2010 from $60.27 billion at December 31, 2009. The increase in total assets reflected a $693.4 million increase in total mortgage-backed securities and a $291.7 million increase in net loans.  

The increase in loans reflected our focus on loan portfolio growth through the origination of one- to four-family first mortgage loans in New Jersey, New York and Connecticut and, to a lesser extent, the continued purchase of mortgage loans.  We are a portfolio lender and do not sell loans in the secondary market or to the GSEs.  For the first three months of 2010, we originated $1.40 billion and purchased $404.2 million of loans, compared to originations of $1.32 billion and purchases of $723.3 million for the first three months of 2009.  The origination and purchases of loans were partially offset by principal repayments of $1.45 billion for the first quarter of 2010 as compared to $1.35 billion for the first quarter of 2009.  Loan originations have increased primarily due to an increase in mortgage refinancing caused by market interest rates that are at near-historic lows as well as a modest increase in home sales activity.  The refinancing activity has also caused an increase in principal repayments.

Total mortgage-backed securities increased $693.4 million during the first three months of 2010, reflecting purchases of $2.77 billion of variable-rate mortgage-backed securities issued by GSEs. The increase was partially offset by repayments received of $1.55 billion (excluding principal receivable on FHLMC mortgage-backed securities) and sales of $573.7 million, which resulted in a net realized securities gain of $30.8 million (pre-tax).  We believe that the continued elevated levels of prepayments and the eventual increase in interest rates will reduce the amount of unrealized gains available in the portfolio.  Accordingly, we sold these securities to take advantage of the favorable pricing that currently exists in the market.

During the first quarter of 2010, the Federal National Mortgage Association ("FNMA") and FHLMC announced that they would be repurchasing certain non-performing loans that are in mortgage-backed securities that they issued (the "GSE repurchase").  Since FHLMC remits principal payments to us generally with a 45 day delay, we will not receive the proceeds until April 2010.  Included in mortgage-backed securities at March 31, 2010 is principal receivable of $1.13 billion related to the GSE repurchase.  We plan on reinvesting these proceeds in mortgage-backed securities.  Commitments to purchase mortgage-backed securities totaled $1.89 billion at March 31, 2010.

Total liabilities increased $907.0 million, or 1.7%, to $55.84 billion at March 31, 2010 from $54.93 billion at December 31, 2009.  The increase in total liabilities primarily reflected an $810.8 million increase in deposits. The increase in total deposits reflected a $329.7 million increase in our time deposits, a $202.7 million increase in our money market checking accounts and a $289.2 million increase in our interest-bearing transaction accounts and savings accounts. Borrowings amounted to $29.98 billion at March 31, 2010, unchanged from December 31, 2009.  During the first three months of 2010, we modified $1.33 billion of borrowings to extend the call dates of the borrowings by between three and four years, thereby reducing our interest rate risk and the amount of borrowings that may be called in any one quarter.  Due to brokers amounted to $125.6 million as compared to $100.0 million at December 31, 2009. Due to brokers at March 31, 2010 represents securities purchased in the first quarter of 2010 with settlement dates in the second quarter of 2010.

Total shareholders' equity increased $56.9 million to $5.40 billion at March 31, 2010 from $5.34 billion at December 31, 2009. The increase was primarily due to net income of $148.9 million for the quarter ended March 31, 2010. These increases to shareholders' equity were partially offset by cash dividends paid to common shareholders of $74.0 million and a $26.0 million decrease in accumulated other comprehensive income primarily due to a decrease in the net unrealized gain on securities available-for-sale.  This decrease was due primarily to the sale of mortgage-backed securities during the first quarter of 2010 which resulted in a net realized gain of $30.8 million.  At March 31, 2010, our shareholders' equity to asset ratio was 8.81% and our tangible book value per share was $10.63.

The accumulated other comprehensive income of $158.5 million at March 31, 2010 includes a $179.5 million after-tax net unrealized gain on securities available for sale ($303.4 million pre-tax) partially offset by a $21.0 million after-tax accumulated other comprehensive loss related to the funded status of our employee benefit plans.  

Statement of Income Summary

The Federal Open Market Committee of the Board of Governors of the Federal Reserve System (the "FOMC") noted that economic activity has continued to strengthen and that the labor market is stabilizing during the first quarter of 2010.  The national unemployment rate decreased to 9.7% in March 2010 as compared to 10.0% in December 2009 and 9.8% in September 2009.  Although there has been recent improvement in the economy, the FOMC decided to maintain the overnight lending rate at zero to 0.25% during the first quarter of 2010. As a result, short-term market interest rates have remained at low levels during the first quarter of 2010.  This allowed us to continue to re-price our short-term deposits thereby reducing our cost of funds. The yields on mortgage-related assets have also remained at relatively low levels due primarily to the Federal Reserve's program to purchase mortgage-backed securities.  While the intent of this program was to stimulate the housing market, it also resulted in additional price competition for mortgage loans which are our primary product.  The Federal Reserve ended this program on March 31, 2010 and we anticipate that this will allow us to grow our loan portfolio at a faster rate than in recent quarters.  As compared to the first quarter of 2009, our net interest rate spread and net interest margin increased for the first quarter of 2010 as we repriced deposits to lower rates during 2009 at a faster pace than our interest-earning assets repriced.  However, our net interest margin decreased to 2.20% during the first quarter of 2010 from 2.30% for the fourth quarter of 2009 as yields on interest-earning assets continued to decrease as consumers refinanced mortgage loans to lower rates.  

Net interest income increased $47.3 million, or 16.7%, to $331.1 million for the first quarter of 2010 as compared to $283.8 million for the first quarter of 2009. During the first quarter of 2010, our net interest rate spread increased 22 basis points to 1.97%, as compared to 1.75% for the same quarter in 2009. Our net interest margin increased 14 basis points to 2.20% as compared to 2.06% for the first quarter of 2009.

Total interest and dividend income for the first quarter of 2010 increased $11.6 million, or 1.6%, to $734.9 million as compared to $723.3 million for the first quarter of 2009. The increase in total interest and dividend income was primarily due to a $5.18 billion, or 9.6%, increase in the average balance of total interest-earning assets to $59.08 billion for the first quarter of 2010 as compared to $53.90 billion for the first quarter of 2009.  The increase in the average balance of total interest-earning assets was partially offset by a decrease of 39 basis points in the annualized weighted-average yield to 4.98% for the quarter ended March 31, 2010 from 5.37% for the same quarter in 2009.

Interest on first mortgage loans increased $14.0 million to $428.2 million for the first quarter of 2010 as compared to $414.2 million for the same period in 2009. This was primarily due to a $2.15 billion increase in the average balance of first mortgage loans, reflecting our continued emphasis on the growth of our mortgage loan portfolio. The increase in the average balance of first mortgage loans was partially offset by a 21 basis point decrease in the weighted-average yield to 5.44% from 5.65% for the 2009 first quarter.  

Interest on mortgage-backed securities decreased $19.2 million to $231.7 million for the first quarter of 2010 as compared to $250.9 million for the first quarter of 2009.  This decrease was due primarily to a 59 basis point decrease in the weighted-average yield to 4.57% for the first quarter of 2010 from 5.16% for the first quarter of 2009. The decrease in the weighted-average yield was partially offset by an $826.2 million increase in the average balance of mortgage-backed securities to $20.26 billion during the first quarter of 2010 as compared to $19.44 billion for the first quarter of 2009.

The increases in the average balances of mortgage-backed securities were due to purchases of these securities.  We purchase these securities as part of our overall management of interest rate risk and to provide us with a source of monthly cash flows.  The decrease in the weighted average yield on mortgage-backed securities is a result of lower yields on securities purchased during 2009 and the first three months of 2010 when market interest rates were lower than the yield earned on the existing portfolio.

The GSE repurchase resulted in the repayment of approximately $1.13 billion of principal on the mortgage-backed securities.  Since FHLMC remits payments to us generally with a 45 day delay, we will not receive the proceeds until April 2010. The amount of the repayment was recorded as principal receivable and is included in mortgage-backed securities at March 31, 2010.  We do not earn interest on the principal receivable.  As a result, net interest income for the first quarter of 2010 was adversely affected by approximately $3.6 million of amortization of purchase premiums and the loss of interest income on the principal receivable of approximately $4.9 million.

Interest on investment securities increased $11.7 million to $57.4 million for the first quarter of 2010 as compared to $45.7 million for the same period in 2009.  This increase was due primarily to a $1.61 billion increase in the average balance of investment securities to $5.30 billion for the first quarter of 2010 from $3.69 billion for the first quarter of 2009.  The impact on interest income from the increase in the average balance of investment securities was partially offset by a decrease in the average yield of investment securities of 62 basis points to 4.33%.  

Dividends on Federal Home Loan Bank of New York ("FHLB") stock increased $6.0 million, or 93.8%, to $12.4 million for the first quarter of 2010 as compared to $6.4 million for the first quarter of 2009.  This increase was due primarily to a 274 basis point increase in the average dividend yield earned to 5.66% as compared to 2.92% for the first quarter of 2009.  The increase in dividend income was also due to a $2.7 million increase in the average balance to $874.8 million for the first quarter of 2010 as compared to $872.1 million for the same period in 2009.

Interest on Federal funds sold amounted to $449,000 for the first quarter of 2010 as compared to $176,000 for the first quarter of 2009.  The average balance of Federal funds sold amounted to $789.3 million for the first quarter of 2010 as compared to $146.8 million for the first quarter of 2009.  The yield earned on Federal funds sold was 0.23% for the 2010 first quarter and 0.49% for the 2009 first quarter.  The increase in the average balance of Federal funds sold is a result of liquidity provided by strong deposit growth and increased levels of repayments on mortgage-related assets.  

Total interest expense for the quarter ended March 31, 2010 decreased $35.8 million, or 8.2%, to $403.7 million as compared to $439.5 million for the quarter ended March 31, 2009.  This decrease was primarily due to a 61 basis point decrease in the weighted-average cost of total interest-bearing liabilities to 3.01% for the quarter ended March 31, 2010 compared with 3.62% for the quarter ended March 31, 2009. The decrease was partially offset by a $5.16 billion, or 10.5%, increase in the average balance of total interest-bearing liabilities to $54.39 billion for the quarter ended March 31, 2010 compared with $49.23 billion for the first quarter of 2009. This increase in interest-bearing liabilities was primarily used to fund asset growth.

Interest expense on deposits decreased $34.9 million, or 25.1%, to $103.9 million for the first quarter of 2010 as compared to $138.8 million for the first quarter of 2009.  This decrease is due primarily to a decrease in the average cost of interest-bearing deposits of 125 basis points to 1.73% for the first quarter of 2010 as compared to 2.98% for the first quarter of 2009.  The decrease was partially offset by a $5.55 billion increase in the average balance of interest-bearing deposits to $24.41 billion during the first quarter of 2010 as compared to $18.86 billion for the first quarter of 2009.

The increases in the average balances of interest-bearing deposits reflect our plan to expand our branch network and to grow deposits in our existing branches by offering competitive rates.  Also, in response to the economic conditions in 2009, we believe that households increased their personal savings and customers sought insured bank deposit products as an alternative to investments such as equity securities and bonds.  We believe these factors contributed to our deposit growth.  The decrease in the average cost of deposits for 2010 reflected lower market interest rates.  At March 31, 2010, time deposits scheduled to mature within one year totaled $12.27 billion with an average cost of 1.67%.  These time deposits are scheduled to mature as follows: $5.82 billion with an average cost of 1.69% in the second quarter of 2010, $3.72 billion with an average cost of 1.55% in the third quarter of 2010, $1.21 billion with an average cost of 1.72% in the fourth quarter of 2010 and $1.52 million with an average cost of 1.84% in the first quarter of 2011.  The current yields offered for our six month, one year and two year time deposits are 1.05%, 1.25% and 1.85%, respectively.  In addition, our money market accounts are currently yielding 1.0%.  Based on our deposit retention experience and current pricing strategy, we anticipate that a significant portion of these time deposits will remain with us as renewed time deposits or as transfers to other deposit products at the prevailing rate.

Interest expense on borrowed funds decreased $861,000 to $299.8 million for the first quarter of 2010 as compared to $300.7 million for the first quarter of 2009. This was primarily due to a $391.6 million decrease in the average balance of borrowed funds to $29.98 billion for the first quarter of 2010 as compared to $30.37 billion for the first quarter of 2009. The weighted-average cost of borrowed funds amounted to 4.06% for the first quarter of 2010 as compared to 4.02% for the first quarter of 2009.

We have historically used borrowings to fund a portion of the growth in interest-earning assets.  However, we were able to fund substantially all of our growth in 2009 and for the first quarter of 2010 with deposits.  We anticipate that we will be able to continue to use deposit growth to fund our asset growth, however, we may use borrowings as a supplemental funding source if deposit growth decreases.  Substantially all of our borrowings are callable quarterly at the discretion of the lender after an initial non-call period of one to five years with a final maturity of ten years.  We believe, given current market conditions, that the likelihood that a significant portion of these borrowings would be called will not increase substantially unless interest rates were to increase by at least 300 basis points.  During the first three months of 2010, we modified $1.33 billion of borrowings to extend the call dates of the borrowings by between three and four years, thereby reducing our interest rate risk.  

The provision for loan losses amounted to $50.0 million for the quarter ended March 31, 2010 as compared to $20.0 million for the quarter ended March 31, 2009.  The increase in the provision for loan losses was due primarily to an increase in non-performing loans and charge-offs as well as the continuing elevated levels of unemployment during the first quarter of 2010.  Non-performing loans, defined as non-accruing loans and accruing loans delinquent 90 days or more, amounted to $744.9 million at March 31, 2010 compared with $627.7 million at December 31, 2009. The ratio of non-performing loans to total loans was 2.32% at March 31, 2010 compared with 1.98% at December 31, 2009.  Early-stage delinquencies (loans that are past due 30 to 89 days) decreased in the first quarter of 2010.  Loans delinquent 30 to 59 days decreased $60.2 million to $370.7 million at March 31, 2010 as compared to $430.9 million at December 31, 2009.  Loans delinquent 60 to 89 days decreased $11.0 million to $171.5 million at March 31, 2010 as compared to $182.5 million at December 31, 2009.  The allowance for loan losses amounted to $165.8 million and $140.1 million at March 31, 2010 and December 31, 2009, respectively.  The allowance for loan losses as a percent of total loans and as a percent of non-performing loans was 0.52% and 22.26%, respectively at March 31, 2010, as compared to 0.44% and 22.32%, respectively at December 31, 2009.  

Net charge-offs amounted to $24.2 million for the quarter ended March 31, 2010 as compared to net charge-offs of $4.7 million for the same quarter in 2009.  We generally obtain new collateral values for loans on or before 180 days of delinquency.  If the estimated fair value of the collateral (less estimated selling costs) is less than the recorded investment in the loan, we charge-off an amount to reduce the loan to the fair value of the collateral less estimated selling costs.  As a result, certain losses inherent in our non-performing loans are being recognized as charge-offs which may result in a lower ratio of the allowance for loan losses to non-performing loans.

Total non-interest income was $33.0 million for the first quarter 2010 as compared to $2.3 million for the same quarter in 2009. Included in non-interest income for the quarter ended March 31, 2010 were net gains on securities transactions of $30.8 million which resulted from the sale of $573.7 million of mortgage-backed securities available-for-sale.

Total non-interest expense increased $11.7 million, or 21.4%, to $66.5 million for the first quarter of 2010 from $54.8 million for the first quarter of 2009.  The increase is primarily due to increases of $10.0 million in Federal deposit insurance expense and $1.5 million increase in compensation and employee benefits expense.  The increase in Federal deposit insurance expense is due primarily to the increases in our deposit insurance assessment rate as a result of a restoration plan implemented by the FDIC to recapitalize the Deposit Insurance Fund.  The increase in compensation and employee benefits expense included a $2.0 million increase in compensation costs, due primarily to normal increases in salary as well as additional full time employees and an $838,000 increase in expense related to our stock benefit plans.  These increases were partially offset by a $1.1 million decrease in costs related to our health plan and $798,000 decrease in pension expense.  At March 31, 2010, we had 1,500 full-time equivalent employees as compared to 1,458 at March 31, 2009.  Included in other non-interest expense for the first quarter of 2010 were write-downs on foreclosed real estate and net losses on the sale of foreclosed real estate of $1.4 million as compared to $1.2 million for the first quarter of 2009.  

Our efficiency ratio was 18.27% for the 2010 first quarter as compared to 19.15% for the 2009 first quarter.  The efficiency ratio is calculated by dividing non-interest expense, by the sum of net interest income and non-interest income.  Our annualized ratio of non-interest expense to average total assets for the first quarter of 2010 was 0.44% as compared to 0.40% for the first quarter of 2009.  

Income tax expense amounted to $98.7 million for the first quarter of 2010 compared with $83.6 million for the same quarter in 2009.  Our effective tax rate for the first quarter of 2010 was 39.87% compared with 39.58% for the first quarter of 2009.  

Hudson City Bancorp maintains its corporate offices in Paramus, New Jersey. Hudson City Savings Bank, a well-established community financial institution serving its customers since 1868, is ranked in the top twenty-five U.S. financial institutions by asset size and is the largest thrift institution headquartered in New Jersey.  Hudson City Savings Bank currently operates a total of 131 branch offices in the New York metropolitan area.

Forward-Looking Statements

This release may contain 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 "may," "believe," "expect," "anticipate," "should," "plan," "estimate," "predict," "continue," and "potential" or the negative of these terms or other comparable terminology.  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. Any or all of the forward-looking statements in this release and in any other public statements made by Hudson City Bancorp may turn out to be wrong. They can be affected by inaccurate assumptions Hudson City Bancorp might make or by known or unknown risks and uncertainties. Consequently, no forward-looking statement can be guaranteed. Hudson City Bancorp does not intend to update any of the forward-looking statements after the date of this release or to conform these statements to actual events.

TABLES FOLLOW

• Charge-offs amounted to $24.2 million for the first quarter of 2010, consisting of 297 loans.  These charge-offs include $22.6 million that relate to loans that are still in the loan portfolio at March 31, 2010 and are working through the foreclosure process.
• Updated valuations are received on or before the time a loan becomes 180 days past due.  If necessary, we charge-off an amount to reduce the loan's carrying value to the updated valuation less estimated selling costs.  Our policy is that we receive an updated valuation for these loans annually.
• The average loan-to-value ratio, using appraised values at time of origination, of our non-performing one- to four-family mortgage loans and total one- to four-family mortgage loans was 71.8% and 61.1%, respectively at March 31, 2010.
• Based on the valuation indices, house prices have declined in the New York metropolitan area, where 64.6% of our non-performing loans were located at March 31, 2010, by approximately 21.0% from the peak of the market in 2006 through January 2010 and by 29.1% nationwide during that period.  From July 2009 through January 2010, the house price indices decreased by 2.0% in the New York metropolitan area and increased 1.1% nationwide.
• Our quantitative analysis of the allowance for loan losses considers the results of the reappraisal process as well as the results of our foreclosed property transactions.
• Our qualitative analysis of the allowance for loan losses includes a further evaluation of economic factors, such as trends in the unemployment rate, as well as ratio analysis to evaluate the overall measurement of the allowance for loan losses.  This analysis includes a review of delinquency ratios, house price indices, net charge-off ratios and the ratio of the allowance for loan losses to both non-performing loans and total loans.

• During the first three months of 2010, we sold 8 foreclosed properties.  It is currently taking up to 30 months to foreclose on a loan once it becomes non-performing.