UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the quarterly period ended:
March 31, 2010
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o
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the transition period from
to
Commission File Number: 0-26001
Hudson City Bancorp, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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22-3640393
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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West 80 Century Road
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Paramus, New Jersey
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07652
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(Address of Principal Executive Offices)
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(Zip Code)
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(201) 967-1900
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes
þ
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
þ
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Accelerated filer
o
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Non-accelerated filer
o
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Smaller reporting company
o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes
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No
þ
As of May 4, 2010, the registrant had 526,592,530 shares of common stock, $0.01 par value,
outstanding.
Forward-Looking Statements
This Quarterly Report on Form 10-Q 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 corresponding 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, Inc. These
factors include, but are not limited to:
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the timing and occurrence or non-occurrence of events may be subject to circumstances
beyond our control;
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there may be increases in competitive pressure among the financial institutions or from
non-financial institutions;
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changes in the interest rate environment may reduce interest margins or affect the value of
our investments;
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changes in deposit flows, loan demand or real estate values may adversely affect our
business;
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changes in accounting principles, policies or guidelines may cause our financial condition
to be perceived differently;
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general economic conditions, including unemployment rates, either nationally or locally in
some or all of the areas in which we do business, or conditions in the securities markets or
the banking industry may be less favorable than we currently anticipate;
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legislative or regulatory changes may adversely affect our business;
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applicable technological changes may be more difficult or expensive than we anticipate;
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success or consummation of new business initiatives may be more difficult or expensive than
we anticipate;
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litigation or matters before regulatory agencies, whether currently existing or commencing
in the future, may delay the occurrence or non-occurrence of events longer than we anticipate;
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the risks associated with adverse changes to credit quality, including changes in the level
of loan delinquencies and non-performing assets and charge-offs, the length of time our
non-performing assets remain in our portfolio and changes in estimates of the adequacy of the
allowance for loan losses;
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difficulties associated with achieving or predicting expected future financial results;
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our ability to diversify our finding sources and to continue to access the wholesale
borrowing market and the capital markets; and
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the risk of a continued economic slowdown that would adversely affect credit quality and
loan originations.
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Our ability to predict results or the actual effects of our plans or strategies is inherently
uncertain. As such, forward-looking statements can be affected by inaccurate assumptions we might
make or by known or unknown risks and uncertainties. Consequently, no forward-looking statement
can be guaranteed. Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this filing. We do not intend to update any of the
forward-looking statements after the date of this Form 10-Q or to conform these statements to
actual events.
Page 3
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Hudson City Bancorp, Inc. and Subsidiary
Consolidated Statements of Financial Condition
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March 31,
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December 31,
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2010
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2009
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(In thousands, except share and per share amounts)
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(unaudited)
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Assets:
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Cash and due from banks
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$
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124,780
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$
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198,752
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Federal funds sold and other overnight deposits
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350,318
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362,449
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Total cash and cash equivalents
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475,098
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561,201
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Securities available for sale:
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Mortgage-backed securities
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12,662,490
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11,116,531
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Investment securities
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457,538
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1,095,240
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Securities held to maturity:
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Mortgage-backed securities (fair value of $9,432,191 at March 31, 2010
and $10,324,831 at December 31, 2009)
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9,110,956
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9,963,554
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Investment securities (fair value of $4,856,434 at March 31, 2010
and $4,071,005 at December 31, 2009)
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4,887,949
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4,187,704
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Total securities
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27,118,933
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26,363,029
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Loans
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32,090,987
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31,779,921
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Net deferred loan costs
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87,695
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81,307
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Allowance for loan losses
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(165,830
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(140,074
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Net loans
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32,012,852
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31,721,154
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Federal Home Loan Bank of New York stock
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874,768
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874,768
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Foreclosed real estate, net
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19,563
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16,736
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Accrued interest receivable
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301,174
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304,091
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Banking premises and equipment, net
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70,647
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70,116
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Goodwill
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152,109
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152,109
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Other assets
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206,507
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204,556
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Total Assets
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$
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61,231,651
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$
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60,267,760
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Liabilities and Shareholders Equity:
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Deposits:
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Interest-bearing
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$
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24,813,775
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$
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23,992,007
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Noninterest-bearing
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575,025
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586,041
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Total deposits
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25,388,800
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24,578,048
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Repurchase agreements
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15,100,000
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15,100,000
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Federal Home Loan Bank of New York advances
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14,875,000
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14,875,000
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Total borrowed funds
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29,975,000
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29,975,000
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Due to brokers
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125,580
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100,000
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Accrued expenses and other liabilities
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346,194
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275,560
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Total liabilities
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55,835,574
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54,928,608
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Common stock, $0.01 par value, 3,200,000,000 shares authorized;
741,466,555 shares issued; 526,620,063 shares outstanding
at March 31, 2010 and 526,493,676 shares outstanding
at December 31, 2009
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7,415
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7,415
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Additional paid-in capital
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4,689,151
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4,683,414
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Retained earnings
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2,476,277
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2,401,606
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Treasury stock, at cost; 214,846,492 shares at March 31, 2010 and
214,972,879 shares at December 31, 2009
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(1,726,563
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(1,727,579
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Unallocated common stock held by the employee stock ownership plan
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(208,692
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(210,237
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Accumulated other comprehensive income, net of tax
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158,489
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184,533
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Total shareholders equity
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5,396,077
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5,339,152
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Total Liabilities and Shareholders Equity
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$
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61,231,651
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$
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60,267,760
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See accompanying notes to unaudited consolidated financial statements
Page 4
Hudson City Bancorp, Inc. and Subsidiary
Consolidated Statements of Income
(Unaudited)
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For the Three Months
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Ended March 31,
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2010
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2009
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(In thousands, except per share data)
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Interest and Dividend Income:
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First mortgage loans
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$
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428,161
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$
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414,208
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Consumer and other loans
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4,759
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5,990
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Mortgage-backed securities held to maturity
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110,126
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121,931
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Mortgage-backed securities available for sale
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121,592
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128,983
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Investment securities held to maturity
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47,064
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2,358
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Investment securities available for sale
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10,346
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43,303
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Dividends on Federal Home Loan Bank of New York stock
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12,373
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6,373
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Federal funds sold
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449
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176
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Total interest and dividend income
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734,870
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723,322
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Interest Expense:
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Deposits
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103,919
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138,824
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Borrowed funds
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299,806
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300,667
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Total interest expense
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403,725
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439,491
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Net interest income
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331,145
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283,831
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Provision for Loan Losses
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50,000
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20,000
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Net interest income after provision for loan losses
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281,145
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263,831
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Non-Interest Income:
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Service charges and other income
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2,230
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2,125
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Gain on securities transactions, net
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30,768
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148
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Total non-interest income
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32,998
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2,273
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Non-Interest Expense:
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Compensation and employee benefits
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34,162
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32,731
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Net occupancy expense
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8,347
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8,480
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Federal deposit insurance assessment
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12,627
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2,616
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Other expense
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11,395
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10,967
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Total non-interest expense
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66,531
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54,794
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Income before income tax expense
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247,612
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211,310
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Income Tax Expense
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98,727
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83,647
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Net income
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$
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148,885
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$
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127,663
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Basic Earnings Per Share
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$
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0.30
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$
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0.26
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Diluted Earnings Per Share
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$
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0.30
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$
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0.26
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Weighted Average Number of Common Shares Outstanding:
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Basic
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492,564,183
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487,567,802
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Diluted
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493,694,756
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491,326,567
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See accompanying notes to unaudited consolidated financial statements
Page 5
Hudson City Bancorp, Inc. and Subsidiary
Consolidated Statements of Changes in Shareholders Equity
(Unaudited
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For the Three Months
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Ended March 31,
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2010
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2009
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(In thousands, except per share data)
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Common Stock
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$
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7,415
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$
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7,415
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Additional paid-in capital:
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Balance at beginning of year
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4,683,414
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4,641,571
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Stock option plan expense
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2,583
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3,736
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Tax benefit from stock plans
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256
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1,505
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Allocation of ESOP stock
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1,708
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1,332
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RRP stock granted
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(6,771
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)
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Vesting of RRP stock
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1,190
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1,179
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Balance at end of period
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4,689,151
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4,642,552
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Retained Earnings:
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Balance at beginning of year
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2,401,606
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2,196,235
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Net Income
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148,885
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127,663
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Dividends paid on common stock ($0.15 and $0.14 per share, respectively)
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(74,023
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(68,328
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Exercise of stock options
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(191
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)
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(2,209
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)
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Balance at end of period
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2,476,277
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2,253,361
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Treasury Stock:
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Balance at beginning of year
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(1,727,579
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)
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(1,737,838
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)
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Purchase of common stock
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(40,695
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)
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Exercise of stock options
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1,016
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3,147
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RRP stock granted
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6,771
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Balance at end of period
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(1,726,563
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)
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(1,768,615
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)
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Unallocated common stock held by the ESOP:
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Balance at beginning of year
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(210,237
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)
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(216,244
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)
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Allocation of ESOP stock
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1,545
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1,502
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Balance at end of period
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(208,692
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)
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|
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(214,742
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)
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Accumulated other comprehensive income(loss):
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|
|
|
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Balance at beginning of year
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|
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184,533
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|
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47,657
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|
|
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Net unrealized gains (losses) on securities available for sale arising during period,
net of tax benefit (expense) of $5,597 and $(59,751) in 2010 and 2009, respectively
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|
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(8,105
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)
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86,605
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|
Reclassification adjustment for gains in net income, net of tax of expense of $12,569
and $61 in 2010 and 2009, respectively
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|
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(18,199
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)
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(87
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)
|
Pension and other postretirement benefits adjustment, net of tax (expense) benefit of
$(180) and $930 for 2010 and 2009, respectively
|
|
|
260
|
|
|
|
(1,348
|
)
|
|
|
|
|
|
|
|
Other comprehensive income, net of tax
|
|
|
(26,044
|
)
|
|
|
85,170
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
158,489
|
|
|
|
132,827
|
|
|
|
|
|
|
|
|
Total Shareholders Equity
|
|
$
|
5,396,077
|
|
|
$
|
5,052,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary of comprehensive income
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
148,885
|
|
|
$
|
127,663
|
|
Other comprehensive income, net of tax
|
|
|
(26,044
|
)
|
|
|
85,170
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
122,841
|
|
|
$
|
212,833
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited consolidated financial statements.
Page 6
Hudson City Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
148,885
|
|
|
$
|
127,663
|
|
Adjustments to reconcile net income to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation, accretion and amortization expense
|
|
|
21,832
|
|
|
|
11,747
|
|
Provision for loan losses
|
|
|
50,000
|
|
|
|
20,000
|
|
Gains on securities transactions, net
|
|
|
(30,768
|
)
|
|
|
(148
|
)
|
Share-based compensation, including committed ESOP shares
|
|
|
7,026
|
|
|
|
7,749
|
|
Deferred tax benefit
|
|
|
(8,630
|
)
|
|
|
(7,184
|
)
|
Decrease (increase) in accrued interest receivable
|
|
|
2,917
|
|
|
|
(907
|
)
|
Decrease (increase) in other assets
|
|
|
22,245
|
|
|
|
(4,750
|
)
|
Increase in accrued expenses and other liabilities
|
|
|
73,063
|
|
|
|
79,337
|
|
|
|
|
|
|
|
|
Net Cash Provided by Operating Activities
|
|
|
286,570
|
|
|
|
233,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Originations of loans
|
|
|
(1,399,557
|
)
|
|
|
(1,315,546
|
)
|
Purchases of loans
|
|
|
(404,167
|
)
|
|
|
(723,293
|
)
|
Principal payments on loans
|
|
|
1,446,075
|
|
|
|
1,345,615
|
|
Principal collection of mortgage-backed securities held to maturity
|
|
|
892,402
|
|
|
|
333,280
|
|
Purchases of mortgage-backed securities held to maturity
|
|
|
(47,110
|
)
|
|
|
(300,000
|
)
|
Principal collection of mortgage-backed securities available for sale
|
|
|
661,965
|
|
|
|
365,801
|
|
Purchases of mortgage-backed securities available for sale
|
|
|
(2,719,940
|
)
|
|
|
(1,242,355
|
)
|
Proceeds from sales of mortgage backed securities available for sale
|
|
|
604,476
|
|
|
|
|
|
Proceeds from maturities and calls of investment securities held to maturity
|
|
|
300,000
|
|
|
|
50,000
|
|
Purchases of investment securities held to maturity
|
|
|
(1,100,294
|
)
|
|
|
(450,097
|
)
|
Proceeds from maturities and calls of investment securities available for sale
|
|
|
650,000
|
|
|
|
725,000
|
|
Proceeds from sales of investment securities available for sale
|
|
|
|
|
|
|
317
|
|
Purchases of investment securities available for sale
|
|
|
|
|
|
|
(849,450
|
)
|
Purchases of Federal Home Loan Bank of New York stock
|
|
|
|
|
|
|
(29,250
|
)
|
Redemption of Federal Home Loan Bank of New York stock
|
|
|
|
|
|
|
27,000
|
|
Purchases of premises and equipment, net
|
|
|
(2,738
|
)
|
|
|
(2,525
|
)
|
Net proceeds from sale of foreclosed real estate
|
|
|
8,405
|
|
|
|
3,033
|
|
|
|
|
|
|
|
|
Net Cash Used in Investment Activities
|
|
|
(1,110,483
|
)
|
|
|
(2,062,470
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Net increase in deposits
|
|
|
810,752
|
|
|
|
1,971,874
|
|
Proceeds from borrowed funds
|
|
|
|
|
|
|
650,000
|
|
Principal payments on borrowed funds
|
|
|
|
|
|
|
(600,000
|
)
|
Dividends paid
|
|
|
(74,023
|
)
|
|
|
(68,328
|
)
|
Purchases of treasury stock
|
|
|
|
|
|
|
(40,695
|
)
|
Exercise of stock options
|
|
|
825
|
|
|
|
938
|
|
Tax benefit from stock plans
|
|
|
256
|
|
|
|
1,505
|
|
|
|
|
|
|
|
|
Net Cash Provided by Financing Activities
|
|
|
737,810
|
|
|
|
1,915,294
|
|
|
|
|
|
|
|
|
Net (Decrease) increase in Cash and Cash Equivalents
|
|
|
(86,103
|
)
|
|
|
86,331
|
|
Cash and Cash Equivalents at Beginning of Year
|
|
|
561,201
|
|
|
|
261,811
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Period
|
|
$
|
475,098
|
|
|
$
|
348,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
404,820
|
|
|
$
|
441,684
|
|
|
|
|
|
|
|
|
Loans transferred to foreclosed real estate
|
|
$
|
14,362
|
|
|
$
|
1,302
|
|
|
|
|
|
|
|
|
Income tax payments
|
|
$
|
20,277
|
|
|
$
|
2,163
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited consolidated financial statements.
Page 7
1. Organization
Hudson City Bancorp, Inc. (Hudson City Bancorp or the Company) is a Delaware corporation and is
the thrift holding company for Hudson City Savings Bank and its subsidiaries (Hudson City
Savings).
On March 4, 2010, Hudson City Savings filed an application with the Office of the
Comptroller of the Currency (OCC) to convert from a federally chartered stock savings bank to a
national bank (the Application). If the Application is approved, Hudson City Savings will no
longer be a federal savings bank subject to the regulation and examination of the Office of Thrift
Supervision (OTS) and will become a national bank subject to the regulation and examination of
the OCC. In addition, the Company will cease being a savings and loan holding company subject to
the regulation and supervision of the OTS and will become a bank holding company subject to the
regulation and supervision of the Board of Governors of the Federal Reserve System.
While the Company and Hudson City Savings will be subject to different regulatory frameworks
upon completion of the Conversion, the Company does not expect its
business or operations to be materially affected by this change in regulation.
2. Basis of Presentation
The accompanying consolidated financial statements include the accounts of Hudson City Bancorp and
its wholly-owned subsidiary, Hudson City Savings.
In our opinion, all the adjustments (consisting of normal and recurring adjustments) necessary for
a fair presentation of the consolidated financial condition and consolidated results of operations
for the unaudited periods presented have been included. The results of operations and other data
presented for the three-month period ended March 31, 2010 are not necessarily indicative of the
results of operations that may be expected for the year ending December 31, 2010. 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 the results of operations for the period. Actual results could differ from these
estimates. The allowance for loan losses is a material estimate that is particularly susceptible
to near-term change. The current economic environment has increased the degree of uncertainty
inherent in this material estimate.
Certain information and note disclosures usually included in financial statements prepared in
accordance with U.S. generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for the
preparation of the Form 10-Q. The consolidated financial statements presented should be read in
conjunction with Hudson City Bancorps audited consolidated financial statements and notes to
consolidated financial statements included in Hudson City Bancorps 2009 Annual Report to
Shareholders and incorporated by reference into Hudson City Bancorps 2009 Annual Report on Form
10-K.
Page 8
3. Earnings Per Share
The following is a summary of our earnings per share calculations and reconciliation of basic to
diluted earnings per share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Per
|
|
|
|
|
|
|
|
|
|
|
Per
|
|
|
|
|
|
|
|
Average
|
|
|
Share
|
|
|
|
|
|
|
Average
|
|
|
Share
|
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
|
(In thousands, except per share data)
|
|
Net income
|
|
$
|
148,885
|
|
|
|
|
|
|
|
|
|
|
$
|
127,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to
common stockholders
|
|
$
|
148,885
|
|
|
|
492,564
|
|
|
$
|
0.30
|
|
|
$
|
127,663
|
|
|
|
487,568
|
|
|
$
|
0.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive common
stock equivalents
|
|
|
|
|
|
|
1,131
|
|
|
|
|
|
|
|
|
|
|
|
3,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to
common stockholders
|
|
$
|
148,885
|
|
|
|
493,695
|
|
|
$
|
0.30
|
|
|
$
|
127,663
|
|
|
|
491,327
|
|
|
$
|
0.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 9
4. Fair Value and Unrealized Losses of Securities
The following table shows the gross unrealized losses and fair value of the Companys investments
with unrealized losses that are deemed to be temporarily impaired, aggregated by investment
category and length of time that individual securities have been in a continuous unrealized loss
position at March 31, 2010 and December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or Longer
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
|
(In thousands)
|
|
March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
|
$
|
2,969,983
|
|
|
$
|
(29,329
|
)
|
|
$
|
490,420
|
|
|
$
|
(9,345
|
)
|
|
$
|
3,460,403
|
|
|
$
|
(38,674
|
)
|
Mortgage-backed securities
|
|
|
705,057
|
|
|
|
(9,155
|
)
|
|
|
171,896
|
|
|
|
(4,157
|
)
|
|
|
876,953
|
|
|
|
(13,312
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired
securities held to maturity
|
|
|
3,675,040
|
|
|
|
(38,484
|
)
|
|
|
662,316
|
|
|
|
(13,502
|
)
|
|
|
4,337,356
|
|
|
|
(51,986
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
|
|
|
|
|
|
|
|
|
|
368,038
|
|
|
|
(6,670
|
)
|
|
|
368,038
|
|
|
|
(6,670
|
)
|
Mortgage-backed securities
|
|
|
1,012,104
|
|
|
|
(6,179
|
)
|
|
|
114,780
|
|
|
|
(6,694
|
)
|
|
|
1,126,884
|
|
|
|
(12,873
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired
securities available for sale
|
|
|
1,012,104
|
|
|
|
(6,179
|
)
|
|
|
482,818
|
|
|
|
(13,364
|
)
|
|
|
1,494,922
|
|
|
|
(19,543
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,687,144
|
|
|
$
|
(44,663
|
)
|
|
$
|
1,145,134
|
|
|
$
|
(26,866
|
)
|
|
$
|
5,832,278
|
|
|
$
|
(71,529
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
|
$
|
3,930,974
|
|
|
$
|
(117,614
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,930,974
|
|
|
$
|
(117,614
|
)
|
Mortgage-backed securities
|
|
|
618,105
|
|
|
|
(10,749
|
)
|
|
|
171,665
|
|
|
|
(5,727
|
)
|
|
|
789,770
|
|
|
|
(16,476
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired
securities held to maturity
|
|
|
4,549,079
|
|
|
|
(128,363
|
)
|
|
|
171,665
|
|
|
|
(5,727
|
)
|
|
|
4,720,744
|
|
|
|
(134,090
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
|
|
472,545
|
|
|
|
(7,263
|
)
|
|
|
263,730
|
|
|
|
(11,161
|
)
|
|
|
736,275
|
|
|
|
(18,424
|
)
|
Mortgage-backed securities
|
|
|
1,328,008
|
|
|
|
(16,319
|
)
|
|
|
19,690
|
|
|
|
(3
|
)
|
|
|
1,347,698
|
|
|
|
(16,322
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired
securities available for sale
|
|
|
1,800,553
|
|
|
|
(23,582
|
)
|
|
|
283,420
|
|
|
|
(11,164
|
)
|
|
|
2,083,973
|
|
|
|
(34,746
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,349,632
|
|
|
$
|
(151,945
|
)
|
|
$
|
455,085
|
|
|
$
|
(16,891
|
)
|
|
$
|
6,804,717
|
|
|
$
|
(168,836
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The unrealized losses are primarily due to the changes in market interest rates subsequent to
purchase. We only purchase securities issued by U.S. government-sponsored enterprises (GSEs) and
do not own any unrated or private label securities or other high-risk securities such as those
backed by sub-prime loans. Accordingly, it is expected that the securities would not be settled at
a price less than the Companys amortized cost basis. We do not consider these investments to be
other-than-temporarily impaired at March 31, 2010 and December 31, 2009 since the decline in market
value is attributable to changes in interest rates and not credit
quality, the Company has the
intent and ability to hold these investments until there is a full recovery of the unrealized loss,
which may be at maturity and it is not more likely than not that we
will be required to sell these securities before the anticipated
recovery of the remaining amortized cost basis. As a result no impairment loss was recognized during the quarter
ended March 31, 2010 or for the year ended December 31, 2009.
5. Stock Repurchase Programs
Under our previously announced stock repurchase programs, shares of Hudson City Bancorp common
stock may be purchased in the open market and through other privately negotiated transactions,
depending on market conditions. The repurchased shares are held as treasury stock, which may be
reissued for
Page 10
general corporate use. We have not purchased any of our common shares during the three months ended
March 31, 2010. As of March 31, 2010, there remained 50,123,550 shares that may be purchased under
the existing stock repurchase programs.
6. Fair Value Measurements
a) Fair Value Measurements
The Accounting Standards Codification (ASC) Topic 820,
Fair Value Measurements and Disclosures,
defines fair value, establishes a framework for measuring fair value and expands disclosures about
fair value measurements. ASC Topic 820 applies only to fair value measurements already required or
permitted by other accounting standards and does not impose requirements for additional fair value
measures. ASC Topic 820 was issued to increase consistency and comparability in reporting fair
values.
We use fair value measurements to record fair value adjustments to certain assets and to determine
fair value disclosures. We did not have any liabilities that were measured at fair value at March
31, 2010 and December 31, 2009. Our securities available-for-sale are recorded at fair value on a
recurring basis. Additionally, from time to time, we may be required to record at fair value other
assets or liabilities on a non-recurring basis, such as foreclosed real estate owned, certain
impaired loans and goodwill. These non-recurring fair value adjustments generally involve the
write-down of individual assets due to impairment losses.
In accordance with ASC Topic 820-10-35-01, we group our assets at fair value in three levels, based
on the markets in which the assets are traded and the reliability of the assumptions used to
determine fair value. These levels are:
Level 1 Valuation is based upon quoted prices for identical instruments traded in active
markets.
Level 2 Valuation is based upon quoted prices for similar instruments in active markets,
quoted prices for identical or similar instruments in markets that are not active and model-based
valuation techniques for which all significant assumptions are observable in the market.
Level 3 Valuation is generated from model-based techniques that use significant assumptions
not observable in the market. These unobservable assumptions reflect our own estimates of
assumptions that market participants would use in pricing the asset or liability. Valuation
techniques include the use of option pricing models, discounted cash flow models and similar
techniques. The results cannot be determined with precision and may not be realized in an actual
sale or immediate settlement of the asset or liability.
We base our fair values on the price that would be received to sell an asset in an orderly
transaction between market participants at the measurement date. ASC Topic 820 requires us to
maximize the use of observable inputs and minimize the use of unobservable inputs when measuring
fair value.
Assets that we measure on a recurring basis are limited to our available-for-sale securities
portfolio. Our available-for-sale portfolio is carried at estimated fair value with any unrealized
gains and losses, net of taxes, reported as accumulated other comprehensive income or loss in
shareholders equity. Substantially all of our available-for-sale portfolio consists of
mortgage-backed securities and investment securities issued by GSEs. The fair values for
substantially all of these securities are obtained from an independent nationally recognized
pricing service. Based on the nature of our securities, our independent pricing
Page 11
service provides us with prices which are categorized as Level 2 since quoted prices in active
markets for identical assets are generally not available for the majority of securities in our
portfolio. Various modeling techniques are used to determine pricing for our mortgage-backed
securities, including option pricing and discounted cash flow models. The inputs to these models
include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets,
benchmark securities, bids, offers and reference data. We also own equity securities with a
carrying value of $7.1 million at March 31, 2010 and December 31, 2009 for which fair values are
obtained from quoted market prices in active markets and, as such, are classified as Level 1.
The following table provides the level of valuation assumptions used to determine the carrying
value of our assets measured at fair value on a recurring basis at March 31, 2010 and December 31,
2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at March 31, 2010 using
|
|
|
|
|
|
|
|
Quoted Prices in Active
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
Carrying
|
|
|
Markets for Identical
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
Description
|
|
Value
|
|
|
Assets (Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Available for sale debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
12,662,490
|
|
|
$
|
|
|
|
$
|
12,662,490
|
|
|
$
|
|
|
U.S. government-sponsored
enterprises debt
|
|
|
450,403
|
|
|
|
|
|
|
|
450,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
debt securities
|
|
$
|
13,112,893
|
|
|
$
|
|
|
|
$
|
13,112,893
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services industry
|
|
$
|
7,135
|
|
|
$
|
7,135
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
equity securities
|
|
|
7,135
|
|
|
|
7,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale securities
|
|
$
|
13,120,028
|
|
|
$
|
7,135
|
|
|
$
|
13,112,893
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2009 using
|
|
|
|
|
|
|
|
Quoted Prices in Active
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
Carrying
|
|
|
Markets for Identical
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
Description
|
|
Value
|
|
|
Assets (Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Available for sale debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
11,116,531
|
|
|
$
|
|
|
|
$
|
11,116,531
|
|
|
$
|
|
|
U.S. government-sponsored
enterprises debt
|
|
|
1,088,165
|
|
|
|
|
|
|
|
1,088,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
debt securities
|
|
|
12,204,696
|
|
|
|
|
|
|
|
12,204,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services industry
|
|
$
|
7,075
|
|
|
$
|
7,075
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
equity securities
|
|
|
7,075
|
|
|
|
7,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale securities
|
|
$
|
12,211,771
|
|
|
$
|
7,075
|
|
|
$
|
12,204,696
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets that were measured at fair value on a non-recurring basis at March 31, 2010 were
limited to non-performing commercial and construction loans that are collateral dependent and
foreclosed real estate. Commercial and construction loans evaluated for impairment in accordance
with Financial Accounting
Page 12
Standards Board (FASB) guidance amounted to $9.4 million and $11.2 million at March 31, 2010 and
December 31, 2009, respectively. Based on this evaluation, we established an allowance for loan
losses of $2.3 million and $2.1 million for those same respective periods. The provision for loan
losses related to these loans amounted to $219,000 and $122,000 for the first three months of 2010
and 2009. These impaired loans are individually assessed to determine that the loans carrying
value is not in excess of the fair value of the collateral, less estimated selling costs. Since
all of our impaired loans at March 31, 2010 are secured by real estate, fair value is estimated
through current appraisals, where practical, or an inspection and a comparison of the property
securing the loan with similar properties in the area by either a licensed appraiser or real estate
broker and, as such, are classified as Level 3.
Foreclosed real estate represents real estate acquired as a result of foreclosure or by deed in
lieu of foreclosure and is carried at the lower of cost or fair value less estimated selling costs.
Fair value is estimated through current appraisals, where practical, or an inspection and a
comparison of the property securing the loan with similar properties in the area by either a
licensed appraiser or real estate broker and, as such, foreclosed real estate properties are
classified as Level 3. Foreclosed real estate at March 31, 2010 and December 31, 2009 amounted to
$19.6 million and $16.7 million, respectively. During the first three months of 2010 and 2009,
charge-offs to the allowance for loan losses related to loans that were transferred to foreclosed
real estate amounted to $1.8 million and $1.2 million, respectively. Write downs and net loss on
sale related to foreclosed real estate that were charged to non-interest expense amounted to $1.4
million and $1.2 million for those same respective periods.
The following table provides the level of valuation assumptions used to determine the carrying
value of our assets measured at fair value on a non-recurring basis at March 31, 2010 and December
31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at March 31, 2010 using
|
|
|
Quoted Prices in Active
|
|
Significant Other
|
|
Significant
|
|
Total
|
|
|
Markets for Identical
|
|
Observable Inputs
|
|
Unobservable Inputs
|
|
Gains
|
Description
|
|
Assets (Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
(Losses)
|
|
|
(In thousands)
|
Impaired loans
|
|
$
|
|
|
|
$
|
|
|
|
$
|
9,447
|
|
|
$
|
|
|
Foreclosed real estate
|
|
|
|
|
|
|
|
|
|
|
19,563
|
|
|
|
(1,372
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurments at December 31, 2009 using
|
|
|
Quoted Prices in Active
|
|
Significant Other
|
|
Significant
|
|
Total
|
|
|
Markets for Identical
|
|
Observable Inputs
|
|
Unobservable Inputs
|
|
Gains
|
Description
|
|
Assets (Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
(Losses)
|
|
|
(In thousands)
|
Impaired loans
|
|
$
|
|
|
|
$
|
|
|
|
$
|
11,178
|
|
|
$
|
|
|
Foreclosed real estate
|
|
|
|
|
|
|
|
|
|
|
16,736
|
|
|
|
(2,365
|
)
|
b) Fair Value Disclosures
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.
Page 13
Carrying amounts of cash, due from banks and federal funds sold are considered to approximate fair
value. The carrying value of Federal Home Loan Bank of New York (FHLB) stock equals cost. The
fair value of FHLB stock is based on redemption at par 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, assuming future prepayments and using market rates
for new loans with comparable credit risk.
For time deposits and fixed-maturity borrowed funds, the fair value is estimated by discounting
estimated future cash flows using currently offered rates. Structured borrowed funds are valued
using an option valuation model which uses assumptions for anticipated calls of borrowings based on
market interest rates and weighted-average life. For deposit liabilities payable on demand, the
fair value is the carrying value at the reporting date. There is no material difference between
the fair value and the carrying amounts recognized with respect to our off-balance sheet
commitments.
Other important elements that are not deemed to be financial assets or liabilities and, therefore,
not considered in these estimates include the value of Hudson City Bancorps retail branch delivery
system, its existing core deposit base and banking premises and equipment.
The estimated fair value of Hudson City Bancorps financial instruments are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
December 31, 2009
|
|
|
Carrying
|
|
Estimated
|
|
Carrying
|
|
Estimated
|
|
|
Amount
|
|
Fair Value
|
|
Amount
|
|
Fair Value
|
|
|
(In thousands)
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
124,780
|
|
|
$
|
124,780
|
|
|
$
|
198,752
|
|
|
$
|
198,752
|
|
Federal funds sold
|
|
|
350,318
|
|
|
|
350,318
|
|
|
|
362,449
|
|
|
|
362,449
|
|
Investment securities held to maturity
|
|
|
4,887,949
|
|
|
|
4,856,434
|
|
|
|
4,187,704
|
|
|
|
4,071,005
|
|
Investment securities available for sale
|
|
|
457,538
|
|
|
|
457,538
|
|
|
|
1,095,240
|
|
|
|
1,095,240
|
|
Federal Home Loan Bank of New York stock
|
|
|
874,768
|
|
|
|
874,768
|
|
|
|
874,768
|
|
|
|
874,768
|
|
Mortgage-backed securities held to maturity
|
|
|
9,110,956
|
|
|
|
9,432,191
|
|
|
|
9,963,554
|
|
|
|
10,324,831
|
|
Mortgage-backed securities available for sale
|
|
|
12,662,490
|
|
|
|
12,662,490
|
|
|
|
11,116,531
|
|
|
|
11,116,531
|
|
Loans
|
|
|
32,012,852
|
|
|
|
34,039,905
|
|
|
|
31,721,154
|
|
|
|
32,758,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
25,388,800
|
|
|
|
25,755,488
|
|
|
|
24,578,048
|
|
|
|
24,913,407
|
|
Borrowed funds
|
|
|
29,975,000
|
|
|
|
32,580,345
|
|
|
|
29,975,000
|
|
|
|
32,485,513
|
|
7. Postretirement Benefit Plans
We maintain non-contributory retirement and post-retirement plans to cover employees hired prior to
August 1, 2005, including retired employees, who have met the eligibility requirements of the
plans. Benefits under 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 our 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, which is maintained for certain employees, is
unfunded.
Page 14
In 2005, we limited participation in the non-contributory retirement plan and the post-retirement
benefit plan to those employees hired on or before July 31, 2005. We also placed a cap on paid
medical expenses at the 2007 rate, beginning in 2008, for those eligible employees who retire after
December 31, 2005. As part of our acquisition of Sound Federal Bancorp, Inc. (Sound Federal) in
2006, participation in the Sound Federal retirement plans and the accrual of benefits for such
plans were frozen as of the acquisition date.
The components of the net periodic expense for the plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
|
Retirement Plans
|
|
|
Other Benefits
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
Service cost
|
|
$
|
1,018
|
|
|
$
|
1,003
|
|
|
$
|
152
|
|
|
$
|
234
|
|
Interest cost
|
|
|
2,076
|
|
|
|
1,863
|
|
|
|
476
|
|
|
|
529
|
|
Expected return on assets
|
|
|
(2,914
|
)
|
|
|
(1,939
|
)
|
|
|
|
|
|
|
|
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
680
|
|
|
|
824
|
|
|
|
66
|
|
|
|
128
|
|
Unrecognized
prior service cost
|
|
|
85
|
|
|
|
85
|
|
|
|
(391
|
)
|
|
|
(391
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic
benefit cost
|
|
$
|
944
|
|
|
$
|
1,836
|
|
|
$
|
302
|
|
|
$
|
500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We made no contributions to the pension plans during the first quarter of 2010 or 2009.
8. Stock-Based Compensation
Stock Option Plans
A summary of the changes in outstanding stock options is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2010
|
|
2009
|
|
|
Number of
|
|
Weighted
|
|
Number of
|
|
Weighted
|
|
|
Stock
|
|
Average
|
|
Stock
|
|
Average
|
|
|
Options
|
|
Exercise Price
|
|
Options
|
|
Exercise Price
|
Outstanding at beginning of period
|
|
|
24,262,692
|
|
|
$
|
12.51
|
|
|
|
26,728,119
|
|
|
$
|
10.35
|
|
Granted
|
|
|
3,895,000
|
|
|
|
13.10
|
|
|
|
3,025,000
|
|
|
|
12.03
|
|
Exercised
|
|
|
(126,387
|
)
|
|
|
6.53
|
|
|
|
(392,028
|
)
|
|
|
2.23
|
|
Forfeited
|
|
|
(47,500
|
)
|
|
|
14.79
|
|
|
|
(10,859
|
)
|
|
|
2.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
27,983,805
|
|
|
|
12.61
|
|
|
|
29,350,232
|
|
|
|
10.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In June 2006, our shareholders approved the Hudson City Bancorp, Inc. 2006 Stock Incentive
Plan (the SIP Plan) authorizing us to grant up to 30,000,000 shares of common stock. In July
2006, the Compensation Committee of the Board of Directors of Hudson City Bancorp (the
Committee), authorized grants to each non-employee director, executive officers and other
employees to purchase shares of the Companys common stock, pursuant to the SIP Plan. Grants of
stock options made through December 31, 2009 pursuant to the SIP Plan amounted to 18,887,500
options at an exercise
Page 15
price equal to the fair value of our common stock on the grant date, based on quoted market prices.
Of these options, 5,535,000 have vesting periods ranging from one to five years and an expiration
period of ten years. The remaining 13,352,500 shares have vesting periods ranging from two to
three years if certain financial performance measures are met. Subject to review and verification
by the Committee, we believe we attained these performance measures and have therefore recorded
compensation expense for these grants.
During 2010, the Committee authorized stock option grants (the 2010 grants) pursuant to the SIP
Plan for 3,895,000 options at an exercise price equal to the fair value of our common stock on the
grant date, based on quoted market prices. Of these options, 3,700,000 will vest in January 2013 if
certain financial performance measures are met and employment continues through the vesting date
(the 2010 Performance Options). The remaining 195,000 options will vest in January 2011 (the
2010 Retention Options). The 2010 grants have an expiration period of ten years. We have
determined that it is probable these performance measures will be met and have therefore recorded
compensation expense for the 2010 grants.
The fair value of the 2010 grants was estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions
.
The dividend yield
assumption for the 2010 grants was based on our current declared dividend as a percentage of the
stock price on the grant date. The expected volatility assumption was calculated based on the
weighting of our historical and rolling volatility for the expected term of the option grants. The
risk-free interest rate was determined by reference to the continuously compounded yield on
Treasury obligations for the expected term. The expected option life was based on historic optionee
behavior for prior option grant awards.
As a result of low employee turnover, the assumption regarding the forfeiture rate of option grants
had no effect on the fair value estimate.
|
|
|
|
|
|
|
2010
|
|
2010
|
|
|
Retention Options
|
|
Performance Options
|
Expected dividend yield
|
|
4.57%
|
|
4.57%
|
Expected volatility
|
|
41.30%
|
|
34.58%
|
Risk-free interest rate
|
|
1.65%
|
|
2.55%
|
Expected option life
|
|
3.6 years
|
|
5.6 years
|
Fair value of options granted
|
|
$3.00
|
|
$2.87
|
Compensation expense related to our outstanding stock options amounted to $2.6 million and
$3.7 million for the three months ended March 31, 2010 and 2009, respectively.
Stock Awards
During 2009, the Committee granted performance-based stock awards (the 2009 stock awards)
pursuant to the SIP Plan for 847,500 shares of our common stock. These shares were issued from
treasury stock and will vest in annual installments over a three-year period if certain performance
measures are met and employment continues through the vesting date. None of these shares may be
sold or transferred before their January 2012 vesting date. We have determined that it is probable
these performance measures will be met and have therefore recorded compensation expense for the
2009 stock awards. Expense for the 2009 stock awards is recognized over the vesting period and is
based on the fair value of the shares on the grant date which was $12.03. In addition to the 2009
stock awards, grants were made in 2010 (the 2010 stock awards) pursuant to the SIP Plan for
18,000 shares of our common stock. Expense for the 2010 stock awards is recognized over the
vesting period of three years and is based on the fair value of the
Page 16
shares on the grant date which was $13.12. Total compensation expense for stock awards amounted
to $1.2 million for both the three months ended March 31, 2010 and 2009, respectively.
9. Recent Accounting Pronouncements
In January 2010, FASB issued an accounting standards update regarding disclosure
requirements for fair value measurement. This update provides amendments to fair value measurement
that require new disclosures related to transfers in and out of Levels 1 and 2 and activity in
Level 3 fair value measurements. The update also provides amendments clarifying level of
disaggregation and disclosures about inputs and valuation techniques along with conforming
amendments to the guidance on employers disclosures about postretirement benefit plan assets. This
update is effective for interim and annual reporting periods beginning after December 15, 2009,
except for the disclosures about purchases, sales, issuances, and settlements in the rollforward of
activity in Level 3 fair value measurements which are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal years. We do not expect that this
accounting standard update will have a material impact on our financial condition, results of
operations or financial statement disclosures.
In December 2009, the FASB issued an accounting standards update which amends the FASB
Accounting Standards Codification for the issuance of FASB Statement No. 167, Amendments to FASB
Interpretation No. 46(R). The amendments in this accounting standards update replace the
quantitative-based risks and rewards calculation for determining which reporting entity, if any,
has a controlling financial interest in a variable interest entity with an approach focused on
identifying which reporting entity has the power to direct the activities of a variable interest
entity that most significantly impact the entitys economic performance and (1) the obligation to
absorb losses of the entity or (2) the right to receive benefits from the entity. An approach that
is expected to be primarily qualitative will be more effective for identifying which reporting
entity has a controlling financial interest in a variable interest entity. The amendments in this
update also require additional disclosures about a reporting entitys involvement in variable
interest entities, which will enhance the information provided to users of financial statements.
This accounting standards update was effective for fiscal years beginning after November 15, 2009.
This accounting standards update did not affect our financial condition, results of operations or
financial statement disclosures.
In December 2009, the FASB issued an accounting standards update which amends the FASB Accounting
Standards Codification for the issuance of FASB Statement No. 166, Accounting for Transfers of
Financial Assetsan amendment of FASB Statement No. 140. The amendments in this accounting
standards update improve financial reporting by eliminating the exceptions for qualifying
special-purpose entities from the consolidation guidance and the exception that permitted sale
accounting for certain mortgage securitizations when a transferor has not surrendered control over
the transferred financial assets. In addition, the amendments require enhanced disclosures about
the risks that a transferor continues to be exposed to because of its continuing involvement in
transferred financial assets. Comparability and consistency in accounting for transferred financial
assets will also be improved through clarifications of the requirements for isolation and
limitations on portions of financial assets that are eligible for sale accounting. This accounting
standards update was effective as of the beginning of each reporting entitys first annual
reporting period that begins after November 15, 2009, for interim periods within that first annual
reporting period, and for interim and annual reporting periods thereafter. This accounting
standards update did not affect our financial condition, results of operations or financial
statement disclosures.
Page 17
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Executive Summary
We continue to focus on our traditional consumer-oriented business model by growing our
franchise through the origination and purchase of one- to four-family mortgage loans. We have
traditionally funded this loan production with customer deposits and borrowings. During 2009 and
the first three months of 2010 we were able to fund substantially all of our loan growth with
deposit growth.
Our results of operations depend primarily on net interest income, which in part, is a
direct result of the market interest rate environment. 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, interest-bearing transaction accounts and
borrowed funds. Net interest income is affected by the shape of the market yield curve, the timing
of the placement and repricing of interest-earning assets and interest-bearing liabilities on our
balance sheet, the prepayment rate on our mortgage-related assets and the calls of our borrowings.
Our results of operations may also be affected significantly by national and local economic and
competitive conditions, particularly those with respect to changes in market interest rates, credit
quality, government policies and actions of regulatory authorities. Our results are also affected
by the market price of our stock, as the expense of our employee stock ownership plan is related to
the current price of our common stock.
The Federal Open Market Committee of the Board of Governors of the Federal Reserve System (the
FOMC) noted that for the first quarter of 2010, economic activity continued to strengthen and the
labor market was beginning to improve. 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 signs of 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 to the Federal Reserves 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 income amounted to $148.9 million for the first quarter of 2010, as compared to $127.7
million for the first quarter of 2009. For the quarter ended March 31, 2010, our annualized return
on average assets and average shareholders equity were 0.98% and 10.96%, respectively, as compared
to 0.93% and 10.21%, respectively, for the same period in 2009. The increases in our return on
average equity and average assets are due primarily to the increase in our net income during the
first three months of 2010 as compared to the first three months of 2009. The increase in net
income reflects both a decrease in interest expense and significant realized gains from securities
transactions offset in part by significantly higher deposit insurance fees as well as a
significantly higher provision for loan losses.
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
Page 18
spread increased 22 basis points to 1.97% as compared to 1.75% for the first quarter of 2009 and
our net interest margin increased 14 basis points to 2.20% for the first quarter of 2010 as
compared to 2.06% for the first quarter of 2009. The increases in our net interest rate spread and
net interest margin were due to a steeper yield curve which allowed us to reduce our deposit costs
at a faster pace than the decrease in the yields on our interest-earning assets.
The provision for loan losses amounted to $50.0 million for the first quarter of 2010 as compared
to $20.0 million for the first quarter of 2009. The increase in the provision for loan losses
reflects the risks inherent in our loan portfolio due to decreases in real estate values in our
lending markets, the increase in non-performing and delinquent loans, the increase in loan
charge-offs, as well as the continuing elevated levels of unemployment during the first three
months of 2010. Non-performing loans were $744.9 million or 2.32% of total loans at March 31, 2010
as compared to $627.7 million or 1.98% of total loans at
December 31, 2009. While national economic activity appears to
be showing signs of improvement, unemployment levels
remained near 10% during the first three months of 2010, which has negatively impacted the
financial condition of residential borrowers and their ability to remain current on their mortgage
loans. As a result, we experienced increases in loan delinquencies and loan loss experience, which
resulted in increased levels of charge-offs. These factors contributed to an increase in our
provision for loan losses for the first three months of 2010 and resulted in an increase in our
allowance for loan losses.
Total non-interest income was $33.0 million for the first quarter of 2010 as compared to $2.3
million for the same quarter in 2009. Included in non-interest income 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. In addition, total non-interest income includes service charges and
other income which increased slightly for the first three months of 2010 as compared to the same
period in 2009.
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 a $1.5 million increase in
compensation and employee benefits expense.
We grew our assets by 1.6% to $61.23 billion at March 31, 2010 from $60.27 billion at December 31,
2009. Our growth rate slowed during 2009 and during the first quarter of 2010 as mortgage
refinancing activity caused an increase in loan repayments and prepayments on mortgage-backed
securities remained at elevated levels. During this same time period, available reinvestment
yields on the types of assets in which we invest also decreased. As a result, we may continue to
grow at a slower rate than in the past until market conditions allow us to grow interest-earning
assets with higher yields than currently available and at a more favorable interest rate spread to
the funding cost of interest-bearing liabilities.
Loans increased $291.7 million to $32.01 billion at March 31, 2010 from $31.72 billion at December
31, 2009. While the residential real estate markets have weakened during the past 15 months, low
market interest rates and an increase in mortgage refinancing caused by market interest rates that
are at near-historic lows have resulted in increased loan originations. The increase in
refinancing activity has also resulted in an increase in principal repayments.
Total securities increased $755.9 million to $27.12 billion at March 31, 2010 from $26.36 billion
at December 31, 2009. The increase in securities was primarily due to purchases (including
purchases recorded in the first quarter of 2010 with settlement dates after March 31, 2010) of
mortgage-backed and investment securities of $2.77 billion and $1.10 billion, respectively,
partially offset by principal collections on mortgage-backed securities of $1.55 billion and sales
of mortgage-backed securities of $573.7 million and calls of investment securities of $950.0
million.
Page 19
The increase in our total assets during the first three months of 2010 was funded primarily by an
increase in customer deposits. Deposits increased $810.8 million to $25.39 billion at March 31,
2010 from $24.58 billion at December 31, 2009. The increase in deposits was attributable to growth
in our time deposits and money market accounts. Borrowed funds remained unchanged at $29.98
billion at March 31, 2010. We anticipate that we will be able to fund our future growth primarily
with customer deposits, using borrowed funds as a supplemental funding source if deposit growth
decreases.
On March 4, 2010, Hudson City Savings filed an application with the Office of the Comptroller of
the Currency (OCC) to convert from a federally chartered stock savings bank to a national bank
(the Application). If the Application is approved, Hudson City Savings will no longer be a
federal savings bank subject to the regulation and examination of the Office of Thrift Supervision
(OTS) and will become a national bank subject to the regulation and examination of the OCC. In
addition, the Company will cease being a savings and loan holding company subject to the regulation
and supervision of the OTS and will become a bank holding company subject to the regulation and
supervision of the Board of Governors of the Federal Reserve System.
While the Company and Hudson City Savings will be subject to different regulatory frameworks upon
completion of the Conversion, the Company does not expect its business or operations to be materially affected by this change in regulation.
Comparison of Financial Condition at March 31, 2010 and December 31, 2009
During the first quarter of 2010, our 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 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. During the first quarter 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 quarter 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.
Loan purchase activity declined as conditions in the secondary mortgage market have made it more
difficult for us to purchase loans that meet our underwriting standards. We expect that the amount
of loan purchases may be at reduced levels for the near-term.
Our first mortgage loan originations and purchases during the first three months of 2010 were
substantially all in one-to four-family mortgage loans. Approximately 57.0% of mortgage loan
originations for the first quarter of 2010 were variable-rate loans as compared to approximately
47.0% for the first quarter of 2009. Approximately 67.0% of mortgage loans purchased during the
first quarter of 2010 were fixed-rate mortgage loans. Fixed-rate mortgage loans accounted for
68.9% of our first mortgage loan portfolio at March 31, 2010 and 69.1% at December 31, 2009.
Non-performing loans amounted to $744.9 million, or 2.32%, of total loans at March 31, 2010 as
compared to $627.7 million, or 1.98%, of total loans at December 31, 2009.
Page 20
The following table presents the geographic distribution of our total loan portfolio, as well
as the geographic distribution of our non-performing loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2010
|
|
|
At December 31, 2009
|
|
|
|
Total loans
|
|
|
Non-performing loans
|
|
|
Total loans
|
|
|
Non-performing loans
|
|
New Jersey
|
|
|
41.5
|
%
|
|
|
40.7
|
%
|
|
|
43.0
|
%
|
|
|
41.6
|
%
|
New York
|
|
|
18.5
|
|
|
|
18.3
|
|
|
|
18.2
|
|
|
|
18.0
|
|
Connecticut
|
|
|
13.1
|
|
|
|
5.6
|
|
|
|
12.6
|
|
|
|
4.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total New York
metropolitan area
|
|
|
73.1
|
|
|
|
64.6
|
|
|
|
73.8
|
|
|
|
63.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Virginia
|
|
|
4.7
|
|
|
|
5.5
|
|
|
|
4.6
|
|
|
|
6.2
|
|
Illinois
|
|
|
3.8
|
|
|
|
5.4
|
|
|
|
3.9
|
|
|
|
5.6
|
|
Maryland
|
|
|
3.6
|
|
|
|
5.1
|
|
|
|
3.5
|
|
|
|
5.1
|
|
Massachusetts
|
|
|
2.7
|
|
|
|
2.4
|
|
|
|
2.7
|
|
|
|
2.3
|
|
Pennsylvania
|
|
|
2.2
|
|
|
|
1.7
|
|
|
|
2.0
|
|
|
|
1.9
|
|
Minnesota
|
|
|
1.6
|
|
|
|
1.9
|
|
|
|
1.4
|
|
|
|
1.8
|
|
Michigan
|
|
|
1.3
|
|
|
|
3.7
|
|
|
|
1.3
|
|
|
|
4.2
|
|
All others
|
|
|
7.0
|
|
|
|
9.7
|
|
|
|
6.8
|
|
|
|
9.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Outside New York
metropolitan area
|
|
|
26.9
|
|
|
|
35.4
|
|
|
|
26.2
|
|
|
|
36.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities increased $693.4 million to $21.77 billion at March 31, 2010
from $21.08 billion at December 31, 2009. This increase in total mortgage-backed securities
resulted from the purchase of $2.77 billion of variable-rate mortgage-backed securities issued by
GSEs. The increase was partially offset by repayments of $1.55 billion (excluding principal
receivable on Federal Home Loan Mortgage Corporation (FHLMC) mortgage-backed securities) and
sales of $573.7 million. At March 31, 2010, variable-rate mortgage-backed securities accounted for
75.5% of our portfolio compared with 70.7% at December 31, 2009. The purchase of variable-rate
mortgage-backed securities is a component of our interest rate risk management strategy. Since our
loan portfolio includes a concentration of fixed-rate mortgage loans, the purchase of variable-rate
mortgage-backed securities provides us with an asset that reduces our exposure to interest rate
fluctuations.
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 did 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 investment securities increased $62.5 million to $5.35 billion at March 31, 2010 as compared
to $5.28 billion at December 31, 2009. The increase in investment securities is
primarily due to purchases of $1.10 billion, substantially offset by calls of investment securities
of $950.0 million.
Page 21
Since we invest primarily in securities issued by GSEs, there were no debt securities past due or
securities for which the Company currently believes it is not probable that it will collect all
amounts due according to the contractual terms of the security.
Total cash and cash equivalents decreased $86.1 million to $475.1 million at March 31, 2010 as
compared to $561.2 million at December 31, 2009. Other assets increased $1.9 million to $206.5
million at March 31, 2010 as compared to $204.6 million at December 31, 2009.
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 due primarily to an increase in deposits.
Total deposits increased $810.8 million, or 3.3%, to $25.39 billion at March 31, 2010 as compared
to $24.58 billion at December 31, 2009. 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. Deposit flows are typically affected by the level of market interest rates, the interest rates
and products offered by competitors, the volatility of equity markets, and other factors.
Our deposit growth slowed in the first quarter of 2010. Deposits grew by $1.5 billion
during the fourth quarter of 2009 and by $6.11 billion for the year ended December 31, 2009. The growth in deposits during 2009 was due to the economic conditions existing at
the time that we believe caused customers to use insured bank deposit products as an
alternative to investments such as equity securities and bonds. We believe that the slower
deposit growth is due to improving economic conditions as well as improving conditions
in the securities markets that have changed customer preferences for these alternative
investments. In addition, we have lowered our deposit rates to slow our deposit growth
from the 2009 levels since the low yields that are available to us for mortgage loans and
investment securities have made a growth strategy less prudent until market conditions
improve.
We had 131
branches at March 31, 2010 unchanged from December 31, 2009.
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. Borrowed funds at March 31, 2010
were comprised of $14.88 billion of FHLB advances and $15.10
billion of securities sold under agreements to repurchase.
Substantially all of our borrowed funds are callable at the discretion of the lender after an
initial no-call period. Our callable borrowings typically have a final maturity of ten years, are
callable quarterly and may not be called for an initial period of one to five years. We have used
this type of borrowing primarily to fund our loan growth because these borrowings have a longer
duration than shorter-term non-callable borrowings and have a lower cost than a non-callable
borrowing with a maturity date similar to the initial call date of the callable borrowing. At
March 31, 2010, we had $22.18 billion of borrowed funds with call dates within one year. If
interest rates were to decrease, or remain consistent with current rates, we believe these
borrowings would probably not be called and our average cost of existing borrowings would not
decrease even as market interest rates decrease. Conversely, if interest rates increase above the
market interest rate for similar borrowings, we believe these borrowings would likely be called at
their next call date and our cost to replace these borrowings would increase. 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 2009 and the first three months of 2010, we have been able to fund our asset growth
primarily with deposit inflows. 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. We anticipate that we would use longer term fixed-maturity borrowings
with terms of two to five years for this purpose.
The Company has two collateralized borrowings in the form of repurchase agreements totaling $100.0
million with Lehman Brothers, Inc. Lehman Brothers, Inc. is currently in liquidation under the
Securities Industry Protection Act. Mortgage-backed securities with an amortized cost of
approximately $114.5 million are pledged as collateral for these borrowings. We intend to pursue
full recovery of the pledged collateral in accordance with the contractual terms of the repurchase
agreements. There can be no assurances that the final settlement of this transaction will result
in the full recovery of the collateral or the full amount of the claim. We have not recognized a
loss in our financial statements related to these repurchase agreements.
Page 22
Due to brokers amounted to $125.6 million at March 31, 2010 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. Other liabilities increased
to $346.2 million at March 31, 2010 as compared to $275.6 million at December 31, 2009. The
increase is primarily the result of an increase in accrued taxes of $82.7 million, partially offset
by a decrease in accrued expenses of $11.1 million.
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, 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.
As of March 31, 2010, there remained 50,123,550 shares that may be purchased under our existing
stock repurchase programs. We did not repurchase any shares of our common stock during the first
quarter of 2010. Our capital ratios remain in excess of the regulatory requirements for a
well-capitalized bank. See Liquidity and Capital Resources.
The accumulated other comprehensive income of $158.5 million at March 31, 2010 included 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.
At March 31, 2010, our shareholders equity to asset ratio was 8.81% compared with 8.86% at
December 31, 2009. For the first quarter of 2010, the ratio of average shareholders equity to
average assets was 8.94% compared with 9.07% for the first quarter of 2009. The slightly lower
equity-to-assets ratios reflect our asset growth and the payment of dividends. Our book value per
share, using the period-end number of outstanding shares, less purchased but unallocated employee
stock ownership plan shares and less purchased but unvested recognition and retention plan shares,
was $10.96 at March 31, 2010 and $10.85 at December 31, 2009. Our tangible book value per share,
calculated by deducting goodwill and the core deposit intangible from shareholders equity, was
$10.63 as of March 31, 2010 and $10.53 at December 31, 2009.
Page 23
Comparison of Operating Results for the Three-Month Periods Ended March 31, 2010 and 2009
Average Balance Sheet.
The following table presents the average balance sheets, average yields
and costs and certain other information for the three months ended March 31, 2010 and 2009. The
table presents the annualized average yield on interest-earning assets and the annualized average
cost of interest-bearing liabilities. We derived the yields and costs by dividing annualized
income or expense by the average balance of interest-earning assets and interest-bearing
liabilities, respectively, for the periods shown. We derived average balances from daily balances
over the periods indicated. Interest income includes fees that we considered to be adjustments to
yields. Yields on tax-exempt obligations were not computed on a tax equivalent basis. Nonaccrual
loans were included in the computation of average balances and therefore have a zero yield. The
yields set forth below include the effect of deferred loan origination fees and costs, and purchase
discounts and premiums that are amortized or accreted to interest income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
|
|
|
Yield/
|
|
|
Average
|
|
|
|
|
|
|
Yield/
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Cost
|
|
|
Balance
|
|
|
Interest
|
|
|
Cost
|
|
|
|
(Dollars in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earnings assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First mortgage loans, net (1)
|
|
$
|
31,496,413
|
|
|
$
|
428,161
|
|
|
|
5.44
|
%
|
|
$
|
29,346,715
|
|
|
$
|
414,208
|
|
|
|
5.65
|
%
|
Consumer and other loans
|
|
|
358,637
|
|
|
|
4,759
|
|
|
|
5.31
|
|
|
|
402,059
|
|
|
|
5,990
|
|
|
|
5.96
|
|
Federal funds sold
|
|
|
789,310
|
|
|
|
449
|
|
|
|
0.23
|
|
|
|
146,751
|
|
|
|
176
|
|
|
|
0.49
|
|
Mortgage-backed securities at amortized cost
|
|
|
20,261,865
|
|
|
|
231,718
|
|
|
|
4.57
|
|
|
|
19,313,880
|
|
|
|
250,914
|
|
|
|
5.20
|
|
Federal Home Loan Bank stock
|
|
|
874,768
|
|
|
|
12,373
|
|
|
|
5.66
|
|
|
|
872,095
|
|
|
|
6,373
|
|
|
|
2.92
|
|
Investment securities, at amortized cost
|
|
|
5,303,422
|
|
|
|
57,410
|
|
|
|
4.33
|
|
|
|
3,692,237
|
|
|
|
45,661
|
|
|
|
4.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest-earning assets
|
|
|
59,084,415
|
|
|
|
734,870
|
|
|
|
4.98
|
|
|
|
53,773,737
|
|
|
|
723,322
|
|
|
|
5.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earnings assets (4)
|
|
|
1,635,807
|
|
|
|
|
|
|
|
|
|
|
|
1,331,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
60,720,222
|
|
|
|
|
|
|
|
|
|
|
$
|
55,104,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings accounts
|
|
$
|
796,816
|
|
|
|
1,466
|
|
|
|
0.75
|
|
|
$
|
718,720
|
|
|
|
1,348
|
|
|
|
0.76
|
|
Interest-bearing transaction accounts
|
|
|
2,204,513
|
|
|
|
7,510
|
|
|
|
1.38
|
|
|
|
1,624,474
|
|
|
|
9,068
|
|
|
|
2.26
|
|
Money market accounts
|
|
|
5,171,810
|
|
|
|
16,730
|
|
|
|
1.31
|
|
|
|
2,918,741
|
|
|
|
16,705
|
|
|
|
2.32
|
|
Time deposits
|
|
|
16,238,606
|
|
|
|
78,213
|
|
|
|
1.95
|
|
|
|
13,602,195
|
|
|
|
111,703
|
|
|
|
3.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest-bearing deposits
|
|
|
24,411,745
|
|
|
|
103,919
|
|
|
|
1.73
|
|
|
|
18,864,130
|
|
|
|
138,824
|
|
|
|
2.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase agreements
|
|
|
15,100,000
|
|
|
|
151,429
|
|
|
|
4.07
|
|
|
|
15,099,951
|
|
|
|
151,052
|
|
|
|
4.06
|
|
Federal Home Loan Bank of New York advances
|
|
|
14,875,000
|
|
|
|
148,377
|
|
|
|
4.05
|
|
|
|
15,266,667
|
|
|
|
149,615
|
|
|
|
3.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
borrowed funds
|
|
|
29,975,000
|
|
|
|
299,806
|
|
|
|
4.06
|
|
|
|
30,366,618
|
|
|
|
300,667
|
|
|
|
4.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest-bearing liabilities
|
|
|
54,386,745
|
|
|
|
403,725
|
|
|
|
3.01
|
|
|
|
49,230,748
|
|
|
|
439,491
|
|
|
|
3.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits
|
|
|
572,030
|
|
|
|
|
|
|
|
|
|
|
|
563,360
|
|
|
|
|
|
|
|
|
|
Other noninterest-bearing liabilities
|
|
|
330,127
|
|
|
|
|
|
|
|
|
|
|
|
310,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
noninterest-bearing liabilities
|
|
|
902,157
|
|
|
|
|
|
|
|
|
|
|
|
873,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
55,288,902
|
|
|
|
|
|
|
|
|
|
|
|
50,104,394
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
5,431,320
|
|
|
|
|
|
|
|
|
|
|
|
5,000,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Shareholders Equity
|
|
$
|
60,720,222
|
|
|
|
|
|
|
|
|
|
|
$
|
55,104,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/net interest rate
spread (2)
|
|
|
|
|
|
$
|
331,145
|
|
|
|
1.97
|
|
|
|
|
|
|
$
|
283,831
|
|
|
|
1.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest-earning assets/net interest margin (3)
|
|
$
|
4,697,670
|
|
|
|
|
|
|
|
2.20
|
%
|
|
$
|
4,542,989
|
|
|
|
|
|
|
|
2.06
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of interest-earning assets to
interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
1.09
|
x
|
|
|
|
|
|
|
|
|
|
|
1.09
|
x
|
|
|
|
(1)
|
|
Amount includes deferred loan costs and non-performing loans and is net of the allowance for loan losses.
|
|
(2)
|
|
Determined by subtracting the annualized weighted average cost of total interest-bearing liabilities from the annualized weighted average yield on
total interest-earning assets.
|
|
(3)
|
|
Determined by dividing annualized net interest income by total average interest-earning assets.
|
|
(4)
|
|
Includes the average balance of principal receivable related to FHLMC mortgage-backed securities of $365.5 million and $121.7 million for the
quarters ended March 31, 2010 and 2009, respectively.
|
Page 24
General.
Net income was $148.9 million for the first quarter of 2010, an increase of $21.2
million, or 16.6%, compared with net income of $127.7 million for the first quarter of 2009. Basic
and diluted earnings per common 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. For the three
months ended March 31, 2010, our annualized return on average shareholders equity was 10.96%,
compared with 10.21% for the corresponding period in 2009. Our annualized return on average assets
for the first quarter of 2010 was 0.98% as compared to 0.93% for the first quarter of 2009. The
increase in the annualized return on average equity and assets is primarily due to the increase in
net income during the first quarter of 2010.
Interest and Dividend Income.
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 $5.31
billion, or 9.9%, increase in the average balance of total interest-earning assets to $59.08
billion for the first quarter of 2010 as compared to $53.77 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 40 basis points in the annualized weighted-average yield on total interest-earning
assets to 4.98% for the quarter ended March 31, 2010 from 5.38% 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 quarter in 2009. This was primarily due to a $2.15
billion increase in the average balance of first mortgage loans, which reflected our continued
emphasis on the growth of our mortgage loan portfolio and an increase in mortgage originations due
to refinancing activity caused by market interest rates that are at near-historic lows. The
positive impact on first mortgage loan interest income from the increase in the average balance was
partially offset by a 21 basis point decrease in the weighted-average yield to 5.44% for the first
quarter of 2010 from 5.65% for the first quarter of 2009. The decrease in the average yield earned
was due to lower market interest rates on mortgage products and also due to the continued mortgage
refinancing activity. During the first three months of 2010, existing mortgage customers
refinanced or modified approximately $584.0 million in mortgage loans with a weighted average rate
of 5.97% to a new weighted average rate of 5.16%. We allow existing customers to modify their
mortgage loans, for a fee, with the intent of maintaining our customer relationship in periods of
extensive refinancing due to a low interest rate environment. The modification changes the
existing interest rate to the market rate for a product currently offered by us with a similar or
reduced term. We generally do not extend the maturity date of the loan. To qualify for a
modification, the loan should be current and our review of past payment performance should indicate
that no payments were past due in any of the 12 preceding months. In general, all other terms and
conditions of the existing mortgage remain the same.
Interest on consumer and other loans decreased $1.2 million to $4.8 million for the first quarter
of 2010 from $6.0 million for the first quarter of 2009. The average balance of consumer and other
loans decreased $43.5 million to $358.6 million for the first quarter of 2010 as compared to $402.1
million for the first quarter of 2009 and the average yield earned decreased 65 basis points to
5.31% as compared to 5.96% for the same respective periods.
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 63 basis point decrease in the weighted-average yield to 4.57% for the first quarter
of 2010 from 5.20% for the first quarter of 2009. The decrease in the weighted-average yield was
partially offset by a $948.0 million increase in the average balance of mortgage-backed securities
to $20.26 billion during the first quarter of 2010 as compared to $19.31 billion for the first
quarter of 2009.
Page 25
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 as well as the effects of the GSE repurchase.
The GSE repurchase was effective in March 2010 and 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 did 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
accelerated amortization of purchase premiums related to these
securities 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 during the first quarter
of 2010 as compared to $45.7 million for the first quarter of 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 increase in the average balance of investment securities was due primarily to purchases of these securities to reinvest excess cash flows. 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% reflecting current market interest rates.
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
ongoing liquidity provided by strong deposit growth and increased levels of repayments on
mortgage-related assets.
Interest Expense.
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 our time deposit accounts decreased $33.5 million to $78.2 million for the
first quarter of 2010 as compared to $111.7 million for the first quarter of 2009. This decrease
was due to a decrease in the annualized weighted-average cost of 138 basis points to 1.95% for the
first quarter of 2010 from 3.33% for the first quarter of 2009 as maturing time deposits were
renewed or replaced by new time deposits at lower rates. This decrease was partially offset by a
$2.64 billion increase in the average
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balance of time deposit accounts to $16.24 billion for the first quarter of 2010 from $13.60
billion for the first quarter of 2009. Interest expense on our interest-bearing transaction
accounts decreased $1.6 million to $7.5 million for the first quarter of 2010 from $9.1 million for
the same period in 2009. The decrease is due to an 88 basis point decrease in the annualized
weighted-average cost to 1.38%, partially offset by a $580.0 million increase in the average
balance to $2.20 billion for the first quarter of 2010 as compared to $1.62 billion for the first
quarter of 2009. Interest expense on money market accounts amounted to $16.7 million for the first
quarter of 2010, virtually unchanged from the first quarter of 2009. While interest expense on
money market accounts remained substantially unchanged, the average balance of these accounts
increased $2.25 billion to $5.17 billion for the first quarter of 2010 as compared to $2.92 billion
for the first quarter of 2009. The increase in the average balance was substantially offset by a
101 basis point decrease in the annualized weighted-average cost to 1.31%.
The increases in the average balances of interest-bearing deposits reflect our strategy 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 the first quarter of 2010
reflected lower market interest rates.
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. The slight increase in the average cost of our borrowings is due primarily
to our strategy of modifying current borrowings to extend the call
dates. The modified borrowings are typically at a slightly higher
interest rate than the original borrowings. 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. During 2009, we modified
approximately $1.73 billion of these borrowings.
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. See Liquidity and Capital Resources.
Net Interest Income.
Net interest income increased $47.3 million, or 16.7%, to $331.1 million
for the first quarter of 2010 compared with $283.8 million for the first quarter of 2009. Our net
interest rate spread increased 21 basis points to 1.97% for the first quarter of 2010 from 1.76%
for the same quarter in 2009. Our net interest margin increased 14 basis points to 2.20% for the
first quarter of 2010 from 2.06% for the same quarter in 2009.
The increase in our net interest margin and net interest rate spread was primarily due to the
decrease in the weighted-average cost of interest-bearing liabilities
.
The yield curve steepened
during 2009 and the first three months of 2010, with short-term rates decreasing while longer-term
rates increased slightly. The yields on mortgage-related assets, which account for 87.6% of the
average balance of interest-earning assets in the first quarter of 2010, remained at near-historic
lows primarily due to the Federal Reserves
Page 27
program to purchase mortgage-backed securities. The low market interest rates resulted in
increased refinancing activity which caused a decrease in the yield we earned on mortgage-related
assets. However, we were able to reduce deposit costs to a greater extent than the decrease in
mortgage yields thereby increasing our net interest rate spread and net interest margin.
Provision for Loan Losses.
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 allowance for loan losses (ALL) amounted to $165.8 million at March 31, 2010 and $140.1
million at December 31, 2009. The increase in the provision for loan losses for the quarter ended
March 31, 2010 and the resulting increase in the ALL is due primarily to the increase in
non-performing loans in the first quarter of 2010, continuing declines in home values and an
increase in charge-offs, also taking into account a decrease in our early-stage delinquencies. We
recorded our provision for loan losses during the first three months of 2010 based on our ALL
methodology that considers a number of quantitative and qualitative factors, including the amount
of non-performing loans, the loss experience of our non-performing loans, conditions in the real
estate and housing markets, current economic conditions, particularly continued elevated levels of
unemployment, and growth in the loan portfolio. See Critical Accounting Policies Allowance for
Loan Losses.
Our primary lending emphasis is the origination and purchase 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. Our loan growth is primarily concentrated in one- to
four-family mortgage loans with original loan-to-value (LTV) ratios of less than 80%. The
average LTV ratio of our 2010 first mortgage loan originations and our total first mortgage loan
portfolio were 59.2% and 61.1%, respectively using the appraised value at the time of origination.
The value of the property used as collateral for our loans is dependent upon local market
conditions. As part of our estimation of the allowance for loan losses, we monitor changes in the
values of homes in each market using indices published by various organizations. Based on our
analysis of the data for the first quarter of 2010, we concluded that home values in the Northeast
quadrant of the United States, where most of our lending activity occurs, continued to decline from
2009 levels, as evidenced by reduced levels of sales, increasing inventories of houses on the
market, declining house prices and an increase in the length of time houses remain on the market.
However, the rate of decline in home values decreased significantly during the second half of 2009
and first quarter of 2010.
We define the Northeast quadrant of the country generally as those states that are east of the
Mississippi River and as far south as South Carolina. At March 31, 2010, approximately 73.1% of
our total loans were in the New York metropolitan area. Additionally, the states of Virginia,
Illinois, Maryland, Massachusetts, Pennsylvania, Minnesota, and Michigan accounted for 4.7%, 3.8%,
3.6%, 2.7%, 2.2%, 1.6%, and 1.3%, respectively, of total loans. The remaining 7.0% of the loan
portfolio is secured by real estate primarily in the remainder of the Northeast quadrant of the
United States. With respect to our non-performing loans, approximately 64.6% are in the New York
metropolitan area and 5.5%, 5.4%, 5.1%, 2.4%, 1.7%, 1.9% and 3.7% are located in the states of
Virginia, Illinois, Maryland, Massachusetts, Pennsylvania, Minnesota, and Michigan, respectively.
The remaining 9.7% of our non-performing loans are secured by real estate primarily in the
remainder of the Northeast quadrant of the United States.
The national economy was in a recessionary cycle for approximately 2 years with the housing and
real estate markets suffering significant losses in value. The faltering economy was marked by
contractions in the availability of business and consumer credit, increases in corporate borrowing
rates, falling home prices, increasing home foreclosures and rising levels of unemployment.
Economic conditions improved slightly during the first quarter of 2010 with unemployment rates
stabilizing and home sale activity increasing slightly. We continue to closely monitor the local
and national real estate markets and other
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factors related to risks inherent in our loan portfolio. We determined the provision for loan
losses for the first quarter of 2010 based on our evaluation of the foregoing factors, the growth
of the loan portfolio, the recent increases in delinquent loans, non-performing loans and net loan
charge-offs, and trends in the unemployment rate.
At March 31, 2010, first mortgage loans secured by one-to four-family properties accounted for
98.7% of total loans. Fixed-rate mortgage loans represent 68.9% of our first mortgage loans.
Compared to adjustable-rate loans, fixed-rate loans possess less inherent credit risk since loan
payments do not change in response to changes in interest rates. In addition, we do not originate
or purchase loans with payment options, negative amortization loans or sub-prime loans.
Included in our loan portfolio at March 31, 2010 are interest-only loans of approximately $4.75
billion or 14.8% of total loans as compared to $4.59 billion or 14.4% of total loans at December
31, 2009. These loans are originated as adjustable rate mortgage loans with initial terms of five,
seven or ten years with the interest-only portion of the payment based upon the initial loan term,
or offered on a 30-year fixed-rate loan, with interest-only payments for the first 10 years of the
obligation. At the end of the initial 5-, 7- or 10-year interest-only period, the loan payment will
adjust to include both principal and interest and will amortize over the remaining term so the loan
will be repaid at the end of its original life. These loans are underwritten using the
fully-amortizing payment amount. Non-performing interest-only loans amounted to $139.5 million or
18.7% of non-performing loans at March 31, 2010 as compared to non-performing interest-only loans
of $82.2 million or 13.1% of non-performing loans at December 31, 2009.
Non-performing loans amounted to $744.9 million at March 31, 2010 as compared to $627.7 million at
December 31, 2009. Non-performing loans at March 31, 2010 included $732.6 million of one- to
four-family first mortgage loans as compared to $613.6 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. Our recent increases in non-performing loans appear to be directly related to the high level
of unemployment in our market areas. 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. Foreclosed real estate amounted to $19.6 million
at March 31, 2010 as compared to $16.7 million at December 31, 2009. As a result of our
underwriting policies, our borrowers typically have a significant amount of equity, at the time of
origination, in the underlying real estate that we use as collateral for our loans. Due to the
steady deterioration of real estate values, the LTV ratios based on appraisals obtained at time of
origination do not necessarily indicate the extent to which we may incur a loss on any given loan
that may go into foreclosure. However, our lower average LTV ratios have helped to moderate
our charge-offs as there has generally been adequate equity behind our first lien as of the
foreclosure date to satisfy our loan.
As a result of the increase in non-performing loans, the ratio of the ALL to non-performing
loans decreased from 102.09% at December 31, 2006 to 22.26% at March 31, 2010. During this same
period, the ratio of the ALL to total loans increased from 0.17% to
0.52%. At December 31, 2009, the ratio of the ALL to non-performing loans was 22.32% and the ratio of the ALL to total loans was 0.44%.
Historically, our
non-performing loans have been a negligible percentage of our total loan portfolio and, as a
result, our ratio of the ALL to non-performing loans was high and did not serve as a reasonable
measure of the adequacy of our ALL. The decline in the ratio of the ALL to non-performing loans
is not, absent other factors, an indication of the adequacy of the ALL since there is not
necessarily a direct relationship between changes in various asset quality ratios and changes in
the ALL and non-performing loans. In the current economic environment, a loan generally becomes
non-performing when the borrower experiences financial difficulty. In many cases, the borrower
also has a second mortgage or home equity loan on the
Page 29
property. In substantially all of these cases, we do not hold the second mortgage or home equity
loan as this is not a business we have actively pursued.
Charge-offs on our non-performing loans increased in 2009 and during the first three
months of 2010 but, overall, have been modest due to our first lien position and relatively low
average LTV ratios at origination. We generally obtain new collateral values for loans
after 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 ALL to non-performing loans. Charge-offs amounted to $24.2
million, consisting of 297 loans, for the first quarter of 2010 as compared to $19.8 million for
the fourth quarter of 2009, consisting of 187 loans. These charge-offs were primarily due to the
results of our reappraisal process for our non-performing residential first mortgage loans with
only 8 loans disposed of through the foreclosure process during the first quarter of 2010 with a
final loss on sale (after previous charge-offs) of approximately $400,000. The results of our
reappraisal process and our recent charge-off history are also considered in the determination of
the ALL. At March 31, 2010 the average LTV ratio (using appraised values at the time of
origination) of our non-performing loans was 71.8% and was 61.1% for our total mortgage loan
portfolio. Thus, the ratio of the ALL to non-performing loans needs to be viewed in the context
of the underlying LTVs of the non-performing loans and the relative decline in home values.
As part of our estimation of the ALL, we monitor changes in the values of homes in each market
using indices published by various organizations including the Office of Federal Housing
Enterprise Oversight and Case-Shiller. Our Asset Quality Committee (AQC) uses these indices
and a stratification of our loan portfolio by state as part of its quarterly determination of the
ALL. We do not apply different loss factors based on geographic locations since, at March 31,
2010, 73.1% of our loan portfolio and 64.6% of our non-performing loans are located in the New
York metropolitan area. In addition, we obtain updated collateral values when a loan becomes 180
days past due which we believe identifies potential charge-offs more accurately than a house
price index that is based on a wide geographic area and includes many different types of houses.
However, we use the house price indices to identify geographic areas experiencing weaknesses in
housing markets to determine if an overall adjustment to the ALL is required based on loans we
have in those geographic areas and to determine if changes in the loss factors used in the ALL
quantitative analysis are necessary. Our quantitative analysis of the ALL accounts for increases
in non-performing loans by applying progressively higher risk factors to loans as they become
more delinquent.
Due to the nature of our loan portfolio, our evaluation of the adequacy of our ALL is performed
primarily on a pooled basis. Each month we prepare an analysis which categorizes the entire loan
portfolio by certain risk characteristics such as loan type (one- to four-family, multi-family,
commercial, construction, etc.), loan source (originated or purchased) 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. These factors are periodically
reviewed for appropriateness giving consideration to charge-off history, delinquency trends,
portfolio growth and the status of the regional economy and housing market, in order to ascertain
that the loss factors cover probable and estimable losses inherent in the portfolio. Based on our
recent loss experience on non-performing loans, we increased the loss factors used in our
quantitative analysis of the ALL for certain loan types during the first three months of
2010. If our future loss experience requires additional increases in our loss factors, this
may result in increased levels of loan loss provisions.
Page 30
In addition to our quantitative systematic methodology, we also use qualitative analyses to
determine the adequacy of our ALL. Our qualitative analyses include further evaluation of economic
factors, such as trends in the unemployment rate, as well as a ratio analysis to evaluate the
overall measurement of the ALL. This analysis includes a review of delinquency ratios, net
charge-off ratios and the ratio of the ALL to both non-performing loans and total loans. This
qualitative review is used to reassess the overall determination of the ALL and to ensure that
directional changes in the ALL and the provision for loan losses are supported by relevant internal
and external data.
We consider the average LTV of our non-performing loans and our total portfolio in relation to the
overall changes in house prices in our lending markets when determining the ALL. This provides us
with a macro indication of the severity of potential losses that might be expected. Since
substantially all of our portfolio consists of first mortgage loans on residential properties, the
LTV is particularly important to us when a loan becomes non-performing. The weighted average LTV
in our one- to four-family mortgage loan portfolio at March 31, 2010 was 61.1%, using appraised
values at the time of origination. The average LTV ratio of our non-performing loans was 71.8% 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% from the peak of the market in 2006 through February 2010 and by 29% nationwide
during that period. During the first two months of 2010, house prices declined 0.4% in the New
York metropolitan area and increased 0.2% nationwide. Changes in house values may affect our loss
experience which may require that we change the loss factors used in our quantitative analysis of
the allowance for loan losses. There can be no assurance whether significant further declines in
house values may occur and result in a higher loss experience and increased levels of charge-offs
and loan loss provisions.
Net charge-offs amounted to $24.2 million for the first quarter of 2010 as compared to net
charge-offs of $4.7 million for the corresponding period in 2009. Our charge-offs on
non-performing loans have historically been low due to the amount of underlying equity in the
properties collateralizing our first mortgage loans. Until the recent recessionary cycle, it was
our experience that as a non-performing loan approached foreclosure, the borrower sold the
underlying property or, if there was a second mortgage or other subordinated lien, the subordinated
lien holder would purchase the property to protect their interest thereby resulting in the full
payment of principal and interest to Hudson City Savings. This process normally took approximately
12 months. However, due to the unprecedented level of foreclosures and the desire by most states
to slow the foreclosure process, we are now experiencing a time frame to repayment or foreclosure
ranging from 24 to 30 months from the initial non-performing period. As real estate prices
continue to decline, this extended time may result in further charge-offs. In addition, current
conditions in the housing market have made it more difficult for borrowers to sell homes to satisfy
the mortgage and second lien holders are less likely to repay our loan if the value of the property
is not enough to satisfy their loan. We continue to monitor closely the property values underlying
our non-performing loans during this timeframe and take appropriate charge-offs when the loan
balances exceed the underlying property values.
At March 31, 2010 and December 31, 2009, commercial and construction loans evaluated for impairment
in accordance with FASB guidance amounted to $9.4 million and $11.2 million, respectively. Based
on this evaluation, we established an ALL of $2.3 million for loans classified as impaired at March
31, 2010 compared to $2.1 million at December 31, 2009.
The markets in which we lend have experienced significant declines in real estate values
which we have taken into account in evaluating our ALL. Although we believe that we have
established and maintained the ALL at adequate levels, additions may be necessary if future
economic and other conditions differ substantially from the current operating environment.
Increases in our loss experience on non-performing loans, the loss factors
Page 31
used in our quantitative analysis of the ALL and continued increases in overall loan delinquencies
can have a significant impact on our need for increased levels of loan loss provisions in the
future. No assurance can be given in any particular case that our LTV ratios will provide full
protection in the event of borrower default. Although we use the best information available, the
level of the ALL remains an estimate that is subject to significant judgment and short-term change.
See Critical Accounting Policies.
Non-Interest Income.
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. We
believe that the continued elevated levels of prepayments and the eventual increase in interest
rates will reduce the amount of unrealized gains in the available-for-sale portfolio. Accordingly,
we sold these securities to take advantage of the favorable pricing that currently exists in the
market.
Non-Interest Expense.
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 Federal Deposit Insurance Corporation
(FDIC) to recapitalize the Deposit Insurance Fund (DIF). 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 a $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 Taxes.
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.
Liquidity and Capital Resources
The term liquidity refers to our ability to generate adequate amounts of cash to fund loan
originations, loan and security purchases, deposit withdrawals, repayment of borrowings and
operating expenses. Our primary sources of funds are deposits, borrowings, the proceeds from
principal and interest payments on loans and mortgage-backed securities, the maturities and calls
of investment securities and funds provided by our operations. Deposit flows, calls of investment
securities and borrowed funds, and prepayments of loans and mortgage-backed securities are strongly
influenced by interest rates, national and local economic conditions and competition in the
marketplace. These factors reduce the predictability of the receipt of these sources of funds. Our
membership in the FHLB provides us access to additional sources of borrowed funds, which is
generally limited to approximately twenty times the amount of FHLB stock
Page 32
owned. We also have the ability to access the capital markets from time to time, depending on
market conditions.
Our primary investing activities are the origination and purchase of one-to four-family real estate
loans and consumer and other loans, the purchase of mortgage-backed securities, and the purchase of
investment securities. These activities are funded primarily by borrowings, deposit growth and
principal and interest payments on loans, mortgage-backed securities and investment securities. We
originated $1.40 billion and purchased $404.2 million of loans during the first three months of
2010 as compared to $1.32 billion and $723.3 million during the first three months of 2009. While
the residential real estate markets have slowed during the past year, our competitive rates and an
increase in mortgage refinancing have resulted in a slight increase in origination production for
the first quarter of 2010. The increase in refinancing activity occurring in the marketplace has
also caused an increase in principal repayments which amounted to $1.45 billion for the first
quarter of 2010 as compared to $1.35 billion for the same period in 2009. At March 31, 2010,
commitments to originate and purchase mortgage loans amounted to $470.1 million and $50.6 million,
respectively as compared to $595.5 million and $143.6 million, respectively at March 31, 2009.
The decrease in mortgage loan commitments is due to a decrease in refinancing activity and
continued low levels of home purchase activity. We believe the decrease in refinancing activity reflects the high volume of refinancings
which have already occurred during this extended period of low market interest rates.
Conditions in the secondary mortgage market have made it more difficult for us to
purchase loans that meet our underwriting standards. We expect that the amount of loan purchases
may be at reduced levels for the near-term.
Purchases of mortgage-backed securities during the first three months of 2010 were $2.77 billion as
compared to $1.54 billion during the first three months of 2009. The increase in the purchases of
mortgage-backed securities was due primarily to the reinvestments of proceeds from the principal
repayments and sales of mortgage-backed securities during the first quarter of 2010. Principal
repayments on mortgage-backed securities amounted to $1.55 billion for the first quarter of 2010
(excluding the principal receivable on FHLMC mortgage-backed securities due primarily to the GSE
repurchase) as compared to $699.1 million for the same period in 2009. The increase in principal
repayments was due primarily to the refinancing activity caused by market interest rates that are
at near-historic lows. We also sold $573.7 million of mortgage-backed securities during the first
three months of 2010, resulting in a gain of $30.8 million. There were no securities sales in the
first three months of 2009.
We purchased $1.10 billion of investment securities during the first three months of 2010 as
compared to $1.30 billion during the first three months of 2009. Proceeds from the calls of
investment securities amounted to $950.0 million during the first three months of 2010 as compared
to $775.0 million for the corresponding period in 2009.
As part of the membership requirements of the FHLB, we are required to hold a certain dollar amount
of FHLB common stock based on our mortgage-related assets and borrowings from the FHLB. During the
first three months of 2010, we did not purchase any additional FHLB common stock. During the first
three months of 2009 we had net purchases of $2.3 million.
Our primary financing activities consist of gathering deposits, engaging in wholesale borrowings,
repurchases of our common stock and the payment of dividends.
Total deposits increased $810.8 million during the first three months of 2010 as compared to an
increase of $1.97 billion for the first three months of 2009. Deposit flows are typically affected
by the level of market interest rates, the interest rates and products offered by competitors, the
volatility of equity markets, and other factors. The growth in deposits during the first quarter of
2009 was due to the
Page 33
economic conditions existing at the time that we believe caused customers to use insured bank
deposit products as an alternative to investments such as equity securities and bonds. We believe
that improving economic conditions as well as improving conditions in the securities markets have
changed customer preferences for these alternative investments. In addition, we have lowered our
deposit rates to slow our deposit growth from the 2009 levels since the low yields that are
available to us for mortgage loans and investment securities have made a growth strategy less
prudent until market conditions improve. Time deposits scheduled to mature within one year were
$12.27 billion at March 31, 2010. These time deposits have a weighted average rate 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 1.00%. We anticipate that we will have sufficient
resources to meet this current funding commitment. 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
interest rate.
We have historically used wholesale borrowings to fund our investing and financing
activities. However, during 2009 and the first three months of 2010, we were able to fund
substantially all of our growth with deposit inflows. At March 31, 2010, we had $22.18
billion of borrowed funds with a weighted-average rate of 4.07% and with call dates within one
year. We anticipate that none of these borrowings will be called assuming current market interest
rates remain stable. 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. However, in the event borrowings are
called, we anticipate that we will have sufficient resources to meet this funding commitment by
borrowing new funds at the prevailing market interest rate, using funds generated by deposit growth
or by using proceeds from securities sales. In addition, at March 31, 2010 we had $450.0 million
of borrowings with a weighted average rate of 4.89% that are scheduled to mature within one year.
Our borrowings have traditionally consisted of structured callable borrowings with ten year final
maturities and initial non-call periods of one to five years. We have used this type of borrowing
primarily to fund our loan growth because they have a longer duration than shorter-term
non-callable borrowings and have a slightly lower cost than a non-callable borrowing with a
maturity date similar to the initial call date of the callable borrowing.
However, during the first three months of 2010, we have been able to fund our asset growth with
deposit inflows. In order to effectively manage our interest rate risk and liquidity risk
resulting from our current callable borrowing position, we are pursuing a variety of strategies to
reduce callable borrowings while continuing to pursue our growth plans. We intend to continue
focusing on funding our growth primarily with customer deposits, using borrowed funds as a
supplemental funding source if deposit growth decreases which will allow us to achieve a greater
balance between deposits and borrowings. If necessary to fund our growth and provide for
liquidity, we may borrow a combination of short-term borrowings with maturities of three to six
months and longer-term fixed-maturity borrowings with terms of two to five years. We also intend to
modify certain borrowings to extend their call dates, which we began to do during 2009. During the
first three months of 2010, we modified approximately $1.33 billion of callable borrowings to
extend the call dates of the borrowings by between three and four years as part of this strategy.
In addition, we are considering prepayment of certain borrowings; however, at this time, we have no
immediate plans to make any such prepayments, and we anticipate that any prepayment of borrowings
will be limited.
Page 34
Cash dividends paid during the first three months of 2010 were $74.0 million. We have not
purchased any of our common shares during the three months ended March 31, 2010. At March 31,
2010, there remained 50,123,550 shares available for purchase under existing stock repurchase
programs.
The primary source of liquidity for Hudson City Bancorp, the holding company of Hudson City
Savings, is capital distributions from Hudson City Savings. During the first three months of 2010,
Hudson City Bancorp received $80.0 million in dividend payments from Hudson City Savings. The
primary use of these funds is the payment of dividends to our shareholders and, when appropriate as
part of our capital management strategy, the repurchase of our outstanding common stock. Hudson
City Bancorps ability to continue these activities is dependent upon capital distributions from
Hudson City Savings. Applicable federal law may limit the amount of capital distributions Hudson
City Savings may make. At March 31, 2010, Hudson City Bancorp had total cash and due from banks of
$229.2 million.
At March 31, 2010, Hudson City Savings exceeded all regulatory capital requirements. Hudson City
Savings tangible capital ratio, leverage (core) capital ratio and total risk-based capital ratio
were 7.60%, 7.60% and 21.24%, respectively.
Off-Balance Sheet Arrangements and Contractual Obligations
We are a party to certain off-balance sheet arrangements, which occur in the normal course of our
business, to meet the credit needs of our customers and the growth initiatives of Hudson City
Savings. These arrangements are primarily commitments to originate and purchase mortgage loans, and
to purchase securities. We are also obligated under a number of non-cancelable operating leases.
The following table reports the amounts of our contractual obligations as of March 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Period
|
|
|
|
|
|
|
|
Less Than
|
|
|
One Year to
|
|
|
Three Years to
|
|
|
More Than
|
|
Contractual Obligation
|
|
Total
|
|
|
One Year
|
|
|
Three Years
|
|
|
Five Years
|
|
|
Five Years
|
|
|
|
|
(In thousands)
|
|
Mortgage loan originations
|
|
$
|
470,077
|
|
|
$
|
470,077
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Mortgage loan purchases
|
|
|
50,613
|
|
|
|
50,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed security purchases
|
|
|
1,891,000
|
|
|
|
1,891,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
152,804
|
|
|
|
9,131
|
|
|
|
18,598
|
|
|
|
18,166
|
|
|
|
106,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,564,494
|
|
|
$
|
2,420,821
|
|
|
$
|
18,598
|
|
|
$
|
18,166
|
|
|
$
|
106,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 of approximately 90 days and other termination clauses. 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 customers
credit-worthiness on a case-by-case basis. Additionally, we have available home equity, commercial
lines of credit, and overdraft lines of credit, which do not have fixed expiration dates, of
approximately $188.1 million, $8.7 million, and $2.9 million. We are not obligated to advance
further amounts on credit lines if the customer is delinquent, or otherwise in violation of the
agreement. The commitments to purchase first mortgage loans and mortgage-backed securities had a
normal period from trade date to settlement date of approximately 90 days and 60 days,
respectively.
Page 35
Critical Accounting Policies
Note 2 to our Audited Consolidated Financial Statements, included in our 2009 Annual Report to
Shareholders and incorporated by reference into our 2009 Annual Report on Form 10-K, contains a
summary of our significant accounting policies. We believe our policies with respect to the
methodology for our determination of the ALL, the measurement of stock-based compensation expense
and the measurement of the funded status and cost of our pension and other post-retirement benefit
plans involve a higher degree of complexity and require management to make difficult and subjective
judgments which often require assumptions or estimates about highly uncertain matters. Changes in
these judgments, assumptions or estimates could cause reported results to differ materially. These
critical policies and their application are continually reviewed by management, and are
periodically reviewed with the Audit Committee and our Board of Directors.
Allowance for Loan Losses
The ALL has been determined in accordance with GAAP, under which we are required to maintain an
adequate ALL at March 31, 2010. We are responsible for the timely and periodic determination of the
amount of the allowance required. We believe that our ALL 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.
Our primary lending emphasis is the origination and purchase 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 resulting in a loan concentration in residential first mortgage
loans at March 31, 2009. As a result of our lending practices, we also have a concentration of
loans secured by real property located primarily in New Jersey, New York and Connecticut. At March
31, 2009, approximately 73.1% of our total loans are in the New York metropolitan area.
Additionally, the states of Virginia, Illinois, Maryland, Massachusetts, Pennsylvania, Minnesota,
and Michigan accounted for 4.7%, 3.8%, 3.6%, 2.7%, 2.2%, 1.6% and 1.3%, respectively of total
loans. The remaining 7.0% of the loan portfolio is secured by real estate primarily in the
remainder of the Northeast quadrant of the United States. Based on the composition of our loan
portfolio and the growth in our loan portfolio, we believe the primary risks inherent in our
portfolio are the continued weakened economic conditions due to the recent U.S. recession,
continued high levels of unemployment, rising interest rates in the markets we lend and a
continuing decline in real estate market values. Any one or a combination of these adverse trends
may adversely affect our loan portfolio resulting in increased delinquencies, non-performing
assets, loan losses and future levels of loan loss provisions. We consider these trends in market
conditions in determining the ALL.
Due to the nature of our loan portfolio, our evaluation of the adequacy of our ALL is performed
primarily on a pooled basis. Each month we prepare an analysis which categorizes the entire
loan portfolio by certain risk characteristics such as loan type (one- to four-family,
multi-family, commercial, construction, etc.), loan source (originated or purchased) 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. These factors are
periodically reviewed for appropriateness giving consideration to charge-off history, delinquency
trends, portfolio growth and the status of the regional economy and housing market, in order to
ascertain that the loss factors cover probable and estimable losses inherent in the portfolio.
Based on our recent loss experience on non-performing loans, we increased the loss factors used
in our quantitative analysis of the ALL for certain loan types during the first quarter of 2010.
We use this analysis, as a tool, together with principal balances and delinquency reports, to
Page 36
evaluate the adequacy of the ALL. Other key factors we consider in this process are current real
estate market conditions in geographic areas where our loans are located, changes in the trend of
non-performing loans, the results of our foreclosed property transactions, the current state of
the local and national economy, changes in interest rates and loan portfolio growth. Any one or
a combination of these adverse trends may adversely affect our loan portfolio resulting in
increased delinquencies, loan losses and future levels of provisions.
We maintain the ALL through provisions for loan losses that we charge to income. We charge losses
on loans against the ALL when we believe the collection of loan principal is unlikely. We
establish the provision for loan losses after considering the results of our review as described
above. We apply this process and methodology in a consistent manner and we reassess and modify the
estimation methods and assumptions used in response to changing conditions. Such changes, if any,
are approved by our AQC each quarter.
Hudson City Savings defines the population of potential impaired loans to be all non-accrual
construction, commercial real estate and multi-family loans. Impaired loans are individually
assessed to determine that the loans carrying value is not in excess of the fair value of the
collateral or the present value of the loans 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 analysis.
We believe that we have established and maintained the ALL at adequate levels. Additions may be
necessary if future economic and other conditions differ substantially from the current operating
environment. Although management uses the best information available, the level of the ALL remains
an estimate that is subject to significant judgment and short-term change.
Stock-Based Compensation
We recognize the cost of employee services received in exchange for awards of equity instruments
based on the grant-date fair value for all awards granted, modified, repurchased or cancelled after
January 1, 2006 and for the portion of outstanding awards for which the requisite service was not
rendered as of January 1, 2006, in accordance with accounting guidance. We have made annual grants
of performance-based stock options since 2006 that vest if certain financial performance measures
are met. In accordance with accounting guidance, we assess the probability of achieving these
financial performance measures and recognize the cost of these performance-based grants if it is
probable that the financial performance measures will be met. This probability assessment is
subjective in nature and may change over the assessment period for the performance measures.
We estimate the per share fair value of option grants on the date of grant using the Black-Scholes
option pricing model using assumptions for the expected dividend yield, expected stock price
volatility, risk-free interest rate and expected option term. These assumptions are based on our
analysis of our historical option exercise experience and our judgments regarding future option
exercise experience and market conditions. These assumptions are subjective in nature, involve
uncertainties and, therefore, cannot be determined with precision. The Black-Scholes option pricing
model also contains certain inherent limitations when applied to options that are not traded on
public markets.
The per share fair value of options is highly sensitive to changes in assumptions. In general, the
per share fair value of options will move in the same direction as changes in the expected stock
price volatility, risk-free interest rate and expected option term, and in the opposite direction
of changes in the expected dividend yield. For example, the per share fair value of options will
generally increase as expected stock
Page 37
price volatility increases, risk-free interest rate increases, expected option term increases and
expected dividend yield decreases. The use of different assumptions or different option pricing
models could result in materially different per share fair values of options.
Pension and Other Post-Retirement Benefit Assumptions
Non-contributory retirement and post-retirement defined benefit plans are maintained for certain
employees, including retired employees hired on or before July 31, 2005 who have met other
eligibility requirements of the plans. We adopted ASC 715,
Retirement Benefits
. This ASC requires
an employer to: (a) recognize in its statement of financial condition an asset for a plans
overfunded status or a liability for a plans underfunded status; (b) measure a plans assets and
its obligations that determine its funded status as of the end of the employers fiscal year; and
(c) recognize, in comprehensive income, changes in the funded status of a defined benefit
post-retirement plan in the year in which the changes occur.
We provide our actuary with certain rate assumptions used in measuring our benefit obligation. We
monitor these rates in relation to the current market interest rate environment and update our
actuarial analysis accordingly. The most significant of these is the discount rate used to
calculate the period-end present value of the benefit obligations, and the expense to be included
in the following years financial statements. A lower discount rate will result in a higher benefit
obligation and expense, while a higher discount rate will result in a lower benefit obligation and
expense. The discount rate assumption was determined based on a cash flow/yield curve model
specific to our pension and post-retirement plans. We compare this rate to certain market indices,
such as long-term treasury bonds, or the Moodys bond indices, for reasonableness. A discount rate
of 6.00% was selected for the December 31, 2009 measurement date and the 2010 expense calculation.
For our pension plan, we also assumed an annual rate of salary increase of 4.00% for future
periods. This rate is corresponding to actual salary increases experienced over prior years. We
assumed a return on plan assets of 8.25% for future periods. We actuarially determine the return on
plan assets based on actual plan experience over the previous ten years. The actual return on plan
assets was 12.9% for 2009. The assumed return on plan assets of 8.25% is based on expected returns
in future periods. There can be no assurances with respect to actual return on plan assets in the
future. We continually review and evaluate all actuarial assumptions affecting the pension plan,
including assumed return on assets.
For our post-retirement benefit plan, the assumed health care cost trend rate used to measure the
expected cost of other benefits for 2009 was 8.50%. The rate was assumed to decrease gradually to
4.75% for 2016 and remain at that level thereafter. Changes to the assumed health care cost trend
rate are expected to have an immaterial impact as we capped our obligations to contribute to the
premium cost of coverage to the post-retirement health benefit plan at the 2007 premium level.
Securities Impairment
Our available-for-sale securities portfolio is carried at estimated fair value with any
unrealized gains and losses, net of taxes, reported as accumulated other comprehensive income/loss
in shareholders equity. Debt securities which we have the positive intent and ability to hold to
maturity are classified as held-to-maturity and are carried at amortized cost. The fair values for
our securities are obtained from an independent nationally recognized pricing service.
Substantially all of our securities portfolio is comprised of mortgage-backed securities and debt
securities issued by a GSE. The fair value of these securities is primarily impacted by changes in
interest rates. We generally view changes in fair value caused by changes in interest rates as
temporary, which is consistent with our experience.
Page 38
In April 2009, the FASB issued guidance which changes the method for determining whether an
other-than-temporary impairment exists for debt securities and the amount of the impairment to be
recognized in earnings. This guidance requires that an entity assess whether an impairment of a
debt security is other-than-temporary and, as part of that assessment, determine its intent and
ability to hold the security. If the entity intends to sell the debt security, an
other-than-temporary impairment shall be considered to have occurred. In addition, an
other-than-temporary impairment shall be considered to have occurred if it is more likely than not
that it will be required to sell the security before recovery of its amortized cost.
We conduct a periodic review and evaluation of the securities portfolio to determine if a decline
in the fair value of any security below its cost basis is other-than-temporary. Our evaluation of
other-than-temporary impairment considers the duration and severity of the impairment, our intent
and ability to hold the securities and our assessments of the reason for the decline in value and
the likelihood of a near-term recovery. The unrealized losses on securities in our portfolio were
due primarily to changes in market interest rates subsequent to purchase. In addition, we only
purchase securities issued by GSEs. As a result, the unrealized losses on our securities were not
considered to be other-than-temporary and, accordingly, no impairment loss was recognized during
the first quarter of 2010.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Quantitative and qualitative disclosure about market risk is presented as of December 31, 2009 in
Hudson City Bancorps Annual Report on Form 10-K. The following is an update of the discussion
provided therein.
General
As a financial institution, our primary component of market risk is interest rate volatility. Our
net income is primarily based on net interest income, and fluctuations in interest rates will
ultimately impact the 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 that possess a short term to maturity. Due to the nature
of our operations, we are not subject to foreign currency exchange or commodity price risk. 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 the first three months of 2010 and did
not have any such hedging transactions in place at March 31, 2010. Our mortgage loan and
mortgage-backed security portfolios, which comprise 87.8% of our balance sheet, are subject to
risks associated with the economy in the New York metropolitan area, the general economy of the
United States and the continuing pressure on housing prices. We continually analyze our asset
quality and believe our allowance for loan losses is adequate to cover known or potential losses.
The difference between rates on the yield curve, or the shape of the yield curve, impacts our net
interest income. The FOMC noted that for the first quarter of 2010 economic activity continued to
strengthen and that the labor market was beginning to improve. 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 to the Federal Reserves
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
Page 39
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.
As a result of the FOMC policy decisions and the general tenor of the economy, short-term market
interest rates have remained at low levels during the first quarter of 2010 while longer-term
market interest rates increased, thus steepening the slope of the market yield curve. Due to our
investment and financing decisions, a more positive slope of the yield curve results in a more
favorable environment for us to generate net interest income. Our interest-bearing liabilities
generally reflect movements in short- and intermediate-term rates, while our interest-earning
assets, a majority of which have initial terms to maturity or repricing greater than one year,
generally reflect movements in intermediate- and long-term interest rates. A positive slope of the
yield curve allows us to invest in interest-earning assets at a wider spread to the cost of
interest-bearing liabilities. Due to these changes in market rates, our net interest rate spread
and net interest margin increased for the first quarter of 2010 from the three month period ended
March 31, 2009.
The impact of interest rate changes on our interest income is generally felt in later periods than
the impact on our interest expense due to differences in the timing of the recognition of items on
our balance sheet. The timing of the recognition of interest-earning assets on our balance sheet
generally lags the current market rates by 60 to 90 days due to the normal time period between
commitment and settlement dates. In contrast, the recognition of interest-bearing liabilities on
our balance sheet generally reflects current market interest rates as we generally fund purchases
at the time of settlement. During a period of decreasing short-term interest rates, this timing
difference has a positive impact on our net interest income as our interest-bearing liabilities
reset to the lower interest rates. If short-term interest rates were to increase, the cost of our
interest-bearing liabilities would also increase and have an adverse impact on our net interest
income.
Also impacting our net interest income and net interest rate spread is the level of prepayment
activity on our interest-sensitive assets. The actual amount of time before mortgage loans and
mortgage-backed securities are repaid can be significantly impacted by changes in market interest
rates and mortgage prepayment 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,
availability of credit, seasonal factors and demographic variables. However, the major factors
affecting prepayment rates are prevailing interest rates, related mortgage refinancing
opportunities and competition. Generally, the level of prepayment activity directly affects the
yield earned on those assets, as the payments received on the interest-earning assets will be
reinvested at the prevailing lower market interest rate. Prepayment rates are generally inversely
related to the prevailing market interest rate, thus, as market interest rates increase, prepayment
rates tend to decrease. Prepayment rates on our mortgage-related assets have increased during 2009
and the first three months of 2010, due to the current low market interest rate environment. We
believe the higher level of prepayment activity may continue as market interest rates are expected
to remain at the current low levels through at least the first three quarters of 2010.
Calls of investment securities and borrowed funds are also impacted by the level of market interest
rates. The level of calls of investment securities are generally inversely related to the
prevailing market interest rate, meaning as rates decrease the likelihood of a security being
called would increase. The level of call activity generally affects the yield earned on these
assets, as the payment received on the security would be reinvested at the prevailing lower market
interest rate. During the first three months of 2010 we saw an increase in call activity on our
investment securities as market interest rates remained at these historic
Page 40
lows. We anticipate continued calls of investment securities due to the anticipated continuation of
the low current market interest rate environment.
Our borrowings have traditionally consisted of structured callable borrowings with ten year final
maturities and initial non-call periods of one to five years. We have used this type of borrowing
primarily to fund our loan growth because they have a longer duration than shorter-term
non-callable borrowings and have a slightly lower cost than a non-callable borrowing with a
maturity date similar to the initial call date of the callable borrowing. The likelihood of a
borrowing being called is directly related to the current market interest rates, meaning the higher
that interest rates move, the more likely the borrowing would be called. The level of call activity
generally affects the cost of our borrowed funds, as the call of a borrowing would generally
necessitate re-funding, either through a new borrowing or deposit growth, at the higher current
market interest rate. During the first three months of 2010 we experienced no call activity on our
borrowed funds due to the continued low levels of market interest rates. At March 31, 2010, we had
$22.18 billion of borrowed funds, with a weighted-average rate of 4.07%, with call dates within one
year as compared to $22.25 billion at December 31, 2009. We anticipate that none of these
borrowings will be called assuming current market interest rates remain stable or increase
modestly. 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. However, in the event borrowings are called, we
anticipate that we will have sufficient resources to meet this funding commitment by borrowing new
funds at the prevailing market interest rate, using funds generated by deposit growth or by using
proceeds from securities sales.
During 2009 and the first three months of 2010, we were able to fund our asset growth primarily
with deposit inflows. In order to effectively manage our interest rate risk and liquidity risk
resulting from our current callable borrowing position, we are pursuing a variety of strategies to
reduce borrowings callable within 12 months while continuing to pursue our growth plans. We intend
to continue focusing on funding our growth primarily with customer deposits, using borrowed funds
as a supplemental funding source if deposit growth decreases which will allow us to achieve a
greater balance between deposits and borrowings. If necessary to fund our growth and provide for
liquidity, we may borrow a combination of short-term borrowings with maturities of three to six
months and longer-term fixed-maturity borrowings with terms of two to five years. We also intend to
modify certain borrowings to extend their call dates, which we began to do during 2009. During the
first three months of 2010, we modified approximately $1.33 billion of callable borrowings to
extend the call dates of the borrowings by between three and four years as part of this strategy.
In addition, we are considering prepayment of certain borrowings; however, at this time, we have no
immediate plans to make any such prepayments, and we anticipate that any prepayment of borrowings
will be limited.
Simulation Model.
Hudson City continues to monitor the impact of interest rate volatility
in the same manner as at December 31, 2009, utilizing simulation models as a means of analyzing the
impact of interest rate changes on our net interest income and net present value of equity. We have
not reported the minus 100 or 200 basis point interest rate shock scenarios in either of our
simulation model analyses, as we believe, given the current interest rate environment and
historical interest rate levels, the resulting information would not be meaningful.
As a primary means of managing interest rate risk, we monitor the impact of interest rate changes
on our net interest income over the next twelve-month period. This model does not purport to
provide estimates of net interest income over the next twelve-month period, but attempts to assess
the impact of a simultaneous and parallel interest rate change on our net interest income. The
following table reports the changes to our net interest income over the next 12 months ending March
31, 2011 assuming incremental
Page 41
(equal percent change in each quarter) and permanent changes in interest rates for the given rate
shock scenarios. The incremental rate changes occur over the 12 month period.
|
|
|
|
|
|
Change in
|
|
Percent Change in
|
Interest Rates
|
|
Net Interest Income
|
|
(Basis points)
|
|
|
|
|
|
200
|
|
|
(0.92
|
)%
|
|
100
|
|
|
(0.54
|
)
|
|
50
|
|
|
(0.29
|
)
|
|
(50)
|
|
|
0.25
|
|
The preceding table indicates that at March 31, 2010, in the event of a 200 basis point
incremental increase in interest rates, we would expect to experience a 0.92% decrease from the
base case in net interest income. This compares to a 1.66% decrease at December 31, 2009. If market
rates were to increase 200 basis points instantaneously, we would expect to experience a 4.54%
decrease to net interest income from the base case analysis compared with a 6.02% decrease at
December 31, 2009. The negative change to net interest income in the increasing interest rate
scenarios in both these analyses was primarily due to the increased expense of our short-term time
deposits. Our internal policy sets a maximum change of 20.0% given an instantaneous 200 basis point
increase or decrease shock in interest rates.
The preceding table also indicates that at March 31, 2010, in the event of a 50 basis point
incremental decrease in interest rates over the next 12 months, we would expect to experience a
0.25% increase from the base case in net interest income. This compares to the 0.01% increase at
December 31, 2009. In this analysis, where the rates change over the 12 month period, the decrease
in deposit expense offsets the decrease in interest income on assets, which will decrease due to
accelerated prepayments on these instruments. If market rates were to decrease 50 basis points
instantaneously, we would expect to experience a 5.23% decrease in net interest income from the
base case compared with a 4.83% decrease at December 31, 2009. This decrease is primarily due to
the instantaneous acceleration of prepayment speeds on our mortgage-related assets and calls of our
investment securities in the lower shocked environment, and the subsequent replacement of these
instruments at the lower prevailing market rate.
We also monitor our interest rate risk by modeling changes in the present value of equity in
the different rate environments. The present value of equity is the difference between the
estimated fair value 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, rate caps, rate 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 the 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.
Page 42
The following table presents the estimated present value of equity over a range of interest rate
change scenarios at March 31, 2010. 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.
|
|
|
|
|
|
|
|
|
As Percent of Present
|
Value of Assets
|
Change in
|
|
Present
|
|
Basis Point
|
Interest Rates
|
|
Value Ratio
|
|
Change
|
|
(Basis points)
|
|
|
|
|
|
|
|
|
200
|
|
|
6.40
|
%
|
|
|
(214
|
)
|
100
|
|
|
8.24
|
|
|
|
(30
|
)
|
50
|
|
|
8.63
|
|
|
|
9
|
|
0
|
|
|
8.54
|
|
|
|
|
|
(50)
|
|
|
7.80
|
|
|
|
(74
|
)
|
In the 200 basis point increase scenario, the present value ratio was 6.40% at March 31, 2010
as compared to 4.81% at December 31, 2009. The change in the present value ratio was negative 214
basis points at March 31, 2010 as compared to negative 258 basis points at December 31, 2009. The
decreases in the present value ratio and the sensitivity measure from the base case in the current
period positive 200 basis point shock scenario reflect the decrease in the value of our primarily
fixed-rate assets below par while the value of our borrowing portfolio remains above par due to
call options. In the 50 basis point decrease scenario, the present value ratio was 7.80% at March
31, 2010 as compared to 7.07% at December 31, 2009. The change in the present value ratio was
negative 74 basis points at March 31, 2010 as compared to negative 32 basis points at December 31,
2009. The decrease in the present value ratio in the current period negative 50 basis point shock
scenario reflects the higher valuation of borrowings as lower market rates would further decrease
the likelihood that these borrowings will be called.
The increase in the present value ratio in the base case, the 200 basis point increase scenario and
the 50 basis point decrease scenario from December 31, 2009 reflects the higher valuation of our
mortgage-related asset portfolios due to accelerated prepayment speeds and the initial lower
valuation of our borrowing portfolio due to the modifications we have executed during the past six
months that have decreased the likelihood that these borrowings will be called. The increase in
the present value ratio is also due to the growth of our deposit portfolio during 2009 and the
first three months of 2010 as deposits price closer to par in the various scenarios.
The methods we used in simulation modeling are inherently imprecise. This type of modeling requires
that we make assumptions that 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 previous two tables 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 net interest income or present
value of equity.
GAP Analysis.
The following table presents the amounts of our interest-earning assets and
interest-bearing liabilities outstanding at March 31, 2010, which we anticipate to reprice or
mature in each of the
Page 43
future time periods shown. Except for prepayment or call activity and non-maturity deposit decay
rates, we determined the amounts of assets and liabilities that reprice or mature during a
particular period in accordance with the earlier of the term to rate reset or the contractual
maturity of the asset or liability. Assumptions used for decay rates are the same as those used in
the preparation of our December 31, 2009 model. Prepayment speeds on our mortgage-backed securities
have increased from our December 31, 2009 analysis to reflect actual prepayment speeds for these
items. Investment securities with step-up features, totaling $4.55 billion, are reported at the
earlier of their next step-up date or anticipated call date. Callable investment securities and
borrowed funds are reported at the anticipated call date, for those that are callable within one
year, or at their contractual maturity date. We reported $299.0 million of investment securities at
their anticipated call date. We have reported no borrowings at their anticipated call date due to
the low interest rate environment. We have excluded non-accrual mortgage loans of $696.7 million,
non-accrual other loans of $2.8 million and the principal receivable on mortgage-backed securities
of $1.29 billion from the table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More than
|
|
|
More than
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More than
|
|
|
More than
|
|
|
two years
|
|
|
three years
|
|
|
|
|
|
|
|
|
|
Six months
|
|
|
six months
|
|
|
one year to
|
|
|
to three
|
|
|
to five
|
|
|
More than
|
|
|
|
|
|
|
or less
|
|
|
to one year
|
|
|
two years
|
|
|
years
|
|
|
years
|
|
|
five years
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First mortgage loans
|
|
$
|
3,233,635
|
|
|
$
|
2,520,391
|
|
|
$
|
4,038,189
|
|
|
$
|
3,520,135
|
|
|
$
|
5,726,455
|
|
|
$
|
12,015,065
|
|
|
$
|
31,053,870
|
|
Consumer and other loans
|
|
|
128,693
|
|
|
|
3,002
|
|
|
|
17,920
|
|
|
|
3,053
|
|
|
|
11,208
|
|
|
|
173,690
|
|
|
|
337,566
|
|
Federal funds sold
|
|
|
350,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
350,318
|
|
Mortgage-backed securities
|
|
|
3,273,486
|
|
|
|
2,635,554
|
|
|
|
4,955,022
|
|
|
|
3,673,474
|
|
|
|
5,098,928
|
|
|
|
843,761
|
|
|
|
20,480,225
|
|
FHLB stock
|
|
|
874,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
874,768
|
|
Investment securities
|
|
|
306,370
|
|
|
|
|
|
|
|
1,000,000
|
|
|
|
1,750,000
|
|
|
|
1,600,000
|
|
|
|
689,117
|
|
|
|
5,345,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
8,167,270
|
|
|
|
5,158,947
|
|
|
|
10,011,131
|
|
|
|
8,946,662
|
|
|
|
12,436,591
|
|
|
|
13,721,633
|
|
|
|
58,442,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings accounts
|
|
|
61,174
|
|
|
|
61,174
|
|
|
|
81,565
|
|
|
|
81,565
|
|
|
|
203,912
|
|
|
|
326,257
|
|
|
|
815,647
|
|
Interest-bearing demand accounts
|
|
|
228,144
|
|
|
|
228,144
|
|
|
|
339,523
|
|
|
|
339,523
|
|
|
|
583,822
|
|
|
|
616,132
|
|
|
|
2,335,288
|
|
Money market accounts
|
|
|
526,166
|
|
|
|
526,166
|
|
|
|
1,052,332
|
|
|
|
1,052,332
|
|
|
|
1,841,581
|
|
|
|
263,083
|
|
|
|
5,261,660
|
|
Time deposits
|
|
|
9,539,209
|
|
|
|
2,730,155
|
|
|
|
2,686,874
|
|
|
|
717,593
|
|
|
|
727,349
|
|
|
|
|
|
|
|
16,401,180
|
|
Borrowed funds
|
|
|
150,000
|
|
|
|
300,000
|
|
|
|
450,000
|
|
|
|
350,000
|
|
|
|
950,000
|
|
|
|
27,775,000
|
|
|
|
29,975,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing
liabilities
|
|
|
10,504,693
|
|
|
|
3,845,639
|
|
|
|
4,610,294
|
|
|
|
2,541,013
|
|
|
|
4,306,664
|
|
|
|
28,980,472
|
|
|
|
54,788,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate sensitivity gap
|
|
$
|
(2,337,423
|
)
|
|
$
|
1,313,308
|
|
|
$
|
5,400,837
|
|
|
$
|
6,405,649
|
|
|
$
|
8,129,927
|
|
|
$
|
(15,258,839
|
)
|
|
$
|
3,653,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative interest rate sensitivity gap
|
|
$
|
(2,337,423
|
)
|
|
$
|
(1,024,115
|
)
|
|
$
|
4,376,722
|
|
|
$
|
10,782,371
|
|
|
$
|
18,912,298
|
|
|
$
|
3,653,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative interest rate sensitivity gap
as a percent of total assets
|
|
|
(3.82)
|
%
|
|
|
(1.67)
|
%
|
|
|
7.15
|
%
|
|
|
17.61
|
%
|
|
|
30.89
|
%
|
|
|
5.97
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative interest-earning assets
as a percent of interest-bearing
liabilities
|
|
|
77.75
|
%
|
|
|
92.86
|
%
|
|
|
123.08
|
%
|
|
|
150.15
|
%
|
|
|
173.28
|
%
|
|
|
106.67
|
%
|
|
|
|
|
The cumulative one-year gap as a percent of total assets was negative 1.67% at March 31,
2010 compared with negative 3.70% at December 31, 2009. The lower negative cumulative one-year gap
primarily reflects the increase in longer-term (over one year to maturity) time deposits and money
market deposit accounts placed on our balance sheet during the first three months of 2010. The
decrease also reflects the amount of mortgage-related assets in the lower repricing categories due
to the current prepayment levels.
Page 44
The methods used in the gap table are also inherently imprecise. 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 and mortgage-backed securities, have features that 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 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.
Item 4. Controls and Procedures
Ronald E. Hermance, Jr., our Chairman, President and Chief Executive Officer, and James C. Kranz,
our Executive Vice President and Chief Financial Officer, conducted an evaluation of the
effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended) as of March 31, 2010. Based upon their
evaluation, they each found that our disclosure controls and procedures were effective to ensure
that information required to be disclosed in the reports that we file and submit under the Exchange
Act was recorded, processed, summarized and reported as and when required and that such information
was accumulated and communicated to our management as appropriate to allow timely decisions
regarding required disclosures.
There was no change in our internal control over financial reporting that occurred during the
period covered by this report that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
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.
Item 1A. Risk Factors
For a summary of risk factors relevant to our operations, please see Part I, Item 1A in our 2009
Annual Report on Form 10-K. There has been no material change in risk factors since December 31,
2009, except as described below.
Hudson City Savings proposed conversion to a national bank will subject us to a different
regulatory framework and a new group of regulators. In addition, the potential adoption of
significant aspects of proposed regulatory reform legislation may have a material effect on our
operations whether we remain a federal thrift or become a national bank.
We are currently subject to extensive regulation, supervision, and examination by the OTS and the FDIC.
Assuming that Hudson City Savings becomes a national bank, the OCC will be the primary federal bank
regulatory agency for Hudson City Savings and the FRB will be the primary regulator for Hudson City
Bancorp. Such regulators will govern the activities in which we may engage, primarily for the protection
of depositors. These regulatory authorities have extensive discretion in connection with their supervisory
and enforcement activities, including the imposition of restrictions on the operation of a bank, the
classification of assets by a bank, and the adequacy of a banks allowance for credit losses. Any change in
such regulation and oversight, whether in the form of regulatory policy, regulations, or legislation, could
have a material impact on us and our operations. In addition, upon completion of the proposed conversion
we would become subject to formal consolidated capital requirements imposed by the FRB on bank
holding companies, which as a thrift holding company we are not currently subject to. Although the
proposed conversion is not expected to result in a change in our business plan or operations, we expect to
incur additional regulatory compliance costs as we adjust to the regulatory and reporting requirements of
our new regulators.
On December 11, 2009, the House of Representatives passed H.R. 4173, the Wall Street Reform and
Consumer Protection Act of 2009, or the Reform Bill. The Reform Bill is intended to address perceived
weaknesses in the U.S. financial regulatory system and prevent future economic and financial crises. The
Reform Bill, among other things, would create three new governmental agencies: the Financial Services
Oversight Council, the Federal Insurance Office and the Consumer Financial Protection Agency, or the
CFPA. The CFPA will have the authority to implement and enforce a variety of existing consumer
protection statutes and to issue new regulations. In addition, the Reform Bill amends the Home Owners
Loan Act to abolish the OTS and transfer its functions and personnel to a newly created Division of Thrift
Supervision within the OCC. The Reform Bill preserves the federal thrift charter for thrifts, such as
Hudson City Savings. Most significantly for us if Hudson City Savings is to remain a federal thrift, the
Reform Bill contains provisions which would result in thrift holding companies, such as Hudson City
Bancorp, becoming bank holding companies subject to consolidated capital requirements, Bank Holding
Company Act limitations and supervision by the FRB.
On March 15, 2010, Senate Banking Committee Chairman Christopher Dodd released a revised draft of
financial regulatory reform legislation, the Restoring American Financial Stability Act. Like the Reform
Bill, Chairman Dodds bill contemplates the elimination of the OTS and the transfer of supervisory
authority over federal thrifts to the OCC, however it does not eliminate the thrift holding company. In
addition, Chairman Dodds bill contains other provisions that are currently under consideration. The exact
requirements and timing of any final legislation cannot be determined at this time. We may be affected by
certain reform proposals under consideration pursuant to the Reform Bill and Chairman Dodds bill that
could result in us becoming subject to increased levels of regulatory assessments and fees. In addition, we
may also be subject to stricter capital requirements, leverage limits and liquidity requirements which may
affect the scope, coverage, or calculation of capital, all of which could require us to reduce business levels
or to raise capital.
We cannot assure you that proposed laws, rules and regulations, or any other laws, rules, or regulation, will
not be adopted in the future, which could make compliance more difficult or expensive or otherwise
adversely affect our business, financial condition or prospects. Further, we can not assure you as to the
receipt of regulatory approval to complete the proposed conversion, whether, or to what extent, the OCC or
the FRB would require conditions to any such approval or the timing of the completion of the proposed
conversion.
Page 45
Higher FDIC deposit insurance premiums and assessments could adversely affect our financial
condition.
As a result of the recent failures of a number of banks and thrifts, there has been a significant
increase in the loss provisions of the DIF of the FDIC. This has resulted in a decline in the DIF
reserve ratio. Because the DIF reserve ratio declined below 1.15% and is expected to remain below
1.15%, the FDIC was required to establish a restoration plan to restore the reserve ratio to 1.15%
within a period of five years, which was subsequently extended to eight years. In February 2009,
the FDIC adopted a final rule which set the initial base assessment rates beginning April 1, 2009
and provided for the following adjustments to an institutions assessment rate: (1) a decrease for
long-term unsecured debt, including most senior and subordinated debt; (2) an increase for secured
liabilities in excess of 25% of domestic deposits; and (3) for institutions not placed in the
lowest risk category for assessment purposes, an increase for brokered deposits above a threshold
amount. Additionally, in September, 2009, the FDIC adopted an amendment to the restoration plan
that increases the deposit insurance assessment rate schedule by 3 basis points (annualized) of
insured deposits beginning January 1, 2011.
Page 46
On April 13, 2010, the Board of Directors of the FDIC approved a Notice of Proposed Rulemaking to
revise the deposit insurance assessment system for large institutions that pose unique and
concentrated risks to the DIF. The FDIC proposes to revise the assessment system applicable to
large institutions to better capture risk at the time an institution assumes the risk, to better
differentiate institutions during periods of good economic and banking conditions based on how they
would fare during periods of stress or economic downturns, and to better take into account the
losses that the FDIC may incur if an institution fails. Under the proposal, risk categories and
long-term debt ratings would no longer be used to categorize large institutions for purposes of
assigning a range of potential assessment rates, but the FDIC would continue to use the supervisory
ratings as a factor in measuring risk. The FDIC would replace the financial ratios currently used
with two scorecards: one for large institutions and the other for highly complex institutions. A
highly complex institution would be defined as an insured depository institution with greater than
$50 billion in total assets that is wholly owned by a parent company with more than $500 billion in
total assets. A large institution would be defined under the proposal as an insured depository
institution with $10 billion or greater in total assets for at least four consecutive quarters.
Accordingly, we would be considered a large institution under the proposal.
Each scorecard would have two componentsa performance score and loss severity score. The two
scores would be combined to produce a total score, which would be translated into an initial
assessment rate. Similar to the current system, the FDIC would retain an ability to make limited
discretionary adjustments. The FDIC proposes that the Board of Directors of the FDIC adopt new
initial and total base assessment rate schedules effective January 1, 2011. For large
institutions, the initial base assessment rate would range from 10 to 50 basis points, and the
total base assessment rate would range from 5 to 85 basis points, effective January 1, 2011.
Additionally, these assessment rates would increase 3 additional basis points on January 1, 2011
pursuant to the amendment to the FDIC restoration plan adopted in September 2009.
In addition to the this Notice of Proposed Rulemaking, Congress, as part of Chairman Dodds bill,
is also evaluating a proposal on deposit insurance assessments.
The potential effects on us of this Notice of Proposed Rulemaking and of the deposit insurance
assessment provisions of Chairman Dodds bill are unknown at this time. However, if adopted as
proposed, these new rules could result in even higher FDIC deposit insurance assessments effective
January 1, 2011, which could further increase non-interest expense and have a material impact on
our results of operations.
Page 47
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table reports information regarding repurchases of our common stock during the first
quarter of 2010 and the stock repurchase plans approved by our Board of Directors.
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Maximum
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Total Number of
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Number of Shares
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Total
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Shares Purchased
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that May Yet Be
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Number of
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Average
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as Part of Publicly
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Purchased Under
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Shares
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Price Paid
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Announced Plans
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the Plans or
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Period
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Purchased
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per Share
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or Programs
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Programs (1)
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January 1-January 31, 2010
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$
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50,123,550
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February 1-February 28, 2010
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50,123,550
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March 1-March 31, 2010
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50,123,550
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Total
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(1)
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On January 25, 2007, Hudson City Bancorp announced the adoption of its eighth Stock
Repurchase Program, which authorized the repurchase
of up to 51,400,000 shares of common stock. This program has no expiration date.
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Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. (Removed and Reserved)
Item 5. Other Information
Not applicable.
Item 6. Exhibits
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Exhibit Number
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Exhibit
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10.2A
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Profit Incentive Bonus Plan of Hudson City Savings Bank
Adoption Agreement No.1
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10.2B
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Profit Incentive Bonus Plan of Hudson City Savings Bank
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10.34
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Form of Hudson City Bancorp, Inc. 2006 Stock Incentive
Plan Performance Stock Option Agreement
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10.35
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Form of Hudson City Bancorp, Inc. 2006 Stock Incentive
Plan Retention Stock Option Agreement
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10.36
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Form of Hudson City Bancorp, Inc. 2006 Stock Incentive
Plan Director Stock Option Agreement
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31.1
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Certification of Chief Executive Officer
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Page 48
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Exhibit Number
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Exhibit
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31.2
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Certification of Chief Financial Officer
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32.1
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Written Statement of Chief Executive Officer and Chief
Financial Officer furnished pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. *
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101
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The following information from the Companys Quarterly
Report on Form 10-Q for the quarter ended March 31, 2010,
filed with the SEC on May 7, 2010, has been formatted in
eXtensible Business Reporting Language: (i) Consolidated
Statements of Financial Condition at March 31, 2010 and
December 31, 2009, (ii) Consolidated Statements of Income
for the three months ended March 31, 2010 and 2009, (iii)
Consolidated Statements of Changes in Shareholders
Equity for the three months ended March 31, 2010 and 2009, (iv) Consolidated Statements of Cash Flows for the
three months ended March 31, 2010 and 2009 and (v) Notes
to the Unaudited Consolidated Financial Statements
(tagged as blocks of text). *
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*
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Pursuant to SEC rules, this exhibit will not be deemed filed for purposes of Section 18
of the Exchange Act or otherwise subject to the liability of that section.
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Page 49
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Hudson City Bancorp, Inc.
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Date: May 7, 2010
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By:
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/s/ Ronald E. Hermance, Jr.
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Ronald E. Hermance, Jr.
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Chairman, President and Chief Executive Officer
(Principal Executive Officer)
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Date: May 7, 2010
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By:
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/s/ James C. Kranz
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James C. Kranz
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Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
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Page 50
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