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: September 30, 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
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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West 80 Century Road
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
o
No
þ
As of November 2, 2010, the registrant had 526,603,530 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 including, without limitation, the recent passage of the
Dodd-Frank Wall Street Reform and Consumer Protection Act, 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 including, without limitation, our
application to convert Hudson City Savings Bank to a national bank, 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 funding 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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September 30,
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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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147,614
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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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485,479
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362,449
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Total cash and cash equivalents
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633,093
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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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14,961,441
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11,116,531
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Investment securities
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90,797
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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 $7,134,252 at September 30, 2010
and $10,324,831 at December 31, 2009)
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6,777,579
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9,963,554
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Investment securities (fair value of $4,967,621 at September 30, 2010
and $4,071,005 at December 31, 2009)
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4,939,922
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4,187,704
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Total securities
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26,769,739
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26,363,029
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Loans
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31,749,402
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31,779,921
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Net deferred loan costs
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93,442
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81,307
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Allowance for loan losses
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(216,283
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)
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(140,074
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)
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Net loans
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31,626,561
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31,721,154
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Federal Home Loan Bank of New York stock
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878,690
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874,768
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Foreclosed real estate, net
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40,276
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16,736
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Accrued interest receivable
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273,606
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304,091
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Banking premises and equipment, net
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70,456
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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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172,102
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204,556
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Total Assets
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$
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60,616,632
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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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24,323,915
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$
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23,992,007
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Noninterest-bearing
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590,706
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586,041
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Total deposits
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24,914,621
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24,578,048
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Repurchase agreements
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14,950,000
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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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29,825,000
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29,975,000
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Due to brokers
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100,000
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Accrued expenses and other liabilities
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254,241
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275,560
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Total liabilities
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54,993,862
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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; 526,630,332 shares outstanding
at September 30, 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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4,699,677
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4,683,414
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Retained earnings
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2,595,547
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2,401,606
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Treasury stock, at cost; 214,836,223 shares at September 30, 2010 and
214,972,879 shares at December 31, 2009
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(1,726,653
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)
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(1,727,579
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)
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Unallocated common stock held by the employee stock ownership plan
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(205,732
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)
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(210,237
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)
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Accumulated other comprehensive income, net of tax
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252,516
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184,533
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Total shareholders equity
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5,622,770
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5,339,152
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Total Liabilities and Shareholders Equity
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$
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60,616,632
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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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For the Nine Months
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Ended September 30,
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Ended September 30,
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2010
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2009
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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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417,071
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$
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424,521
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$
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1,271,476
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$
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1,252,011
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Consumer and other loans
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4,525
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5,212
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13,938
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16,629
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Mortgage-backed securities held to maturity
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82,783
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128,996
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285,228
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368,212
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Mortgage-backed securities available for sale
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123,841
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114,821
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375,223
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374,995
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Investment securities held to maturity
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47,415
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30,835
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144,106
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44,920
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Investment securities available for sale
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2,443
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27,155
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17,992
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107,074
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Dividends on Federal Home Loan Bank of New York stock
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10,128
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12,281
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31,668
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30,698
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Federal funds sold and other overnight deposits
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604
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344
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1,629
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707
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Total interest and dividend income
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688,810
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744,165
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2,141,260
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2,195,246
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Interest Expense:
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Deposits
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90,526
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112,925
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290,115
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375,003
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Borrowed funds
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307,950
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305,783
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912,152
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908,558
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Total interest expense
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|
398,476
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418,708
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1,202,267
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1,283,561
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Net interest income
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290,334
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325,457
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938,993
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911,685
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Provision for Loan Losses
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50,000
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40,000
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150,000
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92,500
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|
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Net interest income after provision for loan losses
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240,334
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285,457
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|
788,993
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819,185
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|
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|
|
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|
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Non-Interest Income:
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|
|
|
|
|
|
|
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|
|
|
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Service charges and other income
|
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|
2,842
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|
|
|
2,513
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|
|
|
7,656
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|
|
|
7,207
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|
Gain on securities transactions, net
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|
31,017
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|
|
|
|
|
|
|
92,411
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|
|
|
24,185
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|
|
|
|
|
|
|
|
|
|
|
|
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|
Total non-interest income
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|
|
33,859
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|
|
|
2,513
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|
|
|
100,067
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|
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31,392
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|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Non-Interest Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and employee benefits
|
|
|
32,054
|
|
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34,043
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|
|
|
99,005
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|
|
|
103,166
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|
Net occupancy expense
|
|
|
8,275
|
|
|
|
7,965
|
|
|
|
24,546
|
|
|
|
24,260
|
|
Federal deposit insurance assessment
|
|
|
15,000
|
|
|
|
10,930
|
|
|
|
40,927
|
|
|
|
23,294
|
|
FDIC special assessment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,098
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|
Other expense
|
|
|
10,377
|
|
|
|
9,982
|
|
|
|
32,355
|
|
|
|
30,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expense
|
|
|
65,706
|
|
|
|
62,920
|
|
|
|
196,833
|
|
|
|
202,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
208,487
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|
|
|
225,050
|
|
|
|
692,227
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|
|
|
647,916
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
83,918
|
|
|
|
89,964
|
|
|
|
276,182
|
|
|
|
257,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
124,569
|
|
|
$
|
135,086
|
|
|
$
|
416,045
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|
|
$
|
390,668
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
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|
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|
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|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.25
|
|
|
$
|
0.28
|
|
|
$
|
0.84
|
|
|
$
|
0.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.25
|
|
|
$
|
0.27
|
|
|
$
|
0.84
|
|
|
$
|
0.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Number of Common Shares Outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
493,164,078
|
|
|
|
489,545,739
|
|
|
|
492,873,570
|
|
|
|
488,048,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
493,983,690
|
|
|
|
491,992,378
|
|
|
|
494,489,274
|
|
|
|
491,356,241
|
|
See accompanying notes to unaudited consolidated financial statements
Page 5
Hudson City Bancorp, Inc. and Subsidiary
Consolidated Statements of Changes in Shareholders Equity
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months
|
|
|
|
Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands, except per share data)
|
|
Common stock
|
|
$
|
7,415
|
|
|
$
|
7,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital:
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
4,683,414
|
|
|
|
4,641,571
|
|
Stock option plan expense
|
|
|
8,191
|
|
|
|
9,901
|
|
Tax benefit from stock plans
|
|
|
406
|
|
|
|
18,003
|
|
Allocation of ESOP stock
|
|
|
4,861
|
|
|
|
4,633
|
|
RRP stock granted
|
|
|
(145
|
)
|
|
|
(6,771
|
)
|
Vesting of RRP stock
|
|
|
2,950
|
|
|
|
3,471
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
4,699,677
|
|
|
|
4,670,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings:
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
2,401,606
|
|
|
|
2,196,235
|
|
Net income
|
|
|
416,045
|
|
|
|
390,668
|
|
Dividends paid on common stock ($0.45 and $0.44 per share, respectively)
|
|
|
(221,817
|
)
|
|
|
(214,926
|
)
|
Exercise of stock options
|
|
|
(287
|
)
|
|
|
(24,150
|
)
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
2,595,547
|
|
|
|
2,347,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock:
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
(1,727,579
|
)
|
|
|
(1,737,838
|
)
|
Purchase of common stock
|
|
|
|
|
|
|
(43,477
|
)
|
Exercise of stock options
|
|
|
1,245
|
|
|
|
34,077
|
|
Vesting of RRP stock
|
|
|
(464
|
)
|
|
|
|
|
RRP stock granted
|
|
|
145
|
|
|
|
6,771
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
(1,726,653
|
)
|
|
|
(1,740,467
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated common stock held by the ESOP:
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
(210,237
|
)
|
|
|
(216,244
|
)
|
Allocation of ESOP stock
|
|
|
4,505
|
|
|
|
4,506
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
(205,732
|
)
|
|
|
(211,738
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income(loss):
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
184,533
|
|
|
|
47,657
|
|
|
|
|
|
|
|
|
Net unrealized gains on securities available for sale arising during period,
net of tax expense of $84,161 and $112,963 in 2010 and 2009, respectively
|
|
|
121,863
|
|
|
|
163,568
|
|
Reclassification adjustment for gains in net income, net of tax of expense of $37,750
and $9,880 in 2010 and 2009, respectively
|
|
|
(54,661
|
)
|
|
|
(14,305
|
)
|
Pension and other postretirement benefits adjustment, net of tax(expense) benefit of
($539) and $403 for 2010 and 2009, respectively
|
|
|
781
|
|
|
|
(584
|
)
|
|
|
|
|
|
|
|
Other comprehensive income, net of tax
|
|
|
67,983
|
|
|
|
148,679
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
252,516
|
|
|
|
196,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
$
|
5,622,770
|
|
|
$
|
5,270,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary of comprehensive income
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
416,045
|
|
|
$
|
390,668
|
|
Other comprehensive income, net of tax
|
|
|
67,983
|
|
|
|
148,679
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
484,028
|
|
|
$
|
539,347
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited consolidated financial statements.
Page 6
Hudson City Bancorp, Inc. and Subsidiary
Consolidated
Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months
|
|
|
|
Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
416,045
|
|
|
$
|
390,668
|
|
Adjustments to reconcile net income to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation, accretion and amortization expense
|
|
|
73,287
|
|
|
|
48,690
|
|
Provision for loan losses
|
|
|
150,000
|
|
|
|
92,500
|
|
Gains on securities transactions, net
|
|
|
(92,411
|
)
|
|
|
(24,185
|
)
|
Share-based compensation, including committed ESOP shares
|
|
|
20,043
|
|
|
|
22,511
|
|
Deferred tax benefit
|
|
|
(42,386
|
)
|
|
|
(29,580
|
)
|
Decrease (increase) in accrued interest receivable
|
|
|
30,485
|
|
|
|
(11,475
|
)
|
Decrease (increase) in other assets
|
|
|
27,185
|
|
|
|
(11,166
|
)
|
Decrease in accrued expenses and other liabilities
|
|
|
(20,538
|
)
|
|
|
(25,868
|
)
|
|
|
|
|
|
|
|
Net Cash Provided by Operating Activities
|
|
|
561,710
|
|
|
|
452,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Originations of loans
|
|
|
(4,278,071
|
)
|
|
|
(4,656,065
|
)
|
Purchases of loans
|
|
|
(580,145
|
)
|
|
|
(2,451,388
|
)
|
Principal payments on loans
|
|
|
4,744,510
|
|
|
|
5,340,970
|
|
Principal collection of mortgage-backed securities held to maturity
|
|
|
3,340,264
|
|
|
|
1,827,195
|
|
Purchases of mortgage-backed securities held to maturity
|
|
|
(172,434
|
)
|
|
|
(3,017,731
|
)
|
Principal collection of mortgage-backed securities available for sale
|
|
|
3,022,528
|
|
|
|
1,604,549
|
|
Purchases of mortgage-backed securities available for sale
|
|
|
(8,705,622
|
)
|
|
|
(1,992,789
|
)
|
Proceeds from sales of mortgage backed securities available for sale
|
|
|
1,992,002
|
|
|
|
785,594
|
|
Proceeds from maturities and calls of investment securities held to maturity
|
|
|
5,049,235
|
|
|
|
50,000
|
|
Purchases of investment securities held to maturity
|
|
|
(5,902,176
|
)
|
|
|
(3,040,329
|
)
|
Proceeds from maturities and calls of investment securities available for sale
|
|
|
1,025,000
|
|
|
|
2,622,225
|
|
Proceeds from sales of investment securities available for sale
|
|
|
|
|
|
|
317
|
|
Purchases of investment securities available for sale
|
|
|
|
|
|
|
(1,331,300
|
)
|
Purchases of Federal Home Loan Bank of New York stock
|
|
|
(8,422
|
)
|
|
|
(78,272
|
)
|
Redemption of Federal Home Loan Bank of New York stock
|
|
|
4,500
|
|
|
|
66,825
|
|
Purchases of premises and equipment, net
|
|
|
(6,860
|
)
|
|
|
(4,881
|
)
|
Net proceeds from sale of foreclosed real estate
|
|
|
19,753
|
|
|
|
12,218
|
|
|
|
|
|
|
|
|
Net Cash Used in Investment Activities
|
|
|
(455,938
|
)
|
|
|
(4,262,862
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Net increase in deposits
|
|
|
336,573
|
|
|
|
4,649,907
|
|
Proceeds from borrowed funds
|
|
|
|
|
|
|
750,000
|
|
Principal payments on borrowed funds
|
|
|
(150,000
|
)
|
|
|
(950,000
|
)
|
Dividends paid
|
|
|
(221,817
|
)
|
|
|
(214,926
|
)
|
Purchases of treasury stock
|
|
|
|
|
|
|
(43,477
|
)
|
Exercise of stock options
|
|
|
958
|
|
|
|
9,927
|
|
Tax benefit from stock plans
|
|
|
406
|
|
|
|
18,003
|
|
|
|
|
|
|
|
|
Net Cash (Used in) provided by Financing Activities
|
|
|
(33,880
|
)
|
|
|
4,219,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase in Cash and Cash Equivalents
|
|
|
71,892
|
|
|
|
408,667
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at Beginning of Year
|
|
|
561,201
|
|
|
|
261,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Period
|
|
$
|
633,093
|
|
|
$
|
670,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
1,194,875
|
|
|
$
|
1,282,653
|
|
|
|
|
|
|
|
|
Loans transferred to foreclosed real estate
|
|
$
|
56,533
|
|
|
$
|
14,998
|
|
|
|
|
|
|
|
|
Income tax payments
|
|
$
|
360,058
|
|
|
$
|
279,347
|
|
|
|
|
|
|
|
|
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 savings and loan holding company for Hudson City Savings Bank and its subsidiaries (Hudson
City Savings). Each of Hudson City Savings and the Company is currently subject to the regulation
and examination of the Office of Thrift Supervision (OTS).
On March 4, 2010, Hudson City Savings filed an application (the 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 Conversion). If the Application is approved, Hudson City Savings will no
longer be a federal savings bank subject to the regulation and examination of the 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 (the FRB). We cannot provide
assurance as to whether the Application will be approved or the timing of any approval.
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection
Act (the Reform Act). The Reform Act, among other things, effectively merges the OTS into the
OCC, with the OCC assuming all functions and authority from the OTS relating to federally chartered
savings banks, and the FRB assuming all functions and authority from the OTS relating to savings
and loan holding companies.
Whether the aforementioned Application is approved by the OCC or upon implementation of the Reform
Act, Hudson City Savings will be regulated by the OCC and the Company will be regulated by the FRB.
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 and nine month periods ended September 30, 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 (ALL) 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 September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Per
|
|
|
|
|
|
|
|
|
|
|
Per
|
|
|
|
|
|
|
|
Average
|
|
|
Share
|
|
|
|
|
|
|
Average
|
|
|
Share
|
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
|
(In thousands, except per share data)
|
|
Net income
|
|
$
|
124,569
|
|
|
|
|
|
|
|
|
|
|
$
|
135,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to
common stockholders
|
|
$
|
124,569
|
|
|
|
493,164
|
|
|
$
|
0.25
|
|
|
$
|
135,086
|
|
|
|
489,546
|
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive common
stock equivalents
|
|
|
|
|
|
|
820
|
|
|
|
|
|
|
|
|
|
|
|
2,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to
common stockholders
|
|
$
|
124,569
|
|
|
|
493,984
|
|
|
$
|
0.25
|
|
|
$
|
135,086
|
|
|
|
491,992
|
|
|
$
|
0.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Per
|
|
|
|
|
|
|
|
|
|
|
Per
|
|
|
|
|
|
|
|
Average
|
|
|
Share
|
|
|
|
|
|
|
Average
|
|
|
Share
|
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
|
(In thousands, except per share data)
|
|
Net income
|
|
$
|
416,045
|
|
|
|
|
|
|
|
|
|
|
$
|
390,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to
common stockholders
|
|
$
|
416,045
|
|
|
|
492,874
|
|
|
$
|
0.84
|
|
|
$
|
390,668
|
|
|
|
488,048
|
|
|
$
|
0.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive common
stock equivalents
|
|
|
|
|
|
|
1,615
|
|
|
|
|
|
|
|
|
|
|
|
3,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to
common stockholders
|
|
$
|
416,045
|
|
|
|
494,489
|
|
|
$
|
0.84
|
|
|
$
|
390,668
|
|
|
|
491,356
|
|
|
$
|
0.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 9
4. Securities
The amortized cost and estimated fair market value of investment securities and
mortgage-backed securities available-for-sale at September 30, 2010 and December 31, 2009 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair Market
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
(In thousands)
|
|
September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States government
-sponsored enterprises debt
|
|
$
|
80,000
|
|
|
$
|
3,483
|
|
|
$
|
|
|
|
$
|
83,483
|
|
Equity securities
|
|
|
6,767
|
|
|
|
547
|
|
|
|
|
|
|
|
7,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
available for sale
|
|
|
86,767
|
|
|
|
4,030
|
|
|
|
|
|
|
|
90,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA pass-through certificates
|
|
|
1,917,530
|
|
|
|
53,548
|
|
|
|
|
|
|
|
1,971,078
|
|
FNMA pass-through certificates
|
|
|
7,346,785
|
|
|
|
202,695
|
|
|
|
|
|
|
|
7,549,480
|
|
FHLMC pass-through certificates
|
|
|
4,511,226
|
|
|
|
181,954
|
|
|
|
|
|
|
|
4,693,180
|
|
FHLMC and FNMA REMICs
|
|
|
728,436
|
|
|
|
21,125
|
|
|
|
(1,858
|
)
|
|
|
747,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities
available for sale
|
|
$
|
14,503,977
|
|
|
$
|
459,322
|
|
|
$
|
(1,858
|
)
|
|
$
|
14,961,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States government
-sponsored enterprises debt
|
|
$
|
1,104,699
|
|
|
$
|
1,890
|
|
|
$
|
(18,424
|
)
|
|
$
|
1,088,165
|
|
Equity securities
|
|
|
6,770
|
|
|
|
305
|
|
|
|
|
|
|
|
7,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
available for sale
|
|
|
1,111,469
|
|
|
|
2,195
|
|
|
|
(18,424
|
)
|
|
|
1,095,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA pass-through certificates
|
|
|
1,257,590
|
|
|
|
13,365
|
|
|
|
(881
|
)
|
|
|
1,270,074
|
|
FNMA pass-through certificates
|
|
|
3,782,198
|
|
|
|
128,429
|
|
|
|
(3,259
|
)
|
|
|
3,907,368
|
|
FHLMC pass-through certificates
|
|
|
4,655,629
|
|
|
|
232,697
|
|
|
|
|
|
|
|
4,888,326
|
|
FHLMC and FNMA REMICs
|
|
|
1,057,007
|
|
|
|
5,938
|
|
|
|
(12,182
|
)
|
|
|
1,050,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities
available for sale
|
|
$
|
10,752,424
|
|
|
$
|
380,429
|
|
|
$
|
(16,322
|
)
|
|
$
|
11,116,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 10
The amortized cost and estimated fair market value of investment securities and
mortgage-backed securities held to maturity at September 30, 2010 and December 31, 2009 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair Market
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
(In thousands)
|
|
September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States government
-sponsored enterprises debt
|
|
$
|
4,939,922
|
|
|
$
|
27,699
|
|
|
$
|
|
|
|
$
|
4,967,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
held to maturity
|
|
|
4,939,922
|
|
|
|
27,699
|
|
|
|
|
|
|
|
4,967,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA pass-through certificates
|
|
|
101,909
|
|
|
|
3,243
|
|
|
|
|
|
|
|
105,152
|
|
FNMA pass-through certificates
|
|
|
1,782,463
|
|
|
|
97,112
|
|
|
|
|
|
|
|
1,879,575
|
|
FHLMC pass-through certificates
|
|
|
3,239,926
|
|
|
|
176,227
|
|
|
|
|
|
|
|
3,416,153
|
|
FHLMC and FNMA REMICs
|
|
|
1,653,281
|
|
|
|
80,091
|
|
|
|
|
|
|
|
1,733,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities
held to maturity
|
|
$
|
6,777,579
|
|
|
$
|
356,673
|
|
|
$
|
|
|
|
$
|
7,134,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States government
-sponsored enterprises debt
|
|
$
|
4,187,599
|
|
|
$
|
915
|
|
|
$
|
(117,614
|
)
|
|
$
|
4,070,900
|
|
Municipal bonds
|
|
|
105
|
|
|
|
|
|
|
|
|
|
|
|
105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
held to maturity
|
|
|
4,187,704
|
|
|
|
915
|
|
|
|
(117,614
|
)
|
|
|
4,071,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA pass-through certificates
|
|
|
112,019
|
|
|
|
2,769
|
|
|
|
(1
|
)
|
|
|
114,787
|
|
FNMA pass-through certificates
|
|
|
2,510,095
|
|
|
|
106,509
|
|
|
|
|
|
|
|
2,616,604
|
|
FHLMC pass-through certificates
|
|
|
4,764,429
|
|
|
|
231,356
|
|
|
|
(3
|
)
|
|
|
4,995,782
|
|
FHLMC and FNMA REMICs
|
|
|
2,577,011
|
|
|
|
37,119
|
|
|
|
(16,472
|
)
|
|
|
2,597,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities
held to maturity
|
|
$
|
9,963,554
|
|
|
$
|
377,753
|
|
|
$
|
(16,476
|
)
|
|
$
|
10,324,831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 11
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 September 30, 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)
|
|
September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC and FNMA REMICs
|
|
|
|
|
|
|
|
|
|
|
97,249
|
|
|
|
(1,858
|
)
|
|
|
97,249
|
|
|
|
(1,858
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired
securities available for sale
|
|
|
|
|
|
|
|
|
|
|
97,249
|
|
|
|
(1,858
|
)
|
|
|
97,249
|
|
|
|
(1,858
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
|
$
|
97,249
|
|
|
$
|
(1,858
|
)
|
|
$
|
97,249
|
|
|
$
|
(1,858
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States goverment
-sponsored enterprises debt
|
|
$
|
3,930,974
|
|
|
$
|
(117,614
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,930,974
|
|
|
$
|
(117,614
|
)
|
GNMA pass-through certificates
|
|
|
|
|
|
|
|
|
|
|
582
|
|
|
|
(1
|
)
|
|
|
582
|
|
|
|
(1
|
)
|
FHLMC pass-through certificates
|
|
|
642
|
|
|
|
(2
|
)
|
|
|
52
|
|
|
|
(1
|
)
|
|
|
694
|
|
|
|
(3
|
)
|
FHLMC and FNMA REMICs
|
|
|
617,463
|
|
|
|
(10,747
|
)
|
|
|
171,031
|
|
|
|
(5,725
|
)
|
|
|
788,494
|
|
|
|
(16,472
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired
securities held to maturity
|
|
|
4,549,079
|
|
|
|
(128,363
|
)
|
|
|
171,665
|
|
|
|
(5,727
|
)
|
|
|
4,720,744
|
|
|
|
(134,090
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States goverment
-sponsored enterprises debt
|
|
|
472,545
|
|
|
|
(7,263
|
)
|
|
|
263,730
|
|
|
|
(11,161
|
)
|
|
|
736,275
|
|
|
|
(18,424
|
)
|
GNMA pass-through certificates
|
|
|
156,668
|
|
|
|
(878
|
)
|
|
|
19,690
|
|
|
|
(3
|
)
|
|
|
176,358
|
|
|
|
(881
|
)
|
FNMA pass-through certificates
|
|
|
694,543
|
|
|
|
(3,259
|
)
|
|
|
|
|
|
|
|
|
|
|
694,543
|
|
|
|
(3,259
|
)
|
FHLMC and FNMA REMICs
|
|
|
476,797
|
|
|
|
(12,182
|
)
|
|
|
|
|
|
|
|
|
|
|
476,797
|
|
|
|
(12,182
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 consider these investments to be
temporarily impaired at September 30, 2010 and December 31, 2009 since the decline in market value
is primarily 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 the
securities before the anticipated recovery of the remaining amortized cost basis. As a
result no impairment loss was recognized during the nine months ended September 30, 2010 or for the
year ended December 31, 2009.
Page 12
The amortized cost and estimated fair market value of our securities held to maturity and
available-for-sale at September 30, 2010, by contractual maturity, are shown below. The table does
not include the effect of prepayments or scheduled principal amortization. The expected maturity
may differ from the contractual maturity because issuers may have the right to call or prepay
obligations. Equity securities have been excluded from this table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
|
Estimated
|
|
|
|
Mortgage-backed
|
|
|
Investment
|
|
|
Fair Market
|
|
|
|
securities
|
|
|
securities
|
|
|
Value
|
|
|
|
(In thousands)
|
|
September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
34
|
|
|
$
|
|
|
|
$
|
35
|
|
Due after one year through five years
|
|
|
457
|
|
|
|
|
|
|
|
487
|
|
Due after five years through ten years
|
|
|
11,587
|
|
|
|
400,000
|
|
|
|
413,310
|
|
Due after ten years
|
|
|
6,765,501
|
|
|
|
4,539,922
|
|
|
|
11,688,041
|
|
|
|
|
|
|
|
|
|
|
|
Total held to maturity
|
|
$
|
6,777,579
|
|
|
$
|
4,939,922
|
|
|
$
|
12,101,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Due after ten years
|
|
|
14,503,977
|
|
|
|
80,000
|
|
|
|
15,044,924
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
|
|
$
|
14,503,977
|
|
|
$
|
80,000
|
|
|
$
|
15,044,924
|
|
|
|
|
|
|
|
|
|
|
|
Sales of mortgage-backed securities available-for-sale amounted to $1.90 billion and $761.6
million for the nine months ended September 30, 2010 and 2009, respectively, resulting in realized
gains of $92.4 million and $24.0 million for the same respective periods. There were no sales of
investment securities available-for-sale or held to maturity during the nine months ended September
30, 2010. There were sales of $168,000 of investment securities available-for-sale during the nine
months ended September 30, 2009. Gross realized gains on sales and calls of investment securities
available-for-sale were $148,000 during the first nine months of 2009. Gains and losses
on the sale of all securities are determined using the specific identification method.
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 general corporate use. We have not purchased any of our common shares during the nine
months ended September 30, 2010. As of September 30, 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
Page 13
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
September 30, 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, 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 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 $7.3 million and $7.1 million at September 30, 2010 and December 31, 2009, respectively, for
which fair values are obtained from quoted market prices in active markets and, as such, are
classified as Level 1.
Page 14
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 September 30, 2010 and December
31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at September 30, 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
|
|
$
|
14,961,441
|
|
|
$
|
|
|
|
$
|
14,961,441
|
|
|
$
|
|
|
U.S. government-sponsored
enterprises debt
|
|
|
83,483
|
|
|
|
|
|
|
|
83,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
debt securities
|
|
$
|
15,044,924
|
|
|
$
|
|
|
|
$
|
15,044,924
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services industry
|
|
$
|
7,314
|
|
|
$
|
7,314
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
equity securities
|
|
|
7,314
|
|
|
|
7,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale securities
|
|
$
|
15,052,238
|
|
|
$
|
7,314
|
|
|
$
|
15,044,924
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 September 30, 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 Standards Board (FASB) guidance amounted to $11.5 million and $11.2
million at September 30, 2010 and December 31, 2009, respectively. Based on this evaluation, we
established an allowance for loan losses of $2.7 million and $2.1 million for those respective
periods. The provision for loan losses related to these loans amounted to $579,000 and $1.3
million for the first nine months of 2010 and 2009, respectively. 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
September 30, 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.
Page 15
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 September 30, 2010 and December 31, 2009 amounted
to $40.3 million and $16.7 million, respectively. During the first nine 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 $4.1 million and $2.9 million, respectively. Write downs and net loss on
sale related to foreclosed real estate that were charged to non-interest expense amounted to $1.2
million and $2.0 million for those 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 September 30, 2010 and
December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at September 30, 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
|
|
$
|
|
|
|
$
|
|
|
|
$
|
11,534
|
|
|
$
|
|
|
Foreclosed real estate
|
|
|
|
|
|
|
|
|
|
|
40,276
|
|
|
|
(1,155
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
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. This method of estimating fair value does not
incorporate the exit-price concept of fair value prescribed by ASC Topic 820.
Page 16
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
Carrying
|
|
|
Estimated
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
147,614
|
|
|
$
|
147,614
|
|
|
$
|
198,752
|
|
|
$
|
198,752
|
|
Federal funds sold
|
|
|
485,479
|
|
|
|
485,479
|
|
|
|
362,449
|
|
|
|
362,449
|
|
Investment securities held to maturity
|
|
|
4,939,922
|
|
|
|
4,967,621
|
|
|
|
4,187,704
|
|
|
|
4,071,005
|
|
Investment securities available for sale
|
|
|
90,797
|
|
|
|
90,797
|
|
|
|
1,095,240
|
|
|
|
1,095,240
|
|
Federal Home Loan Bank of New York stock
|
|
|
878,690
|
|
|
|
878,690
|
|
|
|
874,768
|
|
|
|
874,768
|
|
Mortgage-backed securities held to maturity
|
|
|
6,777,579
|
|
|
|
7,134,252
|
|
|
|
9,963,554
|
|
|
|
10,324,831
|
|
Mortgage-backed securities available for sale
|
|
|
14,961,441
|
|
|
|
14,961,441
|
|
|
|
11,116,531
|
|
|
|
11,116,531
|
|
Loans
|
|
|
31,626,561
|
|
|
|
33,337,678
|
|
|
|
31,721,154
|
|
|
|
32,758,247
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
24,914,621
|
|
|
|
25,384,187
|
|
|
|
24,578,048
|
|
|
|
24,913,407
|
|
Borrowed funds
|
|
|
29,825,000
|
|
|
|
34,039,146
|
|
|
|
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.
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.
Page 17
The components of the net periodic expense for the plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30,
|
|
|
|
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
|
|
$
|
945
|
|
|
$
|
1,836
|
|
|
$
|
303
|
|
|
$
|
500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
Retirement Plans
|
|
|
Other Benefits
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
Service cost
|
|
$
|
3,054
|
|
|
$
|
3,009
|
|
|
$
|
456
|
|
|
$
|
702
|
|
Interest cost
|
|
|
6,228
|
|
|
|
5,589
|
|
|
|
1,428
|
|
|
|
1,587
|
|
Expected return on assets
|
|
|
(8,742
|
)
|
|
|
(5,817
|
)
|
|
|
|
|
|
|
|
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
2,040
|
|
|
|
2,472
|
|
|
|
198
|
|
|
|
384
|
|
Unrecognized prior service cost
|
|
|
255
|
|
|
|
255
|
|
|
|
(1,173
|
)
|
|
|
(1,173
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
2,835
|
|
|
$
|
5,508
|
|
|
$
|
909
|
|
|
$
|
1,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We made no contributions to the pension plans during the nine months ended September 30, 2010.
During the nine months ended September 30, 2009, we made contributions of $35.0 million to the
pension plans.
8. Stock-Based Compensation
Stock Option Plans
A summary of the changes in outstanding stock options is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
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
|
|
|
4,232,500
|
|
|
|
13.13
|
|
|
|
3,375,000
|
|
|
|
12.11
|
|
Exercised
|
|
|
(154,829
|
)
|
|
|
6.18
|
|
|
|
(4,240,913
|
)
|
|
|
2.33
|
|
Forfeited
|
|
|
(122,500
|
)
|
|
|
14.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
28,217,863
|
|
|
|
12.65
|
|
|
|
25,862,206
|
|
|
|
11.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 18
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 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 4,232,500 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 532,500 options will vest between January 2011
(the 2010 Retention Options) and July 2011. 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 in 2010.
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 $3.0 million for both the
three months ended September 30, 2010 and 2009, respectively, and $8.2 million and $9.9 million,
for the nine months ended September 30, 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 847,750 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
Page 19
be met and have therefore recorded compensation expense for the 2009 stock awards in 2010.
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 shares on the grant date which was $13.12. Total
compensation expense for stock awards amounted to $890,000 and $1.2 million for the three months
ended September 30, 2010 and 2009, respectively, and $3.0 million and $3.5 million, for the nine
months ended September 30, 2010 and 2009, respectively.
9. Recent Accounting Pronouncements
In July 2010, FASB issued an accounting standards update regarding disclosures about the credit
quality of financing receivables and the allowance for credit losses. This update amends Topic 310
to improve the disclosures that an entity provides about the credit quality of its financing
receivables and the related allowance for credit losses. As a result of these amendments, an entity
is required to disaggregate by portfolio segment or class certain existing disclosures and provide
certain new disclosures about its financing receivables and related allowance for credit losses.
This update is effective for interim and annual reporting periods ending on or after December 15,
2010. 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 April 2010, FASB issued an accounting standards update regarding the effect of a loan
modification when the loan is part of a pool that is accounted for as a single asset. This update
clarifies that modifications of loans that are accounted for within a pool under Subtopic 310-30,
which provides guidance on accounting for acquired loans that have evidence of credit deterioration
upon acquisition, do not result in the removal of those loans from the pool even if the
modification would otherwise be considered a troubled debt restructuring. An entity will continue
to be required to consider whether the pool of assets in which the loan is included is impaired if
expected cash flows for the pool change. The amendments do not affect the accounting for loans
under the scope of Subtopic 310-30 that are not accounted for within pools. Loans accounted for
individually under Subtopic 310-30 continue to be subject to the troubled debt restructuring
accounting provisions within Subtopic 310-40. This update was effective in the first interim or
annual period ending on or after July 15, 2010. This accounting standard update did not have a
material impact on our financial condition, results of operations or financial statement
disclosures.
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. The effective portions of this accounting standards
update did not affect our financial condition, results of operations or financial statement
disclosures, and we do not expect that the remaining portions of this accounting standard update
will have a material impact on our financial condition, results of operations or financial
statement disclosures.
Page 20
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 the first nine months of
2010, we funded substantially all of our asset 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 the pace of recovery in output and employment has slowed in recent months.
Household spending is increasing gradually, but remains constrained by high unemployment, modest
income growth, lower housing wealth, and tight credit. The national unemployment rate was 9.6% in
September 2010 as compared to 9.5% in June 2010 and 10.0% in December 2009. The FOMC decided to
maintain the overnight lending rate at zero to 0.25% during the third quarter of 2010. As a result,
short-term market interest rates have remained at low levels during the third quarter of 2010.
This allowed us to continue to re-price our deposits thereby reducing our cost of funds. The
yields on mortgage-related assets have also remained at low levels as the 10-year treasury fell to
2.5% during the third quarter of 2010. Our net interest rate spread decreased to 1.73% for the
third quarter of 2010 as compared to 1.89% for the linked second quarter of 2010 and 2.04% for the
third quarter of 2009. Our net interest margin decreased to 1.97% for the third quarter of 2010 as
compared to 2.13% for the linked second quarter of 2010 and 2.31% for the third quarter of 2009.
While our deposits continued to reprice to lower rates during the third quarter of 2010, the cost
of our borrowings increased slightly due to the modification of certain borrowings. In addition,
the low market interest rates, coupled with the GSEs efforts to keep mortgage rates low to support
the housing markets, have resulted in lower yields on our mortgage-related interest-earning assets
as customers refinanced to lower mortgage rates and our new loan production and asset purchases
were at the current low market interest rates. Mortgage-related assets represented 87.4% of our
average interest-earning assets during the 2010 third quarter.
On March 4, 2010, Hudson City Savings filed the Application with the OCC to convert from a
federally chartered stock savings bank to a national bank. If the Application is approved, Hudson
City Savings will no longer be a federal savings bank subject to the regulation and examination of
the 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
Page 21
Governors of the FRB. We cannot provide assurance as to whether the Application will be approved
or the timing of any such approval.
On July 21, 2010, President Obama signed the Reform Act. The Reform Act, among other things,
effectively merges the OTS into the OCC, with the OCC assuming all functions and authority from the
OTS relating to federally chartered savings banks, and the FRB assuming all functions and authority
from the OTS relating to savings and loan holding companies. Certain aspects of the Reform Act
will have an impact on us including the combination of our primary regulator, the OTS, with the
OCC, the imposition of consolidated holding company capital requirements, changes to deposit
insurance assessments and the rollback of federal preemption applicable to certain of our
operations. Whether the aforementioned Application is approved by the OCC or upon implementation
of the Reform Act, Hudson City Savings will be regulated by the OCC and the Company will be
regulated by the FRB.
Net income amounted to $124.6 million for the third quarter of 2010, as compared to $135.1 million
for the third quarter of 2009. The decrease in net income for the third quarter of 2010 is the
result of a decrease in net interest income reflecting a lower net interest margin, an increase in
the provision for loan losses and higher deposit insurance fees, offset in part by an increase in
realized gains from securities transactions. Net income increased 6.5% for the first nine months
of 2010 to $416.0 million as compared to $390.7 million for the first nine months of 2009. The
increase in net income for the nine month period reflects an increase in net interest income, an
increase in realized gains from securities transactions and the absence of the FDIC special
assessment offset, in part, by significantly higher deposit insurance fees as well as a higher
provision for loan losses.
For the quarter ended September 30, 2010, our annualized return on average assets and average
shareholders equity were 0.82% and 8.86%, respectively, as compared to 0.93% and 10.34%,
respectively, for the corresponding period in 2009. For the nine months ended September 30, 2010,
our annualized return on average assets and average shareholders equity were 0.91% and 10.07%,
respectively, as compared to 0.92% and 10.17%, respectively, for the corresponding period in 2009.
The decreases in our return on average equity and average assets are due primarily to the increase
in the average balances of shareholders equity and total assets for the three and nine months
ended September 30, 2010 as compared to the same periods in 2009. In addition, the decreases in
our return on average equity and average assets for the quarter ended September 30, 2010 as
compared to the same period in 2009 are also due to a decrease in net income for the same
corresponding periods.
Net interest income decreased $35.2 million, or 10.8%, to $290.3 million for the third quarter of
2010 as compared to $325.5 million for the third quarter of 2009. Net interest income decreased
primarily as a result of a decrease in the weighted-average yield of our interest-earning assets.
During the third quarter of 2010, our net interest rate spread decreased 31 basis points to 1.73%
and our net interest margin decreased 34 basis points to 1.97% for the third quarter of 2010 from
2.31% for the third quarter of 2009. Our net interest margin decreased during the third quarter of
2010 as the average yield on interest-earning assets and the average cost of interest-bearing
liabilities both decreased while the average balance of interest-earning assets increased. Net
interest income increased $27.3 million, or 3.0%, to $939.0 million for the first nine months of
2010 as compared to $911.7 million for the same period in 2009. During the first nine months of
2010, our net interest rate spread decreased 3 basis points to 1.86% and our net interest margin
decreased 8 basis points to 2.10% as compared to 2.18% for the same period in 2009.
Market interest rates on mortgage-related assets remained at near-historic lows primarily due to
the FRBs program to purchase mortgage-backed securities to keep mortgage rates low and provide
stimulus to the housing markets. In addition, over the past few years, we have faced increased
competition for mortgage
Page 22
loans due to the unprecedented involvement of the GSEs in the mortgage
market as a result of the
economic crisis. The GSEs involvement is also an attempt to provide stimulus to the housing
markets and has caused the interest rates for thirty year fixed rate mortgage loans that conform to
the GSEs guidelines for purchase to remain artificially low. We originate such conforming loans
and retain them in our portfolio. The United States Congress recently extended to September 2011
the time period within which the GSEs may purchase loans under an expanded limit on principal
balances that qualify as conforming loans. Further, we have no indication that the FOMC is likely
to increase rates in the near future. As a result, we expect this adverse environment for
portfolio lending to continue, with the likely result that we will continue to experience
compression of our net interest margin, and, in combination with the likelihood of nominal balance
sheet growth, a reduction of net interest income.
The provision for loan losses amounted to $50.0 million for the third quarter of 2010 and $150.0
million for the nine months ended September 30, 2010 as compared to $40.0 million and $92.5 million
for the same respective periods in 2009. The increase in the provision for loan losses for the
quarter ended September 30, 2010 and the resulting increase in ALL is due primarily to the increase
in non-performing loans during the first nine months of 2010, continuing elevated levels of
unemployment and an increase in net charge-offs. In addition, although home prices appear to have
started to stabilize, conditions in the housing markets in many of our lending markets remain weak.
Non-performing loans were $837.5 million or 2.64% of total loans at September 30, 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, the continued high unemployment levels have 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 nine months of 2010 and resulted in an
increase in our ALL.
Total non-interest income was $33.9 million for the third quarter of 2010 as compared to $2.5
million for the same quarter in 2009. Included in non-interest income were net gains on securities
transactions of $31.0 million, which resulted from the sale of $810.7 million of mortgage-backed
securities available-for-sale. Total non-interest income for the nine months ended September 30,
2010 was $100.1 million compared with $31.4 million for the comparable period in 2009. Included in
non-interest income for the nine months ended September 30, 2010 were net gains on securities
transactions of $92.4 million which resulted from the sale of $1.90 billion of mortgage-backed
securities available-for-sale. Included in non-interest income for the nine months ended September
30, 2009 were net gains on securities transactions of $24.2 million substantially all of which
resulted from the sale of $761.6 million of mortgage-backed securities available-for-sale.
Total non-interest expense increased $2.8 million, or 4.5%, to $65.7 million for the third quarter
of 2010 from $62.9 million for the third quarter of 2009. The increase is primarily due to
an increase of $4.1 million in Federal deposit insurance expense due primarily to an increase
in total deposits. The increase in Federal deposit insurance expense was partially offset by a
$2.0 million decrease in compensation and employee benefits expense. Total non-interest expense
decreased $5.9 million, or 2.9%, to $196.8 million for the first nine months of 2010 from $202.7
million for the first nine months of 2009 due primarily to the absence of the FDIC special
assessment of $21.1 million and a $4.2 million decrease in compensation and employee benefits
expense, primarily due to a decrease in stock benefit plan expense. These decreases were partially
offset by an increase of $17.6 million in Federal deposit insurance expense.
Our assets grew by 0.6% to $60.62 billion at September 30, 2010 from $60.27 billion at December 31,
2009. However, total assets decreased $316.5 million from June 30, 2010. Our growth rate slowed
Page 23
during the first nine months of 2010 as mortgage refinancing activity caused loan repayments and
prepayments on mortgage-backed securities to remain at elevated levels during 2010. During this
same
time period, available reinvestment yields on the types of assets in which we invest also
decreased. We lowered our deposit rates beginning in the first quarter of 2010 to slow our deposit
growth from 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.
Loans decreased $94.6 million to $31.63 billion at September 30, 2010 from $31.72 billion at
December 31, 2009. Our loan production was $4.86 billion for the first nine months of 2010
substantially offset by $4.74 billion in principal repayments. Loan originations continue to be
strong as a result of elevated levels of mortgage refinancing activity caused by low market
interest rates. The refinancing activity has also caused increased levels of repayments to continue
in 2010 as some of our customers refinanced with other banks.
Total securities increased $406.7 million to $26.77 billion at September 30, 2010 from $26.36
billion at December 31, 2009. The increase in securities was primarily due to purchases of
mortgage-backed and investment securities of $8.88 billion and $5.90 billion, respectively,
partially offset by principal collections on mortgage-backed securities of $6.36 billion and sales
of mortgage-backed securities with an amortized cost of $1.90 billion and calls of investment
securities of $6.07 billion. The securities purchased were all issued by GSEs. Total securities
decreased $182.6 million from June 30, 2010 as we slowed our growth rate from the 2009 levels since
the low yields that are available to us for mortgage-related assets and investment securities have
made a growth strategy less prudent until market conditions improve.
The increase in our total assets during the first nine months of 2010 was funded primarily by
growth in customer deposits. Deposits increased $336.6 million to $24.91 billion at September 30,
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 decreased $150.0 million to $29.83
billion at September 30, 2010.
Comparison of Financial Condition at September 30, 2010 and December 31, 2009
During the first nine months of 2010, our total assets increased $348.9 million, or 0.6%, to $60.62
billion at September 30, 2010 from $60.27 billion at December 31, 2009. The increase in total
assets reflected a $658.9 million increase in total mortgage-backed securities partially offset by
a $252.2 million decrease in investment securities and a $94.6 million decrease in net loans.
Total assets decreased $615.0 million from March 31, 2010 as mortgage refinancing activity
caused loan repayments and prepayments on mortgage-backed securities to remain at elevated levels.
During this same time period, available reinvestment yields on these types of assets also
decreased. We lowered our deposit rates beginning in the first quarter of 2010 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. This resulted in a decrease in deposits during the second and third quarters of 2010.
In addition, the current economic environment, where interest rate levels are very low
and GSEs are actively purchasing loans in an effort to keep mortgage rates down to
support the housing market, has provided very little opportunity for one- to four- family
lenders, like us, to profitably add mortgage loan products to our portfolio and to continue
our recent growth strategy. Accordingly, we are likely to maintain our relative
balance sheet size or experience only
Page 24
nominal growth, and we may even experience some balance sheet
shrinkage, while current economic and regulatory conditions prevail.
Our net loans decreased $94.6 million during the nine months ended September 30, 2010 to
$31.63 billion. The decrease in loans primarily reflects the elevated levels of loan repayments
during 2010 as a result of continued low market interest rates. Historically, our focus has been on
loan portfolio growth through the origination of one- to four-family first mortgage loans in New
Jersey, New York, Pennsylvania and Connecticut and, to a lesser extent, the purchases of mortgage
loans. During the first nine months of 2010, we originated $4.28 billion and purchased $580.1
million of loans, compared to originations of $4.66 billion and purchases of $2.45 billion for the
same period in 2009. The origination and purchases of loans were offset by principal repayments of
$4.74 billion in the first nine months of 2010 as compared to $5.34 billion for the first nine
months of 2009. Loan originations continue to be strong as a result of elevated levels of
mortgage refinancing activity caused by low market interest rates. The refinancing activity has
also caused increased levels of repayments to continue in 2010 as some of our customers refinanced
with other banks. Our loan purchase activity has significantly declined as the GSEs have been
actively purchasing loans as part of their efforts to keep mortgage rates low to support the
housing market during the recent economic recession. As a result, the sellers from whom we have
historically purchased loans are selling to the GSEs. We expect that the amount of loan purchases
may continue to be at reduced levels for the near-term.
Our first mortgage loan originations and purchases during the first nine months of 2010 were
substantially all in one- to four-family mortgage loans. Approximately 56.0% of mortgage loan
originations for the first nine months of 2010 were variable-rate loans as compared to
approximately 45.0% for the comparable period in 2009. Approximately 71.0% of mortgage loans
purchased for the nine months ended September 30, 2010 were fixed-rate mortgage loans. Fixed-rate
mortgage loans accounted for 66.8% of our first mortgage loan portfolio at September 30, 2010 and
69.1% at December 31, 2009.
Non-performing loans amounted to $837.5 million, or 2.64%, of total loans at September 30, 2010 as
compared to $627.7 million, or 1.98%, of total loans at December 31, 2009.
Total mortgage-backed securities increased $658.9 million to $21.74 billion at September 30, 2010
from $21.08 billion at December 31, 2009. This increase in total mortgage-backed securities
resulted from the purchase of $8.88 billion of mortgage-backed securities issued by GSEs,
substantially all of which were hybrid adjustable-rate securities. These securities typically have
a fixed interest rate for three, five or ten years. After this initial fixed-rate term, the
interest rates adjust annually. The increase was partially offset by repayments received of $6.36
billion and sales of $1.90 billion. At September 30, 2010, variable-rate mortgage-backed securities
accounted for 81.6% 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.
Total investment securities decreased $252.2 million to $5.03 billion at September 30, 2010
as compared to $5.28 billion at December 31, 2009. The decrease in investment
securities is primarily due to calls of investment securities of $6.07 billion, substantially
offset by purchases of $5.90 billion.
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.
Page 25
Total cash and cash equivalents increased $71.9 million to $633.1 million at September 30, 2010 as
compared to $561.2 million at December 31, 2009. Other assets decreased $32.5 million to $172.1
million at September 30, 2010 as compared to $204.6 million at December 31, 2009.
Total liabilities increased $65.3 million to $54.99 billion at September 30, 2010 from $54.93
billion at December 31, 2009 due to an increase in deposits partially offset by a $150.0 million
decrease in borrowed funds and a $100.0 million decrease in amounts due to brokers.
Total deposits increased $336.6 million, or 1.4%, to $24.91 billion at September 30, 2010 as
compared to $24.58 billion at December 31, 2009. The increase in total deposits reflected a
$413.8 million increase in our interest-bearing transaction accounts and savings accounts and a
$37.6 million increase in our time deposits. These increases were partially offset by a decrease of
$119.5 million in our money market accounts. The increase in our interest-bearing transaction
accounts is primarily due to a $322.7 million increase in our High Value checking account product.
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 during the first nine months of 2010. During the third quarter of 2010, deposits
decreased by $253.8 million from June 30, 2010 and have
decreased 474.2 million since March 31, 2010. We lowered our deposit rates to slow our deposit
growth from the 2009 levels since the low yields that are available to us for mortgage-related
assets and investment securities have made a growth strategy less prudent until market conditions
improve. We had 135 branches at September 30, 2010 as compared to 131 branches at December 31,
2009.
Borrowings amounted to $29.83 billion at September 30, 2010 as compared to $29.98 billion at
December 31, 2009. During the first nine months of 2010, we modified $4.03 billion of borrowings
to extend the call dates of the borrowings by between three and five years. Borrowed funds at
September 30, 2010 were comprised of $14.88 billion of FHLB advances and $14.95 billion of
securities sold under agreements to repurchase.
Substantially all of our borrowings are callable quarterly at the discretion of the lender after an
initial no-call period of one to five years with a final maturity of ten years. We have
historically used this type of borrowing to fund a portion of the growth in interest-earning
assets. At September 30, 2010, we had $22.58 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. However, 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.
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 and we have demanded
the return of this collateral. We believe that we have the legal right to setoff our obligation to
repay the borrowings against our right to the return of the mortgage-backed securities pledged as
collateral. As a result, we believe that our potential economic loss from Lehman Brothers failure
to return the collateral is limited to the excess market value of the collateral over the $100
million repurchase price. We intend to pursue full recovery of the pledged collateral in
accordance with the contractual terms of the repurchase agreements. There
Page 26
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 as we have concluded that a loss is neither probable or estimable at
September 30, 2010.
Other liabilities decreased to $254.2 million at September 30, 2010 from $275.6 million at
December 31, 2009. The decrease is primarily the result of a decrease in accrued taxes of $33.0
million.
Total shareholders equity increased $283.6 million to $5.62 billion at September 30, 2010 as
compared to $5.34 billion at December 31, 2009. The increase was primarily due to net income of
$416.0 million for the nine months ended September 30, 2010 and a $68.0 million increase in
accumulated other comprehensive income primarily due to an increase in the net unrealized gain on
securities available-for-sale. These increases to shareholders equity were partially offset by
cash dividends paid to common shareholders of $221.8 million. The accumulated other comprehensive
income of $252.5 million at September 30, 2010 included a $273.0 million after-tax net unrealized
gain on securities available-for-sale ($461.5 million pre-tax) partially offset by a $20.5 million
after-tax accumulated other comprehensive loss related to the funded status of our employee benefit
plans.
As of September 30, 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
nine months of 2010. Our capital ratios remain in excess of the regulatory requirements for a
well-capitalized bank. See Liquidity and Capital Resources.
At September 30, 2010, our shareholders equity to asset ratio was 9.28% compared with 8.86% at
December 31, 2009. The ratio of average shareholders equity to average assets was 9.05% for both
the nine months ended September 30, 2010 and 2009, respectively. 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
$11.40 at September 30, 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
$11.08 as of September 30, 2010 and $10.53 at December 31, 2009.
Page 27
Comparison of Operating Results for the Three-Month Periods Ended September 30, 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 September 30, 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 September 30,
|
|
|
|
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)
|
|
$
|
31,561,184
|
|
|
$
|
417,071
|
|
|
|
5.29
|
%
|
|
$
|
30,445,939
|
|
|
$
|
424,521
|
|
|
|
5.58
|
%
|
Consumer and other loans
|
|
|
342,374
|
|
|
|
4,525
|
|
|
|
5.29
|
|
|
|
369,556
|
|
|
|
5,212
|
|
|
|
5.64
|
|
Federal funds sold and other overnight deposits
|
|
|
1,104,738
|
|
|
|
604
|
|
|
|
0.22
|
|
|
|
475,094
|
|
|
|
344
|
|
|
|
0.29
|
|
Mortgage-backed securities at amortized cost
|
|
|
20,402,928
|
|
|
|
206,624
|
|
|
|
4.05
|
|
|
|
19,762,620
|
|
|
|
243,817
|
|
|
|
4.93
|
|
Federal Home Loan Bank stock
|
|
|
881,380
|
|
|
|
10,128
|
|
|
|
4.60
|
|
|
|
878,827
|
|
|
|
12,281
|
|
|
|
5.59
|
|
Investment securities, at amortized cost
|
|
|
5,196,235
|
|
|
|
49,858
|
|
|
|
3.84
|
|
|
|
4,996,795
|
|
|
|
57,990
|
|
|
|
4.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
59,488,839
|
|
|
|
688,810
|
|
|
|
4.63
|
|
|
|
56,928,831
|
|
|
|
744,165
|
|
|
|
5.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earnings assets (4)
|
|
|
1,469,928
|
|
|
|
|
|
|
|
|
|
|
|
1,249,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
60,958,767
|
|
|
|
|
|
|
|
|
|
|
$
|
58,178,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings accounts
|
|
$
|
861,079
|
|
|
|
1,524
|
|
|
|
0.70
|
|
|
$
|
759,757
|
|
|
|
1,437
|
|
|
|
0.75
|
|
Interest-bearing transaction accounts
|
|
|
2,430,111
|
|
|
|
5,651
|
|
|
|
0.92
|
|
|
|
1,831,426
|
|
|
|
7,351
|
|
|
|
1.59
|
|
Money market accounts
|
|
|
5,069,129
|
|
|
|
11,687
|
|
|
|
0.91
|
|
|
|
4,109,583
|
|
|
|
17,606
|
|
|
|
1.70
|
|
Time deposits
|
|
|
16,232,326
|
|
|
|
71,664
|
|
|
|
1.75
|
|
|
|
15,311,050
|
|
|
|
86,531
|
|
|
|
2.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
|
24,592,645
|
|
|
|
90,526
|
|
|
|
1.46
|
|
|
|
22,011,816
|
|
|
|
112,925
|
|
|
|
2.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase agreements
|
|
|
15,057,609
|
|
|
|
156,609
|
|
|
|
4.13
|
|
|
|
15,100,000
|
|
|
|
154,175
|
|
|
|
4.05
|
|
Federal Home Loan Bank of New York advances
|
|
|
14,875,000
|
|
|
|
151,341
|
|
|
|
4.04
|
|
|
|
14,965,217
|
|
|
|
151,608
|
|
|
|
4.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowed funds
|
|
|
29,932,609
|
|
|
|
307,950
|
|
|
|
4.08
|
|
|
|
30,065,217
|
|
|
|
305,783
|
|
|
|
4.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
54,525,254
|
|
|
|
398,476
|
|
|
|
2.90
|
|
|
|
52,077,033
|
|
|
|
418,708
|
|
|
|
3.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits
|
|
|
543,667
|
|
|
|
|
|
|
|
|
|
|
|
542,273
|
|
|
|
|
|
|
|
|
|
Other noninterest-bearing liabilities
|
|
|
264,696
|
|
|
|
|
|
|
|
|
|
|
|
330,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest-bearing liabilities
|
|
|
808,363
|
|
|
|
|
|
|
|
|
|
|
|
873,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
55,333,617
|
|
|
|
|
|
|
|
|
|
|
|
52,950,099
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
5,625,150
|
|
|
|
|
|
|
|
|
|
|
|
5,228,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders
Equity
|
|
$
|
60,958,767
|
|
|
|
|
|
|
|
|
|
|
$
|
58,178,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/net interest rate spread (2)
|
|
|
|
|
|
$
|
290,334
|
|
|
|
1.73
|
|
|
|
|
|
|
$
|
325,457
|
|
|
|
2.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest-earning assets/net interest margin (3)
|
|
$
|
4,963,585
|
|
|
|
|
|
|
|
1.97
|
%
|
|
$
|
4,851,798
|
|
|
|
|
|
|
|
2.31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $209.5 million and $181.3 million
|
|
|
|
for the quarters ended September 30, 2010 and 2009, respectively.
|
Page 28
General.
Net income was $124.6 million for the third quarter of 2010, a decrease of $10.5
million, or 7.8%, compared with net income of $135.1 million for the third quarter of 2009. Both
basic and diluted earnings per common share were $0.25 for the third quarter of 2010 as compared to
basic and diluted earnings per share of $0.28 and $0.27, respectively, for the third quarter of
2009. For the third quarter of 2010, our annualized return on average shareholders equity was
8.86%, compared with 10.34% for the
corresponding period in 2009. Our annualized return on average assets for the third quarter of 2010
was 0.82% as compared to 0.93% for the third quarter of 2009. The decrease in the annualized return
on average equity and assets is primarily due to the decrease in net income and increase in average
equity and assets during the third quarter of 2010.
Interest and Dividend Income.
Total interest and dividend income for the third quarter of 2010
decreased $55.4 million, or 7.4%, to $688.8 million from $744.2 million for the third quarter of
2009. The decrease in total interest and dividend income was primarily due to a decrease of 60
basis points in the annualized weighted-average yield on total interest-earning assets to 4.63% for
the quarter ended September 30, 2010 from 5.23% for the same quarter in 2009. The decrease in the
annualized weighted-average yield was partially offset by an increase in the average balance of
total interest-earning assets of $2.56 billion, or 4.5%, to $59.49 billion for the third quarter of
2010 as compared to $56.93 billion for the third quarter of 2009.
Interest on first mortgage loans decreased $7.4 million to $417.1 million for the third quarter of
2010 as compared to $424.5 million for the same quarter in 2009. This was primarily due to a 29
basis point decrease in the weighted-average yield to 5.29% from 5.58% for the 2009 third quarter.
The decrease in the weighted-average yield was partially offset by a $1.12 billion increase in the
average balance of first mortgage loans to $31.56 billion, reflecting our historical emphasis on
the growth of our mortgage loan portfolio. During 2010 our mortgage loan portfolio decreased
slightly as refinancing activity resulted in continued elevated levels of loan repayments and the
weak real estate markets resulted in decreased home purchase mortgage activity. In addition, loan
purchase activity has significantly declined as the GSEs have been actively purchasing loans as
part of their efforts to keep mortgage rates low to support the housing market during the recent
economic recession. As a result, the sellers from whom we have historically purchased loans are
selling to the GSEs. 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 nine months of 2010, existing mortgage customers refinanced or modified approximately $2.11
billion in mortgage loans with a weighted average rate of 5.82% to a new weighted average rate of
4.94%. During the first nine months of 2009, customers refinanced or modified approximately $2.08
billion in mortgage loans with a weighted average rate of 6.21% to a new weighted average rate of
5.42%. 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 $687,000 to $4.5 million for the third quarter of
2010 from $5.2 million for the third quarter of 2009. The average balance of consumer and other
loans decreased $27.2 million to $342.4 million for the third quarter of 2010 as compared to $369.6
million for the third quarter of 2009 and the average yield earned decreased 35 basis points to
5.29% as compared to 5.64% for the same respective periods.
Page 29
Interest on mortgage-backed securities decreased $37.2 million to $206.6 million for the third
quarter of 2010 from $243.8 million for the third quarter of 2009. This decrease was due primarily
to an 88 basis point decrease in the weighted-average yield to 4.05% for the third quarter of 2010
from 4.93% for the third quarter of 2009. The decrease in the weighted-average yield was partially
offset by a $640.3 million increase in the average balance of mortgage-backed securities to $20.40
billion during the third quarter of 2010 as compared to $19.76 billion for the third quarter of
2009.
The increases in the average balances of mortgage-backed securities were due to purchases of
primarily variable-rate hybrid securities. These securities typically have a fixed interest rate
for three, five or ten years. After this initial fixed-rate term, the interest rates adjust
annually. 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 since the second
half of 2009 when market interest rates were lower than the yield earned on the existing portfolio.
Interest on investment securities decreased $8.1 million to $49.9 million for the third quarter of
2010 as compared to $58.0 million for the same period in 2009. This decrease was due primarily to
a decrease in the weighted-average yield of investment securities of 80 basis points to 3.84% for
the third quarter of 2010 as compared to 4.64% for the third quarter of 2009. The decrease in the
weighted-average yield on investment securities was partially offset by a $199.4 million increase
in the average balance of investment securities to $5.20 billion for the third quarter of 2010 from
$5.00 billion for the third quarter of 2009. The increase in the average balance was due primarily
to the reinvestment of proceeds from the continued elevated levels of repayments of
mortgage-related assets.
Dividends on FHLB stock decreased $2.2 million, or 17.9%, to $10.1 million for the third quarter of
2010 as compared to $12.3 million for the third quarter of 2009. This decrease was due primarily
to a 99 basis point decrease in the average dividend yield earned to 4.60% as compared to 5.59% for
the third quarter of 2009. The decrease in dividend income was partially offset by a $2.6 million
increase in the average balance to $881.4 million for the third quarter of 2010 as compared to
$878.8 million for the same period in 2009. The increase in the average balance was due to
purchases of FHLB stock to meet membership requirements.
Interest on Federal funds sold amounted to $604,000 for the third quarter of 2010 as compared to
$344,000 for the third quarter of 2009. The average balance of Federal funds sold amounted to
$1.10 billion for the third quarter of 2010 as compared to $475.1 million for the third quarter of
2009. The yield earned on Federal funds sold was 0.22% for the 2010 third quarter and 0.29% for
the 2009 third quarter. The increase in the average balance of Federal funds sold is a result of
liquidity provided by increased levels of repayments on mortgage-related assets and calls of
investment securities.
Interest Expense.
Total interest expense for the quarter ended September 30, 2010 decreased
$20.2 million, or 4.8%, to $398.5 million from $418.7 million for the quarter ended September 30,
2009. This decrease was primarily due to a 29 basis point decrease in the weighted-average cost of
total interest-bearing liabilities to 2.90% for the quarter ended September 30, 2010 compared with
3.19% for the quarter ended September 30, 2009. The decrease was partially offset by a $2.45
billion, or 4.7%, increase in the average balance of total interest-bearing liabilities to $54.53
billion for the quarter ended September 30, 2010 compared with $52.08 billion for the third quarter
of 2009. This increase in interest-bearing liabilities was primarily used to fund asset growth.
Page 30
Interest expense on our time deposit accounts decreased $14.8 million to $71.7 million for the
third quarter of 2010 as compared to $86.5 million for the third quarter of 2009. This decrease
was due to a decrease in the annualized weighted-average cost of 49 basis points to 1.75% for the
third quarter of 2010 compared with 2.24% for the third 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 $921.3 million increase in the average balance of time deposit accounts to $16.23 billion for the
third quarter of 2010 as compared to $15.31 billion for the third quarter of 2009. Interest
expense on money market accounts decreased $5.9 million to $11.7 million for the third quarter of
2010 from $17.6 million for the same period in 2009.
This decrease was due to a decrease in the annualized weighted-average cost of 79 basis points to
0.91% for the third quarter of 2010 compared with 1.70% for the third quarter of 2009. This
decrease was partially offset by an increase in the average balance of $959.5 million to $5.07
billion for the third quarter of 2010 as compared to $4.11 billion for the third quarter of 2009.
Interest expense on our interest-bearing transaction accounts decreased $1.7 million to $5.7
million for the third quarter of 2010 from $7.4 million for the same period in 2009. The decrease
is due to a 67 basis point decrease in the annualized weighted-average cost to 0.92%, partially
offset by a $598.7 million increase in the average balance to $2.43 billion for the third quarter
of 2010 as compared to $1.83 billion for the third quarter of 2009.
The increases in the average balances of interest-bearing deposits reflect our expanded branch
network and our historical efforts 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. However, total deposits decreased $474.2 million from March 31,
2010. We lowered our deposit rates in order to slow our deposit growth from the 2009 levels since
the low yields that are available to us for mortgage-related assets and investment securities have
made a growth strategy less prudent until market conditions improve. The decrease in the average
cost of deposits for 2010 reflected lower market interest rates.
Interest expense on borrowed funds increased $2.2 million to $308.0 million for the third quarter
of 2010 as compared to $305.8 million for the third quarter of 2009. This increase was primarily
due to a 4 basis point increase in the weighted-average cost of borrowed funds to 4.08% for the
third quarter of 2010 as compared to 4.04% for the third quarter of 2009. This increase was
partially offset by a $132.6 million decrease in the average balance of borrowed funds to $29.93
billion for the third quarter of 2010 as compared to $30.07 billion for the third 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 interest rates on modified borrowings
are typically between 10 and 25 basis points higher than the interest rate on original borrowings.
During the first nine months of 2010, we modified $4.03 billion of borrowings to extend the call
dates of the borrowings by between three and five years. During the year ended December 31, 2009
we modified approximately $1.73 billion of these borrowings. We will continue to explore further
modifications of similar borrowings as part of our overall interest rate risk management
strategies.
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 nine months
of 2010 with deposits. 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.
Page 31
Net Interest Income.
Net interest income decreased $35.2 million, or 10.8%, to $290.3 million
for the third quarter of 2010 compared with $325.5 million for the third quarter of 2009. Our
net interest rate spread decreased 31 basis points to 1.73% for the three months ended September
30, 2010 as compared to 2.04% for the same period in 2009. Our net interest margin decreased 34
basis points to 1.97% for the third quarter of 2010 from 2.31% for the same quarter in 2009. The
decrease in our net interest income, net interest rate spread and net interest margin was primarily
due to the decrease in the weighted-average yield of our interest-earning assets. While our
deposits continued to reprice to lower rates during the third quarter of 2010, the low market
interest rates resulted in lower yields on our mortgage-related interest-earning assets as
customers refinanced to lower mortgage rates and our new loan production and asset
purchases were at the current low market interest rates. Mortgage-related assets represented 87.4%
of our average interest-earning assets during the third quarter of 2010.
Provision for Loan Losses.
The provision for loan losses amounted to $50.0 million for the
quarter ended September 30, 2010 as compared to $40.0 million for the quarter ended September 30,
2009. The ALL amounted to $216.3 million at September 30, 2010 and $140.1 million at December 31,
2009. The increase in the provision for loan losses for the quarter ended September 30, 2010 and
the resulting increase in the ALL is due primarily to the increase in non-performing loans during
the quarter, continuing elevated levels of unemployment and an increase in charge-offs. In
addition, although home prices appear to have started to stabilize, conditions in the housing
markets in many of our lending markets remain weak. We recorded our provision for loan losses
during the first nine 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, recent collateral valuations, 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 61.4% and 60.4%, 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 ALL, 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
third 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.
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 have improved but at a slower pace than anticipated during the third quarter of
2010. Home sale activity decreased during the third quarter of 2010 while unemployment remained at
elevated levels. We continue to closely monitor the local and national real estate markets and
other factors related to risks inherent in our loan portfolio. We determined the provision for
loan losses for the third 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.
Page 32
Non-performing loans amounted to $837.5 million at September 30, 2010 as compared to $790.1 million
at June 30, 2010 and $627.7 million at December 31, 2009. Non-performing loans at September 30,
2010 included $821.3 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 2.64% at
September 30, 2010 compared with 2.46% at June 30, 2010 and 1.98% at December 31, 2009. Our recent
increases in non-performing loans appear to be directly related to the elevated level of
unemployment in our market areas. Loans delinquent 30 to 59 days amounted to $432.7 million at
September 30, 2010 as compared to $396.5 million at June 30, 2010 and $430.9 million at December
31, 2009. Loans delinquent 60 to 89 days amounted to $188.6 million at September 30, 2010 as
compared to $168.6 million at June 30, 2010 and
$182.5 million at December 31, 2009. Foreclosed real estate amounted to $40.3 million at September
30, 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 in recent years, 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.
At September 30, 2010, the ratio of the ALL to non-performing loans was 25.83% as compared to
24.42% at June 30, 2010 and 22.32% at December 31, 2009. The ratio of the ALL to total loans was
0.68% at September 30, 2010 as compared to 0.60% at June 30, 2010 and 0.44% at December 31, 2009.
Changes 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 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 nine months of 2010.
We generally obtain new collateral values by the time a loan becomes 180 days past due. 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 $26.7 million for the third quarter of 2010
as compared to $22.8 million for the second quarter of 2010 and $24.2 million for the first quarter
of 2010. These charge-offs were primarily due to the results of our reappraisal process for our
non-performing residential first mortgage loans with only 58 loans disposed of through the
foreclosure process during the first nine months of 2010 with a final realized gain on sale (after
previous charge-offs and write-downs) of approximately $1.2 million. Write-downs on foreclosed
real estate amounted to $2.3 million for the first nine months of 2010. The results of our
reappraisal process and our recent charge-off history are also considered in the determination of
the ALL.
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 September 30, 2010,
77.0% of our loan portfolio and 69.4% of our non-performing loans are located in the New York
metropolitan area. In addition, we obtain updated
Page 33
collateral values by the time 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
estimated 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 nine months of 2010. We define our loss
experience on non-performing loans as the ratio of the excess of the loan balance (including
selling costs) over the updated collateral value to the principal balance of loans for which we
have updated valuations. We generally obtain updated collateral
values by the time a loan becomes 180
days past due. Based on our analysis, our loss experience on our non-performing one- to
four-family first mortgage loans was approximately 12.2% during the first nine months of 2010 and
was approximately 11.0% in 2009. Our one- to four- family mortgage loans represent 98.8% of our
total loans. The recent adjustment in our loss factors did not have a material effect on the
ultimate level of our ALL or on our provision for loan losses. If our future loss experience
requires additional increases in our loss factors, this may result in increased levels of loan loss
provisions.
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 September 30, 2010 was 60.4%, using appraised
values at the time of origination. The average LTV ratio of our non-performing loans, using
appraised values at the time of origination, was 71.7% at September 30, 2010. Based on the
valuation indices, house prices have declined in the New York metropolitan area, where 69.4% of our
non-performing loans were located at September 30, 2010, by approximately 19% from the peak of the
market in 2006 through July 2010 and by 29% nationwide during that period. During the first seven
months of 2010, house prices increased by 1.6% in the New
Page 34
York metropolitan area and increased 1.2%
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 $26.7 million for the third quarter of 2010 as compared to net
charge-offs of $13.2 million for the corresponding period in 2009. For the nine months ended
September 30, 2010, net charge-offs amounted to $73.8 million as compared to $27.5 million for the
same 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. In addition, in light of the
highly publicized foreclosure issues that have recently affected the nations largest mortgage loan
servicers which has resulted in self-imposed moratoriums by these servicers on their foreclosures
and greater court and state attorney general scrutiny, our foreclosure process and timing to
completion of foreclosures may be further delayed. If 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 closely monitor 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 September 30, 2010 and December 31, 2009, commercial and construction loans evaluated for
impairment in accordance with FASB guidance amounted to $11.5 million and $11.2 million,
respectively. Based on this evaluation, we established an ALL of $2.7 million for loans classified
as impaired at September 30, 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 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 $33.9 million for the third quarter 2010 as
compared to $2.5 million for the same quarter in 2009. Included in non-interest income for the
three month period ended September 30, 2010 were net gains on securities transactions of $31.0
million which resulted from the sale of $810.7 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
Page 35
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 $2.8 million, or 4.5%, to $65.7
million for the third quarter of 2010 from $62.9 million for the third quarter of 2009. The
increase is primarily due to an increase of $4.1 million in Federal deposit insurance expense
due primarily to an increase in total deposits. On October 19, 2010, the Board of Directors of the
FDIC adopted a new Restoration Plan to ensure that the DIF reserve ratio reaches 1.35% by September
30, 2020, as required by the Reform Act. Among other things, the Restoration Plan provides that
the FDIC will forego the uniform three basis point increase in initial assessments rates that was
previously scheduled to take effect on January 1, 2011 and will maintain the current assessment
rate schedule for all insured depository institutions until the reserve ratio reaches 1.15%. The
FDIC intends to pursue further rulemaking in 2011 regarding the requirement under the Reform Act
that the FDIC offset the effect on institutions with less than $10 billion in assets of
the requirement that the reserve ratio reach 1.35% by
September 30, 2020, rather than 1.15% by the
end of 2016 (as required under the prior restoration plan), so that more of the cost of raising the
reserve ratio to 1.35% will be borne by institutions with more than $10 billion in assets, such as
the Company.
The increase in Federal deposit insurance expense was partially offset by a $2.0 million decrease
in compensation and employee benefits expense. The decrease in compensation and employee benefits
expense included a $2.2 million decrease in expense related to our stock benefit plans and a $1.0
million decrease in pension expense. These decreases were partially offset by a $1.3 million
increase in costs related to our health plan and a $367,000 increase in compensation costs. At
September 30, 2010, we had 1,573 full-time equivalent employees as compared to 1,483 at September
30, 2009. We expect to incrementally add staff as we identify areas of operations for which
compliance needs will increase as a result of our past growth and the increased regulatory burden,
particularly on larger financial institutions, imposed by the Reform Act. Included in other
non-interest expense for the third quarter of 2010 were gains on the sale of foreclosed real estate
(net of write-downs on foreclosed real estate) of $391,000 as compared to net losses of $481,000
for the third quarter of 2009.
Our efficiency ratio was 20.27% for the third quarter of 2010 as compared to 19.18% for the third
quarter of 2009. The efficiency ratio is calculated by dividing non-interest expense, by the sum
of net interest income and non-interest income. Our annualized ratio of non-interest expense to
average total assets for both the third quarter of 2010 and 2009 was 0.43%.
Income Taxes.
Income tax expense amounted to $83.9 million for the third quarter of 2010
compared with $90.0 million for the same quarter in 2009. Our effective tax rate for the third
quarter of 2010 was 40.25% compared with 39.98% for the third quarter of 2009.
Page 36
Comparison of Operating Results for the Nine Month Periods Ended September 30, 2010 and 2009
Average Balance Sheet.
The following table presents the average balance sheets, average yields
and costs and certain other information for the nine months ended September 30, 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 Nine Months Ended September 30,
|
|
|
|
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)
|
|
$
|
31,557,701
|
|
|
$
|
1,271,476
|
|
|
|
5.37
|
%
|
|
$
|
29,832,820
|
|
|
$
|
1,252,011
|
|
|
|
5.60
|
%
|
Consumer and other loans
|
|
|
350,193
|
|
|
|
13,938
|
|
|
|
5.31
|
|
|
|
385,774
|
|
|
|
16,629
|
|
|
|
5.75
|
|
Federal funds sold and other overnight deposits
|
|
|
927,964
|
|
|
|
1,629
|
|
|
|
0.23
|
|
|
|
460,265
|
|
|
|
707
|
|
|
|
0.21
|
|
Mortgage-backed securities at amortized cost
|
|
|
20,412,325
|
|
|
|
660,451
|
|
|
|
4.31
|
|
|
|
19,574,806
|
|
|
|
743,207
|
|
|
|
5.06
|
|
Federal Home Loan Bank stock
|
|
|
879,680
|
|
|
|
31,668
|
|
|
|
4.80
|
|
|
|
876,773
|
|
|
|
30,698
|
|
|
|
4.67
|
|
Investment securities, at amortized cost
|
|
|
5,202,508
|
|
|
|
162,098
|
|
|
|
4.15
|
|
|
|
4,294,557
|
|
|
|
151,994
|
|
|
|
4.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
59,330,371
|
|
|
|
2,141,260
|
|
|
|
4.81
|
|
|
|
55,424,995
|
|
|
|
2,195,246
|
|
|
|
5.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earnings assets (4)
|
|
|
1,566,867
|
|
|
|
|
|
|
|
|
|
|
|
1,170,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
60,897,238
|
|
|
|
|
|
|
|
|
|
|
$
|
56,595,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings accounts
|
|
$
|
831,128
|
|
|
|
4,546
|
|
|
|
0.73
|
|
|
$
|
740,889
|
|
|
|
4,179
|
|
|
|
0.75
|
|
Interest-bearing transaction accounts
|
|
|
2,337,134
|
|
|
|
19,448
|
|
|
|
1.11
|
|
|
|
1,732,510
|
|
|
|
24,459
|
|
|
|
1.89
|
|
Money market accounts
|
|
|
5,170,008
|
|
|
|
41,375
|
|
|
|
1.07
|
|
|
|
3,498,955
|
|
|
|
50,564
|
|
|
|
1.93
|
|
Time deposits
|
|
|
16,257,836
|
|
|
|
224,746
|
|
|
|
1.85
|
|
|
|
14,464,413
|
|
|
|
295,801
|
|
|
|
2.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
|
24,596,106
|
|
|
|
290,115
|
|
|
|
1.58
|
|
|
|
20,436,767
|
|
|
|
375,003
|
|
|
|
2.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase agreements
|
|
|
15,085,714
|
|
|
|
463,030
|
|
|
|
4.10
|
|
|
|
15,100,295
|
|
|
|
457,252
|
|
|
|
4.05
|
|
Federal Home Loan Bank of New York advances
|
|
|
14,875,000
|
|
|
|
449,122
|
|
|
|
4.04
|
|
|
|
15,076,250
|
|
|
|
451,306
|
|
|
|
4.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowed funds
|
|
|
29,960,714
|
|
|
|
912,152
|
|
|
|
4.07
|
|
|
|
30,176,545
|
|
|
|
908,558
|
|
|
|
4.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
54,556,820
|
|
|
|
1,202,267
|
|
|
|
2.95
|
|
|
|
50,613,312
|
|
|
|
1,283,561
|
|
|
|
3.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits
|
|
|
539,435
|
|
|
|
|
|
|
|
|
|
|
|
537,326
|
|
|
|
|
|
|
|
|
|
Other noninterest-bearing liabilities
|
|
|
289,828
|
|
|
|
|
|
|
|
|
|
|
|
324,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest-bearing liabilities
|
|
|
829,263
|
|
|
|
|
|
|
|
|
|
|
|
861,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
55,386,083
|
|
|
|
|
|
|
|
|
|
|
|
51,475,172
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
5,511,155
|
|
|
|
|
|
|
|
|
|
|
|
5,120,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
60,897,238
|
|
|
|
|
|
|
|
|
|
|
$
|
56,595,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/net interest rate spread (2)
|
|
|
|
|
|
$
|
938,993
|
|
|
|
1.86
|
|
|
|
|
|
|
$
|
911,685
|
|
|
|
1.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest-earning assets/net interest margin (3)
|
|
$
|
4,773,551
|
|
|
|
|
|
|
|
2.10
|
%
|
|
$
|
4,811,683
|
|
|
|
|
|
|
|
2.18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of interest-earning assets to
interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
1.09
|
x
|
|
|
|
|
|
|
|
|
|
|
1.10
|
x
|
|
|
|
(1)
|
|
Amount includes deferred loan costs and non-performing loans and is net of the ALL.
|
|
(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 $323.7 million and $163.3 million
|
|
|
|
for the nine months ended September 30, 2010 and 2009, respectively.
|
Page 37
General.
Net income was $416.0 million for the first nine months of 2010, an increase of
$25.3 million, or 6.5%, compared with net income of $390.7 million for the first nine months of
2009. Basic and diluted earnings per common share were both $0.84 for the first nine months of 2010
as compared to $0.80 for both basic and diluted earnings per share for the first nine months of
2009. For the nine months ended September 30, 2010, our annualized return on average shareholders
equity was 10.07%, compared with 10.17% for the corresponding period in 2009. Our annualized return
on average assets for the first nine months of 2010 was 0.91% as compared to 0.92% for the first
nine months of 2009. The decrease in the annualized return on average equity and assets is
primarily due to the increase in average equity and assets during the first nine months of 2010.
Interest and Dividend Income.
Total interest and dividend income for the first nine months of
2010 decreased $54.0 million, or 2.5%, to $2.14 billion compared with $2.20 billion for the first
nine months of 2009. The decrease in total interest and dividend income was primarily due to a
decrease of 47 basis points in the annualized weighted-average yield to 4.81% for the nine months
ended September 30, 2010 as compared to 5.28% for the same period in 2009. The decrease in the
annualized weighted-average yield was partially offset by an increase in the average balance of
total interest-earning assets of $3.91 billion, or 7.0%, to $59.33 billion for the nine months
ended September 30, 2010 as compared to $55.42 billion for the comparable period in 2009.
Interest on first mortgage loans increased $19.5 million to $1.27 billion for the first nine months
of 2010 as compared to $1.25 billion for the corresponding period in 2009. This was primarily due
to a $1.72 billion increase in the average balance of first mortgage loans to $31.56 billion, which
reflected our historical emphasis on the growth of our mortgage loan portfolio and the increase in
mortgage originations due to refinancing activity as a result of the current low interest rate
environment. The increase in the average balance of first mortgage loans was partially offset by a
23 basis point decrease in the weighted-average yield to 5.37% for the nine months ended September
30, 2010 as compared to 5.60% for the same period in 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 nine months of 2010, existing mortgage customers
refinanced or modified approximately $2.11 billion in mortgage loans with a weighted average rate
of 5.82% to a new weighted average rate of 4.94%.
Interest on consumer and other loans decreased $2.7 million to $13.9 million for the first nine
months of 2010 from $16.6 million for the first nine months of 2009. The average balance of
consumer and other loans decreased $35.6 million to $350.2 million for the first nine months of
2010 as compared to $385.8 million for the first nine months of 2009 and the average yield earned
decreased 44 basis points to 5.31% as compared to 5.75% for the same respective periods.
Interest on mortgage-backed securities decreased $82.7 million to $660.5 million for the first nine
months of 2010 as compared to $743.2 million for the first nine months of 2009. This decrease was
due primarily to a 75 basis point decrease in the weighted-average yield to 4.31% for the first
nine months of 2010 from 5.06% for the first nine months of 2009. The decrease in the
weighted-average yield was partially offset by an $837.5 million increase in the average balance of
mortgage-backed securities to $20.41 billion during the first nine months of 2010 as compared to
$19.57 billion for the first nine months of 2009.
The increases in the average balances of mortgage-backed securities were due to purchases of
primarily variable-rate hybrid securities. These securities typically have a fixed interest rate
for three, five or ten years. After this initial fixed-rate term, the interest rates adjust
annually. We purchase these types of
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
Page 38
of lower yields on securities that have been purchased since the second half of 2009 when
market interest rates were lower than the yield earned on the existing portfolio.
Interest on investment securities increased $10.1 million to $162.1 million during the first nine
months of 2010 as compared to $152.0 million for the first nine months of 2009. This increase was
due primarily to a $908.0 million increase in the average balance of investment securities to $5.20
billion for the first nine months of 2010 from $4.29 billion for the first nine months of 2009.
The increase in the average balance was due primarily to the reinvestment of proceeds from the
continued elevated levels of repayments of mortgage-related assets. 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 57 basis points to 4.15% for the nine
months ended September 30, 2010 as compared to 4.72% for the same period in 2009. This decrease in
the average yield earned reflects current market interest rates.
Dividends on FHLB stock increased $970,000, or 3.2%, to $31.7 million for the first nine months of
2010 as compared to $30.7 million for the same period in 2009. This increase was due primarily to
a 13 basis point increase in the average dividend yield earned to 4.80% for the first nine months
of 2010 as compared to 4.67% for the same period in 2009. The increase in dividend income was also
due to a $2.9 million increase in the average balance to $879.7 million for the first nine months
of 2010 as compared to $876.8 million for the same period in 2009. The increase in the average
balance was due to purchases of FHLB stock to meet membership requirements.
Interest on Federal funds sold amounted to $1.6 million for the first nine months of 2010 as
compared to $707,000 for the comparable period in 2009. The average balance of Federal funds sold
amounted to $928.0 million for the first nine months of 2010 as compared to $460.3 million for the
same period in 2009. The yield earned on Federal funds sold was 0.23% for the nine months ended
September 30, 2010 and 0.21% for the nine months ended September 30, 2009. The increase in the
average balance of Federal funds sold is a result of liquidity provided by increased levels of
repayments on mortgage-related assets and calls of investment securities.
Interest Expense.
Total interest expense for the nine months ended September 30, 2010 decreased
$81.3 million, or 6.3%, to $1.20 billion from $1.28 billion for the nine months ended September 30,
2009. This decrease was primarily due to a 44 basis point decrease in the weighted-average cost of
total interest-bearing liabilities to 2.95% for the nine months ended September 30, 2010 compared
with 3.39% for the nine months ended September 30, 2009. The decrease was partially offset by a
$3.95 billion, or 7.8%, increase in the average balance of total interest-bearing liabilities to
$54.56 billion for the nine months ended September 30, 2010 compared with $50.61 billion for the
first nine months of 2009. This increase in the average balance of interest-bearing liabilities was
primarily used to fund the increase in average interest-earning assets.
Interest expense on our time deposit accounts decreased $71.1 million to $224.7 million for the
first nine months of 2010 from $295.8 million for the first nine months of 2009. This decrease was
due to a decrease in the annualized weighted-average cost of 88 basis points to 1.85% for the first
nine months of 2010 from 2.73% for the first nine months of 2009 as maturing time deposits were
renewed or replaced by new time deposits at lower rates. This decrease was partially offset by a
$1.80 billion increase in the average balance of time deposit accounts to $16.26 billion for the
first nine months of 2010 from $14.46 billion for the first nine months of 2009. Interest expense
on money market accounts decreased $9.2 million to $41.4 million for the first nine months of 2010
from $50.6 million for the same period in 2009.
This decrease was due to a decrease in the annualized weighted-average cost of 86 basis points to
1.07% for the first nine months of 2010 from 1.93% for the first nine months of 2009. This decrease
was
Page 39
partially offset by an increase in the average balance of $1.67 billion to $5.17 billion for
the third quarter of 2010 as compared to $3.50 billion for the third quarter of 2009. Interest
expense on our interest-bearing transaction accounts decreased $5.1 million to $19.4 million for
the first nine months of 2010 compared with $24.5 million for the same period in 2009. The decrease
is due to a 78 basis point decrease in the annualized weighted-average cost to 1.11%, partially
offset by a $604.6 million increase in the average balance to $2.34 billion for the first nine
months of 2010 as compared to $1.73 billion for the corresponding period in 2009.
The increases in the average balances of interest-bearing deposits reflect our expanded branch
network and our historical efforts 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. However, total deposits have
decreased $474.2 million since March 31, 2010. We lowered our deposit rates to slow our deposit
growth from 2009 levels since the low yields that are available to us for mortgage-related assets
and investment securities have made a growth strategy less prudent until market conditions improve.
The decrease in the average cost of deposits in 2010 reflected lower market interest rates.
Interest expense on borrowed funds increased $3.6 million to $912.2 million for the nine months
ended September 30, 2010 as compared to $908.6 million for the comparable period in 2009. This
increase was primarily due to a 4 basis point increase in the weighted-average cost of borrowed
funds to 4.07% for the first nine months of 2010 as compared to 4.03% for the first nine months of
2009 reflecting the incremental cost of the debt modifications. This increase was partially offset
by a $215.8 million decrease in the average balance of borrowed funds to $29.96 billion for the
first nine months of 2010 as compared to $30.18 billion for the first nine months of 2009. During
the first nine months of 2010, we modified $4.03 billion of borrowings to extend the call dates of
the borrowings by between three and five years. 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 nine months
of 2010 with deposits. 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 $27.3 million, or 3.0%, to $939.0 million
for the first nine months of 2010 compared with $911.7 million for the first nine months of 2009.
Our net interest rate spread decreased 3 basis points to 1.86% for the first nine months of 2010
from 1.89% for the corresponding period in 2009. Our net interest margin decreased 8 basis points
to 2.10% for the first nine months of 2010 from 2.18% for the corresponding period in 2009.
The decrease in our net interest margin and net interest rate spread was primarily due to the
decrease in the weighted-average yield of our interest-earning assets
.
The yields on
mortgage-related assets, which account for 87.6% of the average balance of interest-earning assets
for the nine months ended September 30, 2010, remained at near-historic lows. The low market
interest rates resulted in increased refinancing activity which caused a decrease in the yield we
earned on mortgage-related assets. We were able to
reduce deposit costs but to a lesser extent than the decrease in mortgage yields, resulting in a
decrease in our net interest rate spread and net interest margin for the nine months ended
September 30, 2010.
Page 40
Provision for Loan Losses.
The provision for loan losses amounted to $150.0 million for the nine
months ended September 30, 2010 as compared to $92.5 million for the nine months ended September
30, 2009. The ALL amounted to $216.3 million at September 30, 2010 and $140.1 million at December
31, 2009. The increase in the provision for loan losses for the quarter ended September 30, 2010
and the resulting increase in the ALL is due primarily to the increase in non-performing loans
during the first nine months of 2010, continuing elevated levels of unemployment and an increase in
charge-offs. In addition, although home prices appear to have started to stabilize, conditions in
the housing markets in many of our lending markets remain weak. We recorded our provision for loan
losses during the first nine 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 Comparison of Operating Results for the Three Months Ended September 30, 2010 and
2009 Provision for Loan Losses.
Non-Interest Income.
Total non-interest income for the nine months ended September 30, 2010 was
$100.1 million compared with $31.4 million for the comparable period in 2009. Included in
non-interest income for the nine months ended September 30, 2010 were net gains on securities
transactions of $92.4 million which resulted from the sale of $1.90 billion of mortgage-backed
securities available-for-sale. Included in non-interest income for the nine months ended September
30, 2009 were net gains on securities transactions of $24.2 million substantially all of which
resulted from the sale of $761.6 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 decreased $5.9 million, or 2.9%, to $196.8
million for the nine months ended September 30, 2010 from $202.7 million for the nine months ended
September 30, 2009. The decrease is primarily due to the absence of the FDIC special
assessment of $21.1 million that was assessed during the second quarter of 2009 and a $4.2
million decrease in compensation and employee benefits expense. These decreases were
partially offset by an increase of $17.6 million in Federal deposit insurance expense. The
increase in Federal deposit insurance expense is due primarily to an increase in total deposits and
the increases in our deposit insurance assessment rate primarily as a result of a restoration plan
implemented by the FDIC to recapitalize the Deposit Insurance Fund. The decrease in compensation
and employee benefits expense included a $4.6 million decrease in expense related to our stock
benefit plans and a $3.0 million decrease in pension expense. These decreases were partially
offset by a $3.6 million increase in compensation costs due primarily to normal increases in salary
as well as additional full time employees. Included in other non-interest expense for the nine
months ended September 30, 2010 were write-downs on foreclosed real estate and net losses on the
sale of foreclosed real estate, of $1.2 million as compared to $2.0 million for the comparable
period in 2009.
Our efficiency ratio was 18.94% for the nine months ended September 30, 2010 as compared to 21.49%
for the nine months ended September 30, 2009. 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 nine months of 2010 was 0.43%
as compared to 0.48% for the first nine months of 2009.
Page 41
Income Taxes.
Income tax expense amounted to $276.2 million for the first nine months of 2010
compared with $257.2 million for the corresponding period in 2009. Our effective tax rate for the
first nine months of 2010 was 39.90% compared with 39.70% for the first nine months of 2009.
Asset Quality
Credit Quality
One of our key operating objectives has been, and continues to be, to maintain a high level
of asset quality. Through a variety of strategies we have been proactive in addressing problem
loans and non-performing assets. These strategies, as well as our concentration on one- to
four-family mortgage lending and our maintenance of sound credit standards for new loan
originations have helped us to maintain the strength of our financial condition. Our primary
lending emphasis is the origination and purchase of one- to four-family first mortgage loans on
residential properties located in the Northeast quadrant of the United States. 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.
The following table presents the composition of our loan portfolio in dollar amounts and in
percentages of the total portfolio at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
Percent
|
|
|
|
Amount
|
|
|
of Total
|
|
|
Amount
|
|
|
of Total
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
First mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizing
|
|
$
|
25,812,333
|
|
|
|
81.30
|
%
|
|
$
|
26,490,454
|
|
|
|
83.36
|
%
|
Interest-only
|
|
|
5,166,553
|
|
|
|
16.27
|
|
|
|
4,586,375
|
|
|
|
14.43
|
|
FHA/VA
|
|
|
380,108
|
|
|
|
1.20
|
|
|
|
285,003
|
|
|
|
0.90
|
|
Multi-family and commercial
|
|
|
50,421
|
|
|
|
0.16
|
|
|
|
54,694
|
|
|
|
0.17
|
|
Construction
|
|
|
10,519
|
|
|
|
0.03
|
|
|
|
13,030
|
|
|
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total first mortgage loans
|
|
|
31,419,934
|
|
|
|
98.96
|
|
|
|
31,429,556
|
|
|
|
98.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer and other loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate second mortgages
|
|
|
171,875
|
|
|
|
0.54
|
|
|
|
201,375
|
|
|
|
0.63
|
|
Home equity credit lines
|
|
|
138,606
|
|
|
|
0.44
|
|
|
|
127,987
|
|
|
|
0.40
|
|
Other
|
|
|
18,987
|
|
|
|
0.06
|
|
|
|
21,003
|
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer and other loans
|
|
|
329,468
|
|
|
|
1.04
|
|
|
|
350,365
|
|
|
|
1.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
31,749,402
|
|
|
|
100.00
|
%
|
|
|
31,779,921
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred loan costs
|
|
|
93,442
|
|
|
|
|
|
|
|
81,307
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(216,283
|
)
|
|
|
|
|
|
|
(140,074
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans
|
|
$
|
31,626,561
|
|
|
|
|
|
|
$
|
31,721,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2010, first mortgage loans secured by one-to four-family properties accounted
for 98.8% of total loans. Fixed-rate mortgage loans represent 66.8% 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.
The market does not apply a uniform definition of what constitutes sub-prime lending. Our
reference to sub-prime lending relies upon the Statement on Subprime Mortgage Lending issued by
the OTS and the other federal bank regulatory
Page 42
agencies (the Agencies), on September 29, 2007,
which further references the Expanded Guidance for Subprime Lending Programs (the Expanded
Guidance), issued by the Agencies by press release dated January 31, 2001. In the
Expanded Guidance, the Agencies indicated that sub-prime lending does not refer to individual
sub-prime loans originated and managed, in the ordinary course of business, as exceptions to prime
risk selection standards. The Agencies recognize that many prime loan portfolios will contain such
loans. The Agencies also excluded prime loans that develop credit problems after acquisition and
community development loans from the sub-prime arena. According to the Expanded Guidance,
sub-prime loans are other loans to borrowers which display one or more characteristics of reduced
payment capacity. Five specific criteria, which are not intended to be exhaustive and are not
meant to define specific parameters for all sub-prime borrowers and may not match all markets or
institutions specific sub-prime definitions, are set forth, including having a Fair Isaac
Corporation (FICO) score of 660 or below. Based upon the definition and exclusions described
above, we are a prime lender. However, as we are a portfolio lender, we review all data contained
in borrower credit reports and do not base our underwriting decisions on FICO scores and do
not record FICO scores on our mortgage loan system. We believe our loans, when made, were amply
collateralized and otherwise conformed to our prime lending standards.
Included in our loan portfolio at September 30, 2010 are interest-only loans of approximately $5.17
billion, or 16.3%, 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 $162.5
million, or 19.4%, of non-performing loans at September 30, 2010 as compared to non-performing
interest-only loans of $82.2 million, or 13.1%, of non-performing loans at December 31, 2009.
In addition to our full documentation loan program, we originate and purchase loans to certain
eligible borrowers as limited documentation loans. Generally the maximum loan amount for limited
documentation loans is $750,000 and these loans are subject to higher interest rates than our full
documentation loan products. We require applicants for limited documentation loans to complete a
FreddieMac/FannieMae loan application and request income, asset and credit history information from
the borrower. Additionally, we verify asset holdings and obtain credit reports from outside vendors
on all borrowers to ascertain the credit history of the borrower. Applicants with delinquent credit
histories usually do not qualify for the limited documentation processing, although delinquencies
that are adequately explained will not prohibit processing as a limited documentation loan. We
reserve the right to verify income and do require asset verification but we may elect not to verify
or corroborate certain income information where we believe circumstances warrant. We also allow
certain borrowers to obtain mortgage loans without disclosing income levels and without any
verification of income. In these cases, we require verification of the borrowers assets. We are
able to provide data relating to limited
documentation loans that we originate. Originated loans overall represent 60.6% of our one- to
four- family first mortgage loans. As part of our wholesale loan program, we allow sellers to
include limited documentation loans in each pool of purchased mortgage loans but limit the amount
of these loans to be no more than 10% of the principal balance of the purchased pool. In addition,
these loans must have a maximum LTV of 70% and meet other characteristics such as maximum loan
size. However, we have not tracked wholesale limited documentation loans on our mortgage loan
system. Included in our loan portfolio at September 30, 2010 are $3.30 billion of originated
amortizing limited documentation loans
Page 43
and $911.6 million of originated limited documentation
interest-only loans. Non-performing loans at September 30, 2010 include $86.0 million of
originated amortizing limited documentation loans and $53.6 million of originated interest-only
limited documentation loans.
The following table presents the geographic distribution of our total loan portfolio, as well as
the geographic distribution of our non-performing loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2010
|
|
|
At December 31, 2009
|
|
|
|
Total loans
|
|
|
Non-performing loans
|
|
|
Total loans
|
|
|
Non-performing loans
|
|
New Jersey
|
|
|
43.0
|
%
|
|
|
43.8
|
%
|
|
|
43.0
|
%
|
|
|
41.6
|
%
|
New York
|
|
|
19.6
|
|
|
|
19.3
|
|
|
|
18.2
|
|
|
|
18.0
|
|
Connecticut
|
|
|
14.4
|
|
|
|
6.3
|
|
|
|
12.6
|
|
|
|
4.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total New York
metropolitan area
|
|
|
77.0
|
|
|
|
69.4
|
|
|
|
73.8
|
|
|
|
63.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Virginia
|
|
|
3.8
|
|
|
|
5.3
|
|
|
|
4.6
|
|
|
|
6.2
|
|
Illinois
|
|
|
3.3
|
|
|
|
4.9
|
|
|
|
3.9
|
|
|
|
5.6
|
|
Maryland
|
|
|
2.9
|
|
|
|
4.6
|
|
|
|
3.5
|
|
|
|
5.1
|
|
Massachusetts
|
|
|
2.2
|
|
|
|
1.9
|
|
|
|
2.7
|
|
|
|
2.3
|
|
Pennsylvania
|
|
|
2.6
|
|
|
|
1.6
|
|
|
|
2.0
|
|
|
|
1.9
|
|
Minnesota
|
|
|
1.4
|
|
|
|
2.0
|
|
|
|
1.4
|
|
|
|
1.8
|
|
Michigan
|
|
|
1.1
|
|
|
|
2.8
|
|
|
|
1.3
|
|
|
|
4.2
|
|
All others
|
|
|
5.7
|
|
|
|
7.5
|
|
|
|
6.8
|
|
|
|
9.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total outside New York
metropolitan area
|
|
|
23.0
|
|
|
|
30.6
|
|
|
|
26.2
|
|
|
|
36.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Performing Assets
The following table presents information regarding non-performing assets as of the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2010
|
|
|
At December 31, 2009
|
|
|
|
(Dollars in thousands)
|
|
Non-accrual first mortgage loans
|
|
$
|
604,520
|
|
|
$
|
500,964
|
|
Non-accrual interest-only mortgage loans
|
|
|
162,495
|
|
|
|
82,236
|
|
Non-accrual construction loans
|
|
|
7,886
|
|
|
|
6,624
|
|
Non-accrual consumer and other loans
|
|
|
3,726
|
|
|
|
1,916
|
|
Accruing loans delinquent 90 days or more:
|
|
|
|
|
|
|
|
|
FHA Loans
|
|
|
57,941
|
|
|
|
31,855
|
|
Other loans
|
|
|
902
|
|
|
|
4,100
|
|
|
|
|
|
|
|
|
Total non-performing loans
|
|
|
837,470
|
|
|
|
627,695
|
|
Foreclosed real estate, net
|
|
|
40,276
|
|
|
|
16,736
|
|
|
|
|
|
|
|
|
Total non-performing assets
|
|
$
|
877,746
|
|
|
$
|
644,431
|
|
|
|
|
|
|
|
|
|
Non-performing loans to total loans
|
|
|
2.64
|
%
|
|
|
1.98
|
%
|
Non-performing assets to total assets
|
|
|
1.45
|
|
|
|
1.07
|
|
Page 44
Non-performing assets amounted to $877.7 million at September 30, 2010 as compared to $644.4
million at December 31, 2009. Non-performing loans increased $209.8 million to $837.5 million at
September 30, 2010 as compared to $627.7 million at December 31, 2009. The increase in
non-performing loans appears to be directly related to the elevated level of unemployment in our
market areas. The ratio of non-performing loans to total loans was 2.64% at September 30, 2010
compared with 1.98% at December 31, 2009.
The following table is a comparison of our delinquent loans at September 30, 2010 and December 31,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-59 Days
|
|
|
60-89 Days
|
|
|
90 Days or More
|
|
|
|
Number
|
|
|
Principal
|
|
|
Number
|
|
|
Principal
|
|
|
Number
|
|
|
Principal
|
|
|
|
of
|
|
|
Balance
|
|
|
of
|
|
|
Balance
|
|
|
of
|
|
|
Balance
|
|
|
|
Loans
|
|
|
of Loans
|
|
|
Loans
|
|
|
of Loans
|
|
|
Loans
|
|
|
of Loans
|
|
|
|
(Dollars in thousands)
|
|
At September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family first mortgages
|
|
|
1,059
|
|
|
$
|
411,879
|
|
|
|
441
|
|
|
$
|
178,929
|
|
|
|
2,033
|
|
|
$
|
763,367
|
|
FHA/VA first mortgages
|
|
|
80
|
|
|
|
17,689
|
|
|
|
35
|
|
|
|
7,696
|
|
|
|
208
|
|
|
|
57,941
|
|
Multi-family and commercial mortgages
|
|
|
2
|
|
|
|
681
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
3,648
|
|
Construction loans
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
490
|
|
|
|
6
|
|
|
|
7,886
|
|
Consumer and other loans
|
|
|
39
|
|
|
|
2,477
|
|
|
|
13
|
|
|
|
1,529
|
|
|
|
40
|
|
|
|
4,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,180
|
|
|
$
|
432,726
|
|
|
|
490
|
|
|
$
|
188,644
|
|
|
|
2,291
|
|
|
$
|
837,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquent loans to total loans
|
|
|
|
|
|
|
1.36
|
%
|
|
|
|
|
|
|
0.59
|
%
|
|
|
|
|
|
|
2.64
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family first mortgages
|
|
|
1,053
|
|
|
$
|
404,392
|
|
|
|
408
|
|
|
$
|
171,913
|
|
|
|
1,480
|
|
|
$
|
581,786
|
|
FHA/VA first mortgages
|
|
|
83
|
|
|
|
20,682
|
|
|
|
35
|
|
|
|
8,650
|
|
|
|
115
|
|
|
|
31,855
|
|
Multi-family and commercial mortgages
|
|
|
2
|
|
|
|
1,357
|
|
|
|
2
|
|
|
|
1,088
|
|
|
|
1
|
|
|
|
1,414
|
|
Construction loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
9,764
|
|
Consumer and other loans
|
|
|
43
|
|
|
|
4,440
|
|
|
|
14
|
|
|
|
882
|
|
|
|
34
|
|
|
|
2,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,181
|
|
|
$
|
430,871
|
|
|
|
459
|
|
|
$
|
182,533
|
|
|
|
1,636
|
|
|
$
|
627,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquent loans to total loans
|
|
|
|
|
|
|
1.36
|
%
|
|
|
|
|
|
|
0.57
|
%
|
|
|
|
|
|
|
1.98
|
%
|
In addition to non-performing loans, we had $196.1 million of potential problem loans at
September 30, 2010 as compared to $189.9 million at December 31, 2009. This amount includes loans
which are 60-89 days delinquent (other than loans guaranteed by the FHA) and certain other
internally classified loans. We will in certain cases grant customers a short-term deferment of
principal payments on one- to four- family mortgage loans. However, we generally do not modify
the contractual terms of loans for borrowers experiencing financial difficulty where such
modifications would represent a troubled debt restructuring.
Potential problem loans are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
|
December 31,2009
|
|
|
|
(In thousands)
|
|
One- to four-family first mortgages
|
|
$
|
178,929
|
|
|
$
|
171,913
|
|
Multi-family and commercial mortgages
|
|
|
13,056
|
|
|
|
17,076
|
|
Construction loans
|
|
|
2,633
|
|
|
|
|
|
Consumer and other loans
|
|
|
1,529
|
|
|
|
882
|
|
|
|
|
|
|
|
|
Total potential problem loans
|
|
$
|
196,147
|
|
|
$
|
189,871
|
|
|
|
|
|
|
|
|
Page 45
Allowance for Loan Losses
The following table presents the activity in our allowance for loan losses at or for the dates
indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
For the Nine Months
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
192,983
|
|
|
$
|
88,053
|
|
|
$
|
140,074
|
|
|
$
|
49,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
50,000
|
|
|
|
40,000
|
|
|
|
150,000
|
|
|
|
92,500
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First mortgage loans
|
|
|
(29,958
|
)
|
|
|
(13,483
|
)
|
|
|
(78,902
|
)
|
|
|
(27,783
|
)
|
Consumer and other loans
|
|
|
(16
|
)
|
|
|
(8
|
)
|
|
|
(99
|
)
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs
|
|
|
(29,974
|
)
|
|
|
(13,491
|
)
|
|
|
(79,001
|
)
|
|
|
(27,800
|
)
|
Recoveries
|
|
|
3,274
|
|
|
|
271
|
|
|
|
5,210
|
|
|
|
336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(26,700
|
)
|
|
|
(13,220
|
)
|
|
|
(73,791
|
)
|
|
|
(27,464
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
216,283
|
|
|
$
|
114,833
|
|
|
$
|
216,283
|
|
|
$
|
114,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to total loans
|
|
|
0.68
|
%
|
|
|
0.37
|
%
|
|
|
0.68
|
%
|
|
|
0.37
|
%
|
Allowance for loan losses to non-performing loans
|
|
|
25.83
|
|
|
|
22.19
|
|
|
|
25.83
|
|
|
|
22.19
|
|
Net charge-offs as a percentage of average loans (1)
|
|
|
0.33
|
|
|
|
0.17
|
|
|
|
0.31
|
|
|
|
0.12
|
|
The following table presents our allocation of the ALL by loan category and the percentage of
loans in each category to total loans at the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2010
|
|
|
At December 31, 2009
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
of Loans in
|
|
|
|
|
|
|
of Loans in
|
|
|
|
|
|
|
|
Category to
|
|
|
|
|
|
|
Category to
|
|
|
|
Amount
|
|
|
Total Loans
|
|
|
Amount
|
|
|
Total Loans
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
First mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
$
|
206,323
|
|
|
|
98.77
|
%
|
|
$
|
133,927
|
|
|
|
98.69
|
%
|
Other first mortgages
|
|
|
6,657
|
|
|
|
0.19
|
|
|
|
3,169
|
|
|
|
0.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total first mortgage loans
|
|
|
212,980
|
|
|
|
98.96
|
|
|
|
137,096
|
|
|
|
98.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer and other loans
|
|
|
3,303
|
|
|
|
1.04
|
|
|
|
2,978
|
|
|
|
1.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowance for loan losses
|
|
$
|
216,283
|
|
|
|
100.00
|
%
|
|
$
|
140,074
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
We invest primarily in mortgage-backed securities issued by Ginnie Mae, Fannie Mae and
Freddie Mac, as well as other securities issued by GSEs. These securities account for
substantially all of our securities. We do not purchase unrated or private label mortgage-backed
securities or other higher risk securities such as those backed by sub-prime loans. There were no
debt securities past due or securities for which the Company
Page 46
currently believes it is not probable
that it will collect all amounts due according to the contractual terms of the security.
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 and we have demanded
the return of this collateral. We believe that we have the legal right to setoff our obligation to
repay the borrowings against our right to the return of the mortgage-backed securities pledged as
collateral. As a result, we believe that our potential economic loss from Lehman Brothers failure
to return the collateral is limited to the excess market value of the collateral over the $100
million repurchase price. 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 as we have concluded that a loss in neither probable or
estimable at September 30, 2010.
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 owned. We also have the
ability to access the capital markets, depending on market conditions.
On December 16, 2009, we filed an automatic shelf registration statement on Form S-3 with the SEC,
which was declared effective immediately upon filing. This shelf registration statement allows us
to periodically offer and sell, from time to time, in one or more offerings, individually or in any
combination, common stock, preferred stock, debt securities, capital securities, guarantees,
warrants to purchase common stock or preferred stock and units consisting of one or more of the
foregoing. The shelf registration statement provides us with greater capital management
flexibility and enables us to readily access the capital markets in order to pursue growth
opportunities that may become available to us in the future or should there be any changes in the
regulatory environment that call for increased capital requirements. Although the shelf
registration statement does not limit the amount of the foregoing items that we may offer and sell
pursuant to the shelf registration statement, our ability and any decision to do so is subject to
market conditions and our capital needs. In addition, our ability to issue debt through the
capital markets may also be dependent on our ability to obtain an
acceptable credit rating from one or more
nationally recognized credit rating agencies. At this time, we do not have any immediate plans or
current commitments to sell securities under the self registration statement.
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 $4.28 billion and purchased $580.1 million of loans during the first nine months of 2010
as compared to
Page 47
$4.66 billion and $2.45 billion during the first nine months of 2009. Loan
origination activity continues
to be strong as a result of an increase in mortgage refinancing caused by market interest rates
that remain at near-historic lows. Our loan purchase activity has significantly declined as the
GSEs have been actively purchasing loans as part of their efforts to keep mortgage rates low to
support the housing market during the recent economic recession. As a result, the sellers from
whom we have historically purchased loans are selling to the GSEs. We expect that the amount of
loan purchases may continue to be at reduced levels for the near-term. Principal repayments on
loans amounted to $4.74 billion for the first nine months of 2010 as compared to $5.34 billion for
the same period in 2009. At September 30, 2010, commitments to originate and purchase mortgage
loans amounted to $676.0 million and $700,000, respectively as compared to $469.0 million and
$243.1 million, respectively at September 30, 2009.
Purchases of mortgage-backed securities during the first nine months of 2010 were $8.88 billion as
compared to $5.01 billion during the first nine months of 2009. The increase in the purchases of
mortgage-backed securities was due primarily to the reinvestment of proceeds from the principal
repayments and sales of mortgage-backed securities during the first nine months of 2010. Principal
repayments on mortgage-backed securities amounted to $6.36 billion for the first nine months of
2010 as compared to $3.43 billion 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. The increase in repayments is also due to the principal repayment of $1.13
billion of mortgage-backed securities by the Federal Home Loan Mortgage Corporation (FHLMC)
during the first quarter of 2010. These principal repayments represented the balances of
non-performing loans that were included in mortgage-backed securities that they issued. We sold
$1.90 billion of mortgage-backed securities during the first nine months of 2010, resulting in a
gain of $92.4 million. We also sold $761.6 million of mortgage-backed securities during the first
nine months of 2009, resulting in a gain of $24.0 million.
We purchased $5.90 billion of investment securities during the first nine months of 2010 as
compared to $4.37 billion during the first nine months of 2009. Proceeds from the calls of
investment securities amounted to $6.07 billion during the first nine months of 2010 as compared to
$2.67 billion for the corresponding period in 2009.
At September 30, 2010, we had mortgage-backed securities and investment securities with an
amortized cost of $17.46 billion that were used as collateral for securities sold under agreements
to repurchase and at that date we had $8.85 billion of unencumbered securities.
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 nine months of 2010, we had net purchases of $3.9 million of FHLB common stock. During the
first nine months of 2009 we had net purchases of $11.4 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 $336.6 million during the first nine months of 2010 as compared to an
increase of $4.65 billion for the first nine 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. However, total deposits have decreased $474.2 million from March 31, 2010.
We have lowered our deposit rates to slow our
Page 48
deposit growth from the 2009 levels since the low
yields that are available to us for mortgage-related
assets and investment securities have made a growth strategy less prudent until market conditions
improve. Time deposits scheduled to mature within one year were $10.69 billion at September 30,
2010. These time deposits have a weighted average rate of 1.32%. These time deposits are
scheduled to mature as follows: $4.05 billion with an average cost of 1.20% in the fourth quarter
of 2010, $3.42 billion with an average cost of 1.33% in the first quarter of 2011, $1.90 billion
with an average cost of 1.44% in the second quarter of 2011 and $1.32 billion with an average cost
of 1.49% in the third quarter of 2011. The current yields offered for our six month, one year and
two year time deposits are 0.75%, 1.00% and 1.50%, respectively. In addition, our money market
savings account is currently yielding 1.35%. 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, we were able to fund our growth during the first nine months of 2010 with deposits. At
September 30, 2010, we had $22.58 billion of borrowed funds with a weighted-average rate of 3.91%
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 September 30, 2010 we had $600.0 million of borrowings with a weighted average rate of 4.18%
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. In addition, a
significant concentration of our borrowed funds involve the FHLB. At September 30, 2010, $17.18
billion or 57.6% of our total borrowed funds are with the FHLB. Our
borrowing agreement with the FHLB requires the FHLB to offer another
lending product at
market interest rates to replace any called borrowings.
Our policies and procedures with respect to managing funding and liquidity risk are
established to ensure our safe and sound operation in compliance with applicable bank
regulatory requirements. Our liquidity management process is sufficient to meet our
daily funding needs and cover both expected and unexpected deviations from normal
daily operations. Processes are in place to appropriately identify, measure, monitor and
control liquidity and funding risk. The primary tools we use for measuring and managing
liquidity risk include cash flow projections, diversified funding sources, stress testing, a
cushion of liquid assets, and a formal, well developed contingency funding plan.
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 positioning the Company for future growth. We intend to continue focusing on funding our
future growth primarily with customer deposits, using borrowed funds as a supplemental funding
source if deposit growth is insufficient to support these growth plans. Funding our future growth
primarily with deposits will allow us to achieve a greater balance between deposits and borrowings.
We also intend to modify certain borrowings to extend their call dates, which we began to do
during 2009. During the first nine months of 2010, we modified approximately $4.03 billion of
callable borrowings to extend the call dates of the borrowings by between three and five 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.
Cash dividends paid during the first nine months of 2010 were $221.8 million. We have not
purchased any of our common shares during the nine months ended September 30, 2010. At September
30, 2010, there remained 50,123,550 shares available for purchase under existing stock repurchase
programs.
Page 49
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 nine months of 2010,
Hudson City Bancorp received $240.0 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 September 30, 2010, Hudson City Bancorp had total cash and due from banks
of $233.8 million.
At September 30, 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 7.91%, 7.91% and 22.42%, 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 to repay borrowings at the earlier of maturity date
or call date. At September 30, 2010, we had $22.58 billion of borrowed funds 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. We also have obligations
pursuant to a number of non-cancelable operating leases.
The following table reports the amounts of our contractual obligations as of September 30, 2010.
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
676,000
|
|
|
$
|
676,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Mortgage loan purchases
|
|
|
700
|
|
|
|
700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed security purchases
|
|
|
2,142,000
|
|
|
|
2,142,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of borrowed funds
|
|
|
29,825,000
|
|
|
|
600,000
|
|
|
|
500,000
|
|
|
|
2,250,000
|
|
|
|
26,475,000
|
|
Operating leases
|
|
|
147,372
|
|
|
|
9,273
|
|
|
|
18,691
|
|
|
|
18,080
|
|
|
|
101,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
32,791,072
|
|
|
$
|
3,427,973
|
|
|
$
|
518,691
|
|
|
$
|
2,268,080
|
|
|
$
|
26,576,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $187.9 million, $8.7 million, and $2.8 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 50
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 U.S. generally accepted accounting principles, under
which we are required to maintain an adequate ALL at September 30, 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 September 30, 2010. 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
September 30, 2010, approximately 77.0% 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 3.8%, 3.3%, 2.9%, 2.2%, 2.6%, 1.4% and 1.1%, respectively of total
loans. The remaining 5.7% 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 third quarter of
Page 51
2010. We use this analysis, as a tool, together with principal balances and delinquency reports,
to 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,
Page 52
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 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.
Page 53
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.
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 nine months 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 nine months of 2010 and did not
have any such hedging transactions in place at September 30,
2010 although we may elect to do so in the future as part of our
overall interest rate risk management strategy. Our mortgage loan and
mortgage-backed security portfolios, which comprise 87.7% 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 and 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 the economic outlook softened somewhat in the third quarter of
2010 but that the economy is continuing to grow although at a slower pace than anticipated. The
national unemployment rate was 9.6% in September 2010 as compared to 9.5% in June 2010 and 10.0% in
December 2009. Although there has been recent improvement in certain economic indicators, the FOMC
decided to maintain the overnight lending rate at zero to 0.25% during the third quarter of 2010.
As a result of the FOMC policy decisions and the general tenor of the economy, short-term market
interest
rates have remained at the low levels that have been experienced during the first nine months of
2010
Page 54
while longer-term market interest rates have decreased, thus flattening the slope of the
market yield curve. Due to our investment and financing decisions, a flatter slope of the yield
curve results in a less 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.
The current interest rate environment has allowed us to continue to re-price lower our short-term
time and non-maturity deposits, thereby reducing our cost of funds, and has also allowed us to
price medium-term time deposits (2-5 year maturities) at lower rates and extend the
weighted-average remaining maturity on this portfolio. The yields on mortgage-related assets have
also remained at relatively low levels as the 10 year Treasury fell to 2.5% during the third
quarter of 2010 and the GSEs have actively purchased loans in an
effect to keep mortgage rates down and support the housing market. Our net interest rate spread decreased to 1.73% for the third quarter of 2010 as
compared to 1.89% for the linked second quarter of 2010 and 2.04% for the third quarter of 2009 and
our net interest margin decreased to 1.97% for the third quarter of 2010 as compared to 2.13% for
the linked second quarter of 2010 and 2.31% for the third quarter of 2009. While our deposits
continued to reprice to lower rates during the third quarter of 2010, the cost of our borrowed
funds increased reflecting the modification of certain of these borrowings and the lack of
repricing opportunity due to the extension to maturity of the putable borrowings in this low
interest rate environment. In addition, the low market interest rates resulted in lower yields on
our mortgage-related interest-earning assets as customers refinanced to lower mortgage rates and
our new loan production and asset purchases were at the current low market interest rates.
Mortgage-related assets represented 87.4% of our average interest-earning assets during the third
quarter of 2010.
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.
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 decrease, prepayment
rates tend to increase. Prepayment rates on our mortgage-related assets have increased during 2009
and the first nine 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 into 2011.
Page 55
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 nine months of 2010 we saw an increase in call activity on our
investment securities as market interest rates remained at these historic 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 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. 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 nine months of 2010 we experienced no call activity on our borrowed funds
due to the continued low levels of market interest rates. At September 30, 2010, we had $22.58
billion of borrowed funds, with a weighted-average rate of 3.91%, 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 or by repaying the borrowings, using funds generated by deposit
growth or by using proceeds from securities sales.
During 2009 and the first nine months of 2010, we were 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
borrowings callable within 12 months. We intend to continue funding any future growth primarily
with customer deposits. We also intend to use customer deposits to payoff borrowings as they
mature. Using customer deposits in this manner will allow us to achieve a greater balance between
deposits and borrowings. If necessary for any future growth or to provide for short-term liquidity
needs, we may borrow a combination of short-term borrowings with maturities of three to nine months
and longer-term fixed-maturity borrowings with terms of two to five years. We also intend to
continue to modify certain borrowings, either extending their call dates or repurchasing the call
options. During the first nine months of 2010, we modified approximately $4.03 billion of callable
borrowings and extended the call dates of these modified borrowings by at least four years. In
addition, we are considering prepayment of certain borrowings; however, at this time, we have no
immediate plans to make any such prepayments.
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.
Page 56
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 rather, attempts
to assess the impact on our net interest income of interest rate changes. The following table
reports the changes to our net interest income over the next 12 months ending September 30, 2011
assuming incremental (equal percent change in each quarter) changes in interest rates or
instantaneous changes in interest rates for the given rate shock scenarios.
|
|
|
|
|
|
|
|
|
Change in
|
|
Percent Change in Net Interest Income
|
Interest Rates
|
|
Incremental Change
|
|
Instantaneous Change
|
(Basis points)
|
|
|
|
|
|
|
|
|
200
|
|
|
2.13
|
%
|
|
|
7.22
|
%
|
100
|
|
|
0.94
|
|
|
|
7.85
|
|
50
|
|
|
0.44
|
|
|
|
4.77
|
|
(50)
|
|
|
(0.41
|
)
|
|
|
(3.78
|
)
|
The preceding table indicates that at September 30, 2010, in the event of a 200 basis point
incremental increase in interest rates, we would expect to experience a 2.13% increase in net
interest income from the base case. This compares to a 1.66% decrease at December 31, 2009. The
table also indicates that if market rates were to instantaneously increase 200 basis points we
would expect to experience a 7.22% increase to net interest income from the base case analysis
compared with a 6.02% decrease at December 31, 2009.
The current period positive change to net interest income in the increasing interest rate scenarios
in both these analyses was primarily due to the increased income from our mortgage-related assets
due to higher reinvestment rates. This is partially offset by a lower increase in interest expense
from deposits due to a lower aggregate principal balance of deposits compared to our
interest-earning assets, and limited change in borrowing expense due to the current low interest
rate environment and the fact these borrowings will not be significantly put back to us through the
200 basis point analysis. The change from the December 31, 2009 analysis reflects the flattening of
the market rate curve and the lower rate environment.
The preceding table also indicates that at September 30, 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
0.41% decrease 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 interest income, due to accelerated prepayments and calls, is greater than the decrease in
deposits while borrowing expense does not change. The table also indicates that if market rates
were to decrease 50 basis points instantaneously we would expect to experience a 3.78% 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 interest 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
Page 57
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.
The following table presents the estimated present value of equity over a range of interest rate
change scenarios at September 30, 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 interest
rate environments.
|
|
|
|
|
|
|
|
|
Change in
|
|
Present
|
|
Basis Point
|
Interest Rates
|
|
Value Ratio
|
|
Change
|
|
(Basis points)
|
|
|
|
|
|
|
|
|
200
|
|
|
6.04
|
%
|
|
|
58
|
|
100
|
|
|
6.54
|
|
|
|
108
|
|
50
|
|
|
6.21
|
|
|
|
75
|
|
0
|
|
|
5.46
|
|
|
|
|
|
(50)
|
|
|
4.23
|
|
|
|
(123
|
)
|
In the 200 basis point increase scenario, the present value ratio was 6.04% at September 30,
2010 as compared to 4.81% at December 31, 2009. The change in the present value ratio was positive
58 basis points at September 30, 2010 as compared to negative 258 basis points at December 31,
2009. The increase in the present value ratio and the decrease of 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 borrowed funds from the base case elevated price level due to pricing to maturity and
the elevated levels of pricing of our mortgage related assets in this low rate environment. If
rates were to increase 300 basis points, the present value ratio would be 4.32% with a decrease
from the base case of 114 basis points. In the 50 basis point decrease scenario, the present value
ratio was 4.23% at September 30, 2010 as compared to 7.07% at December 31, 2009. The change in the
present value ratio was negative 123 basis points at September 30, 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
changes from the December 31, 2009 analysis (decrease in base case and negative 50 basis point
scenario and the increase in the positive 200 basis point scenario) reflect the flattening of the
interest rate curve that has occurred during 2010. The long end of the curve has decreased thus
causing our borrowings to increase in price while our mortgage-related assets have not increased
proportionally due to elevated prepayment speeds. This has resulted in the lower net present value
ratio in the base case and negative 50 basis point scenario. However, the lower base case market
rate means our borrowings have farther to decrease in price before being put back to us, resulting
in an increase in the positive rate scenarios from the December 31, 2009 analysis.
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
Page 58
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.
Page 59
GAP Analysis.
The following table presents the amounts of our interest-earning assets and
interest-bearing liabilities outstanding at September 30, 2010, which we anticipate to reprice or
mature in each of the 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
loans and 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
$2.90 billion, are reported at the earlier of their next step-up 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 $2.00 billion 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 $769.9 million, non-accrual other loans of $4.6 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 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
|
|
$
|
3,809,203
|
|
|
$
|
3,283,507
|
|
|
$
|
4,840,347
|
|
|
$
|
4,246,723
|
|
|
$
|
3,074,144
|
|
|
$
|
11,394,110
|
|
|
$
|
30,648,034
|
|
Consumer and other loans
|
|
|
90,745
|
|
|
|
5,097
|
|
|
|
14,473
|
|
|
|
47,913
|
|
|
|
11,815
|
|
|
|
156,826
|
|
|
|
326,869
|
|
Federal funds sold
|
|
|
485,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
485,479
|
|
Mortgage-backed securities
|
|
|
4,770,384
|
|
|
|
3,731,996
|
|
|
|
5,293,611
|
|
|
|
3,869,256
|
|
|
|
2,301,107
|
|
|
|
1,772,666
|
|
|
|
21,739,020
|
|
FHLB stock
|
|
|
878,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
878,690
|
|
Investment securities
|
|
|
2,007,315
|
|
|
|
|
|
|
|
1,350,000
|
|
|
|
1,050,000
|
|
|
|
500,000
|
|
|
|
123,404
|
|
|
|
5,030,719
|
|
|
Total interest-earning assets
|
|
|
12,041,816
|
|
|
|
7,020,600
|
|
|
|
11,498,431
|
|
|
|
9,213,892
|
|
|
|
5,887,066
|
|
|
|
13,447,006
|
|
|
|
59,108,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings accounts
|
|
|
64,797
|
|
|
|
64,797
|
|
|
|
86,396
|
|
|
|
86,396
|
|
|
|
215,990
|
|
|
|
345,585
|
|
|
|
863,961
|
|
Interest-bearing demand accounts
|
|
|
235,578
|
|
|
|
235,578
|
|
|
|
350,570
|
|
|
|
350,570
|
|
|
|
602,924
|
|
|
|
636,477
|
|
|
|
2,411,697
|
|
Money market accounts
|
|
|
493,923
|
|
|
|
493,923
|
|
|
|
987,846
|
|
|
|
987,846
|
|
|
|
1,728,731
|
|
|
|
246,962
|
|
|
|
4,939,231
|
|
Time deposits
|
|
|
7,468,475
|
|
|
|
3,219,948
|
|
|
|
3,062,711
|
|
|
|
871,825
|
|
|
|
1,486,067
|
|
|
|
|
|
|
|
16,109,026
|
|
Borrowed funds
|
|
|
300,000
|
|
|
|
300,000
|
|
|
|
150,000
|
|
|
|
350,000
|
|
|
|
2,250,000
|
|
|
|
26,475,000
|
|
|
|
29,825,000
|
|
|
Total interest-bearing liabilities
|
|
|
8,562,773
|
|
|
|
4,314,246
|
|
|
|
4,637,523
|
|
|
|
2,646,637
|
|
|
|
6,283,712
|
|
|
|
27,704,024
|
|
|
|
54,148,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate sensitivity gap
|
|
$
|
3,479,043
|
|
|
$
|
2,706,354
|
|
|
$
|
6,860,908
|
|
|
$
|
6,567,255
|
|
|
$
|
(396,646
|
)
|
|
$
|
(14,257,018
|
)
|
|
$
|
4,959,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative interest rate sensitivity gap
|
|
$
|
3,479,043
|
|
|
$
|
6,185,397
|
|
|
$
|
13,046,305
|
|
|
$
|
19,613,560
|
|
|
$
|
19,216,914
|
|
|
$
|
4,959,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative interest rate sensitivity gap
as a percent of total assets
|
|
|
5.74
|
%
|
|
|
10.20
|
%
|
|
|
21.52
|
%
|
|
|
32.36
|
%
|
|
|
31.70
|
%
|
|
|
8.18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative interest-earning assets
as a percent of interest-bearing
liabilities
|
|
|
140.63
|
%
|
|
|
148.03
|
%
|
|
|
174.49
|
%
|
|
|
197.28
|
%
|
|
|
172.67
|
%
|
|
|
109.16
|
%
|
|
|
|
|
The cumulative one-year gap as a percent of total assets was positive 10.20% at September
30, 2010 compared with negative 3.70% at December 31, 2009. The change to a positive cumulative
one-year gap primarily reflects the accelerated prepayment speeds on our mortgage-related assets,
the increase in the amount of agency bonds assumed to be called and the extension of our time
deposits to longer-term maturities. The proceeds from the assumed call of $2.00 billion in agency
bonds will likely be reinvested in agency hybrid
Page 60
adjustable-rate securities. As a result of the
expected reinvestment of these proceeds, our one-year interest rate sensitivity gap may decrease in
future periods.
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 September 30, 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 and our June 30, 2010 Form 10-Q. There has been no material change in
risk factors since June 30, 2010, except as described below.
The recently publicized foreclosure issues affecting the nations largest mortgage loan servicers
could impact our foreclosure process and timing to completion of foreclosures.
Several of the nations largest mortgage loan servicers have experienced highly publicized
compliance issues with respect to their foreclosure processes. As a result, these servicers have
self imposed moratoriums on their foreclosures and have been the subject of state attorney general
scrutiny and consumer lawsuits. These difficulties and the potential legal and regulatory
responses could impact the foreclosure process and timing to completion of foreclosures for
residential mortgage lenders generally,
Page 61
including the Company. Over the past few years,
foreclosure timelines have increased in general due to, among other reasons, processing delays
associated with the significant increase in the number of foreclosure cases as a result of the
economic crisis and voluntary (and in some cases mandatory) programs
intended to permit or require lenders to consider loan modifications or other alternatives to
foreclosure. Further increases in the foreclosure timeline may have an adverse effect on
collateral values and our ability to maximize our recoveries.
Our ability to originate mortgage loans for portfolio has been adversely affected by the increased
competition resulting from the unprecedented involvement of the U.S. government and GSEs in the
residential mortgage market.
Over the past few years, we have faced increased competition for mortgage loans due to the
unprecedented involvement of the GSEs in the mortgage market. This involvement is a result of the
recent economic crisis and has caused the interest rate for thirty year fixed rate mortgage loans
that conform to the GSEs loan purchase guidelines to remain artificially low. We originate and
purchase such conforming loans and retain them for portfolio. In addition, the U.S. Congress
recently extended through September 2011 the expanded GSE conforming loan limits in many of our
operating markets, allowing larger balance loans to be acquired by the GSEs, and more loans in our
portfolio qualified under the expanding conforming loan limits and were refinanced into fixed rate
mortgages. As a result of these factors, we expect that our one-to-four family loan repayments
will remain at elevated levels, making it
difficult for us to grow our mortgage loan portfolio and balance sheet.
Our concentration in FHLB borrowings, particularly borrowings callable at the option of the FHLB,
could adversely affect our cost of funds and net interest margin if interest rates were to
increase significantly.
At September 30, 2010, we had $17.18 billion of borrowing from the FHLB, or 57.6% of our total
borrowings and 31.2% of our total liabilities. In addition, at that date $16.73 billion of our FHLB
borrowings are callable by the FHLB on a quarterly basis. Although we believe that under current
market conditions none of these borrowings would be called and that the likelihood they would be
called would not increase substantially unless interest rates were to increase by 300 basis points,
we are at risk that the FHLB may decide to call these borrowings
earlier than we anticipate. Our borrowing agreement with the FHLB
requires the FHLB to offer another leading product at market interest
rates to replace any called borrowings. Should the FHLB call a
substantial portion of these borrowings during a short time period we may experience a significant
increase in our cost of funds and a decline in our net interest income.
We do not expect to experience more than nominal growth in the current economic environment and
bank regulatory environment.
Since our second step conversion and public offering in 2005 we have experienced approximately 21%
annualized growth through year end 2009. During the first nine months of 2010 our assets increased
$348.9 million, or 0.6%. However, since March 31, 2010, our assets decreased $615.0 million. Although
our regulatory capital ratios are in excess of the requirements to be considered well capitalized
for bank regulatory purposes, we believe the current regulatory environment, marked by both
legislative and regulatory reactions to the recent recession and financial crisis, would
necessitate maintaining a reasonable cushion above the applicable regulatory requirements to be
considered well capitalized.
Page 62
In addition, the current economic environment, where interest rate levels are very low
and GSEs are actively purchasing loans in an effort to keep mortgage rates down to
support the housing market, has provided very little opportunity for one- to four- family
lenders, like us, to profitably add mortgage loan products to our portfolio and to continue
our recent growth strategy. Accordingly, we are likely to maintain our relative balance sheet size or experience
only nominal growth, and we may even experience some balance sheet shrinkage, while current
economic and regulatory conditions prevail.
We experienced a contraction in our net interest margin during the three and nine month periods
ended September 30, 2010 and expect to continue to experience a contraction in our net interest
margin if current market conditions continue.
Our net interest margin for the three months ended September 30, 2010 was 1.97% compared to 2.13%
for the three months ended June 30, 2010 and 2.31% for the three months ended September 30, 2009.
Similarly, our net interest margin was 1.86% for the nine months ended September 30, 2010 compared
to 1.89% for the nine months ended September 30, 2009. The respective declines in our net interest
margin were due to the declines in the average yields on our interest earning assets outpacing the
declines in our average cost of funds over similar time frames. The decline in our average yields
reflects the combination of the overall low interest rate environment, the GSEs efforts to keep
mortgage rates low to support the housing market and the continuation of the trend of homeowners to
refinance their mortgage loans in the low rate environment. The efforts by the GSEs has also had
the effect of reducing our sources for purchasing loans in the secondary market as the sellers from
whom we have historically purchased loans are selling to the GSEs. The United States Congress
recently extended to September 2011 the time period within which the GSEs may purchase loans under
an expanded limit on principal balances that qualify as conforming loans. Further, on November 3, 2010, the FOMC announced that the FRB will purchase
approximately $600 billion of longer-term U.S. government securities, thus likely to put
downward pressure on long-term interest rates, including interest rates on mortgage-
related assets. As a result, we expect
this adverse environment for portfolio lending to continue, with the likely result that we will
continue to experience compression of our net interest margin, and, in combination with the
likelihood of nominal balance sheet growth, a reduction of net interest income.
Enhanced regulatory scrutiny in the wake of the recent financial crisis and the Reform Act combined
with our significant growth will require us to enhance certain aspects of our operations to ensure
our ongoing compliance with regulatory requirements.
The recent economic recession and financial crisis, which has been marked by hundreds of bank
failures, has resulted in significant government reaction both in terms of legislative actions and
enhanced regulatory scrutiny. Legislative action has included adoption and implementation of the
Troubled Asset Relief Program resulting in the significant investment of public monies in financial
institutions, and the enactment of the Reform Act which will impose significant new regulatory
burdens on us. We believe the regulatory response to the financial crisis, the legislative
directives to the banking regulators and related public reaction has resulted in significantly
greater regulatory supervision of financial institutions, particularly larger institutions such as
Hudson City. Our growth since our initial public offering in 1999, and particularly since our
second step conversion in 2005, has resulted in our becoming one of the 40 largest domestic insured
depository institutions by asset size. We have enhanced systems and added to staff to keep up with
the ordinary operational and regulatory burden normally associated
with a growing institution. We expect these efforts to be further enhanced, as we are
faced with a greater regulatory burden under the Reform Act and the enhanced regulatory scrutiny
based on our size in the current environment. As a result, we expect to enhance our
operational and compliance functions in a number of areas in order to meet the expected regulatory
Page 63
scrutiny. This may result in additional investment in both technology and staffing that is likely
to increase our non-interest expense.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table reports information regarding repurchases of our common stock during the third
quarter of 2010 and the stock repurchase plans approved by our Board of Directors.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Number of Shares
|
|
|
|
Total
|
|
|
|
|
|
|
Shares Purchased
|
|
|
that May Yet Be
|
|
|
|
Number of
|
|
|
Average
|
|
|
as Part of Publicly
|
|
|
Purchased Under
|
|
|
|
Shares
|
|
|
Price Paid
|
|
|
Announced Plans
|
|
|
the Plans or
|
|
Period
|
|
Purchased
|
|
|
per Share
|
|
|
or Programs
|
|
|
Programs (1)
|
|
|
July 1-July 31, 2010
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
50,123,550
|
|
August 1-August 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,123,550
|
|
September 1-September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,123,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
On July 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.
|
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. (Removed and Reserved)
Item 5. Other Information
Not applicable.
Item 6. Exhibits
|
|
|
Exhibit Number
|
|
Exhibit
|
31.1
|
|
Certification of Chief Executive Officer
|
|
|
|
31.2
|
|
Certification of Chief Financial Officer
|
|
|
|
32.1
|
|
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. *
|
|
|
|
101
|
|
The following information from the Companys Quarterly
Report on Form 10-Q for the quarter ended September 30,
2010, filed with the SEC on November 8, 2010, has been
formatted in eXtensible Business Reporting Language: (i)
Consolidated Statements of Financial Condition at
September 30, 2010 and December 31, 2009, (ii)
Consolidated Statements of Income for the three and nine
months ended September 30, 2010 and 2009, (iii)
Consolidated Statements of Changes in Shareholders
Equity for the nine months ended September 30, 2010 and
2009 , (iv) Consolidated Statements of Cash Flows for the
nine months ended September 30, 2010 and 2009 and (v)
Notes to the Unaudited Consolidated Financial Statements
(detail tagged). *
|
|
|
|
*
|
|
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.
|
Page 64
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
Hudson City Bancorp, Inc.
|
|
Date: November 8, 2010
|
By:
|
/s/ Ronald E. Hermance, Jr.
|
|
|
|
Ronald E. Hermance, Jr.
|
|
|
|
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
|
|
|
|
|
|
Date: November 8, 2010
|
By:
|
/s/ James C. Kranz
|
|
|
|
James C. Kranz
|
|
|
|
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
|
|
|
Page 65
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