PARAMUS, N.J., March 28, 2011 /PRNewswire/ -- Hudson City
Bancorp, Inc. (Nasdaq: HCBK), the holding company for Hudson City
Savings Bank, announced today that it has completed a restructuring
of its balance sheet that significantly reduced higher-cost
structured borrowings and will allow for increased future net
interest income. As a result, the Bank expects to be better
able to grow and compete in the current and foreseeable residential
mortgage marketplace.
In a series of transactions executed this month, Hudson City paid off $12.50 billion in structured quarterly putable
borrowings, funded by the sale of $8.66
billion of securities, and $5.00
billion of new shorter-term fixed maturity borrowings with
an average cost of 0.66%. These transactions will negatively
impact first quarter 2011 after-tax earnings by approximately
$644 million or $1.30 per share. For the full year 2011,
the loss from the restructuring will be reduced by four quarters of
earnings, absent the restructuring charge.
Hudson City expects its Tier 1
leverage capital ratio will be substantially unchanged by the
restructuring transactions and is expected to increase to more than
8.0% by March 31, 2011 due to
earnings in the first quarter of 2011 absent the transaction.
As a result of the restructuring transactions, the net
interest margin will improve by as much as 40 basis points for the
second quarter of 2011 as compared to the fourth quarter of
2010.
The Bank's core business operations are performing in accordance
with management's expectations, and should continue to do so in the
three remaining quarters of 2011. The Company expects to
continue paying a dividend at a rate to be determined by the Board
of Directors at its meeting on April 19,
2011.
JP Morgan acted as adviser to the Company on the balance sheet
restructuring strategy.
Hudson City's decision to
restructure reflects five critical parameters:
- Interest rate risk: Structured quarterly putable
borrowings represented a significant portion of Hudson City's interest rate risk exposure,
both in current market pricing (reflected in our calculation of net
portfolio value) and sensitivity to price changes from interest
rate movements. Removing these borrowings from our balance
sheet is a necessary first step to mitigate the current price risk
exposure. In future quarters, the Bank intends to further modify or
hedge certain of the remaining putable borrowings to reduce our
exposure to price sensitivity from interest rate movements.
These modifications will not result in extinguishment charges
to income. Putable borrowings remaining after the
restructuring total approximately $16.6
billion.
- Reduction of liquidity concerns: Borrowings subject to
quarterly put options can cause uncertainty regarding when the
borrowings will have to be repaid. By extinguishing a large
portion of these borrowings, uncertainty regarding future cash
outflows is substantially reduced.
- Reduction of low-yielding investments: By selling
mortgage-backed securities with a weighted-average yield of
approximately 3.20%, the Bank is reducing the risk inherent in
holding these securities in a rising-rate environment.
- Realignment of the overall funding mix: This restructuring
reduces putable borrowings' share of total non-equity funding to
35% from its past 53% level. This realigned funding mix will
ease margin compression and give the Bank a greater opportunity to
control the cost of interest-bearing liabilities.
- Future growth potential: By reducing the mismatch of investing
and funding rates, Hudson City
will be better positioned to take advantage of a rising rate
environment and begin to grow assets.
Ronald E. Hermance, Jr., Chairman
and Chief Executive Officer of the Company, commented on the
restructuring, "Since our two highly successful public offerings,
we have constructed a balance sheet that we believe returned
substantial value to our shareholders. The balance sheet was
managed with a focus on fundamental banking by originating and
purchasing 1-4 family first mortgage loans with substantial down
payments. This focus has provided the Bank with charge-offs
that are still low by industry standards. Asset quality and levels
of anticipated charge-offs are not expected to change as a result
of the restructuring, as the restructuring was not predicated upon
these items. We funded our growth using a mix of deposits and
borrowings that, given normal market conditions, would have matched
well with the longer term assets we placed on the balance sheet. In
essence, the balance sheet was built to handle normal interest rate
volatility."
Mr. Hermance continued, "However, recent market events and the
unprecedented involvement of the United
States government in both the mortgage markets, through the
government-sponsored enterprises (the "GSEs"), and the maintenance
of low market interest rates, have resulted in an environment that
has caused our balance sheet to be less responsive to current
market conditions. The extended low interest rate environment
has caused accelerated prepayment speeds on our mortgage-related
assets resulting in reinvestment in these instruments at the
current low market interest rates. These lower-yielding assets and
higher-cost borrowings, which did not reprice during this extended
low rate environment, have caused interest rate risk and margin
compression concerns for us. We believe that when interest rates
increase beyond where they are today, the extension of the low
yielding assets will cause greater pressure on both these
factors."
Mr. Hermance added, "Accordingly, we undertook this balance
sheet restructuring at a time when market interest rates are
beginning to increase with the intent on preserving our
shareholders' equity as much as reasonably possible and yet
executing a trade that looks to increase our forward earnings
potential. We chose to extinguish structured quarterly putable
borrowings to address interest rate risk and liquidity concerns
that this extended low interest rate environment exacerbated.
We expect that this transaction will position us to
eventually return to our core strategy of measured balance sheet
growth funded with appropriately matched liabilities. As a result
of this transaction, we should be properly positioned to do this
when the market conditions change. When the anticipated GSE
reform is enacted and a substantial portion of the mortgage market
is returned to the private sector, we believe we will be able to
capture a greater share of this market more profitably."
Mr. Hermance concluded, "We have analyzed this restructuring
carefully, as well as other potential actions to address our
balance sheet, interest rate risk and liquidity concerns, and
concluded that the transactions we have completed are in the best
interest of the long term health of the balance sheet and future
earnings of the institution and are consistent with regulatory
guidelines and directives regarding interest rate risk and
liquidity applicable to banks and thrifts."
Forward-Looking Statements
This release may contain certain "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act
of 1995 that are based on certain assumptions and describe future
plans, strategies and expectations of Hudson City Bancorp, Inc.
Such forward-looking statements may be identified by the use
of such words as "may," "believe," "expect," "anticipate,"
"should," "plan," "estimate," "predict," "continue," and
"potential" or the negative of these terms or other comparable
terminology. Examples of forward-looking statements include,
but are not limited to, estimates with respect to the financial
condition, results of operations and business of Hudson City
Bancorp Inc., the characterization of the future effects of the
restructuring transactions on balance sheet strength, capital
ratios, net interest margin and earnings prospects, and Hudson City
Bancorp Inc.'s plans, objectives, expectations and intentions, and
other statements contained in this release that are not historical
facts. Hudson City Bancorp Inc.'s ability to predict results
or the actual effect of future plans or strategies is inherently
uncertain and actual results and performance could differ
materially from those contemplated or implied by these
forward-looking statements. They can be affected by inaccurate
assumptions Hudson City Bancorp, Inc. might make or by known or
unknown risks and uncertainties. Factors that could cause
assumptions to be incorrect include, but are not limited to,
changes in interest rates, general economic conditions, and
legislative, regulatory and public policy changes. These risks and
uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such
statements. For a summary of important factors that could
affect Hudson City's
forward-looking statements, please refer to Hudson City's filings with the Securities and
Exchange Commission available at www.sec.gov. Hudson City
Bancorp does not intend to update any of the forward-looking
statements after the date of this release or to conform these
statements to actual events.
SOURCE Hudson City Bancorp, Inc.