Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
HCBK > SEC Filings for HCBK > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for HUDSON CITY BANCORP INC

Form 10-Q for HUDSON CITY BANCORP INC


9-Nov-2012

Quarterly Report


Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations

Executive Summary

Pending Merger

On August 27, 2012, the Company entered into an Agreement and Plan of Merger with M&T and WTC, with WTC as the surviving entity. As part of the Merger, the Bank will merge with and into Manufacturers and Traders Trust Company. Subject to the terms and conditions of the Merger Agreement, in the Merger, Hudson City shareholders will have the right to receive with respect to each of their shares of common stock of the Company, at their election (but subject to proration and adjustment procedures), 0.08403 of a share of M&T Common Stock, or cash having a value equal to the product of 0.08403 multiplied by the average closing price of the M&T Common Stock for the ten days immediately prior to the completion of the Merger. The Merger Agreement also provides that at the closing of the Merger, 40% of the outstanding shares of Hudson City common stock will be converted into the right to receive cash and the remainder of the outstanding shares of Hudson City common stock will be converted into the right to receive shares of M&T Common Stock. In connection with the Merger, M&T has filed a registration statement on Form S-4 with the SEC that includes a joint proxy statement of the Company and M&T and a prospectus of M&T, as well as other relevant documents concerning the Merger. The registration statement is subject to completion and has not yet become effective. A definitive proxy statement will be mailed to shareholders of the Company after the registration statement is declared effective. The Merger is subject to shareholder and regulatory approvals and the satisfaction of other customary conditions. The Company anticipates that the closing of the Merger will take place in the second quarter of 2013.

Financial Condition and Results of Operations

During the first nine months of 2012, we continued to focus on our traditional consumer-oriented business model through the origination of one- to four-family mortgage loans. We have traditionally funded this loan production with customer deposits and borrowings. Market interest rates remained at historically low levels during 2011 and during the first nine months of 2012 and, as a result, we continued to reduce the size of our balance sheet.

During the first quarter of 2011, the Bank completed a restructuring of its balance sheet (referred to as the "Restructuring Transaction") which involved the extinguishment of $12.5 billion of structured putable borrowings with an average cost of 3.56%. The extinguishment of the borrowings was funded by the sale of $8.66 billion of securities with an average yield of 3.20% and $5.00 billion of new short-term fixed-maturity borrowings with an average cost of 0.66%. Interest rates continued to decline in 2011 which resulted in increased prepayments on our mortgage-related assets and calls of our investment securities. During the fourth quarter of 2011, the Bank used the excess liquidity provided by the prepayments of mortgage-related assets and calls of investment securities to extinguish $4.3 billion of structured putable borrowings with a weighted average cost of 4.21%. The Restructuring Transaction and the extinguishment of debt during the fourth quarter of 2011, (collectively referred to as the "Transactions"), reduced after-tax earnings by $1.07 billion in 2011.

Page 36


Table of Contents

The Transactions were part of our ongoing strategy to reduce interest rate risk and realign our funding mix. We decided to complete the Transactions because of the effect that the then recent market events, including the unprecedented involvement of the U.S. government and the GSEs in the mortgage market and the protracted period of historically low market interest rates had on our balance sheet. The extended low interest rate environment caused accelerated prepayment speeds on our mortgage-related assets and calls of our investment securities resulting in the reinvestment of these funds 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, caused margin compression and heightened interest rate risk concerns for us.

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 puts 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 economy has continued to expand at a moderate pace in recent months. Growth in employment has slowed in recent months, and the unemployment rate remains elevated. The FOMC noted that while the housing sector has showed signs of improvement and household spending continues to advance, growth in business fixed investment has slowed. The national unemployment rate was 7.9% during October 2012 representing a decline from 8.5% in December 2011. The FOMC decided to maintain the overnight lending rate at zero to 0.25% during the third quarter of 2012 and stated that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015. As a result, market interest rates have remained at low levels, and consequently, the yields on our mortgage-related assets have continued to decrease during the first nine months of 2012.

The FOMC also decided to expand its accommodative monetary policy by purchasing an additional $40 billion of agency mortgage-backed securities per month to ensure that inflation is at the rate most consistent with its dual mandate regarding both inflation and unemployment. The Federal Reserve program "Operation Twist", which was originally set to expire at the end of June, has been extended until the end of the year. This program consists of the purchase of Treasury securities with remaining maturities of 6 to 30 years funded by the sale of an equal amount of Treasury securities with remaining maturities of 3 years or less. These programs will continue to put downward pressure on longer-term interest rates.

Net interest income decreased $41.3 million, or 16.9%, to $203.3 million for the third quarter of 2012 as compared to $244.6 million for the third quarter of 2011. Our interest rate spread increased slightly to 1.80% for the third quarter of 2012 as compared to 1.76% for the third quarter of 2011. Our net interest margin was 2.02% for the third quarter of 2012 as compared to 1.97% for the third quarter of 2011. The decrease in net interest income reflects the overall decrease in interest-earning assets and interest-bearing liabilities as a result of the extinguishment of $4.3 billion of borrowings during the fourth quarter of 2011 and the continued decrease in the size of our balance sheet as a result of the lack of reinvestment opportunities.

Page 37


Table of Contents

Net interest income decreased $112.3 million, or 14.5%, to $661.7 million for the first nine months of 2012 as compared to $774.0 million for the first nine months of 2011, primarily reflecting the reduction in the size of our balance sheet. Our interest rate spread increased 18 basis points to 1.91% for the nine months ended September 30, 2012 as compared to 1.73% for the nine months ended September 30, 2011. Our net interest margin increased 17 basis points to 2.11% as compared to 1.94% for the those same respective periods. The increase in our interest rate spread and net interest margin for the first nine months of 2012 is primarily due to the effects of the Transactions.

Market interest rates on mortgage-related assets remained at near-historic lows primarily due to the FRB's 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 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 the thirty year fixed rate mortgage loans that conform to the GSEs' guidelines for purchase to remain low. We originate such conforming loans and retain them in our portfolio. Further, the FOMC has decided to maintain the overnight lending rate at the current level of zero to 0.25% through mid-2015 if recent economic conditions continue. 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. We expect that this compression in net interest margin, along with the reduction in the size of our balance sheet from the Transactions, will result in a reduction of net interest income for the remainder of 2012.

The provision for loan losses amounted to $20.0 million and $70.0 million for the three and nine month periods ended September 30, 2012 as compared to $25.0 million and $95.0 million for the three and nine month periods ended September 30, 2011. The decrease in our provision for loan losses during the third quarter of 2012 as compared to the same period in 2011 was due primarily to the overall declining trend in net charge-offs and a decrease in the size of the loan portfolio, yet resulted in an overall increase in our allowance for loan losses as non-performing loans continued to increase. Non-performing loans, defined as non-accrual loans and accruing loans delinquent 90 days or more, amounted to $1.14 billion at September 30, 2012 compared with $1.02 billion at December 31, 2011. The ratio of non-performing loans to total loans was 4.12% at September 30, 2012 compared with 3.48% at December 31, 2011. The highly publicized foreclosure issues that have affected the nation's largest mortgage loan servicers have resulted in greater bank regulatory, court and state attorney general scrutiny. As a result, our foreclosure process and the time to complete a foreclosure continue to be prolonged, especially in New York and New Jersey where 72% of our non-performing loans are located. We are now experiencing a time frame to repayment or foreclosure ranging from 30 to 36 months from the initial non-performing period. This protracted foreclosure process delays our ability to resolve non-performing loans through the sale of the underlying collateral and our ability to maximize any recoveries.

Total non-interest income was $3.0 million for the third quarter of 2012 as compared to $3.1 million for the same quarter in 2011. Non-interest income for the third quarter of 2012 is primarily made up of service fees and charges on deposit and loan accounts.

Total non-interest income was $8.7 million for the first nine months of 2012 as compared to $111.0 million for the same period in 2011. Included in non-interest income for the first nine months of 2011 were net gains on securities transactions of $102.5 million which resulted from the sale of $9.04 billion of securities available-for-sale. Substantially all of the proceeds from the sale of securities were used to repay borrowings in the Restructuring Transaction. There were no securities sales for the nine months ended September 30, 2012.

Page 38


Table of Contents

Total non-interest expense amounted to $93.9 million for the third quarter of 2012 as compared to $83.7 million for the third quarter of 2011. This increase is due to increases of $6.7 million in compensation and employee benefit costs and $7.3 million in other expense (including $6.1 million of Merger related costs), partially offset by a decrease of $3.6 million in Federal deposit insurance expense. The decrease in Federal deposit insurance expense for the quarter ended September 30, 2012 is primarily due to the reduction in the size of our balance sheet as a result of the Transactions.

Total non-interest expense amounted to $269.0 million for the nine months ended September 30, 2012 as compared to $1.41 billion for the nine months ended September 30, 2011. Included in total non-interest expense for the first nine months of 2011 was a $1.17 billion loss on the extinguishment of debt related to the Restructuring Transaction. The increase in total non-interest expense for the first nine months of 2012 was due to an increase of $8.4 million in compensation and employee benefit costs, an increase of $11.4 million in other expense (including $6.1 million of Merger related costs), and an increase of $10.6 million in Federal deposit insurance expense.

Net loans amounted to $27.53 billion at September 30, 2012 as compared to $29.14 billion at December 31, 2011. During the first nine months of 2012, our loan production amounted to $3.92 billion as compared to $4.09 billion for the nine months ended September 30, 2011. Loan production was offset by principal repayments of $5.38 billion in the first nine months of 2012, as compared to principal repayments of $4.85 billion for the first nine months of 2011.

Total mortgage-backed securities decreased $1.26 billion to $12.03 billion at September 30, 2012 from $13.29 billion at December 31, 2011. The decrease in mortgage-backed securities reflected repayments of $2.74 billion, partially offset by purchases of $1.47 billion of mortgage-backed securities issued by GSEs.

Investment securities decreased $79.0 million to $467.4 million at September 30, 2012 from $546.4 million at December 31, 2011 due to calls of $500.0 million during the nine months ended September 30, 2012. The proceeds from these calls were used to purchase $407.8 million of corporate bonds.

Total deposits amounted to $24.02 billion at September 30, 2012 as compared to $25.51 billion at December 31, 2011. The decrease in deposits was due to planned reductions in our deposit rates to curtail deposit growth while we experience excess liquidity from prepayment activity and limited investment opportunities.

Borrowings amounted to $12.93 billion at September 30, 2012 as compared to $15.08 billion at December 31, 2011. The decrease in borrowings was due to the maturity of short-term borrowings utilized as part of the Restructuring Transaction.

The Bank is currently subject to the Bank MOU. In accordance with the Bank MOU, the Bank has adopted and has implemented enhanced operating policies and procedures that are intended to enable us to continue to (a) reduce our level of interest rate risk, (b) reduce our funding concentration, (c) diversify our funding sources, (d) enhance our liquidity position, (e) monitor and manage loan modifications and (f) maintain our capital position in accordance with our existing capital plan. In addition, we developed a written strategic plan for the Bank which establishes various objectives, including, but not limited to, objectives for the Bank's overall risk profile, earnings performance, growth and balance sheet mix and to enhance our enterprise risk management program. The implementation of the strategic plan has been suspended pending the completion of the Merger.

Page 39


Table of Contents

The Company is currently subject to the Company MOU. In accordance with the Company MOU, the Company must, among other things support the Bank's compliance with the Bank MOU. The Company MOU also requires the Company to: (a) obtain approval from the FRB prior to receiving a capital distribution from the Bank or declaring a dividend to shareholders, (b) obtain approval from the FRB prior to repurchasing or redeeming any Company stock or incurring any debt with a maturity of greater than one year and (c) submit a comprehensive Capital Plan and a comprehensive Earnings Plan to the FRB. These agreements will remain in effect until modified or terminated by the OCC (with respect to the Bank MOU) and the FRB (with respect to the Company MOU).

On October 29, 2012, and continuing through October 30, 2012, the New York metropolitan area was hit by Hurricane Sandy, one of the most significant storm systems experienced in this area. As a result, we temporarily ceased all operations. By November 1, 2012, the Bank was able to reopen 75 branches with full banking services and normal business hours, while 55 branches were without power and/or telephones, but providing limited service and hours to meet customers' emergency needs. We have since resumed full banking services in all of our branches except for 4 branches that remain unable to open. We are continuing to assess the damage resulting from the storm. We cannot at this time assess the impact that this storm may have had on our borrowers or on the related collateral for loans.

Comparison of Financial Condition at September 30, 2012 and December 31, 2011

Total assets decreased $3.46 billion, or 7.6%, to $41.90 billion at September 30, 2012 from $45.36 billion at December 31, 2011. The decrease in total assets reflected a $1.61 billion decrease in net loans, a $1.26 billion decrease in total mortgage-backed securities, a $328.2 million decrease in cash and cash equivalents and a $120.4 million decrease in Federal Home Loan Bank of New York ("FHLB") stock.

Net loans amounted to $27.53 billion at September 30, 2012 as compared to $29.14 billion at December 31, 2011. During the first nine months of 2012, our loan production amounted to $3.92 billion as compared to $4.09 billion for the same period in 2011. Loan production was offset by principal repayments of $5.38 billion in the first nine months of 2012, as compared to principal repayments of $4.85 billion for the first nine months of 2011.

The decrease in loan production during the first nine months of 2012 primarily reflects our low appetite for adding long-term fixed rate loans to our portfolio in the current low market interest rate environment. The decrease in net loans was also due to continued elevated levels of refinancing activity caused by low market interest rates.

Our first mortgage loan production during the first nine months of 2012 was substantially all in one- to four-family mortgage loans. Approximately 60% of mortgage loan originations for the first nine months of 2012 were variable-rate loans as compared to approximately 41% for the corresponding period in 2011. Fixed-rate mortgage loans accounted for 62.9% of our first mortgage loan portfolio at September 30, 2012 as compared to 66.8% at December 31, 2011.

Our ALL amounted to $291.6 million at September 30, 2012 and $273.8 million at December 31, 2011. Non-performing loans amounted to $1.14 billion, or 4.12% of total loans, at September 30, 2012 as compared to $1.02 billion, or 3.48% of total loans, at December 31, 2011.

Total mortgage-backed securities decreased $1.26 billion to $12.03 billion at September 30, 2012 from $13.29 billion at December 31, 2011. The decrease in mortgage-backed securities reflected repayments of $2.73 billion, partially offset by purchases of $1.47 billion of mortgage-backed securities issued by GSEs. At September 30, 2012, variable-rate mortgage-backed securities accounted for 85.7% of our portfolio compared with 84.1% at December 31, 2011.

Total investment securities decreased $79.0 million, or 14.5%, to $467.4 million at September 30, 2012 as compared to $546.4 million at December 31, 2011. The decrease in investment securities is primarily due to calls of $500.0 million of investment securities partially offset by the purchase of corporate bonds in the amount of $407.8 million during the nine months ended September 30, 2012.

FHLB stock decreased $120.4 million to $390.2 million at September 30, 2012 as compared to $510.6 million at December 31, 2011. The decrease in the balance of FHLB stock was primarily due to mandatory redemptions of stock due to a decrease in the amount of borrowings outstanding with the FHLB.

Page 40


Table of Contents

Total cash and cash equivalents decreased $328.2 million to $425.9 million at September 30, 2012 as compared to $754.1 million at December 31, 2011. The decrease in cash is due primarily to the decrease in deposits as we continue our balance sheet reduction while profitable investment opportunities remain scarce in the current environment. Other assets decreased $51.7 million to $677.5 million at September 30, 2012 from $729.2 million at December 31, 2011. The decrease in other assets is due to a decrease in current and deferred taxes of $59.8 million primarily due to accrued tax expense related to earnings during the first nine months of 2012.

Total liabilities decreased $3.61 billion, or 8.9%, to $37.19 billion at September 30, 2012 from $40.80 billion at December 31, 2011. The decrease in total liabilities primarily reflected a $2.15 billion decrease in borrowed funds and a decrease in total deposits of $1.49 billion.

Total deposits decreased $1.49 billion, or 5.8%, to $24.02 billion at September 30, 2012 from $25.51 billion at December 31, 2011. The decrease in total deposits reflected a $1.41 billion decrease in our money market accounts and a decrease of $445.3 million in our time deposits, partially offset by an increase in interest-bearing transaction and savings accounts of $301.3 million and $53.4 million, respectively. The decrease in our money market and time deposit accounts is primarily due to planned reductions in our deposit rates to curtail deposit growth while we experience excess liquidity from prepayment activity and limited investment opportunities. We had 135 banking offices at both September 30, 2012 and December 31, 2011.

Borrowings decreased $2.15 billion, or 14.3%, to $12.93 billion at September 30, 2012 as compared to $15.08 billion at December 31, 2011. The decrease in borrowings was due to the maturity of short-term borrowings utilized as part of the Restructuring Transaction.

At September 30, 2012 and December 31, 2011 borrowings consisted of the following:

                                              September 30, 2012                    December 31, 2011
                                                             Weighted                             Weighted
                                                             Average                              Average
                                          Principal            Rate            Principal            Rate
                                                                (Dollars in thousands)
Structured borrowings:
Quarterly put option                     $  3,325,000            4.40  %      $  3,325,000            4.40  %
One-time put option                         4,600,000             4.52           4,600,000             4.52

                                            7,925,000             4.47           7,925,000             4.47
Fixed-rate/fixed-maturity borrowings        5,000,000             4.21           7,150,000             3.21

Total borrowed funds                     $ 12,925,000            4.37  %      $ 15,075,000            3.87  %

At September 30, 2012, we had $2.93 billion of borrowed funds with put dates within one year. If interest rates were to decrease, or remain consistent with current rates, we believe these borrowings would probably not be put back 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 put back at their next put 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 put back will not increase substantially unless interest rates were to increase by at least 300 basis points.

Page 41


Table of Contents

The Company had 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 ("SIPA"). Mortgage-backed securities with an amortized cost of approximately $114.1 million were pledged as collateral for these borrowings and we demanded the return of this collateral. The trustee for the SIPA liquidation of Lehman Brothers Inc. (the "Trustee") notified the Company in the fourth quarter of 2011 that it no longer holds these securities and considers our claim to be approximately $13.9 million representing the excess of the market value of the collateral over the $100 million repurchase price. While we dispute the Trustee's calculation of the claim, as a result of the Trustee's position, in the fourth quarter of 2011 we removed the mortgage-backed securities and the borrowings from our balance sheet and recorded the net amount as a receivable included in other assets (the "Net Claim"). While we intend to pursue full recovery of our Net Claim, during the fourth quarter of 2011 we established a reserve of $3.9 million against the receivable balance. There can be no assurances as to the amount of the final settlement of this transaction.

Other liabilities increased $26.6 million to $239.3 million at September 30, 2012 from $212.7 million at December 31, 2011 due primarily to an increase in accrued FDIC assessments.

Total shareholders' equity increased $151.6 million to $4.71 billion at September 30, 2012 from $4.56 billion at December 31, 2011. The increase was primarily due to net income of $201.2 million for the nine months ended September 30, 2012 and an increase in accumulated other comprehensive income of $54.8 million. The increase was partially offset by cash dividends paid to common shareholders of $119.1 million.

Accumulated other comprehensive income amounted to $94.4 million at September 30, 2012 and included a $141.6 million after-tax net unrealized gain on securities available for sale ($239.3 million pre-tax) partially offset by a $47.2 million after-tax accumulated other comprehensive loss related to the funded status of our employee benefit plans. Accumulated other comprehensive income amounted to $39.7 million at December 31, 2011 and included an $89.3 million after-tax net unrealized gain on securities available for sale ($150.9 million pre-tax) partially offset by a $49.6 million after-tax accumulated other comprehensive loss related to the funded status of our employee benefit plans.

As of September 30, 2012, 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 2012 pursuant to our repurchase programs. Pursuant to the Company MOU, any future share repurchases . . .

  Add HCBK to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for HCBK - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.