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HCBK > SEC Filings for HCBK > Form 10-Q on 9-May-2013All Recent SEC Filings

Show all filings for HUDSON CITY BANCORP INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for HUDSON CITY BANCORP INC


9-May-2013

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 Bancorp 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 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.

On April 12, 2013, M&T and Hudson City Bancorp announced that additional time will be required to obtain a regulatory determination on the applications necessary to complete the proposed Merger. On April 13, 2013, M&T and Hudson City Bancorp entered into Amendment No. 1 to the Merger Agreement. Amendment No. 1, among other things, extends the date after which either party may elect to terminate the Merger Agreement if the Merger has not yet been completed from August 27, 2013 to January 31, 2014. In addition, Amendment No. 1 also enables the Company to submit for a vote of its stockholders an unsolicited bona fide alternative transaction that its board of directors determines in good faith is more favorable from a financial point of view to the Company's stockholders than the Merger. If such a potential alternative transaction is submitted to an approved by the Company's stockholders, the Merger Agreement will be terminated subject to the Company paying a termination fee to M&T. Amendment No. 1 also permits the Company to take certain interim actions, including with respect to the Company's conduct of business, retiree benefits, retention incentive and certain other matters with respect to the Company's personnel, prior to the completion of the Merger. In accordance with these provisions, the Company has implemented additional retention programs with regard to key employees to help ensure continued staffing pending the completion of the Merger in light of the delay in closing. The cost of these programs is not expected to be material to the results of our operations.

The Merger Agreement, as amended, was approved by the shareholders of both Hudson City Bancorp and M&T. The Merger is subject to regulatory approvals and the satisfaction of other customary conditions.

Financial Condition and Results of Operations

During the first three months of 2013, 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 the first three months of 2013 and, as a result, we continued to reduce the size of our balance sheet, though at a slower pace than in previous quarters. Our total assets decreased to $40.29 billion at March 31, 2013 as compared to $40.60 billion at December 31, 2012. During 2012, our total assets decreased 10.5% from $45.36 billion at December 31, 2011.

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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 a return to moderate economic growth following a pause late last year. The FOMC noted that the housing sector has strengthened and household spending and growth in business fixed investment has advanced. Labor market conditions have continued to show signs of improvement, but the unemployment rate remains at elevated levels. The national unemployment rate decreased to 7.6% in March 2013 from 7.8% in December 2012 and 8.2% in March 2012. The FOMC decided to maintain the overnight lending rate at zero to 0.25% during the second quarter of 2013 and stated that exceptionally low levels for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6.5%. Previously, the FOMC stated that these 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 quarter of 2013.

The FOMC also decided to continue its accommodative monetary policy by purchasing an additional $40.0 billion of agency mortgage-backed securities per month and longer-term Treasury securities initially at a pace of $45.0 billion per month to ensure that inflation is at the rate most consistent with its dual mandate regarding both inflation and unemployment. These programs will continue to put downward pressure on longer-term interest rates.

Net interest income decreased $56.7 million, or 24.2%, to $177.4 million for the first quarter of 2013 as compared to $234.1 million for the first quarter of 2012. The decrease in net interest income reflects the overall decrease in the average balance of interest-earning assets and interest-bearing liabilities and the continued low interest rate environment. Our interest rate spread decreased to 1.53% for the first quarter of 2013 as compared to 1.75% for the linked fourth quarter of 2012 and 1.95% for the first quarter of 2012. Our net interest margin was 1.78% for the first quarter of 2013 as compared 1.97% for the linked fourth quarter of 2012 and 2.15% for the first quarter of 2012.

Mortgage-related assets represented 93.0% of our average interest-earning assets at March 31, 2013. 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. The resulting low market interest rates have made reinvestment opportunities scarce. We expect this adverse environment for portfolio lending to continue, with the likely result that we will continue to reduce the size of our balance sheet and experience compression of our net interest margin.

The provision for loan losses amounted to $20.0 million for the quarter ended March 31, 2013 as compared to $25.0 million for the quarter ended March 31, 2012. The decrease in our provision for loan

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losses during the first quarter of 2013 as compared to the first quarter of 2012 was due primarily to the stabilization of home prices, a decrease in the size of the loan portfolio and a decrease in the amount of total delinquent loans. Non-performing loans, defined as non-accrual loans and accruing loans delinquent 90 days or more, amounted to $1.14 billion at March 31, 2013 as compared to $1.16 billion at December 31, 2012. The ratio of non-performing loans to total loans was 4.35% at March 31, 2013 compared with 4.29% at December 31, 2012. Notwithstanding the decrease in non-performing loans, the foreclosure process and the time to complete a foreclosure, while improving, continue to be prolonged, especially in New York and New Jersey where 76% of our non-performing loans are located. 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. Early stage loan delinquencies (defined as loans that are 30 to 89 days delinquent) decreased $72.3 million to $560.8 million from $633.1 million at December 31, 2012.

Total non-interest expense amounted to $81.3 million for the first quarter of 2013 as compared to $91.6 million for the first quarter of 2012. This decrease is due to decreases of $11.9 million in Federal deposit insurance expense and $541,000 in compensation and employee benefit costs, partially offset by an increase of $2.0 million in other expense.

Net loans decreased $962.9 million to $25.92 billion at March 31, 2013 from $26.89 billion at December 31, 2012. During the first quarter of 2013, our loan production (origination and purchases) amounted to $824.8 million as compared to $1.08 billion for the first quarter of 2012. Loan production was offset by principal repayments of $1.73 billion during the first quarter of 2013, as compared to $1.64 billion for the first quarter of 2012. Loan production declined during the first three months of 2013 which reflects our reduced appetite for adding long-term fixed-rate mortgage loans 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.

Total mortgage-backed securities decreased $905.4 million to $10.11 billion at March 31, 2013 from $11.02 billion at December 31, 2012. The decrease in mortgage-backed securities reflected continued elevated levels of repayments. Repayments amounted to $880.4 million for the first quarter of 2013 as compared to $837.4 million for the same period in 2012.

Total deposits amounted to $23.16 billion at March 31, 2013 as compared to $23.48 billion at December 31, 2012. The decrease in deposits was due to planned reductions in our deposit rates to curtail deposit growth as we continue to experience excess liquidity from prepayment activity on mortgage-related assets and limited investment opportunities with attractive yields.

Borrowings amounted to $12.18 billion at March 31, 2013 with an average cost of 4.59%. There are no scheduled maturities for 2013.

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 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. Prior to the execution of Amendment No. 1, the implementation of the strategic plan had been suspended pending the completion of the Merger. However, based on the extended time to complete the Merger, the Company intends to proceed with implementation of certain parts of the strategic plan.

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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).

Comparison of Financial Condition at March 31, 2013 and December 31, 2012

Total assets decreased $309.6 million, or 0.8%, to $40.29 billion at March 31, 2013 from $40.60 billion at December 31, 2012. The decrease in total assets reflected a $962.9 million decrease in net loans, a $905.4 million decrease in total mortgage-backed securities and a $375.9 million decrease in other assets, partially offset by a $1.93 billion increase in cash and cash equivalents.

Total cash and cash equivalents increased $1.93 billion to $2.76 billion at March 31, 2013 as compared to $828.0 million at December 31, 2012. This increase is primarily due to continued elevated levels of repayments on mortgage-related assets and the lack of attractive reinvestment opportunities due to low market interest rates. In addition, we received tax refunds of $361.3 million as a result of the net loss in 2011 from our balance sheet restructuring transactions. Other assets decreased $376.0 million to $303.9 million at March 31, 2013 from $679.9 million at December 31, 2012 due primarily to a decrease in income taxes receivable as a result of the $361.3 million of tax refunds received during the first quarter of 2013.

Net loans amounted to $25.92 billion at March 31, 2013 as compared to $26.89 billion at December 31, 2012. During the first quarter of 2013, our loan production amounted to $824.8 million as compared to $1.08 billion for the same period in 2012. Loan production was offset by principal repayments of $1.73 billion in the first quarter of 2013, as compared to principal repayments of $1.64 billion for the first quarter of 2012.

The decrease in loan production during the first quarter of 2013 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 quarter of 2013 was substantially all in one- to four-family mortgage loans. Approximately 81.2% of mortgage loan originations for the first quarter of 2013 were variable-rate loans as compared to approximately 64.0% for the corresponding period in 2012. Fixed-rate mortgage loans accounted for 59.3% of our first mortgage loan portfolio at March 31, 2013 as compared to 61.1% at December 31, 2012.

Our ALL amounted to $301.1 million at March 31, 2013 and $302.3 million at December 31, 2012. Non-performing loans amounted to $1.14 billion, or 4.35% of total loans, at March 31, 2013 as compared to $1.16 billion, or 4.29% of total loans, at December 31, 2012.

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Total mortgage-backed securities decreased $905.4 million to $10.11 billion at March 31, 2013 from $11.02 billion at December 31, 2012. The decrease in mortgage-backed securities reflected repayments of $880.4 million. We did not purchase any mortgage-backed securities during the first quarter of 2013. At March 31, 2013, variable-rate mortgage-backed securities accounted for 86.4% of our portfolio compared with 86.0% at December 31, 2012.

Total liabilities decreased $321.3 million, or 0.9%, to $35.58 billion at March 31, 2013 from $35.90 billion at December 31, 2012. The decrease in total liabilities primarily reflected a decrease in total deposits of $320.8 million.

Total deposits decreased $320.8 million, or 1.4%, to $23.16 billion at March 31, 2013 from $23.48 billion at December 31, 2012. The decrease in total deposits reflected a $330.6 million decrease in our money market accounts and a decrease of $40.9 million in our demand accounts, partially offset by an increase in time deposits and savings accounts of $26.4 million and $28.2 million, respectively. The decrease in our money market and demand accounts is primarily due to planned reductions in our deposit rates to curtail deposit growth while we experience excess liquidity from prepayment activity on mortgage-related assets and limited investment opportunities with attractive yields. We had 135 banking offices at both March 31, 2013 and December 31, 2012.

Borrowings amounted to $12.18 billion at both March 31, 2013 and December 31, 2012. At March 31, 2013, we had $4.0 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.

Total shareholders' equity increased $11.6 million to $4.71 billion at March 31, 2013 from $4.70 billion at December 31, 2012. The increase was primarily due to net income of $47.9 million for the quarter ended March 31, 2013. The increase was partially offset by cash dividends paid to common shareholders of $39.8 million.

Accumulated other comprehensive income amounted to $68.1 million at March 31, 2013 and included a $119.8 million after-tax net unrealized gain on securities available for sale ($202.5 million pre-tax) partially offset by a $51.7 million after-tax accumulated other comprehensive loss related to the funded status of our employee benefit plans. Accumulated other comprehensive income amounted to $70.0 million at December 31, 2012 and included a $122.5 million after-tax net unrealized gain on securities available for sale ($207.2 million pre-tax) partially offset by a $52.5 million after-tax accumulated other comprehensive loss related to the funded status of our employee benefit plans.

As of March 31, 2013, 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 three months of 2013 pursuant to our repurchase programs. Pursuant to the Company MOU, any future share repurchases must be approved by the FRB. In addition, pursuant to the terms of the Merger Agreement, we may not repurchase shares of Hudson City Bancorp common stock without the consent of M&T. At March 31, 2013, our capital ratios were in excess of the applicable regulatory requirements to be considered well-capitalized. See "Liquidity and Capital Resources."

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At March 31, 2013, our shareholders' equity to asset ratio was 11.69% compared with 11.58% at December 31, 2012. 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 $9.47 at March 31, 2013 and $9.46 at December 31, 2012. Our tangible book value per share, calculated by deducting goodwill and the core deposit intangible from shareholders' equity, was $9.16 as of March 31, 2013 and $9.15 at December 31, 2012.

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Comparison of Operating Results for the Three-Month Periods Ended March 31, 2013 and 2012

Average Balance Sheet. The following table presents the average balance sheets, average yields and costs and certain other information for the three months ended March 31, 2013 and 2012. The table presents the annualized average yield on interest-earning assets and the annualized average cost of interest-bearing liabilities. We derived the yields and costs by dividing annualized income or expense by the average balance of interest-earning assets and interest-bearing liabilities, respectively, for the periods shown. We derived average balances from daily balances over the periods indicated. Interest income includes fees that we considered to be adjustments to yields. Yields on tax-exempt obligations were not computed on a tax equivalent basis. Nonaccrual loans were included in the computation of average balances and therefore have a zero yield. The yields set forth below include the effect of deferred loan origination fees and costs, and purchase discounts and premiums that are amortized or accreted to interest income.

                                                                 For the Three Months Ended March 31,
                                                          2013                                          2012
                                                                        Average                                       Average
                                          Average                       Yield/          Average                       Yield/
                                          Balance        Interest        Cost           Balance        Interest        Cost
                                                                        (Dollars in thousands)
Assets:
Interest-earnings assets:
First mortgage loans, net (1)           $ 26,182,603     $ 294,390          4.50 %    $ 28,537,843     $ 342,725          4.80 %
Consumer and other loans                     245,687         2,705          4.40           287,685         3,383          4.70
Federal funds sold and other
overnight deposits                         1,677,616           872          0.21           904,295           568          0.25
Mortgage-backed securities at
amortized cost                            10,292,070        60,907          2.37        12,744,610        90,640          2.84
Federal Home Loan Bank stock                 356,467         4,208          4.72           495,223         8,489          6.86
Investment securities, at amortized
cost                                         452,367         2,983          2.64           402,317         2,986          2.97

Total interest-earning assets             39,206,810       366,065          3.73        43,371,973       448,791          4.14

Noninterest-earnings assets (4)            1,288,300                                     1,515,313

Total Assets                            $ 40,495,110                                  $ 44,887,286

Liabilities and Shareholders' Equity:
Interest-bearing liabilities:
Savings accounts                        $    961,884           602          0.25      $    881,077           819          0.37
Interest-bearing transaction accounts      2,273,146         2,135          0.38         2,006,461         3,266          0.65
Money market accounts                      6,460,700         5,586          0.35         8,350,175        12,657          0.61
Time deposits                             12,959,500        40,816          1.28        13,464,569        51,134          1.53

Total interest-bearing deposits           22,655,230        49,139          0.88        24,702,282        67,876          1.11

Repurchase agreements                      6,950,000        77,054          4.50         6,950,000        78,182          4.52
Federal Home Loan Bank of New York
advances                                   5,225,000        62,489          4.85         7,774,195        68,615          3.55

Total borrowed funds                      12,175,000       139,543          4.65        14,724,195       146,797          4.01

Total interest-bearing liabilities        34,830,230       188,682          2.20        39,426,477       214,673          2.19

Noninterest-bearing liabilities:
Noninterest-bearing deposits                 631,174                                       598,789
Other noninterest-bearing liabilities        299,017                                       248,758

Total noninterest-bearing liabilities        930,191                                       847,547

Total liabilities                         35,760,421                                    40,274,024
Shareholders' equity                       4,734,689                                     4,613,262

Total Liabilities and Shareholders'
Equity                                  $ 40,495,110                                  $ 44,887,286

Net interest income/net interest rate
spread (2)                                               $ 177,383          1.53                       $ 234,118          1.95

Net interest-earning assets/net
interest margin (3)                     $  4,376,580                        1.78 %    $  3,945,496                        2.15 %

Ratio of interest-earning assets to
interest-bearing liabilities                                                1.13 x                                        1.10 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 $111.8 million and $110.5 million for the quarters ended March 31, 2013 and 2012, respectively.

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General. Net income was $47.9 million for the first quarter of 2013 as compared to $73.0 million for the first quarter of 2012. Both basic and diluted earnings per common share were $0.10 for the first quarter of 2013 as compared to basic and diluted earnings per share of $0.15 for the first quarter of 2012. For the first quarter of 2013, our annualized return on average shareholders' equity was 4.05%, compared with 6.33% for the corresponding period in 2012. Our annualized return on average assets for the first quarter of 2013 was 0.47% as compared to 0.65% for the first quarter of 2012. The decrease in the annualized return on average equity and assets is primarily due to the decrease in net income during the first quarter of 2013.

Interest and Dividend Income. Total interest and dividend income for the first quarter of 2013 decreased $82.7 million, or 18.4%, to $366.1 million from $448.8 million for the first quarter of 2012. The decrease in total interest and dividend income was due to a $4.16 billion or 9.6% decrease in the average balance of total interest-earning assets to $39.21 billion for the first quarter of 2013 from $43.37 billion for the first quarter of 2012. The decrease in the . . .

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