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HCBK > SEC Filings for HCBK > Form 10-Q on 8-Nov-2013All Recent SEC Filings

Show all filings for HUDSON CITY BANCORP INC

Form 10-Q for HUDSON CITY BANCORP INC


8-Nov-2013

Quarterly Report


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

Executive Summary

During the first nine months of 2013, we continued to focus on our traditional consumer-oriented business model through the origination of one- to four-family mortgage loans. Our primary funding sources have been customer deposits and borrowings. Longer term interest rates increased during the third quarter of 2013, however this increase did not have a significant impact on the elevated levels of repayments on mortgage-related assets. Notwithstanding the recent increase in market interest rates, they remain too low to compel us to pursue balance sheet growth. As a result, we continued to reduce the size of our balance sheet. Our total assets decreased to $39.19 billion at September 30, 2013 from $40.60 billion at December 31, 2012.

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 economic activity has been expanding at a moderate pace. The FOMC noted that some indicators of labor market conditions have shown further improvement in recent months, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has been strengthening, but mortgage rates have risen further and fiscal policy is restraining economic growth. The national unemployment rate decreased to 7.2% in September 2013 from 7.8% in December 2012 and 7.8% in September 2012. The FOMC decided to maintain the overnight lending target rate at zero to 0.25% during the third quarter of 2013 and stated that exceptionally low levels for the federal funds rate will be appropriate for at least as long as the unemployment rate remains above 6.5%, inflation in the one to two year timeframe is projected to be no more than a half percentage point above the FOMC's 2% longer-run goal, and longer-term inflation expectations continue to be well anchored.

The FOMC continued its accommodative monetary policy by purchasing additional agency mortgage-backed securities at $40.0 billion per month and longer-term Treasury securities 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.

Net interest income decreased $63.9 million, or 31.4%, to $139.4 million for the third quarter of 2013 from $203.3 million for the third quarter of 2012 reflecting the overall decrease in the average balance of interest-earning assets and interest-bearing liabilities, the continued low interest rate environment and an increase in the average balance of Federal funds sold and other overnight deposits as the average

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balances of our loan and securities portfolios declined. Our interest rate spread decreased to 1.22% for the third quarter of 2013 as compared to 1.38% for the linked second quarter of 2013 and 1.80% for the third quarter of 2012. Our net interest margin was 1.48% for the third quarter of 2013 as compared 1.64% for the linked second quarter of 2013 and 2.02% for the third quarter of 2012.

Net interest income decreased $185.1 million, or 28.0%, to $476.6 million for the first nine months of 2013 as compared to $661.7 million for the first nine months of 2012. Our interest rate spread decreased 50 basis points to 1.41% for the nine months ended September 30, 2013 as compared to 1.91% for the nine months ended September 30, 2012. Our net interest margin decreased 46 basis points to 1.65% for the nine months ended September 30, 2013 as compared to 2.11% for the nine months ended September 30, 2012.

The decreases in our interest rate spread and net interest margin for the three and nine months ended September 30, 2013 is primarily due to repayments of higher yielding assets due to the low interest rate environment and increases for those same respective periods in the average balance of Federal funds and other overnight deposits. The average yield earned on Federal funds and other overnight deposits was 0.23% and 0.24% for three and nine months ended September 30, 2013, respectively. The increase in the average balance of Federal funds and other overnight deposits was due primarily to the elevated levels of repayments on mortgage-related assets and the lack of attractive reinvestment opportunities due to low market interest rates as available short term reinvestment opportunities continue to carry low yields, and medium and longer term opportunities are creating more significant duration risk at relatively low yields despite the recent increase in rates.

Mortgage-related assets represented 91% of our average interest-earning assets at September 30, 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. Given the current market environment and our concerns about taking on additional interest rate risk, we expect to continue to reduce the size of our balance sheet in the near term.

The provision for loan losses amounted to $4.0 million and $36.5 million for the three and nine months ended September 30, 2013, respectively, as compared to $20.0 million and $70.0 million for the three and nine months ended September 30, 2012, respectively. These decreases in our provision for loan losses were due primarily to improving home prices, a decrease in the size of the loan portfolio, a decrease in charge-offs and a decrease in the amount of total delinquent loans. Early stage loan delinquencies (defined as loans that are 30 to 89 days delinquent) decreased $159.7 million to $473.4 million at September 30, 2013 from $633.1 million at December 31, 2012. Non-performing loans, defined as non-accrual loans and accruing loans delinquent 90 days or more, amounted to $1.07 billion at September 30, 2013 as compared to $1.16 billion at December 31, 2012. The ratio of non-performing loans to total loans was 4.36% at September 30, 2013 compared with 4.29% at December 31, 2012. The increase in this ratio was due primarily to a $2.54 billion decrease in total loans at September 30, 2013 as compared to December 31, 2012. Notwithstanding the decrease in non-performing loans, the foreclosure process and the time to complete a foreclosure, while improving, continues to be prolonged, especially in New York and New Jersey where 69% of our non-performing loans are located at September 30, 2013 as we continue to experience 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. However, for loans that have been in the foreclosure process for over 30 months, we are beginning to see an increased volume of completed foreclosures.

Total non-interest income was $13.5 million for the third quarter of 2013 as compared to $3.0 million for the third quarter of 2012. Included in non-interest income for the third quarter of 2013 was a $10.6 million gain on the sale of $150.3 million of mortgage-backed securities. The remainder of non-interest income is primarily made up of service fees and charges on deposit and loan accounts. There were no securities sales for the quarter ended September 30, 2012.

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Total non-interest income was $25.6 million for the first nine months of 2013 as compared to $8.7 million for the same period in 2012. Included in non-interest income for the first nine months of 2013 was a $7.2 million gain on the sale of corporate bonds with an amortized cost of $405.7 million and a $10.6 million gain on the sale of $150.3 million of mortgage-backed securities. There were no securities sales for the nine months ended September 30, 2012.

Total non-interest expense decreased $15.4 million to $78.5 million for the third quarter of 2013 as compared to $93.9 million for the third quarter of 2012. This decrease was due to an $11.4 million decrease in Federal deposit insurance expense and a $5.7 million decrease in other non-interest expense partially offset by a $919,000 increase in compensation and benefits.

Total non-interest expense decreased $32.6 million to $236.4 million for the nine months ended September 30, 2013 as compared to $269.0 million for the nine months ended September 30, 2012. This decrease was due to a $31.4 million decrease in Federal deposit insurance expense and a $6.0 million decrease in other non-interest expense partially offset by increases of $2.6 million in compensation and benefits.

Net loans decreased $2.53 billion to $24.36 billion at September 30, 2013 from $26.89 billion at December 31, 2012. During the first nine months of 2013, our loan production (origination and purchases) amounted to $2.93 billion as compared to $3.92 billion for the same period of 2012. Loan production was offset by principal repayments of $5.32 billion in the first nine months of 2013, as compared to $5.38 billion for the first nine months of 2012. Loan production declined during the first nine months of 2013 reflecting our limited 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 $1.33 billion to $9.69 billion at September 30, 2013 from $11.02 billion at December 31, 2012. The decrease in mortgage-backed securities reflected continued elevated levels of repayments. Repayments amounted to $2.66 billion for the first nine months of 2013 as compared to $2.73 billion for the same period in 2012. Repayments were partially offset by purchases of $1.67 billion during the nine months ended September 30, 2013 of mortgage-backed securities issued by GSEs.

Total deposits amounted to $22.08 billion at September 30, 2013 as compared to $23.48 billion at December 31, 2012. The decrease in deposits was due to our decision to maintain lower deposit rates allowing us to control deposit reductions at a time when we are experiencing excess liquidity from prepayment activity on mortgage-related assets and limited investment opportunities with attractive yields.

Borrowings amounted to $12.18 billion at September 30, 2013 with an average cost of 4.59%, unchanged from December 31, 2012. There are no scheduled maturities for the next twelve months.

On August 27, 2012, the Company entered into an Agreement and Plan of Merger with M&T and WTC, pursuant to which the Company will merge with and into WTC, with WTC continuing 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

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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. While M&T and Hudson City Bancorp extended the date after which either party may elect to terminate the merger agreement from August 27, 2013 to January 31, 2014, there can be no assurances that the Merger will be completed by that date. 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 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. Since the execution of Amendment No. 1, we have updated the strategic plan, prioritizing certain matters that can be achieved during the pendency of the Merger. The Company is proceeding with implementation of the prioritized aspects of the updated strategic plan.

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).

As previously disclosed, the regulation and oversight of our business has changed significantly in recent years. As described in more detail in Part I, Item 1A, "Risk Factors," in our 2012 Annual Report on Form 10-K and Part II, Item 1A, "Risk Factors" in our June 30, 2013 Form 10Q, certain aspects of the Reform

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Act continue to have a significant impact on us. In July 2013, the federal bank regulatory agencies (the "Agencies") approved rules that will subject many savings and loan holding companies, including Hudson City Bancorp, to consolidated capital requirements which will be phased in with the initial provisions effective for us on January 1, 2015. The rules also revise the quantity and quality of required minimum risk-based and leverage capital requirements applicable to Hudson City Bancorp and Hudson City Savings and revise the calculation of risk-weighted assets to enhance their risk sensitivity. We continue to review and prepare for the impact that the Reform Act, the Third Basel Accord adopted by the Basel Committee on Banking Supervision, or Basel III, capital standards and related rulemaking will have on our business, financial condition and results of operations. In addition, pursuant to the Reform Act, in January 2013, the Consumer Financial Protection Bureau (the "CFPB") issued a series of final rules related to mortgage loan origination and mortgage loan servicing. Among other things, these final rules, most provisions of which become effective January 10, 2014, prohibit creditors, such as Hudson City Savings, from extending mortgage loans without regard for the consumer's ability to repay and establishes certain protections from liability for loans that meet the requirements of a "qualified mortgage." As a result of these rules, beginning in January of 2014, we intend to originate only mortgage loans that meet the requirements of a "qualified mortgage."

Comparison of Financial Condition at September 30, 2013 and December 31, 2012

Total assets decreased $1.41 billion, or 3.5%, to $39.19 billion at September 30, 2013 from $40.60 billion at December 31, 2012. The decrease in total assets reflected a $2.53 billion decrease in net loans, a $1.33 billion decrease in total mortgage-backed securities and a $298.6 million decrease in other assets, partially offset by a $2.89 billion increase in cash and cash equivalents.

Total cash and cash equivalents increased $2.89 billion to $3.72 billion at September 30, 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 in the current low interest rate environment as available short term reinvestment opportunities continue to carry low yields, and medium and longer term opportunities are creating more significant duration risk at relatively low yields despite the recent increase in rates. In addition, during the first nine months of 2013 we received additional cash from previously accrued tax refunds of $364.9 million. Other assets decreased $298.6 million to $381.3 million at September 30, 2013 from $679.9 million at December 31, 2012 due primarily to the receipt of the accrued tax refund as noted above.

Net loans amounted to $24.36 billion at September 30, 2013 as compared to $26.89 billion at December 31, 2012. During the first nine months of 2013, our loan production (origination and purchases) amounted to $2.93 billion as compared to $3.92 billion for the same period in 2012. Loan production was offset by principal repayments of $5.32 billion in the first nine months of 2013, as compared to $5.38 billion for the first nine months of 2012. Loan production declined during the first nine months of 2013 which reflects our limited 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.

Our first mortgage loan production during the first nine months of 2013 was substantially all in one- to four-family mortgage loans. Approximately 76.7% of mortgage loan originations for the first nine months of 2013 were variable-rate loans as compared to approximately 60.1% for the corresponding period in 2012. Fixed-rate mortgage loans accounted for 56.4% of our first mortgage loan portfolio at September 30, 2013 as compared to 61.1% at December 31, 2012.

Our ALL amounted to $291.0 million at September 30, 2013 and $302.3 million at December 31, 2012. Non-performing loans amounted to $1.07 billion, or 4.36% of total loans, at September 30, 2013 as compared to $1.16 billion, or 4.29% of total loans, at December 31, 2012.

Total mortgage-backed securities decreased $1.33 billion to $9.69 billion at September 30, 2013 from $11.02 billion at December 31, 2012. The decrease in mortgage-backed securities reflected continued elevated levels of repayments. Repayments amounted to $2.66 billion for the nine months ended

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September 30, 2013 as compared to $2.73 billion for the same period in 2012. Repayments were partially offset by purchases of $1.67 billion of mortgage-backed securities issued by U.S. government-sponsored entities ("GSEs") during the first nine months of 2013. At September 30, 2013, variable-rate mortgage-backed securities accounted for 82.2% of our portfolio compared with 86.0% at December 31, 2012.

Total investment securities decreased $129.4 million, or 27.7%, to $337.7 million at September 30, 2013 as compared to $467.1 million at December 31, 2012. The decrease in investment securities is primarily due to the sale of corporate bonds with an amortized cost of $405.7 million. This decrease was partially offset by purchases during the first nine months of 2013 of $298.0 million of investment securities issued by GSEs.

Total liabilities decreased $1.40 million, or 3.9%, to $34.50 billion at September 30, 2013 from $35.90 billion at December 31, 2012. The decrease in total liabilities primarily reflected a decrease in total deposits of $1.40 billion, while borrowed funds remained unchanged.

Total deposits decreased $1.40 billion, or 6.0%, to $22.08 billion at September 30, 2013 from $23.48 billion at December 31, 2012. The decrease in total deposits reflected a $1.08 billion decrease in our money market accounts, a $276.5 million decrease in our time deposits accounts, and a decrease of $97.0 million in our demand accounts. These decreases were partially offset by an increase in savings accounts of $43.4 million. The decrease in our money market and time deposit accounts was due to our decision to maintain lower deposit rates allowing us to control deposit reductions at a time when we are experiencing excess liquidity from prepayment activity on mortgage-related assets and limited investment opportunities with attractive yields. The larger decrease in our money market accounts as compared to time deposits is also due to the low interest rate environment and the flexibility that those accounts offer customers to reinvest their funds elsewhere, including the equity markets, as compared to certificates of deposit which carry early withdrawal penalties. We had 135 banking offices at both September 30, 2013 and December 31, 2012.

Borrowings amounted to $12.18 billion at both September 30, 2013 and December 31, 2012. At September 30, 2013, we had $7.48 billion of borrowed funds with an average rate of 4.48% and 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 250 basis points.

Total shareholders' equity decreased $10.7 million to $4.69 billion at September 30, 2013 from $4.70 billion at December 31, 2012. The decrease was primarily due to an $85.9 million change in accumulated other comprehensive loss and cash dividends paid to common shareholders of $79.6 million. The decrease was partially offset by net income of $139.4 million for the nine months ended September 30, 2013.

Accumulated other comprehensive loss amounted to $15.9 million at September 30, 2013 as compared to accumulated other comprehensive income of $70.0 million at December 31, 2012 The resulting $85.9 million change in accumulated other comprehensive loss primarily reflects a decrease in the net unrealized gain on securities available for sale at September 30, 2013 as compared to December 31, 2012, due primarily to an increase in longer-term market interest rates during the first nine months of 2013 as well as a decrease in the size of our available for sale securities portfolio.

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As of September 30, 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 nine 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 September 30, 2013, our capital ratios were in excess of the applicable regulatory requirements to be considered well-capitalized. See "Liquidity and Capital Resources."

At September 30, 2013, our shareholders' equity to asset ratio was 11.97% 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 $9.42 at September 30, 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 $9.11 as of September 30, 2013 and $9.15 at December 31, 2012.

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Comparison of Operating Results for the Three-Month Periods Ended September 30, 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 September 30, 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. . . .

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