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HCBK > SEC Filings for HCBK > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for HUDSON CITY BANCORP INC

Form 10-Q for HUDSON CITY BANCORP INC


9-May-2014

Quarterly Report


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

Executive Summary

During the first three months of 2014, we continued to focus on our 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. Despite an increase in market interest rates during 2013, market interest rates remained at historically low levels during the first three months of 2014 which provided limited opportunities for the reinvestment of payments received on our mortgage-related assets which account for 85.2% of our average interest-earning assets in the first quarter of 2014. As a result, we continued to reduce the size of our balance sheet and we continue to carry an elevated level of overnight funds. Federal funds and other overnight deposits amounted to $5.1 billion, or 13.3%, of total assets at March 31, 2014. We believe that while carrying this level of overnight funds impacts our current earnings, it better positions us for future initiatives such as a balance sheet restructuring and the completion of the Merger. Our total assets decreased $376.7 million, or 1.0%, to $38.23 billion at March 31, 2014 from $38.61 billion at December 31, 2013.

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 general 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 in its April 30, 2014 statement that economic activity has picked up recently after having slowed sharply during the winter in part because of adverse weather conditions. The FOMC noted that labor market indicators were mixed but have shown further improvement. Household spending appears to be rising more quickly than in recent months, but business fixed investment edged down while the recovery in the housing sector remained slow. The national unemployment rate decreased to 6.3% in April 2014 from 6.7% in December 2013 and 7.5% in March 2013.

The FOMC, in its most recent statement, decided to reduce the rate of purchases of agency mortgage-backed securities to $20.0 billion per month from $25.0 billion per month and to reduce purchases of longer-term Treasury securities to $25.0 billion per month from $30.0 billion per month. The FOMC has noted that its sizeable and increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, promote a stronger economy and help to ensure that inflation, over time, is at the rate most consistent with the FOMC's dual mandate regarding both inflation and unemployment. The FOMC decided to maintain the overnight lending target rate at zero to 0.25% during the first quarter of 2014. The FOMC stated that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset program ends, taking into account a variety of factors including the unemployment rate and inflation.

Net interest income decreased $45.1 million, or 25.4%, to $132.3 million for the first quarter of 2014 from $177.4 million for the first quarter of 2013 reflecting the overall decrease in the average balance of

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interest-earning assets and interest-bearing liabilities, the continued low interest rate environment and an increase in the already high average balance of Federal funds sold and other overnight deposits. Our interest rate spread decreased to 1.12% for the first quarter of 2014 as compared to 1.56% for the first quarter of 2013. Our net interest margin was 1.41% for the first quarter of 2014 as compared to 1.80% for the first quarter of 2013.

The decreases in our interest rate spread and net interest margin for the three months ended March 31, 2014 is primarily due to repayments of higher yielding assets due to the low interest rate environment and the increase in the average balance of Federal funds and other overnight deposits. The average yield earned on Federal funds and other overnight deposits was 0.25% for the three months ended March 31, 2014. The increase in the average balance of Federal funds and other overnight deposits was due primarily to the 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. The large excess cash position, while negatively impacting our returns, better positions us for implementation of our strategic initiatives.

Mortgage-related assets represented 85.2% of our average interest-earning assets at March 31, 2014. 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.

There was no provision for loan losses for the quarter ended March 31, 2014, as compared to $20.0 million for the quarter ended March 31, 2013. The decrease in our provision for loan losses was due primarily to improving economic conditions, increasing home prices, a decrease in the size of the loan portfolio 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 $40.3 million to $433.1 million at March 31, 2014 from $473.4 million at December 31, 2013. Non-performing loans, defined as non-accrual loans and accruing loans delinquent 90 days or more, amounted to $1.03 billion at March 31, 2014 as compared to $1.05 billion at December 31, 2013. The ratio of non-performing loans to total loans was 4.32% at March 31, 2014 compared with 4.35% at December 31, 2013. 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 68.2% of our non-performing loans are located at March 31, 2014 as we continue to experience a time frame to repayment or foreclosure of up to 48 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 $17.8 million for the first quarter of 2014 as compared to $2.5 million for the first quarter of 2013. Included in non-interest income for the first quarter of 2014 was a $15.9 million gain on the sale of $419.3 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.

Total non-interest expense decreased $1.6 million to $79.7 million for the first quarter of 2014 as compared to $81.3 million for the first quarter of 2013. This decrease was due to a $10.2 million decrease in Federal deposit insurance expense partially offset by a $5.7 million increase in other non-interest expense and a $2.0 million increase in compensation and benefits.

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Net loans decreased $363.5 million to $23.58 billion at March 31, 2014 as compared to $23.94 billion at December 31, 2013. Our loan production (originations and purchases) was $476.1 million during the first quarter of 2014 offset by $812.8 million in principal repayments. Loan production declined during the first three months of 2014 which reflects our limited appetite for adding long-term fixed-rate mortgage loans in the current low market interest rate environment. In addition, our loan production has been impacted by the new qualified mortgage regulations issued by the CFPB which went into effect in January 2014. We discontinued our reduced documentation loan program in January 2014 in order to comply with the CFPB's new requirements to validate a borrower's ability to repay and the corresponding safe harbor for loans that meet the requirements for a "qualified mortgage". During 2013, 22% of our total loan production consisted of reduced documentation loans.

Total mortgage-backed securities decreased $761.1 million to $8.19 billion at March 31, 2014 from $8.95 billion at December 31, 2013. The decrease was due primarily to security sales of $419.3 million and repayments of $391.2 million of mortgage-backed securities during the first quarter of 2014. These decreases were partially offset by purchases of $41.4 million of mortgage-backed securities issued by U.S. government-sponsored entities ("GSEs") during the first quarter of 2014.

Total deposits amounted to $21.07 billion at March 31, 2014 as compared to $21.47 billion at December 31, 2013. 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 limited opportunities to reinvest at attractive yields the cash flows received from the repayments on mortgage-related assets.

Borrowings amounted to $12.18 billion at March 31, 2014 with an average cost of 4.59%, unchanged from December 31, 2013. There are no scheduled maturities through March 31, 2015.

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 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 the Company announced that additional time would be required to obtain a regulatory determination on the applications necessary to complete the proposed Merger. On April 13, 2013, M&T and the Company entered into Amendment No. 1 to the Merger Agreement. Amendment No. 1, among other things, extended the date after which either party may elect to terminate the Merger Agreement from August 27, 2013 to January 31, 2014. On December 17, 2013, M&T and the Company announced that they entered into Amendment No. 2 to the Merger Agreement. Amendment No. 2 further extends the date after which either party may terminate the Merger Agreement if the Merger has not yet been completed from January 31, 2014 to December 31, 2014, and provides that the Company may terminate the Merger Agreement at any time if it reasonably determines that M&T is unlikely to be able to obtain the requisite regulatory approvals of the Merger to permit the closing to occur on or prior to December 31, 2014. Amendment No. 2 also permits the Company to take certain interim actions,

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including with respect to our conduct of business, implementation of our Strategic Plan, retention incentives and certain other matters with respect to our personnel, prior to the completion of the Merger. While Amendment No. 2 extends the date after which either party may elect to terminate the Merger Agreement from January 31, 2014 to December 31, 2014, there can be no assurances that the Merger will be completed by that date or that the Company will not exercise its right to terminate the Merger Agreement in accordance with its terms.

As part of our Strategic Plan, we are continuing to explore ways to reduce our interest rate risk while strengthening our balance sheet, which may include a further restructuring of our balance sheet during 2014. The Company previously completed a series of restructuring transactions in 2011 that reduced higher-cost structured borrowings on the Company's balance sheet. Management is continuing to consider a variety of different restructuring alternatives, including whether to restructure all or various portions of our borrowed funds and various alternatives for replacement funding. No decision has been made at this time regarding the timing, structure and scope of any restructuring transaction. Decisions regarding any restructuring transaction are dependent upon, among other things, market interest rates, overall economic conditions and the status of the Merger. However, any such transaction will likely not occur before the second half of 2014. Similar to the 2011 restructuring transactions, we expect a restructuring to result in a net loss and reduction of stockholder equity, though we also expect an improvement in net interest margin and future earnings prospects. Any restructuring will focus on the prospects for long-term overall earnings stability and growth. Any restructuring will likely reduce our excess cash position, but will not adversely affect the liquidity we need to operate in a safe and sound manner.

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 the Strategic Plan which establishes objectives for the Bank's overall risk profile, earnings performance, growth and balance sheet mix and to enhance our enterprise risk management program.

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 and (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. In accordance with the Company MOU, the Company submitted 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, 2014 and December 31, 2013

Total assets decreased $376.7 million, or 1.0%, to $38.23 billion at March 31, 2014 from $38.61 billion at December 31, 2013. The decrease in total assets reflected a $761.1 million decrease in total mortgage-backed securities and a $363.5 million decrease in net loans, partially offset by a $778.3 million increase in cash and cash equivalents.

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Total cash and cash equivalents increased $778.3 million to $5.10 billion at March 31, 2014 as compared to $4.32 billion at December 31, 2013. This increase is primarily due to 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 available to us are creating more significant duration risk at relatively low yields despite the recent increase in rates. The large excess cash position, while negatively impacting our returns, better positions us for implementation of our strategic initiatives.

Net loans amounted to $23.58 billion at March 31, 2014 as compared to $23.94 billion at December 31, 2013. During the first quarter of 2014, our loan production (origination and purchases) amounted to $476.1 million as compared to $824.8 million for the same period in 2013. Loan production was offset by principal repayments of $812.8 million in the first quarter of 2014, as compared to $1.73 billion for the same period in 2013. Loan production declined during the first three months of 2014 as compared to the same period in 2013 which reflects our limited appetite for adding long-term fixed-rate mortgage loans to our portfolio in the current low market interest rate environment. In addition, loan production has been impacted by the new qualified mortgage regulations issued by CFPB. Effective in January 2014, we discontinued our reduced documentation loan program in order to comply with the new requirements to validate a borrower's ability to repay and the corresponding safe harbor for loans that meet the requirements for a "qualified mortgage." During 2013, 22% of our total loan production consisted of reduced documentation loans.

Our first mortgage loan production during the first quarter of 2014 was substantially all in one- to four-family mortgage loans. Approximately 80.0% of mortgage loan production for the first quarter of 2014 were variable-rate loans as compared to approximately 81.0% for the corresponding period in 2013. Fixed-rate mortgage loans accounted for 54.9% of our first mortgage loan portfolio at March 31, 2014 as compared to 55.4% at December 31, 2013.

Our ALL amounted to $265.7 million at March 31, 2014 and $276.1 million at December 31, 2013. Non-performing loans amounted to $1.03 billion, or 4.32% of total loans, at March 31, 2014 as compared to $1.05 billion, or 4.35% of total loans, at December 31, 2013.

Total mortgage-backed securities decreased $761.1 million to $8.19 billion at March 31, 2014 from $8.95 billion at December 31, 2013. The decrease was due primarily to security sales of $419.3 million and repayments of $391.2 million of mortgage-backed securities during the first quarter of 2014. These decreases were partially offset by purchases of $41.4 million of mortgage-backed securities issued by GSEs during the first quarter of 2014.

Total liabilities decreased $417.0 million, or 1.2%, to $33.45 billion at March 31, 2014 from $33.86 billion at December 31, 2013. The decrease in total liabilities primarily reflected a decrease in total deposits of $406.7 million, while total borrowed funds remained unchanged.

Total deposits decreased $406.7 million, or 1.9%, to $21.07 billion at March 31, 2014 from $21.47 billion at December 31, 2013. The decrease in total deposits reflected a $252.4 million decrease in our money market accounts and a $179.2 million decrease in our time deposits accounts. These decreases were partially offset by an increase in savings accounts of $28.1 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 there are limited investment opportunities with attractive yields to reinvest the funds received from payment activity on mortgage-related assets. We had 135 banking offices at both March 31, 2014 and December 31, 2013.

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Borrowings amounted to $12.18 billion at both March 31, 2014 and December 31, 2013. At March 31, 2014, we had $5.53 billion of borrowed funds with put dates within one year, including $3.13 billion that can be put back to the Company quarterly. If interest rates were to decrease, or remain consistent with current rates, we believe these borrowings would likely 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 increased $40.3 million to $4.78 billion at March 31, 2014 from $4.74 billion at December 31, 2013. The increase was primarily due to net income of $42.5 million and a $12.7 million change in accumulated other comprehensive income, partially offset by cash dividends paid to common shareholders of $19.9 million.

Accumulated other comprehensive income amounted to $19.0 million at March 31, 2014 as compared to $6.3 million at December 31, 2013. This increase was due primarily to an increase in the net unrealized gain on securities available for sale at March 31, 2014 as compared to December 31, 2013.

As of March 31, 2014, 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 quarter of 2014 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, 2014, our capital ratios were in excess of the applicable regulatory requirements to be considered well-capitalized. See "Liquidity and Capital Resources."

At March 31, 2014, our shareholders' equity to asset ratio was 12.51% compared with 12.28% at December 31, 2013. 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 $9.60 at March 31, 2014 and $9.52 at December 31, 2013. Our tangible book value per share, calculated by deducting goodwill and the core deposit intangible from shareholders' equity, was $9.29 as of March 31, 2014 and $9.21 at December 31, 2013.

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Comparison of Operating Results for the Three-Month Periods Ended March 31, 2014 and 2013

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, 2014 and 2013. 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,
                                                       2014                                         2013
                                                                     Average                                      Average
                                        Average                       Yield/         Average                       Yield/
                                        Balance        Interest        Cost          Balance        Interest        Cost
                                                                     (Dollars in thousands)
Assets:
Interest-earnings assets:
First mortgage loans, net (1)         $ 23,538,424     $ 253,139         4.30 %    $ 26,182,603     $ 294,390         4.50 %
Consumer and other loans                   212,098         2,278         4.30           245,687         2,705         4.40
Federal funds sold and other
overnight deposits                       4,629,158         2,886         0.25         1,677,616           872         0.21
Mortgage-backed securities at
amortized cost                           8,427,527        48,701         2.31        10,292,070        60,907         2.37
Federal Home Loan Bank stock               347,102         4,156         4.79           356,467         4,208         4.72
Investment securities, at amortized
cost                                       344,351         1,379         1.60           452,367         2,983         2.64

Total interest-earning assets           37,498,660       312,539         3.33        39,206,810       366,065         3.73

Noninterest-earnings assets (2)            917,835                                    1,288,300

Total Assets                          $ 38,416,495                                 $ 40,495,110

Liabilities and Shareholders'
Equity:
Interest-bearing liabilities:
Savings accounts                      $  1,021,143           378         0.15      $    961,884           602         0.25
Interest-bearing transaction
accounts                                 2,195,612         1,560         0.29         2,273,146         2,135         0.38
Money market accounts                    5,054,582         2,473         0.20         6,460,700         5,586         0.35
Time deposits                           12,314,050        36,227         1.19        12,959,500        40,816         1.28

Total interest-bearing deposits         20,585,387        40,638         0.80        22,655,230        49,139         0.88

Repurchase agreements                    6,656,667        73,647         4.43         6,950,000        77,054         4.43
Federal Home Loan Bank of New York
advances                                 5,518,333        65,918         4.78         5,225,000        62,489         4.78

Total borrowed funds                    12,175,000       139,565         4.59        12,175,000       139,543         4.58
. . .
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