XNAS:HCBK Hudson City Bancorp Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

XNAS:HCBK Fair Value Estimate
Premium
XNAS:HCBK Consider Buying
Premium
XNAS:HCBK Consider Selling
Premium
XNAS:HCBK Fair Value Uncertainty
Premium
XNAS:HCBK Economic Moat
Premium
XNAS:HCBK Stewardship
Premium
 
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended: June 30, 2012

 

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from              to             

Commission File Number: 0-26001

 

 

Hudson City Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   22-3640393

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

West 80 Century Road

Paramus, New Jersey

  07652
(Address of Principal Executive Offices)   (Zip Code)

(201) 967-1900

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No  x

As of August 3, 2012, the registrant had 528,132,975 shares of common stock, $0.01 par value, outstanding.

 

 

 


Table of Contents

Table of Contents

 

      Page
Number
 

PART I – FINANCIAL INFORMATION

  

Item 1. – Financial Statements

  

Consolidated Statements of Financial Condition – June 30, 2012 (Unaudited) and December 31, 2011

     5   

Consolidated Statements of Operations (Unaudited) – For the three and six months ended June 30, 2012 and 2011

     6   

Consolidated Statements of Comprehensive Income (Loss) – For the three and six months ended June 30, 2012 and 2011

     7   

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) – For the six months ended June 30, 2012 and 2011

     8   

Consolidated Statements of Cash Flows (Unaudited) – For the six months ended June 30, 2012 and 2011

     9   

Notes to Unaudited Consolidated Financial Statements

     10   

Item 2. – Management’s Discussion and Analysis of Financial Condition and Results of Operations

     36   

Item 3. – Quantitative and Qualitative Disclosures About Market Risk

     70   

Item 4. – Controls and Procedures

     78   

PART II – OTHER INFORMATION

  

Item 1. – Legal Proceedings

     78   

Item 1A. – Risk Factors

     78   

Item 2. – Unregistered Sales of Equity Securities and Use of Proceeds

     79   

Item 3. – Defaults Upon Senior Securities

     79   

Item 4. – Mine Safety Disclosures

     79   

Item 5. – Other Information

     79   

Item 6. – Exhibits

     80   

SIGNATURES

     81   

 

Page 2


Table of Contents

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 which may be identified by the use of such words as “may,” “believe,” “expect,” “anticipate,” “should,” “plan,” “estimate,” “predict,” “continue,” and “potential” or the negative of these terms or other comparable terminology. Examples of forward-looking statements include, but are not limited to, estimates with respect to the financial condition, results of operations and business of Hudson City Bancorp, Inc and Hudson City Bancorp, Inc.’s strategies, plans, objectives, expectations and intentions, and other statements contained in this Quarterly Report on Form 10-Q that are not historical facts. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors (many of which are beyond our control) that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. These factors include, but are not limited to:

 

 

the timing and occurrence or non-occurrence of events may be subject to circumstances beyond our control;

 

 

there may be increases in competitive pressure among financial institutions or from non-financial institutions;

 

 

changes in the interest rate environment may reduce interest margins or affect the value of our investments;

 

 

changes in deposit flows, loan demand or real estate values may adversely affect our business;

 

 

changes in accounting principles, policies or guidelines may cause our financial condition to be perceived differently;

 

 

general economic conditions, including unemployment rates, either nationally or locally in some or all of the areas in which we do business, or conditions in the securities markets or the banking industry may be less favorable than we currently anticipate;

 

 

legislative or regulatory changes including, without limitation, the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Reform Act”), and any actions regarding foreclosures may adversely affect our business;

 

 

enhanced regulatory scrutiny may adversely affect our business and increase our cost of operation;

 

 

applicable technological changes may be more difficult or expensive than we anticipate;

 

 

success or consummation of new business initiatives may be more difficult or expensive than we anticipate;

 

 

litigation or matters before regulatory agencies, whether currently existing or commencing in the future, may delay the occurrence or non-occurrence of events longer than we anticipate;

 

 

the risks associated with adverse changes to credit quality, including changes in the level of loan delinquencies and non-performing assets and charge-offs, the length of time our non-performing assets remain in our portfolio and changes in estimates of the adequacy of the allowance for loan losses;

 

 

difficulties associated with achieving or predicting expected future financial results;

 

 

our ability to diversify our funding sources and to access the capital markets;

 

 

our ability to comply with the terms of the Memoranda of Understanding with the Office of the Comptroller of the Currency (the “OCC”) and the Board of Governors of the Federal Reserve System;

 

 

our ability to pay dividends, repurchase our outstanding common stock or execute capital management strategies each of which requires the approval of the OCC and Federal Reserve Board;

 

 

the effects of changes in existing U.S. government or U.S. government sponsored mortgage programs; and

 

 

the risk of a continued economic slowdown that would adversely affect credit quality and loan originations.

Our ability to predict results or the actual effects of our plans or strategies is inherently uncertain. As such, forward-looking statements can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Consequently, no forward-looking statement can be guaranteed. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this filing. We do not intend to update any of the forward-looking statements after the date of this Form 10-Q or to conform these statements to actual events.

 

Page 3


Table of Contents

As used in this Form 10-Q, unless we specify otherwise, “Hudson City Bancorp,” “Company,” “we,” “us,” and “our” refer to Hudson City Bancorp, Inc., a Delaware corporation. “Hudson City Savings” and “Bank” refer to Hudson City Savings Bank, a federal stock savings bank and the wholly-owned subsidiary of Hudson City Bancorp.

 

Page 4


Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. – Financial Statements

Hudson City Bancorp, Inc. and Subsidiary

Consolidated Statements of Financial Condition

 

     June 30,
2012
    December 31,
2011
 
(In thousands, except share and per share amounts)    (unaudited)        

Assets:

    

Cash and due from banks

   $ 130,768      $ 194,029   

Federal funds sold and other overnight deposits

     674,662        560,051   
  

 

 

   

 

 

 

Total cash and cash equivalents

     805,430        754,080   

Securities available for sale:

    

Mortgage-backed securities

     9,309,881        9,170,390   

Investment securities

     417,590        7,368   

Securities held to maturity:

    

Mortgage-backed securities (fair value of $3,792,972 at June 30, 2012 and $4,368,423 at December 31, 2011)

     3,556,969        4,115,523   

Investment securities (fair value of $45,566 at June 30, 2012 and $545,761 at December 31, 2011)

     39,011        539,011   
  

 

 

   

 

 

 

Total securities

     13,323,451        13,832,292   

Loans

     28,183,710        29,327,345   

Net deferred loan costs

     87,750        83,805   

Allowance for loan losses

     (287,901     (273,791
  

 

 

   

 

 

 

Net loans

     27,983,559        29,137,359   

Federal Home Loan Bank of New York stock

     412,717        510,564   

Foreclosed real estate, net

     40,568        40,619   

Accrued interest receivable

     108,793        129,088   

Banking premises and equipment, net

     74,313        70,610   

Goodwill

     152,109        152,109   

Other assets

     689,245        729,164   
  

 

 

   

 

 

 

Total Assets

   $ 43,590,185      $ 45,355,885   
  

 

 

   

 

 

 

Liabilities and Shareholders’ Equity:

    

Deposits:

    

Interest-bearing

   $ 24,027,204      $ 24,903,311   

Noninterest-bearing

     617,344        604,449   
  

 

 

   

 

 

 

Total deposits

     24,644,548        25,507,760   

Repurchase agreements

     6,950,000        6,950,000   

Federal Home Loan Bank of New York advances

     6,475,000        8,125,000   
  

 

 

   

 

 

 

Total borrowed funds

     13,425,000        15,075,000   

Due to brokers for securities purchases

     629,145        —     

Accrued expenses and other liabilities

     228,050        212,685   
  

 

 

   

 

 

 

Total liabilities

     38,926,743        40,795,445   
  

 

 

   

 

 

 

Common stock, $0.01 par value, 3,200,000,000 shares authorized; 741,466,555 shares issued; 528,132,975 and 527,571,496 shares outstanding at June 30, 2012 and December 31, 2011, respectively

     7,415        7,415   

Additional paid-in capital

     4,725,363        4,720,890   

Retained earnings

     1,774,138        1,709,821   

Treasury stock, at cost; 213,333,580 and 213,895,059 shares at June 30, 2012 and December 31, 2011, respectively

     (1,714,526     (1,719,114

Unallocated common stock held by the employee stock ownership plan

     (195,220     (198,223

Accumulated other comprehensive income, net of tax

     66,272        39,651   
  

 

 

   

 

 

 

Total shareholders’ equity

     4,663,442        4,560,440   
  

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

   $ 43,590,185      $ 45,355,885   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements

 

Page 5


Table of Contents

Hudson City Bancorp, Inc. and Subsidiary

Consolidated Statements of Operations

(Unaudited)

 

     For the Three Months
Ended June 30,
     For the Six Months
Ended June 30,
 
     2012      2011      2012      2011  
     (In thousands, except per share data)  

Interest and Dividend Income:

           

First mortgage loans

   $ 336,026       $ 380,375       $ 678,751       $ 763,328   

Consumer and other loans

     3,220         4,077         6,603         8,225   

Mortgage-backed securities held to maturity

     33,651         55,761         71,460         116,977   

Mortgage-backed securities available for sale

     49,040         69,415         101,871         191,507   

Investment securities held to maturity

     585         32,708         2,318         65,535   

Investment securities available for sale

     2,165         57         3,418         832   

Dividends on Federal Home Loan Bank of New York stock

     5,536         9,632         14,025         22,433   

Federal funds sold

     438         707         1,006         1,418   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest and dividend income

     430,661         552,732         879,452         1,170,255   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest Expense:

           

Deposits

     61,642         84,360         129,518         168,678   

Borrowed funds

     144,766         195,463         291,563         472,267   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     206,408         279,823         421,081         640,945   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     224,253         272,909         458,371         529,310   

Provision for Loan Losses

     25,000         30,000         50,000         70,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     199,253         242,909         408,371         459,310   
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-Interest Income:

           

Service charges and other income

     2,924         2,732         5,711         5,471   

Gain on securities transactions, net

     —           —           —           102,468   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest income

     2,924         2,732         5,711         107,939   
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-Interest Expense:

           

Compensation and employee benefits

     30,401         29,889         62,543         60,773   

Net occupancy expense

     8,543         8,030         17,200         16,455   

Federal deposit insurance assessment

     27,695         33,198         63,695         49,528   

Loss on extinguishment of debt

     —           —           —           1,172,092   

Other expense

     16,932         14,720         31,731         27,557   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest expense

     83,571         85,837         175,169         1,326,405   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) before income tax expense (benefit)

     118,606         159,804         238,913         (759,156

Income Tax Expense (Benefit)

     46,330         63,796         93,650         (299,500
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss)

   $ 72,276       $ 96,008       $ 145,263       $ (459,656
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic Earnings (Loss) Per Share

     0.15       $ 0.19       $ 0.29       $ (0.93
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted Earnings (Loss) Per Share

   $ 0.15       $ 0.19       $ 0.29       $ (0.93
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted Average Number of Common Shares Outstanding:

           

Basic

     496,539,980         494,137,888         496,267,105         493,993,685   

Diluted

     496,552,810         494,751,960         496,291,724         493,993,685   

See accompanying notes to unaudited consolidated financial statements

 

Page 6


Table of Contents

Hudson City Bancorp, Inc. and Subsidiary

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

 

     For the Three Months
Ended June 30,
 
     2012     2011  
     (In thousands)  

Net income (loss)

   $ 72,276      $ 96,008   

Other comprehensive income (loss), net of tax:

    

Net unrealized gains (losses) on securities:

    

Net unrealized gains (losses) on securities available for sale arising during period, net of tax expense of $7,150 and $65,551 in 2012 and 2011, respectively

     10,353        96,686   

Postretirement benefit pension plans:

    

Net loss arising during period, net of tax expense of $689 and $524 for 2012 and 2011, respectively

     998        755   

Amortization or prior service cost included in net periodic pension cost, net of tax benefit of $125 and $127 in 2012 and 2011, respectively

     (178     (179
  

 

 

   

 

 

 

Other comprehensive income (loss)

     11,173        97,262   
  

 

 

   

 

 

 

Total comprehensive income (loss)

   $ 83,449      $ 193,270   
  

 

 

   

 

 

 
     For the Six Months
Ended June 30,
 
     2012     2011  
     (In thousands)  

Net income (loss)

   $ 145,263      $ (459,656

Other comprehensive income (loss), net of tax:

    

Net unrealized gains (losses) on securities:

    

Net unrealized gains (losses) on securities available for sale arising during period, net of tax expense of $17,253 and $415 in 2012 and 2011, respectively

     24,982        601   

Reclassification adjustment for realized gains in net income (loss), net of tax expense of $40,526 in 2011

     —          (61,942

Postretirement benefit pension plans:

    

Net loss arising during period, net of tax expense of $1,379 and $1,045 for 2012 and 2011, respectively

     1,996        1,511   

Amortization or prior service cost included in net periodic pension cost, net of tax benefit of $247 and $250 in 2012 and 2011, respectively

     (357     (360
  

 

 

   

 

 

 

Other comprehensive income (loss)

     26,621        (60,190
  

 

 

   

 

 

 

Total comprehensive income (loss)

   $ 171,884      $ (519,846
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements

 

Page 7


Table of Contents

Hudson City Bancorp, Inc. and Subsidiary

Consolidated Statements of Changes in Shareholders’ Equity

(Unaudited)

 

     For the Six Months  
     Ended June 30,  
     2012     2011  
     (In thousands, except per share data)  

Common Stock

   $ 7,415      $ 7,415   
  

 

 

   

 

 

 

Additional paid-in capital:

    

Balance at beginning of year

     4,720,890        4,705,255   

Stock option plan expense

     3,730        4,464   

Tax benefit from stock plans

     483        172   

Allocation of ESOP stock

     240        1,844   

Vesting of RRP stock

     20        1,739   
  

 

 

   

 

 

 

Balance at end of period

     4,725,363        4,713,474   
  

 

 

   

 

 

 

Retained Earnings:

    

Balance at beginning of year

     1,709,821        2,642,338   

Net income (loss)

     145,263        (459,656

Dividends paid on common stock ($0.16 and $0.23 per share, respectively)

     (79,369     (113,531

Exercise of stock options

     (1,577     (13
  

 

 

   

 

 

 

Balance at end of period

     1,774,138        2,069,138   
  

 

 

   

 

 

 

Treasury Stock:

    

Balance at beginning of year

     (1,719,114     (1,725,946

Purchase of common stock

     (427     (163

Exercise of stock options

     5,015        52   
  

 

 

   

 

 

 

Balance at end of period

     (1,714,526     (1,726,057
  

 

 

   

 

 

 

Unallocated common stock held by the ESOP:

    

Balance at beginning of year

     (198,223     (204,230

Allocation of ESOP stock

     3,003        3,003   
  

 

 

   

 

 

 

Balance at end of period

     (195,220     (201,227
  

 

 

   

 

 

 

Accumulated other comprehensive income(loss):

    

Balance at beginning of year

     39,651        85,406   

Other comprehensive income (loss), net of tax

     26,621        (60,190
  

 

 

   

 

 

 

Balance at end of period

     66,272        25,216   
  

 

 

   

 

 

 

Total Shareholders’ Equity

   $ 4,663,442      $ 4,887,959   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

Page 8


Table of Contents

Hudson City Bancorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows

(Unaudited)

 

     For the Six Months  
   Ended June 30,  
     2012     2011  
     (In thousands)  

Cash Flows from Operating Activities:

    

Net income (loss)

   $ 145,263      $ (459,656

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation, accretion and amortization expense

     60,433        62,096   

Provision for loan losses

     50,000        70,000   

Gains on securities transactions, net

     —          (102,468

Loss on extinguishment of debt

     —          1,172,092   

Share-based compensation, including committed ESOP shares

     6,993        11,050   

Deferred tax expense (benefit)

     44,314        (187,429

Decrease in accrued interest receivable

     20,295        34,005   

Increase in other assets

     (20,756     (90,655

Increase (decrease) in accrued expenses and other liabilities

     15,364        (58,390
  

 

 

   

 

 

 

Net Cash Provided by Operating Activities

     321,906        450,645   
  

 

 

   

 

 

 

Cash Flows from Investing Activities:

    

Originations of loans

     (2,525,496     (2,696,323

Purchases of loans

     (4,240     (290,544

Principal payments on loans

     3,587,421        3,461,917   

Principal collection of mortgage-backed securities held to maturity

     555,827        1,012,516   

Principal collection of mortgage-backed securities available for sale

     1,180,469        1,500,411   

Purchases of mortgage-backed securities available for sale

     (691,361     (3,508,207

Proceeds from sales of mortgage backed securities available for sale

     —          9,064,379   

Proceeds from maturities and calls of investment securities held to maturity

     500,000        300,000   

Proceeds from sales of investment securities available for sale

     —          82,475   

Purchases of investment securities available for sale

     (407,832     —     

Purchases of Federal Home Loan Bank of New York stock

     —          (16,624

Redemption of Federal Home Loan Bank of New York stock

     97,847        121,500   

Purchases of premises and equipment, net

     (7,759     (5,678

Net proceeds from sale of foreclosed real estate

     33,655        21,887   
  

 

 

   

 

 

 

Net Cash Provided by Investment Activities

     2,318,531        9,047,709   
  

 

 

   

 

 

 

Cash Flows from Financing Activities:

    

Net (decrease) increase in deposits

     (863,212     381,475   

Proceeds from borrowed funds

     —          6,500,000   

Principal payments on borrowed funds

     (1,650,000     (16,222,092

Dividends paid

     (79,369     (113,531

Purchases of treasury stock

     (427     (163

Exercise of stock options

     3,438        39   

Tax benefit from stock plans

     483        172   
  

 

 

   

 

 

 

Net Cash Used in Financing Activities

     (2,589,087     (9,454,100
  

 

 

   

 

 

 

Net Increase in Cash and Cash Equivalents

     51,350        44,254   

Cash and Cash Equivalents at Beginning of Year

     754,080        669,397   
  

 

 

   

 

 

 

Cash and Cash Equivalents at End of Period

   $ 805,430      $ 713,651   
  

 

 

   

 

 

 

Supplemental Disclosures:

    

Interest paid

   $ 419,958      $ 694,772   
  

 

 

   

 

 

 

Loans transferred to foreclosed real estate

   $ 46,942      $ 25,911   
  

 

 

   

 

 

 

Income tax payments

   $ 62,461      $ 16,902   
  

 

 

   

 

 

 

Income tax refunds

   $ 5,294      $ —     
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

Page 9


Table of Contents

Notes to Unaudited Consolidated Financial Statements

1. Organization

Hudson City Bancorp, Inc. (“Hudson City Bancorp” or the “Company”) is a Delaware corporation and is the savings and loan holding company for Hudson City Savings Bank and its subsidiaries (“Hudson City Savings” or the “Bank”). As a savings and loan holding company, Hudson City Bancorp is subject to the supervision and examination of the Board of Governors of the Federal Reserve System (the “FRB”). Hudson City Savings is a federally chartered stock savings bank subject to supervision and examination by the Office of the Comptroller of the Currency (the “OCC”).

On March 30, 2012, the Bank entered into a Memorandum of Understanding with the OCC (the “Bank MOU”), which is substantially similar to the MOU the Bank entered into with our former regulator, the Office of Thrift Supervision (the “OTS”), on June 24, 2011. The Bank MOU replaces the June 24th memorandum of understanding. In accordance with the Bank MOU, the Bank has adopted and has implemented enhanced operating policies and procedures, that will 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 agreed to develop 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 Company entered into a separate Memorandum of Understanding with the FRB (the “Company MOU”) on April 24, 2012, which is substantially similar to the MOU the Company entered into with our former regulator, the OTS, on June 24, 2011. The Company MOU replaces the June 24th memorandum of understanding. 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).

2. Basis of Presentation

The accompanying consolidated financial statements include the accounts of Hudson City Bancorp and its wholly-owned subsidiary, Hudson City Savings.

In our opinion, all the adjustments (consisting of normal and recurring adjustments) necessary for a fair presentation of the consolidated financial condition and consolidated results of operations for the unaudited periods presented have been included. The results of operations and other data presented for the three and six-month periods ended June 30, 2012 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2012. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statements of financial condition and the results of operations for the period. Actual results could differ from these estimates. The allowance for loan losses (“ALL”) is a material estimate that is particularly susceptible to near-term change. The current economic environment has increased the degree of uncertainty inherent in this material estimate. In addition, bank regulators, as an integral part of their supervisory function, periodically review our ALL. These regulatory agencies have the ability to require us, as they can require all banks, to increase our provision for loan losses or to recognize further charge-offs based on their judgments, which may be different from ours. Any increase in the ALL required by these regulatory agencies could adversely affect our financial condition and results of operations.

 

Page 10


Table of Contents

Notes to Unaudited Consolidated Financial Statements

 

Certain information and note disclosures usually included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for the preparation of the Form 10-Q. The consolidated financial statements presented should be read in conjunction with Hudson City Bancorp’s audited consolidated financial statements and notes to consolidated financial statements included in Hudson City Bancorp’s 2011 Annual Report to Shareholders and incorporated by reference into Hudson City Bancorp’s 2011 Annual Report on Form 10-K.

3. Earnings Per Share

The following is a summary of our earnings per share calculations and reconciliation of basic to diluted earnings (loss) per share.

 

     For the Three Months Ended June 30,  
     2012      2011  
     Income      Average
Shares
     Per
Share
Amount
     Income     Average
Shares
     Per
Share
Amount
 
     (In thousands, except per share data)  

Net income

   $ 72,276             $ 96,008        
  

 

 

          

 

 

      

Basic earnings per share:

                

Income available to common stockholders

   $ 72,276         496,540       $ 0.15       $ 96,008        494,138       $ 0.19   
        

 

 

         

 

 

 

Effect of dilutive common stock equivalents

     —           13            —          614      
  

 

 

    

 

 

       

 

 

   

 

 

    

Diluted earnings per share:

                

Income available to common stockholders

   $ 72,276         496,553       $ 0.15       $ 96,008        494,752       $ 0.19   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
     For the Six Months Ended June 30,  
     2012      2011  
     Income      Average
Shares
     Per
Share
Amount
     Average
Income
    Shares      Per
Share
Amount
 
     (In thousands, except per share data)  

Net (loss) income

   $ 145,263             $ (459,656     
  

 

 

          

 

 

      

Basic (loss) earnings per share:

                

(Loss) income available to common stockholders

   $ 145,263         496,267       $ 0.29       $ (459,656     493,994       $ (0.93
        

 

 

         

 

 

 

Effect of dilutive common stock equivalents

     —           25            —          —        
  

 

 

    

 

 

       

 

 

   

 

 

    

Diluted (loss) earnings per share:

                

(Loss) income available to common stockholders

   $ 145,263         496,292       $ 0.29       $ (459,656     493,994       $ (0.93
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

Page 11


Table of Contents

Notes to Unaudited Consolidated Financial Statements

 

Common stock equivalents exclude outstanding options to purchase 24,191,389 shares of the Company’s common stock which were outstanding for both the quarter and six months ended June 30, 2012; options to purchase 26,619,976 shares of common stock which were outstanding for the quarter ended June 30, 2011; and options to purchase 26,309,557 shares of common stock which were outstanding for the six months ended June 30, 2011 as their inclusion would be anti-dilutive.

4. Securities

The amortized cost and estimated fair market value of investment securities and mortgage-backed securities available-for-sale at June 30, 2012 and December 31, 2011 are as follows:

 

      Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair Market
Value
 
     (In thousands)  

June 30, 2012

          

Investment Securities:

          

Corporate debt

   $ 407,167       $ 2,929       $ —        $ 410,096   

Equity securities

     6,813         681         —          7,494   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total investment securities available for sale

   $ 413,980       $ 3,610       $ —        $ 417,590   
  

 

 

    

 

 

    

 

 

   

 

 

 

Mortgage-backed securities:

          

GNMA pass-through certificates

   $ 1,077,666       $ 34,035       $ —        $ 1,111,701   

FNMA pass-through certificates

     4,673,423         81,377         (129     4,754,671   

FHLMC pass-through certificates

     3,299,922         71,912         (74     3,371,760   

FHLMC and FNMA - REMICs

     69,352         2,397         —          71,749   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total mortgage-backed securities available for sale

   $ 9,120,363       $ 189,721       $ (203   $ 9,309,881   
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2011

          

Investment securities:

          

Equity securities

   $ 6,767       $ 601       $ —        $ 7,368   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total investment securities available for sale

   $ 6,767       $ 601       $ —        $ 7,368   
  

 

 

    

 

 

    

 

 

   

 

 

 

Mortgage-backed securities:

          

GNMA pass-through certificates

   $ 1,139,894       $ 26,353       $ (19   $ 1,166,228   

FNMA pass-through certificates

     4,407,970         60,059         —          4,468,029   

FHLMC pass-through certificates

     3,390,467         61,689         —          3,452,156   

FHLMC and FNMA - REMICs

     81,768         2,209         —          83,977   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total mortgage-backed securities available for sale

   $ 9,020,099       $ 150,310       $ (19   $ 9,170,390   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

Page 12


Table of Contents

Notes to Unaudited Consolidated Financial Statements

 

The amortized cost and estimated fair market value of investment securities and mortgage-backed securities held to maturity at June 30, 2012 and December 31, 2011 are as follows:

 

      Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair Market
Value
 
     (In thousands)  

June 30, 2012

          

Investment securities:

          

United States government-sponsored enterprises debt

   $ 39,011       $ 6,555       $ —        $ 45,566   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total investment securities held to maturity

   $ 39,011       $ 6,555       $ —        $ 45,566   
  

 

 

    

 

 

    

 

 

   

 

 

 

Mortgage-backed securities:

          

GNMA pass-through certificates

   $ 78,621       $ 2,808       $ —        $ 81,429   

FNMA pass-through certificates

     1,007,833         73,551         (3     1,081,381   

FHLMC pass-through certificates

     1,890,551         122,224         —          2,012,775   

FHLMC and FNMA - REMICs

     579,964         37,423         —          617,387   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total mortgage-backed securities held to maturity

   $ 3,556,969       $ 236,006       $ (3   $ 3,792,972   
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2011

          

Investment securities:

          

United States government -sponsored enterprises debt

   $ 539,011       $ 6,750       $ —        $ 545,761   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total investment securities held to maturity

   $ 539,011       $ 6,750       $ —        $ 545,761   
  

 

 

    

 

 

    

 

 

   

 

 

 

Mortgage-backed securities:

          

GNMA pass-through certificates

   $ 83,587       $ 2,602       $ —        $ 86,189   

FNMA pass-through certificates

     1,154,638         78,603         (4     1,233,237   

FHLMC pass-through certificates

     2,132,408         125,364         —          2,257,772   

FHLMC and FNMA - REMICs

     744,890         46,335         —          791,225   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total mortgage-backed securities held to maturity

   $ 4,115,523       $ 252,904       $ (4   $ 4,368,423   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

Page 13


Table of Contents

Notes to Unaudited Consolidated Financial Statements

 

The following tables summarize the fair values and unrealized losses of mortgage-backed securities with an unrealized loss at June 30, 2012 and December 31, 2011, segregated between securities that had been in a continuous unrealized loss position for less than twelve months or longer than twelve months at the respective dates.

 

    Less Than 12 Months     12 Months or Longer     Total  
    Fair
Value
    Unrealized
Losses
    Fair
Value
    Unrealized
Losses
    Fair
Value
    Unrealized
Losses
 
    (In thousands)  

June 30, 2012

           

Held to maturity:

           

FNMA pass-through certificates

  $ 207      $ (3   $     —        $     —        $ 207      $ (3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total temporarily impaired securities held to maturity

    207        (3     —          —          207        (3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Available for sale:

           

FNMA pass-through certificates

    51,109        (129     —          —          51,109        (129

FHLMC pass-through certificates

    41,023        (74     —          —          41,023        (74
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total temporarily impaired securities available for sale

    92,132        (203     —          —          92,132        (203
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 92,339      $ (206   $ —        $ —        $ 92,339      $ (206
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2011

           

Held to maturity:

           

FNMA pass-through certificates

  $ 210      $ (4   $ —        $ —        $ 210      $ (4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total temporarily impaired securities held to maturity

    210        (4     —          —          210        (4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Available for sale:

           

GNMA pass-through certificates

    12,891        (19     —          —          12,891        (19
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total temporarily impaired securities available for sale

    12,891        (19     —          —          12,891        (19
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 13,101      $ (23   $ —        $ —        $ 13,101      $ (23
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The unrealized losses are primarily due to the changes in market interest rates subsequent to purchase. We do not consider these investments to be other-than-temporarily impaired at June 30, 2012 and December 31, 2011 since the decline in market value is attributable to changes in interest rates and not credit quality. In addition, the Company does not intend to sell and does not believe that it is more likely than not that we will be required to sell these investments until there is a full recovery of the unrealized loss, which may be at maturity. As a result no impairment loss was recognized during the six months ended June 30, 2012 or for the year ended December 31, 2011.

 

Page 14


Table of Contents

Notes to Unaudited Consolidated Financial Statements

 

The amortized cost and estimated fair market value of our securities held to maturity and available-for-sale at June 30, 2012, by contractual maturity, are shown below. The table does not include the effect of prepayments or scheduled principal amortization. The expected maturity may differ from the contractual maturity because issuers may have the right to call or prepay obligations. Equity securities have been excluded from this table.

 

     Amortized Cost      Estimated
Fair Market
Value
 
      Mortgage-backed
securities
     Investment
securities
    
     (In thousands)  

June 30, 2012

  

Held to Maturity:

        

Due in one year or less

   $ 8       $ —         $ 8   

Due after one year through five years

     2,413         —           2,543   

Due after five years through ten years

     9,686         —           10,283   

Due after ten years

     3,544,862         39,011         3,825,704   
  

 

 

    

 

 

    

 

 

 

Total held to maturity

   $ 3,556,969       $ 39,011       $ 3,838,538   
  

 

 

    

 

 

    

 

 

 

Available for Sale:

        

Due after one year through five years

   $ —         $ 407,167       $ 410,096   

Due after ten years

     9,120,363         —           9,309,881   
  

 

 

    

 

 

    

 

 

 

Total available for sale

   $ 9,120,363       $ 407,167       $ 9,719,977   
  

 

 

    

 

 

    

 

 

 

There were no sales of mortgage-backed securities available-for-sale for the six months ended June 30, 2012. Sales of mortgage-backed securities available-for-sale amounted to $8.96 billion for the six months ended June 30, 2011, resulting in realized gains of $100.0 million. There were no sales of investment securities available-for-sale during the six months ended June 30, 2012, as compared to sales of $80.0 million for the same period in 2011. Gross realized gains on sales and calls of investment securities available-for-sale were $2.5 million during the first six months of 2011. Gains and losses on the sale of all securities are determined using the specific identification method.

5. Stock Repurchase Programs

We have previously announced several stock repurchase programs. Under our stock repurchase programs, shares of Hudson City Bancorp common stock may be purchased in the open market or through other privately negotiated transactions, depending on market conditions. The repurchased shares are held as treasury stock for general corporate use. In accordance with the terms of the Company MOU, future share repurchases must be approved by the FRB. We did not purchase any of our common shares pursuant to the repurchase programs during the six months ended June 30, 2012. Included in treasury stock are vested shares related to stock awards that were surrendered for withholding taxes. These shares are included in treasury stock purchases in the consolidated statements of cash flows and amounted to 62,579 and 17,145 shares for the six months ended June 30, 2012 and 2011, respectively. As of June 30, 2012, there remained 50,123,550 shares that may be purchased under the existing stock repurchase programs.

 

Page 15


Table of Contents

Notes to Unaudited Consolidated Financial Statements

 

6. Loans and Allowance for Loan Losses

Loans at June 30, 2012 and December 31, 2011 are summarized as follows:

 

     June 30, 2012      December 31, 2011  
     (In thousands)  

First mortgage loans:

     

One- to four-family

     

Amortizing

   $ 22,421,189       $ 23,480,909   

Interest-only

     4,755,679         4,779,863   

FHA/VA

     700,528         734,781   

Multi-family and commercial

     37,760         39,634   

Construction

     4,170         4,929   
  

 

 

    

 

 

 

Total first mortgage loans

     27,919,326         29,040,116   
  

 

 

    

 

 

 

Consumer and other loans:

     

Fixed–rate second mortgages

     117,462         131,597   

Home equity credit lines

     125,695         134,502   

Other

     21,227         21,130   
  

 

 

    

 

 

 

Total consumer and other loans

     264,384         287,229   
  

 

 

    

 

 

 

Total loans

   $ 28,183,710       $ 29,327,345   
  

 

 

    

 

 

 

There were no loans held for sale at June 30, 2012 and December 31, 2011.

The following tables present the composition of our loan portfolio by credit quality indicator at the dates indicated:

 

Credit Risk Profile based on Payment Activity  
                   (In thousands)                              
     One-to four- family      Other first                           Total  
     first mortgage loans      Mortgages      Consumer and Other      Loans  
                   Multi-family             Fixed-rate                       
                   and             second      Home Equity                

June 30, 2012

   Amortizing      Interest-only      Commercial      Construction      mortgages      credit lines      Other         

Performing

   $ 22,260,512       $ 4,535,198       $ 35,678       $ 80       $ 116,363       $ 121,884       $ 20,119       $ 27,089,834   

Non-performing

     861,205         220,481         2,082         4,090         1,099         3,811         1,108         1,093,876   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 23,121,717       $ 4,755,679       $ 37,760       $ 4,170       $ 117,462       $ 125,695       $ 21,227       $ 28,183,710   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

                                                       

Performing

   $ 23,417,785       $ 4,566,001       $ 37,411       $ 585       $ 130,869       $ 130,897       $ 21,110       $ 28,304,658   

Non-performing

     797,905         213,862         2,223         4,344         728         3,605         20         1,022,687   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 24,215,690       $ 4,779,863       $ 39,634       $ 4,929       $ 131,597       $ 134,502       $ 21,130       $ 29,327,345   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Page 16


Table of Contents

Notes to Unaudited Consolidated Financial Statements

 

 

Credit Risk Profile by Internally Assigned Grade  
(In thousands)  
     One-to four- family      Other first                           Total  
     first mortgage loans      Mortgages      Consumer and Other      Loans  
                   Multi-family             Fixed-rate                       
                   and             second      Home Equity                

June 30, 2012

   Amortizing      Interest-only      Commercial      Construction      mortgages      credit lines      Other         

Pass

   $ 22,185,867       $ 4,488,835       $ 22,477       $ 80       $ 115,075       $ 121,163       $ 18,343       $ 26,951,840   

Special mention

     130,416         41,998         2,818         —           345         721         374         176,672   

Substandard

     805,434         224,846         12,465         4,090         2,042         3,811         2,510         1,055,198   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 23,121,717       $ 4,755,679       $ 37,760       $ 4,170       $ 117,462       $ 125,695       $ 21,227       $ 28,183,710   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

                                                       

Pass

   $ 23,325,078       $ 4,536,090       $ 23,997       $ —         $ 130,649       $ 130,487       $ 19,231       $ 28,165,532   

Special mention

     146,391         26,428         2,989         —           220         410         593         177,031   

Substandard

     744,221         217,345         12,648         4,929         728         3,605         1,306         984,782   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 24,215,690       $ 4,779,863       $ 39,634       $ 4,929       $ 131,597       $ 134,502       $ 21,130       $ 29,327,345   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loan classifications are defined as follows:

 

   

Pass – These loans are protected by the current net worth and paying capacity of the obligor (or guarantors, if any) or by the fair value, less cost to acquire and sell, of any underlying collateral in a timely manner.

 

   

Special Mention – These loans have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of repayment prospects.

 

   

Substandard – These loans are inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected.

 

   

Doubtful – These loans have all the weaknesses inherent in a loan classified substandard with the added characteristic that the weaknesses make the full recovery of our principal balance highly questionable and improbable on the basis of currently known facts, conditions, and values. The likelihood of a loss on an asset or portion of an asset classified Doubtful is high. Its classification as Loss is not appropriate, however, because pending events are expected to materially affect the amount of loss.

 

   

Loss – These loans are considered uncollectible and of such little value that a charge-off is warranted. This classification does not necessarily mean that an asset has no recovery or salvage value; but rather, there is much doubt about whether, how much, or when the recovery will occur.

We evaluate the classification of our one-to four- family mortgage loans, consumer loans and other loans primarily on a pooled basis by delinquency. Loans that are past due 60 to 89 days are classified as special mention and loans that are past due 90 days or more are classified as substandard. We obtain updated valuations for one- to four- family mortgage loans by the time a loan becomes 180 days past due. If necessary, we charge-off an amount to reduce the carrying value of the loan to the value of the underlying property, less estimated selling costs. This process is repeated on an annual basis for each loan that remains past due 180 days or more in order to mitigate the risk of falling real estate values. Since we record the charge-off when we receive the updated valuation, we typically do not have any residential first mortgages classified as doubtful or loss. We evaluate multi-family, commercial and construction loans individually and base our classification on the debt service capability of the underlying property as well as secondary sources of repayment such as the borrower’s and any guarantor’s ability and willingness to provide debt service.

 

Page 17


Table of Contents

Notes to Unaudited Consolidated Financial Statements

 

Originating loans secured by residential real estate is our primary business. Our financial results may be adversely affected by changes in prevailing economic conditions, either nationally or in our local New Jersey and metropolitan New York market areas, including decreases in real estate values, adverse employment conditions, the monetary and fiscal policies of the federal and state government and other significant external events. As a result of our lending practices, we have a concentration of loans secured by real property located primarily in New Jersey, New York and Connecticut (the “New York metropolitan area”). At June 30, 2012 approximately 82.4% of our total loans are in the New York metropolitan area.

Included in our loan portfolio at June 30, 2012 and December 31, 2011 are $4.76 billion and $4.78 billion, respectively, of interest-only one-to four-family residential mortgage loans. These loans are originated as adjustable-rate mortgage (“ARM”) loans with initial terms of five, seven or ten years with the interest-only portion of the payment based upon the initial loan term, or offered on a 30-year fixed-rate loan with interest-only payments for the first 10 years of the obligation. At the end of the initial 5-, 7- or 10-year interest-only period, the loan payment will adjust to include both principal and interest and will amortize over the remaining term so the loan will be repaid at the end of its original life. We had $220.5 million and $213.9 million of non-performing interest-only one-to four-family residential mortgage loans at June 30, 2012 and December 31, 2011, respectively.

In addition to our full documentation loan program, we originate loans to certain eligible borrowers as limited documentation loans. We have originated these types of loans for over 15 years. Loans eligible for limited documentation processing are ARM loans, interest-only first mortgage loans and 10-, 15-, 20- and 30-year fixed-rate loans to owner-occupied primary and second home applicants. These loans are available in amounts up to 65% of the lower of the appraised value or purchase price of the property. Generally the maximum loan amount for limited documentation loans is $750,000 and these loans are subject to higher interest rates than our full documentation loan products. Limited documentation loans have an inherently higher level of risk compared to loans with full documentation. Included in our loan portfolio at June 30, 2012 are $3.92 billion of originated amortizing limited documentation loans and $944.3 million of originated limited documentation interest-only loans. Non-performing loans at June 30, 2012 include $139.0 million of originated amortizing limited documentation loans and $68.7 million of originated interest-only limited documentation loans. Included in our loan portfolio at December 31, 2011 are $3.85 billion of originated amortizing limited documentation loans and $956.2 million of originated limited documentation interest-only loans. Non-performing loans at December 31, 2011 included $126.9 million of originated amortizing limited documentation loans and $71.0 million or originated interest-only limited documentation loans.

 

Page 18


Table of Contents

Notes to Unaudited Consolidated Financial Statements

 

The following table is a comparison of our delinquent loans by class as of the dates indicated:

 

     30-59 Days      60-89 Days      90 Days
or more
     Total
Past Due
     Current
Loans
     Total
Loans
     90 Days or
more and
accruing (1)
 

At June 30, 2012

   (Dollars in thousands)  

One- to four-family first mortgages:

                    

Amortizing

   $ 342,845       $ 145,838       $ 861,205       $ 1,349,888       $ 21,771,829       $ 23,121,717       $ 113,058   

Interest-only

     62,608         41,998         220,481         325,087         4,430,592         4,755,679         —     

Multi-family and commercial mortgages

     1,885         1,289         2,082         5,256         32,504         37,760         —     

Construction loans

     80         —           4,090         4,170         —           4,170         —     

Consumer and other loans:

                       —     

Fixed-rate second mortgages

     724         345         1,099         2,168         115,294         117,462         —     

Home equity lines of credit

     1,595         721         3,811         6,127         119,568         125,695         —     

Other

     1         4         1,108         1,113         20,114         21,227         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 409,738       $ 190,195       $ 1,093,876       $ 1,693,809       $ 26,489,901       $ 28,183,710       $ 113,058   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2011

                                                

One- to four-family first mortgages:

                    

Amortizing

   $ 357,099       $ 158,546       $ 797,905       $ 1,313,550       $ 22,902,140       $ 24,215,690       $ 97,476   

Interest-only

     63,360         27,833         213,862         305,055         4,474,808         4,779,863         —     

Multi-family and commercial mortgages

     1,521         393         2,223         4,137         35,497         39,634         —     

Construction loans

     —           —           4,344         4,344         585         4,929         —     

Consumer and other loans:

                    

Fixed-rate second mortgages

     1,202         220         728         2,150         129,447         131,597         —     

Home equity lines of credit

     2,471         410         3,605         6,486         128,016         134,502         —     

Other

     1,536         2         20         1,558         19,572         21,130         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 427,189       $ 187,404       $ 1,022,687       $ 1,637,280       $ 27,690,065       $ 29,327,345       $ 97,476   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Loans that are past due 90 days or more and still accruing interest are loans that are guaranteed by the FHA.

The following table presents the geographic distribution of our loan portfolio as a percentage of total loans and of our non-performing loans as a percentage of total non-performing loans.

 

     At June 30, 2012     At December 31, 2011  
           Non-performing           Non-performing  
     Total loans     Loans     Total loans     Loans  

New Jersey

     44.2     49.8     44.7     51.3

New York

     23.7        20.2        22.4        19.5   

Connecticut

     14.5        7.5        14.6        6.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total New York metropolitan area

     82.4        77.5        81.7        77.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Pennsylvania

     4.9        1.7        4.7        1.4   

Virginia

     2.4        2.7        2.6        2.9   

Illinois

     2.1        4.6        2.3        4.7   

Maryland

     1.9        3.8        2.0        3.2   

All others

     6.3        9.7        6.7        10.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Outside New York metropolitan area

     17.6        22.5        18.3        22.4   
  

 

 

   

 

 

   

 

 

   

 

 

 
     100.0     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

   

 

 

 

 

Page 19


Table of Contents

Notes to Unaudited Consolidated Financial Statements

 

The following is a summary of loans, by class, on which the accrual of income has been discontinued and loans that are contractually past due 90 days or more but have not been classified as non-accrual at June 30, 2012 and December 31, 2011:

 

     June 30, 2012      December 31, 2011  
     (In thousands)  

Non-accrual loans:

     

One-to four-family amortizing loans

   $ 748,147       $ 700,429   

One-to four-family interest-only loans

     220,481         213,862   

Multi-family and commercial mortgages

     2,082         2,223   

Construction loans

     4,090         4,344   

Fixed-rate second mortgages

     1,099         728   

Home equity lines of credit

     3,811         3,605   

Other loans

     1,108         20   
  

 

 

    

 

 

 

Total non-accrual loans

     980,818         925,211   

Accruing loans delinquent 90 days or more (1)

     113,058         97,476   
  

 

 

    

 

 

 

Total non-performing loans

   $ 1,093,876       $ 1,022,687   
  

 

 

    

 

 

 

 

(1) Loans that are past due 90 days or more and still accruing interest are loans that are insured by the FHA.

The total amount of interest income on non-accrual loans that would have been recognized during the first six months of 2012, if interest on all such loans had been recorded based upon original contract terms amounted to approximately $30.1 million. Hudson City is not committed to lend additional funds to borrowers on non-accrual status.

Loans modified in a troubled debt restructuring totaled $83.0 million at June 30, 2012 of which $8.4 million are 30 to 59 days past due, $4.5 million are 60 to 89 days past due and $12.5 million are 90 days or more past due and are included in non-accrual loans. The remaining troubled debt restructurings were current at June 30, 2012 and have complied with the terms of their restructure agreement. We discontinue accruing interest on troubled debt restructurings that are past due 90 days or more or if we believe we will not collect all amounts contractually due. Approximately $4.8 million of troubled debt restructurings that were previously accruing interest became 90 days or more past due during the first six months of 2012 for which we ceased accruing interest. At December 31, 2011, loans modified in a troubled debt restructuring totaled $66.5 million of which $7.4 million were 30 to 59 days past due, $4.8 million were 60 to 89 days past due and $11.4 million were 90 days or more past due and are included in non-accrual loans at that date.

 

Page 20


Table of Contents

Notes to Unaudited Consolidated Financial Statements

 

The following table is a comparison of our troubled debt restructuring by class as of the date indicated.

 

     June 30, 2012      December 31, 2011  
     Number
of
Contracts
     Pre-restructuring
Outstanding
Recorded
Investment
     Post-restructuring
Outstanding
Recorded
Investment
     Number
of
Contracts
     Pre-restructuring
Outstanding
Recorded
Investment
     Post-restructuring
Outstanding
Recorded
Investment
 
     (In thousands)  

Troubled debt restructurings:

                 

One-to-four family first mortgages:

                 

Amortizing

     187       $ 73,092       $ 68,287         146       $ 57,336       $ 53,831   

Interest-only

     10         5,086         5,638         9         4,970         4,799   

Multi-family and commercial mortgages

     2         7,911         7,911         2         7,911         7,911   

Consumer and other loans

     8         1,221         1,195         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     207       $ 87,310       $ 83,031         157       $ 70,217       $ 66,541   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Upon request and subject to credit review, we will generally agree to a short-term payment plan for certain residential mortgage loan borrowers. Many of these customers are current as to their mortgage payments, but may be anticipating a short-term cash flow need and want to protect their credit history. The extent of these plans is generally limited to no more than a six-month deferral of principal payments. Pursuant to these short-term payment plans, we do not modify mortgage notes, recast legal documents, extend maturities or reduce interest rates. We also do not forgive any interest or principal. These loans have not been classified as troubled debt restructurings since we expect to collect all principal and interest, the deferral period is short and any reduction in the present value of cash flows is due to the insignificant delay in the timing of principal payments. As a result, these restructurings did not meet the requirements in ASU No. 2011-02 to be considered a troubled debt restructuring. The principal balance of loans with payment plans at June 30, 2012 amounted to $4.6 million, including $3.5 million of loans that are current and $1.1 million that are 30 to 59 days past due. There were no loans that were 60 to 89 days past due or non-accrual and 90 days or more past due. The principal balance of loans with payment plans at December 31, 2011 amounted to $28.1 million, including $19.7 million of loans that were current, $2.0 million were 30 to 59 days past due, $3.1 million were 60 to 89 days past due and $3.3 million were 90 days or more past due at that date.

 

Page 21


Table of Contents

Notes to Unaudited Consolidated Financial Statements

 

Loans evaluated for impairment include loans classified as troubled debt restructurings and non-performing multi-family, commercial and construction loans. The following table presents our loans evaluated for impairment by class at the date indicated:

 

     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 
     (In thousands)  

June 30, 2012

              

One-to four-family amortizing loans

   $ 68,287       $ 72,627       $ —         $ 70,186       $ 1,472   

One-to four-family interest-only loans

     5,638         5,788         —           5,151         112   

Multi-family and commercial mortgages

     7,345         10,116         2,771         10,122         242   

Construction loans

     2,974         4,090         1,116         4,177         —     

Consumer and other loans

     1,147         1,195         48         1,197         26   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 85,391       $ 93,816       $ 3,935       $ 90,833       $ 1,852   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

              

One-to four-family amortizing loans

   $ 53,831       $ 56,876       $ —         $ 55,595       $ 2,411   

One-to four-family interest-only loans

     4,799         4,974         —           4,891         159   

Multi-family and commercial mortgages

     6,548         10,266         3,718         10,294         485   

Construction loans

     3,622         4,344         722         4,752         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 68,800       $ 76,460       $ 4,440       $ 75,532       $ 3,055   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the activity in our ALL for the periods indicated:

 

     For the Three Months Ended June 30,     For the Six Months Ended June 30,  
     2012     2011     2012     2011  
     (In thousands)  

Balance at beginning of period

   $ 280,713      $ 255,283      $ 273,791      $ 236,574   
  

 

 

   

 

 

   

 

 

   

 

 

 

Charge-offs

     (23,022     (28,551     (46,512     (51,997

Recoveries

     5,210        5,574        10,622        7,729   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     (17,812     (22,977     (35,890     (44,268
  

 

 

   

 

 

   

 

 

   

 

 

 

Provision for loan losses

     25,000        30,000        50,000        70,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 287,901      $ 262,306      $ 287,901      $ 262,306   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

Page 22


Table of Contents

Notes to Unaudited Consolidated Financial Statements

 

The following table presents the activity in our ALL by portfolio segment.

 

     One-to four-     Multi-family                     
     Family     and Commercial            Consumer and        
   Mortgages     Mortgages     Construction      Other Loans     Total  
     (In thousands)  

Balance at December 31, 2011

   $ 264,922      $ 4,382      $ 734       $ 3,753      $ 273,791   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Provision for loan losses

     50,416        (899     390         93        50,000   

Charge-offs

     (46,399     —          —           (113     (46,512

Recoveries

     10,621        —          —           1        10,622   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net charge-offs

     (35,778     —          —           (112     (35,890
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance at June 30, 2012

   $ 279,560      $ 3,483      $ 1,124       $ 3,734      $ 287,901   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Loan portfolio:

           

Balance at June 30, 2012

           

Individually evaluated for impairment

   $ 73,925      $ 10,116      $ 4,090       $ 1,195      $ 89,326   

Collectively evaluated for impairment

     27,803,471        27,644        80         263,189        28,094,384   

Allowance

           

Individually evaluated for impairment

   $ 1,720      $ 2,771      $ 1,116       $ 48      $ 5,655   

Collectively evaluated for impairment

     277,840        712        8         3,686        282,246   

The ultimate ability to collect the loan portfolio is subject to changes in the real estate market and future economic conditions. Since 2008, there has been a decline in house prices, both nationally and locally. Housing market conditions in our lending market areas weakened during this period as evidenced by reduced levels of sales, increasing inventories of houses on the market, declining house prices and an increase in the length of time houses remain on the market.

Although we believe that we have established and maintained the ALL at adequate levels, additions may be necessary if future economic and other conditions differ substantially from the current operating environment. While we continue to adhere to prudent underwriting standards, we are geographically concentrated in the New York metropolitan area of the United States and, therefore, are not immune to negative consequences arising from overall economic weakness and, in particular, a sharp downturn in the housing industry. Continued decreases in real estate values could adversely affect the value of property used as collateral for our loans. No assurance can be given in any particular case that our loan-to-value ratios will provide full protection in the event of borrower default. Adverse changes in the economy and increases in the unemployment rate may have a negative effect on the ability of our borrowers to make timely loan payments, which would have an adverse impact on our earnings. A further increase in loan delinquencies would decrease our net interest income and may adversely impact our loss experience on non-performing loans which may result in an increase in the loss factors used in our quantitative analysis of the ALL, causing increases in our provision and ALL. Although we use the best information available, the level of the ALL remains an estimate that is subject to significant judgment and short-term change.

We obtain new collateral values by the time a loan becomes 180 days delinquent and then annually thereafter. If the estimated fair value of the collateral (less estimated selling costs) is less than the recorded investment in the loan, we charge-off an amount to reduce the loan to the fair value of the collateral less estimated selling costs. As a result, certain losses inherent in our non-performing loans are being recognized as charge-offs which may result in a lower ratio of the ALL to non-performing loans. Net charge-offs amounted to $35.9 million for the six months ended June 30, 2012 as compared to $44.3 million for the corresponding period in 2011.

 

Page 23


Table of Contents

Notes to Unaudited Consolidated Financial Statements

 

7. Borrowed Funds

Borrowed funds at June 30, 2012 and December 31, 2011 are summarized as follows:

 

     June 30, 2012     December 31, 2011  
     Principal      Weighted
Average
Rate
    Principal      Weighted
Average
Rate
 
     (Dollars in thousands)  

Securities sold under agreements to repurchase:

          

FHLB

   $ 800,000         4.53   $ 800,000         4.53

Other brokers

     6,150,000         4.44        6,150,000         4.44   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total securities sold under agreements to repurchase

     6,950,000         4.45        6,950,000         4.45   

Advances from the FHLB

     6,475,000         4.03        8,125,000         3.39   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total borrowed funds

   $ 13,425,000         4.24   $ 15,075,000         3.87
  

 

 

      

 

 

    

Accrued interest payable

   $ 67,851         $ 66,252      

The average balances of borrowings and the maximum amount outstanding at any month-end are as follows:

 

     June 30, 2012     December 31, 2011  
     (Dollars in thousands)  

Repurchase Agreements:

    

Average balance outstanding during the period

   $ 6,950,000      $ 9,127,800   
  

 

 

   

 

 

 

Maximum balance outstanding at any month-end during the period

   $ 6,950,000      $ 14,750,000   
  

 

 

   

 

 

 

Weighted average rate during the period

     4.45     4.37
  

 

 

   

 

 

 

FHLB Advances:

    

Average balance outstanding during the period

   $ 7,344,766      $ 13,349,342   
  

 

 

   

 

 

 

Maximum balance outstanding at any month-end during the period

   $ 7,875,000      $ 14,875,000   
  

 

 

   

 

 

 

Weighted average rate during the period

     3.71     3.44
  

 

 

   

 

 

 

 

Page 24


Table of Contents

Notes to Unaudited Consolidated Financial Statements

 

At June 30, 2012, $7.93 billion of our borrowed funds may be put back to us at the discretion of the lender. The remaining $5.50 billion of borrowed funds at June 30, 2012 are fixed-rate, fixed-maturity borrowings. At June 30, 2012, borrowed funds had scheduled maturities and potential put dates as follows:

 

     Borrowings by Scheduled     Borrowings by Earlier of Scheduled  
   Maturity Date     Maturity or Next Potential Put Date  
            Weighted            Weighted  
            Average            Average  

Year

   Principal      Rate     Principal      Rate  
     (Dollars in thousands)  

2012

   $ 1,250,000         0.90   $ 3,925,000         3.28

2013

     —           —          1,325,000         4.69   

2014

     —           —          3,725,000         4.47   

2015

     75,000         4.62        275,000         4.10   

2016

     3,925,000         4.92        3,925,000         4.92   

2017

     2,475,000         4.37        —           —     

2018

     700,000         3.65        250,000         3.10   

2019

     1,725,000         4.62        —           —     

2020

     3,275,000         4.53        —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 13,425,000         4.24   $ 13,425,000         4.24
  

 

 

      

 

 

    

8. Goodwill and Other Intangible Assets

Goodwill and other intangible assets amounted to $154.5 million and were recorded as a result of Hudson City Bancorp’s acquisition of Sound Federal Bancorp, Inc. (“Sound Federal”) in 2006.

We performed a goodwill impairment analysis as of June 30, 2012 with the assistance of an independent third-party valuation firm. We utilized multiple approaches in estimating the fair value of the Company including (i) a comparable transactions approach based on acquisition pricing multiples or ratios recently paid in the sale or merger of relatively comparable banking franchises; (ii) a control premium approach based on the Company’s trading price adjusted by a premium for acquiring control based on control premium data for recent banking sales or mergers; (iii) a public market peers control premium approach based on the trading prices of similar publicly-traded companies as measured by standard valuation multiples or ratios adjusted by a premium for acquiring control based on control premium data for recent banking sales or mergers; and, (iv) a discounted cash flow approach whereby value is determined based on the present value of the sum of the projected dividends and a terminal value in the future.

Based on the results of the goodwill impairment analysis, we concluded that goodwill was not impaired. Therefore, we did not recognize any impairment of goodwill or other intangible assets during the six months ended June 30, 2012. The estimation of the fair value of the Company requires the use of estimates and assumptions that are subject to a greater degree of uncertainty. In addition, the estimated fair value of the Company is based on, among other things, the market price of our common stock, the change-in-control premiums for recent acquisitions and our projection of net income in future periods. As a result of the current volatility in market and economic conditions, these estimates and assumptions are subject to change in the near-term and may result in the impairment in future periods of some or all of the goodwill on our balance sheet.

 

Page 25


Table of Contents

Notes to Unaudited Consolidated Financial Statements

 

9. Fair Value Measurements

a) Fair Value Measurements

We use fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. We did not have any liabilities that were measured at fair value at June 30, 2012 and December 31, 2011. Our securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value other assets or liabilities on a non-recurring basis, such as foreclosed real estate owned, certain impaired loans and goodwill. These non-recurring fair value adjustments generally involve the write-down of individual assets due to impairment losses.

In accordance with ASC Topic 820, Fair Value Measurements and Disclosures, we group our assets at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value. These levels are:

 

 

Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets.

 

 

Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market.

 

 

Level 3 – Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect our own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing models, discounted cash flow models and similar techniques. The results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability.

We base our fair values on the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. ASC Topic 820 requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

Assets that we measure on a recurring basis are limited to our available-for-sale securities portfolio. Our available-for-sale portfolio is carried at estimated fair value with any unrealized gains and losses, net of taxes, reported as accumulated other comprehensive income or loss in shareholders’ equity. Substantially all of our available-for-sale portfolio consists of mortgage-backed securities and investment securities issued by U.S. government-sponsored entities (the “GSEs”). The fair values for substantially all of these securities are obtained monthly from an independent nationally recognized pricing service. On a monthly basis, we assess the reasonableness of the fair values obtained by reference to a second independent nationally recognized pricing service. Based on the nature of our securities, our independent pricing service provides us with prices which are categorized as Level 2 since quoted prices in active markets for identical assets are generally not available for the majority of securities in our portfolio. Various modeling techniques are used to determine pricing for our mortgage-backed securities, including option pricing and discounted cash flow models. The inputs to these models include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. On an annual basis, we obtain the models, inputs and assumptions utilized by our pricing service

 

Page 26


Table of Contents

Notes to Unaudited Consolidated Financial Statements

 

and review them for reasonableness. We also own equity securities with a carrying value of $7.5 million at June 30, 2012 and $7.4 million at December 31, 2011 for which fair values are obtained from quoted market prices in active markets and, as such, are classified as Level 1.

The following table provides the level of valuation assumptions used to determine the carrying value of our assets measured at fair value on a recurring basis at June 30, 2012 and December 31, 2011.

 

          Fair Value Measurements at June 30, 2012 using  

Description

  Carrying
Value
    Quoted Prices in Active
Markets for Identical
Assets (Level 1)
    Significant Other
Observable Inputs
(Level 2)
    Significant
Unobservable Inputs
(Level 3)
 
                (In thousands)        

Available for sale debt securities:

       

Mortgage-backed securities

  $ 9,309,881      $ —        $ 9,309,881      $ —     

Corporate debt

    410,096        —          410,096        —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total available for sale debt securities

    9,719,977        —          9,719,977        —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Available for sale equity securities:

       

Financial services industry

  $ 7,494      $ 7,494      $ —        $ —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total available for sale equity securities

    7,494        7,494        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total available for sale securities

  $ 9,727,471      $ 7,494      $ 9,719,977      $ —     
 

 

 

   

 

 

   

 

 

   

 

 

 

 

    

Fair Value at December 31, 2011 using

 

Description

  Carrying
Value
    Quoted Prices in Active
Markets for Identical
Assets (Level 1)
    Significant Other
Observable Inputs
(Level 2)
    Significant
Unobservable Inputs
(Level 3)
 
    (In thousands)  

Available for sale debt securities:

       

Mortgage-backed securities

  $ 9,170,390      $ —        $ 9,170,390      $ —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total available for sale debt securities

    9,170,390        —          9,170,390        —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Available for sale equity securities:

       

Financial services industry

  $ 7,368      $ 7,368      $ —        $ —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total available for sale equity securities

    7,368        7,368        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total available for sale securities

  $ 9,177,758      $ 7,368      $ 9,170,390      $ —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Assets that were measured at fair value on a non-recurring basis at June 30, 2012 and December 31, 2011 were limited to non-performing commercial and construction loans that are collateral dependent, troubled debt restructurings and foreclosed real estate. Loans evaluated for impairment in accordance with FASB guidance amounted to $89.3 million and $73.2 million at June 30, 2012 and December 31, 2011, respectively. Based on this evaluation, we established an ALL of $3.9 million and $4.4 million for those respective periods. The provision for loan losses related to these loans amounted to $438,000 and $0 for the first six months of 2012 and 2011, respectively. These impaired loans are individually assessed to determine that the loan’s carrying value is not in excess of the fair value of the collateral, less estimated selling costs or the present value of the loan’s expected future cash flows. For impaired loans that are secured by real estate, fair value is estimated through current appraisals, where practical, or an inspection and a comparison of the property securing the loan with similar properties in the area by either a licensed appraiser or real estate broker and, as such, are classified as Level 3.

 

Page 27


Table of Contents

Notes to Unaudited Consolidated Financial Statements

 

Foreclosed real estate represents real estate acquired as a result of foreclosure or by deed in lieu of foreclosure and is carried at the lower of cost or fair value less estimated selling costs. Fair value is estimated through current appraisals, where practical, or an inspection and a comparison of the property securing the loan with similar properties in the area by either a licensed appraiser or real estate broker and, as such, foreclosed real estate properties are classified as Level 3. Foreclosed real estate consisted of one-to four-family properties and amounted to $40.6 million at both June 30, 2012 and December 31, 2011, respectively. During the first six months of 2012 and the first six months of 2011, charge-offs to the allowance for loan losses related to loans that were transferred to foreclosed real estate amounted to $2.3 million and $1.9 million, respectively. Write downs and net loss on sale related to foreclosed real estate that were charged to non-interest expense amounted to $1.3 million and $2.8 million for those respective periods.

The following table provides the level of valuation assumptions used to determine the carrying value of our assets measured at fair value on a non-recurring basis at June 30, 2012 and December 31, 2011.

 

     Fair Value Measurements at June 30, 2012 using  

Description

   Quoted Prices in  Active
Markets for Identical
Assets (Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable Inputs
(Level 3)
     Total
Gains
(Losses)
 
            (In thousands)                

Impaired loans

   $ —         $ —         $ 89,326       $ —     

Foreclosed real estate

     —           —           40,568         (1,331
     Fair Value Measurements at December 31, 2011 using  

Description

   Quoted Prices in Active
Markets for Identical
Assets (Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable Inputs
(Level 3)
     Total
Gains
(Losses)
 
            (In thousands)                

Impaired loans

   $ —         $ —         $ 73,240       $ (2,280

Foreclosed real estate

     —           —           40,619         (7,461

The following table provides a reconciliation of assets measured at fair value on a non-recurring basis at June 30, 2012.

 

     Fair Value Measurements Using
Significant Unobservable Inputs (Level 3)
 
     (In thousands)  
     Foreclosed
Real  Estate
    Impaired
Loans
 

Beginning balance at December 31, 2011

   $ 40,619      $ 73,240   

Gain (loss) on sale of foreclosed properties

     (1,331     —     

Net transfers in (out)

     1,280        16,086   
  

 

 

   

 

 

 

Ending balance at June 30, 2012

   $ 40,568      $ 89,326   
  

 

 

   

 

 

 

 

Page 28


Table of Contents

Notes to Unaudited Consolidated Financial Statements

 

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at June 30, 2012.

 

     June 30, 2012

Description

   Fair Value      Valuation
Technique
  

Significant

Unobservable

Input

  

Range
(Weighted Average)

            (In thousands)          

Impaired loans:

           

One-to four-family mortgages

   $ 75,120       Net Present Value    N/A    0.0%-31.0% (1.9%)

Multi-family, Commercial and Construction mortgages

     14,206       Appraisal Value    Adjustment for differences between the comparable sales.    N/A

Foreclosed real estate

     40,568       Appraisal Value    Adjustment for differences between the comparable sales.    0.0%-100.0% (12.2%)

b) Fair Value Disclosures

The fair value of financial instruments represents the estimated amounts at which the asset or liability could be exchanged in a current transaction between willing parties, other than in a forced liquidation sale. These estimates are subjective in nature, involve uncertainties and matters of judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Further, certain tax implications related to the realization of the unrealized gains and losses could have a substantial impact on these fair value estimates and have not been incorporated into any of the estimates.

Cash and due from Banks

Carrying amounts of cash, due from banks and federal funds sold are considered to approximate fair value (Level 1).

FHLB Stock

The carrying value of FHLB stock equals cost. The fair value of FHLB stock is based on redemption at par value (Level 1).

Loans

The fair value of one- to four-family mortgages and home equity loans are generally estimated using the present value of expected future cash flows, assuming future prepayments and using market rates for new loans with comparable credit risk. Published pricing in the secondary and securitization markets was also utilized to assist in the fair value of the loan portfolio (Level 3). The valuation of our loan portfolio is consistent with accounting guidance but does not fully incorporate the exit price approach.

Deposits

For deposit liabilities payable on demand, the fair value is the carrying value at the reporting date (Level 1). For time deposits the fair value is estimated by discounting estimated future cash flows using currently offered rates (Level 2).

Borrowed Funds

The fair value of fixed-maturity borrowed funds is estimated by discounting estimated future cash flows using currently offered rates (Level 2). Structured borrowed funds are valued using an option valuation model which uses assumptions for anticipated calls of borrowings based on market interest rates and weighted-average life (Level 2).

 

Page 29


Table of Contents

Notes to Unaudited Consolidated Financial Statements

 

Off-balance Sheet Financial Instruments

There is no material difference between the fair value and the carrying amounts recognized with respect to our off-balance sheet commitments (Level 3).

Other important elements that are not deemed to be financial assets or liabilities and, therefore, not considered in these estimates include the value of Hudson City’s retail branch delivery system, its existing core deposit base and banking premises and equipment.

The estimated fair values of financial instruments are summarized as follows:

 

    June 30, 2012     December 31, 2011  
    Carrying
Amount
    Estimated
Fair Value
    Carrying
Amount
    Estimated
Fair Value
 
    (In thousands)  
Assets:        

Cash and due from banks

  $ 130,768      $ 130,768      $ 194,029      $ 194,029   

Federal funds sold and other overnight deposits

    674,662        674,662        560,051        560,051   

Investment securities held to maturity

    39,011        45,566        539,011        545,761   

Investment securities available for sale

    417,590        417,590        7,368        7,368   

Federal Home Loan Bank of New York stock

    412,717        412,717        510,564        510,564   

Mortgage-backed securities held to maturity

    3,556,969        3,792,972        4,115,523        4,368,423   

Mortgage-backed securities available for sale

    9,309,881        9,309,881        9,170,390        9,170,390   

Loans

    27,983,559        29,733,588        29,137,359        30,935,705   
Liabilities:        

Deposits

    24,644,548        24,844,335        25,507,760        25,707,551   

Borrowed funds

    13,425,000        15,757,692        15,075,000        17,428,484   

10. Postretirement Benefit Plans

We maintain non-contributory retirement and post-retirement plans to cover employees hired prior to August 1, 2005, including retired employees, who have met the eligibility requirements of the plans. Benefits under the qualified and non-qualified defined benefit retirement plans are based primarily on years of service and compensation. Funding of the qualified retirement plan is actuarially determined on an annual basis. It is our policy to fund the qualified retirement plan sufficiently to meet the minimum requirements set forth in the Employee Retirement Income Security Act of 1974. The non-qualified retirement plan, which is maintained for certain employees, is unfunded.

In 2005, we limited participation in the non-contributory retirement plan and the post-retirement benefit plan to those employees hired on or before July 31, 2005. We also placed a cap on paid medical expenses at the 2007 rate, beginning in 2008, for those eligible employees who retire after December 31, 2005. As part of our acquisition of Sound Federal in 2006, participation in the Sound Federal retirement plans and the accrual of benefits for such plans were frozen as of the acquisition date.

 

Page 30


Table of Contents

Notes to Unaudited Consolidated Financial Statements

 

The components of the net periodic expense for the plans were as follows:

 

     For the Three Months Ended June 30,  
     Retirement Plans     Other Benefits  
     2012     2011     2012     2011  
     (In thousands)  

Service cost

   $ 1,298      $ 1,123      $ 307      $ 250   

Interest cost

     2,149        2,190        573        646   

Expected return on assets

     (3,007     (3,080     —          —     

Amortization of:

        

Net loss

     1,382        945        306        332   

Unrecognized prior service cost

     90        87        (391     (391
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 1,912      $ 1,265      $ 795      $ 837   
  

 

 

   

 

 

   

 

 

   

 

 

 
     For the Six Months Ended June 30,  
     Retirement Plans     Other Benefits  
     2012     2011     2012     2011  
     (In thousands)  

Service cost

   $ 2,596      $ 2,246      $ 614      $ 501   

Interest cost

     4,298        4,380        1,146        1,292   

Expected return on assets

     (6,014     (6,160     —          —     

Amortization of:

        

Net loss

     2,764        1,890        612        664   

Unrecognized prior service cost

     180        174        (782     (783
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 3,824      $ 2,530      $ 1,590      $ 1,675   
  

 

 

   

 

 

   

 

 

   

 

 

 

We made no contributions to the pension plans during the first six months of 2012 or 2011.

 

Page 31


Table of Contents

Notes to Unaudited Consolidated Financial Statements

 

11. Stock-Based Compensation

Stock Option Plans

A summary of the changes in outstanding stock options is as follows:

 

     For the Six Months Ended June 30,  
     2012      2011  
     Number of
Stock
Options
    Weighted
Average
Exercise Price
     Number of
Stock
Options
    Weighted
Average
Exercise Price
 

Outstanding at beginning of period

     28,825,986      $ 12.77         28,129,885      $ 12.68   

Granted

     —          —           1,567,119        9.53   

Exercised

     (624,058     5.51         (6,412     5.96   

Forfeited

     (17,100     9.50         (7,500     12.76   
  

 

 

      

 

 

   

Outstanding at end of period

     28,184,828      $ 12.93         29,683,092      $ 12.51   
  

 

 

      

 

 

   

In June 2006, our shareholders approved the Hudson City Bancorp, Inc. 2006 Stock Incentive Plan (the “2006 SIP”) authorizing us to grant up to 30,000,000 shares of common stock. In July 2006, the Compensation Committee of the Board of Directors of Hudson City Bancorp (the “Committee”), authorized grants to each non-employee director, executive officers and other employees to purchase shares of the Company’s common stock, pursuant to the 2006 SIP. Grants of stock options made through December 31, 2010 pursuant to the 2006 SIP amounted to 23,120,000 options at an exercise price equal to the fair value of our common stock on the grant date, based on quoted market prices. Of these options, 6,067,500 have vesting periods ranging from one to five years and an expiration period of ten years. The remaining 17,052,500 shares have vesting periods ranging from two to three years if certain financial performance measures are met. The financial performance measures for each of these awards, other than the performance stock options granted in 2010 (“2010 grants”), have either been met, or are considered, subject to review and verification of the Committee, probable to be met, so we have recorded compensation expenses for these awards accordingly. The Company has determined that it is more than likely that one of the two performance measures related to the 2010 option grants will not be met. As a result, the Company expects that half of the 2010 option grants will vest and the expense for these options has been adjusted accordingly.

In April 2011, our shareholders approved the Hudson City Bancorp, Inc. Amended and Restated 2011 Stock Incentive Plan (the “2011 SIP”) authorizing us to grant up to 28,750,000 shares of common stock including the 2,070,000 shares remaining under the 2006 SIP. During 2011, the Committee authorized stock option grants (the “2011 option grants”) pursuant to the 2011 SIP for 1,618,932 options at an exercise price equal to the fair value of our common stock on the grant date, based on quoted market prices. Of these options, 1,308,513 will vest between April 2014 and July 2014 if certain financial performance measures are met and employment continues through the vesting date (the “2011 Performance Options”). The remaining 310,419 options vested in April 2012. The 2011 option grants have an expiration period of ten years. We have determined that it is probable these performance measures for the 2011 Performance Options will be met and have recorded compensation expense for the those grants accordingly.

Compensation expense related to our outstanding stock options amounted to $405,000 and $2.3 million for the three months ended June 30, 2012 and 2011, respectively and $1.0 million and $4.5 million, for the six months ended June 30, 2012 and 2011, respectively.

 

Page 32


Table of Contents

Notes to Unaudited Consolidated Financial Statements

 

Stock Awards

During 2009, the Committee granted performance-based stock awards (the “2009 stock awards”) pursuant to the 2006 SIP for 847,750 shares of our common stock. These shares were issued from treasury stock and were scheduled to vest in annual installments over a three-year period if certain performance measures were met and employment continued through the vesting date. These performance measures were met and we recorded compensation expense for the 2009 stock awards over the vesting period based on the fair value of the shares on the grant date which was $12.03. In addition to the 2009 stock awards, grants were made in 2010 (the “2010 stock awards”) pursuant to the 2006 SIP for 18,000 shares of our common stock. Expense for the 2010 stock awards is recognized over the vesting period of three years and is based on the fair value of the shares on the grant date which was $13.12. Total compensation expense for stock awards amounted to $19,675 and $870,000 for the three months ended June 30, 2012 and 2011, respectively, and $39,350 and $1.7 million, for the six months ended June 30, 2012 and 2011, respectively.

Stock Unit Awards

Hudson City Bancorp granted stock unit awards to a newly appointed member of the Board of Directors in July 2010. These awards were for a value of $250,000 which was converted to common stock equivalents (stock units) of 20,661 shares. These units vest annually over a three-year period if service continues through the vesting dates. Vested units will be settled in shares of our common stock following the director’s departure from the Board of Directors. Stock unit awards were also made in 2011 (the “2011 stock unit awards”) pursuant to the 2011 SIP for a total value of $9.7 million, or stock units of 1,004,230 shares. 2011 stock unit awards to employees vest if service continues through the third anniversary of the awards, and will be settled, if vested, in shares of our common stock on the third and fifth anniversaries of the awards. 2011 stock unit awards to directors vest if service continues through the first anniversary of the award, and are settled in shares of our common stock following the director’s departure from the Board of Directors.

Stock unit awards were made in 2012 (the “2012 stock unit awards”) pursuant to the 2011 SIP for a total of $10.5 million, or stock units of 1,396,869 shares. 2012 stock unit awards to employees vest if service continues through the third anniversary of the awards and certain financial performance measures are met. The 2012 stock unit awards include stock units of 791,409 shares that will be settled, if vested, in shares of our common stock on the third and sixth anniversaries of the awards. The 2012 stock unit awards also included variable performance stock units (“VPUs”) of 530,133 shares which will be settled, if vested, in shares of our common stock on the third anniversary of the awards. The percentage of VPUs that will vest will be determined by ranking the total shareholder return of the Company’s common stock over the performance period against the total shareholder return of a peer group of 50 companies and also on return on tangible equity measures. Based on the level of performance, between 0% and 150% of the VPUs may vest. The market condition requirements are reflected in the grant date fair value of the award, and the compensation expense for the award will be recognized regardless of whether the market conditions are met.

 

Page 33


Table of Contents

Notes to Unaudited Consolidated Financial Statements

 

The fair value of the VPUs was estimated as of the date of grant using the Monte Carlo simulation model, which utilized multiple input variables that determine the probability of satisfying the market condition requirements applicable to each award as follows:

 

     2012
VPUs
 

HCBK closing price

   $ 7.32   

Expected volatility

     35.56

Risk-free interest rate

     0.40

Remaining term (in years)

     2.75   

Fair value of options granted

   $ 7.85   

The expected volatility assumption was calculated based on the weighting of our historical and rolling volatility for the expected term of the option grants. The risk-free interest rate was determined by reference to the continuously compounded yield on Treasury obligations for the expected term.

The remaining 75,327 stock unit awards will vest in April 2013. Expense for the stock unit awards is recognized over their vesting period and is based on the fair value of our common stock on each stock unit grant date, based on quoted market prices. Total compensation expense for stock unit awards amounted to $1.8 million and $914,000 for the three months ended June 30, 2012 and 2011, respectively, and $2.7 million and $976,000 for the six months ended June 30, 2012 and 2011, respectively.

12. Recent Accounting Pronouncements

In December 2011, FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05, which indefinitely defers the requirement that companies present reclassification adjustments for each component of accumulated other comprehensive income in both net income and other comprehensive income on the face of the financial statements for all periods presented. Entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect prior to ASU 2011-05. All other requirements in ASU 2011-05 are not affected by this update, including the requirement to report comprehensive income either in a single continuous statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. We have reported the required information in the accompanying Consolidated Statements of Comprehensive Income.

In September 2011, FASB issued ASU No. 2011-08, Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment. Under the amendments in this update, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit, as described in the accounting guidance. The guidance in ASU 2011-08 also provides entities with the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the

 

Page 34


Table of Contents

Notes to Unaudited Consolidated Financial Statements

 

two-step goodwill impairment test and an entity may resume performing the qualitative assessment in any subsequent period. ASU 2011-08 does not change current accounting guidance for testing other indefinite-lived intangible assets for impairment. This guidance is effective for fiscal years beginning after December 15, 2011. Early adoption is permitted, including annual and interim goodwill impairment tests performed prior to September 15, 2011. This ASU did not have a material impact on our financial condition, results of operations or financial statement disclosures.

 

Page 35


Table of Contents

Item 2. – Management’s Discussion and Analysis of Financial Condition and Results of Operations

Executive Summary

During the first six 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 half of 2012 and, as a result, we continued to reduce the size of our balance sheet. We intend to restrain any future growth until the yields available on mortgage-related assets increase and make growth more profitable.

The extraordinarily low market interest rates combined with the GSEs participation in the mortgage market make it difficult for us to profitably grow our business in the same manner as we have in the past. Accordingly, we have been developing a variety of strategies to help us adapt to the new environment in which we operate. One of those strategies is to extend our core mortgage lending business by diversifying our loan production channels and revenue sources. We have been a residential mortgage lender since our inception in 1868. Historically, we have kept all of our loans on our balance sheet. While we will continue to offer loans to keep in our portfolio, we will also begin to offer residential mortgage loans that are eligible for sale in the secondary market. We may either retain or release servicing on these loans. We believe this will enable us to offer rates that are typically lower than we can offer for a portfolio product and capture more customer relationships.

Another strategy is to add commercial mortgage loans to our balance sheet. These mortgages will be on properties in our existing market. Initially, we intend to participate in syndicated commercial real estate and multi-family mortgage loans as we build the capacity to grow organically in this market through originations. These types of loans are typically shorter-term than our residential mortgages and therefore help to balance our interest rate and liquidity risk profile. In addition, we can offer commercial real estate customers deposit products that we believe will strengthen relationships and increase the amount and types of deposit accounts on our balance sheet.

These initiatives are a natural extension of our business and we expect to implement such initiatives in 2013. They will require the addition of staff, including business unit leaders, as well as the enhancement of existing systems. However, we do not expect that these costs will have a material impact on our results of operations in 2012.

The FRB recently issued notices of proposed rulemaking that will subject all savings and loan holding companies, including Hudson City Bancorp, to consolidated capital requirements. These proposed rules also revise the quantity and quality of required minimum risk-based and leverage capital requirements, consistent with the Reform Act and the Basel III capital standards, and revise the FRB’s rules for calculating risk-weighted assets to enhance their risk sensitivity. The proposed rules provide for various phase-in periods over the next several years. We are continuing to review the impact the Reform Act, Basel III and the related proposed rule-making will have on our business, financial condition and results of operations.

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.

 

Page 36


Table of Contents

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.

The Transactions were part of our ongoing strategy to reduce interest rate risk and realign our funding mix and should improve our net interest margin from the levels we would have otherwise experienced. We decided to complete the Transactions because of the effect that 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.

The Federal Open Market Committee of the Board of Governors of the Federal Reserve System (the “FOMC”) noted that the economy has been expanding moderately during the first six months of 2012. However, growth in employment has slowed in recent months, and the unemployment rate remains at elevated levels. The FOMC noted that business fixed investment has continued to expand and household spending appears to be rising at a slower pace than earlier in the year while the housing sector remains depressed. The national unemployment rate was 8.2% during June 2012 representing a slight decline from 8.5% in December 2011. The FOMC decided to maintain the overnight lending rate at zero to 0.25% during the second quarter of 2012. As a result, market interest rates have remained at low levels, and consequently, the yields on our mortgage-related assets have decreased during the first six months of 2012.

In addition, the Federal Reserve program “Operation Twist”, which was 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. The extension of this program will continue to put downward pressure on longer-term interest rates.

Net interest income decreased $48.6 million, or 17.8%, to $224.3 million for the second quarter of 2012 as compared to $272.9 million for the second quarter of 2011. Our interest rate spread decreased slightly to 1.91% for the second quarter of 2012 as compared to 1.95% for the first quarter of 2012 and 1.94% for the second quarter of 2011. Our net interest margin was 2.12% for the second quarter of 2012 as compared to 2.15% for the linked first quarter of 2012 and 2.14% for the second quarter of 2011. The decrease in net interest income also reflects the overall decrease in interest-earning assets and interest-bearing liabilities as a result of the Transactions.

 

Page 37


Table of Contents

Net interest income decreased $70.9 million, or 13.4%, to $458.4 million for the first six months of 2012 as compared to $529.3 million for the first six months of 2011. Our interest rate spread increased 23 basis points to 1.94% for the six months ended June 30, 2012 as compared to 1.71% for the six months ended June 30, 2011. Our net interest margin increased 21 basis points to 2.13% as compared to 1.92% for the those same respective periods. The increase in our interest rate spread and net interest margin for the first six 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 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 late 2014 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 $25.0 million and $50.0 million for the three and six month periods ended June 30, 2012 as compared to $30.0 million and $70.0 million for the three and six month periods ended June 30, 2011. The decrease in our provision for loan losses during the second quarter of 2012 as compared to the same period in 2011 was due primarily to the overall declining trends in net charge-offs since September 30, 2010 and in the size of the loan portfolio since June 30, 2010. Non-performing loans, defined as non-accruing loans and accruing loans delinquent 90 days or more, amounted to $1.09 billion at June 30, 2012 compared with $1.02 billion at December 31, 2011. The ratio of non-performing loans to total loans was 3.88% at June 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 have been delayed. 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 $2.9 million for the second quarter of 2012 as compared to $2.7 million for the same quarter in 2011. Non-interest income for the second quarter of 2012 is primarily made up of service fees and charges on deposit and loan accounts.

Total non-interest income was $5.7 million for the first six months of 2012 as compared to $107.9 million for the same period in 2011. Included in non-interest income for the first six 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 pay off borrowings in the Restructuring Transaction. There were no securities sales for the six months ended June 30, 2012.

Total non-interest expense amounted to $83.6 million for the second quarter of 2012 as compared to $85.8 million for the second quarter of 2011. This decrease was due primarily to a $5.5 million decrease in Federal deposit insurance expense partially offset by increases of $512,000 in compensation and employee benefit costs, $513,000 in occupancy expense, and $2.2 million increase in other expense.

 

Page 38


Table of Contents

Total non-interest expense amounted to $175.2 million for the six months ended June 30, 2012 as compared to $1.33 billion for the six months ended June 30, 2011. Included in total non-interest expense for the first six months of 2011 was a $1.17 billion loss on the extinguishment of debt related to the Restructuring Transaction.

Net loans amounted to $27.98 billion at June 30, 2012 as compared to $29.14 billion at December 31, 2011. During the first six months of 2012, our loan production amounted to $2.53 billion as compared to $2.99 billion for the six months ended June 30, 2011. Loan production was offset by principal repayments of $3.59 billion in the first six months of 2012, as compared to principal repayments of $3.46 billion for the first six months of 2011.

Total mortgage-backed securities decreased $419.1 million to $12.87 billion at June 30, 2012 from $13.29 billion at December 31, 2011. The decrease in mortgage-backed securities reflected repayments of $1.74 billion, partially offset by purchases of $1.32 billion of mortgage-backed securities issued by GSEs.

Investment securities decreased $89.8 million to $456.6 million at June 30, 2012 from $546.4 million at December 31, 2011 due to calls of $500.0 million during the six months ended June 30, 2012. The proceeds from these calls were used to purchase $407.8 million of corporate bonds.

Total deposits amounted to $24.64 billion at June 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 at this time of excess liquidity and limited investment opportunities.

Borrowings amounted to $13.43 billion at June 30, 2012 as compared to $15.08 billion at December 31, 2011. The decrease in borrowi