UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the quarterly period ended: March 31, 2011
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o
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the transition period from
to
Commission File Number: 0-26001
Hudson
City Bancorp, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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22-3640393
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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West 80 Century Road
Paramus, New Jersey
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07652
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(Address of Principal Executive Offices)
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(Zip Code)
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(201) 967-1900
(Registrants 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
þ
No
o
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
þ
No
o
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.
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Large accelerated filer
þ
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Accelerated filer
o
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Non-accelerated filer
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(Do not check if a smaller reporting company)
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Smaller reporting company
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes
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No
þ
As of May 2, 2011, the registrant had 526,697,920 shares of common stock, $0.01 par value,
outstanding.
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. 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:
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the timing and occurrence or non-occurrence of events may be subject to circumstances
beyond our control;
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there may be increases in competitive pressure among financial institutions or from
non-financial institutions;
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changes in the interest rate environment may reduce interest margins or affect the value of
our investments;
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changes in deposit flows, loan demand or real estate values may adversely affect our
business;
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changes in accounting principles, policies or guidelines may cause our financial condition
to be perceived differently;
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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;
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legislative or regulatory changes including, without limitation, the provisions of the
Dodd-Frank Wall Street Reform and Consumer Protection Act, may adversely affect our business;
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enhanced regulatory scrutiny may adversely affect our business and increase our cost of
operation;
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applicable technological changes may be more difficult or expensive than we anticipate;
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success or consummation of new business initiatives may be more difficult or expensive than
we anticipate;
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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;
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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;
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difficulties associated with achieving or predicting expected future financial results;
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our ability to diversify our funding sources and to continue to access the wholesale
borrowing market and the capital markets; and
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the risk of a continued economic slowdown that would adversely affect credit quality and
loan originations.
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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.
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 3
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Hudson City Bancorp, Inc. and Subsidiary
Consolidated Statements of Financial Condition
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March 31,
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December 31,
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2011
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2010
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(In thousands, except share and per share amounts)
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(unaudited)
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Assets:
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Cash and due from banks
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$
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148,276
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$
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175,769
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Federal funds sold and other overnight deposits
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289,719
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493,628
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Total cash and cash equivalents
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437,995
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669,397
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Securities available for sale:
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Mortgage-backed securities
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10,540,674
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18,120,537
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Investment securities
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7,122
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89,795
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Securities held to maturity:
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Mortgage-backed securities (fair value of $5,564,944 at March 31, 2011
and $6,199,507 at December 31, 2010)
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5,304,263
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5,914,372
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Investment securities (fair value of $3,843,386 at March 31, 2011
and $3,867,488 at December 31, 2010)
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3,938,950
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3,939,006
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Total securities
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19,791,009
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28,063,710
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Loans
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30,351,370
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30,923,897
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Net deferred loan costs
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86,293
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86,633
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Allowance for loan losses
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(255,283
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(236,574
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Net loans
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30,182,380
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30,773,956
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Federal Home Loan Bank of New York stock
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804,440
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871,940
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Foreclosed real estate, net
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44,011
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45,693
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Accrued interest receivable
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201,730
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245,546
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Banking premises and equipment, net
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69,712
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69,444
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Goodwill
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152,109
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152,109
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Other assets
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745,680
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274,238
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Total Assets
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$
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52,429,066
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$
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61,166,033
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Liabilities and Shareholders Equity:
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Deposits:
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Interest-bearing
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$
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24,868,905
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$
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24,605,896
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Noninterest-bearing
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592,174
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567,230
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Total deposits
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25,461,079
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25,173,126
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Repurchase agreements
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7,850,000
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14,800,000
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Federal Home Loan Bank of New York advances
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14,175,000
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14,875,000
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Total borrowed funds
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22,025,000
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29,675,000
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Due to brokers
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538,200
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Accrued expenses and other liabilities
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214,140
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269,469
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Total liabilities
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47,700,219
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55,655,795
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Common
stock, $0.01 par value, 3,200,000,000 shares authorized; 741,466,555
shares issued; 526,718,310 shares outstanding
at March 31, 2011 and December 31, 2010
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7,415
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7,415
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Additional paid-in capital
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4,709,574
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4,705,255
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Retained earnings
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2,012,579
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2,642,338
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Treasury stock, at cost; 214,748,245 shares at March 31, 2011 and
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December 31, 2010
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(1,725,946
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(1,725,946
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Unallocated common stock held by the employee stock ownership plan
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(202,729
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(204,230
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Accumulated other comprehensive income, net of tax
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(72,046
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85,406
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Total shareholders equity
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4,728,847
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5,510,238
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Total Liabilities and Shareholders Equity
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$
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52,429,066
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$
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61,166,033
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See accompanying notes to unaudited consolidated financial statements
Page 4
Hudson City Bancorp, Inc. and Subsidiary
Consolidated Statements of Income
(Unaudited)
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For the Three Months
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Ended March 31,
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2011
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2010
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(In thousands, except per share data)
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Interest and Dividend Income:
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First mortgage loans
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$
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382,953
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$
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428,161
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Consumer and other loans
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4,148
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4,759
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Mortgage-backed securities held to maturity
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61,216
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110,126
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Mortgage-backed securities available for sale
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122,092
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121,592
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Investment securities held to maturity
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32,827
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47,064
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Investment securities available for sale
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775
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10,346
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Dividends on Federal Home Loan Bank of New York stock
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12,801
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12,373
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Federal funds sold
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711
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449
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Total interest and dividend income
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617,523
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734,870
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Interest Expense:
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Deposits
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84,318
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103,919
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Borrowed funds
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276,804
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299,806
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Total interest expense
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361,122
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403,725
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Net interest income
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256,401
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331,145
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Provision for Loan Losses
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40,000
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50,000
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Net interest income after provision for loan losses
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216,401
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281,145
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Non-Interest Income:
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Service charges and other income
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2,739
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2,230
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Gain on securities transactions, net
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102,468
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30,768
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Total non-interest income
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105,207
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32,998
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Non-Interest Expense:
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Compensation and employee benefits
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30,884
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34,162
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Net occupancy expense
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8,425
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8,347
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Federal deposit insurance assessment
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16,330
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12,627
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Loss on extinguishment of debt
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1,172,092
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Other expense
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12,837
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11,395
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Total non-interest expense
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1,240,568
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66,531
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(Loss) income before income tax (benefit) expense
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(918,960
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)
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247,612
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Income Tax (Benefit) Expense
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(363,296
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)
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98,727
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Net (loss) income
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$
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(555,664
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)
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$
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148,885
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Basic (Loss) Earnings Per Share
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$
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(1.13
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$
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0.30
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Diluted (Loss) Earnings Per Share
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$
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(1.13
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)
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$
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0.30
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Weighted Average Number of Common Shares Outstanding:
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Basic
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493,843,304
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492,564,183
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Diluted
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493,843,304
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493,694,756
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See accompanying notes to unaudited consolidated financial statements
Page 5
Hudson City Bancorp, Inc. and Subsidiary
Consolidated Statements of Changes in Shareholders Equity
(Unaudited
)
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For the Three Months
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Ended March 31,
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2011
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2010
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(In thousands, except per share data)
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Common Stock
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$
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7,415
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$
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7,415
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Additional paid-in capital:
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Balance at beginning of year
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4,705,255
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4,683,414
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Stock option plan expense
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2,196
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2,583
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Tax benefit from stock plans
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89
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256
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Allocation of ESOP stock
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1,164
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1,708
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Vesting of RRP stock
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870
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1,190
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Balance at end of period
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4,709,574
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4,689,151
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Retained Earnings:
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Balance at beginning of year
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2,642,338
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2,401,606
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Net Income
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(555,664
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)
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148,885
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Dividends paid on common stock ($0.15 and $0.15 per share, respectively)
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(74,095
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)
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(74,023
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)
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Exercise of stock options
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(191
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)
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Balance at end of period
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2,012,579
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2,476,277
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Treasury Stock:
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Balance at beginning of year
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|
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(1,725,946
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)
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|
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(1,727,579
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)
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Exercise of stock options
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1,016
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Balance at end of period
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|
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(1,725,946
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)
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|
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(1,726,563
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)
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Unallocated common stock held by the ESOP:
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Balance at beginning of year
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(204,230
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)
|
|
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(210,237
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)
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Allocation of ESOP stock
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1,501
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1,545
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Balance at end of period
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(202,729
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)
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|
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(208,692
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)
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|
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Accumulated other comprehensive income(loss):
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|
|
|
|
|
|
|
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Balance at beginning of year
|
|
|
85,406
|
|
|
|
184,533
|
|
|
|
|
|
|
|
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Net unrealized losses on securities available for sale arising during period,
net of tax benefit of $65,136 and $5,597 in 2011 and 2010, respectively
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|
|
(96,085
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)
|
|
|
(8,105
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)
|
Reclassification adjustment for gains in net income, net of tax expense of $40,526
and $12,569 in 2011 and 2010, respectively
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|
|
(61,942
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)
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|
|
(18,199
|
)
|
Pension and other postretirement benefits adjustment, net of tax expense of
$397 and $180 for 2011 and 2010, respectively
|
|
|
575
|
|
|
|
260
|
|
|
|
|
|
|
|
|
Other comprehensive loss, net of tax
|
|
|
(157,452
|
)
|
|
|
(26,044
|
)
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
(72,046
|
)
|
|
|
158,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Shareholders Equity
|
|
$
|
4,728,847
|
|
|
$
|
5,396,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary of comprehensive (loss) income
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(555,664
|
)
|
|
$
|
148,885
|
|
Other comprehensive loss, net of tax
|
|
|
(157,452
|
)
|
|
|
(26,044
|
)
|
|
|
|
|
|
|
|
Total comprehensive (loss) income
|
|
$
|
(713,116
|
)
|
|
$
|
122,841
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited consolidated financial statements.
Page 6
Hudson City Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(555,664
|
)
|
|
$
|
148,885
|
|
Adjustments to reconcile net income to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation, accretion and amortization expense
|
|
|
36,850
|
|
|
|
21,832
|
|
Provision for loan losses
|
|
|
40,000
|
|
|
|
50,000
|
|
Gains on securities transactions, net
|
|
|
(102,468
|
)
|
|
|
(30,768
|
)
|
Loss on extinguishment of debt
|
|
|
1,172,092
|
|
|
|
|
|
Share-based compensation, including committed ESOP shares
|
|
|
5,731
|
|
|
|
7,026
|
|
Deferred tax benefit
|
|
|
(3,163
|
)
|
|
|
(8,630
|
)
|
Decrease in accrued interest receivable
|
|
|
43,816
|
|
|
|
2,917
|
|
(Increase) decrease in other assets
|
|
|
(359,512
|
)
|
|
|
22,245
|
|
(Decrease) increase in accrued expenses and other liabilities
|
|
|
(54,754
|
)
|
|
|
73,063
|
|
|
|
|
|
|
|
|
Net Cash Provided by Operating Activities
|
|
|
222,928
|
|
|
|
286,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Originations of loans
|
|
|
(1,398,408
|
)
|
|
|
(1,399,557
|
)
|
Purchases of loans
|
|
|
(147,231
|
)
|
|
|
(404,167
|
)
|
Principal payments on loans
|
|
|
2,080,773
|
|
|
|
1,446,075
|
|
Principal collection of mortgage-backed securities held to maturity
|
|
|
606,678
|
|
|
|
892,402
|
|
Purchases of mortgage-backed securities held to maturity
|
|
|
|
|
|
|
(47,110
|
)
|
Principal collection of mortgage-backed securities available for sale
|
|
|
1,026,203
|
|
|
|
661,965
|
|
Purchases of mortgage-backed securities available for sale
|
|
|
(3,237,757
|
)
|
|
|
(2,719,940
|
)
|
Proceeds from sales of mortgage backed securities available for sale
|
|
|
9,064,379
|
|
|
|
604,476
|
|
Proceeds from maturities and calls of investment securities held to maturity
|
|
|
|
|
|
|
300,000
|
|
Purchases of investment securities held to maturity
|
|
|
|
|
|
|
(1,100,294
|
)
|
Proceeds from maturities and calls of investment securities available for sale
|
|
|
|
|
|
|
650,000
|
|
Proceeds from sales of investment securities available for sale
|
|
|
82,475
|
|
|
|
|
|
Purchases of Federal Home Loan Bank of New York stock
|
|
|
(13,500
|
)
|
|
|
|
|
Redemption of Federal Home Loan Bank of New York stock
|
|
|
81,000
|
|
|
|
|
|
Purchases of premises and equipment, net
|
|
|
(2,300
|
)
|
|
|
(2,738
|
)
|
Net proceeds from sale of foreclosed real estate
|
|
|
11,503
|
|
|
|
8,405
|
|
|
|
|
|
|
|
|
Net Cash Provided by (Used in) Investment Activities
|
|
|
8,153,815
|
|
|
|
(1,110,483
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Net increase in deposits
|
|
|
287,953
|
|
|
|
810,752
|
|
Proceeds from borrowed funds
|
|
|
6,500,000
|
|
|
|
|
|
Principal payments on borrowed funds
|
|
|
(15,322,092
|
)
|
|
|
|
|
Dividends paid
|
|
|
(74,095
|
)
|
|
|
(74,023
|
)
|
Exercise of stock options
|
|
|
|
|
|
|
825
|
|
Tax benefit from stock plans
|
|
|
89
|
|
|
|
256
|
|
|
|
|
|
|
|
|
Net Cash (Used in) Provided by Financing Activities
|
|
|
(8,608,145
|
)
|
|
|
737,810
|
|
|
|
|
|
|
|
|
Net Decrease in Cash and Cash Equivalents
|
|
|
(231,402
|
)
|
|
|
(86,103
|
)
|
Cash and Cash Equivalents at Beginning of Year
|
|
|
669,397
|
|
|
|
561,201
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Period
|
|
$
|
437,995
|
|
|
$
|
475,098
|
|
|
|
|
|
|
|
|
Supplemental Disclosures:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
410,252
|
|
|
$
|
404,820
|
|
|
|
|
|
|
|
|
Loans transferred to foreclosed real estate
|
|
$
|
15,794
|
|
|
$
|
14,362
|
|
|
|
|
|
|
|
|
Income tax payments
|
|
$
|
8,900
|
|
|
$
|
20,277
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited consolidated financial statements.
Page 7
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). Each of Hudson City Savings and the Company is currently
subject to the regulation and examination of the Office of Thrift Supervision (OTS).
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection
Act (the Reform Act). The Reform Act, among other things, effectively merges the OTS into the
Office of the Comptroller of the Currency (OCC), with the OCC assuming all functions and
authority from the OTS relating to federally chartered savings banks, and the Federal Reserve Board
(the FRB) assuming all functions and authority from the OTS relating to savings and loan holding
companies. Pursuant to the Reform Act, the OTS will be merged into the OCC as early as July 2011
at which time Hudson City Savings will be regulated by the OCC and the Company will be regulated by
the FRB.
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-month period ended March 31, 2011 are not necessarily indicative of the
results of operations that may be expected for the year ending December 31, 2011. 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 upon 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.
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 Bancorps audited
consolidated financial statements and notes to consolidated financial statements included in Hudson
City Bancorps 2010 Annual Report to Shareholders and incorporated by reference into Hudson City
Bancorps 2010 Annual Report on Form 10-K.
Page 8
Notes to Unaudited Consolidated Financial Statements
3. Earnings Per Share
The following is a summary of our earnings per share calculations and reconciliation of basic to
diluted (loss) earnings per share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
Per
|
|
|
|
|
|
|
|
|
|
|
Per
|
|
|
|
|
|
|
|
Average
|
|
|
Share
|
|
|
|
|
|
|
Average
|
|
|
Share
|
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(555,664
|
)
|
|
|
|
|
|
|
|
|
|
$
|
148,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income
available to
common stockholders
|
|
$
|
(555,664
|
)
|
|
|
493,843
|
|
|
$
|
(1.13
|
)
|
|
$
|
148,885
|
|
|
|
492,564
|
|
|
$
|
0.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive common
stock equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income
available to
common stockholders
|
|
$
|
(555,664
|
)
|
|
|
493,843
|
|
|
$
|
(1.13
|
)
|
|
$
|
148,885
|
|
|
|
493,695
|
|
|
$
|
0.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4. Securities
The amortized cost and estimated fair market value of investment securities and mortgage-backed
securities available-for-sale at March 31, 2011 and December 31, 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair Market
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
March 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
6,767
|
|
|
$
|
355
|
|
|
$
|
|
|
|
$
|
7,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities available for sale
|
|
|
6,767
|
|
|
|
355
|
|
|
|
|
|
|
|
7,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA pass-through certificates
|
|
|
1,068,976
|
|
|
|
12,599
|
|
|
|
(15,501
|
)
|
|
|
1,066,074
|
|
FNMA pass-through certificates
|
|
|
5,354,770
|
|
|
|
21,770
|
|
|
|
(74,559
|
)
|
|
|
5,301,981
|
|
FHLMC pass-through certificates
|
|
|
4,091,728
|
|
|
|
33,304
|
|
|
|
(47,039
|
)
|
|
|
4,077,993
|
|
FHLMC and FNMA REMICs
|
|
|
94,436
|
|
|
|
190
|
|
|
|
|
|
|
|
94,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities available for sale
|
|
$
|
10,609,910
|
|
|
$
|
67,863
|
|
|
$
|
(137,099
|
)
|
|
$
|
10,540,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States government
-sponsored enterprises debt
|
|
$
|
80,000
|
|
|
$
|
2,647
|
|
|
$
|
|
|
|
$
|
82,647
|
|
Equity securities
|
|
|
6,767
|
|
|
|
381
|
|
|
|
|
|
|
|
7,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities available for sale
|
|
|
86,767
|
|
|
|
3,028
|
|
|
|
|
|
|
|
89,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA pass-through certificates
|
|
|
1,560,755
|
|
|
|
27,214
|
|
|
|
(7,487
|
)
|
|
|
1,580,482
|
|
FNMA pass-through certificates
|
|
|
10,333,033
|
|
|
|
122,305
|
|
|
|
(57,550
|
)
|
|
|
10,397,788
|
|
FHLMC pass-through certificates
|
|
|
5,521,741
|
|
|
|
129,547
|
|
|
|
(32,116
|
)
|
|
|
5,619,172
|
|
FHLMC and FNMA REMICs
|
|
|
509,755
|
|
|
|
13,340
|
|
|
|
|
|
|
|
523,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities available for sale
|
|
$
|
17,925,284
|
|
|
$
|
292,406
|
|
|
$
|
(97,153
|
)
|
|
$
|
18,120,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 9
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 March 31, 2011 and December 31, 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair Market
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
March 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States government
-sponsored enterprises debt
|
|
$
|
3,938,950
|
|
|
$
|
2,982
|
|
|
$
|
(98,546
|
)
|
|
$
|
3,843,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
held to maturity
|
|
|
3,938,950
|
|
|
|
2,982
|
|
|
|
(98,546
|
)
|
|
|
3,843,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA pass-through certificates
|
|
|
96,315
|
|
|
|
3,525
|
|
|
|
|
|
|
|
99,840
|
|
FNMA pass-through certificates
|
|
|
1,482,969
|
|
|
|
84,411
|
|
|
|
(3
|
)
|
|
|
1,567,377
|
|
FHLMC pass-through certificates
|
|
|
2,678,434
|
|
|
|
138,599
|
|
|
|
|
|
|
|
2,817,033
|
|
FHLMC and FNMA REMICs
|
|
|
1,046,545
|
|
|
|
35,649
|
|
|
|
(1,500
|
)
|
|
|
1,080,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities
held to maturity
|
|
$
|
5,304,263
|
|
|
$
|
262,184
|
|
|
$
|
(1,503
|
)
|
|
$
|
5,564,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States government
-sponsored enterprises debt
|
|
$
|
3,939,006
|
|
|
$
|
3,698
|
|
|
$
|
(75,216
|
)
|
|
$
|
3,867,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
held to maturity
|
|
|
3,939,006
|
|
|
|
3,698
|
|
|
|
(75,216
|
)
|
|
|
3,867,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA pass-through certificates
|
|
|
98,887
|
|
|
|
2,802
|
|
|
|
|
|
|
|
101,689
|
|
FNMA pass-through certificates
|
|
|
1,622,994
|
|
|
|
87,271
|
|
|
|
|
|
|
|
1,710,265
|
|
FHLMC pass-through certificates
|
|
|
2,943,565
|
|
|
|
148,248
|
|
|
|
|
|
|
|
3,091,813
|
|
FHLMC and FNMA REMICs
|
|
|
1,248,926
|
|
|
|
46,846
|
|
|
|
(32
|
)
|
|
|
1,295,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities
held to maturity
|
|
$
|
5,914,372
|
|
|
$
|
285,167
|
|
|
$
|
(32
|
)
|
|
$
|
6,199,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 10
Notes to Unaudited Consolidated Financial Statements
The following table shows the gross unrealized losses and fair value of the Companys
investments with unrealized losses that are deemed to be temporarily impaired, aggregated by
investment category and length of time that individual securities have been in a continuous
unrealized loss position at March 31, 2011 and December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or Longer
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States government
-sponsored enterprises debt
|
|
$
|
3,801,393
|
|
|
$
|
(98,546
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,801,393
|
|
|
$
|
(98,546
|
)
|
FNMA pass-through certificates
|
|
|
146
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
146
|
|
|
|
(3
|
)
|
FHLMC and FNMA REMICs
|
|
|
77,654
|
|
|
|
(1,280
|
)
|
|
|
27,194
|
|
|
|
(220
|
)
|
|
|
104,848
|
|
|
|
(1,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired
securities held to maturity
|
|
|
3,879,193
|
|
|
|
(99,829
|
)
|
|
|
27,194
|
|
|
|
(220
|
)
|
|
|
3,906,387
|
|
|
|
(100,049
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA pass-through certificates
|
|
|
632,592
|
|
|
|
(15,501
|
)
|
|
|
|
|
|
|
|
|
|
|
632,592
|
|
|
|
(15,501
|
)
|
FNMA pass-through certificates
|
|
|
4,806,193
|
|
|
|
(74,559
|
)
|
|
|
|
|
|
|
|
|
|
|
4,806,193
|
|
|
|
(74,559
|
)
|
FHLMC pass-through certificates
|
|
|
3,434,814
|
|
|
|
(47,039
|
)
|
|
|
|
|
|
|
|
|
|
|
3,434,814
|
|
|
|
(47,039
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired
securities available for sale
|
|
|
8,873,599
|
|
|
|
(137,099
|
)
|
|
|
|
|
|
|
|
|
|
|
8,873,599
|
|
|
|
(137,099
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,752,792
|
|
|
$
|
(236,928
|
)
|
|
$
|
27,194
|
|
|
$
|
(220
|
)
|
|
$
|
12,779,986
|
|
|
$
|
(237,148
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States government
-sponsored enterprises debt
|
|
$
|
3,524,781
|
|
|
|
(75,216
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,524,781
|
|
|
$
|
(75,216
|
)
|
FHLMC and FNMA REMICs
|
|
|
7,373
|
|
|
|
(24
|
)
|
|
|
3,163
|
|
|
|
(8
|
)
|
|
|
10,536
|
|
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired
securities held to maturity
|
|
|
3,532,154
|
|
|
|
(75,240
|
)
|
|
|
3,163
|
|
|
|
(8
|
)
|
|
|
3,535,317
|
|
|
|
(75,248
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA pass-through certificates
|
|
|
424,575
|
|
|
|
(7,487
|
)
|
|
|
|
|
|
|
|
|
|
|
424,575
|
|
|
|
(7,487
|
)
|
FNMA pass-through certificates
|
|
|
4,375,620
|
|
|
|
(57,550
|
)
|
|
|
|
|
|
|
|
|
|
|
4,375,620
|
|
|
|
(57,550
|
)
|
FHLMC pass-through certificates
|
|
|
2,425,458
|
|
|
|
(32,116
|
)
|
|
|
|
|
|
|
|
|
|
|
2,425,458
|
|
|
|
(32,116
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired
securities available for sale
|
|
|
7,225,653
|
|
|
|
(97,153
|
)
|
|
|
|
|
|
|
|
|
|
|
7,225,653
|
|
|
|
(97,153
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,757,807
|
|
|
$
|
(172,393
|
)
|
|
$
|
3,163
|
|
|
$
|
(8
|
)
|
|
$
|
10,760,970
|
|
|
$
|
(172,401
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The unrealized losses are primarily due to the changes in market interest rates
subsequent to purchase. We only purchase securities issued by U.S. government-sponsored
enterprises (GSEs) and do not own any unrated or private label securities or other high-risk
securities such as those backed by sub-prime loans. We do not consider these investments to be
other-than-temporarily impaired at March 31, 2011 and December 31, 2010 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
Page 11
Notes to Unaudited Consolidated Financial Statements
maturity. As a result no impairment loss was recognized during the three months ended
March 31, 2011 or for the year ended December 31, 2010.
The amortized cost and estimated fair market value of our securities held to maturity and
available-for-sale at March 31, 2011, 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
|
|
|
|
Mortgage-backed
|
|
|
Investment
|
|
|
Fair Market
|
|
|
|
securities
|
|
|
securities
|
|
|
Value
|
|
|
|
(In thousands)
|
|
March 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
11
|
|
|
$
|
|
|
|
$
|
12
|
|
Due after one year through five years
|
|
|
1,494
|
|
|
|
|
|
|
|
1,626
|
|
Due after five years through ten years
|
|
|
9,849
|
|
|
|
|
|
|
|
10,544
|
|
Due after ten years
|
|
|
5,292,909
|
|
|
|
3,938,950
|
|
|
|
9,396,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held to maturity
|
|
$
|
5,304,263
|
|
|
$
|
3,938,950
|
|
|
$
|
9,408,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Due after ten years
|
|
$
|
10,609,910
|
|
|
$
|
|
|
|
$
|
10,540,674
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
|
|
$
|
10,609,910
|
|
|
$
|
|
|
|
$
|
10,540,674
|
|
|
|
|
|
|
|
|
|
|
|
Sales of mortgage-backed securities available-for-sale amounted to $8.96 billion and
$573.7 million for the three months ended March 31, 2011 and 2010, respectively, resulting in
realized gains of $100.0 million and $30.8 million for the same respective periods. There were
sales of $80.0 million of investment securities available-for-sale during the three months ended
March 31, 2011. There were no sales of investment securities available-for-sale or held to
maturity during the three months ended March 31, 2010. Gross realized gains on sales and calls of
investment securities available-for-sale were $2.5 million during the first three 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. We did not purchase any of our common shares
pursuant to the repurchase programs during the three months ended March 31, 2011. As of March 31,
2011, there remained 50,123,550 shares that may be purchased under the existing stock repurchase
programs.
Page 12
Notes to Unaudited Consolidated Financial Statements
6. Loans and Allowance for Loan Losses
Loans at March 31, 2011 and December 31, 2010 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
|
December 31, 2010
|
|
|
|
(In thousands)
|
|
First mortgage loans:
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
|
|
|
|
|
|
|
Amortizing
|
|
$
|
24,330,624
|
|
|
$
|
24,912,935
|
|
Interest-only
|
|
|
5,052,855
|
|
|
|
5,136,463
|
|
FHA/VA
|
|
|
608,216
|
|
|
|
499,724
|
|
Multi-family and commercial
|
|
|
44,466
|
|
|
|
48,067
|
|
Construction
|
|
|
8,595
|
|
|
|
9,081
|
|
|
|
|
|
|
|
|
Total first mortgage loans
|
|
|
30,044,756
|
|
|
|
30,606,270
|
|
|
|
|
|
|
|
|
Consumer and other loans:
|
|
|
|
|
|
|
|
|
Fixedrate second mortgages
|
|
|
150,705
|
|
|
|
160,896
|
|
Home equity credit lines
|
|
|
136,248
|
|
|
|
137,467
|
|
Other
|
|
|
19,661
|
|
|
|
19,264
|
|
|
|
|
|
|
|
|
Total consumer and other loans
|
|
|
306,614
|
|
|
|
317,627
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
30,351,370
|
|
|
$
|
30,923,897
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
Amortizing
|
|
|
Interest-only
|
|
|
Commercial
|
|
|
Construction
|
|
|
mortgages
|
|
|
credit lines
|
|
|
Other
|
|
|
|
|
|
Performing
|
|
$
|
24,246,901
|
|
|
$
|
4,869,645
|
|
|
$
|
43,520
|
|
|
$
|
1,430
|
|
|
$
|
150,245
|
|
|
$
|
133,994
|
|
|
$
|
19,105
|
|
|
$
|
29,464,840
|
|
Non-performing
|
|
|
691,939
|
|
|
|
183,210
|
|
|
|
946
|
|
|
|
7,165
|
|
|
|
460
|
|
|
|
2,254
|
|
|
|
556
|
|
|
|
886,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
24,938,840
|
|
|
$
|
5,052,855
|
|
|
$
|
44,466
|
|
|
$
|
8,595
|
|
|
$
|
150,705
|
|
|
$
|
136,248
|
|
|
$
|
19,661
|
|
|
$
|
30,351,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing
|
|
$
|
24,733,745
|
|
|
$
|
4,957,115
|
|
|
$
|
46,950
|
|
|
$
|
1,521
|
|
|
$
|
160,456
|
|
|
$
|
135,111
|
|
|
$
|
17,740
|
|
|
$
|
30,052,638
|
|
Non-performing
|
|
|
678,914
|
|
|
|
179,348
|
|
|
|
1,117
|
|
|
|
7,560
|
|
|
|
440
|
|
|
|
2,356
|
|
|
|
1,524
|
|
|
|
871,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
25,412,659
|
|
|
$
|
5,136,463
|
|
|
$
|
48,067
|
|
|
$
|
9,081
|
|
|
$
|
160,896
|
|
|
$
|
137,467
|
|
|
$
|
19,264
|
|
|
$
|
30,923,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 13
Notes to Unaudited Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Risk Profile by Internally Assigned Grade
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
One-to four- family
|
|
|
Other first
|
|
|
|
|
|
|
|
|
|
first mortgage loans
|
|
|
Mortgages
|
|
|
Consumer and Other
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
|
|
|
|
Fixed-rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
|
|
|
|
|
second
|
|
|
Home Equity
|
|
|
|
|
March 31, 2011
|
|
Amortizing
|
|
|
Interest-only
|
|
|
Commercial
|
|
|
Construction
|
|
|
mortgages
|
|
|
credit lines
|
|
|
Other
|
|
Pass
|
|
$
|
24,188,894
|
|
|
$
|
4,833,071
|
|
|
$
|
29,572
|
|
|
$
|
|
|
|
$
|
150,073
|
|
|
$
|
132,971
|
|
|
$
|
19,103
|
|
Special mention
|
|
|
127,711
|
|
|
|
36,574
|
|
|
|
5,351
|
|
|
|
1,430
|
|
|
|
172
|
|
|
|
1,023
|
|
|
|
2
|
|
Substandard
|
|
|
622,235
|
|
|
|
183,210
|
|
|
|
1,494
|
|
|
|
7,165
|
|
|
|
460
|
|
|
|
2,254
|
|
|
|
556
|
|
Doubtful
|
|
|
|
|
|
|
|
|
|
|
8,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
24,938,840
|
|
|
$
|
5,052,855
|
|
|
$
|
44,466
|
|
|
$
|
8,595
|
|
|
$
|
150,705
|
|
|
$
|
136,248
|
|
|
$
|
19,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
24,646,101
|
|
|
$
|
4,927,545
|
|
|
$
|
37,697
|
|
|
$
|
1,521
|
|
|
$
|
160,216
|
|
|
$
|
134,408
|
|
|
$
|
17,737
|
|
Special mention
|
|
|
151,800
|
|
|
|
29,570
|
|
|
|
1,199
|
|
|
|
|
|
|
|
240
|
|
|
|
703
|
|
|
|
3
|
|
Substandard
|
|
|
614,758
|
|
|
|
179,348
|
|
|
|
1,117
|
|
|
|
7,560
|
|
|
|
440
|
|
|
|
2,356
|
|
|
|
1,524
|
|
Doubtful
|
|
|
|
|
|
|
|
|
|
|
8,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
25,412,659
|
|
|
$
|
5,136,463
|
|
|
$
|
48,067
|
|
|
$
|
9,081
|
|
|
$
|
160,896
|
|
|
$
|
137,467
|
|
|
$
|
19,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 managements
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 generally 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.
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-
Page 14
Notes to Unaudited Consolidated Financial Statements
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
borrowers and any guarantors ability and willingness to provide debt service.
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. At March 31, 2011 approximately 79.1% of our total loans are in
the New York metropolitan area.
Included in our loan portfolio at March 31, 2011 and December 31, 2010 are $5.05 billion and $5.14
billion, respectively, of interest-only 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 $183.2 million and $179.3 million of non-performing interest-only loans at
March 31, 2011 and December 31, 2010, 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-, 30- and 40-year fixed-rate loans to owner-occupied primary and
second home applicants. These loans are available in amounts up to 70% 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. We also allow certain borrowers to obtain mortgage loans without
verification of income. However, in these cases, we do verify the borrowers assets. These loans
are subject to somewhat higher interest rates than our regular products, and are generally limited
to a maximum loan-to-value ratio of 60%. Limited documentation and no income verification loans
have an inherently higher level of risk compared to loans with full documentation. We had $163.5
million and $149.8 million of originated non-performing reduced-documentation loans at March 31,
2011 and December 31, 2010, respectively.
Page 15
Notes to Unaudited Consolidated Financial Statements
The following table is a comparison of our delinquent loans by class as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90 Days
|
|
|
|
|
|
|
|
|
|
|
|
90 Days
|
|
|
Total
|
|
|
Current
|
|
|
Total
|
|
|
or more
|
|
|
|
30-59 Days
|
|
|
60-89 Days
|
|
|
or more
|
|
|
Past Due
|
|
|
Loans
|
|
|
Loans
|
|
|
accruing
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family first mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizing
|
|
$
|
319,167
|
|
|
$
|
136,548
|
|
|
$
|
691,939
|
|
|
$
|
1,147,654
|
|
|
$
|
23,791,186
|
|
|
$
|
24,938,840
|
|
|
$
|
69,704
|
|
Interest-only
|
|
|
54,345
|
|
|
|
36,574
|
|
|
|
183,210
|
|
|
|
274,129
|
|
|
|
4,778,726
|
|
|
|
5,052,855
|
|
|
|
|
|
Multi-family and commercial mortgages
|
|
|
3,530
|
|
|
|
|
|
|
|
946
|
|
|
|
4,476
|
|
|
|
39,990
|
|
|
|
44,466
|
|
|
|
|
|
Construction loans
|
|
|
|
|
|
|
|
|
|
|
7,165
|
|
|
|
7,165
|
|
|
|
1,430
|
|
|
|
8,595
|
|
|
|
|
|
Consumer and other loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate second mortgages
|
|
|
927
|
|
|
|
172
|
|
|
|
460
|
|
|
|
1,559
|
|
|
|
149,146
|
|
|
|
150,705
|
|
|
|
|
|
Home equity lines of credit
|
|
|
2,039
|
|
|
|
1,023
|
|
|
|
2,254
|
|
|
|
5,316
|
|
|
|
130,932
|
|
|
|
136,248
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
2
|
|
|
|
556
|
|
|
|
558
|
|
|
|
19,103
|
|
|
|
19,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
380,008
|
|
|
$
|
174,319
|
|
|
$
|
886,530
|
|
|
$
|
1,440,857
|
|
|
$
|
28,910,513
|
|
|
$
|
30,351,370
|
|
|
$
|
69,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family first mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizing
|
|
$
|
363,583
|
|
|
$
|
161,530
|
|
|
$
|
678,914
|
|
|
$
|
1,204,027
|
|
|
$
|
24,208,632
|
|
|
$
|
25,412,659
|
|
|
$
|
64,156
|
|
Interest-only
|
|
|
47,479
|
|
|
|
29,570
|
|
|
|
179,348
|
|
|
|
256,397
|
|
|
|
4,880,066
|
|
|
|
5,136,463
|
|
|
|
|
|
Multi-family and commercial mortgages
|
|
|
3,199
|
|
|
|
1,199
|
|
|
|
1,117
|
|
|
|
5,515
|
|
|
|
42,552
|
|
|
|
48,067
|
|
|
|
|
|
Construction loans
|
|
|
|
|
|
|
|
|
|
|
7,560
|
|
|
|
7,560
|
|
|
|
1,521
|
|
|
|
9,081
|
|
|
|
|
|
Consumer and other loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate second mortgages
|
|
|
896
|
|
|
|
240
|
|
|
|
440
|
|
|
|
1,576
|
|
|
|
159,320
|
|
|
|
160,896
|
|
|
|
|
|
Home equity lines of credit
|
|
|
2,419
|
|
|
|
703
|
|
|
|
2,356
|
|
|
|
5,478
|
|
|
|
131,989
|
|
|
|
137,467
|
|
|
|
|
|
Other
|
|
|
1,330
|
|
|
|
3
|
|
|
|
1,524
|
|
|
|
2,857
|
|
|
|
16,407
|
|
|
|
19,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
418,906
|
|
|
$
|
193,245
|
|
|
$
|
871,259
|
|
|
$
|
1,483,410
|
|
|
$
|
29,440,487
|
|
|
$
|
30,923,897
|
|
|
$
|
64,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans that are past due 90 days or more and still accruing interest are loans that are insured
by the FHA.
Upon request, 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 a six-month deferral of principal
payments only which may be extended in certain circumstances. 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. We have not classified these
loans as troubled debt restructurings since we 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. The principal balance of loans with payment plans at
March 31, 2011 amounted to $46.1 million, including $32.8 million of loans that are current, $6.4
million that are 30 to 59 days past due, $2.1 million that are 60 to 89 days past due and $4.8
million that are 90 days or more past due. The principal balance of loans with payment plans
at December 31, 2010 amounted to $81.3 million, including $54.4 million of loans that are current,
$13.9 million that are 30 to 59 days past due, $4.7 million that are 60 to 89 days past due and
$8.3 million that are 90 days or more past due.
Loans modified in a troubled debt restructuring totaled $14.5 million at March 31, 2011 of which
$693,000 were 30 days past due and $1.6 million were 60-89 days past due. The remaining loans
modified were current at the time of the restructuring and have complied with the terms of their
restructure agreement. At December 31, 2010, loans modified in a troubled debt restructuring
totaled $11.1 million. These loans were
Page 16
Notes to Unaudited Consolidated Financial Statements
current at the time of their restructuring and were in
compliance with the terms of their restructure agreement at December 31, 2010.
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 March 31, 2011
|
|
|
At December 31, 2010
|
|
|
|
|
|
|
|
Non-performing
|
|
|
|
|
|
|
Non-performing
|
|
|
|
Total loans
|
|
|
Loans
|
|
|
Total loans
|
|
|
Loans
|
|
New Jersey
|
|
|
43.9
|
%
|
|
|
45.3
|
%
|
|
|
44.0
|
%
|
|
|
45.7
|
%
|
New York
|
|
|
20.3
|
|
|
|
17.9
|
|
|
|
19.9
|
|
|
|
18.7
|
|
Connecticut
|
|
|
14.9
|
|
|
|
6.4
|
|
|
|
14.5
|
|
|
|
6.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total New
York metropolitan area
|
|
|
79.1
|
|
|
|
69.6
|
|
|
|
78.4
|
|
|
|
70.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pennsylvania
|
|
|
3.6
|
|
|
|
1.3
|
|
|
|
3.1
|
|
|
|
1.2
|
|
Virginia
|
|
|
3.3
|
|
|
|
3.9
|
|
|
|
3.5
|
|
|
|
4.6
|
|
Illinois
|
|
|
2.8
|
|
|
|
4.9
|
|
|
|
3.0
|
|
|
|
4.9
|
|
Maryland
|
|
|
2.5
|
|
|
|
4.0
|
|
|
|
2.7
|
|
|
|
4.4
|
|
All others
|
|
|
8.7
|
|
|
|
16.3
|
|
|
|
9.3
|
|
|
|
14.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Outside New York
metropolitan area
|
|
|
20.9
|
|
|
|
30.4
|
|
|
|
21.6
|
|
|
|
29.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The ultimate ability to collect the loan portfolio is subject to changes in the real estate
market and future economic conditions. Since 2009, 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 generally obtain new collateral values by the time a loan becomes 180 days delinquent. 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
Page 17
Notes to Unaudited Consolidated Financial Statements
result in a lower ratio of the
ALL to non-performing loans. Net charge-offs amounted to $21.3 million for the first quarter 2011
as compared to $24.2 million in the first quarter of 2010. These charge-offs were primarily due to
the results of our reappraisal process for our non-performing residential first mortgage loans with
only 29 loans disposed of through the foreclosure process during 2011 with a final net gain on sale
(after previous charge-offs of $5.5 million) of approximately $540,000. Write-downs on foreclosed
real estate amounted to $1.3 million for the first quarter of 2011. The results of our reappraisal
process and our recent charge-off history are also considered in the determination of the ALL. At
March 31, 2011 the average loan-to-value (LTV) ratio
(using appraised values at the time of origination) of our non-performing one- to four-family
mortgage loans was 74.3% and was 60.6% for our total mortgage loan portfolio. Thus, the ratio of
the ALL to non-performing loans needs to be viewed in the context of the underlying LTV ratios of
the non-performing loans and the relative decline in home values.
As part of our estimation of the ALL, we monitor changes in the values of homes in each market
using indices published by various organizations including the Federal Housing Finance Agency
(FHFA) and Case-Shiller. Our Asset Quality Committee uses these indices and a stratification of
our loan portfolio by state as part of its quarterly determination of the ALL. We generally obtain
updated collateral values by the time a loan becomes 180 days delinquent which we believe
identifies potential charge-offs more accurately than a house price index that is based on a wide
geographic area and includes many different types of houses. However, we use the house price
indices to identify geographic areas experiencing weaknesses in housing markets to determine if an
overall adjustment to the ALL is required based on loans we have in those geographic areas and to
determine if changes in the loss factors used in the ALL quantitative analysis are necessary. Our
quantitative analysis of the ALL accounts for increases in non-performing loans by applying
progressively higher risk factors to loans as they become more delinquent. Based on our recent
loss experience on non-performing loans, we increased certain loss factors used in our quantitative
analysis of the ALL for our one- to four- family first mortgage loans during the first quarter of
2011. The recent adjustment in our loss factors did not have a material effect on the ultimate
level of our ALL or on our provision for loan losses. If our future loss experience requires
additional increases in our loss factors, this may result in increased levels of loan loss
provisions.
In addition to our quantitative systematic methodology, we also use qualitative analyses to
determine the adequacy of our ALL. Our qualitative analyses include further evaluation of economic
factors, such as trends in the unemployment rate, as well as a ratio analysis to evaluate the
overall measurement of the ALL. This analysis includes a review of delinquency ratios, net
charge-off ratios and the ratio of the ALL to both non-performing loans and total loans. This
qualitative review is used to reassess the overall determination of the ALL and to ensure that
directional changes in the ALL and the provision for loan losses are supported by relevant internal
and external data.
We consider the average LTV ratio of our non-performing loans and our total portfolio in relation
to the overall changes in house prices in our lending markets when determining the ALL. This
provides us with a macro indication of the severity of potential losses that might be expected.
Since substantially all our portfolio consists of first mortgage loans on residential properties,
the LTV ratio is particularly important to us when a loan becomes non-performing. The weighted
average LTV ratio in our one- to four-family mortgage loan portfolio at March 31, 2011 was 60.6%,
using appraised values at the time of origination. The weighted average LTV ratio of our
non-performing loans was 74.3% at March 31, 2011, using appraised values at the time of
origination. Based on the valuation indices, house prices have declined in the New York
metropolitan area, where 69.6% of our non-performing loans were located at March 31, 2011, by
approximately
23% from the peak of the market in 2006 through January 2011 and by 31% nationwide during that
period. Changes in house values may affect our loss experience which may require that we
Page 18
Notes to Unaudited Consolidated Financial Statements
change
the loss factors used in our quantitative analysis of the ALL. There can be no assurance whether
significant further declines in house values may occur and result in higher loss experience and
increased levels of charge-offs and loan loss provisions.
There were no loans held for sale at March 31, 2011 and December 31, 2010.
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 March 31, 2011 and December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
|
December 31, 2010
|
|
|
|
(In thousands)
|
|
Non-accrual loans:
|
|
|
|
|
|
|
|
|
One-to four-family amortizing loans
|
|
$
|
622,235
|
|
|
$
|
614,758
|
|
One-to four-family interest-only loans
|
|
|
183,210
|
|
|
|
179,348
|
|
Multi-family and commercial mortgages
|
|
|
946
|
|
|
|
1,117
|
|
Construction loans
|
|
|
7,165
|
|
|
|
7,560
|
|
Fixed-rate second mortgages
|
|
|
460
|
|
|
|
440
|
|
Home equity lines of credit
|
|
|
2,254
|
|
|
|
2,356
|
|
Other loans
|
|
|
556
|
|
|
|
1,524
|
|
|
|
|
|
|
|
|
Total non-accrual loans
|
|
|
816,826
|
|
|
|
807,103
|
|
Accruing loans delinquent 90 days or more
|
|
|
69,704
|
|
|
|
64,156
|
|
|
|
|
|
|
|
|
Total non-performing loans
|
|
$
|
886,530
|
|
|
$
|
871,259
|
|
|
|
|
|
|
|
|
The total amount of interest income on non-accrual loans that would have been recognized
during the first quarter of 2011, if interest on all such loans had been recorded based upon
original contract terms amounted to approximately $12.7 million. The total amount of interest
income received during the first quarter of 2011 on non-accrual loans was immaterial. Hudson City
is not obligated to lend additional funds to borrowers on non-accrual status.
The following table presents our loans evaluated for impairment by class at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
|
Average
|
|
|
Interest
|
|
|
|
Recorded
|
|
|
Principal
|
|
|
Related
|
|
|
Recorded
|
|
|
Income
|
|
|
|
Investment
|
|
|
Balance
|
|
|
Allowance
|
|
|
Investment
|
|
|
Recognized
|
|
|
|
(In thousands)
|
|
March 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family and commercial mortgages
|
|
$
|
5,712
|
|
|
$
|
8,995
|
|
|
$
|
3,283
|
|
|
$
|
8,989
|
|
|
$
|
121
|
|
Construction loans
|
|
|
5,527
|
|
|
|
7,165
|
|
|
|
1,638
|
|
|
|
7,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,239
|
|
|
$
|
16,160
|
|
|
$
|
4,921
|
|
|
$
|
16,352
|
|
|
$
|
121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family and commercial mortgages
|
|
$
|
5,712
|
|
|
$
|
9,161
|
|
|
$
|
3,449
|
|
|
$
|
9,159
|
|
|
$
|
485
|
|
Construction loans
|
|
|
5,863
|
|
|
|
7,560
|
|
|
|
1,697
|
|
|
|
6,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,575
|
|
|
$
|
16,721
|
|
|
$
|
5,146
|
|
|
$
|
16,108
|
|
|
$
|
485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 19
Notes to Unaudited Consolidated Financial Statements
At March 31, 2011 and December 31, 2010, loans evaluated for impairment in accordance
with Financial Accounting Standards Board (FASB) guidance amounted to $16.2 million and $16.7
million, respectively. Based on this evaluation, the ALL related to loans classified as impaired
at March 31, 2011 and December 31, 2010 amounted to $4.9 million and $5.1 million, respectively.
Interest income received during the year on loans classified as impaired was immaterial.
The following table presents the activity in our ALL for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Year
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
For the Three Months Ended March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2010
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
236,574
|
|
|
$
|
140,074
|
|
|
$
|
140,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
|
(23,446
|
)
|
|
|
(24,871
|
)
|
|
|
(110,771
|
)
|
Recoveries
|
|
|
2,155
|
|
|
|
627
|
|
|
|
12,271
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(21,291
|
)
|
|
|
(24,244
|
)
|
|
|
(98,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
40,000
|
|
|
|
50,000
|
|
|
|
195,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
255,283
|
|
|
$
|
165,830
|
|
|
$
|
236,574
|
|
|
|
|
|
|
|
|
|
|
|
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, 2010
|
|
$
|
227,224
|
|
|
$
|
4,419
|
|
|
$
|
1,728
|
|
|
$
|
3,203
|
|
|
$
|
236,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
40,555
|
|
|
|
(352
|
)
|
|
|
(46
|
)
|
|
|
(157
|
)
|
|
|
40,000
|
|
Charge-offs
|
|
|
(23,357
|
)
|
|
|
|
|
|
|
|
|
|
|
(89
|
)
|
|
|
(23,446
|
)
|
Recoveries
|
|
|
2,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(21,202
|
)
|
|
|
|
|
|
|
|
|
|
|
(89
|
)
|
|
|
(21,291
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2011
|
|
$
|
246,577
|
|
|
$
|
4,067
|
|
|
$
|
1,682
|
|
|
$
|
2,957
|
|
|
$
|
255,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for
impairment
|
|
$
|
|
|
|
$
|
8,995
|
|
|
$
|
7,165
|
|
|
$
|
|
|
|
$
|
16,160
|
|
Collectively evaluated for
impairment
|
|
|
29,991,695
|
|
|
|
35,471
|
|
|
|
1,430
|
|
|
|
306,614
|
|
|
|
30,335,210
|
|
Page 20
Notes to Unaudited Consolidated Financial Statements
7. Borrowed Funds
Borrowed funds at March 31, 2011 and December 31, 2010 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
Principal
|
|
|
Rate
|
|
|
Principal
|
|
|
Rate
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Securities sold under agreements to repurchase:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB
|
|
$
|
1,350,000
|
|
|
|
4.50
|
%
|
|
$
|
2,150,000
|
|
|
|
4.29
|
%
|
Other brokers
|
|
|
6,500,000
|
|
|
|
4.44
|
|
|
|
12,650,000
|
|
|
|
4.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities sold under agreements to repurchase
|
|
|
7,850,000
|
|
|
|
4.45
|
|
|
|
14,800,000
|
|
|
|
4.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances from the FHLB
|
|
|
14,175,000
|
|
|
|
3.00
|
|
|
|
14,875,000
|
|
|
|
3.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowed funds
|
|
$
|
22,025,000
|
|
|
|
3.52
|
%
|
|
$
|
29,675,000
|
|
|
|
4.02
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest payable
|
|
$
|
102,374
|
|
|
|
|
|
|
$
|
151,215
|
|
|
|
|
|
The average balances of borrowings and the maximum amount outstanding at any month-end are
as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
|
December 31, 2010
|
|
|
|
(Dollars in thousands)
|
|
Repurchase Agreements:
|
|
|
|
|
|
|
|
|
Average balance outstanding during the period
|
|
$
|
13,687,190
|
|
|
$
|
15,034,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum balance outstanding at any month-end
during the period
|
|
$
|
14,750,000
|
|
|
$
|
15,100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average rate during the period
|
|
|
4.14
|
%
|
|
|
4.10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB Advances:
|
|
|
|
|
|
|
|
|
Average balance outstanding during the period
|
|
$
|
15,019,833
|
|
|
$
|
14,875,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum balance outstanding at any month-end
during the period
|
|
$
|
15,175,000
|
|
|
$
|
14,875,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average rate during the period
|
|
|
3.70
|
%
|
|
|
4.04
|
%
|
|
|
|
|
|
|
|
Page 21
Notes to Unaudited Consolidated Financial Statements
At March 31, 2011, $16.58 billion of our borrowed funds may be put back to us at the
discretion of the lender as compared to $29.08 billion at December 31, 2010. The remaining $5.45
billion of borrowed funds at March 31, 2011 are fixed-rate, fixed-maturity borrowings. At March 31,
2011, 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)
|
|
|
|
|
|
2011
|
|
$
|
2,550,000
|
|
|
|
0.90
|
%
|
|
$
|
13,175,000
|
|
|
|
3.65
|
%
|
2012
|
|
|
2,900,000
|
|
|
|
0.88
|
|
|
|
3,600,000
|
|
|
|
1.57
|
|
2013
|
|
|
100,000
|
|
|
|
5.46
|
|
|
|
1,325,000
|
|
|
|
4.69
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
3,725,000
|
|
|
|
4.47
|
|
2015
|
|
|
225,000
|
|
|
|
4.09
|
|
|
|
200,000
|
|
|
|
3.91
|
|
2016
|
|
|
4,525,000
|
|
|
|
4.40
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
5,875,000
|
|
|
|
4.30
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
850,000
|
|
|
|
3.62
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
1,725,000
|
|
|
|
4.62
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
3,275,000
|
|
|
|
4.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
22,025,000
|
|
|
|
3.52
|
%
|
|
$
|
22,025,000
|
|
|
|
3.52
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three months ended March 31, 2011, the Company completed a restructuring of its
balance sheet (referred to as the Restructuring Transaction). The Restructuring Transaction
included the extinguishment of $12.50 billion of structured borrowings. The borrowings extinguished
were structured putable borrowings with a weighted average rate of 3.56% and consisted of
borrowings with the Federal Home Loan Bank of New York and some of the larger Wall Street financial
houses. The extinguishments were funded by proceeds from the sales of $8.58 billion of
mortgage-backed securities available for sale and $80.0 million of investment securities available
for sale, and the use of $5.00 billion of fixed-rate, fixed-maturity borrowings with a weighted
average rate of 0.66%. These new borrowings have monthly maturities of $250.0 million beginning in
April 2011 and concluding in November 2012. The extinguishment of debt resulted in a pre-tax charge of $1.17
billion which was recorded in non-interest expense.
8. Fair Value Measurements
a) Fair Value Measurements
The Accounting Standards Codification (ASC) Topic 820,
Fair Value Measurements and Disclosures,
defines fair value, establishes a framework for measuring fair value and expands disclosures about
fair value measurements. ASC Topic 820 applies only to fair value measurements already required or
permitted by other accounting standards and does not impose requirements for additional fair value
measures. ASC Topic 820 was issued to increase consistency and comparability in reporting fair
values.
Page 22
Notes to Unaudited Consolidated Financial Statements
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 March
31, 2011 and December 31, 2010. 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, 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 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. We also own equity
securities with a carrying value of $7.1 million at both March 31, 2011 and December 31, 2010 for
which fair values are obtained from quoted market prices in active markets and, as such, are
classified as Level 1.
Page 23
Notes to Unaudited Consolidated Financial Statements
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 March 31, 2011 and December 31,
2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at March 31, 2011 using
|
|
|
|
|
|
|
|
Quoted Prices in Active
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
Carrying
|
|
|
Markets for Identical
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
Description
|
|
Value
|
|
|
Assets (Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Available for sale debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
10,540,674
|
|
|
$
|
|
|
|
$
|
10,540,674
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
debt securities
|
|
$
|
10,540,674
|
|
|
$
|
|
|
|
$
|
10,540,674
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale equity
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services industry
|
|
$
|
7,122
|
|
|
$
|
7,122
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
equity securities
|
|
|
7,122
|
|
|
|
7,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale securities
|
|
$
|
10,547,796
|
|
|
$
|
7,122
|
|
|
$
|
10,540,674
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at December 31, 2010 using
|
|
|
|
|
|
|
|
Quoted Prices in Active
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
Carrying
|
|
|
Markets for Identical
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
Description
|
|
Value
|
|
|
Assets (Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Available for sale debt
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
18,120,537
|
|
|
$
|
|
|
|
$
|
18,120,537
|
|
|
$
|
|
|
U.S. government-sponsored
enterprises debt
|
|
|
82,647
|
|
|
|
|
|
|
|
82,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
debt securities
|
|
|
18,203,184
|
|
|
|
|
|
|
|
18,203,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services industry
|
|
$
|
7,148
|
|
|
$
|
7,148
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
equity securities
|
|
|
7,148
|
|
|
|
7,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
securities
|
|
$
|
18,210,332
|
|
|
$
|
7,148
|
|
|
$
|
18,203,184
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets that were measured at fair value on a non-recurring basis at March 31, 2011 were
limited to non-performing commercial and construction loans that are collateral dependent and
foreclosed real estate. Commercial and construction loans evaluated for impairment in accordance
with FASB guidance amounted to $16.2 million and $16.7 million at March 31, 2011 and December 31,
2010, respectively. Based on this evaluation, we established an allowance for loan losses of $4.9
million and $5.1 million for those respective periods. The provision for loan losses related to
these loans amounted to $0 and $219,000 for the first three months of 2011 and 2010, respectively.
These impaired loans are individually assessed to determine that the loans carrying value is not
in excess of the fair value of the collateral, less estimated selling costs. Since all of our
impaired loans at March 31, 2011 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 24
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 at March 31, 2011 and December 31, 2010 amounted to
$44.0 million and $45.7 million, respectively. During the first three months of 2011
and 2010, charge-offs to the allowance for loan losses related to loans that were transferred to
foreclosed real estate amounted to $725,000 and $1.8 million, respectively. Write downs and net
loss on sale related to foreclosed real estate that were charged to non-interest expense amounted
to $776,000 and $1.4 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 March 31, 2011 and December
31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at March 31, 2011 using
|
|
|
|
Quoted Prices in Active
|
|
|
Significant Other
|
|
|
Significant
|
|
|
Total
|
|
|
|
Markets for Identical
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
|
Gains
|
|
Description
|
|
Assets (Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
(Losses)
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
|
|
|
$
|
|
|
|
$
|
16,160
|
|
|
$
|
|
|
Foreclosed real estate
|
|
|
|
|
|
|
|
|
|
|
44,011
|
|
|
|
(776
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2010 using
|
|
|
|
Quoted Prices in Active
|
|
|
Significant Other
|
|
|
Significant
|
|
|
Total
|
|
|
|
Markets for Identical
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
|
Gains
|
|
Description
|
|
Assets (Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
(Losses)
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
|
|
|
$
|
|
|
|
$
|
16,721
|
|
|
$
|
|
|
Foreclosed real estate
|
|
|
|
|
|
|
|
|
|
|
45,693
|
|
|
|
(2,739
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides a reconciliation of assets measured at fair value on a
non-recurring basis at March 31, 2011.
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
Significant Unobservable Inputs (Level 3)
|
|
|
|
(In thousands)
|
|
|
|
Foreclosed
|
|
|
Impaired
|
|
|
|
Real Estate
|
|
|
Loans
|
|
Beginning balance at December 31, 2010
|
|
$
|
45,693
|
|
|
$
|
16,721
|
|
Gain (loss) on sale of foreclosed properties
|
|
|
(776
|
)
|
|
|
|
|
Net transfers in (out)
|
|
|
(916
|
)
|
|
|
(561
|
)
|
|
|
|
|
|
|
|
Ending balance at March 31, 2011
|
|
$
|
44,001
|
|
|
$
|
16,160
|
|
|
|
|
|
|
|
|
Page 25
Notes to Unaudited Consolidated Financial Statements
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.
Carrying amounts of cash, due from banks and federal funds sold are considered to approximate fair
value. The carrying value of Federal Home Loan Bank of New York (FHLB) stock equals cost. The
fair value of FHLB stock is based on redemption at par value.
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. This method of estimating fair value does not
incorporate the exit-price concept of fair value prescribed by ASC Topic 820.
For time deposits and fixed-maturity borrowed funds, the fair value is estimated by discounting
estimated future cash flows using currently offered rates. 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. For deposit liabilities payable on demand, the
fair value is the carrying value at the reporting date. There is no material difference between
the fair value and the carrying amounts recognized with respect to our off-balance sheet
commitments.
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 Bancorps retail branch delivery
system, its existing core deposit base and banking premises and equipment.
The estimated fair value of Hudson City Bancorps financial instruments are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
|
December 31, 2010
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
Carrying
|
|
|
Estimated
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
148,276
|
|
|
$
|
148,276
|
|
|
$
|
175,769
|
|
|
$
|
175,769
|
|
Federal funds sold
|
|
|
289,719
|
|
|
|
289,719
|
|
|
|
493,628
|
|
|
|
493,628
|
|
Investment securities held to maturity
|
|
|
3,938,950
|
|
|
|
3,843,386
|
|
|
|
3,939,006
|
|
|
|
3,867,488
|
|
Investment securities available for sale
|
|
|
7,122
|
|
|
|
7,122
|
|
|
|
89,795
|
|
|
|
89,795
|
|
Federal Home Loan Bank of New York stock
|
|
|
804,440
|
|
|
|
804,440
|
|
|
|
871,940
|
|
|
|
871,940
|
|
Mortgage-backed securities held to maturity
|
|
|
5,304,263
|
|
|
|
5,564,944
|
|
|
|
5,914,372
|
|
|
|
6,199,507
|
|
Mortgage-backed securities available for sale
|
|
|
10,540,674
|
|
|
|
10,540,674
|
|
|
|
18,120,537
|
|
|
|
18,120,537
|
|
Loans
|
|
|
30,182,380
|
|
|
|
31,982,759
|
|
|
|
30,773,956
|
|
|
|
32,328,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
25,461,079
|
|
|
|
25,771,672
|
|
|
|
25,173,126
|
|
|
|
25,584,478
|
|
Borrowed funds
|
|
|
22,025,000
|
|
|
|
24,085,221
|
|
|
|
29,675,000
|
|
|
|
32,975,633
|
|
Page 26
Notes to Unaudited Consolidated Financial Statements
9. 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 Bancorp, Inc. (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.
The components of the net periodic expense for the plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
|
Retirement Plans
|
|
|
Other Benefits
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Service cost
|
|
$
|
1,123
|
|
|
$
|
1,018
|
|
|
$
|
250
|
|
|
$
|
152
|
|
Interest cost
|
|
|
2,190
|
|
|
|
2,076
|
|
|
|
646
|
|
|
|
476
|
|
Expected return on assets
|
|
|
(3,080
|
)
|
|
|
(2,914
|
)
|
|
|
|
|
|
|
|
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
945
|
|
|
|
680
|
|
|
|
332
|
|
|
|
66
|
|
Unrecognized prior service cost
|
|
|
87
|
|
|
|
85
|
|
|
|
(391
|
)
|
|
|
(391
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
1,265
|
|
|
$
|
944
|
|
|
$
|
837
|
|
|
$
|
302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We made no contributions to the pension plans during the first three months of 2011 or 2010.
Page 27
Notes to Unaudited Consolidated Financial Statements
10. Stock-Based Compensation
Stock Option Plans
A summary of the changes in outstanding stock options is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
Number of
|
|
|
Weighted
|
|
|
Number of
|
|
|
Weighted
|
|
|
|
Stock
|
|
|
Average
|
|
|
Stock
|
|
|
Average
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Options
|
|
|
Exercise Price
|
|
Outstanding at beginning of period
|
|
|
28,129,885
|
|
|
$
|
12.68
|
|
|
|
24,262,692
|
|
|
$
|
12.51
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
3,895,000
|
|
|
|
13.10
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
(126,387
|
)
|
|
|
6.53
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
(47,500
|
)
|
|
|
14.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
28,129,885
|
|
|
$
|
12.68
|
|
|
|
27,983,805
|
|
|
$
|
12.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In June 2006, our shareholders approved the Hudson City Bancorp, Inc. 2006 Stock Incentive
Plan (the SIP Plan) 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 Companys common stock, pursuant to the SIP Plan. Grants of
stock options made through December 31, 2010 pursuant to the SIP Plan 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. Subject to
review and verification by the Committee, we believe we attained these performance measures and
have therefore recorded compensation expense for these grants.
Compensation expense related to our outstanding stock options amounted to $2.2 million and $2.6
million for the three months ended March 31, 2011 and 2010, respectively.
Stock Awards
During 2009, the Committee granted performance-based stock awards (the 2009 stock awards)
pursuant to the SIP Plan for 847,750 shares of our common stock. These shares were issued from
treasury stock and will vest in annual installments over a three-year period if certain performance
measures are met and employment continues through the vesting date. None of these shares may be
sold or transferred before their January 2012 vesting date. We have determined that it is probable
these performance measures will be met and have therefore recorded compensation expense for the
2009 stock awards. Expense for the 2009 stock awards is recognized over the vesting period and is
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 SIP Plan 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 $870,000 and $1.2 million for
the three months ended March 31, 2011 and 2010, respectively.
Page 28
Notes to Unaudited Consolidated Financial Statements
11. Recent Accounting Pronouncements
In April 2011, FASB issued Accounting Standard Update (ASU) No. 2011-02, Receivables (Topic 310):
A Creditors Determination of Whether a Restructuring Is a Troubled Debt Restructuring. This ASU
amends Topic 310 and provides additional guidance to creditors for evaluating whether a
modification or restructuring of a receivable is a troubled debt restructuring. The amendments in
this update are effective for the first interim or annual period beginning on or after June 15,
2011 and should be applied retrospectively to the beginning of the annual period of adoption. The
new guidance will require creditors to evaluate modifications and restructurings of receivables
using a more principles-based approach, which may result in more modifications and restructurings
being considered troubled debt restructurings. For purposes of measuring impairment of these
receivables, an entity should apply the amendments prospectively for the first interim or annual
period beginning on or after June 15, 2011. Early adoption is permitted. We do not expect this
accounting standards update will have a material impact on our financial condition, results of
operations or financial statement disclosures.
In January 2010, FASB issued an accounting standards update regarding disclosure requirements for
fair value measurement. This update provides amendments to fair value measurement that require new
disclosures related to transfers in and out of Levels 1 and 2 and activity in Level 3 fair value
measurements. The update also provides amendments clarifying level of disaggregation and
disclosures about inputs and valuation techniques along with conforming amendments to the guidance
on employers disclosures about postretirement benefit plan assets. This update is effective for
interim and annual reporting periods beginning after December 15, 2009, except for the disclosures
about purchases, sales, issuances, and settlements in the rollforward of activity in Level 3 fair
value measurements which are effective for fiscal years beginning after December 15, 2010, and for
interim periods within those fiscal years. This accounting standards update did not have a
material impact on our financial condition, results of operations or financial statement
disclosures.
12. Subsequent Event
On April 20, 2011, the Companys Board of Directors declared a cash dividend of $0.08 per share
payable on May 27, 2011 to shareholders of record on May 5, 2011. The Company had previously paid
a quarterly cash dividend of $0.15 per share. The reduced dividend reflects the Companys net loss
for the quarter ended March 31, 2011 as well as the Companys capital management strategy which
considers, among other things, the impact of the Restructuring Transaction, expected earnings
capacity going forward and the desire to provide a competitive dividend yield.
Page 29
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Executive Summary
We continue to focus on our traditional consumer-oriented business model by growing our franchise
through the origination and purchase of one- to four-family mortgage loans. We have traditionally
funded this loan production with customer deposits and borrowings.
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%. The
Restructuring Transaction reduced after-tax earnings by $649.3 million. The Restructuring
Transaction was part of our ongoing strategy to reduce interest rate risk, realign our funding mix
and to provide an increase in net interest margin from the fourth quarter of 2010. We decided to
complete the Restructuring Transaction because recent market events, the unprecedented involvement
of the U.S. government and the GSEs in the mortgage market and the continuance of historically
low market interest rates, resulted in an environment in which our balance sheet as a whole and our
assets in particular became less responsive to current market conditions. The extended low interest
rate environment caused accelerated prepayment speeds on our mortgage-related assets resulting in
reinvestment in these instruments 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 interest rate risk and margin compression concerns for us. Accordingly, we undertook the
Restructuring Transaction at a time when market interest rates were beginning to increase with the
intent of preserving our shareholders equity as much as reasonably possible and yet executing a
trade that we believed would increase our forward earnings potential. We chose to extinguish
structured quarterly putable borrowings to address interest rate risk and liquidity concerns that
this extended low interest rate environment exacerbated. We expect that this transaction will
position us to eventually return to our core strategy of measured balance sheet growth funded with
appropriately matched liabilities. As a result of this transaction, we should be properly
positioned to do this when the market conditions change. When the anticipated GSE reform is enacted
and a substantial portion of the mortgage market is returned to the private sector, we believe we
will be able to capture a greater share of this market more profitably. In future quarters we
intend to further modify or hedge certain of the remaining structured putable borrowings to reduce
our exposure to interest rate movements.
Primarily as a result of the Restructuring Transaction, we had a net loss of $555.7 million for the
first quarter of 2011, as compared to net income of $148.9 million for the first
quarter of 2010. Taking into account the impact of the Restructuring Transaction, the level of
operating earnings excluding the Restructuring Transaction, expected earnings capacity going
forward and the desire to provide a competitive dividend yield, in April the Board of Directors
declared a quarterly dividend of $0.08 per share compared to the recent level of $0.15 per share.
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-
Page 30
bearing transaction accounts and borrowed funds. Net interest income is affected by the shape of
the market yield curve, the timing of the placement and repricing of interest-earning assets and
interest-bearing liabilities on our balance sheet, the prepayment rate on our mortgage-related
assets and the puts of our borrowings. Our results of operations may also be affected
significantly by national and local economic and competitive conditions, particularly those with
respect to changes in market interest rates, credit quality, government policies and actions of
regulatory authorities. Our results are also affected by the market price of our stock, as the
expense of our employee stock ownership plan is related to the current price of our common stock.
The Federal Open Market Committee of the Board of Governors of the Federal Reserve System (the
FOMC) noted in March that the economic recovery is on firmer footing and overall conditions in
the labor market appear to be improving gradually. Household spending and business investment in
equipment and software continue to expand. The national unemployment rate decreased to 8.8% in
March 2011 as compared to 9.4% in December 2010. The FOMC decided to maintain the overnight
lending rate at zero to 0.25% during the first quarter of 2011. As a result, short-term market
interest rates have remained at low levels during the first quarter of 2011. The yields on
mortgage-related assets have also remained at low levels during that same quarter.
Net interest income decreased $74.7 million, or 22.6%, to $256.4 million for the first quarter of
2011 as compared to $331.1 million for the first quarter of 2010. Net interest income decreased
primarily as a result of a decrease in the weighted-average yield of our interest-earning assets.
Our net interest rate spread increased to 1.50% for the first quarter of 2011 as compared to 1.48%
for the linked fourth quarter of 2010 and decreased from 1.97% for the first quarter of 2010. Our
net interest margin decreased to 1.72% for the first quarter of 2011 as compared to 1.73% for the
linked fourth quarter of 2010 and 2.20% for the first quarter of 2010. The decrease in net
interest margin during the first quarter of 2011 is primarily due to the low market interest rates
that resulted in lower yields on our mortgage-related interest-earning assets as customers
refinanced to lower mortgage rates and our new loan production and asset purchases were at the
current low market interest rates. Mortgage-related assets represented 88.5% of our average
interest-earning assets during the 2011 first quarter. As part of the Restructuring Transaction,
we extinguished liabilities and sold securities at different times during March 2011. The timing
of these transactions, as well as the effect of short-term borrowings (less than one month) used to
facilitate the settlement of debt extinguishments, provided a slight benefit to our net interest
margin in the first quarter of 2011. We expect that the Restructuring Transaction will result in
as much as a 40 basis point improvement in our net interest margin in the second quarter of 2011.
Market interest rates on mortgage-related assets remained at near-historic lows primarily due to
the FRBs program to purchase mortgage-backed securities to keep mortgage rates low and provide
stimulus to the housing markets. In addition, over the past few years, we have faced increased
competition for mortgage loans due to the unprecedented involvement of the GSEs in the mortgage
market as a result of the economic crisis. The GSEs involvement is also an attempt to provide
stimulus to the housing markets and has caused the interest rates for thirty year fixed rate
mortgage loans that conform to the GSEs guidelines for purchase to remain artificially low. We
originate such conforming loans and retain them in our portfolio. The United States Congress has
extended to September 2011 the time period within which the GSEs may purchase loans under an
expanded limit on principal balances that qualify as conforming loans. Further, we have no
indication that the FOMC is likely to increase rates in the near future. As a result, 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 from its new higher level resulting
from the Restructuring Transaction, and, in combination with the reduction in the size of our
balance sheet from the Restructuring Transaction, a reduction of net interest income.
Page 31
The provision for loan losses amounted to $40.0 million for the first quarter of 2011 as compared
to $50.0 million for the same period in 2010. The decrease in our provision for loan losses during
the first quarter of 2011 as compared to the same period in 2010 was a result of the decrease in
the growth rate of non-performing loans, improvement in the unemployment rate and a decrease in
charge-offs which resulted in an overall increase in the ALL. Non-performing loans, defined as
non-accruing loans and accruing loans delinquent 90 days or more, amounted to $886.5 million at
March 31, 2011 compared with $871.3 million at December 31, 2010. The ratio of non-performing loans
to total loans was 2.92% at March 31, 2011 compared with 2.82% at December 31, 2010. The highly
publicized foreclosure issues that have recently affected the nations 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 $105.2 million for the first quarter of 2011 as compared to $33.0
million for the same quarter in 2010. Included in non-interest income for the three months ended
March 31, 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 primarily in connection with the
Restructuring Transaction. Included in non-interest income for the three months ended March 31,
2010 were net gains on securities transactions of $30.8 million, substantially all of which
resulted from the sale of $573.7 million of mortgage-backed securities available-for-sale.
Total non-interest expense amounted to $1.24 billion as compared to $66.5 million for the first
quarter of 2010. Included in total non-interest expense for the 2011 first quarter was a $1.17
billion loss on the extinguishment of debt related to the Restructuring Transaction. Compensation
and employee benefit costs decreased $3.3 million primarily due to a $5.8 million decrease in
expense related to our stock benefit plans. Federal deposit insurance expense increased $3.7
million and other expense increased $1.4 million.
Our assets decreased by $8.74 billion, or 14.3%, to $52.43 billion at March 31, 2011 from
$61.17 billion at December 31, 2010. The decrease was due primarily to the Restructuring
Transaction which resulted in an $8.19 billion reduction in total mortgage-backed securities.
Loans decreased $591.6 million to $30.18 billion at March 31, 2011 from $30.77 billion at December
31, 2010. Our loan production was $1.55 billion for the first three months of 2011 offset by
$2.08 billion in principal repayments. Loan originations continue to be strong as a result of
elevated levels of mortgage refinancing activity caused by low market interest rates. The
refinancing activity has also caused increased levels of repayments to continue during the first
three months of 2011 as some of our customers refinanced with other banks.
Total securities decreased $8.27 billion to $19.79 billion at March 31, 2011 from $28.06 billion at
December 31, 2010. The decrease in securities was primarily due to sales of mortgage-backed and
investment securities of $8.96 billion and $80.0 million, respectively, and principal collections
on mortgage-backed securities of $1.63 billion. The sales of securities during the first three
months of 2011 were primarily used to help fund the extinguishment of $12.5 billion of borrowed
funds as part of the Restructuring Transaction. These decreases were partially offset by purchases
of $2.70 billion of mortgage-backed securities issued by GSEs.
Page 32
Comparison of Financial Condition at March 31, 2011 and December 31, 2010
During the first three months of 2011, our total assets decreased $8.74 billion, or 14.3%, to
$52.43 billion at March 31, 2011 from $61.17 billion at December 31, 2010. The decrease in total
assets reflected an $8.19 billion decrease in total mortgage-backed securities, a $591.6 million
decrease in net loans and a $231.4 million decrease in cash and cash equivalents. Total assets
decreased primarily as a result of the Restructuring Transaction completed in March 2011.
Our net loans decreased $591.6 million to $30.18 billion at March 31, 2011 as compared to $30.77
billion at December 31, 2010. The decrease in loans primarily reflects the continued elevated
levels of loan repayments during the first three months of 2011 as a result of continued low market
interest rates. Historically our focus has been on loan portfolio growth through the origination of
one- to four-family first mortgage loans in New Jersey, New York, Pennsylvania and Connecticut and,
to a lesser extent, the purchases of mortgage loans. For the first three months of 2011, we
originated $1.40 billion and purchased $147.2 million of loans, compared to originations of $1.40
billion and purchases of $404.2 million for the first three months of 2010. The originations and
purchases of loans were offset by principal repayments of $2.08 billion for the first quarter of
2011, as compared to $1.45 billion for the first quarter of 2010.
Loan originations continue to be strong as a result of elevated levels of mortgage refinancing
activity caused by low market interest rates. The refinancing activity caused increased levels of
repayments to continue during the first three months of 2011 as some of our customers refinanced
with other banks. Our loan purchase activity has significantly declined as the GSEs have been
actively purchasing loans as part of their efforts to keep mortgage rates low to support the
housing market during the recent economic recession. We expect that the amount of loan purchases
will continue to be at reduced levels for the near-term.
Our first mortgage loan originations and purchases during the first three months of 2011 were
substantially all in one- to four-family mortgage loans. Approximately 40.0% of mortgage loan
originations for the first three months of 2011 were variable-rate loans as compared to
approximately 57.0% for the comparable period in 2010. Approximately 93.6% of mortgage loans
purchased during the three months ended March 31, 2011 were fixed-rate mortgage loans. Fixed-rate
mortgage loans accounted for 66.9% of our first mortgage loan portfolio at March 31, 2011 and 66.8%
at December 31, 2010.
Non-performing loans amounted to $886.5 million, or 2.92%, of total loans at March 31, 2011 as
compared to $871.3 million, or 2.82%, of total loans at December 31, 2010.
Total mortgage-backed securities decreased $8.19 billion during the first three months of 2011 to
$15.84 billion. The decrease was due primarily to the sale of $8.96 billion of mortgage-backed
securities, substantially all of which were sold as part of the Restructuring Transaction. The
decrease in mortgage-backed securities also reflected repayments of $1.63 billion which were offset
by purchases of $2.70 billion of mortgage-backed securities issued by GSEs. At March 31, 2011,
variable-rate mortgage-backed securities accounted for 83.9% of our portfolio compared with 85.9%
at December 31, 2010. The purchase of variable-rate mortgage-backed securities is a component of
our interest rate risk management strategy. Since our loan portfolio includes a concentration of
fixed-rate mortgage loans, the purchase of variable-rate mortgage-backed securities provides us
with an asset that reduces our exposure to interest rate fluctuations.
Page 33
Total investment securities decreased $82.7 million to $3.95 billion at March 31, 2011 as compared
to $4.03 billion at December 31, 2010. The decrease in investment securities is primarily due to
sales of investment securities of $80.0 million as part of the Restructuring Transaction.
Total cash and cash equivalents decreased $231.4 million to $438.0 million at March 31, 2011 as
compared to $669.4 million at December 31, 2010. Other assets increased $471.5 million to $745.7
million at March 31, 2011 as compared to $274.2 million at December 31, 2010. The increase in
other assets is due to an increase in accrued tax benefits of $377.8 million. The accrued tax
benefit is due primarily to the Restructuring Transaction which reduced pre-tax earnings by $1.07
billion and resulted in an income tax benefit of $424.5 million.
Total liabilities decreased $7.96 billion, or 14.3%, to $47.70 billion at March 31, 2011 from
$55.66 billion at December 31, 2010. The decrease in total liabilities primarily reflected a $7.65
billion decrease in borrowed funds as a result of the Restructuring Transaction. Borrowings
amounted to $22.03 billion at March 31, 2011 as compared to $29.68 billion at December 31, 2010.
The decrease in borrowed funds was partially offset by a $288.0 million increase total deposits.
Total deposits increased $288.0 million, or 1.1%, to $25.46 billion at March 31, 2011 as compared
to $25.17 billion at December 31, 2010. The increase in total deposits reflected a $1.15 billion
increase in our money market accounts. These increases were partially offset by a decrease of
$792.4 million in our time deposits and a $92.0 million decrease in interest-bearing transaction
accounts and savings accounts. The increase in our money market accounts is primarily due to our
current offering rate of 1.25% which is comparable to the rates being offered on time deposits with
maturities of up to two years. Deposit flows are typically affected by the level of market
interest rates, the interest rates and products offered by competitors, the volatility of equity
markets, and other factors. We had 135 branches at both March 31, 2011 and December 31, 2010.
Borrowings amounted to $22.03 billion at March 31, 2011 as compared to $29.68 billion at December
31, 10. As part of the Restructuring Transaction, we paid off $12.5 billion of structured putable
borrowings and re-borrowed $5.0 billion of new short-term fixed-maturity borrowings. The
extinguishment of structured putable borrowings was a necessary step in our efforts to reduce our
interest rate risk and eliminate some of the liquidity uncertainties of borrowings that are putable
at the discretion of the lender. In future quarters, we intend to further modify or hedge certain
of the remaining structured putable borrowings to reduce our exposure to interest rate movements.
Borrowings at March 31, 2011 and December 31, 2010 consisted of the following:
|
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|
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|
|
|
|
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|
|
|
|
|
|
March 31, 2011
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
Principal
|
|
|
Rate
|
|
|
Principal
|
|
|
Rate
|
|
|
|
|
|
|
|
(Dollars in thousands)
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|
|
|
|
|
Structured borrowings:
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|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly put option
|
|
$
|
11,725,000
|
|
|
|
4.35
|
%
|
|
$
|
24,125,000
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|
|
|
3.94
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%
|
One-time put option
|
|
|
4,850,000
|
|
|
|
4.45
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|
|
|
4,950,000
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|
|
|
4.44
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
16,575,000
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|
|
|
4.38
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|
|
|
29,075,000
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|
|
|
4.03
|
|
Fixed-rate/fixed-maturity borrowings
|
|
|
5,450,000
|
|
|
|
0.89
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|
|
|
600,000
|
|
|
|
3.47
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowed funds
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|
$
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22,025,000
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|
|
|
3.52
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%
|
|
$
|
29,675,000
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|
|
|
4.02
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%
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 34
At March 31, 2011, we had $10.63 billion of borrowed funds with put dates within one year. If
interest rates were to decrease, or remain consistent with current rates, we believe these
borrowings would probably not be put back and our average cost of existing borrowings would not
decrease even as market interest rates decrease. Conversely, if interest rates increase above the
market interest rate for similar borrowings, we believe these borrowings would likely be put back
at their next put date and our cost to replace these borrowings would increase. However, we
believe, given current market conditions, that the likelihood that a significant portion of these
borrowings would be put back will not increase substantially unless interest rates were to increase
by at least 300 basis points.
The Company has two collateralized borrowings in the form of repurchase agreements totaling $100.0
million with Lehman Brothers, Inc. Lehman Brothers, Inc. is currently in liquidation under the
Securities Industry Protection Act. Mortgage-backed securities with an amortized cost of
approximately $114.4 million are pledged as collateral for these borrowings and we have demanded
the return of this collateral. We believe that we have the legal right to setoff our obligation to
repay the borrowings against our right to the return of the mortgage-backed securities pledged as
collateral. As a result, we believe that our potential economic loss from Lehman Brothers failure
to return the collateral is limited to the excess market value of the collateral over the $100
million repurchase price. We intend to pursue full recovery of the pledged collateral in
accordance with the contractual terms of the repurchase agreements. There can be no assurances
that the final settlement of this transaction will result in the full recovery of the collateral or
the full amount of the claim. We have not recognized a loss in our financial statements related to
these repurchase agreements as we have concluded that a loss is neither probable or estimable at
March 31, 2011.
Other liabilities decreased to $214.1 million at March 31, 2011 from $269.5 million at
December 31, 2010. The decrease is primarily the result of a decrease in accrued interest payable
on borrowed funds of $48.8 million. The decrease in accrued interest payable on borrowed funds is
due to the $7.65 billion decrease in borrowed funds to $22.03 billion at March 31, 2011.
Total shareholders equity decreased $781.4 million to $4.73 billion at March 31, 2011 from $5.51
billion at December 31, 2010. The decrease was primarily due to a net loss of $555.7 million for
the quarter ended March 31, 2011. The decrease was also due to cash dividends paid to common
shareholders of $74.1 million and a $157.5 million decrease in accumulated other comprehensive
income.
The accumulated other comprehensive loss of $72.0 million at March 31, 2011 included a $40.7
million after-tax net unrealized loss on securities available for sale ($68.9 million pre-tax) and
a $31.3 million after-tax accumulated other comprehensive loss related to the funded status of our
employee benefit plans. The accumulated other comprehensive income of $85.4 million at December
31, 2010 included a $117.3 million after-tax net unrealized gain on securities available for sale
($198.3 million pre-tax), partially offset by a $31.9 million after-tax accumulated other
comprehensive loss related to the funded status of our employee benefit plans. The change in the
unrealized loss on securities available-for sale was due
primarily to the sale of securities in the first quarter of 2011 which resulted in pre-tax realized
gains of $102.5 million. We do not consider the investments in an unrealized loss position at
March 31, 2011 to be other-than-temporarily impaired since the decline in market value is
attributable to changes in interest rates and not credit quality and 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.
Page 35
As of March 31, 2011, there remained 50,123,550 shares that may be purchased under our existing
stock repurchase programs. We did not repurchase any shares of our common stock during the first
three months of 2011. Our capital ratios remain in excess of the regulatory requirements for a
well-capitalized bank. See Liquidity and Capital Resources.
At March 31, 2011, our shareholders equity to asset ratio was 9.02% compared with 9.01% at
December 31, 2010. The ratio of average shareholders equity to average assets was 8.98% for the
three months ended March 31, 2011 as compared to 8.94% for the three months ended March 31, 2010.
Our book value per share, using the period-end number of outstanding shares, less purchased but
unallocated employee stock ownership plan shares and less purchased but unvested recognition and
retention plan shares, was $9.58 at March 31, 2011 and $11.16 at December 31, 2010. Our tangible
book value per share, calculated by deducting goodwill and the core deposit intangible from
shareholders equity, was $9.26 as of March 31, 2011 and $10.85 at December 31, 2010. The
decreases in our book value per share and tangible book value per share were primarily due to the
charge to income as a result of the Restructuring Transaction and, to a lesser extent, the $157.5
million decrease in accumulated other comprehensive income. Although our shareholders equity
declined significantly due to the charge to income as a result of the Restructuring Transaction,
the decline in assets from the Restructuring Transaction resulted in the ratio of
shareholdersequity to total assets and the ratio of average shareholders equity to average assets
increasing slightly.
Page 36
Comparison of Operating Results for the Three-Month Periods Ended March 31, 2011 and 2010
Average Balance Sheet.
The following table presents the average balance sheets, average yields
and costs and certain other information for the three months ended March 31, 2011 and 2010. The
table presents the annualized average yield on interest-earning assets and the annualized average
cost of interest-bearing liabilities. We derived the yields and costs by dividing annualized
income or expense by the average balance of interest-earning assets and interest-bearing
liabilities, respectively, for the periods shown. We derived average balances from daily balances
over the periods indicated. Interest income includes fees that we considered to be adjustments to
yields. Yields on tax-exempt obligations were not computed on a tax equivalent basis. Nonaccrual
loans were included in the computation of average balances and therefore have a zero yield. The
yields set forth below include the effect of deferred loan origination fees and costs, and purchase
discounts and premiums that are amortized or accreted to interest income.
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For the Three Months Ended March 31,
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|
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2011
|
2010
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|
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|
|
Average
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|
|
|
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|
|
Average
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|
|
Average
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Yield/
|
|
|
Average
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|
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Yield/
|
|
|
|
Balance
|
|
|
Interest
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|
|
Cost
|
|
|
Balance
|
|
|
Interest
|
|
|
Cost
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Assets:
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|
|
|
|
|
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|
|
|
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|
|
|
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|
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|
Interest-earnings assets:
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
First mortgage loans, net (1)
|
|
$
|
30,051,014
|
|
|
$
|
382,953
|
|
|
|
5.10
|
%
|
|
$
|
31,496,413
|
|
|
$
|
428,161
|
|
|
|
5.44
|
%
|
Consumer and other loans
|
|
|
321,407
|
|
|
|
4,148
|
|
|
|
5.16
|
|
|
|
358,637
|
|
|
|
4,759
|
|
|
|
5.31
|
|
Federal funds sold and other overnight deposits
|
|
|
1,540,837
|
|
|
|
711
|
|
|
|
0.19
|
|
|
|
789,310
|
|
|
|
449
|
|
|
|
0.23
|
|
Mortgage-backed securities at amortized cost
|
|
|
21,516,223
|
|
|
|
183,308
|
|
|
|
3.41
|
|
|
|
20,261,865
|
|
|
|
231,718
|
|
|
|
4.57
|
|
Federal Home Loan Bank stock
|
|
|
868,615
|
|
|
|
12,801
|
|
|
|
5.89
|
|
|
|
874,768
|
|
|
|
12,373
|
|
|
|
5.66
|
|
Investment securities, at amortized cost
|
|
|
3,998,704
|
|
|
|
33,602
|
|
|
|
3.36
|
|
|
|
5,303,422
|
|
|
|
57,410
|
|
|
|
4.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
58,296,800
|
|
|
|
617,523
|
|
|
|
4.24
|
|
|
|
59,084,415
|
|
|
|
734,870
|
|
|
|
4.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earnings assets (4)
|
|
|
1,338,090
|
|
|
|
|
|
|
|
|
|
|
|
1,635,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
59,634,890
|
|
|
|
|
|
|
|
|
|
|
$
|
60,720,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings accounts
|
|
$
|
860,612
|
|
|
|
1,372
|
|
|
|
0.65
|
|
|
$
|
796,816
|
|
|
|
1,466
|
|
|
|
0.75
|
|
Interest-bearing transaction accounts
|
|
|
2,112,630
|
|
|
|
4,146
|
|
|
|
0.80
|
|
|
|
2,204,513
|
|
|
|
7,510
|
|
|
|
1.38
|
|
Money market accounts
|
|
|
6,877,170
|
|
|
|
17,868
|
|
|
|
1.05
|
|
|
|
5,171,810
|
|
|
|
16,730
|
|
|
|
1.31
|
|
Time deposits
|
|
|
14,879,043
|
|
|
|
60,932
|
|
|
|
1.66
|
|
|
|
16,238,606
|
|
|
|
78,213
|
|
|
|
1.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
|
24,729,455
|
|
|
|
84,318
|
|
|
|
1.38
|
|
|
|
24,411,745
|
|
|
|
103,919
|
|
|
|
1.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase agreements
|
|
|
13,687,190
|
|
|
|
139,693
|
|
|
|
4.14
|
|
|
|
15,100,000
|
|
|
|
151,429
|
|
|
|
4.07
|
|
Federal Home Loan Bank of New York advances
|
|
|
15,019,833
|
|
|
|
137,111
|
|
|
|
3.70
|
|
|
|
14,875,000
|
|
|
|
148,377
|
|
|
|
4.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowed funds
|
|
|
28,707,023
|
|
|
|
276,804
|
|
|
|
3.91
|
|
|
|
29,975,000
|
|
|
|
299,806
|
|
|
|
4.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
53,436,478
|
|
|
|
361,122
|
|
|
|
2.74
|
|
|
|
54,386,745
|
|
|
|
403,725
|
|
|
|
3.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits
|
|
|
564,045
|
|
|
|
|
|
|
|
|
|
|
|
572,030
|
|
|
|
|
|
|
|
|
|
Other noninterest-bearing liabilities
|
|
|
276,891
|
|
|
|
|
|
|
|
|
|
|
|
330,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest-bearing liabilities
|
|
|
840,936
|
|
|
|
|
|
|
|
|
|
|
|
902,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
54,277,414
|
|
|
|
|
|
|
|
|
|
|
|
55,288,902
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
5,357,476
|
|
|
|
|
|
|
|
|
|
|
|
5,431,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
59,634,890
|
|
|
|
|
|
|
|
|
|
|
$
|
60,720,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/net interest rate spread (2)
|
|
|
|
|
|
$
|
256,401
|
|
|
|
1.50
|
|
|
|
|
|
|
$
|
331,145
|
|
|
|
1.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest-earning assets/net interest margin (3)
|
|
$
|
4,860,322
|
|
|
|
|
|
|
|
1.72
|
%
|
|
$
|
4,697,670
|
|
|
|
|
|
|
|
2.20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of interest-earning assets to
interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
1.09
|
x
|
|
|
|
|
|
|
|
|
|
|
1.09
|
x
|
|
|
|
(1)
|
|
Amount includes deferred loan costs and non-performing loans and is net of the allowance for loan losses.
|
|
(2)
|
|
Determined by subtracting the annualized weighted average cost of total interest-bearing liabilities from the annualized weighted average yield on total interest-earning assets.
|
|
(3)
|
|
Determined by dividing annualized net interest income by total average interest-earning assets.
|
|
(4)
|
|
Includes the average balance of principal receivable related to FHLMC mortgage-backed securities of $200.2 million and $365.5 million
for the quarters ended March 31, 2011 and 2010, respectively.
|
Page 37
General.
Net loss was $555.7 million for the first quarter of 2011, a decrease of $704.6
million, or 473.2%, compared with net income of $148.9 million for the first quarter of 2010. Both
basic and diluted loss per common share were $(1.13) for the first quarter of 2011 as compared to
basic and diluted earnings per share of $0.30, for the first quarter of 2010. For the first quarter
of 2011, our annualized return on average shareholders equity was (41.49)%, compared with 10.96%
for the corresponding period in 2010. Our annualized return on average assets for the first quarter
of 2011 was (3.73)% as compared to 0.98% for the first quarter of 2010. The decrease in the
annualized return on average equity and assets is primarily due to the net loss in the first
quarter of 2011 due to the Restructuring Transaction completed in March 2011.
Interest and Dividend Income.
Total interest and dividend income for the first quarter of 2011
decreased $117.4 million, or 16.0%, to $617.5 million from $734.9 million for the first quarter of
2010. The decrease in total interest and dividend income was primarily due to a decrease of 74
basis points in the annualized weighted-average yield on total interest-earning assets to 4.24% for
the first quarter of 2011 from 4.98% for the first quarter in 2010. The decrease in total interest
and dividend income was also due to a decrease in the average balance of total interest-earning
assets of $787.6 million, or 1.3%, to $58.30 billion for the first quarter of 2011 as compared to
$59.08 billion for the first quarter of 2010. The decrease in average interest-earning assets was
due primarily to the Restructuring Transaction. Since the Restructuring Transaction occurred in
March of 2011, the full impact of the Restructuring Transaction on average interest-earning assets
will be realized in the second quarter of 2011.
Interest on first mortgage loans decreased $45.2 million to $383.0 million for the first quarter of
2011 as compared to $428.2 million for the first quarter of 2010. This was primarily due to a 34
basis point
decrease in the weighted-average yield to 5.10% for the 2011 first quarter from 5.44% for the 2010
first quarter. The decrease in interest income on mortgage loans was also due to a $1.45 billion
decrease in the average balance of first mortgage loans to $30.05 billion for the first quarter of
2011 as compared to $31.50 billion for the first quarter of 2010. During the first three months of
2011 our mortgage loan portfolio decreased as refinancing activity resulted in continued elevated
levels of loan repayments. During the first three months of 2011, existing mortgage customers
refinanced or recast approximately $672.6 million in mortgage loans with a weighted average rate of
5.76% to a new weighted average rate of 4.74%.
Interest on consumer and other loans decreased $611,000 to $4.1 million for the first quarter of
2011 from $4.8 million for the first quarter of 2010. The average balance of consumer and other
loans decreased $37.2 million to $321.4 million for the first quarter of 2011 as compared to $358.6
million for the first quarter of 2010 and the average yield earned decreased 15 basis points to
5.16% from 5.31% for the same respective periods.
Interest on mortgage-backed securities decreased $48.4 million to $183.3 million for the first
quarter of 2011 as compared to $231.7 million for the first quarter of 2010. This decrease was due
primarily to a 116 basis point decrease in the weighted-average yield to 3.41% for the first
quarter of 2011 from 4.57% for the first quarter of 2010. The effect of the decrease in the
weighted-average yield was partially offset by a $1.26 billion increase in the average balance of
mortgage-backed securities to $21.52 billion during the first quarter of 2011 as compared to $20.26
billion for the first quarter of 2010. While the average balance of mortgage-backed securities
increased in the first quarter of 2011 as compared to the first quarter of 2010, total
mortgage-backed securities decreased $8.19 billion to $15.84 billion at March 31, 2011 as compared
to $24.03 billion at December 31, 2010 as a result of the Restructuring Transaction, which will
significantly lower the average balance of mortgage-backed securities for the second quarter of
2011.
Page 38
The decrease in the weighted average yield on mortgage-backed securities is a result of lower
yields on securities purchased during 2010 when market interest rates were lower than the yield
earned on the existing portfolio.
Interest on investment securities decreased $23.8 million to $33.6 million for the first quarter of
2011 as compared to $57.4 million for the first quarter of 2010. This decrease was due primarily
to a $1.30 billion decrease in the average balance of investment securities to $4.00 billion for
the first quarter of 2011 from $5.30 billion for the first quarter of 2010. In addition, the
average yield of investment securities decreased 97 basis points to 3.36% for the first quarter of
2011 as compared to 4.33% for the first quarter of 2010. The decrease in the average yield earned
reflects current market interest rates.
Dividends on FHLB stock increased $428,000, or 3.5%, to $12.8 million for the first quarter of 2011
as compared to $12.4 million for the first quarter of 2010. This increase was due primarily to a
23 basis point increase in the average dividend yield earned to 5.89% as compared to 5.66% for the
first quarter of 2010. The increase in the average dividend yield was partially offset by a $6.2
million decrease in the average balance to $868.6 million for the first quarter of 2011 as compared
to $874.8 million for the first quarter of 2010.
Interest on Federal funds sold amounted to $711,000 for the first quarter of 2011 as compared to
$449,000 for the first quarter of 2010. The average balance of Federal funds sold amounted to
$1.54 billion for the first quarter of 2011 as compared to $789.3 million for the first quarter of
2010. The yield earned on Federal funds sold was 0.19% for the 2011 first quarter and 0.23% for
the 2010 first quarter. The increase in the average balance of Federal funds sold is primarily a
result of the timing of the debt extinguishments
and the proceeds from securities sales and new borrowings in the Restructuring Transaction.
Federal funds sold amounted to $289.7 million at March 31, 2011.
Interest Expense.
Total interest expense for the quarter ended March 31, 2011 decreased $42.6
million, or 10.6%, to $361.1 million from $403.7 million for the quarter ended March 31, 2010.
This decrease was primarily due to a 27 basis point decrease in the weighted-average cost of total
interest-bearing liabilities to 2.74% for the quarter ended March 31, 2011 compared with 3.01% for
the quarter ended March 31, 2010. The decrease was also due to a $950.3 million, or 1.8%, decrease
in the average balance of total interest-bearing liabilities to $53.44 billion for the quarter
ended March 31, 2011 compared with $54.39 billion for the first quarter of 2010. The decrease in
the average balance of total interest-bearing liabilities was due to the reduction of total
borrowings as part of the Restructuring Transaction. Since the Restructuring Transaction occurred
in March of 2011, the full impact of the Restructuring Transaction on the average balance of total
interest bearing liabilities will be realized in the second quarter of 2011.
Interest expense on our time deposit accounts decreased $17.3 million to $60.9 million for the
first quarter of 2011 as compared to $78.2 million for the first quarter of 2010. This decrease
was due to a 29 basis point decrease in the annualized weighted-average cost to 1.66% for the first
quarter of 2011 compared with 1.95% for the first quarter of 2010 as maturing time deposits were
renewed or replaced by new time deposits at lower rates. This decrease was also due to a $1.36
billion decrease in the average balance of time deposit accounts to $14.88 billion for the first
quarter of 2011 from $16.24 billion for the first quarter of 2010. Interest expense on money
market accounts increased $1.2 million to $17.9 million for the first quarter of 2011 as compared
to $16.7 million for the same period in 2010. This increase was due to an increase in the average
balance of $1.71 billion to $6.88 billion for the first quarter of 2011 as compared to $5.17
billion for the first quarter of 2010. This increase was partially offset by a decrease in the
annualized weighted-average cost of 26 basis points to 1.05% for the first quarter of 2011 compared
Page 39
with 1.31% for the first quarter of 2010. Interest expense on our interest-bearing transaction
accounts decreased $3.4 million to $4.1 million for the first quarter of 2011 from $7.5 million for
the same period in 2010. The decrease is due to a 58 basis point decrease in the annualized
weighted-average cost to 0.80%, and a $91.9 million decrease in the average balance to $2.11
billion for the first quarter of 2011 as compared to $2.20 billion for the first quarter of 2010.
The decrease in the average cost of deposits for the first three months of 2011 reflected lower
market interest rates and our decision to lower deposit rates to slow deposit growth in 2010. At
March 31, 2011, time deposits scheduled to mature within one year totaled $10.15 billion with an
average cost of 1.29%. These time deposits are scheduled to mature as follows: $4.29 billion with
an average cost of 1.05% in the second quarter of 2011, $2.42 billion with an average cost of 1.15%
in the third quarter of 2011, $1.73 billion with an average cost of 1.77% in the fourth quarter of
2011 and $1.71 billion with an average cost of 1.62% in the first quarter of 2012. Based on our
deposit retention experience and current pricing strategy, we anticipate that a significant portion
of these time deposits will remain with us as renewed time deposits or as transfers to other
deposit products at the prevailing rate.
Interest expense on borrowed funds decreased $23.0 million to $276.8 million for the first quarter
of 2011 as compared to $299.8 million for the first quarter of 2010. This decrease was primarily
due to a $1.27 billion decrease in the average balance of borrowed funds to $28.71 billion for the
first quarter of 2011 as compared to $29.98 billion for the first quarter of 2010. This decrease
was also due to a 15 basis point decrease in the weighted-average cost of borrowed funds to 3.91%
for the first quarter of 2011 as compared to 4.06% for the first quarter of 2010. The decrease in
the average balance and cost of our borrowings is due to the Restructuring Transaction. However,
the average balance of borrowings during the first quarter of 2011 does not reflect the full effect
of the debt extinguishments which took place in March 2011 as part of the Restructuring
Transaction. Borrowings amounted to $22.03 billion at March
31, 2011 with an average cost of 3.52%. The full effect of the debt extinguishments will be
experienced in the second quarter of 2011. The Restructuring Transaction involved the re-borrowing
$5.00 billion of short-term fixed-rate/fixed-maturity funds with an average cost of 0.66%. These
borrowings will mature at a rate of $250.0 million per month over the next 20 months. As these
borrowings mature we intend to repay them with deposit growth or with excess cash flows received
from the repayment of mortgage loans and mortgage-backed securities. Borrowings scheduled to
mature over the next 12 months are as follows: $900.0 million with an average cost of 1.17% in the
second quarter of 2011, $900.0 million with an average cost of 0.94% in the third quarter of 2011,
$750.0 million with an average cost of 0.55% in the fourth quarter of 2011 and $900.0 million with
an average cost of 0.98% in the first quarter of 2012.
At March 31, 2011, we had $10.63 billion of borrowings with put dates within one year as compared
to $22.83 billion at December 31, 2010. We believe, given current market conditions, that the
likelihood that a significant portion of these borrowings would be put back will not increase
substantially unless interest rates were to increase by at least 300 basis points. See
Liquidity and Capital Resources.
Net Interest Income.
Net interest income decreased $74.7 million, or 22.6%, to $256.4 million
for the first quarter of 2011 as compared to $331.1 million for the first quarter of 2010. Our net
interest rate spread increased to 1.50% for the first quarter of 2011 as compared to 1.48% for the
linked fourth quarter of 2010 and decreased from 1.97% for the first quarter of 2010. Our net
interest margin decreased to 1.72% for the first quarter of 2011 as compared to 1.73% for the
linked fourth quarter of 2010 and 2.20% for the first quarter of 2010. The decrease in net
interest margin during the first quarter of 2011 is primarily due to the low market interest rates
that resulted in lower yields on our mortgage-related interest-earning assets as customers
refinanced to lower mortgage rates and our new loan production and asset purchases were at the
current low market interest rates. Mortgage-related assets represented 88.5%
Page 40
of our average
interest-earning assets during the 2011 first quarter. As part of the Restructuring Transaction,
we extinguished liabilities and sold securities at different times during March 2011. The timing
of these transactions, as well as the effect of short-term borrowings (less than one month) used to
facilitate the settlement of debt extinguishments, provided a slight benefit to our net interest
margin in the first quarter of 2011. We expect that the Restructuring Transaction will result in
as much as a 40 basis point improvement in our net interest margin in the second quarter of 2011.
Provision for Loan Losses.
The provision for loan losses amounted to $40.0 million for the
quarter ended March 31, 2011 as compared to $50.0 million for the quarter ended March 31, 2010.
The ALL amounted to $255.3 million at March 31, 2011 and $236.6 million at December 31, 2010. The
decrease in the provision for loan losses for the quarter ended March 31, 2011 was due primarily to
a decrease in the growth rate of non-performing loans during the quarter, the reduction in early
stage delinquencies, improvement in the unemployment rate and a decrease in charge-offs. These
factors were tempered by the continued decline in home prices although at a slower rate than during
the recent recessionary cycle. We recorded our provision for loan losses during the first three
months of 2011 based on our ALL methodology that considers a number of quantitative and qualitative
factors, including the amount of non-performing loans, the loss experience of our non-performing
loans, recent collateral valuations, conditions in the real estate and housing markets, current
economic conditions, particularly continued elevated levels of unemployment, and growth or
shrinkage in the loan portfolio. See Critical Accounting Policies Allowance for Loan Losses.
Our primary lending emphasis is the origination and purchase of one- to four-family first mortgage
loans on residential properties and, to a lesser extent, second mortgage loans on one- to
four-family residential properties. Our loan growth is primarily concentrated in one- to
four-family mortgage loans with original LTV ratios of less than 80%. The average LTV ratio of our
2011 first mortgage loan originations and our total first mortgage loan portfolio were 66.8% and
60.6%, respectively, using the appraised value at the
time of origination. The value of the property used as collateral for our loans is dependent upon
local market conditions. As part of our estimation of the ALL, we monitor changes in the values of
homes in each market using indices published by various organizations. Based on our analysis of
the data for the first quarter of 2011, we concluded that home values in our lending markets
continued to decline from 2010 levels, 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.
The national economy was in a recessionary cycle during 2009 and 2010 with the housing and real
estate markets suffering significant losses in value. Economic conditions have improved but at a
slower pace than anticipated during the first quarter of 2011. Home sale activity and real estate
valuations have remained at reduced levels during the first quarter of 2011 and unemployment, while
improving, remained at elevated levels. We continue to closely monitor the local and national real
estate markets and other factors related to risks inherent in our loan portfolio.
Non-performing loans amounted to $886.5 million at March 31, 2011 as compared to $871.3 million at
December 31, 2010 and $744.9 million at March 31, 2010. Non-performing loans at March 31, 2011
included $875.1 million of one- to four-family first mortgage loans as compared to $858.3 million
at December 31, 2010. The ratio of non-performing loans to total loans was 2.92% at March 31, 2011
compared with 2.82% at December 31, 2010 and 2.32% at March 31, 2010. Loans delinquent 30 to 59
days amounted to $380.0 million at March 31, 2011 as compared to $418.9 million at December 31,
2010 and $370.7 million at March 31, 2010. Loans delinquent 60 to 89 days amounted to $174.3
million at March 31, 2011 as compared to $193.2 million at December 31, 2010 and $171.5 million at
March 31, 2010. Accordingly, total early stage delinquencies (loans 30 to 89 days past due)
declined to $554.3
Page 41
million at March 31, 2011 from $612.1 million at December 31, 2010. Foreclosed
real estate amounted to $44.0 million at March 31, 2011 as compared to $45.7 million at December
31, 2010. As a result of our underwriting policies, our borrowers typically have a significant
amount of equity, at the time of origination, in the underlying real estate that we use as
collateral for our loans. Due to the steady deterioration of real estate values in recent years,
the LTV ratios based on appraisals obtained at time of origination do not necessarily indicate the
extent to which we may incur a loss on any given loan that may go into foreclosure. However, our
lower average LTV ratios have helped to moderate our charge-offs.
At March 31, 2011, the ratio of the ALL to non-performing loans was 28.80% as compared to 27.15% at
December 31, 2010 and 22.26% at March 31, 2010. The ratio of the ALL to total loans was 0.84% at
March 31, 2011 as compared to 0.77% at December 31, 2010 and 0.52% at March 31, 2010. Changes in
the ratio of the ALL to non-performing loans is not, absent other factors, an indication of the
adequacy of the ALL since there is not necessarily a direct relationship between changes in various
asset quality ratios and changes in the ALL and non-performing loans. In the current economic
environment, a loan generally becomes non-performing when the borrower experiences financial
difficulty. In many cases, the borrower also has a second mortgage or home equity loan on the
property. In substantially all of these cases, we do not hold the second mortgage or home equity
loan as this is not a business we have actively pursued.
Charge-offs on our non-performing loans have decreased since the third quarter of 2010. We
generally obtain new collateral values by the time a loan becomes 180 days past due. 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. Charge-offs amounted to $21.3 million for the first quarter of 2011
as compared to $24.7 million for the fourth quarter of 2010 and $24.2 million for the first quarter
of 2010. These charge-offs were primarily due to the results of our reappraisal process for our
non-performing residential first mortgage loans with 29 loans disposed of through the foreclosure
process during the first three months of 2011 with a final realized gain on sale (after previous
charge-offs and write-downs of $5.5 million) of approximately $540,000. Write-downs on foreclosed
real estate amounted to $1.3 million for the first three months of 2011. The results of our
reappraisal process and our recent charge-off history are also considered in the determination of
the ALL.
As part of our estimation of the ALL, we monitor changes in the values of homes in each market
using indices published by various organizations including the FHFA. Our Asset Quality Committee
(AQC) uses these indices and a stratification of our loan portfolio by state as part of its
quarterly determination of the ALL. We do not apply different loss factors based on geographic
locations since, at March 31, 2011, 79.1% of our loan portfolio and 69.6% of our non-performing
loans are located in the New York metropolitan area. We generally obtain updated collateral values
by the time a loan becomes 180 days past due which we believe identifies potential charge-offs more
accurately than a house price index that is based on a wide geographic area and includes many
different types of houses. However, we use the house price indices to identify geographic areas
experiencing weaknesses in housing markets to determine if an overall adjustment to the ALL is
required based on loans we have in those geographic areas and to determine if changes in the loss
factors used in the ALL quantitative analysis are necessary. Our quantitative analysis of the ALL
accounts for increases in non-performing loans by applying progressively higher risk factors to
loans as they become more delinquent.
Due to the nature of our loan portfolio, our evaluation of the adequacy of our ALL is performed
primarily on a pooled basis. Each month we prepare an analysis which categorizes the entire loan
portfolio by
Page 42
certain risk characteristics such as loan type (one- to four-family, multi-family,
commercial, construction, etc.), loan source (originated or purchased) and payment status (i.e.,
current or number of days delinquent). Loans with known potential losses are categorized
separately. We assign estimated loss factors to the payment status categories on the basis of our
assessment of the potential risk inherent in each loan type. These factors are periodically
reviewed for appropriateness giving consideration to charge-off history, delinquency trends,
portfolio growth and the status of the regional economy and housing market, in order to ascertain
that the loss factors cover probable and estimable losses inherent in the portfolio. Based on our
recent loss experience on non-performing loans, we increased certain loss factors used in our
quantitative analysis of the ALL for one- to four- family mortgage loans during the first three
months of 2011. We define our loss experience on non-performing loans as the ratio of the excess of
the loan balance (including selling costs) over the updated collateral value to the principal
balance of loans for which we have updated valuations. We generally obtain updated collateral
values by the time a loan becomes 180 days past due. Based on our analysis, our loss experience on
our non-performing one- to four-family first mortgage loans was approximately 12.8% at March 31,
2011 and was approximately 13.3% at December 31, 2010. Our one- to four- family mortgage loans
represent 98.8% of our total loans. The recent adjustment in our loss factors did not have a
material effect on the ultimate level of our ALL or on our provision for loan losses. If our
future loss experience requires additional increases in our loss factors, this may result in
increased levels of loan loss provisions.
In addition to our quantitative systematic methodology, we also use qualitative analyses to
determine the adequacy of our ALL. Our qualitative analyses include further evaluation of economic
factors, such as trends in the unemployment rate, as well as a ratio analysis to evaluate the
overall measurement of the ALL. This analysis includes a review of delinquency ratios, net
charge-off ratios and the ratio of the ALL to both non-performing loans and total loans. This
qualitative review is used to reassess the overall determination of the ALL and to ensure that
directional changes in the ALL and the provision for loan losses are supported by relevant internal
and external data.
We consider the average LTV ratio of our non-performing loans and our total portfolio in relation
to the overall changes in house prices in our lending markets when determining the ALL. This
provides us with a macro indication of the severity of potential losses that might be expected.
Since substantially all of our portfolio consists of first mortgage loans on residential
properties, the LTV ratio is particularly important to us when a loan becomes non-performing. The
weighted average LTV ratio in our one- to four-family mortgage loan portfolio at March 31, 2011 was
60.6%, using appraised values at the time of origination. The average LTV ratio of our
non-performing loans, using appraised values at the time of origination, was 74.3% at March 31,
2011. Based on the valuation indices, house prices have declined in the New York metropolitan
area, where 69.6% of our non-performing loans were located at March 31, 2011, by approximately 23%
from the peak of the market in 2006 through January 2011 and by 31% nationwide during that period.
From January 2010 to January 2011, house prices decreased by approximately 3% in the New York
metropolitan area and 3% nationwide. Changes in house values may affect our loss experience which
may require that we change the loss factors used in our quantitative analysis of the allowance for
loan losses. There can be no assurance whether significant further declines in house values may
occur and result in a higher loss experience and increased levels of charge-offs and loan loss
provisions. Further, no assurance can be given in any particular case that our LTV ratios
will provide full protection in the event of borrower default.
Net charge-offs amounted to $21.3 million for the first quarter of 2011 as compared to net
charge-offs of $24.2 million for the corresponding period in 2010. Our charge-offs on
non-performing loans have historically been low due to the amount of underlying equity in the
properties collateralizing our first mortgage loans. Until the recent recessionary cycle, it was
our experience that as a non-performing loan
Page 43
approached foreclosure, the borrower sold the
underlying property or, if there was a second mortgage or other subordinated lien, the subordinated
lien holder would purchase the property to protect their interest thereby resulting in the full
payment of principal and interest to Hudson City Savings. This process normally took approximately
12 months. However, due to the unprecedented level of foreclosures and the desire by most states
to slow the foreclosure process, we are now experiencing a time frame to repayment or foreclosure
ranging from 30 to 36 months from the initial non-performing period. These delays have impacted
our level of non-performing loans as these loans take longer to migrate to real estate owned and
ultimate disposition. In addition, the highly publicized foreclosure issues that have recently
affected the nations largest mortgage loan servicers has resulted in greater court and state
attorney general scrutiny, and our foreclosure process and timing to completion of foreclosures may
be further delayed. If real estate prices do not improve or continue to decline, this extended
time may result in further charge-offs. In addition, current conditions in the housing market have
made it more difficult for borrowers to sell homes to satisfy the mortgage and second lien holders
are less likely to repay our loan if the value of the property is not enough to satisfy their loan.
We continue to closely monitor the property values underlying our non-performing loans during this
timeframe and take appropriate charge-offs when the loan balances exceed the underlying property
values.
At March 31, 2011 and December 31, 2010, commercial and construction loans evaluated for impairment
in accordance with FASB guidance amounted to $16.2 million and $16.7 million, respectively. Based
on this evaluation, we established an ALL of $4.9 million for loans classified as impaired at March
31, 2011 compared to $5.1 million at December 31, 2010.
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. Increases in our loss experience on non-performing loans, the loss factors
used in our quantitative analysis of the ALL and continued increases in overall loan delinquencies
can have a significant impact on our need for increased levels of loan loss provisions in the
future. 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. See Critical Accounting Policies.
Non-Interest Income.
Total non-interest income was $105.2 million for the first quarter 2011 as
compared to $33.0 million for the same quarter in 2010. Included in non-interest income for the
three month period ended March 31, 2011 were net gains on securities transactions of $102.5 million
which resulted from the sale of $9.04 billion of securities available-for-sale. Substantially all
of the proceeds from the sale of securities were used to repay borrowings as part of the
Restructuring Transaction. Included in non-interest income for the first quarter 2010 were net
gains on securities transactions of $30.8 million which resulted from the sale of $573.7 million of
mortgage-backed securities available-for-sale.
Non-Interest Expense.
Total non-interest expense amounted to $1.24 billion for the first
quarter of 2011 as compared to $66.5 million for the first quarter of 2010. Included in total
non-interest expense for the 2011 first quarter was a $1.17 billion loss on the extinguishment of
debt related to the Restructuring Transaction. Compensation and employee benefit costs decreased
$3.3 million, or 9.6%, to $30.9 million for the first quarter of 2011 as compared to $34.2 million
for the same period in 2010. The decrease in compensation costs is primarily due to a $5.8 million
decrease in expense related to our stock benefit plans. This decrease was partially offset by an
increase in medical expenses of $1.6 million and a $917,000 increase in compensation costs due
primarily to normal increases in salary as well as additional full time employees. At March 31,
2011, we had 1,569 full-time equivalent employees as compared to 1,562 at December 31, 2010 and
1,500 at March 31, 2010.
Page 44
Federal deposit insurance expense increased $3.7 million, or 29.3%, to $16.3 million for the first
quarter of 2011 as compared to $12.6 million for the first quarter of 2010. The increase in
Federal deposit insurance expense is due primarily to an increase in total deposits and an increase
in our deposit insurance assessment rate. In February 2011, the Federal Deposit Insurance
Corporation adopted a final rule that became effective on April 1, 2011, that redefines the
assessment base for deposit insurance assessments as average consolidated total assets minus
average tangible equity, rather than on the amount of deposits as under the previous rule. The
final rule also revises the assessment rate schedule. We estimate that our Federal deposit
insurance expense, calculated under the new assessment rule, will amount to approximately $33.9
million for the second quarter of 2011.
Included in other expense for the first quarter of 2011 were write-downs on foreclosed real estate
and net losses on the sale of foreclosed real estate of $776,000 as compared to $1.4 million for
the first quarter of 2010.
Income Taxes.
Income tax benefit amounted to $363.3 million for the first quarter of 2011
compared with income tax expense $98.7 million for the same quarter in 2010. Our effective tax
rate for the first quarter of 2011 was 39.53% compared with 39.87% for the first quarter of 2010.
The income tax benefit in the first quarter of 2011 was due to the loss before income taxes of
$910.0 million.
Page 45
Asset Quality
Credit Quality
Our primary lending emphasis is the origination and purchase of one- to four-family first mortgage
loans on residential properties. Our lending market areas generally consists of those states that
are east of the Mississippi River and as far south as South Carolina.
The following table presents the composition of our loan portfolio in dollar amounts and in
percentages of the total portfolio at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
Percent
|
|
|
|
Amount
|
|
|
of Total
|
|
|
Amount
|
|
|
of Total
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
First mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizing
|
|
$
|
24,330,624
|
|
|
|
80.16
|
%
|
|
$
|
24,912,935
|
|
|
|
80.56
|
%
|
Interest-only
|
|
|
5,052,855
|
|
|
|
16.65
|
|
|
|
5,136,463
|
|
|
|
16.61
|
|
FHA/VA
|
|
|
608,216
|
|
|
|
2.00
|
|
|
|
499,724
|
|
|
|
1.62
|
|
Multi-family and commercial
|
|
|
44,466
|
|
|
|
0.15
|
|
|
|
48,067
|
|
|
|
0.16
|
|
Construction
|
|
|
8,595
|
|
|
|
0.03
|
|
|
|
9,081
|
|
|
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total first mortgage loans
|
|
|
30,044,756
|
|
|
|
98.99
|
|
|
|
30,606,270
|
|
|
|
98.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer and other loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate second mortgages
|
|
|
150,705
|
|
|
|
0.50
|
|
|
|
160,896
|
|
|
|
0.52
|
|
Home equity credit lines
|
|
|
136,248
|
|
|
|
0.45
|
|
|
|
137,467
|
|
|
|
0.44
|
|
Other
|
|
|
19,661
|
|
|
|
0.06
|
|
|
|
19,264
|
|
|
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer and other loans
|
|
|
306,614
|
|
|
|
1.01
|
|
|
|
317,627
|
|
|
|
1.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
30,351,370
|
|
|
|
100.00
|
%
|
|
|
30,923,897
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred loan costs
|
|
|
86,293
|
|
|
|
|
|
|
|
86,633
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(255,283
|
)
|
|
|
|
|
|
|
(236,574
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans
|
|
$
|
30,182,380
|
|
|
|
|
|
|
$
|
30,773,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2011, first mortgage loans secured by one-to four-family properties accounted for
98.8% of total loans. Fixed-rate mortgage loans represent 66.9% of our first mortgage loans.
Compared to adjustable-rate loans, fixed-rate loans possess less inherent credit risk since loan
payments do not change in response to changes in interest rates. In addition, we do not originate
or purchase loans with payment options, negative amortization loans or sub-prime loans. We believe our loans, when
made, were amply collateralized and otherwise conformed to our prime lending standards.
Included in our loan portfolio at March 31, 2011 are interest-only loans of approximately $5.05
billion, or 16.7%, of total loans as compared to $5.14 billion, or 16.6%, of total loans at
December 31, 2010. These loans are originated as adjustable rate mortgage 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. These loans are underwritten
using the fully-amortizing payment amount. Non-performing interest-only loans amounted
Page 46
to $183.2 million, or 20.7%, of non-performing loans at March 31, 2011 as compared to
non-performing interest-only loans of $179.3 million, or 20.6%, of non-performing loans at December
31, 2010.
In addition to our full documentation loan program, we originate and purchase loans to certain
eligible borrowers as limited documentation loans. 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. We require applicants for limited documentation loans to complete a
FreddieMac/FannieMae loan application and request income, asset and credit history information from
the borrower. Additionally, we verify asset holdings and obtain credit reports from outside vendors
on all borrowers to ascertain the credit history of the borrower. Applicants with delinquent credit
histories usually do not qualify for the limited documentation processing, although delinquencies
that are adequately explained will not prohibit processing as a limited documentation loan. We
reserve the right to verify income and do require asset verification but we may elect not to verify
or corroborate certain income information where we believe circumstances warrant. We also allow
certain borrowers to obtain mortgage loans without disclosing income levels and without any
verification of income. In these cases, we require verification of the borrowers assets. We are
able to provide data relating to limited documentation loans that we originate. Originated loans
overall represent 65.4% of our one- to four- family first mortgage loans. As part of our wholesale
loan program, we allow sellers to include limited documentation loans in each pool of purchased
mortgage loans but limit the amount of these loans to be no more than 10% of the principal balance
of the purchased pool. In addition, these loans must have a maximum LTV ratio of 60% and meet
other characteristics such as maximum loan size. However, we have not tracked wholesale limited
documentation loans on our mortgage loan system. Included in our loan portfolio at March 31, 2011
are $3.55 billion of originated amortizing limited documentation loans and $950.0 million of
originated limited documentation interest-only loans. Non-performing loans at March 31, 2011
include $99.0 million of originated amortizing limited documentation loans and $64.5 million of
originated interest-only limited documentation loans as compared to $91.5 million and $58.3
million, respectively, at December 31, 2010.
The following table presents the geographic distribution of our total loan portfolio, as well as
the geographic distribution of our non-performing loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2011
|
|
|
At December 31, 2010
|
|
|
|
|
|
|
|
Non-performing
|
|
|
|
|
|
|
Non-performing
|
|
|
|
Total loans
|
|
|
Loans
|
|
|
Total loans
|
|
|
Loans
|
|
New Jersey
|
|
|
43.9
|
%
|
|
|
45.3
|
%
|
|
|
44.0
|
%
|
|
|
45.7
|
%
|
New York
|
|
|
20.3
|
|
|
|
17.9
|
|
|
|
19.9
|
|
|
|
18.7
|
|
Connecticut
|
|
|
14.9
|
|
|
|
6.4
|
|
|
|
14.5
|
|
|
|
6.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total New York
metropolitan area
|
|
|
79.1
|
|
|
|
69.6
|
|
|
|
78.4
|
|
|
|
70.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pennsylvania
|
|
|
3.6
|
|
|
|
1.3
|
|
|
|
3.1
|
|
|
|
1.2
|
|
Virginia
|
|
|
3.3
|
|
|
|
3.9
|
|
|
|
3.5
|
|
|
|
4.6
|
|
Illinois
|
|
|
2.8
|
|
|
|
4.9
|
|
|
|
3.0
|
|
|
|
4.9
|
|
Maryland
|
|
|
2.5
|
|
|
|
4.0
|
|
|
|
2.7
|
|
|
|
4.4
|
|
All others
|
|
|
8.7
|
|
|
|
16.3
|
|
|
|
9.3
|
|
|
|
14.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Outside New York
metropolitan area
|
|
|
20.9
|
|
|
|
30.4
|
|
|
|
21.6
|
|
|
|
29.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 47
Non-Performing Assets
The following table presents information regarding non-performing assets as of the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
|
December 31, 2010
|
|
|
|
(Dollars in thousands)
|
|
Non-accrual loans:
|
|
|
|
|
|
|
|
|
Amortizing residential first mortgage loans
|
|
$
|
622,235
|
|
|
$
|
614,758
|
|
Interest-only residential first mortgage loans
|
|
|
183,210
|
|
|
|
179,348
|
|
Multi-family and commercial mortgages
|
|
|
946
|
|
|
|
1,117
|
|
Construction loans
|
|
|
7,165
|
|
|
|
7,560
|
|
Consumer and other loans
|
|
|
3,270
|
|
|
|
4,320
|
|
|
|
|
|
|
|
|
Total non-accrual loans
|
|
|
816,826
|
|
|
|
807,103
|
|
Accruing loans delinquent 90 days or more
|
|
|
69,704
|
|
|
|
64,156
|
|
|
|
|
|
|
|
|
Total non-performing loans
|
|
|
886,530
|
|
|
|
871,259
|
|
Foreclosed real estate, net
|
|
|
44,011
|
|
|
|
45,693
|
|
|
|
|
|
|
|
|
Total non-performing assets
|
|
$
|
930,541
|
|
|
$
|
916,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans to total loans
|
|
|
2.92
|
%
|
|
|
2.82
|
%
|
Non-performing assets to total assets
|
|
|
1.77
|
|
|
|
1.50
|
|
Loans that are past due 90 days or more and still accruing interest are loans that are
insured by the FHA.
The following table is a comparison of our delinquent loans at March 31, 2011 and December 31,
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-59 Days
|
|
|
60-89 Days
|
|
|
90 Days or More
|
|
|
|
Number
|
|
|
Principal
|
|
|
Number
|
|
|
Principal
|
|
|
Number
|
|
|
Principal
|
|
|
|
of
|
|
|
Balance
|
|
|
of
|
|
|
Balance
|
|
|
of
|
|
|
Balance
|
|
|
|
Loans
|
|
|
of Loans
|
|
|
Loans
|
|
|
of Loans
|
|
|
Loans
|
|
|
of Loans
|
|
|
|
(Dollars in thousands)
|
|
At March 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four- family first mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizing
|
|
|
818
|
|
|
$
|
302,629
|
|
|
|
351
|
|
|
$
|
127,711
|
|
|
|
1,880
|
|
|
$
|
622,235
|
|
Interest-only
|
|
|
95
|
|
|
|
54,345
|
|
|
|
59
|
|
|
|
36,574
|
|
|
|
336
|
|
|
|
183,210
|
|
FHA/VA first mortgages
|
|
|
76
|
|
|
|
16,538
|
|
|
|
37
|
|
|
|
8,837
|
|
|
|
260
|
|
|
|
69,704
|
|
Multi-family and commercial mortgages
|
|
|
5
|
|
|
|
3,530
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
946
|
|
Construction loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
7,165
|
|
Consumer and other loans
|
|
|
39
|
|
|
|
2,966
|
|
|
|
10
|
|
|
|
1,197
|
|
|
|
39
|
|
|
|
3,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,033
|
|
|
$
|
380,008
|
|
|
|
457
|
|
|
$
|
174,319
|
|
|
|
2,524
|
|
|
$
|
886,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquent loans to total loans
|
|
|
|
|
|
|
1.25
|
%
|
|
|
|
|
|
|
0.57
|
%
|
|
|
|
|
|
|
2.92
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four- family first mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizing
|
|
|
940
|
|
|
$
|
342,990
|
|
|
|
415
|
|
|
$
|
151,800
|
|
|
|
1,839
|
|
|
$
|
614,758
|
|
Interest-only
|
|
|
72
|
|
|
|
47,479
|
|
|
|
45
|
|
|
|
29,570
|
|
|
|
305
|
|
|
|
179,348
|
|
FHA/VA first mortgages
|
|
|
96
|
|
|
|
20,594
|
|
|
|
40
|
|
|
|
9,730
|
|
|
|
234
|
|
|
|
64,156
|
|
Multi-family and commercial mortgages
|
|
|
4
|
|
|
|
3,199
|
|
|
|
2
|
|
|
|
1,199
|
|
|
|
4
|
|
|
|
1,117
|
|
Construction loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
7,560
|
|
Consumer and other loans
|
|
|
45
|
|
|
|
4,644
|
|
|
|
14
|
|
|
|
946
|
|
|
|
42
|
|
|
|
4,320
|
|
|
|
|
Total
|
|
|
1,157
|
|
|
$
|
418,906
|
|
|
|
516
|
|
|
$
|
193,245
|
|
|
|
2,430
|
|
|
$
|
871,259
|
|
|
|
|
Delinquent loans to total loans
|
|
|
|
|
|
|
1.35
|
%
|
|
|
|
|
|
|
0.62
|
%
|
|
|
|
|
|
|
2.82
|
%
|
Page 48
Upon request, 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 a six-month deferral of principal payments only which
may be extended in certain circumsatnces. 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. We have not classified these loans as troubled debt
restructurings since we 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. The principal balance of loans with payment plans at March 31, 2011 amounted
to $46.1 million, including $32.8 million of loans that are current, $6.4 million that are 30 to 59
days past due, $2.1 million that are 60 to 89 days past due and $4.8 million that are 90 days or
more past due.
Loans modified in a troubled debt restructuring totaled $14.5 million at March 31, 2011 of which
$693,000 were 30 days past due and $1.6 million were 60-89 days past due. The remaining loans
modified were current at the time of the restructuring and have complied with the terms of their
restructure agreement. At December 31, 2010, loans modified in a troubled debt restructuring
totaled $11.1 million. These loans were current at the time of their restructuring and were in
compliance with the terms of their restructure agreement at December 31, 2010.
In addition to non-performing loans, we had $180.3 million of potential problem loans at March 31,
2011 as compared to $194.8 million at December 31, 2010. This amount includes loans which are
60-89 days delinquent (other than loans insured by the FHA) and certain other internally classified
loans.
Potential problem loans are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
|
December 31,2010
|
|
|
|
(In thousands)
|
|
One- to four-family first mortgages
|
|
$
|
164,284
|
|
|
$
|
181,370
|
|
Multi-family and commercial mortgages
|
|
|
13,400
|
|
|
|
12,448
|
|
Construction loans
|
|
|
1,430
|
|
|
|
|
|
Consumer and other loans
|
|
|
1,197
|
|
|
|
946
|
|
|
|
|
|
|
|
|
Total potential problem loans
|
|
$
|
180,311
|
|
|
$
|
194,764
|
|
|
|
|
|
|
|
|
Page 49
Allowance for Loan Losses
The following table presents the activity in our allowance for loan losses at or for the dates
indicated.
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(Dollars in thousands)
|
|
Balance at beginning of period
|
|
$
|
236,574
|
|
|
$
|
140,074
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
40,000
|
|
|
|
50,000
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
First mortgage loans
|
|
|
(23,357
|
)
|
|
|
(24,841
|
)
|
Consumer and other loans
|
|
|
(89
|
)
|
|
|
(30
|
)
|
|
|
|
|
|
|
|
Total charge-offs
|
|
|
(23,446
|
)
|
|
|
(24,871
|
)
|
Recoveries
|
|
|
2,155
|
|
|
|
627
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(21,291
|
)
|
|
|
(24,244
|
)
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
255,283
|
|
|
$
|
165,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to total loans
|
|
|
0.84
|
%
|
|
|
0.52
|
%
|
Allowance for loan losses to non-performing loans
|
|
|
28.80
|
|
|
|
22.26
|
|
The following table presents our allocation of the ALL by loan category and the percentage of
loans in each category to total loans at the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2011
|
|
|
At December 31, 2010
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
of Loans in
|
|
|
|
|
|
|
of Loans in
|
|
|
|
|
|
|
|
Category to
|
|
|
|
|
|
|
Category to
|
|
|
|
Amount
|
|
|
Total Loans
|
|
|
Amount
|
|
|
Total Loans
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
First mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
$
|
246,577
|
|
|
|
98.81
|
%
|
|
$
|
227,224
|
|
|
|
98.79
|
%
|
Other first mortgages
|
|
|
5,749
|
|
|
|
0.18
|
|
|
|
6,147
|
|
|
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total first mortgage loans
|
|
|
252,326
|
|
|
|
98.99
|
|
|
|
233,371
|
|
|
|
98.98
|
|
|
Consumer and other loans
|
|
|
2,957
|
|
|
|
1.01
|
|
|
|
3,203
|
|
|
|
1.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowance for loan losses
|
|
$
|
255,283
|
|
|
|
100.00
|
%
|
|
$
|
236,574
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
We invest primarily in mortgage-backed securities issued by Ginnie Mae, Fannie Mae and Freddie Mac,
as well as other securities issued by GSEs. These securities account for substantially all of our
securities. We do not purchase unrated or private label mortgage-backed securities or other higher
risk securities such as those backed by sub-prime loans. There were no debt securities past due or
securities for which the Company currently believes it is not probable that it will collect all
amounts due according to the contractual terms of the security.
The Company has two collateralized borrowings in the form of repurchase agreements totaling $100.0
million with Lehman Brothers, Inc. Lehman Brothers, Inc. is currently in liquidation under the
Securities
Page 50
Industry Protection Act. Mortgage-backed securities with an amortized cost of
approximately $114.4 million are pledged as collateral for these borrowings and we have
demanded the return of this collateral. We believe that we have the legal right to setoff our
obligation to repay the borrowings against our right to the return of the mortgage-backed
securities pledged as collateral. As a result, we believe that our potential economic loss from
Lehman Brothers failure to return the collateral is limited to the excess market value of the
collateral over the $100 million repurchase price. We intend to pursue full recovery of the
pledged collateral in accordance with the contractual terms of the repurchase agreements. There
can be no assurances that the final settlement of this transaction will result in the full recovery
of the collateral or the full amount of the claim. We have not recognized a loss in our
financial statements related to these repurchase agreements as we have concluded that a loss is
neither probable nor estimable at March 31, 2011.
Liquidity and Capital Resources
The term liquidity refers to our ability to generate adequate amounts of cash to fund loan
originations, loan and security purchases, deposit withdrawals, repayment of borrowings and
operating expenses. Our primary sources of funds are deposits, borrowings, the proceeds from
principal and interest payments on loans and mortgage-backed securities, the maturities and calls
of investment securities and funds provided by our operations. Deposit flows, calls of investment
securities and borrowed funds, and prepayments of loans and mortgage-backed securities are strongly
influenced by interest rates, national and local economic conditions and competition in the
marketplace. These factors reduce the predictability of the receipt of these sources of funds. Our
membership in the FHLB provides us access to additional sources of borrowed funds. We also have
the ability to access the capital markets, depending on market conditions.
Our primary investing activities are the origination and purchase of one-to four-family real estate
loans and consumer and other loans, the purchase of mortgage-backed securities, and the purchase of
investment securities. These activities are funded primarily by borrowings, deposit growth and
principal and interest payments on loans, mortgage-backed securities and investment securities. We
originated $1.40 billion and purchased $147.2 million of loans during the first three months of
2011 as compared to $1.40 billion and $404.2 million during the first three months of 2010. Loan
origination activity continues to be strong as a result of an increase in mortgage refinancing
caused by market interest rates that remain at near-historic lows. Our loan purchase activity has
significantly declined as the GSEs have been actively purchasing loans as part of their efforts to
keep mortgage rates low to support the housing market during the recent economic recession. As a
result, the sellers from whom we have historically purchased loans are either selling to the GSEs
or retaining these loans in their own portfolios. We expect that the amount of loan purchases may
continue to be at reduced levels for the near-term. Principal repayments on loans amounted to
$2.08 billion for the first three months of 2011 as compared to $1.45 billion for the same period
in 2010. At March 31, 2011, commitments to originate and purchase mortgage loans amounted to
$543.9 million and $50.4 million, respectively, as compared to $470.1 million and $50.6 million,
respectively, at March 31, 2010.
Purchases of mortgage-backed securities during the first three months of 2011 were $3.24 billion as
compared to $2.77 billion during the first three months of 2010. Principal repayments on
mortgage-backed securities amounted to $1.63 billion for the first three months of 2011 as compared
to $1.55 billion for the same period in 2010. The increase in principal repayments was due
primarily to the refinancing activity caused by market interest rates that are at near-historic lows. We sold $8.96
billion of mortgage-backed securities during the first quarter of 2011, resulting in a gain of
$100.0 million. Substantially all of the proceeds from the sales of mortgage-backed securities
were used to repay
Page 51
borrowings as part of the Restructuring Transaction. We sold $573.7 million of
mortgage-backed securities during the first quarter of 2010, resulting in a gain of $30.8 million.
We did not purchase investment securities during the first three months of 2011. We purchased $1.10
billion of investment securities during the first three months of 2010. There were no calls of
investment securities during the first three months of 2011 as compared to $950.0 million for the
first quarter of 2010. We sold $80.0 million of investment securities during the first quarter of
2011, resulting in a gain of $2.5 million.
At March 31, 2011, we had mortgage-backed securities and investment securities with an amortized
cost of $8.14 billion that were used as collateral for securities sold under agreements to
repurchase and at that date we had $11.72 billion of unencumbered securities.
As part of the membership requirements of the FHLB, we are required to hold a certain dollar amount
of FHLB common stock based on our mortgage-related assets and borrowings from the FHLB. During the
first three months of 2011, we had net redemptions of $67.5 million of FHLB common stock. During
the first three months of 2010, we did not purchase any additional FHLB common stock.
Our primary financing activities consist of gathering deposits, engaging in wholesale borrowings,
repurchases of our common stock and the payment of dividends.
Total deposits increased $288.0 million during the first three months of 2011 as compared to $810.8
million for the first three months of 2010. Deposit flows are typically affected by the level of
market interest rates, the interest rates and products offered by competitors, the volatility of
equity markets, and other factors. We lowered our deposit rates during 2010 to slow our deposit
growth from the 2009 levels since the low yields that are available to us for mortgage-related
assets and investment securities have made a growth strategy less prudent until market conditions
improve. At March 31, 2011, time deposits scheduled to mature within one year totaled $10.15
billion with an average cost of 1.29%. These time deposits are scheduled to mature as follows:
$4.29 billion with an average cost of 1.05% in the second quarter of 2011, $2.42 billion with an
average cost of 1.15% in the third quarter of 2011, $1.73 billion with an average cost of 1.77% in
the fourth quarter of 2011 and $1.71 billion with an average cost of 1.62% in the first quarter of
2012. We anticipate that we will have sufficient resources to meet this current funding
commitment. Based on our deposit retention experience and current pricing strategy, we anticipate
that a significant portion of these time deposits will remain with us as renewed time deposits or
as transfers to other deposit products at the prevailing interest rate.
We have, in the past, primarily used wholesale borrowings to fund our investing activities. During
the first three months of 2011 we completed the Restructuring Transaction which reduced our
reliance on structured putable borrowings for funding purposes and as part of our overall interest
rate risk strategy. The Restructuring Transaction included the sale of approximately $8.60 billion
of variable-rate/hybrid mortgage-backed securities and the re-borrowing $5.00 billion of short-term
fixed-rate/fixed-maturity funds. These borrowings will mature at a rate of $250.0 million per
month over the next 20 months. It is our intention to repay these borrowings as they mature to
further reduce our concentration in FHLB borrowings. The Restructuring Transaction has improved
our overall liquidity position by significantly reducing our reliance on structured putable
borrowings. At March 31, 2011, we had $16.58 billion of
structured putable borrowings with a weighted-average rate of 4.38% as compared to $29.08 billion
of structured putable borrowings with a weighted average cost of 4.03% at December 31, 2010.
Structured putable borrowings with put dates within one year amounted to $10.63 billion at March
31, 2011 as compared to $22.83 billion at December 31, 2010. We anticipate that none of these
borrowings will be
Page 52
put back assuming current market interest rates remain stable. We believe,
given current market conditions, that the likelihood that a significant portion of these borrowings
would be put back will not increase substantially unless interest rates were to increase by at
least 300 basis points. At March 31, 2011, $8.93 billion or 53.9% of our structured putable
borrowings are with the FHLB. Our borrowing agreement with the FHLB requires the FHLB to offer
another lending product, which we would expect would be at prevailing market interest rates, to
replace any borrowings that were put back. In the event our structured borrowings are put back, we
anticipate that we will have sufficient resources to meet this funding commitment by borrowing new
funds at the prevailing market interest rate as the market for reverse repurchase agreements
remains active and the FHLB is obligated to offer replacement financing for any borrowing it may
put back. Our remaining borrowings are fixed-rate, fixed maturity borrowings of $5.45 billion with
a weighted-average rate of 0.89%. Borrowings scheduled to mature over the next 12 months are as
follows: $900.0 million with an average cost of 1.17% in the second quarter of 2011, $900.0 million
with an average cost of 0.94% in the third quarter of 2011, $750.0 million with an average cost of
0.55% in the fourth quarter of 2011 and $900.0 million with an average cost of 0.98% in the first
quarter of 2012. In future quarters, we intend to further modify or hedge certain of the remaining
structured putable borrowings to reduce our exposure to interest rate movements.
Our liquidity management process is structured to meet our daily funding needs and cover both
expected and unexpected deviations from normal daily operations. The primary tools we use for
measuring and managing liquidity risk include cash flow projections, diversified funding sources,
stress testing, a cushion of liquid assets, and a formal, well developed contingency funding plan.
Cash dividends paid during the first three months of 2011 were $74.1 million. We have not
purchased any of our common shares during the three months ended March 31, 2011. At March 31,
2011, there remained 50,123,550 shares available for purchase under existing stock repurchase
programs.
The primary source of liquidity for Hudson City Bancorp, the holding company of Hudson City
Savings, is capital distributions from Hudson City Savings. The primary use of these funds is the
payment of dividends to our shareholders and, when appropriate as part of our capital management
strategy, the repurchase of our outstanding common stock. Hudson City Bancorps ability to
continue these activities is dependent upon capital distributions from Hudson City Savings.
Applicable federal law, regulations and regulatory actions may limit the amount of capital
distributions Hudson City Savings may make. Currently, Hudson City Savings must seek approval from
the OTS for future capital distributions. At March 31, 2011, Hudson City Bancorp had total cash
and due from banks of $168.2 million.
On December 16, 2009, we filed an automatic shelf registration statement on Form S-3 with the SEC,
which was declared effective immediately upon filing. This shelf registration statement allows us
to periodically offer and sell, from time to time, in one or more offerings, individually or in any
combination, common stock, preferred stock, debt securities, capital securities, guarantees,
warrants to purchase common stock or preferred stock and units consisting of one or more of the
foregoing. The shelf registration statement provides us with greater capital management
flexibility and enables us to readily access the capital markets in order to pursue growth
opportunities that may become available to us in the future or should there be any changes in the
regulatory environment that call for increased capital requirements. Although the shelf
registration statement does not limit the amount of the foregoing items
that we may offer and sell pursuant to the shelf registration statement, our ability and any
decision to do so is subject to market conditions and our capital needs. In addition, our ability
to issue debt through the capital markets may also be dependent on our ability to obtain an
acceptable credit rating from one or more nationally recognized credit rating agencies.
Page 53
At March 31, 2011, Hudson City Savings exceeded all regulatory capital requirements. Hudson City
Savings tangible capital ratio, leverage (core) capital ratio and total risk-based capital ratio
were 8.12%, 8.12% and 19.66%, respectively.
Off-Balance Sheet Arrangements and Contractual Obligations
Hudson City Bancorp is a party to certain off-balance sheet arrangements, which occur in the
normal course of our business, to meet the credit needs of our customers and the growth initiatives
of the Bank. These arrangements are primarily commitments to originate and purchase mortgage
loans, and to purchase mortgage-backed securities. We are also obligated under a number of
non-cancellable operating leases.
The following table reports the amounts of our contractual obligations as of March 31, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Period
|
|
|
|
|
|
|
|
|
Less Than
|
|
|
One Year to
|
|
|
Three Years to
|
|
|
More Than
|
|
Contractual Obligation
|
|
Total
|
|
|
One Year
|
|
|
Three Years
|
|
|
Five Years
|
|
|
Five Years
|
|
|
|
|
(In thousands)
|
|
Mortgage loan originations
|
|
$
|
543,901
|
|
|
$
|
543,901
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Mortgage loan purchases
|
|
|
50,374
|
|
|
|
50,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of borrowed funds
|
|
|
22,025,000
|
|
|
|
3,450,000
|
|
|
|
2,100,000
|
|
|
|
725,000
|
|
|
|
15,750,000
|
|
Operating leases
|
|
|
157,748
|
|
|
|
9,785
|
|
|
|
20,260
|
|
|
|
19,573
|
|
|
|
108,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
22,777,023
|
|
|
$
|
4,054,060
|
|
|
$
|
2,120,260
|
|
|
$
|
744,573
|
|
|
$
|
15,858,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to extend credit are agreements to lend money to a customer as long as there is no
violation of any condition established in the contract. Commitments to fund first mortgage loans
generally have fixed expiration dates of approximately 90 days and other termination clauses. Since
some commitments are expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. Hudson City Savings evaluates each customers
credit-worthiness on a case-by-case basis. Additionally, we have available home equity, commercial
lines of credit, and overdraft lines of credit, which do not have fixed expiration dates, of
approximately $191.4 million, $8.7 million, and $2.8 million. We are not obligated to advance
further amounts on credit lines if the customer is delinquent, or otherwise in violation of the
agreement. The commitments to purchase first mortgage loans and mortgage-backed securities had a
normal period from trade date to settlement date of approximately 90 days and 60 days,
respectively.
Critical Accounting Policies
Note 2 to our Audited Consolidated Financial Statements, included in our 2010 Annual Report to
Shareholders and incorporated by reference into our 2010 Annual Report on Form 10-K, contains a
summary of our significant accounting policies. We believe our policies with respect to the
methodology for our determination of the ALL, the measurement of stock-based compensation expense,
the impairment of securities, the impairment of goodwill and the measurement of the funded status and cost of our
pension and other post-retirement benefit plans involve a higher degree of complexity and require
management to make difficult and subjective judgments which often require assumptions or estimates
about highly uncertain matters. Changes in these judgments, assumptions or estimates could cause
reported results to differ materially. These critical policies and their application are
continually reviewed by management, and are periodically reviewed with the Audit Committee and our
Board of Directors.
Page 54
Allowance for Loan Losses
The ALL has been determined in accordance with U.S. generally accepted accounting principles, under
which we are required to maintain an adequate ALL at March 31, 2011. We are responsible for the
timely and periodic determination of the amount of the allowance required. We believe that our ALL
is adequate to cover specifically identifiable loan losses, as well as estimated losses inherent in
our portfolio for which certain losses are probable but not specifically identifiable.
Our primary lending emphasis is the origination and purchase of one- to four-family first mortgage
loans on residential properties and, to a lesser extent, second mortgage loans on one- to
four-family residential properties resulting in a loan concentration in residential first mortgage
loans at March 31, 2011. As a result of our lending practices, we also have a concentration of
loans secured by real property located primarily in New Jersey, New York and Connecticut. At March
31, 2011, approximately 79.1% of our total loans are in the New York metropolitan area.
Additionally, the states of Pennsylvania, Virginia, Illinois and Maryland, accounted for 3.6%,
3.3%, 2.8%, and 2.5%, respectively of total loans. The remaining 8.7% of the loan portfolio is
secured by real estate primarily in the remainder of our lending markets. Based on the composition
of our loan portfolio and the growth in our loan portfolio, we believe the primary risks inherent
in our portfolio are the continued weakened economic conditions due to the recent U.S. recession,
continued high levels of unemployment, rising interest rates in the markets we lend and a
continuing decline in real estate market values. Any one or a combination of these adverse trends
may adversely affect our loan portfolio resulting in increased delinquencies, non-performing
assets, loan losses and future levels of loan loss provisions. We consider these trends in market
conditions in determining the ALL.
Due to the nature of our loan portfolio, our evaluation of the adequacy of our ALL is performed
primarily on a pooled basis. Each month we prepare an analysis which categorizes the entire
loan portfolio by certain risk characteristics such as loan type (one- to four-family,
multi-family, commercial, construction, etc.), loan source (originated or purchased) and payment
status (i.e., current or number of days delinquent). Loans with known potential losses are
categorized separately. We assign potential loss factors to the payment status categories on the
basis of our assessment of the potential risk inherent in each loan type. These factors are
periodically reviewed for appropriateness giving consideration to charge-off history, delinquency
trends, portfolio growth and the status of the regional economy and housing market, in order to
ascertain that the loss factors cover probable and estimable losses inherent in the portfolio.
Based on our recent loss experience on non-performing loans, we increased certain loss factors
used in our quantitative analysis of the ALL for one- to four- family first mortgage loans during
the first quarter of 2011. This adjustment in our loss factors did not have a material effect on
the ultimate level of our ALL or on our provision for loan losses. We use this analysis, as a
tool, together with principal balances and delinquency reports, to evaluate the adequacy of the
ALL. Other key factors we consider in this process are current real estate market conditions in
geographic areas where our loans are located, changes in the trend of non-performing loans, the results of our foreclosed property
transactions, the current state of the local and national economy, changes in interest rates and
loan portfolio growth. Any one or a combination of these adverse trends may adversely affect our
loan portfolio resulting in increased delinquencies, loan losses and future levels of provisions.
We maintain the ALL through provisions for loan losses that we charge to income. We charge losses
on loans against the ALL when we believe the collection of loan principal is unlikely. We
establish the provision for loan losses after considering the results of our review as described
above. We apply this process and methodology in a consistent manner and
we reassess and modify the
estimation methods and
Page 55
assumptions used in response to changing conditions. Such changes, if any,
are approved by our AQC each quarter.
Hudson City Savings defines the population of potential impaired loans to be all non-accrual
construction, commercial real estate and multi-family loans. Impaired loans are individually
assessed to determine that the loans carrying value is not in excess of the fair value of the
collateral or the present value of the loans expected future cash flows. Smaller balance
homogeneous loans that are collectively evaluated for impairment, such as residential mortgage
loans and consumer loans, are specifically excluded from the impaired loan analysis.
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. Although management uses the best information available, the level of the ALL remains
an estimate that is subject to significant judgment and short-term change.
Stock-Based Compensation
We recognize the cost of employee services received in exchange for awards of equity instruments
based on the grant-date fair value for all awards granted, modified, repurchased or cancelled after
January 1, 2006 and for the portion of outstanding awards for which the requisite service was not
rendered as of January 1, 2006, in accordance with accounting guidance. We have made annual grants
of performance-based stock options since 2006 that vest if certain financial performance measures
are met. In accordance with accounting guidance, we assess the probability of achieving these
financial performance measures and recognize the cost of these performance-based grants if it is
probable that the financial performance measures will be met. This probability assessment is
subjective in nature and may change over the assessment period for the performance measures.
We estimate the per share fair value of option grants on the date of grant using the Black-Scholes
option pricing model using assumptions for the expected dividend yield, expected stock price
volatility, risk-free interest rate and expected option term. These assumptions are based on our
analysis of our historical option exercise experience and our judgments regarding future option
exercise experience and market conditions. These assumptions are subjective in nature, involve
uncertainties and, therefore, cannot be determined with precision. The Black-Scholes option pricing
model also contains certain inherent limitations when applied to options that are not traded on
public markets.
The per share fair value of options is highly sensitive to changes in assumptions. In general, the
per share fair value of options will move in the same direction as changes in the expected stock
price volatility, risk-free interest rate and expected option term, and in the opposite direction
of changes in the expected dividend yield. For example, the per share fair value of options will
generally increase as expected stock price volatility increases, risk-free interest rate increases, expected option term increases and
expected dividend yield decreases. The use of different assumptions or different option pricing
models could result in materially different per share fair values of options.
Pension and Other Post-Retirement Benefit Assumptions
Non-contributory retirement and post-retirement defined benefit plans are maintained for certain
employees, including retired employees hired on or before July 31, 2005 who have met other
eligibility requirements of the plans. We have adopted ASC 715,
Retirement Benefits
. This ASC
requires an employer to: (a) recognize in its statement of financial condition an asset for a
plans overfunded status or
Page 56
a liability for a plans underfunded status; (b) measure a plans
assets and its obligations that determine its funded status as of the end of the employers fiscal
year; and (c) recognize, in comprehensive income, changes in the funded status of a defined benefit
post-retirement plan in the year in which the changes occur.
We provide our actuary with certain rate assumptions used in measuring our benefit obligation. We
monitor these rates in relation to the current market interest rate environment and update our
actuarial analysis accordingly. The most significant of these is the discount rate used to
calculate the period-end present value of the benefit obligations and the expense to be included in
the following years financial statements. A lower discount rate will result in a higher benefit
obligation and expense, while a higher discount rate will result in a lower benefit obligation and
expense. The discount rate assumption was determined based on a cash flow/yield curve model
specific to our pension and post-retirement plans. We compare this rate to certain market indices,
such as long-term treasury bonds, or the Moodys bond indices, for reasonableness. A discount rate
of 5.75% was selected for the December 31, 2010 measurement date and the 2011 expense calculation.
For our pension plan, we also assumed an annual rate of salary increase of 4.00% for future
periods. This rate is corresponding to actual salary increases experienced over prior years. We
assumed a return on plan assets of 8.25% for future periods. We actuarially determine the return on
plan assets based on actual plan experience over the previous ten years. The actual return on plan
assets was 8.5% for 2010 and 12.9% for 2009. The assumed return on plan assets of 8.25% is based
on expected returns in future periods. There can be no assurances with respect to actual return on
plan assets in the future. We continually review and evaluate all actuarial assumptions affecting
the pension plan, including assumed return on assets.
For our post-retirement benefit plan, the assumed health care cost trend rate used to measure the
expected cost of other benefits for 2010 was 8.50%. The rate was assumed to decrease gradually to
4.75% for 2016 and remain at that level thereafter. Changes to the assumed health care cost trend
rate are expected to have an immaterial impact as we capped our obligations to contribute to the
premium cost of coverage to the post-retirement health benefit plan at the 2007 premium level.
Securities Impairment
Our available-for-sale securities portfolio is carried at estimated fair value with any unrealized
gains and losses, net of taxes, reported as accumulated other comprehensive income/loss in
shareholders equity. Debt securities which we have the positive intent and ability to hold to
maturity are classified as held-to-maturity and are carried at amortized cost. The fair values for
our securities are obtained from an independent nationally recognized pricing service.
Substantially all of our securities portfolio is comprised of mortgage-backed securities and debt
securities issued by a GSE. The fair value of these securities is primarily impacted by changes in
interest rates. We generally view changes in fair value caused by changes in interest rates as
temporary, which is consistent with our experience.
In April 2009, the FASB issued guidance which changes the method for determining whether an
other-than-temporary impairment exists for debt securities and the amount of the impairment to be
recognized in earnings. This guidance requires that an entity assess whether an impairment of a
debt security is other-than-temporary and, as part of that assessment, determine its intent and
ability to hold the security. If the entity intends to sell the debt security, an
other-than-temporary impairment shall be considered to
Page 57
have occurred. In addition, an
other-than-temporary impairment shall be considered to have occurred if it is more likely than not
that it will be required to sell the security before recovery of its amortized cost.
We conduct a periodic review and evaluation of the securities portfolio to determine if a decline
in the fair value of any security below its cost basis is other-than-temporary. Our evaluation of
other-than-temporary impairment considers the duration and severity of the impairment, our intent
and ability to hold the securities and our assessments of the reason for the decline in value and
the likelihood of a near-term recovery. The unrealized losses on securities in our portfolio were
due primarily to changes in market interest rates subsequent to purchase. In addition, we only
purchase securities issued by GSEs. As a result, the unrealized losses on our securities were not
considered to be other-than-temporary and, accordingly, no impairment loss was recognized during
the first three months of 2011.
Impairment of Goodwill
FASB guidance requires that goodwill and intangible assets with indefinite useful lives no longer
be amortized, but instead be tested for impairment at least annually using a fair-value based
two-step approach. Goodwill and other intangible assets amounted to $156.7 million and were
recorded as a result of Hudson City Bancorps acquisition of Sound Federal Bancorp, Inc. in 2006.
The first step (Step 1) used to identify potential impairment involves comparing each reporting
units estimated fair value to its carrying amount, including goodwill. As a community-oriented
bank, substantially all of the Companys operations involve the delivery of loan and deposit
products to customers and these operations constitute the Companys only segment for financial
reporting purposes. If the estimated fair value of a reporting unit exceeds its carrying amount,
goodwill is not considered to be impaired. If the carrying amount exceeds the estimated fair value,
there is an indication of potential impairment and the second step (Step 2) is performed to
measure the amount. Step 2 involves calculating an implied fair value of goodwill for each
reporting unit for which impairment was indicated in Step 1. The implied fair value of goodwill is
determined in a manner similar to the amount of goodwill calculated in a business combination by
measuring the excess of the estimated fair value of the reporting unit, as determined in Step 1,
over the aggregate estimated fair values of the individual assets, liabilities, and identifiable
intangibles, as if the reporting unit was being acquired at the impairment test date. Subsequent
reversal of goodwill impairment losses is not permitted.
Quoted market prices in active markets are the best evidence of fair value and are used as the
basis for measurement, when available. Other acceptable valuation methods include present-value
measurements based on multiples of earnings or revenues, or similar performance measures. We
utilize quoted market prices as of our impairment test dates as well as control premiums in
determining the estimated fair value of our reporting unit. We also use market multiples based on
recent acquisition activity to calculate our estimated fair value. In determining the appropriate control premium, management considers, among
other factors, control premiums used in comparable transactions. As a result of our analysis we
have concluded that the fair value of goodwill, for purposes of the goodwill impairment analysis,
is in excess of its carrying amount. Therefore, we did not recognize any impairment of goodwill or
other intangible assets during the first quarter of 2011 and for the year ended December 31, 2010.
Page 58
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Quantitative and qualitative disclosure about market risk is presented as of December 31, 2010 in
Hudson City Bancorps Annual Report on Form 10-K. The following is an update of the discussion
provided therein.
General
As a financial institution, our primary component of market risk is interest rate volatility. Our
net income is primarily based on net interest income, and fluctuations in interest rates will
ultimately impact the level of both income and expense recorded on a large portion of our assets
and liabilities. Fluctuations in interest rates will also affect the market value of all
interest-earning assets, other than those that possess a short term to maturity. Due to the nature
of our operations, we are not subject to foreign currency exchange or commodity price risk. We do
not own any trading assets. We did not engage in any hedging transactions that use derivative
instruments (such as interest rate swaps and caps) during the first three months of 2011 and did
not have any such hedging transactions in place at March 31, 2011 although we may elect to do so in
the future as part of our overall interest rate risk management strategy. Our mortgage loan and
mortgage-backed security portfolios, which comprise 87.8% of our balance sheet, are subject to
risks associated with the economy in the New York metropolitan area, the general economy of the
United States and the continuing pressure on housing prices. We continually analyze our asset
quality and believe our allowance for loan losses is adequate to cover known and potential losses.
The difference between rates on the yield curve, or the shape of the yield curve, impacts our net
interest income. The FOMC noted that the economic recovery is proceeding at a moderate pace and
overall conditions in the labor market are improving gradually. However, the housing sector
continues to be depressed and commodity prices have risen significantly. Inflation has picked up in
recent months, but longer-term inflation expectations have remained stable. The national
unemployment rate decreased to 8.8% in March 2011 as compared to 9.4% in December 2010. In light of
these items, the FOMC decided to maintain the overnight lending rate at zero to 0.25% during the
first quarter of 2011 and to continue purchases of securities using the quantitative easing
program. In addition, the government-sponsored enterprises involved in the mortgage market have
actively purchased loans in an effort to keep mortgage rates down and support the housing market,
resulting in further downward pressure on longer-term market interest rates. As a result, both
short-term and long-term market interest rates have remained at low levels during the first quarter
of 2011. During 2010 both shorter-term and longer-term interest decreased, but the longer-term
market rates decreased more than the shorter-term, thus flattening the market yield curve. The
current interest rate environment has allowed us to continue to re-price lower our short-term time
and non-maturity deposits, thereby reducing our cost of funds, and has also allowed us to price
medium-term time deposits (2-5 year maturities) at lower rates and extend the weighted-average
remaining maturity on this portfolio. The overall lower longer-term market interest rates resulted
in lower rates on our primary investments of mortgage loans and mortgage-backed securities. In
addition, the low market interest rates resulted in accelerated prepayment speeds on these assets
as customers sought to refinance their current debt to the lower market rates.
The result of these rate fluctuations was a decrease of our net interest rate spread to 1.50% for
the first quarter of 2011 as compared to 1.48% for the linked fourth quarter of 2010 and 1.97% for
the first quarter of 2010 and our net interest margin decreased to 1.72% for the first quarter of
2011 as compared to 1.73% for the linked fourth quarter of 2010 and 2.20% for the first quarter of
2010. The first quarter 2011 information does not fully reflect the impact of the Restructuring
Transaction that we executed during
Page 59
March 2011. This transaction involved the extinguishment of
$12.50 billion of putable borrowings funded by the sale of approximately $8.66 billion of
variable-rate/hybrid mortgage-backed securities and re-borrowing $5.00 billion of short-term
fixed-rate/fixed-maturity funds. The securities sold were lower-yielding securities purchased by
us primarily during the recent low interest rate cycle. It is our belief that the net interest
margin may increase by as much as 40 basis points in the second quarter of 2011 as a result of the
Restructuring Transaction. However, we expect continued margin compression going forward from this
higher net interest margin level as a result of the slope of the yield curve and the potential for
interest rate increases.
Due to our investment and financing decisions, the more positive the slope of the yield curve the
more favorable the environment is for our ability to generate net interest income. Our
interest-bearing liabilities generally reflect movements in short- and intermediate-term rates,
while our interest-earning assets, a majority of which have initial terms to maturity or repricing
greater than one year, generally reflect movements in intermediate- and long-term interest rates. A
positive slope of the yield curve allows us to invest in interest-earning assets at a wider spread
to the cost of interest-bearing liabilities. However, though the market yield curve is still
relatively steep, we experienced during 2010 a more stable short-term rate environment as compared
to a declining long-term rate environment, resulting in a flatter market yield curve. This curve
has continued through the first quarter of 2011. This flatter market yield has resulted in the
reported decreases in our net interest rate spread and net interest margin over the past several
quarters.
Also impacting our net interest income and net interest rate spread is the level of prepayment
activity on our interest-sensitive assets. The actual amount of time before mortgage loans and
mortgage-backed securities are repaid can be significantly impacted by changes in market interest
rates and mortgage prepayment rates. Mortgage prepayment rates will vary due to a number of
factors, including the regional economy in the area where the underlying mortgages were originated,
availability of credit, seasonal factors and demographic variables. However, the major factors
affecting prepayment rates are prevailing interest rates, related mortgage refinancing
opportunities and competition. Generally, the level of prepayment activity directly affects the
yield earned on those assets, as the payments received on the interest-earning assets will be
reinvested at the prevailing lower market interest rate. Prepayment rates are generally inversely
related to the prevailing market interest rate, thus, as market interest rates increase, prepayment
rates tend to decrease. Prepayment rates on our mortgage-related assets have increased during 2010
and continued at these elevated levels through the first quarter of 2011. We believe the higher
level of prepayment activity may continue as market interest rates are expected to remain at the
current low levels through at least the first half of 2011. Accordingly, we have used higher levels
of prepayment activity in our interest rate risk modeling presented below, based on the recent experience of our
portfolios, though with decreasing speeds over the life of the instruments. However, though the
rate of prepayment speeds has remained elevated, the actual dollars received on our mortgage-backed
securities will decrease in future periods due to the sale of $8.66 billion of securities as a
result of the Restructuring Transaction.
Calls of investment securities and borrowed funds are also impacted by the level of market interest
rates. The level of calls of investment securities are generally inversely related to the
prevailing market interest rates, meaning as rates decrease the likelihood of a security being
called would increase. The level of call activity generally affects the yield earned on these
assets, as the payment received on the security would be reinvested at the prevailing lower market
interest rate. During 2010, we saw an increase in call activity on our investment securities as
short-term market interest rates remained at low levels and long-term market rates decreased during
the first three quarters of the year. The slight rate increases during the fourth quarter of 2010
have decreased the amount of call activity on our investment securities. We do not
Page 60
anticipate
significant levels of calls of investment securities due to the anticipated higher levels of
longer-term market interest rates and the significant turnover of our portfolio during 2010 to
instruments with lower interest rates. Accordingly, we have limited amounts of calls reflected in
the interest rate risk modeling presented below.
Our borrowings have traditionally consisted of structured putable borrowings with ten year final
maturities and initial non-put periods of one to five years. The likelihood of a borrowing being
put back is directly related to the current market interest rates, meaning the higher that interest
rates move, the more likely the borrowing would be put back. The level of put activity generally
affects the cost of our borrowed funds, as the put of a borrowing would generally necessitate the
re-borrowing of the funds or deposit growth at the higher current market interest rates. During
2010 and the first quarter of 2011 we experienced no put activity on our borrowed funds due to the
continued low levels of short-term market interest rates. As a result of the Restructuring
Transaction, we eliminated $12.50 billion of putable borrowings. However, we still have
approximately $10.48 billion quarterly putable borrowings on our balance sheet that could be put
back to us during any three month period. However, these borrowings have a weighted-average rate of
4.33% and we do not believe a significant amount of these borrowings will be put back to us unless
rates increase in excess of 300 basis points.
Although the Restructuring Transaction is expected to have an immediate benefit on our net interest
margin, the Restructuring Transaction by itself did not alleviate our interest rate risk position
under a rising interest rate environment as reflected in the simulation models below. The
Restructuring Transaction improved our market price and net present value of equity measures.
However, the basis point change measures of interest rate risk were negatively impacted. We are
developing strategies such as modifying (maintaining the borrowing with adjusted terms, primarily
repurchasing the put option) or hedging certain borrowings to improve our sensitivity measures and
further improve our interest rate risk position. We may also diversify certain funding sources to
decrease the overall sensitivity of our liabilities to market rate changes.
We intend to continue focusing on funding any future asset growth
primarily with customer deposits. We also intend to use customer deposits to payoff certain
borrowings as they mature. Using customer deposits in this manner will allow us to achieve a
greater balance between deposits and borrowings. During 2009 and 2010, we were able to fund our
asset growth and payments on maturing borrowings in this manner. This growth was primarily in time
deposits with maturities of one year or more and non-maturity money market accounts. For our
interest rate risk modeling, time deposits are presented at their maturity date, while non-maturity deposits are
presented based on a decay rate calculated from our experience.
We may use borrowed funds as a supplemental funding source for short-term liquidity if deposit
growth decreases. These borrowings would be a combination of short-term borrowings with maturities
of three to six months and longer-term fixed-maturity borrowings with terms of two to five years.
We also may modify (maintain the borrowing with adjusted terms, primarily repurchasing the put
option) certain borrowings to manage our interest rate risk. Borrowings are presented at maturity
date, with the price or potential cash flow adjusted for potential puts, as applicable.
Simulation Model.
We use simulation models as our primary means to calculate and monitor the
interest rate risk inherent in our portfolio. These models report changes to net interest income
and the net present value of equity in different interest rate environments, assuming either an
incremental or instantaneous and permanent interest rate shock to all interest rate-sensitive
assets and liabilities. We assume maturing or called instruments are reinvested into the same type
of product, with the rate earned
Page 61
or paid reset to our currently offered rate for loans and
deposits, or the current market rate for securities and borrowed funds. We have not reported the
minus 200 or minus 300 basis point interest rate shock scenarios in either of our simulation model
analyses, as we believe, given the current interest rate environment and historical interest rate
levels, the resulting information would not be meaningful.
Net Interest Income.
As a primary means of managing interest rate risk, we monitor the impact
of interest rate changes on our net interest income over the next twelve-month period. This model
does not purport to provide estimates of net interest income over the next twelve-month period, but
attempts to assess the impact of interest rate changes on our net interest income. The following
table reports the changes to our net interest income over the next 12 months ending March 31, 2011
assuming either incremental or instantaneous changes in interest rates for the given rate shock
scenarios. The incremental interest rate changes occur over a 12 month period.
|
|
|
|
|
|
|
|
|
Change in
|
|
Percent Change in Net Interest Income
|
|
Interest Rates
|
|
Incremental Change
|
|
|
Instantaneous Change
|
|
(Basis points)
|
|
|
|
|
|
|
|
|
300
|
|
|
(4.93)
|
%
|
|
|
(16.28)
|
%
|
200
|
|
|
(3.33
|
)
|
|
|
(9.57
|
)
|
100
|
|
|
(1.76
|
)
|
|
|
(5.18
|
)
|
50
|
|
|
(0.90
|
)
|
|
|
(2.46
|
)
|
(50)
|
|
|
0.92
|
|
|
|
(1.49
|
)
|
(100)
|
|
|
0.60
|
|
|
|
(4.28
|
)
|
Of note in the positive shock scenarios:
|
|
|
the negative change to net interest income is primarily due to our interest-bearing
liabilities, particularly the $5.00 billion re-borrowed due to the Restructuring
Transaction, resetting to higher rates faster than our interest-earning assets, as the
prepayment speeds on our mortgage-related assets and potential calls of investment
securities will both decrease as market rates increase, and
|
|
|
|
|
the lesser impact in the incremental analysis, particularly in the plus 300 basis point
analysis, is primarily due to less additional expense on the $5.00 billion of short-term
borrowings not immediately resetting to the higher interest rates.
|
Of note in the negative shock scenarios:
|
|
|
the decrease in net interest income is due to the accelerated prepayment speeds on our
mortgage-related assets and the re-investment of the proceeds into lower yielding
instruments, and
|
|
|
|
the decrease is also due to the lack of change in the cost of $16.58 billion of our
borrowed funds as they will not be put back in the lower interest rate environment and
extend to maturity.
|
Of note in comparison to December 31, 2010:
|
|
|
the larger negative changes in the positive 200 basis point shock scenario (December 31,
2010 reported (0.65)% in the incremental change analysis and (4.02)% in the instantaneous
change analysis) were primarily due to the extinguishment of $12.50 billion of putable
borrowings and replacing $5.00 billion of these with short-term borrowings ($250.0 million
maturing per month over the next 20 months), whose rate will reset at maturity, and
|
|
|
|
|
the sale of variable-rate/hybrid mortgage-backed securities thus decreasing the amount
of assets that could reset to current market interest rates.
|
Net Present Value of Equity.
We also monitor our interest rate risk by monitoring changes in the
net present value of equity in the different rate environments. The net present value of equity is
the difference
Page 62
between the estimated fair value of interest rate-sensitive assets and liabilities.
The changes in the market value of assets and liabilities due to changes in interest rates reflect
the interest sensitivity of those assets and liabilities. Their values are derived from the
characteristics of the asset or liability (i.e., fixed-rate, adjustable-rate, caps, floors)
relative to the current interest rate environment. For example, in a rising interest rate
environment the fair market value of a fixed-rate asset will decline, whereas the fair market value
of an adjustable-rate asset, depending on its repricing characteristics, may not decline. Increases
in the market value of assets will increase the present value of equity whereas decreases in the
market value of assets will decrease the present value of equity. Conversely, increases in the
market value of liabilities will decrease the present value of equity whereas decreases in the
market value of liabilities will increase the present value of equity.
The following table presents the estimated net present value of equity over a range of interest
rate change scenarios at March 31, 2011. The present value ratio shown in the table is the net
present value of equity as a percent of the present value of total assets in each of the different
rate environments. Our current policy sets a minimum ratio of the net present value of equity to
the fair value of assets in the current interest rate environment (no rate shock) of 7.00% and a
minimum present value ratio of 5.00% in the plus 200 basis point interest rate shock scenario.
|
|
|
|
|
|
|
|
|
Change in
|
|
Present
|
|
|
Basis Point
|
|
Interest Rates
|
|
Value Ratio
|
|
|
Change
|
|
(Basis points)
|
|
|
|
|
|
|
|
|
300
|
|
|
3.02
|
%
|
|
|
(504
|
)
|
200
|
|
|
5.51
|
|
|
|
(255
|
)
|
100
|
|
|
7.32
|
|
|
|
(74
|
)
|
50
|
|
|
7.85
|
|
|
|
(21
|
)
|
0
|
|
|
8.06
|
|
|
|
|
|
(50)
|
|
|
7.79
|
|
|
|
(27
|
)
|
(100)
|
|
|
6.97
|
|
|
|
(109
|
)
|
Of note in the positive shock scenarios:
|
|
|
the decreases in the net present value ratio and the sensitivity measure reflect the
decrease in the value of our mortgage-related assets to below par as the prepayment speeds
will slow on this portfolio, and
|
|
|
|
|
the decrease also reflects that the value of our $16.58 billion putable borrowing
portfolio will remain above par due to put options.
|
Of note in the negative shock scenarios:
|
|
|
the decrease in the present value ratio in the negative basis point change was primarily
due to higher pricing of our putable borrowed funds as the structures will increase in
duration, and
|
|
|
|
|
the value of our mortgage-related assets will move closer to par as the prepayment
speeds increase thus shortening the duration of these portfolios.
|
Of note in comparison to December 31, 2010:
|
|
|
the higher net present value of equity ratio in the base case (6.23% as of December 31,
2010) primarily reflects the extinguishment of higher priced putable borrowings when
compared to the price of the securities sold and the $5.00 billion of re-borrowed funds,
and
|
Page 63
|
|
|
the greater basis point change in the net present value of equity measures in the
positive 200 basis point scenario (148 basis points as of December 31, 2010) reflects the
lower price change of our borrowings due to the extinguishment of the $12.50 billion of
putable borrowings, as these putable borrowings had a greater sensitivity to market rate
changes than the re-borrowed funds.
|
The methods we use in simulation modeling are inherently imprecise. This type of modeling requires
that we make assumptions that may not reflect the manner in which actual yields and costs respond
to changes in market interest rates. For example, we assume the composition of the interest
rate-sensitive assets and liabilities will remain constant over the period being measured and that
all interest rate shocks will be uniformly reflected across the yield curve, regardless of the
duration to maturity or repricing. The table assumes that we will take no action in response to the
changes in interest rates. In addition, prepayment estimates and other assumptions within the model
are subjective in nature, involve uncertainties, and, therefore, cannot be determined with
precision. Accordingly, although the previous two tables may provide an estimate of our interest
rate risk at a particular point in time, such measurements are not intended to and do not provide a
precise forecast of the effect of changes in interest rates on our net interest income or present
value of equity.
GAP Analysis.
The following table presents the amounts of our interest-earning assets and
interest-bearing liabilities outstanding at March 31, 2011, which we anticipate to reprice or
mature in each of the future time periods shown. Except for prepayment or call activity and
non-maturity deposit decay rates, we determined the amounts of assets and liabilities that reprice
or mature during a particular period in accordance with the earlier of the term to rate reset or
the contractual maturity of the asset or liability. Assumptions used for decay rates are based on
the Banks experience with the particular deposit type. Prepayment speeds on our mortgage-related
assets are based on recent experience, but slowed to reflect anticipated rate increase and product
run-off. Callable investment securities and borrowed funds are reported at the anticipated call
date, for those that are callable within one year, or at their contractual maturity date.
Investment securities with step-up features, totaling $3.90 billion, are reported at the earlier of
their next step-up date or anticipated call date. We reported none of our investment securities at
their anticipated call date. We have reported no borrowings at their anticipated put date due to
the low interest
rate environment. We have excluded non-accrual mortgage loans of $813.6 million and non-accrual
other loans of $3.3 million from the table.
Page 64
|
|
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|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More than
|
|
|
More than
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More than
|
|
|
More than
|
|
|
two years
|
|
|
three years
|
|
|
|
|
|
|
|
|
|
Six months
|
|
|
six months
|
|
|
one year to
|
|
|
to three
|
|
|
to five
|
|
|
More than
|
|
|
|
|
|
|
or less
|
|
|
to one year
|
|
|
two years
|
|
|
years
|
|
|
years
|
|
|
five years
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First mortgage loans
|
|
$
|
4,179,044
|
|
|
$
|
3,547,405
|
|
|
$
|
5,162,765
|
|
|
$
|
4,606,167
|
|
|
$
|
2,610,774
|
|
|
$
|
9,125,081
|
|
|
$
|
29,231,236
|
|
Consumer and other loans
|
|
|
100,113
|
|
|
|
2,405
|
|
|
|
14,488
|
|
|
|
40,084
|
|
|
|
11,593
|
|
|
|
134,625
|
|
|
|
303,308
|
|
Federal funds sold
|
|
|
289,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
289,719
|
|
Mortgage-backed securities
|
|
|
3,760,590
|
|
|
|
2,278,849
|
|
|
|
2,973,105
|
|
|
|
2,321,795
|
|
|
|
1,781,802
|
|
|
|
2,728,796
|
|
|
|
15,844,937
|
|
FHLB stock
|
|
|
804,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
804,440
|
|
Investment securities
|
|
|
7,122
|
|
|
|
|
|
|
|
1,900,000
|
|
|
|
700,000
|
|
|
|
1,300,000
|
|
|
|
38,950
|
|
|
|
3,946,072
|
|
|
Total interest-earning assets
|
|
|
9,141,028
|
|
|
|
5,828,659
|
|
|
|
10,050,358
|
|
|
|
7,668,046
|
|
|
|
5,704,169
|
|
|
|
12,027,452
|
|
|
|
50,419,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings accounts
|
|
|
64,899
|
|
|
|
64,899
|
|
|
|
86,532
|
|
|
|
86,532
|
|
|
|
216,329
|
|
|
|
346,125
|
|
|
|
865,316
|
|
Interest-bearing demand accounts
|
|
|
200,162
|
|
|
|
200,162
|
|
|
|
297,527
|
|
|
|
297,527
|
|
|
|
513,990
|
|
|
|
546,591
|
|
|
|
2,055,959
|
|
Money market accounts
|
|
|
745,750
|
|
|
|
745,750
|
|
|
|
1,491,501
|
|
|
|
1,491,501
|
|
|
|
2,610,126
|
|
|
|
372,875
|
|
|
|
7,457,503
|
|
Time deposits
|
|
|
6,711,799
|
|
|
|
3,440,407
|
|
|
|
2,149,689
|
|
|
|
470,280
|
|
|
|
1,717,952
|
|
|
|
|
|
|
|
14,490,127
|
|
Borrowed funds
|
|
|
1,800,000
|
|
|
|
1,650,000
|
|
|
|
2,100,000
|
|
|
|
|
|
|
|
725,000
|
|
|
|
15,750,000
|
|
|
|
22,025,000
|
|
|
Total interest-bearing liabilities
|
|
|
9,522,610
|
|
|
|
6,101,218
|
|
|
|
6,125,249
|
|
|
|
2,345,840
|
|
|
|
5,783,397
|
|
|
|
17,015,591
|
|
|
|
46,893,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate sensitivity gap
|
|
$
|
(381,582
|
)
|
|
$
|
(272,559
|
)
|
|
$
|
3,925,109
|
|
|
$
|
5,322,206
|
|
|
$
|
(79,228
|
)
|
|
$
|
(4,988,139
|
)
|
|
$
|
3,525,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative interest rate sensitivity gap
|
|
$
|
(381,582
|
)
|
|
$
|
(654,141
|
)
|
|
$
|
3,270,968
|
|
|
$
|
8,593,174
|
|
|
$
|
8,513,946
|
|
|
$
|
3,525,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative interest rate sensitivity gap
as a percent of total assets
|
|
|
(0.73
|
)%
|
|
|
(1.25
|
)%
|
|
|
6.24
|
%
|
|
|
16.39
|
%
|
|
|
16.24
|
%
|
|
|
6.72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative interest-earning assets
as a percent of interest-bearing
liabilities
|
|
|
95.99
|
%
|
|
|
95.81
|
%
|
|
|
115.04
|
%
|
|
|
135.66
|
%
|
|
|
128.50
|
%
|
|
|
107.52
|
%
|
|
|
|
|
The cumulative one-year gap as a percent of total assets was negative 1.25% at March 31, 2011
compared with positive 7.21% at December 31, 2010. The change to a negative cumulative one-year gap
primarily reflects the $5.00 billion of short-term fixed-rate/fixed-maturity borrowings placed on
the balance sheet as a result of the Restructuring Transaction. The decrease in the cumulative
one-year gap also reflects the sale of $8.60 billion of primarily variable-rate/hybrid
mortgage-backed securities which reduced the amounts reported in the shorter-term periods.
The methods used in the gap table are also inherently imprecise. For example, although certain
assets and liabilities may have similar maturities or periods to repricing, they may react in
different degrees to changes in market interest rates. Interest rates on certain types of assets
and liabilities may fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates. Certain assets, such as adjustable-rate
loans and mortgage-backed securities, have features that limit changes in interest rates on a
short-term basis and over the life of the loan. If interest rates change, prepayment and early
withdrawal levels would likely deviate from those assumed in calculating the table. Finally, the
ability of borrowers to make payments on their adjustable-rate loans may decrease if interest rates
increase.
Page 65
Item 4. Controls and Procedures
Ronald E. Hermance, Jr., our Chairman, President and Chief Executive Officer, and James C. Kranz,
our Executive Vice President and Chief Financial Officer, conducted an evaluation of the
effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended) as of March 31, 2011. Based upon their
evaluation, they each found that our disclosure controls and procedures were effective to ensure
that information required to be disclosed in the reports that we file and submit under the Exchange
Act was recorded, processed, summarized and reported as and when required and that such information
was accumulated and communicated to our management as appropriate to allow timely decisions
regarding required disclosures.
There was no change in our internal control over financial reporting that occurred during the
period covered by this report that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
We are not involved in any pending legal proceedings other than routine legal proceedings occurring
in the ordinary course of business. We believe that these routine legal proceedings, in the
aggregate, are immaterial to our financial condition and results of operations.
Item 1A. Risk Factors
For a summary of risk factors relevant to our operations, please see Part I, Item 1A in our 2010
Annual Report on Form 10-K. There has been no material change in risk factors since December 31,
2010 except as noted below.
We remain subject to interest rate risk in a rising interest rate environment following the
Restructuring Transaction.
During the first quarter of 2011 we completed the Restructuring Transaction which included the
extinguishment of $12.5 billion of structured putable borrowings funded by the sale of $8.66
billion of securities and $5.00 billion of new short-term fixed-maturity borrowings. While we
expect that the Restructuring Transaction will result in as much as a 40 basis point improvement in
our net interest margin in the second quarter of 2011, the completion of the Restructuring Transaction alone is not
expected to significantly alleviate our interest rate risk position under a rising interest rate
environment. In order to further reduce our interest rate risk going forward we expect to modify
or hedge certain borrowings. We may also diversify certain funding sources and we will continue
our focus on funding any future asset growth primarily with customer deposits to decrease the
overall sensitivity of our liabilities to market rate changes. There is no certainty as to the
timing of any of these efforts and whether and to what extent they will be successful in
alleviating our interest rate risk.
Page 66
The recent adoption of regulatory reform legislation has created uncertainty and may have a
material effect on our operations and capital requirements.
There are many provisions of the Reform Act which are to be implemented through regulations to be
adopted by the federal bank regulatory agencies within specified time frames following the
effective date of the Reform Act, which creates a risk of uncertainty as to the effect that such
provisions will ultimately have. Although it is not possible for us to determine at this time
whether the Reform Act will have a material effect on our business, financial condition or results
of operations, we believe the following provisions of the Reform Act will have an impact on us:
|
|
|
The elimination of our primary federal regulator, the OTS, and the
assumption by the OCC of regulatory authority over all federal savings
associations, such as Hudson City Savings, and the acquisition by the
FRB of regulatory authority over all savings and loan holding
companies, such as Hudson City Bancorp, as well as all subsidiaries of
savings and loan holding companies other than depository institutions.
Although the laws and regulations currently applicable to us generally
will not change by virtue of the elimination of the OTS (except to the
extent such laws have been modified by the Reform Act), the
application of these laws and regulations may vary as administered by
the OCC and the FRB.
|
|
|
|
|
The creation of the Bureau, which will have the authority to implement
and enforce a variety of existing consumer protection statutes and to
issue new regulations and, with respect to institutions of our size,
will have exclusive examination and enforcement authority with respect
to such laws and regulations. As a new independent bureau within the
FRB, it is possible that the Bureau will focus more attention on
consumers and may impose requirements more severe than the previous
bank regulatory agencies, which at a minimum, could increase our
operating and compliance costs.
|
|
|
|
|
The significant roll back of the federal preemption of state consumer
protection laws that is currently enjoyed by federal savings
associations and national banks. As a result, we may now be subject to
state consumer protection laws in each state where we do business, and
those laws may be interpreted and enforced differently in different
states.
|
|
|
|
|
The establishment of consolidated risk-based and leverage capital
requirements for insured depository institutions, depository
institution holding companies and systemically important nonbank
financial companies, as discussed below.
|
|
|
|
|
The increase in the minimum designated reserve ratio for the DIF from
1.15% to 1.35% of insured deposits, which must be reached by September
30, 2020, and the requirement that deposit insurance assessments be
based on average consolidated total assets minus our average tangible
equity, rather than on our deposit bases. As a result of these
provisions, our deposit insurance premiums are expected to increase,
and the increase may be substantial, as discussed below.
|
The Reform Act imposes further restrictions on transactions with affiliates and extensions of
credit to executive officers, director and principal shareholders, by, among other things,
expanding covered transactions to include securities lending, repurchase agreement and derivatives
activities with affiliates. These changes are effective one year after the Designated Transfer
Date.
The Reform Act also includes provisions, subject to further rulemaking by the federal bank
regulatory agencies, that may affect our future operations, including provisions that restrict
proprietary trading by banking entities, restrict the sponsorship of and investment in hedge funds
and private equity funds by
Page 67
banking entities and that remove certain obstacles to the conversion of
savings associations to national banks. We will not be able to determine the impact of these
provisions until final rules are promulgated to implement these provisions and other regulatory
guidance is provided interpreting these provisions.
The Reform Act also includes provisions that create minimum standards for the origination of
mortgage loans. Pursuant to the Reform Act, on April 19, 2011, the FRB requested public comment on
a proposed rule under Regulation Z that would impose extensive regulations governing an
institutions obligation to evaluate a borrowers ability to repay a mortgage loan. The rule would
apply to all consumer mortgages (except home equity lines of credit, timeshare plans, reverse
mortgages or temporary loans). Consistent with the Reform Act, the proposal provides four options
for complying with the ability-to-repay requirement. The proposal would also implement the Reform
Acts limits on prepayment penalties. The Federal Reserve Board is soliciting comment on the
proposed rule until July 22, 2011. It is possible this rule may require us to change our
underwriting practices for certain mortgage loan products.
As a result of the Reform Act and other proposed changes, we may become subject to more stringent
capital requirements.
The Reform Act requires the federal banking agencies to establish consolidated risk-based and
leverage capital requirements for insured depository institutions, depository institution holding
companies and systemically important nonbank financial companies. These requirements must be no
less than those to which insured depository institutions are currently subject. As a result, in
July 2015, we will become subject to consolidated capital requirements which we have not been
subject to previously.
In addition, in December 2010 the Basel Committee on Banking Supervision announced the new Basel
III capital rules, which set new standards for common equity, Tier 1 and total capital, determined
on a risk-weighted basis. It is not yet known how these standards, which will be phased in over a
period of years, will be implemented by U.S. regulators generally or how they will be applied to
financial institutions of our size.
Pursuant to the Reform Act, the FRB will become responsible for the supervision of savings and loan
holding companies on July 21, 2011. In accordance with this authority, on April 15, 2011, the FRB
requested comment on proposed supervisory guidance pursuant to which the FRB is seeking to apply
certain elements of its consolidated supervisory program, including consolidated capital
requirements, for bank holding companies to savings and loan holding companies. Pursuant to the
proposed supervisory
guidance, the FRB is considering applying to savings and loan holding companies the same
consolidated risk-based and leverage capital requirements currently applicable to bank holding
companies. The FRB, together with the other federal banking agencies, expects to issue a notice of
proposed rulemaking in 2011 that will outline how Basel III-based requirements will be implemented
for all institutions, including savings and loan holding companies. The FRB expects that final
rules establishing Basel III-based capital requirements would be finalized in 2012 and
implementation would start in 2013.
The FDIC restoration plan and related rulemaking may have a negative impact on our results
operations.
In light of the failures of a significant number of banks and thrifts over the past several years,
which has resulted in substantial losses to the DIF, in July 2010, the Reform Act increased the
minimum designated reserve ratio for the DIF from 1.15% to 1.35% of insured deposits, which must be
reached by September 30, 2020, and provides that in setting the assessments necessary to meet the
new requirement,
Page 68
the FDIC shall offset the effect of this provision on insured depository
institutions with total consolidated assets of less than $10 billion, so that more of the cost of
raising the reserve ratio will be borne by the institutions with more than $10 billion in assets,
such as Hudson City Savings. In October 2010, the FDIC adopted a new restoration plan to ensure
that the DIF reserve ratio reaches 1.35% by September 30, 2020, as required by the Reform Act. The
FDIC intends to pursue further rulemaking in 2011 regarding the method that will be used to reach
the reserve ratio of 1.35% so that more of the cost of raising the reserve ratio to 1.35% will be
borne by institutions with more than $10 billion in assets.
In addition, on February 7, 2011, the FDIC adopted a final rule that redefines the assessment base
for deposit insurance assessments as average consolidated total assets minus average tangible
equity, rather than on deposit bases, as required by the Reform Act, and revises the risk-based
assessment system for all large insured depository institutions by introducing a scoring system.
This system involves the FDIC establishing a score for each such institution which then translates
into an assessment rate. The adoption of this final rule is expected to result in even higher FDIC
deposit insurance assessments effective April 1, 2011, which would further increase non-interest
expense and have a negative impact on our results of operations.
The final rule allows the FDIC to make limited adjustments to the score used to calculate an
institutions assessment rate and provides that the FDIC will not make any adjustments until new
guidelines have been published for comment and approved by the FDIC. On April 12, 2011, the FDIC
Board of Directors authorized publication of proposed guidelines describing the process that the
FDIC would follow to determine whether to make an adjustment to the score used to calculate the
assessment rate for a large or highly complex institution, the size of any such adjustment, and the
procedure the FDIC would follow to notify an institution of an adjustment. Pursuant to the proposed
guidelines, the FDIC can make a limited adjustment, either upward or downward, to an institutions
total score based upon risks or risk mitigating factors that are not adequately captured in the
institutions scorecard. In addition, an institution can make written request to the FDIC for such
an adjustment. In either case, the FDIC would consult with an institutions primary federal
regulator and appropriate state banking supervisor before making any decision to adjust an
institutions total score. Any adjustment to an institutions score must be approved by the FDIC
and there is no assurance that a request for an adjustment will result in a downward adjustment.
Page 69
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table reports information regarding repurchases of our common stock during the first
quarter of 2011 and the stock repurchase plans approved by our Board of Directors.
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Maximum
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Total Number of
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Number of Shares
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Total
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Shares Purchased
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that May Yet Be
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Number of
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Average
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as Part of Publicly
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Purchased Under
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Shares
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Price Paid
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Announced Plans
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the Plans or
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Period
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Purchased
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per Share
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or Programs
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Programs (1)
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January 1-January 31, 2011
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$
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50,123,550
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February 1-February 28, 2011
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50,123,550
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March 1-March 31, 2011
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50,123,550
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Total
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(1)
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On July 25, 2007, Hudson City Bancorp announced the adoption of its eighth Stock Repurchase Program, which authorized the repurchase
of up to 51,400,000 shares of common stock. This program has no expiration date.
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Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. (Removed and Reserved)
Item 5. Other Information
Not applicable.
Item 6. Exhibits
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Exhibit Number
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Exhibit
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10.1
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Employee Stock Ownership Plan of Hudson City Savings Bank
(incorporating Amendments No. 1,2,3,4,5,6 and 7)
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31.1
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Certification of Chief Executive Officer
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31.2
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Certification of Chief Financial Officer
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32.1
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Written Statement of Chief Executive Officer and Chief
Financial Officer furnished pursuant to Section 906 of the
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101
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Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. *
The following information from the Companys Quarterly
Report on Form 10-Q for the quarter ended March 31, 2011,
filed with the SEC on May 9, 2011, has been formatted in
eXtensible Business Reporting Language: (i) Consolidated
Statements of Financial Condition at March 31, 2011 and
December 31, 2010, (ii)
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Page 70
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Exhibit Number
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Exhibit
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Consolidated Statements of Income
for the three months ended March 31, 2011 and 2010, (iii)
Consolidated Statements of Changes in Shareholders
Equity for the three months ended March 31, 2011 and 2010, (iv) Consolidated Statements of Cash Flows for the
three months ended March 31, 2011 and 2010 and (v) Notes
to the Unaudited Consolidated Financial Statements
(detail tagged). *
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*
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Pursuant to SEC rules, this exhibit will not be deemed filed for purposes of Section 18
of the Exchange Act or otherwise subject to the liability of that section.
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Page 71
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Hudson City Bancorp, Inc.
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Date: May 9, 2011
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By:
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/s/ Ronald E. Hermance, Jr.
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Ronald E. Hermance, Jr.
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Chairman and Chief Executive Officer
(Principal Executive Officer)
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Date: May 9, 2011
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By:
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/s/ Anthony J. Fabiano
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Anthony J. Fabiano
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Senior Vice President
(Principal Accounting Officer)
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Page 72
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