UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
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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: September 30, 2012
¨
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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
x
No
¨
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes
x
No
¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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x
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Accelerated filer
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¨
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Non-accelerated filer
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¨
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Smaller reporting company
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¨
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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
¨
No
x
As of November 6, 2012, the registrant had 528,193,889 shares of common stock, $0.01 par value, outstanding.
Table of Contents
Page 2
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains certain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 which may be identified by the use of
such words as may, believe, expect, anticipate, should, plan, estimate, predict, continue, and potential or the negative of these
terms or other comparable terminology. Examples of forward-looking statements include, but are not limited to, estimates with respect to the financial condition, results of operations and business of Hudson City Bancorp, Inc. and Hudson City
Bancorp, Inc.s strategies, plans, objectives, expectations and intentions, and other statements contained in this Quarterly Report on Form 10-Q that are not historical facts. These statements are not guarantees of future performance and are
subject to risks, uncertainties and other factors (many of which are beyond our control) that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. These factors include,
but are not limited to:
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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
(Reform Act), and any actions regarding foreclosures 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 access the capital markets;
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our ability to comply with the terms of the Memoranda of Understanding with the Office of the Comptroller of the Currency (the OCC) and the
Board of Governors of the Federal Reserve System;
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our ability to pay dividends, repurchase our outstanding common stock or execute capital management strategies each of which requires the approval of
the OCC and Federal Reserve Board;
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the effects of changes in existing U.S. government or U.S. government sponsored mortgage programs;
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the risk of a continued economic slowdown that would adversely affect credit quality and loan originations;
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the potential impact on our operations and customers resulting from natural or man-made disasters, including the impact of Hurricane Sandy;
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the actual results of the pending merger (the Merger) with Wilmington Trust Corporation, a wholly owned subsidiary of M&T Bank
Corporation (M&T) could vary materially as a result of a number of factors, including the possibility that various closing conditions for the transaction may not be satisfied or waived, and the Merger Agreement could be terminated
under certain circumstances; and
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delays in closing the Merger.
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Page 3
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.
Important Additional Information
In connection with the Merger, M&T filed with the Securities and Exchange Commission (SEC) a Registration Statement on Form S-4 that includes a Joint Proxy Statement of M&T and the
Company and a Prospectus of M&T, as well as other relevant documents concerning the proposed Merger. The Registration Statement is subject to completion and has not yet become effective. A definitive proxy statement will be mailed to
shareholders of the Company after the registration statement is declared effective. SHAREHOLDERS OF THE COMPANY AND M&T ARE URGED TO READ THE REGISTRATION STATEMENT AND THE JOINT PROXY STATEMENT/PROSPECTUS REGARDING THE MERGER AND ANY OTHER
RELEVANT DOCUMENTS FILED WITH THE SEC, AS WELL AS ANY AMENDMENTS OR SUPPLEMENTS TO THOSE DOCUMENTS, BECAUSE THEY CONTAIN AND WILL CONTAIN IMPORTANT INFORMATION.
A free copy of the Joint Proxy Statement/Prospectus, as well as other filings containing information about the Company and M&T, may be obtained at the SECs Internet site (http://www.sec.gov).
These documents may also be obtained, free of charge, from M&T at www.mtb.com under the tab About Us and then under the heading Investor Relations or from the Company by accessing the Companys website at
www.hcsbonline.com under the heading Investor Relations. Copies of the Joint Proxy Statement/Prospectus can also be obtained, free of charge, by directing a request to M&Ts Investor Relations, One M&T Plaza, Buffalo, New
York 14203, (716) 842-5445.
The Company and M&T and certain of their directors and executive officers may be deemed to be
participants in the solicitation of proxies from the shareholders of the Company and M&T in connection with the Merger. Information about the directors and executive officers of the Company and their ownership of Company common stock is set
forth in the proxy statement for the Companys 2012 annual meeting of shareholders, as filed with the SEC on a Schedule 14A on March 19, 2012. Information about the directors and executive officers of M&T and their ownership of M&T
Common Stock is set forth in the proxy statement for M&Ts 2012 annual meeting of shareholders, as filed with the SEC on Schedule 14A on March 7, 2012. Additional information regarding the interests of those participants and other
persons who may be deemed participants in the transaction may be obtained by reading the Joint Proxy Statement/Prospectus regarding the Merger. Free copies of this document may be obtained as described in the preceding paragraph.
Page 4
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Hudson City Bancorp, Inc. and Subsidiary
Consolidated Statements of Financial Condition
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September 30,
2012
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December 31,
2011
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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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112,157
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$
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194,029
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Federal funds sold and other overnight deposits
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313,704
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560,051
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Total cash and cash equivalents
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425,861
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754,080
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Securities available for sale:
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Mortgage-backed securities
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8,772,353
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9,170,390
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Investment securities
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428,407
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7,368
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Securities held to maturity:
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Mortgage-backed securities (fair value of $3,482,901 at September 30, 2012 and $4,368,423 at December 31,
2011)
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3,256,099
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4,115,523
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Investment securities (fair value of $45,577 at September 30, 2012 and $545,761 at December 31, 2011)
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39,011
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539,011
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Total securities
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12,495,870
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13,832,292
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Loans
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27,732,074
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29,327,345
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Net deferred loan costs
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93,117
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83,805
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Allowance for loan losses
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(291,573
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)
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(273,791
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)
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Net loans
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27,533,618
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29,137,359
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Federal Home Loan Bank of New York stock
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390,217
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510,564
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Foreclosed real estate, net
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45,336
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40,619
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Accrued interest receivable
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102,656
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129,088
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Banking premises and equipment, net
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75,468
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70,610
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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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677,458
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729,164
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Total Assets
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$
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41,898,593
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$
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45,355,885
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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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23,403,258
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$
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24,903,311
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Noninterest-bearing
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618,923
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604,449
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Total deposits
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24,022,181
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25,507,760
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Repurchase agreements
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6,950,000
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6,950,000
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Federal Home Loan Bank of New York advances
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5,975,000
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8,125,000
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Total borrowed funds
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12,925,000
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15,075,000
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Accrued expenses and other liabilities
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239,327
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212,685
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Total liabilities
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37,186,508
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40,795,445
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Common stock, $0.01 par value, 3,200,000,000 shares authorized; 741,466,555 shares issued; 528,193,889 and 527,571,496 shares
outstanding at September 30, 2012 and December 31, 2011, respectively
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7,415
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7,415
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Additional paid-in capital
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4,727,763
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4,720,890
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Retained earnings
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1,790,232
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1,709,821
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Treasury stock, at cost; 213,272,666 and 213,895,059 shares at September 30, 2012 and December 31, 2011,
respectively
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(1,714,036
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)
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(1,719,114
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)
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Unallocated common stock held by the employee stock ownership plan
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(193,718
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)
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(198,223
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)
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Accumulated other comprehensive income, net of tax
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94,429
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39,651
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Total shareholders equity
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4,712,085
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4,560,440
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Total Liabilities and Shareholders Equity
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$
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41,898,593
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$
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45,355,885
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See accompanying notes to unaudited consolidated financial statements
Page 5
Hudson City Bancorp, Inc. and Subsidiary
Consolidated Statements of Operations
(Unaudited)
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For the Three Months
Ended
September 30,
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For the Nine Months
Ended
September 30,
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2012
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2011
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2012
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2011
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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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320,994
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$
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375,672
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$
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999,745
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$
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1,139,000
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Consumer and other loans
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3,207
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3,792
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9,810
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12,017
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Mortgage-backed securities held to maturity
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29,498
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49,554
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100,958
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166,531
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Mortgage-backed securities available for sale
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43,736
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58,631
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145,607
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250,138
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Investment securities held to maturity
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585
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27,474
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2,903
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93,009
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Investment securities available for sale
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2,362
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55
|
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5,780
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|
887
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Dividends on Federal Home Loan Bank of New York stock
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4,853
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8,841
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18,878
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31,274
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Federal funds sold
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194
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|
519
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1,200
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1,937
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Total interest and dividend income
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405,429
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524,538
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1,284,881
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1,694,793
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Interest Expense:
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Deposits
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56,927
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81,538
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186,445
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250,216
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Borrowed funds
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145,214
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198,357
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436,777
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670,624
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Total interest expense
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202,141
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279,895
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623,222
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920,840
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|
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|
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Net interest income
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203,288
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|
244,643
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661,659
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773,953
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|
Provision for Loan Losses
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|
20,000
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|
25,000
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|
|
|
70,000
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|
|
|
95,000
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|
|
|
|
|
|
|
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|
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|
|
|
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|
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Net interest income after provision for loan losses
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183,288
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|
219,643
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|
|
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591,659
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|
|
678,953
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Non-Interest Income:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Service charges and other income
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|
|
3,017
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|
|
|
3,094
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|
|
|
8,728
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|
|
|
8,565
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|
Gain on securities transactions, net
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
102,468
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income
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|
|
3,017
|
|
|
|
3,094
|
|
|
|
8,728
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|
|
|
111,033
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Non-Interest Expense:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and employee benefits
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|
|
33,883
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27,201
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|
|
|
96,426
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|
|
|
87,974
|
|
Net occupancy expense
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|
|
8,586
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|
|
|
8,711
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|
|
|
25,786
|
|
|
|
25,166
|
|
Federal deposit insurance assessment
|
|
|
30,250
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|
|
|
33,866
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|
|
|
93,945
|
|
|
|
83,394
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|
Loss on extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,172,092
|
|
Other expense
|
|
|
21,158
|
|
|
|
13,883
|
|
|
|
52,889
|
|
|
|
41,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expense
|
|
|
93,877
|
|
|
|
83,661
|
|
|
|
269,046
|
|
|
|
1,410,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense (benefit)
|
|
|
92,428
|
|
|
|
139,076
|
|
|
|
331,341
|
|
|
|
(620,080
|
)
|
Income Tax Expense (Benefit)
|
|
|
36,496
|
|
|
|
54,873
|
|
|
|
130,146
|
|
|
|
(244,627
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
55,932
|
|
|
$
|
84,203
|
|
|
$
|
201,195
|
|
|
$
|
(375,453
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings (Loss) Per Share
|
|
|
0.11
|
|
|
$
|
0.17
|
|
|
$
|
0.41
|
|
|
$
|
(0.76
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings (Loss) Per Share
|
|
$
|
0.11
|
|
|
$
|
0.17
|
|
|
$
|
0.41
|
|
|
$
|
(0.76
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Number of Common Shares Outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
496,772,798
|
|
|
|
494,966,393
|
|
|
|
496,435,666
|
|
|
|
493,994,559
|
|
Diluted
|
|
|
496,779,005
|
|
|
|
495,089,402
|
|
|
|
496,446,418
|
|
|
|
493,994,559
|
|
See accompanying notes to unaudited consolidated financial statements
Page 6
Hudson City Bancorp, Inc. and Subsidiary
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited
)
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(In thousands)
|
|
Net income
|
|
$
|
55,932
|
|
|
$
|
84,203
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses) on securities:
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses) on securities available for sale arising during period, net of tax expense of $18,880 and $25,770
in 2012 and 2011, respectively
|
|
|
27,337
|
|
|
|
37,315
|
|
Postretirement benefit pension plans:
|
|
|
|
|
|
|
|
|
Amortization of net loss arising during period, net of tax expense of $690 and $522 for 2012 and 2011,
respectively
|
|
|
998
|
|
|
|
755
|
|
Amortization of prior service cost included in net periodic pension cost, net of tax benefit of $123 and $124 in 2012 and 2011,
respectively
|
|
|
(178
|
)
|
|
|
(180
|
)
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
28,157
|
|
|
|
37,890
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
84,089
|
|
|
$
|
122,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months
Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(In thousands)
|
|
Net income (loss)
|
|
$
|
201,195
|
|
|
$
|
(375,453
|
)
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses) on securities:
|
|
|
|
|
|
|
|
|
Net unrealized gains on securities available for sale arising during period, net of tax expense of $36,133 and $26,185 in 2012
and 2011, respectively
|
|
|
52,319
|
|
|
|
37,916
|
|
Reclassification adjustment for realized gains in net income (loss), net of tax expense of $40,526 in 2011
|
|
|
|
|
|
|
(61,942
|
)
|
Postretirement benefit pension plans:
|
|
|
|
|
|
|
|
|
Amortization of net loss arising during period, net of tax expense of $2,070 and $1,565 for 2012 and 2011,
respectively
|
|
|
2,994
|
|
|
|
2,266
|
|
Amortization or prior service cost included in net periodic pension cost, net of tax benefit of $368 and $372 in 2012 and 2011,
respectively
|
|
|
(535
|
)
|
|
|
(540
|
)
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
54,778
|
|
|
|
(22,300
|
)
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss)
|
|
$
|
255,973
|
|
|
$
|
(397,753
|
)
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited consolidated financial statements
Page 7
Hudson City Bancorp, Inc. and Subsidiary
Consolidated Statements of Changes in Shareholders Equity
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months
Ended
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(In thousands, except per share data)
|
|
Common Stock
|
|
$
|
7,415
|
|
|
$
|
7,415
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital:
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
4,720,890
|
|
|
|
4,705,255
|
|
Stock option plan expense
|
|
|
6,024
|
|
|
|
6,352
|
|
Tax benefit from stock plans
|
|
|
421
|
|
|
|
1,749
|
|
Allocation of ESOP stock
|
|
|
369
|
|
|
|
1,981
|
|
Vesting of RRP stock
|
|
|
59
|
|
|
|
2,609
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
4,727,763
|
|
|
|
4,717,946
|
|
|
|
|
|
|
|
|
|
|
Retained Earnings:
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
1,709,821
|
|
|
|
2,642,338
|
|
Net income (loss)
|
|
|
201,195
|
|
|
|
(375,453
|
)
|
Dividends paid on common stock ($0.24 and $0.31 per share, respectively)
|
|
|
(119,080
|
)
|
|
|
(153,114
|
)
|
Exercise of stock options
|
|
|
(1,704
|
)
|
|
|
(3,738
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
1,790,232
|
|
|
|
2,110,033
|
|
|
|
|
|
|
|
|
|
|
Treasury Stock:
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
(1,719,114
|
)
|
|
|
(1,725,946
|
)
|
Purchase of common stock
|
|
|
(427
|
)
|
|
|
(163
|
)
|
Exercise of stock options
|
|
|
5,505
|
|
|
|
6,803
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
(1,714,036
|
)
|
|
|
(1,719,306
|
)
|
|
|
|
|
|
|
|
|
|
Unallocated common stock held by the ESOP:
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
(198,223
|
)
|
|
|
(204,230
|
)
|
Allocation of ESOP stock
|
|
|
4,505
|
|
|
|
4,505
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
(193,718
|
)
|
|
|
(199,725
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income(loss):
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
39,651
|
|
|
|
85,406
|
|
Other comprehensive income (loss), net of tax
|
|
|
54,778
|
|
|
|
(22,300
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
94,429
|
|
|
|
63,106
|
|
|
|
|
|
|
|
|
|
|
Total Shareholders Equity
|
|
$
|
4,712,085
|
|
|
$
|
4,979,469
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited consolidated financial statements.
Page 8
Hudson City Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months
Ended
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(In thousands)
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
201,195
|
|
|
$
|
(375,453
|
)
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation, accretion and amortization expense
|
|
|
93,556
|
|
|
|
97,206
|
|
Provision for loan losses
|
|
|
70,000
|
|
|
|
95,000
|
|
Gains on securities transactions, net
|
|
|
|
|
|
|
(102,468
|
)
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
1,172,092
|
|
Share-based compensation, including committed ESOP shares
|
|
|
10,956
|
|
|
|
15,447
|
|
Deferred tax expense (benefit)
|
|
|
51,181
|
|
|
|
(134,560
|
)
|
Decrease in accrued interest receivable
|
|
|
26,432
|
|
|
|
80,647
|
|
Increase in other assets
|
|
|
(34,272
|
)
|
|
|
(54,219
|
)
|
Increase (decrease) in accrued expenses and other liabilities
|
|
|
26,642
|
|
|
|
(44,542
|
)
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Operating Activities
|
|
|
445,690
|
|
|
|
749,150
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Originations of loans
|
|
|
(3,887,709
|
)
|
|
|
(3,752,551
|
)
|
Purchases of loans
|
|
|
(28,742
|
)
|
|
|
(338,594
|
)
|
Principal payments on loans
|
|
|
5,381,977
|
|
|
|
4,847,818
|
|
Principal collection of mortgage-backed securities held to maturity
|
|
|
855,316
|
|
|
|
1,373,355
|
|
Principal collection of mortgage-backed securities available for sale
|
|
|
1,882,793
|
|
|
|
2,200,255
|
|
Purchases of mortgage-backed securities available for sale
|
|
|
(1,473,243
|
)
|
|
|
(3,591,347
|
)
|
Proceeds from sales of mortgage backed securities available for sale
|
|
|
|
|
|
|
9,064,379
|
|
Proceeds from maturities and calls of investment securities held to maturity
|
|
|
500,000
|
|
|
|
2,300,000
|
|
Proceeds from sales of investment securities available for sale
|
|
|
|
|
|
|
82,475
|
|
Purchases of investment securities available for sale
|
|
|
(407,832
|
)
|
|
|
|
|
Purchases of Federal Home Loan Bank of New York stock
|
|
|
(24,750
|
)
|
|
|
(16,624
|
)
|
Redemption of Federal Home Loan Bank of New York stock
|
|
|
145,097
|
|
|
|
162,000
|
|
Purchases of premises and equipment, net
|
|
|
(10,926
|
)
|
|
|
(6,805
|
)
|
Net proceeds from sale of foreclosed real estate
|
|
|
44,974
|
|
|
|
39,583
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Investment Activities
|
|
|
2,976,955
|
|
|
|
12,363,944
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Net (decrease) increase in deposits
|
|
|
(1,485,579
|
)
|
|
|
248,293
|
|
Proceeds from borrowed funds
|
|
|
550,000
|
|
|
|
6,500,000
|
|
Principal payments on borrowed funds
|
|
|
(2,700,000
|
)
|
|
|
(17,122,092
|
)
|
Dividends paid
|
|
|
(119,080
|
)
|
|
|
(153,114
|
)
|
Purchases of treasury stock
|
|
|
(427
|
)
|
|
|
(163
|
)
|
Exercise of stock options
|
|
|
3,801
|
|
|
|
3,065
|
|
Tax benefit from stock plans
|
|
|
421
|
|
|
|
1,749
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used in Financing Activities
|
|
|
(3,750,864
|
)
|
|
|
(10,522,262
|
)
|
|
|
|
|
|
|
|
|
|
Net (Decrease) Increase in Cash and Cash Equivalents
|
|
|
(328,219
|
)
|
|
|
2,590,832
|
|
Cash and Cash Equivalents at Beginning of Year
|
|
|
754,080
|
|
|
|
669,397
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Period
|
|
$
|
425,861
|
|
|
$
|
3,260,229
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
622,178
|
|
|
$
|
963,805
|
|
|
|
|
|
|
|
|
|
|
Loans transferred to foreclosed real estate
|
|
$
|
67,909
|
|
|
$
|
51,891
|
|
|
|
|
|
|
|
|
|
|
Income tax payments
|
|
$
|
99,066
|
|
|
$
|
17,146
|
|
|
|
|
|
|
|
|
|
|
Income tax refunds
|
|
$
|
5,294
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited consolidated financial statements.
Page 9
Notes to Unaudited Consolidated Financial Statements
1. Organization
Hudson City Bancorp, Inc. (Hudson City Bancorp or the Company) is a Delaware corporation and is the savings and
loan holding company for Hudson City Savings Bank and its subsidiaries (Hudson City Savings or the Bank). As a savings and loan holding company, Hudson City Bancorp is subject to the supervision and examination of the Board
of Governors of the Federal Reserve System (the FRB). Hudson City Savings is a federally chartered stock savings bank subject to supervision and examination by the Office of the Comptroller of the Currency (the OCC).
On March 30, 2012, the Bank entered into a Memorandum of Understanding with the OCC (the Bank MOU),
which is substantially similar to the MOU the Bank entered into with our former regulator, the Office of Thrift Supervision (the OTS), on June 24, 2011. The Bank MOU replaces the June 24
th
memorandum of understanding. In accordance with the Bank MOU, the
Bank has adopted and has implemented enhanced operating policies and procedures, intended to enable us to continue to: (a) reduce our level of interest rate risk, (b) reduce our funding concentration, (c) diversify our funding
sources, (d) enhance our liquidity position, (e) monitor and manage loan modifications and (f) maintain our capital position in accordance with our existing capital plan. In addition, we developed a written strategic plan for the Bank
which establishes various objectives, including, but not limited to, objectives for the Banks overall risk profile, earnings performance, growth and balance sheet mix and to enhance our enterprise risk management program.
The Company entered into a separate Memorandum of Understanding with the FRB (the Company MOU) on April 24, 2012,
which is substantially similar to the MOU the Company entered into with our former regulator, the OTS, on June 24, 2011. The Company MOU replaces the June 24
th
memorandum of understanding. In accordance with the Company MOU, the Company must, among other things support the
Banks compliance with the Bank MOU. The Company MOU also requires the Company to: (a) obtain approval from the FRB prior to receiving a capital distribution from the Bank or declaring a dividend to shareholders, (b) obtain approval
from the FRB prior to repurchasing or redeeming any Company stock or incurring any debt with a maturity of greater than one year and (c) submit a comprehensive Capital Plan and a comprehensive Earnings Plan to the FRB. These agreements will
remain in effect until modified or terminated by the OCC (with respect to the Bank MOU) and the FRB (with respect to the Company MOU).
On
August 27, 2012, the Company entered into an Agreement and Plan of Merger (the Merger Agreement) with M&T and Wilmington Trust Corporation, a Delaware corporation and a wholly owned subsidiary of M&T (WTC). The
Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, Hudson City will merge with and into WTC, with WTC continuing as the surviving entity (the Merger).
Subject to the terms and conditions of the Merger Agreement, upon completion of the Merger, Hudson City shareholders will have the right to receive with
respect to each of their shares of common stock of the Company, at their election (but subject to proration and adjustment procedures), 0.08403 of a share of common stock, par value $0.50 per share, of M&T (the M&T Common Stock),
or cash having a value equal to the product of 0.08403 multiplied by the average closing price of the M&T Common Stock for the ten trading days immediately prior to the completion of the Merger. The Merger Agreement provides that at the closing
of the Merger, 40% of the outstanding shares of Hudson City common stock will be converted into the right to receive cash and the remainder of the outstanding shares of Hudson City common stock will be converted into the right to receive shares of
M&T Common Stock.
Completion of the Merger is subject to various conditions, including, among others, (a) approval by Hudson City
shareholders of the Merger Agreement, (b) approval by M&T shareholders of the issuance in the Merger of shares of M&T Common Stock, (c) effectiveness of the registration statement on Form S-4 for the M&T Common Stock to be
issued in the
Page 10
Notes to Unaudited Consolidated Financial Statements
Merger, (d) approval of the listing on the New York Stock Exchange of the shares of M&T Common Stock to be issued in the Merger, (e) the absence of any law or order prohibiting the
closing of the Merger and (f) receipt of required regulatory approvals without the imposition of a condition or conditions that would reasonably be likely to have a material adverse effect on M&T and its subsidiaries, taken as a whole,
giving effect to the Merger (measured on a scale relative to Hudson City and its subsidiaries taken as a whole) (as defined in the Merger Agreement). Each partys obligation to consummate the Merger is also subject to certain additional
customary conditions, including (i) subject to certain exceptions, the accuracy of the representations and warranties of the other party, (ii) performance in all material respects by the other party of its obligations and (iii) the
receipt by such party of an opinion from its counsel to the effect that the Merger will qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended.
2. Basis of Presentation
The accompanying consolidated financial statements include the accounts of Hudson City Bancorp and its wholly-owned subsidiary, Hudson
City Savings.
In our opinion, all the adjustments (consisting of normal and recurring adjustments) necessary for a fair presentation of the
consolidated financial condition and consolidated results of operations for the unaudited periods presented have been included. The results of operations and other data presented for the three and nine-month periods ended September 30, 2012 are
not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2012. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the statements of financial condition and the results of operations for the period. Actual results could differ from these estimates. The allowance for loan losses (ALL) is a
material estimate that is particularly susceptible to near-term change. The current economic environment has increased the degree of uncertainty inherent in this material estimate. In addition, bank regulators, as an integral part of their
supervisory function, periodically review our ALL. These regulatory agencies have the ability to require us, as they can require all banks, to increase our provision for loan losses or to recognize further charge-offs based on their judgments, which
may be different from ours. Any increase in the ALL required by these regulatory agencies could adversely affect our financial condition and results of operations.
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 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 2011 Annual Report to Shareholders and incorporated by reference into Hudson City Bancorps 2011 Annual Report on Form 10-K.
Page 11
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 earnings (loss) per share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
Income
|
|
|
Average
Shares
|
|
|
Per
Share
Amount
|
|
|
Income
|
|
|
Average
Shares
|
|
|
Per
Share
Amount
|
|
|
|
(In thousands, except per share data)
|
|
Net income
|
|
$
|
55,932
|
|
|
|
|
|
|
|
|
|
|
$
|
84,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common stockholders
|
|
$
|
55,932
|
|
|
|
496,773
|
|
|
$
|
0.11
|
|
|
$
|
84,203
|
|
|
|
494,966
|
|
|
$
|
0.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive common stock equivalents
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common stockholders
|
|
$
|
55,932
|
|
|
|
496,779
|
|
|
$
|
0.11
|
|
|
$
|
84,203
|
|
|
|
495,089
|
|
|
$
|
0.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
Income
|
|
|
Average
Shares
|
|
|
Per
Share
Amount
|
|
|
Income
|
|
|
Average
Shares
|
|
|
Per
Share
Amount
|
|
|
|
(In thousands, except per share data)
|
|
Net income (loss)
|
|
$
|
201,195
|
|
|
|
|
|
|
|
|
|
|
$
|
(375,453
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) available to common stockholders
|
|
$
|
201,195
|
|
|
|
496,436
|
|
|
$
|
0.41
|
|
|
$
|
(375,453
|
)
|
|
|
493,995
|
|
|
$
|
(0.76
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive common stock equivalents
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) available to common stockholders
|
|
$
|
201,195
|
|
|
|
496,446
|
|
|
$
|
0.41
|
|
|
$
|
(375,453
|
)
|
|
|
493,995
|
|
|
$
|
(0.76
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock equivalents exclude outstanding options to purchase 24,046,905 shares of the Companys common stock for
the quarter ended September 30, 2012; options to purchase 24,087,514 shares of common stock for the nine months ended September 30, 2012; options to purchase 26,990,228 shares of common stock for the quarter ended September 30, 2011;
and options to purchase 27,707,847 shares of common stock for the nine months ended September 30, 2011 as their inclusion would be anti-dilutive.
Page 12
Notes to Unaudited Consolidated Financial Statements
4. Securities
The amortized cost and estimated fair market value of investment securities and mortgage-backed securities available-for-sale at
September 30, 2012 and December 31, 2011 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair Market
Value
|
|
|
|
(In thousands)
|
|
September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt
|
|
$
|
406,785
|
|
|
$
|
14,068
|
|
|
$
|
|
|
|
$
|
420,853
|
|
Equity securities
|
|
|
6,812
|
|
|
|
742
|
|
|
|
|
|
|
|
7,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities available for sale
|
|
$
|
413,597
|
|
|
$
|
14,810
|
|
|
$
|
|
|
|
$
|
428,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA pass-through certificates
|
|
$
|
1,047,199
|
|
|
$
|
39,866
|
|
|
$
|
|
|
|
$
|
1,087,065
|
|
FNMA pass-through certificates
|
|
|
4,421,561
|
|
|
|
100,619
|
|
|
|
|
|
|
|
4,522,180
|
|
FHLMC pass-through certificates
|
|
|
3,015,523
|
|
|
|
81,677
|
|
|
|
|
|
|
|
3,097,200
|
|
FHLMC and FNMAREMICs
|
|
|
63,534
|
|
|
|
2,374
|
|
|
|
|
|
|
|
65,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities available for sale
|
|
$
|
8,547,817
|
|
|
$
|
224,536
|
|
|
$
|
|
|
|
$
|
8,772,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
6,767
|
|
|
$
|
601
|
|
|
$
|
|
|
|
$
|
7,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities available for sale
|
|
$
|
6,767
|
|
|
$
|
601
|
|
|
$
|
|
|
|
$
|
7,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA pass-through certificates
|
|
$
|
1,139,894
|
|
|
$
|
26,353
|
|
|
$
|
(19
|
)
|
|
$
|
1,166,228
|
|
FNMA pass-through certificates
|
|
|
4,407,970
|
|
|
|
60,059
|
|
|
|
|
|
|
|
4,468,029
|
|
FHLMC pass-through certificates
|
|
|
3,390,467
|
|
|
|
61,689
|
|
|
|
|
|
|
|
3,452,156
|
|
FHLMC and FNMAREMICs
|
|
|
81,768
|
|
|
|
2,209
|
|
|
|
|
|
|
|
83,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities available for sale
|
|
$
|
9,020,099
|
|
|
$
|
150,310
|
|
|
$
|
(19
|
)
|
|
$
|
9,170,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 13
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 September 30, 2012 and December 31, 2011 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair Market
Value
|
|
|
|
(In thousands)
|
|
September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States government-sponsored enterprises debt
|
|
$
|
39,011
|
|
|
$
|
6,566
|
|
|
$
|
|
|
|
$
|
45,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities held to maturity
|
|
$
|
39,011
|
|
|
$
|
6,566
|
|
|
$
|
|
|
|
$
|
45,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA pass-through certificates
|
|
$
|
76,054
|
|
|
$
|
2,943
|
|
|
$
|
|
|
|
$
|
78,997
|
|
FNMA pass-through certificates
|
|
|
928,496
|
|
|
|
72,570
|
|
|
|
(2
|
)
|
|
|
1,001,064
|
|
FHLMC pass-through certificates
|
|
|
1,750,892
|
|
|
|
119,281
|
|
|
|
|
|
|
|
1,870,173
|
|
FHLMC and FNMAREMICs
|
|
|
500,657
|
|
|
|
32,010
|
|
|
|
|
|
|
|
532,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities held to maturity
|
|
$
|
3,256,099
|
|
|
$
|
226,804
|
|
|
$
|
(2
|
)
|
|
$
|
3,482,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States government-sponsored enterprises debt
|
|
$
|
539,011
|
|
|
$
|
6,750
|
|
|
$
|
|
|
|
$
|
545,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities held to maturity
|
|
$
|
539,011
|
|
|
$
|
6,750
|
|
|
$
|
|
|
|
$
|
545,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA pass-through certificates
|
|
$
|
83,587
|
|
|
$
|
2,602
|
|
|
$
|
|
|
|
$
|
86,189
|
|
FNMA pass-through certificates
|
|
|
1,154,638
|
|
|
|
78,603
|
|
|
|
(4
|
)
|
|
|
1,233,237
|
|
FHLMC pass-through certificates
|
|
|
2,132,408
|
|
|
|
125,364
|
|
|
|
|
|
|
|
2,257,772
|
|
FHLMC and FNMAREMICs
|
|
|
744,890
|
|
|
|
46,335
|
|
|
|
|
|
|
|
791,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities held to maturity
|
|
$
|
4,115,523
|
|
|
$
|
252,904
|
|
|
$
|
(4
|
)
|
|
$
|
4,368,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 14
Notes to Unaudited Consolidated Financial Statements
The following tables summarize the fair values and unrealized losses of mortgage-backed securities with
an unrealized loss at September 30, 2012 and December 31, 2011, segregated between securities that had been in a continuous unrealized loss position for less than twelve months or longer than twelve months at the respective dates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or Longer
|
|
|
Total
|
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA pass-through certificates
|
|
$
|
236
|
|
|
$
|
(2
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
236
|
|
|
$
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities held to maturity
|
|
|
236
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
236
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
236
|
|
|
$
|
(2
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
236
|
|
|
$
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA pass-through certificates
|
|
$
|
210
|
|
|
$
|
(4
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
210
|
|
|
$
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities held to maturity
|
|
|
210
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
210
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA pass-through certificates
|
|
|
12,891
|
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
12,891
|
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities available for sale
|
|
|
12,891
|
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
12,891
|
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
13,101
|
|
|
$
|
(23
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
13,101
|
|
|
$
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The unrealized losses are primarily due to the changes in market interest rates subsequent to purchase. We do not
consider these investments to be other-than-temporarily impaired at September 30, 2012 and December 31, 2011 since the decline in market value is attributable to changes in interest rates and not credit quality. In addition, the Company
does not intend to sell and does not believe that it is more likely than not that we will be required to sell these investments until there is a full recovery of the unrealized loss, which may be at maturity. As a result no impairment loss was
recognized during the nine months ended September 30, 2012 or for the year ended December 31, 2011.
The amortized cost and
estimated fair market value of our securities held to maturity and available-for-sale at September 30, 2012, by contractual maturity, are shown below. The table does not include the effect of prepayments or scheduled principal amortization. The
expected maturity may differ from the contractual maturity because issuers may have the right to call or prepay obligations. Equity securities have been excluded from this table.
Page 15
Notes to Unaudited Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
|
Estimated
Fair
Market
Value
|
|
|
|
Mortgage-backed
securities
|
|
|
Investment
securities
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
6
|
|
|
$
|
|
|
|
$
|
6
|
|
Due after one year through five years
|
|
|
2,394
|
|
|
|
|
|
|
|
2,518
|
|
Due after five years through ten years
|
|
|
10,316
|
|
|
|
|
|
|
|
10,935
|
|
Due after ten years
|
|
|
3,243,383
|
|
|
|
39,011
|
|
|
|
3,515,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held to maturity
|
|
$
|
3,256,099
|
|
|
$
|
39,011
|
|
|
$
|
3,528,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Due after one year through five years
|
|
$
|
|
|
|
$
|
406,785
|
|
|
$
|
420,853
|
|
Due after ten years
|
|
|
8,547,817
|
|
|
|
|
|
|
|
8,772,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
|
|
$
|
8,547,817
|
|
|
$
|
406,785
|
|
|
$
|
9,193,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no sales of mortgage-backed securities available-for-sale for the nine months ended September 30, 2012.
Sales of mortgage-backed securities available-for-sale amounted to $8.96 billion for the nine months ended September 30, 2011, resulting in realized gains of $100.0 million. There were no sales of investment securities available-for-sale during
the nine months ended September 30, 2012, as compared to sales of $80.0 million for the same period in 2011. Gross realized gains on sales and calls of investment securities available-for-sale were $2.5 million during the first nine months of
2011. Gains and losses on the sale of all securities are determined using the specific identification method.
5. Stock Repurchase Programs
We have previously announced several stock repurchase programs. Under our stock repurchase programs, shares of Hudson City Bancorp
common stock may be purchased in the open market or through other privately negotiated transactions, depending on market conditions. The repurchased shares are held as treasury stock for general corporate use. In accordance with the terms of the
Company MOU, future share repurchases must be approved by the FRB. In addition, pursuant to the terms of the Merger Agreement, we may not repurchase shares of Hudson City Bancorp common stock without the consent of M&T. We did not purchase any
of our common shares pursuant to the repurchase programs during the nine months ended September 30, 2012. Included in treasury stock are vested shares related to stock awards that were surrendered for withholding taxes. These shares are
included in treasury stock purchases in the consolidated statements of cash flows and amounted to 62,579 and 17,145 shares for the nine months ended September 30, 2012 and 2011, respectively. As of September 30, 2012, there remained
50,123,550 shares that may be purchased under the existing stock repurchase programs.
Page 16
Notes to Unaudited Consolidated Financial Statements
6. Loans and Allowance for Loan Losses
Loans at September 30, 2012 and December 31, 2011 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
|
|
(In thousands)
|
|
First mortgage loans:
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
|
|
|
|
|
|
|
Amortizing
|
|
$
|
22,161,239
|
|
|
$
|
23,480,909
|
|
Interest-only
|
|
|
4,578,710
|
|
|
|
4,779,863
|
|
FHA/VA
|
|
|
693,486
|
|
|
|
734,781
|
|
Multi-family and commercial
|
|
|
37,384
|
|
|
|
39,634
|
|
Construction
|
|
|
4,619
|
|
|
|
4,929
|
|
|
|
|
|
|
|
|
|
|
Total first mortgage loans
|
|
|
27,475,438
|
|
|
|
29,040,116
|
|
|
|
|
|
|
|
|
|
|
Consumer and other loans:
|
|
|
|
|
|
|
|
|
Fixedrate second mortgages
|
|
|
111,561
|
|
|
|
131,597
|
|
Home equity credit lines
|
|
|
122,976
|
|
|
|
134,502
|
|
Other
|
|
|
22,099
|
|
|
|
21,130
|
|
|
|
|
|
|
|
|
|
|
Total consumer and other loans
|
|
|
256,636
|
|
|
|
287,229
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
27,732,074
|
|
|
$
|
29,327,345
|
|
|
|
|
|
|
|
|
|
|
There were no loans held for sale at September 30, 2012 and December 31, 2011.
The following tables present the composition of our loan portfolio by credit quality indicator at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Risk Profile based on Payment Activity
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
One-to four- family
first mortgage
loans
|
|
|
Other first
Mortgages
|
|
|
Consumer and Other
|
|
|
Total
Loans
|
|
|
|
Amortizing
|
|
|
Interest-only
|
|
|
Multi-family
and
Commercial
|
|
|
Construction
|
|
|
Fixed-rate
second
mortgages
|
|
|
Home Equity
credit lines
|
|
|
Other
|
|
|
|
|
September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing
|
|
$
|
21,907,639
|
|
|
$
|
4,397,605
|
|
|
$
|
35,303
|
|
|
$
|
|
|
|
$
|
110,092
|
|
|
$
|
118,655
|
|
|
$
|
19,655
|
|
|
$
|
26,588,949
|
|
Non-performing
|
|
|
947,086
|
|
|
|
181,105
|
|
|
|
2,081
|
|
|
|
4,619
|
|
|
|
1,469
|
|
|
|
4,321
|
|
|
|
2,444
|
|
|
|
1,143,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
22,854,725
|
|
|
$
|
4,578,710
|
|
|
$
|
37,384
|
|
|
$
|
4,619
|
|
|
$
|
111,561
|
|
|
$
|
122,976
|
|
|
$
|
22,099
|
|
|
$
|
27,732,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing
|
|
$
|
23,417,785
|
|
|
$
|
4,566,001
|
|
|
$
|
37,411
|
|
|
$
|
585
|
|
|
$
|
130,869
|
|
|
$
|
130,897
|
|
|
$
|
21,110
|
|
|
$
|
28,304,658
|
|
Non-performing
|
|
|
797,905
|
|
|
|
213,862
|
|
|
|
2,223
|
|
|
|
4,344
|
|
|
|
728
|
|
|
|
3,605
|
|
|
|
20
|
|
|
|
1,022,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
24,215,690
|
|
|
$
|
4,779,863
|
|
|
$
|
39,634
|
|
|
$
|
4,929
|
|
|
$
|
131,597
|
|
|
$
|
134,502
|
|
|
$
|
21,130
|
|
|
$
|
29,327,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 17
Notes to Unaudited Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Risk Profile by Internally Assigned Grade
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
One-to four- family
first mortgage
loans
|
|
|
Other first
Mortgages
|
|
|
Consumer and Other
|
|
|
Total
Loans
|
|
|
|
Amortizing
|
|
|
Interest-only
|
|
|
Multi-family
and
Commercial
|
|
|
Construction
|
|
|
Fixed-rate
second
mortgages
|
|
|
Home Equity
credit lines
|
|
|
Other
|
|
|
|
|
September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
21,807,471
|
|
|
$
|
4,355,958
|
|
|
$
|
22,174
|
|
|
$
|
|
|
|
$
|
108,784
|
|
|
$
|
118,259
|
|
|
$
|
17,866
|
|
|
$
|
26,430,512
|
|
Special mention
|
|
|
155,615
|
|
|
|
34,134
|
|
|
|
2,024
|
|
|
|
|
|
|
|
158
|
|
|
|
396
|
|
|
|
305
|
|
|
|
192,632
|
|
Substandard
|
|
|
891,639
|
|
|
|
188,618
|
|
|
|
13,186
|
|
|
|
4,619
|
|
|
|
2,619
|
|
|
|
4,321
|
|
|
|
3,928
|
|
|
|
1,108,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
22,854,725
|
|
|
$
|
4,578,710
|
|
|
$
|
37,384
|
|
|
$
|
4,619
|
|
|
$
|
111,561
|
|
|
$
|
122,976
|
|
|
$
|
22,099
|
|
|
$
|
27,732,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
23,325,078
|
|
|
$
|
4,536,090
|
|
|
$
|
23,997
|
|
|
$
|
|
|
|
$
|
130,649
|
|
|
$
|
130,487
|
|
|
$
|
19,231
|
|
|
$
|
28,165,532
|
|
Special mention
|
|
|
146,391
|
|
|
|
26,428
|
|
|
|
2,989
|
|
|
|
|
|
|
|
220
|
|
|
|
410
|
|
|
|
593
|
|
|
|
177,031
|
|
Substandard
|
|
|
744,221
|
|
|
|
217,345
|
|
|
|
12,648
|
|
|
|
4,929
|
|
|
|
728
|
|
|
|
3,605
|
|
|
|
1,306
|
|
|
|
984,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
24,215,690
|
|
|
$
|
4,779,863
|
|
|
$
|
39,634
|
|
|
$
|
4,929
|
|
|
$
|
131,597
|
|
|
$
|
134,502
|
|
|
$
|
21,130
|
|
|
$
|
29,327,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan classifications are defined as follows:
|
|
|
Pass These loans are protected by the current net worth and paying capacity of the obligor (or guarantors, if any) or by the fair value, less
cost to acquire and sell, of any underlying collateral in a timely manner.
|
|
|
|
Special Mention These loans have potential weaknesses that deserve 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 obtain updated valuations for one- to four- family mortgage loans by the time a loan becomes 180 days past due. If necessary, we charge-off an amount to
reduce the carrying value of the loan to the value of the underlying property, less estimated selling costs. This process is repeated on an annual basis for each loan that remains past due 180 days or more in order to mitigate the risk of falling
real estate values. Since we record the charge-off when we receive the updated valuation, we typically do not have any residential first mortgages classified as doubtful or loss. We evaluate multi-family, commercial and construction loans
individually and base our classification on the debt service capability of the underlying property as well as secondary sources of repayment such as the borrowers and any guarantors ability and willingness to provide debt service.
Page 18
Notes to Unaudited Consolidated Financial Statements
Originating loans secured by residential real estate is our primary business. Our financial results may
be adversely affected by changes in prevailing economic conditions, either nationally or in our local New Jersey and metropolitan New York market areas, including decreases in real estate values, adverse employment conditions, the monetary and
fiscal policies of the federal and state government and other significant external events. As a result of our lending practices, we have a concentration of loans secured by real property located primarily in New Jersey, New York and Connecticut (the
New York metropolitan area). At September 30, 2012 approximately 83% of our total loans are in the New York metropolitan area.
Included in our loan portfolio at September 30, 2012 and December 31, 2011 are $4.58 billion and $4.78 billion, respectively, of interest-only
one-to four- family residential mortgage loans. These loans are originated as adjustable-rate mortgage (ARM) loans with initial terms of five, seven or ten years with the interest-only portion of the payment based upon the initial loan
term, or offered on a 30-year fixed-rate loan with interest-only payments for the first 10 years of the obligation. At the end of the initial 5-, 7- or 10-year interest-only period, the loan payment will adjust to include both principal and interest
and will amortize over the remaining term so the loan will be repaid at the end of its original life. We had $181.1 million and $213.9 million of non-performing interest-only one-to four-family residential mortgage loans at September 30, 2012
and December 31, 2011, respectively.
In addition to our full documentation loan program, we originate loans to certain eligible
borrowers as limited documentation loans. We have originated these types of loans for over 15 years. Loans eligible for limited documentation processing are ARM loans, interest-only first mortgage loans and 10-, 15-, 20- and 30-year fixed-rate loans
to owner-occupied primary and second home applicants. These loans are available in amounts up to 65% of the lower of the appraised value or purchase price of the property. Generally the maximum loan amount for limited documentation loans is $750,000
and these loans are subject to higher interest rates than our full documentation loan products. Limited documentation loans have an inherently higher level of risk compared to loans with full documentation. Included in our loan portfolio at
September 30, 2012 are $3.96 billion of originated amortizing limited documentation loans and $917.2 million of originated limited documentation interest-only loans. Non-performing loans at September 30, 2012 include $154.6 million of
originated amortizing limited documentation loans and $65.5 million of originated interest-only limited documentation loans. Included in our loan portfolio at December 31, 2011 are $3.85 billion of originated amortizing limited documentation
loans and $956.2 million of originated limited documentation interest-only loans. Non-performing loans at December 31, 2011 included $126.9 million of originated amortizing limited documentation loans and $71.0 million or originated
interest-only limited documentation loans.
Page 19
Notes to Unaudited Consolidated Financial Statements
The following table is a comparison of our delinquent loans by class as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-59 Days
|
|
|
60-89 Days
|
|
|
90 Days
or more
|
|
|
Total
Past Due
|
|
|
Current
Loans
|
|
|
Total
Loans
|
|
|
90 Days or
more and
accruing (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
At September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family first mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizing
|
|
$
|
348,040
|
|
|
$
|
175,597
|
|
|
$
|
947,086
|
|
|
$
|
1,470,723
|
|
|
$
|
21,384,002
|
|
|
$
|
22,854,725
|
|
|
$
|
122,630
|
|
Interest-only
|
|
|
60,610
|
|
|
|
34,970
|
|
|
|
181,105
|
|
|
|
276,685
|
|
|
|
4,302,025
|
|
|
|
4,578,710
|
|
|
|
|
|
Multi-family and commercial mortgages
|
|
|
1,754
|
|
|
|
530
|
|
|
|
2,081
|
|
|
|
4,365
|
|
|
|
33,019
|
|
|
|
37,384
|
|
|
|
|
|
Construction loans
|
|
|
|
|
|
|
|
|
|
|
4,619
|
|
|
|
4,619
|
|
|
|
|
|
|
|
4,619
|
|
|
|
|
|
Consumer and other loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate second mortgages
|
|
|
819
|
|
|
|
609
|
|
|
|
1,469
|
|
|
|
2,897
|
|
|
|
108,664
|
|
|
|
111,561
|
|
|
|
|
|
Home equity lines of credit
|
|
|
1,360
|
|
|
|
396
|
|
|
|
4,321
|
|
|
|
6,077
|
|
|
|
116,899
|
|
|
|
122,976
|
|
|
|
|
|
Other
|
|
|
599
|
|
|
|
|
|
|
|
2,444
|
|
|
|
3,043
|
|
|
|
19,056
|
|
|
|
22,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
413,182
|
|
|
$
|
212,102
|
|
|
$
|
1,143,125
|
|
|
$
|
1,768,409
|
|
|
$
|
25,963,665
|
|
|
$
|
27,732,074
|
|
|
$
|
122,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family first mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizing
|
|
$
|
357,099
|
|
|
$
|
158,546
|
|
|
$
|
797,905
|
|
|
$
|
1,313,550
|
|
|
$
|
22,902,140
|
|
|
$
|
24,215,690
|
|
|
$
|
97,476
|
|
Interest-only
|
|
|
63,360
|
|
|
|
27,833
|
|
|
|
213,862
|
|
|
|
305,055
|
|
|
|
4,474,808
|
|
|
|
4,779,863
|
|
|
|
|
|
Multi-family and commercial mortgages
|
|
|
1,521
|
|
|
|
393
|
|
|
|
2,223
|
|
|
|
4,137
|
|
|
|
35,497
|
|
|
|
39,634
|
|
|
|
|
|
Construction loans
|
|
|
|
|
|
|
|
|
|
|
4,344
|
|
|
|
4,344
|
|
|
|
585
|
|
|
|
4,929
|
|
|
|
|
|
Consumer and other loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate second mortgages
|
|
|
1,202
|
|
|
|
220
|
|
|
|
728
|
|
|
|
2,150
|
|
|
|
129,447
|
|
|
|
131,597
|
|
|
|
|
|
Home equity lines of credit
|
|
|
2,471
|
|
|
|
410
|
|
|
|
3,605
|
|
|
|
6,486
|
|
|
|
128,016
|
|
|
|
134,502
|
|
|
|
|
|
Other
|
|
|
1,536
|
|
|
|
2
|
|
|
|
20
|
|
|
|
1,558
|
|
|
|
19,572
|
|
|
|
21,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
427,189
|
|
|
$
|
187,404
|
|
|
$
|
1,022,687
|
|
|
$
|
1,637,280
|
|
|
$
|
27,690,065
|
|
|
$
|
29,327,345
|
|
|
$
|
97,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Loans that are past due 90 days or more and still accruing interest are loans that are guaranteed by the FHA.
|
The following table presents the geographic distribution of our loan portfolio as a percentage of total loans and of our non-performing loans as a
percentage of total non-performing loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2012
|
|
|
At December 31, 2011
|
|
|
|
Total loans
|
|
|
Non-performing
Loans
|
|
|
Total loans
|
|
|
Non-performing
Loans
|
|
New Jersey
|
|
|
44.0
|
%
|
|
|
50.0
|
%
|
|
|
44.7
|
%
|
|
|
51.3
|
%
|
New York
|
|
|
24.3
|
|
|
|
21.6
|
|
|
|
22.4
|
|
|
|
19.5
|
|
Connecticut
|
|
|
14.7
|
|
|
|
7.2
|
|
|
|
14.6
|
|
|
|
6.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total New York metropolitan area
|
|
|
83.0
|
|
|
|
78.8
|
|
|
|
81.7
|
|
|
|
77.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pennsylvania
|
|
|
4.9
|
|
|
|
1.9
|
|
|
|
4.7
|
|
|
|
1.4
|
|
Virginia
|
|
|
2.2
|
|
|
|
2.5
|
|
|
|
2.6
|
|
|
|
2.9
|
|
Illinois
|
|
|
2.0
|
|
|
|
4.3
|
|
|
|
2.3
|
|
|
|
4.7
|
|
Maryland
|
|
|
1.9
|
|
|
|
3.8
|
|
|
|
2.0
|
|
|
|
3.2
|
|
All others
|
|
|
6.0
|
|
|
|
8.7
|
|
|
|
6.7
|
|
|
|
10.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Outside New York metropolitan area
|
|
|
17.0
|
|
|
|
21.2
|
|
|
|
18.3
|
|
|
|
22.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 20
Notes to Unaudited Consolidated Financial Statements
The following is a summary of loans, by class, on which the accrual of income has been discontinued and
loans that are contractually past due 90 days or more but have not been classified as non-accrual at September 30, 2012 and December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
|
|
(In thousands)
|
|
Non-accrual loans:
|
|
|
|
|
|
|
|
|
One-to four-family amortizing loans
|
|
$
|
824,456
|
|
|
$
|
700,429
|
|
One-to four-family interest-only loans
|
|
|
181,105
|
|
|
|
213,862
|
|
Multi-family and commercial mortgages
|
|
|
2,081
|
|
|
|
2,223
|
|
Construction loans
|
|
|
4,619
|
|
|
|
4,344
|
|
Fixed-rate second mortgages
|
|
|
1,469
|
|
|
|
728
|
|
Home equity lines of credit
|
|
|
4,321
|
|
|
|
3,605
|
|
Other loans
|
|
|
2,444
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
Total non-accrual loans
|
|
|
1,020,495
|
|
|
|
925,211
|
|
Accruing loans delinquent 90 days or more (1)
|
|
|
122,630
|
|
|
|
97,476
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans
|
|
$
|
1,143,125
|
|
|
$
|
1,022,687
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Loans that are past due 90 days or more and still accruing interest are loans that are insured by the FHA.
|
The total amount of interest income on non-accrual loans that would have been recognized during the first nine months of 2012, if interest on all such
loans had been recorded based upon original contract terms amounted to approximately $47.9 million as compared to $40.1 million for the same period in 2011. Hudson City is not committed to lend additional funds to borrowers on non-accrual status.
Loans modified in a troubled debt restructuring totaled $123.2 million at September 30, 2012 of which $8.3 million are 30 to 59 days
past due, $11.1 million are 60 to 89 days past due and $39.4 million are 90 days or more past due and are included in non-accrual loans. The remaining troubled debt restructurings were current at September 30, 2012 and have complied with the
terms of their restructure agreement. Based on recent regulatory guidance, we have classified $32.0 million of loans that have completed Chapter 7 bankruptcy as troubled debt restructurings. We discontinue accruing interest on troubled debt
restructurings that are past due 90 days or more or if we believe we will not collect all amounts contractually due. Approximately $10.8 million of troubled debt restructurings that were previously accruing interest became 90 days or more past due
during the first nine months of 2012 for which we ceased accruing interest. At December 31, 2011, loans modified in a troubled debt restructuring totaled $66.5 million of which $7.4 million were 30 to 59 days past due, $4.8 million were 60 to
89 days past due and $11.4 million were 90 days or more past due and are included in non-accrual loans at that date.
Page 21
Notes to Unaudited Consolidated Financial Statements
The following table is a comparison of our troubled debt restructuring by class as of the date
indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
|
|
Number
of
Contracts
|
|
|
Pre-restructuring
Outstanding
Recorded
Investment
|
|
|
Post-restructuring
Outstanding
Recorded
Investment
|
|
|
Number
of
Contracts
|
|
|
Pre-restructuring
Outstanding
Recorded
Investment
|
|
|
Post-restructuring
Outstanding
Recorded
Investment
|
|
|
|
(In thousands)
|
|
Troubled debt restructurings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family first mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizing
|
|
|
293
|
|
|
$
|
109,104
|
|
|
$
|
100,187
|
|
|
|
146
|
|
|
$
|
57,336
|
|
|
$
|
53,831
|
|
Interest-only
|
|
|
26
|
|
|
|
13,300
|
|
|
|
13,272
|
|
|
|
9
|
|
|
|
4,970
|
|
|
|
4,799
|
|
Multi-family and commercial mortgages
|
|
|
2
|
|
|
|
7,911
|
|
|
|
7,911
|
|
|
|
2
|
|
|
|
7,911
|
|
|
|
7,911
|
|
Consumer and other loans
|
|
|
14
|
|
|
|
1,797
|
|
|
|
1,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
335
|
|
|
$
|
132,112
|
|
|
$
|
123,153
|
|
|
|
157
|
|
|
$
|
70,217
|
|
|
$
|
66,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans evaluated for impairment include loans classified as troubled debt restructurings and non-performing multi-family,
commercial and construction loans. The following table presents our loans evaluated for impairment by class at the date indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded
Investment
|
|
|
Unpaid
Principal
Balance
|
|
|
Related
Allowance
|
|
|
Average
Recorded
Investment
|
|
|
Interest
Income
Recognized
|
|
|
|
(In thousands)
|
|
September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to four-family amortizing loans
|
|
$
|
100,187
|
|
|
$
|
107,997
|
|
|
$
|
|
|
|
$
|
104,168
|
|
|
$
|
2,597
|
|
One-to four-family interest-only loans
|
|
|
13,272
|
|
|
|
14,807
|
|
|
|
|
|
|
|
13,699
|
|
|
|
293
|
|
Multi-family and commercial mortgages
|
|
|
7,343
|
|
|
|
10,114
|
|
|
|
2,771
|
|
|
|
10,121
|
|
|
|
363
|
|
Construction loans
|
|
|
3,499
|
|
|
|
4,619
|
|
|
|
1,120
|
|
|
|
4,441
|
|
|
|
|
|
Consumer and other loans
|
|
|
1,719
|
|
|
|
1,783
|
|
|
|
64
|
|
|
|
1,782
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
126,020
|
|
|
$
|
139,320
|
|
|
$
|
3,955
|
|
|
$
|
134,211
|
|
|
$
|
3,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to four-family amortizing loans
|
|
$
|
53,831
|
|
|
$
|
56,876
|
|
|
$
|
|
|
|
$
|
55,595
|
|
|
$
|
2,411
|
|
One-to four-family interest-only loans
|
|
|
4,799
|
|
|
|
4,974
|
|
|
|
|
|
|
|
4,891
|
|
|
|
159
|
|
Multi-family and commercial mortgages
|
|
|
6,548
|
|
|
|
10,266
|
|
|
|
3,718
|
|
|
|
10,294
|
|
|
|
485
|
|
Construction loans
|
|
|
3,622
|
|
|
|
4,344
|
|
|
|
722
|
|
|
|
4,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
68,800
|
|
|
$
|
76,460
|
|
|
$
|
4,440
|
|
|
$
|
75,532
|
|
|
$
|
3,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 22
Notes to Unaudited Consolidated Financial Statements
The following table presents the activity in our ALL for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30,
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
(In thousands)
|
|
Balance at beginning of period
|
|
$
|
287,901
|
|
|
$
|
262,306
|
|
|
$
|
273,791
|
|
|
$
|
236,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
|
(21,013
|
)
|
|
|
(21,350
|
)
|
|
|
(67,525
|
)
|
|
|
(73,347
|
)
|
Recoveries
|
|
|
4,685
|
|
|
|
2,798
|
|
|
|
15,307
|
|
|
|
10,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(16,328
|
)
|
|
|
(18,552
|
)
|
|
|
(52,218
|
)
|
|
|
(62,820
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
20,000
|
|
|
|
25,000
|
|
|
|
70,000
|
|
|
|
95,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
291,573
|
|
|
$
|
268,754
|
|
|
$
|
291,573
|
|
|
$
|
268,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the activity in our ALL by portfolio segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to four-
Family
Mortgages
|
|
|
Multi-family
and Commercial
Mortgages
|
|
|
Construction
|
|
|
Consumer and
Other Loans
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Balance at December 31, 2011
|
|
$
|
264,922
|
|
|
$
|
4,382
|
|
|
$
|
734
|
|
|
$
|
3,753
|
|
|
$
|
273,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
70,215
|
|
|
|
(972
|
)
|
|
|
386
|
|
|
|
371
|
|
|
|
70,000
|
|
Charge-offs
|
|
|
(67,281
|
)
|
|
|
|
|
|
|
|
|
|
|
(244
|
)
|
|
|
(67,525
|
)
|
Recoveries
|
|
|
15,306
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
15,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(51,975
|
)
|
|
|
|
|
|
|
|
|
|
|
(243
|
)
|
|
|
(52,218
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2012
|
|
$
|
283,162
|
|
|
$
|
3,410
|
|
|
$
|
1,120
|
|
|
$
|
3,881
|
|
|
$
|
291,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
113,459
|
|
|
$
|
10,114
|
|
|
$
|
4,619
|
|
|
$
|
1,783
|
|
|
$
|
129,975
|
|
Collectively evaluated for impairment
|
|
|
27,319,976
|
|
|
|
27,270
|
|
|
|
|
|
|
|
254,853
|
|
|
|
27,602,099
|
|
Allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
5,938
|
|
|
$
|
2,771
|
|
|
$
|
1,120
|
|
|
$
|
64
|
|
|
$
|
9,893
|
|
Collectively evaluated for impairment
|
|
|
277,224
|
|
|
|
639
|
|
|
|
|
|
|
|
3,817
|
|
|
|
281,680
|
|
The ultimate ability to collect the loan portfolio is subject to changes in the real estate market and future economic
conditions. Since 2008, there has been a decline in house prices, both nationally and locally. Housing market conditions in our lending market areas weakened during this period as evidenced by reduced levels of sales, increasing inventories of
houses on the market, declining house prices and an increase in the length of time houses remain on the market.
Although we believe that we
have established and maintained the ALL at adequate levels, additions may be necessary if future economic and other conditions differ substantially from the current operating environment. While we continue to adhere to prudent underwriting
standards, we are geographically concentrated in the New York metropolitan area of the United States and, therefore, are not immune to negative consequences arising from overall economic weakness and, in particular, a sharp downturn in the housing
industry. Continued decreases in real estate values could adversely affect the value of property used as collateral for our loans. No assurance can be given in any particular case that our loan-to-value ratios will provide full protection in the
event of borrower default. Adverse changes in the economy and increases in the unemployment rate may have a negative effect on the ability of our borrowers to make timely loan payments, which would have an adverse impact on our earnings. A further
increase in loan
Page 23
Notes to Unaudited Consolidated Financial Statements
delinquencies would decrease our net interest income and may adversely impact our loss experience on non-performing loans which may result in an increase in the loss factors used in our
quantitative analysis of the ALL, causing increases in our provision and ALL. Although we use the best information available, the level of the ALL remains an estimate that is subject to significant judgment and short-term change.
We obtain new collateral values by the time a loan becomes 180 days delinquent and then annually thereafter. If the estimated fair value of the
collateral (less estimated selling costs) is less than the recorded investment in the loan, we charge-off an amount to reduce the loan to the fair value of the collateral less estimated selling costs. As a result, certain losses inherent in our
non-performing loans are being recognized as charge-offs which may result in a lower ratio of the ALL to non-performing loans. Net charge-offs amounted to $52.2 million for the nine months ended September 30, 2012 as compared to $62.8 million
for the corresponding period in 2011.
7. Borrowed Funds
Borrowed funds at September 30, 2012 and December 31, 2011 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
|
|
Principal
|
|
|
Weighted
Average
Rate
|
|
|
Principal
|
|
|
Weighted
Average
Rate
|
|
|
|
(Dollars in thousands)
|
|
Securities sold under agreements to repurchase:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB
|
|
$
|
800,000
|
|
|
|
4.53
|
%
|
|
$
|
800,000
|
|
|
|
4.53
|
%
|
Other brokers
|
|
|
6,150,000
|
|
|
|
4.44
|
|
|
|
6,150,000
|
|
|
|
4.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities sold under agreements to repurchase
|
|
|
6,950,000
|
|
|
|
4.45
|
|
|
|
6,950,000
|
|
|
|
4.45
|
|
Advances from the FHLB
|
|
|
5,975,000
|
|
|
|
4.27
|
|
|
|
8,125,000
|
|
|
|
3.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowed funds
|
|
$
|
12,925,000
|
|
|
|
4.37
|
%
|
|
$
|
15,075,000
|
|
|
|
3.87
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest payable
|
|
$
|
68,004
|
|
|
|
|
|
|
$
|
66,252
|
|
|
|
|
|
The average balances of borrowings and the maximum amount outstanding at any month-end are as follows:
|
|
|
|
|
|
|
|
|
|
|
At or For the Nine
Months Ended
September 30, 2012
|
|
|
At or For the
Year
Ended
December 31, 2011
|
|
|
|
(Dollars in thousands)
|
|
Repurchase Agreements:
|
|
|
|
|
|
|
|
|
Average balance outstanding during the period
|
|
$
|
6,950,000
|
|
|
$
|
9,127,800
|
|
|
|
|
|
|
|
|
|
|
Maximum balance outstanding at any month-end during the period
|
|
$
|
6,950,000
|
|
|
$
|
14,750,000
|
|
|
|
|
|
|
|
|
|
|
Weighted average rate during the period
|
|
|
4.45
|
%
|
|
|
4.37
|
%
|
|
|
|
|
|
|
|
|
|
FHLB Advances:
|
|
|
|
|
|
|
|
|
Average balance outstanding during the period
|
|
$
|
7,002,024
|
|
|
$
|
13,349,342
|
|
|
|
|
|
|
|
|
|
|
Maximum balance outstanding at any month-end during the period
|
|
$
|
7,875,000
|
|
|
$
|
14,875,000
|
|
|
|
|
|
|
|
|
|
|
Weighted average rate during the period
|
|
|
3.78
|
%
|
|
|
3.44
|
%
|
|
|
|
|
|
|
|
|
|
Page 24
Notes to Unaudited Consolidated Financial Statements
At September 30, 2012, $7.93 billion of our borrowed funds may be put back to us at the discretion
of the lender. The remaining $5.00 billion of borrowed funds at September 30, 2012 are fixed-rate, fixed-maturity borrowings. At September 30, 2012, borrowed funds had scheduled maturities and potential put dates as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings by Scheduled
|
|
|
Borrowings by Earlier of Scheduled
|
|
|
|
Maturity Date
|
|
|
Maturity or Next Potential Put Date
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Year
|
|
Principal
|
|
|
Rate
|
|
|
Principal
|
|
|
Rate
|
|
|
|
(Dollars in thousands)
|
|
2012
|
|
$
|
750,000
|
|
|
|
0.80
|
%
|
|
$
|
3,425,000
|
|
|
|
3.61
|
%
|
2013
|
|
|
|
|
|
|
|
|
|
|
1,325,000
|
|
|
|
4.69
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
3,725,000
|
|
|
|
4.47
|
|
2015
|
|
|
75,000
|
|
|
|
4.62
|
|
|
|
275,000
|
|
|
|
4.10
|
|
2016
|
|
|
3,925,000
|
|
|
|
4.92
|
|
|
|
3,925,000
|
|
|
|
4.92
|
|
2017
|
|
|
2,475,000
|
|
|
|
4.37
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
700,000
|
|
|
|
3.65
|
|
|
|
250,000
|
|
|
|
3.10
|
|
2019
|
|
|
1,725,000
|
|
|
|
4.62
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
3,275,000
|
|
|
|
4.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,925,000
|
|
|
|
4.37
|
%
|
|
$
|
12,925,000
|
|
|
|
4.37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8. Goodwill and Other Intangible Assets
Goodwill and other intangible assets amounted to $154.1 million and were recorded as a result of Hudson City Bancorps acquisition
of Sound Federal Bancorp, Inc. (Sound Federal) in 2006.
We performed our annual goodwill impairment analysis as of June 30,
2012, with the assistance of an independent third-party valuation firm, and also perform interim impairment reviews if an event or circumstances occur which may indicate that the fair value of the Company is less than the Companys book value.
The Company announced the Merger in the third quarter of 2012. The merger price based on the closing price of M&Ts Common Stock on August 24, 2012, the last trading day before the announcement of the Merger and based on the average of
M&Ts Common Stock from the announcement date to September 30, 2012, was $7.22 and $8.00, respectively or a fair value of $3.81 billion for the Company based on the merger price and shares outstanding on August 27, 2012. Since
this amount is less than the reported amount of shareholders equity, we re-assessed goodwill for impairment at September 30, 2012.
For Step 2 of the goodwill impairment test, we compared the fair value of the Company based on the Merger price with the fair value of the assets and
liabilities of the Company to calculate an implied goodwill. Based on our Step 2 analysis, the implied goodwill of the Company exceeded the carrying value of goodwill. The results of the Step 2 analysis were attributable to several factors. In
addition, the estimated fair value of the Company is based on the market price of our common stock. The results of the Step 2 analysis are highly sensitive to these measurements, as well as the key assumptions in determining the estimated fair value
of the Company.
Page 25
Notes to Unaudited Consolidated Financial Statements
Based on the results of the goodwill impairment analysis, we concluded that goodwill was not impaired.
Therefore, we did not recognize any impairment of goodwill or other intangible assets during the nine months ended September 30, 2012. The estimation of the fair value of the Company requires the use of estimates and assumptions and results in
a greater degree of uncertainty. In addition, the estimated fair value of the Company is based on, among other things, the market price of our common stock as calculated based on the terms of the Merger. As a result of the current volatility in
market and economic conditions, these estimates and assumptions are subject to change in the near-term and may result in the impairment in future periods of some or all of the goodwill on our balance sheet.
9. Fair Value Measurements
a) Fair Value Measurements
We use fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. We did not have any liabilities that were measured at fair value at
September 30, 2012 and December 31, 2011. Our securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value other assets or liabilities on a
non-recurring basis, such as foreclosed real estate owned, certain impaired loans and goodwill. These non-recurring fair value adjustments generally involve the write-down of individual assets due to impairment losses.
In accordance with ASC Topic 820,
Fair Value Measurements and Disclosures,
we group our assets at fair value in three levels, based on the markets
in which the assets are traded and the reliability of the assumptions used to determine fair value. These levels are:
Level 1
Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2 Valuation is based upon quoted
prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3 Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These
unobservable assumptions reflect our own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing models, discounted cash flow models and similar
techniques. The results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability.
We base our fair values on the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. ASC Topic 820 requires us to maximize the use of
observable inputs and minimize the use of unobservable inputs when measuring fair value.
Assets that we measure on a recurring basis are
limited to our available-for-sale securities portfolio. Our available-for-sale portfolio is carried at estimated fair value with any unrealized gains and losses, net of taxes, reported as accumulated other comprehensive income or loss in
shareholders equity. Substantially all of our available-for-sale portfolio consists of mortgage-backed securities and investment securities issued by U.S. government-sponsored entities (the GSEs). The fair values for substantially
all of these securities are obtained monthly from an independent nationally recognized pricing service. On a monthly basis, we assess the reasonableness of the fair values obtained by reference to a second independent nationally recognized pricing
service. Based on the nature of our securities, our independent pricing service provides us with prices which are categorized as Level 2 since quoted prices in active markets for
Page 26
Notes to Unaudited Consolidated Financial Statements
identical assets are generally not available for the majority of securities in our portfolio. Various modeling techniques are used to determine pricing for our mortgage-backed securities,
including option pricing and discounted cash flow models. The inputs to these models include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. On an
annual basis, we obtain the models, inputs and assumptions utilized by our pricing service and review them for reasonableness. We also own equity securities with a carrying value of $7.6 million at September 30, 2012 and $7.4 million at
December 31, 2011 for which fair values are obtained from quoted market prices in active markets and, as such, are classified as Level 1.
The following table provides the level of valuation assumptions used to determine the carrying value of our assets measured at fair value on a recurring
basis at September 30, 2012 and December 31, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at September 30, 2012 using
|
|
Description
|
|
Carrying
Value
|
|
|
Quoted Prices in Active
Markets for Identical
Assets (Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable Inputs
(Level 3)
|
|
|
|
(In thousands)
|
|
Available for sale debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
8,772,353
|
|
|
$
|
|
|
|
$
|
8,772,353
|
|
|
$
|
|
|
Corporate debt
|
|
|
420,853
|
|
|
|
|
|
|
|
420,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale debt securities
|
|
|
9,193,206
|
|
|
|
|
|
|
|
9,193,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services industry
|
|
$
|
7,554
|
|
|
$
|
7,554
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale equity securities
|
|
|
7,554
|
|
|
|
7,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale securities
|
|
$
|
9,200,760
|
|
|
$
|
7,554
|
|
|
$
|
9,193,206
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at December 31, 2011 using
|
|
Description
|
|
Carrying Value
|
|
|
Quoted Prices in Active
Markets for Identical
Assets (Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable Inputs
(Level 3)
|
|
|
|
(In thousands)
|
|
Available for sale debt securities:
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
9,170,390
|
|
|
$
|
|
|
|
$
|
9,170,390
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale debt securities
|
|
|
9,170,390
|
|
|
|
|
|
|
|
9,170,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services industry
|
|
$
|
7,368
|
|
|
$
|
7,368
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale equity securities
|
|
|
7,368
|
|
|
|
7,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale securities
|
|
$
|
9,177,758
|
|
|
$
|
7,368
|
|
|
$
|
9,170,390
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets that were measured at fair value on a non-recurring basis at September 30, 2012 and December 31, 2011
were limited to non-performing commercial and construction loans that are collateral dependent, troubled debt restructurings and foreclosed real estate. Loans evaluated for impairment in accordance with FASB guidance amounted to $130.0 million and
$73.2 million at September 30, 2012 and December 31, 2011, respectively. Based on this evaluation, we established an ALL of $4.0 million and $4.4 million for those respective periods. There was no provision for loan losses related to these
loans for the first nine months of 2012 and 2011. These impaired loans are individually assessed to determine that the loans
Page 27
Notes to Unaudited Consolidated Financial Statements
carrying value is not in excess of the fair value of the collateral, less estimated selling costs or the present value of the loans expected future cash flows. For impaired loans that are
secured by real estate, fair value is estimated through current appraisals, where practical, or an inspection and a comparison of the property securing the loan with similar properties in the area by either a licensed appraiser or real estate broker
and, as such, are classified as Level 3.
Foreclosed real estate represents real estate acquired as a result of foreclosure or by deed in lieu
of foreclosure and is carried at the lower of cost or fair value less estimated selling costs. Fair value is estimated through current appraisals, where practical, or an inspection and a comparison of the property securing the loan with similar
properties in the area by either a licensed appraiser or real estate broker and, as such, foreclosed real estate properties are classified as Level 3. Foreclosed real estate consisted of one-to four-family properties and amounted to $45.3 and $40.6
million at September 30, 2012 and December 31, 2011, respectively. During the first nine months of 2012 and 2011, charge-offs to the allowance for loan losses related to loans that were transferred to foreclosed real estate amounted to
$2.8 million and $2.7 million, respectively. Write downs and net loss on sale related to foreclosed real estate that were charged to non-interest expense amounted to $1.3 million and $4.9 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 September 30, 2012 and December 31, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at September 30, 2012 using
|
|
Description
|
|
Quoted Prices in Active
Markets for Identical
Assets (Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable Inputs
(Level 3)
|
|
|
Total
Gains
(Losses)
|
|
|
|
(In thousands)
|
|
|
|
|
Impaired loans
|
|
$
|
|
|
|
$
|
|
|
|
$
|
129,975
|
|
|
$
|
|
|
Foreclosed real estate
|
|
|
|
|
|
|
|
|
|
|
45,336
|
|
|
|
(1,317
|
)
|
|
|
|
|
Fair Value Measurements at December 31, 2011 using
|
|
Description
|
|
Quoted Prices in Active
Markets for Identical
Assets (Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable Inputs
(Level 3)
|
|
|
Total
Gains
(Losses)
|
|
|
|
(In thousands)
|
|
|
|
|
Impaired loans
|
|
$
|
|
|
|
$
|
|
|
|
$
|
73,240
|
|
|
$
|
(2,280
|
)
|
Foreclosed real estate
|
|
|
|
|
|
|
|
|
|
|
40,619
|
|
|
|
(7,461
|
)
|
Page 28
Notes to Unaudited Consolidated Financial Statements
The following table provides a reconciliation of assets measured at fair value on a non-recurring basis
at September 30, 2012.
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
Using
Significant Unobservable Inputs (Level 3)
|
|
|
|
(In thousands)
|
|
|
|
Foreclosed
Real Estate
|
|
|
Impaired
Loans
|
|
Beginning balance at December 31, 2011
|
|
$
|
40,619
|
|
|
$
|
73,240
|
|
Gain (loss) on sale of foreclosed properties
|
|
|
(1,317
|
)
|
|
|
|
|
Net transfers in (out)
|
|
|
6,034
|
|
|
|
56,735
|
|
|
|
|
|
|
|
|
|
|
Ending balance at September 30, 2012
|
|
$
|
45,336
|
|
|
$
|
129,975
|
|
|
|
|
|
|
|
|
|
|
The following table presents quantitative information about Level 3 fair value measurements for financial instruments
measured at fair value on a non-recurring basis at September 30, 2012.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
Description
|
|
Fair Value
|
|
|
Valuation
Technique
|
|
|
Significant
Unobservable
Input
|
|
Range
(Weighted Average)
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to four-family mortgages
|
|
$
|
115,242
|
|
|
|
Net Present Value
|
|
|
N/A
|
|
0.0%-39.1% (3.0%)
|
Multi-family, Commercial and Construction mortgages
|
|
|
14,733
|
|
|
|
Appraisal Value
|
|
|
Adjustment for differences
between the comparable sales.
|
|
N/A
|
Foreclosed real estate
|
|
|
45,336
|
|
|
|
Appraisal Value
|
|
|
Adjustment for differences
between the comparable sales.
|
|
0.0%-100.0% (9.1%)
|
b) Fair Value Disclosures
The fair value of financial instruments represents the estimated amounts at which the asset or liability could be exchanged in a current transaction between willing parties, other than in a forced
liquidation sale. These estimates are subjective in nature, involve uncertainties and matters of judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Further, certain tax
implications related to the realization of the unrealized gains and losses could have a substantial impact on these fair value estimates and have not been incorporated into any of the estimates.
Cash and due from Banks
Carrying
amounts of cash, due from banks and federal funds sold are considered to approximate fair value (Level 1).
FHLB Stock
The carrying value of FHLB stock equals cost. The fair value of FHLB stock is based on redemption at par value (Level 1).
Loans
The fair value of one- to
four-family mortgages and home equity loans are generally estimated using the present value of expected future cash flows, assuming future prepayments and using market rates for new loans with comparable credit risk. Published pricing in the
secondary and securitization markets was also utilized to assist in the fair value of the loan portfolio (Level 3). The valuation of our loan portfolio is consistent with accounting guidance but does not fully incorporate the exit price approach.
Page 29
Notes to Unaudited Consolidated Financial Statements
Deposits
For deposit liabilities payable on demand, the fair value is the carrying value at the reporting date (Level 1). For time deposits the fair value is estimated by discounting estimated future cash flows
using currently offered rates (Level 2).
Borrowed Funds
The fair value of fixed-maturity borrowed funds is estimated by discounting estimated future cash flows using currently offered rates (Level 2). Structured borrowed funds are valued using an option
valuation model which uses assumptions for anticipated calls of borrowings based on market interest rates and weighted-average life (Level 2).
Off-balance Sheet Financial Instruments
There is no material difference between the fair value and the carrying amounts recognized with respect to our off-balance sheet commitments (Level 3).
Other important elements that are not deemed to be financial assets or liabilities and, therefore, not considered in these estimates include
the value of Hudson Citys retail branch delivery system, its existing core deposit base and banking premises and equipment.
The
estimated fair values of financial instruments are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
|
|
Carrying
Amount
|
|
|
Estimated
Fair Value
|
|
|
Carrying
Amount
|
|
|
Estimated
Fair Value
|
|
|
|
(In thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
112,157
|
|
|
$
|
112,157
|
|
|
$
|
194,029
|
|
|
$
|
194,029
|
|
Federal funds sold and other overnight deposits
|
|
|
313,704
|
|
|
|
313,704
|
|
|
|
560,051
|
|
|
|
560,051
|
|
Investment securities held to maturity
|
|
|
39,011
|
|
|
|
45,577
|
|
|
|
539,011
|
|
|
|
545,761
|
|
Investment securities available for sale
|
|
|
428,407
|
|
|
|
428,407
|
|
|
|
7,368
|
|
|
|
7,368
|
|
Federal Home Loan Bank of New York stock
|
|
|
390,217
|
|
|
|
390,217
|
|
|
|
510,564
|
|
|
|
510,564
|
|
Mortgage-backed securities held to maturity
|
|
|
3,256,099
|
|
|
|
3,482,901
|
|
|
|
4,115,523
|
|
|
|
4,368,423
|
|
Mortgage-backed securities available for sale
|
|
|
8,772,353
|
|
|
|
8,772,353
|
|
|
|
9,170,390
|
|
|
|
9,170,390
|
|
Loans
|
|
|
27,533,618
|
|
|
|
29,332,949
|
|
|
|
29,137,359
|
|
|
|
30,935,705
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
24,022,181
|
|
|
|
24,232,928
|
|
|
|
25,507,760
|
|
|
|
25,707,551
|
|
Borrowed funds
|
|
|
12,925,000
|
|
|
|
15,248,961
|
|
|
|
15,075,000
|
|
|
|
17,428,484
|
|
10. Postretirement Benefit Plans
We maintain non-contributory retirement and post-retirement plans to cover employees hired prior to August 1, 2005, including
retired employees, who have met the eligibility requirements of the plans. Benefits under the qualified and non-qualified defined benefit retirement plans are based primarily on years of service and compensation. Funding of the qualified retirement
plan is actuarially determined on an annual basis. It is our policy to fund the qualified retirement plan sufficiently to meet the minimum requirements set forth in the Employee Retirement Income Security Act of 1974. The non-qualified retirement
plan, which is maintained for certain employees, is unfunded.
Page 30
Notes to Unaudited Consolidated Financial Statements
In 2005, we limited participation in the non-contributory retirement plan and the post-retirement
benefit plan to those employees hired on or before July 31, 2005. We also placed a cap on paid medical expenses at the 2007 rate, beginning in 2008, for those eligible employees who retire after December 31, 2005. As part of our
acquisition of Sound Federal in 2006, participation in the Sound Federal retirement plans and the accrual of benefits for such plans were frozen as of the acquisition date.
The components of the net periodic expense for the plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30,
|
|
|
|
Retirement Plans
|
|
|
Other Benefits
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Service cost
|
|
$
|
1,298
|
|
|
$
|
1,123
|
|
|
$
|
307
|
|
|
$
|
250
|
|
Interest cost
|
|
|
2,149
|
|
|
|
2,190
|
|
|
|
573
|
|
|
|
646
|
|
Expected return on assets
|
|
|
(3,007
|
)
|
|
|
(3,080
|
)
|
|
|
|
|
|
|
|
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
1,382
|
|
|
|
945
|
|
|
|
306
|
|
|
|
332
|
|
Unrecognized prior service cost
|
|
|
90
|
|
|
|
87
|
|
|
|
(391
|
)
|
|
|
(391
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
1,912
|
|
|
$
|
1,265
|
|
|
$
|
795
|
|
|
$
|
837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
Retirement Plans
|
|
|
Other Benefits
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Service cost
|
|
$
|
3,894
|
|
|
$
|
3,369
|
|
|
$
|
921
|
|
|
$
|
750
|
|
Interest cost
|
|
|
6,447
|
|
|
|
6,570
|
|
|
|
1,719
|
|
|
|
1,938
|
|
Expected return on assets
|
|
|
(9,021
|
)
|
|
|
(9,240
|
)
|
|
|
|
|
|
|
|
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
4,146
|
|
|
|
2,835
|
|
|
|
918
|
|
|
|
996
|
|
Unrecognized prior service cost
|
|
|
270
|
|
|
|
261
|
|
|
|
(1,173
|
)
|
|
|
(1,173
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
5,736
|
|
|
$
|
3,795
|
|
|
$
|
2,385
|
|
|
$
|
2,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We made no contributions to the pension plans during the first nine months of 2012 or 2011.
Page 31
Notes to Unaudited Consolidated Financial Statements
11. Stock-Based Compensation
Stock Option Plans
A
summary of the changes in outstanding stock options is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
Number of
Stock
Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Number of
Stock
Options
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding at beginning of period
|
|
|
28,825,986
|
|
|
$
|
12.77
|
|
|
|
28,129,885
|
|
|
$
|
12.68
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
1,618,932
|
|
|
|
9.22
|
|
Exercised
|
|
|
(684,972
|
)
|
|
|
5.55
|
|
|
|
(846,384
|
)
|
|
|
3.62
|
|
Forfeited
|
|
|
(336,584
|
)
|
|
|
12.05
|
|
|
|
(7,500
|
)
|
|
|
12.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
27,804,430
|
|
|
$
|
12.96
|
|
|
|
28,894,933
|
|
|
$
|
12.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In June 2006, our shareholders approved the Hudson City Bancorp, Inc. 2006 Stock Incentive Plan (the 2006
SIP) authorizing us to grant up to 30,000,000 shares of common stock. In July 2006, the Compensation Committee of the Board of Directors of Hudson City Bancorp (the Committee), authorized grants to each non-employee director,
executive officers and other employees to purchase shares of the Companys common stock, pursuant to the 2006 SIP. Grants of stock options made through December 31, 2010 pursuant to the 2006 SIP amounted to 23,120,000 options at an
exercise price equal to the fair value of our common stock on the grant date, based on quoted market prices. Of these options, 6,067,500 have vesting periods ranging from one to five years and an expiration period of ten years. The remaining
17,052,500 shares have vesting periods ranging from two to three years if certain financial performance measures are met. The financial performance measures for each of these awards, other than the performance stock options granted in 2010
(2010 grants), have either been met, or are considered, subject to review and verification of the Committee, probable to be met, so we have recorded compensation expenses for these awards accordingly. The Company has determined that it
is more than likely that one of the two performance measures related to the 2010 option grants will not be met. As a result, the Company expects that half of the 2010 option grants will vest and the expense for these options has been adjusted
accordingly.
In April 2011, our shareholders approved the Hudson City Bancorp, Inc. Amended and Restated 2011 Stock Incentive Plan (the
2011 SIP) authorizing us to grant up to 28,750,000 shares of common stock including 2,070,000 shares remaining under the 2006 SIP. During 2011, the Committee authorized stock option grants (the 2011 option grants) pursuant to
the 2011 SIP for 1,618,932 options at an exercise price equal to the fair value of our common stock on the grant date, based on quoted market prices. Of these options, 1,308,513 will vest between April 2014 and July 2014 if certain financial
performance measures are met and employment continues through the vesting date (the 2011 Performance Options). The remaining 310,419 options vested in April 2012. The 2011 option grants have an expiration period of ten years. We have
determined that it is probable these performance measures for the 2011 Performance Options will be met and have recorded compensation expense for the those grants accordingly.
Page 32
Notes to Unaudited Consolidated Financial Statements
Compensation expense related to our outstanding stock options amounted to $446,000 and $1.9 million for
the three months ended September 30, 2012 and 2011, respectively and $1.5 million and $6.4 million, for the nine months ended September 30, 2012 and 2011, respectively.
Stock Awards
During 2009, the Committee granted performance-based stock awards (the
2009 stock awards) pursuant to the 2006 SIP for 847,750 shares of our common stock. These shares were issued from treasury stock and were scheduled to vest in annual installments over a three-year period if certain performance measures
were met and employment continued through the vesting date. These performance measures were met and we recorded compensation expense for the 2009 stock awards over the vesting period based on the fair value of the shares on the grant date which was
$12.03. In addition to the 2009 stock awards, grants were made in 2010 (the 2010 stock awards) pursuant to the 2006 SIP for 18,000 shares of our common stock. Expense for the 2010 stock awards is recognized over the vesting period of
three years and is based on the fair value of the shares on the grant date which was $13.12. Total compensation expense for stock awards amounted to $19,675 and $870,000 for the three months ended September 30, 2012 and 2011, respectively, and
$59,025 and $2.6 million, for the nine months ended September 30, 2012 and 2011, respectively.
Stock Unit Awards
Hudson City Bancorp granted stock unit awards to a newly appointed member of the Board of Directors in July 2010. These awards were for a value of
$250,000 which was converted to common stock equivalents (stock units) of 20,661 shares. These units vest annually over a three-year period if service continues through the vesting dates. Vested units will be settled in shares of our common stock
following the directors departure from the Board of Directors. Stock unit awards were also made in 2011 (the 2011 stock unit awards) pursuant to the 2011 SIP for a total value of $9.7 million, or stock units of 1,004,230 shares.
2011 stock unit awards to employees vest if service continues through the third anniversary of the awards, and will be settled, if vested, in shares of our common stock on the third and fifth anniversaries of the awards. 2011 stock unit awards to
directors vest if service continues through the first anniversary of the award, and are settled in shares of our common stock following the directors departure from the Board of Directors.
Stock unit awards were made in 2012 (the 2012 stock unit awards) pursuant to the 2011 SIP for a total of $12.7 million, or stock units of
1,768,859 shares. 2012 stock unit awards to employees vest if service continues through the third anniversary of the awards and certain financial performance measures are met. The 2012 stock unit awards include stock units of 980,278 shares that
will be settled, if vested, in shares of our common stock on the third and sixth anniversaries of the awards. The 2012 stock unit awards also included variable performance stock units (VPUs) of 713,254 shares which will be settled, if
vested, in shares of our common stock on the third anniversary of the awards. The percentage of VPUs that will vest will be determined by ranking the total shareholder return of the Companys common stock over the performance period against the
total shareholder return of a peer group of 50 companies and also on return on tangible equity measures. Based on the level of performance, between 0% and 150% of the VPUs may vest. The market condition requirements are reflected in the grant date
fair value of the award, and the compensation expense for the award will be recognized regardless of whether the market conditions are met.
Page 33
Notes to Unaudited Consolidated Financial Statements
The fair value of the VPUs was estimated as of the date of grant using a Monte Carlo simulation
model, which utilized multiple input variables that determine the probability of satisfying the market condition requirements applicable to each award as follows:
|
|
|
|
|
|
|
2012
VPUs
|
|
HCBK closing price
|
|
$
|
7.10
|
|
Expected volatility
|
|
|
35.28
|
%
|
Risk-free interest rate
|
|
|
0.39
|
%
|
Remaining term (in years)
|
|
|
2.68
|
|
Fair value of VPUs granted
|
|
$
|
7.44
|
|
The expected volatility assumption was calculated based on the weighting of our historical and rolling volatility for the
expected term of the option grants. The risk-free interest rate was determined by reference to the continuously compounded yield on Treasury obligations for the expected term.
The remaining 75,327 stock unit awards will vest in April 2013. Expense for the stock unit awards is recognized over their vesting period and is based on the fair value of our common stock on each stock
unit grant date, based on quoted market prices. Total compensation expense for stock unit awards amounted to $1.9 million and $872,000 for the three months ended September 30, 2012 and 2011, respectively, and $4.5 million and $1.8 million for
the nine months ended September 30, 2012 and 2011, respectively.
12. Recent Accounting Pronouncements
In December 2011, FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to
the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05, which indefinitely defers the requirement that companies present reclassification adjustments for each component of accumulated other
comprehensive income in both net income and other comprehensive income on the face of the financial statements for all periods presented. Entities should continue to report reclassifications out of accumulated other comprehensive income consistent
with the presentation requirements in effect prior to ASU 2011-05. All other requirements in ASU 2011-05 are not affected by this update, including the requirement to report comprehensive income either in a single continuous statement or in two
separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. We have reported the required information in the
accompanying Consolidated Statements of Comprehensive Income.
In September 2011, FASB issued ASU No. 2011-08, Intangibles
Goodwill and Other (Topic 350): Testing Goodwill for Impairment. Under the amendments in this update, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination
that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a
reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the
fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit, as described in the accounting guidance. The guidance in ASU 2011-08 also provides entities with the option to bypass the qualitative
Page 34
Notes to Unaudited Consolidated Financial Statements
assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test and an entity may resume performing the qualitative
assessment in any subsequent period. ASU 2011-08 does not change current accounting guidance for testing other indefinite-lived intangible assets for impairment. This guidance is effective for fiscal years beginning after December 15, 2011.
Early adoption is permitted, including annual and interim goodwill impairment tests performed prior to September 15, 2011. This ASU did not have a material impact on our financial condition, results of operations or financial statement
disclosures.
13. Legal Matters
Eighteen putative class action complaints have been filed in the Court of Chancery, Delaware against Hudson City, its directors, and
M&T challenging the Merger. Each of these complaints names Hudson City and all of the current members of Hudson Citys board of directors as defendants. Certain of the complaints also name Hudson City Savings Bank and Wilmington Trust
Corporation as defendants. The complaints allege that the Hudson City directors breached their fiduciary duties to Hudson Citys public shareholders by approving the merger at an unfair price. Various of the complaints also generally allege
that the Merger was the product of a flawed sales process, that the directors approved provisions in the merger agreement that constitute impermissible deal protection devices, and that certain officers and directors of Hudson City will receive
personal benefits from the Merger not shared in by other Hudson City stockholders. The complaints further allege that M&T aided and abetted the alleged breaches of fiduciary duties. Certain of the complaints also allege that Hudson City and
Wilmington Trust Corporation aided and abetted the alleged breaches of fiduciary duties.
Three amended complaints have been filed in the
Delaware actions. These complaints add disclosure claims, alleging that the board of directors provided materially misleading and incomplete information to stockholders in the Form S-4 Registration Statement. Some of the amended complaints also
expand upon claims that certain board members will receive personal benefits from the merger not shared in by other stockholders. Certain plaintiffs filed motions to consolidate and to expedite the Delaware actions. The Court has held a hearing on
the motions to consolidate and appointed lead plaintiffs for a consolidated action. Requests for the production of documents have been filed in certain of the Delaware actions. Plaintiffs have agreed that defendants will not have to respond to any
complaints or produce any discovery in the Delaware actions until an operative complaint has been identified.
Six putative class actions
challenging the merger have also been filed in the Superior Court for Bergen County, Chancery Division, of New Jersey. These complaints allege that the Hudson City directors breached their fiduciary duties to Hudson Citys public shareholders
by approving the Merger through a flawed sale process and at an unfair price. Various of the complaints also generally allege, that the directors approved provisions in the merger agreement that constitute impermissible deal protection devices, and
that certain officers and directors of Hudson City will receive personal benefits from the Merger not shared in by other Hudson City stockholders. The complaints further allege that M&T aided and abetted the alleged breaches of fiduciary duties.
Certain of the complaints also allege that Hudson City and Wilmington Trust Corporation aided and abetted the alleged breaches of fiduciary duties. The Court has consolidated these six actions and any subsequent actions into a single matter:
In
re Hudson City Bancorp, Inc. Shareholder Litigation
. The Court also has appointed co-lead counsel. The New Jersey plaintiffs have not yet filed a consolidated, amended complaint.
All of the lawsuits seek, among other things, to enjoin completion of the Merger and an award of costs and attorneys fees. Certain of the actions also seek an accounting of damages sustained as a
result of the alleged breaches of fiduciary duty and punitive damages. The defendants believe these actions are without merit and intend to defend vigorously against the claims.
14. Subsequent Event
On October 29, 2012, and continuing through October 30, 2012, the New York metropolitan area was hit by Hurricane Sandy, one of the
most significant storm systems experienced in this area. As a result, we temporarily ceased all operations. By November 1, 2012, the Bank was able to reopen 75 branches with full banking services and normal business hours, while 55 branches were
without power and/or telephones, but providing limited service and hours to meet customers emergency needs. We have since resumed full banking services in all of our branches except for 4 branches that remain unable to open. We are continuing
to assess the damage resulting from the storm. We cannot at this time assess the impact that this storm may have had on our borrowers or on the related collateral for loans.
Page 35
Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
Executive Summary
Pending Merger
On August 27, 2012, the Company entered into an Agreement and Plan of
Merger with M&T and WTC, with WTC as the surviving entity. As part of the Merger, the Bank will merge with and into Manufacturers and Traders Trust Company. Subject to the terms and conditions of the Merger Agreement, in the Merger, Hudson City
shareholders will have the right to receive with respect to each of their shares of common stock of the Company, at their election (but subject to proration and adjustment procedures), 0.08403 of a share of M&T Common Stock, or cash having a
value equal to the product of 0.08403 multiplied by the average closing price of the M&T Common Stock for the ten days immediately prior to the completion of the Merger. The Merger Agreement also provides that at the closing of the Merger, 40%
of the outstanding shares of Hudson City common stock will be converted into the right to receive cash and the remainder of the outstanding shares of Hudson City common stock will be converted into the right to receive shares of M&T Common
Stock. In connection with the Merger, M&T has filed a registration statement on Form S-4 with the SEC that includes a joint proxy statement of the Company and M&T and a prospectus of M&T, as well as other relevant documents concerning
the Merger. The registration statement is subject to completion and has not yet become effective. A definitive proxy statement will be mailed to shareholders of the Company after the registration statement is declared effective. The Merger is
subject to shareholder and regulatory approvals and the satisfaction of other customary conditions. The Company anticipates that the closing of the Merger will take place in the second quarter of 2013.
Financial Condition and Results of Operations
During the first nine months of 2012, we continued to focus on our traditional consumer-oriented business model through the origination of one- to four-family mortgage loans. We have traditionally funded
this loan production with customer deposits and borrowings. Market interest rates remained at historically low levels during 2011 and during the first nine months of 2012 and, as a result, we continued to reduce the size of our balance sheet.
During the first quarter of 2011, the Bank completed a restructuring of its balance sheet (referred to as the Restructuring
Transaction) which involved the extinguishment of $12.5 billion of structured putable borrowings with an average cost of 3.56%. The extinguishment of the borrowings was funded by the sale of $8.66 billion of securities with an average yield of
3.20% and $5.00 billion of new short-term fixed-maturity borrowings with an average cost of 0.66%. Interest rates continued to decline in 2011 which resulted in increased prepayments on our mortgage-related assets and calls of our investment
securities. During the fourth quarter of 2011, the Bank used the excess liquidity provided by the prepayments of mortgage-related assets and calls of investment securities to extinguish $4.3 billion of structured putable borrowings with a weighted
average cost of 4.21%. The Restructuring Transaction and the extinguishment of debt during the fourth quarter of 2011, (collectively referred to as the Transactions), reduced after-tax earnings by $1.07 billion in 2011.
Page 36
The Transactions were part of our ongoing strategy to reduce interest rate risk and realign our funding mix.
We decided to complete the Transactions because of the effect that the then recent market events, including the unprecedented involvement of the U.S. government and the GSEs in the mortgage market and the protracted period of historically low market
interest rates had on our balance sheet. The extended low interest rate environment caused accelerated prepayment speeds on our mortgage-related assets and calls of our investment securities resulting in the reinvestment of these funds at the
current low market interest rates. These lower-yielding assets and higher-cost borrowings, which did not reprice during this extended low rate environment, caused margin compression and heightened interest rate risk concerns for us.
Our results of operations depend primarily on net interest income, which in part, is a direct result of the market interest rate environment. Net
interest income is the difference between the interest income we earn on our interest-earning assets, primarily mortgage loans, mortgage-backed securities and investment securities, and the interest we pay on our interest-bearing liabilities,
primarily time deposits, interest-bearing transaction accounts and borrowed funds. Net interest income is affected by the shape of the market yield curve, the timing of the placement and repricing of interest-earning assets and interest-bearing
liabilities on our balance sheet, the prepayment rate on our mortgage-related assets and the puts of our borrowings. Our results of operations may also be affected significantly by national and local economic and competitive conditions, particularly
those with respect to changes in market interest rates, credit quality, government policies and actions of regulatory authorities. Our results are also affected by the market price of our stock, as the expense of our employee stock ownership plan is
related to the current price of our common stock.
The Federal Open Market Committee of the Board of Governors of the Federal Reserve System
(the FOMC) noted that the economy has continued to expand at a moderate pace in recent months. Growth in employment has slowed in recent months, and the unemployment rate remains elevated. The FOMC noted that while the housing sector has
showed signs of improvement and household spending continues to advance, growth in business fixed investment has slowed. The national unemployment rate was 7.9% during October 2012 representing a decline from 8.5% in December 2011. The FOMC decided
to maintain the overnight lending rate at zero to 0.25% during the third quarter of 2012 and stated that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015. As a result, market interest rates
have remained at low levels, and consequently, the yields on our mortgage-related assets have continued to decrease during the first nine months of 2012.
The FOMC also decided to expand its accommodative monetary policy by purchasing an additional $40 billion of agency mortgage-backed securities per month to ensure that inflation is at the rate most
consistent with its dual mandate regarding both inflation and unemployment. The Federal Reserve program Operation Twist, which was originally set to expire at the end of June, has been extended until the end of the year. This program
consists of the purchase of Treasury securities with remaining maturities of 6 to 30 years funded by the sale of an equal amount of Treasury securities with remaining maturities of 3 years or less. These programs will continue to put downward
pressure on longer-term interest rates.
Net interest income decreased $41.3 million, or 16.9%, to $203.3 million for the third quarter of
2012 as compared to $244.6 million for the third quarter of 2011. Our interest rate spread increased slightly to 1.80% for the third quarter of 2012 as compared to 1.76% for the third quarter of 2011. Our net interest margin was 2.02% for the third
quarter of 2012 as compared to 1.97% for the third quarter of 2011. The decrease in net interest income reflects the overall decrease in interest-earning assets and interest-bearing liabilities as a result of the extinguishment of $4.3 billion of
borrowings during the fourth quarter of 2011 and the continued decrease in the size of our balance sheet as a result of the lack of reinvestment opportunities.
Page 37
Net interest income decreased $112.3 million, or 14.5%, to $661.7 million for the first nine months of 2012
as compared to $774.0 million for the first nine months of 2011, primarily reflecting the reduction in the size of our balance sheet. Our interest rate spread increased 18 basis points to 1.91% for the nine months ended September 30, 2012 as
compared to 1.73% for the nine months ended September 30, 2011. Our net interest margin increased 17 basis points to 2.11% as compared to 1.94% for the those same respective periods. The increase in our interest rate spread and net interest
margin for the first nine months of 2012 is primarily due to the effects of the Transactions.
Market interest rates on mortgage-related
assets remained at near-historic lows primarily due to the 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 the thirty year fixed rate mortgage loans that conform to the GSEs guidelines for purchase to remain low. We originate such conforming loans and retain them in our portfolio. Further, the FOMC has decided to maintain the
overnight lending rate at the current level of zero to 0.25% through mid-2015 if recent economic conditions continue. We expect this adverse environment for portfolio lending to continue, with the likely result that we will continue to experience
compression of our net interest margin. We expect that this compression in net interest margin, along with the reduction in the size of our balance sheet from the Transactions, will result in a reduction of net interest income for the remainder of
2012.
The provision for loan losses amounted to $20.0 million and $70.0 million for the three and nine month periods ended September 30,
2012 as compared to $25.0 million and $95.0 million for the three and nine month periods ended September 30, 2011. The decrease in our provision for loan losses during the third quarter of 2012 as compared to the same period in 2011 was due
primarily to the overall declining trend in net charge-offs and a decrease in the size of the loan portfolio, yet resulted in an overall increase in our allowance for loan losses as non-performing loans continued to increase. Non-performing loans,
defined as non-accrual loans and accruing loans delinquent 90 days or more, amounted to $1.14 billion at September 30, 2012 compared with $1.02 billion at December 31, 2011. The ratio of non-performing loans to total loans was 4.12% at
September 30, 2012 compared with 3.48% at December 31, 2011. The highly publicized foreclosure issues that have 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 continue to be prolonged, especially in New York and New Jersey where 72% of our non-performing loans are located. 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 $3.0 million for the third quarter of 2012 as compared to $3.1 million for the same
quarter in 2011. Non-interest income for the third quarter of 2012 is primarily made up of service fees and charges on deposit and loan accounts.
Total non-interest income was $8.7 million for the first nine months of 2012 as compared to $111.0 million for the same period in 2011. Included in non-interest income for the first nine months of 2011
were net gains on securities transactions of $102.5 million which resulted from the sale of $9.04 billion of securities available-for-sale. Substantially all of the proceeds from the sale of securities were used to repay borrowings in the
Restructuring Transaction. There were no securities sales for the nine months ended September 30, 2012.
Page 38
Total non-interest expense amounted to $93.9 million for the third quarter of 2012 as compared to $83.7
million for the third quarter of 2011. This increase is due to increases of $6.7 million in compensation and employee benefit costs and $7.3 million in other expense (including $6.1 million of Merger related costs), partially offset by a decrease of
$3.6 million in Federal deposit insurance expense. The decrease in Federal deposit insurance expense for the quarter ended September 30, 2012 is primarily due to the reduction in the size of our balance sheet as a result of the Transactions.
Total non-interest expense amounted to $269.0 million for the nine months ended September 30, 2012 as compared to $1.41 billion for the
nine months ended September 30, 2011. Included in total non-interest expense for the first nine months of 2011 was a $1.17 billion loss on the extinguishment of debt related to the Restructuring Transaction. The increase in total non-interest
expense for the first nine months of 2012 was due to an increase of $8.4 million in compensation and employee benefit costs, an increase of $11.4 million in other expense (including $6.1 million of Merger related costs), and an increase of $10.6
million in Federal deposit insurance expense.
Net loans amounted to $27.53 billion at September 30, 2012 as compared to $29.14 billion
at December 31, 2011. During the first nine months of 2012, our loan production amounted to $3.92 billion as compared to $4.09 billion for the nine months ended September 30, 2011. Loan production was offset by principal repayments of
$5.38 billion in the first nine months of 2012, as compared to principal repayments of $4.85 billion for the first nine months of 2011.
Total
mortgage-backed securities decreased $1.26 billion to $12.03 billion at September 30, 2012 from $13.29 billion at December 31, 2011. The decrease in mortgage-backed securities reflected repayments of $2.74 billion, partially offset by
purchases of $1.47 billion of mortgage-backed securities issued by GSEs.
Investment securities decreased $79.0 million to $467.4 million at
September 30, 2012 from $546.4 million at December 31, 2011 due to calls of $500.0 million during the nine months ended September 30, 2012. The proceeds from these calls were used to purchase $407.8 million of corporate bonds.
Total deposits amounted to $24.02 billion at September 30, 2012 as compared to $25.51 billion at December 31, 2011. The decrease in
deposits was due to planned reductions in our deposit rates to curtail deposit growth while we experience excess liquidity from prepayment activity and limited investment opportunities.
Borrowings amounted to $12.93 billion at September 30, 2012 as compared to $15.08 billion at December 31, 2011. The decrease in borrowings was due to the maturity of short-term borrowings
utilized as part of the Restructuring Transaction.
The Bank is currently subject to the Bank MOU. In accordance with the Bank MOU, the Bank
has adopted and has implemented enhanced operating policies and procedures that are intended to enable us to continue to (a) reduce our level of interest rate risk, (b) reduce our funding concentration, (c) diversify our funding
sources, (d) enhance our liquidity position, (e) monitor and manage loan modifications and (f) maintain our capital position in accordance with our existing capital plan. In addition, we developed a written strategic plan for the Bank
which establishes various objectives, including, but not limited to, objectives for the Banks overall risk profile, earnings performance, growth and balance sheet mix and to enhance our enterprise risk management program. The implementation of
the strategic plan has been suspended pending the completion of the Merger.
Page 39
The Company is currently subject to the Company MOU. In accordance with the Company MOU, the Company must,
among other things support the Banks compliance with the Bank MOU. The Company MOU also requires the Company to: (a) obtain approval from the FRB prior to receiving a capital distribution from the Bank or declaring a dividend to
shareholders, (b) obtain approval from the FRB prior to repurchasing or redeeming any Company stock or incurring any debt with a maturity of greater than one year and (c) submit a comprehensive Capital Plan and a comprehensive Earnings
Plan to the FRB. These agreements will remain in effect until modified or terminated by the OCC (with respect to the Bank MOU) and the FRB (with respect to the Company MOU).
On October 29, 2012, and continuing through October 30, 2012, the New York metropolitan area was hit by Hurricane Sandy, one of the most significant storm systems experienced in this area. As a result, we
temporarily ceased all operations. By November 1, 2012, the Bank was able to reopen 75 branches with full banking services and normal business hours, while 55 branches were without power and/or telephones, but providing limited service and hours to
meet customers emergency needs. We have since resumed full banking services in all of our branches except for 4 branches that remain unable to open. We are continuing to assess the damage resulting from the storm. We cannot at this time assess
the impact that this storm may have had on our borrowers or on the related collateral for loans.
Comparison of Financial Condition at
September 30, 2012 and December 31, 2011
Total assets decreased $3.46 billion, or 7.6%, to $41.90 billion at September 30,
2012 from $45.36 billion at December 31, 2011. The decrease in total assets reflected a $1.61 billion decrease in net loans, a $1.26 billion decrease in total mortgage-backed securities, a $328.2 million decrease in cash and cash equivalents
and a $120.4 million decrease in Federal Home Loan Bank of New York (FHLB) stock.
Net loans amounted to $27.53 billion at
September 30, 2012 as compared to $29.14 billion at December 31, 2011. During the first nine months of 2012, our loan production amounted to $3.92 billion as compared to $4.09 billion for the same period in 2011. Loan production was offset
by principal repayments of $5.38 billion in the first nine months of 2012, as compared to principal repayments of $4.85 billion for the first nine months of 2011.
The decrease in loan production during the first nine months of 2012 primarily reflects our low appetite for adding long-term fixed rate loans to our portfolio in the current low market interest rate
environment. The decrease in net loans was also due to continued elevated levels of refinancing activity caused by low market interest rates.
Our first mortgage loan production during the first nine months of 2012 was substantially all in one- to four-family mortgage loans. Approximately 60% of
mortgage loan originations for the first nine months of 2012 were variable-rate loans as compared to approximately 41% for the corresponding period in 2011. Fixed-rate mortgage loans accounted for 62.9% of our first mortgage loan portfolio at
September 30, 2012 as compared to 66.8% at December 31, 2011.
Our ALL amounted to $291.6 million at September 30, 2012 and
$273.8 million at December 31, 2011. Non-performing loans amounted to $1.14 billion, or 4.12% of total loans, at September 30, 2012 as compared to $1.02 billion, or 3.48% of total loans, at December 31, 2011.
Total mortgage-backed securities decreased $1.26 billion to $12.03 billion at September 30, 2012 from $13.29 billion at December 31, 2011. The
decrease in mortgage-backed securities reflected repayments of $2.73 billion, partially offset by purchases of $1.47 billion of mortgage-backed securities issued by GSEs. At September 30, 2012, variable-rate mortgage-backed securities accounted
for 85.7% of our portfolio compared with 84.1% at December 31, 2011.
Total investment securities decreased $79.0 million, or 14.5%, to
$467.4 million at September 30, 2012 as compared to $546.4 million at December 31, 2011. The decrease in investment securities is primarily due to calls of $500.0 million of investment securities partially offset by the purchase of
corporate bonds in the amount of $407.8 million during the nine months ended September 30, 2012.
FHLB stock decreased $120.4 million to
$390.2 million at September 30, 2012 as compared to $510.6 million at December 31, 2011. The decrease in the balance of FHLB stock was primarily due to mandatory redemptions of stock due to a decrease in the amount of borrowings
outstanding with the FHLB.
Page 40
Total cash and cash equivalents decreased $328.2 million to $425.9 million at September 30, 2012 as
compared to $754.1 million at December 31, 2011. The decrease in cash is due primarily to the decrease in deposits as we continue our balance sheet reduction while profitable investment opportunities remain scarce in the current environment.
Other assets decreased $51.7 million to $677.5 million at September 30, 2012 from $729.2 million at December 31, 2011. The decrease in other assets is due to a decrease in current and deferred taxes of $59.8 million primarily due to
accrued tax expense related to earnings during the first nine months of 2012.
Total liabilities decreased $3.61 billion, or 8.9%, to $37.19
billion at September 30, 2012 from $40.80 billion at December 31, 2011. The decrease in total liabilities primarily reflected a $2.15 billion decrease in borrowed funds and a decrease in total deposits of $1.49 billion.
Total deposits decreased $1.49 billion, or 5.8%, to $24.02 billion at September 30, 2012 from $25.51 billion at December 31, 2011. The decrease
in total deposits reflected a $1.41 billion decrease in our money market accounts and a decrease of $445.3 million in our time deposits, partially offset by an increase in interest-bearing transaction and savings accounts of $301.3 million and $53.4
million, respectively. The decrease in our money market and time deposit accounts is primarily due to planned reductions in our deposit rates to curtail deposit growth while we experience excess liquidity from prepayment activity and limited
investment opportunities. We had 135 banking offices at both September 30, 2012 and December 31, 2011.
Borrowings decreased $2.15
billion, or 14.3%, to $12.93 billion at September 30, 2012 as compared to $15.08 billion at December 31, 2011. The decrease in borrowings was due to the maturity of short-term borrowings utilized as part of the Restructuring Transaction.
At September 30, 2012 and December 31, 2011 borrowings consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
|
|
Principal
|
|
|
Weighted
Average
Rate
|
|
|
Principal
|
|
|
Weighted
Average
Rate
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Structured borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly put option
|
|
$
|
3,325,000
|
|
|
|
4.40
|
%
|
|
$
|
3,325,000
|
|
|
|
4.40
|
%
|
One-time put option
|
|
|
4,600,000
|
|
|
|
4.52
|
|
|
|
4,600,000
|
|
|
|
4.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,925,000
|
|
|
|
4.47
|
|
|
|
7,925,000
|
|
|
|
4.47
|
|
Fixed-rate/fixed-maturity borrowings
|
|
|
5,000,000
|
|
|
|
4.21
|
|
|
|
7,150,000
|
|
|
|
3.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowed funds
|
|
$
|
12,925,000
|
|
|
|
4.37
|
%
|
|
$
|
15,075,000
|
|
|
|
3.87
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2012, we had $2.93 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.
Page 41
The Company had 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 (SIPA). Mortgage-backed securities with an amortized cost of approximately $114.1 million were pledged as
collateral for these borrowings and we demanded the return of this collateral. The trustee for the SIPA liquidation of Lehman Brothers Inc. (the Trustee) notified the Company in the fourth quarter of 2011 that it no longer holds these
securities and considers our claim to be approximately $13.9 million representing the excess of the market value of the collateral over the $100 million repurchase price. While we dispute the Trustees calculation of the claim, as a result of
the Trustees position, in the fourth quarter of 2011 we removed the mortgage-backed securities and the borrowings from our balance sheet and recorded the net amount as a receivable included in other assets (the Net Claim). While we
intend to pursue full recovery of our Net Claim, during the fourth quarter of 2011 we established a reserve of $3.9 million against the receivable balance. There can be no assurances as to the amount of the final settlement of this transaction.
Other liabilities increased $26.6 million to $239.3 million at September 30, 2012 from $212.7 million at December 31, 2011 due
primarily to an increase in accrued FDIC assessments.
Total shareholders equity increased $151.6 million to $4.71 billion at
September 30, 2012 from $4.56 billion at December 31, 2011. The increase was primarily due to net income of $201.2 million for the nine months ended September 30, 2012 and an increase in accumulated other comprehensive income of $54.8
million. The increase was partially offset by cash dividends paid to common shareholders of $119.1 million.
Accumulated other comprehensive
income amounted to $94.4 million at September 30, 2012 and included a $141.6 million after-tax net unrealized gain on securities available for sale ($239.3 million pre-tax) partially offset by a $47.2 million after-tax accumulated other
comprehensive loss related to the funded status of our employee benefit plans. Accumulated other comprehensive income amounted to $39.7 million at December 31, 2011 and included an $89.3 million after-tax net unrealized gain on securities
available for sale ($150.9 million pre-tax) partially offset by a $49.6 million after-tax accumulated other comprehensive loss related to the funded status of our employee benefit plans.
As of September 30, 2012, there remained 50,123,550 shares that may be purchased under our existing stock repurchase programs. We did not repurchase any shares of our common stock during the first
nine months of 2012 pursuant to our repurchase programs. Pursuant to the Company MOU, any future share repurchases must be approved by the FRB. In addition, pursuant to the terms of the Merger Agreement, we may not repurchase shares of Hudson City
Bancorp common stock without the consent of M&T. During the first nine months of 2012, 62,579 shares were surrendered by employees for withholding taxes related to vesting stock awards. At September 30, 2012, our capital ratios were in
excess of the applicable regulatory requirements to be considered well-capitalized. See Liquidity and Capital Resources.
At
September 30, 2012, our shareholders equity to asset ratio was 11.25% compared with 10.05% at December 31, 2011. The ratio of average shareholders equity to average assets was 10.69% for the nine months ended September 30,
2012 as compared to 9.26% for the nine months ended September 30, 2011. 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 $9.48 at September 30, 2012 and $9.20 at December 31, 2011. Our tangible book value per share, calculated by deducting goodwill and the core deposit intangible from shareholders
equity, was $9.17 as of September 30, 2012 and $8.89 at December 31, 2011.
Page 42
Comparison of Operating Results for the Three-Month Periods Ended September 30, 2012 and 2011
Average Balance Sheet.
The following table presents the average balance sheets, average yields and costs and certain
other information for the three months ended September 30, 2012 and 2011. The table presents the annualized average yield on interest-earning assets and the annualized average cost of interest-bearing liabilities. We derived the yields and
costs by dividing annualized income or expense by the average balance of interest-earning assets and interest-bearing liabilities, respectively, for the periods shown. We derived average balances from daily balances over the periods indicated.
Interest income includes fees that we considered to be adjustments to yields. Yields on tax-exempt obligations were not computed on a tax equivalent basis. Nonaccrual loans were included in the computation of average balances and therefore have a
zero yield. The yields set forth below include the effect of deferred loan origination fees and costs, and purchase discounts and premiums that are amortized or accreted to interest income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Average
Yield/
Cost
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Average
Yield/
Cost
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earnings assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First mortgage loans, net (1)
|
|
$
|
27,522,218
|
|
|
$
|
320,994
|
|
|
|
4.67
|
%
|
|
$
|
29,758,353
|
|
|
$
|
375,672
|
|
|
|
5.05
|
%
|
Consumer and other loans
|
|
|
264,556
|
|
|
|
3,207
|
|
|
|
4.85
|
|
|
|
305,452
|
|
|
|
3,792
|
|
|
|
4.97
|
|
Federal funds sold and other overnight deposits
|
|
|
348,170
|
|
|
|
194
|
|
|
|
0.22
|
|
|
|
1,201,323
|
|
|
|
519
|
|
|
|
0.17
|
|
Mortgage-backed securities at amortized cost
|
|
|
12,029,553
|
|
|
|
73,234
|
|
|
|
2.44
|
|
|
|
14,702,692
|
|
|
|
108,185
|
|
|
|
2.94
|
|
Federal Home Loan Bank stock
|
|
|
406,285
|
|
|
|
4,853
|
|
|
|
4.78
|
|
|
|
748,844
|
|
|
|
8,841
|
|
|
|
4.72
|
|
Investment securities, at amortized cost
|
|
|
453,097
|
|
|
|
2,947
|
|
|
|
2.60
|
|
|
|
3,304,656
|
|
|
|
27,529
|
|
|
|
3.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
41,023,879
|
|
|
|
405,429
|
|
|
|
3.95
|
|
|
|
50,021,320
|
|
|
|
524,538
|
|
|
|
4.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earnings assets (4)
|
|
|
1,503,166
|
|
|
|
|
|
|
|
|
|
|
|
1,402,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
42,527,045
|
|
|
|
|
|
|
|
|
|
|
$
|
51,423,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings accounts
|
|
$
|
924,942
|
|
|
|
591
|
|
|
|
0.25
|
|
|
$
|
869,245
|
|
|
|
1,202
|
|
|
|
0.55
|
|
Interest-bearing transaction accounts
|
|
|
2,289,486
|
|
|
|
2,812
|
|
|
|
0.49
|
|
|
|
1,968,076
|
|
|
|
3,797
|
|
|
|
0.77
|
|
Money market accounts
|
|
|
7,274,462
|
|
|
|
7,294
|
|
|
|
0.40
|
|
|
|
8,231,758
|
|
|
|
18,752
|
|
|
|
0.90
|
|
Time deposits
|
|
|
13,184,609
|
|
|
|
46,230
|
|
|
|
1.39
|
|
|
|
13,865,635
|
|
|
|
57,787
|
|
|
|
1.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
|
23,673,499
|
|
|
|
56,927
|
|
|
|
0.96
|
|
|
|
24,934,714
|
|
|
|
81,538
|
|
|
|
1.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase agreements
|
|
|
6,950,000
|
|
|
|
79,151
|
|
|
|
4.46
|
|
|
|
7,656,522
|
|
|
|
86,741
|
|
|
|
4.49
|
|
Federal Home Loan Bank of New York advances
|
|
|
6,327,717
|
|
|
|
66,063
|
|
|
|
4.09
|
|
|
|
13,062,500
|
|
|
|
111,616
|
|
|
|
3.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowed funds
|
|
|
13,277,717
|
|
|
|
145,214
|
|
|
|
4.28
|
|
|
|
20,719,022
|
|
|
|
198,357
|
|
|
|
3.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
36,951,216
|
|
|
|
202,141
|
|
|
|
2.15
|
|
|
|
45,653,736
|
|
|
|
279,895
|
|
|
|
2.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits
|
|
|
614,343
|
|
|
|
|
|
|
|
|
|
|
|
592,614
|
|
|
|
|
|
|
|
|
|
Other noninterest-bearing liabilities
|
|
|
244,554
|
|
|
|
|
|
|
|
|
|
|
|
223,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest-bearing liabilities
|
|
|
858,897
|
|
|
|
|
|
|
|
|
|
|
|
815,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
37,810,113
|
|
|
|
|
|
|
|
|
|
|
|
46,469,440
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
4,716,932
|
|
|
|
|
|
|
|
|
|
|
|
4,954,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
42,527,045
|
|
|
|
|
|
|
|
|
|
|
$
|
51,423,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/net interest rate spread (2)
|
|
|
|
|
|
$
|
203,288
|
|
|
|
1.80
|
|
|
|
|
|
|
$
|
244,643
|
|
|
|
1.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest-earning assets/net interest margin (3)
|
|
$
|
4,072,663
|
|
|
|
|
|
|
|
2.02
|
%
|
|
$
|
4,367,584
|
|
|
|
|
|
|
|
1.97
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of interest-earning assets to interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
1.11 x
|
|
|
|
|
|
|
|
|
|
|
|
1.10 x
|
|
(1)
|
Amount includes deferred loan costs and non-performing loans and is net of the allowance for loan losses.
|
(2)
|
Determined by subtracting the annualized weighted average cost of total interest-bearing liabilities from the annualized weighted average yield on total
interest-earning assets.
|
(3)
|
Determined by dividing annualized net interest income by total average interest-earning assets.
|
(4)
|
Includes the average balance of principal receivable related to FHLMC mortgage-backed securities of $ 133.9 million and $ 155.6 million for the quarters ended
September 30, 2012 and 2011, respectively.
|
Page 43
General.
Net income was $55.9 million for the third quarter of 2012 as compared to $84.2
million for the third quarter of 2011. Both basic and diluted earnings per common share were $0.11 for the third quarter of 2012 as compared to basic and diluted earnings per share of $0.17 for the third quarter of 2011. For the third quarter of
2012, our annualized return on average shareholders equity was 4.74%, compared with 6.80% for the corresponding period in 2011. Our annualized return on average assets for the third quarter of 2012 was 0.53% as compared to 0.65% for the third
quarter of 2011. The decrease in the annualized return on average equity and assets is primarily due to the decrease in net income during the third quarter of 2012 notwithstanding an $8.89 billion decrease in average assets and a $237.2 million
decrease in average equity.
Interest and Dividend Income.
Total interest and dividend income for the third quarter of 2012
decreased $119.1 million, or 22.7%, to $405.4 million from $524.5 million for the third quarter of 2011. The decrease in total interest and dividend income was primarily due to a decrease in the average balance of total interest-earning assets of
$9.00 billion, or 18.0%, to $41.02 billion for the third quarter of 2012 as compared to $50.02 billion for the third quarter of 2011. The decrease in total interest and dividend income was also due to a decrease of 24 basis points in the annualized
weighted-average yield on total interest-earning assets to 3.95% for the third quarter of 2012 from 4.19% for the third quarter in 2011. The decrease in the average balance of total interest-earning assets was due primarily to the effects of the
debt extinguishments in the fourth quarter of 2011 and repayments of mortgage-related assets during the first nine months of 2012 due to the low interest rate environment.
Interest on first mortgage loans decreased $54.7 million, or 14.6%, to $321.0 million for the third quarter of 2012 as compared to $375.7 million for the third quarter of 2011. This was primarily due to a
38 basis point decrease in the annualized weighted-average yield to 4.67% for the third quarter of 2012 from 5.05% for the third quarter of 2011. The decrease in interest income on mortgage loans was also due to a $2.24 billion decrease in the
average balance of first mortgage loans to $27.52 billion for the third quarter of 2012 from $29.76 billion for the same quarter in 2011.
The
decreases in the average yields earned during the quarter ended September 30, 2012 were due to lower market interest rates on mortgage products and also due to the continued mortgage refinancing activity. Refinancing activity, which resulted in
continued elevated levels of loan repayments, also caused the average balance of our first mortgage loans to decline during the third quarter of 2012 as compared to the third quarter of 2011.
Interest on consumer and other loans decreased $585,000 to $3.2 million for the third quarter of 2012 from $3.8 million for the third quarter of 2011 due to a decrease in the average balance of consumer
and other loans. The average balance of consumer and other loans decreased $40.9 million to $264.6 million for the third quarter of 2012 from $305.5 million for the third quarter of 2011 and the average yield earned decreased 12 basis points to
4.85% from 4.97% for the respective periods. The average balance of consumer loans decreased as consumer loans is not a business that we actively pursue. The decrease in the weighted-average yield is a result of current market interest rates.
Interest on mortgage-backed securities decreased $35.0 million to $73.2 million for the third quarter of 2012 from $108.2 million for the
third quarter of 2011. This decrease was due primarily to a $2.67 billion decrease in the average balance of mortgage-backed securities to $12.03 billion for the third quarter of 2012 from $14.70 billion for the third quarter of 2011. The decrease
in the average balance of mortgage-backed securities was due primarily to elevated levels of principal repayments in the current low interest rate environment. The decrease in interest on mortgage-backed securities was also due to a 50 basis point
decrease in the annualized weighted-average yield to 2.44% for the third quarter of 2012 from 2.94% for the third quarter of 2011. The decrease in the weighted-average yield is a result of principal repayments on securities that have higher yields
than the existing portfolio as well as the re-pricing of variable rate mortgage-backed securities in this continued low interest rate environment.
Page 44
Interest on investment securities decreased $24.6 million to $2.9 million for the third quarter of 2012 from
$27.5 million for the third quarter of 2011. This decrease was due primarily to a $2.85 billion decrease in the average balance of investment securities to $453.1 million for the third quarter of 2012 from $3.30 billion for the third quarter of
2011. In addition, the average yield of investment securities decreased 73 basis points to 2.60% for the third quarter of 2012 from 3.33% for the third quarter of 2011. The decrease in the average balance is due primarily to calls of $3.1 billion of
investment securities during the second half of 2011.
Dividends on FHLB stock decreased $3.9 million, or 44.3%, to $4.9 million for the third
quarter of 2012 from $8.8 million for the third quarter of 2011. This decrease was due primarily to a $342.5 million decrease in the average balance of FHLB stock to $406.3 million for the third quarter of 2012 from $748.8 million for the third
quarter of 2011. The effect of the decrease was partially offset by a 6 basis point increase in the average dividend yield earned to 4.78% for the third quarter of 2012 as compared to 4.72% for the third quarter of 2011. The decrease in the average
balance of FHLB stock was primarily due to mandatory redemptions of stock due to a decrease in the amount of borrowings outstanding with the FHLB.
Interest on Federal funds and other overnight deposits sold amounted to $194,000 for the third quarter of 2012 as compared to $519,000 for the third quarter of 2011. The average balance of Federal funds
sold and other overnight deposits amounted to $348.2 million for the third quarter of 2012 as compared to $1.20 billion for the third quarter of 2011. The yield earned on Federal funds sold and other overnight deposits was 0.22% for the 2012 third
quarter and 0.17% for the 2011 third quarter.
Interest Expense.
Total interest expense for the quarter ended September 30,
2012 decreased $77.8 million, or 27.8%, to $202.1 million from $279.9 million for the quarter ended September 30, 2011. This decrease was primarily due to an $8.70 billion, or 19.1%, decrease in the average balance of total interest-bearing
liabilities to $36.95 billion for the quarter ended September 30, 2012 compared to $45.65 billion for the third quarter of 2011. The decrease was also due to a 28 basis point decrease in the annualized weighted-average cost of total
interest-bearing liabilities to 2.15% for the quarter ended September 30, 2012 compared to 2.43% for the quarter ended September 30, 2011. The decrease in the average balance of total interest-bearing liabilities was due primarily to $8.75
billion of borrowings that matured or were extinguished during the second half of 2011 and the first nine months of 2012.
Interest expense on
our time deposit accounts decreased $11.6 million to $46.2 million for the third quarter of 2012 from $57.8 million for the third quarter of 2011. This decrease in interest expense on time deposits was due to a 26 basis point decrease in the
annualized weighted-average cost to 1.39% for the third quarter of 2012 compared with 1.65% for the third quarter of 2011 as maturing time deposits were renewed or replaced by new time deposits at lower rates. This decrease was also due to a $681.0
million decrease in the average balance of time deposit accounts to $13.18 billion for the third quarter of 2012 from $13.87 billion for the third quarter of 2011. The decline in the average balance of our time deposits reflects our decision to
lower deposit rates to continue our balance sheet reduction while profitable investment opportunities remain scarce in the current environment.
Page 45
Interest expense on money market accounts decreased $11.5 million to $7.3 million for the third quarter of
2012 from $18.8 million for the same period in 2011. This was due primarily to a decrease in the annualized weighted-average cost of 50 basis points to 0.40% for the third quarter of 2012 from 0.90% for the third quarter of 2011. In addition, the
average balance of money market accounts decreased $957.3 million to $7.27 billion for the third quarter of 2012 as compared to $8.23 billion for the third quarter of 2011. Interest expense on our interest-bearing transaction accounts decreased
$985,000 to $2.8 million for the third quarter of 2012 from $3.8 million for the same period in 2011. The decrease is due to a 28 basis point decrease in the annualized weighted-average cost to 0.49% for the quarter ended September 30, 2012 as
compared to 0.77% for the same quarter in 2011. The effect of the decrease in the weighted-average cost was partially offset by a $321.4 million increase in the average balance to $2.29 billion for the third quarter of 2012 as compared to $1.97
billion for the third quarter of 2011.
The decrease in the average cost of deposits for the first nine months of 2012 reflected lower market
interest rates and our decision to maintain lower deposit rates to slow deposit growth. At September 30, 2012, time deposits scheduled to mature within one year totaled $7.94 billion with an average cost of 0.99%. These time deposits are
scheduled to mature as follows: $3.13 billion with an average cost of 0.99% in the fourth quarter of 2012, $2.29 billion with an average cost of 0.94% in the first quarter of 2013, $1.37 billion with an average cost of 1.11% in the second quarter of
2013 and $1.15 billion with an average cost of 0.96% in the third quarter of 2013. 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 $53.2 million to
$145.2 million for the third quarter of 2012 from $198.4 million for the third quarter of 2011. This decrease was due to a $7.44 billion decrease in the average balance of borrowed funds to $13.28 billion for the third quarter of 2012 from $20.72
billion for the third quarter of 2011. This decrease was partially offset by a 48 basis point increase in the annualized weighted-average cost of borrowed funds to 4.28% for the third quarter of 2012 as compared to 3.80% for the third quarter of
2011. The decrease in the average balance of borrowed funds was primarily due to the effects of the debt extinguishments in the fourth quarter of 2011. The increase in the weighted-average cost of borrowed funds was due to the maturity of short-term
borrowings that were used to fund a portion of the debt extinguishments in the Restructuring Transaction.
Borrowings amounted to $12.93
billion at September 30, 2012 with an average cost of 4.37%. Borrowings scheduled to mature over the next 12 months are as follows: $750.0 million with an average cost of 0.80% in the fourth quarter of 2012. There are no scheduled maturities
for the first, second or third quarters of 2013.
At September 30, 2012 we had $2.93 billion of borrowings with put dates within one
year. 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 $41.3 million, or 16.9%, to
$203.3 million for the third quarter of 2012 as compared to $244.6 million for the third quarter of 2011. The decrease in net interest income reflects the overall decrease in the average balance of interest-earning assets and interest-bearing
liabilities. Our interest rate spread increased slightly to 1.80% for the third quarter of 2012 as compared to 1.76% for the third quarter of 2011. Our net interest margin was 2.02% for the third quarter of 2012 as compared 1.97% for the third
quarter of 2011. The decrease in net interest income reflects the overall decrease in interest-earning assets and interest-bearing liabilities.
Page 46
Provision for Loan Losses.
The provision for loan losses amounted to $20.0 million for
the quarter ended September 30, 2012 as compared to $25.0 million for the quarter ended September 30, 2011. The ALL amounted to $291.6 million at September 30, 2012 and $273.8 million at December 31, 2011. The decrease in the
provision for loan losses for the quarter ended September 30, 2012 is due primarily to the overall declining trends in net charge-offs, the stabilization of home prices and a decrease in the size of the loan portfolio, yet resulted in an
overall increase in our allowance for loan losses as non-performing loans continued to increase and unemployment levels remain elevated. We recorded our provision for loan losses during the first nine months of 2012 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 production is primarily concentrated in one- to four-family mortgage loans with original loan-to-value (LTV) ratios of less than 80%. For the first
nine months of 2012, the average LTV ratio for our first mortgage loan originations and our total first mortgage loan portfolio were 59.8% and 59.2%, 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 third quarter of 2012, we concluded that home values in our lending markets declined from 2011 levels, but stabilized during the third quarter of 2012.
Economic conditions have improved but at a slower pace than anticipated during the first nine months of 2012. Home sale activity and real estate valuations improved during the third quarter of 2012 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 $1.14 billion at September 30, 2012 as compared to $1.02 billion at December 31, 2011 and $948.7 million at
September 30, 2011. Non-performing loans at September 30, 2012 included $1.13 billion of one- to four-family first mortgage loans as compared to $1.01 billion at December 31, 2011. The ratio of non-performing loans to total loans was
4.12% at September 30, 2012 compared with 3.48% at December 31, 2011 and 3.16% at September 30, 2011. Loans delinquent 30 to 59 days amounted to $413.2 million at September 30, 2012 as compared to $427.2 million at
December 31, 2011 and $405.9 million at September 30, 2011. Loans delinquent 60 to 89 days amounted to $212.1 million at September 30, 2012 as compared to $187.4 million at December 31, 2011 and $201.7 million at
September 30, 2011. Foreclosed real estate amounted to $45.3 million at September 30, 2012 as compared to $40.6 million at December 31, 2011, and $41.0 million at September 30, 2011. Total early stage delinquencies (loans 30 to
89 days past due) increased $10.7 million to $625.3 million at September 30, 2012 from $614.6 million at December 31, 2011 and increased $17.7 million from $607.6 million at September 30, 2011. 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 at origination have helped to
moderate our charge-offs.
Page 47
At September 30, 2012, the ratio of the ALL to non-performing loans was 25.51% as compared to 26.77% at
December 31, 2011 and 28.33% at September 30, 2011. The ratio of the ALL to total loans was 1.05% at September 30, 2012 as compared to 0.93% at December 31, 2011 and 0.89% at September 30, 2011. 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, non-performing loans and
losses we may incur on our loan portfolio. 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 that is not a business we have actively pursued.
We 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 $21.0 million for the third quarter of 2012 as compared to $23.0 million for the second quarter of 2012 and $21.4 million for the third quarter of 2011. Recoveries of amounts previously
charged-off amounted to $4.7 million for the third quarter of 2012 as compared to $5.2 million for the second quarter of 2012 and $2.8 million for the third quarter of 2011. Write-downs and net losses on the sale of foreclosed real estate amounted
to $1.3 million for the first nine months of 2012 as compared to $5.1 million for the first nine months of 2011. The results of our reappraisal process and our recent charge-off history are 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 and Case Shiller. 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 September 30, 2012, 83.0% of our loan portfolio and 79% 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 and annually thereafter, 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 house price indices to
identify geographic trends 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 quarter we prepare an analysis which categorizes the entire
loan portfolio by certain risk characteristics such as loan type (fixed and variable 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 our loss experience, delinquency trends, portfolio growth and environmental factors such
Page 48
as 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. 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 and on an annual basis thereafter for as long as the loan remains non-performing. Based on our analysis, our loss experience on our non-performing one- to four-family first mortgage loans was
approximately 14.6% at September 30, 2012 compared to 13.5% at December 31, 2011.
In addition to our loss experience, we also use
environmental factors and qualitative analyses to determine the adequacy of our ALL. This analysis includes 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, a review of delinquency ratios, net charge-off ratios and the ratio of the ALL to both non-performing loans and total loans. The 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. Based on our recent loss experience on non-performing loans and our consideration of environmental factors, 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 nine months of 2012. The recent adjustment to 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.
We consider the average LTV 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 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 September 30, 2012 was approximately 59.2%, using appraised values at the time of origination. The average LTV ratio of our non-performing
loans was approximately 74.2% at September 30, 2012. Based on the valuation indices, house prices have declined in the New York metropolitan area, where 78.6% of our non-performing loans were located at September 30, 2012, by approximately
25% from the peak of the market in 2006 through July 2012 and by 31% nationwide during that period. 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
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.
Net charge-offs amounted to $16.3 million for the third quarter of 2012 as compared to net charge-offs of $18.6 million for the corresponding period in
2011. Net charge-offs as a percentage of average loans was 0.24% for the quarter ended September 30, 2012 as compared to 0.25% for the quarter ended September 30, 2011. 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 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. Due to the
unprecedented level of foreclosures and the desire by most states to slow the foreclosure process, we continue to experience 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
Page 49
owned and ultimate disposition. In addition, the highly publicized foreclosure issues that have affected the nations largest mortgage loan servicers has resulted in greater court and state
attorney general scrutiny, our foreclosure process and the time to complete a foreclosure continue to be prolonged, especially in New York and New Jersey where 72% of our non-performing loans are located. If real estate prices do not improve or
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 and 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 September 30, 2012 and December 31, 2011, commercial and construction loans evaluated for
impairment amounted to $14.7 million and $14.6 million, respectively. Based on this evaluation, we established an ALL of $3.9 million for loans classified as impaired at September 30, 2012 compared to $4.4 million at December 31, 2011.
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. Changes 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 $3.0 million for the
third quarter of 2012 as compared to $3.1 million for the same quarter in 2011. Non-interest income is primarily made up of service fees and charges on deposit and loan accounts.
Non-Interest Expense.
Total non-interest expense amounted to $93.9 million for the third quarter of 2012 as compared to $83.7 million for the same period in 2011. This increase is due to
increases of $6.7 million in compensation and employee benefit costs and $7.3 million in other expense, partially offset by a decrease of $3.6 million in Federal deposit insurance expense.
Compensation and employee benefit costs increased $6.7 million, or 24.6%, to $33.9 million for the third quarter of 2012 as compared to $27.2 million for the same period in 2011. The increase in
compensation costs is primarily due to increases of $2.3 million related to our stock benefit plans, $2.0 million in compensation costs, $1.6 million in health plan expense and $688,000 in pension expense. The increase in stock benefit plans expense
is primarily due to the price of our common stock which increased during the quarter, which we believe is primarily a result of the announcement of the Merger. The increase in compensation and health plan costs was due primarily to additional full
time equivalent employees as well as normal salary increases. The increase in pension expense is due primarily to the discount rate and other actuarial assumptions used in determining pension expense. At September 30, 2012, we had 1,608
full-time equivalent employees as compared to 1,586 at December 31, 2011 and 1,580 at September 30, 2011.
Federal deposit insurance
expense decreased $3.6 million, or 10.7%, to $30.3 million for the third quarter of 2012 from $33.9 million for the third quarter of 2011. This decrease was due primarily to the reduction in the size of our balance sheet as a result of the
Transactions.
Page 50
Included in other non-interest expense for the quarter ended September 30, 2012 were $6.1 million of
expenses related to the Merger, consisting primarily of professional fees. Also included in other expense for the quarter ended September 30, 2012 were write-downs on foreclosed real estate and net losses and (gains) on the sale of foreclosed
real estate of ($13,000) as compared to $2.1 million for the third quarter of 2011.
Income Taxes.
Income tax expense amounted
to $36.5 million for the third quarter of 2012 compared with $54.9 million for the same quarter in 2011. Our effective tax rate for the third quarter of 2012 was 39.49% compared with 39.46% for the third quarter of 2011.
Page 51
Comparison of Operating Results for the Nine-Month Periods Ended September 30, 2012 and 2011
Average Balance Sheet.
The following table presents the average balance sheets, average yields and costs and certain
other information for the nine months ended September 30, 2012 and 2011. 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 Nine Months Ended September 30,
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2012
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2011
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Average
Balance
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Interest
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Average
Yield/
Cost
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Average
Balance
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Interest
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Average
Yield/
Cost
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(Dollars in thousands)
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Assets:
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Interest-earnings assets:
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First mortgage loans, net (1)
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$
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28,004,580
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$
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999,745
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4.76
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%
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$
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29,883,894
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$
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1,139,000
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5.08
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%
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Consumer and other loans
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275,725
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9,810
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4.74
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313,275
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12,017
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5.11
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Federal funds sold and other overnight deposits
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662,282
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1,200
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0.24
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1,072,936
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1,937
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0.24
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Mortgage-backed securities at amortized cost
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12,346,343
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246,565
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2.66
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17,189,990
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416,669
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3.23
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|
Federal Home Loan Bank stock
|
|
|
445,063
|
|
|
|
18,878
|
|
|
|
5.66
|
|
|
|
801,516
|
|
|
|
31,274
|
|
|
|
5.20
|
|
Investment securities, at amortized cost
|
|
|
423,305
|
|
|
|
8,683
|
|
|
|
2.74
|
|
|
|
3,738,439
|
|
|
|
93,896
|
|
|
|
3.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
42,157,298
|
|
|
|
1,284,881
|
|
|
|
4.06
|
|
|
|
53,000,050
|
|
|
|
1,694,793
|
|
|
|
4.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earnings assets (4)
|
|
|
1,504,426
|
|
|
|
|
|
|
|
|
|
|
|
1,374,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
43,661,724
|
|
|
|
|
|
|
|
|
|
|
$
|
54,374,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings accounts
|
|
$
|
904,911
|
|
|
|
2,164
|
|
|
|
0.32
|
|
|
$
|
865,698
|
|
|
|
3,974
|
|
|
|
0.61
|
|
Interest-bearing transaction accounts
|
|
|
2,154,919
|
|
|
|
9,401
|
|
|
|
0.58
|
|
|
|
2,031,889
|
|
|
|
11,956
|
|
|
|
0.79
|
|
Money market accounts
|
|
|
7,853,938
|
|
|
|
29,129
|
|
|
|
0.50
|
|
|
|
7,732,915
|
|
|
|
57,308
|
|
|
|
0.99
|
|
Time deposits
|
|
|
13,336,544
|
|
|
|
145,751
|
|
|
|
1.46
|
|
|
|
14,301,066
|
|
|
|
176,978
|
|
|
|
1.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
|
24,250,312
|
|
|
|
186,445
|
|
|
|
1.03
|
|
|
|
24,931,568
|
|
|
|
250,216
|
|
|
|
1.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase agreements
|
|
|
6,950,000
|
|
|
|
235,349
|
|
|
|
4.45
|
|
|
|
9,665,923
|
|
|
|
313,230
|
|
|
|
4.33
|
|
Federal Home Loan Bank of New York advances
|
|
|
7,002,024
|
|
|
|
201,428
|
|
|
|
3.78
|
|
|
|
13,980,622
|
|
|
|
357,394
|
|
|
|
3.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowed funds
|
|
|
13,952,024
|
|
|
|
436,777
|
|
|
|
4.11
|
|
|
|
23,646,545
|
|
|
|
670,624
|
|
|
|
3.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
38,202,336
|
|
|
|
623,222
|
|
|
|
2.15
|
|
|
|
48,578,113
|
|
|
|
920,840
|
|
|
|
2.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits
|
|
|
547,318
|
|
|
|
|
|
|
|
|
|
|
|
524,676
|
|
|
|
|
|
|
|
|
|
Other noninterest-bearing liabilities
|
|
|
246,064
|
|
|
|
|
|
|
|
|
|
|
|
235,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest-bearing liabilities
|
|
|
793,382
|
|
|
|
|
|
|
|
|
|
|
|
760,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
38,995,718
|
|
|
|
|
|
|
|
|
|
|
|
49,338,315
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
4,666,006
|
|
|
|
|
|
|
|
|
|
|
|
5,036,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
43,661,724
|
|
|
|
|
|
|
|
|
|
|
$
|
54,374,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/net interest rate spread (2)
|
|
|
|
|
|
$
|
661,659
|
|
|
|
1.91
|
|
|
|
|
|
|
$
|
773,953
|
|
|
|
1.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest-earning assets/net interest margin (3)
|
|
$
|
3,954,962
|
|
|
|
|
|
|
|
2.11
|
%
|
|
$
|
4,421,937
|
|
|
|
|
|
|
|
1.94
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of interest-earning assets to interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
1.10
|
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 $ 121.9 million and $ 163.4 million for the nine months
ended September 30, 2012 and 2011, respectively.
|
Page 52
General.
Net income was $201.2 million for the first nine months of 2012 as compared to a net
loss of $375.5 million for the first nine months of 2011. Both basic and diluted earnings per common share were $0.41 for the first nine months of 2012 as compared to a net loss per share of $0.76 for the first nine months of 2011. For the first
nine months of 2012, our annualized return on average shareholders equity was 5.75%, compared with (9.94)% for the corresponding period in 2011. Our annualized return on average assets for the first nine months of 2012 was 0.61% as compared to
(0.92)% for the nine months of 2011. The increase in the annualized return on average equity and assets is primarily due to the net loss in the first nine months of 2011 due to the Restructuring Transaction completed in March 2011.
Interest and Dividend Income.
Total interest and dividend income for the nine months ended September 30, 2012 decreased $409.9
million, or 24.2%, to $1.28 billion from $1.69 billion for the nine months ended September 30, 2011. The decrease in total interest and dividend income was primarily due to a $10.84 billion, or 20.5%, decrease in the average balance of total
interest-earning assets to $42.16 billion for the first nine months of 2012 from $53.00 billion for the same period in 2011. The decrease in total interest and dividend income was also due to a decrease of 20 basis points in the annualized
weighted-average yield on total interest-earning assets to 4.06% for the nine months ended September 30, 2012 from 4.26% for the same period in 2011. The decrease in the average balance of total interest-earning assets was due primarily to the
effects of the Transactions and elevated levels of repayments of mortgage-related assets during the first nine months of 2012 due to the low interest rate environment.
Interest on first mortgage loans decreased $139.3 million, or 12.2%, to $999.7 million from $1.14 billion for the nine months ended September 30, 2011. This was primarily due to a 32 basis point
decrease in the annualized weighted-average yield to 4.76% for the nine months ended September 30, 2012 from 5.08% for the nine months ended September 30, 2011. The decrease in interest income on mortgage loans was also due to a $1.88
billion decrease in the average balance of first mortgage loans to $28.00 billion for the nine months ended September 30, 2012 from $29.88 billion for the nine months ended September 30, 2011.
The decrease in the average yield earned during the nine months ended September 30, 2012 was due to lower market interest rates on mortgage products
and also due to the continued mortgage refinancing activity. Refinancing activity, which resulted in continued elevated levels of loan repayments, also caused the average balance of our first mortgage loans to decline during the nine months ended
September 30, 2012.
Interest on consumer and other loans decreased $2.2 million to $9.8 million for the first nine months of 2012 from
$12.0 million for the first nine months of 2011 due to a decrease in the average balance of consumer and other loans. The average balance of consumer and other loans decreased $37.6 million to $275.7 million for the first nine months of 2012 as
compared to $313.3 million for the first nine months of 2011 and the average yield earned decreased 37 basis points to 4.74% from 5.11% for those same respective periods. The average balance of consumer loans decreased as consumer loans is not a
business that we actively pursue. The decrease in the weighted-average yield is a result of current market interest rates.
Interest on
mortgage-backed securities decreased $170.1 million to $246.6 million for the nine months ended September 30, 2012 from $416.7 million for the nine months ended September 30, 2011. This decrease was due primarily to a $4.84 billion
decrease in the average balance of mortgage-backed securities to $12.35 billion for the first nine months of 2012 from $17.19 billion for the same period in 2011. The decrease in interest income on mortgage-backed securities was also due to a 57
basis point decrease in the annualized weighted-average yield to 2.66% for the first nine months of 2012 from 3.23% for the first nine months of 2011. The decrease in the average balance of mortgage-backed securities was due primarily to the effects
of the Restructuring Transaction. The decrease in the weighted-average yield is a result of principal repayments on securities that have higher yields than the existing portfolio as well as the re-pricing of variable rate mortgage-backed securities
in this continued low interest rate environment.
Page 53
Interest on investment securities decreased $85.2 million to $8.7 million from $93.9 million for the nine
months ended September 30, 2011. This decrease was due primarily to a $3.32 billion decrease in the average balance of investment securities to $423.3 million for the first nine months of 2012 from $3.74 billion for the first nine months of
2011. The decrease in the average balance is due primarily to calls of $3.40 billion of investment securities during 2011. In addition, the average yield of investment securities decreased 61 basis points to 2.74% for the first nine months of 2012
from 3.35% for the same period in 2011. The decrease in the average yield earned reflects current market interest rates.
Dividends on FHLB
stock decreased $12.4 million, or 39.6%, to $18.9 million for the nine months ended September 30, 2012 from $31.3 million for the comparable period in 2011. The decrease was primarily due to a $356.4 million decrease in the average balance of
FHLB stock to $445.1 million for the first nine months of 2012 from $801.5 million for the same period in 2011. The effect of the decrease was partially offset by a 46 basis point increase in the average dividend yield earned to 5.66% as compared to
5.20% for the first nine months of 2011.
Interest on Federal funds sold and other overnight deposits amounted to $1.2 million for the nine
months ended September 30, 2012 as compared to $1.9 million for the first nine months of 2011. The average balance of Federal funds sold and other overnight deposits amounted to $662.3 million for the first nine months of 2012 as compared to
$1.07 billion for the same period in 2011. The yield earned on Federal funds sold and other overnight deposits was 0.24% for the nine months ended September 30, 2012 and September 30, 2011, respectively. The decrease in the average balance
of Federal funds sold and other overnight deposits is primarily a result of the timing of the Transactions.
Interest Expense.
Total interest expense for the nine months ended September 30, 2012 decreased $297.6 million, or 32.3%, to $623.2 million from $920.8 million for the nine months ended September 30, 2011. This decrease was primarily due to a $10.38
billion, or 21.4%, decrease in the average balance of total interest-bearing liabilities to $38.20 billion for the nine months ended September 30, 2012 from $48.58 billion for the nine months ended September 30, 2011. The decrease was also
due to a 38 basis point decrease in the annualized weighted-average cost of total interest-bearing liabilities to 2.15% for the nine months ended September 30, 2012 from 2.53% for the nine months ended September 30, 2011. The decrease in
the average balance of total interest-bearing liabilities was due primarily to the reduction of total borrowings as part of the Transactions.
Interest expense on our time deposit accounts decreased $31.2 million to $145.8 million for the first nine months of 2012 as compared to $177.0 million
for the first nine months of 2011. This decrease was due to a 19 basis point decrease in the annualized weighted-average cost to 1.46% for the nine months ended September 30, 2012 compared with 1.65% for the nine months ended September 30,
2011 as maturing time deposits were renewed or replaced by new time deposits at lower rates. The decrease was also due to a $964.5 million decrease in the average balance of time deposit accounts to $13.34 billion for the nine months ended
September 30, 2012 from $14.30 billion for the same period in 2011. The decline in the average balance of our time deposits reflects our decision to lower deposit rates to continue our balance sheet reduction while profitable investment
opportunities remain scarce in the current environment.
Page 54
Interest expense on money market accounts decreased $28.2 million to $29.1 million for the nine months ended
September 30, 2012 as compared to $57.3 million for the same period in 2011. This decrease was due primarily to a decrease in the annualized weighted-average cost of 49 basis points to 0.50% for the first nine months of 2012 from 0.99% for the
first nine months of 2011. This decrease was partially offset by an increase in the average balance of money market accounts of $121.0 million to $7.85 billion for the nine months ended September 30, 2012 as compared to $7.73 billion for the
nine months ended September 30, 2011. Interest expense on our interest-bearing transaction accounts decreased $2.6 million to $9.4 million for the nine months ended September 30, 2012 from $12.0 million for the same period in 2011. The
decrease is due to a 21 basis point decrease in the annualized weighted-average cost to 0.58% for the nine months ended September 30, 2012 as compared to 0.79% for the nine months ended September 30, 2011, partially offset by a $123.0
million increase in the average balance to $2.15 billion as compared to $2.03 billion for the same respective periods.
The decrease in the
average cost of deposits for the first nine months of 2012 reflected lower market interest rates and our decision to lower deposit rates to continue our balance sheet reduction while profitable investment opportunities remain scarce in the current
environment.
For the nine months ended September 30, 2012 interest expense on borrowed funds decreased $233.8 million to $436.8 million
from $670.6 million for the nine months ended September 30, 2011. This decrease was due to a $9.70 billion decrease in the average balance of borrowed funds to $13.95 billion for the first nine months of 2012 from $23.65 billion for the first
nine months of 2011. This decrease was partially offset by a 32 basis point increase in the weighted-average cost of borrowed funds to 4.11% for the first nine months of 2012 as compared to 3.79% for the first nine months of 2011. The decrease in
the average balance of borrowed funds is primarily due to the effects of the Transactions. The increase in the weighted-average cost of borrowed funds was due to the maturity of short-term borrowings that were used to fund a portion of the debt
extinguishments in the Restructuring Transaction.
Net Interest Income.
Net interest income decreased $112.3 million, or 14.5%,
to $661.7 million for the first nine months of 2012 from $774.0 million for the first nine months of 2011. Our interest rate spread increased 18 basis points to 1.91% for the nine months ended September 30, 2012 as compared to 1.73% for the
nine months ended September 30, 2011. Our net interest margin increased 17 basis points to 2.11% as compared to 1.94% for those same respective periods. The increase in our interest rate spread and net interest margin for the first nine months
of 2012 is primarily due to the Transactions. Notwithstanding the increase in interest rate spread and net interest margin, net interest income decreased reflecting the overall decrease in interest-earning assets and interest-bearing liabilities.
Provision for Loan Losses.
The provision for loan losses amounted to $70.0 million for the nine months ended
September 30, 2012 as compared to $95.0 million for the nine months ended September 30, 2011. The ALL amounted to $291.6 million at September 30, 2012 and $273.8 million at December 31, 2011. The decrease in our provision for
loan losses for the nine months ended September 30, 2012 was due primarily to the overall declining trends in net charge-offs, the stabilization of home prices and a decrease in the size of the loan portfolio. We recorded our provision for loan
losses during the first nine months of 2012 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 Comparison of Operating Results
for the Three Months Ended September 30, 2012 and 2011 Provision for Loan Losses.
Page 55
Non-Interest Income.
Total non-interest income was $8.7 million for the first nine months of
2012 as compared to $111.0 million for the same period in 2011. Included in non-interest income for the first nine months of 2011 were net gains on securities transactions of $102.5 million which resulted from the sale of $9.04 billion of securities
available-for-sale. Substantially all of the proceeds from the sale of securities were used to pay off borrowings in the Restructuring Transaction. There were no security sales for the nine months ended September 30, 2012.
Non-Interest Expense.
Total non-interest expense amounted to $269.0 million for the nine months ended September 30, 2012 as compared
to $1.41 billion for the nine months ended September 30, 2011. Included in total non-interest expense for the first nine months of 2011 was a $1.17 billion loss on the extinguishment of debt related to the Restructuring Transaction. Included in
total non-interest expense for the first nine months of 2012 was an increase of $8.4 million in compensation and employee benefit costs, an increase of $11.4 million in other expense, and an increase of $10.5 million in Federal deposit insurance
expense.
Compensation and employee benefit costs increased $8.4 million, or 9.6%, to $96.4 million for the first nine months of 2012 as
compared to $88.0 million for the same period in 2011. The increase in compensation costs is primarily due to increases of $3.6 million in compensation costs, $2.1 million in health plan expense, $2.0 million in pension expense and $615,000 in
expense related to our stock benefit plans. The increase in compensation and health plan costs was due primarily to additional full time equivalent employees as well as normal salary increases. The increase in pension expense is due primarily to the
discount rate and other actuarial assumptions used in determining pension expense. At September 30, 2012, we had 1,608 full-time equivalent employees as compared to 1,586 at December 31, 2011 and 1,580 at September 30, 2011.
Federal deposit insurance expense increased $10.5 million, or 12.6%, to $93.9 million from $83.4 million for the nine months ended
September 30, 2011. This increase was due primarily to the new insurance assessment methodology adopted by the Federal Deposit Insurance Corporation that became effective on April 1, 2011 and which redefined the assessment base as average
consolidated total assets minus average tangible equity. Previously, deposit insurance assessments were based on the amount of deposits.
Included in other expense for the first nine months of 2012, were write-downs on foreclosed real estate and net losses on the sale of foreclosed real
estate of $1.3 million as compared to $4.9 million for the first nine months of 2011 and professional fees of $19.1 million as compared to $15.4 million for those same respective periods.
Income Taxes.
Income tax expense amounted to $130.1 million for the first nine months of 2012 compared with an income tax benefit of $244.6 for the same period in 2011. Our effective tax
rate for the first nine months of 2012 was 39.28% compared with 39.46% for the first nine months of 2011.
Page 56
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 consist of those states that are east of the Mississippi River and as far south as South Carolina. Loans located outside of the New York metropolitan area
were part of our loan purchases. Our loan purchase activity has declined significantly as sellers from whom we have historically purchased loans are either retaining these loans in their portfolios or selling them to the GSEs.
The following table presents the composition of our loan portfolio in dollar amounts and in percentages of the total portfolio at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
|
|
Amount
|
|
|
Percent
of Total
|
|
|
Amount
|
|
|
Percent
of Total
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
First mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizing
|
|
$
|
22,161,239
|
|
|
|
79.91
|
%
|
|
$
|
23,480,909
|
|
|
|
80.05
|
%
|
Interest-only
|
|
|
4,578,710
|
|
|
|
16.51
|
|
|
|
4,779,863
|
|
|
|
16.30
|
|
FHA/VA
|
|
|
693,486
|
|
|
|
2.50
|
|
|
|
734,781
|
|
|
|
2.51
|
|
Multi-family and commercial
|
|
|
37,384
|
|
|
|
0.13
|
|
|
|
39,634
|
|
|
|
0.14
|
|
Construction
|
|
|
4,619
|
|
|
|
0.02
|
|
|
|
4,929
|
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total first mortgage loans
|
|
|
27,475,438
|
|
|
|
99.07
|
|
|
|
29,040,116
|
|
|
|
99.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer and other loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate second mortgages
|
|
|
111,561
|
|
|
|
0.40
|
|
|
|
131,597
|
|
|
|
0.45
|
|
Home equity credit lines
|
|
|
122,976
|
|
|
|
0.45
|
|
|
|
134,502
|
|
|
|
0.46
|
|
Other
|
|
|
22,099
|
|
|
|
0.08
|
|
|
|
21,130
|
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer and other loans
|
|
|
256,636
|
|
|
|
0.93
|
|
|
|
287,229
|
|
|
|
0.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
27,732,074
|
|
|
|
100.00
|
%
|
|
|
29,327,345
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred loan costs
|
|
|
93,117
|
|
|
|
|
|
|
|
83,805
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(291,573
|
)
|
|
|
|
|
|
|
(273,791
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans
|
|
$
|
27,533,618
|
|
|
|
|
|
|
$
|
29,137,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2012, first mortgage loans secured by one-to four-family properties accounted for 98.9% of total
loans. Fixed-rate mortgage loans represent 62.9% 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 September 30, 2012 are interest-only loans of approximately $4.58 billion, or 16.5%, of total loans as compared to
$4.78 billion, or 16.3%, of total loans at December 31, 2011. 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 to $181.1 million, or
15.8%, of non-performing loans at September 30, 2012 as compared to non-performing interest-only loans of $213.9 million, or 20.9%, of non-performing loans at December 31, 2011.
Page 57
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 Freddie Mac/Fannie Mae 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 are able to provide data
relating to limited documentation loans that we originate. Originated loans overall represent 74.7% of our one- to four- family first mortgage loans. As part of our wholesale loan program, we allowed sellers to include limited documentation loans in
each pool of purchased mortgage loans but generally limited 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 had a maximum LTV ratio of 70% and meet other
characteristics such as maximum loan size. However, we have not tracked wholesale limited documentation loans on our mortgage loan system. We have not purchased any loans of this nature since 2010 when the program was eliminated. Included in our
loan portfolio at September 30, 2012 are $3.96 billion of originated amortizing limited documentation loans and $917.2 million of originated limited documentation interest-only loans. Non-performing loans at September 30, 2012 include
$154.6 million of originated amortizing limited documentation loans and $65.5 million of originated interest-only limited documentation loans. Included in our loan portfolio at December 31, 2011 are $3.85 billion of originated amortizing
limited documentation loans and $956.2 million of originated limited documentation interest-only loans. Non-performing loans at December 31, 2011 include $126.9 million of originated amortizing limited documentation loans and $71.0 million of
originated interest-only limited documentation loans.
Page 58
The following table presents the geographic distribution of our total loan portfolio, as well as the
geographic distribution of our non-performing loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2012
|
|
|
At December 31, 2011
|
|
|
|
Total loans
|
|
|
Non-performing
Loans
|
|
|
Total loans
|
|
|
Non-performing
Loans
|
|
New Jersey
|
|
|
44.0
|
%
|
|
|
50.0
|
%
|
|
|
44.7
|
%
|
|
|
51.3
|
%
|
New York
|
|
|
24.3
|
|
|
|
21.6
|
|
|
|
22.4
|
|
|
|
19.5
|
|
Connecticut
|
|
|
14.7
|
|
|
|
7.2
|
|
|
|
14.6
|
|
|
|
6.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total New York metropolitan area
|
|
|
83.0
|
|
|
|
78.8
|
|
|
|
81.7
|
|
|
|
77.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pennsylvania
|
|
|
4.9
|
|
|
|
1.9
|
|
|
|
4.7
|
|
|
|
1.4
|
|
Virginia
|
|
|
2.2
|
|
|
|
2.5
|
|
|
|
2.6
|
|
|
|
2.9
|
|
Illinois
|
|
|
2.0
|
|
|
|
4.3
|
|
|
|
2.3
|
|
|
|
4.7
|
|
Maryland
|
|
|
1.9
|
|
|
|
3.8
|
|
|
|
2.0
|
|
|
|
3.2
|
|
All others
|
|
|
6.0
|
|
|
|
8.7
|
|
|
|
6.7
|
|
|
|
10.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Outside New York metropolitan area
|
|
|
17.0
|
|
|
|
21.2
|
|
|
|
18.3
|
|
|
|
22.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Performing Assets
The following table presents information regarding non-performing assets as of the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
|
|
(Dollars in thousands)
|
|
Non-accrual loans:
|
|
|
|
|
|
|
|
|
Amortizing residential first mortgage loans
|
|
$
|
791,453
|
|
|
$
|
690,391
|
|
Interest-only residential first mortgage loans
|
|
|
175,347
|
|
|
|
212,546
|
|
Troubled debt restructurings
|
|
|
39,394
|
|
|
|
11,354
|
|
Multi-family and commercial mortgages
|
|
|
2,081
|
|
|
|
2,223
|
|
Construction loans
|
|
|
4,619
|
|
|
|
4,344
|
|
Consumer and other loans
|
|
|
7,601
|
|
|
|
4,353
|
|
|
|
|
|
|
|
|
|
|
Total non-accrual loans
|
|
|
1,020,495
|
|
|
|
925,211
|
|
Accruing loans delinquent 90 days or more (1)
|
|
|
122,630
|
|
|
|
97,476
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans
|
|
|
1,143,125
|
|
|
|
1,022,687
|
|
Foreclosed real estate, net
|
|
|
45,336
|
|
|
|
40,619
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets
|
|
$
|
1,188,461
|
|
|
$
|
1,063,306
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans to total loans
|
|
|
4.12
|
%
|
|
|
3.48
|
%
|
Non-performing assets to total assets
|
|
|
2.84
|
|
|
|
2.34
|
|
(1)
|
Loans that are past due 90 days or more and still accruing interest are loans that are insured by the FHA.
|
Non-performing loans exclude loans which have been restructured and are accruing and performing in accordance with the terms of their restructure
agreement. Restructured accruing loans totaled $83.8 million at September 30, 2012 and $55.1 million at December 31, 2011. Restructured loans on non-accrual status and included in non-performing loans totaled $39.4 million at
September 30, 2012 and $11.4 million at December 31, 2011.
Page 59
During 2011, we adopted a Loan Modification Policy that, among other things, expands the modified loan
programs currently offered by the Bank. We began to modify loans pursuant to this policy during the first quarter of 2012, resulting in an increase in the amount of loans classified as troubled debt restructurings at September 30, 2012. We
anticipate that as we continue to modify loans in the future, the amount of loans classified as troubled debt restructurings will increase. In addition, based on recent regulatory guidance, we have included in troubled debt restructurings at
September 30, 2012 all loans with borrowers that have completed Chapter 7 bankruptcy.
The following table is a comparison of our
delinquent loans at September 30, 2012 and December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-59 Days
|
|
|
60-89 Days
|
|
|
90 Days or More
|
|
|
|
Number
|
|
|
Principal
|
|
|
Number
|
|
|
Principal
|
|
|
Number
|
|
|
Principal
|
|
|
|
of
|
|
|
Balance
|
|
|
of
|
|
|
Balance
|
|
|
of
|
|
|
Balance
|
|
At September 30, 2012
|
|
Loans
|
|
|
of Loans
|
|
|
Loans
|
|
|
of Loans
|
|
|
Loans
|
|
|
of Loans
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
One- to four- family first mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizing
|
|
|
874
|
|
|
$
|
319,164
|
|
|
|
433
|
|
|
$
|
165,423
|
|
|
|
2,477
|
|
|
$
|
824,456
|
|
Interest-only
|
|
|
88
|
|
|
|
60,610
|
|
|
|
49
|
|
|
|
34,970
|
|
|
|
295
|
|
|
|
181,105
|
|
FHA/VA first mortgages
|
|
|
147
|
|
|
|
28,876
|
|
|
|
48
|
|
|
|
10,174
|
|
|
|
490
|
|
|
|
122,630
|
|
Multi-family and commercial mortgages
|
|
|
5
|
|
|
|
1,754
|
|
|
|
1
|
|
|
|
530
|
|
|
|
6
|
|
|
|
2,081
|
|
Construction loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
4,619
|
|
Consumer and other loans
|
|
|
41
|
|
|
|
2,778
|
|
|
|
15
|
|
|
|
1,005
|
|
|
|
67
|
|
|
|
8,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,155
|
|
|
$
|
413,182
|
|
|
|
546
|
|
|
$
|
212,102
|
|
|
|
3,339
|
|
|
$
|
1,143,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquent loans to total loans
|
|
|
|
|
|
|
1.49
|
%
|
|
|
|
|
|
|
0.76
|
%
|
|
|
|
|
|
|
4.12
|
%
|
|
|
|
|
|
|
|
At December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four- family first mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizing
|
|
|
941
|
|
|
$
|
326,284
|
|
|
|
430
|
|
|
$
|
149,772
|
|
|
|
2,344
|
|
|
$
|
700,429
|
|
Interest-only
|
|
|
76
|
|
|
|
63,360
|
|
|
|
27
|
|
|
|
27,833
|
|
|
|
209
|
|
|
|
213,862
|
|
FHA/VA first mortgages
|
|
|
147
|
|
|
|
30,815
|
|
|
|
40
|
|
|
|
8,774
|
|
|
|
377
|
|
|
|
97,476
|
|
Multi-family and commercial mortgages
|
|
|
3
|
|
|
|
1,521
|
|
|
|
1
|
|
|
|
393
|
|
|
|
4
|
|
|
|
2,223
|
|
Construction loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
4,344
|
|
Consumer and other loans
|
|
|
46
|
|
|
|
5,209
|
|
|
|
11
|
|
|
|
632
|
|
|
|
49
|
|
|
|
4,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,213
|
|
|
$
|
427,189
|
|
|
|
509
|
|
|
$
|
187,404
|
|
|
|
2,987
|
|
|
$
|
1,022,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquent loans to total loans
|
|
|
|
|
|
|
1.46
|
%
|
|
|
|
|
|
|
0.64
|
%
|
|
|
|
|
|
|
3.48
|
%
|
Potential problem loans consist of early-stage delinquencies and troubled debt restructurings that are not included in
non-accrual loans. Loans modified in a troubled debt restructuring totaled $123.2 million at September 30, 2012 of which $8.3 million were 30 to 59 days past due, $11.1 million were 60 to 89 days past due and $39.4 million were 90 days or more
past due and were included in non-accrual loans. The remaining loans modified were current at the time of the restructuring and have complied with the terms of their restructure agreement. We discontinue accruing interest on troubled debt
restructurings that are past due 90 days or more or if we believe we will not collect all amounts contractually due. Approximately $10.8 million of troubled debt restructurings that were previously accruing interest became 90 days or more past due
during the first nine months of 2012 for which we ceased accruing interest. At December 31, 2011, loans modified in a troubled debt restructuring totaled $66.5 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, 2011.
Page 60
Loans that were modified in a troubled debt restructuring primarily represent loans that have been in a
deferred principal payment plan for an extended period of time, generally in excess of six months, loans that have had past due amounts capitalized as part of the loan balance, loans that have a confirmed Chapter 13 bankruptcy status and other
repayment plans. In addition, based on recent regulatory guidance, as of September 30, 2012 we classified $32.0 million of loans that have completed Chapter 7 bankruptcy as troubled debt restructurings. These loans are individually evaluated
for impairment to determine if the carrying value of the loan is in excess of the fair value of the collateral or the present value of the loans expected future cash flows.
Troubled debt restructurings are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
|
|
Number
of
Contracts
|
|
|
Pre-restructuring
Outstanding
Recorded
Investment
|
|
|
Post-restructuring
Outstanding
Recorded
Investment
|
|
|
Number
of
Contracts
|
|
|
Pre-restructuring
Outstanding
Recorded
Investment
|
|
|
Post-restructuring
Outstanding
Recorded
Investment
|
|
|
|
(In thousands)
|
|
Troubled debt restructurings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family first mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizing
|
|
|
293
|
|
|
$
|
109,104
|
|
|
$
|
100,187
|
|
|
|
146
|
|
|
$
|
57,336
|
|
|
$
|
53,831
|
|
Interest-only
|
|
|
26
|
|
|
|
13,300
|
|
|
|
13,272
|
|
|
|
9
|
|
|
|
4,970
|
|
|
|
4,799
|
|
Multi-family and commercial mortgages
|
|
|
2
|
|
|
|
7,911
|
|
|
|
7,911
|
|
|
|
2
|
|
|
|
7,911
|
|
|
|
7,911
|
|
Consumer and other loans
|
|
|
14
|
|
|
|
1,797
|
|
|
|
1,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
335
|
|
|
$
|
132,112
|
|
|
$
|
123,153
|
|
|
|
157
|
|
|
$
|
70,217
|
|
|
$
|
66,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosed real estate amounted to $45.3 million and $40.6 million at September 30, 2012 and December 31, 2011,
respectively. During the first nine months of 2012, we sold 150 properties as compared to 113 properties during the nine months of 2011. Write-downs and net losses on the sale of foreclosed real estate amounted to $1.3 million in the first nine
months of 2012 as compared to $4.9 million for the same period in 2011.
Page 61
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
|
|
|
For the Nine Months
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
(Dollars in thousands)
|
|
|
(Dollars in thousands)
|
|
Balance at beginning of period
|
|
$
|
287,901
|
|
|
$
|
262,306
|
|
|
$
|
273,791
|
|
|
$
|
236,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
20,000
|
|
|
|
25,000
|
|
|
|
70,000
|
|
|
|
95,000
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First mortgage loans
|
|
|
(20,882
|
)
|
|
|
(21,249
|
)
|
|
|
(67,281
|
)
|
|
|
(73,101
|
)
|
Consumer and other loans
|
|
|
(131
|
)
|
|
|
(101
|
)
|
|
|
(244
|
)
|
|
|
(246
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs
|
|
|
(21,013
|
)
|
|
|
(21,350
|
)
|
|
|
(67,525
|
)
|
|
|
(73,347
|
)
|
Recoveries
|
|
|
4,685
|
|
|
|
2,798
|
|
|
|
15,307
|
|
|
|
10,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(16,328
|
)
|
|
|
(18,552
|
)
|
|
|
(52,218
|
)
|
|
|
(62,820
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
291,573
|
|
|
$
|
268,754
|
|
|
$
|
291,573
|
|
|
$
|
268,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to total loans
|
|
|
1.05
|
%
|
|
|
0.89
|
%
|
|
|
1.05
|
%
|
|
|
0.89
|
|
Allowance for loan losses to non-performing loans
|
|
|
25.51
|
|
|
|
28.33
|
|
|
|
25.51
|
|
|
|
28.33
|
|
Net charge-offs as a percentage of average loans (1)
|
|
|
0.24
|
|
|
|
0.25
|
|
|
|
0.25
|
|
|
|
0.28
|
|
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 September 30, 2012
|
|
|
At December 31, 2011
|
|
|
|
Amount
|
|
|
Percentage
of Loans in
Category to
Total Loans
|
|
|
Amount
|
|
|
Percentage
of Loans in
Category to
Total Loans
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
First mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
$
|
283,162
|
|
|
|
98.92
|
%
|
|
$
|
264,922
|
|
|
|
98.86
|
%
|
Other first mortgages
|
|
|
4,530
|
|
|
|
0.15
|
|
|
|
5,116
|
|
|
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total first mortgage loans
|
|
|
287,692
|
|
|
|
99.07
|
|
|
|
270,038
|
|
|
|
99.02
|
|
Consumer and other loans
|
|
|
3,881
|
|
|
|
0.93
|
|
|
|
3,753
|
|
|
|
0.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowance for loan losses
|
|
$
|
291,573
|
|
|
|
100.00
|
%
|
|
$
|
273,791
|
|
|
|
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. During the nine months ended September 30, 2012, we purchased $407.8 million of
investment-grade corporate bonds.
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.
Page 62
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 the proceeds from principal and interest payments on loans, mortgage-backed
securities and investment securities. We originated $3.89 billion and purchased $28.7 million of loans during the first nine months of 2012 as compared to $3.75 billion and $338.6 million, respectively, during the first nine months of 2011. 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 originating loans at lower rates than we would accept, selling many of their loans to the GSEs or retaining these loans in their own portfolios. We expect that the amount of loan purchases will continue to be
at reduced levels for the near-term. Principal repayments on loans amounted to $5.38 billion for the first nine months of 2012 as compared to $4.85 billion for the same period in 2011. Refinancing activity caused by low market interest rates have
caused repayments to remain elevated during the first nine months of 2012. At September 30, 2012, commitments to originate and purchase mortgage loans amounted to $670.0 million and $140,000 respectively, as compared to $443.9 million and
$140,000 respectively, at September 30, 2011.
Purchases of mortgage-backed securities during the first nine months of 2012 were $1.47
billion as compared to $3.59 billion during the first nine months of 2011. Principal repayments on mortgage-backed securities amounted to $2.74 billion for the first nine months of 2012 as compared to $3.57 billion for the same period in 2011. The
decrease in principal repayments was due primarily to a reduction in the size of our mortgage-backed securities portfolio as a result of the Restructuring Transaction. 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 borrowings as part of the Restructuring Transaction.
During the first nine months of 2012, purchases of investment securities consisted of the purchase of corporate bonds in the amount of $407.8 million. We
did not purchase any investment securities during the first nine months of 2011. There were $500.0 million of calls of investment securities during the first nine months of 2012 as compared to $2.30 billion of calls of investment securities during
the same period in 2011. We sold $80.0 million of investment securities during the nine months ended September 30, 2011, all of which occurred in the first quarter, resulting in a gain of $2.5 million. No sales of investment securities were
made in the first nine months of 2012.
Page 63
At September 30, 2012, mortgage-backed securities and investment securities with an amortized cost of
$8.67 billion were used as collateral for securities sold under agreements to repurchase and at that date we had $3.61 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
nine months of 2012, we had net redemptions of $120.3 million of FHLB common stock. During the first nine months of 2011, we had net redemptions of $145.4 million of 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 decreased $1.49 billion during the first nine months of 2012 as compared to an increase of $248.3 million for the first nine months of
2011. 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 the first nine months
of 2012 to continue our balance sheet reduction while profitable investment opportunities remain scarce in the current environment 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 September 30, 2012, time deposits scheduled to mature within one year totaled $7.94 billion with an average cost of 0.99%. These time deposits are scheduled to mature as follows: $3.13
billion with an average cost of 0.99% in the fourth quarter of 2012, $2.29 billion with an average cost of 0.94% in the first quarter of 2013, $1.37 billion with an average cost of 1.11% in the second quarter of 2013 and $1.15 billion with an
average cost of 0.96% in the third quarter of 2013. 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.
We have, in the past, primarily used wholesale borrowings to fund our investing activities.
During 2011 we completed the Transactions which reduced our reliance on structured putable borrowings for funding purposes and as part of our overall interest rate risk strategy.
The Transactions have improved our overall liquidity position
by significantly reducing our reliance on structured putable borrowings. At September 30, 2012 we had $7.93 billion of structured putable borrowings with a weighted-average rate of 4.47% as compared to $12.33 billion with a weighted average
rate of 4.39% at September 30, 2011. Structured putable borrowings with put dates within one year amounted to $2.93 billion at September 30, 2012. We anticipate that none of these borrowings will be 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 September 30, 2012 we had a concentration of borrowings with a single counterparty with $6.78 billion of borrowings with the FHLB. We do not believe this concentration creates a material liquidity risk to us.
Our remaining borrowings are fixed-rate, fixed maturity borrowings of $5.00 billion with a weighted-average rate of 4.21% at September 30, 2012.
Borrowings scheduled to mature over the next 12 months are as follows: $750.0 million with an average cost of 0.80% in the fourth quarter of 2012. There are no scheduled maturities for the first, second or third quarters of 2013.
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.
Page 64
Cash dividends paid during the first nine months of 2012 were $119.1 million. We have not purchased any of
our common shares during the nine months ended September 30, 2012 pursuant to our repurchase programs. Pursuant to the Company MOU, any future share repurchases must be approved by the FRB. Pursuant to the Merger Agreement, we may not
repurchase any shares without the consent of M&T. At September 30, 2012, 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. At September 30, 2012, Hudson City Bancorp had
total cash and due from banks of $134.9 million. 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 OCC and the FRB for future capital distributions.
In accordance with the
Bank MOU, the Bank has adopted and has implemented enhanced operating policies and procedures intended to enable us to continue to: (a) reduce our level of interest rate risk, (b) reduce our funding concentration, (c) diversify our
funding sources, (d) enhance our liquidity position, (e) monitor and manage loan modifications and (f) maintain our capital position in accordance with our existing capital plan. In addition, we developed a written strategic plan for
the Bank which establishes various objectives, including, but not limited to, objectives for the Banks overall risk profile, earnings performance, growth and balance sheet mix and to enhance our enterprise risk management
program.
The implementation of the strategic plan has been suspended pending the completion of the Merger.
In accordance with
the Company MOU, the Company must, among other things support the Banks compliance with the Bank MOU. The Company MOU also requires the Company to: (a) obtain approval from the FRB prior to receiving a capital distribution from the Bank
or declaring a dividend to shareholders, (b) obtain approval from the FRB prior to repurchasing or redeeming any Company stock or incurring any debt with a maturity date of greater than one year and (c) submit a comprehensive Capital Plan
and a comprehensive Earnings Plan to the FRB.
These agreements will remain in effect until modified or terminated by the OCC (with respect to
the Bank MOU) and the FRB (with respect to the Company MOU).
At September 30, 2012, Hudson City Savings exceeded all regulatory capital
requirements and is in compliance with our capital plan. Hudson City Savings tangible capital ratio, leverage (core) capital ratio and total risk-based capital ratio were 9.75%, 9.75% and 21.02%, respectively. We have agreed in the Bank MOU
not to materially deviate from our capital plan without regulatory approval.
The FRB issued notices of proposed rulemaking that will subject
all savings and loan holding companies, including Hudson City Bancorp, to consolidated capital requirements. These proposed rules also revise the quantity and quality of required minimum risk-based and leverage capital requirements, consistent with
the Reform Act and the Basel III capital standards, and revise the FRBs rules for calculating risk-weighted assets to enhance their risk sensitivity. The proposed rules provide for various phase-in periods over the next several years. We are
continuing to review the impact the Reform Act, Basel III and the related proposed rule-making will have on our business, financial condition and results of operations.
Page 65
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 September 30, 2012.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Period
|
|
Contractual Obligation
|
|
Total
|
|
|
Less Than
One Year
|
|
|
One Year to
Three Years
|
|
|
Three Years to
Five Years
|
|
|
More Than
Five Years
|
|
|
|
(In thousands)
|
|
Mortgage loan originations
|
|
$
|
669,998
|
|
|
$
|
669,998
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Mortgage loan purchases
|
|
|
140
|
|
|
|
140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of borrowed funds
|
|
|
12,925,000
|
|
|
|
750,000
|
|
|
|
|
|
|
|
6,275,000
|
|
|
|
5,900,000
|
|
Operating leases
|
|
|
152,080
|
|
|
|
10,454
|
|
|
|
20,965
|
|
|
|
20,040
|
|
|
|
100,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
13,747,218
|
|
|
$
|
1,430,592
|
|
|
$
|
20,965
|
|
|
$
|
6,295,040
|
|
|
$
|
6,000,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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/construction lines of
credit and overdraft lines of credit, which do not have fixed expiration dates, of approximately $163.3 million, $3.0 million, and $2.6 million, respectively. 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 2011 Annual Report to Shareholders and incorporated by reference into our 2011
Annual Report on Form 10-K, contains a summary of our significant accounting policies. We believe our policies with respect to the methodology
Page 66
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.
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 September 30, 2012. 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 September 30, 2012. 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 September 30, 2012, approximately 83.0% of our total loans are in the New York metropolitan
area. Additionally, the states of Pennsylvania, Virginia, Illinois and Maryland, accounted for 4.9%, 2.2%, 2.0%, and 1.9%, respectively of total loans. The remaining 6.0% 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 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 (fixed and variable 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 and our consideration of environmental factors, we changed certain loss factors used in our quantitative analysis of the ALL for one- to four-
family first mortgage loans during the third quarter of 2012. 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-
Page 67
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 higher 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 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 as well as loans classified as troubled debt restructurings. 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 of such awards in accordance with ASC 718-10. We have made annual grants
of performance-based stock options and stock unit awards that vest if certain financial performance measures are met. In accordance with ASC 718-10-30-6, 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 have made
grants of stock units in 2012 for which the sizes of the awards depend in part on market conditions based on the performance of our common stock. In accordance with ASC 718-10-30-15, we include the impact of these market conditions when estimating
the grant date fair value of the awards. In accordance with ASC 718-10-55-61, we recognize compensation cost for these awards if service conditions are satisfied, even if the market condition is not satisfied.
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.
Page 68
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. In accordance with ASC 715, Retirement Benefits, we: (a) recognize in the statement of financial condition an asset for a
plans overfunded status or a liability for a plans underfunded status; (b) measure plan assets and obligations that determine the plans funded status as of the end of our fiscal year; and (c) recognize, in comprehensive
income, changes in the funded status of our 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. For our pension plan, a discount rate of 4.75% was selected for the December 31, 2011 measurement date and the 2012 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 0.21% for 2011 and 8.5% for 2010. There can be no assurances with respect to actual return on plan assets in the future. We periodically review and evaluate all actuarial assumptions affecting the pension plan, including assumed return on
assets.
For our post-retirement benefit plan, a discount rate of 4.55% was used for the December 31, 2011 measurement date and for the
2012 expense calculation. The assumed health care cost trend rate used to measure the expected cost of other benefits for 2011 was 8.0%. The rate was assumed to decrease gradually to 4.75% for 2019 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. On a monthly basis, we
assess the reasonableness of the fair values obtained by reference to a second independent nationally recognized pricing service.
Page 69
Substantially all of our securities portfolio is comprised of mortgage-backed securities and debt securities
issued by GSEs. The fair value of these securities is primarily impacted by changes in interest rates and prepayment speeds. 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 changed 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 staff position 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 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, whether it is more likely than not that we will be required to sell the security before recovery of the amortized cost 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. 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 nine months of 2012.
Impairment of Goodwill
Goodwill
and intangible assets with indefinite useful lives are tested for impairment at least annually using a fair-value based two-step approach. Goodwill and other intangible assets amounted to $154.1 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.
Page 70
Quoted market prices in active markets are the best evidence of fair value and are used as the basis for
measurement, when available. With the assistance of a third-party valuation firm, we utilized multiple approaches in estimating the fair value of the Company as of our impairment test dates including (i) a comparable transactions approach based
on acquisition pricing multiples or ratios recently paid in the sale or merger of relatively comparable banking franchises; (ii) a control premium approach based on the Companys trading price adjusted by a premium for acquiring control
based on control premium data for recent banking sales or mergers; (iii) a public market peers control premium approach based on the trading prices of similar publicly-traded companies as measured by standard valuation multiples or ratios
adjusted by a premium for acquiring control based on control premium data for recent banking sales or mergers; and, (iv) the discounted cash flow approach whereby value is determined based on the present value of the sum of the projected
dividends and a terminal value in the future.
We performed our annual goodwill impairment analysis as of June 30, 2012 and also perform
interim impairment reviews if an event or circumstances occur which may indicate that the fair value of the Company is less than the Companys book value. The Company announced the Merger in the third quarter of 2012. The merger price based on
the closing price of M&Ts Common Stock on August 24, 2012, the last trading date before the announcement of the Merger and based on the average of M&Ts common stock from the announcement date to September 30, 2012, was $7.22
and $8.00, respectively or a fair value of $3.81 billion for the Company based on the merger price and shares outstanding on August 27, 2012. Since this amount is less than the reported amount of shareholders equity, we re-assessed
goodwill for impairment at September 30, 2012 by performing Step 2 of the goodwill impairment test.
For Step 2 of the goodwill
impairment test, we compared the fair value of the Company as determined by the Merger price with the fair value of the assets and liabilities of the Company to calculate an implied goodwill. Based on our Step 2 analysis, the implied goodwill of the
Company exceeded the carrying value of goodwill. The results of the Step 2 analysis were attributable to several factors. In addition, the estimated fair value of the Company is based on the market price of our common stock. The results of the Step
2 analysis are highly sensitive to these measurements, as well as the key assumptions in determining the estimated fair value of the Company.
Based on the results of the goodwill impairment analysis, we concluded that goodwill was not impaired. Therefore, we did not recognize any impairment of
goodwill or other intangible assets during the nine months ended September 30, 2012. The estimation of the fair value of the Company requires the use of estimates and assumptions that results in a greater degree of uncertainty. In addition, the
estimated fair value of the Company is based on, among other things, the market price of our common stock as calculated per the terms of the merger. As a result of the current volatility in market and economic conditions, these estimates and
assumptions are subject to change in the near-term and may result in the impairment in future periods of some or all of the goodwill on our balance sheet.
Page 71
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Quantitative and qualitative disclosure about market risk is presented as of December 31, 2011 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
and interest-bearing liabilities, 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 nine months of 2012 and did not have any such hedging transactions in place at September 30, 2012. Our mortgage loan and
mortgage-backed security portfolios, which comprise approximately 94% 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 recent pressure on
housing prices. Our mortgage-related assets are also subject to pre-payment risk due to mortgage refinancing and/or housing turnover. We continually analyze our asset quality and believe our allowance for loan losses is adequate to cover known and
potential losses.
Historically, our lending activities have emphasized one- to four-family fixed-rate and variable rate first and second
mortgage loans. Additionally, the bank holds sizable positions in variable-rate or hybrid-rate mortgage-backed securities. As of September 30, 2012, approximately 63% of our first mortgage loans had fixed interest rates while approximately 86%
of our mortgage-backed securities had contractual rate adjustments features. The current prevailing interest rate environment and the desires of our customers have resulted in a demand for longer-term hybrid (5- to 10-year no rate adjustment
periods, variable thereafter) and fixed-rate mortgage loans. These fixed-rate interest earning assets may have an adverse impact on our earnings in a rising rate environment as the interest rate on these interest-earning assets would not reprice to
current market interest rates as fast as the interest rates on our interest-bearing deposits.
In the past several years, we have attempted to
originate and purchase a larger percentage of variable-rate mortgage-related assets in order to better manage our interest rate risk. Variable-rate mortgage-related assets include those loans or securities with a contractual annual rate adjustment
after an initial fixed-rate period of one to ten years. These variable-rate instruments are more rate-sensitive, given the potential interest rate adjustment, than the long-term fixed-rate loans that we have traditionally held in our portfolio.
Growth in variable-rate mortgage-related assets would help reduce our exposure to interest rate fluctuations and is expected to benefit our long-term profitability, as the rate earned on the mortgage loan will increase as prevailing market rates
increase. However, this strategy to originate a higher percentage of variable-rate instruments may have an initial adverse impact on our net interest income and net interest margin in the short-term, as variable-rate interest-earning assets
generally have initial interest rates lower than alternative fixed-rate investments.
Variable-rate/hybrid products constituted 60% of loan
originations and purchases and 93% of mortgage-backed security purchases year-to-date. In the aggregate, 69% of our mortgage-related asset originations and purchases were variable-rate or hybrid instruments. Our percentage of fixed-rate
mortgage-related
Page 72
assets to total mortgage-related assets was 48% as of September 30, 2012 compared with 51% as of December 31, 2011. The slight decrease in this ratio reflects the higher percentage of
variable-rate/hybrid instruments originated and purchased during 2012. However, included in the variable-rate/hybrid total are mortgage-related assets whose contractual next rate change date is over five years.
Our primary sources of funds have traditionally been deposits, consisting primarily of time deposits and interest-bearing demand accounts, and
borrowings. Our deposits have substantially shorter terms to maturity than our mortgage loan portfolio and borrowed funds. The Bank currently has $10.26 billion of interest-bearing non-maturity deposits, and $7.94 billion of time deposits scheduled
to mature within the next 12 months. Our borrowings have generally had longer-terms to maturity, in an effort to offset our short-term deposit liabilities and assist in managing our interest rate risk, but generally have a put option, where the
lender could put the borrowing back to the Company at pre-determined points. During 2011, the Company, in an effort to reduce its borrowings position and lower the amount of structured putable borrowings on its balance sheet, extinguished $16.80
billion of putable borrowings, funding $5.00 billion of these extinguishment transactions with short-term borrowings. To further reduce our structured putable position, we modified $4.00 billion of structured putable borrowings into
fixed-rate/fixed-maturity borrowings. The Company has not executed any such transactions during the first nine months of 2012. The $5.00 billion of short-term borrowings placed on the balance sheet as a result of the transactions have been or will
be paid-off at maturity. The Company has reduced its borrowing position by $2.15 billion during the first nine months of 2012, primarily due to the payments on these maturing short-term borrowings.
If interest rates were to decrease, or stay at current levels, these borrowings would probably not be put back to us and our average cost of existing
borrowings would not decrease even as market interest rates decrease. Conversely, if market interest rates for similar borrowings increase above the coupon rate on our borrowings, the remaining structured putable borrowings would likely be put back
to us at their next put date and our cost to replace these borrowings would increase. The Company currently has $3.33 billion of quarterly putable borrowings funding its balance sheet. Of this amount, $2.68 billion with a weighted-average rate of
4.40% could be put back to us within the next three months. Given the current market interest rates, we believe interest rates would need to increase at least 300 basis points before a majority of these borrowings would be put back to the Bank.
We have $4.60 billion of one-time putable borrowings that were placed on the balance sheet as a result of modifying previously existing
quarterly putable borrowings into one-time putable borrowings. The next put option for any of this type of borrowing will be September 2013. We also have $5.00 billion of fixed-rate/fixed-maturity borrowings. $750.0 million of these borrowings, with
a weighted-average rate of 0.80%, are scheduled to mature over the next three months. We will repay these maturing borrowings with cash flows from operations.
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 economy has continued to expand at a moderate pace in recent
months. Growth in employment has slowed in recent months, and the unemployment rate remains elevated. The FOMC noted that while the housing sector has showed signs of improvement and household spending continues to advance, growth in business fixed
investment has slowed. The national unemployment rate was 7.9% during October 2012 representing a decline from 8.5% in December 2011. The FOMC decided to maintain the overnight lending rate at zero to 0.25% during the third quarter of 2012 and
stated that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015. As a result, market interest rates have remained at low levels, and consequently, the yields on our mortgage-related assets have
continued to decrease during the first nine months of 2012.
Page 73
The FOMC also decided to expand its accommodative monetary policy by purchasing an additional $40 billion of
agency mortgage-backed securities per month to ensure that inflation is at the rate most consistent with its dual mandate regarding both inflation and unemployment. The Federal Reserve program Operation Twist, which was originally set to
expire at the end of June, has been extended until the end of the year. This program consists of the purchase of Treasury securities with remaining maturities of 6 to 30 years funded by the sale of an equal amount of Treasury securities with
remaining maturities of 3 years or less. These programs will continue to put downward pressure on longer-term interest rates.
As a result,
both short-term and long-term market interest rates remained at low levels and decreased still further during the first nine months of 2012, with the long-term rates decreasing more than short-term rates 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 longer-term time deposits (2-5 year maturities) at
lower rates and extend the weighted-average remaining maturity on this portfolio. However, 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 have maintained the elevated prepayment speeds on these assets as customers sought to refinance their current debt to the lower market rates.
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 five years, 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. During 2011 and the first nine months of 2012, a more stable short-term
rate environment as compared to a declining long-term rate environment, resulted in a flatter market yield curve.
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 principal 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 remained at elevated levels during the first nine months of 2012. Accordingly, we have used relatively high levels of prepayment
activity in our interest rate risk modeling presented below. However, though the rate of prepayment speeds has generally remained elevated, the actual dollars received on our mortgage-backed securities has decreased due to a decrease in the size of
the portfolio as a result of the 2011 sales and limited re-investment opportunities during 2012. Given the current interest rate environment and prospective prepayment activity the duration of assets is estimated to be 2.10 years as of
September 30, 2012.
Page 74
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. Market interest rates decreased enough during the third and fourth quarters of 2011 to cause approximately $3.40
billion of our investment security portfolio to be called. These low interest rates continued into 2012 causing an additional $500.0 million of our portfolio to be called. The remaining $39.1 million of callable agency securities has an initial call
date in 2016. The $407.8 million of corporate bonds placed on our balance sheet during 2012 have fixed maturity dates of five years.
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 the first nine of 2012 we experienced no put activity on our borrowed funds due to the continued low levels of market interest rates. Currently we have approximately
$2.68 billion of putable borrowings that could be put back to the Bank within the next three months. This amount of quarterly putable borrowings has a weighted-average rate of 4.40%. 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. Given the current interest rate environment, prospective borrowings activity, the duration of liabilities is estimated to be 2.75 years as of September 30, 2012.
We may pay off the $750.0 million of remaining short-term borrowings as they mature or we may re-borrow, depending on other funding opportunities and
currently offered rates. The Company may use cash flows from mortgage-related assets to pay-off these borrowings, which may further reduce the size of the balance sheet. The Company may also use deposit growth to pay-off these borrowings. We
continually monitor our interest rate risk position and are continuing to develop strategies to mitigate this risk. Borrowings are presented at maturity date, with the price or potential cash flow adjusted for potential puts, as applicable.
We intend to continue focusing on funding any potential future asset growth primarily with customer deposits. 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.
Interest Rate Risk Modeling
Simulation Model.
We use our internal 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 economic value of equity in different interest rate environments, assuming either an incremental or instantaneous and permanent and parallel interest rate shock, as applicable, 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 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.
Page 75
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 September, 2013 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.
Percent Change in Net Interest Income
|
|
|
|
|
|
|
|
|
|
|
Change in
Interest Rates
|
|
|
Incremental Change
|
|
|
Instantaneous Change
|
|
(basis points)
|
|
|
|
|
|
|
|
|
300
|
|
|
|
(2.14
|
)%
|
|
|
(15.82
|
)%
|
|
200
|
|
|
|
(1.18
|
)
|
|
|
(8.07
|
)
|
|
100
|
|
|
|
(0.55
|
)
|
|
|
(2.37
|
)
|
|
50
|
|
|
|
(0.28
|
)
|
|
|
(0.54
|
)
|
|
(50)
|
|
|
|
0.04
|
|
|
|
(1.52
|
)
|
|
(100)
|
|
|
|
(0.14
|
)
|
|
|
(6.24
|
)
|
Of note in the positive shock scenarios:
the increase in interest income from total interest-earning assets repricing is, in effect, more than offset by the increase in deposit and short-term borrowing expense.
Of note in the negative shock scenarios:
the increase in net interest income in the incremental minus 50 basis point change reflects the resetting of interest rates on our non-maturity deposits and the short-term borrowings scheduled to mature over the next 12 months,
the decrease in net interest income in the minus 100 basis point instantaneous shock analysis 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 continued high cost of high fixed rate borrowed funds
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 between the estimated fair value of 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, and 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.
Page 76
The following table presents the estimated net present value of equity over a range of parallel interest
rate change scenarios, as applicable, at September 30, 2012. 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 5.50% in the plus 200 basis point interest rate shock
scenario.
|
|
|
|
|
|
|
|
|
|
|
Change in
Interest Rates
|
|
|
Present
Value
Ratio
|
|
|
Basis
Point
Change
|
|
(basis points)
|
|
|
|
|
|
|
|
|
300
|
|
|
|
7.49
|
%
|
|
|
(195
|
)
|
|
200
|
|
|
|
9.08
|
%
|
|
|
(36
|
)
|
|
100
|
|
|
|
9.70
|
%
|
|
|
26
|
|
|
50
|
|
|
|
9.66
|
%
|
|
|
22
|
|
|
- 0 -
|
|
|
|
9.44
|
%
|
|
|
|
|
|
(50)
|
|
|
|
9.03
|
%
|
|
|
(41
|
)
|
|
(100)
|
|
|
|
8.46
|
%
|
|
|
(98
|
)
|
Of note in the positive shock scenarios:
the improvement in our net present value ratios up to the +100 basis point change reflects the observation that the duration of assets is less than the duration of liabilities, i.e. the value of
liabilities deteriorates faster than assets; beyond +100 basis points, the duration of assets extends and therefore exceeds that of liabilities.
Of note in the negative shock scenarios:
the decrease in the present value ratio in the negative basis point changes was primarily due to higher valuations of our putable borrowed funds as the structures have longer durations, and
the value of our mortgage-related assets will remain closer to par than the borrowings as the prepayment speeds increase thus shortening the duration of these portfolios.
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 analyses assume 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 matching of the repricing characteristics of assets and liabilities may be analyzed by examining the extent to which such
assets and liabilities are interest rate-sensitive and by monitoring a financial institutions interest rate sensitivity gap. An asset or liability is said to be interest rate-sensitive within a specific time
period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of
interest-bearing liabilities maturing or repricing within that same time period.
Page 77
A gap is considered negative when the amount of interest-bearing liabilities maturing or repricing within a
specific time period exceeds the amount of interest-earning assets maturing or repricing within that same period. A gap is considered positive when the amount of interest-earning assets maturing or repricing within a specific time period exceeds the
amount of interest-bearing liabilities maturing or repricing within that same time period. During a period of rising interest rates, a financial institution with a negative gap position would be expected, absent the effects of other factors, to
experience a greater increase in the costs of its interest-bearing liabilities relative to the yields of its interest-earning assets and thus a decrease in the institutions net interest income. An institution with a positive gap position would
be expected, absent the effect of other factors, to experience the opposite result. Conversely, during a period of falling interest rates, a negative gap would tend to result in an increase in net interest income while a positive gap would tend to
reduce net interest income.
The following table presents the amounts of our interest-earning assets and interest-bearing liabilities
outstanding at September 30, 2012, 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. Callable investment securities and putable borrowed funds are reported at the anticipated call or put date, for those that are
callable or putable within one year and which we believe the instrument will be called or put based on the current interest rate environment, or at their contractual maturity date or next interest rate step-up date, as applicable. For this analysis,
we did not report any investment securities or borrowed funds at their call or put date. We have excluded non-accrual mortgage loans of $1.01 billion and non-accrual other loans of $8.2 million from the table.
Page 78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
|
|
Six
Months
or Less
|
|
|
More Than
Six Months
to One Year
|
|
|
More Than
One Year
to Two Years
|
|
|
More Than
Two Years
to Three Years
|
|
|
More Than
Three Years
to Five Years
|
|
|
More Than
Five Years
|
|
|
Total
|
|
Interest-earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First mortgage loans
|
|
|
3,254,142
|
|
|
|
3,172,489
|
|
|
|
4,683,181
|
|
|
|
3,807,851
|
|
|
|
4,300,519
|
|
|
|
7,245,032
|
|
|
|
26,463,214
|
|
Consumer and other loans
|
|
|
97,178
|
|
|
|
9,324
|
|
|
|
10,969
|
|
|
|
24,123
|
|
|
|
8,393
|
|
|
|
98,379
|
|
|
|
248,366
|
|
Federal funds sold
|
|
|
313,704
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
313,704
|
|
Mortgage-backed securities
|
|
|
3,584,261
|
|
|
|
1,488,009
|
|
|
|
1,883,495
|
|
|
|
1,894,163
|
|
|
|
2,424,836
|
|
|
|
753,688
|
|
|
|
12,028,452
|
|
FHLB stock
|
|
|
390,217
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
390,217
|
|
Investment securities
|
|
|
7,554
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
459,864
|
|
|
|
0
|
|
|
|
467,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
7,647,056
|
|
|
|
4,669,822
|
|
|
|
6,577,645
|
|
|
|
5,726,137
|
|
|
|
7,193,612
|
|
|
|
8,097,099
|
|
|
|
39,911,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings accounts
|
|
|
55,457
|
|
|
|
55,457
|
|
|
|
97,973
|
|
|
|
85,958
|
|
|
|
142,339
|
|
|
|
487,092
|
|
|
|
924,276
|
|
Interest-bearing demand
|
|
|
219,825
|
|
|
|
219,825
|
|
|
|
320,860
|
|
|
|
264,277
|
|
|
|
397,539
|
|
|
|
863,919
|
|
|
|
2,286,245
|
|
Money market accounts
|
|
|
957,831
|
|
|
|
957,832
|
|
|
|
1,380,627
|
|
|
|
998,168
|
|
|
|
1,250,999
|
|
|
|
1,501,123
|
|
|
|
7,046,580
|
|
Time deposits
|
|
|
5,421,993
|
|
|
|
2,519,090
|
|
|
|
2,456,232
|
|
|
|
1,572,976
|
|
|
|
1,175,866
|
|
|
|
0
|
|
|
|
13,146,157
|
|
Borrowing
|
|
|
750,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
6,275,000
|
|
|
|
5,900,000
|
|
|
|
12,925,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
7,405,106
|
|
|
|
3,752,204
|
|
|
|
4,255,692
|
|
|
|
2,921,379
|
|
|
|
9,241,743
|
|
|
|
8,752,134
|
|
|
|
36,328,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest sensitivity gap
|
|
|
241,950
|
|
|
|
917,618
|
|
|
|
2,321,953
|
|
|
|
2,804,758
|
|
|
|
(2,048,131
|
)
|
|
|
(655,035
|
)
|
|
|
3,583,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative interest sensitivity gap
|
|
|
241,950
|
|
|
|
1,159,568
|
|
|
|
3,481,521
|
|
|
|
6,286,279
|
|
|
|
4,283,148
|
|
|
|
3,583,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
41,898,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative interest sensitivity gap as a percentage of total assets
|
|
|
0.58
|
%
|
|
|
2.77
|
%
|
|
|
8.31
|
%
|
|
|
15.00
|
%
|
|
|
10.12
|
%
|
|
|
8.55
|
%
|
|
|
|
|
Cumulative interest-earnings assets as a percentage of interest-bearing liabilities
|
|
|
103.27
|
%
|
|
|
110.39
|
%
|
|
|
122.59
|
%
|
|
|
134.29
|
%
|
|
|
115.37
|
%
|
|
|
109.86
|
%
|
|
|
|
|
Of note regarding the GAP analysis:
the $750.0 million of borrowings in less than six months are maturities of the short-term borrowings placed on the balance sheet as a result of the Restructuring Transaction, and
we have experienced elevated levels of prepayment activity on our mortgage-related assets as interest rates have remained at low levels.
The cumulative one-year gap increase to positive 2.77% as of September 30, 2012 from 0.44% as of June 30, 2012 was due to a decrease in
borrowings maturing within one year as we have paid-off at maturity certain short-term borrowings, a decrease in time deposits as we have lowered interest rates to curtail deposit growth, and an extension of time deposit maturities as our customers
have sought higher rates in longer-term term maturities.
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 79
Item 4.Controls and Procedures
Ronald E. Hermance, Jr., our Chairman 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 September 30, 2012. 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
Except as described below, 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.
Eighteen putative class
action complaints have been filed in the Court of Chancery, Delaware against Hudson City, its directors, and M&T challenging the Merger. Each of these complaints names Hudson City and all of the current members of Hudson Citys board of
directors as defendants. Certain of the complaints also name Hudson City Savings Bank and Wilmington Trust Corporation as defendants. The complaints allege that the Hudson City directors breached their fiduciary duties to Hudson Citys public
shareholders by approving the merger at an unfair price. Various of the complaints also generally allege that the Merger was the product of a flawed sales process, that the directors approved provisions in the Merger Agreement that constitute
impermissible deal protection devices, and that certain officers and directors of Hudson City will receive personal benefits from the Merger not shared in by other Hudson City stockholders. The complaints further allege that M&T aided and
abetted the alleged breaches of fiduciary duties. Certain of the complaints also allege that Hudson City and Wilmington Trust Corporation aided and abetted the alleged breaches of fiduciary duties.
Three amended complaints have been filed in the Delaware actions. These complaints add disclosure claims, alleging that the board of directors
provided materially misleading and incomplete information to stockholders in the Form S-4 Registration Statement. Some of the amended complaints also expand upon claims that certain board members will receive personal benefits from the merger
not shared in by other stockholders. Certain plaintiffs filed motions to consolidate and to expedite the Delaware actions. The Court has held a hearing on the motions to consolidate and appointed lead plaintiffs for a consolidated action. Requests
for the production of documents have been filed in certain of the Delaware actions. Plaintiffs have agreed that defendants will not have to respond to any complaints or produce any discovery in the Delaware actions until an operative complaint has
been identified.
Six putative class actions challenging the merger have also been filed in the Superior Court for Bergen County, Chancery
Division, of New Jersey. These complaints allege that the Hudson City directors breached their fiduciary duties to Hudson Citys public shareholders by approving the Merger through a flawed sales process and at an unfair price. Various of the
complaints also generally allege, that the directors approved provisions in the Merger Agreement that constitute impermissible deal protection devices, and that certain officers and directors of Hudson City will receive personal benefits from the
Merger not shared in by other Hudson City stockholders. The complaints further allege that M&T aided and abetted the alleged breaches of fiduciary duties. Certain of the complaints also allege that Hudson City and Wilmington Trust Corporation
aided and abetted the alleged breaches of fiduciary duties. The Court has consolidated these six actions and any subsequent actions into a single matter:
In re Hudson City Bancorp, Inc. Shareholder Litigation
. The Court also has
appointed co-lead counsel. The New Jersey plaintiffs have not yet filed a consolidated, amended complaint.
All of the lawsuits seek, among
other things, to enjoin completion of the Merger and an award of costs and attorneys fees. Certain of the actions also seek an accounting of damages sustained as a result of the alleged breaches of fiduciary duty and punitive damages. The
defendants believe these actions are without merit and intend to defend vigorously against the claims.
Item 1A. Risk Factors
For a summary of risk factors relevant to our operations, please see Part I, Item 1A in our 2011 Annual Report on Form 10-K and Part II, Item 1A in our June 30, 2012 Form 10-Q. There has
been no material change in risk factors since June 30, 2012, except as noted below.
The recent storm that impacted our region may
have a negative impact on future earnings.
The primary market area of Hudson City Savings Bank was severely affected by the hurricane
that impacted the area on October 29 and 30. The Federal Emergency Management Agency (FEMA) has issued a Major Disaster Declaration for ten counties in New Jersey, nine counties in New York and four counties in Connecticut disaster
areas.
Page 80
We cannot at this time assess the impact that this storm may have on our borrowers or on the related
collateral for our loans. The damage from the storm may impact the collateral value of the underlying property, delay payment on loans through-out the affected areas and impair certain borrowers ability to repay their loans. These issues may
affect net income as the Company may need to provide additional amounts to the allowance for loan losses, or may have reduced net interest income due to loans becoming non-performing.
Hudson City stockholders who make elections to receive cash, stock or mixed consideration in the Merger may be unable to sell their shares in the market pending the Merger.
Hudson City stockholders may elect to receive cash, stock or mixed consideration in the Merger by completing an election form that will be provided to
stockholders. Elections will require that stockholders making the election turn in their Hudson City stock certificates. This means that during the time between when the election is made and the date the Merger is completed, Hudson City stockholders
will be unable to sell their Hudson City common stock. If the Merger is unexpectedly delayed, this period could extend for a significant period of time. Hudson City stockholders can shorten the period during which they cannot sell their shares by
delivering their election shortly before the election deadline. However, elections received after the election deadline will not be accepted or honored.
The Merger Agreement may be terminated in accordance with its terms and the Merger may not be completed
.
The Merger Agreement is subject to a number of conditions which must be fulfilled in order to complete the Merger. Those conditions include: approval of the Merger Agreement by Hudson City stockholders,
approval of the issuance of M&T Common Stock in connection with the merger by M&T shareholders, receipt of requisite regulatory approvals, absence of orders prohibiting completion of the merger, effectiveness of the registration statement of
which this document is a part, approval of the shares of M&T Common Stock to be issued to Hudson City stockholders for listing on the NYSE, the continued accuracy of the representations and warranties by both parties and the performance by both
parties of their covenants and agreements, and the receipt by both parties of legal opinions from their respective tax counsels. If these conditions to the closing of the merger are not fulfilled, then the Merger may not be completed. In addition,
if the Merger is not completed by August 27, 2013, either M&T or Hudson City may choose not to proceed with the Merger, and the parties can mutually decide to terminate the Merger Agreement at any time, before or after shareholder approval.
In addition, M&T may elect to terminate the merger agreement in certain other circumstances.
Termination of the Merger Agreement
could negatively impact Hudson City.
If the Merger Agreement is terminated, Hudson Citys business may be adversely impacted by
the failure to pursue other beneficial opportunities due to the focus of management on the Merger. In addition, if the Merger Agreement is terminated, the market price of Hudson City common stock might decline to the extent that the current market
price reflects a market assumption that the Merger will be completed. If the Merger Agreement is terminated and Hudson Citys board of directors seeks another merger or business combination, Hudson City stockholders cannot be certain that
Hudson City will be able to find a party willing to offer equivalent or more attractive consideration than the consideration M&T has agreed to provide in the Merger. If the Merger Agreement is terminated under certain circumstances, Hudson City
may be required to pay a termination fee of $125 million to M&T.
Hudson City will be subject to business uncertainties and
contractual restrictions while the Merger is pending.
Uncertainty about the effect of the Merger on employees and customers may have
an adverse effect on Hudson City and consequently on M&T. These uncertainties may impair Hudson Citys ability to attract, retain and motivate key personnel until the Merger is completed, and could cause customers and others that deal with
Hudson City to seek to change existing business relationships with Hudson City. Retention of certain employees may be challenging during the pendency of the Merger, as certain employees may experience uncertainty about their future roles. If key
employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with the business, Hudson Citys business could be negatively impacted. In addition, the Merger Agreement restricts Hudson
City from making certain acquisitions and taking other specified actions until the Merger occurs without the consent of M&T. These restrictions may prevent Hudson City from pursuing attractive business opportunities that may arise prior to the
completion of the Merger.
Various lawsuits have been filed against Hudson City, Hudson Citys Board of Directors and M&T
challenging the Merger, and an adverse judgment in any such lawsuit may prevent the Merger from being completed or from being completed within the expected timeframe.
Hudson City, Hudson Citys board of directors and M&T are named as defendants in 24 lawsuits brought by various Hudson City shareholders, both in the Court of Chancery in the State of Delaware
and the Superior Court for Bergen County, Chancery Division, of New Jersey. Certain of the complaints also name Hudson City Savings Bank and Wilmington Trust Corporation as defendants. The lawsuits challenge the proposed Merger and seek, among other
things, to enjoin the completion of the Merger on the agreed-upon terms and an award of costs and attorneys fees. Certain of the actions also seek an accounting of damages sustained as a result of alleged breaches of fiduciary duties and
punitive damages.
Page 81
One of the conditions to the closing of the Merger is that no judgment, decree, injunction or other order
(whether temporary, preliminary or permanent) issued by a governmental authority of competent jurisdiction that prohibits the completion of the Merger shall be in effect. As such, if a settlement or other resolution is not reached in these lawsuits
and the plaintiffs are successful in obtaining an injunction prohibiting the completion of the Merger on the agreed-upon terms, then such injunction may prevent the Merger from being completed, or from being completed within the expected timeframe.
Page 82
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
The following table reports information regarding repurchases of our common stock during the third quarter of 2012 and the stock repurchase plans approved by our Board of Directors.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
Total
Number of
Shares
Purchased
|
|
|
Average
Price Paid
per Share
|
|
|
Total Number of
Shares Purchased
as Part of Publicly
Announced
Plans
or Programs
|
|
|
Maximum
Number of Shares
that May Yet Be
Purchased Under
the Plans or
Programs
(1)
|
|
July 1-July 31, 2012
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
August 1-August 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 1-September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
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.
|
Item 3.
|
Defaults Upon Senior Securities
|
Not
applicable.
Item 4.
|
Mine Safety Disclosures
|
Not applicable.
Item 5.
|
Other Information
|
Not applicable.
|
|
|
Exhibit Number
|
|
Exhibit
|
|
|
10.42
|
|
Form of Hudson City Bancorp, Inc. Amended and Restated 2011 Stock Incentive Plan Variable Deferred Stock Unit Award Notice Employees
|
|
|
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 Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
*
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Page 84
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101
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The following information from the Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, filed with the SEC on November 9, 2012, has been
formatted in eXtensible Business Reporting Language: (i) Consolidated Statements of Financial Condition at September 30, 2012 and December 31, 2011, (ii) Consolidated Statements of Operations for the three and nine months ended September 30, 2012
and 2011, (iii) Consolidated Statements of Changes in Shareholders Equity for the nine months ended September 30, 2012 and 2011 , (iv) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2012 and
2011 and (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011 and (vi) 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 85
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.
Hudson City Bancorp, Inc.
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Date: November 9, 2012
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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
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(Principal Executive Officer)
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Date: November 9, 2012
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By:
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/s/ Anthony J. Fabiano
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Anthony J. Fabiano
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Executive Vice President
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(Principal Accounting Officer)
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Page 86
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