Item 1.
|
Financial Statements
|
Hudson City Bancorp, Inc. and Subsidiary
Consolidated Statements of Financial Condition
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
(In thousands, except share and per share amounts)
|
|
(unaudited)
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
128,637
|
|
|
$
|
133,665
|
|
Federal funds sold and other overnight deposits
|
|
|
5,322,044
|
|
|
|
4,190,809
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
|
5,450,681
|
|
|
|
4,324,474
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
5,781,024
|
|
|
|
7,167,555
|
|
Investment securities
|
|
|
903,003
|
|
|
|
297,283
|
|
Securities held to maturity:
|
|
|
|
|
|
|
|
|
Mortgage-backed securities (fair value of $1,610,817 at June 30, 2014 and $1,888,823 at December 31, 2013)
|
|
|
1,516,666
|
|
|
|
1,784,464
|
|
Investment securities (fair value of $42,350 at June 30, 2014 and $42,727 at December 31, 2013)
|
|
|
39,011
|
|
|
|
39,011
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
|
8,239,704
|
|
|
|
9,288,313
|
|
Loans
|
|
|
23,154,711
|
|
|
|
24,112,829
|
|
Net deferred loan costs
|
|
|
104,597
|
|
|
|
105,480
|
|
Allowance for loan losses
|
|
|
(255,011
|
)
|
|
|
(276,097
|
)
|
|
|
|
|
|
|
|
|
|
Net loans
|
|
|
23,004,297
|
|
|
|
23,942,212
|
|
Federal Home Loan Bank of New York stock
|
|
|
337,295
|
|
|
|
347,102
|
|
Foreclosed real estate, net
|
|
|
77,803
|
|
|
|
70,436
|
|
Accrued interest receivable
|
|
|
45,681
|
|
|
|
52,887
|
|
Banking premises and equipment, net
|
|
|
61,074
|
|
|
|
65,353
|
|
Goodwill
|
|
|
152,109
|
|
|
|
152,109
|
|
Other assets
|
|
|
332,001
|
|
|
|
364,468
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
37,700,645
|
|
|
$
|
38,607,354
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity:
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Interest-bearing
|
|
$
|
19,845,215
|
|
|
$
|
20,811,108
|
|
Noninterest-bearing
|
|
|
668,620
|
|
|
|
661,221
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
20,513,835
|
|
|
|
21,472,329
|
|
Repurchase agreements
|
|
|
6,150,000
|
|
|
|
6,950,000
|
|
Federal Home Loan Bank of New York advances
|
|
|
6,025,000
|
|
|
|
5,225,000
|
|
|
|
|
|
|
|
|
|
|
Total borrowed funds
|
|
|
12,175,000
|
|
|
|
12,175,000
|
|
Accrued expenses and other liabilities
|
|
|
198,918
|
|
|
|
217,449
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
32,887,753
|
|
|
|
33,864,778
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 3,200,000,000 shares authorized; 741,466,555 shares issued; 528,752,920 and 528,419,170 shares
outstanding at June 30, 2014 and December 31, 2013
|
|
|
7,415
|
|
|
|
7,415
|
|
Additional paid-in capital
|
|
|
4,747,434
|
|
|
|
4,743,388
|
|
Retained earnings
|
|
|
1,925,398
|
|
|
|
1,883,754
|
|
Treasury stock, at cost; 212,713,635 and 213,047,385 shares at June 30, 2014 and December 31, 2013
|
|
|
(1,709,727
|
)
|
|
|
(1,712,107
|
)
|
Unallocated common stock held by the employee stock ownership plan
|
|
|
(183,207
|
)
|
|
|
(186,210
|
)
|
Accumulated other comprehensive income, net of tax
|
|
|
25,579
|
|
|
|
6,336
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
4,812,892
|
|
|
|
4,742,576
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
37,700,645
|
|
|
$
|
38,607,354
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited consolidated financial statements.
Page 5
Hudson City Bancorp, Inc. and Subsidiary
Consolidated Statements of Income
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
For the Six Months
|
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
(In thousands, except share data)
|
|
Interest and Dividend Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First mortgage loans
|
|
$
|
247,124
|
|
|
$
|
283,857
|
|
|
$
|
500,263
|
|
|
$
|
578,247
|
|
Consumer and other loans
|
|
|
2,199
|
|
|
|
2,611
|
|
|
|
4,477
|
|
|
|
5,316
|
|
Mortgage-backed securities held to maturity
|
|
|
10,128
|
|
|
|
20,614
|
|
|
|
21,339
|
|
|
|
44,610
|
|
Mortgage-backed securities available for sale
|
|
|
31,595
|
|
|
|
32,051
|
|
|
|
69,085
|
|
|
|
68,962
|
|
Investment securities held to maturity
|
|
|
585
|
|
|
|
586
|
|
|
|
1,170
|
|
|
|
1,171
|
|
Investment securities available for sale
|
|
|
920
|
|
|
|
2,305
|
|
|
|
1,714
|
|
|
|
4,703
|
|
Dividends on Federal Home Loan Bank of New York stock
|
|
|
3,338
|
|
|
|
3,516
|
|
|
|
7,494
|
|
|
|
7,724
|
|
Federal funds sold and other overnight deposits
|
|
|
3,316
|
|
|
|
1,969
|
|
|
|
6,202
|
|
|
|
2,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and dividend income
|
|
|
299,205
|
|
|
|
347,509
|
|
|
|
611,744
|
|
|
|
713,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
40,173
|
|
|
|
46,604
|
|
|
|
80,811
|
|
|
|
95,743
|
|
Borrowed funds
|
|
|
141,350
|
|
|
|
141,052
|
|
|
|
280,915
|
|
|
|
280,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
181,523
|
|
|
|
187,656
|
|
|
|
361,726
|
|
|
|
376,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
117,682
|
|
|
|
159,853
|
|
|
|
250,018
|
|
|
|
337,236
|
|
Provision for Loan Losses
|
|
|
|
|
|
|
12,500
|
|
|
|
|
|
|
|
32,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
|
117,682
|
|
|
|
147,353
|
|
|
|
250,018
|
|
|
|
304,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Interest Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges and other income
|
|
|
1,645
|
|
|
|
2,405
|
|
|
|
3,460
|
|
|
|
4,938
|
|
Gain on securities transactions, net
|
|
|
19,539
|
|
|
|
7,183
|
|
|
|
35,482
|
|
|
|
7,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income
|
|
|
21,184
|
|
|
|
9,588
|
|
|
|
38,942
|
|
|
|
12,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Interest Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and employee benefits
|
|
|
32,405
|
|
|
|
32,613
|
|
|
|
66,016
|
|
|
|
64,214
|
|
Net occupancy expense
|
|
|
9,433
|
|
|
|
9,723
|
|
|
|
19,144
|
|
|
|
18,533
|
|
Federal deposit insurance assessment
|
|
|
13,086
|
|
|
|
19,600
|
|
|
|
27,010
|
|
|
|
43,675
|
|
Other expense
|
|
|
18,184
|
|
|
|
14,685
|
|
|
|
40,651
|
|
|
|
31,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expense
|
|
|
73,108
|
|
|
|
76,621
|
|
|
|
152,821
|
|
|
|
157,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
65,758
|
|
|
|
80,320
|
|
|
|
136,139
|
|
|
|
158,981
|
|
Income Tax Expense
|
|
|
26,576
|
|
|
|
31,598
|
|
|
|
54,436
|
|
|
|
62,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
39,182
|
|
|
$
|
48,722
|
|
|
$
|
81,703
|
|
|
$
|
96,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Share
|
|
$
|
0.08
|
|
|
$
|
0.10
|
|
|
$
|
0.16
|
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Share
|
|
$
|
0.08
|
|
|
$
|
0.10
|
|
|
$
|
0.16
|
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Number of Common Shares Outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
498,874,695
|
|
|
|
497,720,918
|
|
|
|
498,646,420
|
|
|
|
497,527,375
|
|
Diluted
|
|
|
499,838,263
|
|
|
|
498,070,995
|
|
|
|
499,452,014
|
|
|
|
497,722,679
|
|
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 June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
(In thousands)
|
|
Net income
|
|
$
|
39,182
|
|
|
$
|
48,722
|
|
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) benefit of $(11,788) for
2014 and $55,485 for 2013
|
|
|
17,069
|
|
|
|
(80,340
|
)
|
Reclassification adjustment for realized gains in net income, net of tax expense of $7,459 for 2014 and $2,934 for 2013
|
|
|
(10,801
|
)
|
|
|
(4,249
|
)
|
Postretirement benefit pension plans:
|
|
|
|
|
|
|
|
|
Amortization of net loss arising during period, net of tax expense of $329 for 2014 and $739 for 2013
|
|
|
475
|
|
|
|
1,070
|
|
Amortization or prior service cost included in net periodic pension cost, net of tax benefit of $137 for 2014 and $123 for
2013
|
|
|
(196
|
)
|
|
|
(178
|
)
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
6,547
|
|
|
|
(83,697
|
)
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss)
|
|
$
|
45,729
|
|
|
$
|
(34,975
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months
|
|
|
|
Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
(In thousands)
|
|
Net income
|
|
$
|
81,703
|
|
|
$
|
96,653
|
|
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) benefit of $(24,647) for
2014 and $57,383 for 2013
|
|
|
35,827
|
|
|
|
(83,089
|
)
|
Reclassification adjustment for realized gains in net income, net of tax expense of $11,741 for 2014 and $2,934 for 2013
|
|
|
(17,141
|
)
|
|
|
(4,249
|
)
|
Postretirement benefit pension plans:
|
|
|
|
|
|
|
|
|
Net loss arising during period, net of tax expense of $657 for 2014 and $1,478 for 2013
|
|
|
951
|
|
|
|
2,140
|
|
Amortization or prior service cost included in net periodic pension cost, net of tax benefit of $272 for 2014 and $246 for
2013
|
|
|
(394
|
)
|
|
|
(356
|
)
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
19,243
|
|
|
|
(85,554
|
)
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
100,946
|
|
|
$
|
11,099
|
|
|
|
|
|
|
|
|
|
|
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 Six Months
|
|
|
|
Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
(In thousands, except per share data)
|
|
Common Stock
|
|
$
|
7,415
|
|
|
$
|
7,415
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital:
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
4,743,388
|
|
|
|
4,730,105
|
|
Stock option plan expense
|
|
|
6,072
|
|
|
|
3,962
|
|
Tax benefit from stock plans
|
|
|
307
|
|
|
|
218
|
|
Allocation of ESOP stock
|
|
|
1,619
|
|
|
|
1,103
|
|
Common stock issued for vested deferred stock unit awards
|
|
|
(3,952
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
4,747,434
|
|
|
|
4,735,388
|
|
|
|
|
|
|
|
|
|
|
Retained Earnings:
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
1,883,754
|
|
|
|
1,798,430
|
|
Net income
|
|
|
81,703
|
|
|
|
96,653
|
|
Dividends paid on common stock ($0.08 and $0.12 per share, respectively)
|
|
|
(40,076
|
)
|
|
|
(59,701
|
)
|
Exercise of stock options
|
|
|
17
|
|
|
|
(381
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
1,925,398
|
|
|
|
1,835,001
|
|
|
|
|
|
|
|
|
|
|
Treasury Stock:
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
(1,712,107
|
)
|
|
|
(1,713,895
|
)
|
Purchase of vested stock awards surrendered for witholding taxes
|
|
|
(1,668
|
)
|
|
|
|
|
Exercise of stock options
|
|
|
96
|
|
|
|
1,788
|
|
Common stock issued for vested deferred stock unit awards
|
|
|
3,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
(1,709,727
|
)
|
|
|
(1,712,107
|
)
|
|
|
|
|
|
|
|
|
|
Unallocated common stock held by the ESOP:
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
(186,210
|
)
|
|
|
(192,217
|
)
|
Allocation of ESOP stock
|
|
|
3,003
|
|
|
|
3,004
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
(183,207
|
)
|
|
|
(189,213
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
6,336
|
|
|
|
69,970
|
|
Other comprehensive income (loss), net of tax
|
|
|
19,243
|
|
|
|
(85,554
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
25,579
|
|
|
|
(15,584
|
)
|
|
|
|
|
|
|
|
|
|
Total Shareholders Equity
|
|
$
|
4,812,892
|
|
|
$
|
4,660,900
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited consolidated financial statements.
Page 8
Hudson City Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the Six Months
|
|
|
|
Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
(In thousands)
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
81,703
|
|
|
$
|
96,653
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation, accretion and amortization expense
|
|
|
20,288
|
|
|
|
62,914
|
|
Provision for loan losses
|
|
|
|
|
|
|
32,500
|
|
Gains on securities transactions, net
|
|
|
(35,482
|
)
|
|
|
(7,183
|
)
|
Share-based compensation, including committed ESOP shares
|
|
|
10,694
|
|
|
|
8,069
|
|
Deferred tax expense
|
|
|
8,927
|
|
|
|
3,005
|
|
Decrease in accrued interest receivable
|
|
|
7,206
|
|
|
|
13,762
|
|
Increase in other assets
|
|
|
10,696
|
|
|
|
367,724
|
|
(Decrease) increase in accrued expenses and other liabilities
|
|
|
(18,531
|
)
|
|
|
3,666
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Operating Activities
|
|
|
85,501
|
|
|
|
581,110
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Originations of loans
|
|
|
(697,091
|
)
|
|
|
(1,689,648
|
)
|
Purchases of loans
|
|
|
(116,302
|
)
|
|
|
(44,704
|
)
|
Principal payments on loans
|
|
|
1,715,277
|
|
|
|
3,554,335
|
|
Principal collection of mortgage-backed securities held to maturity
|
|
|
144,787
|
|
|
|
521,343
|
|
Principal collection of mortgage-backed securities available for sale
|
|
|
624,203
|
|
|
|
1,267,172
|
|
Purchases of mortgage-backed securities available for sale
|
|
|
(94,422
|
)
|
|
|
(1,250,177
|
)
|
Proceeds from sales of mortgage backed securities available for sale
|
|
|
891,265
|
|
|
|
|
|
Proceeds from sales of mortgage backed securities held to maturity
|
|
|
129,126
|
|
|
|
|
|
Proceeds from sales of investment securities available for sale
|
|
|
|
|
|
|
412,886
|
|
Purchases of investment securities available for sale
|
|
|
(600,797
|
)
|
|
|
(298,017
|
)
|
Redemption of Federal Home Loan Bank of New York stock
|
|
|
9,807
|
|
|
|
9,365
|
|
Purchases of premises and equipment, net
|
|
|
(1,472
|
)
|
|
|
(89
|
)
|
Net proceeds from sale of foreclosed real estate
|
|
|
36,143
|
|
|
|
28,387
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Investment Activities
|
|
|
2,040,524
|
|
|
|
2,510,853
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Net decrease in deposits
|
|
|
(958,494
|
)
|
|
|
(864,646
|
)
|
Dividends paid
|
|
|
(40,076
|
)
|
|
|
(59,701
|
)
|
Purchase of vested stock awards surrendered for witholding taxes
|
|
|
(1,668
|
)
|
|
|
|
|
Exercise of stock options
|
|
|
113
|
|
|
|
1,407
|
|
Tax benefit from stock plans
|
|
|
307
|
|
|
|
218
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used in Financing Activities
|
|
|
(999,818
|
)
|
|
|
(922,722
|
)
|
|
|
|
|
|
|
|
|
|
Net Increase in Cash and Cash Equivalents
|
|
|
1,126,207
|
|
|
|
2,169,241
|
|
Cash and Cash Equivalents at Beginning of Year
|
|
|
4,324,474
|
|
|
|
827,968
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Period
|
|
$
|
5,450,681
|
|
|
$
|
2,997,209
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
360,295
|
|
|
$
|
372,210
|
|
|
|
|
|
|
|
|
|
|
Loans transferred to foreclosed real estate
|
|
$
|
60,270
|
|
|
$
|
54,188
|
|
|
|
|
|
|
|
|
|
|
Income tax payments
|
|
$
|
50,238
|
|
|
$
|
51,440
|
|
|
|
|
|
|
|
|
|
|
Income tax refunds
|
|
$
|
170
|
|
|
$
|
361,288
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited consolidated financial statements.
Page 9
Notes to Unaudited Consolidated Financial Statements
Hudson City Bancorp is a Delaware corporation and is the savings and loan holding company for Hudson City Savings Bank and its subsidiaries.
As a savings and loan holding company, Hudson City Bancorp is subject to the supervision and examination of the FRB. Hudson City Savings is a federally chartered stock savings bank subject to supervision and examination by the OCC.
On August 27, 2012, the Company entered into an Agreement and Plan of Merger (the Merger Agreement) with M&T and WTC. The Merger
Agreement provides that, upon the terms and subject to the conditions set forth therein, the Company will merge with and into WTC, with WTC continuing as the surviving entity.
Subject to the terms and conditions of the Merger Agreement, in the Merger, Hudson City Bancorp shareholders will have the right to receive with respect to
each of their shares of common stock of the Company, at their election (but subject to proration and adjustment procedures), 0.08403 of a share of common stock, or cash having a value equal to the product of 0.08403 multiplied by the average closing
price of the M&T Common Stock for the ten days immediately prior to the completion of the Merger. The Merger Agreement also provides that at the closing of the Merger, 40% of the outstanding shares of Hudson City Bancorp common stock will be
converted into the right to receive cash and the remainder of the outstanding shares of Hudson City Bancorp common stock will be converted into the right to receive shares of M&T common stock.
On April 12, 2013, M&T and the Company announced that additional time would be required to obtain a regulatory determination on the applications
necessary to complete the proposed Merger. On April 13, 2013, M&T and the Company entered into Amendment No. 1 to the Merger Agreement (Amendment No. 1). Amendment No. 1, among other things, extended the date
after which either party may elect to terminate the Merger Agreement from August 27, 2013 to January 31, 2014. On December 17, 2013, M&T and the Company announced that they entered into Amendment No. 2 to the Merger Agreement
(Amendment No. 2). Amendment No. 2 extends the date after which either party may terminate the Merger Agreement if the Merger has not yet been completed from January 31, 2014 to December 31, 2014, and provides that
the Company may terminate the Merger Agreement at any time if it reasonably determines that M&T is unlikely to be able to obtain the requisite regulatory approvals in time to permit the closing to occur on or prior to December 31, 2014.
Amendment No. 2 also permits the Company to take certain interim actions without the prior approval of M&T, including with respect to the Banks conduct of business, implementation of its strategic plan, retention incentives and
certain other matters with respect to Bank personnel, prior to the completion of the Merger. While M&T and the Company extended the date after which either party may elect to terminate the Merger Agreement from January 31, 2014 to
December 31, 2014, there can be no assurances that the Merger will be completed by that date or that the Company will not exercise its right to terminate the Merger Agreement in accordance with its terms.
The Merger Agreement, as amended by Amendment No. 1, was approved by the shareholders of both Hudson City Bancorp and M&T. The Merger is subject to
the receipt of regulatory approvals and the satisfaction of other customary closing conditions.
On March 30, 2012, the Bank entered into a
Memorandum of Understanding with the OCC (the Bank MOU), which is substantially similar to and replaced the MOU the Bank entered into with our former regulator, the Office of Thrift Supervision (the OTS), on June 24,
2011. In accordance with the Bank MOU, the Bank has adopted and has implemented enhanced operating policies and procedures, that are
Page 10
Notes to Unaudited Consolidated Financial Statements
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 (the Strategic Plan) for the
Bank which establishes objectives for the Banks overall risk profile, earnings performance, growth and balance sheet mix and to enhance our enterprise risk management program. The Strategic Plan includes initiatives such as secondary mortgage
market operations, commercial real estate lending, the introduction of small business banking products and developing a more robust suite of consumer banking products. These initiatives require significant lead time for full implementation and roll
out to our customers.
The Company entered into a separate Memorandum of Understanding with the FRB (the Company MOU) on April 24, 2012,
which is substantially similar to and replaced the MOU the Company entered into with our former regulator, the OTS, on June 24, 2011. 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).
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 six months ended June 30, 2014 are not necessarily indicative of the
results of operations that may be expected for the year ending December 31, 2014. 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.
The goodwill impairment analysis depends on the use of estimates and assumptions which are
highly sensitive to, among other things, market interest rates and are therefore subject to change in the near-term. Goodwill is tested for impairment at least annually and is considered impaired if the carrying value of goodwill exceeds its implied
fair value. Similar to the calculation of goodwill in a business combination, the implied fair value of goodwill is determined by measuring the excess of the fair value of the reporting
Page 11
Notes to Unaudited Consolidated Financial Statements
unit over the aggregate estimated fair values of individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired at the impairment test date. The
estimation of the fair value of the Company is based on, among other things, the market price of our common stock. In addition, the fair value of the individual assets, liabilities and identifiable intangibles are determined using estimates and
assumptions that are highly sensitive to market interest rates. 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.
Certain information and note disclosures usually included in financial statements prepared in accordance with U.S. generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for the preparation of the Form 10-Q. The consolidated financial statements presented should be read in conjunction with
Hudson City Bancorps audited consolidated financial statements and notes to consolidated financial statements included in Hudson City Bancorps 2013 Annual Report on Form 10-K.
The following is a summary of our earnings per share calculations and reconciliation of basic to diluted earnings per share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
For the Six Months
|
|
|
|
Ended June 30
|
|
|
Ended June 30
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
(In thousands, except share data)
|
|
Net income
|
|
$
|
39,182
|
|
|
$
|
48,722
|
|
|
$
|
81,703
|
|
|
$
|
96,653
|
|
Less: Income allocated to participating securities
|
|
|
(176
|
)
|
|
|
|
|
|
|
(176
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
|
$
|
39,006
|
|
|
$
|
48,722
|
|
|
$
|
81,527
|
|
|
$
|
96,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
498,874,695
|
|
|
|
497,720,918
|
|
|
|
498,646,420
|
|
|
|
497,527,375
|
|
Effect of dilutive common stock equivalents
|
|
|
963,568
|
|
|
|
350,077
|
|
|
|
805,594
|
|
|
|
195,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common shares outstanding
|
|
|
499,838,263
|
|
|
|
498,070,995
|
|
|
|
499,452,014
|
|
|
|
497,722,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
$
|
0.08
|
|
|
$
|
0.10
|
|
|
$
|
0.16
|
|
|
$
|
0.19
|
|
Diluted EPS
|
|
$
|
0.08
|
|
|
$
|
0.10
|
|
|
$
|
0.16
|
|
|
$
|
0.19
|
|
Common stock equivalents for both the three and six months ended June 30, 2014 exclude outstanding options to purchase
21,031,224 shares of the Companys common stock as their inclusion would be anti-dilutive. Common stock equivalents for both the three and six months ended June 30, 2013 exclude outstanding options to purchase 25,461,142 shares of common
stock as their inclusion would be anti-dilutive.
Page 12
Notes to Unaudited Consolidated Financial Statements
The amortized cost and estimated fair market value of investment securities and mortgage-backed securities available-for-sale at
June 30, 2014 and December 31, 2013 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair Market
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
(In thousands)
|
|
June 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States government-sponsored enterprises debt
|
|
$
|
899,159
|
|
|
$
|
151
|
|
|
$
|
(3,531
|
)
|
|
$
|
895,779
|
|
Equity securities
|
|
|
6,873
|
|
|
|
351
|
|
|
|
|
|
|
|
7,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities available for sale
|
|
$
|
906,032
|
|
|
$
|
502
|
|
|
$
|
(3,531
|
)
|
|
$
|
903,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA pass-through certificates
|
|
$
|
712,480
|
|
|
$
|
22,799
|
|
|
$
|
(444
|
)
|
|
$
|
734,835
|
|
FNMA pass-through certificates
|
|
|
3,230,647
|
|
|
|
53,053
|
|
|
|
(16,814
|
)
|
|
|
3,266,886
|
|
FHLMC pass-through certificates
|
|
|
1,746,033
|
|
|
|
36,278
|
|
|
|
(3,008
|
)
|
|
|
1,779,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities available for sale
|
|
$
|
5,689,160
|
|
|
$
|
112,130
|
|
|
$
|
(20,266
|
)
|
|
$
|
5,781,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States government-sponsored enterprises debt
|
|
$
|
298,190
|
|
|
$
|
|
|
|
$
|
(7,996
|
)
|
|
$
|
290,194
|
|
Equity securities
|
|
|
6,873
|
|
|
|
216
|
|
|
|
|
|
|
|
7,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities available for sale
|
|
$
|
305,063
|
|
|
$
|
216
|
|
|
$
|
(7,996
|
)
|
|
$
|
297,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA pass-through certificates
|
|
$
|
788,504
|
|
|
$
|
17,775
|
|
|
$
|
(1,396
|
)
|
|
$
|
804,883
|
|
FNMA pass-through certificates
|
|
|
3,879,723
|
|
|
|
50,800
|
|
|
|
(39,800
|
)
|
|
|
3,890,723
|
|
FHLMC pass-through certificates
|
|
|
2,396,085
|
|
|
|
46,300
|
|
|
|
(8,947
|
)
|
|
|
2,433,438
|
|
FHLMC and FNMA - REMICs
|
|
|
38,220
|
|
|
|
291
|
|
|
|
|
|
|
|
38,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities available for sale
|
|
$
|
7,102,532
|
|
|
$
|
115,166
|
|
|
$
|
(50,143
|
)
|
|
$
|
7,167,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 June 30, 2014 and December 31, 2013 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair Market
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
(In thousands)
|
|
June 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States government-sponsored enterprises debt
|
|
$
|
39,011
|
|
|
$
|
3,339
|
|
|
$
|
|
|
|
$
|
42,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities held to maturity
|
|
$
|
39,011
|
|
|
$
|
3,339
|
|
|
$
|
|
|
|
$
|
42,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA pass-through certificates
|
|
$
|
58,496
|
|
|
$
|
1,758
|
|
|
$
|
|
|
|
$
|
60,254
|
|
FNMA pass-through certificates
|
|
|
345,832
|
|
|
|
24,000
|
|
|
|
(4
|
)
|
|
|
369,828
|
|
FHLMC pass-through certificates
|
|
|
1,003,136
|
|
|
|
62,431
|
|
|
|
(1
|
)
|
|
|
1,065,566
|
|
FHLMC and FNMA - REMICs
|
|
|
109,202
|
|
|
|
5,967
|
|
|
|
|
|
|
|
115,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities held to maturity
|
|
$
|
1,516,666
|
|
|
$
|
94,156
|
|
|
$
|
(5
|
)
|
|
$
|
1,610,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States government-sponsored enterprises debt
|
|
$
|
39,011
|
|
|
$
|
3,716
|
|
|
$
|
|
|
|
$
|
42,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities held to maturity
|
|
$
|
39,011
|
|
|
$
|
3,716
|
|
|
$
|
|
|
|
$
|
42,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA pass-through certificates
|
|
$
|
63,070
|
|
|
$
|
2,260
|
|
|
$
|
|
|
|
$
|
65,330
|
|
FNMA pass-through certificates
|
|
|
402,848
|
|
|
|
25,103
|
|
|
|
(1
|
)
|
|
|
427,950
|
|
FHLMC pass-through certificates
|
|
|
1,123,029
|
|
|
|
66,816
|
|
|
|
(1
|
)
|
|
|
1,189,844
|
|
FHLMC and FNMA - REMICs
|
|
|
195,517
|
|
|
|
10,182
|
|
|
|
|
|
|
|
205,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities held to maturity
|
|
$
|
1,784,464
|
|
|
$
|
104,361
|
|
|
$
|
(2
|
)
|
|
$
|
1,888,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 14
Notes to Unaudited Consolidated Financial Statements
The following tables summarize the fair values and unrealized losses of our securities held to maturity and
available-for-sale with an unrealized loss at June 30, 2014 and December 31, 2013, 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
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
|
(In thousands)
|
|
June 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA pass-through certificates
|
|
$
|
209
|
|
|
$
|
(3
|
)
|
|
$
|
92
|
|
|
$
|
(1
|
)
|
|
$
|
301
|
|
|
$
|
(4
|
)
|
FHLMC pass-through certificates
|
|
|
204
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
204
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities held to maturity
|
|
|
413
|
|
|
|
(4
|
)
|
|
|
92
|
|
|
|
(1
|
)
|
|
|
505
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States government-sponsored enterprises debt
|
|
$
|
248,538
|
|
|
$
|
(356
|
)
|
|
$
|
196,643
|
|
|
$
|
(3,175
|
)
|
|
$
|
445,181
|
|
|
$
|
(3,531
|
)
|
GNMA pass-through certificates
|
|
|
|
|
|
|
|
|
|
|
17,982
|
|
|
|
(444
|
)
|
|
|
17,982
|
|
|
|
(444
|
)
|
FNMA pass-through certificates
|
|
|
54,732
|
|
|
|
(109
|
)
|
|
|
823,044
|
|
|
|
(16,705
|
)
|
|
|
877,776
|
|
|
|
(16,814
|
)
|
FHLMC pass-through certificates
|
|
|
|
|
|
|
|
|
|
|
191,791
|
|
|
|
(3,008
|
)
|
|
|
191,791
|
|
|
|
(3,008
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities available for sale
|
|
|
303,270
|
|
|
|
(465
|
)
|
|
|
1,229,460
|
|
|
|
(23,332
|
)
|
|
|
1,532,730
|
|
|
|
(23,797
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
303,683
|
|
|
$
|
(469
|
)
|
|
$
|
1,229,552
|
|
|
$
|
(23,333
|
)
|
|
$
|
1,533,235
|
|
|
$
|
(23,802
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA pass-through certificates
|
|
$
|
|
|
|
$
|
|
|
|
$
|
65
|
|
|
$
|
(1
|
)
|
|
$
|
65
|
|
|
$
|
(1
|
)
|
FHLMC pass-through certificates
|
|
|
166
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
166
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities held to maturity
|
|
|
166
|
|
|
|
(1
|
)
|
|
|
65
|
|
|
|
(1
|
)
|
|
|
231
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States government-sponsored enterprises debt
|
|
$
|
290,194
|
|
|
$
|
(7,996
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
290,194
|
|
|
$
|
(7,996
|
)
|
GNMA pass-through certificates
|
|
|
35,971
|
|
|
|
(1,396
|
)
|
|
|
|
|
|
|
|
|
|
|
35,971
|
|
|
|
(1,396
|
)
|
FNMA pass-through certificates
|
|
|
1,478,488
|
|
|
|
(39,800
|
)
|
|
|
|
|
|
|
|
|
|
|
1,478,488
|
|
|
|
(39,800
|
)
|
FHLMC pass-through certificates
|
|
|
434,059
|
|
|
|
(8,947
|
)
|
|
|
|
|
|
|
|
|
|
|
434,059
|
|
|
|
(8,947
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities available for sale
|
|
|
2,238,712
|
|
|
|
(58,139
|
)
|
|
|
|
|
|
|
|
|
|
|
2,238,712
|
|
|
|
(58,139
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,238,878
|
|
|
$
|
(58,140
|
)
|
|
$
|
65
|
|
|
$
|
(1
|
)
|
|
$
|
2,238,943
|
|
|
$
|
(58,141
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The unrealized losses of our held to maturity and available-for-sale securities are primarily due to the changes in market
interest rates subsequent to purchase. At June 30, 2014, a total of 60 securities were in an unrealized loss position compared to 82 at December 31, 2013. We do not consider these investments to be other-than-temporarily impaired at
June 30, 2014 and December 31, 2013 since the decline in market value is attributable to changes in interest rates and not credit quality. In addition, the Company does not intend to sell and does not believe that it is more likely than
not that we will be required to sell these investments until there is a full recovery of the unrealized loss, which may be at maturity. As a result no impairment loss was recognized during the six months ended June 30, 2014.
Page 15
Notes to Unaudited Consolidated Financial Statements
The amortized cost and estimated fair market value of our securities held to maturity and available-for-sale
at June 30, 2014, by contractual maturity, are shown below. The table does not include the effect of prepayments or scheduled principal amortization. The expected maturity may differ from the contractual maturity because issuers may have the
right to call or prepay obligations. Equity securities have been excluded from this table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
|
Estimated
Fair Market
|
|
|
|
Mortgage-backed
|
|
|
Investment
|
|
|
|
|
securities
|
|
|
securities
|
|
|
Value
|
|
|
|
(In thousands)
|
|
June 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
9
|
|
|
$
|
|
|
|
$
|
9
|
|
Due after one year through five years
|
|
|
3,134
|
|
|
|
|
|
|
|
3,246
|
|
Due after five years through ten years
|
|
|
38,529
|
|
|
|
|
|
|
|
40,539
|
|
Due after ten years
|
|
|
1,474,994
|
|
|
|
39,011
|
|
|
|
1,609,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held to maturity
|
|
$
|
1,516,666
|
|
|
$
|
39,011
|
|
|
$
|
1,653,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Due after one year through five years
|
|
$
|
|
|
|
$
|
899,159
|
|
|
$
|
895,779
|
|
Due after five years through ten years
|
|
|
17,397
|
|
|
|
|
|
|
|
19,282
|
|
Due after ten years
|
|
|
5,671,763
|
|
|
|
|
|
|
|
5,761,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
|
|
$
|
5,689,160
|
|
|
$
|
899,159
|
|
|
$
|
6,676,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of mortgage-backed securities held-to-maturity amounted to $122.5 million for the six months ended June 30, 2014,
resulting in a realized gain of $6.6 million. The sale of the held-to-maturity securities were made after the Company had collected at least 85% of the initial principal balance. There were no sales of mortgage-backed securities held-to-maturity for
the six months ended June 30, 2013.
Sales of mortgage-backed securities available-for-sale amounted to $862.4 million for the six months ended
June 30, 2014, resulting in a realized gain of $28.9 million. There were no sales of mortgage-backed securities available-for-sale for the six months ended June 30, 2013.
There were no sales of investment securities available-for-sale or held to maturity for the six months ended June 30, 2014. There were sales of $405.7
million of investment securities available-for-sale during the six months ended June 30, 2013 resulting in a realized gain of $7.2 million. There were no sales of investment securities held to maturity during the six months ended June 30,
2013. Gains and losses on the sale of all securities are determined using the specific identification method.
5.
|
Stock Repurchase Programs
|
Pursuant to 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 six
months ended June 30, 2014. Included in treasury stock are vested shares related to stock awards that were surrendered for withholding taxes. These shares are included in purchases of vested stock awards surrendered for withholding taxes in the
consolidated statements of cash flows and amounted to
Page 16
Notes to Unaudited Consolidated Financial Statements
169,091 shares for the six months ended June 30, 2014. There were no shares surrendered for withholding taxes for the six months ended June 30, 2013. As of June 30, 2014, there
remained 50,123,550 shares that may be purchased under the existing stock repurchase programs.
6.
|
Loans and Allowance for Loan Losses
|
Loans at June 30, 2014 and December 31, 2013 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
|
December 31, 2013
|
|
|
|
(In thousands)
|
|
First mortgage loans:
|
|
|
|
|
|
|
|
|
One- to four-family Amortizing
|
|
$
|
18,907,354
|
|
|
$
|
19,518,912
|
|
Interest-only
|
|
|
3,283,509
|
|
|
|
3,648,732
|
|
FHA/VA
|
|
|
740,159
|
|
|
|
704,532
|
|
Multi-family and commercial
|
|
|
18,812
|
|
|
|
25,671
|
|
Construction
|
|
|
177
|
|
|
|
294
|
|
|
|
|
|
|
|
|
|
|
Total first mortgage loans
|
|
|
22,950,011
|
|
|
|
23,898,141
|
|
|
|
|
|
|
|
|
|
|
Consumer and other loans:
|
|
|
|
|
|
|
|
|
Fixedrate second mortgages
|
|
|
79,392
|
|
|
|
86,079
|
|
Home equity credit lines
|
|
|
105,732
|
|
|
|
108,550
|
|
Other
|
|
|
19,576
|
|
|
|
20,059
|
|
|
|
|
|
|
|
|
|
|
Total consumer and other loans
|
|
|
204,700
|
|
|
|
214,688
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
23,154,711
|
|
|
$
|
24,112,829
|
|
|
|
|
|
|
|
|
|
|
There were no loans held for sale at June 30, 2014 and December 31, 2013.
The following tables present the composition of our loan portfolio by credit quality indicator at the dates indicated:
Credit Risk Profile based on Payment Activity
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to four-
family
|
|
|
Other first
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
first mortgage loans
|
|
|
Mortgages
|
|
|
Consumer and Other
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
|
|
|
Fixed-rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
|
|
|
|
second
|
|
|
Home Equity
|
|
|
|
|
|
|
|
|
|
Amortizing
|
|
|
Interest-only
|
|
|
Commercial
|
|
|
Construction
|
|
|
mortgages
|
|
|
credit lines
|
|
|
Other
|
|
|
|
|
June 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing
|
|
$
|
18,763,845
|
|
|
$
|
3,167,612
|
|
|
$
|
17,768
|
|
|
$
|
|
|
|
$
|
77,825
|
|
|
$
|
101,476
|
|
|
$
|
17,932
|
|
|
$
|
22,146,458
|
|
Non-performing
|
|
|
883,668
|
|
|
|
115,897
|
|
|
|
1,044
|
|
|
|
177
|
|
|
|
1,567
|
|
|
|
4,256
|
|
|
|
1,644
|
|
|
|
1,008,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
19,647,513
|
|
|
$
|
3,283,509
|
|
|
$
|
18,812
|
|
|
$
|
177
|
|
|
$
|
79,392
|
|
|
$
|
105,732
|
|
|
$
|
19,576
|
|
|
$
|
23,154,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing
|
|
$
|
19,319,959
|
|
|
$
|
3,513,504
|
|
|
$
|
22,482
|
|
|
$
|
|
|
|
$
|
84,667
|
|
|
$
|
104,655
|
|
|
$
|
18,318
|
|
|
$
|
23,063,585
|
|
Non-performing
|
|
|
903,485
|
|
|
|
135,228
|
|
|
|
3,189
|
|
|
|
294
|
|
|
|
1,412
|
|
|
|
3,895
|
|
|
|
1,741
|
|
|
|
1,049,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
20,223,444
|
|
|
$
|
3,648,732
|
|
|
$
|
25,671
|
|
|
$
|
294
|
|
|
$
|
86,079
|
|
|
$
|
108,550
|
|
|
$
|
20,059
|
|
|
$
|
24,112,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 17
Notes to Unaudited Consolidated Financial Statements
Credit Risk Profile by Internally Assigned Grade
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to four-family
|
|
|
Other first
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
first mortgage loans
|
|
|
Mortgages
|
|
|
Consumer and Other
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
|
|
|
Fixed-rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
|
|
|
|
second
|
|
|
Home Equity
|
|
|
|
|
|
|
|
|
|
Amortizing
|
|
|
Interest-only
|
|
|
Commercial
|
|
|
Construction
|
|
|
mortgages
|
|
|
credit lines
|
|
|
Other
|
|
|
|
|
June 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
18,672,404
|
|
|
$
|
3,131,156
|
|
|
$
|
11,806
|
|
|
$
|
|
|
|
$
|
76,790
|
|
|
$
|
98,939
|
|
|
$
|
17,441
|
|
|
$
|
22,008,536
|
|
Special mention
|
|
|
88,417
|
|
|
|
20,641
|
|
|
|
701
|
|
|
|
|
|
|
|
76
|
|
|
|
1,193
|
|
|
|
40
|
|
|
|
111,068
|
|
Substandard
|
|
|
886,692
|
|
|
|
131,712
|
|
|
|
6,305
|
|
|
|
177
|
|
|
|
2,526
|
|
|
|
5,600
|
|
|
|
2,095
|
|
|
|
1,035,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
19,647,513
|
|
|
$
|
3,283,509
|
|
|
$
|
18,812
|
|
|
$
|
177
|
|
|
$
|
79,392
|
|
|
$
|
105,732
|
|
|
$
|
19,576
|
|
|
$
|
23,154,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
19,218,917
|
|
|
$
|
3,480,909
|
|
|
$
|
15,281
|
|
|
$
|
|
|
|
$
|
84,233
|
|
|
$
|
102,364
|
|
|
$
|
17,157
|
|
|
$
|
22,918,861
|
|
Special mention
|
|
|
108,957
|
|
|
|
19,866
|
|
|
|
980
|
|
|
|
|
|
|
|
129
|
|
|
|
875
|
|
|
|
45
|
|
|
|
130,852
|
|
Substandard
|
|
|
895,570
|
|
|
|
147,957
|
|
|
|
9,410
|
|
|
|
294
|
|
|
|
1,717
|
|
|
|
5,311
|
|
|
|
2,857
|
|
|
|
1,063,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
20,223,444
|
|
|
$
|
3,648,732
|
|
|
$
|
25,671
|
|
|
$
|
294
|
|
|
$
|
86,079
|
|
|
$
|
108,550
|
|
|
$
|
20,059
|
|
|
$
|
24,112,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. 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 troubled debt restructurings, 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.
Residential mortgage loans that are classified as troubled debt restructurings are individually evaluated for impairment based on the present value of each loans expected future cash flows.
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 June 30, 2014, approximately 84.8% of our total loans are in the New York metropolitan area.
Included in
our loan portfolio at June 30, 2014 and December 31, 2013 are $3.28 billion and $3.65 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 $115.9 million and $135.2 million of non-performing interest-only one-to four-family residential mortgage loans at June 30, 2014 and December 31, 2013, respectively.
In addition to our full documentation loan program, prior to January 2014, we originated loans to certain eligible borrowers as reduced documentation loans.
We discontinued our reduced documentation loan program in January 2014 in order to comply with the Consumer Financial Protection Bureaus (the CFPB) new requirements to validate a borrowers ability to repay and the
corresponding safe harbor for loans that meet the requirements for a qualified mortgage. Loans that were eligible for reduced documentation processing were 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 were 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 reduced documentation
loans was $750,000 and these loans were subject to higher interest rates than our full documentation loan products. Reduced documentation loans have an inherently higher level of risk compared to loans with full documentation. Reduced documentation
loans represent 21.6% of our one- to four-family first mortgage loans at June 30, 2014. Included in our loan portfolio at June 30, 2014 are $4.24 billion of amortizing reduced documentation loans and $721.0 million of reduced documentation
interest-only loans as compared to $4.27 billion and $826.5 million, respectively, at December 31, 2013. Non-performing loans at June 30, 2014 include $186.2 million of amortizing reduced documentation loans and $40.1 million of
interest-only reduced documentation loans as compared to $182.9 million and $48.8 million, respectively, at December 31, 2013.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90 Days or
|
|
|
|
|
|
|
|
|
|
90 Days
|
|
|
Total
|
|
|
Current
|
|
|
Total
|
|
|
more and
|
|
|
|
30-59 Days
|
|
|
60-89 Days
|
|
|
or more
|
|
|
Past Due
|
|
|
Loans
|
|
|
Loans
|
|
|
accruing (1)
|
|
|
|
(In thousands)
|
|
At June 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family first mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizing
|
|
$
|
238,310
|
|
|
$
|
108,740
|
|
|
$
|
883,668
|
|
|
$
|
1,230,718
|
|
|
$
|
18,416,795
|
|
|
$
|
19,647,513
|
|
|
$
|
134,417
|
|
Interest-only
|
|
|
32,776
|
|
|
|
21,514
|
|
|
|
115,897
|
|
|
|
170,187
|
|
|
|
3,113,322
|
|
|
|
3,283,509
|
|
|
|
|
|
Multi-family and commercial mortgages
|
|
|
1,845
|
|
|
|
4,552
|
|
|
|
1,044
|
|
|
|
7,441
|
|
|
|
11,371
|
|
|
|
18,812
|
|
|
|
|
|
Construction loans
|
|
|
|
|
|
|
|
|
|
|
177
|
|
|
|
177
|
|
|
|
|
|
|
|
177
|
|
|
|
|
|
Consumer and other loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate second mortgages
|
|
|
549
|
|
|
|
219
|
|
|
|
1,567
|
|
|
|
2,335
|
|
|
|
77,057
|
|
|
|
79,392
|
|
|
|
|
|
Home equity lines of credit
|
|
|
610
|
|
|
|
1,474
|
|
|
|
4,256
|
|
|
|
6,340
|
|
|
|
99,392
|
|
|
|
105,732
|
|
|
|
|
|
Other
|
|
|
773
|
|
|
|
40
|
|
|
|
1,644
|
|
|
|
2,457
|
|
|
|
17,119
|
|
|
|
19,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
274,863
|
|
|
$
|
136,539
|
|
|
$
|
1,008,253
|
|
|
$
|
1,419,655
|
|
|
$
|
21,735,056
|
|
|
$
|
23,154,711
|
|
|
$
|
134,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family first mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizing
|
|
$
|
274,303
|
|
|
$
|
132,910
|
|
|
$
|
903,485
|
|
|
$
|
1,310,698
|
|
|
$
|
18,912,746
|
|
|
$
|
20,223,444
|
|
|
$
|
132,844
|
|
Interest-only
|
|
|
34,277
|
|
|
|
21,283
|
|
|
|
135,228
|
|
|
|
190,788
|
|
|
|
3,457,944
|
|
|
|
3,648,732
|
|
|
|
|
|
Multi-family and commercial mortgages
|
|
|
1,384
|
|
|
|
5,983
|
|
|
|
3,189
|
|
|
|
10,556
|
|
|
|
15,115
|
|
|
|
25,671
|
|
|
|
|
|
Construction loans
|
|
|
|
|
|
|
|
|
|
|
294
|
|
|
|
294
|
|
|
|
|
|
|
|
294
|
|
|
|
|
|
Consumer and other loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate second mortgages
|
|
|
484
|
|
|
|
129
|
|
|
|
1,412
|
|
|
|
2,025
|
|
|
|
84,054
|
|
|
|
86,079
|
|
|
|
|
|
Home equity lines of credit
|
|
|
1,389
|
|
|
|
1,163
|
|
|
|
3,895
|
|
|
|
6,447
|
|
|
|
102,103
|
|
|
|
108,550
|
|
|
|
|
|
Other
|
|
|
58
|
|
|
|
45
|
|
|
|
1,741
|
|
|
|
1,844
|
|
|
|
18,215
|
|
|
|
20,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
311,895
|
|
|
$
|
161,513
|
|
|
$
|
1,049,244
|
|
|
$
|
1,522,652
|
|
|
$
|
22,590,177
|
|
|
$
|
24,112,829
|
|
|
$
|
132,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Loans that are past due 90 days or more and still accruing interest are loans that are guaranteed by the FHA.
|
The following table presents the geographic distribution of our loan portfolio as a percentage of total loans and of our non-performing loans as a percentage
of total non-performing loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2014
|
|
|
At December 31, 2013
|
|
|
|
|
|
|
Non-performing
|
|
|
|
|
|
Non-performing
|
|
|
|
Total loans
|
|
|
Loans
|
|
|
Total loans
|
|
|
Loans
|
|
New Jersey
|
|
|
42.4
|
%
|
|
|
42.4
|
%
|
|
|
42.5
|
%
|
|
|
44.2
|
%
|
New York
|
|
|
27.6
|
|
|
|
24.9
|
|
|
|
27.1
|
|
|
|
24.1
|
|
Connecticut
|
|
|
14.8
|
|
|
|
8.5
|
|
|
|
14.9
|
|
|
|
8.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total New York metropolitan area
|
|
|
84.8
|
|
|
|
75.8
|
|
|
|
84.5
|
|
|
|
76.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pennsylvania
|
|
|
4.9
|
|
|
|
2.7
|
|
|
|
4.9
|
|
|
|
2.4
|
|
Massachusetts
|
|
|
1.9
|
|
|
|
1.7
|
|
|
|
1.8
|
|
|
|
1.6
|
|
Virginia
|
|
|
1.7
|
|
|
|
2.4
|
|
|
|
1.8
|
|
|
|
2.3
|
|
Maryland
|
|
|
1.6
|
|
|
|
4.9
|
|
|
|
1.7
|
|
|
|
4.7
|
|
Illinois
|
|
|
1.5
|
|
|
|
4.9
|
|
|
|
1.6
|
|
|
|
4.8
|
|
All others
|
|
|
3.6
|
|
|
|
7.6
|
|
|
|
3.7
|
|
|
|
7.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Outside New York metropolitan area
|
|
|
15.2
|
|
|
|
24.2
|
|
|
|
15.5
|
|
|
|
23.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 June 30, 2014 and December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
|
December 31, 2013
|
|
|
|
(In thousands)
|
|
Non-accrual loans:
|
|
|
|
|
|
|
|
|
One-to four-family amortizing loans
|
|
$
|
749,251
|
|
|
$
|
770,641
|
|
One-to four-family interest-only loans
|
|
|
115,897
|
|
|
|
135,228
|
|
Multi-family and commercial mortgages
|
|
|
1,044
|
|
|
|
3,189
|
|
Construction loans
|
|
|
177
|
|
|
|
294
|
|
Fixed-rate second mortgages
|
|
|
1,567
|
|
|
|
1,412
|
|
Home equity lines of credit
|
|
|
4,256
|
|
|
|
3,895
|
|
Other loans
|
|
|
1,644
|
|
|
|
1,741
|
|
|
|
|
|
|
|
|
|
|
Total non-accrual loans
|
|
|
873,836
|
|
|
|
916,400
|
|
Accruing loans delinquent 90 days or more (1)
|
|
|
134,417
|
|
|
|
132,844
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans
|
|
$
|
1,008,253
|
|
|
$
|
1,049,244
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Loans that are past due 90 days or more and still accruing interest are loans that are insured by the FHA.
|
The total amount of interest income on non-accrual loans that would have been recognized during the first six months of 2014, if interest on all such loans
had been recorded based upon original contract terms, amounted to approximately $27.8 million as compared to $30.4 million for the same period in 2013. Hudson City Savings is not committed to lend additional funds to borrowers on non-accrual status.
Non-performing loans exclude troubled debt restructurings that are accruing and have been performing in accordance with the terms of their restructure
agreement for at least six months. The following table presents information regarding loans modified in a troubled debt restructuring at June 30, 2014 and December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
|
December 31, 2013
|
|
|
|
(In thousands)
|
|
Troubled debt restructurings:
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
118,850
|
|
|
$
|
108,413
|
|
30-59 days
|
|
|
25,288
|
|
|
|
19,931
|
|
60-89 days
|
|
|
15,466
|
|
|
|
17,407
|
|
90 days or more
|
|
|
161,165
|
|
|
|
176,797
|
|
|
|
|
|
|
|
|
|
|
Total troubled debt restructurings
|
|
$
|
320,769
|
|
|
$
|
322,548
|
|
|
|
|
|
|
|
|
|
|
Page 21
Notes to Unaudited Consolidated Financial Statements
The following table presents loan portfolio class modified as troubled debt restructurings at June 30,
2014 and December 31, 2013. The pre-restructuring and post-restructuring outstanding recorded investments disclosed in the table below represent the loan carrying amounts immediately prior to the restructuring and the carrying amounts at
June 30, 2014 and December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
|
December 31, 2013
|
|
|
|
|
|
|
Pre-restructuring
|
|
|
Post-restructuring
|
|
|
|
|
|
Pre-restructuring
|
|
|
Post-restructuring
|
|
|
|
Number
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
Number
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
|
of
|
|
|
Recorded
|
|
|
Recorded
|
|
|
of
|
|
|
Recorded
|
|
|
Recorded
|
|
|
|
Contracts
|
|
|
Investment
|
|
|
Investment
|
|
|
Contracts
|
|
|
Investment
|
|
|
Investment
|
|
|
|
(Dollars in thousands)
|
|
Troubled debt restructurings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to four- family first mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizing
|
|
|
934
|
|
|
$
|
328,995
|
|
|
$
|
282,158
|
|
|
|
933
|
|
|
$
|
318,908
|
|
|
$
|
281,481
|
|
Interest-only
|
|
|
57
|
|
|
|
34,502
|
|
|
|
30,112
|
|
|
|
55
|
|
|
|
35,226
|
|
|
|
31,564
|
|
Multi-family and commercial mortgages
|
|
|
2
|
|
|
|
7,911
|
|
|
|
4,744
|
|
|
|
2
|
|
|
|
7,029
|
|
|
|
7,029
|
|
Consumer and other loans
|
|
|
34
|
|
|
|
4,006
|
|
|
|
3,755
|
|
|
|
24
|
|
|
|
2,672
|
|
|
|
2,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,027
|
|
|
$
|
375,414
|
|
|
$
|
320,769
|
|
|
|
1,014
|
|
|
$
|
363,835
|
|
|
$
|
322,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 as well as the related allowance for loan losses based on the impairment analysis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded
|
|
|
Unpaid
Principal
|
|
|
Related
|
|
|
Average
Recorded
|
|
|
Interest
Income
|
|
|
|
Investment
|
|
|
Balance
|
|
|
Allowance
|
|
|
Investment
|
|
|
Recognized
|
|
|
|
(In thousands)
|
|
June 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to four-family amortizing loans
|
|
$
|
282,158
|
|
|
$
|
326,043
|
|
|
$
|
|
|
|
$
|
304,768
|
|
|
$
|
3,731
|
|
One-to four-family interest-only loans
|
|
|
30,112
|
|
|
|
35,002
|
|
|
|
|
|
|
|
32,562
|
|
|
|
407
|
|
Multi-family and commercial mortgages
|
|
|
5,157
|
|
|
|
8,545
|
|
|
|
1
|
|
|
|
5,123
|
|
|
|
184
|
|
Construction loans
|
|
|
177
|
|
|
|
292
|
|
|
|
|
|
|
|
293
|
|
|
|
|
|
Consumer and other loans
|
|
|
3,487
|
|
|
|
3,755
|
|
|
|
268
|
|
|
|
3,793
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
321,091
|
|
|
$
|
373,637
|
|
|
$
|
269
|
|
|
$
|
346,539
|
|
|
$
|
4,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to four-family amortizing loans
|
|
$
|
281,481
|
|
|
$
|
319,783
|
|
|
$
|
|
|
|
$
|
301,291
|
|
|
$
|
7,013
|
|
One-to four-family interest-only loans
|
|
|
31,564
|
|
|
|
35,924
|
|
|
|
|
|
|
|
33,398
|
|
|
|
854
|
|
Multi-family and commercial mortgages
|
|
|
8,002
|
|
|
|
9,289
|
|
|
|
414
|
|
|
|
8,307
|
|
|
|
368
|
|
Construction loans
|
|
|
181
|
|
|
|
294
|
|
|
|
113
|
|
|
|
295
|
|
|
|
|
|
Consumer and other loans:
|
|
|
2,411
|
|
|
|
2,474
|
|
|
|
63
|
|
|
|
2,575
|
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
323,639
|
|
|
$
|
367,764
|
|
|
$
|
590
|
|
|
$
|
345,866
|
|
|
$
|
8,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 June 30,
|
|
|
For the Six Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
(In thousands)
|
|
Balance at beginning of period
|
|
$
|
265,732
|
|
|
$
|
301,093
|
|
|
$
|
276,097
|
|
|
$
|
302,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
|
(15,709
|
)
|
|
|
(20,896
|
)
|
|
|
(32,241
|
)
|
|
|
(48,282
|
)
|
Recoveries
|
|
|
4,988
|
|
|
|
4,591
|
|
|
|
11,155
|
|
|
|
10,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(10,721
|
)
|
|
|
(16,305
|
)
|
|
|
(21,086
|
)
|
|
|
(37,560
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
|
|
|
|
12,500
|
|
|
|
|
|
|
|
32,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
255,011
|
|
|
$
|
297,288
|
|
|
$
|
255,011
|
|
|
$
|
297,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the activity in our ALL by portfolio segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to four-
|
|
|
Multi-family
|
|
|
|
|
|
|
|
|
|
|
|
|
Family
|
|
|
and Commercial
|
|
|
|
|
|
Consumer and
|
|
|
|
|
|
|
Mortgages
|
|
|
Mortgages
|
|
|
Construction
|
|
|
Other Loans
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Balance at December 31, 2013
|
|
$
|
271,261
|
|
|
$
|
805
|
|
|
$
|
113
|
|
|
$
|
3,918
|
|
|
$
|
276,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
(1,592
|
)
|
|
|
2,078
|
|
|
|
2
|
|
|
|
(488
|
)
|
|
|
|
|
Charge-offs
|
|
|
(29,220
|
)
|
|
|
(2,515
|
)
|
|
|
(115
|
)
|
|
|
(391
|
)
|
|
|
(32,241
|
)
|
Recoveries
|
|
|
10,711
|
|
|
|
|
|
|
|
|
|
|
|
444
|
|
|
|
11,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(18,509
|
)
|
|
|
(2,515
|
)
|
|
|
(115
|
)
|
|
|
53
|
|
|
|
(21,086
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2014
|
|
$
|
251,160
|
|
|
$
|
368
|
|
|
$
|
|
|
|
$
|
3,483
|
|
|
$
|
255,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
312,269
|
|
|
$
|
5,158
|
|
|
$
|
177
|
|
|
$
|
3,755
|
|
|
$
|
321,359
|
|
Collectively evaluated for impairment
|
|
|
22,618,752
|
|
|
|
13,654
|
|
|
|
|
|
|
|
200,945
|
|
|
|
22,833,351
|
|
Allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
19,709
|
|
|
$
|
1
|
|
|
$
|
|
|
|
$
|
268
|
|
|
$
|
19,978
|
|
Collectively evaluated for impairment
|
|
|
231,451
|
|
|
|
367
|
|
|
|
|
|
|
|
3,215
|
|
|
|
235,033
|
|
Historically, our primary lending emphasis has been 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 June 30, 2014. 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. As of June 30, 2014, approximately 84.8% of our total loans are in the New York metropolitan area. Additionally, the
states of Pennsylvania, Massachusetts, Virginia, Maryland and Illinois, accounted for 4.9%, 1.9%, 1.7%, 1.6%, and 1.5%, respectively of total loans. The remaining 3.6% 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, we believe the primary risks inherent in our portfolio relate to the conditions in our lending market areas including economic conditions, unemployment levels, rising interest rates
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, charge-offs and future levels of loan loss provisions.
We consider these trends in market conditions in determining the ALL.
Page 23
Notes to Unaudited Consolidated Financial Statements
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, interest-only, reduced documentation,
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 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 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 13.1% at
June 30, 2014 compared to 13.6% at December 31, 2013.
One-to four-family mortgage loans that are individually evaluated for impairment consist
primarily of troubled debt restructurings. If our evaluation indicates that the loan is impaired, we record a charge-off for the amount of the impairment. Loans that were individually evaluated for impairment, but would otherwise be evaluated on a
pooled basis, are included in the collective evaluation if the individual evaluation indicated no impairment existed. This collective evaluation of one-to four-family mortgage loans that were also individually evaluated for impairment (but for which
no impairment existed) resulted in an ALL of $19.7 million at June 30, 2014.
The ultimate ability to collect the loan portfolio is subject to
changes in the real estate market and future economic conditions. Economic conditions in our primary market area continued to improve modestly during the second quarter of 2014 as evidenced by increased levels of home sale activity, higher real
estate valuations and a decrease in the unemployment rate which, while improving, remains elevated. We continue to closely monitor the local and national real estate markets and other factors related to risks inherent in our loan portfolio.
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. 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. An increase in loan delinquencies would decrease our net interest income and may adversely impact our loss experience on non-performing loans which may
result in an increase in the loss factors used in our quantitative analysis of the ALL, causing increases in our provision and ALL. Although we use the best information available, the level of the ALL remains an estimate that is subject to
significant judgment and short-term change.
Page 24
Notes to Unaudited Consolidated Financial Statements
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 $21.1 million for the six months ended June 30, 2014 as
compared to $37.6 million for the corresponding period in 2013.
Borrowed funds at June 30, 2014 and December 31, 2013 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
|
December 31, 2013
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Principal
|
|
|
Rate
|
|
|
Principal
|
|
|
Rate
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Securities sold under agreements to repurchase:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB
|
|
$
|
|
|
|
|
|
%
|
|
$
|
800,000
|
|
|
|
4.53
|
%
|
Other financial institutions
|
|
|
6,150,000
|
|
|
|
4.44
|
|
|
|
6,150,000
|
|
|
|
4.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities sold under agreements to repurchase
|
|
|
6,150,000
|
|
|
|
4.44
|
|
|
|
6,950,000
|
|
|
|
4.45
|
|
Advances from the FHLB
|
|
|
6,025,000
|
|
|
|
4.75
|
|
|
|
5,225,000
|
|
|
|
4.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowed funds
|
|
$
|
12,175,000
|
|
|
|
4.59
|
%
|
|
$
|
12,175,000
|
|
|
|
4.59
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest payable
|
|
$
|
66,932
|
|
|
|
|
|
|
$
|
64,061
|
|
|
|
|
|
The average balances of borrowings and the maximum amount outstanding at any month-end are as follows:
|
|
|
|
|
|
|
|
|
|
|
At or For the Six
|
|
|
At or For the
|
|
|
|
Months Ended
|
|
|
Year Ended
|
|
|
|
June 30, 2014
|
|
|
December 31, 2013
|
|
|
|
(Dollars in thousands)
|
|
Repurchase Agreements:
|
|
|
|
|
|
|
|
|
Average balance outstanding during the period
|
|
$
|
6,401,934
|
|
|
$
|
6,950,000
|
|
|
|
|
|
|
|
|
|
|
Maximum balance outstanding at any month-end during the period
|
|
$
|
6,950,000
|
|
|
$
|
6,950,000
|
|
|
|
|
|
|
|
|
|
|
Weighted average rate during the period
|
|
|
4.43
|
%
|
|
|
4.51
|
%
|
|
|
|
|
|
|
|
|
|
FHLB Advances:
|
|
|
|
|
|
|
|
|
Average balance outstanding during the period
|
|
$
|
5,773,066
|
|
|
$
|
5,225,000
|
|
|
|
|
|
|
|
|
|
|
Maximum balance outstanding at any month-end during the period
|
|
$
|
6,025,000
|
|
|
$
|
5,225,000
|
|
|
|
|
|
|
|
|
|
|
Weighted average rate during the period
|
|
|
4.76
|
%
|
|
|
4.84
|
%
|
|
|
|
|
|
|
|
|
|
Page 25
Notes to Unaudited Consolidated Financial Statements
At June 30, 2014, $3.88 billion of our borrowed funds may be put back to us at the discretion of the
lender. At that date, borrowed funds had scheduled maturities and potential put dates as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity Date
|
|
|
Maturity or Next Potential Put Date
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Year
|
|
Principal
|
|
|
Rate
|
|
|
Principal
|
|
|
Rate
|
|
|
|
(Dollars in thousands)
|
|
2014
|
|
$
|
|
|
|
|
|
%
|
|
$
|
3,675,500
|
|
|
|
4.39
|
%
|
2015
|
|
|
75,000
|
|
|
|
4.62
|
|
|
|
275,000
|
|
|
|
4.10
|
|
2016
|
|
|
3,925,000
|
|
|
|
4.92
|
|
|
|
3,925,000
|
|
|
|
4.92
|
|
2017
|
|
|
2,475,000
|
|
|
|
4.39
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
700,000
|
|
|
|
3.65
|
|
|
|
350,000
|
|
|
|
3.38
|
|
2019
|
|
|
1,725,000
|
|
|
|
4.62
|
|
|
|
1,325,000
|
|
|
|
4.69
|
|
2020
|
|
|
3,275,000
|
|
|
|
4.53
|
|
|
|
2,625,000
|
|
|
|
4.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,175,000
|
|
|
|
4.59
|
%
|
|
$
|
12,175,500
|
|
|
|
4.59
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the first quarter of 2014, we modified $800.0 million of FHLB repurchase agreements to be FHLB advances. This reduced
our collateral requirements related to the repurchase agreements, which use securities as collateral. FHLB advances are secured by a blanket lien on our loan portfolio. The modification resulted in an increase of six basis points in the weighted
average cost of the borrowings that were modified.
The Bank had two collateralized borrowings in the form of repurchase agreements totaling $100.0
million with Lehman Brothers, Inc. that were secured by mortgage-backed securities with an amortized cost of approximately $114.1 million. The trustee for the liquidation of Lehman Brothers, Inc. (the Trustee) notified the Bank in the
fourth quarter of 2011 that it considered our claim to be a non-customer claim, which has a lower payment preference than a customer claim and that the value of such claim is approximately $13.9 million representing the excess of the fair value of
the collateral over the $100.0 million repurchase price. At that time we established a reserve of $3.9 million against the receivable balance at December 31, 2011. On June 25, 2013, the Bankruptcy Court affirmed the Trustees
determination that the repurchase agreements did not entitle the Bank to customer status. On February 26, 2014, the U.S. District Court upheld the Bankruptcy Courts decision that our claim should be treated as a non-customer claim. As a
result of the U.S. District Courts decision, we increased our reserve by $3.0 million to $6.9 million against the receivable balance during the first quarter of 2014.
8.
|
Goodwill and Other Intangible Assets
|
Goodwill and other intangible assets amounted to $152.7 million and were recorded as a result of Hudson City Bancorps acquisition of
Sound Federal Bancorp, Inc. (Sound Federal) 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
Page 26
Notes to Unaudited Consolidated Financial Statements
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. We perform our goodwill impairment analysis annually and also perform interim impairment reviews if certain triggering events occur which may indicate that the fair value of goodwill is less than the
carrying value. Subsequent reversal of goodwill impairment losses is not permitted.
We performed our annual goodwill impairment analysis as of
June 30, 2014 and concluded that goodwill was not impaired. Therefore, we did not recognize any impairment of goodwill or other intangible assets during 2014.
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.
9.
|
Fair Value Measurements
|
a) Fair Value Measurements
We use fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. We did not have any liabilities that
were measured at fair value at June 30, 2014 and December 31, 2013. 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.
|
Page 27
We base our fair values on the price that would be received to sell an asset in an orderly transaction between
market participants at the measurement date. ASC Topic 820 requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
Assets that we measure on a recurring basis are limited to our available-for-sale securities portfolio. Our available-for-sale portfolio is carried at
estimated fair value with any unrealized gains and losses, net of taxes, reported as accumulated other comprehensive income or loss in shareholders equity. Substantially all of our available-for-sale portfolio consists of mortgage-backed
securities and investment securities issued by U.S. government-sponsored entities (the GSEs). The fair values for substantially all of these securities are obtained monthly from an independent nationally recognized pricing service. On a
monthly basis, we assess the reasonableness of the fair values obtained by reference to a second independent nationally recognized pricing service. Based on the nature of our securities, our independent pricing service provides us with prices which
are categorized as Level 2 since quoted prices in active markets for identical assets are generally not available for the majority of securities in our portfolio. Various modeling techniques are used to determine pricing for our mortgage-backed
securities, including option pricing and discounted cash flow models. The inputs to these models include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference
data. On an annual basis, we obtain the models, inputs and assumptions utilized by our pricing service and review them for reasonableness. We also own equity securities with a carrying value of $7.2 million and $7.1 million at June 30, 2014 and
December 31, 2013, respectively, for which fair values are obtained from quoted market prices in active markets and, as such, are classified as Level 1.
The following table provides the level of valuation assumptions used to determine the carrying value of our assets measured at fair value on a recurring basis
at June 30, 2014 and December 31, 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at June 30, 2014 using
|
|
|
|
|
|
|
Quoted Prices in Active
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
Carrying
|
|
|
Markets for Identical
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
Description
|
|
Value
|
|
|
Assets (Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
(In thousands)
|
|
Available for sale debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
5,781,024
|
|
|
$
|
|
|
|
$
|
5,781,024
|
|
|
$
|
|
|
U.S. government-sponsored enterprises debt
|
|
|
294,965
|
|
|
|
|
|
|
|
294,965
|
|
|
|
|
|
U.S. Treasury securities
|
|
|
600,814
|
|
|
|
|
|
|
|
600,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale debt securities
|
|
|
6,676,803
|
|
|
|
|
|
|
|
6,676,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services industry
|
|
$
|
7,224
|
|
|
$
|
7,224
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale equity securities
|
|
|
7,224
|
|
|
|
7,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale securities
|
|
$
|
6,684,027
|
|
|
$
|
7,224
|
|
|
$
|
6,676,803
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 28
Notes to Unaudited Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at December 31, 2013 using
|
|
|
|
|
|
|
Quoted Prices in Active
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
Carrying
|
|
|
Markets for Identical
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
Description
|
|
Value
|
|
|
Assets (Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
(In thousands)
|
|
Available for sale debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
7,167,555
|
|
|
$
|
|
|
|
$
|
7,167,555
|
|
|
$
|
|
|
U.S. government-sponsored enterprises debt
|
|
|
290,194
|
|
|
|
|
|
|
|
290,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale debt securities
|
|
$
|
7,457,749
|
|
|
$
|
|
|
|
$
|
7,457,749
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services industry
|
|
$
|
7,089
|
|
|
$
|
7,089
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale equity securities
|
|
|
7,089
|
|
|
|
7,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale securities
|
|
$
|
7,464,838
|
|
|
$
|
7,089
|
|
|
$
|
7,457,749
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets that were measured at fair value on a non-recurring basis at June 30, 2014 and December 31, 2013 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 Financial Accounting Standards Board (FASB)
guidance amounted to $321.4 million and $324.2 million at June 30, 2014 and December 31, 2013, respectively. Based on this evaluation, we established an ALL of $269,000 and $590,000 for those same respective periods. These impaired loans
are individually assessed to determine that the loans carrying value is not in excess of the fair value of the collateral, less estimated selling costs or the present value of the loans expected future cash flows. Impaired loans for
which the carrying value exceeded the fair value and which are recorded at fair value at June 30, 2014 and December 31, 2013 amounted to $155.1 million and $138.2 million, respectively. Loans that were individually evaluated for impairment, but
would otherwise be evaluated on a pooled basis, are included in the collective evaluation if the individual evaluation indicated no impairment existed. This collective evaluation of one-to four-family mortgage loans that were also individually
evaluated for impairment (but for which no impairment existed) resulted in an ALL of $19.7 million at June 30, 2014 and $25.0 million at December 31, 2013. 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 primarily of one-to four-family properties and amounted to $77.8 million and $70.4 million at June 30, 2014 and
December 31, 2013, respectively. Foreclosed real estate for which the carrying value exceeded fair value and which are recorded at fair value at June 30, 2014 and December 31, 2013 amounted to $23.9 million and $16.9 million, respectively.
During the first six months of 2014 and 2013, charge-offs to the allowance for loan losses related to loans that were transferred to foreclosed real estate amounted to $2.3 million and $560,000, respectively. Write downs and net gains and losses on
sale related to foreclosed real estate that were charged to non-interest expense amounted to a net gain of $670,000 and a net loss of $407,000 for those same respective periods.
Page 29
Notes to Unaudited Consolidated Financial Statements
The following table provides the level of valuation assumptions used to determine the carrying value,
included in the Consolidated Statements of Financial Condition, of our assets measured at fair value on a non-recurring basis at June 30, 2014 and December 31, 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at June 30, 2014 using
|
|
|
|
|
|
|
Quoted Prices in Active
|
|
|
Significant Other
|
|
|
Significant
|
|
|
Total
|
|
|
|
Markets for Identical
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
|
Gains
|
|
Description
|
|
Assets (Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
(Losses)
|
|
|
|
(In thousands)
|
|
Impaired loans
|
|
$
|
|
|
|
$
|
|
|
|
$
|
155,054
|
|
|
$
|
(5,140
|
)
|
Foreclosed real estate
|
|
|
|
|
|
|
|
|
|
|
23,925
|
|
|
|
670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2013 using
|
|
|
|
|
|
|
Quoted Prices in Active
|
|
|
Significant Other
|
|
|
Significant
|
|
|
Total
|
|
|
|
Markets for Identical
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
|
Gains
|
|
Description
|
|
Assets (Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
(Losses)
|
|
|
|
(In thousands)
|
|
Impaired loans
|
|
$
|
|
|
|
$
|
|
|
|
$
|
138,171
|
|
|
$
|
(3,100
|
)
|
Foreclosed real estate
|
|
|
|
|
|
|
|
|
|
|
16,867
|
|
|
|
1,661
|
|
The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured
at fair value on a non-recurring basis at June 30, 2014.
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
|
Valuation
|
|
Unobservable
|
|
Range of
|
Description
|
|
Fair Value
|
|
|
Technique
|
|
Input
|
|
Inputs
|
|
|
(Dollars in thousands)
|
Impaired loans
|
|
$
|
155,054
|
|
|
Net Present Value
|
|
Discount rate
|
|
Varies
|
|
|
|
|
|
|
|
|
|
|
|
Appraisal Value
|
|
Discount for costs to sell
|
|
13.0%
|
|
|
|
|
|
|
|
|
Adjustment for differences between comparable sales.
|
|
Varies
|
|
|
|
|
|
Foreclosed real estate
|
|
|
23,925
|
|
|
Appraisal Value
|
|
Discount for costs to sell
|
|
13.0%
|
|
|
|
|
|
|
|
|
Adjustment for differences between comparable sales.
|
|
Varies
|
Page 30
Notes to Unaudited Consolidated Financial Statements
b) Fair Value Disclosures
The fair value of financial instruments represents the estimated amounts at which the asset or liability could be exchanged in a current transaction between
willing parties, other than in a forced liquidation sale. These estimates are subjective in nature, involve uncertainties and matters of judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect
the estimates. Further, certain tax implications related to the realization of the unrealized gains and losses could have a substantial impact on these fair value estimates and have not been incorporated into any of the estimates.
Cash and due from Banks
Carrying amounts of cash, due
from banks and federal funds sold are considered to approximate fair value (Level 1).
FHLB Stock
The carrying value of FHLB stock equals cost. The fair value of FHLB stock is based on redemption at par value (Level 1).
Loans
The fair value of one- to four-family mortgages
and home equity loans are generally estimated using the present value of expected future cash flows, assuming future prepayments and using market rates for new loans with comparable credit risk. Published pricing in the secondary and securitization
markets was also utilized to assist in the fair value of the loan portfolio (Level 3). The valuation of our loan portfolio is consistent with accounting guidance but does not fully incorporate the exit price approach.
Deposits
For deposit liabilities payable on demand, the
fair value is the carrying value at the reporting date (Level 1). For time deposits the fair value is estimated by discounting estimated future cash flows using currently offered rates (Level 2).
Borrowed Funds
The fair value of fixed-maturity borrowed
funds is estimated by discounting estimated future cash flows using currently offered rates (Level 2). Structured borrowed funds are valued using an option valuation model which uses assumptions for anticipated calls of borrowings based on market
interest rates and weighted-average life (Level 2).
Off-balance Sheet Financial Instruments
There is no material difference between the fair value and the carrying amounts recognized with respect to our off-balance sheet commitments (Level 3).
Other important elements that are not deemed to be financial assets or liabilities and, therefore, not considered in these estimates include the value of
Hudson City Savings retail branch delivery system, its existing core deposit base and banking premises and equipment.
Page 31
Notes to Unaudited Consolidated Financial Statements
The estimated fair values of financial instruments are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
|
December 31, 2013
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
Carrying
|
|
|
Estimated
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
128,637
|
|
|
$
|
128,637
|
|
|
$
|
133,665
|
|
|
$
|
133,665
|
|
Federal funds sold and other overnight deposits
|
|
|
5,322,044
|
|
|
|
5,322,044
|
|
|
|
4,190,809
|
|
|
|
4,190,809
|
|
Investment securities held to maturity
|
|
|
39,011
|
|
|
|
42,350
|
|
|
|
39,011
|
|
|
|
42,727
|
|
Investment securities available for sale
|
|
|
903,003
|
|
|
|
903,003
|
|
|
|
297,283
|
|
|
|
297,283
|
|
Federal Home Loan Bank of New York stock
|
|
|
337,295
|
|
|
|
337,295
|
|
|
|
347,102
|
|
|
|
347,102
|
|
Mortgage-backed securities held to maturity
|
|
|
1,516,666
|
|
|
|
1,610,817
|
|
|
|
1,784,464
|
|
|
|
1,888,823
|
|
Mortgage-backed securities available for sale
|
|
|
5,781,024
|
|
|
|
5,781,024
|
|
|
|
7,167,555
|
|
|
|
7,167,555
|
|
Loans
|
|
|
23,004,297
|
|
|
|
24,185,021
|
|
|
|
23,942,212
|
|
|
|
25,245,987
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
20,513,835
|
|
|
|
20,618,167
|
|
|
|
21,472,329
|
|
|
|
21,590,537
|
|
Borrowed funds
|
|
|
12,175,000
|
|
|
|
13,729,059
|
|
|
|
12,175,000
|
|
|
|
13,621,332
|
|
10.
|
Postretirement Benefit Plans
|
We maintain non-contributory retirement and post-retirement plans to cover employees hired prior to August 1, 2005, including retired
employees, who have met the eligibility requirements of the plans. Benefits under the qualified and non-qualified defined benefit retirement plans are based primarily on years of service and compensation. Funding of the qualified retirement plan is
actuarially determined on an annual basis. It is our policy to fund the qualified retirement plan sufficiently to meet the minimum requirements set forth in the Employee Retirement Income Security Act of 1974. The non-qualified retirement plan,
which is maintained for certain employees, is unfunded.
In 2005, we limited participation in the non-contributory retirement plan and the post-retirement
benefit plan to those employees hired on or before July 31, 2005. We also placed a cap on paid medical expenses at the 2007 rate, beginning in 2008, for those eligible employees who retire after December 31, 2005. As part of our
acquisition of Sound Federal in 2006, participation in the Sound Federal retirement plans and the accrual of benefits for such plans were frozen as of the acquisition date.
Page 32
Notes to Unaudited Consolidated Financial Statements
The components of the net periodic expense for the plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30,
|
|
|
|
Retirement Plans
|
|
|
Other Benefits
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
(In thousands)
|
|
Service cost
|
|
$
|
1,130
|
|
|
$
|
1,293
|
|
|
$
|
246
|
|
|
$
|
327
|
|
Interest cost
|
|
|
2,326
|
|
|
|
2,121
|
|
|
|
554
|
|
|
|
527
|
|
Expected return on assets
|
|
|
(3,609
|
)
|
|
|
(3,244
|
)
|
|
|
|
|
|
|
|
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
617
|
|
|
|
1,511
|
|
|
|
187
|
|
|
|
298
|
|
Unrecognized prior service cost
|
|
|
58
|
|
|
|
90
|
|
|
|
(391
|
)
|
|
|
(391
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
522
|
|
|
$
|
1,771
|
|
|
$
|
596
|
|
|
$
|
761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30,
|
|
|
|
Retirement Plans
|
|
|
Other Benefits
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
(In thousands)
|
|
Service cost
|
|
$
|
2,260
|
|
|
$
|
2,586
|
|
|
$
|
492
|
|
|
$
|
654
|
|
Interest cost
|
|
|
4,652
|
|
|
|
4,242
|
|
|
|
1,108
|
|
|
|
1,054
|
|
Expected return on assets
|
|
|
(7,218
|
)
|
|
|
(6,488
|
)
|
|
|
|
|
|
|
|
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
1,234
|
|
|
|
3,022
|
|
|
|
374
|
|
|
|
596
|
|
Unrecognized prior service cost
|
|
|
116
|
|
|
|
180
|
|
|
|
(782
|
)
|
|
|
(782
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
1,044
|
|
|
$
|
3,542
|
|
|
$
|
1,192
|
|
|
$
|
1,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We made no contributions to the pension plans during the first six months of 2014 or 2013.
11.
|
Other Comprehensive Income (Loss)
|
The changes in accumulated other comprehensive income (loss) by component, net of tax, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains
|
|
|
|
|
|
|
|
|
|
(losses) on securities
|
|
|
Postretirement
|
|
|
|
|
|
|
available for sale
|
|
|
Benefit Plans
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Balance at December 31, 2013
|
|
$
|
33,944
|
|
|
$
|
(27,608
|
)
|
|
$
|
6,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income before reclassifications
|
|
|
35,827
|
|
|
|
|
|
|
|
35,827
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
(17,141
|
)
|
|
|
557
|
|
|
|
(16,584
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
18,686
|
|
|
|
557
|
|
|
|
19,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2014
|
|
$
|
52,630
|
|
|
$
|
(27,051
|
)
|
|
$
|
25,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
$
|
122,630
|
|
|
$
|
(52,660
|
)
|
|
$
|
69,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss before reclassifications
|
|
|
(83,089
|
)
|
|
|
|
|
|
|
(83,089
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
(4,249
|
)
|
|
|
1,784
|
|
|
|
(2,465
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income
|
|
|
(87,338
|
)
|
|
|
1,784
|
|
|
|
(85,554
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2013
|
|
$
|
35,292
|
|
|
$
|
(50,876
|
)
|
|
$
|
(15,584
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 33
Notes to Unaudited Consolidated Financial Statements
The following table presents the reclassification adjustment out of accumulated other comprehensive income
(loss) included in net income and the corresponding line item on the consolidated statements of operations for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Reclassified
|
|
|
Line Item in
|
Details about Accumulated Other
|
|
from Accumulated Other
|
|
|
the Statement of
|
Comprehensive Income Components
|
|
Comprehensive Income
|
|
|
Income
|
(In thousands)
|
|
For the Three Months
|
|
|
For the Six Months
|
|
|
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gain on securities available for sale
|
|
$
|
(18,260
|
)
|
|
$
|
(7,183
|
)
|
|
$
|
(28,882
|
)
|
|
$
|
(7,183
|
)
|
|
Gain on securities transaction, net
|
Income tax expense
|
|
|
7,459
|
|
|
|
2,934
|
|
|
|
11,741
|
|
|
|
2,934
|
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of income tax expense
|
|
|
(10,801
|
)
|
|
|
(4,249
|
)
|
|
|
(17,141
|
)
|
|
|
(4,249
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of postretirement benefit pension plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
$
|
804
|
|
|
$
|
1,809
|
|
|
$
|
1,608
|
|
|
$
|
3,618
|
|
|
(a)
|
Prior service cost
|
|
|
(333
|
)
|
|
|
(301
|
)
|
|
|
(666
|
)
|
|
|
(602
|
)
|
|
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total before income tax expense
|
|
|
471
|
|
|
|
1,508
|
|
|
|
942
|
|
|
|
3,016
|
|
|
|
Income tax expense
|
|
|
(192
|
)
|
|
|
(616
|
)
|
|
|
(385
|
)
|
|
|
(1,232
|
)
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of income tax expense
|
|
|
279
|
|
|
|
892
|
|
|
|
557
|
|
|
|
1,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reclassifications
|
|
$
|
(10,522
|
)
|
|
$
|
(3,357
|
)
|
|
$
|
(16,584
|
)
|
|
$
|
(2,465
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
These items are included in the computation of net period pension cost. See Postretirement Benefit Plans footnote for additional disclosure.
|
12.
|
Stock-Based Compensation
|
Stock Option Plans
A summary of the
changes in outstanding stock options is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
Number of
|
|
|
Weighted
|
|
|
Number of
|
|
|
Weighted
|
|
|
|
Stock
|
|
|
Average
|
|
|
Stock
|
|
|
Average
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Options
|
|
|
Exercise Price
|
|
Outstanding at beginning of period
|
|
|
25,402,955
|
|
|
$
|
13.02
|
|
|
|
27,775,857
|
|
|
$
|
12.97
|
|
Exercised
|
|
|
(11,900
|
)
|
|
|
9.50
|
|
|
|
(222,510
|
)
|
|
|
6.32
|
|
Forfeited
|
|
|
(2,804,799
|
)
|
|
|
11.92
|
|
|
|
(2,040,392
|
)
|
|
|
12.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
22,586,256
|
|
|
$
|
13.16
|
|
|
|
25,512,955
|
|
|
$
|
13.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
Page 34
Notes to Unaudited Consolidated Financial Statements
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 of the respective options, based
on quoted market prices. Of these options, 6,067,500 had vesting periods ranging from one to five years and an expiration period of ten years. The remaining 17,052,500 shares had vesting periods ranging from two to three years if certain financial
performance measures were met. The financial performance measures for each of these awards, other than the performance stock options granted in 2010 (2010 option grants), have been met, so we have recorded compensation expenses for these
awards accordingly. One of the two performance measures related to the 2010 option grants was not met so the Company recorded expense for only half of the 2010 option grants. The options that did not vest are reflected as forfeitures in 2013 in the
table above.
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. The performance
measures for the 2011 Performance Options have been met and we have recorded compensation expense for those grants accordingly.
Compensation expense
related to our outstanding stock options amounted to $10,000 and $406,000 for the three months ended June 30, 2014 and 2013, respectively and $272,000 and $668,000 for the six months ended June 30, 2014 and 2013, 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 vested over a three-year period upon
continued service through the annual vesting dates and 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 vested on continued service through the third anniversary of the awards, and our attainment of certain financial performance measures as certified by the Committee. A portion of these awards
were settled in shares of our common stock upon vesting, and the remainder will be settled in shares of our common stock on the sixth anniversary of the awards. 2011 stock unit awards to directors vested on continued service 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 1,768,681 shares. The 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 974,528 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 718,826 shares which will be settled,
Page 35
Notes to Unaudited Consolidated Financial Statements
if vested, in shares of our common stock on the third anniversary of the awards. Half of each VPU award is conditioned on the ranking of the total shareholder return of the Companys common
stock over the calendar years 2012 to 2014 against the total shareholder return of a peer group of 50 companies and the other half was conditioned on the Companys attainment of return on tangible equity measures for the calendar year 2012.
Based on the level of performance of each award, 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. Based on performance through December 31, 2012, the Company has determined that no more than 60.25% of the VPUs subject to the return on tangible equity condition may vest upon continued
service through their vesting dates.
The remaining 75,327 2012 stock unit awards, which were granted to outside directors, vested in April 2013 and will
be settled upon the directors resignation from the Board of Directors. 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.
Stock unit awards were made in 2013 (the 2013 stock unit awards) pursuant to the 2011 SIP for a total of $13.8 million, or
stock units of 1,672,639 shares. The 2013 stock unit awards include 1,480,100 shares granted to employees in June 2013 that will be settled, if vested, in shares of our common stock on the third and sixth anniversaries of the awards. These awards
vest in annual installments, subject to continued service through January 1, 2014, 2015 and 2016 and the attainment of certain financial performance measures. Attainment of these measures was certified by the Committee in 2014. The Committee
specifically reserved its rights to reduce the number of shares covered by the 2013 stock unit awards to senior executives on or before certification of the performance goals if the Committee determined, in its discretion, that prevailing
circumstances warrant such a reduction. The Committee exercised this discretion in the first quarter of 2014 resulting in the forfeiture of stock units representing 323,550 shares. The 2013 stock unit awards also include 138,800 shares which were
granted in March 2013 that will be settled in shares of our common stock on each vesting date. These awards vest in annual installments, subject to continued service through March 19, 2014, 2015 and 2016. The remaining 53,739 2013 stock unit
awards, which were granted to outside directors, vested on continued service through April 2014 and will be settled upon such directors resignation from the Board of Directors. These awards will be settled, if vested, in shares of our common
stock on the final vesting date.
Stock unit awards were made in March 2014 (the 2014 stock unit awards) pursuant to the 2011 SIP for a total
of $13.6 million, or stock units of 1,394,051 shares. The 2014 stock unit awards include 1,340,200 shares granted to employees in March 2014 that will be settled, if vested, in shares of our common stock on the third and sixth anniversaries of the
awards. These awards vest in annual installments, subject to continued service through January 1, 2015, 2016 and 2017 and our achievement of certain financial performance measures. The remaining 53,851 stock unit awards, which were granted to
outside directors, vest on continued service through March 2015 and will be settled upon such directors resignation from the Board of Directors. These awards will be settled, if vested, in shares of our common stock on the final vesting date.
Total compensation expense for stock unit awards amounted to $3.2 million and $1.6 million for the three months ended June 30, 2014 and 2013,
respectively, and $5.8 million and $3.4 million for the six months ended June 30, 2014 and 2013, respectively.
Page 36
Notes to Unaudited Consolidated Financial Statements
13.
|
Recent Accounting Pronouncements
|
In June 2014, the FASB issued Accounting Standards Update (ASU) 2014-12, Stock Compensation Accounting for
Share-Based Payments When the Terms of an Award Provide that a Performance Target Could Be Achieved after the Requisite Service Period. The amendment applies to reporting entities that grant their employees share-based payments in which the
terms of the award provide that a performance target can be achieved after the requisite service period. A reporting entity should apply existing guidance in ASC Topic 718 as it relates to awards with performance conditions that affect vesting to
account for such awards. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will
be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service
period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the
number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the
performance target is achieved. As indicated in the definition of vest, the stated vesting period (which includes the period in which the performance target could be achieved) may differ from the requisite service period. The amendments in ASU
2014-12 are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2014. Early adoption is permitted. This guidance is not expected to have a material impact on our
financial condition or results of operations.
In June 2014, the FASB issued ASU 2014-11, Transfers and Servicing Repurchase-to-Maturity
Transactions, Repurchase Financings, and Disclosures. The amendments in this Update require that repurchase-to-maturity transactions be accounted for as secured borrowings consistent with the accounting for other repurchase agreements. In
addition, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty (a repurchase financing), which will result in secured borrowing accounting
for the repurchase agreement. The amendments require an entity to disclose information about transfers accounted for as sales in transactions that are economically similar to repurchase agreements, in which the transferor retains substantially all
of the exposure to the economic return on the transferred financial asset throughout the term of the transaction. In addition the amendments require disclosure of the types of collateral pledged in repurchase agreements, securities lending
transactions, and repurchase-to-maturity transactions and the tenor of those transactions. The amendments in ASU 2014-11 are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2014, and the disclosure for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings is required to be presented for annual periods beginning after
December 15, 2014, and for interim periods beginning after March 15, 2015. This guidance is not expected to have a material impact on our financial condition or results of operations.
In January 2014, the FASB issued ASU 2014-04, Receivables Troubled Debt Restructurings by Creditors (Subtopic 310-40) Reclassification of
Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure, which applies to all creditors who obtain physical possession of residential real estate property collateralizing a consumer mortgage loan in satisfaction of a
receivable. The amendments in this update clarify when an in substance repossession or foreclosure occurs and requires disclosure of both (1) the amount of foreclosed residential real estate property held by a creditor and (2) the recorded
investment in consumer mortgage loans collateralized by residential real estate
Page 37
Notes to Unaudited Consolidated Financial Statements
property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in ASU 2014-04 are effective for public business entities for
fiscal years, and interim periods within those fiscal years, beginning after December 15, 2014. Early adoption is permitted and entities can elect to adopt a modified retrospective transition method or a prospective transition method. This
guidance is not expected to have a material impact on our financial condition or results of operations.
Since the announcement of the Merger, eighteen putative class action complaints have been filed in the Court of Chancery, Delaware against
Hudson City Bancorp, its directors, M&T, and WTC challenging the Merger. Six putative class actions challenging the Merger have also been filed in the Superior Court for Bergen County, Chancery Division, of New Jersey (the New Jersey
Court). The lawsuits generally allege, among other things, that the Hudson City Bancorp directors breached their fiduciary duties to Hudson City Bancorps public shareholders by approving the Merger at an unfair price, that the Merger was
the product of a flawed sales process, and that Hudson City Bancorp and M&T filed a misleading and incomplete Form S-4 with the SEC in connection with the proposed transaction. All 24 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.
On April 12, 2013, the defendants entered into a memorandum of understanding (the MOU) with the plaintiffs regarding the settlement of all of
the actions described above (collectively, the Actions).
Under the terms of the MOU, Hudson City Bancorp, M&T, the other named
defendants, and all the plaintiffs have reached an agreement in principle to settle the Actions and release the defendants from all claims relating to the Merger, subject to approval of the New Jersey Court. Pursuant to the MOU, Hudson City Bancorp
and M&T agreed to make available additional information to Hudson City Bancorp shareholders. The additional information was contained in a Supplement to the Joint Proxy Statement filed with the SEC as an exhibit to a Current Report on Form 8-K
dated April 12, 2013. In addition, under the terms of the MOU, plaintiffs counsel also has reserved the right to seek an award of attorneys fees and expenses. If the New Jersey Court approves the settlement contemplated by the MOU,
the Actions will be dismissed with prejudice. The settlement will not affect the Merger consideration to be paid to Hudson City Bancorps shareholders in connection with the proposed Merger. In the event the New Jersey Court approves an award
of attorneys fees and expenses in connection with the settlement, such fees and expenses shall be paid by Hudson City Bancorp, its successor in interest, or its insurers.
Hudson City Bancorp, M&T, and the other defendants deny all of the allegations in the Actions and believe the disclosures in the Joint Proxy Statement are
adequate under the law. Nevertheless, Hudson City Bancorp, M&T, and the other defendants have agreed to settle the Actions in order to avoid the costs, disruption, and distraction of further litigation.
Page 38
Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
Executive Summary
During the first six months of 2014, we continued to focus on our consumer-oriented business model through the origination of one- to four-family mortgage
loans. We have traditionally funded this loan production with customer deposits and borrowings. Market interest rates remained at historically low levels during the first six months of 2014 which provided limited opportunities for the reinvestment
of repayments received on our mortgage-related assets which account for 84.1% of our average interest-earning assets for six months ended June 30, 2014. As a result, we continued to reduce the size of our balance sheet and we continue to carry
an elevated level of overnight funds. Federal funds and other overnight deposits amounted to $5.32 billion, or 14.1%, of total assets at June 30, 2014. We believe that while carrying this level of overnight funds adversely impacts our current
earnings, it better positions our balance sheet for future strategic initiatives such as a balance sheet restructuring. Our total assets decreased $906.7 million, or 2.4%, to $37.70 billion at June 30, 2014 from $38.61 billion at
December 31, 2013.
Our results of operations depend primarily on net interest income, which, in part, is a direct result of the market interest rate
environment. Net interest income is the difference between the interest income we earn on our interest-earning assets, primarily mortgage loans, mortgage-backed securities and investment securities, and the interest we pay on our interest-bearing
liabilities, primarily time deposits, interest-bearing transaction accounts and borrowed funds. Net interest income is affected by the shape of the market yield curve, the timing of the placement and repricing of interest-earning assets and
interest-bearing liabilities on our balance sheet, the prepayment rate on our mortgage-related assets and the puts of our borrowings. Our results of operations may also be affected significantly by general and local economic and competitive
conditions, particularly those with respect to changes in market interest rates, credit quality, government policies and actions of regulatory authorities. Our results of operations 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 growth in economic activity rebounded in the second quarter. The FOMC noted that the unemployment rate declined. However, a range of labor market indicators suggests that there remains
significant underutilization of labor resources. Household spending appears to be rising moderately and business fixed investment is advancing, while the recovery in the housing sector remained slow. The national unemployment rate decreased to 6.2%
in July 2014 from 6.7% in December 2013 and from 7.5% in June 2013. The FOMC decided to maintain the overnight lending target rate at zero to 0.25% for the third quarter of 2014.
Beginning in August 2014, the FOMC decided to reduce the pace at which it will add to its holdings of agency mortgage-backed securities to $10.0 billion per
month from $15.0 billion per month and to reduce the pace at which it adds to its holdings of longer-term Treasury securities to $15.0 billion per month from $20.0 billion per month. The FOMC noted that its sizeable and increasing holdings of
longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets and help to make broader financial conditions more accommodative.
Net interest income decreased $42.2 million, or 26.4%, to $117.7 million for the second quarter of 2014 from $159.9 million for the second quarter of 2013
reflecting the overall decrease in the average balance of interest-earning assets and interest-bearing liabilities, the continued low interest rate environment and a
Page 39
continued increase in the average balance of short-term liquid assets, including U.S. Treasury securities and Federal funds sold and other overnight deposits. Our interest rate spread decreased
to 1.00% for the second quarter of 2014 as compared to 1.38% for the second quarter of 2013. Our net interest margin was 1.29% for the second quarter of 2014 as compared to 1.64% for the second quarter of 2013.
Net interest income decreased $87.2 million, or 25.9%, to $250.0 million for the first six months of 2014 as compared to $337.2 million for the first six
months of 2013. Our interest rate spread decreased 39 basis points to 1.07% for the six months ended June 30, 2014 as compared to 1.46% for the six months ended June 30, 2013. Our net interest margin decreased 36 basis points to 1.35% for
the six months ended June 30, 2014 as compared to 1.71% for the six months ended June 30, 2013.
The decrease in our interest rate spread and
net interest margin for the three and six months periods ended June 30, 2014 is primarily due to repayments of higher yielding assets due to the low interest rate environment and an increase in the average balance of Federal funds and other
overnight deposits which yield 0.25%.
The increase in the average balance of Federal funds and other overnight deposits was due primarily to the
repayments on mortgage-related assets and the lack of attractive reinvestment opportunities due to low market interest rates as available short term reinvestment opportunities continue to carry low yields, and medium and longer term opportunities
are creating more significant duration risk at relatively low yields.
Mortgage-related assets represented 84.1% of our average interest-earning assets at
June 30, 2014. 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. Given the current market environment and our concerns about taking on additional interest rate risk, we expect to continue to reduce the size of our balance sheet in the near term.
There was no provision for loan losses for the three and six months ended June 30, 2014, as compared to $12.5 million and $32.5 million for the three and
six months ended June 30, 2013, respectively. The decreases in our provision for loan losses were due primarily to improving home prices and economic conditions, a decrease in the size of the loan portfolio and a decrease in the amount of total
delinquent loans. Early stage loan delinquencies (defined as loans that are 30 to 89 days delinquent) decreased $62.0 million to $411.4 million at June 30, 2014 from $473.4 million at December 31, 2013. Non-performing loans, defined as
non-accrual loans and accruing loans delinquent 90 days or more, amounted to $1.01 billion at June 30, 2014 as compared to $1.05 billion at December 31, 2013. The ratio of non-performing loans to total loans was 4.35% at both June 30,
2014 and December 31, 2013. Notwithstanding the decrease in non-performing loans, the foreclosure process and the time to complete a foreclosure, while improving, continues to be prolonged, especially in New York and New Jersey where 76% of our
non-performing loans are located at June 30, 2014. 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 $21.2 million for the second quarter of 2014 as compared to $9.6 million for the second quarter of 2013. Included in
non-interest income for the second quarter of 2014 were $19.5 million in gains from the sale of $565.6 million of mortgage-backed securities. Gains on the sales of securities amounted to $7.2 million in the second quarter of 2013. The remainder of
non-interest income is primarily made up of service fees and charges on deposit and loan accounts.
Page 40
Total non-interest income was $38.9 million for the first six months of 2014 as compared to $12.1 million for the
same period in 2013. Included in non-interest income for the first six months 2014 were $35.5 million in gains from the sale of $984.9 million of mortgage-backed securities. Gains on the sales of securities amounted to $7.2 million for the six
months ended June 30, 2013.
We sold these mortgage-backed securities during 2014 to take advantage of current market demand and prices in advance of
an anticipated rising interest rate environment.
Total non-interest expense decreased $3.5 million to $73.1 million for the second quarter of 2014 as
compared to $76.6 million for the second quarter of 2013. This decrease was due to a $6.5 million decrease in Federal deposit insurance expense partially offset by a $3.5 million increase in other non-interest expense.
Total non-interest expense decreased $5.1 million to $152.8 million for the six months ended June 30, 2014 as compared to $157.9 million for the six
months ended June 30, 2013. This decrease was due to a $16.7 million decrease in Federal deposit insurance expense partially offset by increases of $9.2 million in other non-interest expense and $1.8 million in compensation and employee benefit
expenses.
Net loans decreased $937.9 million to $23.00 billion at June 30, 2014 as compared to $23.94 billion at December 31, 2013. Our loan
production (originations and purchases) was $813.4 million during the first six months of 2014 offset by $1.72 billion in principal repayments. Loan production declined during the first six months of 2014 which reflects our limited appetite for
adding long-term fixed-rate mortgage loans in the current low market interest rate environment. In addition, our loan production has been impacted by the new qualified mortgage regulations issued by the CFPB which went into effect in January 2014.
We discontinued our reduced documentation loan program in January 2014 in order to comply with the CFPBs new requirements to validate a borrowers ability to repay and the corresponding safe harbor for loans that meet the requirements for
a qualified mortgage. During 2013, 22% of our total loan production consisted of reduced documentation loans to borrowers with acceptable credit and larger down payments resulting in loss ratios similar to our full documentation
portfolio.
Total mortgage-backed securities decreased $1.65 billion to $7.30 billion at June 30, 2014 from $8.95 billion at December 31, 2013.
The decrease was due primarily to securities sales of $984.9 million and repayments of $769.0 million of mortgage-backed securities during the first six months of 2014. We sold these mortgage-backed securities to take advantage of current market
demand and prices in advance of an anticipated rising interest rate environment. The proceeds from the sales have been invested primarily in short-term liquid assets with some invested in mortgage-backed securities. While this further increases our
levels of low-yielding, short-term liquid assets, we believe this better positions our balance sheet for future strategic initiatives such as a potential balance sheet restructuring. During the first six months of 2014, we purchased $94.4 million of
mortgage-backed securities issued by U.S. government-sponsored entities.
Total deposits amounted to $20.51 billion at June 30, 2014 as compared to
$21.47 billion at December 31, 2013. The decrease in deposits was due to our decision to maintain lower deposit rates that allow us to manage deposit levels at a time when we are experiencing excess liquidity from prepayment activity on
mortgage-related assets and limited investment opportunities with attractive yields.
Borrowings amounted to $12.18 billion at June 30, 2014 with an
average cost of 4.59%. During the first quarter of 2014, we modified $800.0 million of FHLB repurchase agreements to be FHLB advances. This reduced our collateral requirements related to the repurchase agreements, which use securities as collateral.
FHLB advances are secured by a blanket lien on our loan portfolio. The modification resulted in a slight increase in the weighted average cost of the borrowings that were modified.
Page 41
On August 27, 2012, the Company entered into the Merger Agreement with M&T and WTC, pursuant to which
the Company will merge with and into WTC, with WTC continuing as the surviving entity. As part of the Merger, the Bank will merge with and into Manufacturers and Traders Trust Company.
Subject to the terms and conditions of the Merger Agreement, in the Merger, Hudson City Bancorp shareholders will have the right to receive with respect to
each of their shares of common stock of the Company, at their election (but subject to proration and adjustment procedures), 0.08403 of a share of common stock, or cash having a value equal to the product of 0.08403 multiplied by the average closing
price of the M&T common stock for the ten days immediately prior to the completion of the Merger. The Merger Agreement also provides that at the closing of the Merger, 40% of the outstanding shares of Hudson City common stock will be converted
into the right to receive cash and the remainder of the outstanding shares of Hudson City common stock will be converted into the right to receive shares of M&T common stock.
On two occasions, M&T and the Company announced that additional time would be required to obtain a regulatory determination on the applications necessary
to complete the proposed Merger. Most recently, on December 17, 2013, M&T and the Company announced that they entered into Amendment No. 2 to the Merger Agreement. Amendment No. 2 further extends the date after which either party
may terminate the Merger Agreement if the Merger has not yet been completed from January 31, 2014 to December 31, 2014, and provides that the Company may terminate the Merger Agreement at any time if it reasonably determines that M&T
is unlikely to be able to obtain the requisite regulatory approvals of the Merger to permit the closing to occur on or prior to December 31, 2014. Amendment No. 2 also permits the Company to take certain interim actions, including with
respect to our conduct of business, implementation of our Strategic Plan, retention incentives and certain other matters with respect to our personnel, prior to the completion of the Merger. While Amendment No. 2 extends the date after which
either party may elect to terminate the Merger Agreement from January 31, 2014 to December 31, 2014, there can be no assurances that the Merger will be completed by that date or that the Company will not exercise its right to terminate the
Merger Agreement in accordance with its terms.
As part of our Strategic Plan, we are continuing to explore ways to reduce our interest rate risk while
strengthening our balance sheet, which may include a further restructuring of our balance sheet during 2014. The Company previously completed a series of restructuring transactions in 2011 that reduced higher-cost structured borrowings on the
Companys balance sheet. Management is continuing to consider a variety of different restructuring alternatives, including whether to restructure all or various portions of our borrowed funds and various alternatives for replacement funding. No
decision has been made at this time regarding the timing, structure and scope of any restructuring transaction. Decisions regarding any restructuring transaction are dependent upon, among other things, market interest rates, overall economic
conditions and the status of the Merger. We expect a restructuring to result in a net loss and reduction of stockholder equity, though we also expect an improvement in net interest margin and future earnings prospects. Any restructuring will focus
on the prospects for long-term overall earnings stability and growth. Any restructuring will likely reduce our excess cash position, but will not adversely affect the liquidity we need to operate in a safe and sound manner.
The Bank is currently subject to the Bank MOU. In accordance with the Bank MOU, the Bank has adopted and has implemented enhanced operating policies and
procedures that are intended to continue to (a) reduce our level of interest rate risk, (b) reduce our funding concentration, (c) diversify our funding sources, (d) enhance our liquidity position, (e) monitor and manage loan
modifications and (f) maintain
Page 42
our capital position in accordance with our existing capital plan. In addition, we developed the Strategic Plan
which establishes objectives for the Banks overall risk profile, earnings performance, growth and balance sheet mix and to enhance our enterprise risk management program.
The Company is currently subject to the Company MOU. In accordance with the Company MOU, the Company must, among other things support the 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 and (b) obtain approval from the
FRB prior to repurchasing or redeeming any Company stock or incurring any debt with a maturity of greater than one year. In accordance with the Company MOU, the Company submitted a comprehensive Capital Plan and a comprehensive Earnings Plan to the
FRB. These agreements will remain in effect until modified or terminated by the OCC (with respect to the Bank MOU) and the FRB (with respect to the Company MOU).
Comparison of Financial Condition at June 30, 2014 and December 31, 2013
Total assets decreased $906.7 million, or 2.4%, to $37.70 billion at June 30, 2014 from $38.61 billion at December 31, 2013. The decrease in total
assets reflected a $1.65 billion decrease in total mortgage-backed securities and a $937.9 million decrease in net loans, partially offset by a $1.13 billion increase in cash and cash equivalents and a $605.7 million increase in investment
securities.
Total cash and cash equivalents increased $1.13 billion to $5.45 billion at June 30, 2014 as compared to $4.32 billion at
December 31, 2013. This increase is primarily due to repayments on mortgage-related assets and the lack of attractive reinvestment opportunities in the current low interest rate environment as available short term reinvestment opportunities
continue to carry low yields, and medium and longer term opportunities available to us are creating more significant duration risk at relatively low yields. We have maintained lower deposit rates to allow a reduction in our deposits to help
alleviate the pressure created by our increasing cash position. Accordingly, we have used a portion of our excess cash inflows to fund these deposit reductions.
Net loans decreased to $23.00 billion at June 30, 2014 as compared to $23.94 billion at December 31, 2013 due primarily to a decrease in loan
production. During the first six months of 2014, our loan production (origination and purchases) amounted to $813.4 million as compared to $1.73 billion for the same period in 2013. Loan production was offset by principal repayments of $1.72 billion
for the first six months of 2014, as compared to principal repayments of $3.55 billion for the first six months of 2013. The decline in our loan production during the first six months of 2014 reflects our limited appetite for adding long-term
fixed-rate mortgage loans to our portfolio in the current low market interest rate environment. In addition, loan production has been impacted by the new qualified mortgage regulations issued by the CFPB. Effective in January 2014, we discontinued
our reduced documentation loan program in order to comply with the new requirements to validate a borrowers ability to repay and the corresponding safe harbor for loans that meet the requirements for a qualified mortgage. During
2013, 22% of our total loan production consisted of reduced documentation loans to borrowers with acceptable credit and larger down payments resulting in loss ratios similar to our prime portfolio.
Our first mortgage loan production during the first six months of 2014 was substantially all in one- to four-family mortgage loans. Approximately 79% of
mortgage loan production for the first six months of 2014 were variable-rate loans as compared to approximately 81% for the corresponding period in 2013. Fixed-rate mortgage loans accounted for 54.5% of our first mortgage loan portfolio at
June 30, 2014 as compared to 55.4% at December 31, 2013.
Page 43
Our ALL amounted to $255.0 million at June 30, 2014 and $276.1 million at December 31, 2013.
Non-performing loans amounted to $1.01 billion, or 4.35% of total loans, at June 30, 2014 as compared to $1.05 billion, or 4.35% of total loans, at December 31, 2013.
Total mortgage-backed securities decreased $1.65 billion to $7.30 billion at June 30, 2014 from $8.95 billion at December 31, 2013. The decrease was
due primarily to security sales of $984.9 million and repayments of $769.0 million of mortgage-backed securities during the first six months of 2014. We sold these mortgage-backed securities to take advantage of current market demand and prices in
advance of an anticipated rising interest rate environment. The proceeds from the sales have been invested primarily in short-term liquid assets with some invested in mortgage-backed securities. While this further increases our levels of
low-yielding, short-term liquid assets, we believe this better positions our balance sheet for future strategic initiatives such as a potential balance sheet restructuring.
Total investment securities increased $605.7 million to $942.0 million at June 30, 2014 as compared to $336.3 million at December 31, 2013. The
increase was due primarily to purchases of $600.8 million of U.S. Treasury securities with a remaining term to maturity of approximately 18 months. These securities were purchased to be used as collateral for our outstanding borrowings.
Total liabilities decreased $977.0 million, or 2.9%, to $32.89 billion at June 30, 2014 from $33.86 billion at December 31, 2013. The decrease in
total liabilities primarily reflected a decrease in total deposits of $958.5 million, while total borrowed funds remained unchanged.
Total deposits
decreased $958.5 million, or 4.5%, to $20.51 billion at June 30, 2014 from $21.47 billion at December 31, 2013. The decrease in total deposits reflected a $527.9 million decrease in our money market accounts and a $420.5 million decrease
in our time deposits accounts. The decrease in our money market and time deposit accounts was due to our decision to maintain lower deposit rates that allow us to manage deposit levels at a time when there are limited investment opportunities with
attractive yields to reinvest the funds received from payment activity on mortgage-related assets. We had 135 banking offices at both June 30, 2014 and December 31, 2013.
Borrowings amounted to $12.18 billion at both June 30, 2014 and December 31, 2013. At June 30, 2014, we had $3.88 billion of borrowed funds
with put dates within one year, including $3.33 billion that can be put back to the Company quarterly. If interest rates were to decrease, or remain consistent with current rates, we believe these borrowings would likely not be put back and our
average cost of existing borrowings would not decrease even as market interest rates decrease. Conversely, if interest rates increase above the market interest rate for similar borrowings, we believe these borrowings would likely be put back at
their next put date and our cost to replace these borrowings would increase. However, we believe, given current market conditions, that the likelihood that a significant portion of these borrowings would be put back will not increase substantially
unless interest rates were to increase by at least 250 basis points.
Total shareholders equity increased $70.3 million to $4.81 billion at
June 30, 2014 from $4.74 billion at December 31, 2013. The increase was primarily due to net income of $81.7 million and a $19.2 million change in accumulated other comprehensive income, partially offset by cash dividends paid to common
shareholders of $40.1 million.
Accumulated other comprehensive income amounted to $25.6 million at June 30, 2014 as compared to accumulated other
comprehensive income of $6.3 million at December 31, 2013. The $19.2 million change in accumulated other comprehensive income primarily reflects an increase in the net unrealized gain on securities available for sale at June 30, 2014 as
compared to December 31, 2013.
Page 44
As of June 30, 2014, there remained 50,123,550 shares that may be purchased under our existing stock
repurchase programs. We did not repurchase any shares of our common stock during the second quarter of 2014 pursuant to our repurchase programs. Pursuant to the Company MOU, any future share repurchases must be approved by the FRB. In addition,
pursuant to the terms of the Merger Agreement, we may not repurchase shares of Hudson City Bancorp common stock without the consent of M&T. At June 30, 2014, our capital ratios were in excess of the applicable regulatory requirements to be
considered well-capitalized. See Liquidity and Capital Resources.
At June 30, 2014, our shareholders equity to asset ratio was
12.77% compared with 12.28% at December 31, 2013. Our book value per share, using the period-end number of outstanding shares, less purchased but unallocated employee stock ownership plan shares and less purchased but unvested recognition and
retention plan shares, was $9.65 at June 30, 2014 and $9.52 at December 31, 2013. Our tangible book value per share, calculated by deducting goodwill and the core deposit intangible from shareholders equity, was $9.34 as of
June 30, 2014 and $9.21 at December 31, 2013.
Page 45
Comparison of Operating Results for the Three-Month Periods Ended June 30, 2014 and 2013
Average Balance Sheet.
The following table presents the average balance sheets, average yields and costs and certain other information for the
three months ended June 30, 2014 and 2013. The table presents the annualized average yield on interest-earning assets and the annualized average cost of interest-bearing liabilities. We derived the yields and costs by dividing annualized income
or expense by the average balance of interest-earning assets and interest-bearing liabilities, respectively, for the periods shown. We derived average balances from daily balances over the periods indicated. Interest income includes fees that we
considered to be adjustments to yields. Yields on tax-exempt obligations were not computed on a tax equivalent basis. Nonaccrual loans were included in the computation of average balances and therefore have a zero yield. The yields set forth below
include the effect of deferred loan origination fees and costs, and purchase discounts and premiums that are amortized or accreted to interest income.
|
|
|
|
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
|
|
Yield/
|
|
|
Average
|
|
|
|
|
|
Yield/
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Cost
|
|
|
Balance
|
|
|
Interest
|
|
|
Cost
|
|
|
|
(Dollars in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earnings assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First mortgage loans, net (1)
|
|
$
|
23,083,914
|
|
|
$
|
247,124
|
|
|
|
4.28
|
%
|
|
$
|
25,206,816
|
|
|
$
|
283,857
|
|
|
|
4.50
|
%
|
Consumer and other loans
|
|
|
207,456
|
|
|
|
2,199
|
|
|
|
4.24
|
|
|
|
231,791
|
|
|
|
2,611
|
|
|
|
4.51
|
|
Federal funds sold and other overnight deposits
|
|
|
5,252,541
|
|
|
|
3,316
|
|
|
|
0.25
|
|
|
|
2,938,417
|
|
|
|
1,969
|
|
|
|
0.27
|
|
Mortgage-backed securities at amortized cost
|
|
|
7,646,018
|
|
|
|
41,723
|
|
|
|
2.18
|
|
|
|
9,706,470
|
|
|
|
52,665
|
|
|
|
2.17
|
|
Federal Home Loan Bank stock
|
|
|
337,942
|
|
|
|
3,338
|
|
|
|
3.95
|
|
|
|
347,822
|
|
|
|
3,516
|
|
|
|
4.04
|
|
Investment securities, at amortized cost
|
|
|
539,141
|
|
|
|
1,505
|
|
|
|
1.12
|
|
|
|
521,924
|
|
|
|
2,891
|
|
|
|
2.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
37,067,012
|
|
|
|
299,205
|
|
|
|
3.23
|
|
|
|
38,953,240
|
|
|
|
347,509
|
|
|
|
3.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earnings assets (4)
|
|
|
901,004
|
|
|
|
|
|
|
|
|
|
|
|
1,101,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
37,968,016
|
|
|
|
|
|
|
|
|
|
|
$
|
40,054,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings accounts
|
|
|
1,045,799
|
|
|
|
392
|
|
|
|
0.15
|
|
|
$
|
982,386
|
|
|
|
504
|
|
|
|
0.21
|
|
Interest-bearing transaction accounts
|
|
|
2,163,365
|
|
|
|
1,558
|
|
|
|
0.29
|
|
|
|
2,232,757
|
|
|
|
1,853
|
|
|
|
0.33
|
|
Money market accounts
|
|
|
4,788,273
|
|
|
|
2,366
|
|
|
|
0.20
|
|
|
|
6,078,945
|
|
|
|
3,967
|
|
|
|
0.26
|
|
Time deposits
|
|
|
12,112,789
|
|
|
|
35,857
|
|
|
|
1.19
|
|
|
|
12,940,974
|
|
|
|
40,280
|
|
|
|
1.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
|
20,110,226
|
|
|
|
40,173
|
|
|
|
0.80
|
|
|
|
22,235,062
|
|
|
|
46,604
|
|
|
|
0.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase agreements
|
|
|
6,150,000
|
|
|
|
69,083
|
|
|
|
4.44
|
|
|
|
6,950,000
|
|
|
|
78,283
|
|
|
|
4.46
|
|
Federal Home Loan Bank of New York advances
|
|
|
6,025,000
|
|
|
|
72,267
|
|
|
|
4.75
|
|
|
|
5,225,000
|
|
|
|
62,769
|
|
|
|
4.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowed funds
|
|
|
12,175,000
|
|
|
|
141,350
|
|
|
|
4.59
|
|
|
|
12,175,000
|
|
|
|
141,052
|
|
|
|
4.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
32,285,226
|
|
|
|
181,523
|
|
|
|
2.23
|
|
|
|
34,410,062
|
|
|
|
187,656
|
|
|
|
2.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits
|
|
|
659,994
|
|
|
|
|
|
|
|
|
|
|
|
644,520
|
|
|
|
|
|
|
|
|
|
Other noninterest-bearing liabilities
|
|
|
204,034
|
|
|
|
|
|
|
|
|
|
|
|
243,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest-bearing liabilities
|
|
|
864,028
|
|
|
|
|
|
|
|
|
|
|
|
888,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
33,149,254
|
|
|
|
|
|
|
|
|
|
|
|
35,298,473
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
4,818,762
|
|
|
|
|
|
|
|
|
|
|
|
4,756,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
37,968,016
|
|
|
|
|
|
|
|
|
|
|
$
|
40,054,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/net interest rate spread (2)
|
|
|
$
|
117,682
|
|
|
|
1.00
|
|
|
|
|
|
|
$
|
159,853
|
|
|
|
1.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest-earning assets/net interest margin (3)
|
|
$
|
4,781,786
|
|
|
|
|
|
|
|
1.29
|
%
|
|
$
|
4,543,178
|
|
|
|
|
|
|
|
1.64
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of interest-earning assets to interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
1.15
|
x
|
|
|
|
|
|
|
|
|
|
|
1.13
|
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 $42.5 million and $112.3 million for the quarters ended June 30, 2014 and 2013, respectively.
|
Page 46
General.
Net income was $39.2 million for the second quarter of 2014 as compared to $48.7 million
for the second quarter of 2013. Both basic and diluted earnings per common share were $0.08 for the second quarter of 2014 as compared to both basic and diluted earnings per share of $0.10 for the second quarter of 2013. For the second quarter of
2014, our annualized return on average shareholders equity was 3.25% as compared to 4.10% for the corresponding period in 2013. Our annualized return on average assets for the second quarter of 2014 was 0.41% as compared to 0.49% for the
second quarter of 2013. The decrease in the annualized return on average equity and assets is primarily due to the decrease in net income during the second quarter of 2014.
Interest and Dividend Income.
Total interest and dividend income for the second quarter of 2014 decreased $48.3 million, or 13.9%, to $299.2
million from $347.5 million for the second quarter of 2013. The decrease in total interest and dividend income was due to a $1.88 billion decrease in the average balance of total interest-earning assets during the second quarter of 2014 to $37.07
billion from $38.95 billion for the second quarter of 2013 as well as a decrease in the annualized weighted-average yield on total interest earning assets. The decrease in the average balance of total interest-earning assets for the second quarter
of 2014 as compared to the second quarter of 2013 was due primarily to repayments of mortgage-related assets as a result of the low interest rate environment and our decision not to reinvest in low yielding, long term assets. The annualized
weighted-average yield on total interest-earning assets was 3.23% for the second quarter of 2014 as compared to 3.57% for the second quarter of 2013. The decrease in the annualized weighted average yield on interest-earning assets was due to lower
market interest rates earned on mortgage-related assets and a $2.31 billion increase in the average balance of Federal funds sold and other overnight deposits to $5.25 billion which had an average yield of 0.25% during the second quarter of 2014.
Interest on first mortgage loans decreased $36.8 million, or 13.0%, to $247.1 million for the second quarter of 2014 from $283.9 million for the second
quarter of 2013. The decrease in interest on first mortgage loans was primarily due to a $2.13 billion decrease in the average balance of first mortgage loans to $23.08 billion for the second quarter of 2014 from $25.21 billion for the same quarter
in 2013. The decrease in interest income on first mortgage loans was also due to a 22 basis point decrease in the annualized weighted-average yield to 4.28% for the second quarter of 2014 from 4.50% for the second quarter of 2013.
The decrease in the average yield earned on first mortgage loans during the second quarter of 2014 was due to repayments of higher-yielding loans and the
rates on newly originated mortgage loans which have been below the average yield on our portfolio, reflecting overall low market rates. Consequently, the average yield on our loan portfolio continued to decline during the second quarter of 2014. In
addition, our loan production decreased reflecting our low appetite for adding long-term fixed-rate mortgage loans to our portfolio in the current low interest rate environment and also the impact of the CFPBs new ability to repay and
qualified mortgage regulations, which went into effect in January 2014. During the first six months of 2014, our loan production (originations and purchases) amounted to $813.4 million as compared to $1.73 billion for the same period in 2013. Loan
production was offset by principal repayments of $1.72 billion for the first six months of 2014 as compared to $3.55 billion for the same period in 2013.
Interest on consumer and other loans decreased $412,000 to $2.2 million for the second quarter of 2014 from $2.6 million for the second quarter of 2013 due to
a decrease in the average balance of consumer and other loans. The average balance of consumer and other loans decreased $24.3 million to $207.5 million for the second quarter of 2014 from $231.8 million for the second quarter of 2013 and the
average yield earned decreased 27 basis points to 4.24% from 4.51% 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 annualized
weighted-average yield is a result of current market interest rates.
Page 47
Interest on mortgage-backed securities decreased $11.0 million to $41.7 million for the second quarter of 2014
from $52.7 million for the second quarter of 2013. This decrease was due primarily to a $2.06 billion decrease in the average balance of mortgage-backed securities to $7.65 billion for the second quarter of 2014 from $9.71 billion for the second
quarter of 2013. This was partially offset by an increase in the annualized weighted-average yield of mortgage-backed securities to 2.18% for the second quarter of 2014 as compared to 2.17% for second quarter of 2013.
The decrease in the average balance of mortgage-backed securities was due to sales of mortgage-backed securities as well as principal repayments during 2013
and the first half of 2014. During the six months ended June 30 2014, we sold $984.9 million of mortgage-backed securities to realize gains that would likely decrease as market interest rates increase and as the outstanding principal balance of
these securities decreases due to repayments.
Interest on investment securities decreased $1.4 million to $1.5 million for the second quarter of 2014 as
compared to $2.9 million for the second quarter of 2013. This decrease was due to a 110 basis point decrease in the annualized weighted-average yield to 1.12% for the second quarter of 2014 from 2.22% for the second quarter of 2013. The decrease in
the average yield earned reflects current market interest rates. The effect of the decrease in the average yield earned was partially offset by a $17.2 million increase in the average balance of investment securities to $539.1 million for the second
quarter of 2014 from $521.9 million for the second quarter of 2013. The increase in the average balance of investment securities for the second quarter of 2014 was due to the purchase of $600.8 million of U.S. Treasury securities partially offset by
the sale of corporate bonds with an amortized cost of $405.7 million in the second half of 2013.
Interest on Federal funds sold and other overnight
deposits amounted to $3.3 million for the second quarter of 2014 as compared to $2.0 million for the second quarter of 2013. The increase in interest income on Federal funds sold and other overnight deposits was primarily due to an increase in the
average balance of Federal funds sold and other overnight deposits. The average balance of Federal funds sold and other overnight deposits amounted to $5.25 billion for the second quarter of 2014 as compared to $2.94 billion for the second quarter
of 2013. The yield earned on Federal funds sold and other overnight deposits was 0.25% for the 2014 second quarter and 0.27% for the 2013 second quarter.
The increase in the average balance of Federal funds sold and other overnight deposits for the second quarter of 2014 was due primarily to repayments on
mortgage-related assets and our low appetite for adding long-term fixed-rate mortgage loans to our portfolio in the current low interest rate environment.
Interest Expense.
Total interest expense for the quarter ended June 30, 2014 decreased $6.2 million, or 3.3%, to $181.5 million from $187.7
million for the quarter ended June 30, 2013. This decrease was primarily due to a $2.12 billion, or 6.2%, decrease in the average balance of total interest-bearing liabilities to $32.29 billion for the quarter ended June 30, 2014 from
$34.41 billion for the quarter ended June 30, 2013. This was partially offset by an increase in the annualized weighted-average cost of total interest-bearing liabilities to 2.23% for the quarter ended June 30, 2014 as compared to 2.19%
for the quarter ended June 30, 2013. The decrease in the average balance of total interest-bearing liabilities was due to a $2.13 billion decrease in the average balance of total deposits.
Page 48
Interest expense on deposits decreased $6.4 million, or 13.7%, to $40.2 million for the second quarter of 2014
from $46.6 million for the second quarter of 2013. The decrease is primarily due to a $2.13 billion decrease in the average balance of interest-bearing deposits to $20.11 billion for the second quarter of 2014 from $22.24 billion for the second
quarter of 2013. In addition, the average cost of interest-bearing deposits declined 4 basis points to 0.80% for the second quarter of 2014 from 0.84% for the second quarter of 2013.
Interest expense on time deposits decreased $4.4 million to $35.9 million for the second quarter of 2014 from $40.3 million for the second quarter of 2013.
This was due primarily to a decrease of $828.2 million in the average balance of time deposit accounts to $12.11 billion for the second quarter of 2014 from $12.94 billion in the second quarter of 2013. In addition, the average cost of time deposits
decreased 6 basis points to 1.19% for the second quarter of 2014 as compared to 1.25% for the second quarter of 2013.
Interest expense on money market
accounts decreased $1.6 million to $2.4 million for the second quarter of 2014 from $4.0 million for the second quarter of 2013. This was due primarily to a decrease of 6 basis points in the annualized weighted-average cost to 0.20% for the second
quarter of 2014 from 0.26% for the second quarter of 2013. The decrease was also due to a $1.29 billion decrease in the average balance of money market accounts to $4.79 billion for the second quarter of 2014 from $6.08 billion for the second
quarter of 2013.
The decrease in the average cost of deposits for the second quarter of 2014 reflected lower market interest rates and our decision to
maintain lower deposit rates to continue our balance sheet reduction.
Interest expense on borrowed funds increased slightly to $141.4 million for the
second quarter of 2014 from $141.1 million for the second quarter of 2013. The average cost of borrowed funds was 4.59% for the quarter ended June 30, 2014 as compared to 4.58% for the quarter ended June 30, 2013. The average balance
of borrowings was unchanged for both comparative periods. The increase in the average cost of borrowed funds reflects a shift in our borrowings towards FHLB advances which have a slightly higher cost. During the first quarter of 2014, we modified
$800.0 million of FHLB repurchase agreements to be FHLB advances. This reduced our collateral requirements related to the repurchase agreements, which use securities as collateral. FHLB advances are secured by a blanket lien on our loan portfolio.
The slight increase in the average cost of borrowed funds coupled with the decline in the average balance of our deposits caused our overall average cost of funds to increase slightly.
At June 30, 2014 we had $3.88 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 250 basis points. See Liquidity and Capital Resources.
Net Interest Income.
Net interest income decreased $42.2 million, or 26.4%, to $117.7 million for the second quarter of 2014 from $159.9 million
for the second quarter of 2013 reflecting the overall decrease in the average balance of interest-earning assets and interest-bearing liabilities, the continued low interest rate environment and a continued increase in the average balance of
short-term liquid assets, including U.S. Treasury securities and Federal funds sold and other overnight deposits. Our interest rate spread decreased to 1.00% for the second quarter of 2014 as compared to 1.38% for the second quarter of 2013. Our net
interest margin was 1.29% for the second quarter of 2014 as compared to 1.64% for the second quarter of 2013.
The decreases in our interest rate spread
and net interest margin for the second quarter of 2014 as compared to the second quarter of 2013 are primarily due to repayments of higher yielding assets due to the low interest rate environment and a $2.31 billion increase in the average balance
of Federal funds and other overnight deposits, which yielded 0.25% during this same period, all of which caused our average yield on interest earning assets to decline while the average cost of interest bearing liabilities rose slightly. The
compression of our net interest margin and the reduction in the size of our balance sheet may result in a decline in our net interest income in future periods.
Page 49
Provision for Loan Losses.
There was no provision for loan losses for the quarter ended
June 30, 2014 as compared to $12.5 million for the quarter ended June 30, 2013. The ALL amounted to $255.0 million at June 30, 2014 as compared to $276.1 million at December 31, 2013 and $297.3 million at June 30, 2013. The
decrease in the provision for loan losses for the quarter ended June 30, 2014 is due primarily to improving home prices and economic conditions in our lending market areas, a decrease in the size of the loan portfolio and a decrease in the
amount of both non-performing loans and early stage delinquencies. We did not record a provision for loan losses during the second quarter of 2014 based on our ALL methodology which 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 the level 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 six months of 2014, the average LTV ratio for our first mortgage loan originations was 60%. The weighted average
LTV ratio for our one-to four-family mortgage loan portfolio was 59% at June 30, 2014, using the appraised value of the collateral property 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 second quarter of 2014, we concluded
that home values in our primary lending markets have increased approximately 6% since the second quarter of 2013.
Economic conditions in our primary
market area continued to improve modestly during the first six months of 2014 as evidenced by increased levels of home sale activity, higher real estate valuations and a decrease in the unemployment rate which, while improving, remains elevated. 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 $1.01 billion at June 30, 2014 as compared to $1.05 billion at December 31, 2013 and $1.11 billion at June 30, 2013. Non-performing loans at June 30, 2014 included $999.6 million of one- to four-family first
mortgage loans as compared to $1.04 billion at December 31, 2013 and $1.10 billion at June 30, 2013. The ratio of non-performing loans to total loans was 4.35% at both June 30, 2014 and December 31, 2013 and was 4.42% at
June 30, 2013. Loans delinquent 30 to 59 days amounted to $274.9 million at June 30, 2014 as compared to $311.9 million at December 31, 2013 and $334.4 million at June 30, 2013. Loans delinquent 60 to 89 days amounted to $136.5
million at June 30, 2014 as compared to $161.5 million at December 31, 2013 and $212.6 million at June 30, 2013. Accordingly, total early stage delinquencies (loans 30 to 89 days past due) decreased $62.0 million to $411.4 million at
June 30, 2014 from $473.4 million at December 31, 2013 and decreased $135.6 million from $547.0 million at June 30, 2013. Foreclosed real estate amounted to $77.8 million at June 30, 2014 as compared to $70.4 million at
December 31, 2013, and $61.6 million at June 30, 2013. 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 ability of real estate values to fluctuate, 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.
Page 50
At June 30, 2014, the ratio of the ALL to non-performing loans was 25.29% as compared to 26.31% at
December 31, 2013 and 26.73% at June 30, 2013. The ratio of the ALL to total loans was 1.10% at June 30, 2014 as compared to 1.15% at December 31, 2013 and 1.18% at June 30, 2013. Changes in the ratio of the ALL to
non-performing loans are 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. 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 and 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. Charge-offs, net of
recoveries amounted to $10.7 million for the second quarter of 2014 as compared to $16.3 million for the second quarter of 2013. Write-downs and net gains or losses on the sale of foreclosed real estate amounted to a net gain of $592,000 for the
second quarter of 2014 as compared to a net gain of $803,000 for the second quarter of 2013. The results of our reappraisal process, our recent charge-off history and our loss experience related to the sale of foreclosed real estate are considered
in the determination of the ALL. Our loss experience on the sale of foreclosed real estate, calculated without regard for previous charge-offs and write-downs, was 14% for the quarter ended June 30, 2014 as compared to 20% for the quarter ended
June 30, 2013.
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 June 30, 2014, 85% of our loan portfolio and 76% of our non-performing loans are located in the New York metropolitan area. We 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, interest-only, reduced documentation, 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 as the status
of the regional economy and housing market, in order to ascertain
Page 51
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 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 13.1% at June 30, 2014 compared to 13.6% at December 31, 2013.
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 the sale of foreclosed real estate as well as our consideration of environmental factors, we changed certain loss factors used in our quantitative analysis of the ALL for our one-
to four- family first mortgage loans during the first quarter of 2014. The 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 June 30, 2014 was 59%, using the appraised value of the collateral property at the time of origination. Based on the valuation indices, house prices have declined in the New York metropolitan area, where 76% of our non-performing loans were
located at June 30, 2014, by approximately 19% from the peak of the market in 2006 through April 2014 and by 17% nationwide during that period. The average LTV ratio of our non-performing loans was approximately 75% at June 30, 2014 using
appraised values at the time of origination. 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 $10.7 million for the second quarter of 2014 as compared to net charge-offs of $16.3 million for the second quarter of 2013. Net charge-offs as a percentage of average loans was 0.18% for the quarter ended June 30, 2014 as compared
to 0.26% for the quarter ended June 30, 2013.
Due to the unprecedented level of foreclosures and the desire by many states to slow the foreclosure
process, we continue to experience a time frame to repayment or foreclosure of up to 48 months from the initial non-performing period. These delays have impacted our level of non-performing loans as these loans take longer to migrate to real estate
owned and ultimate disposition. In addition, the highly publicized foreclosure issues that have affected the nations largest mortgage loan servicers has resulted in greater court and state attorney general scrutiny, and the time to complete a
foreclosure continues to be prolonged, especially in New York and New Jersey where 76% of our non-performing loans are located. If real estate prices do not continue to improve or begin to decline, this extended time may result in further
charge-offs. 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.
Page 52
Commercial and construction loans evaluated for impairment amounted to $5.3 million, $8.7 million and $11.2
million at June 30, 2014, December 31, 2013 and June 30, 2013, respectively. Based on this evaluation, we established an ALL of $1,000 for these loans classified as impaired at June 30, 2014 as compared to $527,000 at
December 31, 2013 and $901,000 at June 30, 2013.
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 $21.2 million for the second quarter of 2014 as compared to $9.6 million for the second quarter of 2013. Included in non-interest income for the second quarter of 2014 were $19.5 million in gains from the sale of $565.6
million of mortgage-backed securities. Gains on the sales of securities amounted to $7.2 million in the second quarter of 2013. The remainder of non-interest income is primarily made up of service fees and charges on deposit and loan accounts.
Non-Interest Expense.
Total non-interest expense decreased $3.5 million to $73.1 million for the second quarter of 2014 from $76.6 million for
the second quarter of 2013. This decrease was due to a $6.5 million decrease in Federal deposit insurance expense partially offset by a $3.5 million increase in other non-interest expense.
Compensation and employee benefit costs decreased $208,000, or 0.6%, to $32.4 million for the second quarter of 2014 as compared to $32.6 million for the same
period in 2013. The decrease in compensation and employee benefit costs is primarily due to a $2.3 million decrease in compensation expense and a $1.3 million decrease in postretirement benefit costs, partially offset by increases of $1.9 million in
medical plan expenses and $1.2 million in stock benefit plan expense. The increase in stock benefit plan expense was due primarily to an increase in the market price of our common stock. At June 30, 2014, we had 1,514 full-time equivalent
employees as compared to 1,522 at June 30, 2013.
For the quarter ended June 30, 2014, Federal deposit insurance expense decreased $6.5 million,
or 33.2%, to $13.1 million from $19.6 million for the quarter ended June 30, 2013. The decrease in Federal deposit insurance expense for the quarter ended June 31, 2014 is primarily due to a reduction in the size of our balance sheet
and a decrease in our assessment rate.
Other non-interest expense increased $3.5 million to $18.2 million for the quarter ended June 30, 2014 as
compared to $14.7 million for the second quarter of 2013. This increase was due primarily to an increase of $1.8 million in professional service fees and an increase of $691,000 in foreclosed real estate expenses.
The increase in professional service fees is due primarily to fees related to the use of consultants to assist the Company in preparing its capital stress
tests and capital plan as well as the use of consultants to supplement staffing during the pendency of the Merger.
Page 53
Included in other non-interest expense were write-downs on foreclosed real estate and net gains and losses on the
sale of foreclosed real estate which amounted to a net gain of $592,000 for the second quarter of 2014 as compared to net gain of $803,000 for the second quarter of 2013. We sold 70 properties during the second quarter of 2014 and had 228
properties in foreclosed real estate with a carrying value of $77.8 million, 85 of which were under contract to sell as of June 30, 2014. For the second quarter of 2013, we sold 58 properties and had 149 properties in foreclosed real
estate with a carrying value of $61.6 million, of which 35 were under contract to sell as of June 30, 2013.
Income Taxes.
Income tax
expense amounted to $26.6 million for the second quarter of 2014 as compared to income tax expense of $31.6 million for the corresponding period in 2013. Our effective tax rate for the second quarter of 2014 was 40.41% compared with 39.34% for the
second quarter of 2013.
Page 54
Comparison of Operating Results for the Six-Month Periods Ended June 30, 2014 and 2013
Average Balance Sheet.
The following table presents the average balance sheets, average yields and costs and certain other information for the
six months ended June 30, 2014 and 2013. The table presents the annualized average yield on interest-earning assets and the annualized average cost of interest-bearing liabilities. We derived the yields and costs by dividing annualized income
or expense by the average balance of interest-earning assets and interest-bearing liabilities, respectively, for the periods shown. We derived average balances from daily balances over the periods indicated. Interest income includes fees that we
considered to be adjustments to yields. Yields on tax-exempt obligations were not computed on a tax equivalent basis. Nonaccrual loans were included in the computation of average balances and therefore have a zero yield. The yields set forth below
include the effect of deferred loan origination fees and costs, and purchase discounts and premiums that are amortized or accreted to interest income.
|
|
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|
|
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|
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|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
|
|
Yield/
|
|
|
Average
|
|
|
|
|
|
Yield/
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Cost
|
|
|
Balance
|
|
|
Interest
|
|
|
Cost
|
|
|
|
(Dollars in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earnings assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First mortgage loans, net (1)
|
|
$
|
23,309,914
|
|
|
$
|
500,263
|
|
|
|
4.29
|
%
|
|
$
|
25,692,014
|
|
|
$
|
578,247
|
|
|
|
4.50
|
%
|
Consumer and other loans
|
|
|
209,764
|
|
|
|
4,477
|
|
|
|
4.27
|
|
|
|
238,701
|
|
|
|
5,316
|
|
|
|
4.45
|
|
Federal funds sold and other overnight deposits
|
|
|
4,942,571
|
|
|
|
6,202
|
|
|
|
0.25
|
|
|
|
2,311,499
|
|
|
|
2,841
|
|
|
|
0.25
|
|
Mortgage-backed securities at amortized cost
|
|
|
8,034,614
|
|
|
|
90,424
|
|
|
|
2.25
|
|
|
|
9,997,654
|
|
|
|
113,572
|
|
|
|
2.27
|
|
Federal Home Loan Bank stock
|
|
|
342,496
|
|
|
|
7,494
|
|
|
|
4.38
|
|
|
|
352,121
|
|
|
|
7,724
|
|
|
|
4.39
|
|
Investment securities, at amortized cost
|
|
|
442,286
|
|
|
|
2,884
|
|
|
|
1.30
|
|
|
|
487,337
|
|
|
|
5,874
|
|
|
|
2.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
37,281,645
|
|
|
|
611,744
|
|
|
|
3.28
|
|
|
|
39,079,326
|
|
|
|
713,574
|
|
|
|
3.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earnings assets (4)
|
|
|
905,703
|
|
|
|
|
|
|
|
|
|
|
|
1,194,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
38,187,348
|
|
|
|
|
|
|
|
|
|
|
$
|
40,273,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings accounts
|
|
|
1,033,539
|
|
|
|
770
|
|
|
|
0.15
|
|
|
$
|
972,192
|
|
|
|
1,105
|
|
|
|
0.23
|
|
Interest-bearing transaction accounts
|
|
|
2,179,399
|
|
|
|
3,118
|
|
|
|
0.29
|
|
|
|
2,252,840
|
|
|
|
3,988
|
|
|
|
0.36
|
|
Money market accounts
|
|
|
4,985,144
|
|
|
|
4,839
|
|
|
|
0.20
|
|
|
|
6,330,416
|
|
|
|
9,553
|
|
|
|
0.30
|
|
Time deposits
|
|
|
12,212,864
|
|
|
|
72,084
|
|
|
|
1.19
|
|
|
|
12,950,186
|
|
|
|
81,097
|
|
|
|
1.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
|
20,410,946
|
|
|
|
80,811
|
|
|
|
0.80
|
|
|
|
22,505,634
|
|
|
|
95,743
|
|
|
|
0.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase agreements
|
|
|
6,401,934
|
|
|
|
142,730
|
|
|
|
4.43
|
|
|
|
6,950,000
|
|
|
|
155,337
|
|
|
|
4.45
|
|
Federal Home Loan Bank of New York advances
|
|
|
5,773,066
|
|
|
|
138,185
|
|
|
|
4.76
|
|
|
|
5,225,000
|
|
|
|
125,258
|
|
|
|
4.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowed funds
|
|
|
12,175,000
|
|
|
|
280,915
|
|
|
|
4.59
|
|
|
|
12,175,000
|
|
|
|
280,595
|
|
|
|
4.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
32,585,946
|
|
|
|
361,726
|
|
|
|
2.21
|
|
|
|
34,680,634
|
|
|
|
376,338
|
|
|
|
2.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits
|
|
|
591,218
|
|
|
|
|
|
|
|
|
|
|
|
576,235
|
|
|
|
|
|
|
|
|
|
Other noninterest-bearing liabilities
|
|
|
207,396
|
|
|
|
|
|
|
|
|
|
|
|
271,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest-bearing liabilities
|
|
|
798,614
|
|
|
|
|
|
|
|
|
|
|
|
847,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
33,384,560
|
|
|
|
|
|
|
|
|
|
|
|
35,528,165
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
4,802,788
|
|
|
|
|
|
|
|
|
|
|
|
4,745,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
38,187,348
|
|
|
|
|
|
|
|
|
|
|
$
|
40,273,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/net interest rate spread (2)
|
|
|
$
|
250,018
|
|
|
|
1.07
|
|
|
|
|
|
|
$
|
337,236
|
|
|
|
1.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest-earning assets/net interest margin (3)
|
|
$
|
4,695,699
|
|
|
|
|
|
|
|
1.35
|
%
|
|
$
|
4,398,692
|
|
|
|
|
|
|
|
1.71
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of interest-earning assets to interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
1.14
|
x
|
|
|
|
|
|
|
|
|
|
|
1.13
|
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 $46.4 million and $112.8 million for the six months ended June 30, 2014 and 2013, respectively.
|
Page 55
General.
Net income was $81.7 million for the six months ended June 30, 2014 as compared to
net income of $96.7 million for the six months ended June 30, 2013. Both basic and diluted earnings per common share were $0.16 for the six months ended June 30, 2014 as compared to both basic and diluted earnings per share of $0.19 for
the six months ended June 30, 2013. For the six months ended June 30, 2014, our annualized return on average shareholders equity was 3.40%, compared with 4.07% for the six months ended June 30, 2013. Our annualized return on
average assets for the six months ended June 30, 2014 was 0.43% as compared to 0.48% for the six months ended June 30, 2013.
Interest and
Dividend Income.
Total interest and dividend income for the six months ended June 30, 2014 decreased $101.9 million, or 14.3%, to $611.7 million from $713.6 million for the six months ended June 30, 2013. The decrease in total
interest and dividend income was primarily due to a decrease in the average balance of total interest-earning assets of $1.80 billion, or 4.6%, to $37.28 billion for the six months ended June 30, 2014 from $39.08 billion for the six months
ended June 30, 2013. The decrease in total interest and dividend income was also due to a decrease of 37 basis points in the annualized weighted-average yield on total interest-earning assets to 3.28% for the six months ended June 30, 2014
from 3.65% for the same period in 2013. The decrease in the average balance of total interest-earning assets was due primarily to repayments of mortgage-related assets during the first six months of 2014 as a result of the low interest rate
environment and our decision not to reinvest in low yielding, long term assets. The decrease in the weighted average yield of interest-earning assets was due to lower market interest rates earned on mortgage-related assets and a $2.63 billion
increase in the average balance of Federal funds and other overnight deposits which had an average yield of 0.25% during the six months ended June 30, 2014.
For the six months ended June 30, 2014, interest on first mortgage loans decreased $77.9 million, or 13.5%, to $500.3 million from $578.2 million for the
six months ended June 30, 2013. This was primarily due to a $2.38 billion decrease in the average balance of first mortgage loans to $23.31 billion for the six months ended June 30, 2014 from $25.69 billion for the six months ended
June 30, 2013. The decrease in interest income on mortgage loans was also due to a 21 basis point decrease in the annualized weighted-average yield to 4.29% for the six months ended June 30, 2014 from 4.50% for the six months ended
June 30, 2013.
The decrease in the annualized weighted-average yield earned on first mortgage loans during the six months ended June 30, 2014
was due to repayments of higher-yielding loans and the rates on newly originated mortgage loans which have been below the average yield on our portfolio, reflecting overall low market rates. Consequently, the average yield on our loan portfolio
continued to decline during the first six months of 2014. In addition, our loan production decreased reflecting our low appetite for adding long-term fixed-rate mortgage loans to our portfolio in the current low interest rate environment and also
the impact of the CFPBs new qualified mortgage regulations, which went into effect in January 2014
.
Interest on consumer and other loans
decreased $839,000 to $4.5 million for the six months ended June 30, 2014 from $5.3 million for the six months ended June 30, 2013. The average balance of consumer and other loans decreased $28.9 million to $209.8 million for the first six
months of 2014 from $238.7 million for the first six months of 2013 and the average yield earned decreased 18 basis points to 4.27% from 4.45% 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 annualized weighted-average yield is a result of current market interest rates.
Page 56
Interest on mortgage-backed securities decreased $23.2 million to $90.4 million for the six months ended
June 30, 2014 from $113.6 million for the six months ended June 30, 2013. This decrease was due primarily to a $1.97 billion decrease in the average balance of mortgage-backed securities to $8.03 billion during the first six months of 2014
from $10.00 billion for the first six months of 2013. The annualized weighted-average yield of mortgage-backed securities was 2.25% for the first six months of 2014 as compared to 2.27% for the first six months of 2013.
The decrease in the average yield earned on mortgage-backed securities during the six months ended June 30, 2014 was 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 low interest rate environment. The decrease in the average balance of mortgage-backed securities during this
same period was due to sales of mortgage-backed securities and principal repayments. During the first six months of 2014, we sold $984.9 million of mortgage-backed securities to realize gains that would decrease as market interest rates increase and
as repayments reduced the outstanding principal balance on these securities.
For the six months ended June 30, 2014, interest on investment
securities decreased $3.0 million to $2.9 million as compared to $5.9 million for the six months ended June 30, 2013. This decrease was due to a decrease of 111 basis points in the annualized weighted-average yield to 1.30% for the first six
months of 2014 from 2.41% for the same period in 2013. This decrease was also due to a $45.0 million decrease in the average balance of investment securities to $442.3 million for the first six months of 2014 as compared to $487.3 million for the
first six months of 2013. The decrease in the average yield earned reflects current market interest rates.
Dividends on FHLB stock decreased $230,000 or
3.0%, to $7.5 million for the six months ended June 30, 2014 from $7.7 million for the six months ended June 30, 2013. The decrease was primarily due to a $9.6 million decrease in the average balance of FHLB stock to $342.5 million for the
first six months of 2014 as compared to $352.1 million for the first six months of 2013. The average dividend yield earned on FHLB stock was 4.38% for the six months ended June 30, 2014 and was 4.39% for the same period in 2013.
Interest on Federal funds sold and other overnight deposits amounted to $6.2 million for the six months ended June 30, 2014 as compared to $2.8 million
for the six months ended June 30, 2013 due primarily to an increase in the average balance of Federal funds sold and other overnight deposits. The average balance of Federal funds sold and other overnight deposits amounted to $4.94 billion for
the first six months of 2014 as compared to $2.31 billion for the same period in 2013. The yield earned on Federal funds and other overnight deposits was 0.25% for both the six months ended June 30, 2014 and 2013.
The increase in the average balance of Federal funds sold and other overnight deposits for the six month period ended June 30, 2014 was due primarily to
repayments on mortgage-related assets and our low appetite for adding long-term fixed-rate mortgage loans to our portfolio in the current low interest rate environment.
Interest Expense.
For the six months ended June 30, 2014 total interest expense decreased $14.6 million, or 3.9%, to $361.7 million from
$376.3 million for the six months ended June 30, 2013. This decrease was primarily due to a $2.09 billion, or 6.0%, decrease in the average balance of total interest-bearing liabilities to $32.59 billion for the six months ended June 30,
2014 compared with $34.68 billion for the six months ended June 30, 2013. This was partially offset by an increase in the annualized weighted-average cost of total interest-bearing liabilities to 2.21% for the six months ended June 30,
2014 as compared to 2.19% for the six months ended June 30, 2013. The decrease in the average balance of total interest-bearing liabilities was due to a $2.09 billion decrease in the average balance of total deposits.
Page 57
Interest expense on deposits decreased $14.9 million, or 15.6%, to $80.8 million for the six months ended
June 30, 2014 from $95.7 million for the six months ended June 30, 2013. The decrease is primarily due to a $2.10 billion decrease in the average balance of interest-bearing deposits to $20.41 billion for the first six months of 2014
from $22.51 billion for the first six months of 2013. The decrease is also due to a decrease in the average cost of interest-bearing deposits of 6 basis points to 0.80% for the first six months of 2014 from 0.86% for the first six months of 2013.
Interest expense on our time deposit accounts decreased $9.0 million to $72.1 million for the six months ended June 30, 2014 as compared to $81.1
million for the six months ended June 30, 2013. This decrease was due to a $737.3 million decrease in the average balance of time deposit accounts to $12.21 billion for the six months ended June 30, 2014 from $12.95 billion for the same
period in 2013. The decrease was also due to a 7 basis point decrease in the annualized weighted-average cost to 1.19% for the six months ended June 30, 2014 compared with 1.26% for the six months ended June 30, 2013 as maturing time
deposits were renewed or replaced by new time deposits at lower rates. The decline in the average balance of our time deposits reflects our decision to maintain lower deposit rates to continue our balance sheet reduction while profitable investment
opportunities remain scarce in the current environment.
Interest expense on money market accounts decreased $4.8 million to $4.8 million for the six
months ended June 30, 2014 from $9.6 million for the six months ended June 30, 2013. This decrease was due to a decrease in the annualized weighted-average cost of 10 basis points to 0.20% for the six months ended June 30, 2014 from
0.30% for the six months ended June 30, 2013. This decrease was also the result of a $1.34 billion decrease in the average balance of money market accounts to $4.99 billion for the six months ended June 30, 2014 from $6.33 billion for the
six months ended June 30, 2013.
Interest expense on our interest-bearing transaction accounts decreased $870,000 to $3.1 million for the six months
ended June 30, 2014 from $4.0 million for the same period in 2013. The decrease is due to a 7 basis point decrease in the annualized weighted-average cost to 0.29% for the six months ended June 30, 2014 as compared to 0.36% for the same
period in 2013. The decrease was also the result of $73.4 million decrease in the average balance to $2.18 billion for the six months ended June 30, 2014 as compared to $2.25 billion for the same period in 2013.
The decrease in the average cost of deposits for the first six months of 2014 reflected lower market interest rates and our decision to maintain lower deposit
rates to continue our balance sheet reduction.
For the six months ended June 30, 2014 interest expense on borrowed funds increased to $280.9 million
as compared to $280.6 million for the six months ended June 30, 2013. The average cost of borrowed funds was 4.59% for the six months ended June 30, 2014 as compared to 4.58% for the six months ended June 30, 2013. The average balance
of borrowings was unchanged for both comparative periods.
Borrowings amounted to $12.18 billion at June 30, 2014 with an average cost of 4.59%.
There are no scheduled maturities for 2014. During the first quarter of 2014, we modified $800.0 million of FHLB repurchase agreements to be FHLB advances. This reduced our collateral requirements related to the repurchase agreements, which use
securities as collateral. FHLB advances are secured by a blanket lien on our loan portfolio. The modification resulted in a slight increase in the weighted average cost of the borrowings that were modified.
Page 58
Net Interest Income
.
Net interest income decreased $87.2 million, or 25.9%, to $250.0
million for the first six months of 2014 as compared to $337.2 million for the first six months of 2013. Our interest rate spread decreased 39 basis points to 1.07% for the six months ended June 30, 2014 as compared to 1.46% for the six months
ended June 30, 2013. Our net interest margin decreased 36 basis points to 1.35% for the six months ended June 30, 2014 as compared to 1.71% for the six months ended June 30, 2013. The decrease in our interest rate spread and net
interest margin for the six months ended June 30, 2014 is primarily due to repayments of higher yielding assets due to the low interest rate environment and an increase in the average balance of Federal funds and other overnight deposits which
yield 0.25%.
Provision for Loan Losses.
There was no provision for loan losses for the six months ended June 30, 2014 as compared to
$32.5 million for the six months ended June 30, 2013. The ALL amounted to $255.0 million at June 30, 2014 and $276.1 million at December 31, 2013. The decrease in our provision for loan losses was due primarily to improving home
prices and economic conditions, a decrease in the size of the loan portfolio and a decrease in the amount of total delinquent loans. We recorded our provision for loan losses during the first six months of 2014 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 June 30, 2014 and 2013 Provision for Loan
Losses.
Non-Interest Income.
Total non-interest income was $38.9 million for the first six months of 2014 as compared to $12.1
million for the same period in 2013. Included in non-interest income for the first six months 2014 were $35.5 million in gains from the sale of $984.9 million of mortgage-backed securities. Gains on the sales of securities amounted to $7.2 million
for the six months ended June 30, 2013.
Non-Interest Expense.
Total non-interest expense amounted to $152.8 million for the six months
ended June 30, 2014 as compared to $157.9 million for the six months ended June 30, 2013.
Compensation and employee benefit costs increased
$1.8 million, or 2.8%, to $66.0 million for the first six months of 2014 as compared to $64.2 million for the same period in 2013. The increase in compensation costs is primarily due to increases of $3.1 million in stock benefit plan expense and
$2.9 million in medical plan expenses. The increases were partially offset by decreases of $2.9 million in pension plan expense and $1.9 million in compensation expense.
For the six months ended June 30, 2014 Federal deposit insurance expense decreased $16.7 million, or 38.2%, to $27.0 million from $43.7 million for the
six months ended June 30, 2013. This decrease was due primarily to a reduction in the size of our balance sheet and a decrease in our assessment rate.
For the six months ended June 30, 2014, other non-interest expense increased $9.2 million to $40.7 million as compared to $31.5 million for the same
period in 2013. This increase was due to an increase of $2.2 million in foreclosed property expenses, a $4.0 million increase in professional fees and a $3.0 million increase in our reserve related to our claim against the Lehman Brothers, Inc.
estate.
The increase in professional fees is due primarily to fees related to the use of consultants to assist the Company in preparing its capital
stress tests and capital plan as well as the use of consultants to supplement staffing during the pendency of the Merger.
The Bank had two collateralized
borrowings in the form of repurchase agreements totaling $100.0 million with Lehman Brothers, Inc. that were secured by mortgage-backed securities with an amortized cost of approximately $114.1 million. The trustee for the liquidation of Lehman
Brothers, Inc. (the Trustee)
Page 59
notified the Bank in the fourth quarter of 2011 that it considered our claim to be a non-customer claim, which has a lower payment preference than a customer claim and that the value of such
claim is approximately $13.9 million representing the excess of the fair value of the collateral over the $100.0 million repurchase price. At that time we established a reserve of $3.9 million against the receivable balance at December 31,
2011. On June 25, 2013, the Bankruptcy Court affirmed the Trustees determination that the repurchase agreements did not entitle the Bank to customer status and on February 26, 2014, the U.S. District Court upheld the Bankruptcy
Courts decision that our claim should be treated as a non-customer claim. As a result, we increased our reserve by $3.0 million to $6.9 million against the receivable balance during the first quarter of 2014.
Included in other non-interest expense were write-downs on foreclosed real estate and net gains and losses on the sale of foreclosed real estate which
amounted to a net gain of $670,000 for the six months ended June 30, 2014 as compared to a net gain of $407,000 for the comparable period in 2013. We sold 116 properties during the first six months of 2014 as compared to 91 properties for the
same period in 2013. Expenses associated with foreclosed real estate were $8.4 million and $6.2 million for the six months ended June 30, 2014 and 2013, respectively.
Income Taxes.
Income tax expense amounted to $54.4 million for the six months ended of 2014 compared with an income tax expense of $62.3 million
for the same quarter in 2013. Our effective tax rate was 39.99% for the six months ended of June 30, 2014 and 39.20% for the six months ended June 30, 2013.
On March 31, 2014, New York tax legislation was signed into law in connection with the approval of the New York State 2014-2015 budget that will
generally become effective on January 1, 2015. Portions of the new legislation will result in significant changes in the method of calculation of income taxes for banks and thrifts operating in New York State, including changes to
(1) future period tax rates and (2) rules related to the sourcing of revenue. At this time, we expect the changes to the New York tax code will cause our effective tax rate to increase. The amount of such increase will depend on the amount
of revenues that are sourced to New York State under the new legislation, which can be expected to fluctuate over time. The changes in the tax code had an immaterial effect on the carrying value of the Companys net deferred tax asset at
March 31, 2014 (the date the legislation was signed into law).
Page 60
Asset Quality
Credit Quality
Historically, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
|
December 31, 2013
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
Amount
|
|
|
of Total
|
|
|
Amount
|
|
|
of Total
|
|
|
|
(Dollars in thousands)
|
|
First mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizing
|
|
$
|
18,907,354
|
|
|
|
81.66
|
%
|
|
$
|
19,518,912
|
|
|
|
80.95
|
%
|
Interest-only
|
|
|
3,283,509
|
|
|
|
14.18
|
|
|
|
3,648,732
|
|
|
|
15.13
|
|
FHA/VA
|
|
|
740,159
|
|
|
|
3.20
|
|
|
|
704,532
|
|
|
|
2.92
|
|
Multi-family and commercial
|
|
|
18,812
|
|
|
|
0.08
|
|
|
|
25,671
|
|
|
|
0.11
|
|
Construction
|
|
|
177
|
|
|
|
|
|
|
|
294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total first mortgage loans
|
|
|
22,950,011
|
|
|
|
99.12
|
|
|
|
23,898,141
|
|
|
|
99.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer and other loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate second mortgages
|
|
|
79,392
|
|
|
|
0.34
|
|
|
|
86,079
|
|
|
|
0.36
|
|
Home equity credit lines
|
|
|
105,732
|
|
|
|
0.46
|
|
|
|
108,550
|
|
|
|
0.45
|
|
Other
|
|
|
19,576
|
|
|
|
0.08
|
|
|
|
20,059
|
|
|
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer and other loans
|
|
|
204,700
|
|
|
|
0.88
|
|
|
|
214,688
|
|
|
|
0.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
23,154,711
|
|
|
|
100.00
|
%
|
|
|
24,112,829
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred loan costs
|
|
|
104,597
|
|
|
|
|
|
|
|
105,480
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(255,011
|
)
|
|
|
|
|
|
|
(276,097
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans
|
|
$
|
23,004,297
|
|
|
|
|
|
|
$
|
23,942,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2014, first mortgage loans secured by one-to four-family properties accounted for 99.0% of total loans.
Fixed-rate mortgage loans represent 54.5% 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 or negative amortization loans. We believe our loans, when made, were amply collateralized and otherwise conformed to our lending standards.
Included in our loan portfolio at June 30, 2014 are interest-only loans of approximately $3.28 billion, or 14.2% of total loans, as compared to $3.65
billion, or 15.1% of total loans, at December 31, 2013. 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
Page 61
underwritten using the fully-amortizing payment amount. Non-performing interest-only loans amounted to $115.9 million, or 11.5% of non-performing loans at June 30, 2014 as compared to
non-performing interest-only loans of $135.2 million, or 12.9% of non-performing loans at December 31, 2013.
In addition to our full documentation
loan program, prior to January 2014, we originated and purchased loans to certain eligible borrowers as reduced documentation loans. Generally the maximum loan amount for reduced documentation loans was $750,000 and these loans were subject to
higher interest rates than our full documentation loan products. We required applicants for reduced documentation loans to complete a Freddie Mac/Fannie Mae loan application and requested income, asset and credit history information from the
borrower. Additionally, we verified asset holdings and obtained credit reports from outside vendors on all borrowers to ascertain the credit history of the borrower. Applicants with delinquent credit histories generally did not qualify for the
reduced documentation processing, although delinquencies that were adequately explained did not prohibit processing as a reduced documentation loan. We reserved the right to verify income and required asset verification, but on a case by case basis
we elected to not verify or corroborate certain income information. Reduced documentation loans represent 21.6% of our one- to four-family first mortgage loans at June 30, 2014 and 21.3% at December 31, 2013. Included in our loan portfolio
at June 30, 2014 are $4.24 billion of amortizing reduced documentation loans and $721.0 million of reduced documentation interest-only loans as compared to $4.27 billion and $826.5 million, respectively, at December 31, 2013.
Non-performing loans at June 30, 2014 include $186.2 million of amortizing reduced documentation loans and $40.1 million of interest-only reduced documentation loans as compared to $182.9 million and $48.8 million, respectively, at
December 31, 2013. Beginning in January 2014, we only originate loans that meet the CFPBs requirements under the ability to repay regulation or qualified mortgage rule, although we continue to originate interest only loans, subject to
full compliance with the ability to repay provisions of the rule. As a result, in January 2014 we discontinued our reduced documentation loan program in order to comply with the newly effective CFPB requirements to validate a borrowers ability
to repay and the corresponding safe harbor for qualified mortgages.
The following table presents the geographic distribution of our total
loan portfolio, as well as the geographic distribution of our non-performing loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2014
|
|
|
At December 31, 2013
|
|
|
|
|
|
|
Non-performing
|
|
|
|
|
|
Non-performing
|
|
|
|
Total loans
|
|
|
Loans
|
|
|
Total loans
|
|
|
Loans
|
|
New Jersey
|
|
|
42.4
|
%
|
|
|
42.4
|
%
|
|
|
42.5
|
%
|
|
|
44.2
|
%
|
New York
|
|
|
27.6
|
|
|
|
24.9
|
|
|
|
27.1
|
|
|
|
24.1
|
|
Connecticut
|
|
|
14.8
|
|
|
|
8.5
|
|
|
|
14.9
|
|
|
|
8.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total New York metropolitan area
|
|
|
84.8
|
|
|
|
75.8
|
|
|
|
84.5
|
|
|
|
76.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pennsylvania
|
|
|
4.9
|
|
|
|
2.7
|
|
|
|
4.9
|
|
|
|
2.4
|
|
Massachusetts
|
|
|
1.9
|
|
|
|
1.7
|
|
|
|
1.8
|
|
|
|
1.6
|
|
Virginia
|
|
|
1.7
|
|
|
|
2.4
|
|
|
|
1.8
|
|
|
|
2.3
|
|
Maryland
|
|
|
1.6
|
|
|
|
4.9
|
|
|
|
1.7
|
|
|
|
4.7
|
|
Illinois
|
|
|
1.5
|
|
|
|
4.9
|
|
|
|
1.6
|
|
|
|
4.8
|
|
All others
|
|
|
3.6
|
|
|
|
7.6
|
|
|
|
3.7
|
|
|
|
7.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total outside New York metropolitan area
|
|
|
15.2
|
|
|
|
24.2
|
|
|
|
15.5
|
|
|
|
23.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 62
Non-Performing Assets
The following table presents information regarding non-performing assets as of the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
|
December 31, 2013
|
|
|
|
(Dollars in thousands)
|
|
Non-accrual loans:
|
|
|
|
|
|
|
|
|
One-to four-family amortizing loans
|
|
$
|
749,251
|
|
|
$
|
770,641
|
|
One-to four-family interest-only loans
|
|
|
115,897
|
|
|
|
135,228
|
|
Multi-family and commercial mortgages
|
|
|
1,044
|
|
|
|
3,189
|
|
Construction loans
|
|
|
177
|
|
|
|
294
|
|
Consumer and other loans
|
|
|
7,467
|
|
|
|
7,048
|
|
|
|
|
|
|
|
|
|
|
Total non-accrual loans
|
|
|
873,836
|
|
|
|
916,400
|
|
Accruing loans delinquent 90 days or more (1)
|
|
|
134,417
|
|
|
|
132,844
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans
|
|
|
1,008,253
|
|
|
|
1,049,244
|
|
Foreclosed real estate, net
|
|
|
77,803
|
|
|
|
70,436
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets
|
|
$
|
1,086,056
|
|
|
$
|
1,119,680
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans to total loans
|
|
|
4.35
|
%
|
|
|
4.35
|
%
|
Non-performing assets to total assets
|
|
|
2.88
|
|
|
|
2.90
|
|
(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
for at least six months. We discontinue accruing and reverse accrued, but unpaid 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 $12.7
million of troubled debt restructurings that were previously accruing interest became 90 days or more past due during the second quarter of 2014 for which we discontinued accruing and reversed accrued, but unpaid interest.
Page 63
The following table is a comparison of our delinquent loans at June 30, 2014 and December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-59 Days
|
|
|
60-89 Days
|
|
|
90 Days or More
|
|
|
|
Number
|
|
|
Principal
|
|
|
Number
|
|
|
Principal
|
|
|
Number
|
|
|
Principal
|
|
|
|
of
|
|
|
Balance
|
|
|
of
|
|
|
Balance
|
|
|
of
|
|
|
Balance
|
|
|
|
Loans
|
|
|
of Loans
|
|
|
Loans
|
|
|
of Loans
|
|
|
Loans
|
|
|
of Loans
|
|
|
|
(Dollars in thousands)
|
|
At June 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four- family first mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizing
|
|
|
665
|
|
|
$
|
216,422
|
|
|
|
288
|
|
|
$
|
98,538
|
|
|
|
2,230
|
|
|
$
|
749,251
|
|
Interest-only
|
|
|
50
|
|
|
|
32,776
|
|
|
|
23
|
|
|
|
21,514
|
|
|
|
202
|
|
|
|
115,897
|
|
FHA/VA first mortgages
|
|
|
126
|
|
|
|
21,888
|
|
|
|
55
|
|
|
|
10,202
|
|
|
|
570
|
|
|
|
134,417
|
|
Multi-family and commercial mortgages
|
|
|
7
|
|
|
|
1,845
|
|
|
|
2
|
|
|
|
4,552
|
|
|
|
3
|
|
|
|
1,044
|
|
Construction loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
177
|
|
Consumer and other loans
|
|
|
30
|
|
|
|
1,932
|
|
|
|
15
|
|
|
|
1,733
|
|
|
|
75
|
|
|
|
7,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
878
|
|
|
$
|
274,863
|
|
|
|
383
|
|
|
$
|
136,539
|
|
|
|
3,081
|
|
|
$
|
1,008,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquent loans to total loans
|
|
|
|
|
|
|
1.19
|
%
|
|
|
|
|
|
|
0.59
|
%
|
|
|
|
|
|
|
4.35
|
%
|
|
|
|
|
|
|
|
At December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four- family first mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizing
|
|
|
728
|
|
|
$
|
246,435
|
|
|
|
327
|
|
|
$
|
118,947
|
|
|
|
2,366
|
|
|
$
|
770,641
|
|
Interest-only
|
|
|
51
|
|
|
|
34,277
|
|
|
|
29
|
|
|
|
21,283
|
|
|
|
235
|
|
|
|
135,228
|
|
FHA/VA first mortgages
|
|
|
153
|
|
|
|
27,868
|
|
|
|
73
|
|
|
|
13,963
|
|
|
|
559
|
|
|
|
132,844
|
|
Multi-family and commercial mortgages
|
|
|
4
|
|
|
|
1,384
|
|
|
|
1
|
|
|
|
5,983
|
|
|
|
4
|
|
|
|
3,189
|
|
Construction loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
294
|
|
Consumer and other loans
|
|
|
36
|
|
|
|
1,931
|
|
|
|
18
|
|
|
|
1,337
|
|
|
|
68
|
|
|
|
7,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
972
|
|
|
$
|
311,895
|
|
|
|
448
|
|
|
$
|
161,513
|
|
|
|
3,233
|
|
|
$
|
1,049,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquent loans to total loans
|
|
|
|
|
|
|
1.29
|
%
|
|
|
|
|
|
|
0.67
|
%
|
|
|
|
|
|
|
4.35
|
%
|
Potential problem loans consist of early-stage delinquencies and troubled debt restructurings that are not included in
non-accrual loans. The following table presents information regarding loans modified in a troubled debt restructuring at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
|
December 31, 2013
|
|
|
|
(In thousands)
|
|
Troubled debt restructurings:
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
118,850
|
|
|
$
|
108,413
|
|
30-59 days
|
|
|
25,288
|
|
|
|
19,931
|
|
60-89 days
|
|
|
15,466
|
|
|
|
17,407
|
|
90 days or more
|
|
|
161,165
|
|
|
|
176,797
|
|
|
|
|
|
|
|
|
|
|
Total troubled debt restructurings
|
|
$
|
320,769
|
|
|
$
|
322,548
|
|
|
|
|
|
|
|
|
|
|
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 nine months, loans that have had past due amounts capitalized as part of the loan balance, loans that have a confirmed Chapter 13 bankruptcy status, loans to borrowers that have
completed Chapter 7 bankruptcy and other repayment plans. 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.
Page 64
The following table presents loan portfolio class modified as troubled debt restructurings. The pre-restructuring
and post-restructuring outstanding recorded investments disclosed in the table below represent the loan carrying amounts immediately prior to the restructuring and the carrying amounts as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
|
December 31, 2013
|
|
|
|
|
|
|
Pre-restructuring
|
|
|
Post-restructuring
|
|
|
|
|
|
Pre-restructuring
|
|
|
Post-restructuring
|
|
|
|
Number
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
Number
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
|
of
|
|
|
Recorded
|
|
|
Recorded
|
|
|
of
|
|
|
Recorded
|
|
|
Recorded
|
|
|
|
Contracts
|
|
|
Investment
|
|
|
Investment
|
|
|
Contracts
|
|
|
Investment
|
|
|
Investment
|
|
|
|
(Dollars in thousands)
|
|
Troubled debt restructurings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family first mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizing
|
|
|
934
|
|
|
$
|
328,995
|
|
|
$
|
282,158
|
|
|
|
933
|
|
|
$
|
318,908
|
|
|
$
|
281,481
|
|
Interest-only
|
|
|
57
|
|
|
|
34,502
|
|
|
|
30,112
|
|
|
|
55
|
|
|
|
35,226
|
|
|
|
31,564
|
|
Multi-family and commercial mortgages
|
|
|
2
|
|
|
|
7,911
|
|
|
|
4,744
|
|
|
|
2
|
|
|
|
7,029
|
|
|
|
7,029
|
|
Consumer and other loans
|
|
|
34
|
|
|
|
4,006
|
|
|
|
3,755
|
|
|
|
24
|
|
|
|
2,672
|
|
|
|
2,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,027
|
|
|
$
|
375,414
|
|
|
$
|
320,769
|
|
|
|
1,014
|
|
|
$
|
363,835
|
|
|
$
|
322,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosed real estate amounted to $77.8 million and $70.4 million at June 30, 2014 and December 31, 2013,
respectively. During the first six months of 2014 we sold 116 properties as compared to 91 properties during the first six months of 2013. Write-downs and net gains on the sale of foreclosed real estate amounted to a net gain of $670,000 for the six
months ended June 30, 2014 as compared to a net gain of $407,000 for the comparable period in 2013. Holding costs associated with foreclosed real estate amounted to $8.4 million and $6.2 million for the six months ended June 30, 2014 and
2013, respectively.
Page 65
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 Six Months
|
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
(Dollars in thousands)
|
|
|
(Dollars in thousands)
|
|
Balance at beginning of period
|
|
$
|
265,732
|
|
|
$
|
301,093
|
|
|
$
|
276,097
|
|
|
$
|
302,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
|
|
|
|
12,500
|
|
|
|
|
|
|
|
32,500
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First mortgage loans
|
|
|
(15,489
|
)
|
|
|
(20,693
|
)
|
|
|
(31,850
|
)
|
|
|
(47,831
|
)
|
Consumer and other loans
|
|
|
(220
|
)
|
|
|
(203
|
)
|
|
|
(391
|
)
|
|
|
(451
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs
|
|
|
(15,709
|
)
|
|
|
(20,896
|
)
|
|
|
(32,241
|
)
|
|
|
(48,282
|
)
|
Recoveries
|
|
|
4,988
|
|
|
|
4,591
|
|
|
|
11,155
|
|
|
|
10,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(10,721
|
)
|
|
|
(16,305
|
)
|
|
|
(21,086
|
)
|
|
|
(37,560
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
255,011
|
|
|
$
|
297,288
|
|
|
$
|
255,011
|
|
|
$
|
297,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to total loans
|
|
|
1.10
|
%
|
|
|
1.18
|
%
|
|
|
1.10
|
%
|
|
|
1.18
|
|
Allowance for loan losses to non-performing loans
|
|
|
25.29
|
|
|
|
26.73
|
|
|
|
25.29
|
|
|
|
26.73
|
|
Net charge-offs as a percentage of average loans (1)
|
|
|
0.18
|
|
|
|
0.26
|
|
|
|
0.18
|
|
|
|
0.29
|
|
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 June 30, 2014
|
|
|
At December 31, 2013
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
of Loans in
|
|
|
|
|
|
of Loans in
|
|
|
|
|
|
|
Category to
|
|
|
|
|
|
Category to
|
|
|
|
Amount
|
|
|
Total Loans
|
|
|
Amount
|
|
|
Total Loans
|
|
|
|
(Dollars in thousands)
|
|
First mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
$
|
251,160
|
|
|
|
99.04
|
%
|
|
$
|
271,261
|
|
|
|
99.00
|
%
|
Other first mortgages
|
|
|
368
|
|
|
|
0.08
|
|
|
|
918
|
|
|
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total first mortgage loans
|
|
|
251,528
|
|
|
|
99.12
|
|
|
|
272,179
|
|
|
|
99.11
|
|
Consumer and other loans
|
|
|
3,483
|
|
|
|
0.88
|
|
|
|
3,918
|
|
|
|
0.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowance for loan losses
|
|
$
|
255,011
|
|
|
|
100.00
|
%
|
|
$
|
276,097
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
Page 66
Historically, our primary investing activities have been 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, deposits and the proceeds from principal and interest payments on
loans, mortgage-backed securities and investment securities. Our loan production (originations and purchases) was $813.4 million during the first six months of 2014 as compared to $1.73 billion during the first six months of 2013. Principal
repayments on loans amounted to $1.72 billion and $3.55 billion for those same respective periods. At June 30, 2014, commitments to originate and purchase mortgage loans amounted to $97.9 million and $140,000 respectively, as compared to $400.7
million and $0 respectively, at June 30, 2013.
Purchases of mortgage-backed securities during the six months ended June 30, 2014 were $94.4
million as compared to $1.25 billion for the six months ended June 30, 2013. Principal repayments on mortgage-backed securities amounted to $769.0 million for the six months ended June 30, 2014 as compared to $1.79 billion for the six
months ended June 30, 2013. Proceeds from sales of mortgage-backed securities during the six months ended June 30, 2014 were $984.9 million. There were no sales of mortgage-backed securities during the six months ended June 30, 2013.
At June 30, 2014, mortgage-backed securities and investment securities with an amortized cost of $7.27 billion were used as collateral for
securities sold under agreements to repurchase and at that date we had $881.0 million 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 second quarter of 2014, we had no purchases or redemptions of FHLB common stock.
During the first six months of 2014, total cash and cash equivalents increased $1.13 billion to $5.45 billion. This increase is primarily due to repayments on
mortgage-related assets and the lack of attractive reinvestment opportunities in the current low interest rate environment as available short term reinvestment opportunities continue to carry low yields, and medium and longer term opportunities
available to us are creating more significant duration risk at relatively low yields. We have maintained lower deposit rates to allow a reduction in our deposits to help alleviate the pressure created by our increasing cash position. Accordingly, we
have used a portion of our excess cash inflows to fund these deposit reductions. We believe that while carrying this level of cash and cash equivalents adversely impacts our current earnings, it better positions our balance sheet for future
strategic initiatives such as a balance sheet restructuring.
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 $958.5 million during the first six months of 2014 as
compared to a decrease of $864.6 million for the first six months of 2013. 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 maintained our deposit rates at low levels during the first six months of 2014 to continue our balance sheet reduction. At June 30, 2014, time deposits scheduled to mature within one year totaled $6.80 billion with an average cost
of 1.01%. These time deposits are scheduled to mature as follows: $2.51 billion with an average cost of 0.61% in the third quarter of 2014, $1.65 billion with an average cost of 0.95% in the fourth quarter of 2014, $1.05 billion with an average
cost of 1.44% in the first quarter of 2015 and $1.59 billion with an average cost of 1.43% in the second quarter of 2015.
Page 67
We have, in the past, primarily used wholesale borrowings to fund our investing activities. Structured putable
borrowings amounted to $3.88 billion at June 30, 2014, including $3.68 billion with put dates within one year. These structured putable borrowings consist of $550.0 million of one-time putable borrowings and $3.13 billion of quarterly putable
borrowings. 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 250 basis points. Our remaining borrowings are fixed-rate, fixed maturity borrowings of $8.30 billion with a weighted-average rate of 4.70%. There are no
scheduled maturities through June 30, 2015.
As part of our Strategic Plan, we are continuing to explore ways to reduce our interest rate risk while
strengthening our balance sheet, which may include a further restructuring of our balance sheet during 2014. The Company previously completed a series of restructuring transactions in 2011 that reduced higher-cost structured borrowings on the
Companys balance sheet. Management is continuing to consider a variety of different restructuring alternatives, including whether to restructure all or various portions of our borrowed funds and various alternatives for replacement funding. No
decision has been made at this time regarding the timing, structure and scope of any restructuring transaction. Decisions regarding any restructuring transaction are dependent upon, among other things, market interest rates, overall economic
conditions and the status of the Merger. We expect a restructuring to result in a net loss and reduction of stockholder equity, though we also expect an improvement in net interest margin and future earnings prospects. Any restructuring will focus
on the prospects for long-term overall earnings stability and growth. Any restructuring will likely reduce our excess cash position, but will not adversely affect the liquidity we need to operate in a safe and sound manner.
At June 30, 2014 we had a concentration of borrowings with a single counterparty with $6.03 billion of borrowings with the FHLB. We do not believe this
concentration creates a material liquidity risk to us.
Our liquidity management process is structured to meet our daily funding needs and to 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, balance sheet concentration and liquidity limits, stress
testing, a cushion of liquid assets and a formal, well developed contingency funding plan.
Cash dividends paid during the six months ended June 30,
2014 were $40.1 million as compared to $59.7 million for the same period of 2013. We did not purchase any of our common shares during the first six months ended June 30, 2014 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 June 30, 2014, 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 June 30, 2014, Hudson City Bancorp had total cash and due from banks of $130.5 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.
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In accordance with the Bank MOU, the Bank has adopted and has implemented enhanced operating policies and
procedures that will enable us to continue to: (a) reduce our level of interest rate risk, (b) reduce our funding concentration, (c) diversify our funding sources, (d) enhance our liquidity position, (e) monitor and manage
loan modifications and (f) maintain our capital position in accordance with our existing capital plan. In addition, we developed the 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. Prior to the execution of Amendment No. 1, the implementation of the Strategic Plan had been
suspended pending the completion of the Merger. Since the execution of Amendment No. 1, we have updated the Strategic Plan, prioritizing certain matters that can be achieved during the pendency of the Merger. The Company is proceeding with
implementation of the prioritized aspects of the updated Strategic Plan.
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 June 30, 2014, 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 11.26%, 11.26% and 26.91%, respectively. We have agreed in the Bank MOU not to materially deviate from our capital plan without regulatory
approval.
Pursuant to the Reform Act, we will become subject to new minimum capital requirements. In July 2013, the Agencies issued rules that will
subject many savings and loan holding companies, including Hudson City Bancorp, to consolidated capital requirements. The rules also revise the quantity and quality of required minimum risk-based and leverage capital requirements applicable to
Hudson City Bancorp and Hudson City Savings, consistent with the Reform Act and the Basel III capital standards, add a new common equity Tier 1 risk-based capital ratio and add an additional common equity Tier 1 capital conservation buffer, or
Conservation Buffer, of 2.50% of risk-weighted assets, to be applied to the new common equity Tier 1 risk-based capital ratio, the Tier 1 risk-based capital ratio and the total risk-based capital ratio. The rules impose restrictions on capital
distributions and certain discretionary cash bonus payments if the minimum Conservation Buffer is not met. The rules also revise the calculation of risk-weighted assets to enhance their risk sensitivity and phase out trust preferred securities and
cumulative perpetual preferred stock as Tier 1 capital. The new minimum regulatory capital ratios and changes to the calculation of risk-weighted assets will be phased in to allow banking organizations to meet the new capital standards, with the
initial provisions effective for Hudson City Bancorp and Hudson City Savings on January 1, 2015. We are continuing to review and prepare for the impact that the Reform Act, Basel III capital standards and related rulemaking will have on our
business, financial condition and results of operations. For additional information, see Part II, Item 1A, Risk Factors, in our December 31, 2013 Form 10-K.
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Off-Balance Sheet Arrangements and Contractual Obligations
The Bank 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 June 30, 2014.
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Payments Due By Period
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Less Than
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One Year to
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Three Years to
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More Than
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Contractual Obligation
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Total
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One Year
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Three Years
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Five Years
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Five Years
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(In thousands)
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Mortgage loan originations
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$
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97,921
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$
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97,921
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$
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$
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$
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Mortgage loan purchases
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140
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140
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Repayment of borrowed funds
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12,175,000
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5,100,000
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2,375,000
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4,700,000
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Operating leases
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138,824
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10,691
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21,009
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20,118
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87,006
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Total
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$
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12,411,885
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$
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108,752
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$
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5,121,009
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$
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2,395,118
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$
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4,787,006
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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 $151.1 million, $158,000, and $2.3 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 60 days.
Critical Accounting Policies
Note 2 to our Audited
Consolidated Financial Statements, included in our 2013 Annual Report on Form 10-K, contains a summary of our significant accounting policies. We believe our policies with respect to the methodology for our determination of the ALL, the measurement
of stock-based compensation expense, the impairment of securities, the impairment of goodwill and the measurement of the funded status and cost of our pension and other post-retirement benefit plans involve a higher degree of complexity and require
management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could cause reported results to differ materially. These critical
policies and their application are continually reviewed by management, and are periodically reviewed with the Audit Committee and our Board of Directors.
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
June 30, 2014. 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.
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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 June 30, 2014. 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 June 30, 2014, approximately 84.8% of our total loans are in the New York metropolitan area. Additionally, the states of
Pennsylvania, Massachusetts, Virginia, Maryland and Illinois, accounted for 4.9%, 1.9%, 1.7%, 1.6% and 1.5%, respectively of total loans. The remaining 3.6% 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 the potential for future declines 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, interest-only, reduced documentation, 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 first six months of 2014. This adjustment in our loss factors did not have a material effect on the ultimate level of our ALL or on our provision
for loan losses. We use this analysis, as a tool, together with principal balances and delinquency reports, to evaluate the adequacy of the ALL. Other key factors we consider in this process are current real estate market conditions in geographic
areas where our loans are located, changes in the trend of non-performing loans, the results of our foreclosed property transactions, the current state of the local and national economy, changes in interest rates and loan portfolio growth. Any one
or a combination of these adverse trends may adversely affect our loan portfolio resulting in increased delinquencies, loan losses and 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.
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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 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 made grants of stock units in 2012 for which the sizes of the awards depended
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 and stock unit awards on the date of grant using the Black-Scholes option pricing model using assumptions for the expected dividend yield, expected stock price volatility, risk-free interest rate
and expected option term. These assumptions are based on our analysis of our historical option exercise experience and our judgments regarding future option exercise experience and market conditions. These assumptions are subjective in nature,
involve uncertainties and, therefore, cannot be determined with precision. The Black-Scholes option pricing model also contains certain inherent limitations when applied to options that are not traded on public markets.
The per share fair value of these equity grants 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.
Page 72
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, 2013 measurement date and for the 2014 expense calculation.
For our pension plan, we also assumed an annual rate of salary increase of 3.50% 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 14.7%
for 2013 and 11.4% for 2012. 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 4.70% was used for the December 31, 2013 measurement date and for the 2014 expense calculation.
The assumed health care cost trend rate used to measure the expected cost of other benefits for 2013 was 8.0%. The rate was assumed to decrease gradually to 4.50% for 2021 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.
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.
Accounting guidance requires that an entity assess whether an
impairment of a debt security is other-than-temporary and, as part of that assessment, determine its intent and ability to hold the security. If the entity intends to sell the debt security, an other-than-temporary impairment shall be considered to
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.
Page 73
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
six months of 2014.
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 $152.7 million and were recorded as a result of Hudson City Bancorps acquisition of Sound Federal Bancorp, Inc. in 2006.
The first step (Step 1) used to identify potential impairment involves comparing each reporting units estimated fair value to its carrying
amount, including goodwill. As a community-oriented bank, substantially all of the Companys operations involve the delivery of loan and deposit products to customers and these operations constitute the Companys only segment for financial
reporting purposes. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill is not considered to be impaired. If the carrying amount exceeds the estimated fair value, there is an indication of potential impairment and
the second step (Step 2) is performed to measure the amount. Step 2 involves calculating an implied fair value of goodwill for each reporting unit for which impairment was indicated in Step 1. The implied fair value of goodwill is
determined in a manner similar to the amount of goodwill calculated in a business combination by measuring the excess of the estimated fair value of the reporting unit, as determined in Step 1, over the aggregate estimated fair values of the
individual assets, liabilities, and identifiable intangibles, as if the reporting unit was being acquired at the impairment test date. Subsequent reversal of goodwill impairment losses is not permitted.
We performed our annual goodwill impairment analysis as of June 30, 2014 and concluded that goodwill was not impaired. Therefore, we did not recognize
any impairment of goodwill or other intangible assets during 2014.
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 74