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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

(Mark One)

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

For the fiscal year ended: December 31, 2014

 

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

For the transition period from                      to                     

Commission File Number: 0-26001

 

 

Hudson City Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   22-3640393

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

West 80 Century Road Paramus, New Jersey   07652
(Address of Principal Executive Offices)   (Zip Code)

(201) 967-1900

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.01 par value

(Title of Class)

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

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

 

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

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

As of February 18, 2015, the registrant had 741,466,555 shares of common stock, $0.01 par value, issued and 528,934,665 shares outstanding. The aggregate market value of voting stock held by non-affiliates of the registrant as of June 30, 2014 was $4,635,705,602. This figure was based on the closing price by the NASDAQ Global Market for a share of the registrant’s common stock, which was $9.83 as reported by the NASDAQ Global Market on June 30, 2014.

Documents Incorporated by Reference:

1. Portions of the definitive Proxy Statement to be used in connection with the Annual Meeting of Shareholders or any amendments to this Form 10-K are incorporated by reference into Part III.

 

 

 


Table of Contents

Hudson City Bancorp, Inc.

Form 10-K

Table of Contents

 

     Page  

PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT

     i   

PART I

     1   

Item 1. Business

     1   

Item 1A. Risk Factors

     55   

Item 1B. Unresolved Staff Comments

     64   

Item 2. Properties

     64   

Item 3. Legal Proceedings

     64   

Item 4. Mine Safety Disclosures

     65   

PART II

     65   

Item  5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     65   

Item 6. Selected Financial Data

     67   

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     71   

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

     106   

Item 8. Financial Statements and Supplementary Data

     114   

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     173   

Item 9A. Controls and Procedures

     173   

Item 9B. Other Information

     174   

PART III

     174   

Item 10. Directors, Executive Officers and Corporate Governance

     174   

Item 11. Executive Compensation

     174   

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     174   

Item 13. Certain Relationships and Related Transactions, and Director Independence

     175   

Item 14. Principal Accounting Fees and Services

     175   

PART IV

     175   

Item 15. Exhibits, Financial Statement Schedules

     175   

SIGNATURES

     179   


Table of Contents

PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

  difficulties associated with achieving or predicting expected future financial results;

 

  our ability to restructure our balance sheet, diversify our funding sources and access the capital markets;

 

  our ability to comply with the terms of the Memorandum of Understanding with the Board of Governors of the Federal Reserve System (the “FRB”);

 

  our ability to pay dividends, repurchase our outstanding common stock or execute capital management strategies each of which requires the approval of the Office of the Comptroller of the Currency (the “OCC”) and the FRB;

 

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

 

  the risk of an economic slowdown that would adversely affect credit quality and loan originations;

 

  the potential impact on our operations and customers resulting from natural or man-made disasters, wars, acts of terrorism and cyberattacks;

 

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Table of Contents
  the actual results of the pending merger (the “Merger”) with Wilmington Trust Corporation (“WTC”), a wholly owned subsidiary of M&T Bank Corporation (“M&T”) could vary materially as a result of a number of factors, including the possibility that various closing conditions for the Merger may not be satisfied or waived, and our merger agreement with M&T could be terminated under certain circumstances;

 

  the outcome of any judicial decision related to the settlement of existing class action lawsuits related to the Merger;

 

  further delays in closing the Merger, including the possibility that the Merger may not be completed prior to the end of the extension period previously agreed to with M&T; and

 

  difficulties and delays in the implementation of our Strategic Plan (as defined below) in the event the Merger is further delayed or is not completed.

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

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

 

ii


Table of Contents

PART I

Item 1. Business

Hudson City Bancorp, Inc. Hudson City Bancorp is a Delaware corporation organized in 1999 and serves as the holding company of its only subsidiary, Hudson City Savings Bank. The principal asset of Hudson City Bancorp is its investment in Hudson City Savings Bank. As a savings and loan holding company, Hudson City Bancorp is subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the “FRB”).

Hudson City Bancorp’s executive offices are located at West 80 Century Road, Paramus, New Jersey 07652 and our telephone number is (201) 967-1900.

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, Hudson City Bancorp will merge with and into WTC, with WTC continuing as the surviving entity.

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 three occasions, Hudson City Bancorp and M&T have agreed to extend the date after which either party may elect to terminate the Merger Agreement, with the latest extension to April 30, 2015. Each extension was documented with an amendment to the Merger Agreement and the most recent amendment, Amendment No. 3, 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 April 30, 2015. Amendment No. 3 and applicable provisions from the prior amendments, permit the Company to take certain interim actions without the prior approval of M&T, including with respect to the Bank’s 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. There can be no assurances that the Merger will be completed by April 30, 2015 or that the Company will not exercise its right to terminate the Merger Agreement in accordance with its terms.

Prior to the announcement of the Merger, the Company retained an outside consultant to assist management in developing a strategic plan (the “Strategic Plan”). The operational core of the Strategic Plan is the expansion of our loan and deposit product offerings over time to create more balanced sources of revenue and funding. We believe that the markets in which we operate provide significant opportunities for the Hudson City brand to capture market share in products and services that we have not actively pursued previously. The Strategic Plan includes initiatives such as:

 

    origination of residential mortgages for sale to the secondary mortgage market,

 

    establishment of a commercial real estate lending unit,

 

    the analysis of a balance sheet restructuring transaction,

 

    establishment of a small business banking unit,

 

    tactical deposit pricing, and

 

    developing a more robust suite of consumer banking products.

Prior to the execution of Amendment No.1, the implementation of the Strategic Plan was suspended pending completion of the Merger. When we announced the first extension of the Merger in April 2013, we charted a dual path for the Company. We continued to plan for the completion of the Merger, but we also refreshed the Strategic Plan prioritizing the matters that we could achieve during the pendency of the Merger such as secondary mortgage market operations and commercial real estate lending, and proceeded with planning for the implementation of those prioritized matters. Amendment No. 2 provided that the Company is permitted to

 

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proceed with the implementation of the Strategic Plan without any prior approval, consent or consultation with M&T, which provision remains in effect under Amendment No. 3. The Strategic Plan includes the implementation of our commercial real estate (“CRE”) lending initiative. During 2014, the Bank began to purchase CRE and multi-family mortgage loans and interests in such loans. The Bank purchased $86.6 million of such loans and interests in the fourth quarter of 2014. We expect to expand our CRE lending business by engaging in direct originations commencing in the second half of 2015. Many of the remaining initiatives in our Strategic Plan require significant lead time for full implementation and roll-out to our customers.

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 memorandum of understanding 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 adopted and implemented enhanced operating policies and procedures that are intended to enable us to continue to: (a) reduce our level of interest rate risk, (b) reduce our funding concentration, (c) diversify our funding sources, (d) enhance our liquidity position, (e) monitor and manage loan modifications and (f) maintain our capital position in accordance with our existing capital plan. In addition, we developed the Strategic Plan for the Bank which establishes objectives for the Bank’s overall risk profile, earnings performance, growth and balance sheet mix and to enhance our enterprise risk management program. On February 26, 2015 the OCC terminated the Bank MOU.

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 memorandum of understanding 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 Bank’s compliance with the Bank MOU. The Company MOU also requires the Company to: (a) obtain approval from the FRB prior to receiving a capital distribution from the Bank or declaring a dividend to shareholders and (b) obtain approval from the FRB prior to repurchasing or redeeming any Company stock or incurring any debt with a maturity of greater than one year. In accordance with the Company MOU, the Company submitted a comprehensive capital plan and a comprehensive earnings plan to the FRB. While the Company believes it is in compliance in all material respects with the terms of the Company MOU, it will remain in effect until modified or terminated by the FRB.

Hudson City Savings. Hudson City Savings is a federally chartered stock savings bank subject to supervision and examination by the OCC. The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”).

Hudson City Savings Bank has served its customers since 1868. We conduct our operations out of our corporate offices in Paramus in Bergen County, New Jersey and through 135 branches in the New York metropolitan area. We operate 97 branches located in 17 counties throughout the State of New Jersey. In New York State, we operate 10 branch offices in Westchester County, 12 branch offices in Suffolk County, 1 branch office each in Putnam and Rockland Counties and 5 branch offices in Richmond County (Staten Island). We also operate 9 branch offices in Fairfield County, Connecticut. We also open deposit accounts through our internet banking service.

We are a community and consumer-oriented retail savings bank offering traditional deposit products, residential real estate mortgage loans and consumer loans. In addition, we purchase residential mortgages, commercial real estate mortgages and interests in such loans and mortgage-backed securities and other securities issued by U.S. government-sponsored enterprises (“GSEs”) as well as other investments permitted by applicable laws and regulations. We currently retain substantially all of the loans we originate in our portfolio. As part of our Strategic Plan, beginning in the first quarter of 2016, we intend to originate loans for sale in the secondary market.

 

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Table of Contents

Our revenues are derived principally from interest on our mortgage loans and mortgage-backed securities and interest and dividends on our investment securities. Our primary sources of funds are customer deposits, borrowings, scheduled amortization and prepayments of mortgage loans and mortgage-backed securities, maturities and calls of investment securities and funds provided by operations.

Available Information

Our periodic and current reports, proxy and information statements, and other information that we file with the Securities and Exchange Commission (the “SEC”), are available free of charge through our website, www.hcbk.com, as soon as reasonably practicable after such reports are filed with, or furnished to, the SEC. Unless specifically incorporated by reference, the information on our website is not part of this annual report. Such reports are also available on the SEC’s website at www.sec.gov, or at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC, 20549. Information may be obtained on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

Market Area

Through our branch offices, we have operations in the New York metropolitan market area (which we define to include New York, New Jersey and Connecticut). Prior to 2010, we purchased first mortgage loans in states that are east of the Mississippi River and as far south as South Carolina. Loan purchase activity has declined significantly since 2010 and has been limited to our primary market area, which consists of New Jersey, New York and Connecticut. The decline in our loan purchase activity reflects our limited appetite for adding long-term fixed-rate mortgage loans to our portfolio in the current low market interest rate environment. Historically, our wholesale loan purchase program complemented our retail loan origination by enabling us to diversify our assets outside of our local market area.

The northern New Jersey market represents the greatest concentration of population, deposits and income in New Jersey. The combination of these counties represents more than half of the entire New Jersey population and more than half of New Jersey households. The northern New Jersey market also represents the greatest concentration of Hudson City Savings retail operations both lending and deposit gathering and based on its high level of economic activity, we believe that the northern New Jersey market provides significant opportunities for future growth. The New Jersey shore market represents a strong concentration of population and income, and is a popular resort and retirement market area, which provides healthy opportunities for deposit growth and residential lending. The southwestern New Jersey market consists of communities adjacent to the Philadelphia metropolitan area.

The New York counties of Richmond, Westchester, Suffolk, Rockland and Putnam as well as Fairfield County, Connecticut have similar demographic and economic characteristics to the northern New Jersey market area. Our entry into these counties, which started in 2004, has allowed us to expand our retail operations and geographic footprint.

We also open deposit accounts through our internet banking service which allows us to serve customers throughout the United States. As of December 31, 2014, we had $109.2 million of deposits that were opened through our internet banking service.

Our future growth opportunities will be influenced by the growth and stability of the regional economy, other demographic population trends and the competitive environment in the New York metropolitan area. During 2014 economic conditions improved at a moderate pace. The unemployment rate declined to 5.6% in December 2014 from 6.7% in 2013. Economic conditions in our primary market area continued to improve modestly during 2014 as evidenced by increased levels of home sale activity, higher real estate valuations and a decrease in the unemployment rate. Housing prices increased during 2014 as indicated by the S&P/Case-Shiller Home Price Indices. Approximately 84.8% of our mortgage loans are located in the New York metropolitan area. The

 

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Federal Housing Finance Agency (“FHFA”), an independent entity within the Department of Housing and Urban Development, publishes housing market data on a quarterly basis. According to the most recent data published by the FHFA, house prices in New Jersey have increased 1.95% from the third quarter of 2013. For New York house prices increased 1.55% and for Connecticut they decreased 1.27% during this same period. Additionally, according to the FHFA data, the states of Pennsylvania, Massachusetts, Virginia, Illinois and Maryland experienced increases in house prices of 1.73%, 4.69%, 0.92%, 3.56%, and 0.38%, respectively for those same periods. These eight states account for 96.3% of our total mortgage portfolio. We can give no assurance as to whether economic and housing conditions will continue to improve in the near future.

Competition

We face intense competition both in making loans and attracting deposits in the market areas we serve. New Jersey and the New York metropolitan area have a high concentration of financial institutions, many of which are branches of large money center banks and regional banks. Some of these competitors have greater resources than we do and may offer services that we do not provide such as trust services or investment services. Customers who seek “one-stop shopping” may be drawn to these institutions.

Our competition for loans comes principally from commercial banks, savings institutions, mortgage banking firms, credit unions, finance companies, insurance companies and brokerage firms. We have also faced increased competition for mortgage loans due to the unprecedented involvement of the GSEs in the mortgage market in recent years.

Our most direct competition for deposits comes from commercial banks, savings banks, savings and loan associations and credit unions. We face additional competition for deposits from short-term money market funds and other corporate and government securities funds and from brokerage firms and insurance companies.

Lending Activities

Loan Portfolio Composition. Our loan portfolio primarily consists of one- to four-family residential first mortgage loans, which represent 98.6% of total loans. The remaining loans in our portfolio include multi-family and commercial mortgage loans, construction loans and consumer loans, which primarily consist of fixed-rate second mortgage loans and home equity credit lines. Beginning in the fourth quarter of 2014, we began to diversify our loan portfolio through the purchase of commercial real estate loans and interests in such loans.

At December 31, 2014, we had total loans of $21.56 billion, of which $21.37 billion, or 99.1%, were first mortgage loans. Of the first mortgage loans outstanding at that date, 53.4% were fixed-rate mortgage loans and 46.6% were adjustable-rate mortgage (“ARM”) loans. At December 31, 2014, multi-family and commercial mortgage loans totaled $102.3 million, construction loans totaled $177,000, and consumer and other loans, primarily fixed-rate second mortgage loans and home equity credit lines, amounted to $194.2 million, or 0.9%, of total loans.

Our loans are subject to federal and state laws and regulations. The interest rates we charge on loans are affected principally by the demand for loans, the supply of money available for lending purposes and the interest rates offered by our competitors. These factors are, in turn, affected by general and local economic conditions, monetary policies of the federal government, including the FRB, legislative tax policies and governmental budgetary matters.

 

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The following table presents the composition of our loan portfolio in dollar amounts and in percentages of the total portfolio at the dates indicated:

 

    At December 31,  
    2014     2013     2012     2011     2010  
    Amount     Percent
of Total
    Amount     Percent
of Total
    Amount     Percent
of Total
    Amount     Percent
of Total
    Amount     Percent
of Total
 
    (Dollars in thousands)  

First mortgage loans:

                   

One- to four-family

  $ 20,620,173        95.62   $ 23,167,644        96.08   $ 26,119,764        96.41   $ 28,260,772        96.35   $ 30,049,398        97.17

FHA/VA

    648,070        3.01        704,532        2.92        687,172        2.54        734,781        2.51        499,724        1.62   

Multi-family and commercial

    102,323        0.47        25,671        0.11        32,259        0.12        39,634        0.14        48,067        0.16   

Construction

    177        —          294        —          4,669        0.02        4,929        0.02        9,081        0.03   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total first mortgage loans

    21,370,743        99.10        23,898,141        99.11        26,843,864        99.09        29,040,116        99.02        30,606,270        98.98   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consumer and other loans:

                   

Fixed-rate second mortgages

    72,309        0.34        86,079        0.36        106,239        0.39        131,597        0.45        160,896        0.52   

Home equity credit lines

    104,372        0.48        108,550        0.45        119,872        0.44        134,502        0.46        137,467        0.44   

Other

    17,550        0.08        20,059        0.08        20,904        0.08        21,130        0.07        19,264        0.06   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer and other loans

    194,231        0.90        214,688        0.89        247,015        0.91        287,229        0.98        317,627        1.02   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

    21,564,974        100.00     24,112,829        100.00     27,090,879        100.00     29,327,345        100.00     30,923,897        100.00
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Deferred loan costs

    99,155          105,480          97,534          83,805          86,633     

Allowance for loan losses

    (235,317       (276,097       (302,348       (273,791       (236,574  
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Net Loans

  $ 21,428,812        $ 23,942,212        $ 26,886,065        $ 29,137,359        $ 30,773,956     
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

 

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

 

     Credit Risk Profile based on Payment Activity  
     (In thousands)         
     One-to four- family first
mortgage loans
     Other first Mortgages      Consumer and Other      Total Loans  
     Amortizing      Interest-only      Multi-family
and
Commercial
     Construction      Fixed-rate
second
mortgages
     Home Equity
credit lines
     Other         

December 31, 2014

                       

Performing

   $ 17,652,318       $ 2,774,245       $ 100,780       $ —         $ 71,056       $ 100,607       $ 13,955       $ 20,712,961   

Non-performing

     741,901         99,779         1,543         177         1,253         3,765         3,595         852,013   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 18,394,219    $ 2,874,024    $ 102,323    $ 177    $ 72,309    $ 104,372    $ 17,550    $ 21,564,974   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Credit Risk Profile by Internally Assigned Grade  
     (In thousands)         
     One-to four- family
first mortgage loans
     Other first Mortgages      Consumer and Other      Total Loans  
     Amortizing      Interest-only      Multi-family
and
Commercial
     Construction      Fixed-rate
second
mortgages
     Home Equity
credit lines
     Other         

December 31, 2014

                       

Pass

   $ 17,447,845       $ 2,744,846       $ 94,858       $ —         $ 70,669       $ 97,905       $ 13,385       $ 20,469,508   

Special mention

     89,166         10,926         1,180         —           71         252         118         101,713   

Substandard

     857,208         118,252         6,285         177         1,569         6,215         4,047         993,753   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 18,394,219    $ 2,874,024    $ 102,323    $ 177    $ 72,309    $ 104,372    $ 17,550    $ 21,564,974   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of repayment prospects.

 

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

 

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

 

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    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, as well as impaired loans, 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 individually, as well as multi-family, commercial and construction loans when they become 120 days past due and base our classification on the debt service capability of the underlying property as well as secondary sources of repayment such as the borrower’s and any guarantor’s ability and willingness to provide debt service. Residential mortgage loans that are classified as troubled debt restructurings are individually evaluated for impairment based on the present value of each loan’s expected future cash flows.

The following table presents the geographic distribution of loans in our portfolio at the dates indicated:

 

    At December 31, 2014     At December 31, 2013  
    Percentage of Loans by     Percentage of Loans by  
    State to Total loans     State to Total loans  

New Jersey

    42.4     42.5

New York

    27.8        27.1   

Connecticut

    14.6        14.9   
 

 

 

   

 

 

 

Total New York metropolitan area

  84.8      84.5   
 

 

 

   

 

 

 

Pennsylvania

  4.8      4.9   

Massachusetts

  2.0      1.8   

Virginia

  1.6      1.8   

Illinois

  1.5      1.6   

Maryland

  1.6      1.7   

All others

  3.7      3.7   
 

 

 

   

 

 

 

Total outside the New York metropolitan area

  15.2      15.5   
 

 

 

   

 

 

 
  100.0   100.0
 

 

 

   

 

 

 

 

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Loan Maturity. The following table presents the contractual maturity of our loans at December 31, 2014. The table does not include the effect of prepayments or scheduled principal amortization. Prepayments and scheduled principal amortization on first mortgage loans totaled $3.70 billion for 2014, $6.27 billion for 2013 and $7.03 billion for 2012.

 

     At December 31, 2014  
     One-to four-
Family First
Mortgages
     Multi-family
and Commercial
Mortgages
     Construction      Consumer and
Other Loans
     Total  
     (In thousands)  

Amounts Due:

              

One year or less

   $ 854         1,970         177         12,703       $ 15,704   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

After one year:

One to three years

  30,408      2,002      —        5,804      38,214   

Three to five years

  125,266      19,276      —        6,622      151,164   

Five to ten years

  408,030      71,634      —        29,140      508,804   

Ten to twenty years

  4,206,966      7,441      —        136,566      4,350,973   

Over twenty years

  16,496,719      —        —        3,396      16,500,115   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total due after one year

  21,267,389      100,353      —        181,528      21,549,270   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

$ 21,268,243    $ 102,323    $ 177    $ 194,231      21,564,974   
  

 

 

    

 

 

    

 

 

    

 

 

    

Deferred loan costs

  99,155   

Allowance for loan losses

  (235,317
              

 

 

 

Net loans

$ 21,428,812   
              

 

 

 

The following table presents, as of December 31, 2014, the dollar amounts of all fixed-rate and adjustable-rate loans that are contractually due after December 31, 2015:

 

     Due After December 31, 2015  
     Fixed      Adjustable      Total  
     (In thousands)  

One-to-four family first mortgage loans

   $ 11,406,524       $ 9,860,865       $ 21,267,389   

Multi-family and commercial mortgages

     11,275         89,078         100,353   

Consumer and other loans

     73,064         108,464         181,528   
  

 

 

    

 

 

    

 

 

 

Total loans due after one year

$ 11,490,863    $ 10,058,407    $ 21,549,270   
  

 

 

    

 

 

    

 

 

 

 

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The following table presents our loan originations, purchases, sales and principal payments for the periods indicated:

 

     For the Year Ended December 31,  
     2014      2013      2012  
     (In thousands)  

Total loans:

        

Balance outstanding at beginning of period

   $ 24,112,829       $ 27,090,879       $ 29,327,345   
  

 

 

    

 

 

    

 

 

 

Originations:

First mortgage loans (1)

  1,098,166      3,443,460      4,976,263   

Consumer and other loans

  46,974      52,719      58,907   
  

 

 

    

 

 

    

 

 

 

Total originations

  1,145,140      3,496,179      5,035,170   
  

 

 

    

 

 

    

 

 

 

Purchases:

One- to four-family first mortgage loans

  167,139      96,892      28,742   

Multi-family and commercial first mortgage loans

  86,577      —        —     
  

 

 

    

 

 

    

 

 

 

Total purchases

  253,716      96,892      28,742   
  

 

 

    

 

 

    

 

 

 

Less:

Principal payments:

First mortgage loans (1)

  (3,583,393   (6,273,486   (7,029,457

FHA loan sale

  (112,113   —        —     

Consumer and other loans

  (66,750   (84,493   (98,660
  

 

 

    

 

 

    

 

 

 

Total principal payments

  (3,762,256   (6,357,979   (7,128,117
  

 

 

    

 

 

    

 

 

 

Premium amortization and discount accretion, net

  (169   1,483      2,626   

Transfers to foreclosed real estate

  (123,625   (126,771   (87,787

Charge-offs:

First mortgage loans (1)

  (59,978   (87,288   (86,636

Consumer and other loans

  (683   (566   (464
  

 

 

    

 

 

    

 

 

 

Balance outstanding at end of period

$ 21,564,974    $ 24,112,829    $ 27,090,879   
  

 

 

    

 

 

    

 

 

 

 

(1) Includes Multi-family, Commercial and Construction loans

Residential Mortgage Lending. Historically, our primary lending emphasis has been the origination and purchase of first mortgage loans secured by one- to four-family properties that serve as the primary or secondary residence of the owner. We do not offer loans secured by cooperative apartment units or interests therein. We currently originate and purchase substantially all of our one- to four-family first mortgage loans for retention in our portfolio. We specialize in residential mortgage loans with principal balances in excess of the Fannie Mae, single-family limit which, prior to 2008, was $417,000 (“non-conforming” or “jumbo” loans). Beginning in 2008, Fannie Mae instituted two sets of loan limits—a conforming loan limit at $417,000 and a “high-cost” loan limit at $729,750. On October 1, 2011, the “high-cost’ loan limit was reduced to $625,500.

Most of our retail loan originations are from licensed mortgage bankers or brokers, existing or past customers, members of our local communities or referrals from local real estate agents, attorneys and builders. Our extensive branch network is also a source of new loan generation. We also employ a staff of representatives who call on real estate professionals to disseminate information regarding our loan programs and take applications directly from their clients. These representatives are paid for each origination. Originated loans represent 80.3% of our one- to four- family first mortgage loans.

 

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We currently offer loans that generally conform to underwriting standards specified by Fannie Mae (“conforming loans”) and non-conforming loans. These loans may be fixed-rate one- to four-family mortgage loans or adjustable-rate one- to four-family mortgage loans with maturities of up to 30 years. The average size of our one- to four-family mortgage loans originated in 2014 was approximately $588,000. The overall average size of our one- to four-family first mortgage loans held in portfolio was approximately $387,000 and $413,000 at December 31, 2014 and 2013, respectively. With the exception of certain non-performing loans that were sold back to the financial institution that originally sold the loans to the Bank, we sold no loans in 2014, 2013 or 2012 and had no loans classified as held for sale at December 31, 2014.

Our originations of residential first mortgage loans amounted to $1.10 billion in 2014, $3.44 billion in 2013 and $4.98 billion in 2012. Included in these totals are refinancings of our existing first mortgage loans as follows:

 

            Percent of  
            First Mortgage  
     Amount      Loan Originations  
     (In thousands)  

2014

   $ 167,384         14.5

2013

   $ 850,997         23.7   

2012

   $ 1,334,841         26.7   

We offer a variety of adjustable-rate and fixed-rate one- to four-family mortgage loans with maximum loan to value (“LTV”) ratios that depend on the type of property and the size of loan involved. The LTV ratio is the loan amount divided by the appraised value of the property. The LTV ratio is a measure commonly used by financial institutions to determine exposure to risk. Loans on owner-occupied one- to four-family homes of up to $1.0 million are generally subject to a maximum LTV ratio of 80%. LTV ratios of 75% or less are generally required for one- to four-family loans in excess of $1.0 million and less than $1.5 million. Loans in excess of $1.5 million and less than $2.0 million are generally subject to a maximum LTV ratio of 70%. Loans in excess of $2.0 million and up to $2.5 million are generally subject to a maximum LTV ratio of 65%. Loans in excess of $2.5 million and up to $3.0 million are generally subject to a maximum LTV ratio of 60%. We typically do not originate mortgage loans in excess of $3.0 million.

We also offer a variety of ARM loans secured by one- to four-family residential properties with a fixed rate for initial terms of three years, five years, seven years or ten years. After the initial adjustment period, ARM loans adjust on an annual basis. These loans are originated in amounts generally up to $1.0 million. The ARM loans that we currently originate have a maximum 30-year amortization period and are generally subject to the LTV ratios described above. The interest rates on ARM loans fluctuate based upon a fixed spread above the monthly average yield on United States Treasury securities adjusted to a constant maturity of one year and generally are subject to a maximum increase or decrease of 2% per adjustment period and a limitation on the aggregate adjustment of 5% over the life of the loan. As a result of generally low market interest rates for ARM loans, the initial offered rates on these loans ranged from 2.625% to 4.000% while the current fully indexed rate was 3.000% at December 31, 2014. We originated $931.5 million of one- to four-family ARM loans in 2014. At December 31, 2014, 46.4% of our one- to four-family mortgage loans consisted of ARM loans.

The origination and retention of ARM loans helps reduce exposure to increases in interest rates. However, ARM loans can pose credit risks different from the risks inherent in fixed-rate loans, primarily because as interest rates rise, the underlying payments of the borrower may rise, which increases the potential for default. The marketability of the underlying property also may be adversely affected by higher interest rates. In order to minimize risks, we evaluate borrowers of ARM loans based on their ability to repay the loans at the higher of the initial interest rate or the fully indexed rate. On January 10, 2014, the Bank began to utilize the guidelines included in Appendix Q of the qualified mortgage regulation when qualifying ARM borrowers. We have not in the past, nor do we currently, originate ARM loans that provide for negative amortization of principal.

 

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Historically, our wholesale loan purchase program complemented our retail loan origination production by enabling us to diversify assets outside our local market area. At December 31, 2014, $4.11 billion, or 19.3%, of our one- to four-family first mortgage loans were purchased loans. Our loan purchase activity has significantly declined reflecting our limited appetite for adding long term fixed rate mortgage loans to our portfolio in the current low market interest rate environment. We expect that the amount of loan purchases will continue to be at reduced levels for the near future.

We have developed written standard operating guidelines relating to the purchase of these assets. These guidelines include an evaluation and approval process for the various sellers from whom we choose to buy whole loans, the acceptable types of whole loans and acceptable property locations. The purchase agreements, as established with each seller/servicer, contain parameters of the loan characteristics that can be included in each package. These parameters, such as maximum loan size and maximum weighted average LTV, generally conform to parameters utilized by us to originate mortgage loans. Loans are reviewed for compliance with the agreed upon parameters. Purchased loan packages are subject to internal due diligence procedures including review of a sampling of individual loan files. We generally perform full credit reviews of 10% to 20% of the mortgage loans in each package purchased. Our due diligence procedures include a review of the legal documents, including the note, the mortgage and the title policy, review of the credit file, evaluating debt service ratios, review of the appraisal and verifying LTV ratios and evaluating the completeness of the loan package. This review subjects the loan files in the sample to substantially the same underwriting standards used in our own loan origination process. We maintain custody of the legal documents including the original note.

We purchased first mortgage loans of $253.7 million in 2014, $96.9 million in 2013 and $28.7 million in 2012. The average size of our one-to four-family mortgage loans purchased during 2014 was approximately $215,000. During 2014, loan purchases included $86.6 million of CRE and multi-family mortgage loans. The remaining loans purchased in 2014 were loans guaranteed by the Federal Housing Administration (the “FHA”). Substantially all of the loans purchased in 2013 and 2012 were loans guaranteed by the FHA.

We also originate, and in the past have purchased, interest-only mortgage loans. These loans are designed for customers who desire flexible amortization schedules. These loans are originated as 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. These loans are underwritten using fully amortizing payment amounts, more restrictive standards and generally are made with lower LTV limitations imposed to help minimize any potential credit risk. These loans may involve higher risks compared to standard loan products since there is the potential for higher payments once the interest rate resets and the principal begins to amortize and they rely on a stable or rising housing market to maintain an acceptable LTV ratio. However, we do not believe these programs will have a material adverse impact on our asset quality based on our underwriting criteria and the average LTV ratios on the loans originated in this program. During 2014, we originated $101.2 million of interest-only loans with an average LTV ratio of 58.9% based on the appraised value at the time of origination. The outstanding principal balance of interest-only loans in our portfolio was approximately $2.87 billion as of December 31, 2014. Non-performing interest-only loans amounted to $99.8 million, or 11.7%, of non-performing loans at December 31, 2014 as compared to non-performing interest-only loans of $135.2 million, or 12.9%, of non-performing loans at December 31, 2013. We have not in the past, nor do we currently, originate or purchase option ARM loans, where the borrower is given various payment options that could change payment flows to the Bank. For a description of guidance on nontraditional mortgage products, see “Regulation of Hudson City Savings Bank and Hudson City Bancorp.”

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 Bureau’s (the “CFPB”) new requirements to validate a borrower’s ability to repay and the corresponding safe harbor for loans that meet the requirements for a “qualified mortgage”. Loans that were eligible for reduced documentation processing were

 

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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. We originated $156.2 million of reduced documentation loans in 2014, for applications received prior to discontinuing our reduced documentation program, as compared to $780.2 million in 2013. Reduced documentation loans represent 21.7% of our one- to four-family first mortgage loans at December 31, 2014. Included in our loan portfolio at December 31, 2014 are $3.99 billion of amortizing reduced documentation loans and $620.0 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 December 31, 2014 include $168.2 million of amortizing reduced documentation loans and $39.8 million of interest-only reduced documentation loans as compared to $182.9 million and $48.8 million, respectively, at December 31, 2013.

In January 2013, the Consumer Financial Protection Bureau (the “CFPB”) issued a series of final rules related to mortgage loan origination and mortgage loan servicing. Among other things, these final rules, which went into effect on January 10, 2014, prohibit creditors, such as Hudson City Savings, from extending mortgage loans without regard to the consumer’s ability to repay and establishes certain protections from liability for loans that meet the requirements of a “qualified mortgage.” As of January 10, 2014, we only originate loans that meet the requirements of a “qualified mortgage”, except we may continue to originate interest only loans subject to our compliance with the ability to repay provisions of the CFPB’s final 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 borrower’s ability to repay and the corresponding safe harbor for qualified mortgages. Accordingly, our loan production volume decreased in 2014. See “Regulation of Hudson City Savings Bank and Hudson City Bancorp.”

We offer mortgage programs designed to address the credit needs of low and moderate-income home mortgage applicants and low and moderate-income home improvement loan applicants. We define low and moderate-income applicants as borrowers residing in low- and moderate-income census tracts or households with income not greater than 80% of the median income of the Metropolitan Statistical Area in the county where the subject property is located. Among the features of the low- and moderate-income home mortgage programs are reduced rates, reduced fees and closing costs, and generally less restrictive requirements for qualification compared with our traditional one- to four-family mortgage loans. For example, these programs have generally provided for loans with up to 80% LTV ratios and rates which are 25 basis points lower than our traditional mortgage loans. In 2014, we originated $1.4 million in mortgage loans under these programs.

Origination and Sale in the Secondary Market of Residential Mortgage Loans. In accordance with our Strategic Plan, we intend to begin to originate residential mortgage loans that conform to GSE guidelines for sale to the GSEs by the end of the first quarter of 2016. Initially, all loans sold to the GSEs will be serviced by a third party subservicing vendor, however, we intend to enhance our servicing function to allow us to service our sold portfolio in the future. As we originate, sell and service our sold loan portfolio, we would expect to have a mortgage servicing rights asset build up over time. We are currently in the process of hiring secondary mortgage market professionals, enhancing our existing servicing program, building out necessary systems and establishing processes and procedures for originating and selling residential mortgage loans to the GSEs.

Multi-family and Commercial Mortgage Loans. At December 31, 2014, $102.3 million, or 0.47%, of the total loan portfolio consisted of multi-family and commercial mortgage loans. Commercial mortgage loans are secured by office buildings and other commercial properties. Multi-family mortgage loans generally are secured by multi-family rental properties (including mixed-use buildings and walk-up apartments). The composition of these loans includes a legacy portfolio that is primarily loans that were acquired in the acquisition of Sound Federal Bancorp, Inc. in 2006 (the “Legacy Portfolio”) and loans originated in 2014 as part of the newly created commercial real estate lending program. During 2014 we hired commercial real estate

 

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professionals, built out necessary systems and established processes and procedures for originating, purchasing and monitoring commercial real estate loans. As part of our strategic initiative, we have begun to purchase CRE and multi-family loans and interests in such loans that are secured by mixed-used buildings, retail properties, apartments and office buildings. We expect to expand our CRE lending business by engaging in direct originations commencing in the second half of 2015.

The Legacy Portfolio has 50 loans totaling $19.7 million which are not strategic holdings or relationships. The remainder of the portfolio consists of 8 newly purchased loans and a loan syndication totaling $86.6 million. Although the new loans are all secured by multi-family rental properties, we anticipate that we will originate mortgage loans on office buildings, mixed-use buildings and retail properties in the future.

At December 31, 2014, the largest commercial mortgage loan was a loan participation in which our interest had a principal balance of $25.0 million and was secured by a multi-family rental property. This loan was a portion of an $82.0 million syndicated loan.

Loans secured by multi-family and commercial real estate generally are larger than one-to four-family residential loans and involve a greater degree of risk. Commercial mortgage loans can involve large loan balances to single borrowers or groups of related borrowers. Such loans depend to a large degree, on the results of operations and management of the properties or underlying businesses, and may be affected to a greater extent by adverse conditions in the real estate market or in the economy in general.

Consumer Loans. At December 31, 2014, consumer and other loans amounted to $194.2 million, or 0.90%, of our total loans and consisted primarily of fixed-rate second mortgage loans and home equity credit lines. Consumer loans generally have shorter terms to maturity, relative to our mortgage portfolio, which reduces our exposure to changes in interest rates. Consumer loans generally carry higher rates of interest than do one- to four-family residential mortgage loans. In addition, we believe that offering consumer loan products helps to expand and create stronger ties to our existing customer base by increasing the number of customer relationships and providing cross-marketing opportunities.

We offer fixed-rate second mortgage loans generally in amounts up to $250,000 secured by owner-occupied one- to four-family residences located in the State of New Jersey, and the portions of New York and Connecticut served by our first mortgage loan products, for terms of up to 20 years. At December 31, 2014 these loans totaled $72.3 million, or 0.34%, of total loans. The underwriting standards applicable to these loans generally are the same as one- to four-family first mortgage loans, except that the combined LTV ratio, including the balance of the first mortgage, generally cannot exceed 75% of the appraised value of the property at time of origination.

Our home equity credit line loans totaled $104.4 million, or 0.48%, of total loans at December 31, 2014. These loans are either fixed-rate or adjustable-rate loans secured by a first or second mortgage on owner-occupied one-to four-family residences located in our market area. The interest rates on adjustable-rate home equity credit lines are based on the “prime rate” as published in The Wall Street Journal (the “Index”) subject to certain interest rate limitations. Interest rates on home equity credit lines are adjusted monthly based upon changes in the Index. Minimum monthly principal payments on currently offered home equity lines of credit are based on 1/240th of the outstanding principal balance or $100, whichever is greater. The maximum credit line generally available is $250,000. The underwriting terms and procedures applicable to these loans are substantially the same as for our fixed-rate second mortgage loans.

Other loans totaled $17.5 million at December 31, 2014 and consisted of collateralized passbook loans, overdraft protection loans, unsecured personal loans, and secured and unsecured commercial lines of credit. We have not originated unsecured personal loans since 2005.

 

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Loan Approval Procedures and Authority. All residential mortgage loans up to $600,000 must be approved by two underwriting officers in the Mortgage Origination Department. Residential mortgage loans in excess of $600,000 up to $1.0 million in size require that one of the two officers signing off on the loan be a senior underwriting staff member assigned and approved by senior management in the Mortgage Origination area or any officer bearing the title of First Vice President-Mortgage Officer, Senior Vice President-Mortgage Officer, Executive Vice President-Lending, Chief Operating Officer or Chief Executive Officer prior to issuance of a commitment letter. Residential mortgage loans in excess of $1.0 million up to $3.0 million require that in addition to the standard underwriter approval, one of the officers signing off on the loan must be a senior underwriting staff member assigned and approved by senior management in the Mortgage Origination area and one additional officer signing off on the loan must bear the title of the First Vice President-Mortgage Officer, Senior Vice President-Mortgage Officer, Executive Vice President-Lending, Chief Operating Officer or Chief Executive Officer prior to issuance of a commitment letter. Residential mortgage loans in excess of $3.0 million require that in addition to the standard underwriter approval, two additional signatures are required with the officers bearing the title of Senior Vice President-Mortgage Officer, Executive Vice President-Lending, Chief Operating Officer or Chief Executive Officer prior to issuance of a commitment letter. Loan requests in excess of $5.0 million must be approved by at least two of the following senior officers, Executive Vice President-Lending, Chief Operating Officer or Chief Executive Officer and will be reported to the Board of Directors at the next regularly scheduled Board meeting. The maximum number of first mortgage loans outstanding at any one time per borrower (obligor on the note) shall not exceed three loans with only one loan being permitted for investment purposes. The aggregate of all residential loans, existing and/or committed to any one borrower, generally shall not exceed $5.0 million. Aggregate loan balances exceeding this limit must be approved by at least two of the following senior officers: Executive Vice President-Lending, Chief Operating Officer or Chief Executive Officer and will be reported to the Board of Directors at the next regularly scheduled Board meeting.

Historically, our primary lending emphasis has been the origination and purchase of residential first mortgage loans. During 2014, we began to purchase CRE loans and interests in such loans. All commercial real estate loans are independently underwritten to standards defined in our Commercial Real Estate Credit Policy. Prior to issuance of a commitment letter, all CRE loans must be approved by the Commercial Loan Committee comprised of senior officers, including the Company’s Chief Executive Officer, Chief Operating Officer and Chief Financial Officer. All commercial real estate lending activity is reported to the Board of Directors at their next regular meeting.

Home equity credit lines and fixed-rate second mortgage loans in principal amounts of $50,000 or less require approval by one of our designated Consumer Loan Department underwriters. Home equity credit lines and fixed-rate home equity loans in excess of $50,000, up to the $250,000 maximum, require approval by an underwriter and either our Consumer Loan Officer, Executive Vice President-Lending, Chief Executive Officer or Chief Operating Officer. Home equity credit lines and loans involving mortgage liens where the combined first and second mortgage principal balances exceed $750,000 require approval by an underwriter, our Consumer Loan Officer and either our Executive Vice President-Lending, Chief Executive Officer or Chief Operating Officer.

Upon receipt of a completed loan application from a prospective borrower, we order a credit report and we verify certain other information. If necessary, we obtain additional financial or credit-related information. We require an appraisal for all first mortgage loans. Appraisals may be performed by our in-house Appraisal Department or by licensed or certified third-party appraisal firms. Currently most appraisals are performed by third-party appraisers and are reviewed by our in-house Appraisal Department.

We require title insurance on all mortgage loans, except for home equity credit lines and fixed-rate second mortgage loans. For these loans, we require a property search detailing the current chain of title. We require borrowers to obtain hazard insurance and we require borrowers to obtain flood insurance prior to closing, if appropriate. We require most borrowers to advance funds on a monthly basis together with each payment of principal and interest to a mortgage escrow account from which we make disbursements for items such as real estate taxes, flood insurance and private mortgage insurance premiums, if required. Presently, we do not escrow for real estate taxes on properties located in the states of New York, Connecticut, Massachusetts and Pennsylvania.

 

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Asset Quality

One of our key operating objectives has been, and continues to be, to maintain a high level of asset quality. Through a variety of strategies we have been proactive in addressing problem loans and non-performing assets. Charge-offs, net of recoveries, amounted to $37.3 million in 2014 and $62.8 million in 2013. Economic conditions have improved at a moderate pace. The unemployment rate declined to 5.6% in December 2014 from 6.7% in 2013. Economic conditions in our primary market area continued to improve modestly during 2014 as evidenced by increased levels of home sale activity, higher real estate valuations and a decrease in the unemployment rate. We continue to closely monitor the local and national real estate markets and other factors related to risks inherent in our loan portfolio. We determined the provision for loan losses for 2014 based on our allowance for loan loss (“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, continued elevated levels of unemployment, and growth or shrinkage in the loan portfolio.

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. Our loan growth is primarily concentrated in one- to four-family mortgage loans with original LTV ratios of less than 80%. The average LTV ratio of our 2014 first mortgage loan originations and our total first mortgage loan portfolio were 61.3% and 55.8%, respectively, using the appraised value at the time of origination. The value of the property used as collateral for our loans is dependent upon local market conditions. As part of our estimation of the ALL, we monitor changes in the values of homes in each market using indices published by various organizations. Based on our analysis of the data for 2014, we concluded that home values in our primary lending markets increased during 2014 but remain lower than their peak levels reached in 2006 prior to the economic recession. Due to the decline of real estate values starting in 2006 and continuing through 2011, 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.

 

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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 December 31, 2014     At December 31, 2013  
           Non-performing           Non-performing  
     Total loans     Loans     Total loans     Loans  

New Jersey

     42.4     42.6     42.5     44.2

New York

     27.8        27.8        27.1        24.1   

Connecticut

     14.6        7.8        14.9        8.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total New York metropolitan area

  84.8      78.2      84.5      76.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Pennsylvania

  4.8      1.5      4.9      2.4   

Massachusetts

  2.0      1.8      1.8      1.6   

Virginia

  1.6      1.9      1.8      2.3   

Illinois

  1.5      4.7      1.6      4.8   

Maryland

  1.6      5.2      1.7      4.7   

All others

  3.7      6.7      3.7      7.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total outside New York metropolitan area

  15.2      21.8      15.5      23.7   
  

 

 

   

 

 

   

 

 

   

 

 

 
  100.0   100.0   100.0   100.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Delinquent Loans and Foreclosed Assets. When a borrower fails to make required payments on a loan, we take a number of steps to induce the borrower to cure the delinquency and restore the loan to a current status. In the case of originated mortgage loans, our Mortgage Servicing Department is responsible for collection procedures from the 15th day up to the 119th day of delinquency. Specific procedures include a late charge notice being sent at the time a payment is over 15 days past due. Telephone contact is attempted on approximately the 20th day of the month to avoid a 30-day delinquency. A second written notice is sent at the time the payment becomes 30 days past due.

We send additional letters if no contact is established by approximately the 45th day of delinquency. On the 60th day of delinquency, we send another letter followed by continued telephone contact. Between the 30th and the 60th day of delinquency, if telephone contact has not been established, an independent contractor may be sent to make a physical inspection of the property. When contact is made with the borrower at any time prior to foreclosure, we attempt to obtain full payment, work out a repayment schedule, or discuss other loss mitigation options with the borrower in order to avoid foreclosure.

We send a foreclosure notice when a loan is over 90 days delinquent. The accrual of income on loans that are not guaranteed by a federal agency is generally discontinued when interest or principal payments are 90 days in arrears and any accrued but unpaid interest is reversed. We commence foreclosure proceedings if the loan is not brought current between the 120th and 150th day of delinquency unless specific limited circumstances warrant an exception. The collection procedures for mortgage loans guaranteed by federal agencies follow the collection guidelines outlined by those agencies.

We monitor delinquencies on our serviced loan portfolio from reports sent to us by the servicers. Once all past due reports are received, we examine the delinquencies and contact appropriate servicer personnel to determine the status of the loans. We also use these reports to prepare our own monthly reports for management review. These summaries break down, by servicer, total principal and interest due, length of delinquency, as well as accounts in foreclosure and bankruptcy. We monitor all accounts in foreclosure to confirm that the servicer has taken all proper steps to foreclose promptly if there is no other recourse.

The collection procedures for consumer and other loans include sending periodic late notices to a borrower once a loan is past due. We attempt to make direct contact with a borrower once a loan becomes 30 days past due. Supervisory personnel in our Consumer Loan Department review the delinquent loans and collection efforts on a regular basis. If collection activity is unsuccessful after 90 days, we may refer the matter to our legal counsel

 

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for further collection effort or charge-off the loan. Loans we deem to be uncollectible are proposed for charge-off. Charge-offs of consumer loans require the approval of our Consumer Loan Officer and either the Executive Vice President-Lending, our Chief Executive Officer or Chief Operating Officer.

Foreclosed real estate is property acquired through foreclosure or deed in lieu of foreclosure. Write-downs to fair value (net of estimated costs to sell) at the time of acquisition are charged to the ALL. After acquisition, foreclosed properties are held for sale and carried at the lower of fair value minus estimated cost to sell, or at cost. If a foreclosure action is commenced and the loan is not brought current, paid in full or refinanced before the foreclosure sale, the real property securing the loan is either sold at the foreclosure sale, or we or our servicer sells the property as soon thereafter as practicable.

Management continuously monitors the status of the loan portfolio and reports to the Board of Directors at each regular meeting. Our Asset Quality Committee (“AQC”) is responsible for monitoring our loan portfolio, delinquencies and foreclosed real estate. This committee includes members of senior management from the Loan Originations, Loan Servicing, Appraisal, Risk Management and Finance Departments.

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

 

    30-59 Days     60-89 Days     90 Days or more     Total Past Due     Current Loans     Total Loans     > 90 Days
accruing
 
    No. of     Loan     No. of     Loan     No. of     Loan     No. of     Loan     No. of     Loan     No. of     Loan     No. of     Loan  
    Loans     Balance     Loans     Balance     Loans     Balance     Loans     Balance     Loans     Balance     Loans     Balance     Loans     Balance  

At December 31, 2014

                           

One- to four-family first mortgages:

                           

Amortizing

    821      $ 243,560        340      $ 111,420        2,294      $ 741,901        3,455      $ 1,096,881        47,254      $ 17,297,338        50,709      $ 18,394,219        175      $ 33,383   

Interest-only

    43        30,256        21        12,507        180        99,779        244        142,542        4,001        2,731,482        4,245        2,874,024        —          —     

Multi-family and commercial mortgages

    17        2,782        2        4,743        4        1,543        23        9,068        34        93,255        57        102,323        —          —     

Construction loans

    —          —          —          —          1        177        1        177        —          —          1        177        —          —     

Consumer and other loans:

                           

Fixed-rate second mortgages

    7        272        5        71        31        1,253        43        1,596        2,303        70,713        2,346        72,309        —          —     

Home equity lines of credit

    6        1,077        3        252        29        3,765        38        5,094        2,566        99,278        2,604        104,372        —          —     

Other

    3        589        3        118        9        3,595        15        4,302        1,807        13,248        1,822        17,550        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    897      $ 278,536        374      $ 129,111        2,548      $ 852,013        3,819      $ 1,259,660        57,965      $ 20,305,314        61,784      $ 21,564,974        175      $ 33,383   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Delinquent loans to total loans

      1.29       0.60       3.95                
    30-59 Days     60-89 Days     90 Days or more     Total Past Due     Current Loans     Total Loans     > 90 Days
accruing
 
    No. of     Loan     No. of     Loan     No. of     Loan     No. of     Loan     No. of     Loan     No. of     Loan     No. of     Loan  
    Loans     Balance     Loans     Balance     Loans     Balance     Loans     Balance     Loans     Balance     Loans     Balance     Loans     Balance  

At December 31, 2013

                           

One- to four-family first mortgages:

                           

Amortizing

    881      $ 274,303        400      $ 132,910        2,925      $ 903,485        4,206      $ 1,310,698        50,158      $ 18,912,746        54,364      $ 20,223,444        559      $ 132,844   

Interest-only

    51        34,277        29        21,283        235        135,228        315        190,788        4,984        3,457,944        5,299        3,648,732        —          —     

Multi-family and commercial mortgages

    4        1,384        1        5,983        4        3,189        9        10,556        54        15,115        63        25,671        —          —     

Construction loans

    —          —          —          —          1        294        1        294        —          —          1        294        —          —     

Consumer and other loans:

                           

Fixed-rate second mortgages

    16        484        8        129        32        1,412        56        2,025        2,637        84,054        2,693        86,079        —          —     

Home equity lines of credit

    17        1,389        7        1,163        30        3,895        54        6,447        2,682        102,103        2,736        108,550        —          —     

Other

    3        58        3        45        6        1,741        12        1,844        1,878        18,215        1,890        20,059        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    972      $ 311,895        448      $ 161,513        3,233      $ 1,049,244        4,653      $ 1,522,652        62,393      $ 22,590,177        67,046      $ 24,112,829        559      $ 132,844   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Delinquent loans to total loans

      1.29       0.67       4.35                

 

    30-59 Days     60-89 Days     90 Days or more     Total Past Due     Current Loans     Total Loans     > 90 Days
accruing
 
    No. of     Loan     No. of     Loan     No. of     Loan     No. of     Loan     No. of     Loan     No. of     Loan     No. of     Loan  
    Loans     Balance     Loans     Balance     Loans     Balance     Loans     Balance     Loans     Balance     Loans     Balance     Loans     Balance  

At December 31, 2012

                           

One- to four-family first mortgages:

                           

Amortizing

    959      $ 327,122        568      $ 206,033        3,046      $ 965,956        4,573      $ 1,499,111        54,972      $ 20,821,950        59,545      $ 22,321,061        525      $ 129,553   

Interest-only

    83        58,004        43        29,609        307        182,239        433        269,852        6,025        4,216,023        6,458        4,485,875        —          —     

Multi-family and commercial mortgages

    5        6,474        3        3,190        5        1,688        13        11,352        63        20,907        76        32,259        —          —     

Construction loans

    —          —          —          —          3        4,669        3        4,669        —          —          3        4,669        —          —     

Consumer and other loans:

                           

Fixed-rate second mortgages

    14        587        5        68        39        1,665        58        2,320        3,189        103,919        3,247        106,239        —          —     

Home equity lines of credit

    17        1,592        4        379        28        3,996        49        5,967        2,879        113,905        2,928        119,872        —          —     

Other

    4        62        —          —          4        2,314        8        2,376        2,063        18,528        2,071        20,904        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    1,082      $ 393,841        623      $ 239,279        3,432      $ 1,162,527        5,137      $ 1,795,647        69,191      $ 25,295,232        74,328      $ 27,090,879        525      $ 129,553   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Delinquent loans to total loans

      1.45       0.88       4.29                

 

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During 2014, we sold a pool of $112.1 million of non-performing residential mortgage loans guaranteed by the FHA back to the financial institution that originally sold the loans to the Bank. The sale of the non-performing loan pool was in accordance with the repurchase right with respect to loans that become non-performing that the financial institution exercised pursuant to the terms of the original sale and servicing agreement between the Bank and the financial institution. As consideration for the sale of the non-performing loans, the Bank received from the financial institution an amount equal to 100% of the outstanding unpaid principal balance of the loans, plus all accrued and unpaid interest on the loans. The Bank may sell additional loans to the financial institution in the future, in the event the financial institution exercises its repurchase right with respect to any additional non-performing FHA loans.

We continue to closely monitor the local and national real estate markets and other factors related to risks inherent in our loan portfolio. Economic conditions in our primary market area continued to improve modestly during 2014 as evidenced by increased levels of home sale activity, higher real estate valuations and a decrease in the unemployment rate.

With the exception of first mortgage loans guaranteed by a federal agency, we stop accruing income on loans when interest or principal payments are 90 days in arrears or earlier when the timely collectability of such interest or principal is doubtful. We reverse any accrued, but unpaid interest on non-accrual loans that we previously credited to income. We recognize income in the period that we collect it or when the ultimate collectability of principal is no longer in doubt. We return a non-accrual loan to accrual status when factors indicating doubtful collection no longer exist.

The following table presents information regarding non-performing assets as of the dates indicated:

 

     At December 31,  
     2014     2013     2012     2011     2010  
     (Dollars in thousands)  

Non-accrual loans:

          

One-to four family amortizing loans

   $ 708,518      $ 770,641      $ 836,403      $ 700,429      $ 614,758   

One-to four family interest-only loans

     99,779        135,228        182,239        213,862        179,348   

Multi-family and commercial mortgages

     1,543        3,189        1,688        2,223        1,117   

Construction loans

     177        294        4,669        4,344        7,560   

Consumer and other loans

     8,613        7,048        7,975        4,353        4,320   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-accrual loans

  818,630      916,400      1,032,974      925,211      807,103   

Accruing loans delinquent 90 days or more

  33,383      132,844      129,553      97,476      64,156   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-performing loans

  852,013      1,049,244      1,162,527      1,022,687      871,259   

Foreclosed real estate, net

  79,952      70,436      47,322      40,619      45,693   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-performing assets

$ 931,965    $ 1,119,680    $ 1,209,849    $ 1,063,306    $ 916,952   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-performing loans to total loans

  3.95   4.35   4.29   3.48   2.82

Non-performing assets to total assets

  2.55      2.90      2.98      2.34      1.50   

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

 

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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:

 

     December 31,  
     2014      2013      2012      2011      2010  
     (In thousands)         

Troubled debt restructurings:

              

Current

   $ 137,249       $ 108,413       $ 64,438       $ 43,042       $ 9,429   

30-59 days

     20,344         19,931         28,988         7,359         1,616   

60-89 days

     17,079         17,407         14,346         4,786         —     

90 days or more

     157,744         176,797         107,320         11,354         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total troubled debt restructurings

$ 332,416    $ 322,548    $ 215,092    $ 66,541    $ 11,045   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The increases in troubled debt restructurings since 2010 were primarily due to an expansion of loan modification programs offered by the Bank pursuant to a Residential Mortgage Loss Mitigation Policy that became effective during the first quarter of 2012.

Loans that were modified in a troubled debt restructuring primarily represent loans that have been in a deferred principal payment plan for an extended period of time, generally in excess of six months, loans that have had past due amounts capitalized as part of the loan balance, loans that have a confirmed Chapter 13 bankruptcy status, borrowers’ loans that have been discharged in a 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 each loan’s expected future cash flows.

We discontinue accruing interest and reverse previously 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 $16.9 million of troubled debt restructurings that were previously accruing interest became 90 days or more past due during 2014 for which we discontinued accruing interest and reversed previously accrued, but unpaid interest.

Included in accruing loans delinquent 90 days or more are $33.4 million of FHA loans. We continue to accrue interest on these loans since they are insured by the FHA and we believe that we will collect substantially all amounts contractually due under the terms of the loan. At December 31, 2014, approximately 78.2% of our non-performing loans were in the New York metropolitan area and 21.8% were outside of the New York metropolitan area. At December 31, 2013, approximately 76.3% of our non-performing loans were in the New York metropolitan area and 23.7% were outside of the New York metropolitan area. Non-accrual first mortgage loans at December 31, 2014 included $99.8 million of interest-only loans and $208.0 million of reduced documentation loans ($39.8 million of which were also interest-only loans) with average LTV ratios of approximately 66.8% and 55.2%, respectively, based on appraised values at time of origination. Non-accrual first mortgage loans at December 31, 2013 included $135.2 million of interest-only loans and $231.7 million of reduced documentation loans with average LTV ratios of approximately 63.4% and 66.2%, respectively, based on appraised values at time of origination.

The total amount of interest income on non-accrual loans that would have been recognized if interest on all such loans had been recorded based upon original contract terms amounted to approximately $50.5 million. The total amount of interest income received on non-accrual loans amounted to approximately $1.0 million during 2014. We are not committed to lend additional funds to borrowers whose loans are in non-accrual status.

 

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Allowance for Loan Losses.

The following table presents the activity in our ALL at or for the years indicated:

 

    At or for the Year December 31,  
    2014     2013     2012     2011     2010  
    (Dollars in thousands)  

Balance at beginning of year

  $ 276,097      $ 302,348      $ 273,791      $ 236,574      $ 140,074   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision for loan losses

  (3,500   36,500      95,000      120,000      195,000   

Charge-offs:

First mortgage loans

  (59,978   (87,288   (86,636   (96,714   (110,669

Consumer and other loans

  (683   (566   (464   (382   (102
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total charge-offs

  (60,661   (87,854   (87,100   (97,096   (110,771

Recoveries

  23,381      25,103      20,657      14,313      12,271   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

  (37,280   (62,751   (66,443   (82,783   (98,500
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of year

$ 235,317    $ 276,097    $ 302,348    $ 273,791    $ 236,574   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses to total loans

  1.09   1.15   1.12   0.93   0.77

Allowance for loan losses to non-performing loans

  27.62      26.31      26.01      26.77      27.15   

Net charge-offs as a percentage of average loans

  0.16      0.24      0.24      0.28      0.31   

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

 

     At December 31, 2014  
     One-to four-
Family
Mortgages
    Multi-family
and Commercial
Mortgages
    Construction     Consumer and
Other Loans
    Total  
     (In thousands)  

Balance at December 31, 2012

   $ 295,096      $ 1,937      $ 1,116      $ 4,199      $ 302,348   

Provision for loan losses

     38,380        (1,132     (1,003     255        36,500   

Charge-offs

     (87,288     —          —          (566     (87,854

Recoveries

     25,073        —          —          30        25,103   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (charge-offs) recoveries

  (62,215   —        —        (536   (62,751
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2013

$ 271,261    $ 805    $ 113    $ 3,918    $ 276,097   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision for loan losses

  (5,867   2,281      2      84      (3,500

Charge-offs

  (57,348   (2,515   (115   (683   (60,661

Recoveries

  22,816      —        —        565      23,381   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (charge-offs) recoveries

  (34,532   (2,515   (115   (118   (37,280
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2014

$ 230,862    $ 571    $ —      $ 3,884    $ 235,317   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loan portfolio:

Balance at end of year

Individually evaluated for impairment

$ 322,661    $ 5,651    $ 177    $ 4,314    $ 332,803   

Collectively evaluated for impairment

  20,945,582      96,672      —        189,917      21,232,171   

Allowance

Individually evaluated for impairment

$ 20,413    $ 126    $ —      $ 343    $ 20,882   

Collectively evaluated for impairment

  210,449      445      —        3,541      214,435   

The ALL has been determined in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and applicable regulatory requirements, which require us to maintain an adequate ALL. 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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The ALL amounted to $235.3 million and $276.1 million at December 31, 2014 and 2013, respectively. We recorded a net credit provision for loan losses during 2014 based on our ALL methodology that considers a number of quantitative and qualitative factors, including the amount of non-performing loans, our loss experience on non-performing loans, conditions in the real estate and housing markets, current economic conditions, particularly increasing levels of unemployment, and changes in the size of the loan portfolio. The net credit provision for loan losses and the decline in the ALL were primarily due to a decrease in non-performing loans and early stage delinquent loans. The decline in non-performing loans was primarily due to the sale of a pool of non-performing FHA loans as well as improving economic conditions, particularly in the housing and labor markets. The decline in the ALL also reflects improving home prices and economic conditions and a decrease in the size of the loan portfolio. See “Item 7 – Management’s Discussion and Analysis – Critical Accounting Policies – Allowance for Loan Losses.”

At December 31, 2014, first mortgage loans secured by one-to four-family properties accounted for 99.1% of total loans. Fixed-rate mortgage loans represent 53.4% 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. We do not originate or purchase option ARM loans or negative amortization loans.

Non-performing loans amounted to $852.0 million at December 31, 2014 as compared to $1.05 billion at December 31, 2013. Non-performing loans at December 31, 2014 included $841.7 million of one- to four-family first mortgage loans as compared to $1.04 billion at December 31, 2013. The ratio of non-performing loans to total loans was 3.95% at December 31, 2014 compared with 4.35% at December 31, 2013. Loans delinquent 60 to 89 days amounted to $129.1 million at December 31, 2014 as compared to $161.5 million at December 31, 2013. Foreclosed real estate amounted to $80.0 million at December 31, 2014 as compared to $70.4 million at December 31, 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 steady deterioration of real estate values that began in 2006 and continued into the first half of 2012, the LTV ratios based on appraisals obtained at time of origination do not necessarily indicate the extent to which we may incur a loss on any given loan that may go into foreclosure. However, our lower average LTV ratios have helped to moderate our charge-offs as there has generally been adequate equity behind our first lien as of the foreclosure date to satisfy our loan.

At December 31, 2014, the ratio of the ALL to non-performing loans was 27.62% as compared to 26.31% at December 31, 2013. The ratio of the ALL to total loans was 1.09% at December 31, 2014 as compared to 1.15% at December 31, 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 and non-performing loans. In the current economic environment, a loan generally becomes non-performing when the borrower experiences financial difficulty. In many cases, the borrower also has a second mortgage or home equity loan on the property. In substantially all of these cases, we do not hold the second mortgage or home equity loan as this is not a business we have actively pursued.

We obtain updated collateral values by the time a loan becomes 180 days past due. If the estimated fair value of the collateral (less estimated selling costs) is less than the recorded investment in the loan, we charge-off an amount to reduce the loan to the fair value of the collateral less estimated selling costs. As a result, certain losses inherent in our non-performing loans are being recognized as charge-offs which may result in a lower ratio of the ALL to non-performing loans. Charge-offs, net of recoveries, amounted to $37.3 million for 2014 as compared to $62.8 million for 2013. Write-downs and net gains or losses on the sale of foreclosed real estate amounted to a net gain of $3.2 million for 2014 as compared to a net gain of $1.7 million for 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 was 18.3% for 2014 as compared to 18.0% for 2013.

 

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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 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 December 31, 2014, 84.8% of our loan portfolio and 78.2% of our non-performing loans are located in the New York metropolitan area. We believe that our process of obtaining updated collateral values by the time a loan becomes 180 days past due, and annually thereafter, 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 losses are categorized separately. We assign estimated loss factors to the payment status categories on the basis of our assessment of the 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 12.1% during 2014 as compared to 13.6% in 2013 and 14.3% in 2012.

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 2014. The recent adjustment to our loss factors did not have a material effect on the ultimate level of our ALL or on our provision for loan losses. If our future loss experience requires additional increases in our loss factors, this may result in increased levels of loan loss provisions.

We consider the average LTV ratio of our non-performing loans and our total portfolio in relation to the overall changes in house prices in our lending markets when determining the ALL. This provides us with a “macro” indication of the severity of potential losses that might be expected. Since substantially all our portfolio consists of first mortgage loans on residential properties, the LTV ratio is particularly important to us when a loan becomes non-performing. The weighted average LTV ratio in our one- to four-family mortgage loan portfolio at December 31, 2014 was approximately 55.8%, using appraised values at the time of origination. The average LTV ratio of our non-performing loans using appraised values at the time of origination was approximately

 

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67.6% at December 31, 2014. Based on the valuation indices, house prices have declined in the New York metropolitan area, where 78.2% of our non-performing loans were located at December 31, 2014, by approximately 18.7% from the peak of the market in 2006 through November 2014 and by 16.0% nationwide during that period. For the year ended December 31, 2014, home prices increased 1.5% in the New York metropolitan area and increased 4.3% nationwide. Changes in house values may affect our loss experience which may require that we change the loss factors used in our quantitative analysis of the ALL. There can be no assurance whether significant declines in house values may occur and result in higher loss experience and increased levels of charge-offs and loan loss provisions.

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 nation’s largest mortgage loan servicers has resulted in greater court and state attorney general scrutiny. Our foreclosure process and the time to complete a foreclosure continue to be prolonged, especially in New York and New Jersey where 70.4% of our non-performing loans are located. However, since 2013, we have experienced an increased volume of completed foreclosures for loans that have been in the foreclosure process for over 48 months. If real estate prices do not continue to improve or begin to decline, this extended time may result in further charge-offs. In addition, current conditions in the housing market have made it more difficult for borrowers to sell homes to satisfy the mortgage and second lien holders and are less likely to repay our loan if the value of the property is not enough to satisfy their loan. We continue to closely monitor the property values underlying our non-performing loans during this timeframe and take appropriate charge-offs when the loan balances exceed the underlying estimated property values.

Foreclosed real estate amounted to $80.0 million at December 31, 2014 as compared to $70.4 million at December 31, 2013. During 2014, we transferred $123.6 million of loans to foreclosed real estate as compared to $126.8 million during 2013. Write-downs on foreclosed real estate and net gains or losses on the sale of foreclosed real estate amounted to a net gain of $3.2 million for the year ended December 31, 2014 as compared to a net gain of $1.7 million for 2013. We sold 241 properties during 2014 as compared to 207 properties during 2013. Holding costs associated with foreclosed real estate amounted to $18.6 million and $14.5 million for the years ended December 31, 2014 and 2013, respectively.

At December 31, 2014 and December 31, 2013, commercial and construction loans evaluated for impairment in accordance with Financial Accounting Standards Board (“FASB”) guidance amounted to $5.8 million and $8.7 million, respectively. Based on this evaluation, we established an ALL of $126,000 for commercial and construction loans classified as impaired at December 31, 2014 compared to $527,000 at December 31, 2013. Charge-offs related to these loans amounted to $2.5 million in 2014. There were no charge-offs related to these loans in 2013.

The markets in which we lend experienced significant declines in real estate values beginning in 2006 and continuing into 2012. House prices have continued to increase since the second half of 2012. We have taken these conditions into consideration in evaluating our ALL. Although we believe that we have established and maintained the ALL at adequate levels, additions may be necessary if future economic and other conditions differ substantially from the current operating environment. Increases in our loss experience on non-performing loans, the loss factors used in our quantitative analysis of the ALL and continued increases in overall loan delinquencies can have a significant impact on our need for increased levels of loan loss provisions in the future. No assurance can be given in any particular case that our LTV ratios will provide full protection in the event of borrower default. 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 “Item 7 – Management’s Discussion and Analysis – Critical Accounting Policies – Allowance for Loan Losses.”

 

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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 December 31,  
    2014     2013     2012     2011     2010  
    Amount     Percentage
of Loans in
Category to
Total Loans
    Amount     Percentage
of Loans in
Category to
Total Loans
    Amount     Percentage
of Loans in
Category to
Total Loans
    Amount     Percentage
of Loans in
Category to
Total Loans
    Amount     Percentage
of Loans in
Category to
Total Loans
 
    (Dollars in thousands)  

First mortgage loans:

                   

One- to four-family

  $ 230,862        98.62   $ 271,261        99.00   $ 295,096        98.95   $ 264,922        98.86   $ 227,224        98.79

Other first mortgages

    571        0.48        918        0.11        3,053        0.14        5,116        0.16        6,147        0.19   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total first mortgage loans

    231,433        99.10        272,179        99.11        298,149        99.09        270,038        99.02        233,371        98.98   

Consumer and other loans

    3,884        0.90        3,918        0.89        4,199        0.91        3,753        0.98        3,203        1.02   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total allowance for loan losses

  $ 235,317        100.00   $ 276,097        100.00   $ 302,348        100.00   $ 273,791        100.00   $ 236,574        100.00
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment Activities

The Board of Directors reviews and approves our investment policy on an annual basis. The Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, and other officers are authorized to purchase, sell, or loan securities. The Board of Directors reviews our investment activity on a quarterly basis.

Our investment policy is designed primarily to manage the interest rate sensitivity of our assets and liabilities, to generate a favorable return without incurring undue interest rate and credit risk, to complement our lending activities and to provide and maintain liquidity within established guidelines. In establishing our investment strategies, we consider our asset/liability position, asset concentrations, interest rate risk, credit risk, liquidity, market volatility and desired rate of return. We may invest in securities in accordance with the regulations of the OCC including U.S. Treasury obligations, federal agency securities, mortgage-backed securities, certain time deposits of insured banks and savings institutions, certain bankers’ acceptances, repurchase agreements, federal funds sold, and, subject to certain limits, corporate debt and equity securities, commercial paper and mutual funds. Our investment policy also provides that we will not engage in any practice that the Federal Financial Institutions Examination Council considers to be an unsuitable investment practice.

On December 10, 2013, the OCC, the FDIC, the FRB, the SEC and the Commodity Futures Trading Commission (“CFTC”) released final rules to implement Section 619 of the Reform Act, commonly known as the “Volcker Rule.” The Volcker Rule, among other things, prohibits banking entities from engaging in proprietary trading and from sponsoring, having an ownership interest in or having certain relationships with a hedge fund or private equity fund, subject to certain exemptions. Any such prohibited investments are required to be disposed of by July 21, 2016. At December 31, 2014, we were not engaged in any activities, nor did we have any ownership interests in any funds, that are prohibited under the Volcker Rule. See “Regulation of Hudson City Savings Bank and Hudson City Bancorp.”

We invest in mortgage-backed securities issued by Ginnie Mae, Fannie Mae and Freddie Mac, as well as other securities issued by GSEs and the U.S. Treasury. These securities account for substantially all of our securities. We do not purchase unrated or private label mortgage-backed securities. During 2014, we purchased $3.30 billion of U.S. Treasury securities with an average life of 1.2 years and which are used as collateral for our outstanding borrowings.

 

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At December 31, 2014, there were no debt securities past due or securities for which the Company currently believes it is not probable that it will collect all amounts due according to the contractual terms of the security.

We also have an investment in Federal Home Loan Bank of New York (“FHLB”) stock for $320.8 million at December 31, 2014. We have evaluated our investment in FHLB stock for impairment which includes a review of the financial statements and capital balances of FHLB. FHLB is in compliance with its regulatory capital to assets ratio and liquidity requirements. We have also considered the structure of the federal home loan bank system, which enables the regulator of the federal home loan banks to reallocate debt among the members, so each federal home loan bank member has a potential obligation to repay the consolidated obligations issued by other federal home loan bank members. The FHLB structure has received support from the U.S. Treasury, which established a lending facility designed to provide secured funding on an as needed basis to government-sponsored enterprises, such as the FHLB. As a result of our review of the FHLB and the federal home loan bank system, we have noted that there were no issues that would result in impairment in our investment.

We classify investments as held to maturity or available for sale at the date of purchase based on our assessment of our internal liquidity requirements. Held to maturity securities are reported at cost, adjusted for amortization of premium and accretion of discount. We have both the ability and positive intent to hold these securities to maturity. During 2014, we sold mortgage-backed securities that were classified as held-to-maturity with a carrying value of $262.0 million. Each of these securities had less than 15% of the purchased par amount remaining at the time of sale. Available for sale securities are reported at fair value. We currently have no securities classified as trading securities.

Investment Securities. At both December 31, 2014 and December 31, 2013, investment securities classified as held to maturity had a carrying value of $39.0 million, all of which were callable by the issuer. Investments classified as available for sale amounted to $3.61 billion at December 31, 2014 and $297.3 million at December 31, 2013. At December 31, 2014, the investment securities portfolio had a weighted-average rate of 0.40% and a fair value of approximately $3.65 billion. During 2014 we purchased $3.31 billion of investment securities substantially all of which were U.S. Treasury securities. During 2013 we purchased $298.0 million of investment securities all of which were issued by GSEs. During 2012, we purchased $407.8 million of investment grade corporate bond issues. We sold these corporate bonds in 2013 as we repositioned our portfolio in anticipation of an increase in market interest rates. There were no calls of investment securities during 2014. As of December 31, 2014, investment securities with an amortized cost of $3.50 billion were pledged as collateral for securities sold under agreements to repurchase. Also, at December 31, 2014, we had $320.8 million in FHLB stock. See “Regulation of Hudson City Savings Bank and Hudson City Bancorp.”

The following table presents our investment securities activity for the years indicated:

 

     For the Year Ended December 31,  
     2014      2013      2012  
     (In thousands)  

Investment securities:

        

Carrying value at beginning of year

   $ 336,294       $ 467,068       $ 546,378   
  

 

 

    

 

 

    

 

 

 

Purchases:

Available for sale

  3,311,944      298,033      407,832   

Calls:

Held to maturity

  —        —        (500,000

Sales:

Available for sale

  —        (405,703   —     

Premium (amortization) and discount accretion, net

  63      (491   (1,376

Change in unrealized gain or (loss)

  1,755      (22,613   14,234   
  

 

 

    

 

 

    

 

 

 

Net increase (decrease) in investment securities

  3,313,762      (130,774   (79,310
  

 

 

    

 

 

    

 

 

 

Carrying value at end of year

$ 3,650,056    $ 336,294    $ 467,068   
  

 

 

    

 

 

    

 

 

 

 

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Mortgage-backed Securities. All of our mortgage-backed securities are issued by Ginnie Mae, Fannie Mae or Freddie Mac. At December 31, 2014, mortgage-backed securities classified as held to maturity totaled $1.27 billion, or 3.5% of total assets, while $2.96 billion, or 8.1% of total assets, were classified as available for sale. At December 31, 2014, the mortgage-backed securities portfolio had a weighted-average rate of 2.13% and a fair value of approximately $4.32 billion. Of the mortgage-backed securities we held at December 31, 2014, $3.32 billion, or 78.4% of total mortgage-backed securities, had adjustable rates and $914.3 billion, or 21.6% of total mortgage-backed securities, had fixed rates. Our mortgage-backed securities portfolio includes real estate mortgage investment conduits (“REMICs”), which are securities derived by reallocating cash flows from mortgage pass-through securities or from pools of mortgage loans held by a trust. REMICs are a form of, and are often referred to as, collateralized mortgage obligations (“CMOs”). At December 31, 2014, we held $73.5 million of fixed-rate REMICs, which constituted 1.7% of our mortgage-backed securities portfolio. Mortgage-backed security purchases totaled $94.4 million during 2014 compared with $1.67 billion during 2013. At December 31, 2014, mortgage-backed securities with an amortized cost of $3.77 billion were used as collateral for securities sold under agreements to repurchase.

Mortgage-backed securities generally yield less than the underlying loans because of the cost of payment guarantees or credit enhancements that reduce credit risk. However, mortgage-backed securities are more liquid than individual mortgage loans and may be used to collateralize certain borrowings. In general, mortgage-backed securities issued or guaranteed by Ginnie Mae, Fannie Mae and Freddie Mac are weighted at no more than 20% for risk-based capital purposes, compared to the 50% risk-weighting assigned to most non-securitized residential mortgage loans.

While mortgage-backed securities are subject to a reduced credit risk as compared to whole loans, they remain subject to the risk of a fluctuating interest rate environment. Along with other factors, such as the geographic distribution of the underlying mortgage loans, changes in interest rates may alter the prepayment rate of those mortgage loans and affect both the prepayment rates and value of the mortgage-backed securities. At December 31, 2014, we did not own any principal-only, REMIC residuals, private label mortgage-backed securities or other higher risk securities such as those backed by sub-prime loans.

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 Trustee’s 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 Court’s 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. During the third quarter of 2014, the Bank received a partial payment on our non-customer claim of $2.4 million.

 

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Table of Contents

The following table presents our mortgage-backed securities activity for the years indicated:

 

     For the Year Ended December 31,  
     2014      2013      2012  
     (In thousands)  

Mortgage-backed securities:

        

Carrying value at beginning of year

   $ 8,952,019       $ 11,017,499       $ 13,285,913   
  

 

 

    

 

 

    

 

 

 

Purchases:

Available for sale

  94,422      1,671,343      1,473,244   

Principal payments:

Held to maturity

  (249,549   (877,505   (1,133,484

Available for sale

  (1,183,248   (2,337,327   (2,560,457

Sales:

Held to maturity

  (262,022   (311,380   —     

Available for sale

  (3,048,277   (4,820   —     

Premium (amortization) and discount accretion, net

  (39,841   (78,473   (89,767

Change in unrealized gain or (loss)

  (28,063   (127,318   42,050   
  

 

 

    

 

 

    

 

 

 

Net decrease in mortgage-backed securities

  (4,716,578   (2,065,480   (2,268,414
  

 

 

    

 

 

    

 

 

 

Carrying value at end of year

$ 4,235,441    $ 8,952,019    $ 11,017,499   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following table presents the composition of our money market investments, investment securities and mortgage-backed securities portfolios in dollar amount and in percentage of each investment type at the dates indicated. The table also presents the mortgage-backed securities portfolio by coupon type.

 

    At December 31,  
    2014     2013     2012  
          Percent                 Percent                 Percent        
    Carrying     of     Fair     Carrying     of     Fair     Carrying     of     Fair  
    Value     Total (1)     Value     Value     Total (1)     Value     Value     Total (1)     Value  
    (Dollars in thousands)  

Money market investments:

                 

Federal funds sold and other overnight deposits

  $ 6,163,082        100.00   $ 6,163,082      $ 4,190,809        100.00   $ 4,190,809      $ 656,926        100.00   $ 656,926   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment securities:

                 

Held to maturity:

                 

United States government- sponsored enterprises

  $ 39,011        1.07   $ 41,593      $ 39,011        11.60   $ 42,727      $ 39,011        8.35   $ 45,592   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total held to maturity

    39,011        1.07        41,593        39,011        11.60        42,727        39,011        8.35        45,592   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Available for sale:

                 

United States government- sponsored enterprises

    3,593,649        98.45        3,593,649        290,194        86.29        290,194        —          —          —     

Corporate bonds

    —          —          —          —          —          —          420,590        90.05        420,590   

Equity securities

    17,396        0.48        17,396        7,089        2.11        7,089        7,467        1.60        7,467   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available for sale

    3,611,045        98.93        3,611,045        297,283        88.40        297,283        428,057        91.65        428,057   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investment securities

  $ 3,650,056        100.00   $ 3,652,638      $ 336,294        100.00   $ 340,010      $ 467,068        100.00   $ 473,649   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Mortgage-backed securities:

                 

By issuer:

                 

Held to maturity:

                 

Pass-through certificates:

                 

GNMA

  $ 54,301        1.28   $ 56,141      $ 63,070        0.70   $ 65,330      $ 73,546        0.67   $ 76,378   

FNMA

    278,953        6.59        299,161        402,848        4.50        427,950        856,840        7.78        918,252   

FHLMC

    865,364        20.43        923,461        1,123,029        12.55        1,189,844        1,619,119        14.69        1,722,010   

REMICS:

                 

FHLMC and FNMA

    73,519        1.74        77,397        195,517        2.18        205,699        427,252        3.88        455,852   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total held to maturity

    1,272,137        30.04        1,356,160        1,784,464        19.93        1,888,823        2,976,757        27.02        3,172,492   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Available for sale:

                 

Pass-through certificates:

                 

GNMA

    653,408        15.42        653,408        804,883        8.99        804,883        1,033,641        9.38        1,033,641   

FNMA

    1,695,898        40.04        1,695,898        3,890,723        43.47        3,890,723        4,135,635        37.54        4,135,635   

FHLMC

    613,998        14.50        613,998        2,433,438        27.18        2,433,438        2,811,850        25.52        2,811,850   

REMICS:

                 

FHLMC and FNMA

    —          —          —          38,511        0.43        38,511        59,616        0.54        59,616   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available for sale

    2,963,304        69.96        2,963,304        7,167,555        80.07        7,167,555        8,040,742        72.98        8,040,742   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total mortgage-backed securities

  $ 4,235,441        100.00   $ 4,319,464      $ 8,952,019        100.00   $ 9,056,378      $ 11,017,499        100.00   $ 11,213,234   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

By coupon type:

                 

Adjustable-rate

  $ 3,321,189        78.41   $ 3,396,138      $ 7,401,916        82.68   $ 7,490,495      $ 9,475,416        86.00   $ 9,606,020   

Fixed-rate

    914,252        21.59        923,326        1,550,103        17.32        1,565,883        1,542,083        14.00        1,607,214   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total mortgage-backed securities

  $ 4,235,441        100.00   $ 4,319,464      $ 8,952,019        100.00   $ 9,056,378      $ 11,017,499        100.00   $ 11,213,234   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investment portfolio

  $ 14,048,579        $ 14,135,184      $ 13,479,122        $ 13,587,197      $ 12,141,493        $ 12,343,809   
 

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

 

(1) Based on carrying value for each investment type.

 

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Table of Contents

Carrying Values, Rates and Maturities. The table below presents information regarding the carrying values, weighted average rates and contractual maturities of our money market investments, investment securities and mortgage-backed securities at December 31, 2014. Mortgage-backed securities are presented by issuer and by coupon type. The table does not include the effect of prepayments or scheduled principal amortization. Equity securities have been excluded from this table.

 

  At December 31, 2014  
  One Year or Less   More Than One Year
to Five Years
  More Than Five
Years to Ten
Years
  More Than Ten Years   Total  
      Weighted       Weighted       Weighted       Weighted       Weighted  
  Carrying   Average   Carrying   Average   Carrying   Average   Carrying   Average   Carrying   Average  
  Value   Rate   Value   Rate   Value   Rate   Value   Rate   Value   Rate  
  (Dollars in thousands)  

Money market investments:

Federal funds sold and other overnight deposits

$ 6,163,082      0.25 $ —        —   $ —        —   $ —        0 $ 6,163,082      0.25
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Investment securities:

Held to maturity:

United States government-sponsored enterprises

$ —        —   $ —        —   $ —        —   $ 39,011      5.00 $ 39,011      5.00
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total held to maturity

  —        —        —        —        —        —        39,011      5.00      39,011      5.00   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Available for sale:

United States government-sponsored enterprises

  300,152      0.26      3,293,497      0.36      —        —        —        3,593,649      0.35   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available for sale

  300,152      0.26      3,293,497      0.36      —        —        3,593,649      0.35   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investment securities

$ 300,152      0.26 $ 3,293,497      0.36 $ —        —   $ 39,011      5.00 $ 3,632,660      0.40
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Mortgage-backed securities:

By issuer:

Held to maturity:

Pass-through certificates:

GNMA

$ —        —   $ 61      2.91 $ 23,676      1.61 $ 30,564      1.65 $ 54,301      1.63

FNMA

  22      8.60      1,361      5.93      7,524      4.78      270,046      2.47      278,953      2.55   

FHLMC

  —        —        1,035      2.57      5,156      4.82      859,173      2.33      865,364      2.35   

REMICS:

FHLMC and FNMA

  —        —        —        —        989      4.87      72,530      4.50      73,519      4.50   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total held to maturity

  22      8.60      2,457      4.44      37,345      2.78      1,232,313      2.47      1,272,137      2.48   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Available for sale:

Pass-through certificates:

GNMA

  —        —        —        —        —        —        653,408      2.21      653,408      2.21   

FNMA

  —        —        —        —        12,748      5.06      1,683,150      1.91      1,695,898      1.93   

FHLMC

  —        —        —        —        9,093      4.94      604,905      1.83      613,998      1.88   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available for sale

  —        —        —        —        21,841      5.01      2,941,463      1.96      2,963,304      1.98   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total mortgage-backed securities

$ 22      8.60 $ 2,457      4.44 $ 59,186      3.60 $ 4,173,776      2.11 $ 4,235,441      2.13
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

By coupon type:

Adjustable-rate

  1      1.19      1,054      1.90      24,145      1.62      3,295,989      1.91      3,321,189      1.91   

Fixed-rate

  21      8.83      1,403      6.34      35,040      4.96      877,788      2.89      914,252      2.97   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total mortgage-backed securities

$ 22      8.60 $ 2,457      4.44 $ 59,185      3.60 $ 4,173,777      2.11 $ 4,235,441      2.13
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Total

$ 6,463,256      0.25 $ 3,295,954      0.36 $ 59,185      3.60 $ 4,212,788      2.14 $ 14,031,183      0.86
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

 

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Table of Contents

Sources of Funds

General. Our primary sources of funds are customer deposits, borrowings, scheduled amortization and prepayments of mortgage loans and mortgage-backed securities, maturities and calls of investment securities and funds provided by our operations. Retail deposits generated through our branch network and wholesale borrowings have been our primary means of funding our growth initiatives. During 2014, we maintained lower deposit rates to manage deposit reductions at a time when there were limited investment opportunities with attractive yields to reinvest the funds received from payment activity on mortgage-related assets. Market interest rates remained at historically low levels during 2014 and as a result, we continued to reduce the size of our balance sheet, a process that began in 2012. We intend to restrain any future growth until the yields available on mortgage-related assets and investment securities increase and allow for more profitable growth. We intend to fund such future growth primarily with customer deposits, using borrowed funds as a supplemental funding source if deposit growth decreases. See “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

Deposits. We offer a variety of deposit accounts having a range of interest rates and terms. We currently offer passbook and statement savings accounts, interest-bearing transaction accounts, checking accounts, money market accounts and time deposits. We also offer IRA accounts and qualified retirement plans.

Deposit flows are influenced significantly by general and local economic conditions, changes in prevailing market interest rates, pricing of deposits and competition. In determining our deposit rates, we consider local competition, U.S. Treasury securities offerings and the rates charged on other sources of funds. Our deposits are primarily obtained from market areas surrounding our branch offices. We also open deposit accounts through the internet for customers throughout the United States. We rely primarily on paying competitive rates, providing strong customer service and maintaining long-standing relationships with customers to attract and retain these deposits. We do not use brokers to obtain deposits. Our most direct competition for deposits comes from commercial banks, savings banks, savings and loan associations and credit unions. There are large money-center and regional financial institutions operating throughout our market area, and we also face strong competition from other community-based financial institutions.

Total deposits decreased $2.09 billion, or 9.7%, during 2014 due primarily to a decrease of $1.03 billion in our money market accounts, a decrease of $1.02 billion in our time deposit accounts, and a decrease of $92.5 million in our interest-bearing transaction accounts. The decrease in our money market accounts, time deposit accounts and interest-bearing transaction accounts is primarily due to maintaining lower deposit rates that allow us to manage deposit levels at a time when there are limited investment opportunities. These decreases were partially offset by an increase of $46.1 million in our savings accounts. Total core deposits (defined as non-time deposit accounts) represented approximately 41.2% of total deposits as of December 31, 2014 compared with 42.2% as of December 31, 2013. The aggregate balance in our time deposit accounts was $11.39 billion as of December 31, 2014 compared with $12.40 billion as of December 31, 2013. Time deposits with remaining maturities of less than one year amounted to $7.34 billion at December 31, 2014 compared with $7.49 billion at December 31, 2013.

 

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Table of Contents

The following table presents our deposit activity for the years indicated:

 

     For the Year Ended December 31,  
     2014     2013     2012  
     (Dollars in thousands)  

Total deposits at beginning of year

   $ 21,472,329      $ 23,483,917      $ 25,507,760   

Net decrease in deposits

     (2,254,937     (2,193,979     (2,262,527

Interest credited

     159,152        182,391        238,684   
  

 

 

   

 

 

   

 

 

 

Total deposits at end of year

$ 19,376,544    $ 21,472,329    $ 23,483,917   
  

 

 

   

 

 

   

 

 

 

Net decrease

$ (2,095,785 $ (2,011,588 $ (2,023,843
  

 

 

   

 

 

   

 

 

 

Percent decrease

  (9.76 )%    (8.57 )%    (7.93 )% 

At December 31, 2014, we had $4.77 billion in time deposits with balances of $100,000 and over maturing as follows:

 

Maturity Period

   Amount  
     (In thousands)  

3 months or less

   $ 796,637   

Over 3 months through 6 months

     815,274   

Over 6 months through 12 months

     1,356,505   

Over 12 months

     1,797,311   
  

 

 

 

Total

$ 4,765,727   
  

 

 

 

The following table presents the distribution of our deposit accounts at the dates indicated by dollar amount and percent of portfolio, and the weighted average nominal interest rate on each category of deposits.

 

    At December 31,  
    2014     2013     2012  
                Weighted                 Weighted                 Weighted  
          Percent     average           Percent     average           Percent     average  
          of total     nominal           of total     nominal           of total     nominal  
    Amount     deposits     rate     Amount     deposits     rate     Amount     deposits     rate  
    (Dollars in thousands)  

Savings

  $ 1,055,298        5.45     0.15   $ 1,009,237        4.70     0.15   $ 948,194        4.04     0.25

Interest-bearing demand

    2,116,447        10.92        0.24        2,208,985        10.29        0.24        2,300,145        9.79        0.33   

Money market

    4,154,310        21.44        0.20        5,188,632        24.16        0.20        6,634,308        28.25        0.35   

Noninterest-bearing demand

    665,100        3.43        —          661,221        3.08        —          649,925        2.77        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  7,991,155      41.24      0.19      9,068,075      42.23      0.19      10,532,572      44.85      0.32   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Time deposits:

Time deposits $100,000 and over

  4,765,727      24.60      1.25      5,117,193      23.83      1.29      5,171,558      22.02      1.38   

Time deposits less than $100,000

  5,329,163      27.50      1.04      5,915,254      27.55      1.05      6,385,130      27.19      1.17   

Qualified retirement plans

  1,290,499      6.66      1.36      1,371,807      6.39      1.44      1,394,657      5.94      1.53   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total time deposits

  11,385,389      58.76      1.16      12,404,254      57.77      1.19      12,951,345      55.15      1.29   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits

$ 19,376,544      100.00   0.76 $ 21,472,329      100.00   0.77 $ 23,483,917      100.00   0.85
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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The following table presents, by rate category, the amount of our time deposit accounts outstanding at the dates indicated.

 

     At December 31,  
     2014      2013      2012  
     (In thousands)  
     Amount      Amount      Amount  

Time deposit accounts:

        

0.50% or less

   $ 2,678,865       $ 2,792,287       $ 2,495,055   

0.51% to 1.00%

     3,683,392         4,954,935         4,455,625   

1.01% to 1.50%

     2,649,670         1,682,361         2,591,004   

1.51% to 2.00%

     777,722         856,167         765,595   

2.01% to 2.50%

     719,999         808,720         1,054,713   

2.51% to 3.00%

     206,652         328,296         499,653   

3.01% and over

     669,089         981,488         1,089,700   
  

 

 

    

 

 

    

 

 

 

Total

$ 11,385,389    $ 12,404,254    $ 12,951,345   
  

 

 

    

 

 

    

 

 

 

The following table presents, by rate category, the remaining period to maturity of time deposit accounts outstanding as of December 31, 2014.

 

     Period to Maturity from December 31, 2014  
     Within     Over three     Over six     Over one     Over two     Over        
     three     to six     months to     to two     to three     three        
     months     months     one year     years     years     years     Total  
     (Dollars in thousands)  

Time deposit accounts:

              

0.50% or less

   $ 1,433,988      $ 742,865      $ 501,579      $ 251      $ 100      $ 82      $ 2,678,865   

0.51% to 1.00%

     331,063        845,861        1,693,890        812,285        43        250        3,683,392   

1.01% to 1.50%

     63,346        46,567        499,102        1,517,719        143,935        379,001        2,649,670   

1.51% to 2.00%

     38        38        17,854        206,333        416,179        137,280        777,722   

2.01% to 2.50%

     39,537        36,200        211,986        432,258        18        —          719,999   

2.51% to 3.00%

     —          26,892        179,737        23        —          —          206,652   

3.01% and over

     280,696        387,414        967        12        —          —          669,089   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

$ 2,148,668    $ 2,085,837    $ 3,105,115    $ 2,968,881    $ 560,275    $ 516,613    $ 11,385,389   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average rate

  0.83   1.16   1.12   1.33   1.55   1.46   1.16

Borrowings. We have entered into agreements with selected brokers and the FHLB to repurchase securities sold to these parties. These agreements are recorded as financing transactions as we have maintained effective control over the transferred securities. The dollar amount of the securities underlying the agreements continues to be carried in our securities portfolio. The obligations to repurchase the securities are reported as a liability in the consolidated statements of financial condition. The securities underlying the agreements are delivered to the party with whom each transaction is executed. They agree to resell to us the same securities at the maturity or put date of the agreement. We retain the right of substitution of the underlying securities throughout the terms of the agreements.

We have also obtained advances from the FHLB, which are generally secured by a blanket lien against our mortgage portfolio. Borrowings with the FHLB are generally limited to approximately twenty times the amount of FHLB stock owned.

 

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Borrowed funds at December 31 are summarized as follows:

 

     2014     2013  
            Weighted            Weighted  
            Average            Average  
     Principal      Rate     Principal      Rate  
     (Dollars in thousands)  

Securities sold under agreements to repurchase:

          

FHLB

   $ —           —     $ 800,000         4.53

Other brokers

     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

$ 64,080    $ 64,061   

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

 

     At or for the Year Ended December 31,  
     2014     2013     2012  
     (Dollars in thousands)  

Repurchase Agreements:

      

Average balance outstanding during the year

   $ 6,274,932      $ 6,950,000      $ 6,950,000   
  

 

 

   

 

 

   

 

 

 

Maximum balance outstanding at any month-end during the year

$ 6,950,000    $ 6,950,000    $ 6,950,000   
  

 

 

   

 

 

   

 

 

 

Weighted average rate during the period

  4.49   4.51   4.52
  

 

 

   

 

 

   

 

 

 

FHLB Advances:

Average balance outstanding during the year

$ 5,900,068    $ 5,225,000    $ 6,623,094   
  

 

 

   

 

 

   

 

 

 

Maximum balance outstanding at any month-end during the year

$ 6,025,000    $ 5,225,000    $ 7,875,000   
  

 

 

   

 

 

   

 

 

 

Weighted average rate during the period

  4.82   4.84   4.02
  

 

 

   

 

 

   

 

 

 

Since market interest rates have remained very low for an extended period of time, we have not had any lenders put borrowings back to us. At December 31, 2014, we had $3.33 billion of borrowed funds with a weighted average of 4.41% and with put dates within one year, all of which 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 probably not be put back and our average cost of existing borrowings would not decrease even as market interest rates decrease. Conversely, if interest rates increase above the market interest rate for similar borrowings, we believe these borrowings would likely be put back at their next put date and our cost to replace these borrowings would increase. However, we believe, given current market conditions, that the likelihood that a significant portion of these borrowings would be put back will not increase substantially unless interest rates were to increase by at least 250 basis points from current levels.

We did not enter into any new repurchase agreements during 2014.

 

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The scheduled maturities and potential put dates of our borrowings as of December 31, 2014 are as follows:

 

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

Year

   Principal      Rate     Principal      Rate  
     (Dollars in thousands)  

2015

   $ 75,000         4.62   $ 3,400,000         4.42

2016

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

2017

     2,475,000         4.39        200,000         4.04   

2018

     700,000         3.65        500,000         3.54   

2019

     1,725,000         4.62        1,325,000         4.69   

2020

     3,275,000         4.53        2,825,000         4.52   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

$ 12,175,000      4.59 $ 12,175,000      4.59
  

 

 

      

 

 

    

The amortized cost and fair value of the underlying securities used as collateral for securities sold under agreements to repurchase are as follows:

 

     At December 31,  
     2014      2013      2012  
     (In thousands)  

Amortized cost of collateral:

        

United States government-sponsored enterprise securities

   $ 3,501,025       $ 298,190       $ —     

Mortgage-backed securities

     3,766,108         7,886,833         8,672,162   
  

 

 

    

 

 

    

 

 

 

Total amortized cost of collateral

$ 7,267,133    $ 8,185,023    $ 8,672,162   
  

 

 

    

 

 

    

 

 

 

Fair value of collateral:

United States government-sponsored enterprise securities

$ 3,496,659    $ 290,194    $ —     

Mortgage-backed securities

  3,864,959      8,045,674      8,991,053   
  

 

 

    

 

 

    

 

 

 

Total fair value of collateral

$ 7,361,618    $ 8,335,868    $ 8,991,053   
  

 

 

    

 

 

    

 

 

 

Subsidiaries

Hudson City Savings has two wholly owned and consolidated subsidiaries: HudCiti Service Corporation and HC Value Broker Services, Inc. HudCiti Service Corporation, which qualifies as a New Jersey investment company, had two wholly owned and consolidated subsidiaries during 2014: Hudson City Preferred Funding Corporation and Sound REIT, Inc. Hudson City Preferred Funding and Sound REIT qualified as real estate investment trusts, pursuant to the Internal Revenue Code of 1986, as amended. Hudson City Preferred Funding is no longer active and a certificate of dissolution was filed for this entity on December 31, 2014. Sound REIT had $6.5 million of residential mortgage loans outstanding at December 31, 2014.

HC Value Broker Services, Inc., whose primary operating activity is the referral of insurance applications, formed a strategic alliance that jointly markets insurance products with Savings Bank Life Insurance of Massachusetts.

 

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Personnel

As of December 31, 2014, we had 1,438 full-time employees and 137 part-time employees. Employees are not represented by a collective bargaining unit and we consider our relationship with our employees to be good.

REGULATION OF HUDSON CITY SAVINGS BANK AND HUDSON CITY BANCORP

General

Hudson City Savings has been a federally chartered savings bank since January 1, 2004 when it converted from a New Jersey chartered savings bank. Its deposit accounts are insured up to applicable limits by the FDIC under the Deposit Insurance Fund (“DIF”). On July 21, 2010, President Obama signed into law the Reform Act. The Reform Act imposes new restrictions and extends the framework of regulatory oversight for financial institutions, including depository institutions. The Reform Act provides for a variety of new, substantive operational requirements that impact a large number of different areas of bank operations, risk management and capital management. In addition, the Reform Act changed the jurisdictions of existing bank regulatory agencies and in particular transferred the regulation of federal savings associations from the OTS to the OCC, effective July 21, 2011. Savings and loan holding companies are now regulated by the FRB. As a result, Hudson City Savings is now regulated, examined and supervised by the OCC and Hudson City Bancorp is now regulated, examined and supervised by the FRB.

Hudson City Savings must file reports with the OCC concerning its activities and financial condition, and must obtain regulatory approval from the OCC prior to entering into certain transactions, such as mergers with, or acquisitions of, other depository institutions. The OCC conducts periodic examinations to assess Hudson City Savings’ compliance with various regulatory requirements. The OCC has primary enforcement responsibility over Hudson City Savings and has substantial discretion to impose an enforcement action if Hudson City Savings fails to comply with applicable regulatory requirements, particularly with respect to its capital requirements. In addition, the FDIC has the authority to recommend to the OCC that enforcement action be taken with respect to Hudson City Savings and, if action is not taken by the OCC, the FDIC has the authority to take such action under certain circumstances.

We are also subject to supervision, examination and regulation by the Consumer Financial Protection Bureau (“CFPB”), which is authorized to supervise certain consumer financial services companies and insured depository institutions with more than $10 billion in total assets, such as Hudson City Savings, for consumer protection purposes. The CFPB has exclusive examination and primary enforcement authority with respect to compliance with federal consumer financial protection laws and regulations by institutions under its supervision and is authorized to conduct investigations to determine whether any person is, or has, engaged in conduct that violates such laws or regulations.

This regulation and supervision establishes a comprehensive framework of activities in which a federal savings bank can engage and is intended primarily for the protection of the DIF and depositors and other consumers. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in laws and regulations (including laws concerning taxes, banking, securities, accounting and insurance), whether by the FRB, OCC, FDIC, CFPB or another government agency, or through legislation, could have a material adverse impact on Hudson City Bancorp and Hudson City Savings and their operations.

 

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Certain of the regulatory requirements that are or will be applicable to Hudson City Bancorp and Hudson City Savings are described below. This description of statutes and regulations is not intended to be a complete explanation of such statutes and regulations and their effects on Hudson City Bancorp and Hudson City Savings and is qualified in its entirety by reference to the actual statutes and regulations.

Informal Regulatory Agreement — Memorandum of Understanding. On March 30, 2012, the Bank entered into the Bank MOU with the OCC, which is substantially similar to and replaced the memorandum of understanding the Bank entered into with our former regulator, the OTS, on June 24, 2011. In accordance with the Bank MOU, the Bank adopted and implemented enhanced operating policies and procedures that are intended to enable us to continue to (a) reduce our level of interest rate risk, (b) reduce our funding concentration, (c) diversify our funding sources, (d) enhance our liquidity position, (e) monitor and manage loan modifications and (f) maintain our capital position in accordance with our existing capital plan. In addition, we developed the Strategic Plan for the Bank which establishes objectives for the Bank’s overall risk profile, earnings performance, growth and balance sheet mix and to enhance our enterprise risk management program. On February 26, 2015 the OCC terminated the Bank MOU.

The Company entered into the Company MOU with the FRB on April 24, 2012, which is substantially similar to and replaced the memorandum of understanding 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 Bank’s compliance with the Bank MOU. The Company MOU also requires the Company to: (a) obtain approval from the FRB prior to receiving a capital distribution from the Bank or declaring a dividend to shareholders and (b) obtain approval from the FRB prior to repurchasing or redeeming any Company stock or incurring any debt with a maturity of greater than one year. In accordance with the Company MOU, the Company submitted a comprehensive capital plan and a comprehensive earnings plan to the FRB.

While the Company believes it is in compliance in all material respects with the Company MOU, it will remain in effect until modified or terminated by the FRB.

Federally Chartered Savings Bank Regulation

Activity Powers. Hudson City Savings derives its lending, investment and other activity powers primarily from the Home Owners’ Loan Act, as amended, commonly referred to as HOLA, and the regulations of the OCC thereunder. Under these laws and regulations, federal savings banks, including Hudson City Savings, generally may invest in real estate mortgages, consumer and commercial loans, certain types of debt securities and certain other assets.

These investment powers are subject to various limitations, including (1) a prohibition against the acquisition of any corporate debt security unless the debt securities may be sold with reasonable promptness at a price that corresponds reasonably to their fair value and such securities are investment grade, (2) a limit of 400% of an association’s capital on the aggregate amount of loans secured by non-residential real estate property, (3) a limit of 20% of an association’s assets on commercial loans, with the amount of commercial loans in excess of 10% of assets being limited to small business loans, (4) a limit of 35% of an association’s assets on the aggregate amount of consumer loans and acquisitions of certain debt securities, (5) a limit of 5% of assets on non-conforming loans (certain loans in excess of the specific limitations of HOLA), and (6) a limit of the greater of 5% of assets or an association’s capital on certain construction loans made for the purpose of financing what is or is expected to become residential property. Hudson City Savings may also establish service corporations that may engage in activities not otherwise permissible for Hudson City Savings, including certain real estate equity investments and securities and insurance brokerage activities.

Capital Requirements. Prior to January 1, 2015, the OCC capital regulations required federally chartered savings banks to meet three minimum capital ratios: a 1.5% tangible capital ratio, a 4.0% (3.0% if the savings bank received the highest rating on its most recent examination) leverage (core capital) ratio and an 8.0% total risk-based capital ratio. At December 31, 2014, Hudson City Savings exceeded each of its capital requirements with a tangible capital ratio of 11.74%, leverage ratio of 11.74% and a total risk-based capital ratio of 28.75%.

 

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Generally banks, bank holding companies and savings associations (collectively, banking organizations) are required to deduct certain assets from Tier 1 capital, and though a banking organization is permitted to net any associated deferred tax liability against some of such assets prior to making the deduction from Tier 1 capital, such netting generally is not permitted for goodwill and other intangible assets arising from a taxable business combination. In these cases, the full or gross carrying amount of the asset is deducted. However, banking organizations may reduce the amount of goodwill arising from a taxable business combination that they may deduct from Tier 1 capital by the amount of any deferred tax liability associated with that goodwill. We have no deferred tax liabilities associated with goodwill and, as a result, the full amount of our goodwill is deducted from Tier 1 capital. For banking organizations that elect to apply this rule, the amount of goodwill deducted from Tier 1 capital would reflect the maximum exposure to loss in the event that the entire amount of goodwill is impaired or derecognized for financial reporting purposes. A banking organization that reduces the amount of goodwill deducted from Tier 1 capital by the amount of the deferred tax liability is not permitted to net this deferred tax liability against deferred tax assets when determining regulatory capital limitations on deferred tax assets.

The following table sets forth information regarding Hudson City Savings’ actual capital amounts and ratios and the regulatory capital requirements applicable to Hudson City Savings at the dates indicated:

 

                  OCC Requirements  
                  Minimum Capital     For Classification as  
     Bank Actual     Adequacy     Well-Capitalized  
     Amount      Ratio     Amount      Ratio     Amount      Ratio  
     (Dollars in thousands)  

December 31, 2014

               

Tangible capital

   $ 4,262,696         11.74   $ 544,721         1.50     n/a         n/a   

Leverage (core) capital

     4,262,696         11.74        1,452,590         4.00      $ 1,815,737         5.00

Total-risk-based capital

     4,457,171         28.75        1,240,172         8.00        1,550,215         10.00   

December 31, 2013

               

Tangible capital

   $ 4,145,444         10.82   $ 574,791         1.50     n/a         n/a   

Leverage (core) capital

     4,145,444         10.82        1,532,777         4.00      $ 1,915,971         5.00

Total-risk-based capital

     4,361,710         25.31        1,378,687         8.00        1,723,359         10.00   

Pursuant to the Reform Act, the federal bank regulatory agencies (the “Agencies”) issued rules that subject many savings and loan holding companies, including Hudson City Bancorp, to consolidated capital requirements (the “Final Capital Rules”). The Final Capital 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. The Final Capital Rules revise the quantity and quality of capital required by: (1) establishing a new minimum common equity Tier 1 ratio of 4.5% of risk-weighted assets; (2) raising the minimum Tier 1 capital ratio from 4.0% to 6.0% of risk-weighted assets; (3) maintaining the minimum total capital ratio of 8.0% of risk-weighted assets; and (4) maintaining a minimum Tier 1 capital to adjusted average consolidated assets, known as the leverage ratio, of 4.0%.

Furthermore, the Final Capital Rules add a requirement for a minimum common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets, or the Conservation Buffer, to be applied to the common equity Tier 1 capital ratio, the Tier 1 capital ratio and the total capital ratio. Failure to maintain the Conservation Buffer will result in restrictions on capital distributions and certain discretionary cash bonus payments to

 

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executive officers. The required minimum Conservation Buffer will be phased in incrementally, starting at 0.625% on January 1, 2016 and increasing to 1.25% on January 1, 2017, 1.875% on January 1, 2018 and 2.5% on January 1, 2019. If a banking organization’s Conservation Buffer is less than the required minimum and its net income for the four calendar quarters preceding the applicable calendar quarter, net of any capital distributions and associated tax effects not already reflected in net income, or Eligible Retained Income, is negative, it would be prohibited from making capital distributions or certain discretionary cash bonus payments to executive officers. As a result, under the Final Capital Rules, should we fail to maintain the Conservation Buffer we would be subject to limits on, and in the event we have negative Eligible Retained Income for any four consecutive calendar quarters, we would be prohibited in, our ability to obtain capital distributions from Hudson City Savings. If we do not receive sufficient cash dividends from Hudson City Savings, then we may not have sufficient funds to pay dividends or repurchase our common stock.

Moreover, the Final Capital Rules revise existing and establish new risk weights for certain exposures, including, among other exposures, residential mortgage loans, commercial loans, which generally include commercial real estate loans, multi-family loans, past due loans and GSE exposures. Under the Final Capital Rules, residential mortgage loans guaranteed by the U.S. government or its agencies maintain their current risk-based capital treatment (a risk weight of 0% for those unconditionally guaranteed and a risk weight of 20% for those that are conditionally guaranteed). Residential mortgage loans secured by a first-lien on an owner-occupied or rented one-to four-family residential property that meet prudential underwriting standards, are not 90 days or more past due or carried on non-accrual status, and that are not restructured or modified have a risk weight of 50%. All other residential mortgage loans have a risk weight of 100%. Under the Final Capital Rules, pre-sold construction loans have a risk weight of 50%, unless the purchase contract is cancelled, in which case the risk weight is 100%. Multi-family mortgage loans have a risk weight of 50%. High-volatility commercial real estate exposures have a risk weight of 150%, preferred stock issued by a GSE has a risk weight of 100% and exposures to GSEs that are not equity exposures have a risk weight of 20%.

The new minimum regulatory capital ratios and changes to the calculation of risk-weighted assets (each as described above) under the Final Capital Rules became effective for Hudson City Bancorp and Hudson City Savings on January 1, 2015. The required minimum Conservation Buffer will be phased in incrementally, starting at 0.625% on January 1, 2016 and increasing to 1.25% on January 1, 2017, 1.875% on January 1, 2018 and 2.5% on January 1, 2019.

In assessing an institution’s capital adequacy, the OCC takes into consideration not only these numeric factors but qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions where necessary. Hudson City Savings, as a matter of prudent management, targets as its goal the maintenance of capital ratios that exceed these minimum requirements and that are consistent with Hudson City Savings’ risk profile.

Stress Tests. The Reform Act requires national banks and federal savings associations with total consolidated assets of more than $10 billion to conduct annual stress tests. On October 9, 2012, the OCC published its final rules requiring annual capital-adequacy stress tests for national banks and federal savings associations with consolidated assets of more than $10 billion (the “Stress Test Rule”). Pursuant to the Stress Test Rule, Hudson City Savings must conduct annual stress tests using financial data as of September 30, report the results of the stress test to the OCC on or before March 31 and publicly disclose a summary of the results of its annual stress test between June 15 and June 30. The Stress Test Rule also requires each institution to establish and maintain a system of controls, oversight, and documentation, including policies and procedures, designed to ensure that the stress testing processes used by the institution are effective in meeting the requirements of the rule. In December 2014, the OCC amended the Stress Test Rule to shift the dates of the annual stress testing cycle (the “Amended Stress Test Rule”). In accordance with the Amended Stress Test Rule, for the stress test beginning January 1, 2016, Hudson City Savings must conduct its annual stress test using financial data as of December 31, report the results of the stress test to the OCC on or before July 31 and publicly disclose a summary of the results of its annual stress test between October 15 and October 31.

 

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During the first quarter of 2014, the Agencies issued final guidance outlining high-level principles for implementation of the stress tests required by the Reform Act and the Stress Test Rule (the “Stress Test Guidance”), which is applicable to all bank and savings and loan holding companies, national banks, state-member banks, state non-member banks, federal savings associations, and state chartered savings associations with more than $10 billion but less than $50 billion in total consolidated assets. The Stress Test Guidance discusses supervisory expectations for stress test practices under the Stress Test Rule. The Stress Test Guidance states that a company is expected to ensure that projected balance sheet and risk-weighted assets remain consistent with regulatory and accounting changes, are applied consistently across the company, and are consistent with the economic scenarios provided by the OCC for use in the stress test and the company’s past history of managing through different business environments. Furthermore, the Stress Test Guidance states that a company must consider the results of stress testing in the company’s capital planning, assessment of capital adequacy and risk management practices.

In addition, in May 2012, the Agencies adopted final supervisory guidance which outlines high-level principles for general stress testing practices, which is applicable to all banking organizations with more than $10 billion in total consolidated assets. The guidance provides an overview of how a banking organization should structure its stress testing activities and ensure they fit into overall risk management. The guidance outlines broad principles for a satisfactory stress testing framework and describes the manner in which stress testing should be employed as an integral component of risk management that is applicable at various levels of aggregation within a banking organization, as well as for contributing to capital and liquidity planning.

The Volcker Rule. In December 2013, the Agencies, the SEC and the CFTC adopted final rules implementing Section 619 of the Reform Act. Section 619 and the final implementing rules are, commonly known as the “Volcker Rule.” While Section 619 of the Reform Act provided that banking organizations were required to conform their activities and investments by July 21, 2014, in connection with issuing the final Volcker Rule, the FRB extended the conformance period until July 21, 2015. The FRB is permitted, by rule or order, to extend the conformance period for one year at a time, for a total of not more than 3 years. On December 18, 2014, the FRB issued an order (the “Extension Order”) that further extends until July 21, 2016 the conformance period under the Volcker Rule. The FRB stated in the Extension Order that it intends to exercise its authority again next year and grant the final one-year extension in order to permit banking organizations until July 21, 2017 to conform to the requirements of the Volcker Rule.

The Volcker Rule prohibits banking entities from acquiring and retaining an ownership interest in, sponsoring, or having certain relationships with a “covered fund.” The Volcker Rule generally treats as a covered fund any entity that would be an investment company under the Investment Company Act of 1940 (the “1940 Act”), but for the application of the exemptions from SEC registration set forth in Section 3(c)(1) (fewer than 100 beneficial owners) or Section 3(c)(7) (qualified purchasers) of the 1940 Act. In addition to prohibiting a banking entity from sponsoring or having an ownership interest in a covered fund, the Volker Rule also limits the term of relationships between banking entities and covered funds, and imposes new disclosure obligations for covered funds serviced by banking entities. The Volcker Rule also imposes corporate governance, compliance and control program, record keeping, regulatory reporting, training and audit requirements on banking entities. These requirements become more stringent and detailed based upon the size of the banking organization and scope and nature of its activities. Under the Volcker Rule, banking entities are also prohibited from engaging in proprietary trading.

The Company does not currently anticipate that the Volcker Rule will have a material effect on the operations of the Company and its subsidiaries, as the Company does not engage in proprietary trading, does not have any ownership interest in any funds that are not permitted under the Volcker Rule and does not engage in any other the activities prohibited by the Volcker Rule. As a depositary institution with over $ 10 billion in assets, we will need to adopt additional policies and systems to ensure compliance with the Volcker Rule. The costs of developing and implementing such policies and systems are not expected to be material.

 

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Interest Rate Risk. The Federal Deposit Insurance Corporation Improvement Act (“FDICIA”), required that the Agencies revise their risk-based capital standards to take into account interest rate risk, concentration of risk and the risks of non-traditional activities. The OCC regulations do not include a specific interest rate risk component of the risk based capital requirement. However, the OCC expects all federal savings associations to have an independent interest rate risk measurement process in place that measures both earnings and capital at risk, as described in the IRR Advisory and the 1996 IRR policy statement (each described below).

In June 1996, the Agencies adopted a Joint Agency Policy Statement on interest rate risk (the “1996 IRR policy statement”). The 1996 IRR policy statement provides guidance to examiners and bankers on sound practices for managing interest rate risk. The 1996 IRR policy statement also outlines fundamental elements of sound management that have been identified in prior regulatory guidance and discusses the importance of these elements in the context of managing interest rate risk. Specifically, the guidance emphasizes the need for active board of director and senior management oversight and a comprehensive risk management process that effectively identifies, measures and controls interest rate risk.

In January 2010, the Agencies released an Advisory on Interest Rate Risk Management (the “IRR Advisory”) to remind institutions of the supervisory expectations regarding sound practices for managing interest rate risk. While some degree of interest rate risk is inherent in the business of banking, the Agencies expect institutions to have sound risk management practices in place to measure, monitor and control interest rate risk exposures, and interest rate risk management should be an integral component of an institution’s risk management infrastructure. The Agencies expect all institutions to manage their interest rate risk exposures using processes and systems commensurate with their earnings and capital levels, complexity, business model, risk profile and scope of operations, and the IRR Advisory reiterates the importance of effective corporate governance, policies and procedures, risk measuring and monitoring systems, stress testing, and internal controls related to the interest rate risk exposures of institutions.

The IRR Advisory encourages institutions to use a variety of techniques to measure interest rate risk exposure, including simple maturity gap analysis, income measurement and valuation measurement for assessing the impact of changes in market rates, as well as simulation modeling to measure interest rate risk exposure. Institutions are encouraged to use the full complement of analytical capabilities of their interest rate risk simulation models. The IRR Advisory also reminds institutions that stress testing, which includes both scenario and sensitivity analysis, is an integral component of interest rate risk management. The IRR Advisory indicates that institutions should regularly assess interest rate risk exposures beyond typical industry conventions, including changes in rates of greater magnitude (e.g., up and down 300 and 400 basis points, as compared to up and down 200 basis points, which has been the general practice) across different tenors to reflect changing slopes and twists of the yield curve.

The IRR Advisory emphasizes that effective interest rate risk management not only involves the identification and measurement of interest rate risk, but also the appropriate actions to control this risk. The adequacy and effectiveness of an institution’s interest rate risk management process and the level of its interest rate risk exposure are critical factors in the Agencies’ evaluation of an institution’s sensitivity to changes in interest rates and capital adequacy.

Safety and Soundness Standards. Pursuant to the requirements of the FDICIA, as amended by the Riegle Community Development and Regulatory Improvement Act of 1994, the Agencies adopted guidelines establishing general standards relating to internal controls, information and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset quality, earnings and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director, or principal shareholder.

 

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In addition, the OCC adopted regulations pursuant to FDICIA to require a savings bank that is given notice by the OCC that it is not satisfying any of such safety and soundness standards to submit a compliance plan to the OCC. If, after being so notified, a savings bank fails to submit an acceptable compliance plan or fails in any material respect to implement an accepted compliance plan, the OCC may issue an order directing corrective and other actions of the types to which a significantly undercapitalized institution is subject under the “prompt corrective action” provisions of FDICIA. If a savings bank fails to comply with such an order, the OCC may seek to enforce such an order in judicial proceedings and to impose civil monetary penalties.

Prompt Corrective Action. FDICIA established a system of prompt corrective action to resolve the problems of undercapitalized institutions. Under this system, the bank regulators are required to take certain, and authorized to take other, supervisory actions against undercapitalized institutions, based upon five categories of capitalization which FDICIA created: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” The severity of the action authorized or required to be taken under the prompt corrective action regulations increases as a bank’s capital decreases within the three undercapitalized categories. All banks are prohibited from paying dividends or other capital distributions or paying management fees to any controlling person if, following such distribution, the bank would be undercapitalized. The OCC is required to monitor closely the condition of an undercapitalized bank and to restrict the growth of its assets.

An undercapitalized bank is required to file a capital restoration plan with the OCC within 45 days of the date the bank receives notices that it is within any of the three undercapitalized categories, and the plan must be guaranteed by every parent holding company. The aggregate liability of a parent holding company is limited to the lesser of:

 

  1. an amount equal to five percent of the bank’s total assets at the time it became “undercapitalized”; and

 

  2. the amount that is necessary (or would have been necessary) to bring the bank into compliance with all capital standards applicable with respect to such bank as of the time it fails to comply with the plan.

If a bank fails to submit an acceptable plan, it is treated as if it were “significantly undercapitalized.” Banks that are significantly or critically undercapitalized are subject to a wider range of regulatory requirements and restrictions. Prior to January 1, 2015, under the OCC regulations, a federally chartered savings bank was considered well capitalized if its total risk-based capital ratio was 10.0% or greater and its Tier 1 risk-based capital ratio was 6.0% or greater, and its leverage ratio was 5.0% or greater, and it was not subject to any order or directive by the OCC to meet a specific capital level. As of December 31, 2014, Hudson City Savings met the applicable requirements to be considered “well capitalized”. Under the Final Capital Rules (described above), effective January 1, 2015, to be well capitalized, an insured depository institution must maintain a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a common equity Tier 1 risk-based capital ratio of 6.5% or greater and a leverage capital ratio of 5.0% or greater and not be subject to any order or directive by the OCC to meet a specific capital level.

In addition to measures taken under the prompt corrective action provisions with respect to undercapitalized institutions, insured banks and their holding companies may be subject to potential enforcement actions by their regulators for unsafe and unsound practices in conducting their business or for violations of law or regulation, including the filing of a false or misleading regulatory report. Enforcement actions under this authority may include the issuance of cease and desist orders, the imposition of civil money penalties, the issuance of directives to increase capital, formal and informal agreements, or removal and prohibition orders against “institution-affiliated parties” (generally bank insiders). Further, the FRB may bring an enforcement action against a depository institution holding company either to address undercapitalization in the holding company or to require the holding company to take measures to remediate undercapitalization or other safety and soundness concerns in a depository institution subsidiary.

 

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Consumer Protection Laws.

Ability to Pay Rules. The CFPB adopted final rules in January 2013, referred to as the “Ability to Pay Rules,” that (i) prohibit creditors, such as Hudson City Savings, from extending mortgage loans without regard for the consumer’s ability to repay, (ii) specify the types of income and assets that may be considered in the ability-to-repay determination, the permissible sources for verification, and the required methods of calculating a loan’s monthly payments and (iii) establish certain protections from liability for loans that meet the requirements of a “Qualified Mortgage.” Previously, Regulation Z prohibited creditors from extending higher-priced mortgage loans without regard for the consumer’s ability to repay. The Ability to Pay Rules extend application of this requirement to all loans secured by dwellings, not just higher-priced mortgages.

As defined by the CFPB, a Qualified Mortgage is a mortgage that meets the following standards prohibiting or limiting certain high risk product and features:

 

  (1) No excessive upfront points and fees—generally points and fees paid by the borrower must not exceed 3% of the total amount borrowed;

 

  (2) No toxic loan features—prohibited features are: interest only-loans, negative-amortization loans, terms beyond 30 years and balloon loans; and

 

  (3) Limited on debt-to-income ratios—borrowers’ total debt-to-income ratios must be no higher than 43%.

In October 2014, the CFPB published a final rule that allows lenders to cure loans that do not meet the “points and fees” test under the Qualified Mortgage definition, but that otherwise satisfy the requirements of a Qualified Mortgage. Pursuant to the final rule, lenders will be able to “cure” loans for which the points and fees exceed the 3% cap for Qualified Mortgages by refunding the points and fees that exceed the 3% cap, with interest within 210 days after closing of the loan. The cure mechanism is available for loans closed on or after November 3, 2014 and before January 10, 2021.

Lenders that generate Qualified Mortgage loans will receive specific protections against borrower lawsuits that could result from failing to satisfy the Ability to Pay Rules. There are two levels of liability protections for Qualified Mortgages: the Safe Harbor protection and the Rebuttable Presumption protection. Safe Harbor Qualified Mortgages are lower-priced loans with interest rates closer to the prime rate, issued to borrowers with high credit scores. Borrowers suing lenders under Safe Harbor Qualified Mortgages are faced with overcoming the pre-determined legal conclusion that the lender has satisfied the Ability to Pay Rules. Rebuttable Presumption Qualified Mortgages are loans at higher prices that are granted to borrowers with lower credit scores. Lenders generating Rebuttable Presumption Qualified Mortgages receive the protection of a presumption that they have legally satisfied the Ability to Pay Rules while the borrower can rebut that presumption by proving that the lender did not consider the borrower’s living expenses after their mortgage and other debts. In addition, Qualified Mortgages are exempt from the new appraisal requirement rules described below under “Appraisal Rules.”

As a result of these final rules, beginning in January 2014, we only originate mortgage loans that meet the requirements of a “qualified mortgage” except we may continue to originate interest-only loans, subject to our compliance with the ability to repay provisions of the rule.

Mortgage Servicing Rules. The CFPB also issued final rules concerning mortgage servicing standards, referred to as the “Mortgage Servicing Rules,” which amend both Regulation X and Regulation Z. The Regulation X rule requires servicers to provide certain information to borrowers, to provide protections to such borrowers in connection with force-placed insurance, to establish policies and procedures to achieve certain delineated objectives, to correct errors asserted by borrowers, and to evaluate borrowers’ applications for available loss mitigation options. The Regulation Z rule requires creditors, assignees and servicers to provide interest rate adjustment notices for adjustable-rate mortgages, periodic statements for residential mortgage loans, prompt crediting of mortgage payments, and responses to requests for payoff amounts.

 

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In November 2014, the CFPB published proposed amendments to the Mortgage Servicing Rules, which would further amend both Regulation X and Regulation Z. The proposed rule would, among other things, require servicers to provide certain borrowers with foreclosure protections more than once over the life of the loan, expand consumer protections to surviving family members and other homeowners, require servicers to notify borrowers when loss mitigation applications are complete, clarify when a borrower becomes delinquent and provide more information to borrowers in bankruptcy.

Loan Originator Qualification and Compensation Rule. The CFPB also issued a final rule implementing requirements and restrictions imposed by the Reform Act concerning, among other things, qualifications of individual loan originators and the compensation practices with respect to such persons. The rule prohibits loan origination organizations from basing compensation for themselves or individual loan originators on any of the origination transaction’s terms or conditions and prohibits such persons from receiving compensation from another person in connection with the same transaction. The rule also imposes duties on loan originator organizations to ensure that their individual loan originators meet certain licensing or qualification standards and extends existing recordkeeping requirements.

Enforcement. The CFPB has exclusive examination and primary enforcement authority with respect to compliance with federal consumer financial protection laws and regulations by institutions under its supervision and is authorized, individually or jointly with the Agencies, to conduct investigations to determine whether any person is, or has, engaged in conduct that violates such laws or regulations. The CFPB may bring an administrative enforcement proceeding or civil action in Federal district court. In addition, in accordance with a memorandum of understanding entered into between the CFPB and the Department of Justice (“DOJ”), the two agencies have agreed to coordinate efforts related to enforcing the fair lending laws, which includes information sharing and conducting joint investigations. As an independent bureau within the FRB, the CFPB may impose requirements more severe than the previous bank regulatory agencies.

Insurance Activities. Hudson City Savings is generally permitted to engage in certain activities through its subsidiaries. However, the federal banking agencies have adopted regulations prohibiting depository institutions from conditioning the extension of credit to individuals upon either the purchase of an insurance product or annuity or an agreement by the consumer not to purchase an insurance product or annuity from an entity that is not affiliated with the depository institution. The regulations also require prior disclosure of this prohibition to potential insurance product or annuity customers.

Deposit Insurance. Hudson City Savings is a member of the DIF and pays its deposit insurance assessments to the DIF.

Under the Federal Deposit Insurance Act, as amended (“FDIA”), the FDIC may terminate the insurance of an institution’s deposits upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. The management of Hudson City Savings does not know of any practice, condition or violation that might lead to termination of deposit insurance.

In determining the deposit insurance assessment to be paid by large insured depository institutions,

 

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generally defined as those with at least $10 billion in total assets, such as Hudson City Savings, the FDIC combines CAMELS ratings and financial measures into two scorecards to calculate assessment rates, one for most large insured depository institutions and another for highly complex insured depository institutions (which are generally those with more than $50 billion in total assets that are controlled by a parent company with more than $500 billion in total assets). Each scorecard has two components—a performance score and loss severity score, which are combined and converted to an initial assessment rate. The FDIC has the ability to adjust a large or highly complex insured depository institution’s total score by a maximum of 15 points, up or down, based upon significant risk factors that are not captured by the scorecard. Under the current assessment rate schedule, the initial base assessment rate for large and highly complex insured depository institutions ranges from five to 35 basis points, and the total base assessment rate, after applying the unsecured debt and brokered deposit adjustments, ranges from two and one-half to 45 basis points.

The FDIC also annually establishes a designated reserve ratio (“DRR”) of estimated insured deposits. The DRR will remain at 2.00% for 2015, which is the same ratio that has been in effect since January 1, 2011. The FDIC is authorized to change deposit insurance assessment rates as necessary, to maintain the DRR, without further notice-and-comment rulemaking, provided that: (i) no such adjustment can be greater than three basis points from one quarter to the next, (ii) adjustments cannot result in rates more than three basis points above or below the base rates and (iii) rates cannot be negative.

As a result of the failures of a number of banks and thrifts, during the financial crisis, there was a significant increase in the loss provisions of the DIF. This resulted in a decline in the DIF reserve ratio during 2008 below the then minimum DRR of 1.15%. As a result, the FDIC was required to establish a restoration plan to restore the reserve ratio to 1.15% within a period of eight years.

The Reform Act gave the FDIC much greater discretion to manage the DIF, including where to set the DRR. Among other things, the Reform Act (i) raises the minimum reserve, which the FDIC is required to set each year, to 1.35% (from the former minimum of 1.15%) and removed the upper limit on the reserve ratio (which was formerly capped at 1.5%); (ii) requires that the fund reserve ratio reach 1.35% by September 30, 2020; and (iii) requires that the FDIC offset the effect of requiring the reserve ratio to reach 1.35% on insured depository institutions with total consolidated assets of less than $10 billion, so that more of the cost of raising the reserve ratio will be borne by the institutions with more than $10 billion in assets, such as Hudson City Savings. In October 2010, the FDIC adopted a restoration plan to ensure that the DIF reserve ratio reaches 1.35% by September 30, 2020, as required by the Reform Act. The FDIC is expected to pursue further rulemaking regarding the method that will be used to reach the reserve ratio of 1.35% so that more of the cost of raising the reserve ratio to 1.35% will be borne by institutions with more than $10 billion in assets.

For 2014, Hudson City Savings had an assessment rate of approximately 13.83 basis points resulting in a deposit insurance assessment of $47.7 million. The deposit insurance assessment rates are in addition to the FICO payments. Total expense for 2014, including the FICO assessment, was $49.8 million.

The FDIC deposit insurance assessments are in addition to the assessments for payments on the bonds issued in the late 1980s by the Financing Corporation to recapitalize the now defunct Federal Savings and Loan Insurance Corporation. The Financing Corporation payments will continue until the bonds mature in 2017 through 2019. Our expense for these payments totaled $2.1 million in 2014.

Transactions with Affiliates of Hudson City Savings. Hudson City Savings is subject to the affiliate and insider transaction rules set forth in Sections 23A, 23B, 22(g) and 22(h) of the Federal Reserve Act (“FRA”), and Regulation W and Regulation O issued by the FRB. These provisions, among other things, prohibit or limit a savings bank from extending credit to, or entering into certain transactions with, its affiliates (which for Hudson City Savings would include Hudson City Bancorp) and principal shareholders, directors and executive officers. The OCC is authorized to impose additional restriction on transactions with affiliates if necessary to protect the safety and soundness of a savings institution.

 

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In addition, the FRB regulations include additional restrictions on savings banks under Section 11 of HOLA, including provisions prohibiting a savings bank from making a loan to an affiliate that is engaged in non-bank holding company activities and provisions prohibiting a savings association from purchasing or investing in securities issued by an affiliate that is not a subsidiary. FRB regulations also include certain specific exemptions from these prohibitions. The FRB and the OCC require each depository institution that is subject to Sections 23A and 23B of the FRA to implement policies and procedures to ensure compliance with Regulation W regarding transactions with affiliates.

Section 402 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) prohibits the extension of personal loans to directors and executive officers of “issuers” (as defined in Sarbanes-Oxley). The prohibition, however, does not apply to mortgages advanced by an insured depository institution, such as Hudson City Savings, that are subject to the insider lending restrictions of Section 22(h) of the FRA.

The Reform Act imposes further restrictions on transactions with affiliates and extensions of credit to executive officers, director and principal shareholders, by, among other things, expanding covered transactions to include securities lending, repurchase agreement and derivatives activities with affiliates. These changes became effective on July 21, 2012.

Privacy Standards. Hudson City Savings is subject to OCC regulations implementing the privacy protection provisions of the Gramm-Leach-Bliley Act (“Gramm-Leach”). These regulations require Hudson City Savings to disclose its privacy policy, including identifying with whom it shares “non-public personal information,” to customers at the time of establishing the customer relationship and annually thereafter.

The regulations also require Hudson City Savings to provide its customers with initial and annual notices that accurately reflect its privacy policies and practices. In addition, Hudson City Savings is required to provide its customers with the ability to “opt-out” of having Hudson City Savings share their non-public personal information with unaffiliated third parties before they can disclose such information, subject to certain exceptions.

Hudson City Savings is subject to regulatory guidelines establishing standards for safeguarding customer information. These regulations implement certain provisions of Gramm-Leach. The guidelines describe the Agencies’ expectations for the creation, implementation and maintenance of an information security program, which would include administrative, technical and physical safeguards appropriate to the size and complexity of the institution and the nature and scope of its activities. The standards set forth in the guidelines are intended to ensure the security and confidentiality of customer records and information, protect against any anticipated threats or hazards to the security or integrity of such records and protect against unauthorized access to or use of such records or information that could result in substantial harm or inconvenience to any customer.

Community Reinvestment Act. Under the Community Reinvestment Act (“CRA”), as implemented by OCC regulations, any federally chartered savings bank, including Hudson City Savings, has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community. The CRA requires the OCC, in connection with its examination of a federally chartered savings bank, to assess the depository institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution.

Current CRA regulations rate an institution based on its actual performance in meeting community needs. In particular, the evaluation system focuses on three tests:

 

    a lending test, to evaluate the institution’s record of making loans in its service areas;

 

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    an investment test, to evaluate the institution’s record of investing in community development projects, affordable housing, and programs benefiting low or moderate income individuals and businesses; and

 

    a service test, to evaluate the institution’s delivery of services through its branches, ATMs and other offices.

The CRA also requires all institutions to make public disclosure of their CRA ratings. Hudson City Savings has received a “satisfactory” rating in its most recent CRA examination. The Agencies adopted regulations implementing the requirement under Gramm-Leach that insured depository institutions publicly disclose certain agreements that are in fulfillment of the CRA. Hudson City Savings has no such agreements in place at this time.

Loans to One Borrower. Under HOLA, savings banks are generally subject to the national bank limits on loans to one borrower. Generally, savings banks may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of the institution’s unimpaired capital and unimpaired surplus. Additional amounts may be loaned, not in excess of 10% of unimpaired capital and unimpaired surplus, if such loans or extensions of credit are secured by readily-marketable collateral. Hudson City Savings is in compliance with applicable loans to one borrower limitations. At December 31, 2014, Hudson City Savings’ largest aggregate amount of loans to one borrower totaled $25.0 million and was secured by a multi-family rental property. This loan was a portion of an $82.0 million syndicated loan. The borrower has no affiliation with Hudson City Savings.

Interagency Guidance on Commercial Real Estate Lending. In December 2006, the Agencies published guidance entitled “Interagency Guidance on Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices,” or the CRE Guidance, to address concentrations of commercial real estate loans in savings associations. The CRE Guidance reinforces and enhances the OCC’s existing regulations and guidelines for real estate lending and loan portfolio management, but does not establish specific commercial real estate lending limits.

In October 2009, the Agencies adopted a policy statement supporting prudent commercial real estate mortgage loan workouts, or the Policy Statement. The Policy Statement provides guidance for examiners, and for financial institutions that are working with commercial real estate mortgage loan borrowers who are experiencing diminished operating cash flows, depreciated collateral values, or prolonged delays in selling or renting commercial properties. The Policy Statement details risk-management practices for loan workouts that support prudent and pragmatic credit and business decision-making within the framework of financial accuracy, transparency, and timely loss recognition. Financial institutions that implement prudent loan workout arrangements after performing comprehensive reviews of borrowers’ financial conditions will not be subject to criticism for engaging in these efforts, even if the restructured loans have weaknesses that result in adverse credit classifications. In addition, performing loans, including those renewed or restructured on reasonable modified terms, made to creditworthy borrowers, will not be subject to adverse classification solely because the value of the underlying collateral declined. The Policy Statement reiterates existing guidance that examiners are expected to take a balanced approach in assessing institutions’ risk-management practices for loan workout activities.

We have evaluated the CRE Guidance and the Policy Statement to determine our compliance and, as necessary, modified our risk management practices, underwriting guidelines and consumer protection standards in connection with the implementation, during 2014, of our commercial real estate lending initiative. See “Lending Activities – Residential Mortgage Lending and Multi-family and Commercial Mortgage Loans” for a discussion of our loan product offerings and related underwriting standards and “Item 7—Management’s Discussion and Analysis—Asset Quality” for information regarding our loan portfolio composition.

 

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Interagency Guidance on Nontraditional Mortgage Product Risks. On October 4, 2006, the Agencies published the Interagency Guidance on Nontraditional Mortgage Product Risks (the “Guidance”). The Guidance describes sound practices for managing risk, as well as marketing, originating and servicing nontraditional mortgage products, which include, among other things, interest only loans. The Guidance sets forth supervisory expectations with respect to loan terms and underwriting standards, portfolio and risk management practices and consumer protection. For example, the Guidance indicates that originating interest only loans with reduced documentation is considered a layering of risk and that institutions are expected to demonstrate mitigating factors to support their underwriting decision and the borrower’s repayment capacity.

On June 29, 2007, the Agencies issued the “Statement on Subprime Mortgage Lending” (the “Statement”) to address the growing concerns facing the sub-prime mortgage market, particularly with respect to rapidly rising sub-prime default rates that may indicate borrowers do not have the ability to repay adjustable-rate sub-prime loans originated by financial institutions. In particular, the Agencies expressed concern in the Statement that current underwriting practices do not take into account that many subprime borrowers are not prepared for “payment shock” and that the current subprime lending practices compound risk for financial institutions. The Statement describes the prudent safety and soundness and consumer protection standards that financial institutions should follow to ensure borrowers obtain loans that they can afford to repay. The Statement also reinforces the April 17, 2007 Interagency Statement on Working with Mortgage Borrowers, in which the Agencies encouraged institutions to work constructively with residential borrowers who are financially unable or reasonably expected to be unable to meet their contractual payment obligations on their home loans.

Prior to January 10, 2014, we purchased and originated reduced documentation loans (including interest-only reduced documentation loans). However, as of January 10, 2014, we no longer purchase or originate such loans. In addition, we do not originate or purchase sub-prime loans, negative amortization loans or option ARM loans. During 2014 and 2013, originations of reduced documentation loans totaled $152.6 million and $780.2 million, respectively, of which all were one-to four-family loans. Included in our loan portfolio at December 31, 2014 are $3.99 billion of amortizing reduced documentation loans and $620.0 million of reduced documentation interest-only loans. See “Residential Mortgage Lending,” and “Item 7 – Management’s Discussion and Analysis – Asset Quality.”

We have evaluated the Guidance and the Statement to determine our compliance and, as necessary, modified our risk management practices, underwriting guidelines and consumer protection standards.

Appraisal Rules. In January 2013, pursuant to the Reform Act, the Agencies issued final rules on appraisal requirements for higher-priced mortgage loans which became effective in January 2014. For mortgage loans with an annual percentage rate the exceeds a certain threshold, the Bank must obtain an appraisal using a licensed or certified appraiser. The appraiser must prepare a written appraisal report based on a physical inspection of the interior of the property. The Bank must also then disclose to applicants information about the purpose of the appraisal and provide them with a free copy of the appraisal report. “Qualified mortgages” are exempt from these appraisal requirements.

Qualified Thrift Lender (“QTL”) Test. The HOLA requires savings associations to meet a Qualified Thrift Lender (the “QTL test”). Under the QTL test, a savings association is required to maintain at least 65% of its “portfolio assets” (total assets less (1) specified liquid assets up to 20% of total assets, (2) intangibles, including goodwill, and (3) the value of property used to conduct business) in certain “qualified thrift investments” (primarily residential mortgages and related investments, including certain mortgage-backed securities, credit card loans, student loans, and small business loans) on a monthly basis during at least 9 out of every 12 months. As of December 31, 2014, Hudson City Savings held 87.2% of its portfolio assets in qualified thrift investments and had more than 75% of its portfolio assets in qualified thrift investments for each of the 12 months ending December 31, 2014. Therefore, Hudson City Savings qualified under the QTL test.

 

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A savings association that fails the QTL test will immediately be prohibited from: (1) making any new investment or engaging in any new activity not permissible for a national bank, (2) paying dividends, unless such payment would be permissible for a national bank, is necessary to meet the obligations of a company that controls the savings association, and is specifically approved by the OCC and the FRB, and (3) establishing any new branch office in a location not permissible for a national bank in the association’s home state. A savings association that fails to meet the QTL test is deemed to have violated the HOLA and may be subject to OCC enforcement action. In addition, if the association does not requalify under the QTL test within three years after failing the test, the association would be prohibited from retaining any investment or engaging in any activity not permissible for a national bank.

Limitation on Capital Distributions. The OCC regulations impose limitations upon certain capital distributions by federal savings banks, such as certain cash dividends, payments to repurchase or otherwise acquire its shares, payments to shareholders of another institution in a cash out merger and other distributions charged against capital.

The OCC regulates all capital distributions by Hudson City Savings directly or indirectly to Hudson City Bancorp, including dividend payments. A federal savings association, such as Hudson City Savings, must file a notice or seek affirmative approval from the OCC at least 30 days prior to each proposed capital distribution. Whether an application is required is based on a number of factors including whether the institution qualifies for expedited treatment under the OCC rules and regulations or if the total amount of all capital distributions (including each proposed capital distribution) for the applicable calendar year exceeds net income for that year to date plus the retained net income for the preceding two years. Currently, Hudson City Savings must seek approval from the OCC for future capital distributions. In addition, as a subsidiary of a savings and loan holding company, Hudson City Savings must receive approval from the FRB before declaring a dividend.

During 2014, we were required to file applications with the OCC and the FRB for proposed capital distributions, all of which were approved. Hudson City Savings paid dividends to Hudson City Bancorp totaling $80.0 million in 2014.

Hudson City Savings may not pay dividends to Hudson City Bancorp if, after paying those dividends, it would fail to meet the required minimum levels under risk-based capital guidelines and the minimum leverage and tangible capital ratio requirements or if the dividend would violate a prohibition contained in any statute, regulation or agreement. Under the FDIA, an insured depository institution such as Hudson City Savings is prohibited from making capital distributions, including the payment of dividends, if, after making such distribution, the institution would become “undercapitalized” (as such term is used in the FDIA). Payment of dividends by Hudson City Savings also may be restricted at any time at the discretion of the OCC if it deems the payment to constitute an unsafe and unsound banking practice.

In addition, Hudson City Savings may not declare or pay cash dividends on or repurchase any of its shares of common stock if the effect thereof would cause shareholders’ equity to be reduced below the amounts required for the liquidation account which was established as a result of Hudson City Savings’ conversion to a stock holding company structure.

Liquidity. Hudson City Savings maintains sufficient liquidity to ensure its safe and sound operation, in accordance with OCC regulations.

Assessments. The OCC charges assessments to recover the cost of examining federal savings banks and their affiliates. We also pay semi-annual assessments for the holding company. We paid a total of $6.8 million in assessments for the year ended December 31, 2014.

Branching. Federally chartered savings banks may branch nationwide to the extent allowed by federal statute.

 

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Anti-Money Laundering and Customer Identification

Hudson City Savings is subject to the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“USA PATRIOT Act”), and its implementing regulations. The USA PATRIOT Act gives the federal government powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering requirements. By way of amendments to the Bank Secrecy Act, Title III of the USA PATRIOT Act takes measures intended to encourage information sharing among bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions, including banks, thrifts, brokers, dealers, credit unions, money transfer agents and parties registered under the Commodity Exchange Act.

Title III of the USA PATRIOT Act and the implementing regulations impose the following requirements on financial institutions:

 

    Establishment of anti-money laundering programs.

 

    Establishment of a program specifying procedures for obtaining identifying information from customers seeking to open new accounts, including verifying the identity of customers within a reasonable period of time.

 

    Establishment of enhanced due diligence policies, procedures and controls designed to detect and report money-laundering.

 

    Prohibitions on correspondent accounts for foreign shell banks and compliance with record keeping obligations with respect to correspondent accounts of foreign banks.

 

    Bank regulators are directed to consider a holding company’s effectiveness in combating money laundering when ruling on Bank Holding Company Act and Bank Merger Act applications.

Federal Home Loan Bank System

Hudson City Savings is a member of the Federal Home Loan Bank system, which consists of twelve regional Federal Home Loan Banks, each subject to supervision and regulation by the Federal Housing Finance Agency (“FHFA”). The Federal Home Loan Bank provides a central credit facility primarily for member thrift institutions as well as other entities involved in home mortgage lending. It is funded primarily from proceeds derived from the sale of consolidated obligations of Federal Home Loan Banks. It makes loans to members (i.e., advances) in accordance with policies and procedures, including collateral requirements, established by the respective boards of directors of the Federal Home Loan Banks. These policies and procedures are subject to the regulation and oversight of the FHFA. All long-term advances are required to provide funds for residential home financing. The FHFA has also established standards of community or investment service that members must meet to maintain access to such long-term advances.

Hudson City Savings, as a member of the FHLB, is currently required to acquire and hold shares of FHLB Class B stock. The Class B stock has a par value of $100 per share and is redeemable upon five years notice, subject to certain conditions. The Class B stock has two subclasses, one for membership stock purchase requirements and the other for activity-based stock purchase requirements. The minimum stock investment requirement in the FHLB Class B stock is the sum of the membership stock purchase requirement, determined on an annual basis at the end of each calendar year, and the activity-based stock purchase requirement, determined on a daily basis. For Hudson City Savings, the membership stock purchase requirement is 0.2% of the Mortgage-Related Assets, as defined by the FHLB, which consists principally of residential mortgage loans

 

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and mortgage-backed securities, including CMOs and REMICs, held by Hudson City Savings. The activity-based stock purchase requirement for Hudson City Savings is equal to the sum of: (1) 4.5% of outstanding borrowings from the FHLB; (2) 4.5% of the outstanding principal balance of Acquired Member Assets, as defined by the FHLB, and delivery commitments for Acquired Member Assets; (3) a specified dollar amount related to certain off-balance sheet items, which for Hudson City Savings is zero; and (4) a specified percentage ranging from 0 to 5% of the carrying value on the FHLB’s balance sheet of derivative contracts between the FHLB and Hudson City Savings, which for Hudson City Savings is also zero. The FHLB can adjust the specified percentages and dollar amount from time to time within the ranges established by the FHLB capital plan. At December 31, 2014, the amount of FHLB stock held by us satisfies the requirements of the FHLB capital plan.

Federal Reserve System

FRB regulations require federally chartered savings banks to maintain non-interest-earning cash reserves against their transaction accounts (primarily NOW and demand deposit accounts). A reserve of 3% is to be maintained against net transaction accounts between $14.5 million and $103.6 million (subject to adjustment by the FRB) plus a reserve of 10% (subject to adjustment by the FRB) against that portion of total transaction accounts in excess of $103.6 million. The first $14.5 million of otherwise reservable balances (subject to adjustment by the FRB) is exempt from the reserve requirements. Hudson City Savings is in compliance with the foregoing requirements. Because required reserves must be maintained in the form of either vault cash, a non-interest-bearing account at a Federal Reserve Bank or a pass-through account as defined by the FRB, the effect of this reserve requirement is to reduce Hudson City Savings’ interest-earning assets.

Pursuant to the Emergency Economic Stabilization Act of 2008, the Federal Reserve Banks pay interest on depository institutions’ required and excess reserve balances. The interest rate paid on required reserve balances is currently the average target federal funds rate over the reserve maintenance period. The rate on excess balances will be set equal to the lowest Federal Open Market Committee of the FRB target rate in effect during the reserve maintenance period.

Federal Savings and Loan Holding Company Regulation

Hudson City Bancorp is a unitary savings and loan holding company within the meaning of HOLA. As a result of the Reform Act, Hudson City Bancorp is now subject to regulation, examination, supervision and reporting requirements by the FRB. In addition, the FRB has enforcement authority over Hudson City Bancorp and its subsidiaries other than Hudson City Savings Bank. Among other things, this authority permits the FRB to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings bank.

Restrictions Applicable to New Savings and Loan Holding Companies. Gramm-Leach also restricts the powers of new unitary savings and loan holding companies. Under Gramm-Leach, all unitary savings and loan holding companies formed after May 4, 1999, such as Hudson City Bancorp, are limited to financially related activities permissible for bank holding companies, as defined under Gramm-Leach. Accordingly, Hudson City Bancorp’s activities are restricted to:

 

    furnishing or performing management services for the savings institution subsidiary of such holding company;

 

    conducting an insurance agency or escrow business;

 

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    holding, managing, or liquidating assets owned or acquired from the savings institution subsidiary of such holding company;

 

    holding or managing properties used or occupied by the savings institution subsidiary of such holding company;

 

    acting as trustee under a deed of trust;

 

    any other activity (i) that the FRB, by regulation, has determined to be permissible for bank holding companies under Section 4(c) of the Bank Holding Company Act of 1956 (the “BHC Act”), unless the FRB, by regulation, prohibits or limits any such activity for savings and loan holding companies, or (ii) which multiple savings and loan holding companies were authorized by regulation to directly engage in on March 5, 1987;

 

    purchasing, holding, or disposing of stock acquired in connection with a qualified stock issuance if the purchase of such stock by such holding company is approved by the FRB; and

 

    any activity permissible for financial holding companies under section 4(k) of the BHC Act.

Activities permissible for financial holding companies under section 4(k) of the BHC Act include:

 

    lending, exchanging, transferring, investing for others, or safeguarding money or securities;

 

    insurance activities or providing and issuing annuities, and acting as principal, agent, or broker;

 

    financial, investment, or economic advisory services;

 

    issuing or selling instruments representing interests in pools of assets that a bank is permitted to hold directly;

 

    underwriting, dealing in, or making a market in securities;

 

    activities previously determined by the FRB to be closely related to banking;

 

    activities that bank holding companies are permitted to engage in outside of the U.S.; and

 

    portfolio investments made by an insurance company.

In addition, Hudson City Bancorp cannot be acquired or acquire a company unless the acquirer or target, as applicable, is engaged solely in financial activities.

Restrictions Applicable to All Savings and Loan Holding Companies. Except under limited circumstances, Federal law prohibits a savings and loan holding company, including Hudson City Bancorp, directly or indirectly, from:

 

    acquiring control (as defined under HOLA) of another savings institution (or a holding company parent) without prior FRB approval;

 

    acquiring, through merger, consolidation, or purchase of assets, another savings institution or a holding company thereof, or acquiring all or substantially all of the assets of such institution (or a holding company) without prior FRB approval;

 

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    acquiring or retaining more than 5% of the voting shares of a non-subsidiary savings association, a non-subsidiary holding company, or a non-subsidiary company engaged in activities other than those permitted by the HOLA; or

 

    acquiring or retaining control of a depository institution that is not federally insured.

In evaluating applications by holding companies to acquire savings associations, the FRB must consider the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the DIF, the convenience and needs of the community and competitive factors.

A savings and loan holding company may not acquire as a separate subsidiary an insured institution that has a principal office outside of the state where the principal office of its subsidiary institution is located, except:

 

    in the case of certain emergency acquisitions approved by the FDIC;

 

    if such holding company controls a savings institution subsidiary that operated a home or branch office in such additional state as of March 5, 1987; or

 

    if the laws of the state in which the savings institution to be acquired is located specifically authorize a savings institution chartered by that state to be acquired by a savings institution chartered by the state where the acquiring savings institution or savings and loan holding company is located or by a holding company that controls such a state chartered association.

In general, a savings and loan holding company, with the prior approval of the FRB, may engage in all activities that bank holding companies may engage in under any regulation that the FRB has promulgated under Section 4(c) of the BHC Act. Prior approval from the FRB is not required, however, if: (1) the savings and loan holding company received a composite rating of “1” or “2” in its most recent examination, and it is not in troubled condition, and the holding company does not propose to commence the activity by an acquisition of a going concern, or (2) the activity is otherwise permissible under another provision of HOLA, for which prior notice to or approval from the FRB is not required.

Other Holding Company Restrictions. Pursuant to the terms of the Company MOU, we are required to seek approval from the FRB at least 30 days prior to declaring any future cash dividend. Each dividend request submitted to the FRB must evidence our compliance with applicable guidance regarding payment of dividends issued by the FRB. This process enables the FRB to comment on, object to or otherwise prohibit us from paying the proposed dividend. The supervisory guidance issued by the FRB states that we should either eliminate, defer or significantly reduce dividends if (i) our net income available to common shareholders over the past year is insufficient to fully fund a dividend, (ii) our prospective rate of earnings retention is not consistent with our capital needs and our overall current or prospective financial condition or (iii) we will not meet, or are in danger of not meeting, our minimum regulatory capital adequacy ratios.

In accordance with the Reform Act, the Agencies have established consolidated risk-based and leverage capital requirements for insured depository institutions, depository institution holding companies and systemically important nonbank financial companies. As discussed above, the Final Capital Rules, subject all federal savings associations and their FRB regulated holding companies, including Hudson City Savings and Hudson City Bancorp, to a new consolidated regulatory capital framework. As a result, effective January 1, 2015, we became subject to consolidated capital requirements which we have not been subject to previously. In addition, pursuant to the Reform Act, we are required to serve as a source of strength for Hudson City Savings.

 

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In October 2012, the FRB published two final rules that set forth the annual stress testing requirements for certain bank holding companies, state member banks, and savings and loan holding companies to take effect for such companies once subject to the Final Capital Rules. In October 2014, the FRB published a final rule that modified the 2012 rules. Pursuant to the stress test rules, as modified, on an annual basis we must conduct holding company stress tests in January using financial data as of December 31 of the prior year, report the results of the stress test to the FRB on or before July 31, 2016 and publicly disclose a summary of the results of its annual stress test between October 15 and October 31, 2016. Hudson City Bancorp became subject to the Final Capital Rules on January 1, 2015. Accordingly, we must conduct our first annual holding company stress test in January 2016, using financial data as of December 31, 2015, report the results to the FRB on or before July 31, 2016 and publicly disclose a summary of the results between October 15 and October 31, 2016.

Federal Securities Law

Hudson City Bancorp’s securities are registered with the SEC under the Securities Exchange Act of 1934, as amended. As such, Hudson City Bancorp is subject to the information, proxy solicitation, insider trading, and other requirements and restrictions of the Securities Exchange Act of 1934.

Delaware Corporation Law

Hudson City Bancorp is incorporated under the laws of the State of Delaware, and is therefore subject to regulation by the State of Delaware. In addition, the rights of Hudson City Bancorp’s shareholders are governed by the Delaware General Corporation Law.

TAXATION

Federal

General. The following discussion is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to Hudson City Savings or Hudson City Bancorp. For federal income tax purposes, Hudson City Bancorp reports its income on the basis of a taxable year ending December 31, using the accrual method of accounting, and is generally subject to federal income taxation in the same manner as other corporations. Hudson City Savings and Hudson City Bancorp constitute an affiliated group of corporations and are therefore eligible to report their income on a consolidated basis. The Company’s tax returns are subject to audit by the Internal Revenue Service for the tax years 2010 through 2014.

Distributions. To the extent that Hudson City Savings makes “non-dividend distributions” to Shareholders, such distributions will be considered to result in distributions from Hudson City Savings’ unrecaptured tax bad debt reserve “base year reserve,” i.e., its reserve as of December 31, 1987, to the extent thereof and then from its supplemental reserve for losses on loans, and an amount based on the amount distributed will be included in Hudson City Savings’ taxable income. Non-dividend distributions include distributions in excess of Hudson City Savings’ current and accumulated earnings and profits, distributions in redemption of stock and distributions in partial or complete liquidation. However, dividends paid out of Hudson City Savings’ current or accumulated earnings and profits, as calculated for federal income tax purposes, will not constitute non-dividend distributions and, therefore, will not be included in Hudson City Savings’ income.

The amount of additional taxable income created from a non-dividend distribution is equal to the lesser of Hudson City Savings’ base year reserve and supplemental reserve for losses on loans or an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Thus, in certain situations, approximately one and one-half times the non-dividend distribution would be included in gross income for federal income tax purposes, assuming a 35% federal corporate income tax rate. Hudson City Savings does not intend to pay dividends that would result in the recapture of any portion of its bad debt reserve.

 

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Corporate Alternative Minimum Tax. In addition to the regular corporate income tax, corporations generally are subject to an alternative minimum tax, or AMT, in an amount equal to 20% of alternative minimum taxable income, to the extent the AMT exceeds the corporation’s regular income tax. The AMT is available as a credit against future regular income tax. We do not expect to be subject to the AMT.

Elimination of Dividends; Dividends Received Deduction. Hudson City Bancorp may exclude from its income 100% of dividends received from Hudson City Savings because Hudson City Savings is a member of the affiliated group of corporations of which Hudson City Bancorp is the parent.

State

New Jersey State Taxation. Hudson City Savings files New Jersey Corporate Business income tax returns. Generally, the income of savings institutions in New Jersey, which is calculated based on federal taxable income, subject to certain adjustments, is subject to New Jersey tax at a rate of 9.00%. Savings institutions must also calculate, as part of their corporate tax return, an Alternative Minimum Assessment (“AMA”), which for Hudson City Savings is based on New Jersey gross receipts. Hudson City Savings must calculate its corporate business tax and the AMA, then pay the higher amount. In future years, if the corporate business tax is greater than the AMA paid in prior years, Hudson City Savings may apply the prepaid AMA against its corporate business taxes (up to 50% of the corporate business tax, subject to certain limitations). Hudson City Savings is not currently under audit with respect to its New Jersey income tax returns.

Hudson City Bancorp is required to file a New Jersey income tax return and will generally be subject to a state income tax at a 9.00% rate. However, if Hudson City Bancorp meets certain requirements, it may be eligible to elect to be taxed as a New Jersey Investment Company, which would allow it to be taxed at a rate of 3.60%. Further, investment companies are not subject to the AMA. If Hudson City Bancorp does not qualify as an investment company, it would be subject to taxation at the higher of the 9.00% corporate business rate on taxable income or the AMA.

Delaware State Taxation. As a Delaware holding company not earning income in Delaware, Hudson City Bancorp is exempt from Delaware corporate income tax but is required to file annual returns and pay annual fees and a franchise tax to the State of Delaware.

New York State Taxation. New York State imposes an annual franchise tax on banking corporations, based on net income allocable to New York State, at a rate of 7.1%. If, however, the application of an alternative minimum tax (based on taxable assets allocated to New York, “alternative” net income, or a flat minimum fee) results in a greater tax, an alternative minimum tax will be imposed. In addition, New York State imposes a tax surcharge of 17.0% of the New York State Franchise Tax, calculated using an annual franchise tax rate of 9.00% (which represents the 2000 annual franchise tax rate), allocable to business activities carried on in the Metropolitan Commuter Transportation District. These taxes apply to Hudson City Savings. During 2013, the State of New York completed an audit of the Bank’s tax returns for tax years 2006 through 2008.

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 went into effect 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 Company’s net deferred tax asset at March 31, 2014 (the date the legislation was signed into law).

 

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Connecticut State Taxation. Connecticut imposes an income tax based on net income allocable to the State of Connecticut, at a rate of 7.5%.

New York City Taxation. Hudson City Savings is also subject to the New York City Financial Corporation Tax calculated, subject to a New York City income and expense allocation, on a similar basis as the New York State Franchise Tax. A significant portion of Hudson City Savings’ entire net income is derived from outside the New York City jurisdiction which has the effect of significantly reducing the New York City taxable income of Hudson City Savings. During 2014, the New York City Department of Finance completed an audit of the Bank’s tax returns for tax years 2010 and 2011.

Item 1A. Risk Factors

The Merger Agreement may be terminated in accordance with its terms and the Merger may not be completed.

The Merger Agreement is subject to a number of conditions which must be fulfilled in order to complete the Merger. Those conditions include: approval of the Merger Agreement by Hudson City Bancorp stockholders, approval of the issuance of M&T Common Stock in connection with the Merger by M&T shareholders, receipt of requisite regulatory approvals, absence of orders prohibiting completion of the Merger, approval of the shares of M&T Common Stock to be issued to Hudson City stockholders for listing on the NYSE, the continued accuracy of the representations and warranties by both parties and the performance by both parties of their covenants and agreements, and the receipt by both parties of legal opinions from their respective tax counsels. Hudson City Bancorp stockholders have approved the Merger Agreement and M&T’s stockholders have approved the issuance of M&T Common Stock. However, if the remaining conditions to the closing of the Merger are not fulfilled, the Merger may not be completed.

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 three occasions, Hudson City Bancorp and M&T have agreed to extend the date after which either party may elect to terminate the Merger Agreement, with the latest extension to April 30, 2015. Each extension was documented with an amendment to the Merger Agreement and the most recent amendment, Amendment No. 3, 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 April 30, 2015. Amendment No. 3, and applicable provisions from the prior amendments, permit the Company to take certain interim actions without the prior approval of M&T, 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. There can be no assurances that the Merger will be completed by April 30, 2015 or that the Company will not exercise its right to terminate the Merger Agreement in accordance with its terms.

Termination of the Merger Agreement could negatively impact Hudson City.

If the Merger Agreement is terminated, Hudson City Bancorp’s business may be adversely impacted by not having pursued other beneficial opportunities due to the focus of management on the Merger.

As of December 31, 2014, goodwill and other intangible assets amounted to $152.5 million. We performed our annual goodwill impairment analysis as of June 30, 2014 and concluded that the implied fair value of goodwill of the Company exceeded the carrying value of goodwill. If the Merger Agreement is terminated, the market price of Hudson City Bancorp common stock might decline to the extent that the current market price reflects a market assumption that the Merger will be completed. In the event the market price of Hudson City Bancorp common stock does so decline, we may be required to recognize a goodwill impairment charge.

 

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In addition, if the Merger Agreement is terminated and Hudson City Bancorp’s board of directors seeks another merger or business combination, Hudson City Bancorp stockholders cannot be certain that Hudson City Bancorp will be able to find a party willing to offer equivalent or more attractive consideration than the consideration M&T has agreed to provide in the Merger.

Hudson City Bancorp stockholders who make elections to receive cash, stock or mixed consideration in the Merger will be unable to sell their shares in the market pending the Merger.

Hudson City Bancorp stockholders may elect to receive cash, stock or mixed consideration in the Merger by completing an election form that will be provided to stockholders. Elections will require that stockholders making the election turn in their Hudson City Bancorp stock certificates. This means that during the time between when the election is made and the date the Merger is completed, Hudson City Bancorp stockholders will be unable to sell their Hudson City Bancorp common stock. If the election forms are returned by Hudson City Bancorp stockholders and then the Merger is unexpectedly delayed, this period could extend for a significant period of time. Hudson City Bancorp stockholders can shorten the period during which they cannot sell their shares by delivering their election shortly before the election deadline. However, elections received after the election deadline will not be accepted or honored.

Hudson City will be subject to business uncertainties and contractual restrictions while the Merger is pending.

Uncertainty about the effect of the Merger on employees and customers may have an adverse effect on Hudson City. These uncertainties may impair Hudson City’s ability to attract, retain and motivate key personnel until the Merger is completed, and could cause customers and others that deal with Hudson City to seek to change existing business relationships with Hudson City. Retention of certain employees may be challenging during the pendency of the Merger, as certain employees may experience uncertainty about their future roles. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with the business, Hudson City’s business could be negatively impacted. In addition, the Merger Agreement still restricts Hudson City from making certain acquisitions and taking other specified actions until the Merger occurs without the consent of M&T. These restrictions may prevent Hudson City from pursuing attractive business opportunities that may arise prior to the completion of the Merger.

Successful implementation of our Strategic Plan may be difficult during the pendency of the Merger and we may not be able to fully execute on our new initiatives.

Hudson City has historically been a community and consumer oriented retail savings bank, offering traditional deposit products and focusing on one- to four-family residential mortgages. However, the recent economic downturn made it difficult for us to profitably grow our business in the same manner as in the past. Prior to the announcement of the Merger, we retained an outside consultant to assist management in developing the Strategic Plan. The operational core of the Strategic Plan is the expansion of our loan and deposit product offerings over time to create more balanced sources of revenue and funding and 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.

In the event the Merger is not completed, our future success will depend on our ability to effectively implement our Strategic Plan. There are risks and uncertainties associated with the implementation and execution of the Strategic Plan initiatives, including the investment of time and resources, the possibility that these initiatives will be unprofitable, and the risk of additional liabilities associated with these initiatives. In addition, our ability to successfully execute on these new initiatives will depend in part on our ability to attract and retain talented

 

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individuals, which may be difficult during the pendency of the Merger, to help manage these new operations. In addition, successful execution of the initiatives will require satisfactory market conditions that will allow us to profitably grow these new businesses. While we expect to incur start up expenses for our prioritized initiatives throughout 2015, we do not expect to realize revenues from these efforts until 2016. Our revenues and operating results may be adversely affected if we experience further delays or we are unable to successfully implement the strategic initiatives set forth in the Strategic Plan.

Future balance sheet restructuring would adversely affect our net income for the period in which we complete the restructuring.

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 2015. The Company previously completed a series of restructuring transactions in 2011 that reduced higher-cost structured borrowings on the Company’s balance sheet. Management is currently considering 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. In the event the Merger Agreement is terminated, we would expect to proceed soon thereafter to execute the restructuring transaction, if it has not been completed by that time. Similar to the 2011 restructuring transactions, we expect any restructuring to result in a decrease in the size of our balance sheet, a material charge to earnings and a decrease in our regulatory capital ratios, though we also expect an improvement in net interest margin and future earnings prospects.

New and future rulemaking and enforcement initiatives from the CFPB has had, and will continue to have, a material effect on our loan production and on our operations and operating costs.

The CFPB has the authority to implement and enforce a variety of existing consumer protection statutes and to issue new regulations and, with respect to institutions of our size, has exclusive examination and primary enforcement authority with respect to such laws and regulations and is authorized, individually or jointly with the Agencies, to conduct investigations to determine whether any person is, or has, engaged in conduct that violates such laws or regulations. In addition, in accordance with a memorandum of understanding entered into between the CFPB and DOJ, the two agencies have agreed to coordinate efforts related to enforcing the fair lending laws, which includes information sharing and conducting joint investigations.

As an independent bureau within the FRB, the CFPB may impose requirements more severe than the previous bank regulatory agencies. The CFPB has initiated enforcement actions against a variety of bank and non-bank market participants with respect to a number of consumer financial products and services that has resulted in those participants expending significant time, money and resources to adjust to the initiatives being pursued by the CFPB. These enforcement actions may serve as precedent for how the CFPB interprets and enforces consumer protection laws with respect to all supervised institutions, which may result in the imposition of higher standards of compliance with such laws.

Pursuant to the Reform Act, in January 2013, the CFPB issued a series of final rules related to mortgage loan origination and mortgage loan servicing. These final rules went into effect in January 2014 and prohibit creditors, such as Hudson City Savings Bank, from extending mortgage loans secured by a dwelling without regard for the consumer’s ability to repay and establishes certain protections from liability for loans that meet the requirements of a “qualified mortgage.” In addition, these rules add restrictions and requirements to mortgage origination and servicing practices and restrict the application of prepayment penalties and compensation practices relating to mortgage loan underwriting. Compliance with these rules required us to change our underwriting practices and in January 2014 we discontinued our reduced documentation loan program in order to comply with the newly effective CFPB requirements to validate a borrower’s ability to repay and the corresponding safe harbor for qualified mortgages. During 2013, 22% of our total loan production consisted of reduced documentation loans. As a result, these rules adversely affected the volume of mortgage loans that we originated in 2014 and will continue to do so in the future. In addition, these rules may subject the Bank to increased potential liability related to its residential loan origination activities.

 

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The CFPB is authorized, individually or jointly with the Agencies, to conduct investigations to determine whether any person is, or has, engaged in conduct that violates such laws or regulations. In addition, in accordance with a memorandum of understanding entered into between the CFPB and DOJ, the two agencies have agreed to coordinate efforts related to enforcing the fair lending laws, which includes information sharing and conducting joint investigations. As an independent bureau within the FRB, the CFPB may impose requirements more severe than the previous bank regulatory agencies. The CFPB has initiated enforcement actions against a variety of bank and non-bank market participants with respect to a number of consumer financial products and services that has resulted in those participants expending significant time, money and resources to adjust to the initiatives being pursued by the CFPB. In the event we become the subject of CFPB examination criticism or the target of a CFPB enforcement action we may need to spend considerable time, money and resources revising our operations to conform to the requirements of the CFPB.

Multi-family and commercial real estate lending may expose us to increased lending risks.

As part of our Strategic Plan, in 2014, we commenced the purchase of commercial real estate loans and interests in such loans. At December 31, 2014, our portfolio of multi-family and commercial real estate loans totaled $102.3 million. We intend to continue to build our commercial real estate lending portfolio, consistent with our Strategic Plan. Multi-family and commercial real estate mortgage loans generally involve a greater degree of credit risk than residential mortgage loans because they typically have larger balances than residential mortgage loans and other consumer loans and are more affected by adverse conditions in the economy. Additionally, such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to one- to four- family residential mortgage loans. Because payments on loans secured by multi-family properties and commercial real estate often depend upon the successful operation and management of the properties and the businesses which operate from within them, repayment of such loans may be affected by factors outside the borrower’s control, such as adverse conditions in the real estate market or the economy or changes in government regulation. In light of the planned future growth of these portfolios, we have implemented enhanced risk management policies, procedures and controls. Our failure to adequately implement enhanced risk management policies, procedures and controls could result in an increased rate of delinquencies, increased losses from these portfolios and adversely affect our ability to increase our multi-family and commercial real estate loan portfolio going forward.

To the extent we originate multi-family and commercial real estate mortgage loans in areas other than the New York metropolitan area, we could be subject to additional risks with respect to multi-family and commercial real estate mortgage lending in those areas since we have less direct oversight of the local market and the borrowers’ operations.

New lines of business or new products and services may subject us to additional risks. A failure to successfully manage these risks may have a material adverse effect on our business.

From time to time and in accordance with our Strategic Plan, we plan to implement new lines of business and offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts. In developing and marketing new lines of business and/or new products and services, we will invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, any new line of business and/or new product or service could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could have a material adverse effect on our business, results of operations and financial condition.

 

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Our net interest margin may contract further in the current interest rate environment and changes in interest rates could adversely affect our results of operations and financial condition.

The current protracted low interest rate environment has resulted in a continued trend of net interest margin compression. During this period of low market interest rates, elevated levels of prepayments and refinancings have resulted in a decrease in the yields earned on our interest-earning assets while our interest-bearing liabilities are repricing at a slower rate and include borrowings that are not expected to reprice in the near-term. In addition, we have maintained elevated levels of short-term liquid assets due primarily to the reinvestment of cash flows from repayments and sales of mortgage-related assets reflecting our low appetite for adding long term mortgage assets to our balance sheet in the current low interest rate environment. As a result, we experienced declines in net interest income in each quarter of 2014. We expect net interest income to continue to decline in the current environment.

The Federal Open Market Committee of the Board of Governors of the Federal Reserve System (the “FOMC”) noted that economic activity has improved in recent months. The FOMC noted that labor market indicators were mixed but on balance showed further improvement. However, the unemployment rate was little changed during the fourth quarter and 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 slowed somewhat. The national unemployment rate decreased to 5.6% in December 2014 from 6.7% in December 2013 and from 5.9% in September 2014. The FOMC decided to maintain the overnight lending target rate at zero to 0.25% during the fourth quarter of 2014.

The FOMC is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The FOMC