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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended: June 30, 2015

 

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

For the transition period from                     to                      

Commission File Number: 0-26001

 

 

Hudson City Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   22-3640393

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

West 80 Century Road

Paramus, New Jersey

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

(201) 967-1900

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x    No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  x    No  ¨

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

 

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨    No   x

As of August 4, 2015, the registrant had 529,529,490 shares of common stock, $0.01 par value, outstanding.

 

 

 


Table of Contents

Table of Contents

 

     Page
Number
 

PART I – FINANCIAL INFORMATION

  

Item 1. – Financial Statements

  

Consolidated Statements of Financial Condition – June 30, 2015 (Unaudited) and December 31, 2014

     5   

Consolidated Statements of Income (Unaudited) – For the three and six months ended June 30, 2015 and 2014

     6   

Consolidated Statements of Comprehensive Income (Loss) (Unaudited) – For the three and six months ended June 30, 2015 and 2014

     7   

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) – For the six months ended June 30, 2015 and 2014

     8   

Consolidated Statements of Cash Flows (Unaudited) – For the six months ended June 30, 2015 and 2014

     9   

Notes to Unaudited Consolidated Financial Statements

     10   

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

     40   

Item 3. – Quantitative and Qualitative Disclosures About Market Risk

     77   

Item 4. – Controls and Procedures

     83   

PART II – OTHER INFORMATION

  

Item 1. – Legal Proceedings

     84   

Item 1A. – Risk Factors

     84   

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

     85   

Item 3. – Defaults Upon Senior Securities

     85   

Item 4. – Mine Safety Disclosures

     85   

Item 5. – Other Information

     85   

Item 6. – Exhibits

     85   

SIGNATURES

     86   

 

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Table of Contents

Forward-Looking Statements

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

    litigation or matters before regulatory agencies, whether currently existing or commencing in the future;

 

    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 transaction may not be satisfied or waived, and the Merger Agreement (as defined below) 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 (“Strategic Plan”) initiatives 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 reflect conditions only as of the date of this filing. We do not intend to update any of the forward-looking statements after the date of this Form 10-Q or to conform these statements to actual events.

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

 

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Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. – Financial Statements

Hudson City Bancorp, Inc. and Subsidiary

Consolidated Statements of Financial Condition

 

     June 30,
2015
    December 31,
2014
 
(In thousands, except share and per share amounts)    (unaudited)        

Assets:

    

Cash and due from banks

   $ 102,957      $ 122,484   

Federal funds sold and other overnight deposits

     6,599,793        6,163,082   
  

 

 

   

 

 

 

Total cash and cash equivalents

  6,702,750      6,285,566   

Securities available for sale:

Mortgage-backed securities

  2,730,493      2,963,304   

Investment securities

  5,360,431      3,611,045   

Securities held to maturity:

Mortgage-backed securities (fair value of $1,356,160 at December 31, 2014)

  —        1,272,137   

Investment securities (fair value of $41,593 at December 31, 2014)

  —        39,011   
  

 

 

   

 

 

 

Total securities

  8,090,924      7,885,497   

Loans

  19,781,722      21,564,974   

Net deferred loan costs

  90,608      99,155   

Allowance for loan losses

  (225,573   (235,317
  

 

 

   

 

 

 

Net loans

  19,646,757      21,428,812   

Federal Home Loan Bank of New York stock

  309,892      320,753   

Foreclosed real estate, net

  100,193      79,952   

Accrued interest receivable

  20,355      31,665   

Banking premises and equipment, net

  52,420      56,633   

Goodwill

  152,109      152,109   

Other assets

  342,058      328,095   
  

 

 

   

 

 

 

Total Assets

$ 35,417,458    $ 36,569,082   
  

 

 

   

 

 

 

Liabilities and Shareholders’ Equity:

Deposits:

Interest-bearing

$ 17,470,681    $ 18,711,444   

Noninterest-bearing

  703,458      665,100   
  

 

 

   

 

 

 

Total deposits

  18,174,139      19,376,544   

Repurchase agreements

  6,150,000      6,150,000   

Federal Home Loan Bank of New York advances

  6,025,000      6,025,000   
  

 

 

   

 

 

 

Total borrowed funds

  12,175,000      12,175,000   

Accrued expenses and other liabilities

  246,574      236,128   
  

 

 

   

 

 

 

Total liabilities

  30,595,713      31,787,672   
  

 

 

   

 

 

 

Common stock, $0.01 par value, 3,200,000,000 shares authorized;

741,466,555 shares issued; 529,529,490 and 528,908,735 shares outstanding at June 30, 2015

and December 31, 2014

  7,415      7,415   

Additional paid-in capital

  4,753,106      4,751,778   

Retained earnings

  1,983,067      1,961,531   

Treasury stock, at cost; 211,937,065 and 212,557,820 shares at June 30, 2015 and December 31, 2014

  (1,704,412   (1,708,736

Unallocated common stock held by the employee stock ownership plan

  (177,201   (180,204

Accumulated other comprehensive loss, net of tax

  (40,230   (50,374
  

 

 

   

 

 

 

Total shareholders’ equity

  4,821,745      4,781,410   
  

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

$ 35,417,458    $ 36,569,082   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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Table of Contents

Hudson City Bancorp, Inc. and Subsidiary

Consolidated Statements of Income

(Unaudited)

 

     For the Three Months
Ended June 30,
     For the Six Months
Ended June 30,
 
     2015      2014      2015      2014  
     (In thousands, except share data)  

Interest and Dividend Income:

           

First mortgage loans

   $ 201,401       $ 247,124       $ 418,689       $ 500,263   

Consumer and other loans

     1,890         2,199         3,931         4,477   

Mortgage-backed securities held to maturity

     —           10,128         7,602         21,339   

Mortgage-backed securities available for sale

     16,109         31,595         28,643         69,085   

Investment securities held to maturity

     —           585         585         1,170   

Investment securities available for sale

     4,644         920         8,015         1,714   

Dividends on Federal Home Loan Bank of New York stock

     3,243         3,338         6,962         7,494   

Federal funds sold and other overnight deposits

     3,922         3,316         7,711         6,202   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest and dividend income

     231,209         299,205         482,138         611,744   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest Expense:

           

Deposits

     33,371         40,173         68,910         80,811   

Borrowed funds

     141,282         141,350         281,044         280,915   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     174,653         181,523         349,954         361,726   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     56,556         117,682         132,184         250,018   

Provision for Loan Losses

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     56,556         117,682         132,184         250,018   
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-Interest Income:

           

Service charges and other income

     1,534         1,645         2,927         3,460   

Gain on securities transactions, net

     67,064         19,539         74,411         35,482   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest income

     68,598         21,184         77,338         38,942   
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-Interest Expense:

           

Compensation and employee benefits

     34,163         32,405         68,594         66,016   

Net occupancy expense

     8,679         9,433         18,230         19,144   

Federal deposit insurance assessment

     7,949         13,086         18,895         27,010   

Other expense

     15,659         18,184         35,489         40,651   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest expense

     66,450         73,108         141,208         152,821   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income tax expense

     58,704         65,758         68,314         136,139   

Income Tax Expense

     23,047         26,576         26,767         54,436   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 35,657       $ 39,182       $ 41,547       $ 81,703   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic Earnings Per Share

   $ 0.07       $ 0.08       $ 0.08       $ 0.16   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted Earnings Per Share

   $ 0.07       $ 0.08       $ 0.08       $ 0.16   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted Average Number of Common Shares Outstanding:

           

Basic

     501,078,623         498,874,695         500,585,010         498,646,420   

Diluted

     502,348,521         499,838,263         502,111,709         499,452,014   

See accompanying notes to unaudited consolidated financial statements.

 

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Table of Contents

Hudson City Bancorp, Inc. and Subsidiary

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

 

     For the Three Months
Ended June 30,
 
     2015     2014  
     (In thousands)  

Net income

   $ 35,657      $ 39,182   

Other comprehensive income, net of tax:

    

Net unrealized gains (losses) on securities:

    

Net unrealized gains (losses) on securities available for sale arising during period, net of tax benefit (expense) of $5,520 for 2015 and ($11,788) for 2014

     (7,994     17,069   

Reclassification for securities transferred to available for sale, net of tax expense of $33,339 for 2015

     48,275        —     

Reclassification adjustment for realized gains in net income, net of tax benefit of $27,396 for 2015 and $7,459 for 2014

     (39,668     (10,801

Postretirement benefit pension plans:

    

Amortization of net loss arising during period, net of tax expense of $888 for 2015 and $329 for 2014

     1,286        475   

Amortization or prior service cost included in net periodic pension cost, net of tax benefit of $145 for 2015 and $137 for 2014

     (211     (196
  

 

 

   

 

 

 

Other comprehensive income

     1,688        6,547   
  

 

 

   

 

 

 

Total comprehensive income

   $ 37,345      $ 45,729   
  

 

 

   

 

 

 
     For the Six Months
Ended June 30,
 
     2015     2014  
     (In thousands)  

Net income

   $ 41,547      $ 81,703   

Other comprehensive income, net of tax:

    

Net unrealized gains (losses) on securities:

    

Net unrealized gains (losses) on securities available for sale arising during period, net of tax expense of $1,814 for 2015 and $24,647 for 2014

     2,626        35,827   

Reclassification for securities transferred to available for sale, net of tax expense of $33,339 for 2015

     48,275        —     

Reclassification adjustment for realized gains in net income, net of tax benefit of $29,632 for 2015 and $11,741 for 2014

     (42,906     (17,141

Postretirement benefit pension plans:

    

Amortization of net loss arising during period, net of tax expense of $1,775 for 2015 and $657 for 2014

     2,571        951   

Amortization or prior service cost included in net periodic pension cost, net of tax benefit of $290 for 2015 and $272 for 2014

     (422     (394
  

 

 

   

 

 

 

Other comprehensive income

     10,144        19,243   
  

 

 

   

 

 

 

Total comprehensive income

   $ 51,691      $ 100,946   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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Table of Contents

Hudson City Bancorp, Inc. and Subsidiary

Consolidated Statements of Changes in Shareholders’ Equity

(Unaudited)

 

     For the Six Months
Ended June 30,
 
     2015     2014  
     (In thousands, except per share data)  

Common Stock

   $ 7,415      $ 7,415   

Additional paid-in capital:

    

Balance at beginning of year

     4,751,778        4,743,388   

Stock option plan expense

     5,806        6,072   

Tax benefit from stock plans

     1,033        307   

Allocation of ESOP stock

     1,661        1,619   

Common stock issued for vested deferred stock unit awards

     (7,172     (3,952
  

 

 

   

 

 

 

Balance at end of period

     4,753,106        4,747,434   
  

 

 

   

 

 

 

Retained Earnings:

    

Balance at beginning of year

     1,961,531        1,883,754   

Net income

     41,547        81,703   

Dividends paid on common stock ($0.04 and $0.08 per share, respectively)

     (20,011     (40,076

Exercise of stock options

     —          17   
  

 

 

   

 

 

 

Balance at end of period

     1,983,067        1,925,398   
  

 

 

   

 

 

 

Treasury Stock:

    

Balance at beginning of year

     (1,708,736     (1,712,107

Purchase of vested stock awards surrendered for witholding taxes

     (2,848     (1,668

Exercise of stock options

     —          96   

Common stock issued for vested deferred stock unit awards

     7,172        3,952   
  

 

 

   

 

 

 

Balance at end of period

     (1,704,412     (1,709,727
  

 

 

   

 

 

 

Unallocated common stock held by the ESOP:

    

Balance at beginning of year

     (180,204     (186,210

Allocation of ESOP stock

     3,003        3,003   
  

 

 

   

 

 

 

Balance at end of period

     (177,201     (183,207
  

 

 

   

 

 

 

Accumulated other comprehensive income (loss):

    

Balance at beginning of year

     (50,374     6,336   

Other comprehensive income, net of tax

     10,144        19,243   
  

 

 

   

 

 

 

Balance at end of period

     (40,230     25,579   
  

 

 

   

 

 

 

Total Shareholders’ Equity

   $ 4,821,745      $ 4,812,892   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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Table of Contents

Hudson City Bancorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows

(Unaudited)

 

     For the Six Months
Ended June 30,
 
     2015     2014  
     (In thousands)  

Cash Flows from Operating Activities:

    

Net income

   $ 41,547      $ 81,703   

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

    

Depreciation, accretion and amortization expense

     6,277        20,288   

Gains on securities transactions, net

     (74,411     (35,482

Share-based compensation, including committed ESOP shares

     10,470        10,694   

Deferred tax expense

     10,240        8,927   

Decrease in accrued interest receivable

     11,310        7,206   

(Increase) decrease in other assets

     (27,770     10,696   

Increase (decrease) in accrued expenses and other liabilities

     10,446        (18,531
  

 

 

   

 

 

 

Net Cash (Used in) Provided by Operating Activities

     (11,891     85,501   
  

 

 

   

 

 

 

Cash Flows from Investing Activities:

    

Originations of loans

     (301,444     (697,091

Purchases of loans

     (115,252     (116,302

Principal payments on loans

     2,155,066        1,715,277   

Principal collection of mortgage-backed securities held to maturity

     38,802        144,787   

Principal collection of mortgage-backed securities available for sale

     326,971        624,203   

Purchases of mortgage-backed securities available for sale

     (72,919     (94,422

Proceeds from sales of mortgage backed securities available for sale

     1,250,961        891,265   

Proceeds from sales of mortgage backed securities held to maturity

     30,318        129,126   

Proceeds from sales of investment securities available for sale

     —          —     

Purchases of investment securities available for sale

     (1,701,877     (600,797

Redemption of Federal Home Loan Bank of New York stock

     10,861        9,807   

Purchases of premises and equipment, net

     (203     (1,472

Net proceeds from sale of foreclosed real estate

     32,022        36,143   
  

 

 

   

 

 

 

Net Cash Provided by Investment Activities

     1,653,306        2,040,524   
  

 

 

   

 

 

 

Cash Flows from Financing Activities:

    

Net decrease in deposits

     (1,202,405     (958,494

Dividends paid

     (20,011     (40,076

Purchase of vested stock awards surrendered for withholding taxes

     (2,848     (1,668

Exercise of stock options

     —          113   

Tax benefit from stock plans

     1,033        307   
  

 

 

   

 

 

 

Net Cash Used in Financing Activities

     (1,224,231     (999,818
  

 

 

   

 

 

 

Net Increase in Cash and Cash Equivalents

     417,184        1,126,207   

Cash and Cash Equivalents at Beginning of Year

     6,285,566        4,324,474   
  

 

 

   

 

 

 

Cash and Cash Equivalents at End of Period

   $ 6,702,750      $ 5,450,681   
  

 

 

   

 

 

 

Supplemental Disclosures:

    

Interest paid

   $ 347,428      $ 360,295   
  

 

 

   

 

 

 

Loans transferred to foreclosed real estate

   $ 74,101      $ 60,270   
  

 

 

   

 

 

 

Income tax payments

   $ 20,489      $ 50,238   
  

 

 

   

 

 

 

Transfer of securities held to maturity to available for sale (at amortized cost)

   $ 1,220,137      $ —     
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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Table of Contents

Notes to Unaudited Consolidated Financial Statements

1. Organization

Hudson City Bancorp is a Delaware corporation and is the savings and loan holding company for Hudson City Savings Bank and its subsidiaries. As a savings and loan holding company, Hudson City Bancorp is subject to the supervision and examination of the FRB. Hudson City Savings is a federally chartered stock savings bank subject to supervision and examination by the OCC.

On August 27, 2012, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with M&T and WTC. The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, the Company will merge with and into WTC, with WTC continuing as the surviving entity.

Subject to the terms and conditions of the Merger Agreement, in the Merger, Hudson City Bancorp shareholders will have the right to receive with respect to each of their shares of common stock of the Company, at their election (but subject to proration and adjustment procedures), 0.08403 of a share of common stock, or cash having a value equal to the product of 0.08403 multiplied by the average closing price of the M&T Common Stock for the ten days immediately prior to the completion of the Merger. The Merger Agreement also provides that at the closing of the Merger, 40% of the outstanding shares of Hudson City Bancorp common stock will be converted into the right to receive cash and the remainder of the outstanding shares of Hudson City Bancorp common stock will be converted into the right to receive shares of M&T common stock.

On four 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 October 31, 2015. Each extension was documented with an amendment to the Merger Agreement and the most recent amendment, Amendment No. 4, 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 October 31, 2015. Amendment No. 4, 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 October 31, 2015 or that the Company will not exercise its right to terminate the Merger Agreement in accordance with its terms.

The Merger Agreement, as amended by Amendment No. 1, was approved by the shareholders of both Hudson City Bancorp and M&T. The Merger is subject to the receipt of regulatory approvals and the satisfaction of other customary closing conditions.

On March 30, 2012, the Bank entered into a memorandum of understanding with the OCC (the “Bank MOU”). 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. These initiatives require significant lead time for full implementation and roll out to our customers. On February 26, 2015 the OCC terminated the Bank MOU.

 

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Notes to Unaudited Consolidated Financial Statements

 

The Company entered into a separate memorandum of understanding with the FRB (the “Company MOU”) on April 24, 2012. The Company MOU 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.

2. Basis of Presentation

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

In our opinion, all the adjustments (consisting of normal and recurring adjustments) necessary for a fair presentation of the consolidated financial condition and consolidated results of operations for the unaudited periods presented have been included. The results of operations and other data presented for the six months ended June 30, 2015 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2015. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statements of financial condition and the results of operations for the period. Actual results could differ from these estimates.

During the second quarter of 2015, we transferred held to maturity securities with a carrying value of $1.22 billion and a fair value of $1.30 billion to available for sale. The after-tax net unrealized gain of $48.3 million ($81.6 million pre-tax) was recorded as a component of accumulated other comprehensive income (loss).

The allowance for loan losses (“ALL”) is a material estimate that is particularly susceptible to near-term change. The current economic environment has increased the degree of uncertainty inherent in this material estimate. In addition, bank regulators, as an integral part of their supervisory function, periodically review our ALL. These regulatory agencies have the ability to require us, as they can require all banks, to increase our provision for loan losses or to recognize further charge-offs based on their judgments, which may be different from ours. Any increase in the ALL required by these regulatory agencies could adversely affect our financial condition and results of operations.

The goodwill impairment analysis depends on the use of estimates and assumptions which are highly sensitive to, among other things, market interest rates and are therefore subject to change in the near-term. Goodwill is tested for impairment at least annually and is considered impaired if the carrying value of goodwill exceeds its implied fair value. Similar to the calculation of goodwill in a business combination, the implied fair value of goodwill is determined by measuring the excess of the fair value of the reporting unit over the aggregate estimated fair values of individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired at the impairment test date. The estimation of the fair value of the Company is based on, among other things, the market price of our common stock. In addition, the fair value of the individual assets, liabilities and identifiable intangibles are determined using estimates and assumptions that are highly sensitive to market interest rates. These estimates and assumptions are subject to change in the near-term and may result in the impairment in future periods of some or all of the goodwill on our balance sheet.

 

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Notes to Unaudited Consolidated Financial Statements

 

Certain information and note disclosures usually included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for the preparation of the Form 10-Q. The consolidated financial statements presented should be read in conjunction with Hudson City Bancorp’s audited consolidated financial statements and notes to consolidated financial statements included in Hudson City Bancorp’s 2014 Annual Report on Form 10-K.

3. Earnings Per Share

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

 

     For the Three Months      For the Six Months  
     Ended June 30      Ended June 30  
     2015      2014      2015      2014  
     (In thousands, except share data)  

Net income

   $ 35,657       $ 39,182       $ 41,547       $ 81,703   

Less: Income allocated to participating securities

     —           (176      (8      (176
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income available to common shareholders

$ 35,657    $ 39,006    $ 41,539    $ 81,527   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic weighted average common shares outstanding

  501,078,623      498,874,695      500,585,010      498,646,420   

Effect of dilutive common stock equivalents

  1,269,898      963,568      1,526,699      805,594   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted weighted average common shares outstanding

  502,348,521      499,838,263      502,111,709      499,452,014   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic EPS

$ 0.07    $ 0.08    $ 0.08    $ 0.16   

Diluted EPS

$ 0.07    $ 0.08    $ 0.08    $ 0.16   

Common stock equivalents for both the three and six months ended June 30, 2015 exclude outstanding options to purchase 20,422,500 shares of the Company’s common stock as their inclusion would be anti-dilutive. Common stock equivalents for both the three and six months ended June 30, 2014 exclude outstanding options to purchase 21,031,224 shares of common stock as their inclusion would be anti-dilutive.

 

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Notes to Unaudited Consolidated Financial Statements

 

4. Securities

The amortized cost and estimated fair market value of investment securities and mortgage-backed securities available-for-sale at June 30, 2015 and December 31, 2014 are as follows:

 

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

June 30, 2015

           

Investment Securities:

           

United States government

           

-sponsored enterprises debt

   $ 5,340,027       $ 4,324       $ (1,342    $ 5,343,009   

Equity securities

     17,077         345         —           17,422   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities available for sale

   $ 5,357,104       $ 4,669       $ (1,342    $ 5,360,431   
  

 

 

    

 

 

    

 

 

    

 

 

 

Mortgage-backed securities:

           

GNMA pass-through certificates

   $ 611,380       $ 17,038       $ (398    $ 628,020   

FNMA pass-through certificates

     1,472,077         20,563         (11,776      1,480,864   

FHLMC pass-through certificates

     585,227         16,196         (1,441      599,982   

FHLMC and FNMA—REMICs

     20,685         942         —           21,627   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage-backed securities available for sale

   $ 2,689,369       $ 54,739       $ (13,615    $ 2,730,493   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

           

Investment securities:

           

United States government

           

-sponsored enterprises debt

   $ 3,600,085       $ 72       $ (6,508    $ 3,593,649   

Equity securities

     16,985         411         —           17,396   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities available for sale

   $ 3,617,070       $ 483       $ (6,508    $ 3,611,045   
  

 

 

    

 

 

    

 

 

    

 

 

 

Mortgage-backed securities:

           

GNMA pass-through certificates

   $ 633,629       $ 20,056       $ (277    $ 653,408   

FNMA pass-through certificates

     1,688,568         19,247         (11,917      1,695,898   

FHLMC pass-through certificates

     604,147         12,191         (2,340      613,998   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage-backed securities available for sale

   $ 2,926,344       $ 51,494       $ (14,534    $ 2,963,304   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Notes to Unaudited Consolidated Financial Statements

 

The amortized cost and estimated fair market value of investment securities and mortgage-backed securities held to maturity at December 31, 2014 is as follows:

 

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

December 31, 2014

           

Investment securities:

           

United States government

           

-sponsored enterprises debt

   $ 39,011       $ 2,582       $ —         $ 41,593   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities held to maturity

   $ 39,011       $ 2,582       $ —         $ 41,593   
  

 

 

    

 

 

    

 

 

    

 

 

 

Mortgage-backed securities:

           

GNMA pass-through certificates

   $ 54,301       $ 1,840       $ —         $ 56,141   

FNMA pass-through certificates

     278,953         20,209         (1      299,161   

FHLMC pass-through certificates

     865,364         58,097         —           923,461   

FHLMC and FNMA—REMICs

     73,519         3,878         —           77,397   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage-backed securities held to maturity

   $ 1,272,137       $ 84,024       $ (1    $ 1,356,160   
  

 

 

    

 

 

    

 

 

    

 

 

 

During 2014, we supplemented our earnings with gains on the sales of securities. This strategy was key to maintaining earnings despite a decreasing net interest margin as rates remained low and we continued to carry excess liquidity with very little appetite for reinvesting this liquidity into longer-term investments or fixed-rate residential mortgage loans. In addition, the market demand and prices provided a strong opportunity for us to sell these securities. However, in anticipation of the closing of the Merger, which was expected to close on May 1, 2015, we suspended the sale of securities during the first quarter of 2015. The unexpected news in early April that there would be a further delay in completing the Merger came too late for us to resume the sale of securities before the end of the first quarter and, as a result, our net income for the first six months of 2015 was adversely affected. We resumed the sale of securities during the second quarter of 2015. To facilitate these securities sales, in the second quarter of 2015 we transferred held to maturity securities with a carrying value of $1.22 billion and a fair value of $1.30 billion to available for sale. The after-tax net unrealized gain of $48.3 million ($81.6 million pre-tax) was recorded as a component of accumulated other comprehensive income (loss). As a result of this transfer, we are precluded from classifying any future security purchases as held to maturity for a period of two years.

 

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Notes to Unaudited Consolidated Financial Statements

 

The following tables summarize the fair values and unrealized losses of our securities held to maturity and available-for-sale with an unrealized loss at June 30, 2015 and December 31, 2014, segregated between securities that had been in a continuous unrealized loss position for less than twelve months or longer than twelve months at the respective dates.

 

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

June 30, 2015

               

Available for sale:

               

United States goverment

               

-sponsored enterprises debt

   $ 1,150,171       $ (582   $ 99,402       $ (760   $ 1,249,573       $ (1,342

GNMA pass-through certificates

     10,073         (43     10,064         (355     20,137         (398

FNMA pass-through certificates

     318,311         (4,245     408,436         (7,531     726,747         (11,776

FHLMC pass-through certificates

     69,617         (305     94,600         (1,136     164,217         (1,441
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired securities available for sale

     1,548,172         (5,175     612,502         (9,782     2,160,674         (14,957
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,548,172       $ (5,175   $ 612,502       $ (9,782   $ 2,160,674       $ (14,957
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

December 31, 2014

               

Held to maturity:

               

FNMA pass-through certificates

   $ —         $ —        $ 90       $ (1   $ 90       $ (1
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired securities held to maturity

     —           —          90         (1     90         (1
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Available for sale:

               

United States goverment

               

-sponsored enterprises debt

   $ 3,047,275       $ (3,342   $ 196,674       $ (3,166   $ 3,243,949       $ (6,508

GNMA pass-through certificates

     —           —          11,251         (277     11,251         (277

FNMA pass-through certificates

     48,955         (54     664,779         (11,863     713,734         (11,917

FHLMC pass-through certificates

     —           —          151,889         (2,340     151,889         (2,340
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired securities available for sale

     3,096,230         (3,396     1,024,593         (17,646     4,120,823         (21,042
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 3,096,230       $ (3,396   $ 1,024,683       $ (17,647   $ 4,120,913       $ (21,043
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The unrealized losses of our securities available for sale at June 30, 2015 are primarily due to the changes in market interest rates subsequent to purchase. At June 30, 2015, a total of 50 securities were in an unrealized loss position compared to 51 at December 31, 2014. We do not consider these investments to be other-than-temporarily impaired at June 30, 2015 and December 31, 2014 since the decline in market value is attributable to changes in interest rates and not credit quality. In addition, the Company does not intend to sell and does not believe that it is more likely than not that we will be required to sell these investments until there is a full recovery of the unrealized loss, which may be at maturity. As a result no impairment loss was recognized during the six months ended June 30, 2015.

 

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Notes to Unaudited Consolidated Financial Statements

 

The amortized cost and estimated fair market value of our securities available-for-sale at June 30, 2015, by contractual maturity, are shown below. The table does not include the effect of prepayments or scheduled principal amortization. The expected maturity may differ from the contractual maturity because issuers may have the right to call or prepay obligations. Equity securities have been excluded from this table.

 

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

June 30, 2015

        

Available for Sale:

        

Due in one year or less

   $ 62       $ 5,002,219       $ 5,004,173   

Due after one year through five years

     1,840         298,797         300,112   

Due after five years through ten years

     53,554         —           57,250   

Due after ten years

     2,633,913         39,011         2,711,967   
  

 

 

    

 

 

    

 

 

 

Total available for sale

   $ 2,689,369       $ 5,340,027       $ 8,073,502   
  

 

 

    

 

 

    

 

 

 

Sales of mortgage-backed securities held to maturity amounted to $28.4 million for the six months ended June 30, 2015, resulting in a realized gain of $1.9 million. Sales of mortgage-backed securities held to maturity amounted to $122.5 million for the six months ended June 30, 2014, resulting in a realized gain of $6.6 million. The sales of the held to maturity securities were made after the Company had collected at least 85% of the initial principal balance.

Sales of mortgage-backed securities available for sale amounted to $1.18 billion for the six months ended June 30, 2015, resulting in a realized gain of $72.5 million. Sales of mortgage-backed securities available for sale amounted to $862.4 million for the six months ended June 30, 2014, resulting in a realized gain of $28.9 million.

There were no sales of investment securities available for sale or held to maturity for both the six months ended June 30, 2015 and 2014. Gains and losses on the sale of all securities are determined using the specific identification method.

In April 2015, the Company transferred to available for sale all securities that were classified as held to maturity.

5. Stock Repurchase Programs

Pursuant to our stock repurchase programs, shares of Hudson City Bancorp common stock may be purchased in the open market or through other privately negotiated transactions, depending on market conditions. The repurchased shares are held as treasury stock for general corporate use. In accordance with the terms of the Company MOU, future share repurchases must be approved by the FRB. In addition, pursuant to the terms of the Merger Agreement, we may not repurchase shares of Hudson City Bancorp common stock without the consent of M&T. We did not purchase any of our common shares pursuant to the repurchase programs during the six months ended June 30, 2015. Included in treasury stock are vested shares related to stock awards that were surrendered for withholding taxes. These shares

 

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Notes to Unaudited Consolidated Financial Statements

 

are included in purchases of vested stock awards surrendered for withholding taxes in the consolidated statements of cash flows and amounted to 297,253 shares for the six months ended June 30, 2015. Shares surrendered for withholding taxes for the six months ended June 30, 2014 amounted to 169,091 shares. As of June 30, 2015, there remained 50,123,550 shares that may be purchased under the existing stock repurchase programs.

6. Loans and Allowance for Loan Losses

Loans at June 30, 2015 and December 31, 2014 are summarized as follows:

 

     June 30, 2015      December 31, 2014  
     (In thousands)  

First mortgage loans:

     

One- to four-family

     

Amortizing

   $ 16,342,897       $ 17,746,149   

Interest-only

     2,459,933         2,874,024   

FHA/VA

     638,835         648,070   

Multi-family and commercial

     157,838         102,323   

Construction

     177         177   
  

 

 

    

 

 

 

Total first mortgage loans

     19,599,680         21,370,743   
  

 

 

    

 

 

 

Consumer and other loans:

     

Fixed–rate second mortgages

     65,736         72,309   

Home equity credit lines

     100,013         104,372   

Other

     16,293         17,550   
  

 

 

    

 

 

 

Total consumer and other loans

     182,042         194,231   
  

 

 

    

 

 

 

Total loans

   $ 19,781,722       $ 21,564,974   
  

 

 

    

 

 

 

There were no loans held for sale at June 30, 2015 and December 31, 2014.

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

 

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

June 30, 2015

                       

Performing

   $ 16,282,895       $ 2,369,644       $ 151,780       $ —         $ 64,778       $ 96,253       $ 14,539       $ 18,979,889   

Non-performing

     698,837         90,289         6,058         177         958         3,760         1,754         801,833   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 16,981,732       $ 2,459,933       $ 157,838       $ 177       $ 65,736       $ 100,013       $ 16,293       $ 19,781,722   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Notes to Unaudited Consolidated Financial Statements

 

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

June 30, 2015

                       

Pass

   $ 16,091,630       $ 2,338,240       $ 150,663       $ —         $ 63,730       $ 93,332       $ 14,521       $ 18,752,116   

Special mention

     72,810         14,509         430         —           88         432         18         88,287   

Substandard

     817,292         107,184         6,745         177         1,918         6,249         1,754         941,319   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 16,981,732       $ 2,459,933       $ 157,838       $ 177       $ 65,736       $ 100,013       $ 16,293       $ 19,781,722   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loan classifications are defined as follows:

 

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

 

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

 

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

 

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

 

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

We evaluate the classification of our one-to four-family mortgage loans, consumer loans and other loans primarily on a pooled basis by delinquency. Loans that are past due 60 to 89 days are classified as special mention and loans that are past due 90 days or more, 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

 

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Table of Contents

Notes to Unaudited Consolidated Financial Statements

 

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.

Originating loans secured by residential real estate is our primary business. Our financial results may be adversely affected by changes in prevailing economic conditions, either nationally or in our local New Jersey and metropolitan New York market areas, including decreases in real estate values, adverse employment conditions, the monetary and fiscal policies of the federal and state government and other significant external events. As a result of our lending practices, we have a concentration of loans secured by real property located primarily in New Jersey, New York and Connecticut (the “New York metropolitan area”). At June 30, 2015, approximately 85.1% of our total loans are in the New York metropolitan area.

Included in our loan portfolio at June 30, 2015 and December 31, 2014 are $2.46 billion and $2.87 billion, respectively, of interest-only one-to four- family residential mortgage loans. These loans are originated as adjustable-rate mortgage (“ARM”) loans with initial terms of five, seven or ten years with the interest-only portion of the payment based upon the initial loan term, or offered on a 30-year fixed-rate loan with interest-only payments for the first 10 years of the obligation. At the end of the initial 5-, 7- or 10-year interest-only period, the loan payment will adjust to include both principal and interest and will amortize over the remaining term so the loan will be repaid at the end of its original life. We had $90.3 million and $99.8 million of non-performing interest-only one-to four-family residential mortgage loans at June 30, 2015 and December 31, 2014, respectively.

Prior to January 2014, we originated loans to certain eligible borrowers as reduced documentation loans. Loans that were eligible for reduced documentation processing were ARM loans, interest-only first mortgage loans and 10-, 15-, 20- and 30-year fixed-rate loans to owner-occupied primary and second home applicants. These loans were available in amounts up to 65% of the lower of the appraised value or purchase price of the property. Generally the maximum loan amount for reduced documentation loans was $750,000 and these loans were subject to higher interest rates than our full documentation loan products. Reduced documentation loans have an inherently higher level of risk compared to loans with full documentation. Reduced documentation loans represent 21.9% of our one-to four-family first mortgage loans at June 30, 2015. Included in our loan portfolio at June 30, 2015 are $3.73 billion of amortizing reduced documentation loans and $532.7 million of reduced documentation interest-only loans as compared to $3.99 billion and $620.0 million, respectively, at December 31, 2014. Non-performing loans at June 30, 2015 include $151.2 million of amortizing reduced documentation loans and $33.5 million of interest-only reduced documentation loans as compared to $168.2 million and $39.8 million, respectively, at December 31, 2014.

 

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Table of Contents

Notes to Unaudited Consolidated Financial Statements

 

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

 

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

At June 30, 2015

                    

One- to four-family first mortgages:

                    

Amortizing

   $ 215,083       $ 90,631       $ 698,837       $ 1,004,551       $ 15,977,181       $ 16,981,732       $ 39,378   

Interest-only

     18,730         15,402         90,289         124,421         2,335,512         2,459,933         —     

Multi-family and commercial mortgages

     —           688         6,058         6,746         151,092         157,838         —     

Construction loans

     —           —           177         177         —           177         —     

Consumer and other loans:

                       —     

Fixed-rate second mortgages

     938         143         958         2,039         63,697         65,736         —     

Home equity lines of credit

     301         432         3,760         4,493         95,520         100,013         —     

Other

     69         18         1,754         1,841         14,452         16,293         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 235,121       $ 107,314       $ 801,833       $ 1,144,268       $ 18,637,454       $ 19,781,722       $ 39,378   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2014

                    

One- to four-family first mortgages:

                    

Amortizing

   $ 243,560       $ 111,420       $ 741,901       $ 1,096,881       $ 17,297,338       $ 18,394,219       $ 33,383   

Interest-only

     30,256         12,507         99,779         142,542         2,731,482         2,874,024         —     

Multi-family and commercial mortgages

     2,782         4,743         1,543         9,068         93,255         102,323         —     

Construction loans

     —           —           177         177         —           177         —     

Consumer and other loans:

                    

Fixed-rate second mortgages

     272         71         1,253         1,596         70,713         72,309         —     

Home equity lines of credit

     1,077         252         3,765         5,094         99,278         104,372         —     

Other

     589         118         3,595         4,302         13,248         17,550         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 278,536       $ 129,111       $ 852,013       $ 1,259,660       $ 20,305,314       $ 21,564,974       $ 33,383   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

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

 

     At June 30, 2015     At December 31, 2014  
           Non-performing           Non-performing  
     Total loans     Loans     Total loans     Loans  

New Jersey

     42.4     41.9     42.4     42.6

New York

     28.1        29.4        27.8        27.8   

Connecticut

     14.6        7.9        14.6        7.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total New York metropolitan area

     85.1        79.2        84.8        78.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Pennsylvania

     4.8        1.8        4.8        1.5   

Massachusetts

     2.0        1.8        2.0        1.8   

Virginia

     1.6        2.0        1.6        1.9   

Maryland

     1.6        4.6        1.6        5.2   

Illinois

     1.5        4.3        1.5        4.7   

All others

     3.4        6.3        3.7        6.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Outside New York metropolitan area

     14.9        20.8        15.2        21.8   
  

 

 

   

 

 

   

 

 

   

 

 

 
     100.0     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Notes to Unaudited Consolidated Financial Statements

 

The following is a summary of loans, by class, on which the accrual of income has been discontinued and loans that are contractually past due 90 days or more but have not been classified as non-accrual at June 30, 2015 and December 31, 2014:

 

     June 30, 2015      December 31, 2014  
     (In thousands)  

Non-accrual loans:

     

One-to four-family amortizing loans

   $ 659,459       $ 708,518   

One-to four-family interest-only loans

     90,289         99,779   

Multi-family and commercial mortgages

     6,058         1,543   

Construction loans

     177         177   

Fixed-rate second mortgages

     958         1,253   

Home equity lines of credit

     3,760         3,765   

Other loans

     1,754         3,595   
  

 

 

    

 

 

 

Total non-accrual loans

     762,455         818,630   

Accruing loans delinquent 90 days or more (1)

     39,378         33,383   
  

 

 

    

 

 

 

Total non-performing loans

   $ 801,833       $ 852,013   
  

 

 

    

 

 

 

 

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

The total amount of interest income on non-accrual loans that would have been recognized during the first six months of 2015, if interest on all such loans had been recorded based upon original contract terms, amounted to approximately $23.5 million as compared to $27.8 million for the same period in 2014. Hudson City Savings is not committed to lend additional funds to borrowers on non-accrual status.

Non-performing loans exclude troubled debt restructurings that are accruing and have been performing in accordance with the terms of their restructure agreement for at least six months. The following table presents information regarding loans modified in a troubled debt restructuring at June 30, 2015 and December 31, 2014:

 

     June 30, 2015      December 31, 2014  
     (In thousands)  

Troubled debt restructurings:

     

Current

   $ 144,502       $ 137,249   

30-59 days

     23,571         20,344   

60-89 days

     10,790         17,079   

90 days or more

     153,974         157,744   
  

 

 

    

 

 

 

Total troubled debt restructurings

   $ 332,837       $ 332,416   
  

 

 

    

 

 

 

 

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Table of Contents

Notes to Unaudited Consolidated Financial Statements

 

The following table presents loan portfolio by class that were modified as troubled debt restructurings at June 30, 2015 and December 31, 2014. The pre-restructuring and post-restructuring outstanding recorded investments disclosed in the table below represent the loan carrying amounts immediately prior to the restructuring and the carrying amounts, respectively at June 30, 2015 and December 31, 2014:

 

    June 30, 2015     December 31, 2014  
          Pre-restructuring     Post-restructuring           Pre-restructuring     Post-restructuring  
    Number     Outstanding     Outstanding     Number     Outstanding     Outstanding  
    of     Recorded     Recorded     of     Recorded     Recorded  
    Contracts     Investment     Investment     Contracts     Investment     Investment  
    (Dollars in thousands)  

Troubled debt restructurings:

           

One-to four- family first mortgages:

           

Amortizing

    978      $ 341,432      $ 292,327        980      $ 341,398      $ 291,404   

Interest-only

    55        33,425        30,021        59        35,025        31,257   

Multi-family and commercial mortgages

    3        8,650        5,432        3        8,650        5,441   

Consumer and other loans

    42        5,381        5,057        36        4,594        4,314   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    1,078      $ 388,888      $ 332,837        1,078      $ 389,667      $ 332,416   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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

June 30, 2015

         

One-to four-family amortizing loans

  $ 292,327      $ 336,192      $ —        $ 294,525      $ 4,233   

One-to four-family interest-only loans

    30,021        34,081        —          30,037        440   

Multi-family and commercial mortgages

    6,552        10,308        193        6,863        26   

Construction loans

    177        292        —          177        —     

Consumer and other loans

    5,555        6,233        283        6,063        77   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 334,632      $ 387,106      $ 476      $ 337,665      $ 4,776   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2014

         

One-to four-family amortizing loans

  $ 291,404      $ 337,174      $ —        $ 295,986      $ 7,496   

One-to four-family interest-only loans

    31,257        35,732        —          31,447        936   

Multi-family and commercial mortgages

    5,525        9,039        126        7,033        359   

Construction loans

    177        292        —          293        —     

Consumer and other loans:

    3,971        4,314        343        4,367        109   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 332,334      $ 386,551      $ 469      $ 339,126      $ 8,900   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Notes to Unaudited Consolidated Financial Statements

 

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

 

     For the Three Months Ended June 30,      For the Six Months Ended June 30,  
     2015      2014      2015      2014  
     (In thousands)  

Balance at beginning of period

   $ 230,489       $ 265,732       $ 235,317       $ 276,097   
  

 

 

    

 

 

    

 

 

    

 

 

 

Charge-offs

     (11,278      (15,709      (20,556      (32,241

Recoveries

     6,362         4,988         10,812         11,155   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net charge-offs

     (4,916      (10,721      (9,744      (21,086
  

 

 

    

 

 

    

 

 

    

 

 

 

Provision for loan losses

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at end of period

   $ 225,573       $ 255,011       $ 225,573       $ 255,011   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

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

Balance at December 31, 2014

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

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Provision for loan losses

     431        126        —           (557     —     

Charge-offs

     (19,759     (220     —           (577     (20,556

Recoveries

     10,735        —          —           77        10,812   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net charge-offs

     (9,024     (220     —           (500     (9,744
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance at June 30, 2015

   $ 222,269      $ 477      $ —         $ 2,827      $ 225,573   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Loan portfolio:

           

Balance at June 30, 2015

           

Individually evaluated for impairment

   $ 322,348      $ 6,745      $ 177       $ 5,838      $ 335,108   

Collectively evaluated for impairment

     19,119,317        151,093        —           176,204        19,446,614   

Allowance

           

Individually evaluated for impairment

   $ 16,046      $ 193      $ —         $ 283      $ 16,522   

Collectively evaluated for impairment

     206,223        284        —           2,544        209,051   

Historically, our primary lending emphasis has been the origination and purchase of one- to four-family first mortgage loans on residential properties and, to a lesser extent, second mortgage loans on one- to four-family residential properties resulting in a loan concentration in residential first mortgage loans at June 30, 2015. As a result of our lending practices, we also have a concentration of loans secured by real property located primarily in New Jersey, New York and Connecticut. As of June 30, 2015, approximately 85.1% of our total loans are in the New York metropolitan area. Additionally, the states of Pennsylvania, Massachusetts, Virginia, Maryland and Illinois, accounted for 4.8%, 2.0%, 1.6%, 1.6%, and 1.5%, respectively of total loans. The remaining 3.4% of the loan portfolio is secured by real estate primarily in the remainder of our lending markets. Based on the composition of our loan portfolio, we believe the primary risks inherent in our portfolio relate to the conditions in our lending market areas including economic conditions, unemployment levels, rising interest rates and a decline in real estate market values. Any one or a combination of these adverse trends may adversely affect our loan portfolio resulting in increased delinquencies, non-performing assets, charge-offs and future levels of loan loss provisions. We consider these trends in market conditions in determining the ALL.

 

Page 23


Table of Contents

Notes to Unaudited Consolidated Financial Statements

 

Due to the nature of our loan portfolio, our evaluation of the adequacy of our ALL is performed primarily on a “pooled” basis. Each quarter we prepare an analysis which categorizes the entire loan portfolio by certain risk characteristics such as loan type (fixed and variable one- to four-family, interest-only, reduced documentation, multi-family, commercial, construction, etc.), loan source (originated or purchased) and payment status (i.e., current or number of days delinquent). Loans with known potential losses are categorized separately. We assign estimated loss factors to the payment status categories on the basis of our assessment of the potential risk inherent in each loan type. These factors are periodically reviewed for appropriateness giving consideration to our loss experience, delinquency trends, portfolio growth and environmental factors such as the status of the regional economy and housing market, in order to ascertain that the loss factors cover probable and estimable losses inherent in the portfolio. We define our loss experience on non-performing loans as the ratio of the excess of the loan balance (including selling costs) over the updated collateral value to the principal balance of loans for which we have updated valuations. We obtain updated collateral values by the time a loan becomes 180 days past due and on an annual basis thereafter for as long as the loan remains non-performing. Based on our analysis, our loss experience on our non-performing one- to four-family first mortgage loans was approximately 10.9% at June 30, 2015 compared to 12.1% at December 31, 2014.

One-to four-family mortgage loans that are individually evaluated for impairment consist primarily of troubled debt restructurings. If our evaluation indicates that the loan is impaired, we record a charge-off for the amount of the impairment. Loans that were individually evaluated for impairment, but would otherwise be evaluated on a pooled basis, are included in the collective evaluation if the individual evaluation indicated no impairment existed. This collective evaluation of one-to four-family mortgage loans that were also individually evaluated for impairment (but for which no impairment existed) resulted in an ALL of $16.0 million at June 30, 2015, which is intended to capture the risk that the net present value calculation did not account for such as changes in collateral, unemployment and other environmental factors.

The ultimate ability to collect the loan portfolio is subject to changes in the real estate market and future economic conditions. Economic conditions in our primary market area continued to improve modestly during the first six months of 2015 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.

 

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Table of Contents

Notes to Unaudited Consolidated Financial Statements

 

7. Borrowed Funds

Borrowed funds at June 30, 2015 and December 31, 2014 are summarized as follows:

 

     June 30, 2015     December 31, 2014  
            Weighted            Weighted  
            Average            Average  
     Principal      Rate     Principal      Rate  
     (Dollars in thousands)  

Securities sold under agreements to repurchase:

          

Other financial institutions

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

 

 

    

 

 

   

 

 

    

 

 

 

Total securities sold under agreements to repurchase

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

Advances from the FHLB

  6,025,000      4.75      6,025,000      4.75   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total borrowed funds

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

 

 

      

 

 

    

Accrued interest payable

$ 65,106    $ 64,080   

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

 

     At or For the Six     At or For the  
     Months Ended     Year Ended  
     June 30, 2015     December 31, 2014  
     (Dollars in thousands)  

Repurchase Agreements:

    

Average balance outstanding during the period

   $ 6,150,000      $ 6,274,932   
  

 

 

   

 

 

 

Maximum balance outstanding at any month-end during the period

$ 6,150,000    $ 6,950,000   
  

 

 

   

 

 

 

Weighted average rate during the period

  4.44   4.49
  

 

 

   

 

 

 

FHLB Advances:

Average balance outstanding during the period

$ 6,025,000    $ 5,900,068   
  

 

 

   

 

 

 

Maximum balance outstanding at any month-end during the period

$ 6,025,000    $ 6,025,000   
  

 

 

   

 

 

 

Weighted average rate during the period

  4.75   4.82
  

 

 

   

 

 

 

 

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Table of Contents

Notes to Unaudited Consolidated Financial Statements

 

At June 30, 2015, $3.33 billion of our borrowed funds may be put back to us at the discretion of the lender. At that date, borrowed funds had scheduled maturities and potential put dates as follows:

 

     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 following table provides the contractual maturity and weighted average interest rate of repurchase agreements, all of which are accounted for as secured borrowings, at June 30, 2015:

 

                  Mortgage-backed      U.S. government-sponsored  
                  securities      enterprise securities  

Contractual Maturity

   Amount      Weighted Average
Interest Rate
    Amortized
Cost
     Fair Value      Amortized
Cost
     Fair Value  
(dollars in thousands)                                         

Over 90 days

   $ 6,150,000         4.44   $ 2,114,035       $ 2,141,960       $ 5,142,803       $ 5,144,040   

Our repurchase agreements are recorded as financing transactions and the obligations to repurchase are reflected as a liability in the consolidated financial statements. The underlying securities used as collateral for the repurchase agreements remain registered in the name of the Company and are returned upon maturity of the repurchase agreement. We retain the right of substitution of collateral throughout the terms of the agreements. As both the borrowing and collateral are valued in determining collateral levels, changes in prices of either instrument could result in additional collateral requirements. The difference between the principal balance of our repurchase agreement and the carrying amount of the underlying securities used as collateral could result in a potential loss to the Bank should we be unable to recover our securities.

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 2014. During the six months ended June 30, 2015, the Bank received a partial payment on our non-customer claim of $1.4 million.

 

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Table of Contents

Notes to Unaudited Consolidated Financial Statements

 

8. Goodwill and Other Intangible Assets

Goodwill and other intangible assets amounted to $152.2 million and were recorded as a result of Hudson City Bancorp’s acquisition of Sound Federal Bancorp, Inc. (“Sound Federal”) in 2006.

The first step (“Step 1”) used to identify potential impairment involves comparing each reporting unit’s estimated fair value to its carrying amount, including goodwill. As a community-oriented bank, substantially all of the Company’s operations involve the delivery of loan and deposit products to customers and these operations constitute the Company’s only segment for financial reporting purposes. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill is not considered to be impaired. If the carrying amount exceeds the estimated fair value, there is an indication of potential impairment and the second step (“Step 2”) is performed to measure the amount. Step 2 involves calculating an implied fair value of goodwill for each reporting unit for which impairment was indicated in Step 1. The implied fair value of goodwill is determined in a manner similar to the amount of goodwill calculated in a business combination by measuring the excess of the estimated fair value of the reporting unit, as determined in Step 1, over the aggregate estimated fair values of the individual assets, liabilities, and identifiable intangibles, as if the reporting unit was being acquired at the impairment test date. We perform our goodwill impairment analysis annually and also perform interim impairment reviews if certain triggering events occur which may indicate that the fair value of goodwill is less than the carrying value. Subsequent reversal of goodwill impairment losses is not permitted.

We performed our annual goodwill impairment analysis as of June 30, 2015 and concluded that goodwill was not impaired. Therefore, we did not recognize any impairment of goodwill or other intangible assets during 2015.

The estimation of the fair value of the Company requires the use of estimates and assumptions that results in a greater degree of uncertainty. In addition, the estimated fair value of the Company is based on, among other things, the market price of our common stock as calculated per the terms of the Merger. As a result of the current volatility in market and economic conditions, these estimates and assumptions are subject to change in the near-term and may result in the impairment in future periods of some or all of the goodwill on our balance sheet.

9. Fair Value Measurements

a) Fair Value Measurements

We use fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. We did not have any liabilities that were measured at fair value at June 30, 2015 and December 31, 2014. Our securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value other assets or liabilities on a non-recurring basis, such as foreclosed real estate owned, certain impaired loans and goodwill. These non-recurring fair value adjustments generally involve the write-down of individual assets due to impairment losses.

 

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Table of Contents

Notes to Unaudited Consolidated Financial Statements

 

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

 

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

 

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

 

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

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

Assets that we measure on a recurring basis are limited to our available-for-sale securities portfolio. Our available-for-sale portfolio is carried at estimated fair value with any unrealized gains and losses, net of taxes, reported as accumulated other comprehensive income or loss in shareholders’ equity. Substantially all of our available-for-sale portfolio consists of mortgage-backed securities and investment securities issued by U.S. government-sponsored entities (the “GSEs”). The fair values for substantially all of these securities are obtained monthly from an independent nationally recognized pricing service. On a monthly basis, we assess the reasonableness of the fair values obtained by reference to a second independent nationally recognized pricing service. Based on the nature of our securities, our independent pricing service provides us with prices which are categorized as Level 2 since quoted prices in active markets for identical assets are generally not available for the majority of securities in our portfolio. Various modeling techniques are used to determine pricing for our mortgage-backed securities, including option pricing and discounted cash flow models. The inputs to these models include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. On an annual basis, we obtain the models, inputs and assumptions utilized by our pricing service and review them for reasonableness. We also own equity securities with a carrying value of $17.4 million at both June 30, 2015 and December 31, 2014 for which fair values are obtained from quoted market prices in active markets and, as such, are classified as Level 1.

 

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Table of Contents

Notes to Unaudited Consolidated Financial Statements

 

The following table provides the level of valuation assumptions used to determine the carrying value of our assets measured at fair value on a recurring basis at June 30, 2015 and December 31, 2014.

 

          Fair Value Measurements at June 30, 2015 using  
          Quoted Prices in Active     Significant Other     Significant  
    Carrying     Markets for Identical     Observable Inputs     Unobservable Inputs  

Description

  Value     Assets (Level 1)     (Level 2)     (Level 3)  
                (In thousands)        

Available for sale debt securities:

       

Mortgage-backed securities

  $ 2,730,493      $ —        $ 2,730,493      $ —     

U.S. government-sponsored enterprises debt

    5,343,009        —          5,343,009        —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total available for sale debt securities

  $ 8,073,502      $ —        $ 8,073,502      $ —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Available for sale equity securities:

       

Financial services industry

  $ 17,422      $ 17,422      $ —        $ —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total available for sale equity securities

    17,422        17,422        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total available for sale securities

  $ 8,090,924      $ 17,422      $ 8,073,502      $ —     
 

 

 

   

 

 

   

 

 

   

 

 

 
          Fair Value at December 31, 2014 using  
          Quoted Prices in Active     Significant Other     Significant  
    Carrying     Markets for Identical     Observable Inputs     Unobservable Inputs  

Description

  Value     Assets (Level 1)     (Level 2)     (Level 3)  
                (In thousands)        

Available for sale debt securities:

       

Mortgage-backed securities

  $ 2,963,304      $ —        $ 2,963,304      $ —     

U.S. government-sponsored enterprises debt

    3,593,649        —          3,593,649        —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total available for sale debt securities

  $ 6,556,953      $ —        $ 6,556,953      $ —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Available for sale equity securities:

       

Financial services industry

  $ 17,396      $ 17,396      $ —        $ —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total available for sale equity securities

    17,396        17,396        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total available for sale securities

  $ 6,574,349      $ 17,396      $ 6,556,953      $ —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Assets that were measured at fair value on a non-recurring basis at June 30, 2015 and December 31, 2014 were limited to non-performing commercial and construction loans that are collateral dependent, troubled debt restructurings and foreclosed real estate. Loans evaluated for impairment in accordance with accounting guidance amounted to $335.1 million and $332.8 million at June 30, 2015 and December 31, 2014, respectively. Based on this evaluation, we established an ALL of $476,000 and $469,000 for those same respective periods. These impaired loans are individually assessed to determine that the loan’s carrying value is not in excess of the fair value of the collateral, less estimated selling costs or the present value of the loan’s expected future cash flows. Impaired loans for which the carrying value exceeded the fair value and which are recorded at fair value at June 30, 2015 and December 31, 2014 amounted to $155.4 million and $156.2 million, respectively. For impaired loans that are secured by real estate, fair value is estimated through current appraisals, where practical, or an inspection and a comparison of the property securing the loan with similar properties in the area by either a licensed appraiser or real estate broker and, as such, are classified as Level 3.

 

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Table of Contents

Notes to Unaudited Consolidated Financial Statements

 

Foreclosed real estate represents real estate acquired as a result of foreclosure or by deed in lieu of foreclosure and is carried at the lower of cost or fair value less estimated selling costs. Fair value is estimated through current appraisals, where practical, or an inspection and a comparison of the property securing the loan with similar properties in the area by either a licensed appraiser or real estate broker and, as such, foreclosed real estate properties are classified as Level 3. Foreclosed real estate consisted primarily of one-to four-family properties and amounted to $100.2 million and $80.0 million at June 30, 2015 and December 31, 2014, respectively. Foreclosed real estate for which the carrying value exceeded fair value and which are recorded at fair value at June 30, 2015 and December 31, 2014 amounted to $20.2 million and $22.1 million, respectively.

The following table provides the level of valuation assumptions used to determine the carrying value, included in the Consolidated Statements of Financial Condition, of our assets measured at fair value on a non-recurring basis at June 30, 2015 and December 31, 2014.

 

     Fair Value Measurements at June 30, 2015 using  
     Quoted Prices in Active      Significant Other      Significant      Total  
     Markets for Identical      Observable Inputs      Unobservable Inputs      Gains  

Description

   Assets (Level 1)      (Level 2)      (Level 3)      (Losses)  
     (In thousands)  

Impaired loans

   $ —         $ —         $ 155,384       $ (2,295

Foreclosed real estate

     —           —           20,182         (1,125
     Fair Value Measurements at December 31, 2014 using  
     Quoted Prices in Active      Significant Other      Significant      Total  
     Markets for Identical      Observable Inputs      Unobservable Inputs      Gains  

Description

   Assets (Level 1)      (Level 2)      (Level 3)      (Losses)  
     (In thousands)  

Impaired loans

   $ —         $ —         $ 156,194       $ (6,415

Foreclosed real estate

     —           —           22,116         (5,770

The following table presents quantitative information about Level 3 fair value measurements for financial assets measured at fair value on a non-recurring basis at June 30, 2015.

 

    June 30, 2015

Description

  Fair Value    

Valuation Technique

 

Significant Unobservable Input

  Range of
Inputs
              (Dollars in thousands)    

Impaired loans

  $ 155,384      Net Present Value   Discount rate   Varies
    Appraisal Value   Discount for costs to sell   13.0%
     

Adjustment for differences between

comparable sales.

  Varies

Foreclosed real estate

    20,182      Appraisal Value   Discount for costs to sell   13.0%
      Adjustment for differences between comparable sales.   Varies

 

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Table of Contents

Notes to Unaudited Consolidated Financial Statements

 

b) Fair Value Disclosures

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

Cash and due from Banks

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

Securities held to maturity

The fair values for our securities held to maturity are obtained from an independent nationally recognized pricing service utilizing similar modeling techniques and assumptions as used for our securities available-for-sale which are measured at fair value on a recurring basis (Level 2).

FHLB Stock

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

Loans

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

Deposits

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

Borrowed Funds

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

Off-balance Sheet Financial Instruments

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

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

 

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Table of Contents

Notes to Unaudited Consolidated Financial Statements

 

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

 

     June 30, 2015      December 31, 2014  
     Carrying      Estimated      Carrying      Estimated  
     Amount      Fair Value      Amount      Fair Value  
     (In thousands)  
Assets:            

Cash and due from banks

   $ 102,957       $ 102,957       $ 122,484       $ 122,484   

Federal funds sold and other overnight deposits

     6,599,793         6,599,793         6,163,082         6,163,082   

Investment securities held to maturity

     —           —           39,011         41,593   

Investment securities available for sale

     5,360,431         5,360,431         3,611,045         3,611,045   

Federal Home Loan Bank of New York stock

     309,892         309,892         320,753         320,753   

Mortgage-backed securities held to maturity

     —           —           1,272,137         1,356,160   

Mortgage-backed securities available for sale

     2,730,493         2,730,493         2,963,304         2,963,304   

Loans

     19,646,757         20,667,152         21,428,812         22,641,662   
Liabilities:            

Deposits

     18,174,139         18,198,982         19,376,544         19,437,546   

Borrowed funds

     12,175,000         13,357,401         12,175,000         13,525,813   

10. Postretirement Benefit Plans

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

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

 

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Table of Contents

Notes to Unaudited Consolidated Financial Statements

 

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

 

     For the Three Months Ended June 30,  
     Retirement Plans      Other Benefits  
     2015      2014      2015      2014  
     (In thousands)  

Service cost

   $ 1,357       $ 1,130       $ 278       $ 246   

Interest cost

     2,483         2,326         593         554   

Expected return on assets

     (3,794      (3,609      —           —     

Amortization of:

           

Net loss

     1,745         617         428         187   

Unrecognized prior service cost

     35         58         (391      (391
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit cost

   $ 1,826       $ 522       $ 908       $ 596   
  

 

 

    

 

 

    

 

 

    

 

 

 
     For the Six Months Ended June 30,  
     Retirement Plans      Other Benefits  
     2015      2014      2015      2014  
     (In thousands)  

Service cost

   $ 2,714       $ 2,260       $ 556       $ 492   

Interest cost

     4,966         4,652         1,186         1,108   

Expected return on assets

     (7,588      (7,218      —           —     

Amortization of:

           

Net loss

     3,490         1,234         856         374   

Unrecognized prior service cost

     70         116         (782      (782
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit cost

   $ 3,652       $ 1,044       $ 1,816       $ 1,192   
  

 

 

    

 

 

    

 

 

    

 

 

 

We made no contributions to the pension plans during the first six months of 2015 or 2014.

11. Other Comprehensive Income (Loss)

The changes in accumulated other comprehensive income (loss) by component, net of tax, is as follows:

 

     Unrealized gains                
     (losses) on securities      Postretirement         
     available for sale      Benefit Plans      Total  
     (In thousands)  

Balance at December 31, 2014

   $ 18,382       $ (68,756    $ (50,374
  

 

 

    

 

 

    

 

 

 

Other comprehensive income before reclassifications

     50,901         —           50,901   

Amounts reclassified from accumulated other comprehensive income (loss)

     (42,906      2,149         (40,757
  

 

 

    

 

 

    

 

 

 

Other comprehensive income

     7,995         2,149         10,144   
  

 

 

    

 

 

    

 

 

 

Balance at June 30, 2015

   $ 26,377       $ (66,607    $ (40,230
  

 

 

    

 

 

    

 

 

 

Balance at December 31, 2013

   $ 33,944       $ (27,608    $ 6,336   
  

 

 

    

 

 

    

 

 

 

Other comprehensive income before reclassifications

     35,827         —           35,827   

Amounts reclassified from accumulated other comprehensive income (loss)

     (17,141      557         (16,584
  

 

 

    

 

 

    

 

 

 

Other comprehensive income

     18,686         557         19,243   
  

 

 

    

 

 

    

 

 

 

Balance at June 30, 2014

   $ 52,630       $ (27,051    $ 25,579   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Notes to Unaudited Consolidated Financial Statements

 

The following table presents the reclassification adjustment out of accumulated other comprehensive income (loss) included in net income and the corresponding line item on the consolidated statements of operations for the periods indicated:

 

     Amounts Reclassified     Line Item in  
Details about Accumlated Other    from Accumulated Other     the Statement of  

Comprehensive Income Components

   Comprehensive Income     Income  
(In thousands)    For the Three Months
Ended June 30,
    For the Six Months
Ended June 30,
       
     2015     2014     2015     2014        

Securities available for sale:

          

Net realized gain on securities available for sale

   $ (67,064   $ (18,260   $ (72,538   $ (28,882     Gain on securities transaction, net   

Income tax expense

     27,396        7,459        29,632        11,741        Income tax expense   
  

 

 

   

 

 

   

 

 

   

 

 

   

Net of income tax expense

     (39,668     (10,801     (42,906     (17,141  
  

 

 

   

 

 

   

 

 

   

 

 

   

Amortization of postretirement benefit pension plans:

          

Net actuarial loss

   $ 2,173      $ 804      $ 4,346      $ 1,608        (a

Prior service cost

     (356     (333     (712     (666     (a
  

 

 

   

 

 

   

 

 

   

 

 

   

Total before income tax expense

     1,817        471        3,634        942     

Income tax expense

     (743     (192     (1,485     (385     Income tax expense   
  

 

 

   

 

 

   

 

 

   

 

 

   

Net of income tax expense

     1,074        279        2,149        557     
  

 

 

   

 

 

   

 

 

   

 

 

   

Total reclassifications

   $ (38,594   $ (10,522   $ (40,757   $ (16,584  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

(a) These items are included in the computation of net period pension cost. See Postretirement Benefit Plans footnote for additional disclosure.

 

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Table of Contents

Notes to Unaudited Consolidated Financial Statements

 

12. Stock-Based Compensation

Stock Option Plans

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

 

     For the Six Months Ended June 30,  
     2015      2014  
     Number of      Weighted      Number of      Weighted  
     Stock      Average      Stock      Average  
     Options      Exercise Price      Options      Exercise Price  

Outstanding at beginning of period

     22,359,456       $ 13.16         25,402,955       $ 13.02   

Exercised

     —           —           (11,900      9.50   

Forfeited

     (403,024      11.14         (2,804,799      11.92   
  

 

 

       

 

 

    

Outstanding at end of period

     21,956,432       $ 13.20         22,586,256       $ 13.16   
  

 

 

       

 

 

    

In June 2006, our shareholders approved the Hudson City Bancorp, Inc. 2006 Stock Incentive Plan (the “2006 SIP”) authorizing us to grant up to 30,000,000 shares of common stock. In July 2006, the Compensation Committee of the Board of Directors of Hudson City Bancorp (the “Committee”), authorized grants to each non-employee director, executive officers and other employees to purchase shares of the Company’s common stock, pursuant to the 2006 SIP. Grants of stock options made through December 31, 2010 pursuant to the 2006 SIP amounted to 23,120,000 options at an exercise price equal to the fair value of our common stock on the grant date of the respective options, based on quoted market prices. These options had vesting periods ranging from one to five years and, if vested, may be exercised for up to ten years after grant.

In April 2011, our shareholders approved the Hudson City Bancorp, Inc. Amended and Restated 2011 Stock Incentive Plan (the “2011 SIP”) authorizing us to grant up to 28,750,000 shares of common stock including 2,070,000 shares remaining under the 2006 SIP. During 2011, the Committee authorized stock option grants (the “2011 option grants”) pursuant to the 2011 SIP for 1,618,932 options at an exercise price equal to the fair value of our common stock on the grant date, based on quoted market prices. Of these options, 1,308,513 had vesting periods of three years and were subject to our attainment of certain financial performance goals (the “2011 Performance Options”). The remaining 310,419 options vested in April 2012. The 2011 option grants may be exercised after vesting for up to ten years after grant. The performance measures for the 2011 Performance Options have been met and we have recorded compensation expense for those grants accordingly.

There was no compensation expense related to our outstanding stock options for the three and six months ended June 30, 2015. Compensation expense related to our outstanding stock options amounted to $10,000 for the three months ended June 30, 2014 and $272,000 for the six months ended June 30, 2014.

Stock Unit Awards

Beginning in 2011, Hudson City Bancorp has granted annual stock unit awards to each of its officers and outside directors.

Each stock unit award granted since 2011 to our outside directors has been scheduled to vest on continued service through the first anniversary of the award, and to be settled in shares of our common stock following the director’s departure from the Board of Directors. These include 53,739 stock units granted

 

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Notes to Unaudited Consolidated Financial Statements

 

in 2013 that vested on continued service through April 2014, 53,851 stock units granted in 2014 that vested on continued service through March 2015, and 56,757 stock units granted in 2015 that are scheduled to vest on continued service through January 2016, for a total value of $525,000 granted in each of these years.

Hudson City Bancorp granted stock unit awards to employees in 2011 pursuant to the 2011 SIP for a total value of $9.4 million, or stock units of 963,700 shares. These awards vested on continued service through the third anniversary of the awards, based on our attainment of certain financial performance measures as certified by the Committee. A portion of these vested awards was settled in shares of our common stock upon vesting, and the remainder will be settled in shares of our common stock on the sixth anniversary of the awards.

Stock unit awards were made to employees in 2012 (the “2012 stock unit awards”) pursuant to the 2011 SIP for a total of $12.2 million, or stock units of 1,693,354 shares. The 2012 stock unit awards include stock units of 974,528 shares that vested on continued service through the third anniversary of the awards, based on our attainment of certain financial performance measures as certified by the Committee. A portion of these vested awards was settled in shares of our common stock upon vesting, and the remainder will be settled in shares of our common stock on the sixth anniversary of the awards. The 2012 stock unit awards also include variable performance stock units (“VPUs”) of 718,826 shares that vested on continued service through the third anniversary of the awards, and were settled in shares of our common stock upon vesting. Half of each VPU award was conditioned on the ranking of the total shareholder return of the Company’s common stock over the calendar years 2012 to 2014 against the total shareholder return of a peer group of 50 companies and the other half was conditioned on the Company’s attainment of return on tangible equity measures for the calendar year 2012. Based on the level of performance of each award, between 0% and 150% of the VPUs could have vested. The market condition requirements were reflected in the grant date fair value of the award, and the compensation expense for the award was recognized regardless of whether the market conditions were met. Based on performance through December 31, 2014, the Company determined that 128% of the VPUs subject to the total shareholder return condition vested upon continued service through their vesting dates. Based on performance through December 31, 2012, the Company determined that 60.25% of the VPUs subject to the return on tangible equity condition vest upon continued service through their vesting dates.

Stock unit awards were made to employees in 2013 (the “2013 stock unit awards”) pursuant to the 2011 SIP for a total value of $13.2 million, or stock units of 1,618,900 shares. The 2013 stock unit awards include 1,480,100 stock units granted to employees in June 2013 that will be settled, if vested, in shares of our common stock on the third and sixth anniversaries of the awards. Vesting of these stock units is based on the attainment of certain financial performance measures and continued service through a particular date. The attainment of the financial performance measures has been certified by the Committee and a portion of these stock units have vested based on continued service through January 1, 2014 and 2015, with the remainder subject to continued service through January 1, 2016. The Committee specifically reserved its rights to reduce the number of shares covered by the 2013 stock unit awards to senior executives on or before certification of the performance goals if the Committee determined, in its discretion, that prevailing circumstances warrant such a reduction. The Committee exercised this discretion in the first quarter of 2014 resulting in the forfeiture of stock units representing 323,550 shares. The 2013 stock unit awards also include 138,800 stock units granted in March 2013 that are settled in shares of our common stock on each vesting date. These awards have vested in part on continued service through March 19, 2014 and 2015, with the remainder subject to continued service through March 19, 2016.

 

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Notes to Unaudited Consolidated Financial Statements

 

Stock unit awards were made to employees in March 2014 pursuant to the 2011 SIP for a total of $12.7 million, or stock units of 1,363,470 shares. These awards are settled, if vested, in shares of our common stock on the third and sixth anniversaries of the awards. Vesting of these stock units is based on the attainment of certain financial performance measures and continued service through a particular date. The attainment of the financial performance measures has been certified by the Committee and a portion of these awards vested in part based on continued service through January 1, 2015, with the remainder subject to continued service through January 1, 2016 and 2017.

Stock unit awards were made in January 2015 pursuant to the 2011 SIP for a total of $4.3 million, or stock units of 485,600 shares. These awards will be settled, if vested, in shares of our common stock on the third and sixth anniversaries of the awards. These awards are subject to continued service through January 1, 2016 and our achievement of certain financial performance measures.

Expense for the stock unit awards is recognized over their vesting period and is based on the fair value of our common stock on each stock unit grant date, based on quoted market prices. Total compensation expense for stock unit awards amounted to $3.1 million and $3.2 million for the three months ended June 30, 2015 and 2014, respectively, and $6.8 million and $5.8 million for the six months ended June 30, 2015 and 2014, respectively.

13. Recent Accounting Pronouncements

In August 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-14, “Receivables – Troubled Debt Restructurings by Creditors”. The amendment requires that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: (1) the loan has a government guarantee that is not separable from the loan before foreclosure; (2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; and (3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The amendments in ASU 2014-14 are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2014. Early adoption is permitted. This guidance did not have a material impact on our financial condition or results of operations.

In June 2014, the FASB issued ASU 2014-12, “Compensation—Stock Compensation – Accounting for Share-Based Payments When the Terms of an Award Provide that a Performance Target Could Be Achieved after the Requisite Service Period”. The amendment applies to reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target can be achieved after the requisite service period. A reporting entity should apply existing guidance in ASC Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still

 

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Notes to Unaudited Consolidated Financial Statements

 

be eligible to vest in the award if the performance target is achieved. As indicated in the definition of vest, the stated vesting period (which includes the period in which the performance target could be achieved) may differ from the requisite service period. The amendments in ASU 2014-12 are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2014. Early adoption is permitted. This guidance did not have a material impact on our financial condition or results of operations.

In June 2014, the FASB issued ASU 2014-11, “Transfers and Servicing – Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures”. The amendments in this update require that repurchase-to-maturity transactions be accounted for as secured borrowings consistent with the accounting for other repurchase agreements. In addition, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty (a repurchase financing), which will result in secured borrowing accounting for the repurchase agreement. The amendments require an entity to disclose information about transfers accounted for as sales in transactions that are economically similar to repurchase agreements, in which the transferor retains substantially all of the exposure to the economic return on the transferred financial asset throughout the term of the transaction. In addition the amendments require disclosure of the types of collateral pledged in repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions and the tenor of those transactions. The amendments in ASU 2014-11 are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2014, and the disclosure for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015. This guidance did not have a material impact on our financial condition or results of operations.

14. Legal Matters

Since the announcement of the Merger, eighteen putative class action complaints have been filed in the Court of Chancery, Delaware against Hudson City Bancorp, its directors, M&T, and WTC challenging the Merger. Six putative class actions challenging the Merger have also been filed in the Superior Court for Bergen County, Chancery Division, of New Jersey (the “New Jersey Court”). The lawsuits generally allege, among other things, that the Hudson City Bancorp directors breached their fiduciary duties to Hudson City Bancorp’s public shareholders by approving the Merger at an unfair price, that the Merger was the product of a flawed sales process, and that Hudson City Bancorp and M&T filed a misleading and incomplete Form S-4 with the SEC in connection with the proposed transaction. All 24 lawsuits seek, among other things, to enjoin completion of the Merger and an award of costs and attorneys’ fees. Certain of the actions also seek an accounting of damages sustained as a result of the alleged breaches of fiduciary duty and punitive damages.

On April 12, 2013, the defendants entered into a memorandum of understanding (the “MOU”) with the plaintiffs regarding the settlement of all of the actions described above (collectively, the “Actions”).

Under the terms of the MOU, Hudson City Bancorp, M&T, the other named defendants, and all the plaintiffs have reached an agreement in principle to settle the Actions and release the defendants from all claims relating to the Merger, subject to approval of the New Jersey Court. Pursuant to the MOU, Hudson City Bancorp and M&T agreed to make available additional information to Hudson City Bancorp shareholders. The additional information was contained in a Supplement to the Joint Proxy Statement filed with the SEC as an exhibit to a Current Report on Form 8-K dated April 12, 2013. In addition, under the terms of the MOU, plaintiffs’ counsel also has reserved the right to seek an award of attorneys’

 

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Notes to Unaudited Consolidated Financial Statements

 

fees and expenses. If the New Jersey Court approves the settlement contemplated by the MOU, the Actions will be dismissed with prejudice. The settlement will not affect the Merger consideration to be paid to Hudson City Bancorp’s shareholders in connection with the proposed Merger. In the event the New Jersey Court approves an award of attorneys’ fees and expenses in connection with the settlement, such fees and expenses shall be paid by Hudson City Bancorp, its successor in interest, or its insurers.

Hudson City Bancorp, M&T, and the other defendants deny all of the allegations in the Actions and believe the disclosures in the Joint Proxy Statement are adequate under the law. Nevertheless, Hudson City Bancorp, M&T, and the other defendants have agreed to settle the Actions in order to avoid the costs, disruption, and distraction of further litigation.

 

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

Executive Summary

Our results of operations depend primarily on net interest income, which, in part, is a direct result of the market interest rate environment. Net interest income is the difference between the interest income we earn on our interest-earning assets, primarily mortgage loans, mortgage-backed securities and investment securities, and the interest we pay on our interest-bearing liabilities, primarily time deposits, interest-bearing transaction accounts and borrowed funds. Net interest income is affected by the shape of the market yield curve, the timing of the placement and repricing of interest-earning assets and interest-bearing liabilities on our balance sheet, the prepayment rate on our mortgage-related assets and the puts of our borrowings. Our results of operations may also be affected significantly by general and local economic and competitive conditions, particularly those with respect to changes in market interest rates, credit quality, government policies and actions of regulatory authorities. Our results of operations are also affected by the market price of our stock, as the expense of our employee stock ownership plan is related to the current price of our common stock.

On August 27, 2012, the Company entered into the Merger Agreement with M&T and WTC, pursuant to which the Company will merge with and into WTC, with WTC continuing as the surviving entity.

Subject to the terms and conditions of the Merger Agreement, in the Merger, Hudson City Bancorp shareholders will have the right to receive with respect to each of their shares of common stock of the Company, at their election (but subject to proration and adjustment procedures), 0.08403 of a share of common stock, or cash having a value equal to the product of 0.08403 multiplied by the average closing price of the M&T common stock for the ten days immediately prior to the completion of the Merger. The Merger Agreement also provides that at the closing of the Merger, 40% of the outstanding shares of Hudson City Bancorp common stock will be converted into the right to receive cash and the remainder of the outstanding shares of Hudson City Bancorp common stock will be converted into the right to receive shares of M&T common stock.

On four occasions, Hudson City Bancorp and M&T have agreed to extend the date after which either party may elect to terminate the Merger Agreement. Each extension was documented with an amendment to the Merger Agreement and the most recent amendment, Amendment No. 4, 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 October 31, 2015. Amendment No. 4, 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 October 31, 2015 or that the Company will not exercise its right to terminate the Merger Agreement in accordance with its terms.

Over the last several quarters, we have managed our balance sheet on a dual-track strategy, which includes the implementation of our Strategic Plan initiatives and preparing for the completion of the Merger with M&T. The operational core of the Strategic Plan includes the expansion of our loan and deposit product offerings over time and the diversification of our revenue sources. The Strategic Plan also includes a future balance sheet restructuring transaction that would significantly increase our net

 

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interest margin and net income by extinguishing approximately $12 billion of borrowings that have a weighted average cost of 4.59%. We anticipate extinguishing these borrowings primarily with the short-term liquid assets that are currently on our balance sheet as well as new borrowings with significantly lower rates. At June 30, 2015, short-term liquid assets, consisting of Federal funds sold and other overnight funds and U.S. Treasury securities, amounted to $11.6 billion with a weighted average yield of 0.26%. While we expect that the restructuring transaction would result in a material charge to earnings, we believe that the restructuring would increase our net interest margin by as much as 185 basis points depending on the timing of the execution, the net interest margin immediately prior to the restructuring transaction and the prevailing rates at that time. The delay in the execution of the balance sheet restructuring and our continuing to carry an excess liquidity position is primarily due to the delay in obtaining the requisite regulatory approvals for the Merger, though a variety of factors are involved in the decision regarding any such restructuring.

Market interest rates remained at low levels during the first six months of 2015, which provided limited opportunities for the reinvestment of repayments received on our mortgage-related assets. As a result, we continued to reduce the size of our balance sheet and we continue to carry an elevated level of short-term liquid assets. Federal funds sold and other overnight deposits amounted to $6.60 billion, or 18.6%, of total assets at June 30, 2015. In addition, we have $5.00 billion of U.S. Treasury securities with a weighted average remaining term of 9 months and an average yield of 0.28%. We believe that while carrying this level of short-term liquid assets adversely impacts our current earnings, it better positions our balance sheet for a future balance sheet restructuring. Our total assets decreased $1.15 billion, or 3.1%, to $35.42 billion at June 30, 2015 from $36.57 billion at December 31, 2014.

Net income for the first six months of 2015 reflected the continued decrease in the Company’s net interest margin that is the result of our elevated level of low-yielding short-term liquid assets combined with our high-cost borrowings. During 2014, we supplemented our earnings with gains on the sales of securities. This strategy was key to maintaining earnings despite a decreasing net interest margin as rates remained low and we continued to carry excess liquidity with very little appetite for reinvesting this liquidity into longer-term investments or fixed-rate residential mortgage loans. In addition, the market demand and prices provided a strong opportunity for us to sell these securities. However, in anticipation of the closing of the Merger, which was expected to close on May 1, 2015, we significantly reduced the sale of securities during the first quarter of 2015. The unexpected news in early April that there would be a further delay in completing the Merger came too late for us to resume the sale of securities before the end of the first quarter and, as a result, our net income for the first six months of 2015 was adversely affected. We resumed the sale of securities during the second quarter. To facilitate these securities sales, in the second quarter of 2015 we transferred to available for sale all securities that were held to maturity.

The Federal Open Market Committee of the Board of Governors of the Federal Reserve System (the “FOMC”) noted that economic activity expanded moderately during the second quarter of 2015. The FOMC noted that the labor market continued to improve, with solid job gains and declining unemployment. A range of labor market indicators suggests that underutilization of labor resources has diminished. Growth in household spending has been moderate and the housing sector has shown additional improvement. The national unemployment rate decreased to 5.3% in June 2015 from 5.6% in December 2014 and from 6.1% in June 2014. The FOMC decided to maintain the overnight lending target rate at zero to 0.25% during the second quarter of 2015.

Net interest income decreased to $56.6 million for the second quarter of 2015 as compared to $ $117.7 million for the second quarter of 2014 reflecting the overall decrease in the average balance of interest-earning assets and interest-bearing liabilities, the continued low interest rate environment and a continued

 

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increase in the average balance of short-term liquid assets, including U.S. Treasury securities and Federal funds sold and other overnight deposits. Our interest rate spread decreased to 0.33% for the second quarter of 2015 as compared to 0.53% for the linked first quarter of 2015 and 1.00% for the second quarter of 2014. Our net interest margin was 0.66% for the second quarter of 2015 as compared to 0.85% for the linked first quarter of 2015 and 1.29% for the second quarter of 2014.

Net interest income decreased $117.8 million, or 47.1%, to $132.2 million for the first six months of 2015 as compared to $250.0 million for the first six months of 2014. Our interest rate spread decreased 63 basis points to 0.44% for the six months ended June 30, 2015 as compared to 1.07% for the six months ended June 30, 2014. Our net interest margin decreased 59 basis points to 0.76% for the six months ended June 30, 2015 as compared to 1.35% for the six months ended June 30, 2014.

The decrease in our interest rate spread and net interest margin for the three and six month periods ended June 30, 2015 is primarily due to repayments of higher yielding assets due to the low interest rate environment. The decrease is also due to an increase in the average balance of Federal funds sold and other overnight deposits and U.S. Treasury securities with a weighted average yield of 0.26% and 0.28%, respectively.

Market interest rates on mortgage-related assets remained at low levels primarily due to the FRB’s program to purchase mortgage-backed securities to provide stimulus to the housing markets. Given the current market environment and our concerns about taking on additional interest rate risk, we expect to continue to reduce the size of our balance sheet in the near term.

There was no provision for loan losses for both the three and six month periods ended June 30, 2015 and 2014. No provision was needed due to improving home prices and economic conditions, a continued decrease in total delinquent loans and a continued decrease in the size of the loan portfolio. Early stage loan delinquencies (defined as loans that are 30 to 89 days delinquent) decreased $65.2 million to $342.4 million at June 30, 2015 from $407.6 million at December 31, 2014. Non-performing loans, defined as non-accruing loans and accruing loans delinquent 90 days or more, amounted to $801.8 million at June 30, 2015 as compared to $852.0 million at December 31, 2014, and $1.01 billion at June 30, 2014. The ratio of non-performing loans to total loans was 4.05% at June 30, 2015 as compared to 3.95% at December 31, 2014, and 4.35% at June 30, 2014. This increase in the ratio of non-performing loans to total loans was due to the decrease in the size of our loan portfolio. The foreclosure process and the time to complete a foreclosure continue to be prolonged, especially in New York and New Jersey where approximately 71% of our non-performing loans are located. This protracted foreclosure process delays our ability to resolve non-performing loans through the sale of the underlying collateral and our ability to maximize any recoveries.

Total non-interest income was $68.6 million for the second quarter of 2015 as compared to $21.2 million for the second quarter of 2014. Included in non-interest income for the second quarter of 2015 were $67.1 million in gains from the sale of $988.2 million of mortgage-backed securities. Included in non-interest income for the second quarter of 2014 were $19.5 million in gains from the sale of $565.6 million of mortgage-backed securities. The remainder of non-interest income is primarily made up of service fees and charges on deposit and loan accounts.

Total non-interest income was $77.3 million for the first six months of 2015 as compared to $38.9 million for the same period in 2014. Included in non-interest income for the first six months 2015 were $74.4 million in gains from the sale of $1.21 billion of mortgage-backed securities. Gains on the sales of securities amounted to $35.5 million from the sale of $984.9 million of mortgage-backed securities for the six months ended June 30, 2014.

 

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Total non-interest expense decreased $6.6 million to $66.5 million for the second quarter of 2015 as compared to $73.1 million for the second quarter of 2014. This decrease was due primarily to a $5.2 million decrease in the FDIC assessment and a $2.5 million decrease in other non-interest expense. These decreases were partially offset by a $1.8 million increase in compensation and employee benefit costs.

Total non-interest expense amounted to $141.2 million for the six months ended June 30, 2015 as compared to $152.8 million for the six months ended June 30, 2014. This decrease was due to decreases of $8.1 million in Federal deposit insurance expense and $5.2 million in other non-interest expense, partially offset by a $2.6 million increase in compensation and employee benefit expenses.

Net loans decreased to $19.65 billion at June 30, 2015 as compared to $21.43 billion at December 31, 2014 due primarily to a decrease in loan production. During the first six months of 2015, our loan production (originations and purchases) amounted to $416.7 million as compared to $813.4 million for the same period of 2014. Loan production was offset by principal repayments of $2.16 billion in the first six months of 2015, as compared to principal repayments of $1.72 billion for the first six months of 2014.

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 loans and interests in such loans. The Bank funded $86.0 million of such loans and interests in the fourth quarter of 2014 and $57.6 million during the first six months of 2015, for an aggregate of $143.6 million.

Total mortgage-backed securities decreased $1.51 billion to $2.73 billion at June 30, 2015 from $4.24 billion at December 31, 2014. The decrease was due primarily to securities sales of $1.21 billion and repayments of $365.8 million of mortgage-backed securities during the first six months of 2015. We sold mortgage-backed securities to take advantage of market demand and prices. The proceeds from the sales have been invested primarily in short-term liquid assets. While this further increases our levels of low-yielding liquid assets, we believe this positions our balance sheet for a future balance sheet restructuring transaction.

Total investment securities increased $1.71 billion to $5.36 billion at June 30, 2015 as compared to $3.65 billion at December 31, 2014. The increase was due primarily to purchases of $1.70 billion of U.S. Treasury securities with a remaining average life of 9 months, which are used as collateral for our outstanding borrowings.

Total liabilities decreased $1.19 billion, or 3.7%, to $30.60 billion at June 30, 2015 from $31.79 billion at December 31, 2014. The decrease in total liabilities reflected a decrease in total deposits while total borrowed funds remained unchanged.

During 2013 and 2014 the Bank was subject to the Bank MOU. In accordance with the Bank MOU, the Bank adopted and implemented enhanced operating policies and procedures that are intended to continue to (a) reduce our level of interest rate risk, (b) reduce our funding concentration, (c) diversify our funding sources, (d) enhance our liquidity position, (e) monitor and manage loan modifications and (f) maintain our capital position in accordance with our existing capital plan. On February 26, 2015 the OCC terminated the Bank MOU.

 

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The Company is currently subject to the Company MOU. In accordance with the Company MOU, the Company is required 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.

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.

Comparison of Financial Condition at June 30, 2015 and December 31, 2014

Total assets decreased $1.15 billion, or 3.1%, to $35.42 billion at June 30, 2015 from $36.57 billion at December 31, 2014. The decrease in total assets reflected a $1.78 billion decrease in net loans and a $1.51 billion decrease in total mortgage-backed securities, partially offset by a $1.71 billion increase in investment securities and a $417.2 million increase in cash and cash equivalents.

Total cash and cash equivalents increased $417.2 million to $6.70 billion at June 30, 2015 as compared to $6.29 billion at December 31, 2014. The high level of cash and cash equivalents is primarily due to repayments on mortgage-related assets and our continued limited appetite for reinvesting these funds in low-yielding longer-term assets. We have maintained lower deposit rates to allow a reduction in our deposits to help manage deposit levels at a time when there are limited investment opportunities and to prepare for a future balance sheet restructuring during 2015. We have used a portion of our excess cash inflows to fund these deposit reductions.

Net loans decreased to $19.65 billion at June 30, 2015 as compared to $21.43 billion at December 31, 2014 due primarily to a decrease in loan production and the acceleration of loan repayments. During the first six months of 2015, our loan production (originations and purchases) amounted to $416.7 million as compared to $813.4 million for the same period of 2014. Loan production was offset by principal repayments of $2.16 billion in the first six months of 2015, as compared to principal repayments of $1.72 billion for the first six months of 2014.

The decline in loan production during the first six months of 2015 as compared to the first six months of 2014 reflects our continued limited appetite for adding long-term fixed-rate residential mortgage loans to our portfolio and our focus on originating variable-rate residential mortgage loans which are not as attractive to loan customers in the current low market interest rate environment. The low market interest rate environment also significantly influences the increase in principal repayments.

Our first mortgage loan production during the first six months of 2015 was primarily in one- to four-family mortgage loans. Fixed-rate mortgage loans accounted for 52.6% of our first mortgage loan portfolio at June 30, 2015 as compared to 53.4% at December 31, 2014. Beginning in the fourth quarter of 2014, the Bank began to purchase CRE loans and CRE loan participations, which is one of the initiatives in the Company’s Strategic Plan. During the first six months of 2015, the Bank funded $57.6 million of such loans and loan participations and funded $86.0 million during the fourth quarter of 2014, for an aggregate of $143.6 million.

Our ALL amounted to $225.6 million at June 30, 2015 and $235.3 million at December 31, 2014. Non-performing loans amounted to $801.8 million, or 4.05% of total loans, at June 30, 2015 as compared to $852.0 million, or 3.95% of total loans, at December 31, 2014.

 

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Total mortgage-backed securities decreased $1.51 billion to $2.73 billion at June 30, 2015 from $4.24 billion at December 31, 2014. The decrease was due primarily to securities sales of $1.21 billion and repayments of $365.8 million of mortgage-backed securities during the first six months of 2015. We sold mortgage-backed securities to take advantage of market demand and prices. The proceeds from the sales have been invested primarily in short-term liquid assets. While this further increases our levels of low-yielding liquid assets, we believe this positions our balance sheet for a future balance sheet restructuring transaction.

Total investment securities increased $1.71 billion to $5.36 billion at June 30, 2015 as compared to $3.65 billion at December 31, 2014. The increase was due primarily to purchases of $1.70 billion of U.S. Treasury securities with a remaining average life of 9 months, which are used as collateral for our outstanding borrowings.

Total liabilities decreased $1.19 billion, or 3.7%, to $30.60 billion at June 30, 2015 from $31.79 billion at December 31, 2014. The decrease in total liabilities reflected a decrease in total deposits while total borrowed funds remained unchanged.

Total deposits decreased $1.21 billion, or 6.2%, to $18.17 billion at June 30, 2015 from $19.38 billion at December 31, 2014. The decrease in total deposits reflected an $848.9 million decrease in our time deposit accounts, a $369.1 million decrease in our money market accounts and a $56.2 decrease in our NOW accounts, partially offset by an increase in savings accounts of $33.5 million. The decrease in our money market and time deposit accounts was due to our decision to maintain lower deposit rates that allow us to manage deposit levels at a time when there are limited investment opportunities with attractive yields to reinvest the funds received from payment activity on mortgage-related assets. We had 135 banking offices at both June 30, 2015 and December 31, 2014.

Borrowings amounted to $12.18 billion at June 30, 2015 with an average cost of 4.59%, unchanged from December 31, 2014. Borrowings scheduled to mature in the next 12 months amount to $1.83 billion with an average cost of 4.94%.

At June 30, 2015, we had $3.33 billion of borrowed funds 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 likely not be put back and our average cost of existing borrowings would not decrease even as market interest rates decrease. Conversely, if interest rates increase we believe these borrowings would likely be put back at their next put date and our cost to replace these borrowings would increase. However, we believe, given current market conditions, that the likelihood that a significant portion of these borrowings would be put back will not increase substantially unless interest rates were to increase by at least 250 basis points.

Total shareholders’ equity increased $40.3 million to $4.82 billion at June 30, 2015 as compared to $4.78 billion at December 31, 2014. The increase was due to net income of $41.5 million and a change in accumulated other comprehensive loss of $10.2 million, partially offset by $20.0 million in cash dividends paid to common shareholders during the first six months of 2015. At June 30, 2015, our consolidated shareholders’ equity to asset ratio was 13.61% and our tangible book value per share was $9.32.

Accumulated other comprehensive loss amounted to $40.2 million at June 30, 2015 as compared to $50.4 million at December 31, 2014. Accumulated other comprehensive loss at June 30, 2015 included a $66.6 million after-tax accumulated other comprehensive loss related to the funded status of our employee benefit plans partially offset by a $26.4 million after-tax net unrealized gain on securities available for

 

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sale ($44.5 million pre-tax). Accumulated other comprehensive loss at December 31, 2014 included a $68.7 million after-tax accumulated other comprehensive loss related to the funded status of our employee benefit plans partially offset by a $18.3 million after-tax net unrealized gain on securities available for sale ($30.9 million pre-tax). The change in accumulated other comprehensive loss of $10.2 million reflects the transfer to available for sale of all of our securities that were classified as held to maturity with a carrying value of $1.22 billion and a fair value of $1.30 billion, which occurred in the second quarter of 2015. The resulting after-tax net unrealized built-in gain of $48.3 million ($81.6 million pre-tax) was recorded as a component of accumulated other comprehensive loss. In addition, during the six months ended June 30, 2015 we reclassified $42.9 million ($72.5 million pre-tax) of realized gains out of accumulated other comprehensive loss.

As of June 30, 2015, there remained 50,123,550 shares that may be purchased under our existing stock repurchase programs. We did not repurchase any shares of our common stock during the first six months of 2015. Pursuant to the Company MOU, any future share repurchases must be approved by the FRB. In addition, pursuant to the terms of the Merger Agreement, we may not repurchase shares of Hudson City Bancorp common stock without the consent of M&T. At June 30, 2015, our capital ratios were in excess of the applicable regulatory requirements to be considered well-capitalized. See “Liquidity and Capital Resources.”

At June 30, 2015, our shareholders’ equity to asset ratio was 13.61% compared with 13.08% at December 31, 2014. Our book value per share, using the period-end number of outstanding shares, less purchased but unallocated employee stock ownership plan shares and less purchased but unvested recognition and retention plan shares, was $9.62 at June 30, 2015 and $9.57 at December 31, 2014. Our tangible book value per share, calculated by deducting goodwill and the core deposit intangible from shareholders’ equity, was $9.32 as of June 30, 2015 and $9.27 at December 31, 2014.

 

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Comparison of Operating Results for the Three-Month Periods Ended June 30, 2015 and 2014

Average Balance Sheet. The following table presents the average balance sheets, average yields and costs and certain other information for the three months ended June 30, 2015 and 2014. The table presents the annualized average yield on interest-earning assets and the annualized average cost of interest-bearing liabilities. We derived the yields and costs by dividing annualized income or expense by the average balance of interest-earning assets and interest-bearing liabilities, respectively, for the periods shown. We derived average balances from daily balances over the periods indicated. Interest income includes fees that we considered to be adjustments to yields. Yields on tax-exempt obligations were not computed on a tax equivalent basis. Nonaccrual loans were included in the computation of average balances and therefore have a zero yield. The yields set forth below include the effect of deferred loan origination fees and costs, and purchase discounts and premiums that are amortized or accreted to interest income.

 

     For the Three Months Ended June 30,  
     2015     2014  
     Average
Balance
     Interest      Average
Yield/
Cost
    Average
Balance
     Interest      Average
Yield/
Cost
 
     (Dollars in thousands)  

Assets:

                

Interest-earnings assets:

                

First mortgage loans, net (1)

   $ 19,960,416       $ 201,401         4.04   $ 23,083,914       $ 247,124         4.28

Consumer and other loans

     185,327         1,890         4.08        207,456         2,199         4.24   

Federal funds sold and other overnight deposits

     6,144,459         3,922         0.26        5,252,541         3,316         0.25   

Mortgage-backed securities at amortized cost

     3,282,724         16,109         1.96        7,646,018         41,723         2.18   

Federal Home Loan Bank stock

     310,489         3,243         4.18        337,942         3,338         3.95   

Investment securities, at amortized cost

     5,089,160         4,644         0.37        539,141         1,505         1.12   
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-earning assets

     34,972,575         231,209         2.64        37,067,012         299,205         3.23   
  

 

 

    

 

 

      

 

 

    

 

 

    

Noninterest-earnings assets

     880,597              901,004         
  

 

 

         

 

 

       

Total Assets

   $ 35,853,172            $ 37,968,016         
  

 

 

         

 

 

       

Liabilities and Shareholders’ Equity:

                

Interest-bearing liabilities:

                

Savings accounts

   $ 1,080,922         408         0.15        1,045,799         392         0.15   

Interest-bearing transaction accounts

     2,079,086         1,395         0.27        2,163,365         1,558         0.29   

Money market accounts

     3,883,437         1,918         0.20        4,788,273         2,366         0.20   

Time deposits

     10,829,676         29,650         1.10        12,112,789         35,857         1.19   
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing deposits

     17,873,121         33,371         0.75        20,110,226         40,173         0.80   
  

 

 

    

 

 

      

 

 

    

 

 

    

Repurchase agreements

     6,150,000         69,055         4.44        6,150,000         69,083         4.44   

Federal Home Loan Bank of New York advances

     6,025,000         72,227         4.74        6,025,000         72,267         4.75   
  

 

 

    

 

 

      

 

 

    

 

 

    

Total borrowed funds

     12,175,000         141,282         4.59        12,175,000         141,350         4.59   
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing liabilities

     30,048,121         174,653         2.31        32,285,226         181,523         2.23   
  

 

 

    

 

 

      

 

 

    

 

 

    

Noninterest-bearing liabilities:

                

Noninterest-bearing deposits

     696,527              659,994         

Other noninterest-bearing liabilities

     247,903              204,034         
  

 

 

         

 

 

       

Total noninterest-bearing liabilities

     944,430              864,028         
  

 

 

         

 

 

       

Total liabilities

     30,992,551              33,149,254         

Shareholders’ equity

     4,860,621              4,818,762         
  

 

 

         

 

 

       

Total Liabilities and Shareholders’ Equity

   $ 35,853,172            $ 37,968,016         
  

 

 

         

 

 

       

Net interest income/net interest rate spread (2)

  

   $ 56,556         0.33         $ 117,682         1.00   
     

 

 

         

 

 

    

Net interest-earning assets/net interest margin (3)

   $ 4,924,454            0.66   $ 4,781,786            1.29
  

 

 

         

 

 

       

Ratio of interest-earning assets to interest-bearing liabilities

  

        1.16           1.15

 

(1) Amount includes deferred loan costs and non-performing loans and is net of the allowance for loan losses.
(2) Determined by subtracting the annualized weighted average cost of total interest-bearing liabilities from the annualized weighted average yield on total interest-earning assets.
(3) Determined by dividing annualized net interest income by total average interest-earning assets.

 

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General. Net income was $35.7 million for the second quarter of 2015 as compared to $39.2 million for the second quarter of 2014. Both basic and diluted earnings per common share were $0.07 for the second quarter of 2015 as compared to both basic and diluted earnings per share of $0.08 for the second quarter of 2014. For the second quarter of 2015, our annualized return on average shareholders’ equity was 2.93% as compared to 3.25% for the corresponding period in 2014. Our annualized return on average assets for the second quarter of 2015 was 0.40% as compared to 0.41% for the second quarter of 2014. The decrease in the annualized return on average equity and assets is primarily due to the decrease in net income during the second quarter of 2015.

Interest and Dividend Income. Total interest and dividend income for the second quarter of 2015 decreased $68.0 million, or 22.7%, to $231.2 million from $299.2 million for the second quarter of 2014. The decrease in total interest and dividend income was due to a $2.10 billion decrease in the average balance of total interest-earning assets during the second quarter of 2015 to $34.97 billion from $37.07 billion for the second quarter of 2014 as well as a decrease in the annualized weighted-average yield on total interest earning assets. The decrease in the average balance of total interest-earning assets for the second quarter of 2015 as compared to the second quarter of 2014 was due primarily to repayments and sales of mortgage-related assets as a result of the low interest rate environment and our decision not to reinvest in low yielding, long term assets. As such, we maintained lower deposit rates and used the proceeds from the repayments and sales of mortgage related assets to fund the decrease in deposits.

The annualized weighted-average yield on total interest-earning assets was 2.64% for the second quarter of 2015 as compared to 3.23% for the second quarter of 2014. The decrease in the annualized weighted-average yield was due to a $4.55 billion increase in investment securities, which substantially consist of U.S. Treasury securities, with an annualized weighted-average yield of 0.37% and an increase of $891.9 million in the average balance of Federal funds sold and other overnight deposits with an average yield of 0.26% for the quarter ended June 30, 2015. The decrease was also due to continued low market interest rates earned on mortgage-related assets.

Interest on first mortgage loans decreased $45.7 million, or 18.5%, to $201.4 million for the second quarter of 2015 from $247.1 million for the second quarter of 2014. The decrease in interest on first mortgage loans was primarily due to a $3.12 billion decrease in the average balance of first mortgage loans to $19.96 billion for the second quarter of 2015 from $23.08 billion for the second quarter in 2014. The decrease in interest on first mortgage loans was also due to a 24 basis point decrease in the annualized weighted-average yield to 4.04% for the second quarter of 2015 from 4.28% for the second quarter of 2014.

The decrease in the annualized weighted-average yield earned on first mortgage loans during the second quarter of 2015 was due primarily to repayments of higher-yielding loans coupled with lower yields on new loan originations. The decrease in the average balance of first mortgage loans was due to a decrease in our loan production reflecting our continued limited appetite for adding long-term mortgage loans to our portfolio and our focus on originating variable-rate residential mortgage loans which are not as attractive to loan customers in the current low interest rate environment. During the first six months of 2015, our loan production (originations and purchases) amounted to $416.7 million as compared to $813.4 million for the same period of 2014. Loan production was offset by principal repayments of $2.16 billion in the first six months of 2015, as compared to principal repayments of $1.72 billion for the first six months of 2014.

Interest on consumer and other loans decreased $309,000 to $1.9 million for the second quarter of 2015 from $2.2 million for the second quarter of 2014 due to a decrease in the average balance of consumer and other loans. The average balance of consumer and other loans decreased $22.2 million to $185.3 million for the second quarter of 2015 from $207.5 million for the second quarter of 2014 and the annualized

 

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weighted-average yield earned decreased 16 basis points to 4.08% from 4.24% for those same respective periods. The average balance of consumer loans decreased as consumer loans is not a business that we actively pursue. The decrease in the annualized weighted-average yield is a result of current market interest rates.

Interest on mortgage-backed securities decreased $25.6 million to $16.1 million for the second quarter of 2015 from $41.7 million for the second quarter of 2014. This decrease was due primarily to a $4.37 billion decrease in the average balance of mortgage-backed securities to $3.28 billion for the second quarter of 2015 from $7.65 billion for the second quarter of 2014.

The decrease in the average balance of mortgage-backed securities during the second quarter of 2015 was due to sales of mortgage-backed securities and principal repayments continuing our strategy from 2014. During the second quarter of 2015, we sold $988.2 million of mortgage-backed securities to realize gains that otherwise would have decreased as repayments reduced the outstanding principal balance on these securities. The decrease in interest on mortgage-backed securities was also due to a decrease of 22 basis points in the annualized weighted-average yield of mortgage-backed securities to 1.96% for the second quarter of 2015 as compared to 2.18% for second quarter of 2014.

Interest on investment securities increased $3.1 million to $4.6 million for the second quarter of 2015 as compared to $1.5 million for the second quarter of 2014. This increase was due primarily to a $4.55 billion increase in the average balance of investment securities to $5.09 billion for the second quarter of 2015 from $539.1 million for the second quarter of 2014. The increase in the average balance of investment securities was due primarily to the purchase of $3.30 billion of U.S. Treasury securities in 2014 and $1.70 billion of U.S. Treasury securities during the first six months of 2015 as we invested cash from the mortgage-backed securities sales and loan repayments. This increase was partially offset by a decrease in the annualized weighted-average yield to 0.37% for the second quarter of 2015 from 1.12% for the second quarter of 2014. The decrease in the annualized weighted-average yield earned on investment securities is primarily due to the increase in the average balance of U.S. Treasury securities of $4.54 billion for the second quarter of 2015, which have an average yield of 0.28%.

Interest on Federal funds sold and other overnight deposits amounted to $3.9 million for the second quarter of 2015 as compared to $3.3 million for the second quarter of 2014. The increase in interest income on Federal funds sold and other overnight deposits was due to an increase in the average balance of Federal funds sold and other overnight deposits. The average balance of Federal funds sold and other overnight deposits amounted to $6.14 billion for the second quarter of 2015 as compared to $5.25 billion for the second quarter of 2014. The increase in the average balance was due primarily to repayments and sales of mortgage-related assets and our low appetite for adding long-term fixed-rate mortgage loans to our portfolio in the current low interest rate environment. The yield earned on Federal funds sold and other overnight deposits was 0.26% for the second quarter of 2015 as compared to 0.25% for the second quarter of 2014.

Interest Expense. Total interest expense for the quarter ended June 30, 2015 decreased $6.8 million, or 3.7%, to $174.7 million from $181.5 million for the quarter ended June 30, 2014. This decrease was primarily due to a $2.24 billion decrease in the average balance of total interest-bearing liabilities to $30.05 billion for the quarter ended June 30, 2015 from $32.29 billion for the quarter ended June 30, 2014. This was partially offset by an increase in the annualized weighted-average cost of total interest-bearing liabilities to 2.31% for the quarter ended June 30, 2015 as compared to 2.23% for the quarter ended June 30, 2014. The decrease in the average balance of total interest-bearing liabilities was due entirely to a decrease in the average balance of total deposits.

 

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The increase in the average cost of interest-bearing liabilities during the second quarter of 2015 was due to a decrease in the average balance of interest-bearing deposits, which have a lower weighted-average cost than our borrowed funds, the average balances of which remained unchanged. Interest-bearing deposits accounted for 59% of interest-bearing liabilities for the quarter ended June 30, 2015 as compared to 62% for the quarter ended June 30, 2014.

Interest expense on deposits decreased $6.8 million, or 16.9%, to $33.4 million for the second quarter of 2015 from $40.2 million for the second quarter of 2014. The decrease was primarily due to a $2.24 billion decrease in the average balance of interest-bearing deposits to $17.87 billion for the second quarter of 2015 from $20.11 billion for the second quarter of 2014. The decrease is also due to a decrease in the average cost of interest-bearing deposits of 5 basis points to 0.75% for the second quarter of 2015 from 0.80% for the second quarter of 2014. The decrease in the average cost of deposits for the second quarter of 2015 reflected the low market interest rates and our decision to maintain lower deposit rates to continue our balance sheet reduction.

Interest expense on our time deposit accounts decreased $6.2 million to $29.7 million for the second quarter of 2015 from $35.9 million for the second quarter of 2014. This decrease was due to a $1.28 billion decrease in the average balance of time deposit accounts to $10.83 billion for the second quarter of 2015 from $12.11 billion for the same period in 2014. The decrease was also due to a 9 basis point decrease in the annualized weighted-average cost to 1.10% for the second quarter of 2015 compared with 1.19% for the second quarter of 2014 as maturing time deposits were renewed or replaced by new time deposits at lower rates. The decline in the average balance of our time deposits reflects our decision to maintain lower deposit rates to continue our balance sheet reduction.

Interest expense on money market accounts decreased $448,000 to $1.9 million for the second quarter of 2015 from $2.4 million for the second quarter of 2014. This was due primarily to a $904.8 million decrease in the average balance of money market accounts to $3.88 billion for the second quarter of 2015 from $4.79 billion for the second quarter of 2014. The decline in the average balance of our money market accounts reflects our decision to maintain lower deposit rates to continue our balance sheet reduction. The annualized weighted-average cost of money market accounts was 0.20% for both the second quarter of 2015 and the second quarter of 2014.

Interest expense on borrowed funds amounted to $141.3 million for the second quarter of 2015 as compared to $141.4 million for the second quarter of 2014. The average cost of borrowed funds was 4.59% for both the quarters ended June 30, 2015 and 2014. The average balance of borrowings was unchanged for both comparative periods.

Net Interest Income. Net interest income decreased to $56.6 million for the second quarter of 2015 as compared to $117.7 million for the second quarter of 2014 reflecting the overall decrease in the average balance of interest-earning assets and interest-bearing liabilities, the continued low interest rate environment and a continued increase in the average balance of short-term liquid assets, including U.S. Treasury securities and Federal funds sold and other overnight deposits. Our interest rate spread decreased to 0.33% for the second quarter of 2015 as compared to 1.00% for the second quarter of 2014. Our net interest margin was 0.66% for the second quarter of 2015 as compared to 1.29% for the second quarter of 2014.

 

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The decreases in our interest rate spread and net interest margin for the second quarter of 2015 as compared to the second quarter of 2014 are primarily due to repayments and sales of higher yielding assets due to the low interest rate environment. The decrease was also due to an increase of $4.55 billion in investment securities with an annualized weighted-average yield of 0.37% and an increase of $891.9 million in the average balance of Federal funds sold and other overnight deposits to $6.14 billion with an average yield of 0.26% during this same period, all of which caused our average yield on interest earning assets to decline while the average cost of interest-bearing liabilities rose slightly. The compression of our net interest margin and the reduction in the size of our balance sheet may result in a decline in our net interest income in future periods.

Provision for Loan Losses. There was no provision for loan losses recorded for the second quarters of 2015 and 2014 due to improving home prices and economic conditions, a decrease in total delinquent loans and a decrease in the size of the loan portfolio. The decline in non-performing loans was primarily due to improving economic conditions, particularly in the housing and labor markets. The ALL amounted to $225.6 million at June 30, 2015 as compared to $235.3 million at December 31, 2014. See “Critical Accounting Policies – Allowance for Loan Losses.”

Our primary lending emphasis is the origination and purchase of one to four-family first mortgage loans on residential properties and, to a lesser extent, second mortgage loans on one-to four-family residential properties. Our loan growth is primarily concentrated in one-to four-family mortgage loans with original loan-to-value (“LTV”) ratios of less than 80%. At June 30, 2015, the average LTV ratio of our 2015 first mortgage loan originations and our total first mortgage loan portfolio were 64.9% and 60.4%, respectively, using appraised values at the time of origination. The value of the property used as collateral for our loans is dependent upon local market conditions. As part of our estimation of the ALL, we monitor changes in the values of homes in each market using indices published by various organizations. Based on our analysis of the data for the second quarter of 2015, we concluded that home values in our primary lending markets have increased approximately 2.8% since the second quarter of 2014.

Economic conditions in our primary market area continued to improve modestly during the first six months of 2015 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.

Non-performing loans amounted to $801.8 million at June 30, 2015 as compared to $852.0 million at December 31, 2014 and $1.01 billion at June 30, 2014. Non-performing loans at June 30, 2015 included $789.1 million of one- to four-family first mortgage loans as compared to $841.7 million at December 31, 2014 and $999.6 million at June 30, 2014. The ratio of non-performing loans to total loans was 4.05% at June 30, 2015 as compared to 3.95% at December 31, 2014 and 4.35% at June 30, 2014. Loans delinquent 30 to 59 days amounted to $235.1 million at June 30, 2015 as compared to $278.5 million at December 31, 2014 and $274.9 million at June 30, 2014. Loans delinquent 60 to 89 days amounted to $107.3 million at June 30, 2015 as compared to $129.1 million at December 31, 2014 and $136.5 million at June 30, 2014. Accordingly, total early stage delinquencies (loans 30 to 89 days past due) decreased $65.2 million to $342.4 million at June 30, 2015 from $407.6 million at December 31, 2014 and decreased $69.0 million from $411.4 million at June 30, 2014. Foreclosed real estate amounted to $100.2 million at June 30, 2015 as compared to $80.0 million at December 31, 2014 and $77.8 million at June 30, 2014.

 

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At June 30, 2015, the ratio of the ALL to non-performing loans was 28.13% as compared to 27.62% at December 31, 2014 and 25.29% at June 30, 2014. The ratio of the ALL to total loans was 1.14% at June 30, 2015 as compared to 1.09% at December 31, 2014 and 1.10% at June 30, 2014. Changes in the ratio of the ALL to non-performing loans are not, absent other factors, an indication of the adequacy of the ALL since there is not necessarily a direct relationship between changes in various asset quality ratios and changes in the ALL, non-performing loans and losses we may incur on our loan portfolio. A loan generally becomes non-performing when the borrower experiences financial difficulty. In many cases, the borrower also has a second mortgage or home equity loan on the property. In substantially all of these cases, we do not hold the second mortgage or home equity loan as that is not a business we have actively pursued.

We obtain updated collateral values by the time a loan becomes 180 days past due and annually thereafter. If the estimated fair value of the collateral (less estimated selling costs) is less than the recorded investment in the loan, we charge-off an amount to reduce the loan to the fair value of the collateral less estimated selling costs. As a result, certain losses inherent in our non-performing loans are being recognized as charge-offs which may result in a lower ratio of the ALL to non-performing loans. Charge-offs, net of recoveries, amounted to $4.9 million for the second quarter of 2015 as compared to $10.7 million for the second quarter of 2014. The decrease in charge-offs primarily reflects improving home prices in our market area that are reflected in the proceeds received from our foreclosure sales. Net charge-offs as a percentage of average loans was 0.10% for the quarter ended June 30, 2015 and 0.18% for the quarter ended June 30, 2014. Foreclosed real estate transactions (sales and write-downs) resulted in a net gain of $2.5 million for the second quarter of 2015 as compared to a net gain of $592,000 for the second quarter of 2014. 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 (excluding previous charge-offs) on the sale of foreclosed real estate was 14% for both the second quarter of 2015 and 2014.

As part of our estimation of the ALL, we monitor changes in the values of homes in each market using indices published by various organizations including the FHFA and Case Shiller. Our Asset Quality Committee (“AQC”) uses these indices and a stratification of our loan portfolio by state as part of its quarterly determination of the ALL. We do not apply different loss factors based on geographic locations since, at June 30, 2015, 85.1% of our loan portfolio and 79.2% of our non-performing loans are located in the New York metropolitan area. We obtain updated collateral values by the time a loan becomes 180 days past due and annually thereafter, which we believe identifies potential charge-offs more accurately than a house price index that is based on a wide geographic area and includes many different types of houses. However, we use house price indices to identify geographic trends in housing markets to determine if an overall adjustment to the ALL is required based on loans we have in those geographic areas and to determine if changes in the loss factors used in the ALL quantitative analysis are necessary. Our quantitative analysis of the ALL accounts for increases in non-performing loans by applying progressively higher risk factors to loans as they become more delinquent.

Due to the nature of our loan portfolio, our evaluation of the adequacy of our ALL is performed primarily on a “pooled” basis. Each quarter we prepare an analysis which categorizes the entire loan portfolio by certain risk characteristics such as loan type (fixed and variable one-to four-family, interest-only, reduced documentation, multi-family, commercial, construction, etc.), loan source (originated or purchased) and payment status (i.e., current or number of days delinquent). Loans with known losses are categorized separately. We assign estimated loss factors to the payment status categories on the basis of our assessment of the potential risk inherent in each loan type. These factors are periodically reviewed for appropriateness giving consideration to our loss experience, delinquency trends, portfolio growth and environmental factors such as the status of the regional economy and housing market, in order to ascertain

 

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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 10.9% at June 30, 2015 compared to 13.1% at June 30, 2014, reflecting improving home prices.

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.

As a result of our underwriting policies, our borrowers typically have a significant amount of equity, at the time of origination, in the underlying real estate that we use as collateral for our loans. Due to the ability of real estate values to fluctuate, the LTV ratios based on appraisals obtained at time of origination do not necessarily indicate the extent to which we may incur a loss on any given loan that may go into foreclosure. We consider the average LTV of our non-performing loans and our total portfolio in relation to the overall changes in house prices in our lending markets when determining the ALL. This provides us with a “macro” indication of the severity of potential losses that might be expected. Since substantially all our portfolio consists of first mortgage loans on residential properties, the LTV 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 June 30, 2015 was approximately 60.4%, using appraised values at the time of origination. The average LTV ratio of our non-performing loans was approximately 70.0% at June 30, 2015. Based on the valuation indices, house prices declined in the New York metropolitan area, where 79.2% of our non-performing loans were located at June 30, 2015, by approximately 17% from the peak of the market in 2006 through April 2015 and by 13% nationwide during that period. During 2015, home prices increased 2% in the New York metropolitan area and increased 5% 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 further 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 71.3% 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 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.

 

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Although we believe that we have established and maintained the ALL at adequate levels, additions may be necessary if future economic and other conditions differ substantially from the current operating environment. Changes in our loss experience on non-performing loans, the loss factors used in our quantitative analysis of the ALL and continued increases in overall loan delinquencies can have a significant impact on our need for increased levels of loan loss provisions in the future. Although we use the best information available, the level of the ALL remains an estimate that is subject to significant judgment and short-term change. See “Critical Accounting Policies.”

Non-Interest Income. Total non-interest income was $68.6 million for the second quarter of 2015 as compared to $21.2 million for the second quarter of 2014. Included in non-interest income for the second quarter of 2015 were $67.1 million in gains from the sale of $988.2 million of mortgage-backed securities. Included in non-interest income for the second quarter of 2014 were $19.5 million in gains from the sale of $565.6 million of mortgage-backed securities. The remainder of non-interest income is primarily made up of service fees and charges on deposit and loan accounts.

Non-Interest Expense. Total non-interest expense decreased $6.6 million to $66.5 million for the second quarter of 2015 as compared to $73.1 million for the second quarter of 2014. This decrease was due primarily to a $5.2 million decrease in the FDIC assessment and a $2.5 million decrease in other non-interest expense. These decreases were partially offset by a $1.8 million increase in compensation and employee benefit costs.

Compensation and employee benefit costs increased $1.8 million, or 5.6%, to $34.2 million for the second quarter of 2015 as compared to $32.4 million for the same period in 2014. The increase in compensation and employee benefit costs is primarily due to a $1.4 million increase in pension expense. The increase in pension expense is due primarily to a decrease in the discount rate used to calculate our pension obligations as well as the updated mortality tables published in October 2014 by the Society of Actuaries. See “Critical Accounting Policies – Pension and Other Post-Retirement Benefit Assumptions”. At June 30, 2015, we had 1,466 full-time equivalent employees as compared to 1,514 at June 30, 2014. While the reduction in full-time equivalent employees resulted in a reduction in compensation and employee benefit costs, this reduction was offset by costs incurred through the use of temporary employees and consultants to fill vacant positions during the pendency of the Merger.

For the second quarter of 2015 Federal deposit insurance expense decreased $5.2 million, or 39.7%, to $7.9 million compared to $13.1 million for the same period in 2014. This decrease was due primarily to a reduction in the size of our balance sheet and a decrease in our assessment rate.

Other non-interest expense decreased $2.5 million to $15.7 million for the quarter ended June 30, 2015 as compared to $18.2 million for the second quarter of 2014. This decrease was due primarily to a $1.9 million increase in net gains on the sale of foreclosed properties.

 

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Included in other non-interest expense were net gains of $2.5 million resulting from foreclosed real estate transactions for the second quarter of 2015 as compared to a net gain of $592,000 for the same period in 2014. We sold 61 properties during the second quarter of 2015 and had 313 properties in foreclosed real estate with a carrying value of $100.2 million, 65 of which were under contract to sell as of June 30, 2015. For the second quarter of 2014, we sold 70 properties and had 228 properties in foreclosed real estate with a carrying value of $77.8 million, 85 of which were under contract to sell as of June 30, 2014.

Income Taxes. Income tax expense amounted to $23.0 million for the second quarter of 2015 as compared to income tax expense of $26.6 million for the corresponding period in 2014. Our effective tax rate for the second quarter of 2015 was 39.26% compared with 40.41% for the second quarter of 2014.

 

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Comparison of Operating Results for the Six-Month Periods Ended June 30, 2015 and 2014

Average Balance Sheet. The following table presents the average balance sheets, average yields and costs and certain other information for the six months ended June 30, 2015 and 2014. The table presents the annualized average yield on interest-earning assets and the annualized average cost of interest-bearing liabilities. We derived the yields and costs by dividing annualized income or expense by the average balance of interest-earning assets and interest-bearing liabilities, respectively, for the periods shown. We derived average balances from daily balances over the periods indicated. Interest income includes fees that we considered to be adjustments to yields. Yields on tax-exempt obligations were not computed on a tax equivalent basis. Nonaccrual loans were included in the computation of average balances and therefore have a zero yield. The yields set forth below include the effect of deferred loan origination fees and costs, and purchase discounts and premiums that are amortized or accreted to interest income.

 

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     For the Six Months Ended June 30,  
     2015     2014  
     Average
Balance
     Interest      Average
Yield/
Cost
    Average
Balance
     Interest      Average
Yield/
Cost
 
     (Dollars in thousands)  

Assets:

                

Interest-earnings assets:

                

First mortgage loans, net (1)

   $ 20,418,516       $ 418,689         4.10   $ 23,309,914       $ 500,263         4.29

Consumer and other loans

     188,237         3,931         4.18        209,764         4,477         4.27   

Federal funds sold and other overnight deposits

     6,142,236         7,711         0.25        4,942,571         6,202         0.25   

Mortgage-backed securities at amortized cost

     3,685,292         36,245         1.97        8,034,614         90,424         2.25   

Federal Home Loan Bank stock

     315,592         6,962         4.41        342,496         7,494         4.38   

Investment securities, at amortized cost

     4,495,023         8,600         0.38        442,286         2,884         1.30   
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-earning assets

     35,244,896         482,138         2.74        37,281,645         611,744         3.28   
  

 

 

    

 

 

      

 

 

    

 

 

    

Noninterest-earnings assets

     855,414              905,703         
  

 

 

         

 

 

       

Total Assets

   $ 36,100,310            $ 38,187,348         
  

 

 

         

 

 

       

Liabilities and Shareholders’ Equity:

                

Interest-bearing liabilities:

                

Savings accounts

     1,071,638         800         0.15        1,033,539         770         0.15   

Interest-bearing transaction accounts

     2,085,483         2,770         0.27        2,179,399         3,118         0.29   

Money market accounts

     4,042,334         3,909         0.20        4,985,144         4,839         0.20   

Time deposits

     11,029,153         61,431         1.12        12,212,864         72,084         1.19   
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing deposits

     18,228,608         68,910         0.76        20,410,946         80,811         0.80   
  

 

 

    

 

 

      

 

 

    

 

 

    

Repurchase agreements

     6,150,000         137,255         4.44        6,401,934         142,730         4.43   

Federal Home Loan Bank of New York advances

     6,025,000         143,789         4.75        5,773,066         138,185         4.76   
  

 

 

    

 

 

      

 

 

    

 

 

    

Total borrowed funds

     12,175,000         281,044         4.59        12,175,000         280,915         4.59   
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing liabilities

     30,403,608         349,954         2.30        32,585,946         361,726         2.21   
  

 

 

    

 

 

      

 

 

    

 

 

    

Noninterest-bearing liabilities:

                

Noninterest-bearing deposits

     612,793              591,218         

Other noninterest-bearing liabilities

     256,163              207,396         
  

 

 

         

 

 

       

Total noninterest-bearing liabilities

     868,956              798,614         
  

 

 

         

 

 

       

Total liabilities

     31,272,564              33,384,560         

Shareholders’ equity

     4,827,746              4,802,788         
  

 

 

         

 

 

       

Total Liabilities and Shareholders’ Equity

   $ 36,100,310            $ 38,187,348         
  

 

 

         

 

 

       

Net interest income/net interest rate spread (2)

      $ 132,184         0.44         $ 250,018         1.07   
     

 

 

         

 

 

    

Net interest-earning assets/net interest margin (3)

   $ 4,841,288            0.76   $ 4,695,699            1.35
  

 

 

         

 

 

       

Ratio of interest-earning assets to interest-bearing liabilities

           1.16           1.14

 

(1) Amount includes deferred loan costs and non-performing loans and is net of the allowance for loan losses.
(2) Determined by subtracting the annualized weighted average cost of total interest-bearing liabilities from the annualized weighted average yield on total interest-earning assets.
(3) Determined by dividing annualized net interest income by total average interest-earning assets.

General. Net income was $41.5 million for the six months ended June 30, 2015 as compared to net income of $81.7 million for the six months ended June 30, 2014. Both basic and diluted earnings per common share were $0.08 for the six months ended June 30, 2015 as compared to both basic and diluted earnings per share of $0.16 for the six months ended June 30, 2014. For the six months ended June 30, 2015, our annualized return on average shareholders’ equity was 1.72%, compared with 3.40% for the six months ended June 30, 2014. Our annualized return on average assets for the six months ended June 30, 2015 was 0.23% as compared to 0.43% for the six months ended June 30, 2014. The decrease in the annualized return on average equity and assets is primarily due to the decrease in net income during the first six months of 2015.

 

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Interest and Dividend Income. Total interest and dividend income for the six months ended June 30, 2015 decreased $129.6 million, or 21.2%, to $482.1 million from $611.7 million for the six months ended June 30, 2014. The decrease in total interest and dividend income was primarily due to a decrease in the average balance of total interest-earning assets of $2.04 billion, or 5.5%, to $35.24 billion for the six months ended June 30, 2015 from $37.28 billion for the six months ended June 30, 2014. The decrease in total interest and dividend income was also due to a decrease of 54 basis points in the annualized weighted-average yield on total interest-earning assets to 2.74% for the six months ended June 30, 2015 from 3.28% for the six months ended June 30, 2014. The decrease in the average balance of total interest-earning assets was due primarily to repayments and sales of mortgage-related assets during the first six months of 2015 as a result of the low interest rate environment and our decision not to reinvest in low yielding, long term assets. The decrease in the annualized weighted-average yield was due to a $4.35 billion increase in the average balance of Federal funds sold and other overnight deposits, which had an average yield of 0.25% during the six months ended June 30, 2015 and a $4.05 million increase in the average balance of investment securities, which substantially consist of U.S. Treasury securities, with an annualized weighted-average yield of 0.38% for the six months ended June 30, 2015. The decrease was also due to lower market interest rates earned on mortgage-related assets.

For the six months ended June 30, 2015, interest on first mortgage loans decreased $81.6 million, or 16.3%, to $418.7 million from $500.3 million for the six months ended June 30, 2014. This was primarily due to a $2.89 billion decrease in the average balance of first mortgage loans to $20.42 billion for the six months ended June 30, 2015 from $23.31 billion for the six months ended June 30, 2014. The decrease in interest income on mortgage loans was also due to a 19 basis point decrease in the annualized weighted-average yield to 4.10% for the six months ended June 30, 2015 from 4.29% for the six months ended June 30, 2014.

The decrease in the average yield earned on first mortgage loans during the six months ended June 30, 2015 was due primarily to repayments of higher-yielding loans coupled with lower yields on new loan originations. Consequently, the average yield on our loan portfolio continued to decline during 2015.

Interest on consumer and other loans decreased $546,000 to $3.9 million for the six months ended June 30, 2015 from $4.5 million for the six months ended June 30, 2014. The average balance of consumer and other loans decreased $21.6 million to $188.2 million for the first six months of 2015 from $209.8 million for the first six months of 2014 and the annualized weighted-average yield earned decreased 9 basis points to 4.18% from 4.27% for those same respective periods. The average balance of consumer loans decreased as consumer loans is not a business that we actively pursue. The decrease in the annualized weighted-average yield is a result of current market interest rates.

Interest on mortgage-backed securities decreased $54.2 million to $36.2 million for the six months ended June 30, 2015 from $90.4 million for the six months ended June 30, 2014. This decrease was due primarily to a $4.34 billion decrease in the average balance of mortgage-backed securities to $3.69 billion during the first six months of 2015 from $8.03 billion for the first six months of 2014. The annualized weighted-average yield of mortgage-backed securities was 1.97% for the first six months of 2015 as compared to 2.25% for the first six months of 2014.

The decrease in the average balance of mortgage-backed securities during the six months ended June 30, 2015 was due to sales of mortgage-backed securities and principal repayments continuing our strategy from 2014. During the first six months of 2015, we sold $1.21 billion of mortgage-backed securities to realize gains that otherwise would have decreased as repayments reduced the outstanding principal balance on these securities.

 

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For the six months ended June 30, 2015, interest on investment securities increased $5.7 million to $8.6 million as compared to $2.9 million for the six months ended June 30, 2014. This increase was due to a $4.05 billion increase in the average balance of investment securities to $4.50 billion for the first six months of 2015 as compared to $442.3 million for the first six months of 2014. This increase was partially offset by a decrease of 92 basis points in the annualized weighted-average yield to 0.38% for the first six months of 2015 from 1.30% for the same period in 2014.

The increase in the average balance of investment securities during the six months ended June 30, 2015 was due primarily to the purchase of $3.30 billion of U.S. Treasury securities in 2014 and $1.70 billion of U.S. Treasury securities during the first six months of 2015 as we invested cash from the mortgage-backed securities sales and loan repayments. This increase was partially offset by a decrease in the annualized weighted-average yield to 0.38% for the six months ended June 30, 2015 from 1.30% for the six months ended June 30, 2014. The decrease in the annualized weighted-average yield earned on investment securities during the first six months of 2015 is primarily due to the increase in the average balance of U.S. Treasury securities of $4.04 billion for the first six months of 2015, which have an average yield of 0.28%.

Dividends on FHLB stock decreased $532,000 or 7.1%, to $7.0 million for the six months ended June 30, 2015 from $7.5 million for the six months ended June 30, 2014. The decrease was due to a $26.9 million decrease in the average balance of FHLB stock to $315.6 million for the first six months of 2015 as compared to $342.5 million for the first six months of 2014. The annualized weighted-average dividend yield earned on FHLB stock was 4.41% for the six months ended June 30, 2015 as compared to 4.38% for the same period in 2014.

Interest on Federal funds sold and other overnight deposits amounted to $7.7 million for the six months ended June 30, 2015 as compared to $6.2 million for the six months ended June 30, 2014 due primarily to an increase in the average balance of Federal funds sold and other overnight deposits. The average balance of Federal funds sold and other overnight deposits amounted to $6.14 billion for the first six months of 2015 as compared to $4.94 billion for the same period in 2014. The yield earned on Federal funds sold and other overnight deposits was 0.25% for both the six months ended June 30, 2015 and 2014.

The increase in the average balance of Federal funds sold and other overnight deposits for the six months ended June 30, 2015 was due primarily to repayments and sales of mortgage-related assets and our low appetite for adding long-term fixed-rate mortgage loans to our portfolio in the current low interest rate environment.

Interest Expense. For the six months ended June 30, 2015, total interest expense decreased $11.7 million, or 3.2%, to $350.0 million from $361.7 million for the six months ended June 30, 2014. This decrease was primarily due to a $2.19 billion, or 6.7%, decrease in the average balance of total interest-bearing liabilities to $30.40 billion for the six months ended June 30, 2015 compared with $32.59 billion for the six months ended June 30, 2014. This was partially offset by an increase in the annualized weighted-average cost of total interest-bearing liabilities to 2.30% for the six months ended June 30, 2015 as compared to 2.21% for the six months ended June 30, 2014.

The increase in the average cost of interest-bearing liabilities during the six months ended June 30, 2015 was due to a decrease in the average balance of interest-bearing deposits, which have a lower weighted-average cost than our borrowed funds, the average balances of which remained unchanged. Interest-bearing deposits accounted for 60% of interest-bearing liabilities for the six months ended June 30, 2015, as compared to 63% for the six months ended June 30, 2014.

 

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Interest expense on deposits decreased $11.9 million, or 14.7%, to $68.9 million from $80.8 million for the six months ended June 30, 2014. This decrease was due primarily to a decrease of $2.18 billion in the average balance of interest-bearing deposits to $18.23 billion during the first six months of 2015 from $20.41 billion for the first six months of 2014. The decrease is also due to a decrease in the average cost of interest-bearing deposits of 4 basis points to 0.76% for the first six months of 2015 from 0.80% for the first six months of 2014.

Interest expense on our time deposit accounts decreased $10.7 million to $61.4 million for the six months ended June 30, 2015 as compared to $72.1 million for the six months ended June 30, 2014. This decrease was due to a $1.18 billion decrease in the average balance of time deposit accounts to $11.03 billion for the six months ended June 30, 2015 from $12.21 billion for the same period in 2014. The decrease was also due to a 7 basis point decrease in the annualized weighted-average cost to 1.12% for the six months ended June 30, 2015 compared with 1.19% for the six months ended June 30, 2014 as maturing time deposits were renewed or replaced by new time deposits at lower rates. The decline in the average balance of our time deposits reflects our decision to maintain lower deposit rates to continue our balance sheet reduction.

Interest expense on money market accounts decreased $930,000 to $3.9 million for the six months ended June 30, 2015 from $4.8 million for the six months ended June 30, 2014. This decrease was the result of a $942.8 million decrease in the average balance of money market accounts to $4.04 billion for the six months ended June 30, 2015 from $4.99 billion for the six months ended June 30, 2014. The decline in the average balance of our money market accounts reflects our decision to maintain lower deposit rates to continue our balance sheet reduction. The annualized weighted-average cost remained the same at 0.20% for both the six months ended June 30, 2015 and 2014.

Interest expense on our interest-bearing transaction accounts decreased $348,000 to $2.8 million for the six months ended June 30, 2015 from $3.1 million for the same period in 2014. The decrease is due to a 2 basis point decrease in the annualized weighted-average cost to 0.27% for the six months ended June 30, 2015 as compared to 0.29% for the same period in 2014. The decrease was also the result of a $93.9 million decrease in the average balance to $2.09 billion for the six months ended June 30, 2015 as compared to $2.18 billion for the same period in 2014.

The decrease in the average cost of deposits for the first six months of 2015 reflected lower market interest rates and our decision to maintain lower deposit rates to continue our balance sheet reduction.

For the six months ended June 30, 2015 interest expense on borrowed funds was $281.0 million as compared to $280.9 million for the six months ended June 30, 2014. The average cost of borrowed funds was 4.59% for both the six months ended June 30, 2015 and 2014. The average balance of borrowings was unchanged for both comparative periods.

Borrowings amounted to $12.18 billion at June 30, 2015 with an average cost of 4.59%. Borrowings scheduled to mature within 12 months of June 30, 2015 amounted to $1.83 billion with an average cost of 4.94%.

 

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Net Interest Income. Net interest income decreased $117.8 million, or 47.1%, to $132.2 million for the first six months of 2015 as compared to $250.0 million for the first six months of 2014. Our interest rate spread decreased 63 basis points to 0.44% for the six months ended June 30, 2015 as compared to 1.07% for the six months ended June 30, 2014. Our net interest margin decreased 59 basis points to 0.76% for the six months ended June 30, 2015 as compared to 1.35% for the six months ended June 30, 2014. The decrease in our interest rate spread and net interest margin for the six months ended June 30, 2015 was primarily due to repayments and sales of higher yielding assets due to the low interest rate environment and an increase in the average balance of short-term liquid assets, consisting of Federal funds sold and other overnight deposits and U.S. Treasury securities with a weighted average yield of 0.26%.

Provision for Loan Losses. There was no provision for loan losses for the six months ended June 30, 2015 and 2014. No provisions were recorded due to improving home prices and economic conditions, a decrease in total delinquent loans and a decrease in the size of the loan portfolio. The decline in non-performing loans was primarily due to improving economic conditions, particularly in the housing and labor markets. The ALL amounted to $225.6 million at June 30, 2015 as compared to $255.0 million at June 30, 2014. We recorded our provision for loan losses during the first six months of 2015 based on our ALL methodology that considers a number of quantitative and qualitative factors, including the amount of non-performing loans, the loss experience of our non-performing loans, recent collateral valuations, conditions in the real estate and housing markets, current economic conditions, particularly continued elevated levels of unemployment, and growth or shrinkage in the loan portfolio. See “Comparison of Operating Results for the Three Months Ended June 30, 2015 and 2014 – Provision for Loan Losses.”

Non-Interest Income. Total non-interest income was $77.3 million for the first six months of 2015 as compared to $38.9 million for the same period in 2014. Included in non-interest income for the first six months of 2015 were $74.4 million in gains from the sale of $1.21 billion of mortgage-backed securities. Gains on the sales of securities amounted to $35.5 million for the six months ended June 30, 2014.

Non-Interest Expense. Total non-interest expense amounted to $141.2 million for the six months ended June 30, 2015 as compared to $152.8 million for the six months ended June 30, 2014. This decrease was due to an $8.1 million decrease in Federal deposit insurance expense and a $5.2 million decrease in other non-interest expense, partially offset by a $2.6 million increase in compensation and employee benefit expense.

Compensation and employee benefit costs increased $2.6 million, or 3.9%, to $68.6 million for the first six months of 2015 as compared to $66.0 million for the same period in 2014. The increase in compensation costs is primarily due to an increase of $3.0 million in pension plan expense. The increase in pension expense is due primarily to a decrease in the discount rate used to calculate our pension obligations as well as the updated mortality tables published in October 2014 by the Society of Actuaries. See “Critical Accounting Policies – Pension and Other Post-Retirement Benefit Assumptions”. This increase was partially offset by a decrease of $455,000 in medical expenses.

For the six months ended June 30, 2015 Federal deposit insurance expense decreased $8.1 million, or 30.0%, to $18.9 million from $27.0 million for the six months ended June 30, 2014. This decrease was due primarily to a reduction in the size of our balance sheet and a decrease in our assessment rate.

For the six months ended June 30, 2015, other non-interest expense decreased $5.2 million to $35.5 million as compared to $40.7 million for the same period in 2014. This decrease was due to a $3.0 million write down in the receivable related to our claim against the Lehman Brothers, Inc. estate in the first quarter of 2014 and a $2.2 million increase in the net gain on the sale of foreclosed properties.

 

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Included in other non-interest expense were net gains of $2.8 million resulting from foreclosed real estate transactions for the six months ended June 30, 2015 as compared to a net gain of $670,000 for the comparable period in 2014. We sold 110 properties during the first six months of 2015 as compared to 116 properties for the same period in 2014. Expenses associated with foreclosed real estate were $9.5 million and $8.4 million for the six months ended June 30, 2015 and 2014, respectively.

Income Taxes. Income tax expense amounted to $26.8 million for the six months ended June 30, 2015 compared with income tax expense of $54.4 million for the six months ended June 30, 2014. Our effective tax rate for the six months ended June 30, 2015 was 39.18% compared with 39.99% for the six months ended June 30, 2014.

 

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Asset Quality

Credit Quality

Historically, our primary lending emphasis has been the origination and purchase of one- to four-family first mortgage loans on residential properties. Our lending market areas generally consist of those states that are east of the Mississippi River and as far south as South Carolina. Loans located outside of the New York metropolitan area were part of our loan purchases. Our loan purchase activity has declined significantly as sellers from whom we have historically purchased loans are either retaining these loans in their portfolios or selling them to the GSEs.

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

 

     June 30, 2015     December 31, 2014  
            Percent            Percent  
     Amount      of Total     Amount      of Total  
     (Dollars in thousands)  

First mortgage loans:

          

One- to four-family:

          

Amortizing

   $ 16,342,897         82.61   $ 17,746,149         82.29

Interest-only

     2,459,933         12.44        2,874,024         13.33   

FHA/VA

     638,835         3.23        648,070         3.01   

Multi-family and commercial

     157,838         0.80        102,323         0.47   

Construction

     177         —          177         —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total first mortgage loans

     19,599,680         99.08        21,370,743         99.10   
  

 

 

    

 

 

   

 

 

    

 

 

 

Consumer and other loans

          

Fixed-rate second mortgages

     65,736         0.33        72,309         0.34   

Home equity credit lines

     100,013         0.51        104,372         0.48   

Other

     16,293         0.08        17,550         0.08   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total consumer and other loans

     182,042         0.92        194,231         0.90   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total loans

     19,781,722         100.00     21,564,974         100.00
     

 

 

      

 

 

 

Deferred loan costs

     90,608           99,155      

Allowance for loan losses

     (225,573        (235,317   
  

 

 

      

 

 

    

Net loans

   $ 19,646,757         $ 21,428,812      
  

 

 

      

 

 

    

At June 30, 2015, first mortgage loans secured by one-to four-family properties accounted for 98.3% of total loans. Fixed-rate mortgage loans represent 52.6% of our first mortgage loans. Compared to adjustable-rate loans, fixed-rate loans possess less inherent credit risk since loan payments do not change in response to changes in interest rates. In addition, we do not originate or purchase loans with payment options or negative amortization loans. We believe our loans, when made, were amply collateralized and otherwise conformed to our lending standards.

Included in our loan portfolio at June 30, 2015 are interest-only loans of approximately $2.46 billion, or 12.4% of total loans, as compared to $2.87 billion, or 13.3% of total loans, at December 31, 2014. These loans are originated as adjustable rate mortgage loans with initial terms of five, seven or ten years with the interest-only portion of the payment based upon the initial loan term, or offered on a 30-year fixed-rate loan, with interest-only payments for the first 10 years of the obligation. At the end of the initial 5-, 7- or 10-year interest-only period, the loan payment will adjust to include both principal and interest and will

 

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amortize over the remaining term so the loan will be repaid at the end of its original life. These loans are underwritten using the fully- amortizing payment amount. Interest-only loans of $288.6 million will become fully-amortizing within the next 12 months. Non-performing interest-only loans amounted to $90.3 million, or 11.3% of non-performing loans, at June 30, 2015 as compared to non-performing interest-only loans of $99.8 million, or 11.7% of non-performing loans, at December 31, 2014.

Prior to January 2014, we originated loans to certain eligible borrowers as reduced documentation loans. Loans that were eligible for reduced documentation processing were ARM loans, interest-only first mortgage loans and 10-, 15-, 20- and 30-year fixed-rate loans to owner-occupied primary and second home applicants. These loans were available in amounts up to 65% of the lower of the appraised value or purchase price of the property. Generally the maximum loan amount for reduced documentation loans was $750,000 and these loans were subject to higher interest rates than our full documentation loan products. Reduced documentation loans have an inherently higher level of risk compared to loans with full documentation. Reduced documentation loans represent 21.9% of our one- to four-family first mortgage loans at June 30, 2015. Included in our loan portfolio at June 30, 2015 are $3.73 billion of amortizing reduced documentation loans and $532.7 million of reduced documentation interest-only loans as compared to $3.99 billion and $620.0 million, respectively, at December 31, 2014. Non-performing loans at June 30, 2015 include $151.2 million of amortizing reduced documentation loans and $33.5 million of interest-only reduced documentation loans as compared to $168.2 million and $39.8 million, respectively, at December 31, 2014.

The following table presents the geographic distribution of our total loan portfolio, as well as the geographic distribution of our non-performing loans:

 

     At June 30, 2015     At December 31, 2014  
           Non-performing           Non-performing  
     Total loans     Loans     Total loans     Loans  

New Jersey

     42.4     41.9     42.4     42.6

New York

     28.1        29.4        27.8        27.8   

Connecticut

     14.6        7.9        14.6        7.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total New York metropolitan area

     85.1        79.2        84.8        78.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Pennsylvania

     4.8        1.8        4.8        1.5   

Massachusetts

     2.0        1.8        2.0        1.8   

Virginia

     1.6        2.0        1.6        1.9   

Maryland

     1.6        4.6        1.6        5.2   

Illinois

     1.5        4.3        1.5        4.7   

All others

     3.4        6.3        3.7        6.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total outside New York metropolitan area

     14.9        20.8        15.2        21.8   
  

 

 

   

 

 

   

 

 

   

 

 

 
     100.0     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Non-Performing Assets

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

 

     June 30, 2015     December 31, 2014  
     (Dollars in thousands)  

Non-accrual loans:

    

One-to four-family amortizing loans

   $ 659,459      $ 708,518   

One-to four-family interest-only loans

     90,289        99,779   

Multi-family and commercial mortgages

     6,058        1,543   

Construction loans

     177        177   

Consumer and other loans

     6,472        8,613   
  

 

 

   

 

 

 

Total non-accrual loans

     762,455        818,630   

Accruing loans delinquent 90 days or more (1)

     39,378        33,383   
  

 

 

   

 

 

 

Total non-performing loans

     801,833        852,013   

Foreclosed real estate, net

     100,193        79,952   
  

 

 

   

 

 

 

Total non-performing assets

   $ 902,026      $ 931,965   
  

 

 

   

 

 

 

Non-performing loans to total loans

     4.05     3.95

Non-performing assets to total assets

     2.55        2.55   

 

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

Non-performing loans exclude loans which have been restructured and are accruing and performing in accordance with the terms of their restructure agreement for at least six months. We discontinue accruing interest and we reverse any 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 $11.9 million of troubled debt restructurings that were previously accruing interest became 90 days or more past due during the first six months of 2015 for which we discontinued accruing interest and we reversed accrued, but unpaid interest.

 

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The following table is a comparison of our delinquent loans at June 30, 2015 and December 31, 2014:

 

     30-59 Days     60-89 Days     90 Days or More  
     Number      Principal     Number      Principal     Number      Principal  
     of      Balance     of      Balance     of      Balance  
     Loans      of Loans     Loans      of Loans     Loans      of Loans  
     (Dollars in thousands)  

At June 30, 2015

               

One- to four- family first mortgages:

          

Amortizing

     561       $ 188,751        240       $ 81,963        1,931       $ 659,459   

Interest-only

     26         18,730        24         15,402        154         90,289   

FHA/VA first mortgages

     146         26,332        52         8,668        202         39,378   

Multi-family and commercial mortgages

     —           —          1         688        6         6,058   

Construction loans

     —           —          —           —          1         177   

Consumer and other loans

     29         1,308        16         593        59         6,472