Loans and Allowance for Loan Losses

6 Months Ended

Jun. 30, 2011

Loans and Allowance for Loan Losses [Abstract]

Loans and Allowance for Loan Losses

6. Loans and Allowance for Loan Losses

Loans at June 30, 2011 and December 31, 2010 are summarized as follows:

	June 30, 2011		December 31, 2010
	(In thousands)
First mortgage loans:
One- to four-family
Amortizing	$	24,238,748	$	24,912,935
Interest-only		5,065,540		5,136,463
FHA/VA		718,204		499,724
Multi-family and commercial		42,460		48,067
Construction		8,368		9,081
Total first mortgage loans		30,073,320		30,606,270
Consumer and other loans:
Fixed—rate second mortgages		144,746		160,896
Home equity credit lines		134,688		137,467
Other		20,722		19,264
Total consumer and other loans		300,156		317,627
Total loans	$	30,373,476	$	30,923,897

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

	Credit Risk Profile based on Payment Activity
					(In thousands)
	One-to four- family				Other first
	first mortgage loans				Mortgages				Consumer and Other
					Multi-family				Fixed-rate
					and				second		Home Equity				Total
	Amortizing		Interest-only		Commercial		Construction		mortgages		credit lines		Other		Loans
June 30, 2011
Performing	$	24,246,317	$	4,873,257	$	41,929	$	1,366	$	144,284	$	131,422	$	20,662	$	29,459,237
Non-performing		710,635		192,283		531		7,002		462		3,266		60		914,239
Total	$	24,956,952	$	5,065,540	$	42,460	$	8,368	$	144,746	$	134,688	$	20,722	$	30,373,476
December 31, 2010
Performing	$	24,733,745	$	4,957,115	$	46,950	$	1,521	$	160,456	$	135,111	$	17,740	$	30,052,638
Non-performing		678,914		179,348		1,117		7,560		440		2,356		1,524		871,259
Total	$	25,412,659	$	5,136,463	$	48,067	$	9,081	$	160,896	$	137,467	$	19,264	$	30,923,897

	Credit Risk Profile by Internally Assigned Grade
					(In thousands)
	One-to four- family				Other first
	first mortgage loans				Mortgages				Consumer and Other
					Multi-family				Fixed-rate
					and				second		Home Equity
	Amortizing		Interest-only		Commercial		Construction		mortgages		credit lines		Other
June 30, 2011
Pass	$	24,190,053	$	4,846,639	$	25,705	$	—	$	144,067	$	130,833	$	19,848
Special mention		131,009		26,618		3,480		1,366		217		589		814
Substandard		635,290		192,283		4,228		5,302		462		3,174		60
Doubtful		600		—		9,047		1,700		—		92		—
Total	$	24,956,952	$	5,065,540	$	42,460	$	8,368	$	144,746	$	134,688	$	20,722
December 31, 2010
Pass		24,646,101	$	$4,927,545	$	37,697	$	1,521	$	160,216	$	134,408	$	17,737
Special mention		151,800		29,570		1,199		—		240		703		3
Substandard		614,758		179,348		1,117		7,560		440		2,356		1,524
Doubtful		—		—		8,054		—		—		—		—
Total	$	25,412,659	$	5,136,463	$	48,067	$	9,081	$	160,896	$	137,467	$	19,264

Loan classifications are defined as follows:

• Pass — These loans are protected by the current net worth, payment status 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 are classified as substandard. We generally obtain updated valuations for one- to four- family mortgage loans by the time a loan becomes 180 days past due. If necessary, we charge-off an amount to reduce the carrying value of the loan to the value of the underlying property, less estimated selling costs. Since we record the charge-off when we receive the updated valuation, we typically do not have any residential first mortgages classified as doubtful or loss. We evaluate multi- family, commercial and construction loans individually and base our classification on the debt service capability of the underlying property as well as secondary sources of repayment such as the borrower’s and any guarantor’s ability and willingness to provide debt service.

Originating loans secured by residential real estate is our primary business. Our financial results may be adversely affected by changes in prevailing economic conditions, either nationally or in our local New Jersey and metropolitan New York market areas, including decreases in real estate values, adverse employment conditions, the monetary and fiscal policies of the federal and state government and other significant external events. As a result of our lending practices, we have a concentration of loans secured by real property located primarily in New Jersey, New York and Connecticut. At June 30, 2011 approximately 79.9% of our total loans are in the New York metropolitan area.

Included in our loan portfolio at June 30, 2011 and December 31, 2010 are $5.07 billion and $5.14 billion, respectively, of interest-only loans. These loans are originated as adjustable-rate mortgage (“ARM”) loans with initial terms of five, seven or ten years with the interest-only portion of the payment based upon the initial loan term, or offered on a 30-year fixed-rate loan with interest-only payments for the first 10 years of the obligation. At the end of the initial 5-, 7- or 10-year interest-only period, the loan payment will adjust to include both principal and interest and will amortize over the remaining term so the loan will be repaid at the end of its original life. We had $192.3 million and $179.3 million of non-performing interest-only loans at June 30, 2011 and December 31, 2010, respectively.

In addition to our full documentation loan program, we originate loans to certain eligible borrowers as limited documentation loans. We have originated these types of loans for over 15 years. Loans eligible for limited documentation processing are ARM loans, interest-only first mortgage loans and 10-, 15-, 20-, 30- and 40-year fixed-rate loans to owner-occupied primary and second home applicants. These loans are available in amounts up to 70% of the lower of the appraised value or purchase price of the property. Generally the maximum loan amount for limited documentation loans is $750,000 and these loans are subject to higher interest rates than our full documentation loan products. We also allow certain borrowers to obtain mortgage loans without verification of income. However, in these cases, we do verify the borrowers’ assets. These loans are subject to somewhat higher interest rates than our regular products, and are generally limited to a maximum loan-to-value ratio of 60%. Limited documentation and no income verification loans have an inherently higher level of risk compared to loans with full documentation.

Included in our loan portfolio at June 30, 2011 are $3.70 billion of originated amortizing limited documentation loans and $971.8 million of originated limited documentation interest-only loans. Non-performing loans at June 30, 2011 include $112.4 million of originated amortizing limited documentation loans and $62.6 million of originated interest-only limited documentation loans. Included in our loan portfolio at December 31, 2010 are $3.38 billion of originated amortizing limited documentation loans and $938.8 million of originated limited documentation interest-only loans. Non-performing loans at December 31, 2010 include $91.5 million of originated amortizing limited documentation loans and $58.3 million of originated interest-only limited documentation loans.

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

													90 Days
					90 Days		Total		Current		Total		or more
	30-59 Days		60-89 Days		or more		Past Due		Loans		Loans		accruing
	(Dollars in thousands)
At June 30, 2011
One- to four-family first mortgages:
Amortizing	$	338,590	$	141,260	$	710,635	$	1,190,485	$	23,766,467	$	24,956,952	$	75,345
Interest-only		65,416		26,618		192,283		284,317		4,781,223		5,065,540		—
Multi-family and commercial mortgages		1,334		1,717		531		3,582		38,878		42,460		—
Construction loans		—		—		7,002		7,002		1,366		8,368		—
Consumer and other loans:														—
Fixed-rate second mortgages		832		217		462		1,511		143,235		144,746		—
Home equity lines of credit		1,739		589		3,266		5,594		129,094		134,688		—
Other		625		40		60		725		19,997		20,722		—
Total	$	408,536	$	170,441	$	914,239	$	1,493,216	$	28,880,260	$	30,373,476	$	75,345
At December 31, 2010
One- to four-family first mortgages:
Amortizing	$	363,583	$	161,530	$	678,914	$	1,204,027	$	24,208,632	$	25,412,659	$	64,156
Interest-only		47,479		29,570		179,348		256,397		4,880,066		5,136,463		—
Multi-family and commercial mortgages		3,199		1,199		1,117		5,515		42,552		48,067		—
Construction loans		—		—		7,560		7,560		1,521		9,081		—
Consumer and other loans:
Fixed-rate second mortgages		896		240		440		1,576		159,320		160,896		—
Home equity lines of credit		2,419		703		2,356		5,478		131,989		137,467		—
Other		1,330		3		1,524		2,857		16,407		19,264		—
Total	$	418,906	$	193,245	$	871,259	$	1,483,410	$	29,440,487	$	30,923,897	$	64,156

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

We adopted Accounting Standards Update (“ASU”) No. 2011-02 on April 1, 2011 which provides additional guidance to creditors for evaluating whether a modification or restructuring of a receivable is a troubled debt restructuring. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that the restructuring constitutes a concession and the borrower is experiencing financial difficulties. As a result of our adoption of ASU No. 2011-02, we determined that approximately $26.2 million of residential mortgage loans were troubled debt restructurings that were not previously considered as such.

Loans modified in a troubled debt restructuring totaled $41.8 million at June 30, 2011 of which $1.9 million are 30 days past due, $1.8 million are 60-89 days past due and $2.6 million are 90 days or more past due. The remaining loans modified were current at the time of the restructuring and have complied with the terms of their restructure agreement. At December 31, 2010, loans modified in a troubled debt restructuring totaled $11.1 million. These loans were current at the time of their restructuring and were in compliance with the terms of their restructure agreement at December 31, 2010.

Loans that were modified in a troubled debt restructuring primarily represent loans that have been in a deferred payment plan for an extended period of time, generally in excess of six months, and loans that have had past due amounts capitalized as part of the loan balance. These loans are individually evaluated for impairment to determine if the carrying value of the loan is in excess of the fair value of the collateral. Since these loans are secured by real estate, fair value is estimated through current appraisals. As a result of our impairment evaluation, we charged-off $875,000 during the six months ended June 30, 2011 and established an ALL of $4.9 million for loans classified as troubled debt restructurings.

The following table is a comparison of our troubled debt restructuring by class as of the date indicated.

	June 30, 2011						December 31, 2010
			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
			(In thousands)						(In thousands)
Troubled debt restructurings:
One-to-four family first mortgages:
Amortizing		79	$	31,876	$	30,797		6	$	2,014	$	2,031
Interest-only		5		3,077		3,086		1		1,093		1,103
Multi-family and commercial mortgages		2		7,911		7,911		2		7,911		7,911
Total		86	$	42,864	$	41,794		9	$	11,018	$	11,045

Upon request, we will generally agree to a short-term payment plan for certain residential mortgage loan borrowers. Many of these customers are current as to their mortgage payments, but may be anticipating a short-term cash flow need and want to protect their credit history. The extent of these plans is generally limited to a six-month deferral of principal payments. Pursuant to these short-term payment plans, we do not modify mortgage notes, recast legal documents, extend maturities or reduce interest rates. We also do not forgive any interest or principal. These loans have not been classified as troubled debt restructurings since we collect all principal and interest, the deferral period is short and any reduction in the present value of cash flows is due to the insignificant delay in the timing of principal payments. As a result, these restructurings did not meet the requirements in ASU No. 2011-02 to be considered a troubled debt restructuring. The principal balance of loans with payment plans at June 30, 2011 amounted to $27.9 million, including $20.5 million of loans that are current, $2.5 million that are 30 to 59 days past due, $2.9 million that are 60 to 89 days past due and $2.0 million that are 90 days or more past due. The principal balance of loans with payment plans at December 31, 2010 amounted to $81.3 million, including loans that were determined to be troubled debt restructurings as a result of our adoption of ASU No. 2011-02. Of the $81.3 million of loans in payment plans at December 31, 2010, $54.4 million were current, $13.9 million were 30 to 59 days past due, $4.7 million were 60 to 89 days past due and $8.3 million were 90 days or more past due.

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, 2011						At December 31, 2010
				Non-performing						Non-performing
	Total loans			Loans			Total loans			Loans
New Jersey		43.9	%		48.0	%		44.0	%		45.7	%
New York		21.0			18.3			19.9			18.7
Connecticut		15.0			6.4			14.5			6.5
Total New York metropolitan area		79.9			72.7			78.4			70.9
Pennsylvania		4.1			1.4			3.1			1.2
Virginia		3.1			3.9			3.5			4.6
Illinois		2.6			4.7			3.0			4.9
Maryland		2.3			4.1			2.7			4.4
All others		8.0			13.2			9.3			14.0
Total outside New York metropolitan area		20.1			27.3			21.6			29.1
		100.0	%		100.0	%		100.0	%		100.0	%

The ultimate ability to collect the loan portfolio is subject to changes in the real estate market and future economic conditions. Since 2009, there has been a decline in house prices, both nationally and locally. Housing market conditions in our lending market areas weakened during this period as evidenced by reduced levels of sales, increasing inventories of houses on the market, declining house prices and an increase in the length of time houses remain on the market.

Although we believe that we have established and maintained the ALL at adequate levels, additions may be necessary if future economic and other conditions differ substantially from the current operating environment. While we continue to adhere to prudent underwriting standards, we are geographically concentrated in the New York metropolitan area of the United States and, therefore, are not immune to negative consequences arising from overall economic weakness and, in particular, a sharp downturn in the housing industry. Continued decreases in real estate values could adversely affect the value of property used as collateral for our loans. No assurance can be given in any particular case that our loan-to-value ratios will provide full protection in the event of borrower default. Adverse changes in the economy and increases in the unemployment rate may have a negative effect on the ability of our borrowers to make timely loan payments, which would have an adverse impact on our earnings. A further increase in loan delinquencies would decrease our net interest income and may adversely impact our loss experience on non-performing loans which may result in an increase in the loss factors used in our quantitative analysis of the ALL, causing increases in our provision and ALL. Although we use the best information available, the level of the ALL remains an estimate that is subject to significant judgment and short-term change.

We generally obtain new collateral values by the time a loan becomes 180 days delinquent. If the estimated fair value of the collateral (less estimated selling costs) is less than the recorded investment in the loan, we charge-off an amount to reduce the loan to the fair value of the collateral less estimated selling costs. As a result, certain losses inherent in our non-performing loans are being recognized as charge-offs which may result in a lower ratio of the ALL to non-performing loans. Net charge-offs amounted to $44.3 million for the first six months of 2011 as compared to $47.1 million for the first six months of 2010. These charge-offs were primarily due to the results of our reappraisal process for our non-performing residential first mortgage loans. We disposed of 74 loans through the foreclosure process during 2011 with a final net gain on sale (after previous charge-offs of $8.2 million) of approximately $822,000. Write-downs on foreclosed real estate amounted to $3.7 million for the first six months of 2011. The results of our reappraisal process and our recent charge-off history are also considered in the determination of the ALL. At June 30, 2011 the average loan-to-value (“LTV”) ratio (using appraised values at the time of origination) of our non-performing one- to four-family mortgage loans was 74.9% and was 60.8% for our total mortgage loan portfolio. Thus, the ratio of the ALL to non-performing loans needs to be viewed in the context of the underlying LTV ratios of the non-performing loans and the relative decline in home values.

As part of our estimation of the ALL, we monitor changes in the values of homes in each market using indices published by various organizations including the Federal Housing Finance Agency (“FHFA”) and Case-Shiller. Our Asset Quality Committee uses these indices and a stratification of our loan portfolio by state as part of its quarterly determination of the ALL. We generally obtain updated collateral values by the time a loan becomes 180 days delinquent which we believe identifies potential charge-offs more accurately than a house price index that is based on a wide geographic area and includes many different types of houses. However, we use the house price indices to identify geographic areas experiencing weaknesses in housing markets to determine if an overall adjustment to the ALL is required based on loans we have in those geographic areas and to determine if changes in the loss factors used in the ALL quantitative analysis are necessary. Our quantitative analysis of the ALL accounts for increases in non-performing loans by applying progressively higher risk factors to loans as they become more delinquent. Based on our recent loss experience on non-performing loans, we increased certain loss factors used in our quantitative analysis of the ALL for our one- to four- family first mortgage loans during the second quarter of 2011. The recent adjustment in our loss factors did not have a material effect on the ultimate level of our ALL or on our provision for loan losses. If our future loss experience requires additional increases in our loss factors, this may result in increased levels of loan loss provisions.

In addition to our quantitative systematic methodology, we also use qualitative analyses to determine the adequacy of our ALL. Our qualitative analyses include further evaluation of economic factors, such as trends in the unemployment rate, as well as a ratio analysis to evaluate the overall measurement of the ALL. This analysis includes a review of delinquency ratios, net charge-off ratios and the ratio of the ALL to both non-performing loans and total loans. This qualitative review is used to reassess the overall determination of the ALL and to ensure that directional changes in the ALL and the provision for loan losses are supported by relevant internal and external data.

We consider the average LTV ratio of our non-performing loans and our total portfolio in relation to the overall changes in house prices in our lending markets when determining the ALL. This provides us with a “macro” indication of the severity of potential losses that might be expected. Since substantially all our portfolio consists of first mortgage loans on residential properties, the LTV ratio is particularly important to us when a loan becomes non-performing. The weighted average LTV ratio in our one- to four-family mortgage loan portfolio at June 30, 2011 was 60.8%, using appraised values at the time of origination. The weighted average LTV ratio of our non-performing loans was 74.9% at June 30, 2011, using appraised values at the time of origination. Based on the valuation indices, house prices have declined in the New York metropolitan area, where 72.7% of our non-performing loans were located at June 30, 2011, by approximately 23% from the peak of the market in 2006 through April 2011 and by 32% nationwide during that period. Changes in house values may affect our loss experience which may require that we change the loss factors used in our quantitative analysis of the ALL. There can be no assurance whether significant further declines in house values may occur and result in higher loss experience and increased levels of charge-offs and loan loss provisions.

There were no loans held for sale at June 30, 2011 and December 31, 2010.

The following is a summary of loans, by class, on which the accrual of income has been discontinued and loans that are contractually past due 90 days or more but have not been classified as non-accrual at June 30, 2011 and December 31, 2010:

	June 30, 2011		December 31, 2010
	(In thousands)
Non-accrual loans:
One-to four-family amortizing loans	$	635,290	$	614,758
One-to four-family interest-only loans		192,283		179,348
Multi-family and commercial mortgages		531		1,117
Construction loans		7,002		7,560
Fixed-rate second mortgages		462		440
Home equity lines of credit		3,266		2,356
Other loans		60		1,524
Total non-accrual loans		838,894		807,103
Accruing loans delinquent 90 days or more		75,345		64,156
Total non-performing loans	$	914,239	$	871,259

The total amount of interest income on non-accrual loans that would have been recognized during the first six months of 2011, if interest on all such loans had been recorded based upon original contract terms amounted to approximately $26.1 million. The total amount of interest income received during the first six months of 2011 on non-accrual loans was immaterial. The Bank is not obligated to lend additional funds to borrowers on non-accrual status.

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 dates indicated:

			Unpaid					Average		Interest
	Recorded		Principal			Related		Recorded		Income
	Investment		Balance			Allowance		Investment		Recognized
					(In thousands)
June 30, 2011
One-to four-family amortizing loans	$	30,797	$	31,832		$	—	$	31,345	$	793
One-to four-family interest-only loans		3,086		3,086			—		3,086		64
Multi-family and commercial mortgages		5,285		8,578			3,293		5,306		243
Construction loans		5,388		7,002			1,614		5,626		—
Total	$	44,556	$	50,498		$	4,907	$	45,363	$	1,100
December 31, 2010
One-to four-family amortizing loans	$	2,031	$	2,031		$	—	$	2,031	$	106
One-to four-family interest-only loans		1,104		1,104			—		1,104		55
Multi-family and commercial mortgages		5,712		9,161			3,449		9,159		485
Construction loans		5,863		7,560			1,697		6,949		—
Total	$	14,710	$	19,856		$	5,146	$	19,243	$	646

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,
	2011			2010			2011			2010
				(In thousands)
Balance at beginning of period	$	255,283		$	165,829		$	236,574		$	140,074
Charge-offs		(28,551	)		(24,156	)		(51,997	)		(49,027	)
Recoveries		5,574			1,310			7,729			1,936
Net charge-offs		(22,977	)		(22,846	)		(44,268	)		(47,091	)
Provision for loan losses		30,000			50,000			70,000			100,000
Balance at end of period	$	262,306		$	192,983		$	262,306		$	192,983

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

	One-to four-			Multi-family
	Family			and Commercial							Consumer and
	Mortgages			Mortgages				Construction			Other Loans			Total
							(In thousands)
Balance at December 31, 2010	$	227,224		$	4,419			$	1,728		$	3,203		$	236,574
Provision for loan losses		70,429			(298	)			(87	)		(44	)		70,000
Charge-offs		(51,852	)		—				—			(145	)		(51,997	)
Recoveries		7,728			—				—			1			7,729
Net charge-offs		(44,124	)		—				—			(144	)		(44,268	)
Balance at June 30, 2011	$	253,529		$	4,121			$	1,641		$	3,015		$	262,306
Loan portfolio:
Balance at June 30, 2011
Individually evaluated for impairment	$	33,883		$	8,578			$	7,002		$	—		$	49,463
Collectively evaluated for impairment		29,988,609			33,882				1,366			300,156			30,324,013