Loans and Allowance for Loan Losses

3 Months Ended

Mar. 31, 2012

Loans and Allowance for Loan Losses [Abstract]

Loans and Allowance for Loan Losses

6. Loans and Allowance for Loan Losses

Loans at March 31, 2012 and December 31, 2011 are summarized as follows:

	March 31, 2012		December 31, 2011
	(In thousands)
First mortgage loans:
One- to four-family
Amortizing	$	22,858,188	$	23,480,909
Interest-only		4,832,558		4,779,863
FHA/VA		720,720		734,781
Multi-family and commercial		38,657		39,634
Construction		4,669		4,929
Total first mortgage loans		28,454,792		29,040,116
Consumer and other loans:
Fixed–rate second mortgages		124,826		131,597
Home equity credit lines		130,337		134,502
Other		21,343		21,130
Total consumer and other loans		276,506		287,229
Total loans	$	28,731,298	$	29,327,345

There were no loans held for sale at March 31, 2012 and December 31, 2011.

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

Credit Risk Profile based on Payment Activity
(In thousands)
	One-to four- family				Other first										Total
	first mortgage loans				Mortgages				Consumer and Other						Loans
					Multi-family				Fixed-rate
					and				second		Home Equity
March 31, 2012	Amortizing		Interest-only		Commercial		Construction		mortgages		credit lines		Other
Performing	$	22,765,110	$	4,595,150	$	35,536	$	373	$	123,809	$	126,392	$	20,343	$	27,666,713
Non-performing		813,798		237,408		3,121		4,296		1,017		3,945		1,000		1,064,585
Total	$	23,578,908	$	4,832,558	$	38,657	$	4,669	$	124,826	$	130,337	$	21,343	$	28,731,298
December 31, 2011
Performing	$	23,417,785	$	4,566,001	$	37,411	$	585	$	130,869	$	130,897	$	21,110	$	28,304,658
Non-performing		797,905		213,862		2,223		4,344		728		3,605		20		1,022,687
Total	$	24,215,690	$	4,779,863	$	39,634	$	4,929	$	131,597	$	134,502	$	21,130	$	29,327,345

Credit Risk Profile by Internally Assigned Grade
	(In thousands)
	One-to four- family				Other first										Total
	first mortgage loans				Mortgages				Consumer and Other						Loans
					Multi-family				Fixed-rate
					and				second		Home Equity
March 31, 2012	Amortizing		Interest-only		Commercial		Construction		mortgages		credit lines		Other
Pass	$	22,678,188	$	4,563,706	$	23,068	$	80	$	123,511	$	125,737	$	18,439	$	27,532,729
Special mention		140,223		25,883		2,563		—		298		655		548		170,170
Substandard		760,497		242,969		13,026		4,589		1,017		3,945		2,356		1,028,399
Total	$	23,578,908	$	4,832,558	$	38,657	$	4,669	$	124,826	$	130,337	$	21,343	$	28,731,298
December 31, 2011
Pass	$	23,325,078	$	4,536,090	$	23,997	$	—	$	130,649	$	130,487	$	19,231	$	28,165,532
Special mention		146,391		26,428		2,989		—		220		410		593		177,031
Substandard		744,221		217,345		12,648		4,929		728		3,605		1,306		984,782
Total	$	24,215,690	$	4,779,863	$	39,634	$	4,929	$	131,597	$	134,502	$	21,130	$	29,327,345

Loan classifications are defined as follows:

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

• Special Mention – These loans have potential weaknesses that deserve 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 obtain updated valuations for one- to four- family mortgage loans by the time a loan becomes 180 days past due. If necessary, we charge-off an amount to reduce the carrying value of the loan to the value of the underlying property, less estimated selling costs. This process is repeated on an annual basis for each loan that remains past due 180 days or more in order to mitigate the risk of falling real estate values. Since we record the charge-off when we receive the updated valuation, we typically do not have any residential first mortgages classified as doubtful or loss. We evaluate multi-family, commercial and construction loans individually and base our classification on the debt service capability of the underlying property as well as secondary sources of repayment such as the 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 (the “New York metropolitan area”). At March 31, 2012 approximately 81.8% of our total loans are in the New York metropolitan area.

Included in our loan portfolio at March 31, 2012 and December 31, 2011 are $4.83 billion and $4.78 billion, respectively, of interest-only one-to four family residential mortgage loans. These loans are originated as adjustable-rate mortgage (“ARM”) loans with initial terms of five, seven or ten years with the interest-only portion of the payment based upon the initial loan term, or offered on a 30-year fixed-rate loan with interest-only payments for the first 10 years of the obligation. At the end of the initial 5-, 7- or 10-year interest-only period, the loan payment will adjust to include both principal and interest and will amortize over the remaining term so the loan will be repaid at the end of its original life. We had $237.4 million and $213.9 million of non-performing interest-only one-to four-family residential mortgage loans at March 31, 2012 and December 31, 2011, respectively.

In addition to our full documentation loan program, we originate loans to certain eligible borrowers as limited documentation loans. We have originated these types of loans for over 15 years. Loans eligible for limited documentation processing are ARM loans, interest-only first mortgage loans and 10-, 15-, 20- and 30-year fixed-rate loans to owner-occupied primary and second home applicants. These loans are available in amounts up to 65% of the lower of the appraised value or purchase price of the property. Generally the maximum loan amount for limited documentation loans is $750,000 and these loans are subject to higher interest rates than our full documentation loan products. Limited documentation loans have an inherently higher level of risk compared to loans with full documentation. Included in our loan portfolio at March 31, 2012 are $3.89 billion of originated amortizing limited documentation loans and $955.3 million of originated limited documentation interest-only loans. Non-performing loans at March 31, 2012 include $137.4 million of originated amortizing limited documentation loans and $74.6 million of originated interest-only limited documentation loans. Included in our loan portfolio at December 31, 2011 are $3.85 billion of originated amortizing limited documentation loans and $956.2 million of originated limited documentation interest-only loans. Non-performing loans at December 31, 2011 included $126.9 million of originated amortizing limited documentation loans and $71.0 million or originated interest-only limited documentation loans.

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

													90 Days or
					90 Days		Total		Current		Total		more and
	30-59 Days		60-89 Days		or more		Past Due		Loans		Loans		accruing (1)
At March 31, 2012	(Dollars in thousands)
One- to four-family first mortgages:
Amortizing	$	307,581	$	151,988	$	813,798	$	1,273,367	$	22,305,541	$	23,578,908	$	103,631
Interest-only		75,526		27,957		237,408		340,891		4,491,667		4,832,558		—
Multi-family and commercial mortgages		—		767		3,121		3,888		34,769		38,657		—
Construction loans		—		293		4,296		4,589		80		4,669		—
Consumer and other loans:														—
Fixed-rate second mortgages		539		298		1,017		1,854		122,972		124,826		—
Home equity lines of credit		1,737		655		3,945		6,337		124,000		130,337		—
Other		1		50		1,000		1,051		20,292		21,343		—
Total	$	385,384	$	182,008	$	1,064,585	$	1,631,977	$	27,099,321	$	28,731,298	$	103,631
At December 31, 2011
One- to four-family first mortgages:
Amortizing	$	357,099	$	158,546	$	797,905	$	1,313,550	$	22,902,140	$	24,215,690	$	97,476
Interest-only		63,360		27,833		213,862		305,055		4,474,808		4,779,863		—
Multi-family and commercial mortgages		1,521		393		2,223		4,137		35,497		39,634		—
Construction loans		—		—		4,344		4,344		585		4,929		—
Consumer and other loans:
Fixed-rate second mortgages		1,202		220		728		2,150		129,447		131,597		—
Home equity lines of credit		2,471		410		3,605		6,486		128,016		134,502		—
Other		1,536		2		20		1,558		19,572		21,130		—
Total	$	427,189	$	187,404	$	1,022,687	$	1,637,280	$	27,690,065	$	29,327,345	$	97,476

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

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

	At March 31, 2012						At December 31, 2011
				Non-performing						Non-performing
	Total loans			Loans			Total loans			Loans
New Jersey		44.3	%		50.2	%		44.7	%		51.3	%
New York		22.9			20.0			22.4			19.5
Connecticut		14.6			7.3			14.6			6.8
Total New York metropolitan area		81.8			77.5			81.7			77.6
Pennsylvania		4.7			1.7			4.7			1.4
Virginia		2.6			2.8			2.6			2.9
Illinois		2.3			4.6			2.3			4.7
Maryland		2.0			3.6			2.0			3.2
All others		6.6			9.8			6.7			10.2
Total Outside New York metropolitan area		18.2			22.5			18.3			22.4
		100.0	%		100.0	%		100.0	%		100.0	%

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 March 31, 2012 and December 31, 2011:

	March 31, 2012		December 31, 2011
	(In thousands)
Non-accrual loans:
One-to four-family amortizing loans	$	710,167	$	700,429
One-to four-family interest-only loans		237,408		213,862
Multi-family and commercial mortgages		3,121		2,223
Construction loans		4,296		4,344
Fixed-rate second mortgages		1,017		728
Home equity lines of credit		3,945		3,605
Other loans		1,000		20
Total non-accrual loans		960,954		925,211
Accruing loans delinquent 90 days or more (1)		103,631		97,476
Total non-performing loans	$	1,064,585	$	1,022,687

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

The total amount of interest income on non-accrual loans that would have been recognized during the first quarter of 2012, if interest on all such loans had been recorded based upon original contract terms amounted to approximately $14.8 million. Hudson City is not committed to lend additional funds to borrowers on non-accrual status.

Loans modified in a troubled debt restructuring totaled $75.6 million at March 31, 2012 of which $7.7 million are 30 to 59 days past due, $4.9 million are 60 to 89 days past due and $11.8 million are 90 days or more past due and are included in non-accrual loans. The remaining troubled debt restructurings were current at March 31, 2012 and have complied with the terms of their restructure agreement. We discontinue accruing interest on troubled debt restructurings that are past due 90 days or more or if we believe we will not collect all amounts contractually due. Approximately $2.4 million of troubled debt restructurings that were previously accruing interest became 90 days or more past due during the first quarter of 2012 for which we ceased accruing interest. At December 31, 2011, loans modified in a troubled debt restructuring totaled $66.5 million of which $7.4 million were 30 to 59 days past due, $4.8 million were 60 to 89 days past due and $11.4 million were 90 days or more past due and are included in non-accrual loans at that date.

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

	March 31, 2012						December 31, 2011
			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		168	$	65,048	$	60,827		146	$	57,336	$	53,831
Interest-only		12		7,013		6,878		9		4,970		4,799
Multi-family and commercial mortgages		2		7,911		7,911		2		7,911		7,911
Total		182	$	79,972	$	75,616		157	$	70,217	$	66,541

Upon request and subject to credit review, 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 no more than 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 expect to 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 March 31, 2012 amounted to $11.0 million, including $7.7 million of loans that are current, $683,000 that are 30 to 59 days past due, $1.8 million that are 60 to 89 days past due and $814,000 that are non-accrual loans and 90 days or more past due. The principal balance of loans with payment plans at December 31, 2011 amounted to $28.1 million, including $19.7 million of loans that were current, $2.0 million were 30 to 59 days past due, $3.1 million were 60 to 89 days past due and $3.3 million were 90 days or more past due at that date.

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:

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
	(In thousands)
March 31, 2012
One-to four-family amortizing loans	$	60,827	$	64,922	$	—	$	62,978	$	676
One-to four-family interest-only loans		6,878		7,053		—		6,678		62
Multi-family and commercial mortgages		8,131		11,162		3,031		10,908		121
Construction loans		3,581		4,296		715		4,280		—
Total	$	79,417	$	87,433	$	3,746	$	84,844	$	859
December 31, 2011
One-to four-family amortizing loans	$	53,831	$	56,876	$	—	$	55,595	$	2,411
One-to four-family interest-only loans		4,799		4,974		—		4,891		159
Multi-family and commercial mortgages		6,548		10,266		3,718		10,294		485
Construction loans		3,622		4,344		722		4,752		—
Total	$	68,800	$	76,460	$	4,440	$	75,532	$	3,055

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

							For The Year Ended
	For the Three Months Ended March 31,						December 31,
	2012			2011			2011
	(In thousands)
Balance at beginning of year	$	273,791		$	236,574		$	236,574
Charge-offs		(23,490	)		(23,446	)		(97,096	)
Recoveries		5,412			2,155			14,313
Net charge-offs		(18,078	)		(21,291	)		(82,783	)
Provision for loan losses		25,000			40,000			120,000
Balance at end of period	$	280,713		$	255,283		$	273,791

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, 2011	$	264,922		$	4,382		$	734		$	3,753		$	273,791
Provision for loan losses		25,688			(740	)		(17	)		69			25,000
Charge-offs		(23,470	)		—			—			(20	)		(23,490	)
Recoveries		5,411			—			—			1			5,412
Net charge-offs		(18,059	)		—			—			(19	)		(18,078	)
Balance at March 31, 2012	$	272,551		$	3,642		$	717		$	3,803		$	280,713
Loan portfolio:
Balance at March 31, 2012
Individually evaluated for impairment	$	67,705		$	11,162		$	4,296		$	—		$	83,163
Collectively evaluated for impairment		28,343,761			27,495			373			276,506			28,648,135
Allowance
Individually evaluated for impairment	$	2,197		$	3,031		$	715		$	—		$	5,943
Collectively evaluated for impairment		270,354			611			2			3,803			274,770

The ultimate ability to collect the loan portfolio is subject to changes in the real estate market and future economic conditions. Since 2008, there has been a decline in house prices, both nationally and locally. Housing market conditions in our lending market areas weakened during this period as evidenced by reduced levels of sales, increasing inventories of houses on the market, declining house prices and an increase in the length of time houses remain on the market.

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

We obtain new collateral values by the time a loan becomes 180 days delinquent and then annually thereafter. If the estimated fair value of the collateral (less estimated selling costs) is less than the recorded investment in the loan, we charge-off an amount to reduce the loan to the fair value of the collateral less estimated selling costs. As a result, certain losses inherent in our non-performing loans are being recognized as charge-offs which may result in a lower ratio of the ALL to non-performing loans. Net charge-offs amounted to $18.1 million for March 31, 2012 as compared to $21.3 million for the corresponding period in 2011.