Hudson City Bancorp, Inc. Reports Quarterly Earnings Of $72.3 Million

PARAMUS, N.J., July 25, 2012 /PRNewswire/ -- Hudson City Bancorp, Inc. (NASDAQ: HCBK) (the "Company"), the holding company for Hudson City Savings Bank (the "Bank"), reported today net income of $72.3 million for the quarter ended June 30, 2012 as compared to net income of $96.0 million for the quarter ended June 30, 2011. Diluted earnings per share amounted to $0.15 for the second quarter of 2012 as compared to diluted earnings per share of $0.19 for the second quarter of 2011.  For the six months ended June 30, 2012, the Company reported net income of $145.3 million as compared to a net loss of $459.7 million for the same period in 2011.  Diluted earnings per share was $0.29 for the six months ended June 30, 2012 as compared to a net loss per share of $0.93 for the same period in 2011.  The net loss for the first six months of 2011 was the result of a restructuring of the Company's balance sheet in the first quarter of 2011. 

The Company also reported today that the Board of Directors declared a quarterly cash dividend of $0.08 per share payable on August 29, 2012 to shareholders of record on August 8, 2012.

Financial highlights for the second quarter of 2012 are as follows:

• Our net interest rate spread and net interest margin were 1.91% and 2.12%, respectively, for the second quarter of 2012 as compared to 1.95% and 2.15%, respectively, for the linked first quarter of 2012 and 1.94% and 2.14%, respectively, for the second quarter of 2011.
• The provision for loan losses amounted to $25.0 million for both the first and second quarters of 2012, as compared to $30.0 million for the second quarter of 2011.  Net charge-offs amounted to $17.8 million for the second quarter of 2012 as compared to $18.1 million for the linked first quarter of 2012 and $23.0 million for the second quarter of 2011. 
• Total assets decreased 3.9% to $43.59 billion at June 30, 2012 from $45.36 billion at December 31, 2011. 
• Borrowings decreased $1.65 billion to $13.43 billion at June 30, 2012 from $15.08 billion at December 31, 2011. 
• The Bank's Tier 1 leverage capital increased to 9.44% at June 30, 2012 as compared to 8.83% at December 31, 2011.
• Non-interest expense decreased $2.2 million, or 2.6%, to $83.6 million for the quarter ended June 30, 2012.

Denis J. Salamone, the Company's Acting Chairman and Chief Executive Officer commented, "Over the past several quarters, we have discussed the challenges facing our traditional residential portfolio lending model.  The extraordinarily low market interest rates combined with the GSEs participation in the mortgage market persist and make it difficult for us to profitably grow our business in the same manner as we have in the past.  It is apparent that these market conditions are likely to continue for the foreseeable future.  Accordingly, we have been developing a variety of strategies to help us adapt to the new environment in which we operate."

Mr. Salamone continued, "One of those strategies is to extend our core mortgage lending business by diversifying our loan production channels and revenue sources.  We have been a residential mortgage lender since our inception in 1868.  Historically, we have kept all of our loans on our balance sheet.  While we will continue to offer loans to keep in our portfolio, we will also begin to offer residential mortgage loans that are eligible for sale in the secondary market.  We may either retain or release servicing on these loans. This will enable us to offer rates that are typically lower than we can offer for a portfolio product and capture more customer relationships."   

Mr. Salamone further commented, "We will also enter the commercial real estate market in our existing market footprint.  Our retail branch network and residential mortgage relationships provides us with a valuable opportunity to offer these products.  Initially, we will participate in syndicated commercial real estate and multi-family mortgage loan deals as we build capacity to grow organically in this market through originations.  These types of loans are typically shorter-term than our residential mortgages and therefore help to balance our risk profile.  In addition, we can offer commercial real estate customers deposit products that we believe will strengthen relationships and increase the amount and types of deposit accounts on our balance sheet."

Mr. Salamone concluded, "The initiatives to originate to sell residential loans and enter the commercial real estate market are a natural extension of our business and we expect to implement such initiatives in 2013.  The new products and services should provide additional revenues and a more diversified customer base and balance sheet.  While our primary business will always be residential lending, in order to move our Company forward in the "new normal" we must take advantage of the opportunities in our exceptional market areas and leverage our well-known and respected franchise to reach our full potential.  We will continue to examine and evaluate additional strategies to further diversify our business and build shareholder value." 

Statement of Financial Condition Summary

Total assets decreased $1.77 billion, or 3.9%, to $43.59 billion at June 30, 2012 from $45.36 billion at December 31, 2011. The decrease in total assets reflected a $1.16 billion decrease in net loans, a $419.1 million decrease in total mortgage-backed securities, a $97.8 million decrease in FHLB stock and an $89.8 million decrease in investment securities. 

Net loans amounted to $27.98 billion at June 30, 2012 as compared to $29.14 billion at December 31, 2011.  During the first six months of 2012, our loan production amounted to $2.53 billion as compared to $2.99 billion for the same period in 2011.  Loan production was offset by principal repayments of $3.59 billion in the first six months of 2012, as compared to principal repayments of $3.46 billion for the first six months of 2011.  Loan production declined during the first six months of 2012 due to a decline in loan originations which reflects our low appetite for adding long-term fixed rate loans in the current low market interest rate environment.   The decrease in net loans was also due to continued elevated levels of refinancing activity caused by low market interest rates.

Total mortgage-backed securities decreased $419.1 million to $12.87 billion at June 30, 2012 from $13.29 billion at December 31, 2011.  The decrease in mortgage-backed securities reflected repayments of $1.74 billion, partially offset by purchases of $1.32 billion of mortgage-backed securities issued by government-sponsored entities ("GSEs").

Total liabilities decreased $1.87 billion, or 4.6%, to $38.93 billion at June 30, 2012 from $40.80 billion at December 31, 2011.  The decrease in total liabilities primarily reflected a $1.65 billion decrease in borrowed funds and a decrease in total deposits of $863.2 million.  Borrowings amounted to $13.43 billion at June 30, 2012 as compared to $15.08 billion at December 31, 2011.  The decrease in borrowed funds consists of the maturity of short-term borrowings during the first six months of 2012. These decreases were partially offset by an increase in due to brokers of $629.1 million. Due to brokers at June 30, 2012 represents securities purchased in the second quarter of 2012 with settlement dates in the third quarter of 2012. 

Total shareholders' equity increased $104.0 million to $4.66 billion at June 30, 2012 from $4.56 billion at December 31, 2011. The increase was primarily due to net income of $145.3 million for the six months ended June 30, 2012 and an increase in accumulated other comprehensive income of $26.6 million. The increase was partially offset by cash dividends paid to common shareholders of $79.4 million.  At June 30, 2012, our shareholders' equity to asset ratio was 10.70% and our tangible book value per share was $9.08.

Accumulated other comprehensive income amounted to $66.3 million at June 30, 2012 and included a $114.2 million after-tax net unrealized gain on securities available for sale ($193.1 million pre-tax), partially offset by a $47.9 million after-tax accumulated other comprehensive loss related to the funded status of our employee benefit plans.  The accumulated other comprehensive income of $39.7 million at December 31, 2011 included an $89.3 million after-tax net unrealized gain on securities available for sale ($150.9 million pre-tax), partially offset by a $49.6 million after-tax accumulated other comprehensive loss related to the funded status of our employee benefit plans. 

Statement of Income Summary

The Federal Open Market Committee of the Board of Governors of the Federal Reserve System (the "FOMC") noted that the economy has been expanding moderately during the first six months of 2012. However, growth in employment has slowed in recent months, and the unemployment rate remains at elevated levels.  The FOMC noted that business fixed investment has continued to expand and household spending appears to be rising at a slower pace than earlier in the year while the housing sector remains depressed. The national unemployment rate was 8.2% during June 2012 representing a slight decline from 8.5% in December 2011.  The FOMC decided to maintain the overnight lending rate at zero to 0.25% during the second quarter of 2012.  As a result, market interest rates have remained at low levels, and consequently, the yields on our mortgage-related assets have decreased during the first six months of 2012.

In addition, the Federal Reserve program "Operation Twist", which was set to expire at the end of June, has been extended until the end of the year. This program consists of the purchase of Treasury securities with remaining maturities of 6 to 30 years funded by the sale of an equal amount of Treasury securities with remaining maturities of 3 years or less.  The extension of this program will continue to put downward pressure on longer-term interest rates.   

Net interest income decreased $48.6 million, or 17.8%, to $224.3 million for the second quarter of 2012 as compared to $272.9 million for the second quarter of 2011.  Our interest rate spread decreased slightly to 1.91% for the second quarter of 2012 as compared to 1.95% for the first quarter of 2012 and 1.94% for the second quarter of 2011.  Our net interest margin was 2.12% for the second quarter of 2012 as compared to 2.15% for the linked first quarter of 2012 and 2.14% for the second quarter of 2011.  The decrease in net interest income also reflects the overall decrease in interest-earning assets and interest-bearing liabilities.

Net interest income decreased $70.9 million, or 13.4%, to $458.4 million for the first six months of 2012 as compared to $529.3 million for the first six months of 2011.  Our interest rate spread increased 23 basis points to 1.94% for the six months ended June 30, 2012 as compared to 1.71% for the six months ended June 30, 2011.  Our net interest margin increased 21 basis points to 2.13% as compared to 1.92% for the those same respective periods.  The increase in our interest rate spread and net interest margin for the first six months of 2012 is primarily due to the effects of the extinguishment of $4.3 billion of borrowings during the fourth quarter of 2011 as well as a restructuring of the Company's balance sheet in the first quarter of 2011. 

The restructuring of the Company's balance sheet in the first quarter of 2011 resulted in the extinguishment of $12.5 billion of structured putable borrowings with an average cost of 3.56%.  The extinguishment of borrowings was funded by the sale of $8.66 billion of securities and new short-term borrowings of $5.0 billion.  The balance sheet restructuring (the "Restructuring Transaction") reduced after-tax earnings by $649.3 million.  In addition to the Restructuring Transaction, we extinguished $4.3 billion of structured borrowings during the fourth quarter of 2011 using cash proceeds from the calls of investment securities and repayments on mortgage-related assets (the Restructuring Transaction and the extinguishment of debt in the fourth quarter of 2011 are collectively referred to as the "Transactions"). 

Total interest and dividend income for the second quarter of 2012 decreased $122.0 million, or 22.1%, to $430.7 million from $552.7 million for the second quarter of 2011. The decrease in total interest and dividend income was primarily due to a decrease in the average balance of total interest-earning assets of $8.67 billion, or 17.1%, to $42.10 billion for the second quarter of 2012 as compared to $50.77 billion for the second quarter of 2011.  The decrease in total interest and dividend income was also due to a decrease of 26 basis points in the annualized weighted-average yield on total interest-earning assets to 4.09% for the second quarter of 2012 from 4.35% for the second quarter in 2011.  The decrease in the average balance of total interest-earning assets was due primarily to the effects of the debt extinguishments in the fourth quarter of 2011.

Total interest and dividend income for the six months ended June 30, 2012 decreased $290.8 million, or 24.9%, to $879.5 million from $1.17 billion for the six months ended June 30, 2011. The decrease in total interest and dividend income was primarily due to a decrease in the average balance of total interest-earning assets of $11.79 billion, or 21.6%, to $42.73 billion for the first six months of 2012 from $54.52 billion for the same period in 2011.  The decrease in total interest and dividend income was also due to a decrease of 17 basis points in the annualized weighted-average yield on total interest-earning assets to 4.12% for the six months ended June 30, 2012 from 4.29% for the same period in 2011.  The decrease in the average balance of total interest-earning assets was due primarily to the effects of the Transactions.

Interest on first mortgage loans decreased $44.4 million, or 11.7%, to $336.0 million for the second quarter of 2012 as compared to $380.4 million for the second quarter of 2011.  This was primarily due to a $1.89 billion decrease in the average balance of first mortgage loans to $27.96 billion for the second quarter of 2012 from $29.85 billion for the same quarter in 2011.  The decrease in interest income on mortgage loans was also due to a 29 basis point decrease in the weighted-average yield to 4.81% for the second quarter of 2012 from 5.10% for the second quarter of 2011.

For the six months ended June 30, 2012, interest on first mortgage loans decreased $84.5 million, or 11.1%, to $678.8 million as compared to $763.3 million for the six months ended June 30, 2011.  This was primarily due to a 29 basis point decrease in the weighted-average yield to 4.81% for the six months ended June 30, 2012 from 5.10% for the six months ended June 30, 2011.  The decrease in interest income on mortgage loans was also due to a$1.70 billion decrease in the average balance of first mortgage loans to $28.25 billion for the six months ended June 30, 2012 from $29.95 billion for the six months ended June 30, 2011.  

The decreases in the average yields earned during the three and six month periods ended June 30, 2012 were due to lower market interest rates on mortgage products and also due to the continued mortgage refinancing activity.  Refinancing activity, which resulted in continued elevated levels of loan repayments, also caused the decreases in average balance of our first mortgage loans to decline for those same periods. 

Interest on mortgage-backed securities decreased $42.5 million to $82.7 million for the second quarter of 2012 from $125.2 million for the second quarter of 2011.  This decrease was due primarily to a $3.16 billion decrease in the average balance of mortgage-backed securities to $12.27 billion during the second quarter of 2012 from $15.43 billion for the second quarter of 2011. The decrease in the average balance was due primarily to principal repayments.  The decrease in interest on mortgage-backed securities was also due to a 55 basis point decrease in the weighted-average yield to 2.70% for the second quarter of 2012 from 3.25% for the second quarter of 2011.  The decrease in the weighted-average yield is a result of principal repayments on securities that have higher yields than the existing portfolio as well as the re-pricing of variable rate mortgage-backed securities in this continued low interest rate environment.

Interest on mortgage-backed securities decreased $135.2 million to $173.3 million for the six months ended June 30, 2012 as compared to $308.5 million for the six months ended June 30, 2011.  This decrease was due primarily to a $5.95 billion decrease in the average balance of mortgage-backed securities to $12.51 billion during the first six months of 2012 from $18.46 billion for the same period in 2011.  The decrease in interest on mortgage-backed securities was also due to a 57 basis point decrease in the weighted-average yield to 2.77% for the first six months of 2012 from 3.34% for the first six months of 2011.  The decrease in the average balance of mortgage-backed securities was due primarily to the effects of the Restructuring Transaction. The decrease in the weighted-average yield is a result of principal repayments on securities that have higher yields than the existing portfolio as well as the re-pricing of variable rate mortgage-backed securities in this continued low interest rate environment.

Interest on investment securities decreased $30.0 million to $2.8 million for the second quarter of 2012 as compared to $32.8 million for the second quarter of 2011.  This decrease was due primarily to a $3.51 billion decrease in the average balance of investment securities to $413.9 million for the second quarter of 2012 from $3.92 billion for the second quarter of 2011.  In addition, the average yield of investment securities decreased 68 basis points to 2.66% for the second quarter of 2012 from 3.34% for the second quarter of 2011.  The decrease in the average balance is due primarily to calls of $3.4 billion of investment securities during 2011.

For the six months ended June 30, 2012, interest on investment securities decreased $60.7 million to $5.7 million as compared to $66.4 million for the six months ended June 30, 2011.  This decrease was due primarily to a $3.55 billion decrease in the average balance of investment securities to $408.2 million for the first six months of 2012 from $3.96 billion for the first six months of 2011.  The decrease in the average balance is due primarily to calls of $3.4 billion of investment securities during 2011.  In addition, the average yield of investment securities decreased 54 basis points to 2.81% for the first six months of 2012 from 3.35% for the same period in 2011.  The decrease in the average yield earned reflects current market interest rates.

Dividends on Federal Home Loan Bank of New York ("FHLB") stock decreased $4.1 million, or 42.7%, to $5.5 million for the second quarter of 2012 from $9.6 million for the second quarter of 2011.  This decrease was due primarily to a $353.7 million decrease in the average balance of FHLB stock to $434.7 million for the second quarter of 2012 from $788.4 million for the second quarter of 2011.  The effect of the decrease was partially offset by a 20 basis point increase in the average dividend yield earned to 5.09% for the second quarter of 2012 as compared to 4.89% for the second quarter of 2011.  The decrease in the average balance of FHLB stock was primarily due to mandatory redemptions of stock due to a decrease in the amount of borrowings outstanding with the FHLB.

Dividends on FHLB stock decreased $8.4 million, or 37.5%, to $14.0 million for the six months ended June 30, 2012 as compared to $22.4 million for the comparable period in 2011.  The decrease was primarily due to a $363.5 million decrease in the average balance of FHLB stock to $464.8 million for the first six months of 2012 as compared to $828.3 million for the same period in 2011.  The effect of the decrease was partially offset by a 62 basis point increase in the average dividend yield earned to 6.04% as compared to 5.42% for the first six months of 2011.

Interest on Federal funds sold amounted to $438,000 for the second quarter of 2012 as compared to $707,000 for the second quarter of 2011.  The average balance of Federal funds sold amounted to $740.5 million for the second quarter of 2012 as compared to $480.4 million for the second quarter of 2011.  The yield earned on Federal funds sold was 0.24% for the 2012 second quarter and 0.29% for the 2011 second quarter. 

Interest on Federal funds sold amounted to $1.0 million for the six months ended June 30, 2012 as compared to $1.4 million for the first six months of 2011.  The average balance of Federal funds sold amounted to $821.9 million for the first six months of 2012 as compared to $1.01 billion for the same period in 2011.  The yield earned on Federal funds sold was 0.25% for the six months ended June 30, 2012 and 0.28% for the six months ended June 30, 2011.  The decrease in the average balance of Federal funds sold is primarily a result of the timing of the debt extinguishments and the proceeds from securities sales and new borrowings in the Transactions.  

Total interest expense for the quarter ended June 30, 2012 decreased $73.4 million, or 26.2%, to $206.4 million from $279.8 million for the quarter ended June 30, 2011.  This decrease was primarily due to an $8.49 billion, or 18.2%, decrease in the average balance of total interest-bearing liabilities to $38.08 billion for the quarter ended June 30, 2012 compared with $46.57 billion for the second quarter of 2011. The decrease was also due to a 23 basis point decrease in the weighted-average cost of total interest-bearing liabilities to 2.18% for the quarter ended June 30, 2012 compared with 2.41% for the quarter ended June 30, 2011.  The decrease in the average balance of total interest-bearing liabilities was due primarily to the effects of the debt extinguishments in the fourth quarter of 2011 as well as $7.70 billion of borrowings that matured during the second half of 2011 and the first six months of 2012.

For the six months ended June 30, 2012 total interest expense decreased $219.8 million, or 34.3%, to $421.1 million from $640.9 million for the six months ended June 30, 2011.  This decrease was primarily due to an $11.23 billion, or 22.4%, decrease in the average balance of total interest-bearing liabilities to $38.81 billion for the six months ended June 30, 2012 compared with $50.04 billion for the six months ended June 30, 2011. The decrease was also due to a 40 basis point decrease in the weighted-average cost of total interest-bearing liabilities to 2.18% for the six months ended June 30, 2012 compared with 2.58% for the six months ended June 30, 2011.  The decrease in the average balance of total interest-bearing liabilities was due primarily to the reduction of total borrowings as part of the Transactions.

Interest expense on deposits decreased $22.8 million, or 27.0%, to $61.6 million for the second quarter of 2012 from $84.4 million for the second quarter of 2011.  This decrease is due primarily to a decrease in the average cost of interest-bearing deposits of 34 basis points to 1.02% for the second quarter of 2012 from 1.36% for the second quarter of 2011.  The decrease is also due to a $758.2 million decrease in the average balance of interest-bearing deposits to $24.21 billion during the second quarter of 2012 from $24.97 billion for the second quarter of 2011.

For the six months ended June 30, 2012, interest expense on deposits decreased $39.2 million, or 23.2%, to $129.5 million from $168.7 million for the six months ended June 30, 2011.  This decrease is due primarily to a decrease in the average cost of interest-bearing deposits of 31 basis points to 1.06% for the first six months of 2012 from 1.37% for the first six months of 2011.  The decrease is also due to a $388.9 million decrease in the average balance of interest-bearing deposits to $24.51 billion during the first six months of 2012 from $24.90 billion for the first six months of 2011.

The decrease in the average cost of deposits for the first six months of 2012 reflected lower market interest rates and our decision to lower deposit rates to slow deposit growth.  At June 30, 2012, time deposits scheduled to mature within one year totaled $8.30 billion with an average cost of 1.08%.  These time deposits are scheduled to mature as follows: $3.25 billion with an average cost of 0.88% in the third quarter of 2012, $2.34 billion with an average cost of 1.21% in the fourth quarter of 2012, $1.41 billion with an average cost of 1.27% in the first quarter of 2013 and $1.30 billion with an average cost of 1.15% in the second quarter of 2013.  Based on our deposit retention experience and current pricing strategy, we anticipate that a significant portion of these time deposits will remain with us as renewed time deposits or as transfers to other deposit products at the prevailing rate.

Interest expense on borrowed funds decreased $50.7 million to $144.8 million for the second quarter of 2012 from $195.5 million for the second quarter of 2011. This decrease was due to a $7.73 billion decrease in the average balance of borrowed funds to $13.87 billion for the second quarter of 2012 from $21.60 billion for the second quarter of 2011.  This decrease was partially offset by a 57 basis point increase in the weighted-average cost of borrowed funds to 4.20% for the second quarter of 2012 as compared to 3.63% for the second quarter of 2011.  The decrease in the average balance was primarily due to the effects of the debt extinguishments in the fourth quarter of 2011.  The increase in the weighted-average cost of borrowed funds was due to the maturity of short-term borrowings that were used to fund a portion of the debt extinguishments in the Restructuring Transaction.

For the six months ended June 30, 2012 interest expense on borrowed funds decreased $180.7 million to $291.6 million as compared to $472.3 million for the six months ended June 30, 2011. This decrease was due to a $10.84 billion decrease in the average balance of borrowed funds to $14.29 billion for the first six months of 2012 as compared to $25.13 billion for the first six months of 2011.  This decrease was partially offset by a 31 basis point increase in the weighted-average cost of borrowed funds to 4.10% for the first six months of 2012 as compared to 3.79% for the first six months of 2011.  The decrease in the average balance is primarily due to the effects of the Transactions.  The increase in the weighted-average cost of borrowed funds was due to the maturity of short-term borrowings that were used to fund a portion of the debt extinguishments in the Restructuring Transaction.

Borrowings amounted to $13.43 billion at June 30, 2012 with an average cost of 4.24%.  Borrowings scheduled to mature over the next 12 months are as follows: $750.0 million with an average cost of 0.85% in the third quarter of 2012, $500.0 million with an average cost of 0.98% in the fourth quarter of 2012 and there are no scheduled maturities for the first or second quarters of 2013.

The provision for loan losses amounted to $25.0 million for the quarter ended June 30, 2012 as compared to $30.0 million for the quarter ended June 30, 2011.  For the linked first quarter of 2012, the provision for loan losses amounted to $25.0 million.  The slight decrease in our provision for loan losses during the second quarter of 2012 as compared to the same period in 2011 was due primarily to  the overall declining trend in net charge-offs and a decrease in the size of the loan portfolio.  Non-performing loans, defined as non-accruing loans and accruing loans delinquent 90 days or more, amounted to $1.09 billion at June 30, 2012 compared with $1.02 billion at December 31, 2011. The ratio of non-performing loans to total loans was 3.88% at June 30, 2012 compared with 3.48% at December 31, 2011.  The highly publicized foreclosure issues that have affected the nation's largest mortgage loan servicers have resulted in greater bank regulatory, court and state attorney general scrutiny.  As a result, our foreclosure process and the time to complete a foreclosure have been delayed.  We are now experiencing a time frame to repayment or foreclosure ranging from 30 to 36 months from the initial non-performing period.  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. 

Loans delinquent 30 to 59 days amounted to $409.7 million at June 30, 2012 as compared to $427.2 million at December 31, 2011.  Loans delinquent 60 to 89 days amounted to $190.2 million at June 30, 2012 as compared to $187.4 million at December 31, 2011.  The allowance for loans losses amounted to $287.9 million at June 30, 2012 as compared to $273.8 million at December 31, 2011.  The allowance for loan losses as a percent of total loans and as a percent of non-performing loans was 1.02% and 26.32%, respectively at June 30, 2012, as compared to 0.93% and 26.77%, respectively at December 31, 2011.  

Net charge-offs amounted to $17.8 million for second quarter of 2012 as compared to $23.0 million for the second quarter of 2011 and $18.1 million for the linked first quarter of 2012.  The ratio of net charge-offs to average loans was 0.25% for both the first and second quarters of 2012 as compared to 0.30% for the second quarter of 2011.  For the six months ended June 30, 2012, net charge-offs amounted to $35.9 million as compared to $44.3 million of net charge-offs for the same period in 2011.

Total non-interest income was $2.9 million for the second quarter of 2012 as compared to $2.7 million for the same quarter in 2011.  Non-interest income is primarily made up of service fees and charges on deposit and loan accounts. 

Total non-interest income was $5.7 million for the first six months of 2012 as compared to $107.9 million for the same period in 2011. Included in non-interest income for the first six months 2011 were net gains on securities transactions of $102.5 million which resulted from the sale of $9.04 billion of securities available-for-sale.  Substantially all of the proceeds from the sale of securities were used to pay off borrowings in the Restructuring Transaction.  There were no securities sales for the six months ended June 30, 2012.

Total non-interest expense amounted to $83.6 million for the second quarter of 2012 as compared to $85.8 million for the same period in 2011.  This decrease was due primarily to a $5.5 million decrease in Federal deposit insurance expense partially offset by increases of $512,000 in compensation and employee benefit costs, $513,000 in occupancy expense, and $2.2 million in other expense.

The decrease in Federal deposit insurance expense for the quarter ended June 30, 2012 is primarily due to the reduction in the size of our balance sheet as a result of the Transactions.

Compensation and employee benefit costs increased $512,000, or 1.7%, to $30.4 million for the second quarter of 2012 as compared to $29.9 million for the same period in 2011. The increase in compensation costs is primarily due to increases of $1.4 million in compensation costs and $612,000 in pension expense.  The increase in compensation costs was due primarily to additional full time equivalent employees as well as normal salary increases.  The increase in pension expense is due primarily to the discount rate and other actuarial assumptions used in determining pension expense.  These increases were partially offset by a $1.6 million decrease in expense related to our stock benefit plans due primarily to a decrease in the price of our stock.  At June 30, 2012, we had 1,599 full-time equivalent employees as compared to 1,586 at December 31, 2011 and 1,577 at June 30, 2011. 

Included in other expense for the second quarter of 2012 were write-downs on foreclosed real estate and net losses on the sale of foreclosed real estate of $202,000 as compared to $2.1 million for the second quarter of 2011.  We sold 38 properties during the second quarter of 2012 and had 127 properties in foreclosed real estate, 32 of which were under contract to sell as of June 30, 2012.  For the second quarter of 2011, we sold 45 properties and had 123 properties in foreclosed real estate, of which 54 were under contract to sell as of June 30, 2011.

Total non-interest expense amounted to $175.2 million for the six months ended June 30, 2012 as compared to $1.33 billion for the six months ended June 30, 2011.  Included in total non-interest expense for the first six months of 2011 was a $1.17 billion loss on the extinguishment of debt related to the Restructuring Transaction. 

Compensation and employee benefit costs increased $1.7 million, or 2.8%, to $62.5 million for the first six months of 2012 as compared to $60.8 million for the same period in 2011. The increase in compensation costs is primarily due to increases of $2.1 million in compensation costs, $1.3 million in pension expense and $461,000 in health plan expense.  The increase in compensation costs was due primarily to additional full time equivalent employees as well as normal salary increases.  The increase in pension expense is due primarily to the discount rate and other actuarial assumptions used in determining pension expense.  These increases were partially offset by a $2.2 million decrease in expense related to our stock benefit plans due primarily to a decrease in the price of our stock. 

For the six months ended June 30, 2012 Federal deposit insurance expense increased $14.2 million, or 28.6%, to $63.7 million from $49.5 million for the six months ended June 30, 2011.  This increase was due primarily to the new insurance assessment methodology adopted by the Federal Deposit Insurance Corporation that became effective on April 1, 2011 and which redefined the assessment base as average consolidated total assets minus average tangible equity.  Previously, deposit insurance assessments were based on the amount of deposits.

Included in other non-interest expense for the six months ended June 30, 2012 were write-downs on foreclosed real estate and net losses on the sale of foreclosed real estate, of $1.3 million as compared to $2.8 million for the comparable period in 2011.  We sold 104 properties during the first six months of 2012 as compared to 74 properties for the same period in 2011.

Our efficiency ratio was 36.79% for the 2012 second quarter as compared to 31.14% for the 2011 second quarter. For the six months ended June 30, 2012, our efficiency ratio was 37.75% compared with 28.63% for the corresponding 2011 period. The efficiency ratio is calculated by dividing non-interest expense, excluding the loss on the extinguishment of debt, by the sum of net interest income and non-interest income, excluding net securities gains from the Restructuring Transaction.  Our annualized ratio of non-interest expense to average total assets for the second quarter of 2012 was 0.77% as compared to 0.67% for the second quarter of 2011. Our annualized ratio of non-interest expense to average total assets for the six months ended June 30, 2012 was 0.79% compared with 4.79% for the corresponding period in 2011. Excluding the loss on the extinguishment of debt, our annualized ratio of operating non-interest expense to average total assets was 0.56% for the first six months of 2011.  Please see the attached Reconciliation of GAAP and Operating Earnings for a reconciliation of operating earnings to the Company's earnings reported in accordance with generally accepted accounting principles and a calculation of the efficiency ratio.

Income tax expense amounted to $46.3 million for the second quarter of 2012 compared with $63.8 million for the same quarter in 2011.  Our effective tax rate for the second quarter of 2012 was 39.06% compared with 39.92% for the second quarter of 2011. Income tax expense amounted to $93.7 million for the six months ended June 30, 2012 compared with income tax benefit of $299.5 million for the six months ended June 30, 2011.

Hudson City Bancorp, Inc. maintains its corporate offices in Paramus, New Jersey. Hudson City Savings Bank, a well-established community financial institution serving its customers since 1868, is the largest thrift institution headquartered in New Jersey.  Hudson City Savings Bank currently operates a total of 135 branch offices in the New York metropolitan and surrounding areas.

Forward-Looking Statements

This release may contain certain "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, that are based on certain assumptions and describe future plans, strategies and expectations of Hudson City Bancorp, Inc.  Such forward-looking statements may be identified by the use of such words as "may," "believe," "expect," "anticipate," "should," "plan," "estimate," "predict," "continue," and "potential" or the negative of these terms or other comparable terminology.  Examples of forward-looking statements include, but are not limited to, estimates with respect to the financial condition, results of operations and business of Hudson City Bancorp, Inc.,  and Hudson City Bancorp, Inc.'s strategies, plans, objectives, expectations and intentions, and other statements contained in this release that are not historical facts.  Hudson City Bancorp, Inc.'s ability to predict results or the actual effect of future plans or strategies is inherently uncertain and actual results and performance could differ materially from those contemplated or implied by these forward-looking statements. They can be affected by inaccurate assumptions Hudson City Bancorp, Inc. might make or by known or unknown risks and uncertainties. Factors that could cause assumptions to be incorrect include, but are not limited to, changes in interest rates, general economic conditions, and legislative, regulatory and public policy changes. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.  For a summary of important factors that could affect Hudson City Bancorp, Inc.'s forward-looking statements, please refer to Hudson City Bancorp, Inc.'s filings with the Securities and Exchange Commission available at www.sec.gov.  Hudson City Bancorp, Inc. does not intend to update any of the forward-looking statements after the date of this release or to conform these statements to actual events.

TABLES FOLLOW

• Net charge-offs amounted to $17.8 million for the second quarter of 2012.
• Updated valuations are received on or before the time a loan becomes 180 days past due.  If necessary, we charge-off an amount to reduce the loan's carrying value to the updated valuation less estimated selling costs.
• Based on the valuation indices, house prices have declined in the New York metropolitan area, where 77.5% of our non-performing loans were located at June 30, 2012, by approximately 26% from the peak of the market in 2006 through April 2012 and by 33% nationwide during that period.  From April 2011 to April 2012, the house price indices decreased by approximately 3% in the New York metropolitan area and 2% nationwide.
• Our quantitative analysis of the allowance for loan losses considers the results of the reappraisal process as well as the results of our foreclosed property transactions.
• Our qualitative analysis of the allowance for loan losses includes a further evaluation of economic factors, such as trends in the unemployment rate, as well as ratio analysis to evaluate the overall measurement of the allowance for loan losses.  This analysis includes a review of delinquency ratios, house price indices, net charge-off ratios and the ratio of the allowance for loan losses to both non-performing loans and total loans.

Foreclosed real estate at June 30, 2012:

• During the first six months of 2012, we sold 104 foreclosed properties. Write-downs on foreclosed real estate and net losses on the sale of foreclosed real estate amounted to $1.3 million for the first six months of 2012. 

SOURCE Hudson City Bancorp, Inc.