| 8. | Goodwill and Other Intangible Assets |
Goodwill and other intangible assets amounted to $153.2 million and were recorded as a result of Hudson City Bancorp’s acquisition of Sound Federal Bancorp, Inc. 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. Subsequent reversal of goodwill impairment losses is not permitted.
We performed our annual goodwill impairment analysis as of June 30, 2013. The Company announced the Merger in the third quarter of 2012. Based on the average actual closing price of our common stock and the average implied price, based on the terms of the Merger Agreement, for the period from the Merger announcement date, August 24, 2012, through June 30, 2013, the fair value of the Company would be between $4.23 billion and $4.35 billion. Since these amounts were less than the reported amount of shareholders’ equity, we performed Step 2 of the goodwill impairment test.
For Step 2 of the goodwill impairment test, we compared the fair value of the Company based on the merger price with the fair value of the assets and liabilities of the Company to calculate an implied goodwill. Based on our Step 2 analysis, the implied goodwill of the Company exceeded the carrying value of goodwill.
We 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. There was no event or circumstance that occurred since our annual impairment test that would indicate that the implied fair value of goodwill is less than its carrying value as of December 31, 2013.
Based on the results of the goodwill impairment analyses we performed during 2013, we concluded that goodwill was not impaired. Therefore, we did not recognize any impairment of goodwill or other intangible assets during the year ended December 31, 2013. The estimated fair value of the Company is based on, among other things, the market price of our common stock as calculated based on the terms of the Merger. If the Merger Agreement is terminated, the market price of Hudson City Bancorp common stock might decline to the extent that the current market price reflects a market assumption that the Merger will be completed. In the event the market price of Hudson City Bancorp common stock does so decline, we may be required to recognize a goodwill impairment charge. In addition, the fair values of the Company’s assets and liabilities are determined using estimates and assumptions and are highly sensitive to market interest rates. 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.