UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2005
Commission File Number 1-31565
NEW YORK COMMUNITY BANCORP, INC.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
615 Merrick Avenue, Westbury, New York 11590
(Address of principal executive offices)
(Registrant’s telephone number, including area code) (516) 683-4100
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). x Yes ¨ No
Par Value: $0.01
Classes of Common Stock
265,845,332
Number of shares outstanding at
August 1, 2005
Quarter Ended June 30, 2005
INDEX
Item 1.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
CONSOLIDATED STATEMENTS OF CONDITION
(in thousands, except share data)
June 30,
2005
(unaudited)
December 31,
2004
Cash and due from banks
Money market investments
Securities available for sale:
Mortgage-related securities ($2,097,538 and $2,767,756 pledged, respectively)
Other securities
Securities held to maturity:
Mortgage-related securities ($1,817,600 and $2,129,155 pledged, respectively)
Other securities ($938,017 and $1,242,364 pledged, respectively)
Total securities
Mortgage loans, net
Other loans, net
Less: Allowance for loan losses
Loans, net
Federal Home Loan Bank of New York stock, at cost
Premises and equipment, net
Goodwill
Core deposit intangibles
Other assets
Total assets
Deposits:
NOW and money market accounts
Savings accounts
Certificates of deposit
Non-interest-bearing accounts
Total deposits
Official checks outstanding
Borrowed funds:
Wholesale borrowings
Junior subordinated debentures
Other borrowings
Total borrowed funds
Mortgagors’ escrow
Other liabilities
Total liabilities
Stockholders’ equity:
Preferred stock at par $0.01 (5,000,000 shares authorized; none issued)
Common stock at par $0.01 (600,000,000 shares authorized; 273,396,452 shares issued; 265,681,667 and 265,190,635 shares outstanding, respectively)
Paid-in capital in excess of par
Retained earnings (partially restricted)
Less: Treasury stock (7,714,785 and 8,205,817 shares, respectively)
Unallocated common stock held by ESOP
Common stock held by SERP and Deferred Compensation Plans
Accumulated other comprehensive loss, net of tax:
Net unrealized loss on securities available for sale
Net unrealized loss on securities transferred to held to maturity
Total stockholders’ equity
Commitments and contingencies
Total liabilities and stockholders’ equity
See accompanying notes to the unaudited consolidated financial statements.
1
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data)
For the
Three Months Ended
Six Months Ended
Mortgage and other loans
Mortgage-related securities
Total interest income
Borrowed funds
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Fee income
Net securities gains (losses)
Gain on sale of Bank-owned properties
Other
Total non-interest income (loss)
Operating expenses:
Compensation and benefits
Occupancy and equipment
General and administrative
Total operating expenses
Amortization of core deposit intangibles
Total non-interest expense
Income before income taxes
Income tax expense
Net Income
Comprehensive income (loss), net of tax:
Unrealized gain (loss) on securities, net of tax
Comprehensive income (loss)
Basic earnings per share
Diluted earnings per share
2
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
June 30, 2005
Balance at beginning of year
Balance at end of period
Allocation of ESOP stock
Tax effect of stock plans
Net income
Dividends paid on common stock
Exercise of stock options
Purchase of common stock (57,402 shares)
Exercise of stock options (548,434 shares)
Earned portion of ESOP
Net unrealized gain on securities available for sale, net of tax of $3,075
Amortization of net unrealized loss on securities transferred from available for sale to held to maturity, net of tax of $3,136
Less: Reclassification adjustment for gains included in net income, net of tax of $1,166
Change in net unrealized depreciation in securities, net of tax
Total stockholders’ equity at end of period
3
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Accretion of discounts, net of premium amortization
Net decrease in net deferred loan origination costs/fees
Net securities (gains) losses
Net gain on sale of loans
Tax benefits and other stock plan activity
Allocated portion of ESOP
Changes in assets and liabilities:
Decrease (increase) in goodwill, net
Decrease in deferred income taxes, net
Decrease (increase) in other assets
Increase (decrease) in official checks outstanding
Increase in other liabilities
Total adjustments
Net cash provided by operating activities
Proceeds from repayments and redemptions of securities held to maturity
Proceeds from repayments, redemptions, and sales of securities available for sale
Purchase of securities held to maturity
Purchase of securities available for sale
Net purchase of Federal Home Loan Bank of NewYork stock
Net increase in loans
Proceeds from sale of loans
Proceeds from sale of Bank-owned properties
Purchase of premises and equipment, net
Net increase in mortgagors’ escrow
Net increase (decrease) in deposits
Net (decrease) increase in borrowed funds
Cash dividends paid on common stock
Treasury stock purchases
Net cash received from stock option exercises
Proceeds from shares issued in secondary offering, net
Cash in lieu of fractional shares related to stock split
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental information:
Cash paid for (received from):
Interest
Income taxes
Non-cash investing activities:
Transfer to other real estate owned from loans
Transfer of securities from available for sale to held to maturity, at fair value
4
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements include the accounts of New York Community Bancorp, Inc. and subsidiaries (the “Company”) and its wholly-owned subsidiary, New York Community Bank (the “Bank”).
The unaudited consolidated financial statements reflect all normal recurring adjustments that, in the opinion of management, are necessary to present a fair statement of the results for the periods presented. There are no other adjustments reflected in the accompanying consolidated financial statements. The results of operations for the three and six months ended June 30, 2005 are not necessarily indicative of the results of operations that may be expected for all of 2005.
Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).
The unaudited consolidated financial statements include accounts of the Company and other entities in which the Company has a controlling financial interest. All inter-company balances and transactions have been eliminated.
These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s 2004 Annual Report to Shareholders and incorporated by reference into the Company’s 2004 Annual Report on Form 10-K.
Note 2. Stock-based Compensation
The Company had eight stock option plans at June 30, 2005. As the Company applies Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for these plans, no compensation cost has been recognized.
Had compensation cost for the Company’s stock option plans been determined based on the fair value at the date of grant for awards made under those plans, consistent with the method set forth in Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-based Compensation—Transition and Disclosure,” the Company’s net income and earnings per share would have equaled the pro forma amounts indicated in the following table.
Three Months EndedJune 30,
Net Income:
As reported
Deduct: Stock-based employee compensation expense determined under fair
value-based method, net of related tax effects
Pro forma
Basic Earnings Per Share:
Diluted Earnings Per Share:
5
In December 2004, the Financial Accounting Standards Board (the “FASB”) issued SFAS No. 123 (revised 2004), “Share-based Payment” (“SFAS No. 123R”), requiring that compensation cost relating to share-based payment transactions, including employee stock options, be recognized as an expense in the financial statements, effective for the first interim or annual reporting period beginning after June 15, 2005. In April 2005, the SEC deferred the compliance date to the first annual period beginning after June 15, 2005; accordingly, the Company will adopt SFAS No. 123R beginning January 1, 2006. The adoption of SFAS No. 123R, which replaces SFAS No. 123 and supersedes APB Opinion No. 25, is not expected to have a material impact on the Company’s consolidated financial statements.
Note 3. Available-for-Sale Securities
The following table summarizes the amortized cost and estimated market values of the Company’s available-for-sale securities at the dates indicated:
Mortgage-related securities:
Agency certificates
Private label CMOs
Agency CMOs
Other mortgage-related securities
Total mortgage-related securities available for sale
Other securities:
Corporate and other bonds
State, county, and municipal obligations
Capital trust notes
Equities
Total other securities available for sale
Total securities available for sale
Note 4. Loans, net
The following table provides a summary of the Company’s loan portfolio at the dates indicated:
(dollars in thousands)
Mortgage loans:
Multi-family
Commercial real estate
Construction
One-to-four family
Total mortgage loans
Net deferred loan origination costs
Other loans
Net deferred loan origination (fees) costs
Total loans, net
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Note 5. Borrowed Funds
The following table provides a summary of the Company’s borrowed funds at the dates indicated:
FHLB-NY advances
Repurchase agreements
Preferred stock of subsidiaries
Senior debt
At June 30, 2005, the Company had $448.8 million of outstanding junior subordinated deferrable interest debentures (“junior subordinated debentures”) held by nine statutory business trusts that issued guaranteed capital securities. The capital securities qualified as Tier 1 capital of the Company at that date. The proceeds of each issuance were invested in a series of junior subordinated debentures of the Company. The underlying asset of each statutory business trust is the relevant debenture. The Company has fully and unconditionally guaranteed each of the obligations under each trust’s capital securities to the extent set forth in the guarantee. Each trust’s capital securities are subject to mandatory redemption, in whole or in part, upon repayment of the debentures at their stated maturity or earlier redemption.
The following table provides a summary of the outstanding capital securities issued by each trust and the junior subordinated debentures issued by the Company to each trust as of June 30, 2005:
Issuer
JuniorSubordinated
Debenture
Amount
Outstanding
Date of
Original Issue
Stated Maturity
OptionalRedemption Date
Haven Capital Trust I
Haven Capital Trust II
Queens Capital Trust I
Queens Statutory Trust I
NYCB Capital Trust I
New York Community Statutory Trust I
New York Community Statutory Trust II
New York Community Capital Trust V
Roslyn Preferred Trust I
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Note 6. Pension and Other Post-retirement Benefits
The following table sets forth the disclosures required under SFAS No. 132 (Revised), “Employers’ Disclosures about Pensions and Other Post-retirement Benefits” for the Company’s pension and post-retirement plans:
Components of Net Periodic Benefit Cost:
Interest cost
Service cost
Expected return on plan assets
Unrecognized past service liability
Amortization of unrecognized loss
Net periodic (credit) expense
As discussed in the notes to the consolidated financial statements presented in the Company’s 2004 Annual Report to Shareholders, the Company expects to contribute $1.4 million to its post-retirement plan in 2005; no contribution is expected to be made to the Company’s pension plan during that time.
Note 7. Impact of Accounting Pronouncements
Accounting Changes and Error Corrections
In June 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS No. 154 applies to all voluntary changes in accounting principle, and changes the requirements for both accounting for and reporting a change in accounting principle. SFAS No. 154 requires retrospective application to prior periods’ financial statements of a voluntary change in an accounting principle unless it is impracticable. APB Opinion No. 20, “Accounting Changes,” previously required that most voluntary changes in an accounting principle be recognized by including in net income for the period of the change the cumulative effect of changing to the new accounting principle. SFAS No.154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company will adopt SFAS No.154 on January 1, 2006 and does not expect it to have an impact on its consolidated financial statements.
Accounting for Stock Options
In December 2004, the FASB issued SFAS No. 123R, which requires that the compensation cost relating to share-based payment transactions (including employee stock options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans) be recognized as an expense in the Company’s consolidated financial statements. Under SFAS No. 123R, the related compensation cost will be measured based on the fair value of the award at the date of grant.
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As previously described under Note 2, Stock-based Compensation, SFAS No. 123 requires only that the expense relating to employee stock options be disclosed in the footnotes to the consolidated financial statements. SFAS No. 123R will replace SFAS No. 123 and supersede APB Opinion No. 25. While SFAS No. 123R was originally to have been effective for interim and annual reporting periods beginning after June 15, 2005, the SEC, in April 2005, deferred the compliance date to the first annual reporting period beginning after June 15, 2005. SFAS No. 123R is not expected to have a material impact on the Company’s consolidated financial statements when it is adopted on January 1, 2006.
Other-Than-Temporary Impairment of Certain Investments
On June 30, 2004, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“EITF 03-1”), which provides guidance on recognizing other-than-temporary impairment on certain investments. EITF 03-1 is effective for other-than-temporary impairment evaluations for investments accounted for under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” as well as non-marketable equity securities accounted for under the cost method, for reporting periods beginning after June 15, 2004. On September 30, 2004, the FASB directed its staff to delay the effective date for the measurement and recognition guidance contained in paragraphs 10 through 20 of EITF 03-1. During this period of delay, the Company continues to apply the relevant “other-than-temporary” guidance under SFAS No. 115.
On June 29, 2005, the FASB decided not to provide additional guidance on the meaning of other-than-temporary impairment, but directed its staff to issue proposed FASB Staff Position (“FSP”) EITF 03-1-a, “Implementation Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1,” as final. This FSP will supersede EITF Issue No. 03-1 and EITF Topic No. D-44, “Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value.” FSP EITF 03-1-a (retitled FSP FAS 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”) will replace the guidance set forth in paragraphs 10 through 18 of Issue 03-1 with references to existing other-than-temporary impairment guidance, such as FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” SEC Staff Accounting Bulletin No. 59, “Accounting for Noncurrent Marketable Equity Securities,” and APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock.” FSP FAS 115-1 will codify the guidance set forth in EITF Topic D-44 and clarify that an investor should recognize an impairment loss no later than when the impairment is deemed other than temporary, even if a decision to sell has not been made.
FSP FAS 115-1 will be effective for other-than-temporary impairment analysis conducted in periods beginning after September 15, 2005 and is not expected to have a material effect on the Company’s consolidated financial statements.
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Note 8. Pending Business Combination
On August 1, 2005, the Company announced that it has entered into a definitive agreement to acquire Long Island Financial Corp. (“Long Island Financial”), the holding company for Long Island Commercial Bank, a full-service commercial bank with 12 branches in Suffolk, Nassau, and Kings Counties, and assets of $539.7 million, deposits of $415.9 million, and total loans of $250.0 million at June 30, 2005.
In the transaction, shareholders of Long Island Financial will receive 2.32 shares of Company common stock in a tax-free exchange for each share of Long Island Financial held at the closing date. The transaction is valued at approximately $69.8 million, based on the closing price of New York Community Bancorp, Inc. stock on July 29, 2005, and is expected to be completed in the fourth quarter of 2005, pending receipt of Long Island Financial shareholder approval and regulatory approvals.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-looking Statements and Associated Risk Factors
This report, like many written and oral communications presented by New York Community Bancorp, Inc. (the “Company”) and its authorized officers, may contain certain forward-looking statements regarding the Company’s prospective performance and strategies within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of said safe harbor provisions.
Forward-looking statements, which are based on certain assumptions and describe future plans, strategies, and expectations of the Company, are generally identified by use of the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “seek,” “strive,” “try,” or future or conditional verbs such as “will,” “would,” “should,” “could,” “may,” or similar expressions. The Company’s ability to predict results or the actual effects of its plans or strategies is inherently uncertain. Accordingly, actual results may differ materially from anticipated results.
There are a number of factors, many of which are beyond the Company’s control, that could cause actual conditions, events, or results to differ significantly from those described in the forward-looking statements. These factors include, but are not limited to:
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The following factors, among others, could cause the actual results of the proposed acquisition of Long Island Financial Corp. to differ materially from the expectations stated in this filing: the ability of Long Island Financial Corp. to obtain the required shareholder approval and the ability of both companies to obtain the required regulatory approvals; the ability of the two companies to consummate the transaction; a materially adverse change in the financial condition of either company; the ability of New York Community Bancorp, Inc. to successfully integrate the assets, liabilities, customers, systems, and any personnel it may acquire into its operations pursuant to the transaction; and the ability to realize the related revenue synergies and cost savings within the expected time frames.
In addition, it should be noted that the Company routinely evaluates opportunities to expand through acquisition and frequently conducts due diligence activities in connection with such opportunities. As a result, acquisition discussions and, in some cases, negotiations, may take place in the future, and acquisitions involving cash, debt, or equity securities may occur.
Furthermore, the timing and occurrence or non-occurrence of events may be subject to circumstances beyond the Company’s control.
Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. Except as required by applicable law or regulation, the Company undertakes no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date on which such statements were made.
Critical Accounting Policies
The Company has identified the accounting policies below as being critical to understanding its financial condition and results of operations. Certain accounting policies are considered to be important to the portrayal of the Company’s financial condition, since they require management to make complex or subjective judgments, some of which may relate to matters that are inherently uncertain. The inherent sensitivity of the Company’s consolidated financial statements to these critical accounting policies, and the judgments, estimates, and assumptions used therein, could have a material impact on the Company’s results of operations or financial condition.
Allowance for Loan Losses
The allowance for loan losses is increased by the provision for loan losses charged to operations and reduced by reversals or by net charge-offs.
Management establishes the allowance for loan losses through an assessment of probable losses in the loan portfolio. Several factors are considered in this process, including historical and projected default rates and loss severities; internal risk ratings; loan size; economic, geographic, industry, and environmental factors; and loan impairment, as defined under Statement of Financial Accounting Standards (“SFAS”) No. 114, “Accounting by Creditors for Impairment of a Loan,” as amended by SFAS No. 118, “Accounting by Creditors for Impairment of a Loan/Income Recognition and Disclosures.” Under SFAS Nos. 114 and 118, a loan is classified as “impaired” when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due under the contractual terms of the loan. The Bank applies SFAS Nos. 114 and 118 to all loans except smaller balance homogenous loans and loans carried at fair value or the lower of cost or fair value.
In establishing the allowance for loan losses, management also considers the Company’s current business strategies and credit process, including compliance with stringent guidelines established by the Board of Directors with regard to credit limitations, loan approvals, underwriting criteria, and loan workout procedures.
In accordance with the Bank’s policy, the allowance for loan losses is segmented to correspond to the various types of loans in the loan portfolio. These loan categories are assessed with specific emphasis on the internal risk rating; underlying collateral; credit underwriting; loan size; and geographic area. These factors correspond to the respective levels of quantified and inherent risk.
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Larger non-performing loans are individually evaluated for loan impairment, as defined under SFAS Nos. 114 and 118, based upon a review of the credit files. Allocations are made to the allowance for loan losses to the extent of any impairment found.
Smaller nonperforming loans are assigned risk ratings based upon an aging schedule that typically considers the extent of delinquency exceeding 90 days in arrears. Based upon this analysis, quantified risk factors are assigned for each risk-rating category to provide an allocation to the overall allowance for loan losses.
The remainder of the loan portfolio is then assessed, by loan type, with similar risk factors being considered, including the borrower’s ability to pay and the Bank’s past loan loss experience with each type of loan. These loans are also assigned quantified risk factors, which result in allocations to the allowance for loan losses for each particular loan or loan type in the portfolio. In order to determine its overall adequacy, the allowance for loan losses is reviewed quarterly by management and by the Mortgage and Real Estate Committee (the “Committee”) of the Board of Directors. Each of the independent directors who serve on the Committee has had more than 30 years of complementary real estate experience.
Other factors and processes considered in determining the appropriate level of the allowance for loan losses include, but are not limited to:
While management uses available information to recognize losses on loans, future additions to the allowance for loan losses may be necessary, based on changes in economic and local market conditions beyond management’s control. In addition, the Bank may be required to take certain charge-offs and/or recognize additions to the loan loss allowance, based on the judgment of regulatory agencies with regard to information provided to them during their examinations.
Employee Benefit Plans
The Company provides a range of benefits to its employees and retired employees, including pensions and post-retirement health care and life insurance benefits. The Company records annual amounts relating to these plans based on calculations specified by accounting principles generally accepted in the United States of America (“GAAP”), which include various actuarial assumptions such as discount rates, assumed rates of return, assumed rates of compensation increases, turnover rates, and trends in health care costs. The Company reviews its actuarial assumptions on an annual basis and modifies the assumptions based on current rates and trends when deemed appropriate. As required by GAAP, the effects of such modifications are generally recorded or amortized over future periods. The Company believes that the assumptions utilized in recording its obligations under its employee benefit plans are reasonable, based upon the advice of its actuaries. Primary among the assumptions utilized are the discount rate, which is used to calculate expected future benefit payments as a present value on the date of measurement, and the expected long-term rate of return. The Company primarily utilizes the Citigroup Pension Liability Index in making its discount rate assumptions; its expected long-term rate of return on plan assets is based on historical returns earned by equities and fixed income securities, adjusted to reflect expectations of future returns as they apply to the plan’s actual target allocation of asset classes.
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Investment Securities
The Company’s securities portfolio consists of mortgage-backed securities and collateralized mortgage obligations (together, “mortgage-related securities”) and other securities. Securities that are classified as “available for sale” are carried at estimated fair value, with any unrealized gains and losses, net of taxes, reported as accumulated other comprehensive income or loss in stockholders’ equity. Securities that the Company has the positive intent and ability to hold to maturity are classified as “held to maturity” and are carried at amortized cost.
The market values of the Company’s securities, particularly fixed-rate mortgage-related securities, are affected by changes in interest rates. In general, as interest rates rise, the market value of fixed-rate securities will decline; as interest rates fall, the market value of fixed-rate securities will increase. The Company conducts a periodic review and evaluation of the securities portfolio to determine if the decline in the fair value of any security below its carrying value is other than temporary. Estimated fair values for securities are based on published or securities dealers’ market values. If the Company deems any decline in value to be other than temporary, the security is written down to a new cost basis and the resulting loss is charged against earnings. The Company has determined that there was no other-than-temporary impairment of its securities as of June 30, 2005.
Goodwill Impairment
Goodwill is presumed to have an indefinite useful life and is tested for impairment, rather than amortized, at the reporting unit level at least once a year. Impairment exists when the carrying amount of goodwill exceeds its implied fair value. If the fair value of a reporting unit exceeds its carrying amount at the time of testing, the goodwill of the reporting unit is not considered impaired. According to SFAS No. 142, “Goodwill and Other Intangible Assets,” quoted market prices in active markets are the best evidence of fair value and are to be used as the basis for measurement, when available. Other acceptable valuation methods include present-value measurements based on multiples of earnings or revenues, or similar performance measures. Differences in the identification of reporting units and the use of valuation techniques could result in materially different evaluations of impairment.
For the purpose of goodwill impairment testing, the Company has identified one reporting unit. The Company performed its annual goodwill impairment test as of January 1, 2005, and determined that the fair value of the reporting unit was in excess of its carrying value, using the quoted market price of the Company’s common stock on the impairment testing date as the basis for determining fair value. As of the annual impairment test date, there was no goodwill impairment.
Income Taxes
The Company estimates income taxes payable based on the amount it expects to owe the various tax authorities (i.e., federal, state, and local). Income taxes represent the net estimated amount due to, or to be received from, such taxing authorities. In estimating income taxes, management assesses the relative merits and risks of the appropriate tax treatment of transactions, taking into account statutory, judicial, and regulatory guidance in the context of the Company’s tax position. In this process, management also relies on tax opinions, recent audits, and historical experience. Although the Company uses available information to record income taxes, underlying estimates and assumptions can change over time as a result of unanticipated events or circumstances such as changes in tax laws and judicial guidance influencing its overall tax position.
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Overview
New York Community Bancorp, Inc. is the holding company for New York Community Bank (the “Bank”) and the fourth largest thrift in the nation, with total assets of $25.2 billion at June 30, 2005.
The Bank currently serves its customers through a network of 141 banking offices in New York City, Long Island, Westchester County, and New Jersey. Of these, 89 are traditional branches, 49 are located in-store, and three are customer service centers. During the second quarter of 2005, the Company sold an in-store branch in Hillside, New Jersey to another financial institution and closed an in-store branch in Uniondale, New York.
The Bank operates its branch network through seven community-based divisions, each of which represents the Bank in a specific county or community. In New York, the Bank operates through five divisions: Queens County Savings Bank, with 34 locations in Queens; Roslyn Savings Bank, with 60 locations on Long Island; Richmond County Savings Bank, with 23 locations on Staten Island; Roosevelt Savings Bank, with nine branches located in Brooklyn; and CFS Bank, with four branches located in Westchester County, one in Manhattan, and one in the Bronx. In addition, the Company operates a branch in Co-op City (in the Bronx) under the name New York Community Bank. In New Jersey, the Bank operates through two divisions: First Savings Bank of New Jersey, with four branches located in Bayonne (Hudson County); and Ironbound Bank, with four branches in Essex and Union counties.
In addition to ranking as the third largest thrift depository in the New York metropolitan region, the Bank is the leading producer of multi-family loans for portfolio in New York City, with rent-controlled and -stabilized buildings representing its primary market niche. In the first six months of 2005, multi-family loan originations totaled $2.9 billion, representing 77.1% of loans originated year-to-date. Multi-family loans totaled $11.9 billion at quarter-end, signifying a 21.5% year-to-date increase and 76.2% of the total loan portfolio. Commercial real estate loans represented $2.5 billion, or 16.0%, of total loans outstanding at the close of the quarter, while construction loans represented $857.6 million, or 5.5%.
The Company’s record of asset quality was sustained in the current six-month period, with net charge-offs totaling $11,000, including $3,000 in the second quarter, and non-performing assets equaling 0.17% of total assets at June 30, 2005. The Company also maintained an efficient operation, recording an efficiency ratio of 27.55% for the second quarter and 27.03% for the first six months of the year.
Balance Sheet Repositioning and Subsequent Strategic Actions
At the end of June 2004, the Company engaged in a significant repositioning of its balance sheet to enhance its market and interest rate risk profile in the face of rising market interest rates. In connection with this strategy, the Company sold $5.1 billion of available-for-sale securities with an average yield of 4.62%, and utilized the proceeds to reduce its short-term wholesale borrowings by a like amount. In addition, the Company extended $2.4 billion of wholesale borrowings to an average maturity of three years, with an average cost of 3.32%, and reclassified $1.0 billion of available-for-sale securities as held-to-maturity.
In the twelve months ended June 30, 2005, the Company took the following actions to further enhance the quality of its balance sheet:
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The Company’s performance in the three and six months ended June 30, 2005 reflects the impact of the balance sheet repositioning at the end of last year’s second quarter, the actions taken over the four quarters that followed, and the impact of a flattening yield curve on its net interest income and net interest margin over the last twelve months. The Company generated earnings of $86.5 million, or $0.33 per diluted share, in the current second quarter, generating a 1.53% return on average tangible assets and a 29.66% return on average tangible stockholders’ equity. For the six months ended June 30, 2005, the Company generated earnings of $177.6 million, or $0.68 per share, providing a 1.60% return on average tangible assets and a 31.20% return on average tangible stockholders’ equity. Included in the second quarter and six-month amounts is a $1.7 million after-tax gain on the sale of certain one-to-four family mortgage loans to another financial institution; the six-month amount also includes an after-tax gain of $4.0 million on the sale of certain Bank-owned properties in the first quarter of the year.
Recent Events
Dividend Payment
On July 19, 2005, the Board of Directors of the Company declared a quarterly cash dividend of $0.25 per share, payable on August 16, 2005 to shareholders of record at August 1, 2005.
Limited-purpose Commercial Bank
On August 1, 2005, the Bank received the last of the regulatory approvals required to commence operation of a limited-purpose commercial bank for the express purpose of accepting municipal deposits and other public funds. The limited-purpose commercial bank is operating as a subsidiary of New York Community Bank under the name “New York Commercial Bank.”
Proposed Acquisition of Long Island Financial Corp.
The proposed transaction will be submitted to Long Island Financial Corp.’s stockholders for their consideration. New York Community Bancorp, Inc. will file a registration statement containing a proxy statement/prospectus that will be sent to Long
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Island Financial Corp.’s stockholders, and other relevant documents concerning the proposed transaction, with the U.S. Securities and Exchange Commission (the “SEC”). Long Island Financial Corp. will file relevant documents concerning the proposed transaction with the SEC. WE URGE INVESTORS TO READ THE REGISTRATION STATEMENT CONTAINING THE PROXY STATEMENT/PROSPECTUS, AND ANY OTHER RELEVANT DOCUMENTS TO BE FILED WITH THE SEC, BECAUSE THEY CONTAIN IMPORTANT INFORMATION.
Investors will be able to obtain these documents free of charge at the SEC’s web site (www.sec.gov). In addition, documents filed with the SEC by New York Community Bancorp, Inc. will be available free of charge from the Investor Relations Department, New York Community Bancorp, Inc., 615 Merrick Avenue, Westbury, New York 11590. Documents filed with the SEC by Long Island Financial Corp. will be available free of charge from the Corporate Secretary, Long Island Financial Corp., 1601 Veterans Memorial Highway, Suite 120, Islandia, New York 11749.
The directors, executive officers, and certain other members of management of Long Island Financial Corp. may be soliciting proxies in favor of the transaction from the company’s shareholders. For information about these directors, executive officers, and members of management, shareholders are asked to refer to the most recent proxy statement issued by the company, which is available on its web site and at the address provided in the preceding paragraph.
Balance Sheet Summary
The Company recorded total assets of $25.2 billion at June 30, 2005, up $1.2 billion, or 4.9%, from the balance recorded at December 31, 2004. While the loan portfolio grew $2.3 billion, or 17.1%, during this time to $15.7 billion, the increase was partly offset by a $1.1 billion, or 15.5%, reduction in securities to $6.0 billion, representing 23.7% of total assets at quarter-end.
Total liabilities rose $1.1 billion, or 5.3%, in the first half of the year, primarily reflecting a $1.1 billion, or 10.9%, increase in deposits to $11.5 billion, including a $716.4 million, or 10.8% increase in core deposits (defined as NOW and money market accounts, savings accounts, and non-interest-bearing accounts) to $7.4 billion. In addition to supporting the increase in loans, the increase in deposits was used to reduce the balance of borrowed funds by $75.8 million. Borrowed funds totaled $10.1 billion at the close of the second quarter, including $9.3 billion in wholesale borrowings. Stockholders’ equity totaled $3.3 billion at June 30, 2005, signifying a $63.9 million increase from the year-end 2004 balance, and representing 12.90% of total assets at June 30, 2005. Tangible stockholders’ equity totaled $1.2 billion, representing 5.31% of tangible assets, an improvement of nine basis points since year-end 2004.
Loans
The Company recorded total loans of $15.7 billion at June 30, 2005, signifying a $2.3 billion, or 17.1%, increase from the year-end 2004 balance and a $3.8 billion, or 32.0%, increase from the balance recorded at June 30, 2004. The six-month increase was driven by originations totaling $3.8 billion, including $2.0 billion in the second quarter, and tempered by repayments totaling $1.3 billion and loan sales totaling $199.7 million. In addition to the sale of one-to-four family loans through the Company’s conduit program, the latter amount includes a bulk sale of one-to-four family loans totaling $170.7 million during the second quarter of 2005.
Multi-family loan originations represented $2.9 billion, or 77.1%, of total originations in the first six months of 2005, including $1.5 billion in the second quarter, and were up 31.0% from the volume produced in the first six months of 2004. Construction loan originations accounted for $314.9 million, or 8.4%, of current year-to-date originations, including $136.0 million in the second quarter, while commercial real estate loan originations accounted for $474.7 million, or 12.6%, of the six-month total, including second quarter originations of $298.8 million. In the first six months of 2004, construction and commercial real estate loan originations totaled $260.1 million and $569.2 million, respectively.
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Multi-family Loans
Multi-family loans totaled $11.9 billion at June 30, 2005, signifying a 21.5% increase from $9.8 billion at December 31, 2004, and a 40.0% increase from $8.5 billion at June 30, 2004. The June 30, 2005 amount represented 76.2% of total loans outstanding, up from 73.5% and 71.9%, respectively, at the earlier dates. At June 30, 2005, the average multi-family loan had a principal balance of $3.4 million; the expected weighted average life of the portfolio was 3.6 years at that date.
Multi-family loans are typically originated for a term of ten years, with a fixed rate of interest in the first five years, tied to the five-year Constant Maturity Treasury (“CMT”) rate, and a rate that adjusts annually in years six through ten. However, the nature of the Company’s lending niche is such that the typical multi-family loan refinances within the first five-year period, and in doing so, generates prepayment penalties ranging from five points to one point of the initial loan balance.
The majority of the Company’s multi-family loans are secured by rent-regulated buildings in New York City. Because the rents on the apartments in these buildings are typically below market, the buildings tend to be fully occupied, even during times of economic adversity. The Company’s asset quality has been supported by such multi-family credits, which have not incurred a loss for more than twenty years.
The Company has been originating multi-family loans in this market for several decades. Its longevity reflects the relationships it has developed with several leading mortgage brokers, who are familiar with the Company’s lending practices, its underwriting standards, and its long-standing practice of lending on the cash flows produced by the rent rolls of the buildings collateralizing these loans. Because the multi-family market is largely broker-driven, these longstanding relationships have supported the growth of the Company’s multi-family loan portfolio.
Commercial Real Estate Loans
The Company’s portfolio of commercial real estate loans totaled $2.5 billion at June 30, 2005, up $368.0 million, or 17.2%, from the balance recorded at December 31, 2004, and up $649.4 million, or 34.9%, from the balance recorded at June 30, 2004. Commercial real estate loans represented 16.0% of total loans outstanding at the close of the current second quarter, even with the year-end 2004 level and up from 15.7% at the year-earlier date. At June 30, 2005, the average commercial real estate loan had a principal balance of $2.5 million; the expected weighted average life of the portfolio was 4.1 years at that date.
The Company’s commercial real estate loans are structured in a manner similar to that of its multi-family credits, typically featuring a fixed rate of interest for the first five years of the loan and a rate that adjusts in each of years six through ten. Prepayment penalties also apply, with five points generally being charged on loans that refinance in the first year of the mortgage, scaling down to one point on loans that refinance in year five. The Company’s commercial real estate loans also tend to refinance within the first five-year period.
The majority of the Company’s commercial real estate loans are secured by office or mixed-use buildings in New York City, and by retail shopping centers in both the City and Long Island that are typically anchored by national credit-rated tenants.
Construction Loans
The construction loan portfolio totaled $857.6 million at June 30, 2005, up $50.5 million, or 6.3%, from the balance recorded at December 31, 2004, and up $102.3 million, or 13.5%, from the balance recorded at June 30, 2004. Construction loans accounted for 5.5% of total loans outstanding at the close of the current second quarter, as compared to 6.0% and 6.4%, respectively, at the earlier dates. At June 30, 2005, the average construction loan had a principal balance of $3.5 million.
The majority of the construction loan portfolio consists of loans for the construction of one-to-four family homes on Long Island, where the Bank is the primary lender to several leading builders and developers. The typical construction loan features a term of 18 to 24 months and a floating rate of interest that is tied to prime.
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One-to-four Family and Other Loans
Since December 1, 2000, the Company has maintained a policy of originating one-to-four family mortgage and home equity loans on a pass-through basis, and selling such loans to a third-party conduit, service-released, shortly after the loans are closed. During the second quarter of 2005, the Company signed an outsourcing agreement with American Home Mortgage Corp. (“AHM”) under which AHM now serves as the Company’s third-party conduit for one-to-four family and home equity loans.
Reflecting the conduit policy, repayments, and the aforementioned sale of loans totaling $170.7 million, the balance of one-to-four family loans declined $219.1 million, or 43.3%, from the year-end 2004 total to $287.0 million, representing 1.8% of total loans outstanding, at June 30, 2005.
Other loans, net (including consumer and business loans) declined to $80.4 million at June 30, 2005 from $102.5 million at the end of December, reflecting scheduled repayments and the reclassification of certain loans during the first quarter of 2005. Included in the respective amounts were one-to-four family loans held for sale of $1.5 million and $2.3 million, in connection with the aforementioned conduit policy.
Asset Quality
The Company’s record of asset quality was maintained in the second quarter of 2005, with net charge-offs amounting to $3,000 and non-performing assets equaling 0.17% of total assets at quarter-end. Non-performing assets totaled $42.9 million at June 30, 2005, as compared to $33.8 million at March 31, 2005, representing 0.14% of total assets, and to $28.7 million, representing 0.12% of total assets, at December 31, 2004. Non-performing loans represented $42.4 million, $33.1 million, and $28.1 million of the respective amounts, and 0.27%, 0.23%, and 0.21% of total loans at the respective dates.
The June 30, 2005 amounts include a $10.7 million construction loan that is past due more than 90 days and still accruing interest. Due to the value of the underlying collateral, it is currently management’s expectation that the loan will be satisfied in full in the second half of the year. Non-accrual mortgage loans accounted for $31.1 million of non-performing loans at the close of the second quarter, with non-accrual other loans accounting for $613,000. The balance of non-accrual mortgage loans includes another construction loan, of $7.0 million, which management expects will also be satisfied before the end of the year, due to the value of the underlying collateral.
A loan is generally classified as a “non-accrual” loan when it is 90 days past due and management has determined that the collectibility of the loan is doubtful. When a loan is placed on non-accrual status, the Bank ceases the accrual of interest owed, and previously accrued interest is charged against interest income. A loan is generally returned to accrual status when the loan is less than 90 days past due and the Bank has reasonable assurance that the loan will be fully collectible.
Other real estate owned represented the remaining $485,000 of non-performing assets at the close of the current second quarter, down $205,000 and $81,000 from the amounts recorded at March 31, 2005 and December 31, 2004, respectively. The June 30, 2005 amount consisted of three residential properties which are currently in the process of being marketed for sale. The Company does not expect to incur a loss when such properties are sold.
The allowance for loan losses totaled $78.0 million at June 30, 2005, and was down $11,000 from the balance recorded at December 31, 2004. While the Company recorded no provisions for loan losses during the first half of 2005, it charged off $11,000 of consumer loans during this period, all of which had been acquired in merger transactions in 2001 and 2003. The allowance for loan losses represented 0.50% of total loans and 184.22% of non-performing loans at the close of the current second quarter, as compared to 0.54% and 236.03%, respectively, at the close of the trailing quarter, and 0.58% and 277.31%, respectively, at December 31, 2004. Based upon all relevant and presently available information, management believes that the current allowance for loan losses is adequate.
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At or For theYear Ended
December 31, 2004
Allowance for Loan Losses:
Balance at beginning of period
Charge-offs
Non-performing Assets:
Non-accrual mortgage loans
Other non-accrual loans
Total non-accrual loans
Loans 90 days or more delinquent and still accruing interest
Total non-performing loans
Other real estate owned
Total non-performing assets
Ratios:
Non-performing loans to total loans
Non-performing assets to total assets
Allowance for loan losses to non-performing loans
Allowance for loan losses to total loans
As indicated in the Overview, the Company has continued its strategic reduction of the securities portfolio since the repositioning of the balance sheet in June 2004. Securities totaled $6.0 billion at June 30, 2005, representing a $1.1 billion, or 15.5%, decline from $7.1 billion at December 31, 2004, and a $2.5 billion, or 29.3%, decline from $8.5 billion at June 30, 2004. Securities represented 23.7% of total assets at the close of the current quarter, down from 29.5% and 35.1%, respectively, at the earlier dates.
Available-for-sale securities represented $2.4 billion, or 40.9%, of total securities at the close of the current second quarter, and were down 21.3% and 37.8%, respectively, from $3.1 billion at December 31, 2004 and $3.9 billion at June 30, 2004. Held-to-maturity securities represented the remaining $3.5 billion of the securities portfolio at the close of the current second quarter and were down 11.0% and 22.0%, respectively, from $4.0 billion and $4.5 billion, the December 31 and June 30, 2004 amounts.
Mortgage-related securities represented $2.3 billion, or 92.2%, of available-for-sale securities at June 30, 2005, a reduction from $2.9 billion and $3.6 billion, respectively, at December 31 and June 30, 2004. Other securities accounted for the remaining $189.9 million of available-for-sale securities at the close of the current second quarter, down from $207.1 million and $332.9 million, respectively, at the earlier dates. Included in the June 30, 2005 amount were equity securities totaling $121.5 million, bonds totaling $35.2 million, capital trust notes totaling $26.7 million, and municipal obligations totaling $6.5 million.
Mortgage-related securities represented $1.9 billion, or 53.3%, of total held-to-maturity securities at June 30, 2005, while other securities represented the remaining $1.7 billion, or 46.7%. Included in the latter amount were U.S. Government agency obligations totaling $1.2 billion, capital trust notes totaling $308.1 million, and corporate bonds totaling $161.4 million.
At June 30, 2005, the respective market values of mortgage-related securities and other securities held to maturity were $1.8 billion and $1.7 billion, representing 96.9% and 102.5% of the respective carrying values at that date.
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The after-tax net unrealized loss on securities available for sale was $17.6 million at the close of the current second quarter, as compared to $20.4 million and $84.4 million, respectively, at December 31 and June 30, 2004. The improvements reflect the reduction in securities over the past four quarters as well as the decline in intermediate-term interest rates during this time.
At June 30, 2005, the Company also had stock in the Federal Home Loan Bank of New York (“FHLB-NY”) totaling $284.3 million, as compared to $232.2 million and $224.6 million, respectively, at December 31 and June 30, 2004. The amount of FHLB-NY stock held is a function of the Company’s utilization of FHLB-NY advances and repurchase agreements, which totaled $5.8 billion at June 30, 2005.
Sources of Funds
On a stand-alone basis, the Company has four primary funding sources for the payment of dividends, share repurchases, and other corporate uses: dividends paid to the Company by the Bank; capital raised through the issuance of debt instruments; capital raised through the issuance of stock; and maturities of, and income from, investments. The Bank’s ability to pay dividends to the Company is generally limited by New York State banking law and regulations and the regulations of the Federal Deposit Insurance Corporation (the “FDIC”).
The Bank itself has four primary funding sources: principal repayments and interest on loans, and to a lesser extent, loan sales; cash flows from securities sales and redemptions; wholesale borrowings in the form of FHLB-NY advances and repurchase agreements; and deposit growth. For the six months ended June 30, 2005, the cash flows from loans totaled $1.5 billion, including the sale of $170.7 million of certain one-to-four family loans during the second quarter; the cash flows from securities totaled $1.1 billion, of which $614.8 million stemmed from redemptions and $514.7 million stemmed from sales.
Deposits totaled $11.5 billion at June 30, 2005, signifying a $1.1 billion increase from the year-end 2004 balance. The increase reflects a $716.4 million, or 10.8%, rise in core deposits to $7.4 billion, representing 63.8% of total deposits, and a $419.1 million, or 11.2%, increase in certificates of deposit (“CDs”) to $4.2 billion, representing the remaining 36.2%.
The increase in core deposits stemmed from a $1.1 billion, or 40.1% rise in NOW and money market accounts to $4.0 billion and a more modest $8.4 million rise in non-interest-bearing accounts to $747.6 million. These increases served to offset a $433.7 million, or 14.2%, decline in savings accounts to $2.6 billion during the same time.
The increase in deposits has been supported by various actions taken to expand and diversify the deposit base. In the first quarter of the year, the Company established a Private Banking Group to attract deposits from local developers and property owners; in the second quarter, the Company established a Banking Development District Branch in Queens to accept New York State and City deposits, and introduced a new CD product featuring a competitive interest rate. Toward the end of June, the Company introduced MyBankingDirect.com, a nationwide online banking service, and began partnering with local colleges to develop depository relationships with students, while also offering new payment solutions to the colleges themselves.
At the end of the second quarter, the Company received the approval of the Federal Reserve Bank of New York to establish a limited-purpose commercial bank, which will enable it to accept deposits from municipalities throughout the state. As previously mentioned, the new bank will operate as a subsidiary of New York Community Bank under the name “New York Commercial Bank,” and is expected to begin accepting public funds during the third quarter of 2005. While awaiting receipt of the necessary regulatory approvals, the Company has utilized brokered deposits to supplement the deposits generated through its various other initiatives in order to fund the high level of loans produced. Brokered deposits totaled $471.1 million at June 30, 2005.
In addition to funding the increase in loans, the growth in deposits enabled the Company to pay down most of its short-term wholesale borrowings during the second quarter. Wholesale borrowings totaled $9.3 billion at June 30, 2005, down $355.6 million from the March 31, 2005 level, and down $76.1 million and $665.3 million, respectively, from the levels recorded at December 31 and June 30, 2004. Including junior subordinated debentures of $448.8 million and other borrowings of $359.1 million, the Company had total borrowed funds of $10.1 billion at June 30, 2005.
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The Company’s line of credit with the FHLB-NY is collateralized by FHLB-NY stock and by certain securities and mortgage loans under a blanket pledge agreement.
The junior subordinated debentures at June 30, 2005 reflect the effect of four interest rate swap agreements into which the Company entered in the second quarter of 2003. The agreements effectively converted four of the Company’s junior subordinated debentures from fixed to variable rate instruments. Under these agreements, which were designated, and accounted for, as “fair value hedges” aggregating $65.0 million, the Company receives a fixed interest rate equal to the interest due to the holders of the capital securities and pays a floating interest rate which is tied to the three-month LIBOR. The maturity dates, call features, and other critical terms of these derivative instruments match the terms of the junior subordinated debentures. As a result, no net gains or losses were recognized in earnings with respect to these hedges. At June 30, 2005, a $620,000 adjustment was made to the carrying amount of the junior subordinated debentures to recognize the increase in their fair value. An offsetting adjustment was made to reflect the decrease in the fair value of the interest rate swaps.
Asset and Liability Management and the Management of Interest Rate Risk
The Company manages its assets and liabilities to reduce its exposure to changes in market interest rates. The asset and liability management process has three primary objectives: to evaluate the interest rate risk inherent in certain balance sheet accounts; to determine the appropriate level of risk, given the Company’s business strategy, operating environment, capital and liquidity requirements, and performance objectives; and to manage that risk in a manner consistent with the Board’s approved guidelines.
Market Risk
As a financial institution, the Company is focused on reducing its exposure to interest rate volatility, which represents its primary market risk. Changes in market interest rates represent the greatest challenge to the Company’s financial performance, as such changes can have a significant impact on the level of income and expense recorded on a large portion of the Company’s interest-earning assets and interest-bearing liabilities, and on the market value of all interest-earning assets, other than those possessing a short term to maturity. To reduce its exposure to changing rates, the Board of Directors and management monitor the Company’s interest rate sensitivity on a regular or as needed basis so that adjustments in the asset and liability mix can be made when deemed appropriate.
To manage its interest rate risk, the Company has been pursuing the following strategies: (1) continuing its emphasis on the origination and retention of intermediate-term assets, including multi-family, commercial real estate, and construction loans; (2) continuing to originate one-to-four family loans on a pass-through basis and selling them to a third-party conduit without recourse; (3) utilizing the cash flows from securities to fund loan production; (4) increasing the prevalence of deposits within the mix of funding sources; (5) paying down the majority of its short-term borrowings; and (6) extending the maturity of other wholesale borrowings used to supplement the funding of loan production.
The actual duration of mortgage loans and mortgage-related securities can be significantly impacted by changes in prepayment levels and market interest rates. The level of prepayments may be impacted by a variety of factors, including the economy in the region where the underlying mortgages were originated; seasonal factors; demographic variables; and the assumability of the underlying mortgages. However, the largest determinants of prepayments are market interest rates and the availability of refinancing opportunities.
The rates on the Company’s multi-family and commercial real estate loans are typically based on the five-year CMT, which increased toward the end of the first quarter of 2005, but trended downward during the second quarter of the year. During this time, the Company’s cost of funds was negatively impacted by a 100-basis point rise in the federal funds rate to its quarter-end level, 3.25%. The disparate movements in short- and intermediate-term interest rates have resulted in a flattening of the yield curve, a significant factor in the contraction of the Company’s net interest margin over the past six months.
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Interest Rate Sensitivity Analysis
The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest rate sensitive” and by monitoring a bank’s interest rate sensitivity “gap.” An asset or liability is said to be interest rate sensitive within a specific time frame if it will mature or reprice within that period of time. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time frame and the amount of interest-bearing liabilities maturing or repricing within that same period of time. In a rising interest rate environment, an institution with a negative gap would generally be expected, absent the effects of other factors, to experience a greater increase in the cost of its interest-bearing liabilities than it would in the yield on its interest-earning assets, thus producing a decline in its net interest income. Conversely, in a declining rate environment, an institution with a negative gap would generally be expected to experience a lesser reduction in the yield on its interest-earning assets than it would in the cost of its interest-bearing liabilities, thus producing an increase in its net interest income.
At June 30, 2005, the Company had a negative gap of 5.94%, as compared to a negative 5.95% at March 31, 2005 and a negative 5.41% at December 31, 2004. The respective measures reflect the impact of extending the maturity of the Company’s wholesale borrowings in connection with, and subsequent to, the repositioning of the balance sheet at the close of last year’s second quarter, and the impact of the flattened yield curve on mortgage loan refinancing activity. Borrowed funds maturing in one year or less declined from 34.4% of total borrowed funds to 21.7% over the current six-month period, partially reflecting the extension of $2.0 billion of wholesale borrowings to an average maturity of two years with an average cost of 3.37% during this time.
The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at June 30, 2005 which, based on certain assumptions stemming from the Bank’s historical experience, are expected to reprice or mature in each of the future time periods shown. Except as stated below, the amounts of assets and liabilities shown as repricing or maturing during a particular time period were determined in accordance with the earlier of (1) the term to repricing, or (2) the contractual terms of the asset or liability. The table provides an approximation of the projected repricing of assets and liabilities at June 30, 2005 on the basis of contractual maturities, anticipated prepayments, and scheduled rate adjustments within a three-month period and subsequent selected time intervals. For loans and mortgage-related securities, prepayment rates were assumed to range up to 25% annually. Savings accounts, Super NOW accounts, and NOW accounts were assumed to decay at an annual rate of 5% for the first five years and 15% for the years thereafter. Money market accounts, with the exception of accounts with specified repricing dates, are assumed to decay at an annual rate of 20% for the first five years and 50% in the years thereafter.
Prepayment and deposit decay rates can have a significant impact on the Company’s estimated gap. While the Company believes its assumptions to be reasonable, there can be no assurance that assumed prepayment and decay rates will approximate actual future loan prepayments and deposit withdrawal activity.
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ThreeMonths
Or Less
More thanFive Years
to 10 Years
Interest-earning Assets:
Mortgage and other loans (1)
Mortgage-related securities (2) (3)
Other securities (2)
Total interest-earning assets
Interest-bearing Liabilities:
NOW and Super NOW accounts
Money market accounts
Total interest-bearing liabilities
Interest rate sensitivity gap per period (4)
Cumulative interest sensitivity gap
Cumulative interest sensitivity gap as a percentage of total assets
Cumulative net interest-earning assets as a percentage of net interest-bearing liabilities
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Certain shortcomings are inherent in the method of analysis presented in the preceding Interest Rate Sensitivity Analysis. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of the market, while interest rates on other types may lag behind changes in market interest rates. Additionally, certain assets, such as adjustable-rate loans, have features that restrict changes in interest rates both on a short-term basis and over the life of the asset. Furthermore, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Finally, the ability of some borrowers to repay their adjustable-rate loans may be adversely impacted by an increase in market interest rates.
Management also monitors the Company’s interest rate sensitivity through the use of a model that generates estimates of the change in the Company’s net portfolio value (“NPV”) over a range of interest rate scenarios. NPV is defined as the net present value of expected cash flows from assets, liabilities, and off-balance sheet contracts. The model assumes estimated loan prepayment rates, reinvestment rates, and deposit decay rates similar to those utilized in formulating the preceding Interest Rate Sensitivity Analysis.
To monitor its overall sensitivity to changes in interest rates, the Company models the effect of instantaneous increases and decreases in interest rates on its assets and liabilities. At June 30, 2005, a 200-basis point increase in interest rates would have reduced the NPV approximately 9.19%, as compared to 7.72% at March 31, 2005 and 7.58% at December 31, 2004. While the NPV Analysis provides an indication of the Company’s interest rate risk exposure at a particular point in time, such measurements are not intended to, and do not, provide a precise forecast of the effect of changes in market interest rates on the Company’s net interest income, and may very well differ from actual results.
In addition to the analyses of gap and net portfolio value, the Company utilizes an internal net interest income simulation to manage its sensitivity to interest rate risk. The simulation incorporates various market-based assumptions regarding the impact of changing interest rates on future levels of the Company’s financial assets and liabilities. The assumptions used in the net interest income simulation are inherently uncertain. Actual results may differ significantly from those presented in the table below, due to the frequency, timing, and magnitude of changes in interest rates; changes in spreads between maturity and repricing categories; and prepayments, among other factors, coupled with any actions taken to counter the effects of any such changes.
The following table reflects, based on the information and assumptions in effect at June 30, 2005, the estimated percentage change in future net interest income for the next twelve months, assuming a gradual increase or decrease in interest rates during such time:
Changes in
Interest Rates
(in basis points)
+ 200 over one year
- 100 over one year
Management notes that no assurances can be given that future changes in the Company’s mix of assets and liabilities will not result in greater changes to the gap, NPV, or net interest income simulation.
Liquidity, Off-Balance Sheet Arrangements and Contractual Commitments, and Capital Position
Liquidity
The Company manages liquidity to ensure that its cash flows are sufficient to support the Bank’s operations and to compensate for any temporary mismatches with regard to sources and uses of funds caused by erratic deposit and loan demand.
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As discussed under “Sources of Funds,” the Bank has several funding sources, including the deposits it gathers through its extensive branch network; cash flows from securities sales and redemptions and the interest income on investments; principal repayments and interest on loans; and borrowed funds, primarily in the form of wholesale borrowings.
While borrowed funds and the scheduled amortization of loans and securities are predictable funding sources, deposit flows and mortgage-related securities prepayments are subject to such external factors as market interest rates, competition, and economic conditions, and, accordingly, are less predictable.
The principal investing activity of the Bank is mortgage loan production, with a primary focus on loans secured by rent-controlled and -stabilized multi-family buildings in New York City. Prior to the repositioning of the balance sheet, the Company had also been investing in mortgage-related securities and, to a lesser extent, other securities. Since the repositioning, the Company has increased its mortgage loan production, complementing its portfolio of multi-family loans with commercial real estate and construction loans. In the six months ended June 30, 2005, the net cash used in investing activities totaled $1.2 billion, largely reflecting the high volume of loans originated, which was partly offset by the aforementioned cash flows from securities and loans.
The Bank’s investing activities were also supported by internal cash flows generated by its operating and financing activities. For the first six months of 2005, the net cash provided by operating activities totaled $299.3 million; the net cash provided by financing activities totaled $953.6 million, largely reflecting the significant level of deposit growth.
The Bank monitors its liquidity on a daily basis to ensure that sufficient funds are available to meet its financial obligations, including withdrawals from depository accounts, outstanding loan commitments, contractual long-term debt payments, and operating leases. The Bank’s most liquid assets are cash and due from banks and money market investments, which collectively totaled $237.2 million at June 30, 2005, as compared to $188.9 million at December 31, 2004. Additional liquidity stems from the Bank’s portfolio of available-for-sale securities, which totaled $2.4 billion at June 30, 2005, and from the Bank’s approved line of credit with the FHLB-NY.
CDs due to mature in one year or less from June 30, 2005 totaled $2.8 billion. Based upon recent retention rates as well as current pricing, management believes that a significant portion of such deposits will either roll over or be reinvested in alternative investment products sold through the Bank’s branch offices. The Company’s ability to retain its deposit base and to attract new deposits depends on numerous factors, such as customer satisfaction levels, types of deposit products offered, and the competitiveness of its interest rates.
Off-Balance Sheet Arrangements and Contractual Commitments
At June 30, 2005, the Bank had outstanding mortgage loan commitments totaling $1.4 billion. In addition, the Company continued to be obligated under numerous non-cancelable operating lease and license agreements, the amounts of which were consistent with the amounts disclosed at December 31, 2004. The Company also had outstanding letters of credit totaling $10.8 million at June 30, 2005 and December 31, 2004.
Capital Position
The Company recorded stockholders’ equity of $3.3 billion at June 30, 2005, signifying a $63.9 million increase from the balance recorded at December 31, 2004. The June 30, 2005 amount was equivalent to 12.90% of total assets and a book value of $12.44 per share, based on 261,225,054 shares; the December 31, 2004 amount was equivalent to 13.26% of total assets and a book value of $12.23 per share, based on 260,533,784 shares.
The Company calculates book value by subtracting the number of unallocated Employee Stock Ownership Plan (“ESOP”) shares at the end of the period from the number of shares outstanding at the same date. The number of unallocated ESOP shares was 4,456,613 at June 30, 2005 and 4,656,851 at December 31, 2004. The Company calculates book value in this manner to be consistent with its calculations of basic and diluted earnings per share, both of which exclude unallocated ESOP shares from the number of shares outstanding in accordance with SFAS No. 128, “Earnings per Share.”
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Excluding goodwill of $1.9 billion and core deposit intangibles of $81.7 million, the Company reported tangible stockholders’ equity of $1.2 billion at June 30, 2005, equivalent to a tangible book value of $4.71 per share. At December 31, 2004, the Company reported tangible stockholders’ equity of $1.1 billion, equivalent to a tangible book value of $4.40 per share. Excluding net unrealized losses on securities of $33.1 million and $40.7 million from the respective totals, the Company’s tangible stockholders’ equity was equivalent to 5.44% and 5.39% of tangible assets at June 30, 2005 and December 31, 2004, respectively.
The three-month increase in tangible stockholders’ equity reflects 2005 net income of $177.6 million, additional cash contributions to tangible stockholders’ equity of $13.2 million, and the $7.6 million decrease in the net unrealized loss on securities to $33.1 million. These contributing factors were partially offset by year-to-date dividend distributions totaling $130.4 million and the allocation of $1.1 million toward the repurchase of 57,402 shares of the Company’s common stock in plan-related transactions. The Company repurchases shares at the discretion of management, in the open market or through privately negotiated transactions. At June 30, 2005, there were 1,624,525 shares still available for repurchase under the Board of Directors’ five million-share repurchase authorization on April 20, 2004.
At June 30, 2005, the Company’s capital levels significantly exceeded the minimum federal requirements for a bank holding company. The Company’s leverage capital totaled $1.9 billion, representing 8.04% of adjusted average assets; its Tier 1 and total risk-based capital amounted to $1.9 billion and $2.0 billion, representing 14.47% and 15.79%, respectively, of risk-weighted assets. At December 31, 2004, the Company’s leverage capital, Tier 1 risk-based capital, and total risk-based capital amounted to $1.8 billion, $1.8 billion, and $1.9 billion, representing 8.20% of adjusted average assets, 15.00% of risk-weighted assets, and 16.43% of risk-weighted assets, respectively.
In addition, as of June 30, 2005, the Bank was categorized as “well capitalized” under the FDIC’s regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain a minimum leverage capital ratio of 5.00%, a minimum Tier 1 risk-based capital ratio of 6.00%, and a minimum total risk-based capital ratio of 10.00%.
The following regulatory capital analyses set forth the Company’s and the Bank’s leverage, Tier 1 risk-based, and total risk-based capital levels at June 30, 2005, in comparison with the minimum federal requirements.
Regulatory Capital Analysis (Company)
Total capital
Regulatory capital requirement
Excess
Regulatory Capital Analysis (Bank Only)
It is currently management’s expectation that the Bank will continue to be well capitalized under the federal regulatory guidelines and that the Company will continue to exceed the minimum federal requirements for capital adequacy.
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Comparison of the Three Months Ended June 30, 2005 and 2004
Earnings Summary
The Company recorded net income of $86.5 million, or $0.33 per diluted share, in the current second quarter, as compared to $91.1 million, or $0.35 per diluted share, in the trailing quarter and $42.8 million, or $0.16 per diluted share, in the second quarter of 2004.
Included in the second quarter 2005 amount was a $1.7 million after-tax gain on the sale of certain one-to-four family mortgage loans to another financial institution. The Company’s first quarter 2005 earnings included a $4.0 million after-tax gain on the sale of certain Bank-owned properties. In the second quarter of 2004, the Company recorded an after-tax loss of $94.9 million, or $0.35 per diluted share, on the sale of securities (the “repositioning charge”), in connection with the aforementioned repositioning of its balance sheet at the end of June.
The year-over-year increase in net income primarily reflects the impact of the repositioning charge on the Company’s second quarter 2004 net income. Excluding the repositioning charge, the year-over-year comparison of second quarter 2005 and 2004 net income reflects a combination of factors, including the shrinkage of the average balance sheet pursuant to the actions taken at, and subsequent to, the end of last year’s second quarter; the significant flattening of the yield curve over the past twelve months; and the declining benefit of the mark-to-market adjustments related to the assets and liabilities acquired in the Company’s merger with Roslyn Bancorp, Inc. (“Roslyn”) on October 31, 2003, which are being amortized or accreted to income/expense over their estimated weighted average remaining lives.
The linked-quarter reduction in net income largely reflects the impact of the flattening yield curve on the Company’s net interest income, as short-term rates rose steadily from the trailing-quarter levels and intermediate-term interest rates declined. The reduction in intermediate-term interest rates also had an impact on the Company’s fee income, inhibiting multi-family loan refinancings and the level of prepayment penalties received. The linked-quarter reductions in net interest income and non-interest income were partly offset by linked-quarter declines in operating expenses and income tax expense.
To clarify the Company’s direction, and the progress made, since the repositioning of the balance sheet, the following line-item discussions include both year-over-year and linked-quarter performance comparisons.
Net Interest Income
Net interest income is the Company’s primary source of income. Its level is a function of the average balance of interest-earning assets, the average balance of interest-bearing liabilities, and the spread between the yield on such assets and the cost of such liabilities. These factors are influenced by the pricing and mix of the Company’s interest-earning assets and interest-bearing liabilities which, in turn, may be impacted by such external factors as economic conditions, competition for loans and deposits, market interest rates, and the monetary policy of the Federal Open Market Committee of the Federal Reserve Board of Governors (the “FOMC”).
The FOMC reduces, maintains, or increases the target federal funds rate (the rate at which banks borrow funds from one another), as it deems necessary. In the first two quarters of 2004, the federal funds rate was maintained at a 45-year low of 1.00%. On June 30, 2004, the FOMC announced the first of five 25-basis point rate increases to take place through the end of December, and raised the rate another four times, in 25-basis point increments, in February, March, May, and June 2005.
While the federal funds rate drives the cost of short-term borrowings and deposits, the yields earned on loans and other interest-earning assets are typically driven by intermediate-term interest rates. As previously indicated, the Company’s multi-family and commercial real estate loans are based upon the five-year CMT. The five-year CMT rate increased from 3.63% on December 31, 2004 to 4.18% on March 31, 2005, peaking at 4.33% on March 28th. On April 14, 2005, the 5-year CMT fell below 4.00% and remained below that level through the end of the quarter, reaching a low of 3.63% on June 1st and closing the quarter at 3.72%.
To reduce its exposure to future short-term interest rate increases, the Company paid down most of its short-term wholesale borrowings in the first and second quarters of 2005, and extended an additional $2.0 billion of wholesale borrowings to an average maturity of two years with an average cost of 3.37% during the same time. While these actions contributed to the reduction in net interest margin in the second quarter, they are expected to benefit the margin in the quarters ahead.
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The Company recorded net interest income of $149.1 million in the current second quarter, as compared to $158.8 million in the trailing quarter and $235.2 million in the year-earlier three months. While a number of factors contributed to the year-over-year reduction, primary among them were the strategic decline in securities over the past four quarters; the flattening of the yield curve during the same time; the aforementioned extension of wholesale borrowings over the past two quarters; and the net impact of the mark-to-market adjustments associated with the Roslyn merger. As a result of these factors, interest income declined $38.1 million year-over-year, to $291.1 million, while interest expense rose $48.0 million, to $142.0 million.
The year-over-year reduction in interest income was the result of a $2.7 billion decline in average interest-earning assets to $21.9 billion and a three-basis point reduction in the average yield, to 5.32%. Although the average balance of loans rose $3.9 billion year-over-year to $15.2 billion, the average balance of mortgage-related securities fell $6.0 billion, to $4.6 billion, during the same time. The decline in the average yield was due to two primary factors: the reduction in the mark-to-market accretion on the interest-earning assets acquired in the Roslyn merger, and the comparatively low level of market interest rates over the past twelve months. In addition to reducing yields on new loan originations, the level of market interest rates inhibited the volume of multi-family refinancings and the attendant additions to asset yields.
The year-over-year increase in interest expense was the net effect of a $2.9 billion decline in the average balance of interest-bearing liabilities to $20.8 billion and a 114-basis point rise in the average cost of funds to 2.73%. While the average balance of interest-bearing deposits rose $1.2 billion year-over-year, the increase was offset by a decline of $4.0 billion in the average balance of borrowed funds. The higher cost of funds reflects a combination of factors, including the steady rise in short-term interest rates over the past four quarters; the aforementioned extension of wholesale borrowings; an increase in the average balance and cost of NOW and money market accounts; and a reduction in the mark-to-market accretion on the CDs and borrowed funds acquired in the Roslyn merger.
The preceding factors also contributed to a decline in interest rate spread and net interest margin, which equaled 2.59% and 2.73%, respectively, in the current second quarter and 3.76% and 3.83% in the year-earlier three months. On a linked-quarter basis, the contraction was more modest, with the spread declining 33 basis points from 2.92% and the margin declining 30 basis points from 3.03%.
The linked-quarter decline in net interest income was the net effect of an $8.7 million increase in interest income and an $18.4 million increase in interest expense. The $9.7 million difference was attributable to the planned decline in securities, which tempered the significant level of loan growth accomplished, and the immediate impact of the 50-basis point rise in short-term interest rates during the quarter on the Company’s cost of funds.
The linked-quarter increase in interest income was driven by a $937.8 million rise in the average balance of interest-earning assets, which served to offset a seven-basis point decline in the average yield. While average loans rose $1.4 billion to $15.2 billion during the quarter, this increase was somewhat tempered by a $465.7 million decline in the average balance of mortgage-related and other securities, combined. While the average yield on loans held firm at 5.48% despite the decline in market yields over the course of the quarter, the average yields on mortgage-related and other securities declined 35 and 16 basis points, respectively, during this time.
The linked-quarter rise in interest expense was attributable to a $766.2 million increase in the average balance of interest-bearing liabilities, coupled with a 26-basis point increase in the average cost of funds. The higher average balance reflects a $687.8 million rise in the average balance of interest-bearing deposits to $10.4 billion and a $78.4 million rise in the average balance of borrowed funds, to $10.4 billion. The higher average cost reflects the rise in short-term interest rates during the quarter and the extended maturity of certain wholesale borrowings at higher rates, as previously discussed.
The following tables set forth certain information regarding the Company’s average balance sheet for the periods indicated, including the average yields on its interest-earning assets and the average costs of its interest-bearing liabilities. Average yields are calculated by dividing the interest income produced by the average balance of interest-earning assets. Average costs are calculated by dividing the interest expense produced by the average
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balance of interest-bearing liabilities. The average balances for the period are derived from average balances that are calculated daily. The average yields and costs include fees that are considered adjustments to such average yields and costs.
Net Interest Income Analysis (Year-Over-Year Comparison)
Average
Balance
Yield/Cost
Yield/
Cost
Interest-earning assets:
Mortgage and other loans, net (1)
Mortgage-related securities (2)
Non-interest-earning assets
Interest-bearing deposits:
Total interest-bearing deposits
Non-interest-bearing deposits
Stockholders’ equity
Net interest income/interest rate spread
Net interest-earning assets/net interest margin
Ratio of interest-earning assets to interest-bearing liabilities
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Net Interest Income Analysis (Linked-Quarter Comparison)
Assets:
Liabilities and Stockholders’ Equity:
Provision for Loan Losses
The provision for loan losses is based on management’s assessment of the adequacy of the loan loss allowance. This assessment, made periodically, considers several factors, including the current and historic performance of the loan portfolio and its inherent risk characteristics; the level of non-performing loans and charge-offs; current trends in regulatory supervision; local economic conditions; and the direction of real estate values.
Reflecting said assessment, no provision for loan losses was recorded in the three months ended June 30, 2005 or 2004. Non-performing assets totaled $42.9 million at June 30, 2005 and equaled 0.17% of total assets, as compared to $33.8 million, or 0.14% of total assets, at the close of the trailing quarter, and $28.7 million, or 0.12% of total assets, at December 31, 2004. Included in the June 30, 2005 amount were non-performing loans of $42.4 million, up $9.3 million and $14.2 million, respectively, from the amounts recorded at the earlier dates.
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In the second quarter of 2005, the Company charged off $3,000 of consumer loans that had been acquired in merger transactions. Reflecting the charge-off, the allowance for loan losses totaled $78.0 million at June 30, 2005, and was equivalent to 184.22% of non-performing loans and 0.50% of total loans. At March 31, 2005, the allowance for loan losses totaled $78.0 million and was equivalent to 236.03% of non-performing loans and 0.54% of total loans. At December 31, 2004, the allowance for loan losses totaled $78.1 million, and was equivalent to 277.31% of non-performing loans and 0.58% of total loans.
Please see “Critical Accounting Policies” and “Asset Quality” earlier in this report for a detailed discussion of the factors considered by management in determining the allowance for loan losses and a further discussion of the Company’s asset quality.
Non-interest Income
The Company derives non-interest income from two primary sources: fee income, which generally includes retail deposit fees, prepayment penalties, and other loan-related fees; and other income, which primarily includes the revenues produced by the sale of third-party investment products, and the income generated by the Company’s investment in Bank-owned Life Insurance (“BOLI”) and its investment advisory firm, Peter B. Cannell & Co., Inc. (“PBC”).
In the second quarter of 2005, the Company recorded non-interest income of $29.9 million, as compared to $32.0 million in the trailing quarter and a loss of $126.2 million in the three months ended June 30, 2004. Included in the second quarter 2005 amount was a $2.8 million pre-tax gain on the bulk sale of certain one-to-four family loans to another financial institution, in addition to gains of $136,000 in connection with the Company’s practice of originating one-to-four family loans through a third-party conduit. Included in the first quarter 2005 amount was a $6.1 million pre-tax gain on the sale of certain Bank-owned properties. In the second quarter of 2004, the Company recorded a $157.2 million pre-tax loss on the sale of securities in connection with the aforementioned repositioning of the balance sheet.
In the second quarter of 2005, the Company recorded fee income of $11.0 million, down $1.9 million from the trailing-quarter level and $7.2 million from the year-earlier amount. The linked-quarter and year-over-year reductions in fee income primarily reflect the aforementioned decline in multi-family loan refinancings, which has resulted in a reduction in prepayment penalties. Other income totaled $16.0 million in the current second quarter, as compared to $12.9 million and $12.8 million, respectively, in the three months ended March 31, 2005 and June 30, 2004. The linked-quarter and year-over-year increases primarily reflect the aforementioned pre-tax gain on the sale of loans in the current second quarter, in addition to higher levels of BOLI income and PBC revenues.
The following table summarizes the components of the Company’s non-interest income (loss) for the quarters ended June 30, 2005, March 31, 2005, and June 30, 2004.
Other income:
BOLI
Peter B. Cannell
Third-party investment product sales
Gain on sale of 1-4 family and other loans
Total other income
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Non-interest Expense
Non-interest expense has two components: operating expenses, which consist of compensation and benefits, occupancy and equipment, general and administrative (“G&A”), and other expenses; and the amortization of the core deposit intangibles (“CDI”) stemming from the Company’s mergers with Richmond County Financial Corp. and Roslyn Bancorp, Inc.
In the second quarter of 2005, the Company recorded total non-interest expense of $52.2 million, up $1.6 million from the year-earlier level, but down $1.3 million from the level recorded in the first quarter of the current year. Operating expenses accounted for $49.3 million of the second quarter 2005 total, as compared to $47.8 million and $50.6 million, respectively, of the year-earlier and linked-quarter amounts. Operating expenses equaled 0.79% of average assets in the current second quarter and 0.69% and 0.84% of average assets in the year-earlier and trailing periods.
The year-over-year increase in operating expenses was due to a $1.7 million rise in compensation and benefits expense to $25.2 million, primarily reflecting increased staffing levels, and a $1.3 million increase in occupancy and equipment expense to $11.1 million. In the second quarter of 2004, the Company had benefited from a property tax refund and from rental income on certain Bank-owned properties which were sold in the first quarter of 2005. The year-over-year increases in compensation and benefits and occupation and equipment expenses were partly offset by a $1.2 million reduction in G&A expense to $11.1 million and a $192,000 reduction in other expenses to $2.0 million.
The linked-quarter reduction in operating expenses stemmed from three components: a $242,000 decline in compensation and benefits expense; a $303,000 decline in occupancy and equipment expense; and an $869,000 decline in G&A expense. In the first quarter of 2005, the Company’s occupancy and equipment expense was boosted by certain seasonal factors, and its G&A expense by the costs of a marketing campaign.
The Company had 2,048 full-time equivalent employees at June 30, 2005, as compared to 1,970 at June 30, 2004.
CDI amortization totaled $2.9 million in the current second quarter, exceeding the year-earlier amount by $70,000. The year-over-year increase reflects the accelerated amortization relating to the sale of certain deposits that had been acquired in the Richmond County merger.
Income Tax Expense
Income tax expense totaled $40.3 million for the three months ended June 30, 2005, as compared to $46.1 million and $15.6 million, respectively, for the three months ended March 31, 2005 and June 30, 2004. The year-over-year increase reflects the higher level of pre-tax income recorded in the current second quarter, $126.8 million, as compared to the level recorded in the second quarter of 2004, $58.4 million. The linked-quarter reduction in income tax expense was the result of a $10.4 million decline in pre-tax income and a decline in the effective tax rate from 33.6% to 31.8%. The reduction in the effective tax rate partially reflects the Company’s receipt of a New Markets Tax Credit allocation, which entitles the Company to recognize $16.4 million in tax credits from the U.S. Treasury Department over a period of seven years, beginning in the second quarter of 2005.
Comparison of the Six Months Ended June 30, 2005 and 2004
The Company generated net income of $177.6 million, or $0.68 per diluted share, in the six months ended June 30, 2005, up from $172.8 million, or $0.64 per diluted share, in the six months ended June 30, 2004. As previously discussed, the Company’s six-month 2005 earnings include an after-tax gain of $4.0 million on the sale of certain Bank-owned properties in the first quarter and an after-tax gain of $1.7 million on the sale of certain one-to-four family loans in the second quarter of the year. In contrast, the Company’s six-month 2004 earnings reflect the impact of the aforementioned after-tax repositioning charge of $94.9 million, or $0.35 per diluted share.
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Absent these factors, the comparison of the Company’s six-month 2005 and six-month 2004 earnings largely reflects the impact of the flattening of the yield curve over the past four quarters, and the shrinkage of the balance sheet in connection with the aforementioned repositioning. In addition, the benefit of the mark-to-market adjustments on the interest-earning assets and interest-bearing liabilities acquired in the Roslyn merger have declined over the twelve months ended June 30, 2005.
The Company recorded net interest income of $307.9 million in the current six-month period as compared to $448.7 million in the year-earlier six months. During this time, the Company’s interest rate spread and net interest margin contracted 113 and 106 basis points, respectively, to 2.75% and 2.87%.
The disparities between the Company’s six-month 2005 and 2004 net interest income, spread, and margin were attributable to the same combination of factors that triggered the disparities between the second quarter 2005 and 2004 amounts: the significant flattening of the yield curve over the past four quarters; the reduction in the mark-to-market adjustments on the interest-earning assets and interest-bearing liabilities acquired in the Roslyn merger; and the impact of the balance sheet repositioning at the end of June 2004, as discussed in the Overview.
In the subsequent quarters, the Company continued to reduce the balance of securities, as previously noted, using the cash flows from securities sales and redemptions to grow the loan portfolio. Thus, while average loans rose $3.6 billion year-over-year to $14.5 billion in the current six-month period, the increase was offset by a $4.7 billion reduction in average mortgage-related securities to $4.8 billion. During this time, the Company also shifted its funding mix to emphasize deposits. Thus, while average interest-bearing deposits rose $757.9 million to $10.1 billion in the current six-month period, the increase was tempered by a $2.4 billion reduction in average borrowed funds to $10.3 billion. Furthermore, in the first six months of 2005, the Company extended an additional $2.0 million of wholesale borrowings to an average maturity of two years with an average cost of 3.37%.
The impact of these factors is illustrated by comparing the average balances of interest-earning assets and interest-bearing liabilities and the respective average yields and costs. In the first six months of 2004, the Company’s average interest-earning assets totaled $22.8 billion and generated an average yield of 5.48%; its average interest-bearing liabilities totaled $22.1 billion and featured an average cost of 1.60%. In contrast, the Company’s average interest-earning assets totaled $21.4 billion in the first six months of 2005, reflecting a $1.4 billion reduction, and generated an average yield of 5.35%, down 13 basis points. During this time, the average balance of interest-bearing liabilities totaled $20.4 billion, reflecting a $1.6 billion reduction, but generated an average cost of 2.60%, up 100 basis points. As a result, while interest income declined $51.5 million to $573.5 million in the current six-month period, interest expense rose $89.3 million to $265.6 million.
The following table sets forth certain information regarding the Company’s average balance sheet for the periods indicated, including the average yields on its interest-earning assets and the average costs of its interest-bearing liabilities. Average yields are calculated by dividing the interest income produced by the average balance of interest-earning assets. Average costs are calculated by dividing the interest expense produced by the average balance of interest-bearing liabilities. The average balances for the period are derived from average balances that are calculated daily. The average yields and costs include fees that are considered adjustments to such average yields and costs.
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Net Interest Income Analysis
As previously noted, the provision for loan losses is based on management’s assessment of the loan loss allowance and the current and historic performance of the loan portfolio, among other factors. The Company recorded no provision for loan losses in the six months ended June 30, 2005 or 2004. For additional information, please see the second quarter 2005 discussion of the provision for loan losses, the discussion of the allowance for loan losses, and the discussion of asset quality earlier in this report.
The Company recorded non-interest income of $61.9 million in the first six months of 2005, as compared to a non-interest loss of $88.8 million in the first six months of 2004. In the current six-month period, the Company recorded pre-tax net securities gains of $2.9 million, as compared to pre-tax net securities losses of $147.3 million in the year-earlier six months.
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The latter amount reflects the impact of the balance sheet repositioning at the end of June 2004, which included the sale of $5.1 billion of securities at a pre-tax loss of $157.2 million.
Fee income totaled $24.0 million and $32.0 million, respectively, in the current and year-earlier six-month periods, while other income totaled for $28.9 million and $26.6 million, respectively. The decline in six-month fee income was primarily due to a lower level of refinancing activity, which resulted in a reduction in prepayment penalties, particularly in the second quarter of 2005. The increase in other income reflects the gain on the sale of certain one-to-four family loans discussed in the summary of second quarter 2005 non-interest income, as well as an increase in BOLI income and PBC revenues.
The Company also recorded a gain of $6.1 million on the sale of certain Bank-owned properties in the first quarter of 2005, which contributed to the year-over-year increase in six-month 2005 non-interest income.
The following table summarizes the components of the Company’s non-interest income (loss) for the six months ended June 30, 2005 and 2004:
The Company recorded non-interest expense of $105.8 million in the current six-month period, as compared to $100.4 million in the first six months of 2004. The increase was largely due to a $5.3 million rise in operating expenses to $99.9 million, representing 0.81% of average assets, with all four expense categories trending upward year-over-year. The majority of the increase stemmed from a $3.2 million rise in occupancy and equipment expense to $22.5 million and a $1.8 million increase in compensation and benefits expense to $50.6 million. Over the course of 2004, the Company opened four de novo branches, the impact of which is reflected in the higher levels of compensation and benefits and occupancy and equipment expenses in the first six months of 2005.
The Company recorded income tax expense of $86.4 million in the current six-month period, signifying a $389,000 decline from the level recorded in the first six months of 2004. The reduction was the net effect of a $4.4 million increase in pre-tax income to $264.0 million and a decline in the effective tax rate to 32.7% from 33.4%. The lower effective tax rate is primarily due to the benefit of the aforementioned New Markets Tax Credit allocation, which was awarded by the U.S. Treasury Department in the second quarter of 2005 and is expected to benefit the Company over a period of seven years.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Quantitative and qualitative disclosures about the Company’s market risk were presented in the discussion and analysis of Market Risk and Interest Rate Sensitivity that appear on pages 26 – 28 of the Company’s 2004 Annual Report to Shareholders, filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 16, 2005. Subsequent changes in the Company’s market risk profile and interest rate sensitivity are detailed in the discussion entitled “Asset and Liability Management and the Management of Interest Rate Risk,” in this quarterly report.
ITEM 4. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15(b), as adopted by the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms.
(b) Internal Control over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings
In the normal course of the Company’s business, there are various outstanding legal proceedings. In the opinion of management, based on consultation with legal counsel, the financial position of the Company will not be affected materially as a result of the outcome of such legal proceedings.
In February 1983, a burglary of the contents of safe deposit boxes occurred at a branch office of CFS Bank, now the Queens County Savings Bank division of New York Community Bank. At December 31, 2004, the Bank had a lawsuit pending, whereby the plaintiffs are seeking recovery of approximately $12.4 million in damages. This amount does not include any statutory prejudgment interest that could be awarded on a judgment amount, if any; such interest accumulates at a rate of 9% per annum from the date of loss. The ultimate liability, if any, that might arise from the disposition of these claims cannot presently be determined. Management believes it has meritorious defenses against this action and continues to defend its position.
In 2004, the Company and various executive officers and directors were named in a series of class action lawsuits brought in the United States District Court, Eastern District of New York, and one class action lawsuit brought in the Supreme Court of the State of New York, Kings County, that was later removed by the defendants to federal court. The class actions are brought on behalf of persons and entities, other than defendants, who purchased or otherwise acquired the Company’s securities from June 27, 2003 to July 1, 2004, or such shorter period as defined in some of the actions. The lawsuits are all related to the same sets of facts and circumstances and all but one allege that the Company violated Sections 11 and 12 of the Securities Act of 1933, Sections 10 and 14 of the Securities Exchange Act of 1934, and Rule 10b-5, promulgated pursuant to Section 10 of the Securities Exchange Act of 1934. Plaintiffs allege, among other things, that the Registration Statement issued in connection with the Company’s merger with Roslyn Bancorp, Inc. and other documents and statements made by executive management were inaccurate and misleading, contained untrue statements of material facts, omitted other facts necessary to make the statements made not misleading, and concealed and failed to adequately disclose material facts. Based upon the same facts, an additional suit alleges the Company violated the Employee Retirement Income Security Act (“ERISA”) on behalf of a putative class of participants in the New York Community Bank Employee Savings Plan. The cases are in preliminary stages. The defendants moved to dismiss the ERISA action, but no defendant has answered or otherwise responded to any of the putative securities class action complaints. Management believes it has meritorious defenses against these actions and continues to defend its position.
On May 6, 2005, sixteen of the Company’s current or former officers and directors were named as defendants in a putative derivative action filed by an alleged shareholder on behalf of the Company in the United States District Court for the Eastern District of New York. The same shareholder previously had sent the Company’s Board of Directors a letter reciting many of the allegations made in the putative class actions, and demanding that the Board take a variety of actions allegedly required to address those allegations. The Board has appointed a committee of independent directors to evaluate what response, if any, to make to this letter. Nevertheless, the putative derivative plaintiff filed an action repeating the same allegations, and purporting to seek on behalf of the Company money damages, restitution and equitable relief against the defendants for various alleged breaches of duty and alleged corporate waste. Plaintiff has advised the Company that she intends to file an amended complaint by August 15, 2005. The defendants have not yet answered or otherwise responded to the complaint. The defendants deny the allegations in the complaints and will vigorously defend both the substantive and procedural aspects of the litigation.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Share Repurchase Program
During the three months ended June 30, 2005, the Company allocated $25,000 toward the repurchase of 1,415 shares of its common stock, as outlined in the following table:
Period
(a)
Total Number ofShares (or Units)Purchased (1)
(b)
Average Price
Paid per Share
(or Unit)
(c)
Total Number ofShares (or Units)Purchased as Part ofPublicly AnnouncedPlans or Programs
(d)Maximum Number (orApproximate DollarValue) of Shares (orUnits) that May Yet Be
Purchased Under thePlans or Programs (2)
Month #1:
April 1, 2005 through April 30, 2005
Month #2:
May 1, 2005 through May 31, 2005
Month #3:
June 1, 2005 through June 30, 2005
Total
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Dominick Ciampa
William C. Frederick, M.D.
Max L. Kupferberg
Joseph L. Mancino
Spiros J. Voutsinas
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The following directors are serving terms of office that continue through 2006 and 2007, as noted:
Director
Maureen E. Clancy
Robert S. Farrell
Joseph R. Ficalora
Michael F. Manzulli
James J. O’Donovan
Donald M. Blake
Thomas A. Doherty
Michael J. Levine
Guy V. Molinari
John A. Pileski
John M. Tsimbinos
Broker
Non-Votes
Ratification of the appointment of KPMG LLP as independent registered public accounting firm for the fiscal year ending December 31, 2005.
Item 5. Other Information
Item 6. Exhibits
Exhibit 3.1:
Exhibit 3.2:
Exhibit 3.3:
Exhibit 3.4(a):
Exhibit 3.4(b):
Exhibit 4.1:
Exhibit 4.2:
Exhibit 4.3:
Exhibit 4.4:
Exhibit 10.1:
Exhibit 11:
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Exhibit 31.1:
Exhibit 31.2:
Exhibit 32:
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
New York Community Bancorp, Inc.
(Registrant)
DATE: August 9, 2005
BY:
/s/ Joseph R. Ficalora
President and
Chief Executive Officer
/s/ Thomas R. Cangemi
Thomas R. Cangemi
Senior Executive Vice President
and Chief Financial Officer
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