UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2017
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. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-acceleratedfiler, smaller reporting company or an emerging growth company. See the definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
489,054,449
Quarter Ended September 30, 2017
INDEX
FINANCIAL INFORMATION
Financial Statements
Consolidated Statements of Condition as of September 30, 2017 (unaudited) and December 31, 2016
Consolidated Statements of Income and Comprehensive Income for the Three and Nine Months Ended September 30, 2017 and 2016 (unaudited)
Consolidated Statement of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2017 (unaudited)
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016 (unaudited)
Notes to the Consolidated Financial Statements
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Controls and Procedures
OTHER INFORMATION
Legal Proceedings
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults upon Senior Securities
Mine Safety Disclosures
Other Information
Exhibits
Signatures
CONSOLIDATED STATEMENTS OF CONDITION
(in thousands, except share data)
Assets:
Cash and cash equivalents
Securities:
Available-for-sale($1,162,014 pledged at September 30, 2017)
Held-to-maturity($1,930,533 pledged and fair value of $3,813,959 at December 31, 2016)
Total securities
Loans held for sale
Non-covered loans held for investment, net of deferred loan fees and costs
Less: Allowance for losses on non-covered loans
Non-covered loans held for investment, net
Covered loans
Less: Allowance for losses on covered loans
Covered loans, net
Total loans, net
Federal Home Loan Bank stock, at cost
Premises and equipment, net
FDIC loss share receivable
Goodwill
Core deposit intangibles
Bank-owned life insurance
Other assets (includes $16,990 of other real estate owned covered by Loss Share Agreements at December 31, 2016)
Total assets
Liabilities and Stockholders’ Equity:
Deposits:
Interest-bearing checking and money market accounts
Savings accounts
Certificates of deposit
Non-interest-bearing accounts
Total deposits
Borrowed funds:
Wholesale borrowings:
Federal Home Loan Bank advances
Repurchase agreements
Federal funds purchased
Total wholesale borrowings
Junior subordinated debentures
Total borrowed funds
Other liabilities
Total liabilities
Stockholders’ equity:
Preferred stock at par $0.01 (5,000,000 shares authorized): Series A (515,000 shares issued and outstanding)
Common stock at par $0.01 (900,000,000 shares authorized; 489,072,101 and 487,067,889 shares issued; and 489,061,848 and 487,056,676 shares outstanding, respectively)
Paid-in capital in excess of par
Retained earnings
Treasury stock, at cost (10,253 and 11,213 shares, respectively)
Accumulated other comprehensive loss, net of tax:
Net unrealized gain (loss) on securities available for sale, net of tax of $34,189 and $534, respectively
Net unrealized loss on the non-credit portion of other-than-temporary impairment (“OTTI”) losses on securities, net of tax of $3,338 and $3,351, respectively
Net unrealized loss on pension and post-retirement obligations, net of tax of $31,744 and $34,355, respectively
Total accumulated other comprehensive loss, net of tax
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to the consolidated financial statements.
1
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(in thousands, except per share data)
(unaudited)
Interest Income:
Mortgage and other loans
Securities and money market investments
Total interest income
Interest Expense:
Borrowed funds
Total interest expense
Net interest income
Provision for losses on non-covered loans
Recovery of losses on covered loans
Net interest income after provision for (recovery of) loan losses
Non-Interest Income:
Mortgage banking income
Fee income
Net (loss) gain on sales of loans
Net gain on sales of securities
FDIC indemnification expense
Gain on sale of covered loans and mortgage banking operations
Other
Total non-interest income
Non-Interest Expense:
Operating expenses:
Compensation and benefits
Occupancy and equipment
General and administrative
Total operating expenses
Amortization of core deposit intangibles
Merger-related expenses
Total non-interest expense
Income before income taxes
Income tax expense
Net income
Preferred stock dividends
Net income available to common shareholders
Basic earnings per common share
Diluted earnings per common share
Other comprehensive (loss) income, net of tax:
Change in net unrealized gain/loss on securities available for sale, net of tax of $3,049; $396; $35,493; and $1,186, respectively
Change in the non-credit portion of OTTI losses recognized in other comprehensive income, net of tax of $0; $12; $13; and $36, respectively
Change in pension and post-retirement obligations, net of tax of $870; $946; $2,611 and $2,837, respectively
Less: Reclassification adjustment for sales of available-for-sale securities, net of tax of $770
Total other comprehensive (loss) income, net of tax
Total comprehensive income, net of tax
2
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
Preferred Stock (Par Value: $0.01):
Balance at beginning of year
Issuance of preferred stock (515,000 shares)
Balance at end of period
Common Stock (Par Value: $0.01):
Shares issued for restricted stock awards (2,004,212 shares)
Paid-in Capital in Excess of Par:
Shares issued for restricted stock awards, net of forfeitures
Compensation expense related to restricted stock awards
Retained Earnings:
Dividends paid on common stock ($0.51 per share)
Dividends paid on preferred stock ($31.88 per share)
Treasury Stock:
Purchase of common stock (712,877 shares)
Shares issued for restricted stock awards (713,837 shares)
Accumulated Other Comprehensive Loss, Net of Tax:
Other comprehensive income, net of tax
3
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash Flows from Operating Activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses
Depreciation and amortization
Amortization of discounts and premiums, net
Net gain on sales of loans
Stock-based compensation
Deferred tax (benefit) expense
Changes in operating assets and liabilities:
Decrease in other assets
Increase (decrease) in other liabilities
Origination of loans held for sale
Proceeds from sales of loans originated for sale
Net cash provided by operating activities
Cash Flows from Investing Activities:
Proceeds from repayment of securities held to maturity
Proceeds from repayment of securities available for sale
Proceeds from sales of securities held to maturity
Proceeds from sales of securities available for sale
Purchases of securities held to maturity
Purchase of securities available for sale
Redemption of Federal Home Loan Bank stock
Purchase of Federal Home Loan Bank stock
Proceeds from sales of loans
Other changes in loans, net
Purchase of premises and equipment, net
Net cash provided by investing activities
Cash Flows from Financing Activities:
Net increase in deposits
Net decrease in short-term borrowed funds
(Repayments of) proceeds from long-term borrowed funds
Net proceeds from issuance of preferred stock
Cash dividends paid on common stock
Cash dividends paid on preferred stock
Payments relating to treasury shares received for restricted stock award tax payments
Net cash used in financing activities
Net increase 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 interest
Cash paid for income taxes
Non-cash investing and financing activities:
Transfers to other real estate owned from loans
Transfer of loans from held for investment to held for sale
Shares issued for restricted stock awards
Securities transferred from held to maturity to available for sale
4
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Basis of Presentation
Organization
New York Community Bancorp, Inc. (on a stand-alone basis, the “Parent Company” or, collectively with its subsidiaries, the “Company”) was organized under Delaware law on July 20, 1993 and is the holding company for New York Community Bank and New York Commercial Bank (hereinafter referred to as the “Community Bank” and the “Commercial Bank,” respectively, and collectively as the “Banks”). For the purpose of these Consolidated Financial Statements, the “Community Bank” and the “Commercial Bank” refer not only to the respective banks but also to their respective subsidiaries.
The Community Bank is the primary banking subsidiary of the Company, which was formerly known as Queens County Bancorp, Inc. Founded on April 14, 1859 and formerly known as Queens County Savings Bank, the Community Bank converted from a state-chartered mutual savings bank to the capital stock form of ownership on November 23, 1993, at which date the Company issued its initial offering of common stock (par value: $0.01 per share) at a price of $25.00 per share ($0.93 per share on a split-adjusted basis, reflecting the impact of nine stock splits between 1994 and 2004). The Commercial Bank was established on December 30, 2005.
Reflecting its growth through acquisitions, the Community Bank currently operates 225 branches, two of which operate directly under the Community Bank name. The remaining 223 Community Bank branches operate through seven divisional banks: Queens County Savings Bank, Roslyn Savings Bank, Richmond County Savings Bank, and Roosevelt Savings Bank in New York; Garden State Community Bank in New Jersey; AmTrust Bank in Florida and Arizona; and Ohio Savings Bank in Ohio.
The Commercial Bank currently operates 30 branches in Manhattan, Queens, Brooklyn, Westchester County, and Long Island (all in New York), including 18 branches that operate under the name “Atlantic Bank.”
Basis of Presentation
The following is a description of the significant accounting and reporting policies that the Company and its subsidiaries follow in preparing and presenting their consolidated financial statements, which conform to U.S. generally accepted accounting principles (“GAAP”) and to general practices within the banking industry. The preparation of financial statements in conformity with GAAP requires the Company to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Estimates that are particularly susceptible to change in the near term are used in connection with the determination of the allowances for loan losses; the evaluation of goodwill for impairment; and the evaluation of the need for a valuation allowance on the Company’s deferred tax assets.
The accompanying consolidated financial statements include the accounts of the Company and other entities in which the Company has a controlling financial interest. All inter-company accounts and transactions are eliminated in consolidation. The Company currently has certain unconsolidated subsidiaries in the form of wholly-owned statutory business trusts, which were formed to issue guaranteed capital securities (“capital securities”). See Note 7, “Borrowed Funds,” for additional information regarding these trusts.
Note 2. Computation of Earnings per Common Share
Basic earnings per common share (“EPS”) is computed by dividing the net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS is computed using the same method as basic EPS, however, the computation reflects the potential dilution that would occur if outstanding in-the-money stock options were exercised and converted into common stock.
Unvested stock-based compensation awards containing non-forfeitable rights to dividends paid on the Company’s common stock are considered participating securities, and therefore are included in the two-class method for calculating EPS. Under the two-class method, all earnings (distributed and undistributed) are allocated to common shares and participating securities based on their respective rights to receive dividends on the common stock. The Company grants restricted stock to certain employees under its stock-based compensation plan. Recipients receive cash dividends during the vesting periods of these awards, including on the unvested portion of such awards. Since these dividends are non-forfeitable, the unvested awards are considered participating securities and therefore have earnings allocated to them.
5
The following table presents the Company’s computation of basic and diluted EPS for the periods indicated:
Less: Dividends paid on and earnings allocated to participating securities
Earnings applicable to common stock
Weighted average common shares outstanding
Potential dilutive common shares (1)
Total shares for diluted earnings per share computation
Diluted earnings per common share and common share equivalents
Note 3. Reclassifications Out of Accumulated Other Comprehensive Loss
Details about
Accumulated Other Comprehensive Loss
Affected Line Item in theConsolidated Statement of Operations
and Comprehensive Income
Unrealized gains onavailable-for-sale securities
Net gain on sales of securities, net of tax
Amortization of defined benefit pension plan items:
Past service liability
Included in the computation of net periodic (credit) expense (2)
Actuarial losses
Total before tax
Tax benefit
Amortization of defined benefit pension plan items, net of tax
Total reclassifications for the period
6
Note 4. Securities
The following tables summarize the Company’s portfolio of securities available for sale at the dates indicated:
Mortgage-Related Securities:
GSE (1) certificates
GSE CMOs (2)
Total mortgage-related securities
Other Securities:
U. S. Treasury obligations
GSE debentures
Corporate bonds
Municipal bonds
Capital trust notes
Preferred stock
Mutual funds and common stock (3)
Total other securities
Total securities available for sale(4)
GSE certificates
Mutual funds and common stock
Total securities available for sale
7
The following table summarizes the Company’s portfolio of securities held to maturity at December 31, 2016:
GSE CMOs
Total securities held to maturity(1)
At September 30, 2017 and December 31, 2016, respectively, the Company had $579.5 million and $590.9 million of FHLB-NY stock, at cost. The Company is required to maintain an investment in FHLB-NY stock in order to have access to the funding it provides.
The following table summarizes the gross proceeds and gross realized gains from the sale of available-for-sale securities during the periods indicated:
Gross proceeds
Gross realized gains
In addition, during the nine months ended September 30, 2017, the Company sought to take advantage of favorable bond market conditions and sold held-to-maturity securities with an amortized cost of $521.0 million resulting in gross proceeds of $547.9 million including a gross realized gain of $26.9 million. Accordingly, the Company transferred the remaining $3.0 billion of held-to-maturity securities to available-for-sale with a net unrealized gain of $82.8 million classified in other comprehensive loss in the Consolidated Statements of Condition. Having our securities portfolio classified as available-for-sale improves the Company’s interest rate risk sensitivity and liquidity measures and provides the Company with more options in meeting the expected future Liquidity Coverage Ratio (“LCR”) requirements.
In the following table, the beginning balance represents the credit loss component for debt securities on which OTTI occurred prior to January 1, 2017. For credit-impaired debt securities, OTTI recognized in earnings after that date is presented as an addition in two components, based upon whether the current period is the first time a debt security was credit-impaired (initial credit impairment) or is not the first time a debt security was credit-impaired (subsequent credit impairment).
Beginning credit loss amount as of December 31, 2016
Add:
Less:
Ending credit loss amount as of September 30, 2017
8
The following table summarizes, by contractual maturity, the amortized cost of available-for-sale securities at September 30, 2017:
Available-for-SaleSecurities: (3)
Due within one year
Due from one to five years
Due from five to ten years
Due after ten years
9
The following table presentsavailable-for-sale securities having a continuous unrealized loss position for less than twelve months and for twelve months or longer as of September 30, 2017:
Temporarily ImpairedAvailable-for-Sale Securities:
Equity securities
Total temporarily impairedavailable-for-sale securities
The following table presentsheld-to-maturity and available-for-sale securities having a continuous unrealized loss position for less than twelve months and for twelve months or longer as of December 31, 2016:
Temporarily ImpairedHeld-to-Maturity Securities:
Total temporarily impairedheld-to-maturity securities
10
An OTTI loss on impaired debt securities must be fully recognized in earnings if an investor has the intent to sell the debt security, or if it is more likely than not that the investor will be required to sell the debt security before recovery of its amortized cost. However, even if an investor does not expect to sell a debt security, it must evaluate the expected cash flows to be received and determine if a credit loss has occurred. In the event that a credit loss occurs, only the amount of impairment associated with the credit loss is recognized in earnings. Amounts of impairment relating to factors other than credit losses are recorded in AOCL.
At September 30, 2017, the Company had unrealized losses on certain GSE mortgage-related securities, municipal bonds, capital trust notes, and equity securities. The unrealized losses on the Company’s GSE mortgage-related securities, municipal bonds, and capital trust notes at September 30, 2017 were primarily caused by movements in market interest rates and spread volatility, rather than credit risk. These securities are not expected to be settled at a price that is less than the amortized cost of the Company’s investment.
The Company reviews quarterly financial information related to its investments in capital trust notes, as well as other information that is released by each of the issuers of such notes, to determine their continued creditworthiness. The Company continues to monitor these investments and currently estimates that the present value of expected cash flows is not less than the amortized cost of the securities. It is possible that these securities will perform worse than is currently expected, which could lead to adverse changes in cash flows from these securities and potential OTTI losses in the future. Future events that could trigger material unrecoverable declines in the fair values of the Company’s investments, and thus result in potential OTTI losses, include, but are not limited to, government intervention; deteriorating asset quality and credit metrics; significantly higher levels of default and loan loss provisions; losses in value on the underlying collateral; net operating losses; and illiquidity in the financial markets.
The Company considers a decline in the fair value of equity securities to be other than temporary if the Company does not expect to recover the entire amortized cost basis of the security. The unrealized losses on the Company’s equity securities at September 30, 2017 were caused by market volatility. The Company evaluated the near-term prospects of recovering the fair value of these securities, together with the severity and duration of impairment to date, and determined that they were not other-than-temporarily impaired. Nonetheless, it is possible that these equity securities will perform worse than is currently expected, which could lead to adverse changes in their fair value, or to the failure of the securities to fully recover in value as currently anticipated by management. Either event could cause the Company to record an OTTI loss in a future period. Events that could trigger a material decline in the fair value of these securities include, but are not limited to, deterioration in the equity markets; a decline in the quality of the loan portfolio of the issuer in which the Company has invested; and the recording of higher loan loss provisions and net operating losses by such issuer.
The investment securities designated as having a continuous loss position for twelve months or more at September 30, 2017 consisted of five capital trust notes and five agency mortgage-related securities. At December 31, 2016 securities designated as having a continuous loss position for twelve months or more consisted of five capital trust notes. At September 30, 2017, the fair value of securities having a continuous loss position for twelve months or more was 18.4% below the collective amortized cost of $62.5 million. At December 31, 2016, the fair value of such securities was 32.2% below the collective amortized cost of $43.7 million. At September 30, 2017 and December 31, 2016, the combined market value of the respective securities represented unrealized losses of $11.5 million and $14.1 million, respectively.
11
Note 5: Loans
The following table sets forth the composition of the loan portfolio at the dates indicated:
Non-Covered Loans Held for Investment:
Mortgage Loans:
Multi-family
Commercial real estate
One-to-fourfamily
Acquisition, development, and construction
Total mortgage loans held for investment
Other Loans:
Commercial and industrial
Lease financing, net of unearned income of $58,870 and $60,278, respectively
Total commercial and industrial loans(1)
Purchased credit-impaired loans
Total other loans held for investment
Total non-covered loans held for investment
Net deferred loan origination costs
Allowance for losses on non-covered loans
Allowance for losses on covered loans
Non-Covered Loans
Non-Covered Loans Held for Investment
The majority of the loans the Company originates for investment are multi-family loans, most of which are collateralized by non-luxury apartment buildings in New York City with rent-regulated units and below-market rents. In addition, the Company originates commercial real estate (“CRE”) loans, most of which are collateralized by income-producing properties such as office buildings, retail centers, mixed-use buildings, and multi-tenanted light industrial properties that are located in New York City and on Long Island.
To a lesser extent, the Company also originates one-to-fourfamily loans, acquisition, development, and construction (“ADC”) loans, and commercial and industrial (“C&I”) loans, for investment. One-to-fourfamily loans held for investment were originated through the Company’s mortgage banking operation and primarily consisted of jumbo prime adjustable rate mortgages made to borrowers with a solid credit history. ADC loans are primarily originated for multi-family and residential tract projects in New York City and on Long Island. C&I loans consist of asset-based loans, equipment loans and leases, and dealer floor-plan loans (together, “specialty finance loans and leases”) that generally are made to large corporate obligors, many of which are publicly traded, carry investment grade or near-investment grade ratings, and participate in stable industries nationwide; and “other” C&I loans that primarily are made to small and mid-size businesses in Metro New York. “Other” C&I loans are typically made for working capital, business expansion, and the purchase of machinery and equipment.
The repayment of multi-family and CRE loans generally depends on the income produced by the underlying properties which, in turn, depends on their successful operation and management. To mitigate the potential for credit losses, the Company underwrites its loans in accordance with credit standards it considers to be prudent, looking first at the consistency of the cash flows being produced by the underlying property. In addition, multi-family buildings, CRE properties, and ADC projects are inspected as a prerequisite to approval, and independent appraisers, whose appraisals are carefully reviewed by the Company’s in-house appraisers, perform appraisals on the collateral properties. In many cases, a second independent appraisal review is performed.
12
To further manage its credit risk, the Company’s lending policies limit the amount of credit granted to any one borrower and typically require conservative debt service coverage ratios and loan-to-value ratios. Nonetheless, the ability of the Company’s borrowers to repay these loans may be impacted by adverse conditions in the local real estate market and the local economy. Accordingly, there can be no assurance that its underwriting policies will protect the Company from credit-related losses or delinquencies.
ADC loans typically involve a higher degree of credit risk than loans secured by improved or owner-occupied real estate. Accordingly, borrowers are required to provide a guarantee of repayment and completion, and loan proceeds are disbursed as construction progresses, as certified by in-house inspectors or third-party engineers. The Company seeks to minimize the credit risk on ADC loans by maintaining conservative lending policies and rigorous underwriting standards. However, if the estimate of value proves to be inaccurate, the cost of completion is greater than expected, or the length of time to complete and/or sell or lease the collateral property is greater than anticipated, the property could have a value upon completion that is insufficient to assure full repayment of the loan. This could have a material adverse effect on the quality of the ADC loan portfolio, and could result in losses or delinquencies. In addition, the Company utilizes the same stringent appraisal process for ADC loans as it does for its multi-family and CRE loans.
To minimize the risk involved in specialty finance lending and leasing, the Company participates in syndicated loans that are brought to it, and equipment loans and leases that are assigned to it, by a select group of nationally recognized sources who have had long-term relationships with its experienced lending officers. Each of these credits is secured with a perfected first security interest or outright ownership in the underlying collateral, and structured as senior debt or as a non-cancelable lease. To further minimize the risk involved in specialty finance lending and leasing, each transaction is re-underwritten. In addition, outside counsel is retained to conduct a further review of the underlying documentation.
To minimize the risks involved in other C&I lending, the Company underwrites such loans on the basis of the cash flows produced by the business; requires that such loans be collateralized by various business assets, including inventory, equipment, and accounts receivable, among others; and typically requires personal guarantees. However, the capacity of a borrower to repay such a C&I loan is substantially dependent on the degree to which the business is successful. In addition, the collateral underlying such loans may depreciate over time, may not be conducive to appraisal, or may fluctuate in value, based upon the results of operations of the business.
Included in non-covered loans held for investment at September 30, 2017 and December 31, 2016, respectively, were loans of $58.7 million and $91.8 million to officers, directors, and their related interests and parties. There were no loans to principal shareholders at either of those dates.
At December 31, 2016, the Company had non-covered purchased credit-impaired (“PCI”) loans, with a carrying value of $5.8 million and an unpaid principal balance of $7.0 million at that date. PCI loans had been covered under Loss Share Agreements (“LSA”) with the FDIC that expired in March 2015 and had been included in non-covered loans. Such loans were accounted for under Accounting Standards Codification (“ASC”) 310-30 and were initially measured at fair value, which included estimated future credit losses expected to be incurred over the lives of the loans. Under ASC 310-30, purchasers are permitted to aggregate acquired loans into one or more pools, provided that the loans have common risk characteristics. A pool is then accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. There were no such loans accounted for under ASC 310-30 at September 30, 2017.
Loans Held for Sale
As previously disclosed, on June 27, 2017, the Company entered into an agreement to sell its mortgage banking business, which was acquired as part of its 2009 FDIC-assisted acquisition of AmTrust Bank (“AmTrust”) and is reported under the Company’s Residential Mortgage Banking segment, to Freedom Mortgage Corporation (“Freedom”). Accordingly, on September 29, 2017, the sale was completed with proceeds received in the amount of $226.6 million, resulting in a gain of $7.4 million, which is included in “Non-interest income” in the accompanying Consolidated Statement of Income and Comprehensive Income. Freedom acquired both the Company’s origination and servicing platforms, as well as its mortgage servicing loan portfolio of $20.5 billion and related mortgage servicing rights (“MSRs”) asset of $208.8 million.
Additionally, as previously disclosed, the Company received approval from the FDIC to sell assets covered under our LSA, early terminate the LSA, and enter into an agreement to sell the majority of our one-to-four family residential mortgage-related assets, including those covered under the LSA, to an affiliate of Cerberus Capital Management, L.P. (“Cerberus”). On July 28, 2017, the Company completed the sale, resulting in the receipt of proceeds of $1.9 billion from Cerberus and the FDIC and settled the related FDIC loss share receivable, resulting in a gain of $74.6 million which is included in “Non-interest income” in the accompanying Consolidated Statement of Income and Comprehensive Income. Effective October 31, 2017, the Company and the FDIC completed termination of the LSA.
13
The Community Bank’s mortgage banking operations originated, aggregated, sold, and serviced one-to-four family loans. Community banks, credit unions, mortgage companies, and mortgage brokers used its proprietary web-accessiblemortgage banking platform to originate and close one-to-four family loans nationwide. These loans were generally sold to GSEs, servicing retained. To a much lesser extent, the Community Bank used its mortgage banking platform to originate jumbo loans.
Asset Quality
The following table presents information regarding the quality of the Company’s non-covered loans held for investment at September 30, 2017:
Commercial and industrial (1) (2)
Total
14
The following table presents information regarding the quality of the Company’s non-covered loans held for investment (excluding non-covered PCI loans) at December 31, 2016:
Commercial and industrial (2) (3)
The following table summarizes the Company’s portfolio of non-covered loans held for investment by credit quality indicator at September 30, 2017:
Credit Quality Indicator:
Pass
Special mention
Substandard
Doubtful
The following table summarizes the Company’s portfolio of non-covered loans held for investment (excluding non-covered PCI loans) by credit quality indicator at December 31, 2016:
The preceding classifications are the most current ones available and generally have been updated within the last twelve months. In addition, they follow regulatory guidelines and can generally be described as follows: pass loans are of satisfactory quality; special mention loans have potential weaknesses that deserve management’s close attention; substandard loans are inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged (these loans have a well-defined weakness and there is a possibility that the Company will sustain some loss); and doubtful loans, based on existing circumstances, have weaknesses that make collection or liquidation in full highly questionable and improbable. In addition, one-to-four family loans are classified based on the duration of the delinquency.
15
Troubled Debt Restructurings
The Company is required to account for certainheld-for-investment loan modifications and restructurings as troubled debt restructurings (“TDRs”). In general, a modification or restructuring of a loan constitutes a TDR if the Company grants a concession to a borrower experiencing financial difficulty. A loan modified as a TDR generally is placed on non-accrual status until the Company determines that future collection of principal and interest is reasonably assured, which requires, among other things, that the borrower demonstrate performance according to the restructured terms for a period of at least six consecutive months.
In an effort to proactively manage delinquent loans, the Company has selectively extended to certain borrowers concessions such as rate reductions, extension of maturity dates, and forbearance agreements. As of September 30, 2017, loans on which concessions were made with respect to rate reductions and/or extension of maturity dates amounted to $41.5 million; loans on which forbearance agreements were reached amounted to $1.8 million.
The following table presents information regarding the Company’s TDRs as of the dates indicated:
Loan Category:
The eligibility of a borrower for work-out concessions of any nature depends upon the facts and circumstances of each loan, which may change from period to period, and involves judgment by Company personnel regarding the likelihood that the concession will result in the maximum recovery for the Company.
The financial effects of the Company’s TDRs for the periods indicated are summarized as follows:
16
At September 30, 2017, two non-covered one-to-four family loans, totaling $497,000 and six C&I loans, totaling $1.4 million that had been modified as TDRs during the twelve months ended at that date were in payment default. A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms. The Company does not consider a payment to be in default when the loan is in forbearance, or otherwise granted a delay of payment, or when the agreement to forebear or allow a delay of payment is part of a modification.
Subsequent to the modification, the loan is not considered to be in default until payment is contractually past due in accordance with the modified terms. However, the Company does consider a loan with multiple modifications or forbearance periods to be in default, and would also consider a loan to be in default if the borrower were in bankruptcy or if the loan were partially charged off subsequent to modification.
Covered Loans
As previously discussed, the Company sold its covered loan portfolio during the third quarter of 2017; therefore, the Company does not have any covered loans outstanding as of September 30, 2017.
The Company referred to certain loans acquired in the AmTrust and Desert Hills Bank (“Desert Hills”) transactions as “covered loans” because the Company was being reimbursed for a substantial portion of losses on these loans under the terms of the LSA. Covered loans were accounted for under ASC 310-30 and were initially measured at fair value, which included estimated future credit losses expected to be incurred over the lives of the loans. Under ASC 310-30, purchasers are permitted to aggregate acquired loans into one or more pools, provided that the loans have common risk characteristics. A pool is then accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows.
The following table presents the carrying value of covered loans which were acquired in the acquisitions of AmTrust and Desert Hills as of December 31, 2016.
Other loans
Total covered loans
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At December 31, 2016, the unpaid principal balance of covered loans was $2.1 billion and the carrying value of such loans was $1.7 billion.
At December 31, 2016, the Company estimated the fair values of the AmTrust and Desert Hills loan portfolios, which represented the expected cash flows from the portfolios, discounted at market-based rates. In estimating such fair values, the Company: (a) calculated the contractual amount and timing of undiscounted principal and interest payments (the “undiscounted contractual cash flows”); and (b) estimated the expected amount and timing of undiscounted principal and interest payments (the “undiscounted expected cash flows”). The amount by which the undiscounted expected cash flows exceed the estimated fair value (the “accretable yield”) was accreted into interest income over the lives of the loans. The amount by which the undiscounted contractual cash flows exceed the undiscounted expected cash flows is referred to as the “non-accretable difference.” The non-accretable difference represented an estimate of the credit risk in the loan portfolios at the respective acquisition dates.
The accretable yield was affected by changes in interest rate indices for variable rate loans, changes in prepayment assumptions, and changes in expected principal and interest payments over the estimated lives of the loans. Changes in interest rate indices for variable rate loans increased or decreased the amount of interest income expected to be collected, depending on the direction of interest rates. Prepayments affected the estimated lives of covered loans and could have changed the amount of interest income and principal expected to be collected. Changes in expected principal and interest payments over the estimated lives of covered loans were driven by the credit outlook and by actions that may be taken with borrowers. As of September 30, 2017, the accretable yield was reduced to zero.
On a quarterly basis, the Company had evaluated the estimates of the cash flows it expected to collect. Expected future cash flows from interest payments were based on variable rates at the time of the quarterly evaluation. Estimates of expected cash flows that were impacted by changes in interest rate indices for variable rate loans and prepayment assumptions were treated as prospective yield adjustments and included in interest income.
In the nine months ended September 30, 2017, changes in the accretable yield for covered loans were as follows:
Balance at beginning of period
Accretion
Reclassification to non-accretable difference for the six months ended June 30, 2017
Changes in expected cash flows due to the sale of the covered loan portfolio
In the preceding table, the line item “Reclassification tonon-accretable difference for the six months ended June 30, 2017” includes changes in cash flows that the Company expects to collect due to changes in prepayment assumptions, changes in interest rates on variable rate loans, and changes in loss assumptions. As of the Company’s most recent quarterly evaluation, prepayment assumptions increased, which resulted in a decrease in future expected interest cash flows and, consequently, a decrease in the accretable yield. The effect of this decrease was partially offset with an improvement in the underlying credit assumptions and the resetting of rates on variable rate loans at a slightly higher level, which resulted in an increase in future expected interest cash flows and, consequently, an increase in the accretable yield.
Reflecting the foreclosure of certain loans acquired in the AmTrust and Desert Hills acquisitions, the Company owned certain other real estate owned (“OREO”) that was covered under its LSA (“covered OREO”). Covered OREO was initially recorded at its estimated fair value on the respective dates of acquisition, based on independent appraisals, less the estimated selling costs. Any subsequent write-downs due to declines in fair value were charged to non-interest expense, and were partially offset by loss reimbursements under the LSA. Any recoveries of previous write-downs have been credited to non-interest expense and partially offset by the portion of the recovery that was due to the FDIC. As previously discussed, the Company’s covered OREO was sold during the third quarter of 2017.
The FDIC loss share receivable represented the present value of the estimated losses to be reimbursed by the FDIC. The estimated losses were based on the same cash flow estimates used in determining the fair value of the covered loans. The FDIC loss share receivable was reduced as losses on covered loans were recognized and as loss sharing payments were received from the FDIC. Realized losses in excess of acquisition-date estimates resulted in an increase in the FDIC loss share receivable. Conversely, if realized losses were lower than the acquisition-date estimates, the FDIC loss share receivable was reduced by amortization to interest income. Effective October 31, 2017, the Company and the FDIC completed termination of the LSA.
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At December 31, 2016, the Company held residential mortgage loans of $78.6 million that were in the process of foreclosure. The vast majority of such loans were covered loans. The Company had no residential mortgage loans that were in the process of foreclosure at September 30, 2017.
The following table presents information regarding the Company’s covered loans at December 31, 2016 that were 90 days or more past due:
Covered Loans 90 Days or More Past Due:
Total covered loans 90 days or more past due
The following table presents information regarding the Company’s covered loans at December 31, 2016 that were 30 to 89 days past due:
Covered Loans 30-89 Days Past Due:
Total covered loans 30-89 days past due
As noted above, at December 31, 2016, the Company had $22.6 million of covered loans that were 30 to 89 days past due, and covered loans of $131.5 million that were 90 days or more past due but considered to be performing due to the application of the yield accretion method under ASC 310-30. The remainder of the Company’s covered loan portfolio totaled $1.5 billion at December 31, 2016 and were considered current at that date.
Loans that may have been classified as non-performing loans by AmTrust or Desert Hills were no longer classified as non-performing by the Company because, at the respective dates of acquisition, the Company believed that it would fully collect the new carrying value of these loans. The new carrying value represented the contractual balance, reduced by the portion that was expected to be uncollectible (i.e., the non-accretable difference) and by an accretable yield (discount) that was recognized as interest income. It is important to note that management’s judgment was required in reclassifying loans subject to ASC 310-30 as performing loans, and such judgment was dependent on having a reasonable expectation about the timing and amount of the cash flows to be collected, even if the loan was contractually past due.
The primary credit quality indicator for covered loans is the expectation of underlying cash flows. In the nine months ended September 30, 2017, the Company recorded recoveries of losses on covered loans of $23.7 million. The recoveries were largely due to an increase in expected cash flows in the acquired portfolios of one-to-four family and home equity loans, and were partly offset by FDIC indemnification expense of $19.0 million that was recorded in “Non-interest income.”
The Company recovered losses on covered loans of $6.0 million during the nine months ended September 30, 2016, which was largely offset by FDIC indemnification expense of $4.8 million. In the three months ended September 30, 2016, the Company recorded recoveries of losses on covered loans of $1.3 million and FDIC indemnification expense of $1.0 million.
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Note 6. Allowances for Loan Losses
The following tables provide additional information regarding the Company’s allowances for losses onnon-covered loans and covered loans, based upon the method of evaluating loan impairment:
Allowances for Loan Losses at September 30, 2017:
Loans individually evaluated for impairment
Loans collectively evaluated for impairment
Allowances for Loan Losses at December 31, 2016:
Acquired loans with deteriorated credit quality
The following tables provide additional information regarding the methods used to evaluate the Company’s loan portfolio for impairment:
Loans Receivable at September 30, 2017:
Loans Receivable at December 31, 2016:
Allowance for Losses on Non-Covered Loans
The following table summarizes activity in the allowance for losses on non-covered loans for the periods indicated:
Balance, beginning of period
Charge-offs
Recoveries
(Recovery of) provision for non-covered loan losses
Balance, end of period
See “Critical Accounting Policies” for additional information regarding the Company’s allowance for losses on non-covered loans.
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The following table presents additional information about the Company’s impaired non-covered loans at September 30, 2017:
Impaired loans with no related allowance:
Total impaired loans with no related allowance
Impaired loans with an allowance recorded:
Total impaired loans with an allowance recorded
Total impaired loans:
Total impaired loans
The following table presents additional information about the Company’s impaired non-covered loans at December 31, 2016:
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Allowance for Losses on Covered Loans
Covered loans were reported exclusive of the FDIC loss share receivable. The covered loans acquired in the AmTrust and Desert Hills acquisitions were reviewed for collectability based on the expectations of cash flows from these loans. Covered loans were aggregated into pools of loans with common characteristics. In determining the allowance for losses on covered loans, the Company periodically performed an analysis to estimate the expected cash flows for each of the pools of loans. The Company recorded a provision for (recovery of) losses on covered loans to the extent that the expected cash flows from a loan pool had decreased or increased since the acquisition date.
Accordingly, if there was a decrease in expected cash flows due to an increase in estimated credit losses (as compared to the estimates made at the respective acquisition dates), the decrease in the present value of expected cash flows was recorded as a provision for covered loan losses charged to earnings, and the allowance for covered loan losses was increased. A related credit to non-interest income and an increase in the LSA are recognized at the same time, and measured based on the applicable loss sharing agreement percentage.
If there was an increase in expected cash flows due to a decrease in estimated credit losses (as compared to the estimates made at the respective acquisition dates), the increase in the present value of expected cash flows was recorded as a recovery of the prior-period impairment charged to earnings, and the allowance for covered loan losses was reduced. A related debit to non-interest income and a decrease in the LSA was recognized at the same time, and measured based on the applicable Loss Share Agreement percentage.
The following table summarizes activity in the allowance for losses on covered loans for the periods indicated:
Recovery of losses on covered loans(1)
Note 7. Borrowed Funds
The following table summarizes the Company’s borrowed funds at the dates indicated:
Wholesale Borrowings:
FHLB advances
The following table summarizes the Company’s repurchase agreements accounted for as secured borrowings at September 30, 2017:
GSE debentures and mortgage-related securities
At September 30, 2017 and December 31, 2016, the Company had $359.1 million and $358.9 million, respectively, of outstanding junior subordinated deferrable interest debentures (“junior subordinated debentures”) held by statutory business trusts (the “Trusts”) that issued guaranteed capital securities.
The Trusts are accounted for as unconsolidated subsidiaries, in accordance with GAAP. The proceeds of each issuance were invested in a series of junior subordinated debentures of the Company and the underlying assets of each statutory business trust are the relevant debentures. The Company has fully and unconditionally guaranteed the obligations under each trust’s capital securities to the extent set forth in a guarantee by the Company to each trust. The Trusts’ capital securities are each subject to mandatory redemption, in whole or in part, upon repayment of the debentures at their stated maturity or earlier redemption.
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The following junior subordinated debentures were outstanding at September 30, 2017:
Issuer
New York Community Capital Trust V (BONUSESSMUnits)
New York Community Capital Trust X
PennFed Capital Trust III
New York Community Capital Trust XI
Total junior subordinated debentures
Note 8. Mortgage Servicing Rights
The Company records a separate servicing asset representing the right to service third-party loans. Such MSRs are initially recorded at their fair value as a component of the sale proceeds. The fair values of MSRs are based on an analysis of discounted cash flows that incorporates estimates of (1) market servicing costs, (2) market-based estimates of ancillary servicing revenue, (3) market-based prepayment rates, and (4) market profit margins.
MSRs are subsequently measured at either fair value or are amortized in proportion to, and over the period of, estimated net servicing income. The Company elects one of those methods on a class basis. A class is determined based on (1) the availability of market inputs used in determining the fair value of servicing assets, and/or (2) the Company’s method for managing the risks of servicing assets.
As previously discussed, the Company completed the sale of its mortgage banking business in the third quarter of 2017, and consequently sold substantially all of its mortgage servicing assets. Accordingly, the value of the MSR asset declined to $6.9 million at September 30, 2017, compared to $225.4 million at June 30, 2017 and $234.0 million at December 31, 2016. These balances all consisted of two classes of MSRs for which the Company separately manages the economic risk: residential MSRs and participation MSRs (i.e., MSRs on loans sold through participations).
Residential MSRs are carried at fair value, and at September 30, 2017 reflected only loans sold through the FHLB’s Mortgage Partnership Finance Program, with changes in fair value recorded as a component of non-interest income in each period. The Company uses various derivative instruments to mitigate the income statement-effect of changes in fair value due to changes in valuation inputs and assumptions regarding its residential MSRs. The effects of changes in the fair value of the derivatives are recorded as “Mortgage banking income,” which is included in “Non-interest income” in the Consolidated Statements of Income and Comprehensive Income. MSRs do not trade in an active open market with readily observable prices. Accordingly, the Company utilizes a third-party valuation specialist to determine the fair value of its MSRs. This specialist determines fair value based on the present value of estimated future net servicing income cash flows, and incorporates assumptions that market participants would use to estimate fair value, including estimates of prepayment speeds, discount rates, default rates, refinance rates, servicing costs, escrow account earnings, contractual servicing fee income, and ancillary income. The specialist and the Company evaluate, and periodically adjust, as necessary, these underlying inputs and assumptions to reflect market conditions and changes in the assumptions that a market participant would consider in valuing MSRs.
The value of residential MSRs at any given time is significantly affected by the mortgage interest rates that are then available in the marketplace. These, in turn, influence mortgage loan prepayment speeds. The rate of prepayment of serviced residential loans is the most significant estimate involved in the measurement process. Actual prepayment rates may differ from those projected by management due to changes in a variety of economic factors, including prevailing interest rates and the availability of alternative financing sources to borrowers.
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During periods of declining interest rates, the value of residential MSRs generally declines as an increase in mortgage refinancing activity results in an increase in prepayments and a decrease in the carrying value of residential MSRs through a charge to earnings in the current period. Conversely, during periods of rising interest rates, the value of residential MSRs generally increases as mortgage refinancing activity declines and the actual prepayments of loans being serviced occur more slowly than had been expected. This results in the carrying value of residential MSRs and servicing income being higher than previously anticipated. Accordingly, the value of residential MSRs that is actually realized could differ from the value initially recorded.
The collective amount of contractually specified servicing fees, late fees, and ancillary fees, which is recorded as “Mortgage banking income” in the Consolidated Statements of Income and Comprehensive Income, was $483,000 and $1.1 million for the three and nine months ended September 30, 2017, respectively, and $351,000 and $983,000 for the three and nine months ended September 30, 2016, respectively.
Participation MSRs are initially carried at fair value and are subsequently amortized and carried at the lower of their fair value or amortized amount. The amortization is recorded in proportion to, and over the period of, estimated net servicing income, with impairment of those servicing assets evaluated through an assessment of their fair value via a discounted cash-flow method. The net carrying value is compared to the discounted estimated future net cash flows to determine whether adjustments should be made to carrying values or amortization schedules. Impairment of participation MSRs is recognized through a valuation allowance and a charge to current-period earnings if it is considered to be temporary, or through a direct write-down of the asset and a charge to current-period earnings if it is considered to be other than temporary. The predominant risk characteristics of the underlying loans that are used to stratify the participation MSRs for measurement purposes generally include the (1) loan origination date, (2) loan rate, (3) loan type and size, (4) loan maturity date, and (5) geographic location. Changes in the carrying value of participation MSRs due to amortization or declines in fair value (i.e., impairment), if any, are reported in “Other income” in the period during which such changes occur. In the nine months ended September 30, 2017 and 2016, there was no impairment related to the Company’s participation MSRs.
The following tables set forth the changes in the balances of residential MSRs and participation MSRs for the periods indicated:
Carrying value, beginning of period
Additions
Sales
Increase (decrease) in fair value:
Due to changes in interest rates
Due to model assumption changes(1)
Due to loan payoffs
Due to passage of time and other changes
Amortization
Carrying value, end of period
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The following table presents the key assumptions used in calculating the fair value of the Company’s residential MSRs at the dates indicated:
Expected weighted average life
Constant prepayment speed
Discount rate
Primary mortgage rate to refinance
Cost to service (per loan per year):
Current
30-59 days or less delinquent
60-89 days delinquent
90-119 days delinquent
120 days or more delinquent
The increase in the constant prepayment speed was primarily attributable to an increase in the housing price index used by the Company’s third-party valuation specialist, suggesting that homebuyer demand has increased and newly created equity could lead to more refinancing.
In connection with the aforementioned sale of the Company’s MSR portfolio, the Company will temporarily continue to service the $20.5 billion of loans and, consequently, the total unpaid principal balance of loans serviced for others remained largely unchanged at $24.5 billion and $25.1 billion at September 30, 2017 and December 31, 2016, respectively.
Note 9. Pension and Other Post-Retirement Benefits
The following table sets forth certain disclosures for the Company’s pension and post-retirement plans for the periods indicated:
Components of net periodic (credit) expense:
Interest cost
Service cost
Expected return on plan assets
Amortization of prior-service costs
Amortization of net actuarial loss
Net periodic (credit) expense
The Company expects to contribute $1.3 million to its post-retirement plan to pay premiums and claims for the fiscal year ending December 31, 2017. The Company does not expect to make any contributions to its pension plan in 2017.
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Note 10. Stock-Based Compensation
At September 30, 2017, the Company had a total of 6,912,431 shares available for grants as options, restricted stock, or other forms of related rights under the New York Community Bancorp, Inc. 2012 Stock Incentive Plan (the “2012 Stock Incentive Plan”), which was approved by the Company’s shareholders at its Annual Meeting on June 7, 2012. The Company granted 2,941,249 shares of restricted stock during the nine months ended September 30, 2017. The shares had an average fair value of $15.18 per share on the date of grant and a vesting period of five years. The nine-month amount includes 122,500 shares that were granted in the third quarter with an average fair value of $12.95 per share on the date of grant. Compensation and benefits expense related to the restricted stock grants is recognized on a straight-line basis over the vesting period, and totaled $27.3 million and $24.6 million, respectively, in the nine months ended September 30, 2017 and 2016, including $9.1 million and $8.2 million, respectively, in the three months ended at those dates.
The following table provides a summary of activity with regard to restricted stock awards in the nine months ended September 30, 2017:
Unvested at beginning of year
Granted
Vested
Canceled
Unvested at end of period
As of September 30, 2017, unrecognized compensation cost relating to unvested restricted stock totaled $90.9 million. This amount will be recognized over a remaining weighted average period of 3.2 years.
The Company had no stock options outstanding at September 30, 2017 or December 31, 2016.
Note 11. Fair Value Measurements
GAAP sets forth a definition of fair value, establishes a consistent framework for measuring fair value, and requires disclosure for each major asset and liability category measured at fair value on either a recurring or non-recurring basis. GAAP also clarifies that fair value is an “exit” price, representing the amount that would be received when selling an asset, or paid when transferring a liability, in an orderly transaction between market participants. Fair value is thus a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
A financial instrument’s categorization within this valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
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The following tables present assets and liabilities that were measured at fair value on a recurring basis for the periods indicated, and that were included in the Company’s Consolidated Statements of Condition at those dates:
Mortgage-Related Securities Available for Sale:
Other Securities Available for Sale:
U.S Treasury Obligations
Other Assets:
Mortgage servicing rights
Interest rate lock commitments
Derivative assets-other (2)
Liabilities:
Derivative liabilities
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The Company reviews and updates the fair value hierarchy classifications for its assets on a quarterly basis. Changes from one quarter to the next that are related to the observability of inputs for a fair value measurement may result in a reclassification from one hierarchy level to another.
A description of the methods and significant assumptions utilized in estimating the fair values of available-for-sale securities follows:
Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid government securities, exchange-traded securities, and derivatives.
If quoted market prices are not available for a specific security, then fair values are estimated by using pricing models. These pricing models primarily use market-based or independently sourced market parameters as inputs, including, but not limited to, yield curves, interest rates, equity or debt prices, and credit spreads. In addition to observable market information, models incorporate transaction details such as maturity and cash flow assumptions. Securities valued in this manner would generally be classified within Level 2 of the valuation hierarchy, and primarily include such instruments as mortgage-related and corporate debt securities.
Periodically, the Company uses fair values supplied by independent pricing services to corroborate the fair values derived from the pricing models. In addition, the Company reviews the fair values supplied by independent pricing services, as well as their underlying pricing methodologies, for reasonableness. The Company challenges pricing service valuations that appear to be unusual or unexpected.
The Company carries loans held for sale at fair value. The fair value of loans held for sale is primarily based on quoted market prices for securities backed by similar types of loans. Changes in the fair value of these assets are largely driven by changes in interest rates subsequent to loan funding, and changes in the fair value of servicing associated with the mortgage loans held for sale. Loans held for sale are classified within Level 2 of the valuation hierarchy.
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MSRs do not trade in an active open market with readily observable prices. The Company bases the fair value of its MSRs on the present value of estimated future net servicing income cash flows, utilizing a third-party valuation specialist. The specialist estimates future net servicing income cash flows with assumptions that market participants would use to estimate fair value, including estimates of prepayment speeds, discount rates, default rates, refinance rates, servicing costs, escrow account earnings, contractual servicing fee income, and ancillary income. The Company periodically adjusts the underlying inputs and assumptions to reflect market conditions and assumptions that a market participant would consider in valuing the MSR asset. MSR fair value measurements use significant unobservable inputs and, accordingly, are classified within Level 3.
Exchange-traded derivatives that are valued using quoted prices are classified within Level 1 of the valuation hierarchy. The majority of the Company’s derivative positions are valued using internally developed models that use readily observable market parameters as their basis. These are parameters that are actively quoted and can be validated by external sources, including industry pricing services. Where the types of derivative products have been in existence for some time, the Company uses models that are widely accepted in the financial services industry. These models reflect the contractual terms of the derivatives, including the period to maturity, and market-based parameters such as interest rates, volatility, and the credit quality of the counterparty. Furthermore, many of these models do not contain a high level of subjectivity, as the methodologies used in the models do not require significant judgment, and inputs to the models are readily observable from actively quoted markets, as is the case for “plain vanilla” interest rate swaps and option contracts. Such instruments are generally classified within Level 2 of the valuation hierarchy. Derivatives that are valued based on models with significant unobservable market parameters, and that are normally traded less actively, have trade activity that is one-way, and/or are traded in less-developed markets, are classified within Level 3 of the valuation hierarchy.
The fair values of interest rate lock commitments (“IRLCs”) for residential mortgage loans that the Company intends to sell are based on internally developed models. The key model inputs primarily include the sum of the value of the forward commitment based on the loans’ expected settlement dates and the projected values of the MSRs, loan level price adjustment factors, and historical IRLC closing ratios. The closing ratio is computed by the Company’s mortgage banking operation and is periodically reviewed by management for reasonableness. Such derivatives are classified as Level 3.
While the Company believes its valuation methods are appropriate, and consistent with those of other market participants, the use of different methodologies or assumptions to determine the fair values of certain financial instruments could result in different estimates of fair values at a reporting date.
Fair Value Option
The Company has elected the fair value option for its loans held for sale. These loans held for sale consist ofone-to-four family mortgage loans, none of which was 90 days or more past due at September 30, 2017. Management believes that the mortgage banking business operates on a short-term cycle. Therefore, in order to reflect the most relevant valuations for the key components of this business, and to reduce timing differences in amounts recognized in earnings, the Company has elected to record loans held for sale at fair value to match the recognition of IRLCs, MSRs, and derivatives, all of which are recorded at fair value in earnings. Fair value is based on independent quoted market prices of mortgage-backed securities comprised of loans with similar features to those of the Company’s loans held for sale, where available, and adjusted as necessary for such items as servicing value, guaranty fee premiums, and credit spread adjustments.
The following table reflects the difference between the fair value carrying amount of loans held for sale, for which the Company has elected the fair value option, and the unpaid principal balance:
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Gains and Losses Included in Income for Assets Where the Fair Value Option Has Been Elected
The assets accounted for under the fair value option are initially measured at fair value. Gains and losses from the initial measurement and subsequent changes in fair value are recognized in earnings. The following table presents the changes in fair value related to initial measurement, and the subsequent changes in fair value included in earnings, for loans held for sale and MSRs for the periods indicated:
Total loss
The Company has determined that there is no instrument-specific credit risk related to its loans held for sale, due to the short duration of such assets.
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Changes in Level 3 Fair Value Measurements
The following tables present, for the nine months ended September 30, 2017 and 2016, a roll-forward of the balance sheet amounts (including changes in fair value) for financial instruments classified in Level 3 of the valuation hierarchy:
The Company’s policy is to recognize transfers in and out of Levels 1, 2, and 3 as of the end of the reporting period. There were no transfers in or out of Levels 1, 2, or 3 during the nine months ended September 30, 2017 or 2016.
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For Level 3 assets and liabilities measured at fair value on a recurring basis as of September 30, 2017, the significant unobservable inputs used in the fair value measurements were as follows:
Fair Value atSeptember 30, 2017
Valuation Technique
Significant Unobservable Inputs
Discounted Cash Flow
Weighted Average Constant Prepayment Rate(1)
Weighted Average Discount Rate
Weighted Average Closing Ratio
The significant unobservable inputs used in the fair value measurement of the Company’s MSRs are the weighted average constant prepayment rate and the weighted average discount rate. Significant increases or decreases in either of those inputs in isolation could result in significantly lower or higher fair value measurements. Although the constant prepayment rate and the discount rate are not directly interrelated, they generally move in opposite directions.
The significant unobservable input used in the fair value measurement of the Company’s IRLCs is the closing ratio, which represents the percentage of loans currently in an interest rate lock position that management estimates will ultimately close. Generally, the fair value of an IRLC is positive if the prevailing interest rate is lower than the IRLC rate, and the fair value of an IRLC is negative if the prevailing interest rate is higher than the IRLC rate. Therefore, an increase in the closing ratio (i.e., a higher percentage of loans estimated to close) will result in the fair value of the IRLC increasing if in a gain position, or decreasing if in a loss position. The closing ratio is largely dependent on the stage of processing that a loan is currently in, and the change in prevailing interest rates from the time of the interest rate lock.
Assets Measured at Fair Value on a Non-Recurring Basis
Certain assets are measured at fair value on a non-recurring basis. Such instruments are subject to fair value adjustments under certain circumstances (e.g., when there is evidence of impairment). The following tables present assets and liabilities that were measured at fair value on a non-recurring basis as of September 30, 2017 and December 31, 2016, and that were included in the Company’s Consolidated Statements of Condition at those dates:
Certain impaired loans (1)
Other assets (2)
The fair values of collateral-dependent impaired loans are determined using various valuation techniques, including consideration of appraised values and other pertinent real estate market data.
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Other Fair Value Disclosures
GAAP requires the disclosure of fair value information about the Company’s on- and off-balance sheet financial instruments. When available, quoted market prices are used as the measure of fair value. In cases where quoted market prices are not available, fair values are based on present-value estimates or other valuation techniques. Such fair values are significantly affected by the assumptions used, the timing of future cash flows, and the discount rate.
Because assumptions are inherently subjective in nature, estimated fair values cannot be substantiated by comparison to independent market quotes. Furthermore, in many cases, the estimated fair values provided would not necessarily be realized in an immediate sale or settlement of such instruments.
The following tables summarize the carrying values, estimated fair values, and fair value measurement levels of financial instruments that were not carried at fair value on the Company’s Consolidated Statements of Condition at the dates indicated:
Financial Assets:
FHLB stock (1)
Loans, net
Financial Liabilities:
Deposits
Securities held to maturity
The methods and significant assumptions used to estimate fair values for the Company’s financial instruments follow:
Cash and Cash Equivalents
Cash and cash equivalents include cash and due from banks and federal funds sold. The estimated fair values of cash and cash equivalents are assumed to equal their carrying values, as these financial instruments are either due on demand or have short-term maturities.
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Securities
If quoted market prices are not available for a specific security, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. These pricing models primarily use market-based or independently sourced market parameters as inputs, including, but not limited to, yield curves, interest rates, equity or debt prices, and credit spreads. In addition to observable market information, pricing models also incorporate transaction details such as maturities and cash flow assumptions.
Federal Home Loan Bank Stock
Ownership in equity securities of the FHLB is restricted and there is no established market for their resale. The carrying amount approximates the fair value.
Loans
The loan portfolio is segregated into various components for valuation purposes in order to group loans based on their significant financial characteristics, such as loan type (mortgage or other) and payment status (performing ornon-performing). The estimated fair values of mortgage and other loans are computed by discounting the anticipated cash flows from the respective portfolios. The discount rates reflect current market rates for loans with similar terms to borrowers of similar credit quality. The estimated fair values of non-performing mortgage and other loans are based on recent collateral appraisals.
The methods used to estimate the fair values of loans are extremely sensitive to the assumptions and estimates used. While management has attempted to use assumptions and estimates that best reflect the Company’s loan portfolio and current market conditions, a greater degree of subjectivity is inherent in these values than in those determined in active markets. Accordingly, readers are cautioned in using this information for purposes of evaluating the financial condition and/or value of the Company in and of itself, or in comparison with that of any other company.
Mortgage Servicing Rights
MSRs do not trade in an active market with readily observable prices. Accordingly, the Company bases the fair value of its MSRs on a valuation performed by a third-party valuation specialist. This specialist determines fair value based on the present value of estimated future net servicing income cash flows, and incorporates assumptions that market participants would use to estimate fair value, including estimates of prepayment speeds, discount rates, default rates, refinance rates, servicing costs, escrow account earnings, contractual servicing fee income, and ancillary income. The specialist and the Company evaluate, and periodically adjust, as necessary, these underlying inputs and assumptions to reflect market conditions and changes in the assumptions that a market participant would consider in valuing MSRs.
Derivative Financial Instruments
For exchange-traded futures and exchange-traded options, fair value is based on observable quoted market prices in an active market. For forward commitments to buy and sell loans and mortgage-backed securities, fair value is based on observable market prices for similar loans and securities in an active market. The fair value of IRLCs for one-to-four family mortgage loans that the Company intends to sell is based on internally developed models. The key model inputs primarily include the sum of the value of the forward commitment based on the loans’ expected settlement dates, the value of MSRs arrived at by an independent MSR broker, government agency price adjustment factors, and historical IRLC fall-out factors.
The fair values of deposit liabilities with no stated maturity (i.e., interest-bearing checking and money market accounts, savings accounts, and non-interest-bearing accounts) are equal to the carrying amounts payable on demand. The fair values of CDs represent contractual cash flows, discounted using interest rates currently offered on deposits with similar characteristics and remaining maturities. These estimated fair values do not include the intangible value of core deposit relationships, which comprise a significant portion of the Company’s deposit base.
Borrowed Funds
The estimated fair value of borrowed funds is based either on bid quotations received from securities dealers or the discounted value of contractual cash flows with interest rates currently in effect for borrowed funds with similar maturities and structures.
Off-Balance Sheet Financial Instruments
The fair values of commitments to extend credit and unadvanced lines of credit are estimated based on an analysis of the interest rates and fees currently charged to enter into similar transactions, considering the remaining terms of the commitments and the creditworthiness of the potential borrowers. The estimated fair values of such off-balance sheet financial instruments were insignificant at September 30, 2017 and December 31, 2016.
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Note 12. Derivative Financial Instruments
The Company’s derivative financial instruments consist of financial forward and futures contracts, interest rate swaps, IRLCs, and options. These derivatives relate to mortgage banking operations, residential MSRs, and other risk management activities, and seek to mitigate or reduce the Company’s exposure to losses from adverse changes in interest rates. These activities will vary in scope based on the level and volatility of interest rates, other changing market conditions, and the types of assets held.
In accordance with the applicable accounting guidance, the Company takes into account the impact of collateral and master netting agreements that allow it to settle all derivative contracts held with a single counterparty on a net basis, and to offset the net derivative position with the related collateral when recognizing derivative assets and liabilities. As a result, the Company’s Statements of Financial Condition could reflect derivative contracts with negative fair values that are included in derivative assets, and contracts with positive fair values that are included in derivative liabilities.
The Company held derivatives with a notional amount of $765.9 million at September 30, 2017. Changes in the fair value of these derivatives are reflected in current-period earnings. None of these derivatives are designated as hedges for accounting purposes.
The Company uses various financial instruments, including derivatives, in connection with its strategies to reduce pricing risk resulting from changes in interest rates. Derivative instruments may include IRLCs entered into with borrowers or correspondents/brokers to acquire agency-conforming fixed and adjustable rate residential mortgage loans that will be held for sale, as well as Treasury options and Eurodollar futures.
The Company enters into forward contracts to sell fixed rate mortgage-backed securities to protect against changes in the prices of agency-conforming fixed rate loans held for sale. Forward contracts are entered into with securities dealers in an amount related to the portion of IRLCs that is expected to close. The value of these forward sales contracts moves inversely with the value of the loans in response to changes in interest rates.
To manage the price risk associated with fixed-rate non-conforming mortgage loans, the Company generally enters into forward contracts on mortgage-backed securities or forward commitments to sell loans to approved investors. Short positions in Eurodollar futures contracts are used to manage price risk on adjustable rate mortgage loans held for sale.
The Company uses interest rate swaps to hedge the fair value of its residential MSRs. The Company also purchases put and call options to manage the risk associated with variations in the amount of IRLCs that ultimately close.
The following table sets forth information regarding the Company’s derivative financial instruments at September 30, 2017:
Treasury options
Eurodollar futures
Forward commitments to sell loans/mortgage-backed securities
Forward commitments to buy loans/mortgage-backed securities
Total derivatives
In addition, the Company mitigates a portion of the risk associated with changes in the value of its residential MSRs. The general strategy for mitigating this risk is to purchase derivative instruments, the value of which changes in the opposite direction of interest rates. This action partially offsets changes in the value of its servicing assets, which tends to move in the same direction as interest rates. Accordingly, the Company purchases Eurodollar futures and call options on Treasury securities, and enters into forward contracts to purchase mortgage-backed securities.
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The following table sets forth the effect of derivative instruments on the Consolidated Statements of Income and Comprehensive Income for the periods indicated:
Treasury and Eurodollar futures
Interest rate swaps
Forward commitments to buy/sell loans/mortgage-backed securities
Total (loss)/gain
The Company has in place an enforceable master netting arrangement with every counterparty. All master netting arrangements include rights to offset associated with the Company’s recognized derivative assets, derivative liabilities, and the cash collateral received and pledged. Accordingly, the Company, where appropriate, offsets all derivative asset and liability positions with the cash collateral received and pledged.
The following tables present the effect of the master netting arrangements on the presentation of the derivative assets in the Consolidated Statements of Condition as of the dates indicated:
Derivatives
The following tables present the effect the master netting arrangements had on the presentation of the derivative liabilities in the Consolidated Statements of Condition as of the dates indicated:
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Note 13. Segment Reporting
The Company’s operations are divided into two reportable business segments: Banking Operations and Residential Mortgage Banking. These operating segments have been identified based on the Company’s organizational structure. The segments require unique technology and marketing strategies, and offer different products and services. While the Company is managed as an integrated organization, individual executive managers are held accountable for the operations of these business segments.
The Company measures and presents information for internal reporting purposes in a variety of ways. The internal reporting system presently used by management in the planning and measurement of operating activities, and to which most managers are held accountable, is based on organizational structure.
The management accounting process uses various estimates and allocation methodologies to measure the performance of the operating segments. To determine financial performance for each segment, the Company allocates capital, funding charges and credits, certain non-interest expenses, and income tax provisions to each segment, as applicable. Allocation methodologies are subject to periodic adjustment as the internal management accounting system is revised and/or as business or product lines within the segments change. In addition, because the development and application of these methodologies is a dynamic process, the financial results presented may be periodically revised.
The Company seeks to maximize shareholder value by, among other means, optimizing the return on stockholders’ equity and managing risk. Capital is assigned to each segment, the combination of which is equivalent to the Company’s consolidated total, on an economic basis, using management’s assessment of the inherent risks associated with the respective segments.
The Company allocates expenses to the reportable segments based on various factors, including the volume and number of loans produced and the number of full-time equivalent employees. Income taxes are allocated to the various segments based on taxable income and statutory rates applicable to the segment.
Banking Operations Segment
The Banking Operations segment serves consumers and businesses by offering and servicing a variety of loan and deposit products and other financial services.
Residential Mortgage Banking Segment
The Residential Mortgage Banking segment originated, aggregated, sold, and serviced one-to-four family mortgage loans. Mortgage loan products consist primarily of agency-conforming, fixed and adjustable rate loans and, to a lesser extent, jumbo loans, for the purpose of purchasing or refinancing one-to-four family homes. The Residential Mortgage Banking segment earns interest on loans held in the warehouse andnon-interest income from the origination and servicing of loans. It also recognizes gains or losses on the sale of such loans.
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The following tables provide a summary of the Company’s segment results for the periods indicated on an internally managed accounting basis:
Third party(1)
Gain on sale of mortgage banking operations
Inter-segment
Non-interest expense(2)
Income (loss) before income tax expense
Income tax expense (benefit)
Net income (loss)
Identifiable segment assets (period-end)
Recovery of loan losses
Third party (1)
Non-interest expense (2)
Income before income tax expense
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Note 14. Impact of Recent Accounting Pronouncements, Not Yet Adopted
In March 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-08, “Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities” (“ASU No. 2017-08”). ASU No. 2017-08 shortens the amortization period of premiums on certain purchased callable debt securities to the earliest call date. The Company plans to adopt ASU No. 2017-08 effective January 1, 2019 and the adoption is not expected to have a material effect on the Company’s Consolidated Statements of Condition, results of operations, or cash flows.
In January 2017, the FASB issued ASUNo. 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” ASU No. 2017-04 eliminates the second step of the goodwill impairment test which requires an entity to determine the implied fair value of the reporting unit’s goodwill. Instead, an entity will recognize an impairment loss if the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, with the impairment loss not to exceed the amount of goodwill recorded. ASU No. 2017-04 does not amend the optional qualitative assessment of goodwill impairment. The Company plans to adopt ASU No. 2017-04 beginning January 1, 2020 and its adoption is not expected to have a material effect on the Company’s Consolidated Statements of Condition, results of operations, or cash flows.
In August 2016, the FASB issued ASUNo. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” ASU No. 2016-15 addresses the following cash flow issues: debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are
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insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. The Company plans to adopt ASU No. 2016-15 beginning January 1, 2018 and its adoption is not expected to have a material effect on the Company’s Consolidated Statements of Condition or results of operations.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU No. 2016-13 amends guidance on reporting credit losses for assets held on an amortized cost basis and available-for-sale debt securities. For assets held at amortized cost, ASU No. 2016-13 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available-for-saledebt securities, credit losses should be measured in a manner similar to current GAAP, however ASU No. 2016-13 will require that credit losses be presented as an allowance rather than as a write-down. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The Company plans to adopt ASU No. 2016-13 effective January 1, 2020, using the required modified retrospective approach, which includes presenting the cumulative effect of initial application along with supplementary disclosures. The Company is evaluating ASU No. 2016-13, initiating implementation efforts across the Company, and planning for loss modeling requirements consistent with lifetime expected loss estimates. The adoption of ASU No. 2016-13 could have a material effect on the Company’s Consolidated Statements of Condition and results of operations. The extent of the impact upon adoption will likely depend on the characteristics of the Company’s loan portfolio and economic conditions at that date, as well as forecasted conditions thereafter.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” ASU No. 2016-02 will require entities that lease assets to recognize as assets and liabilities on the balance sheet the respective rights and obligations created by those leases. ASUNo. 2016-02 also will require disclosures that include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. The Company plans to adopt ASU No. 2016-02 effective January 1, 2019 using the required modified retrospective approach, which includes presenting the cumulative effect of initial application along with supplementary disclosures. As a lessor and lessee, we do not anticipate the classification of our leases to change, but we expect to recognize substantially all of our leases for which we are the lessee as a lease liability and corresponding right-of-use asset on our Consolidated Statements of Condition. The Company has assembled a project management team and is presently evaluating all of its leases, as well as contracts that may contain embedded leases, for compliance with the new lease accounting rules.
In January 2016, the FASB issued ASUNo. 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU No. 2016-01 amends guidance on classification and measurement of financial instruments, including revisions in accounting related to the classification and measurement of investments in equity securities and presentation of certain fair value changes for financial liabilities when the fair value option is elected. ASU 2016-01 also amends certain disclosure requirements associated with the fair value of financial instruments. The company will adopt ASU No. 2016-01 on January 1, 2018, and its adoption is not expected to have a material effect on the Company’s Consolidated Statements of Condition, results of operations, or cash flows.
In May 2014, the FASB issued ASU No. 2014-09,“Revenue from Contracts with Customers,” which requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company will adopt ASU No. 2014-09 effective January 1, 2018 using the modified retrospective approach, which includes presenting the cumulative effect of initial application along with supplementary disclosures. ASU No. 2014-09 does not apply to the vast majority of our revenue streams, (i.e. interest income) and therefore are not in scope. The remaining revenue streams that are in scope are de minimis and will not have a material impact on the Company’s Consolidated Statements of Condition, results of operations, or cash flows.
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For the purposes of this Quarterly Report on Form 10-Q, the words “we,” “us,” “our,” and the “Company” are used to refer to New York Community Bancorp, Inc. and our consolidated subsidiaries, including New York Community Bank and New York Commercial Bank (the “Community Bank” and the “Commercial Bank,” respectively, and collectively, the “Banks”).
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING LANGUAGE
This report, like many written and oral communications presented by New York Community Bancorp, Inc. and our authorized officers, may contain certain forward-looking statements regarding our 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. We intend 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 are 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. Although we believe that our plans, intentions, and expectations as reflected in these forward-looking statements are reasonable, we can give no assurance that they will be achieved or realized.
Our ability to predict results or the actual effects of our plans and strategies is inherently uncertain. Accordingly, actual results, performance, or achievements could differ materially from those contemplated, expressed, or implied by the forward-looking statements contained in this report.
There are a number of factors, many of which are beyond our control, that could cause actual conditions, events, or results to differ significantly from those described in our forward-looking statements. These factors include, but are not limited to:
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In addition, the timing and occurrence or non-occurrence of events may be subject to circumstances beyond our control.
Furthermore, we routinely evaluate opportunities to expand through acquisitions and conduct due diligence activities in connection with such opportunities. As a result, acquisition discussions and, in some cases, negotiations, may take place at any time, and acquisitions involving cash or our debt or equity securities may occur.
See Part II, Item 1A, “Risk Factors,” in this report and Part I, Item 1A, “Risk Factors,” in our Form 10-K for the year ended December 31, 2016 for a further discussion of important risk factors that could cause actual results to differ materially from our forward-looking statements.
Readers should not place undue reliance on these forward-looking statements, which reflect our expectations only as of the date of this report. We do not assume any obligation to revise or update these forward-looking statements except as may be required by law.
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RECONCILIATIONS OF STOCKHOLDERS’ EQUITY, COMMON STOCKHOLDERS’ EQUITY, AND TANGIBLE COMMON STOCKHOLDERS’ EQUITY;
TOTAL ASSETS AND TANGIBLE ASSETS; AND THE RELATED MEASURES
While stockholders’ equity, common stockholders’ equity, total assets, and book value per common share are financial measures that are recorded in accordance with U.S. generally accepted accounting principles (“GAAP”), tangible common stockholders’ equity, tangible assets, and tangible book value per common share are not. It is management’s belief that thesenon-GAAP measures should be disclosed in this report and others we issue for the following reasons:
Tangible common stockholders’ equity, tangible assets, and the related non-GAAP measures should not be considered in isolation or as a substitute for stockholders’ equity, common stockholders’ equity, total assets, or any other measure calculated in accordance with GAAP. Moreover, the manner in which we calculate these non-GAAP measures may differ from that of other companies reporting non-GAAP measures with similar names.
Reconciliations of our stockholders’ equity, common stockholders’ equity, and tangible common stockholders’ equity; our total assets and tangible assets; and the related financial measures for the respective periods follow:
Stockholders’ Equity
Less: Goodwill
Tangible common stockholders’ equity
Total Assets
Tangible assets
Common stockholders’ equity to total assets
Tangible common stockholders’ equity to tangible assets
Book value per common share
Tangible book value per common share
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Executive Summary
New York Community Bancorp, Inc. is the holding company for New York Community Bank (the “Community Bank”), with 225 branches in Metro New York, New Jersey, Ohio, Florida, and Arizona; and New York Commercial Bank (the “Commercial Bank”), with 30 branches in Metro New York. At September 30, 2017, we had total assets of $48.5 billion, including total loans, net, of $37.5 billion, total deposits of $28.9 billion, and total stockholders’ equity of $6.8 billion.
Chartered in the State of New York, the Community Bank and the Commercial Bank are subject to regulation by the Federal Deposit Insurance Corporation (the “FDIC”), the Consumer Financial Protection Bureau, and the New York State Department of Financial Services. In addition, the holding company is subject to regulation by the Board of Governors of the Federal Reserve System (the “FRB”), the U.S. Securities and Exchange Commission (the “SEC”), and the requirements of the New York Stock Exchange, where shares of our common stock are traded under the symbol “NYCB” and shares of our preferred stock trade under the symbol “NYCB PR A.”
As a publicly traded company, our mission is to provide our shareholders with a solid return on their investment by producing a strong financial performance, maintaining a solid capital position, and engaging in corporate strategies that enhance the value of their shares. In the three months ended September 30, 2017, we generated net income of $110.5 million and net income available to common shareholders of $102.3 million, or $0.21 per diluted common share.
Resumption of Meaningful Loan Growth
After not growing the balance sheet for nearly three years, total non-covered loans held for investment grew 2.7% over the three months on an annualized basis to $37.5 billion. Total non-covered mortgage loans held for investment grew at an annualized rate of 3.5% to $35.5 billion, including 4.3% annualized growth in our multi-family loan portfolio. This was partially offset by a 2.4% (9.5% annualized) sequential decline in commercial and industrial (“C&I”) loans, largely the result of prepayments. Total loans originated for investment increased 24% on a sequential basis, to $2.3 billion, including 50% growth in multi-family originations and 30% growth in commercial real estate (“CRE”) loan originations.
We Maintained Our Solid Record of Asset Quality
Non-performing non-covered assets declined 7% to $84.7 million, or 0.17%, of total non-covered assets at the end of the current third quarter as compared to $91.6 million, or 0.20%, of total non-coveredassets at June 30, 2017. Non-performing non-covered loans decreased 16% to $69.0 million, or 0.18%, of totalnon-covered loans at the end of the current third quarter as compared to $82.0 million, or 0.22%, of total non-covered loans at June 30, 2017.
During the quarter, non-accrual non-covered mortgage loans declined 22% to $24.3 million, while other non-accrual non-covered loans, which primarily consisted of taxi medallion-related loans, decreased 12% to $44.7 million. These improvements were partially offset by a 64% increase, to $15.8 million, in non-covered repossessed assets.
Net charge-offs for the current third quarter rose to $40.4 million, or 0.11%, of average loans compared to $11.4 million, or 0.03%, of average loans in the second quarter of 2017. The increase was due to charge-offs on the taxi medallion-related loan portfolio. Taxi medallion-related loans accounted for $40.6 million of this quarter’s charge-offs compared to $11.3 million in the trailing quarter. Excluding these charge-offs, the Company would have recorded net recoveries during the quarter. At September 30, 2017, the Company’s total taxi medallion-related exposure was $105.6 million.
Our Net Interest Income Was Pressured by the Rise in Interest Rates
The FRB has raised its target federal funds rate four times since the fourth quarter of 2016, including in March and June of 2017. This increase in short-term interest rates led to an increase in our cost of funds. As a result of this factor, our net interest income fell $11.4 million, or 4% sequentially, and $42.1 million, or 13% year-over-year, to $276.3 million and our net interest margin fell 12 and 38 basis points, respectively, to 2.53% in the third quarter of this year.
Ongoing Expense Control
Non-interest expense totaled $162.2 million in the current third quarter, down 1% from the trailing-quarter level and up modestly from the year-earlier quarter. Merger-related expenses were $2.2 million in the year-earlier period; there were no comparable expenses in the third quarter of 2017. The sequential improvement was largely due to lower operating expenses including compensation and benefits expense and general and administrative (“G&A”) expense.
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External Factors
The following is a discussion of certain external factors that tend to influence our financial performance and the strategic actions we take:
Interest Rates
Among the external factors that tend to influence our performance, the interest rate environment is key.
The cost of our deposits and short-term borrowed funds is largely based on short-term rates of interest, the level of which is partially impacted by the actions 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 overnight from one another) as it deems necessary. Since the fourth quarter of 2008, when the target federal funds rate was lowered to a range of 0% to 0.25%, the rate has been raised four times: on December 17, 2015, to a range of 0.25% to 0.50%; on December 14, 2016, to a range of 0.50% to 0.75%; on March 15, 2017, to a range of 0.75% to 1.00%; and most recently on June 14, 2017 to a range of 1.00% to 1.25%.
Just as short-term interest rates affect the cost of our deposits and that of the funds we borrow, market interest rates affect the yields on the loans we produce for investment and the securities in which we invest. As further discussed under “Loans Held for Investment” later on in this discussion, the interest rates on our multi-family and CRE loans generally are based on the five-year Constant Maturity Treasury Rate (“CMT”).
The following table summarizes the high, low, and average five- and ten-year CMTs in the respective periods:
High
Low
Average
(Source: Bloomberg)
Changes in market interest rates generally have a lesser impact on our multi-family and CRE loan production than they do on other types of loans we produce. Because the multi-family and CRE loans we produce generate income when they prepay (which is recorded as interest income), the impact of repayment activity can be meaningful. In the third quarter of 2017, prepayment income from loans contributed $14.1 million to interest income; in the trailing and year-earlier quarters, the contribution was $13.3 million and $13.4 million, respectively.
Economic Indicators
While we attribute our asset quality to the nature of the loans we produce and our conservative underwriting standards, the quality of our assets can also be impacted by economic conditions in our local markets and throughout the United States. The information that follows consists of recent economic data that we consider to be germane to our performance and the markets we serve.
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The following table presents the unemployment rates for the United States and our key deposit markets in the months ended September 30, 2017, June 30, 2017, and September 30, 2016. While unemployment declined year-over-year in all of these markets, the sequential comparison indicates declines in certain markets and modest increases in two states and New York City.
Unemployment rate:
United States
New York City
Arizona
Florida
New Jersey
New York
Ohio
(Source: U.S. Department of Labor)
Another key economic indicator is the Consumer Price Index (the “CPI”), which measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. The following table indicates the change in the CPI for the twelve months ended at each of the indicated dates:
Change in prices:
Yet another pertinent economic indicator is the residential rental vacancy rate in New York, as reported by the U.S. Department of Commerce, and the office vacancy rate in Manhattan, as reported by a leading commercial real estate broker, Jones Lang LaSalle. These measures are important in view of the fact that 64.7% of our multi-family loans and 70.0% of our CRE loans are secured by properties in New York, with Manhattan accounting for 26.9% and 51.3% of our multi-family and CRE loans, respectively.
As reflected in the following table, residential rental vacancy rates in New York increased year-over-year and linked-quarter, while office vacancy rates in Manhattan declined year-over-year and linked quarter.
Rental Vacancy Rates:
New York residential
Manhattan office
Lastly, the Consumer Confidence Index® increased to 120.6 in September 2017 from 117.3 in June 2017 and 104.1 in September 2016. An index level of 90 or more is considered indicative of a strong economy.
Recent Events
Strategic Exit from the Mortgage Banking Business
On June 27, 2017, the Company announced that it had entered into an agreement to sell its mortgage banking business, which was acquired as part of its 2009 FDIC-assisted acquisition of AmTrust Bank (“AmTrust”), to Freedom Mortgage Corporation (“Freedom”). The sale of our mortgage banking business effectively takes the Company out of the one-to-four family residential wholesale lending business. Additionally, the Company received approval from the FDIC to sell the assets covered under our Loss Share Agreements (“LSA”) and entered into an agreement to sell the majority of our one-to-four family residential mortgage-related assets, including those covered under the LSA, to FirstKey Mortgage, LLC, an affiliate of Cerberus Capital Management, L.P. (“Cerberus”).
On July 28, 2017, the Company completed the sale, resulting in the receipt of proceeds of $1.9 billion from Cerberus and the FDIC to sell the aforementioned loans and settle the related LSA, resulting in a gain of $74.6 million which is included in “Non-interest income” in the accompanying Consolidated Statement of Income and Comprehensive Income. Effective October 31, 2017, the Company and the FDIC completed termination of the LSA.
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The sale of our mortgage banking business to Freedom, which included both our origination and servicing platforms, as well as our mortgage servicing portfolio with unpaid loan principal balances totaling $20.5 billion and related mortgage servicing rights (“MSRs”) asset of $208.8 million, closed on September 29, 2017. We received proceeds in the amount of $226.6 million, resulting in a pre-tax gain of $7.4 million.
The decision to sell the mortgage banking business and the assets covered under our LSA was the result of an evaluation with the Board of Directors and our outside advisors. Selling to a large, national, full-service mortgage banking company that would keep certain employees and maintain operations in the region were important considerations during the evaluation process. These actions are consistent with the Company’s strategic objectives. Such sales allow the Company to focus on its core business model, including growth through acquisitions, generate liquidity which will be redeployed into higher-earning assets, and enhance returns through improved efficiencies.
The Community Bank’s mortgage banking operation originated, aggregated, sold, and serviced one-to-four family loans. Community banks, credit unions, mortgage companies, and mortgage brokers used its proprietaryweb-accessible mortgage banking platform to originate and close one-to-four family loans nationwide. These loans were generally sold to GSEs, servicing retained. To a much lesser extent, the Community Bank used its mortgage banking platform to originate jumbo loans.
Declaration of Dividend on Common Shares
On October 24, 2017, the Board of Directors declared a quarterly cash dividend of $0.17 per share on our common stock, payable on November 21, 2017 to shareholders of record at the close of business on November 7, 2017.
Critical Accounting Policies
We consider certain accounting policies to be critically important to the portrayal of our financial condition and results of operations, 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 our consolidated financial statements to these critical accounting policies, and the judgments, estimates, and assumptions used therein, could have a material impact on our financial condition or results of operations.
We have identified the following to be critical accounting policies: the determination of the allowances for loan losses on non-covered loans; the determination of the amount, if any, of goodwill impairment; and the determination of the valuation allowance for deferred tax assets.
The judgments used by management in applying these critical accounting policies may be influenced by adverse changes in the economic environment, which may result in changes to future financial results.
The allowance for losses on non-covered loans represents our estimate of probable and estimable losses inherent in the non-covered loan portfolio as of the date of the balance sheet. Losses on non-covered loans are charged against, and recoveries of losses on non-covered loans are credited back to, the allowance for losses on non-covered loans.
Although non-covered loans are held by either the Community Bank or the Commercial Bank, and a separate loan loss allowance is established for each, the total of the two allowances is available to cover all losses incurred. In addition, except as otherwise noted in the following discussion, the process for establishing the allowance for losses on non-covered loans is largely the same for each of the Community Bank and the Commercial Bank.
The methodology used for the allocation of the allowance for non-covered loan losses at September 30, 2017 and December 31, 2016 was generally comparable, whereby the Community Bank and the Commercial Bank segregated their loss factors (used for both criticized and non-criticized loans) into a component that was primarily based on historical loss rates and a component that was primarily based on other qualitative factors that are probable to affect loan collectability. In determining the respective allowances for non-covered loan losses, management considers the Community Bank’s and the Commercial Bank’s current business strategies and credit processes, including compliance with applicable regulatory guidelines and with guidelines approved by the respective Boards of Directors with regard to credit limitations, loan approvals, underwriting criteria, and loan workout procedures.
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The allowance for losses on non-covered loans is established based on management’s evaluation of incurred losses in the portfolio in accordance with U.S. generally accepted accounting principles (“GAAP”), and is comprised of both specific valuation allowances and general valuation allowances.
Specific valuation allowances are established based on management’s analyses of individual loans that are considered impaired. If a non-covered loan is deemed to be impaired, management measures the extent of the impairment and establishes a specific valuation allowance for that amount. Anon-covered loan is classified as “impaired” when, based on current information and/or events, it is probable that we will be unable to collect all amounts due under the contractual terms of the loan agreement. We apply this classification as necessary to non-covered loans individually evaluated for impairment in our portfolios. Smaller-balance homogenous loans and loans carried at the lower of cost or fair value are evaluated for impairment on a collective, rather than individual, basis. Loans to certain borrowers who have experienced financial difficulty and for which the terms have been modified, resulting in a concession, are considered troubled debt restructurings (“TDRs”) and are classified as impaired.
We generally measure impairment on an individual loan and determine the extent to which a specific valuation allowance is necessary by comparing the loan’s outstanding balance to either the fair value of the collateral, less the estimated cost to sell, or the present value of expected cash flows, discounted at the loan’s effective interest rate. Generally, when the fair value of the collateral, net of the estimated cost to sell, or the present value of the expected cash flows is less than the recorded investment in the loan, any shortfall is promptly charged off.
We also follow a process to assign general valuation allowances tonon-covered loan categories. General valuation allowances are established by applying our loan loss provisioning methodology, and reflect the inherent risk in outstanding held-for-investment loans. This loan loss provisioning methodology considers various factors in determining the appropriate quantified risk factors to use to determine the general valuation allowances. The factors assessed begin with the historical loan loss experience for each major loan category. We also take into account an estimated historical loss emergence period (which is the period of time between the event that triggers a loss and the confirmation and/or charge-off of that loss) for each loan portfolio segment.
The allocation methodology consists of the following components: First, we determine an allowance for loan losses based on a quantitative loss factor for loans evaluated collectively for impairment. This quantitative loss factor is based primarily on historical loss rates, after considering loan type, historical loss and delinquency experience, and loss emergence periods. The quantitative loss factors applied in the methodology are periodically re-evaluated and adjusted to reflect changes in historical loss levels, loss emergence periods, or other risks. Lastly, we allocate an allowance for loan losses based on qualitative loss factors. These qualitative loss factors are designed to account for losses that may not be provided for by the quantitative loss component due to other factors evaluated by management, which include, but are not limited to:
By considering the factors discussed above, we determine an allowance for non-covered loan losses that is applied to each significant loan portfolio segment to determine the total allowance for losses on non-covered loans.
The historical loss period we use to determine the allowance for loan losses on non-covered loans is a rolling 27-quarter look-back period, as we believe this produces an appropriate reflection of our historical loss experience.
The process of establishing the allowance for losses on non-covered loans also involves:
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In order to determine their overall adequacy, each of the respective non-covered loan loss allowances is reviewed quarterly by management and the Board of Directors of the Community Bank or the Commercial Bank, as applicable.
We charge off loans, or portions of loans, in the period that such loans, or portions thereof, are deemed uncollectible. The collectability of individual loans is determined through an assessment of the financial condition and repayment capacity of the borrower and/or through an estimate of the fair value of any underlying collateral. For non-real estate-related consumer credits, the following past-due time periods determine when charge-offs are typically recorded: (1) Closed-end credits are charged off in the quarter that the loan becomes 120 days past due; (2) Open-end credits are charged off in the quarter that the loan becomes 180 days past due; and (3) Both closed-end and open-end credits are typically charged off in the quarter that the credit is 60 days past the date we received notification that the borrower has filed for bankruptcy.
The level of future additions to the respective non-covered loan loss allowances is based on many factors, including certain factors that are beyond management’s control, such as changes in economic and local market conditions, including declines in real estate values, and increases in vacancy rates and unemployment. Management uses the best available information to recognize losses on loans or to make additions to the loan loss allowances; however, the Community Bank and/or the Commercial Bank may be required to take certain charge-offs and/or recognize further additions to their loan loss allowances, based on the judgment of regulatory agencies with regard to information provided to them during their examinations of the Banks.
An allowance for unfunded commitments is maintained separate from the allowances for non-covered loan losses and is included in “Other liabilities” in the Consolidated Statements of Condition.
See Note 6, “Allowances for Loan Losses” for a further discussion of our allowance for losses on covered loans, as well as additional information about our allowance for losses on non-covered loans.
Goodwill Impairment
We have significant intangible assets related to goodwill. In connection with our acquisitions, assets that are acquired and liabilities that are assumed are recorded at their estimated fair values. Goodwill represents the excess of the purchase price of our acquisitions over the fair value of the identifiable net assets acquired, including other identified intangible assets. Our determination of whether or not goodwill is impaired requires us to make significant judgments and requires us to use significant estimates and assumptions regarding estimated future cash flows. If we change our strategy or if market conditions shift, our judgments may change, which may result in adjustments to the recorded goodwill balance.
We test our goodwill for impairment at the reporting unit level. These impairment evaluations are performed by comparing the carrying value of the goodwill of a reporting unit to its estimated fair value. We allocate goodwill to reporting units based on the reporting unit expected to benefit from the business combination. Previously, we had identified two reporting units: our Banking Operations reporting unit and our Residential Mortgage Banking reporting unit. On September 29, 2017, the Company sold the Residential Mortgage Banking reporting unit; accordingly, we have identified only one reporting unit.
For annual goodwill impairment testing, we have the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill and other intangible assets. If we conclude that this is the case, we must perform the two-step test described below. If we conclude based on the qualitative assessment that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, we have completed our goodwill impairment test and do not need to perform the two-step test.
Under step one of the two-step test, we are required to determine the fair value of each reporting unit and compare it to the carrying value, including goodwill and other intangible assets, of such reporting unit. If the fair value exceeds the carrying value, no impairment loss is recognized and the second step, which is a calculation of the impairment, is not performed. However, if the carrying value of the reporting unit exceeds its fair value, an impairment charge is recorded equal to the extent that the carrying amount of goodwill exceeds its implied fair value.
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Application of the impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and the determination of the fair value of each reporting unit. In assessing whether goodwill is impaired, we must make estimates and assumptions regarding future cash flows, long-term growth rates of our business, operating margins, discount rates, weighted average cost of capital, and other factors to determine the fair value of our assets. These estimates and assumptions require management’s judgment, and changes to these estimates and assumptions, as a result of changing economic and competitive conditions, could materially affect the determination of fair value and/or impairment. Future events could cause us to conclude that indicators of impairment exist for goodwill, and may result from, among other things, deterioration in the performance of our business, adverse market conditions, adverse changes in applicable laws and regulations, competition, or the sale or disposition of a reporting unit. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations.
As of September 30, 2017, we had goodwill of $2.4 billion. Our goodwill is evaluated for impairment annually at December 31st, or more frequently if conditions exist that indicate that the value may be impaired. During the three months ended September 30, 2017, no triggering events were identified that indicated that the value of goodwill might be impaired as of such date. We performed our annual goodwill impairment test as of December 31, 2016 and, based on the results of our qualitative assessments, found no indication of goodwill impairment at that date.
Income Taxes
In estimating income taxes, management assesses the relative merits and risks of the tax treatment of transactions, taking into account statutory, judicial, and regulatory guidance in the context of our tax position. In this process, management also relies on tax opinions, recent audits, and historical experience. Although we use the best 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 our overall or transaction-specific tax position.
We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and the carry forward of certain tax attributes such as net operating losses. A valuation allowance is maintained for deferred tax assets that we estimate are more likely than not to be unrealizable, based on available evidence at the time the estimate is made. In assessing the need for a valuation allowance, we estimate future taxable income, considering the prudence and feasibility of tax planning strategies and the realizability of tax loss carry forwards. Valuation allowances related to deferred tax assets can be affected by changes to tax laws, statutory tax rates, and future taxable income levels. In the event we were to determine that we would not be able to realize all or a portion of our net deferred tax assets in the future, we would reduce such amounts through a charge to income tax expense in the period in which that determination was made. Conversely, if we were to determine that we would be able to realize our deferred tax assets in the future in excess of the net carrying amounts, we would decrease the recorded valuation allowance through a decrease in income tax expense in the period in which that determination was made. Subsequently recognized tax benefits associated with valuation allowances recorded in a business combination would be recorded as an adjustment to goodwill.
Balance Sheet Summary
At September 30, 2017, we recorded total assets of $48.5 billion, a $110.2 million increase from the balance at June 30, 2017 and a $468.7 million decline from the balance at December 31, 2016. Loans, net, and securities represented $37.5 billion and $3.0 billion, respectively, of the September 30th balance and were down $1.4 billion and $140.1 million, respectively, from the trailing quarter-end balances and $1.9 billion and $786.0 million, respectively, from the year-end balances.
Deposits and borrowed funds totaled $28.9 billion and $12.4 billion, respectively, at the end of the current third quarter. The current third quarter deposit balance was comparable to the balances at both the second quarter of this year and year end. Borrowed funds were unchanged from the prior quarter-end balance and declined $1.3 billion from year end.
Total stockholders’ equity rose $635.7 million from theyear-end 2016 balance, due primarily to a $502.8 million preferred stock offering in March, and $24.9 million from the June 30, 2017 balance, to $6.8 billion, at the current third-quarter end. Common stockholders’ equity represented 12.91% of total assets at September 30, 2017 compared to 12.89% and 12.31%, respectively, of total assets at June 30, 2017 and September 30, 2016, and a book value per common share of $12.79 at September 30, 2017 compared to $12.74 at June 30, 2017 and $12.50 at September 30, 2016.
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Loans, net, fell $1.4 billion from the trailing quarter-end and $1.9 billion from year end to $37.5 billion in the three months ended September 30, 2017, representing 77.3% of total assets at that date. Included in the quarter-end balance werenon-covered loans held for investment, net, of $37.3 billion, and non-covered loans held for sale of $104.9 million, as more fully discussed below.
Non-covered loans held for investment totaled $37.5 billion at the end of the current third quarter, up $255.2 million from the June 30, 2017 balance and up $123.5 million from the balance at December 31, 2016. Loan originations increased $444.6 million, or 24%, sequentially, driven by 50% growth in multi-family originations and 30% growth in CRE originations.
Sales of participations totaled $37.8 million in the three months ended September 30, 2017, as compared to $148.2 million in the trailing three-month period. The pace of loan sale participations has declined due to the Company’s strategic decision to resume its balance sheet growth.
In addition to multi-family and CRE loans, theheld-for-investment portfolio includes substantially smaller balances of one-to-fourfamily loans, ADC loans, and other loans, with specialty finance loans and leases and other C&I loans comprising the bulk of the “Other loan” portfolio.
At September 30, 2017, loans secured by multi-family, CRE, and ADC properties (as defined in the FDIC’s CRE Guidance) represented 739.9% of the consolidated Banks’ total risk-based capital, within the 850% limit agreed to with our regulators.
The following table presents information about the loans held for investment we originated for the respective periods:
Mortgage Loans Originated for Investment:
One-to-four family residential
Total mortgage loans originated for investment
Other Loans Originated for Investment:
Specialty finance
Other commercial and industrial
Total other loans originated for investment
Total loans originated for investment
The individualheld-for-investment loan portfolios are discussed in detail below.
Multi-Family Loans
Multi-family loans are our principal asset. The loans we produce are primarily secured by non-luxury residential apartment buildings in New York City that are rent-regulated and feature below-market rents—a market we refer to as our “primary lending niche.”
Multi-family loan originations represented $1.4 billion, or 62.0%, of the held-for-investment loans we produced in the current third quarter, reflecting a linked-quarter increase of $480.2 million and a $156.1 million increase year-over-year. At September 30, 2017, multi-family loans represented $27.1 billion, or 72.4%, of total non-covered loans held for investment, reflecting a $286.2 million increase from the balance at June 30th and a $200.3 million increase from the balance at December 31st.
The average multi-family loan had a principal balance of $5.6 million at the end of the current third quarter, which was modestly higher than the balances at June 30, 2017 and December 31, 2016, respectively.
The majority of our multi-family loans are made to long-term owners of residential apartment buildings with units that are subject to rent regulation and feature below-market rents. Our borrowers typically use the funds we provide for future real estate investments, or to make building-wide improvements and renovations to certain units, as a result of which they are able to increase the rents their tenants pay. In this way, the borrower creates increased cash flows to service debt and borrow against in future years.
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In addition to underwriting multi-family loans on the basis of the buildings’ income and condition, we consider the borrowers’ credit history, profitability, and building management expertise. Borrowers are required to present evidence of their ability to repay the loan from the buildings’ current rent rolls, their financial statements, and related documents.
While a small percentage of our multi-family loans areten-year fixed rate credits, the vast majority of our multi-family loans feature a term of ten or twelve years, with a fixed rate of interest for the first five or seven years of the loan, and an alternative rate of interest in years six through ten or eight through twelve. The rate charged in the first five or seven years is generally based on intermediate-term interest rates plus a spread. During the remaining years, the loan resets to an annually adjustable rate that is tied to the prime rate of interest, plus a spread. Alternately, the borrower may opt for a fixed rate that is tied to the five-year fixed advance rate of the Federal Home Loan Bank of New York (the “FHLB-NY”), plus a spread. The fixed-rate option also requires the payment of one percentage point of the then-outstanding loan balance. In either case, the minimum rate at repricing is equivalent to the rate in the initial five- or seven-year term. As the rent roll increases, the typical property owner seeks to refinance the mortgage, and generally does so before the loan reprices in year six or eight.
Our multi-family loans tend to refinance in approximately three years of origination; at September 30, 2017, June 30, 2017, and December 31, 2016, the weighted average life of the multi-family loan portfolio was 2.7 years, 3.2 years, and 2.9 years, respectively.
Multi-family loans that refinance within the first five or seven years are typically subject to an established prepayment penalty schedule. Depending on the remaining term of the loan at the time of prepayment, the penalties normally range from five percentage points to one percentage point of the then-current loan balance. If a loan extends past the fifth or seventh year and the borrower selects the fixed rate option, the prepayment penalties typically reset to a range of five points to one point over years six through ten or eight through twelve. For example, a ten-year multi-family loan that prepays in year three would generally be expected to pay a prepayment penalty equal to three percentage points of the remaining principal balance. A twelve-year multi-family loan that prepays in year one or two would generally be expected to pay a penalty equal to five percentage points.
Because prepayment penalties are recorded as interest income, they are reflected in the average yields on our loans and interest-earning assets, our interest rate spread and net interest margin, and the level of net interest income we record. No assumptions are involved in the recognition of prepayment income, as such income is only recorded when cash is received.
Our success as a multi-family lender partly reflects the solid relationships we have developed with the market’s leading mortgage brokers, who are familiar with our lending practices, our underwriting standards, and our long-standing practice of basing our loans on the cash flows produced by the properties. The process of producing such loans is generally four to six weeks in duration and, because the multi-family market is largely broker-driven, the expense incurred in sourcing such loans is substantially reduced.
At September 30, 2017, the majority of our multi-family loans were secured by rent-regulated rental apartment buildings. In addition, 64.7% of our multi-family loans were secured by buildings in New York City and 5.5% were secured by buildings elsewhere in New York State. The remaining multi-family loans were secured by buildings outside these markets, including in the four other states served by our retail branch offices.
Our emphasis on multi-family loans is driven by several factors, including their structure, which reduces our exposure to interest rate volatility to some degree. Another factor driving our focus on multi-family lending has been the comparative quality of the loans we originate.
We primarily underwrite our multi-family loans based on the current cash flows produced by the collateral property, with a reliance on the “income” approach to appraising the properties, rather than the “sales” approach. The sales approach is subject to fluctuations in the real estate market, as well as general economic conditions, and is therefore likely to be more risky in the event of a downward credit cycle turn. We also consider a variety of other factors, including the physical condition of the underlying property; the net operating income of the mortgaged premises prior to debt service; the debt service coverage ratio (“DSCR”), which is the ratio of the property’s net operating income to its debt service; and the ratio of the loan amount to the appraised value of the property (“LTV”).
In addition to requiring a minimum DSCR of 120% on multi-family buildings, we obtain a security interest in the personal property located on the premises, and an assignment of rents and leases. Our multi-family loans generally represent no more than 75% of the lower of the appraised value or the sales price of the underlying property, and typically feature an amortization period of 30 years. In addition, our multi-family loans may contain an initial interest-only period which typically does not exceed two years; however, these loans are underwritten on a fully amortizing basis.
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Accordingly, while our multi-family lending niche has not been immune to downturns in the credit cycle, the limited number of losses we have recorded, even in adverse credit cycles, suggests that the multi-family loans we produce involve less credit risk than certain other types of loans. In general, buildings that are subject to rent regulation have tended to be stable, with occupancy levels remaining more or less constant over time. Because the rents are typically below market and the buildings securing our loans are generally maintained in good condition, they have been more likely to retain their tenants in adverse economic times. In addition, we exclude any short-term property tax exemptions and abatement benefits the property owners receive when we underwrite the cash flows of our multi-family loans.
Commercial Real Estate Loans
CRE loans represented $7.6 billion, or 20.1%, of total loans held for investment at the end of the current third quarter, a $9.8 million increase from the balance at June 30, 2017, but a $174.0 million decrease from the balance at December 31, 2016. CRE loans represented $249.8 million, or 10.8%, of loans originated for investment in the current third quarter, reflecting a linked-quarter increase of $57.7 million and a year-over-year decrease of $95.8 million.
At September 30, 2017, the average CRE loan had a principal balance of $5.7 million, unchanged from the average principal balance at June 30, 2017, and up modestly from December 31, 2016.
The CRE loans we produce are secured by income-producing properties such as office buildings, retail centers, mixed-use buildings, and multi-tenanted light industrial properties. At September 30, 2017, 70.0% of our CRE loans were secured by properties in New York City, while properties on Long Island accounted for 11.6%. Other parts of New York State accounted for 2.6% of the properties securing our CRE credits, while all other states accounted for 15.8%, combined.
The terms of our CRE loans are similar to the terms of our multi-family credits, and the same prepayment penalties also apply. Furthermore, our CRE loans also tend to refinance in approximately three years of origination; the weighted average life of the CRE portfolio was 2.9 years, 3.0 years, and 3.4 years at September 30, 2017, June 30, 2017, and December 31, 2016, respectively.
The repayment of loans secured by commercial real estate is often dependent on the successful operation and management of the underlying properties. To minimize our credit risk, we originate CRE loans in adherence with conservative underwriting standards, and require that such loans qualify on the basis of the property’s current income stream and DSCR. The approval of a loan also depends on the borrower’s credit history, profitability, and expertise in property management, and generally requires a minimum DSCR of 130% and a maximum LTV of 65%. Furthermore, the origination of CRE loans typically requires a security interest in the fixtures, equipment, and other personal property of the borrower and/or an assignment of the rents and/or leases. In addition, CRE loans may contain an interest-only period which typically does not exceed three years. However, these loans are underwritten on a fully amortizing basis.
One-to-Four Family Loans
Reflecting our announcement that the Company was exiting the mortgage banking business, the September 30, 2017 balance of one-to-four family loans held for investment was relatively unchanged sequentially at $413.2 million, representing 1.1% of total loans held for investment at that date.
Acquisition, Development, and Construction Loans
The balance of ADC loans increased $12.8 million to $385.9 million sequentially, representing 1.0% of total held-for-investment loans at the current third-quarter end. In the third quarter of 2017, we originated ADC loans of $21.8 million, a $918,000 increase from the trailing-quarter volume and a year-over-year increase of $3.9 million.
Because ADC loans are generally considered to have a higher degree of credit risk, especially during a downturn in the credit cycle, borrowers are required to provide a guarantee of repayment and completion. In the nine months ended September 30, 2017 and 2016, we recovered losses against guarantees of $321,000 and $314,000, respectively.
Other Loans
Other loans of $2.0 billion were relatively unchanged from the trailing three-month period, representing 5.3% of total loans at September 30th due to an increase in specialty finance loans and leases to $1.4 billion and a $20.8 million decline in other C&I loans to $545.5 million. Included in the latter amount were taxi medallion-related loans of $99.1 million, representing 0.3% of total loans held for investment. The remainder of the “other loan” portfolio included a nominal amount of consumer loans.
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Originations of other loans totaled $585.0 million in the current third quarter, reflecting a $65.5 million decrease from the trailing-quarter volume and a $63.5 million increase from the year-earlier amount. Specialty finance loans and leases represented the bulk of the quarter’s other loan originations, at $468.7 million, reflecting a $30.2 million decrease from the trailing-quarter level and a $99.4 million increase from the year-earlier amount. Other C&I loans represented $115.6 million of the other loans produced in the current third quarter, down $35.2 million and $35.7 million, respectively, from the volumes in the earlier periods.
Specialty Finance Loans and Leases
Our specialty finance subsidiary is based in Foxboro, Massachusetts, and staffed by a group of industry veterans with expertise in originating and underwriting senior secured debt and equipment loans and leases. The subsidiary participates in syndicated loans that are brought to us, and equipment loans and leases that are assigned to us, by a select group of nationally recognized sources, and generally are made to large corporate obligors, many of which are publicly traded, carry investment grade or near-investment grade ratings, and participate in stable industries nationwide.
The loans and leases we fund fall into three distinct categories: asset-based lending, dealer floor-plan lending, and equipment loan and lease financing. Each of these credits is secured with a perfected first security interest or outright ownership in the underlying collateral, and structured as senior debt or as a non-cancelable lease. The pricing of our asset-based and dealer floor-plan loans are at floating rates predominately tied to LIBOR, while our equipment financing credits are at fixed rates at a spread over Treasuries.
Since launching our specialty finance business in the third quarter of 2013, no losses have been recorded on any of the loans or leases in this portfolio.
Other Commercial and Industrial Loans
In contrast to the loans produced by our specialty finance subsidiary, the other C&I loans we produce are primarily made to small and mid-size businesses in the five boroughs of New York City and on Long Island. Such loans are tailored to meet the specific needs of our borrowers and include term loans, revolving lines of credit, and, to a lesser extent, loans that are partly guaranteed by the Small Business Administration. A broad range of other C&I loans, both collateralized and unsecured, are made available to businesses for working capital (including inventory and accounts receivable), business expansion, the purchase of machinery and equipment, and other general corporate needs. In determining the term and structure of other C&I loans, several factors are considered, including the purpose, the collateral, and the anticipated sources of repayment. Other C&I loans are typically secured by business assets and personal guarantees of the borrower, and include financial covenants to monitor the borrower’s financial stability.
The interest rates on our other C&I loans can be fixed or floating, with floating rate loans being tied to prime or some other market index, plus an applicable spread. Our floating rate loans may or may not feature a floor rate of interest. The decision to require a floor on other C&I loans depends on the level of competition we face for such loans from other institutions, the direction of market interest rates, and the profitability of our relationship with the borrower.
Lending Authority
The loans we originate for investment are subject to federal and state laws and regulations, and are underwritten in accordance with loan underwriting policies and procedures approved by the Mortgage and Real Estate Committee of the Community Bank (the “Mortgage Committee”), the Credit Committee of the Commercial Bank (the “Credit Committee”), and the respective Boards of Directors of the Banks.
Prior to 2017, all loans originated by the Banks were presented to the Mortgage Committee or the Credit Committee, as applicable. Furthermore, all loans of $20.0 million or more originated by the Community Bank, and all loans of $10.0 million or more originated by the Commercial Bank, were reported to the applicable Board of Directors. One-to-four family mortgage loans were approved by line-of-business personnel having underwriting authority pursuant to a separate policy applicable to our mortgage banking segment.
Effective January 27, 2017, and in accordance with the Banks’ credit policies, all loans other than one-to-four family mortgage loans and C&I loans less than or equal to $3.0 million are required to be presented to the Management Credit Committee for approval. All multi-family, CRE, and “other” C&I loans in excess of $5.0 million, and specialty finance loans in excess of $15.0 million, are also required to be presented to the Mortgage Committee or the Credit Committee, as applicable, so that the Committees can review the loans’ associated risks. The Committees have authority to direct changes in lending practices as they deem necessary or appropriate in order to address individual or aggregate risks and credit exposures in accordance with the Banks’ strategic objectives and risk appetites.
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All mortgage loans in excess of $50.0 million and all “other” C&I loans in excess of $5.0 million require approval by the Mortgage Committee or the Credit Committee. Credit Committee approval also is required for specialty finance loans in excess of $15.0 million.
In addition, all loans of $20.0 million or more originated by the Community Bank, and all loans of $10.0 million or more originated by the Commercial Bank, continue to be reported to the applicable Board of Directors, and all one-to-four family mortgage loans and C&I loans less than or equal to $3.0 million continue to be approved by line-of-business personnel.
At September 30, 2017 and December 31, 2016, the largest loan in our portfolio was a loan originated by the Community Bank on June 28, 2013 to the owner of a commercial office building located in Manhattan. As of the date of this report, the loan has been current since origination. The balance of the loan was $287.5 million at both period-ends.
In view of the heightened regulatory focus on CRE concentration, we monitor the ratio of our multi-family, CRE, and ADC loans (as defined in the FDIC’s CRE Guidance) to our total risk-based capital to ensure that it remains within the 850% limit we have agreed to with our regulators. At September 30, 2017, the consolidated Banks’ CRE concentration ratio was 739.9%.
Geographical Analysis of the Portfolio of Non-Covered Loans Held for Investment
The following table presents a geographical analysis of the multi-family and CRE loans in our held-for-investment loan portfolio at September 30, 2017:
New York City:
Manhattan
Brooklyn
Bronx
Queens
Staten Island
Total New York City
Long Island
Other New York State
All other states
At September 30, 2017, the largest concentration of one-to-four family loans held for investment was located in California, with a total of $202.2 million; the largest concentration of ADC loans held for investment was located in New York City, with a total of $282.5 million. The majority of our other loans held for investment were secured by properties and/or businesses located in Metro New York.
Non-Covered Loans Held for Sale
At September 30, 2017, non-covered loans held for sale were $104.9 million, down $304.2 million from the level at December 31, 2016. The decline is attributable to our exit from the mortgage banking business. The Company expects a majority of the current-period balance to be sold during the fourth quarter of 2017.
Outstanding Loan Commitments
At September 30, 2017, we had outstanding loan commitments of $2.2 billion, down $248.4 million from the level at June 30, 2017. Commitments to originate loans held for investment represented $2.1 billion of the September 30th total, and commitments to originate loans held for sale represented the remaining $50.4 million. At December 31, 2016, the respective commitments were $1.8 billion and $242.5 million.
Multi-family, CRE, and ADC loans together represented $814.5 million ofheld-for-investment loan commitments at the end of the third quarter, while other loans represented $1.3 billion, respectively. Included in the latter amount were commitments to originate specialty finance loans and leases of $901.9 million and commitments to originate other C&I loans of $403.8 million.
In addition to loan commitments, we had commitments to issue financial stand-by, performance stand-by, and commercial letters of credit totaling $339.6 million at September 30, 2017, a $20.7 million decrease from the volume at June 30th. The fees we collect in connection with the issuance of letters of credit are included in “Fee income” in the Consolidated Statements of Income and Comprehensive Income.
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Non-Covered Loans Held for Investment and Non-Covered Repossessed Assets
Non-performing non-covered assets represented $84.7 million, or 0.17%, of total non-covered assets at September 30, 2017, as compared to $91.6 million, or 0.20% at June 30, 2017 and $68.1 million, or 0.14%, of total non-covered assets, at December 31, 2016. The $6.9 million decrease was the net effect of a $13.0 million decline in non-performing non-covered loans to $69.0 million, and a $6.2 million increase in non-covered repossessed assets to $15.8 million.Non-performing non-covered loans represented 0.18% of total non-covered loans at the end of the third quarter, compared to 0.22% at June 30th and 0.15% at December 31st.
The increase in both non-performing non-covered loans and non-performing non-covered assets in the current nine-month period was largely attributable to the transition to non-accrual status of taxi medallion-related loans. As reflected in the tables featured later in this discussion, the balance of non-accrualnon-covered mortgage loans declined $14.4 million from the year-end balance to $24.3 million, while the balance ofnon-accrual non-covered other loans rose $26.9 million to $44.7 million. Taxi medallion-related loans accounted for $43.4 million of this total.
In addition, the Company recorded net charge-offs of $40.4 million during the current third quarter, representing 0.11% of average loans.
The following table sets forth the changes in non-performingnon-covered loans over the nine months ended September 30, 2017:
Balance at December 31, 2016
New non-accrual
Transferred to other real estate owned
Loan payoffs, including dispositions and principalpay-downs
Restored to performing status
Balance at September 30, 2017
The following table presents our non-performing non-covered loans by loan type and the changes in the respective balances for the nine months ended September 30, 2017:
Non-PerformingNon-Covered Loans:
Non-accrualnon-covered mortgage loans:
Total non-accrualnon-covered mortgage loans
Non-accrualnon-covered other loans (1)
Total non-performingnon-covered loans
A loan generally is classified as a“non-accrual” loan when it is 90 days or more past due or when it is deemed to be impaired because we no longer expect to collect all amounts due according to the contractual terms of the loan agreement. When a loan is placed on non-accrual status, we cease the accrual of interest owed, and previously accrued interest is reversed and charged against interest income. At September 30, 2017 and December 31, 2016, all of our non-performing loans were non-accrual loans. A loan is generally returned to accrual status when the loan is current and we have reasonable assurance that the loan will be fully collectible.
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We monitor non-accrual loans both within and beyond our primary lending area in the same manner. Monitoring loans generally involves inspecting and re-appraising the collateral properties; holding discussions with the principals and managing agents of the borrowing entities and/or retained legal counsel, as applicable; requesting financial, operating, and rent roll information; confirming that hazard insurance is in place or force-placing such insurance; monitoring tax payment status and advancing funds as needed; and appointing a receiver, whenever possible, to collect rents, manage the operations, provide information, and maintain the collateral properties.
It is our policy to order updated appraisals for all non-performing loans, irrespective of loan type, that are collateralized by multi-family buildings, CRE properties, or land, in the event that such a loan is 90 days or more past due, and if the most recent appraisal on file for the property is more than one year old. Appraisals are ordered annually until such time as the loan becomes performing and is returned to accrual status. It is not our policy to obtain updated appraisals for performing loans. However, appraisals may be ordered for performing loans when a borrower requests an increase in the loan amount, a modification in loan terms, or an extension of a maturing loan. We do not analyze current LTVs on a portfolio-wide basis.
Non-performing loans are reviewed regularly by management and discussed on a monthly basis with the Mortgage Committee, the Credit Committee, and the Boards of Directors of the respective Banks, as applicable. In accordance with our charge-off policy, collateral-dependentnon-performing loans are written down to their current appraised values, less certain transaction costs. Workout specialists from our Loan Workout Unit actively pursue borrowers who are delinquent in repaying their loans in an effort to collect payment. In addition, outside counsel with experience in foreclosure proceedings are retained to institute such action with regard to such borrowers.
Properties that are acquired through foreclosure are classified as OREO, and are recorded at fair value at the date of acquisition, less the estimated cost of selling the property. Subsequent declines in the fair value of OREO are charged to earnings and are included in non-interest expense. It is our policy to require an appraisal and an environmental assessment of properties classified as OREO before foreclosure, and to re-appraise the properties on an as-needed basis, and not less than annually, until they are sold. We dispose of such properties as quickly and prudently as possible, given current market conditions and the property’s condition.
To mitigate the potential for credit losses, we underwrite our loans in accordance with credit standards that we consider to be prudent. In the case of multi-family and CRE loans, we look first at the consistency of the cash flows being generated by the property to determine its economic value using the “income approach,” and then at the market value of the property that collateralizes the loan. The amount of the loan is then based on the lower of the two values, with the economic value more typically used.
The condition of the collateral property is another critical factor. Multi-family buildings and CRE properties are inspected from rooftop to basement as a prerequisite to approval, with a member of the Mortgage or Credit Committee participating in inspections on multi-family loans to be originated in excess of $7.5 million, and a member of the Mortgage or Credit Committee participating in inspections on CRE loans to be originated in excess of $4.0 million. Furthermore, independent appraisers, whose appraisals are carefully reviewed by our experienced in-house appraisal officers and staff, perform appraisals on collateral properties. In many cases, a second independent appraisal review is performed.
In addition, we work with a select group of mortgage brokers who are familiar with our credit standards and whose track record with our lending officers is typically greater than ten years. Furthermore, in New York City, where the majority of the buildings securing our multi-family loans are located, the rents that tenants may be charged on certain apartments are typically restricted under certain rent-control or rent-stabilization laws. As a result, the rents that tenants pay for such apartments are generally lower than current market rents. Buildings with a preponderance of such rent-regulated apartments are less likely to experience vacancies in times of economic adversity.
Reflecting the strength of the underlying collateral for these loans and the collateral structure, a relatively small percentage of our non-performing multi-family loans have resulted in losses over time.
To further manage our credit risk, our lending policies limit the amount of credit granted to any one borrower, and typically require minimum DSCRs of 120% for multi-family loans and 130% for CRE loans. Although we typically lend up to 75% of the appraised value on multi-family buildings and up to 65% on commercial properties, the average LTVs of such credits at origination were below those amounts at September 30, 2017. Exceptions to these LTV limitations are minimal and are reviewed on a case-by-case basis.
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The repayment of loans secured by commercial real estate is often dependent on the successful operation and management of the underlying properties. To minimize our credit risk, we originate CRE loans in adherence with conservative underwriting standards, and require that such loans qualify on the basis of the property’s current income stream and DSCR. The approval of a CRE loan also depends on the borrower’s credit history, profitability, and expertise in property management. Given that our CRE loans are underwritten in accordance with underwriting standards that are similar to those applicable to our multi-family credits, the percentage of our non-performing CRE loans that have resulted in losses has been comparatively small over time.
Multi-family and CRE loans are generally originated at conservative LTVs and DSCRs, as previously stated. Low LTVs provide a greater likelihood of full recovery and reduce the possibility of incurring a severe loss on a credit; in many cases, they reduce the likelihood of the borrower “walking away” from the property. Although borrowers may default on loan payments, they have a greater incentive to protect their equity in the collateral property and to return their loans to performing status. Furthermore, in the case of multi-family loans, the cash flows generated by the properties are generally below-market and have significant value.
The following tables present the number and amount of non-performingmulti-family and CRE loans by originating bank at September 30, 2017 and December 31, 2016:
New York Community Bank
New York Commercial Bank
Total for New York Community Bancorp
With regard to ADC loans, we typically lend up to 75% of the estimatedas-completed market value of multi-family and residential tract projects; however, in the case of home construction loans to individuals, the limit is 80%. With respect to commercial construction loans, we typically lend up to 65% of the estimated as-completed market value of the property. Credit risk is also managed through the loan disbursement process. Loan proceeds are disbursed periodically in increments as construction progresses, and as warranted by inspection reports provided to us by our own lending officers and/or consulting engineers.
To minimize the risk involved in specialty finance lending and leasing, each of our credits is secured with a perfected first security interest or outright ownership in the underlying collateral, and structured as senior debt or as a non-cancellable lease. To further minimize the risk involved in specialty finance lending and leasing, we re-underwrite each transaction. In addition, we retain outside counsel to conduct a further review of the underlying documentation.
Other C&I loans are typically underwritten on the basis of the cash flows produced by the borrower’s business, and are generally collateralized by various business assets, including, but not limited to, inventory, equipment, and accounts receivable. As a result, the capacity of the borrower to repay is substantially dependent on the degree to which the business is successful. Furthermore, the collateral underlying the loan may depreciate over time, may not be conducive to appraisal, and may fluctuate in value, based upon the operating results of the business. Accordingly, personal guarantees are also a normal requirement for other C&I loans.
In addition, one-to-four family loans, ADC loans, and other loans represented 1.1%, 1.0%, and 5.3%, respectively, of total non-covered loans held for investment at September 30, 2017, comparable to, or consistent with, the levels at both June 30, 2017 and December 31, 2016. Furthermore, while 0.5% of our one-to-four family loans were non-performingat the end of the current third quarter, 1.6% of our ADC loans and 2.2% of our other loans were non-performing at that date.
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The procedures we follow with respect to delinquent loans are generally consistent across all categories, with late charges assessed, and notices mailed to the borrower, at specified dates. We attempt to reach the borrower by telephone to ascertain the reasons for delinquency and the prospects for repayment. When contact is made with a borrower at any time prior to foreclosure or recovery against collateral property, we attempt to obtain full payment, and will consider a repayment schedule to avoid taking such action. Delinquencies are addressed by our Loan Workout Unit and every effort is made to collect rather than initiate foreclosure proceedings.
The following table presents ourheld-for-investment loans 30 to 89 days past due by loan type and the changes in the respective balances for the nine months ended September 30, 2017:
Non-Covered Loans30-89 Days Past Due:
Total non-covered loans30-89 days past due
Fair values for all multi-family buildings, CRE properties, and land are determined based on the appraised value. If an appraisal is more than one year old and the loan is classified as either non-performing or as an accruing TDR, then an updated appraisal is required to determine fair value. Estimated disposition costs are deducted from the fair value of the property to determine estimated net realizable value. In the instance of an outdated appraisal on an impaired loan, we adjust the original appraisal by using a third-party index value to determine the extent of impairment until an updated appraisal is received.
While we strive to originate loans that will perform fully, adverse economic and market conditions, among other factors, can adversely impact a borrower’s ability to repay. Largely reflecting the nature of our primary lending niche and our conservative underwriting standards, we recorded aggregate net recoveries on our core multi-family and CRE portfolios in the third quarter of 2017.
Reflecting management’s assessment of the allowance for non-covered loan losses, we recorded a $44.6 million provision for such losses in the current third quarter, as compared to $11.6 million and $1.2 million, respectively, in the trailing and year-earlier three months. Reflecting the third-quarter provision, and the aforementioned net charge-offs, the allowance for losses on non-covered loans increased to $158.9 million at September 30, 2017. This represented 0.42% of total non-covered loans and 230.42% of non-performing non-covered loans at that date.
Based upon all relevant and available information as of the end of the current third quarter, management believes that the allowance for losses on non-covered loans was appropriate at that date.
At September 30, 2017, our three largest non-performing loans were a C&I loan with a balance of $7.8 million, a multi-family loan with a balance of $7.6 million, and an ADC loan with a balance of $6.2 million.
In an effort to proactively manage delinquent loans, we have selectively extended to certain borrowers such concessions as rate reductions and extensions of maturity dates, as well as forbearance agreements, when such borrowers have exhibited financial difficulty. In accordance with GAAP, we are required to account for such loan modifications or restructurings as TDRs.
The eligibility of a borrower for work-out concessions of any nature depends upon the facts and circumstances of each transaction, which may change from period to period, and involve management’s judgment regarding the likelihood that the concession will result in the maximum recovery for the Company.
Loans modified as TDRs are placed on non-accrual status until we determine that future collection of principal and interest is reasonably assured. This generally requires that the borrower demonstrate performance according to the restructured terms for at least six consecutive months. At September 30, 2017, non-accrual TDRs included taxi medallion-related loans with a combined balance of $43.4 million.
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At September 30, 2017, loans on which concessions were made with respect to rate reductions and/or extensions of maturity dates totaled $41.5 million; loans in connection with which forbearance agreements were reached totaled $1.8 million at that date.
Based on the number of loans performing in accordance with their revised terms, our success rates for restructured multi-family loans, CRE loans, one-to-four family loans, and other loans were 100%, 100%, 50%, and 84%, respectively, at September 30, 2017. There were no restructured ADC loans at that date.
Analysis of Troubled Debt Restructurings
The following table sets forth the changes in our TDRs over the nine months ended September 30, 2017:
New TDRs
Transferred from accruing to non-accrual
On a limited basis, we may provide additional credit to a borrower after a loan has been placed on non-accrual status or classified as a TDR if, in management’s judgment, the value of the property after the additional loan funding is greater than the initial value of the property plus the additional loan funding amount. During the nine months ended September 30, 2017, no such additions were made. Furthermore, the terms of our restructured loans typically would not restrict us from cancelling outstanding commitments for other credit facilities to a borrower in the event of non-payment of a restructured loan.
Except for the non-accrual loans and TDRs disclosed in this filing, we did not have any potential problem loans at the end of the current first quarter that would have caused management to have serious doubts as to the ability of a borrower to comply with present loan repayment terms and that would have resulted in such disclosure if that were the case.
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Asset Quality Analysis (Excluding Covered Loans, Covered Repossessed Assets, and Non-Covered PCI Loans)
The following table presents information regarding our consolidated allowance for losses on non-covered loans, our non-performing non-covered assets, and ournon-covered loans 30 to 89 days past due at September 30, 2017 and December 31, 2016. Covered loans and non-covered purchased credit-impaired (“PCI”) loans were considered to be performing due to the application of the yield accretion method, as discussed elsewhere in this report. Therefore, covered loans and non-covered PCI loans are not reflected in the amounts or ratios provided in this table.
Allowance for Losses on Non-Covered Loans:
Charge-offs:
Total charge-offs
Recoveries:
Total recoveries
Net charge-offs
Non-PerformingNon-Covered Assets:
Other non-accrualnon-covered loans
Total non-performingnon-covered loans (1)
Non-covered repossessed assets (2)
Total non-performingnon-covered assets
Asset Quality Measures:
Non-performingnon-covered loans to total non-covered loans
Non-performingnon-covered assets to total non-covered assets
Allowance for losses on non-covered loans to non-performing
non-coveredloans
Allowance for losses on non-covered loans to total non-covered loans
Total non-covered loans30-89 days past due (4)
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Covered Loans and Covered Other Real Estate Owned
In connection with the AmTrust and Desert Hills Bank LSA, we established FDIC loss share receivables of $740.0 million and $69.6 million, respectively, which were the acquisition-date fair values of the respective LSA (i.e., the expected reimbursements from the FDIC over the terms of the agreements). The loss share receivables increased if the losses increased, and decreased if the losses fell short of the expected amounts. Increases in estimated reimbursements were recognized in income in the same period that they were identified and that the allowance for losses on the related covered loans was recognized.
Additionally, as previously disclosed, the Company received approval from the FDIC to sell assets covered under our LSA, early terminate the LSA, and enter into an agreement to sell the majority of our one-to-four family residential mortgage-related assets, including those covered under the LSA, to an affiliate of Cerberus. On July 28, 2017, the Company completed the sale, resulting in the receipt of proceeds of $1.9 billion from Cerberus and the FDIC to sell the aforementioned loans and settle the related LSA, resulting in a gain of $74.6 million which is included in “Non-interest income” in the accompanying Consolidated Statement of Income and Comprehensive Income. Effective October 31, 2017, the Company and the FDIC completed termination of the LSA.
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Asset Quality Analysis (Including Covered Loans, Covered OREO, andNon-Covered PCI Loans)
As previously discussed, the covered loan portfolio was sold during the third quarter of 2017; accordingly, the following table presents information regarding our non-performing assets and loans past due at December 31, 2016 only, including covered loans and covered OREO (collectively, “covered assets”), and non-covered PCI loans:
Covered Loans and Non-Covered PCI Loans 90 Days or More Past Due:
Total covered loans and non-covered PCI loans 90 days or more past due
Covered other real estate owned
Total covered assets and non-covered PCI loans
Total Non-Performing Assets:
Non-performing loans:
Other non-performing loans
Total non-performing loans
Other real estate owned
Total non-performing assets
Asset Quality Ratios (including the allowance for losses on covered loans and non-covered PCI loans):
Total non-performing loans to total loans
Total non-performing assets to total assets
Allowance for loan losses to total non-performingloans
Allowance for loan losses to total loans
Covered Loans and Non-Covered PCI Loans 30-89 Days Past Due:
Total covered loans and non-covered PCI loans 30-89 days past due
Total Loans 30-89 Days Past Due:
Total loans 30-89 days past due
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Geographical Analysis of Non-Performing Loans
The following table presents a geographical analysis of our non-performing loans at September 30, 2017:
Maryland
Connecticut
Securities declined $140.1 million from the current second quarter-end 2017 balance and $786.0 million from the year-end 2016 balance to $3.0 billion, representing 6.3% of total assets, at September 30, 2017. During the second quarter of 2017, the Company repositioned its “Held-to-Maturity” securities portfolio by designating the entire portfolio as “Available-for-Sale.” In addition, it took advantage of favorable bond market conditions and sold approximately $521.0 million of securities, resulting in a pre-tax gain on sale of $26.9 million.
As members of the FHLB-NY, the Community Bank and the Commercial Bank are required to acquire and hold shares of its capital stock. At September 30, 2017 and December 31, 2016, the Community Bank held FHLB-NY stock in the amount of $564.3 million and $562.0 million, respectively, and the Commercial Bank held FHLB-NY stock of $15.1 million and $16.4 million, respectively. FHLB-NY stock continued to be valued at par, with no impairment required at that date.
Dividends from the FHLB-NY to the Community Bank totaled $22.8 million and $19.2 million, respectively, in the nine months ended September 30, 2017 and 2016; dividends from the FHLB-NY to the Commercial Bank totaled $701,000 and $1.1 million, respectively, in the corresponding periods.
Bank-Owned Life Insurance
Bank-owned life insurance (“BOLI”) is recorded at the total cash surrender value of the policies in the Consolidated Statements of Condition, and the income generated by the increase in the cash surrender value of the policies is recorded in “Non-interest income” in the Consolidated Statements of Income and Comprehensive Income.
Reflecting an increase in the cash surrender value of the underlying policies, our investment in BOLI rose $12.4 million to $961.4 million in the nine months ended September 30, 2017.
Goodwill and Core Deposit Intangibles
We record goodwill and core deposit intangibles (“CDI”) in our Consolidated Statements of Condition in connection with certain of our business combinations.
Goodwill, which is tested at least annually for impairment, refers to the difference between the purchase price and the fair value of an acquired company’s assets, net of the liabilities assumed. CDI refers to the fair value of the core deposits acquired in a business combination, and is typically amortized over a period of ten years from the acquisition date.
While goodwill totaled $2.4 billion at both September 30, 2017 and December 31, 2016, the balance of CDI, net, declined from $208,000 to zero as a result of amortization in the first nine months of this year.
For more information about the Company’s goodwill, see the discussion of “Critical Accounting Policies” earlier in this report.
Sources of Funds
The Parent Company (i.e., the Company on an unconsolidated basis) has three primary funding sources for the payment of dividends, share repurchases, and other corporate uses: dividends paid to the Company by the Banks; capital raised through the issuance of stock; and funding raised through the issuance of debt instruments.
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On a consolidated basis, our funding primarily stems from a combination of the following sources: deposits; borrowed funds, primarily in the form of wholesale borrowings; the cash flows generated through the repayment and sale of loans; and the cash flows generated through the repayment and sale of securities.
Loan repayments and sales totaled $9.3 billion in the nine months ended September 30, 2017, down from the $9.1 billion recorded in the year-earlier nine months. Cash flows from the repayment and sales of securities totaled $1.3 billion and $2.7 billion, respectively, in the corresponding periods, while purchases of securities totaled $404.0 million and $281.9 million, respectively.
Our ability to retain and attract deposits depends on numerous factors, including customer satisfaction, the rates of interest we pay, the types of products we offer, and the attractiveness of their terms. That said, there have been times that we’ve chosen not to compete actively for deposits, depending on our access to deposits through acquisitions, the availability of lower-cost funding sources, the impact of competition on pricing, and the need to fund our loan demand.
In the nine months ended September 30, 2017, total deposits of $28.9 billion were comparable to the level recorded at December 31, 2016. Certificates of deposit (“CDs”) represented 30.5% of total deposits at the end of the third quarter, and total deposits represented 59.6% of total assets at that date.
Included in the September 30th balance of deposits were institutional deposits of $2.2 billion and municipal deposits of $791.5 million, as compared to $2.8 billion and $637.7 million, respectively, at December 31, 2016. Brokered deposits dropped $79.1 million during this timeframe, to $3.9 billion, the net effect of an $83.1 million increase in brokered money market accounts to $2.6 billion and a $641.1 million decline in brokered interest-bearing checking accounts to $804.9 million. At September 30, 2017, we had $478.9 million of brokered CDs. We had no brokered CDs at December 31, 2016. The extent to which we accept brokered deposits depends on various factors, including the availability and pricing of such wholesale funding sources, and the availability and pricing of other sources of funds.
Borrowed funds consist primarily of wholesale borrowings (i.e., FHLB-NY advances, repurchase agreements, and federal funds purchased) and, to a far lesser extent, junior subordinated debentures. In the three months ended September 30, 2017, the balance of borrowed funds was unchanged from the trailing quarter and fell $1.3 billion from year end to $12.4 billion, representing 25.5% of total assets, at that date.
Wholesale Borrowings
Wholesale borrowings were unchanged from the trailing quarter but fell $1.3 billion from year end to $12.0 billion, representing 24.8% of total assets, at quarter end.
FHLB-NY advances declined $110.0 million during this time, to $11.6 billion, while the balance of repurchase agreements dropped $1.1 billion to $450.0 million. In addition, while federal funds purchased amounted to $150.0 million at the end of December, there were no federal funds purchased at September 30, 2017.
Junior Subordinated Debentures
Junior subordinated debentures totaled $359.1 million at the end of the current third quarter, comparable to the balance at December 31st.
Risk Definitions
The following section outlines the definitions of interest rate risk, market risk, and liquidity risk, and how the Company manages market and interest rate risk:
Interest Rate Risk – Interest rate risk is the risk to earnings or capital arising from movements in interest rates. Interest rate risk arises from differences between the timing of rate changes and the timing of cash flows (re-pricing risk); from changing rate relationships among different yield curves affecting Company activities (basis risk); from changing rate relationships across the spectrum of maturities (yield curve risk); and from interest-related options embedded in a bank’s products (options risk). The evaluation of interest rate risk must consider the impact of complex, illiquid hedging strategies or products, and also the potential impact on fee income (e.g. prepayment income) which is sensitive to changes in interest rates. In those situations where trading is separately managed, this refers to structural positions and not trading portfolios.
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Market Risk – Market risk is the risk to earnings or capital arising from changes in the value of portfolios of financial instruments. This risk arises from market-making, dealing, and position-taking activities in interest rate, foreign exchange, equity, and commodities markets. Many banks use the term “price risk” interchangeably with market risk; this is because market risk focuses on the changes in market factors (e.g., interest rates, market liquidity, and volatilities) that affect the value of traded instruments. The primary accounts affected by market risk are those which are revalued for financial presentation (e.g., trading accounts for securities, derivatives, and foreign exchange products).
Liquidity Risk – Liquidity risk is the risk to earnings or capital arising from a bank’s inability to meet its obligations when they become due, without incurring unacceptable losses. Liquidity risk includes the inability to manage unplanned decreases or changes in funding sources. Liquidity risk also arises from a bank’s failure to recognize or address changes in market conditions that affect the ability to liquidate assets quickly and with minimal loss in value.
Management of Market and Interest Rate Risk
We manage our assets and liabilities to reduce our 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 our business strategy, risk appetite, operating environment, capital and liquidity requirements, and performance objectives; and to manage that risk in a manner consistent with guidelines approved by the Boards of Directors of the Company, the Community Bank, and the Commercial Bank.
Market Risk
As a financial institution, we are focused on reducing our exposure to interest rate volatility. Changes in interest rates pose the greatest challenge to our financial performance, as such changes can have a significant impact on the level of income and expense recorded on a large portion of our 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 our exposure to changing rates, the Boards of Directors and management monitor interest rate sensitivity on a regular or as needed basis so that adjustments to the asset and liability mix can be made when deemed appropriate.
The actual duration of held-for-investment 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 interest rates and the availability of refinancing opportunities.
In the first nine months of 2017, we managed our interest rate risk by taking the following actions: (1) We continued to emphasize the origination and retention of intermediate-term assets, primarily in the form of multi-family and CRE loans; and (2) We continued the origination of certain C&I loans that feature floating interest rates.
In connection with the activities of our mortgage banking operation, we enter into contingent commitments to fund or purchase residential mortgage loans by a specified future date at a stated interest rate and corresponding price. Such commitments, which were generally known as interest rate lock commitments (“IRLCs”), were considered to be financial derivatives and, as such, were carried at fair value.
To mitigate the interest rate risk associated with our IRLCs, we entered into forward commitments to sell mortgage loans or mortgage-backed securities (“MBS”) by a specified future date and at a specified price. These forward-sale agreements were also carried at fair value. Such forward commitments to sell generally obligated us to complete the transaction as agreed, and therefore pose a risk to us if we are not able to deliver the loans or MBS pursuant to the terms of the applicable forward-sale agreement.
When we retained the servicing on the loans we sold, we capitalized an MSR asset. Residential MSRs are recorded at fair value, with changes in fair value recorded as a component of non-interest income. We estimate the fair value of the MSR asset based upon a number of factors, including current and expected loan prepayment rates, economic conditions, and market forecasts, as well as relevant characteristics of the associated underlying loans. Generally, when market interest rates decline, loan prepayments increase as customers refinance their existing mortgages to take advantage of more favorable interest rate terms. When a mortgage prepays, or when loans are expected to prepay earlier than originally expected, a portion of the anticipated cash flows associated with servicing these loans is terminated or reduced, which can result in a reduction in the fair value of the capitalized MSRs and a corresponding reduction in earnings.
To mitigate the prepayment risk inherent in residential MSRs, we could have sold the servicing of the loans we produced, and thus minimized the potential for earnings volatility. Instead, we opted to mitigate such risk by investing in exchange-traded derivative financial instruments that were expected to experience opposite and partially offsetting changes in fair value as related to the value of our residential MSRs.
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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.
In a rising interest rate environment, an institution with a positive gap would generally be expected to experience a greater increase 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. Conversely, in a declining rate environment, an institution with a positive gap would generally be expected to experience a lesser reduction 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.
At September 30, 2017, our one-year gap was a negative 17.52%, as compared to a negative 21.37% at December 31, 2016. The 385-basis point change was largely due to an increase in cash balances as a result of the sale of the mortgage banking operations and borrowings maturing or repricing within one year, combined with a decrease in loans and deposits maturing or repricing within that time.
The table on the following page sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at September 30, 2017 which, based on certain assumptions stemming from our 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 September 30, 2017 on the basis of contractual maturities, anticipated prepayments, and scheduled rate adjustments within a three-month period and subsequent selected time intervals. For residential mortgage-related securities, prepayment rates are forecasted at a weighted average constant prepayment rate (“CPR”) of 15% per annum; for multi-family and CRE loans, prepayment rates are forecasted at weighted average CPRs of 15% and 13% per annum, respectively. Borrowed funds were not assumed to prepay.
Savings, interest-bearing checking and money market accounts were assumed to decay based on a comprehensive statistical analysis that incorporated our historical deposit experience. Based on the results of this analysis, savings accounts were assumed to decay at a rate of 57% for the first five years and 43% for years six through ten. Interest-bearing checking accounts were assumed to decay at a rate of 70% for the first five years and 30% for years six through ten. The decay assumptions reflect the prolonged low interest rate environment and the uncertainty regarding future depositor behavior. Including those accounts having specified repricing dates, money market accounts were assumed to decay at a rate of 71% for the first five years and 29% for years six through ten.
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INTEREST-EARNING ASSETS:
Mortgage and other loans (1)
Mortgage-related securities (2)(3)
Other securities (2)
Interest-earning cash and cash equivalents
Total interest-earning assets
INTEREST-BEARING LIABILITIES:
Total interest-bearing liabilities
Interest rate sensitivity gap per period(4)
Cumulative interest rate sensitivity gap
Cumulative interest rate 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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Prepayment and deposit decay rates can have a significant impact on our estimated gap. While we believe our assumptions to be reasonable, there can be no assurance that the assumed prepayment and decay rates will approximate actual future loan and securities prepayments and deposit withdrawal activity.
To validate our prepayment assumptions for our multi-family and CRE loan portfolios, we perform a monthly analysis, during which we review our historical prepayment rates and compare them to our projected prepayment rates. We continually review the actual prepayment rates to ensure that our projections are as accurate as possible, since prepayments on these types of loans are not as closely correlated to changes in interest rates as prepayments on one-to-four family loans tend to be. In addition, we review the call provisions, if any, in our borrowings and investment portfolios and, on a monthly basis, compare the actual calls to our projected calls to ensure that our projections are reasonable.
As of September 30, 2017, the impact of a 100-basis point decline in market interest rates would have increased our projected prepayment rates for multi-family and CRE loans by a constant prepayment rate of 11.23% per annum. Conversely, the impact of a 100-basis point increase in market interest rates would have decreased our projected prepayment rates for multi-family and CRE loans by a constant prepayment rate of 4.08% per annum.
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 from those assumed in calculating the table. Also, the ability of some borrowers to repay their adjustable-rate loans may be adversely impacted by an increase in market interest rates.
Interest rate sensitivity is also monitored through the use of a model that generates estimates of the change in our 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 NPV ratio, under any interest rate scenario, is defined as the NPV in that scenario divided by the market value of assets in the same scenario. 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.
Based on the information and assumptions in effect at September 30, 2017, the following table reflects the estimated percentage change in our NPV, assuming the changes in interest rates noted:
Change in Interest Rates
(in basis points)(1)
+100
+200
The net changes in NPV presented in the preceding table are within the parameters approved by the Boards of Directors of the Company and the Banks.
As with the Interest Rate Sensitivity Analysis, certain shortcomings are inherent in the methodology used in the preceding interest rate risk measurements. Modeling changes in NPV requires that certain assumptions be made which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the NPV Analysis presented above assumes that the composition of our interest rate sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured, and also assumes that a particular change in interest rates is reflected uniformly across the yield curve, regardless of the duration to maturity or repricing of specific assets and liabilities. Furthermore, the model does not take into account the benefit of any strategic actions we may take to further reduce our exposure to interest rate risk. Accordingly, while the NPV Analysis provides an indication of our 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 our net interest income, and may very well differ from actual results.
We also utilize an internal net interest income simulation to manage our sensitivity to interest rate risk. The simulation incorporates various market-based assumptions regarding the impact of changing interest rates on future levels of our 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 following table, 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.
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Based on the information and assumptions in effect at September 30, 2017, the following table reflects the estimated percentage change in future net interest income for the next twelve months, assuming the changes in interest rates noted:
(in basis points)(1)(2)
Future changes in our mix of assets and liabilities may result in greater changes to our gap, NPV, and/or net interest income simulation.
In the event that our NPV and net interest income sensitivities were to breach our internal policy limits, we would undertake the following actions to ensure that appropriate remedial measures were put in place:
Where temporary changes in market conditions or volume levels result in significant increases in risk, strategies may involve reducing open positions or employing synthetic hedging techniques to more immediately reduce risk exposure. Where variance from policy tolerances is triggered by more fundamental imbalances in the risk profiles of core loan and deposit products, a remedial strategy may involve restoring balance through natural hedges to the extent possible before employing synthetic hedging techniques. Other strategies might include:
In connection with our net interest income simulation modeling, we also evaluate the impact of changes in the slope of the yield curve. At September 30, 2017, our analysis indicated that an immediate inversion of the yield curve would be expected to result in a 1.83% decrease in net interest income; conversely, an immediate steepening of the yield curve would be expected to result in a 3.85% increase in net interest income.
Liquidity
We manage our liquidity to ensure that cash flows are sufficient to support our operations, and to compensate for any temporary mismatches between sources and uses of funds caused by variable loan and deposit demand.
We monitor our liquidity daily to ensure that sufficient funds are available to meet our financial obligations. Our most liquid assets are cash and cash equivalents, which totaled $3.3 billion and $557.9 million, respectively, at September 30, 2017 and December 31, 2016. As in the past, our portfolios of loans and securities provided liquidity in the first nine months of the year, with cash flows from the repayment and sale of loans totaling $9.3 billion and cash flows from the repayment and sale of securities totaling $1.3 billion.
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Additional liquidity stems from the retail, institutional, and municipal deposits we gather and from our use of wholesale funding sources, including brokered deposits and wholesale borrowings. We also have access to the Banks’ approved lines of credit with various counterparties, including theFHLB-NY. The availability of these wholesale funding sources is generally based on the available amount of mortgage loan collateral under a blanket lien we have pledged to the respective institutions and, to a lesser extent, the available amount of securities that may be pledged to collateralize our borrowings. At September 30, 2017, our available borrowing capacity with the FHLB-NY was $7.5 billion. In addition, the Banks had $3.0 billion of available-for-sale securities, combined, at that date.
Furthermore, both the Community Bank and the Commercial Bank have agreements with the Federal Reserve Bank of New York (the “FRB-NY”) that enable them to access the discount window as a further means of enhancing their liquidity if need be. In connection with their agreements, the Banks have pledged certain loans and securities to collateralize any funds they may borrow. At September 30, 2017, the maximum amount the Community Bank could borrow from the FRB-NY was $1.3 billion; the maximum amount the Commercial Bank could borrow from the FRB-NY was $77.5 million. There were no borrowings against either of these lines of credit at that date.
Our primary investing activity is loan production. In the first nine months of 2017, the volume of loans originated for investment was $5.8 billion. During this time, the net cash provided by investing activities totaled $2.5 billion. Our operating activities provided net cash of $1.3 billion, while the net cash used in our financing activities totaled $1.1 billion.
CDs due to mature in one year or less from September 30, 2017 totaled $8.1 billion, representing 91.9% of total CDs at that date. Our ability to retain these CDs and to attract new deposits depends on numerous factors, including customer satisfaction, the rates of interest we pay on our deposits, the types of products we offer, and the attractiveness of their terms. However, there are times when we may choose not to compete for such deposits, depending on the availability of lower-cost funding, the competitiveness of the market and its impact on pricing, and our need for such deposits to fund loan demand, as previously discussed.
The Parent Company is a separate legal entity from each of the Banks and must provide for its own liquidity. In addition to operating expenses and any share repurchases, the Parent Company is responsible for paying dividends declared to our shareholders. As a Delaware corporation, the Parent Company is able to pay dividends either from surplus or, in case there is no surplus, from net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year.
In each of the four quarters of 2016, the Company was required under Supervisory Letter SR 09-04 to receive a non-objection from the FRB to pay all dividends; non-objections were received from the FRB in all four quarters of the year. The FRB subsequently advised the Company to continue the exchange of written documentation to obtain their non-objection to the declaration of dividends in 2017. The Company has received all necessarynon-objections from the FRB for the dividends declared as of the date of this report.
The Parent Company’s ability to pay dividends may also depend, in part, upon dividends it receives from the Banks. The ability of the Community Bank and the Commercial Bank to pay dividends and other capital distributions to the Parent Company is generally limited by New York State Banking Law and regulations, and by certain regulations of the FDIC. In addition, the Superintendent of the New York State Department of Financial Services (the “Superintendent”), the FDIC, and the FRB, for reasons of safety and soundness, may prohibit the payment of dividends that are otherwise permissible by regulations.
Under New York State Banking Law, a New York State-chartered stock-form savings bank or commercial bank may declare and pay dividends out of its net profits, unless there is an impairment of capital. However, the approval of the Superintendent is required if the total of all dividends declared in a calendar year would exceed the total of a bank’s net profits for that year, combined with its retained net profits for the preceding two years. In the nine months ended September 30, 2017, the Banks paid dividends totaling $276.0 million to the Parent Company, leaving $302.4 million they could dividend to the Parent Company without regulatory approval at that date. Additional sources of liquidity available to the Parent Company at September 30, 2017 included $135.8 million in cash and cash equivalents. If either of the Banks were to apply to the Superintendent for approval to make a dividend or capital distribution in excess of the dividend amounts permitted under the regulations, there can be no assurance that such application would be approved.
We use various financial instruments, including derivatives, in connection with our strategies to mitigate or reduce our exposure to losses from adverse changes in interest rates. Our derivative financial instruments consist of financial forward and futures contracts, IRLCs, swaps, and options, and relate to our mortgage banking operation, residential MSRs, and other risk management activities. These activities will vary in scope based on the level and volatility of interest rates, the types of assets held, and other changing market conditions. At September 30, 2017, we held derivative financial instruments with a notional value of $765.9 million. (See Note 12, “Derivative Financial Instruments,” for a further discussion of our use of such financial instruments.)
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Capital Position
In March 2017, the Company raised $502.8 million, net of underwriting and other issuance expenses, through an offering of depositary shares, each representing a 1/40 interest in a share of preferred stock. Primarily reflecting the capital raised, total stockholders’ equity rose $635.7 million from the December 31st balance to $6.8 billion at September 30, 2017.
Common stockholders’ equity represented 12.91%, 12.89%, and 12.52%, respectively, of total assets at September 30, 2017, June 30, 2017, and December 31, 2016, and was equivalent to a book value per common share of $12.79, $12.74, and $12.57 at the respective dates. We calculate book value per common share by dividing the amount of common stockholders’ equity at the end of a period by the number of common shares outstanding at the same date. At September 30, 2017, June 30, 2017, and December 31, 2016, we had outstanding common shares of 489,061,848, 489,023,298, and 487,056,676, respectively.
Tangible common stockholders’ equity was relatively stable at $3.8 billion, representing 8.30% of tangible assets and a tangible book value per common share of $7.81 at September 30, 2017. At the end of the second quarter, tangible common stockholders’ equity also totaled $3.8 billion or 8.27% of tangible assets and a tangible book value per common share of $7.76. At December 31, 2016, tangible common stockholders’ equity totaled $3.7 billion, representing 7.93% of tangible assets, and a tangible book value per common share of $7.57.
We calculate tangible common stockholders’ equity by subtracting the amount of goodwill and CDI recorded at the end of a period from the amount of common stockholders’ equity recorded at the same date. At September 30, 2017, June 30, 2017, and December 31, 2016, we recorded goodwill of $2.4 billion; CDI was zero, $24,000, and $208,000, respectively, at the corresponding dates. (See the discussion and reconciliations of stockholders’ equity, common stockholders’ equity, and tangible common stockholders’ equity; total assets and tangible assets; and the related financial measures that appear earlier in this report.)
Stockholders’ equity, common stockholders’ equity, and tangible common stockholders’ equity include AOCL, which increased $3.1 million from the balance at the end of June and decreased $52.3 million from the end of December to $4.4 million at September 30, 2017. The increase was the result of a $4.3 million increase in the net unrealized gain on available-for-sale securities, net of tax, to $47.9 million and a $1.2 million decrease in pension and post-retirement obligations, net of tax, to $47.1 million.
At September 30, 2017, our capital measures continued to exceed the minimum federal requirements for a bank holding company. The following table sets forth our common equity tier 1, tier 1 risk-based, total risk-based, and leverage capital amounts and ratios on a consolidated basis, as well as the respective minimum regulatory capital requirements, at that date:
Regulatory Capital Analysis (the Company)
Total capital
Minimum for capital adequacy purposes
Excess
Basel III calls for the phase-in of a capital conservation buffer over a five-year period beginning with 0.625% in 2016 and reaching 2.50% in 2019, when fully phased in. At September 30, 2017, our total risk-based capital ratio exceeded the minimum requirement for capital adequacy purposes by 659 basis points and the fully-phased in capital conservation buffer by 409 basis points.
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As reflected in the following tables, the capital ratios for the Community Bank and the Commercial Bank also continued to exceed the minimum regulatory capital levels required at September 30, 2017:
Regulatory Capital Analysis (New York Community Bank)
Regulatory Capital Analysis (New York Commercial Bank)
As of September 30, 2017, the Community Bank and the Commercial Bank also exceeded the minimum capital requirements to be categorized as “Well Capitalized.” To be categorized as well capitalized, a bank must maintain a minimum common equity tier 1 ratio of 6.50%; a minimum tier 1 risk-based capital ratio of 8.00%; a minimum total risk-based capital ratio of 10.00%; and a minimum leverage capital ratio of 5.00%.
Earnings Summary for the Three Months Ended September 30, 2017
Net income available to common shareholders (“net income”) totaled $102.3 million in the current third quarter, equivalent to $0.21 per diluted common share. In the trailing and year-earlier quarters, net income totaled $107.0 million and $125.3 million, and was equivalent to $0.22 and $0.26 per diluted common share, respectively. The sequential and year-over-year declines in net income were primarily due to a decrease in net interest income, as further discussed below.
Net Interest Income
Net interest income is our primary source of income. Its level is a function of the average balance of our interest-earning assets, the average balance of our interest-bearing liabilities, and the spread between the yield on such assets and the cost of such liabilities. These factors are influenced by both the pricing and mix of our interest-earning assets and our interest-bearing liabilities which, in turn, are impacted by various external factors, including the local economy, competition for loans and deposits, the monetary policy of the FOMC, and market interest rates.
The cost of our deposits and short-term borrowed funds is largely based on short-term rates of interest, the level of which is partially impacted by the actions of the FOMC. The FOMC reduces, maintains, or increases the target federal funds rate (the rate at which banks borrow funds overnight from one another) as it deems necessary. Since the fourth quarter of 2008, when the target federal funds rate was lowered to a range of 0% to 0.25%, the rate has been raised three times: on December 17, 2015, to a range of 0.25% to 0.50%; on December 14, 2016, to a range of 0.50% to 0.75%; on March 15, 2017, to a range of 0.75% to 1.00%, and, most recently on June 14, 2017 to a range of 1.00% to 1.25%.
While the target federal funds rate generally impacts the cost of our short-term borrowings and deposits, the yields on our held-for-investment loans and other interest-earning assets are typically impacted by intermediate-term market interest rates. In the third quarter of 2017, the average five-year CMT was 1.81%, unchanged from the trailing quarter and as compared to 1.13% for the year-earlier quarter. The averageten-year CMT was 2.24% in the current third quarter, as compared to 2.26% and 1.56%, respectively, in the prior periods.
Net interest income is also influenced by the level of prepayment income primarily generated in connection with the prepayment of our multi-family and CRE loans, as well as securities. Since prepayment income is recorded as interest income, an increase or decrease in its level will also be reflected in the average yields (as applicable) on our loans, securities, and interest-earning assets, and therefore in our interest rate spread and net interest margin.
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It should be noted that the level of prepayment income on loans recorded in any given period depends on the volume of loans that refinance or prepay during that time. Such activity is largely dependent on such external factors as current market conditions, including real estate values, and the perceived or actual direction of market interest rates. In addition, while a decline in market interest rates may trigger an increase in refinancing and, therefore, prepayment income, so too may an increase in market interest rates. It is not unusual for borrowers to lock in lower interest rates when they expect, or see, that market interest rates are rising rather than risk refinancing later at a still higher interest rate.
The Company recorded net interest income of $276.3 million in the current second quarter, an $11.4 million decrease from the trailing-quarter level and a $42.1 million decrease from the year-earlier amount.
Linked-Quarter Comparison
The sequential decline in net interest income was attributable to a variety of factors, including an increase in our cost of funds, as short-term interest rates rose in the quarter. Additionally, the sale of our covered loan portfolio, which closed at the end of July and resulted in excess liquidity being invested at lower yields, negatively impacted net interest income. This was partially offset by modest loan growth along with stable loan yields. Details of the linked-quarter decline in net interest income follow:
Year-Over-Year Comparison
The following factors contributed to the year-over-year reduction in net interest income:
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Net Interest Margin
The direction of the Company’s net interest margin was consistent with that of its net interest income, and generally was driven by the same factors as those described above. At 2.53%, the margin was 12 basis points narrower than the trailing-quarter measure and 38 basis points narrower than the margin recorded in the third quarter of last year. The respective reductions were due, in part, to a decline in prepayment income from the levels recorded in the trailing and year-earlier quarters, as reflected in the following table:
Prepayment income:
From loans
From securities
Total prepayment income
Net interest margin (including the contribution of prepayment income)
Contribution of prepayment income to net interest margin:
Total contribution of prepayment income to net interest margin
Adjusted net interest margin (i.e., excluding the contribution of prepayment income) (1)
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While our net interest margin, including the contribution of prepayment income, is recorded in accordance with GAAP, adjusted net interest margin, which excludes the contribution of prepayment income, is not. Nevertheless, management uses this non-GAAP measure in its analysis of our performance, and believes that this non-GAAP measure should be disclosed in this report and other investor communications for the following reasons:
Adjusted net interest margin should not be considered in isolation or as a substitute for net interest margin, which is calculated in accordance with GAAP. Moreover, the manner in which we calculate this non-GAAP measure may differ from that of other companies reporting a non-GAAP measure with a similar name.
The following table sets forth certain information regarding our average balance sheet for the quarters indicated, including the average yields on our interest-earning assets and the average costs of our 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 quarters are derived from average balances that are calculated daily. The average yields and costs include fees, as well as premiums and discounts (including mark-to-market adjustments from acquisitions), that are considered adjustments to such average yields and costs.
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Net Interest Income Analysis
Interest-earning assets:
Mortgage and other loans, net (1)
Securities (2)(3)
Interest-earning cash and cash equivalents(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 margin
Ratio of interest-earning assets to interest-bearing liabilities
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Provision for Losses on Non-Covered Loans
The provision for losses on non-covered loans is based on the methodology used by management in calculating the allowance for losses on such loans. Reflecting this methodology, which is discussed in detail under “Critical Accounting Policies,” we recorded a $44.6 million provision fornon-covered loan losses in the current third quarter, as compared to $11.6 million and $1.2 million in the three months ended June 30, 2017 and September 30, 2016. The elevated loan loss provision for the current third quarter was due to our taxi medallion-related loans. In the third quarter of 2017, the Company recorded net charge-offs of $40.4 million, of which $40.6 million was related to taxi medallion-related loans, compared to the year-earlier quarter during which the Company recorded net recoveries of $412,000, of which $49,000 was related to taxi medallion-related loans.
For additional information about our provisions for and recoveries of loan losses, see the discussion of the allowances for loan losses under “Critical Accounting Policies” and the discussion of “Asset Quality” that appear earlier in this report.
Non-Interest Income
We generate non-interest income through a variety of sources, including—among others—mortgage banking income; fee income (in the form of retail deposit fees and charges on loans); income from our investment in BOLI; gains on the sale of securities; and revenues produced through the sale of third-party investment products and those produced through our wholly-owned subsidiary, Peter B. Cannell & Co., Inc. (“PBC”), an investment advisory firm.
Non-interest income totaled $108.9 million in the current third quarter, up $58.5 million from the trailing-quarter level and $68.3 million from the year-earlier amount. The linked-quarter improvement was primarily driven by an $82.0 million gain on sale of covered loans and mortgage banking operations. This was partially offset by a $6.7 million decline in mortgage banking income. The year-over-year increase reflects contributions from the same factors which impacted the linked-quarter results.
The following table summarizes our mortgage banking income for the periods indicated:
Mortgage Banking Income:
Income from originations
Servicing (loss) income
Total mortgage banking income
The following table summarizes our non-interest income for the respective periods:
Non-Interest Income Analysis
BOLI income
Other income:
Peter B. Cannell & Co., Inc.
Third-party investment product sales
Total other income
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Non-Interest Expense
Non-interest expense has two primary components: operating expenses, which consist of compensation and benefits expense, occupancy and equipment expense, and G&A expense, and the amortization of the CDI stemming from certain merger transactions.
Non-interest expense totaled $162.2 million in the current third quarter, a $1.5 million decrease from the trailing-quarter level and a $549,000 increase from the year-earlier amount. Merger-related expenses added $2.2 million to non-interest expense in the year-earlier quarter; there were no comparable expenses in the current quarter.
The majority of the Company’snon-interest expense consists of operating expenses, which totaled $162.2 million in the current third quarter, as compared to $163.7 million and $158.9 million, respectively, in the trailing and year-earlier periods. The linked-quarter decrease was driven by a $1.3 million decline in compensation and benefits expense to $91.6 million and a $2.0 million decrease in G&A expense to $45.5 million, partially offset by a $1.7 million increase in occupancy and equipment expense to $25.1 million.
The year-over-year increase in operating expenses was largely due to a $5.5 million increase in compensation and benefits expense coupled with a $3.0 million decrease in G&A expense. The year-over-year rise in compensation and benefits expense was generally attributable to the addition of senior level staff in various departments, while the year-over-year decline in G&A expense was largely attributable to lower FDIC insurance premiums.
Income Tax Expense
Income tax expense totaled $68.0 million in the current third quarter, $2.5 million higher than the trailing-quarter level and $4.1 million lower than the year-earlier third-quarter amount.
While pre-tax income declined $2.3 million sequentially, to $178.5 million, the effective tax rate increased to 38.10% in the current third quarter from 36.22% in the trailing three-month period.
In the third quarter of 2016, pre-tax income was $18.9 million higher than the current third-quarter level, and the effective tax rate was 36.52%.
Earnings Summary for the Nine Months Ended September 30, 2017
In the first nine months of 2017, we generated net income available to common shareholders of $313.3 million or $0.64 per diluted common share as compared to net income available to common shareholders of $381.7 million, or $0.78 per diluted common share, in the first nine months of 2016.
Merger-related expenses totaled $4.7 million in the year-earlier nine months; there were no merger-related expenses in the current nine-month period.
Net interest income fell $112.8 million year-over-year to $859.0 million in the nine months ended September 30, 2017. The decrease was the net effect of a $67.7 million decrease in interest income to $1.2 billion and a $45.2 million increase in interest expense to $332.8 million. During this time, our net interest margin fell 32 basis points to 2.63%.
The following factors contributed to the year-over-year decrease in net interest income and margin:
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The following table summarizes the contribution of prepayment income from loans and securities to our interest income and net interest margin in the nine months ended September 30, 2017 and 2016:
Adjusted net interest margin (i.e., excluding the contribution of prepayment income)(1)
(1) “Adjusted net interest margin” is a non-GAAP financial measure, as more fully discussed below.
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The following table sets forth certain information regarding our average balance sheet for the nine-month periods indicated, including the average yields on our interest-earning assets and the average costs of our 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 nine-month periods are derived from average balances that are calculated daily. The average yields and costs include fees, as well as premiums and discounts (including mark-to-market adjustments from acquisitions), that are considered adjustments to such average yields and costs.
Provision for Loan Losses
Reflecting the methodology used by management to calculate the allowance for non-covered loan losses, we recorded a provision for losses on non-covered loans of $58.0 million in the nine months ended September 30, 2017 compared to $6.7 million in the year ago nine months. The higher loan loss provision for the nine months ended September 30, 2017 was due to our taxi medallion-related loans. For the nine months ended September 30, 2017, the Company recorded net charge-offs of $57.4 million, of which $54.8 million was due to taxi medallion-related loans. For the nine months ended September 30, 2016, the Company recorded a net recovery of $882,000, with taxi medallion-related charge-offs of $265,000.
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Provision for (Recovery of) Losses on Covered Loans
In the first nine months of 2017, we recovered $23.7 million from the allowance for covered loan losses, reflecting an increase in expected cash flows from certain pools of covered loans as their credit quality improved and the aforementioned sale of the covered loans. In connection with this recovery, we recorded FDIC indemnification expense of $19.0 million in “Non-interest income” during the corresponding period.
In the first nine months of 2016, we recovered $6.0 million from the allowance for covered loan losses, reflecting an increase in expected cash flows from certain pools of covered loans as their credit quality improved. In connection with this recovery, we recorded FDIC indemnification income of $4.8 million in “Non-interest income” during the corresponding period.
In the first nine months of 2017, we recorded non-interest income of $191.5 million, as compared to $113.2 million in the first nine months of 2016. The $78.3 million increase was largely driven by the $82.0 million gain on the sale of our covered loans and mortgage banking operations and a net gain on sales of securities of $28.9 million. This was partially offset by lower mortgage banking income and lower gains on sales of loans.
Servicing income (loss)
The following table summarizes the components of non-interest income for the respective periods:
In the first nine months of 2017, we recorded non-interest expense of $492.9 million, reflecting an $11.9 million increase from the year-earlier amount. Operating expenses accounted for $492.7 million of the current nine-month total, and were up $18.4 million year-over-year.
The rise in operating expenses was largely due to an $18.8 million increase in compensation and benefits expense to $280.0 million, while most other expense categories were flat on a year-over-year basis.
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Income tax expense fell $28.1 million year-over-year to $193.6 million in the nine months ended September 30, 2017. During this time, pre-tax income declined $80.0 million to $523.3 million, while the effective tax rate rose modestly to 37.00%, as compared to 36.74%.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures about the Company’s market risk were presented on pages83-87 of our 2016 Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 1, 2017. Subsequent changes in the Company’s market risk profile and interest rate sensitivity are detailed in the discussion entitled “Management of Market and Interest Rate Risk” earlier in this quarterly report.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are the controls and other procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the U.S. Securities and Exchange Commission’s (the “SEC’s”) rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
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 our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant toRule 13a-15(b), as adopted by the 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.
(b) Changes in 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
The Company is involved in various legal actions arising in the ordinary course of its business. All such actions in the aggregate involve amounts that are believed by management to be immaterial to the financial condition and results of operations of the Company.
Item 1A. Risk Factors
In addition to the other information set forth in this report, readers should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, as such factors could materially affect the Company’s business, financial condition, or future results of operations. There have been no material changes to the risk factors disclosed in the Company’s 2016 Annual Report on Form 10-K.
The risks described in the 2016 Annual Report on Form 10-K are not the only risks that the Company faces. Additional risks and uncertainties not currently known to the Company, or that the Company currently deems to be immaterial, also may have a material adverse impact on the Company’s business, financial condition, or results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Shares Repurchased Pursuant to the Company’s Stock-Based Incentive Plans
Participants in the Company’s stock-based incentive plans may have shares of common stock withheld to fulfill the income tax obligations that arise in connection with the vesting of their stock awards. Shares that are withheld for this purpose are repurchased pursuant to the terms of the applicable stock-based incentive plan, rather than pursuant to the share repurchase program authorized by the Board of Directors, described below.
During the three months ended September 30, 2017, the Company allocated $344,000 toward the repurchase of shares of its common stock pursuant to the terms of its stock-based incentive plans, as indicated in the following table:
Third Quarter 2017
July 1 – July 31
August 1 – August 31
September 1 – September 30
Total shares repurchased
Shares Repurchased Pursuant to the Board of Directors’ Share Repurchase Authorization
On April 20, 2004, the Board of Directors authorized the repurchase of up to five million shares of the Company’s common stock. Of this amount, 1,659,816 shares were still available for repurchase at September 30, 2017. Under said authorization, shares may be repurchased on the open market or in privately negotiated transactions. No shares have been repurchased under this authorization since August 2006.
Shares that are repurchased pursuant to the Board of Directors’ authorization, and those that are repurchased pursuant to the Company’s stock-based incentive plans, are held in our Treasury account and may be used for various corporate purposes, including, but not limited to, merger transactions and the vesting of restricted stock awards.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Item 5. Other Information
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Item 6. Exhibits
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
/s/ Joseph R. Ficalora
Joseph R. Ficalora
President, Chief Executive Officer,
and Director
/s/ Thomas R. Cangemi
Thomas R. Cangemi
Senior Executive Vice President
and Chief Financial Officer
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