UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2013
or
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For transition period from to
Commission File Number
1-35791
NORTHFIELD BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware
80-0882592
(State or other jurisdiction of incorporation)
(I.R.S. Employer Identification No.)
581 Main Street, Woodbridge, New Jersey
07095
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (732) 499-7200
Not Applicable
(Former name, former address, and former fiscal year, if changed since last report)
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 x No o.
Indicate by check mark whether the registrant has submitted electronically and posted on it corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for shorter period that the registrant was required and post such files). Yes x No o.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer o
Accelerated filer x
Non-accelerated filer o (Do not check if smaller reporting company)
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.
58,226,326 shares of Common Stock, par value $0.01 per share, were issued and outstanding as of August 2, 2013.
Table of Contents
Form 10-Q Quarterly Report
Page
PART I - FINANCIAL INFORMATION
Item 1.
Financial Statements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
PART II - OTHER INFORMATION
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
SIGNATURES
2
PART I
ITEM1 FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETSJune 30, 2013, and December 31, 2012
(In thousands, except share amounts)
June 30, 2013
December 31, 2012
(Unaudited)
ASSETS:
Cash and due from banks
$ 12,344
$ 25,354
Interest-bearing deposits in other financial institutions
Total cash and cash equivalents
Trading securities
Securities available-for-sale, at estimated fair value
(encumbered $249,490 in 2013 and $254,190 in 2012)
Securities held-to-maturity, at amortized cost (estimated fair value of $2,309 in 2012)
(encumbered $0 in 2012)
-
Loans held-for-sale
Purchased credit-impaired (PCI) loans held-for-investment
Loans acquired
Originated loans held-for-investment, net
Loans held-for-investment, net
Allowance for loan losses
Net loans held-for-investment
Accrued interest receivable
Bank owned life insurance
Federal Home Loan Bank of New York stock, at cost
Premises and equipment, net
Goodwill
Other real estate owned
Other assets
Total assets
$ 2,690,218
$ 2,813,201
LIABILITIES AND STOCKHOLDERS’ EQUITY:
LIABILITIES:
Deposits
$ 1,533,951
$ 1,956,860
Securities sold under agreements to repurchase
Other borrowings
Advance payments by borrowers for taxes and insurance
Accrued expenses and other liabilities
Total liabilities
STOCKHOLDERS’ EQUITY:
Preferred stock, $0.01 par value; 10,000,000 shares authorized, none issued or outstanding
Common stock, $0.01 par value: 150,000,000 shares authorized, 58,212,604 and 46,904,286
shares issued at June 30, 2013, and December 31, 2012, respectively, 58,212,604
and 41,486,819 outstanding at June 30, 2013 and December 31, 2012, respectively
Additional paid-in-capital
Unallocated common stock held by employee stock ownership plan
Retained earnings
Accumulated other comprehensive income
Treasury stock at cost; 0 and 5,417,467 shares at June 30, 2013 and December 31, 2012, respectively
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME Three and Six months ended June 30, 2013, and 2012
(In thousands, except share data)
Three Months Ended June 30,
Six Months Ended June 30,
2013
2012
Interest income:
Loans
$ 16,707
$ 14,875
$ 33,194
$ 30,025
Mortgage-backed securities
Other securities
Federal Home Loan Bank of New York dividends
Deposits in other financial institutions
Total interest income
Interest expense:
Borrowings
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Non-interest income:
Fees and service charges for customer services
Income on bank owned life insurance
Gain on securities transactions, net
Other-than-temporary impairment losses on securities
Portion recognized in other comprehensive income (before taxes)
Net impairment losses on securities recognized in earnings
Other
Total non-interest income
Non-interest expense:
Compensation and employee benefits
Occupancy
Furniture and equipment
Data processing
Professional fees
FDIC insurance
Total non-interest expense
Income before income tax expense
Income tax expense
Net income
$ 4,299
$ 3,948
$ 9,091
$ 8,896
Net income per common share:
Basic
$ 0.08
$ 0.07
$ 0.17
$ 0.16
Diluted
Other comprehensive (loss) income:
Unrealized (losses) gains on securities:
Net unrealized holding (losses) gains on securities
$ (21,216)
$ 2,173
$ (26,130)
$ 3,965
Less: reclassification adjustment for gains included in net income (included in gain on securities transactions, net)
Net unrealized (losses) gains
Reclassification adjustment for OTTI impairment included in net income (included OTTI losses on securities)
Other comprehensive (loss) income , before tax
Income tax (benefit) expense related to net unrealized holding (losses) gains on securities
Income tax expense related to reclassification adjustment for gains included in net income
Income tax benefit related to reclassification adjustment for OTTI impairment included in net income
Other comprehensive (loss) income, net of tax
Comprehensive (loss) income
$ (8,624)
$ 5,213
$ (7,722)
$ 10,191
4
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Six months ended June 30, 2013, and 2012
Unallocated
Accumulated
Common Stock
Additional
Held by the
Comprehensive
Total
Par
Paid-in
Employee Stock
Retained
Income (Loss),
Treasury
Stockholders'
Shares
Value
Capital
Ownership Plan
Earnings
Net of tax
Stock
Equity
Balance at December 31, 2011
$ 456
$ 209,302
$ (14,570)
$ 235,776
$ 17,470
$ (65,784)
$ 382,650
Comprehensive income:
Other comprehensive income, net of tax
ESOP shares allocated or committed to be released
Stock compensation expense
Additional tax benefit on equity awards
Cash dividends declared ($0.09 per common share)
Treasury stock (average cost of $9.84 per share)
Balance at June 30, 2012
$ 211,122
$ (14,279)
$ 242,956
$ 18,765
$ (70,128)
$ 388,892
Balance at December 31, 2012
$ 469
$ 230,253
$ (13,965)
$ 249,892
$ 18,231
$ (70,007)
$ 414,873
Corporate reorganization:
Merger of Northfield Bancorp, MHC
Exchange of common stock
Treasury stock retired
Proceeds of stock offering, net of costs
Purchase of common stock by ESOP
Exercise of stock options
Cash dividends declared ($0.37 per common share)
Balance at June 30, 2013
$ 582
$ 506,550
$ (27,682)
$ 238,707
$ 1,418
$ -
$ 719,575
5
CONSOLIDATED STATEMENTS OF CASH FLOWSSix months ended June 30, 2013, and 2012
(Unaudited) (In thousands)
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
ESOP and stock compensation expense
Depreciation
Amortization of premiums, and deferred loan costs, net of (accretion) of discounts, and deferred loan fees
Amortization intangible assets
Net gain on sale of loans held-for-sale
Proceeds from sale of loans held-for-sale
Origination of loans held-for-sale
Net purchases of trading securities
Decrease in accrued interest receivable
(Increase) decrease in other assets
Decrease in accrued expenses and other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Net (increase) decrease in loans receivable
Redemptions of Federal Home Loan Bank of New York stock, net
Purchases of securities available-for-sale
Principal payments and maturities on securities available-for-sale
Principal payments and maturities on securities held-to-maturity
Proceeds from sale of securities available-for-sale
Purchases of bank owned life insurance
Death benefits received from bank owned life insurance
Proceeds from sale of other real estate owned
Purchases and improvements of premises and equipment
Net cash used in investing activities
Cash flows from financing activities:
Net (decrease) increase in deposits
Dividends paid
Net proceeds from sale of common stock
Purchase of common stock for ESOP
Purchase of treasury stock
Increase in advance payments by borrowers for taxes and insurance
Repayments under capital lease obligations
Proceeds from securities sold under agreements to repurchase and other borrowings
Repayments related to securities sold under agreements to repurchase and other borrowings
Net cash (used in) provided by financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
$ 25,353
$ 34,381
Supplemental cash flow information:
Cash paid during the period for:
Interest
$ 8,865
$ 11,741
Income taxes
Non-cash transactions:
Loans charged-off, net
Other real estate owned write-downs
Transfers of loans to other real estate owned
Deposits utilized to purchase common stock
6
Notes to Unaudited Consolidated Financial Statements
Note 1 – Basis of Presentation
The consolidated financial statements are comprised of the accounts of Northfield Bancorp, Inc. and its wholly owned subsidiaries, Northfield Investments, Inc. and Northfield Bank (the Bank) and the Bank’s wholly-owned significant subsidiaries, NSB Services Corp. and NSB Realty Trust. All significant intercompany accounts and transactions have been eliminated in consolidation.
In the opinion of management, all adjustments (consisting solely of normal and recurring adjustments) necessary for the fair presentation of the consolidated financial condition and the consolidated results of operations for the unaudited periods presented have been included. The results of operations and other data presented for the three and six months ended June 30, 2013, are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2013. Certain prior year amounts have been reclassified to conform to the current year presentation.
In preparing the unaudited consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”); management has made estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated statements of financial condition and results of operations for the periods indicated. Material estimates that are particularly susceptible to change are: the allowance for loan losses; the evaluation of goodwill and other intangible assets, impairment on investment securities, fair value measurements of assets and liabilities, and income taxes. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the consolidated financial statements in the period they are deemed necessary. While management uses its best judgment, actual amounts or results could differ significantly from those estimates. The current economic environment has increased the degree of uncertainty inherent in these material estimates.
Certain information and note disclosures usually included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for the preparation of interim financial statements. The consolidated financial statements presented should be read in conjunction with the audited consolidated financial statements and notes to consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2012, of Northfield Bancorp, Inc. as filed with the SEC.
On January 24, 2013, Northfield Bancorp, Inc. completed its conversion from the mutual holding company to the stock holding company form of organization. A total of 35,558,927 shares of common stock were sold in the subscription and community offerings at a price of $10.00 per share, including 1,422,357 shares of common stock purchased by the Northfield Bank Employee Stock Ownership Plan. As part of the conversion, each existing share of Northfield-Federal common stock held by public shareholders was converted into the right to receive 1.4029 shares of Northfield-Delaware common stock. The exchange ratio ensured that, after the conversion and offering, the public shareholders of Northfield-Federal maintained approximately the same ownership interest in Northfield-Delaware as they owned previously. 58,199,819 shares of Northfield-Delaware common stock were outstanding after the completion of the offering and the exchange. The Company incurred costs of approximately $11.5 million related to the conversion.
Share amounts at December 31, 2012, have been restated to reflect the conversion at a rate of 1.4029-to-one, unless noted otherwise.
Note 2 – Securities
The following is a comparative summary of mortgage-backed securities and other securities available-for-sale at June 30, 2013, and December 31, 2012 (in thousands):
Gross
Estimated
Amortized
unrealized
fair
cost
gains
losses
value
Mortgage-backed securities:
Pass-through certificates:
Government sponsored enterprises (GSE)
$ 413,460
$ 10,951
$ 3,810
$ 420,601
Real estate mortgage investment conduits (REMICs):
GSE
Non-GSE
Other securities:
GSE bonds
Equity investments-mutual funds
Corporate bonds
Total securities available-for-sale
$ 1,139,296
$ 13,790
$ 10,958
$ 1,142,128
7
$ 456,441
$ 22,996
$ 99
$ 479,338
—
$ 1,244,777
$ 31,048
$ 194
$ 1,275,631
The following is a summary of the expected maturity distribution of debt securities available-for-sale, other than mortgage-backed securities, at June 30, 2013 (in thousands):
Available-for-sale
Amortized cost
Estimated fair value
Due in one year or less
Due after one year through five years
$ 126,608
$ 125,902
Expected maturities on mortgage-backed securities may differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without penalties.
For the three months and six months ended June 30, 2013, the Company had gross proceeds of $121.4 million and $146.5 million, respectively, on sales of securities available-for-sale with gross realized gains of approximately $363,000 and $2.1 million, respectively, and gross realized losses of $41,000 and $177,000, respectively. For the three and six months ended June 30, 2012, the Company had gross proceeds of $31.5 million and $130.3 million, respectively, on sales of securities available-for-sale with gross realized gains of approximately $66,000 and $1.8 million, respectively, and no gross realized losses. The Company recognized $63,000 and $306,000 in gains on its trading securities portfolio during the three and six months ended June 30, 2013, respectively. The Company recognized $106,000 in losses and $253,000 in gains on its trading securities portfolio during the three and six months ended June 30, 2012, respectively. The Company recognized $362,000 and $434,000 of other-than-temporary impairment charges during the three and six months ended June 30, 2013, respectively, and did not recognize any other-than-temporary impairment charges during the three and six months ended June 30, 2012.
Activity related to the credit component recognized in earnings on debt securities for which a portion of other-than-temporary impairment was recognized in accumulated other comprehensive income for the three and six months ended June 30, 2013 and 2012, is as follows (in thousands):
Three months ended
Six months ended
June 30,
Balance, beginning of period
$ 578
Additions to the credit component on debt securities in which other-than-temporary
impairment was not previously recognized
Cumulative pre-tax credit losses, end of period
8
Gross unrealized losses on mortgage-backed securities, equity investments, and corporate bonds available-for-sale, and the estimated fair value of the related securities, aggregated by security category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2013, and December 31, 2012, were as follows (in thousands):
Less than 12 months
12 months or more
Unrealized
fair value
$ 168,856
REMICs:
$ 10,900
$ 592,978
$ 58
$ 29,128
$ 622,106
$ 14,156
$ 157
$ 114,466
$ 37
$ 8,237
$ 122,703
The Company held five REMIC mortgage-backed securities issued or guaranteed by GSEs and one REMIC mortgage-backed security not issued or guaranteed by GSEs that were in a continuous unrealized loss position of greater than twelve months at June 30, 2013. There were 65 pass-through mortgage-backed securities issued or guaranteed by GSEs, 14 REMIC mortgage-backed securities issued or guaranteed by GSEs, one GSE bond, and 18 corporate bonds that were in an unrealized loss position of less than twelve months, and rated investment grade at June 30, 2013. The declines in value relate to the general interest rate environment and are considered temporary. The securities cannot be prepaid in a manner that would result in the Company not receiving substantially all of its amortized cost. The Company neither has an intent to sell, nor is it more likely than not that the Company will be required to sell, the securities before the recovery of their amortized cost basis or, if necessary, maturity.
The fair values of our investment securities could decline in the future if the underlying performance of the collateral for the collateralized mortgage obligations or other securities deteriorates and our credit enhancement levels do not provide sufficient protections to our contractual principal and interest.
Note 3 – Loans
Net loans held-for-investment is as follows (in thousands):
December 31,
Real estate loans:
Multifamily
$ 696,932
$ 610,129
Commercial mortgage
One-to-four family residential mortgage
Home equity and lines of credit
Construction and land
Total real estate loans
Commercial and industrial loans
Other loans
Total commercial and industrial and other loans
Deferred loan cost, net
PCI Loans
Loans acquired:
Total loans acquired
Loans held for investment, net
$ 1,305,956
$ 1,216,558
9
Loans held-for-sale amounted to $557,000 and $5.4 million at June 30, 2013, and December 31, 2012, respectively.
PCI loans, primarily acquired as part of a Federal Deposit Insurance Corporation-assisted transaction, totaled $68.2 million at June 30, 2013, as compared to $75.3 million at December 31, 2012. The Company accounts for PCI loans utilizing generally accepting accounting principles applicable to loans acquired with deteriorated credit quality. PCI loans consist of approximately 37% commercial real estate and 48% commercial and industrial loans, with the remaining balance in residential and home equity loans. The following details the accretion of interest income for the periods indicated:
Balance at the beginning of period
$ 41,908
$ 40,873
$ 43,431
$ 42,493
Accretion into interest income
Balance at end of period
$ 40,454
$ 39,311
Activity in the allowance for loan losses is as follows (in thousands):
At or for the six months ended June 30,
Beginning balance
$ 26,424
$ 26,836
Charge-offs, net
Ending balance
$ 26,820
$ 27,042
The following tables set forth activity in our allowance for loan losses, by loan type, for the six months ended June 30, 2013, and the year ended December 31, 2012. The following tables also detail the amount of originated and acquired loans held-for-investment, net of deferred loan fees and costs, that are evaluated individually, and collectively, for impairment, and the related portion of the allowance for loan losses that is allocated to each loan portfolio segment, as of June 30, 2013, and December 31, 2012 (in thousands). There was no related allowance for acquired loans as of June 30, 2013, and December 31, 2012.
10
Real Estate
Commercial
One-to-Four Family
Construction and Land
Home Equity and Lines of Credit
Commercial and Industrial
Originated Loans Total
Purchased Credit-Impaired
Allowance for loan losses:
Beginning Balance
$ 13,343
$ 623
$ 994
$ 7,086
$ 2,297
$ 21
$ 1,201
$ 26,188
$ 236
Charge-offs
Recoveries
Provisions
Ending Balance
$ 12,501
$ 796
$ 792
$ 8,030
$ 883
$ 2,208
$ 44
$ 1,330
$ 26,584
Ending balance: individually evaluated for impairment
$ 822
$ 94
$ 294
$ 154
$ 1,690
$ 3,054
Ending balance: collectively evaluated for impairment
$ 11,679
$ 702
$ 7,736
$ 729
$ 518
$ 23,530
$ 23,766
Originated loans, net:
$ 326,004
$ 66,783
$ 23,726
$ 698,310
$ 41,235
$ 14,831
$ 1,499
$ 1,172,388
$ 35,078
$ 2,433
$ 937
$ 2,112
$ 1,839
$ 1,634
$ 44,033
$ 290,926
$ 64,350
$ 22,789
$ 696,198
$ 39,396
$ 13,197
$ 1,128,355
$ 14,120
$ 967
$ 1,189
$ 6,772
$ 418
$ 2,035
$ 226
$ 1,109
$ 1,617
$ 5
$ 317
$ 123
$ 1,553
$ 3,615
$ 11,726
$ 618
$ 6,769
$ 500
$ 744
$ 22,573
$ 22,809
$ 315,603
$ 65,354
$ 23,255
$ 611,469
$ 33,879
$ 14,810
$ 1,830
$ 1,066,200
$ 41,568
$ 2,061
$ 2,040
$ 1,943
$ 4,087
$ 51,699
$ 274,035
$ 63,293
$ 609,429
$ 31,936
$ 10,723
$ 1,014,501
11
The Company monitors the credit quality of its loans by reviewing certain key credit quality indicators. Management has determined that loan-to-value ratios (at period end) and internally assigned credit risk ratings by loan type are the key credit quality indicators that best help management monitor the credit quality of the Company’s loans. Loan-to-value (LTV) ratios used by management in monitoring credit quality are based on current period loan balances and original values at time of origination (unless a more current appraisal has been obtained). In calculating the provision for loan losses, management has determined that commercial real estate loans and multifamily loans having loan-to-value ratios of less than 35%, and one-to-four family loans having loan-to-value ratios of less than 60%, require less of a loss factor than those with higher loan-to-value ratios.
The Company maintains a credit risk rating system as part of the risk assessment of its loan portfolio. The Company’s lending officers are required to assign a credit risk rating to each loan in their portfolio at origination. When the lending officer learns of important financial developments, the risk rating is reviewed and adjusted if necessary. Periodically, management presents monitored assets to the Board Loan Committee. In addition, the Company engages a third party independent loan reviewer that performs semi-annual reviews of a sample of loans, validating the credit risk ratings assigned to such loans. The credit risk ratings play an important role in the establishment of the loan loss provision and in confirming the adequacy of the allowance for loan losses. After determining the general reserve loss factor for each portfolio segment, the portfolio segment balance collectively evaluated for impairment is multiplied by the general reserve loss factor for the respective portfolio segment in order to determine the general reserve. Loans collectively evaluated for impairment that have an internal credit rating of special mention or substandard are multiplied by a multiple of the general reserve loss factors for each portfolio segment, in order to determine the general reserve.
When assigning a risk rating to a loan, management utilizes the Bank’s internal nine-point credit risk rating system.
1.
Strong
2.
Good
3.
Acceptable
4.
Adequate
5.
Watch
6.
Special Mention
7.
Substandard
8.
Doubtful
9.
Loss
Loans rated 1 through 5 are considered pass ratings. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets have well defined weaknesses based on objective evidence, and are characterized by the distinct possibility the Company will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full highly questionable and improbable based on current circumstances. Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets is not warranted. Assets which do not currently expose the Company to sufficient risk to warrant classification in one of the aforementioned categories, but possess weaknesses, are designated special mention.
The following tables detail the recorded investment of originated loans held-for-investment, net of deferred fees and costs, by loan type and credit quality indicator at June 30, 2013, and December 31, 2012 (in thousands).
12
At June 30, 2013
< 35% LTV
=> 35% LTV
< 60% LTV
=> 60% LTV
Internal Risk Rating
Pass
$ 21,978
$ 658,907
$ 42,127
$ 218,648
$ 27,779
$ 31,922
$ 14,146
$ 39,119
$ 11,444
$ 1,067,569
$ 22,321
$ 675,989
$ 45,371
$ 280,633
$ 30,234
$ 36,549
At December 31, 2012
$ 19,438
$ 575,434
$ 30,284
$ 211,679
$ 32,120
$ 28,091
$ 12,536
$ 31,526
$ 10,992
$ 1,804
$ 953,904
$ 20,063
$ 591,406
$ 32,168
$ 283,435
$ 34,608
$ 30,746
13
Included in originated and acquired loans receivable (including held-for-sale) are loans for which the accrual of interest income has been discontinued due to deterioration in the financial condition of the borrowers. The recorded investment of these nonaccrual loans was $22.6 million and $34.9 million at June 30, 2013, and December 31, 2012, respectively. Generally, loans are placed on non-accruing status when they become 90 days or more delinquent, and remain on non-accrual status until they are brought current, have six months of performance under the loan terms, and factors indicating reasonable doubt about the timely collection of payments no longer exist. Therefore, loans may be current in accordance with their loan terms, or may be less than 90 days delinquent and still be on a non-accruing status.
These non-accrual amounts included loans deemed to be impaired of $17.4 million and $26.0 million at June 30, 2013, and December 31, 2012, respectively. Loans on non-accrual status with principal balances less than $500,000, and therefore not meeting the Company’s definition of an impaired loan, amounted to $4.5 million and $4.1 million at June 30, 2013, and December 31, 2012, respectively. Non-accrual amounts included in loans held-for-sale were $5.4 million at December 31, 2012. There were no non-accrual loans held-for-sale at June 30, 2013. Loans past due 90 days or more and still accruing interest were $806,000 and $621,000 at June 30, 2013, and December 31, 2012, respectively, and consisted of loans that are considered well secured and in the process of collection.
The following tables set forth the detail, and delinquency status, of non-performing loans (non-accrual loans and loans past due 90 or more and still accruing), net of deferred fees and costs, at June 30, 2013, and December 31, 2012 (in thousands). The following table excludes PCI loans at June 30, 2013, and December 31, 2012, which have been segregated into pools in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Subtopic 310-30. Each loan pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. At June 30, 2013, expected future cash flows of each PCI loan pool were consistent with those estimated in our most recent recast of the cash flows.
14
Total Non-Performing Loans
Non-Accruing Loans
0-29 Days Past Due
30-89 Days Past Due
90 Days or More Past Due
90 Days or More Past Due and Accruing
Loans held-for-investment:
LTV < 35%
$ 1,676
LTV => 35%
Total commercial
One-to-four family residential
LTV < 60%
LTV => 60%
Total one-to-four family residential
Total construction and land
Total home equity and lines of credit
Total commercial and industrial loans
Total other loans
Total non-performing loans held-for-investment
$ 13,022
$ 894
$ 6,991
$ 20,907
$ 806
$ 21,713
Total non-performing loans acquired
Total non-performing loans
$ 8,671
$ 22,587
$ 23,393
15
$ 1,699
Total multifamily
$ 18,588
$ 1,091
$ 9,821
$ 29,500
$ 621
$ 30,121
Loans held-for-sale:
Total non-performing loans held-for-sale
$ 18,710
$ 15,146
$ 34,947
$ 35,568
16
The following tables set forth the detail and delinquency status of originated and acquired loans held-for-investment, net of deferred fees and costs, by performing and non-performing loans at June 30, 2013 and December 31, 2012 (in thousands).
Performing (Accruing) Loans
Non-Performing Loans
Total Loans Receivable, net
$ 41,276
$ 851
LTV > 35%
LTV > 60%
Total loans held-for-investment
$ 1,127,152
$ 23,523
$ 1,150,675
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$ 3,400
$ 608
$ 1,216,550
$ 24,642
$ 1,241,192
$ 1,264,585
18
$ 29,424
$ 860
$ 1,022,818
$ 13,261
$ 1,036,079
19
The following tables summarize impaired loans as of June 30, 2013, and December 31, 2012 (in thousands):
Recorded Investment
Unpaid Principal Balance
Related Allowance
With No Allowance Recorded:
With a Related Allowance Recorded:
Total:
Real estate loans
$ 49,514
$ (3,054)
20
$ 54,415
$ 58,487
$ (3,615)
21
Included in the table above at June 30, 2013, are loans with carrying balances of $12.5 million that were not written down by either charge-offs or specific reserves in our allowance for loan losses. Included in the table above at December 31, 2012, are loans with carrying balances of $24.9 million that were not written down by either charge-offs or specific reserves in our allowance for loan losses. Loans not written down by charge-offs or specific reserves at June 30, 2013, and December 31, 2012, are considered to have sufficient collateral values, less costs to sell, to support the carrying balances of the loans.
The average recorded balance of originated impaired loans for the six months ended June 30, 2013 and 2012, was $49.2 million and $55.9 million, respectively. The Company recorded $516,000 and $1.1 million of interest income on impaired loans for the three and six months ended June 30, 2013, respectively, as compared to $577,000 and $1.3 million of interest income on impaired loans for the three and six months ended June 30, 2012, respectively.
The following tables summarize loans that were modified in troubled debt restructurings during the six months ended June 30, 2013, and year ended December 31, 2012.
Six Months Ended June 30, 2013
Pre-Modification
Post-Modification
Number of
Outstanding Recorded
Relationships
Investment
(in thousands)
Troubled Debt Restructurings
One-to-four Family
$ 408
Total Troubled Debt Restructurings
Both of the relationships in the table above were restructured to receive reduced interest rates.
Year Ended December 31, 2012
Commercial real estate loans
1
$ 6,251
$ 7,096
All five of the relationships in the table above were restructured to receive reduced interest rates.
At June 30, 2013, and December 31, 2012, we had troubled debt restructurings of $38.6 million and $45.0 million, respectively.
Management classifies all troubled debt restructurings as impaired loans. Impaired loans are individually assessed to determine that the loan’s carrying value is not in excess of the estimated fair value of the collateral (less cost to sell) if the loan is collateral dependent, or the present value of the expected future cash flows if the loan is not collateral dependent. Management performs a detailed evaluation of each impaired loan and generally obtains updated appraisals as part of the evaluation. In addition, management adjusts estimated fair values down to appropriately consider recent market conditions, our willingness to accept a lower sales price to effect a quick sale, and costs to dispose of any supporting collateral. Determining the estimated fair value of underlying collateral (and related costs to sell) can be difficult in illiquid real estate markets and is subject to significant assumptions and estimates. Management employs an independent third party expert in appraisal preparation and review to ascertain the reasonableness of updated appraisals. Projecting the expected cash flows under troubled debt restructurings is inherently subjective and requires, among other things, an evaluation of the borrower’s current and projected financial condition. Actual results may be significantly different than our projections and our established allowance for loan losses on these loans, which could have a material effect on our financial results.
No loan that was restructured during the twelve months ended June 30, 2013 has subsequently defaulted.
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Note 4 – Deposits
Deposit account balances are summarized as follows (in thousands):
Non-interest-bearing demand
$ 225,085
$ 209,639
Interest-bearing negotiable orders of withdrawal (NOW)
Savings-passbook, statement, tiered, and money market
Certificates of deposit
Total deposits
Interest expense on deposit accounts is summarized for the periods indicated (in thousands):
Negotiable order of withdrawal, savings-passbook, statement, tiered, and money market
$ 667
$ 1,023
$ 1,554
$ 2,119
Total interest expense on deposit accounts
$ 1,600
$ 2,461
$ 3,738
$ 4,985
Note 5 – Equity Incentive Plan
The following table is a summary of the Company’s stock options outstanding as of June 30, 2013, and changes therein during the six months then ended:
Number of Stock Options
Weighted Average Grant Date Fair Value
Weighted Average Exercise Price
Weighted Average Contractual Life (years)
Outstanding - December 31, 2012
$ 2.30
$ 7.09
Granted
Forfeited
Exercised
Outstanding - June 30, 2013
Exercisable - June 30, 2013
Expected future stock option expense related to the non-vested options outstanding as of June 30, 2013, is $749,000 over an average period of 0.6 years.
The following is a summary of the status of the Company’s restricted share awards as of June 30, 2013, and changes therein during the six months then ended.
Number of Shares Awarded
Non-vested at December 31, 2012
$ 7.11
Vested
Non-vested at June 30, 2013
Expected future stock award expense related to the non-vested restricted share awards as of June 30, 2013 is $954,000 over an average period of 0.6 years.
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During the three and six months ended June 30, 2013, the Company recorded $797,000 and $1.6 million of stock-based compensation related to the above plans, respectively. During the three and six months ended June 30, 2012, respectively, the Company recorded $742,000 and $1.5 million of stock-based compensation related to the above plans.
Note 6 – Fair Value Measurements
The following tables present the assets reported on the consolidated balance sheet at their estimated fair value as of June 30, 2013, and December 31, 2012, by level within the fair value hierarchy as required by the Fair Value Measurements and Disclosures Topic of the FASB ASC. Financial assets and liabilities are classified in their entirety based on the level of input that is significant to the fair value measurement. The fair value hierarchy is as follows:
·
Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (for example, interest rates, volatilities, prepayment speeds, loss severities, credit risks and default rates) or inputs that are derived principally from or corroborated by observable market data by correlations or other means.
Level 3 Inputs – Significant unobservable inputs that reflect the Company’s own assumptions that market participants would use in pricing the assets or liabilities.
Fair Value Measurements at Reporting Date Using:
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Measured on a recurring basis:
Assets:
Investment securities:
Available-for-sale:
$ 998,220
Equities
Total available-for-sale
$ 1,147,396
$ 17,463
$ 1,129,933
Measured on a non-recurring basis:
Impaired loans:
Commercial real estate
$ 24,309
Total impaired real estate loans
$ 32,353
24
$ 1,180,455
$ 1,280,308
$ 17,675
$ 1,262,633
$ 29,109
$ 37,801
25
The following table presents qualitative information for Level 3 assets measured at fair value on a non-recurring basis at June 30, 2013:
Fair Value
Valuation Methodology
Unobservable Inputs
Range of Inputs
Impaired loans
$ 31,577
Appraisals
Discount for costs to sell
7.0%
Discount for quick sale
10.0% - 25.0%
Discount for dated appraisal utilizing changes in real estate indexes
Varies
Discounted cash flows
Interest rates
$ 776
Available for Sale Securities: The estimated fair values for mortgage-backed, GSE and corporate securities are obtained from an independent nationally recognized third-party pricing service. The estimated fair values are derived primarily from cash flow models, which include assumptions for interest rates, credit losses, and prepayment speeds. Broker/dealer quotes are utilized as well when such quotes are available and deemed representative of the market. The significant inputs utilized in the cash flow models are based on market data obtained from sources independent of the Company (Observable Inputs), and are therefore classified as Level 2 within the fair value hierarchy. The estimated fair values of equity securities, classified as Level 1, are derived from quoted market prices in active markets. Equity securities consist of mutual funds. There were no transfers of securities between Level 1 and Level 2 during the three months ended June 30, 2013.
Trading Securities: Fair values are derived from quoted market prices in active markets. The assets consist of publicly traded mutual funds.
In addition, the Company may be required, from time to time, to measure the fair value of certain other financial assets on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. The adjustments to fair value usually result from the application of lower-of-cost-or-market accounting or write downs of individual assets.
Impaired Loans: At June 30, 2013, and December 31, 2012, the Company had originated impaired loans held-for-investment and held-for-sale with outstanding principal balances of $37.0 million and $43.7 million, respectively, which were recorded at their estimated fair value of $31.6 million and $36.9 million, respectively. The Company recorded net impairment recoveries of $561,000 for the six months ended June 30, 2013 and net impairment charges of $604,000 for the six months ended June 30, 2012, and charge-offs of $298,000 and $992,000 for the six months ended June 30, 2013 and 2012, respectively, utilizing Level 3 inputs. For purposes of estimating fair value of impaired loans, management utilizes independent appraisals, if the loan is collateral dependent, adjusted downward by management, as necessary, for changes in relevant valuation factors subsequent to the appraisal date, or the present value of expected future cash flows for non-collateral dependent loans and troubled debt restructurings.
Other Real Estate Owned: At June 30, 2013, and December 31, 2012, the Company had assets acquired through foreclosure, or deed in lieu of foreclosure, of $776,000 and $870,000, respectively. These assets were recorded at estimated fair value, less estimated selling costs when acquired, establishing a new cost basis. Estimated fair value is generally based on independent appraisals. These appraisals include adjustments to comparable assets based on the appraisers’ market knowledge and experience, and are considered Level 3 inputs. When an asset is acquired, the excess of the loan balance over fair value, less estimated selling costs, is charged to the allowance for loan losses. If the estimated fair value of the asset declines, a write-down is recorded through non-interest expense. The valuation of foreclosed assets is subjective in nature and may be adjusted in the future because of changes in economic conditions.
There were no subsequent valuation adjustments to other real estate owned (REO) for the three months ended June 30, 2013. Operating costs after acquisition are expensed.
Fair Value of Financial Instruments
The FASB ASC Topic for Financial Instruments requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. The following methods and assumptions were used to estimate the fair value of other financial assets and financial liabilities not already discussed above:
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(a) Cash, Cash Equivalents, and Certificates of Deposit
Cash and cash equivalents are short-term in nature with original maturities of six months or less; the carrying amount approximates fair value. Certificates of deposit having original terms of six-months or less; carrying value generally approximates fair value. Certificates of deposit with an original maturity of six months or greater, the fair value is derived from discounted cash flows.
(b) Securities (Held to Maturity)
The estimated fair values for substantially all of our securities are obtained from an independent nationally recognized pricing service. The independent pricing service utilizes market prices of same or similar securities whenever such prices are available. Prices involving distressed sellers are not utilized in determining fair value. Where necessary, the independent third-party pricing service estimates fair value using models employing techniques such as discounted cash flow analyses. The assumptions used in these models typically include assumptions for interest rates, credit losses, and prepayments, utilizing market observable data where available.
(c) Federal Home Loan Bank of New York Stock
The fair value for Federal Home Loan Bank of New York (FHLB) stock is its carrying value, since this is the amount for which it could be redeemed and there is no active market for this stock.
(d) Loans (Held-for-Investment)
Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as originated and purchased, and further segregated by residential mortgage, construction, land, multifamily, commercial and consumer. Each loan category is further segmented into amortizing and non-amortizing and fixed and adjustable rate interest terms and by performing and nonperforming categories. The fair value of loans is estimated by discounting the future cash flows using current prepayment assumptions and current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. This method of estimating fair value does not incorporate the exit price concept of fair value prescribed by the FASB ASC Topic for Fair Value Measurements and Disclosures.
(e) Loans (Held-for-Sale)
Held-for-sale loans are carried at the lower of aggregate cost or estimated fair value, less costs to sell, and therefore fair value is equal to carrying value.
(f) Deposits
The fair value of deposits with no stated maturity, such as non-interest bearing demand deposits, savings, NOW and money market accounts, is equal to the amount payable on demand. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.
(g) Commitments to Extend Credit and Standby Letters of Credit
The fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates.
The fair value of off‑balance sheet commitments is insignificant and therefore not included in the following table.
(h) Borrowings
The fair value of borrowings is estimated by discounting future cash flows based on rates currently available for debt with similar terms and remaining maturity.
(i) Advance Payments by Borrowers
Advance payments by borrowers for taxes and insurance have no stated maturity; the fair value is equal to the amount currently payable.
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The estimated fair value of the Company’s significant financial instruments at June 30, 2013, and December 31, 2012, are presented in the following tables (in thousands):
Estimated Fair Value
Carrying Value
Level 1
Level 2
Level 3
Financial assets:
Cash and cash equivalents
Securities available-for-sale
Financial liabilities:
$ 1,538,285
Repurchase agreements and other borrowings
Advance payments by borrowers
$ 128,761
Securities held-to-maturity
$ 1,962,053
Limitations
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on‑ and off‑balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.
Note 7 – Earnings Per Share
Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of shares outstanding during the period. For purposes of calculating basic earnings per share, weighted average common shares outstanding excludes unallocated employee stock ownership plan (ESOP) shares that have not been committed for release and unvested restricted stock.
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Diluted earnings per share is computed using the same method as basic earnings per share, but reflects the potential dilution that could occur if stock options and unvested shares of restricted stock were exercised and converted into common stock. These potentially dilutive shares are included in the weighted average number of shares outstanding for the period using the treasury stock method. When applying the treasury stock method, we add: (1) the assumed proceeds from option exercises; (2) the tax benefit, if any, that would have been credited to additional paid-in capital assuming exercise of non-qualified stock options and vesting of shares of restricted stock; and (3) the average unamortized compensation costs related to unvested shares of restricted stock and stock options. We then divide this sum by our average stock price for the period to calculate assumed shares repurchased. The excess of the number of shares issuable over the number of shares assumed to be repurchased is added to basic weighted average common shares to calculate diluted earnings per share.
The following is a summary of the Company’s earnings per share calculations and reconciliation of basic to diluted earnings per share for the periods indicated (dollars in thousands, except per share data):
For the three months ended
For the six months ended
Net income available to common stockholders
Weighted average shares outstanding-basic
Effect of non-vested restricted stock and stock options outstanding
Weighted average shares outstanding-diluted
Earnings per share-basic
Earnings per share-diluted
Note 8 – Recent Accounting Pronouncements
In February 2013, the FASB issued ASU No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” This ASU adds new disclosure requirements for items reclassified out of accumulated other comprehensive income to be in a single location in the financial statements. The Company’s disclosures of the components of accumulated other comprehensive income are disclosed in its Statements of Comprehensive Income. For the six months ended June 30, 2013, we reclassified $2.1 million of securities gains included in net income out of accumulated other comprehensive income. The new guidance became effective for all interim and annual periods beginning January 1, 2013, and is to be applied prospectively. The adoption of these pronouncements resulted in a change to the presentation of the Company’s financial statements but did not have an impact on the Company’s financial condition or results of operations.
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ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward-Looking Statements
This Quarterly Report contains certain “forward-looking statements,” which can be identified by the use of such words as “estimate”, “project,” “believe,” “intend,” “anticipate,” “plan”, “seek”, “expect” and words of similar meaning. These forward looking statements include, but are not limited to:
statements of our goals, intentions, and expectations;
statements regarding our business plans, prospects, growth and operating strategies;
statements regarding the quality of our loan and investment portfolios; and
estimates of our risks and future costs and benefits.
These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
general economic conditions, either nationally or in our market areas, that are worse than expected;
competition among depository and other financial institutions;
inflation and changes in the interest rate environment that reduce our margins and yields or reduce the fair value of financial instruments;
adverse changes in the securities markets;
changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;
our ability to manage operations in the current economic conditions;
our ability to enter new markets successfully and capitalize on growth opportunities;
our ability to successfully integrate acquired entities;
changes in consumer spending, borrowing and savings habits;
changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;
changes in our organization, compensation and benefit plans;
changes in the level of government support for housing finance;
significant increases in our loan losses; and
changes in the financial condition, results of operations or future prospects of issuers of securities that we own.
Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. Except as required by law, we disclaim any intention or obligation to update or revise any forward-looking statements after the date of this Form 10-Q, whether as a result of new information, future events or otherwise.
Critical Accounting Policies
Note 1 to the Company’s Audited Consolidated Financial Statements for the year ended December 31, 2012, included in the Company’s Annual Report on Form 10-K, as supplemented by this report, contains a summary of significant accounting policies. Various elements of these accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. Certain assets are carried in the Consolidated Balance Sheets at estimated fair value or the lower of cost or estimated fair value. Policies with respect to the methodologies used to determine the allowance for loan losses, estimated cash flows of our PCI loans, and judgments regarding the valuation of intangible assets and securities as well as the valuation allowance against deferred tax assets are the most critical accounting policies because they are important to the presentation of the Company’s financial condition and results of operations, involve a higher degree of complexity, and require management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. The use of different judgments, assumptions, and estimates could result in material differences in the results of operations or financial condition. These critical accounting policies and their application are reviewed periodically and, at least annually, with the Audit Committee of the Board of Directors. For a further discussion of the critical accounting policies of the Company, see “Management’s Discussion and
30
Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.
Overview
This overview highlights selected information and may not contain all the information that is important to you in understanding our performance during the period. For a more complete understanding of trends, events, commitments, uncertainties, liquidity, capital resources, and critical accounting estimates, you should read this entire document carefully, as well as our Annual Report on Form 10-K for the year ended December 31, 2012.
Net income amounted to $4.3 million and $9.1 million for the three and six months ended June 30, 2013, respectively, as compared to $3.9 million and $8.9 million for the three and six months ended June 30, 2012, respectively. Basic earnings per common share was $0.08 and $0.17 for the quarter and six months ended June 30, 2013, respectively, as compared to $0.07 and $0.16 for the quarter and six months ended June 30, 2012, respectively. Diluted earnings per common share was $0.08 and $0.16 for the quarter and six months ended June 30, 2013, respectively, as compared to $0.07 and $0.16 for the quarter and six months ended June 30, 2012, respectively. For the three and six months ended June 30, 2013, our return on average assets was 0.63% and 0.66%, respectively, as compared to 0.66% and 0.75% for the three and six months ended June 30, 2012, respectively. For the three and six months ended June 30, 2013, our return on average stockholders’ equity was 2.34% and 2.62%, respectively, as compared to 4.11% and 4.64% for the three and six months ended June 30, 2012, respectively. Stockholders’ equity during the six months ended June 30, 2013, was increased by $330.1 million from net proceeds related to the stock conversion completed on January 24, 2013.
Comparison of Financial Condition at June 30, 2013, and December 31, 2012
Total assets decreased $123.0 million, or 4.4%, to $2.69 billion at June 30, 2013, from $2.81 billion at December 31, 2012. The decrease was primarily attributable to decreases in cash and cash equivalents of $103.4 million and, securities available-for-sale of $133.5 million, offset by increases in net loans held-for-investment of $89.4 million, bank owned life insurance of $17.4 million, and other assets of $12.8 million.
Cash and cash equivalents decreased $103.4 million, or 80.3%, to $25.4 million at June 30, 2013, from $128.8 million at December 31, 2012. The decrease is a result of the Company deploying the proceeds from the stock conversion received in December of 2012 that had previously been held in escrow into higher yielding assets.
The Company’s securities available-for-sale portfolio totaled $1.14 billion at June 30, 2013, compared to $1.28 billion at December 31, 2012. At June 30, 2013, $998.2 million of the portfolio consisted of residential mortgage-backed securities issued or guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. The Company also held residential mortgage-backed securities not guaranteed by these three entities, referred to as “private label securities.” The private label securities had an amortized cost of $5.7 million and an estimated fair value of $5.8 million at June 30, 2013. In addition to the above mortgage-backed securities, the Company held $95.7 million in corporate bonds which were all rated investment grade at June 30, 2013, $30.2 million of bonds issued by Federal Home Loan Bank system, and $12.2 million of equity investments in mutual funds, which focus on investments that qualify under the Community Reinvestment Act and money market mutual funds.
Originated loans held-for-investment, net, totaled $1.17 billion at June 30, 2013, as compared to $1.07 billion at December 31, 2012. The increase was primarily due to an increase in multifamily real estate loans, which increased $86.8 million, or 14.2%, to $696.9 million at June 30, 2013, from $610.1 million at December 31, 2012. Currently, management is primarily focused on originating multifamily loans, with less emphasis on other loan types. The following table details our multifamily originations for the six months ended June 30, 2013 (dollars in thousands):
Originations
Weighted Average Interest Rate
Weighted Average Loan-to-Value Ratio
(F)ixed or (V)ariable
Weighted Average Months to Next Rate Change or Maturity for Fixed Rate Loans
Amortization Term
$ 127,929
3.62%
65%
V
99
25 to 30 Years
4.04%
48%
F
173
10 to 15 Years
3.67%
63%
Purchased credit-impaired (PCI) loans, primarily acquired as part of a transaction with the Federal Deposit Insurance Corporation, totaled $68.2 million at June 30, 2013, as compared to $75.3 million at December 31, 2012. The Company accreted interest income of $3.0 million for the six months ended June 30, 2013, compared to $3.2 million for the six months ended June 30, 2012.
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Bank owned life insurance increased $17.4 million, or 18.7%, to $110.4 million at June 30, 2013, from $93.0 million at December 31, 2012. The increase resulted from purchases of $16.0 million and income earned on bank owned life insurance for the six months ended June 30, 2013 partially offset by death benefits received.
Federal Home Loan Bank of New York stock, at cost, increased $297,000, or 2.4%, to $12.9 million at June 30, 2013, from $12.6 million at December 31, 2012. This increase was attributable to increased requirements on borrowings outstanding with the Federal Home Loan Bank of New York over the same time period.
Premises and equipment, net, increased $636,000, or 2.1%, to $30.4 million at June 30, 2013, from $29.8 million at December 31, 2012. This increase was primarily attributable to the renovation of existing branches partially offset by depreciation.
Other real estate owned was $776,000 and $870,000 at June 30, 2013, and December 31, 2012, respectively.
Other assets increased $12.8 million, or 66.3%, to $32.2 million at June 30, 2013, from $19.4 million at December 31, 2012. The increase in other assets was primarily attributable to an increase in amounts due to us from taxing authorities.
The decrease in deposits at June 30, 2013 from December 31, 2012, excluding the deposits used to purchase stock in the second-step conversion of $289.6 million, was $133.4 million, or 8.0%. The decrease was attributable to decreases of $140.1 million in certificates of deposit accounts and $31.1 million in money market accounts, partially offset by increases of $22.0 million in transaction accounts and $15.8 million in savings accounts.
Borrowings decreased by $6.8 million, or 1.6%, to $412.3 million at June 30, 2013, from $419.1 million at December 31, 2012. Management utilizes borrowings to mitigate interest rate risk, for short-term liquidity, and to a lesser extent as part of leverage strategies. The following is a table of term borrowing maturities (excluding capitalized leases and short-term borrowings) and the weighted average rate by year (dollars in thousands):
Year
Amount
Weighted Avg. Rate
$ 53,000
$ 394,913
Accrued expenses and other liabilities decreased $176,000, to $18.7 million at June 30, 2013, from $18.9 million at December 31, 2012.
Total stockholders’ equity increased by $304.7 million to $719.6 million at June 30, 2013, from $414.9 million at December 31, 2012. This increase was primarily attributable to a $330.1 million increase related to the stock conversion net proceeds, net income of $9.1 million for the six months ended June 30, 2013, and a $2.6 million increase related to ESOP and equity award activity. These increases were partially offset by a $16.8 million decrease in accumulated other comprehensive income as a result of an increased interest rate environment and dividend payments of approximately $20.3 million.
Comparison of Operating Results for the Three Months Ended June 30, 2013 and 2012
Net income. Net income was $4.3 million and $3.9 million for the quarters ended June 30, 2013 and 2012, respectively. Significant variances from the comparable prior year period are as follows: a $1.7 million increase in net interest income, a $127,000 decrease in the provision for loan losses, a $268,000 increase in non-interest income, a $1.4 million increase in non-interest expense, and a $378,000 increase in income tax expense.
Interest income. Interest income increased $194,000, or 0.9%, to $23.0 million for the three months ended June 30, 2013, from $22.8 million for the three months ended June 30, 2012. Interest income on loans increased by $1.8 million, primarily attributable to an increase in the average balance of $212.1 million, partially offset by a decrease of 37 basis points in the yield earned. The Company accreted interest income of $1.5 million for the quarter ended June 30, 2013, as compared to $1.6 million for the quarter ended June 30, 2012, related to its PCI loans. Interest income on loans for the quarter ended June 30, 2013, reflected prepayment loan income of $292,000 compared to $226,000 for the quarter ended June 30, 2012. The June 30, 2013, quarter also included a recovery of $256,000 of interest income that was previously applied to principal related to loan recoveries. Interest income on mortgage backed
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securities decreased by $1.2 million primarily attributable to a decrease of 52 basis points in the yield earned, partially offset by an increase in the average balance of $12.9 million.
Interest expense. Interest expense decreased $1.5 million, or 26.9%, to $4.2 million for the three months ended June 30, 2013, from $5.7 million for the three months ended June 30, 2012. The decrease was comprised of a decrease of $861,000 in interest expense on deposits and a decrease in interest expense on borrowings of $687,000. The decrease in interest expense on deposits was attributed to a decrease in the cost of interest bearing deposits of 26 basis points to 0.47% from 0.73%, partially offset by an increase in the average balance of interest bearing deposit accounts of $6.7 million to $1.36 billion for the three months ended June 30, 2013, from $1.35 billion for the three months ended June 30, 2012. The decrease in interest expense on borrowings was attributed to a decrease of eight basis points in the cost to 2.58% for the three months ended June 30, 2013, from 2.66% for the three months ended June 30, 2012, and a decrease in average balances of borrowings of $93.3 million, or 18.8%, to $403.5 million for the three months ended June 30, 2013, from $496.8 million for the three months ended June 30, 2012.
Net Interest Income. Net interest income for the quarter ended June 30, 2013, increased $1.7 million, or 10.2%, due primarily to a $285.3 million, or 12.6%, increase in our interest-earning assets partially offset by a seven basis point, or 2.3%, decrease in our net interest margin to 2.94%. The increase in average interest-earning assets was due primarily to increases in average loans outstanding of $212.1 million, mortgage-backed securities of $12.9 million, other securities of $42.8 million, and deposits in financial institutions of $18.5 million. The June 30, 2013, quarter included loan prepayment income of $292,000 compared to $226,000 for the quarter ended June 30, 2012. The June 30, 2013, quarter also included a recovery of $256,000 of interest income that was previously applied to principal related to loan recoveries. Rates paid on interest-bearing liabilities decreased 29 basis points to 0.96% for the current quarter as compared to 1.25% for the prior year period. This was offset by a 43 basis point decrease in yields earned on interest earning assets to 3.60% for the quarter ended June 30, 2013, as compared to 4.03% for the comparable quarter in 2012.
Provision for Loan Losses. The provision for loan losses decreased $127,000, or 23.3%, to $417,000 for the quarter ended June 30, 2013, from $544,000 for the quarter ended June 30, 2012. The decrease in the provision for loan losses was due primarily to net recoveries of $87,000, consisting of gross recoveries of $614,000 and gross charge-offs of $527,000, for the quarter ended June 30, 2013, compared to net charge-offs of $602,000 for the quarter ended June 30, 2012, as a result of improvements in non-performing loans and stabilization of collateral values which were partially offset by an increase in loan production from the comparable prior year period.
Non-interest Income. Non-interest income increased $268,000, or 18.7%, to $1.7 million for the quarter ended June 30, 2013, from $1.4 million for the quarter ended June 30, 2012. This increase was primarily a result of a $462,000 increase in gain on securities transactions, net, and an $114,000 increase in income on bank owned life insurance partially offset by an increase of $362,000 in other-than-temporary impairment losses on securities. Securities gains in the second quarter of 2013 included $63,000 related to the Company’s trading portfolio, while the second quarter of 2012 included securities losses of $143,000 related to the Company’s trading portfolio. The trading portfolio is utilized to fund the Company’s deferred compensation obligation to certain employees and directors of the plan. The participants of this plan, at their election, defer a portion of their compensation. Gains and losses on trading securities have no effect on net income since participants benefit from, and bear the full risk of, changes in the trading securities market values. Therefore, the Company records an equal and offsetting amount in compensation expense, reflecting the change in the Company’s obligations under the plan.
Non-interest Expense. Non-interest expense increased $1.4 million, or 11.9%, for the quarter ended June 30, 2013 compared to the quarter ended June 30, 2012. This is due primarily to a $958,000 increase in compensation and employee benefits which is related to increased staff due to branch openings, the Flatbush Federal Bancorp, Inc. merger (the Merger), and to a lesser extent salary adjustments effective January 1, 2013, and includes an increase of $206,000 in expense related to the Company’s deferred compensation plan which is described above, and had no effect on net income. Additionally, there was a $394,000 increase in occupancy expense primarily related to new branches and the renovation of existing branches, a $34,000 increase in data processing fees as a result of increased data and maintenance related to the Merger, and a $158,000 increase in other expenses, driven by loan commitment reserves, partially offset by a $216,000 decrease in professional fees.
Income Tax Expense. The Company recorded income tax expense of $2.5 million for the quarter ended June 30, 2013, compared to $2.1 million for the quarter ended June 30, 2012. The effective tax rate for the quarter ended June 30, 2013, was 37.0%, as compared to 35.3% for the quarter ended June 30, 2012.
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ANALYSIS OF NET INTEREST INCOME
(Dollars in thousands)
For the Three Months Ended June 30,
Average Outstanding Balance
Average Yield/ Rate (1)
Interest-earning assets:
Loans (5)
$ 1,280,726
%
$ 1,068,618
Federal Home Loan Bank of New York stock
Interest-earning deposits in other financial institutions
Total interest-earning assets
Non-interest-earning assets
$ 2,742,646
$ 2,417,528
Interest-bearing liabilities:
Savings, NOW, and money market accounts
$ 983,400
$ 878,514
Total interest-bearing deposits
Borrowed funds
Total interest-bearing liabilities
Non-interest bearing deposit accounts
Stockholders' equity
Total liabilities and stockholders' equity
$ 18,755
$ 17,013
Net interest rate spread (2)
Net interest-earning assets (3)
$ 795,013
$ 423,142
Net interest margin (4)
Average interest-earning assets to interest-bearing liabilities
(1)
Average yields and rates for the three months ended June 30, 2013 and 2012 are annualized.
(2)
Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.
(3)
Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(4)
Net interest margin represents net interest income divided by average total interest-earning assets.
(5)
Loans include non-accrual loans.
Comparison of Operating Results for the Six Months Ended June 30, 2013 and 2012
Net income. Net income was $9.1 million and $8.9 million for the six months ended June 30, 2013 and 2012, respectively. Significant variances from the comparable prior year period are as follows: a $3.6 million increase in net interest income, a $465,000 decrease in the provision for loan losses, a $451,000 decrease in non-interest income, a $3.1 million increase in non-interest expense, and a $269,000 increase in income tax expense.
Interest income. Interest income increased $971,000, or 2.1%, to $46.5 million for the six months ended June 30, 2013, from $45.5 million for the six months ended June 30, 2012. Interest income on loans increased by $3.2 million, primarily attributable to an increase in the average balances of $194.8 million, partially offset by a decrease of 36 basis points in the yield earned. The Company accreted interest income of $3.0 million for the six ended June 30, 2013, as compared to $3.2 million for the six months ended June
34
30, 2012, related to its PCI loans. Interest income on loans for the six months ended June 30, 2013, reflected prepayment loan income of $782,000 compared to $414,000 for the six months ended June 30, 2012. The six months ended June 30, 2013 also included a recovery of $256,000 of interest income that was previously applied to principal related to loan recoveries. Interest income on mortgage backed securities decreased by $1.6 million, primarily attributable to a decrease of 53 basis points in the yield earned, partially offset by an increase in the average balance of $101.5 million.
Interest expense. Interest expense decreased $2.6 million, or 22.6%, to $9.0 million for the six months ended June 30, 2013, from $11.6 million for the six months ended June 30, 2012. The decrease was comprised of a decrease of $1.2 million in interest expense on deposits and a decrease in interest expense on borrowings of $1.4 million. The decrease in interest expense on deposits was attributed to a decrease in the cost of interest bearing deposits of 22 basis points to 0.52% from 0.74%, partially offset by an increase in average balance of interest bearing deposit accounts of $90.1 million, or 6.7%, to $1.44 billion for the six months ended June 30, 2013, from $1.35 billion for the six months ended June 30, 2012. The decrease in interest expense on borrowings was attributed to a decrease of 10 basis points in the cost to 2.60% for the six months ended June 30, 2013, from 2.70% for the six months ended June 30, 2012, and a decrease in average balances of borrowings of $85.4 million, or 17.5%, to $404.1 million for the six months ended June 30, 2013, from $489.5 million for the six months ended June 30, 2012.
Net Interest Income. Net interest income for the six months ended June 30, 2013, increased $3.6 million, or 10.6%, as the $331.0 million, or 14.7%, increase in our interest-earning assets more than offset the 10 basis point decrease in our net interest margin to 2.93%. The increase in average interest-earning assets was due primarily to increases in average net loans outstanding of $194.8 million, mortgage-backed securities of $101.5 million, other securities of $12.6 million, and deposits in financial institutions of $23.0 million. The June 30, 2013 period included loan prepayment income of $782,000 compared to $414,000 for the six months ended June 30, 2012. The six months ended June 30, 2013, also included a recovery of $256,000 of interest that was previously applied to principal. Rates paid on interest-bearing liabilities decreased 29 basis points to 0.98% for the current six months as compared to 1.27% for the prior year period. This was offset by a 44 basis point decrease in yields earned on interest earning assets to 3.62% for the six months ended June 30, 2013, as compared to 4.06% for the comparable six months in 2012.
Provision for Loan Losses. The provision for loan losses decreased $465,000, or 40.1%, to $694,000 for the six months ended June 30, 2013, from $1.2 million for the six months ended June 30, 2012. The decrease in the provision for loan losses was due primarily to a decrease in net charge-offs, improvements in non-performing loans and stabilization of collateral values. This was partially offset by an increase in loan production from the comparable prior year period. During the six months ended June 30, 2013, the Company recorded net charge-offs of $298,000 compared to net charge-offs of $953,000 for the six months ended June 30, 2012. Net charge-offs for the six months ended June 30, 2013 consisted of gross charge-offs of $927,000 and gross recoveries of $629,000.
Non-interest Income. Non-interest income decreased $451,000, or 8.3%, to $5.0 million for the six months ended June 30, 2013, from $5.4 million for the six months ended June 30, 2012. This decrease was primarily a result of a decrease of $81,000 in fees and service charges for customer services, a $234,000 decrease in other income primarily due to decreases on gains on loan sales, and an increase of $434,000 in other-than-temporary impairment losses on securities, partially offset by an increase of $138,000 in gain on securities transactions, net, and a $160,000 increase in income on bank owned life insurance. Securities gains in the six months of 2013 included $306,000 related to the Company’s trading portfolio, while the six months of 2012 included securities gains of $253,000 related to the Company’s trading portfolio.
Non-interest Expense. Non-interest expense increased $3.1 million, or 12.8%, for the six months ended June 30, 2013 compared to the six months ended June 30, 2012. This is due primarily to a $1.6 million increase in compensation and employee benefits which is related to increased staff due to branch openings, the Merger, and to a lesser extent salary adjustments effective January 1, 2013, and includes an increase of $53,000 in expense related to the Company’s deferred compensation plan which is described above, and had no effect on net income. Additionally, there is an $831,000 increase in occupancy expense primarily related to new branches, the Merger, and the renovation of existing branches, a $547,000 increase in data processing fees due to data conversion charges related to the Merger, and a $362,000 increase in other expenses driven by loan commitment reserves. This increase was partially offset by a $328,000 decrease in professional fees.
Income Tax Expense. The Company recorded income tax expense of $5.1 million for the six months ended June 30, 2013 compared to $4.8 million for the six months ended June 30, 2012. The effective tax rate for the six months ended June 30, 2013 was 36.0%, as compared to 35.3% for the six months ended June 30, 2012.
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For the Six Months Ended June 30,
$ 1,260,048
$ 1,065,272
Interest-earning deposits in financial institutions
$ 2,775,144
$ 2,399,356
$ 1,019,296
$ 870,663
$ 37,520
$ 33,938
$ 745,738
$ 419,378
Average yields and rates for the six months ended June 30, 2013 and 2012 are annualized.
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Asset Quality
Purchased Credit Impaired Loans
PCI loans were recorded at estimated fair value using expected future cash flows deemed to be collectible on the date acquired. Based on its detailed review of PCI loans and experience in loan workouts, management believes it has a reasonable expectation about the amount and timing of future cash flows and accordingly has classified PCI loans ($68.2 million at June 30, 2013 and $75.3 million at December 31, 2012) as accruing, even though they may be contractually past due. At June 30, 2013, based on recorded contractual principal, 4.2% of PCI loans were past due 30 to 89 days, and 12.0% were past due 90 days or more. At December 31, 2012, based on recorded contractual principal, 5.4% of PCI loans were past due 30 to 89 days, and 11.4% were past due 90 days or more. The amount and timing of expected cash flows as of June 30, 2013, did not change significantly from our latest cash flow recast.
Originated and Acquired loans
The discussion that follows includes originated and acquired loans, both held-for-investment and held-for-sale.
The following table shows total non-performing assets for the current and previous four quarters and also shows, for the same dates, non-performing originated loans to total loans, Troubled Debt Restructurings (TDR) on which interest is accruing, and accruing loans delinquent 30 to 89 days (dollars in thousands).
March 31,
September 30,
Non-accruing loans:
Held-for-investment
$ 10,717
$ 10,348
$ 12,231
$ 12,680
Held-for-sale
Non-accruing loans subject to restructuring agreements:
Total non-accruing loans
Loans 90 days or more past due and still accruing:
Total loans 90 days or more past due and still accruing
Total non-performing assets
$ 24,169
$ 28,819
$ 36,438
$ 33,891
$ 36,932
Loans subject to restructuring agreements and still accruing
$ 26,670
$ 25,891
$ 25,697
$ 24,099
$ 25,502
Accruing loans 30 to 89 days delinquent
$ 20,589
$ 14,780
$ 9,998
$ 12,121
Total Non-accruing Loans
Total non-accruing loans decreased $12.4 million to $22.6 million at June 30, 2013, from $35.0 million at December 31, 2012. This decrease was primarily attributable to $5.4 million of loans held-for-sale being sold, $1.9 million of pay-offs and principal pay-downs, $96,000 of charge-offs, $3.3 million of loans returned to accrual status, and the sale of $3.7 million of loans held-for-investment. The above decreases in non-accruing loans were partially offset by $2.0 million of loans being placed on non-accrual status during the six months ended June 30, 2013.
Delinquency Status of Total Non-accruing Loans
Generally, loans are placed on non-accrual status when they become 90 days or more delinquent, and remain on non-accrual status until they are brought current, have a minimum of six months of performance under the loan terms, and factors indicating reasonable doubt about the timely collection of payments no longer exist. Therefore, loans may be current in accordance with their loan terms, or may be less than 90 days delinquent, and still be on non-accrual status.
The following tables detail the delinquency status of non-accruing loans (held-for-investment and held-for-sale) at June 30, 2013, and December 31, 2012 (dollars in thousands). All delinquent loans in the following two tables are classified as held-for-investment, with the exception of $5.4 million of loans held-for-sale at December 31, 2012.
Days Past Due
0 to 29
30 to 89
90 or more
$ 11,564
$ 433
$ 3,111
$ 15,108
$ 15,646
$ 442
$ 6,337
$ 22,425
$ 18,711
$ 15,145
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Loans Subject to Restructuring Agreements
Included in non-accruing loans are loans subject to TDR agreements totaling $11.9 million and $19.3 million at June 30, 2013, and December 31, 2012, respectively. At June 30, 2013, $1.4 million, or 12.0% of the $11.9 million were not performing in accordance with their restructured terms, as compared to $3.3 million, or 17.0%, at December 31, 2012.
The Company also holds loans subject to restructuring agreements that are on accrual status, totaling $26.7 million and $25.7 million at June 30, 2013 and December 31, 2012, respectively. At June 30, 2013, $10.1 million, or 37.7% of the $26.7 million were not performing in accordance with the restructured terms, as compared to none at December 31, 2012. Of the $10.1 million not performing in accordance with their restructured terms at June 30, 2013, all loans have subsequently made their June 1, 2013 payment.
The following table details the amounts and categories of the loans subject to restructuring agreements by loan type as of June 30, 2013 and December 31, 2012 (dollars in thousands).
Non-Accruing
Accruing
Troubled debt restructurings:
$ 10,038
$ 21,924
$ 16,046
$ 21,785
$ 11,870
$ 19,275
Not performing in accordance with restructured terms
Loans 90 Days or More Past Due and Still Accruing and Other Real Estate Owned
Loans 90 days or more past due and still accruing increased $185,000 to $806,000 at June 30, 2013, from $621,000 at December 31, 2012, and primarily consist of residential loans.
Other real estate owned was $776,000 and $870,000 at June 30, 2013 and December 31, 2012, respectively.
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Delinquency Status of Accruing Loans 30 to 89 Days Delinquent
Loans 30 to 89 days delinquent and on accrual status at June 30, 2013 totaled $24.6 million, an increase of $9.8 million from the December 31, 2012, balance of $14.8 million. The following tables set forth delinquencies for accruing loans by type and by amount at June 30, 2013, and December 31, 2012 (dollars in thousands).
$ 13,550
$ 4,736
Total delinquent accruing loans
Liquidity and Capital Resources
Liquidity. The overall objective of our liquidity management is to ensure the availability of sufficient funds to meet financial commitments and to take advantage of lending and investment opportunities. We manage liquidity in order to meet deposit withdrawals on demand or at contractual maturity, to repay borrowings as they mature, and to fund new loans and investments as opportunities arise.
Our primary sources of funds are deposits, principal and interest payments on loans and securities, borrowed funds, the proceeds from maturing securities and short-term investments, and to a lesser extent the proceeds from the sales of loans and securities and wholesale borrowings. The scheduled amortization of loans and securities, as well as proceeds from borrowed funds, are predictable sources of funds. Other funding sources, however, such as deposit inflows and loan prepayments are greatly influenced by market interest rates, economic conditions, and competition. Northfield Bank is a member of the Federal Home Loan Bank of New York, which provides an additional source of short-term and long-term funding. Northfield Bank also has borrowing capabilities with the Federal Reserve on a short-term basis. The Bank’s borrowed funds, excluding capitalized lease obligations and floating rate advances, were $407.9 million at June 30, 2013, at a weighted average interest rate of 2.51%. A total of $96.5 million of these borrowings will mature in less than one year. Borrowed funds, excluding capitalized lease obligations and floating rate advances, were $414.3 million at December 31, 2012. The Company has the ability to obtain additional funding from the FHLB and Federal Reserve Bank discount window of approximately $742.6 million, utilizing unencumbered securities of $603.7 million and multifamily loans of $215.3 million at June 30, 2013. The Company expects to have sufficient funds available to meet current commitments in the normal course of business.
Capital Resources. At June 30, 2013, and December 31, 2012, Northfield Bank exceeded all regulatory capital requirements to which it is subject.
Actual Ratio
Minimum Required for Capital Adequacy Purposes
Minimum Required to Be Well Capitalized under Prompt Corrective Action Provisions
As of June 30, 2013:
Tangible capital to tangible assets
NA
Tier 1 capital (core) – (to adjusted assets)
Total capital (to risk-weighted assets)
As of December 31, 2012:
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In July 2013, the OCC and the other federal bank regulatory agencies issued a final rule that will revise their leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. Among other things, the rule establishes a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increases the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and assigns a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The final rule also requires unrealized gains and losses on certain "available-for-sale" securities holdings to be included for purposes of calculating regulatory capital requirements unless a one-time opt-in or opt-out is exercised. The rule limits a banking organization's capital distributions and certain discretionary bonus payments if the banking organization does not hold a "capital conservation buffer" consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements.
The final rule becomes effective for the Bank on January 1, 2015. The capital conservation buffer requirement will be phased in beginning January 1, 2016 and ending January 1, 2019, when the full capital conservation buffer requirement will be effective. The final rule also implements consolidated capital requirements for savings and loan holding companies, such as the Company, effective January 1, 2015.
Off-Balance Sheet Arrangements and Contractual Obligations
In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with U.S. generally accepted accounting principles, are not recorded in the financial statements. These transactions primarily relate to lending commitments.
The following table shows the contractual obligations of the Company by expected payment period as of June 30, 2013:
Contractual Obligation
Less than One Year
One to less than Three Years
Three to less than Five Years
Five Years and greater
Debt obligations (excluding capitalized leases)
$ 407,913
$ 96,500
$ 201,500
$ 109,913
Commitments to originate loans
$ 64,915
Commitments to fund unused lines of credit
$ 40,705
Commitments to originate loans and commitments to fund unused lines of credit are agreements to lend additional funds to customers as long as there have been no violations of any of the conditions established in the agreements (original or restructured). Commitments generally have a fixed expiration or other termination clauses which may or may not require payment of a fee. Since some of these loan commitments are expected to expire without being drawn upon, total commitments do not necessarily represent future cash requirements.
For further information regarding our off-balance sheet arrangements and contractual obligations, see Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is interest rate risk. Our assets, consisting primarily of mortgage-related assets and loans, generally have longer maturities than our liabilities, which consist primarily of deposits and wholesale funding. As a result, a principal part of our business strategy involves managing interest rate risk and limiting the exposure of our net interest income to changes in market interest rates. Accordingly, our board of directors has established a management risk committee, comprised of our Chief Investment Officer, who chairs this Committee, our Chief Executive Officer, our President/Chief Operating Officer, our Chief Financial Officer, our Chief Lending Officer, and our Executive Vice President of Operations. This committee is responsible for, among other things, evaluating the interest rate risk inherent in our assets and liabilities, for recommending to the risk management committee of our board of directors the level of risk that is appropriate given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the board of directors.
The management risk committee aims to manage interest risk by structuring the balance sheet to maximize net interest income while maintaining an acceptable level of risk exposure to changes in market interest rates. Liquidity, interest rate risk, and profitability are all considered to reach such a goal. Various asset/liability strategies are used to manage and control the interest rate sensitivity of our assets and liabilities. These strategies include pricing of loans and deposit products, adjusting the terms of loans and borrowings, and managing the deployment of our securities and short-term assets to manage mismatches in interest rate re-pricing.
Net Portfolio Value Analysis. We compute amounts by which the net present value of our assets and liabilities (net portfolio value or “NPV”) would change in the event market interest rates changed over an assumed range of rates. Our simulation model uses a discounted cash flow analysis to measure the interest rate sensitivity of NPV. Depending on current market interest rates we estimate the economic value of these assets and liabilities under the assumption that interest rates experience an instantaneous and sustained increase of 100, 200, 300, or 400 basis points, or a decrease of 100 and 200 basis points, which is based on the current interest rate environment. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the “Change in Interest Rates” column below.
Net Interest Income Analysis. In addition to NPV calculations, we analyze our sensitivity to changes in interest rates through our net interest income model. Net interest income is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest we pay on our interest-bearing liabilities, such as deposits and borrowings. In our model, we estimate what our net interest income would be for a twelve-month period. Depending on current market interest rates we then calculate what the net interest income would be for the same period under the assumption that interest rates experience an instantaneous and sustained increase or decrease of 100, 200, 300, or 400 basis points, or a decrease of 100 and 200 basis points, which is based on the current interest rate environment.
The table below sets forth, as of June 30, 2013, our calculation of the estimated changes in our NPV, NPV ratio, and percent change in net interest income that would result from the designated instantaneous and sustained changes in interest rates. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied on as indicative of actual results (dollars in thousands).
NPV
Change in Interest Rates (basis points)
Estimated Present Value of Assets
Estimated Present Value of Liabilities
Estimated NPV
Estimated Change In NPV
Estimated NPV/Present Value of Assets Ratio
Net Interest Income Percent Change
+400
$ 2,397,580
$ 1,813,630
$ 583,950
$ (217,006)
+300
+200
+100
0
(100)
(200)
The table above indicates that at June 30, 2013, in the event of a 400 basis point increase in interest rates, we would experience a 489 basis point decrease in NPV ratio (29.25% versus 24.36%), and a 12.19% decrease in net interest income. In the event of a 200 basis point decrease in interest rates, we would experience a 122 basis point increase in NPV ratio (29.25% versus 30.47%) and a 4.82% decrease in net interest income. Our policies provide that, in the event of a 400 basis point increase or less in
41
interest rates, our net present value ratio should decrease by no more than 500 basis points and our projected net interest income should decrease by no more than 44%. Additionally, our policy states that our net portfolio value should be at least 8% of total assets before and after such shock. At June 30, 2013, we were in compliance with all board approved policies with respect to interest rate risk management.
The duration of a financial instrument changes as market interest rates change. Potential movements in the duration of our investment portfolio, as well as the duration of the loan portfolio may have a positive or negative effect on our net interest income.
Certain shortcomings are inherent in the methodologies used in determining interest rate risk through changes in NPV and net interest income. Modeling requires making certain assumptions that 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 and net interest income information presented assume that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assume that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although interest rate risk calculations provide 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 will differ from actual results.
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ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of June 30, 2013. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.
During the six months ended June 30, 2013, there were no changes in the Company’s internal control over financial reporting 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
ITEM 1. LEGAL PROCEEDINGS
The Company and subsidiaries are subject to various legal actions arising in the normal course of business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s financial condition or results of operations.
ITEM 1A. RISK FACTORS
During the six months ended June 30, 2013, there have been no material changes to the risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012, as filed with the SEC.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a)
Unregistered Sale of Equity Securities. There were no sales of unregistered securities during the period covered by this report.
(b)
Use of Proceeds. Not applicable
(c)
Repurchases of Our Equity Securities. None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
The exhibits required by Item 601 of Regulation S-K are included with this Form 10-Q and are listed on the “Index to Exhibits” immediately following the Signatures.
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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.
(Registrant)
Date: August 9, 2013
/s/ John W. Alexander
John W. Alexander
Chairman and Chief Executive Officer
/s/ William R. Jacobs
William R. Jacobs
Chief Financial Officer
(Principal Financial and Accounting Officer)
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INDEX TO EXHIBITS
Exhibit
Number
Description
31.1
Certification of John W. Alexander, Chairman, President and Chief Executive Officer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a)
31.2
Certification of William R. Jacobs, Chief Financial Officer,
Pursuant to Rule 13a-14(a) and Rule 15d-14(a)
Certification of John W. Alexander, Chairman and Chief Executive Officer, and William R. Jacobs, Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101
The following materials from the Company’s Report on Form 10-Q for the quarter ended June 30, 2013, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Changes in Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to Consolidated Financial Statements
46