UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2009
Commission File Number 1-31565
NEW YORK COMMUNITY BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware | 06-1377322 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
615 Merrick Avenue, Westbury, New York 11590
(Address of principal executive offices)
(Registrants telephone number, including area code) (516) 683-4100
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
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 the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer | x | Accelerated Filer | ¨ | |||
Non-accelerated Filer | ¨ | Smaller Reporting Company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
345,206,434 |
||||
Number of shares of common stock outstanding at August 4, 2009 |
NEW YORK COMMUNITY BANCORP, INC.
FORM 10-Q
Quarter Ended June 30, 2009
NEW YORK COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CONDITION
(in thousands, except share data)
June 30, 2009 (unaudited) |
December 31, 2008 |
|||||||
Assets: |
||||||||
Cash and cash equivalents |
$ | 162,764 | $ | 203,216 | ||||
Securities available for sale: |
||||||||
Mortgage-related ($684,924 and $811,152 pledged, respectively) |
749,709 | 833,684 | ||||||
Other securities ($9,339 and $78,847 pledged, respectively) |
99,404 | 176,818 | ||||||
Total available-for-sale securities |
849,113 | 1,010,502 | ||||||
Securities held to maturity: |
||||||||
Mortgage-related ($2,795,646 and $3,131,098 pledged, respectively) (fair value of $2,877,393 and $3,199,414, respectively) |
2,813,348 | 3,164,856 | ||||||
Other securities ($1,442,076 and $1,359,912 pledged, respectively) (fair value of $1,878,197 and $1,628,387, respectively) |
1,976,425 | 1,726,135 | ||||||
Total held-to-maturity securities |
4,789,773 | 4,890,991 | ||||||
Total securities |
5,638,886 | 5,901,493 | ||||||
Loans, net of deferred loan fees and costs |
22,777,163 | 22,192,212 | ||||||
Less: Allowance for loan losses |
(98,082 | ) | (94,368 | ) | ||||
Loans, net |
22,679,081 | 22,097,844 | ||||||
Federal Home Loan Bank of New York (FHLB-NY) stock, at cost |
439,063 | 400,979 | ||||||
Premises and equipment, net |
211,137 | 217,762 | ||||||
Goodwill |
2,436,401 | 2,436,401 | ||||||
Core deposit intangibles, net |
76,617 | 87,780 | ||||||
Bank-owned life insurance |
702,123 | 691,429 | ||||||
Other assets |
514,051 | 430,002 | ||||||
Total assets |
$ | 32,860,123 | $ | 32,466,906 | ||||
Liabilities and Stockholders Equity: |
||||||||
Deposits: |
||||||||
NOW and money market accounts |
$ | 4,424,433 | $ | 3,818,952 | ||||
Savings accounts |
2,756,674 | 2,632,078 | ||||||
Certificates of deposit |
6,046,646 | 6,796,971 | ||||||
Non-interest-bearing accounts |
1,126,328 | 1,127,647 | ||||||
Total deposits |
14,354,081 | 14,375,648 | ||||||
Borrowed funds: |
||||||||
FHLB-NY advances |
8,430,528 | 7,708,064 | ||||||
Repurchase agreements |
4,225,000 | 4,485,000 | ||||||
Federal funds purchased |
250,000 | 150,000 | ||||||
Junior subordinated debentures |
483,987 | 484,216 | ||||||
Other borrowings |
669,488 | 669,430 | ||||||
Total borrowed funds |
14,059,003 | 13,496,710 | ||||||
Other liabilities |
236,373 | 375,302 | ||||||
Total liabilities |
28,649,457 | 28,247,660 | ||||||
Stockholders equity: |
||||||||
Preferred stock at par $0.01 (5,000,000 shares authorized; none issued) |
| | ||||||
Common stock at par $0.01 (600,000,000 shares authorized; 345,208,226 and 344,985,111 shares issued, respectively; 345,208,174 and 344,985,111 shares outstanding, respectively) |
3,452 | 3,450 | ||||||
Paid-in capital in excess of par |
4,187,864 | 4,181,599 | ||||||
Retained earnings |
97,125 | 123,511 | ||||||
Treasury stock (52 and 0 shares at the respective dates) |
(1 | ) | | |||||
Unallocated common stock held by Employee Stock Ownership Plan (ESOP) |
(1,473 | ) | (1,995 | ) | ||||
Accumulated other comprehensive loss, net of tax (AOCL): |
||||||||
Net unrealized loss on securities and non-credit portion of other-than-temporary impairment (OTTI) losses, net of tax |
(24,185 | ) | (32,506 | ) | ||||
Net unrealized loss on securities transferred from available for sale to held to maturity, net of tax |
(4,323 | ) | (4,706 | ) | ||||
Net unrealized loss on pension and post-retirement obligations, net of tax |
(47,793 | ) | (50,107 | ) | ||||
Total accumulated other comprehensive loss, net of tax |
(76,301 | ) | (87,319 | ) | ||||
Total stockholders equity |
4,210,666 | 4,219,246 | ||||||
Total liabilities and stockholders equity |
$ | 32,860,123 | $ | 32,466,906 | ||||
See accompanying notes to the unaudited consolidated financial statements.
1
NEW YORK COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data)
(unaudited)
For the Three Months Ended June 30, |
For the Six Months Ended June 30, |
|||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Interest Income: |
||||||||||||||||
Mortgage and other loans |
$ | 321,640 | $ | 310,396 | $ | 643,357 | $ | 623,384 | ||||||||
Securities and money market investments |
80,056 | 82,904 | 158,445 | 172,240 | ||||||||||||
Total interest income |
401,696 | 393,300 | 801,802 | 795,624 | ||||||||||||
Interest Expense: |
||||||||||||||||
NOW and money market accounts |
7,314 | 13,144 | 14,877 | 27,312 | ||||||||||||
Savings accounts |
3,565 | 5,869 | 7,781 | 11,874 | ||||||||||||
Certificates of deposit |
44,617 | 65,799 | 97,340 | 142,373 | ||||||||||||
Borrowed funds |
128,615 | 177,938 | 257,304 | 322,056 | ||||||||||||
Total interest expense |
184,111 | 262,750 | 377,302 | 503,615 | ||||||||||||
Net interest income |
217,585 | 130,550 | 424,500 | 292,009 | ||||||||||||
Provision for loan losses |
12,000 | 1,700 | 18,000 | 1,700 | ||||||||||||
Net interest income after provision for loan losses |
205,585 | 128,850 | 406,500 | 290,309 | ||||||||||||
Non-interest (Loss) Income: |
||||||||||||||||
Total loss on OTTI of securities |
(51,073 | ) | (49,595 | ) | (51,073 | ) | (49,595 | ) | ||||||||
Less: Non-credit portion of OTTI recorded in other comprehensive income (before taxes) |
11,345 | | 11,345 | | ||||||||||||
Net loss on OTTI recognized in earnings |
(39,728 | ) | (49,595 | ) | (39,728 | ) | (49,595 | ) | ||||||||
Fee income |
9,282 | 10,210 | 18,573 | 20,794 | ||||||||||||
Bank-owned life insurance |
6,728 | 7,134 | 13,568 | 13,879 | ||||||||||||
Net gain on sale of securities |
| 568 | | 568 | ||||||||||||
Gain on debt repurchases |
| | | 926 | ||||||||||||
Other |
6,007 | 9,024 | 12,052 | 19,266 | ||||||||||||
Total non-interest (loss) income |
(17,711 | ) | (22,659 | ) | 4,465 | 5,838 | ||||||||||
Non-interest Expense: |
||||||||||||||||
Operating expenses: |
||||||||||||||||
Compensation and benefits |
45,045 | 43,340 | 87,467 | 86,406 | ||||||||||||
Occupancy and equipment |
17,907 | 17,212 | 36,643 | 34,922 | ||||||||||||
General and administrative |
38,975 | 21,948 | 61,728 | 39,990 | ||||||||||||
Total operating expenses |
101,927 | 82,500 | 185,838 | 161,318 | ||||||||||||
Debt repositioning charge |
| 285,369 | | 285,369 | ||||||||||||
Amortization of core deposit intangibles |
5,476 | 5,821 | 11,163 | 11,853 | ||||||||||||
Total non-interest expense |
107,403 | 373,690 | 197,001 | 458,540 | ||||||||||||
Income (loss) before income taxes |
80,471 | (267,499 | ) | 213,964 | (162,393 | ) | ||||||||||
Income tax expense (benefit) |
24,023 | (112,716 | ) | 68,827 | (79,981 | ) | ||||||||||
Net Income (Loss) |
$ | 56,448 | $ | (154,783 | ) | $ | 145,137 | $ | (82,412 | ) | ||||||
Other comprehensive income (loss), net of tax: |
||||||||||||||||
Change in net unrealized gain (loss) on securities and non-credit portion of OTTI for the period |
1,264 | 15,519 | 9,294 | 3,967 | ||||||||||||
Change in pension and post-retirement obligations |
1,111 | 50 | 2,314 | 151 | ||||||||||||
Total comprehensive income (loss), net of tax |
$ | 58,823 | $ | (139,214 | ) | $ | 156,745 | $ | (78,294 | ) | ||||||
Basic earnings (loss) per share |
$ | 0.16 | $ | (0.47 | ) | $ | 0.42 | $ | (0.25 | ) | ||||||
Diluted earnings (loss) per share |
$ | 0.16 | $ | (0.47 | ) | $ | 0.42 | $ | (0.25 | ) | ||||||
See accompanying notes to the unaudited consolidated financial statements.
2
NEW YORK COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
(in thousands, except share data)
(unaudited)
Six Months Ended June 30, 2009 |
||||
Common Stock (Par Value: $0.01): |
||||
Balance at beginning of year |
$ | 3,450 | ||
Shares issued for restricted stock awards (223,115 shares) |
2 | |||
Balance at end of period |
3,452 | |||
Paid-in Capital in Excess of Par: |
||||
Balance at beginning of year |
4,181,599 | |||
Allocation of ESOP stock |
1,354 | |||
Issuances of restricted stock, net of forfeitures |
(1,235 | ) | ||
Compensation expense related to restricted stock awards |
4,803 | |||
Exercise of stock options |
22 | |||
Tax effect of stock plans |
1,321 | |||
Balance at end of period |
4,187,864 | |||
Retained Earnings: |
||||
Balance at beginning of year |
123,511 | |||
Net income |
145,137 | |||
Dividends paid on common stock ($0.50 per share) |
(172,113 | ) | ||
Adjustment for the cumulative effect of applying FASB Staff Position FAS 115-2 (FSP FAS 115-2), net of tax |
590 | |||
Balance at end of period |
97,125 | |||
Treasury Stock: |
||||
Balance at beginning of year |
| |||
Purchase of common stock (109,807 shares) |
(1,262 | ) | ||
Exercise of stock options (2,320 shares) |
28 | |||
Shares issued for restricted stock awards (107,435 shares) |
1,233 | |||
Balance at end of period |
(1 | ) | ||
Unallocated Common Stock Held by ESOP: |
||||
Balance at beginning of year |
(1,995 | ) | ||
Earned portion of ESOP |
522 | |||
Balance at end of period |
(1,473 | ) | ||
Accumulated Other Comprehensive Loss, net of tax: |
||||
Balance at beginning of year |
(87,319 | ) | ||
Change in net unrealized loss on securities available for sale, net of tax of $5,520 |
(8,391 | ) | ||
Adjustment for the cumulative effect of applying FSP FAS 115-2, net of tax of $377 |
(590 | ) | ||
Reclassification adjustment for OTTI losses recognized in earnings, net of tax of $(15,506) |
24,222 | |||
Non-credit portion of OTTI losses recognized in other comprehensive income, net of tax of $4,425 |
(6,920 | ) | ||
Amortization of net unrealized loss on securities transferred from available for sale to held to maturity, net of tax of $(252) |
383 | |||
Change in pension and post-retirement obligations, net of tax of $(1,479) |
2,314 | |||
Balance at end of period |
(76,301 | ) | ||
Total stockholders equity |
$ | 4,210,666 | ||
See accompanying notes to the unaudited consolidated financial statements.
3
NEW YORK COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended June 30, |
||||||||
2009 | 2008 | |||||||
Cash Flows from Operating Activities: |
||||||||
Net income (loss) |
$ | 145,137 | $ | (82,412 | ) | |||
Adjustments to reconcile net income (loss) to net cash used in operating activities: |
||||||||
Provision for loan losses |
18,000 | 1,700 | ||||||
Depreciation and amortization |
10,016 | 9,958 | ||||||
Accretion of discounts, net |
(3,943 | ) | (4,785 | ) | ||||
Net change in net deferred loan origination costs and fees |
(932 | ) | 4,633 | |||||
Amortization of core deposit intangibles |
11,163 | 11,853 | ||||||
Net gain on sale of securities |
| (568 | ) | |||||
Net gain on sale of loans |
(285 | ) | (152 | ) | ||||
Stock plan-related compensation |
6,679 | 6,887 | ||||||
Loss on OTTI of securities recognized in earnings |
39,728 | 49,595 | ||||||
Changes in assets and liabilities: |
||||||||
Increase in deferred tax asset, net |
(16,138 | ) | (18,927 | ) | ||||
Increase in other assets |
(85,622 | ) | (112,954 | ) | ||||
Decrease in other liabilities |
(135,111 | ) | (42,629 | ) | ||||
Origination of loans held for sale |
(50,619 | ) | (25,335 | ) | ||||
Proceeds from sale of loans originated for sale |
43,032 | 23,480 | ||||||
Net cash used in operating activities |
(18,895 | ) | (179,656 | ) | ||||
Cash Flows from Investing Activities: |
||||||||
Proceeds from repayment of securities held to maturity |
1,900,150 | 1,449,965 | ||||||
Proceeds from repayment of securities available for sale |
150,050 | 162,914 | ||||||
Proceeds from sale of securities available for sale |
| 11,438 | ||||||
Purchase of securities held to maturity |
(1,808,546 | ) | (1,469,186 | ) | ||||
Purchase of securities available for sale |
| (12,320 | ) | |||||
Net (purchase) redemption of FHLB-NY stock |
(38,084 | ) | 2,821 | |||||
Net increase in loans |
(590,433 | ) | (612,594 | ) | ||||
Purchase of loans |
| (45,500 | ) | |||||
Proceeds from sale of loans |
| 25,035 | ||||||
Purchase of premises and equipment, net |
(3,391 | ) | (5,547 | ) | ||||
Net cash used in investing activities |
(390,254 | ) | (492,974 | ) | ||||
Cash Flows from Financing Activities: |
||||||||
Net (decrease) increase in deposits |
(21,567 | ) | 223,503 | |||||
Net increase in short-term borrowings |
512,500 | 1,021,100 | ||||||
Net increase (decrease) in long-term borrowings |
49,793 | (817,004 | ) | |||||
Tax effect of stock plans |
1,321 | 2,270 | ||||||
Proceeds from issuance of common stock |
| 339,152 | ||||||
Cash dividends paid on common stock |
(172,113 | ) | (162,026 | ) | ||||
Treasury stock purchases |
(1,262 | ) | (2,160 | ) | ||||
Net cash received from stock option exercises |
25 | 12,177 | ||||||
Net cash provided by financing activities |
368,697 | 617,012 | ||||||
Net decrease in cash and cash equivalents |
(40,452 | ) | (55,618 | ) | ||||
Cash and cash equivalents at beginning of period |
203,216 | 335,743 | ||||||
Cash and cash equivalents at end of period |
$ | 162,764 | $ | 280,125 | ||||
Supplemental information: |
||||||||
Cash paid for interest |
$ | 380,345 | $ | 523,463 | ||||
Cash paid for income taxes |
162,382 | 22,074 | ||||||
Non-cash investing activities: |
||||||||
Mortgage loans securitized and transferred to mortgage-related securities held to maturity, net |
$ | | $ | 71,307 | ||||
Transfer to other real estate owned from loans |
561 | |
See accompanying notes to the unaudited consolidated financial statements.
4
NEW YORK COMMUNITY BANCORP, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements include the accounts of New York Community Bancorp, Inc. and subsidiaries (the Company), including its two principal banking subsidiaries, New York Community Bank (the Community Bank) and New York Commercial Bank (the Commercial Bank). The unaudited consolidated financial statements reflect all normal recurring adjustments that, in the opinion of management, are necessary to present a fair statement of the results for the periods presented. There are no other adjustments reflected in the accompanying consolidated financial statements. The results of operations for the three and six months ended June 30, 2009 are not necessarily indicative of the results of operations that may be expected for all of 2009.
Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC).
The unaudited consolidated financial statements include the accounts of the Company and other entities in which the Company has a controlling financial interest. All inter-company balances and transactions have been eliminated. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Companys 2008 Annual Report on Form 10-K.
Certain reclassifications have been made to the prior-period consolidated financial statements to conform to the June 30, 2009 presentation.
Note 2. Stock-based Compensation
At June 30, 2009, the Company had 6,021,509 shares available for grant as options, restricted stock, or other forms of related rights under the New York Community Bancorp, Inc. 2006 Stock Incentive Plan (the 2006 Stock Incentive Plan). Under the 2006 Stock Incentive Plan, the Company granted 365,000 shares of restricted stock in the six months ended June 30, 2009, with an average fair value of $11.79 per share on the date of grant and a vesting period of five years. The six-month amount includes 335,000 shares that were granted in the second quarter with an average fair value of $11.73 per share on the date of grant. Compensation and benefits expense related to restricted stock grants is recognized on a straight-line basis over the vesting period, and totaled $2.3 million and $2.1 million, respectively, in the three months ended June 30, 2009 and 2008, and $4.8 million and $3.7 million, respectively, in the six months ended at those dates.
A summary of activity with regard to restricted stock awards in the six months ended June 30, 2009 is presented in the following table:
For the Six Months Ended June 30, 2009 | ||||||
Number of Shares | Weighted Average Grant Date Fair Value | |||||
Unvested at January 1, 2009 |
2,346,345 | $ | 14.95 | |||
Granted |
365,000 | 11.79 | ||||
Vested |
(475,100 | ) | 16.94 | |||
Forfeited |
(31,850 | ) | 13.40 | |||
Unvested at June 30, 2009 |
2,204,395 | 14.02 | ||||
5
As of June 30, 2009, unrecognized compensation cost relating to unvested restricted stock totaled $27.8 million. This amount will be recognized over a remaining weighted average period of 3.9 years.
In addition, the Company had eleven stock option plans at June 30, 2009: the 1993 and 1997 New York Community Bancorp, Inc. Stock Option Plans; the 1993 and 1996 Haven Bancorp, Inc. Stock Option Plans; the 1998 Richmond County Financial Corp. Stock Compensation Plan; the T R Financial Corp. 1993 Incentive Stock Option Plan; the Roslyn Bancorp, Inc. 1997 and 2001 Stock-based Incentive Plans; the 1998 Long Island Financial Corp. Stock Option Plan; and the 2003 and 2004 Synergy Financial Group, Inc. Stock Option Plans (all eleven plans collectively referred to as the Stock Option Plans). All stock options granted under the Stock Option Plans expire ten years from the date of grant.
In connection with its adoption of Statement of Financial Accounting Standards (SFAS) No. 123R, Share-based Payment, on January 1, 2006, and using the modified prospective approach, the Company recognizes compensation costs related to share-based payments at fair value on the date of grant, and recognizes such costs in the financial statements over the vesting period during which the employee provides service in exchange for the award. However, as there were no unvested options at any time during the six months ended June 30, 2009 or the year ended December 31, 2008, the Company did not record any compensation and benefits expense relating to stock options during these periods.
Generally, the Company issues new shares of common stock to satisfy the exercise of options. The Company may also use common stock held in Treasury to satisfy the exercise of options. In such event, the difference between the average cost of Treasury shares and the exercise price is recorded as an adjustment to retained earnings or paid-in capital on the date of exercise. At June 30, 2009, there were 13,438,645 stock options outstanding. The number of shares available for future issuance under the Stock Option Plans was 800 at June 30, 2009.
The status of the Companys Stock Option Plans at June 30, 2009 and the changes that occurred during the six months ended at that date are summarized in the following table:
For the Six Months Ended June 30, 2009 | ||||||
Number of Stock Options |
Weighted Average Exercise Price | |||||
Stock options outstanding and exercisable at January 1, 2009 |
13,702,712 | $ | 15.50 | |||
Exercised |
(2,320 | ) | 10.78 | |||
Forfeited |
(261,747 | ) | 15.15 | |||
Stock options outstanding and exercisable at June 30, 2009 |
13,438,645 | 15.51 | ||||
Total stock options outstanding and exercisable at June 30, 2009 had a weighted average remaining contractual life of 2.71 years, a weighted average exercise price of $15.51 per share, and an aggregate intrinsic value of $1.2 million. The intrinsic values of options exercised during the six months ended June 30, 2009 and 2008 were $464.00 and $7.1 million, respectively.
6
Note 3. Securities
The following tables summarize the Companys portfolio of securities available for sale at June 30, 2009 and December 31, 2008:
June 30, 2009 | ||||||||||||
(in thousands) | Amortized Cost |
Gross Unrealized Gain |
Gross Unrealized Loss |
Fair Value | ||||||||
Mortgage-related Securities: |
||||||||||||
GSE(1) certificates |
$ | 162,769 | $ | 7,130 | $ | | $ | 169,899 | ||||
GSE CMOs(2) |
463,035 | 13,801 | 515 | 476,321 | ||||||||
Private label CMOs |
112,493 | | 9,004 | 103,489 | ||||||||
Total mortgage-related securities |
$ | 738,297 | $ | 20,931 | $ | 9,519 | $ | 749,709 | ||||
Other Securities: |
||||||||||||
Corporate bonds |
$ | 15,813 | $ | 18 | $ | 3,490 | $ | 12,341 | ||||
State, county, and municipal |
6,529 | 1 | 209 | 6,321 | ||||||||
Capital trust notes |
44,083 | 109 | 12,084 | 32,108 | ||||||||
Preferred stock |
31,400 | 148 | 14,752 | 16,796 | ||||||||
Common stock |
42,413 | 581 | 11,156 | 31,838 | ||||||||
Total other securities |
$ | 140,238 | $ | 857 | $ | 41,691 | $ | 99,404 | ||||
Total securities available for sale(3) |
$ | 878,535 | $ | 21,788 | $ | 51,210 | $ | 849,113 | ||||
(1) | Government-sponsored enterprises |
(2) | Collateralized mortgage obligations |
(3) | As of June 30, 2009, the non-credit portion of OTTI recorded in AOCL was $471,000 pre-tax. |
December 31, 2008 | ||||||||||||
(in thousands) | Amortized Cost |
Gross Unrealized Gain |
Gross Unrealized Loss |
Fair Value | ||||||||
Mortgage-related Securities: |
||||||||||||
GSE certificates |
$ | 180,132 | $ | 5,160 | $ | | $ | 185,292 | ||||
GSE CMOs |
519,389 | 9,727 | 154 | 528,962 | ||||||||
Private label CMOs |
139,332 | | 19,902 | 119,430 | ||||||||
Total mortgage-related securities |
$ | 838,853 | $ | 14,887 | $ | 20,056 | $ | 833,684 | ||||
Other Securities: |
||||||||||||
GSE debentures |
$ | 59,478 | $ | 2,481 | $ | | $ | 61,959 | ||||
Corporate bonds |
30,814 | | 12,064 | 18,750 | ||||||||
State, county, and municipal |
6,528 | | 387 | 6,141 | ||||||||
Capital trust notes |
44,337 | | 14,471 | 29,866 | ||||||||
Preferred stock |
31,400 | 150 | 14,010 | 17,540 | ||||||||
Common stock |
53,343 | 151 | 10,932 | 42,562 | ||||||||
Total other securities |
$ | 225,900 | $ | 2,782 | $ | 51,864 | $ | 176,818 | ||||
Total securities available for sale |
$ | 1,064,753 | $ | 17,669 | $ | 71,920 | $ | 1,010,502 | ||||
7
The following tables summarize the Companys portfolio of securities held to maturity at June 30, 2009 and December 31, 2008:
June 30, 2009 | |||||||||||||||
(in thousands) | Amortized Cost |
Carrying Amount |
Gross Unrealized Gain |
Gross Unrealized Loss |
Fair Value | ||||||||||
Mortgage-related Securities: |
|||||||||||||||
GSE certificates |
$ | 259,335 | $ | 259,335 | $ | 15,383 | $ | | $ | 274,718 | |||||
GSE CMOs |
2,547,200 | 2,547,200 | 65,296 | 16,634 | 2,595,862 | ||||||||||
Other mortgage-related securities |
6,813 | 6,813 | | | 6,813 | ||||||||||
Total mortgage-related securities |
$ | 2,813,348 | $ | 2,813,348 | $ | 80,679 | $ | 16,634 | $ | 2,877,393 | |||||
Other Securities: |
|||||||||||||||
GSE debentures |
$ | 1,657,589 | $ | 1,657,589 | $ | 5 | $ | 20,863 | $ | 1,636,731 | |||||
Corporate bonds |
111,089 | 111,089 | 3,194 | 4,936 | 109,347 | ||||||||||
Capital trust notes |
218,620 | 207,747 | 1,391 | 77,019 | 132,119 | ||||||||||
Total other securities |
$ | 1,987,298 | $ | 1,976,425 | $ | 4,590 | $ | 102,818 | $ | 1,878,197 | |||||
Total securities held to maturity(1) |
$ | 4,800,646 | $ | 4,789,773 | $ | 85,269 | $ | 119,452 | $ | 4,755,590 | |||||
(1) | Held-to-maturity securities are reported at a carrying amount equal to amortized cost less the non-credit portion of OTTI recorded in AOCL as a result of adopting FSP FAS 115-2. As of June 30, 2009, the non-credit portion recorded in AOCL was $10.9 million (before taxes). |
December 31, 2008 | ||||||||||||
(in thousands) | Amortized Cost |
Gross Unrealized Gain |
Gross Unrealized Loss |
Fair Value | ||||||||
Mortgage-related Securities: |
||||||||||||
GSE certificates |
$ | 282,441 | $ | 12,515 | $ | | $ | 294,956 | ||||
GSE CMOs |
2,875,878 | 40,944 | 18,901 | 2,897,921 | ||||||||
Other mortgage-related securities |
6,537 | | | 6,537 | ||||||||
Total mortgage-related securities |
$ | 3,164,856 | $ | 53,459 | $ | 18,901 | $ | 3,199,414 | ||||
Other Securities: |
||||||||||||
GSE debentures |
$ | 1,372,593 | $ | 3,574 | $ | | $ | 1,376,167 | ||||
Corporate bonds |
133,165 | 153 | 26,561 | 106,757 | ||||||||
Capital trust notes |
220,377 | | 74,914 | 145,463 | ||||||||
Total other securities |
$ | 1,726,135 | $ | 3,727 | $ | 101,475 | $ | 1,628,387 | ||||
Total securities held to maturity |
$ | 4,890,991 | $ | 57,186 | $ | 120,376 | $ | 4,827,801 | ||||
Total pre-tax OTTI for the quarter ended June 30, 2009 was $51.1 million and the net OTTI that was recognized in earnings was $39.7 million. This OTTI related to credit loss was attributable to capital trust notes and was determined through a present-value analysis of expected cash flows on the securities. The significant inputs that the Company used to determine these expected cash flows were the anticipated magnitude and timing of interest payment deferrals, if any, and the underlying creditworthiness of the individual issuers whose debt acts as collateral for these single issue and pooled trust preferred securities.
8
The following table presents a rollforward of the credit loss component of OTTI on debt securities for which a non-credit component of OTTI was recognized in other comprehensive income. The beginning balance represents the credit loss component for debt securities for which OTTI occurred prior to April 1, 2009. OTTI recognized in earnings after that date for credit-impaired debt securities is presented as additions in two components, based upon whether the current period is the first time a debt security was credit-impaired (initial credit impairment) or is not the first time a debt security was credit impaired (subsequent credit impairment). Changes in the credit loss component of credit-impaired debt securities were as follows:
For the Three Months Ended June 30, 2009 | |||
(in thousands) | |||
Beginning balance as of April 1, 2009 |
$ | 103,350 | |
Add: Initial other-than-temporary credit losses |
38,509 | ||
Additional other-than-temporary credit losses |
1,219 | ||
Less: Realized losses for securities sold |
| ||
Securities intended or required to be sold |
| ||
Increases in expected cash flows on debt securities |
| ||
Ending balance as of June 30, 2009 |
$ | 143,078 | |
9
The following table presents held-to-maturity and available-for-sale securities having a continuous unrealized loss position for less than twelve months or for twelve months or longer as of June 30, 2009:
At June 30, 2009 (in thousands) |
Less than Twelve Months | Twelve Months or Longer | Total | |||||||||||||||
Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | |||||||||||||
Held-to-Maturity Debt Securities: |
||||||||||||||||||
GSE debentures |
$ | 1,586,731 | $ | 20,863 | $ | | $ | | $ | 1,586,731 | $ | 20,863 | ||||||
GSE CMOs |
304,595 | 4,130 | 236,397 | 12,504 | 540,992 | 16,634 | ||||||||||||
Corporate bonds |
12,973 | 72 | 35,744 | 4,864 | 48,717 | 4,936 | ||||||||||||
Capital trust notes |
42,027 | 16,740 | 72,562 | 60,279 | 114,589 | 77,019 | ||||||||||||
Total held-to-maturity debt securities |
$ | 1,946,326 | $ | 41,805 | $ | 344,703 | $ | 77,647 | $ | 2,291,029 | $ | 119,452 | ||||||
Available-for-Sale Securities: |
||||||||||||||||||
Debt Securities: |
||||||||||||||||||
GSE CMOs |
$ | 34,521 | $ | 515 | $ | | $ | | $ | 34,521 | $ | 515 | ||||||
Private label CMOs |
44,161 | 7,793 | 59,328 | 1,211 | 103,489 | 9,004 | ||||||||||||
Corporate bonds |
8,611 | 1,389 | 2,655 | 2,101 | 11,266 | 3,490 | ||||||||||||
State, county, and municipal |
1,195 | 97 | 5,000 | 112 | 6,195 | 209 | ||||||||||||
Capital trust notes |
15,999 | 4,147 | 12,801 | 7,937 | 28,800 | 12,084 | ||||||||||||
Total available-for-sale debt securities |
$ | 104,487 | $ | 13,941 | $ | 79,784 | $ | 11,361 | $ | 184,271 | $ | 25,302 | ||||||
Equity securities |
13,767 | 9,183 | 21,795 | 16,725 | 35,562 | 25,908 | ||||||||||||
Total available-for-sale securities |
$ | 118,254 | $ | 23,124 | $ | 101,579 | $ | 28,086 | $ | 219,833 | $ | 51,210 | ||||||
10
The following table presents held-to-maturity and available-for-sale securities having a continuous unrealized loss position for less than twelve months or for twelve months or longer as of December 31, 2008:
At December 31, 2008 (in thousands) |
Less than Twelve Months | Twelve Months or Longer | Total | |||||||||||||||
Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | |||||||||||||
Held-to-Maturity Debt Securities: |
||||||||||||||||||
GSE CMOs |
$ | 10,223 | $ | 279 | $ | 637,364 | $ | 18,622 | $ | 647,587 | $ | 18,901 | ||||||
Corporate bonds |
71,224 | 20,080 | 5,350 | 6,481 | 76,574 | 26,561 | ||||||||||||
Capital trust notes |
69,478 | 15,405 | 75,985 | 59,509 | 145,463 | 74,914 | ||||||||||||
Total held-to-maturity debt securities |
$ | 150,925 | $ | 35,764 | $ | 718,699 | $ | 84,612 | $ | 869,624 | $ | 120,376 | ||||||
Available-for-Sale Securities: |
||||||||||||||||||
Debt Securities: |
||||||||||||||||||
GSE CMOs |
$ | | $ | | $ | 39,603 | $ | 154 | $ | 39,603 | $ | 154 | ||||||
Private label CMOs |
| | 119,430 | 19,902 | 119,430 | 19,902 | ||||||||||||
Corporate bonds |
9,500 | 1,575 | 9,250 | 10,489 | 18,750 | 12,064 | ||||||||||||
State, county, and municipal |
1,137 | 276 | 5,004 | 111 | 6,141 | 387 | ||||||||||||
Capital trust notes |
19,781 | 12,015 | 6,885 | 2,456 | 26,666 | 14,471 | ||||||||||||
Total available-for-sale debt securities |
$ | 30,418 | $ | 13,866 | $ | 180,172 | $ | 33,112 | $ | 210,590 | $ | 46,978 | ||||||
Equity securities |
15,950 | 11,850 | 20,376 | 13,092 | 36,326 | 24,942 | ||||||||||||
Total available-for-sale securities |
$ | 46,368 | $ | 25,716 | $ | 200,548 | $ | 46,204 | $ | 246,916 | $ | 71,920 | ||||||
11
In April 2009, the Financial Accounting Standards Board (the FASB) amended the OTTI model for debt securities. The impairment model for equity securities was not affected. Under the new guidance, an OTTI loss must be fully recognized in earnings if an investor has the intent to sell the debt security or if it is more likely than not that the investor will be required to sell the debt security before recovery of its amortized cost basis. However, even if an investor does not expect to sell a debt security, it must evaluate the expected cash flows to be received and determine if a credit loss has occurred. In the event of a credit loss, only the amount of impairment associated with the credit loss is recognized in earnings. Amounts relating to factors other than credit losses are recorded in AOCL. The guidance also requires additional disclosures regarding the calculation of credit losses as well as factors considered in reaching a conclusion that an investment is not other-than-temporarily impaired. The Company adopted the new guidance effective April 1, 2009. The Company recorded a $967,000 pre-tax transition adjustment for the non-credit portion of OTTI on securities held at April 1, 2009 that were previously considered other-than-temporarily impaired.
Available-for-sale securities in unrealized loss positions are analyzed as part of the Companys ongoing assessment of OTTI. When the Company intends to sell available-for-sale securities, the Company recognizes an impairment loss equal to the full difference between the amortized cost basis and fair value of those securities. When the Company does not intend to sell available-for-sale equity or debt securities in an unrealized loss position, potential OTTI is considered based on a variety of factors, including the length of time and extent to which the fair value has been less than cost; adverse conditions specifically related to the industry, the geographic area or financial condition of the issuer or the underlying collateral of a security; the payment structure of the security; changes to the rating of the security by a rating agency; the volatility of the fair value changes; and changes in fair value of the security after the balance sheet date. For debt securities, the Company estimates cash flows over the remaining lives of the underlying collateral to assess whether credit losses exist and, where applicable under Emerging Issues Task Force (EITF) Issue 99-20, to determine if any adverse changes in cash flows have occurred. The Companys cash flow estimates take into account expectations of relevant market and economic data as of the end of the reporting period. As of June 30, 2009, the Company does not intend to sell the securities with an unrealized loss position in AOCL, and it is not more likely than not that the Company will be required to sell these securities before recovery of their amortized cost basis. The Company believes that the securities with an unrealized loss in AOCL are not other-than-temporarily impaired as of June 30, 2009.
Other factors considered in determining whether a loss is temporary include the length of time and the extent to which fair value has been below cost; the severity of the impairment; the cause of the impairment; the financial condition and near-term prospects of the issuer; activity in the market of the issuer which may indicate adverse credit conditions; and the forecasted recovery period using current estimates of volatility in market interest rates (including liquidity and risk premiums).
Managements assertion regarding its intent not to sell or that it is not more likely than not that the Company will be required to sell the security before its anticipated recovery considers a number of factors, including a quantitative estimate of the expected recovery period (which may extend to maturity), and managements intended strategy with respect to the identified security or portfolio. If management does have the intent to sell or believes it is more likely than not that the Company will be required to sell the security before its anticipated recovery, the unrealized loss is charged directly to earnings in the Consolidated Statement of Operations and Comprehensive Income (Loss).
The unrealized losses on the Companys GSE CMOs were primarily caused by movements in market interest rates and spread volatility, rather than credit risk. The Company purchased these investments either at par or at a discount relative to their face amount, and the contractual cash flows of these investments are guaranteed by U.S. GSEs. Accordingly, it is expected that the securities would not be settled at a price that is less than the amortized cost of the Companys investment. Because the Company does not have the intent to sell the investments and it is not more likely than not that the Company will be required to sell the investments before anticipated recovery of fair value, which may be at maturity, the Company did not consider these investments to be other-than-temporarily impaired at June 30, 2009.
The Companys unrealized losses on corporate bonds and capital trust notes relate to investments in various financial institutions. The unrealized losses were primarily caused by market interest rate volatility and a significant widening of interest rate spreads across market sectors relating to continued illiquidity and uncertainty in the
12
financial markets. Each of these securities was purchased based on an individual assessment of the financial institutions issuing such securities. This assessment included, but was not limited to, a review of credit ratings (if any), as well as an underwriting process designed to determine the financial institutions creditworthiness.
The Company reviews quarterly financial information as well as other information that is released by each financial institution to determine the continued creditworthiness of the securities issued by them. The contractual terms of these investments do not permit settling the securities at prices that are less than the amortized costs of the investments; therefore, the Company expects that these investments would not be settled at prices that are less than their amortized costs. The Company continues to monitor these investments and currently estimates that the present value of expected cash flows is not less than the amortized cost of the securities. Because the Company does not have the intent to sell the investments and it is not more likely than not that the Company will be required to sell the investments before anticipated recovery of fair value, which may be at maturity, it did not consider these investments to be other-than-temporarily impaired at June 30, 2009. It is possible that these securities will perform worse than is currently expected, which could lead to adverse changes in cash flows on these securities and potential OTTI losses in the future. Events that may occur in the future at the financial institutions that issued these securities may trigger material unrecoverable declines in fair values for the Companys investments and therefore may result in future potential OTTI losses. Such events include, but are not limited to, government intervention, deteriorating asset quality, and significantly higher loan loss provisions, net operating losses, and further illiquidity in the financial markets.
The unrealized losses on the Companys private label CMOs were primarily caused by market interest rate volatility and a significant widening of interest rate spreads across market sectors relating to the continued illiquidity and uncertainty in the financial markets, rather than to credit risk. Current characteristics of each security owned, such as delinquency and foreclosure levels, credit enhancement, and projected losses and coverage, are reviewed periodically by management. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Companys investment. Because the Company does not have the intent to sell the investments and it is not more like than not that the Company will be required to sell the investments before anticipated recovery of fair value, which may be at maturity, the Company did not consider these investments to be other than temporarily impaired at June 30, 2009. It is possible that the underlying loan collateral of these securities will perform worse than is currently expected, which could lead to adverse changes in cash flows on these securities and future OTTI losses. Events that could trigger material unrecoverable declines in fair values, and therefore potential OTTI losses for these securities in the future, include, but are not limited to, deterioration of credit metrics, significantly higher levels of default, loss in value on the underlying collateral, deteriorating credit enhancement, and further illiquidity in the financial markets.
At June 30, 2009, the equity securities portfolio consisted of perpetual preferred and common stock, and mutual funds. In analyzing its investments in perpetual preferred stock for OTTI, the Company uses an impairment model that is applied to debt securities, consistent with guidance provided by the SEC, provided there has been no evidence of deterioration in the creditworthiness of the issuer. If deterioration occurs, an equity security impairment model is used. The unrealized losses on the Companys equity securities were primarily caused by market volatility and a significant widening of interest rate spreads across market sectors related to the continued illiquidity and uncertainty in the marketplace. The Company evaluated the near-term prospects of a recovery of fair value for each security in the portfolio, together with the severity and duration of impairment to date. Based on this evaluation, and the Companys ability and intent to hold these investments for a reasonable period of time sufficient to realize a near-term forecasted recovery of fair value, the Company did not consider these investments to be other-than-temporarily impaired at June 30, 2009.
Nonetheless, it is possible that these equity securities will perform worse than currently expected, which could lead to adverse changes in their fair value or the failure of the securities to fully recover in value as presently forecasted by management, causing the Company to record OTTI or other losses in future periods. Events that could trigger material declines in the fair values of these securities in the future include, but are not limited to, deterioration in the equity markets; a decline in the quality of the loan portfolios of the issuers in which the Company has invested; and the recording of higher loan loss provisions and net operating losses by such issuers. The Company considers a decline in fair value of available-for-sale equity securities to be other-than-temporary if the Company does not expect to recover the entire amortized cost basis of the security.
13
The following tables summarize the carrying value and estimated fair value of held-to-maturity securities and the amortized cost and estimated fair value of available-for-sale debt securities at June 30, 2009 by contractual maturity. Mortgage-related securities held to maturity and available for sale, all of which have prepayment provisions, are distributed to a maturity category based on the end of the estimated average life of such securities. Principal and amortization prepayments are not shown in maturity categories as they occur, but are considered in the determination of estimated average life.
Carrying Value | |||||||||||||||||||||||||||
(dollars in thousands) | Mortgage- Related Securities |
Average Yield |
U.S. Treasury and GSE Obligations |
Average Yield |
State, County, and Municipal |
Average Yield(1) |
Other Debt Securities(2) |
Average Yield |
Fair Value | ||||||||||||||||||
Held-to-Maturity Securities: |
|||||||||||||||||||||||||||
Due within one year |
$ | | | % | $ | | | % | $ | | | % | $ | 14,037 | 9.44 | % | $ | 13,939 | |||||||||
Due from one to five years |
| | | | | | 32,764 | 6.34 | 31,742 | ||||||||||||||||||
Due from five to ten years |
| | 1,657,589 | 4.45 | | | 23,029 | 5.20 | 1,660,456 | ||||||||||||||||||
Due after ten years |
2,813,348 | 5.17 | | | | | 249,006 | 6.92 | 3,049,453 | ||||||||||||||||||
Total debt securities held to maturity |
$ | 2,813,348 | 5.17 | % | $ | 1,657,589 | 4.45 | % | $ | | | % | $ | 318,836 | 6.85 | % | $ | 4,755,590 | |||||||||
Amortized Cost | |||||||||||||||||||||||||||
(dollars in thousands) | Mortgage- Related Securities |
Average Yield |
U.S. Treasury and GSE Obligations |
Average Yield |
State, County, and Municipal |
Average Yield(1) |
Other Debt Securities(2) |
Average Yield |
Fair Value | ||||||||||||||||||
Available-for-Sale Securities:(3) |
|||||||||||||||||||||||||||
Due within one year |
$ | | | % | $ | | | % | $ | | | % | $ | | | % | $ | | |||||||||
Due from one to five years |
2,571 | 5.14 | | | 495 | 5.51 | 11,056 | 8.00 | 12,828 | ||||||||||||||||||
Due from five to ten years |
15,077 | 6.96 | | | 2,427 | 6.47 | 4,757 | 2.69 | 20,279 | ||||||||||||||||||
Due after ten years |
720,649 | 5.27 | | | 3,607 | 6.67 | 44,083 | 5.24 | 767,372 | ||||||||||||||||||
Total debt securities available for sale |
$ | 738,297 | 5.30 | % | $ | | | % | $ | 6,529 | 6.51 | % | $ | 59,896 | 5.55 | % | $ | 800,479 | |||||||||
(1) | Not presented on a tax-equivalent basis. |
(2) | Includes corporate bonds and capital trust notes. Included in capital trust notes are $20.9 million and $623,000 of pooled trust preferred securities available for sale and held to maturity, respectively, all of which are due after ten years. The remaining capital trust notes consist of single-issue trust preferred securities. |
(3) | As equity securities have no contractual maturity, they have been excluded from this table. |
14
Note 4. Loans, net
The following table provides a summary of the Companys loan portfolio at the dates indicated:
June 30, 2009 | December 31, 2008 | |||||||||||||
(dollars in thousands) | Amount | Percent of Total |
Amount | Percent of Total |
||||||||||
Mortgage loans: |
||||||||||||||
Multi-family |
$ | 16,226,085 | 71.22 | % | $ | 15,728,264 | 70.85 | % | ||||||
Commercial real estate |
4,775,287 | 20.96 | 4,553,550 | 20.51 | ||||||||||
Acquisition, development, and construction |
727,534 | 3.19 | 778,364 | 3.51 | ||||||||||
1-4 family |
240,451 | 1.05 | 266,307 | 1.20 | ||||||||||
Total mortgage loans |
21,969,357 | 96.42 | 21,326,485 | 96.07 | ||||||||||
Net deferred loan origination fees |
(6,455 | ) | (6,940 | ) | ||||||||||
Mortgage loans, net |
21,962,902 | 21,319,545 | ||||||||||||
Other loans: |
||||||||||||||
Commercial and industrial |
672,258 | 713,099 | ||||||||||||
Consumer |
141,295 | 158,907 | ||||||||||||
Lease financing, net |
1,033 | 1,433 | ||||||||||||
Total other loans |
814,586 | 3.58 | 873,439 | 3.93 | ||||||||||
Net deferred loan origination fees |
(325 | ) | (772 | ) | ||||||||||
Total other loans, net |
814,261 | 872,667 | ||||||||||||
Less: Allowance for loan losses |
98,082 | 94,368 | ||||||||||||
Loans, net |
$ | 22,679,081 | 100.00 | % | $ | 22,097,844 | 100.00 | % | ||||||
The following table provides a summary of activity in the allowance for loan losses at the dates indicated:
(in thousands) | At or For the Six Months Ended June 30, 2009 |
At or For the Year Ended December 31, 2008 |
||||||
Balance at beginning of period |
$ | 94,368 | $ | 92,794 | ||||
Provision for loan losses |
18,000 | 7,700 | ||||||
Charge-offs |
(14,296 | ) | (6,168 | ) | ||||
Recoveries |
10 | 42 | ||||||
Balance at end of period |
$ | 98,082 | $ | 94,368 | ||||
As of June 30, 2009, the Company had $5.4 million of loans classified as troubled debt restructurings, as defined in SFAS No. 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings. There were no loans classified as troubled debt restructurings as of December 31, 2008.
Note 5. Borrowed Funds
The following table provides a summary of the Companys borrowed funds at the dates indicated:
(in thousands) | June 30, 2009 | December 31, 2008 | ||||
Wholesale borrowings: |
||||||
FHLB-NY advances |
$ | 8,430,528 | $ | 7,708,064 | ||
Repurchase agreements |
4,225,000 | 4,485,000 | ||||
Federal funds purchased |
250,000 | 150,000 | ||||
Total wholesale borrowings |
12,905,528 | 12,343,064 | ||||
Junior subordinated debentures |
483,987 | 484,216 | ||||
Senior debt |
601,688 | 601,630 | ||||
Preferred stock of subsidiaries |
67,800 | 67,800 | ||||
Total borrowed funds |
$ | 14,059,003 | $ | 13,496,710 | ||
At June 30, 2009, the Company had $484.0 million of outstanding junior subordinated deferrable interest debentures (junior subordinated debentures) held by nine statutory business trusts (the Trusts) that issued
15
guaranteed capital securities. The capital securities qualified as Tier 1 capital of the Company at that date. The Trusts are accounted for as unconsolidated subsidiaries in accordance with FASB Interpretation No. 46R, Consolidation of Variable Interest Entities (Revised December 2003). The proceeds of each issuance were invested in a series of junior subordinated debentures of the Company. The underlying assets of each statutory business trust are the relevant debentures. The Company has fully and unconditionally guaranteed the obligations under each trusts capital securities to the extent set forth in a guarantee by the Company to each trust. The Trusts capital securities are each subject to mandatory redemption, in whole or in part, upon repayment of the debentures at their stated maturity or earlier redemption.
The following table provides a summary of the outstanding capital securities issued by each trust and the carrying amounts of the junior subordinated debentures issued by the Company to each trust as of June 30, 2009:
Issuer |
Interest Rate of Capital Securities and Debentures(1) |
Junior Subordinated Debenture Carrying Amount |
Capital Securities Amount Outstanding |
Date of Original Issue |
Stated Maturity |
First Optional | |||||||||
(dollars in thousands) | |||||||||||||||
Haven Capital Trust II |
10.250 | % | $ | 23,333 | $ | 22,550 | May 26, 1999 | June 30, 2029 | June 30, 2009(2) | ||||||
Queens County Capital Trust I |
11.045 | 10,309 | 10,000 | July 26, 2000 | July 19, 2030 | July 19, 2010 | |||||||||
Queens Statutory Trust I |
10.600 | 15,464 | 15,000 | September 7, 2000 | September 7, 2030 | September 7, 2010 | |||||||||
New York Community Capital Trust V |
6.000 | 192,020 | 183,515 | November 4, 2002 | November 1, 2051 | November 4, 2007(3) | |||||||||
New York Community Capital Trust X |
2.229 | 123,712 | 120,000 | December 14, 2006 | December 15, 2036 | December 15, 2011 | |||||||||
LIF Statutory Trust I |
10.600 | 7,862 | 7,630 | September 7, 2000 | September 7, 2030 | September 7, 2010 | |||||||||
PennFed Capital Trust II |
10.180 | 13,348 | 12,976 | March 28, 2001 | June 8, 2031 | June 8, 2011 | |||||||||
PennFed Capital Trust III |
3.879 | 30,928 | 30,000 | June 2, 2003 | June 15, 2033 | June 15, 2008(2) | |||||||||
New York Community Capital Trust XI |
2.248 | 67,011 | 65,000 | April 16, 2007 | June 30, 2037 | June 30, 2012 | |||||||||
$ | 483,987 | $ | 466,671 | ||||||||||||
(1) | Excludes the effect of purchase accounting adjustments. |
(2) | Callable at anytime subsequent to this date. |
(3) | Callable subject to certain conditions as described in the prospectus filed with the SEC on November 4, 2002. |
On July 29, 2009, the Company announced the commencement of an offer to exchange shares of its common stock for any and all of the 5,498,544 outstanding units of its Bifurcated Option Note Unit SecuritiESSM (the BONUSES units). The BONUSES units were issued on November 4, 2002 by the Company and are listed on the New York Stock Exchange under the symbol NYB.PrU. Each unit consists of a trust preferred security issued by New York Community Capital Trust V and a warrant to purchase shares of the Companys common stock.
All holders of BONUSES units are eligible to participate in the exchange offer, the terms and conditions of which are set forth in an Offer to Exchange and a related Letter of Transmittal that were sent to current holders of the BONUSES units and filed on July 29, 2009 with the SEC on a Schedule TO. Any BONUSES unit that is not exchanged will remain outstanding. Any BONUSES unit that is validly tendered and accepted for exchange in the Exchange Offer will be retired and cancelled.
The Exchange Ratio to be used to determine the number of shares of the Companys common stock to be exchanged for each BONUSES unit will be calculated at 4:30 p.m., New York City time, on the second trading day immediately preceding the expiration date for the Exchange Offer, as such date may be extended (the Pricing Date). As more fully described in the Offer to Exchange and Letter of Transmittal, the minimum Exchange Ratio will be 2.4953 common shares for each BONUSES unit that is validly tendered and accepted, and the maximum Exchange Ratio will be 4.4953 common shares. The Exchange Ratio will be rounded to the nearest fourth decimal place.
The Exchange Offer is expected to expire at 11:59 p.m., New York City time, on August 25, 2009, unless extended by the Company, and the settlement date is expected to be three days following the expiration date.
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Note 6. Pension and Other Post-Retirement Benefits
The following table sets forth certain disclosures for the Companys pension and post-retirement plans for the periods indicated:
For the Three Months Ended June 30, | ||||||||||||||||
2009 | 2008 | |||||||||||||||
(in thousands) | Pension Benefits |
Post-retirement Benefits |
Pension Benefits |
Post-retirement Benefits |
||||||||||||
Components of net periodic expense (credit): |
||||||||||||||||
Interest cost |
$ | 1,611 | $ | 228 | $ | 1,604 | $ | 234 | ||||||||
Service cost |
| 1 | | 2 | ||||||||||||
Expected return on plan assets |
(2,576 | ) | | (3,752 | ) | | ||||||||||
Unrecognized past service liability |
50 | (62 | ) | 50 | (62 | ) | ||||||||||
Amortization of unrecognized loss |
1,746 | 75 | 49 | 34 | ||||||||||||
Net periodic expense (credit) |
$ | 831 | $ | 242 | $ | (2,049 | ) | $ | 208 | |||||||
For the Six Months Ended June 30, | ||||||||||||||||
2009 | 2008 | |||||||||||||||
(in thousands) | Pension Benefits |
Post-retirement Benefits |
Pension Benefits |
Post-retirement Benefits |
||||||||||||
Components of net periodic expense (credit): |
||||||||||||||||
Interest cost |
$ | 3,222 | $ | 455 | $ | 3,208 | $ | 468 | ||||||||
Service cost |
| 2 | | 4 | ||||||||||||
Expected return on plan assets |
(5,151 | ) | | (7,504 | ) | | ||||||||||
Unrecognized past service liability |
100 | (124 | ) | 100 | (124 | ) | ||||||||||
Amortization of unrecognized loss |
3,492 | 151 | 98 | 68 | ||||||||||||
Net periodic expense (credit) |
$ | 1,663 | $ | 484 | $ | (4,098 | ) | $ | 416 | |||||||
As discussed in the notes to the consolidated financial statements presented in the Companys 2008 Annual Report on
Form 10-K, the Company expects to contribute to its pension and post-retirement plans in 2009.
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Note 7. Computation of Earnings (Loss) per Share (1)
The following table presents the Companys computation of basic and diluted earnings (loss) per share for the periods indicated:
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
(in thousands, except share and per share data) | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Net income (loss) |
$ | 56,448 | $ | (154,783 | ) | $ | 145,137 | $ | (82,412 | ) | ||||||
Less: Dividends paid on participating securities |
(463 | ) | (342 | ) | (945 | ) | (315 | ) | ||||||||
Earnings (loss) applicable to common stock |
$ | 55,985 | $ | (155,125 | ) | $ | 144,192 | $ | (82,727 | ) | ||||||
Weighted average common shares outstanding |
343,549,598 | 331,271,217 | 343,435,986 | 326,995,127 | ||||||||||||
Basic earnings (loss) per common share |
$ | 0.16 | $ | (0.47 | ) | $ | 0.42 | $ | (0.25 | ) | ||||||
Earnings (loss) applicable to common stock |
$ | 55,985 | $ | (155,125 | ) | $ | 144,192 | $ | (82,727 | ) | ||||||
Weighted average common shares outstanding |
343,549,598 | 331,271,217 | 343,435,986 | 326,995,127 | ||||||||||||
Potential dilutive common shares(2) |
75,745 | N.A. | 76,798 | N.A. | ||||||||||||
Total shares for diluted earnings per share computation |
343,625,343 | 331,271,217 | 343,512,784 | 326,995,127 | ||||||||||||
Diluted earnings (loss) per common share and common share equivalents |
$ | 0.16 | $ | (0.47 | ) | $ | 0.42 | $ | (0.25 | ) | ||||||
(1) | In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted In Share-Based Payment Transactions Are Participating Securities, which clarifies that unvested stock-based compensation awards containing non-forfeitable rights to dividends are considered participating securities and therefore are included in the two-class method for calculating earnings per share. Under the two-class method, all earnings (distributed and undistributed) are allocated to common shares and participating securities based on their respective rights to receive dividends. The Company grants restricted stock to certain employees under its stock-based compensation plans. Recipients receive cash dividends during the vesting periods of these awards (i.e., including on the unvested portion of such awards). Since these dividends are non-forfeitable, the unvested awards are considered participating securities and will have earnings allocated to them. |
(2) | Options to purchase 13.1 million and 13.1 million shares, respectively, of the Companys common stock that were outstanding in the three and six months ended June 30, 2009, and options to purchase 14.3 million shares of the Companys common stock that were outstanding in the three and six months ended June 30, 2008, were not included in the respective computation of diluted earnings per share because their inclusion would have had an antidilutive effect. |
Note 8. Fair Value Measurement
On January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements, which, among other things, defines fair value; establishes a consistent framework for measuring fair value; and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. SFAS No. 157 clarifies that fair value is an exit price, representing the amount that would be received when selling an asset, or paid when transferring a liability, in an orderly transaction between market participants. Fair value is thus a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, SFAS No. 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
| Level 1 Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
| Level 2 Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. |
| Level 3 Inputs to the valuation methodology are significant unobservable inputs that reflect a companys own assumptions about the assumptions that market participants use in pricing an asset or liability. |
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A financial instruments categorization within this valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The following table presents, by SFAS No. 157 valuation hierarchy, assets that were measured at fair value on a recurring basis as of June 30, 2009, and that were included in the Companys Consolidated Statement of Condition at that date:
Fair Value Measurements at June 30, 2009 Using | ||||||||||||
(in thousands) | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total Fair Value | ||||||||
Mortgage-related Securities: |
||||||||||||
GSE certificates |
$ | | $ | 169,899 | $ | | $ | 169,899 | ||||
GSE CMOs |
| 476,321 | | 476,321 | ||||||||
Private label CMOs |
| 103,489 | | 103,489 | ||||||||
Total mortgage-related securities |
| 749,709 | | 749,709 | ||||||||
Other Securities: |
||||||||||||
Corporate bonds |
| 12,341 | | 12,341 | ||||||||
State, county, and municipal |
| 6,321 | | 6,321 | ||||||||
Capital trust notes |
| 12,628 | 19,480 | 32,108 | ||||||||
Preferred stock |
| 16,796 | | 16,796 | ||||||||
Common stock |
31,838 | | | 31,838 | ||||||||
Total other securities |
31,838 | 48,086 | 19,480 | 99,404 | ||||||||
Total securities available for sale |
$ | 31,838 | $ | 797,795 | $ | 19,480 | $ | 849,113 | ||||
Instruments for which unobservable inputs are significant to their fair value measurement (i.e., Level 3) include certain less liquid securities. Level 3 assets accounted for 0.06% of the Companys total assets at June 30, 2009.
The Company reviews and updates the fair value hierarchy classifications for its assets on a quarterly basis. Changes from one quarter to the next that are related to the observability of inputs to a fair value measurement may result in a reclassification from one hierarchy level to another.
A description of the methods and significant assumptions utilized in estimating the fair value of available-for-sale securities follows:
Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid government securities and exchange-traded securities.
If quoted market prices are not available for the specific security, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. These pricing models primarily use market-based or independently sourced market parameters as inputs, including, but not limited to, yield curves, interest rates, equity or debt prices, and credit spreads. In addition to observable market information, models also incorporate transaction details, such as maturity and cash flow assumptions. Securities valued in this manner would generally be classified within Level 2 of the valuation hierarchy and primarily include such instruments as mortgage-related securities and corporate debt.
In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. In valuing collateralized debt obligations (CDOs) (which include pooled trust preferred securities and income notes) and certain single-issue capital trust notes, both of which are classified within Level 3, the determination of fair value may require benchmarking to similar instruments or analyzing default and recovery rates. Therefore, CDOs and certain single-issue capital trust notes are valued using a model based on the specific collateral composition and cash flow structure of the security. Key inputs to the model consist of market spread data for each credit rating, collateral type, and other relevant contractual features. In instances where quoted price information is available, that price is considered when arriving at the securitys fair value.
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Each of the methods described above may produce a fair value estimate that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with those of other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
Changes in Level 3 Fair Value Measurements
The tables below include a rollforward of the balance sheet amounts for the six-month periods ended June 30, 2009 and 2008 (including the change in fair value) for financial instruments classified in Level 3 of the valuation hierarchy.
Fair Value | Total Realized/Unrealized Gains/(Losses) Recorded in |
Purchases, Issuances, and |
Transfers | Fair Value | Change in Unrealized Gains and (Losses) Related to |
|||||||||||||||||||
(dollars in thousands) | January 1, 2009 |
Income | Comprehensive Income |
Settlements, net |
in/out of Level 3 |
June 30, 2009 |
Instruments Held at June 30, 2009 |
|||||||||||||||||
Available-for-sale debt securities: |
||||||||||||||||||||||||
Capital securities |
$ | 14,590 | $ | (1,220 | ) | $ | 4,288 | $ | (253 | ) | $ | 2,075 | $ | 19,480 | $ | 3,744 | ||||||||
Fair Value | Total Realized/Unrealized Gains/(Losses) Recorded in |
Purchases, Issuances, and |
Transfers | Fair Value | Change in Unrealized Gains and (Losses) Related to |
|||||||||||||||||||
(dollars in thousands) | January 1, 2008 |
Income | Comprehensive Income |
Settlements, net |
in/out of Level 3 |
June 30, 2008 |
Instruments Held at June 30, 2008 |
|||||||||||||||||
Available-for-sale debt securities: |
||||||||||||||||||||||||
Capital securities |
$ | 65,952 | $ | (37,163 | ) | $ | 8,447 | $ | (588 | ) | $ | | $ | 36,648 | $ | (28,716 | ) | |||||||
Assets Measured at Fair Value on a Non-Recurring Basis
Certain assets are measured at fair value on a non-recurring basis. Such instruments are subject to fair value adjustments under certain circumstances (e.g., when there is evidence of impairment). For the Company, such assets include goodwill, core deposit intangibles, other real estate owned, other long-lived assets, loans held for sale, certain impaired loans, and mortgage servicing rights, all of which are generally classified within Level 3 of the valuation hierarchy. With the exception of a $477.0 million fair value adjustment relating to primarily collateral-dependent impaired loans (which was taken into consideration in computing the required balance for the allowance for loan losses for the period ended June 30, 2009), no amounts were recorded in the Consolidated Statement of Operations and Comprehensive Income (Loss) for the six months ended June 30, 2009 due to fair value adjustments on such assets. The fair values of collateral-dependent impaired loans are determined using various valuation techniques, including consideration of appraised values and other pertinent real estate market data.
Other Fair Value Disclosures
Quoted market prices, when available, are used as the measure of fair value. In cases where quoted market prices are not available, fair values are based on present-value estimates or other valuation techniques. Such fair values are significantly affected by the assumptions used, the timing of future cash flows, and the applicable discount rate.
Because assumptions are inherently subjective in nature, estimated fair values cannot be substantiated by comparison to independent market quotes. Furthermore, in many cases, the estimated fair values provided would not necessarily be realized in an immediate sale or settlement of the instrument.
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The following table summarizes the carrying values and estimated fair values of the Companys on-balance-sheet financial instruments at June 30, 2009 and December 31, 2008:
June 30, 2009 | December 31, 2008 | |||||||||||
(in thousands) | Carrying Value |
Estimated Fair Value |
Carrying Value |
Estimated Fair Value | ||||||||
Financial Assets: |
||||||||||||
Cash and cash equivalents |
$ | 162,764 | $ | 162,764 | $ | 203,216 | $ | 203,216 | ||||
Securities held to maturity |
4,789,773 | 4,755,590 | 4,890,991 | 4,827,801 | ||||||||
Securities available for sale |
849,113 | 849,113 | 1,010,502 | 1,010,502 | ||||||||
FHLB-NY stock |
439,063 | 439,063 | 400,979 | 400,979 | ||||||||
Loans, net |
22,679,081 | 22,809,306 | 22,097,844 | 22,891,568 | ||||||||
Financial Liabilities: |
||||||||||||
Deposits |
$ | 14,354,081 | $ | 14,415,985 | $ | 14,375,648 | $ | 14,445,003 | ||||
Borrowed funds |
14,059,003 | 15,196,231 | 13,496,710 | 15,165,647 |
The methods and significant assumptions used to estimate fair values for the Companys financial instruments are as follows:
Cash and Cash Equivalents
Cash and cash equivalents include cash, due from banks, and federal funds sold. The estimated fair values of cash and cash equivalents are assumed to equal their carrying values, as these financial instruments are either due on demand or have short-term maturities.
Securities Held to Maturity and Available for Sale
If quoted market prices are not available for the specific security, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. These pricing models primarily use market-based or independently sourced market parameters as inputs, including, but not limited to, yield curves, interest rates, equity or debt prices, and credit spreads. In addition to observable market information, models also incorporate transaction details, such as maturity and cash flow assumptions.
Federal Home Loan Bank of New York Stock
The fair value of FHLB-NY stock approximates the carrying amount, which is at cost.
Loans
The loan portfolio is segregated into various components for valuation purposes in order to group loans based on their significant financial characteristics, such as loan type (mortgages or other) and payment status (performing or non-performing). The estimated fair values of mortgage and other loans are computed by discounting the anticipated cash flows from the respective portfolios. The discount rates reflect current market rates for loans with similar terms to borrowers of similar credit quality. The estimated fair values of non-performing mortgage and other loans approximate the carrying amounts, which are at cost.
The methods used to estimate fair value are highly sensitive to the assumptions and estimates used. While management has attempted to use assumptions and estimates that best reflect the Companys loan portfolio and current market conditions, a greater degree of subjectivity is inherent in these values than in those determined in active markets. Accordingly, readers are cautioned in using this information for purposes of evaluating the financial condition and/or value of the Company in and of itself or in comparison with any other company.
Deposits
The fair values of deposit liabilities with no stated maturity (i.e., NOW and money market accounts, savings accounts, and non-interest-bearing accounts) are equal to the carrying amounts payable on demand. The fair values of certificates of deposit (CDs) represent contractual cash flows, discounted using interest rates currently offered
21
on deposits with similar characteristics and remaining maturities. These estimated fair values do not include the intangible value of core deposit relationships, which comprise a significant portion of the Companys deposit base.
Borrowed Funds
The estimated fair value of borrowed funds is based on either bid quotations received from securities dealers or on the discounted value of contractual cash flows with interest rates currently in effect for borrowed funds with similar maturities and structure.
Off-Balance-Sheet Financial Instruments
The fair values of commitments to extend credit and unadvanced lines of credit are estimated based on an analysis of the interest rates and fees currently charged to enter into similar transactions, considering the remaining terms of the commitments and the creditworthiness of the potential borrowers. The estimated fair values of such off-balance-sheet financial instruments were not material at June 30, 2009 and December 31, 2008.
Note 9. Impact of Recent Accounting Pronouncements
In July 2009, the FASB released the FASB Accounting Standards Codification (the Codification) as the single source of authoritative nongovernmental U.S. generally accepted accounting principles. The Codification is effective for interim and annual periods ending after September 15, 2009. All existing accounting standards documents are superseded, as described in SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principlesa Replacement of SFAS No. 162. All other accounting literature not included in the Codification is non-authoritative.
In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets, and No. 167, Amendments to FASB Interpretation No. 46(R). SFAS No. 166 is a revision to SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and will require more information about transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. SFAS No. 166 eliminates the concept of a qualifying special-purpose entity, changes the requirements for derecognizing financial assets, and requires additional disclosures. SFAS No. 167 is a revision to FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities, and changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entitys purpose and design and a companys ability to direct the activities of the entity that most significantly impact the entitys economic performance. These statements will be effective as of the beginning of the first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. The Company does not expect the adoption of SFAS Nos. 166 and 167 to have a material impact on its consolidated financial condition or results of operations.
In June 2009, the FASB issued SFAS No. 165, Subsequent Events. SFAS No. 165 is intended to establish general standards of accounting for, and disclosing, events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that datethat is, whether that date represents the date the financial statements were issued or were available to be issued.
In particular, SFAS No. 165 sets forth:
| The period after the balance sheet date during which the management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; |
| The circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and |
22
| The disclosures that an entity should make about events or transactions that occurred after the balance sheet date. |
In April 2009, the FASB issued three final FSPs that provide additional application guidance and enhance disclosures regarding fair value measurements and impairments of securities. FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, provides guidelines for making fair value measurements more consistent with the principles presented in SFAS No. 157. FSP FAS No. 107-1 and Accounting Principles Board (APB) 28-1, Interim Disclosures about Fair Value of Financial Instruments enhance consistency in financial reporting by increasing the frequency of fair value disclosures. FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments provide additional guidance with respect to accounting for, and presenting, impairment losses on securities.
FSP FAS 157-4 addresses the determination of fair values when there is no active market or where the price inputs being used represent distressed sales. It reaffirms the objective of fair value measurement as set forth in SFAS No. 157, i.e., to reflect how much an asset would be sold for in an orderly transaction (the exit price, as opposed to a distressed or forced transaction) at the date of the financial statements and under current market conditions. It specifically reaffirms the need to use judgment in ascertaining if a formerly active market has become inactive and in determining fair values when markets have become inactive.
FSP FAS 107-1 and APB 28-1 relate to fair value disclosures for financial instruments held by public companies. Prior to issuing this FSP, fair values for such instruments were disclosed only once a year. The FSP now requires quarterly disclosures that provide qualitative and quantitative information about fair value estimates for those financial instruments.
FSP FAS 115-2 and FAS 124-2, which relate to other-than-temporary impairment, are intended to bring greater consistency to the timing of impairment recognition, and to provide greater clarity to investors about the credit and non-credit components of impaired debt securities that are not intended or expected to be sold. The measure of impairment in comprehensive income remains fair value. The FSP also requires increased and more timely disclosure regarding expected cash flows, credit losses, and the aging of securities with unrealized losses. A cumulative-effect adjustment is required to be recorded at the adoption date of the FSPs with respect to certain previously recognized OTTI.
Each of the aforementioned FSPs is effective for interim and annual periods ending after June 15, 2009 and was adopted by the Company on April 1, 2009. The Companys adoption of FSP 157-4 had an immaterial effect on its fair value estimates. The effect of adopting FSP FAS 115-2 is disclosed in Note 3. The additional disclosures required by FSP FAS 107-1 and APB 28-1 are provided in Note 8.
In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities, which clarifies that unvested stock-based compensation awards containing non-forfeitable rights to dividends are considered participating securities and therefore are included in the two-class method calculation of earnings per share. Under the two-class method, all earnings (distributed and undistributed) are allocated to common shares and participating securities based on their respective rights to receive dividends. The Company grants restricted stock to certain employees under its stock-based compensation plans. Recipients receive cash dividends during the vesting periods of these awards. Since certain of these dividends are non-forfeitable, the unvested awards are considered participating securities and will have earnings allocated to them. The adoption of FSP EITF 03-6-1 on January 1, 2009 had an immaterial effect on the Companys earnings per share for the three and six months ended June 30, 2009 and 2008.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activitiesan amendment of SFAS No. 133. SFAS No. 161 requires enhanced disclosures about derivative instruments and hedged items that are accounted for under SFAS No. 133 and related interpretations. SFAS No. 161 is effective for interim and annual financial statements for periods beginning after November 15, 2008, with early adoption permitted. The Companys adoption of SFAS No. 161 on January 1, 2009 did not have an impact on its financial statement disclosures as the Company does not currently engage in such activities.
23
In December 2007, the FASB issued SFAS No. 141R, Business Combinations (revised 2007). SFAS No. 141R requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose the information necessary to evaluate and understand the nature and financial effect of the business combination. SFAS No. 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first fiscal year that commences after December 15, 2008. The Company will apply SFAS No. 141R to any business combinations that may occur after the effective date, and believes that the standard could have a material impact on its accounting for such transactions.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements. SFAS No. 160 improves the relevance, comparability, and transparency of financial information provided to investors by requiring all entities to report noncontrolling (minority) interests in subsidiaries in the same way, i.e., as equity in the consolidated financial statements. In addition, SFAS No. 160 eliminates the diversity that existed in accounting for transactions between an entity and noncontrolling interests by requiring that they be treated as equity transactions. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008. The Companys adoption of SFAS No. 160 on January 1, 2009 did not have a material impact on its financial condition or results of operations.
Note 10. Subsequent Events
In accordance with SFAS No. 165, the Company has evaluated whether any subsequent events that require recognition or disclosure in the accompanying financial statements and notes thereto have taken place through the date these financial statements were issued (August 10, 2009). The Company has determined that there are no such subsequent events, other than the Exchange Offer described in Note 5.
24
NEW YORK COMMUNITY BANCORP, INC.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the purpose of this Quarterly Report on Form 10-Q, the words we, us, our, and the Company are used to refer to New York Community Bancorp, Inc. and our consolidated subsidiaries, including New York Community Bank and New York Commercial Bank (the Community Bank and the Commercial Bank, respectively, and collectively, the Banks).
Forward-looking Statements and Associated Risk Factors
This report, like many written and oral communications presented by New York Community Bancorp, Inc. and our authorized officers, may contain certain forward-looking statements regarding our prospective performance and strategies within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of said safe harbor provisions.
Forward-looking statements, which are based on certain assumptions and describe future plans, strategies, and expectations of the Company, are generally identified by use of the words anticipate, believe, estimate, expect, intend, plan, project, seek, strive, try, or future or conditional verbs such as will, would, should, could, may, or similar expressions. Our ability to predict results or the actual effects of our plans or strategies is inherently uncertain. Accordingly, actual results may differ materially from anticipated results.
There are a number of factors, many of which are beyond our control, that could cause actual conditions, events, or results to differ significantly from those described in our forward-looking statements. These factors include, but are not limited to:
| General economic conditions and trends, either nationally or in some or all of the areas in which we and our customers conduct our respective businesses; |
| Conditions in the securities and real estate markets or the banking industry; |
| Changes in interest rates, which may affect our net income, prepayment penalty income, and other future cash flows, or the market value of our assets, including our investment securities; |
| Changes in real estate values, which could impact the quality of the assets securing the loans in our portfolio; |
| Changes in the quality or composition of our loan or securities portfolios; |
| Changes in competitive pressures among financial institutions or from non-financial institutions; |
| Changes in our customer base or in the financial or operating performances of our customers businesses; |
| Changes in the demand for our deposit, loan, and investment products and other financial services in the markets we serve; |
| Changes in deposit flows and wholesale borrowing facilities; |
| Changes in our credit ratings or in our ability to access the capital markets; |
| Changes in our estimates of future reserves based upon the periodic review thereof under relevant regulatory and accounting requirements; |
| Changes in our capital management policies, including those regarding business combinations, dividends, and share repurchases, among others; |
| Our ability to retain key members of management; |
| Changes in legislation, regulation, policies, or administrative practices, whether by judicial, governmental, or legislative action, including, but not limited to, those pertaining to banking, securities, taxation, rent regulation and housing, environmental protection, and insurance; and the ability to comply with such changes in a timely manner; |
| Changes in accounting principles, policies, practices, or guidelines; |
25
| Changes in the monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board of Governors; |
| Our timely development of new lines of business and competitive products or services in a changing environment, and the acceptance of such products or services by our customers; |
| Operational issues stemming from, and/or capital spending necessitated by, the potential need to adapt to industry changes in information technology systems, on which we are highly dependent; |
| Any interruption or breach of security resulting in failures or disruptions in customer account management, general ledger, deposit, loan, or other systems; |
| Any interruption in customer service due to circumstances beyond our control; |
| Potential exposure to unknown or contingent liabilities of companies we have acquired or target for acquisition; |
| The outcome of pending or threatened litigation, or of other matters before regulatory agencies, or of matters resulting from regulatory exams, whether currently existing or commencing in the future; |
| Environmental conditions that exist or may exist on properties owned by, leased by, or mortgaged to the Company; |
| War or terrorist activities; and |
| Other economic, competitive, governmental, regulatory, and geopolitical factors affecting our operations, pricing, and services. |
In addition, it should be noted that we routinely evaluate opportunities to expand through acquisition and frequently conduct due diligence activities in connection with such opportunities. As a result, acquisition discussions and, in some cases, negotiations, may take place at any time, and acquisitions involving cash, debt, or equity securities may occur.
Furthermore, the timing and occurrence or non-occurrence of events may be subject to circumstances beyond our control.
Readers are cautioned not to place undue reliance on the forward-looking statements contained herein, which speak only as of the date of this report. Except as required by applicable law or regulation, we undertake no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date on which such statements were made.
Reconciliations of Stockholders Equity and Tangible Stockholders Equity, Total Assets and Tangible Assets, and the Related Measures
Although tangible stockholders equity, adjusted tangible stockholders equity, tangible assets, and adjusted tangible assets are not measures that are calculated in accordance with generally accepted accounting principles (GAAP), our management uses these non-GAAP measures in its analysis of our performance. We believe that these non-GAAP measures are important indications of our ability to grow both organically and through business combinations and, with respect to tangible stockholders equity and adjusted tangible stockholders equity, our ability to pay dividends and to engage in various capital management strategies.
We calculate tangible stockholders equity by subtracting from stockholders equity the sum of our goodwill and core deposit intangibles (CDI), and calculate tangible assets by subtracting the same sum from our total assets. To calculate our ratio of tangible stockholders equity to tangible assets, we divide our tangible stockholders equity by our tangible assets, both of which include an amount for accumulated other comprehensive loss, net of tax (AOCL). AOCL consists of after-tax net unrealized losses on securities; certain other-than-temporary impairment (OTTI) losses on securities; and pension and post-retirement obligations, and is recorded in our Consolidated Statements of Condition. We also calculate our ratio of tangible stockholders equity to tangible assets excluding AOCL, as its components are impacted by changes in market conditions, including interest rates, which fluctuate. This ratio is referred to below and earlier in this report as the ratio of adjusted tangible stockholders equity to adjusted tangible assets.
Neither tangible stockholders equity, adjusted tangible stockholders equity, tangible assets, adjusted tangible assets, nor the related tangible and adjusted tangible capital measures should be considered in isolation or as a substitute for stockholders
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equity or any other capital measure prepared in accordance with GAAP. Moreover, the manner in which we calculate these non-GAAP capital measures may differ from that of other companies reporting measures of capital with similar names.
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Reconciliations of our stockholders equity, tangible stockholders equity, and adjusted tangible stockholders equity; our total assets, tangible assets, and adjusted tangible assets; and the related capital measures at June 30, 2009 and December 31, 2008 follow:
(dollars in thousands) | June 30, 2009 |
December 31, 2008 |
||||||
Total stockholders equity |
$ | 4,210,666 | $ | 4,219,246 | ||||
Less: Goodwill |
(2,436,401 | ) | (2,436,401 | ) | ||||
Core deposit intangibles |
(76,617 | ) | (87,780 | ) | ||||
Tangible stockholders equity |
$ | 1,697,648 | $ | 1,695,065 | ||||
Total assets |
$ | 32,860,123 | $ | 32,466,906 | ||||
Less: Goodwill |
(2,436,401 | ) | (2,436,401 | ) | ||||
Core deposit intangibles |
(76,617 | ) | (87,780 | ) | ||||
Tangible assets |
$ | 30,347,105 | $ | 29,942,725 | ||||
Stockholders equity to total assets |
12.81 | % | 13.00 | % | ||||
Tangible stockholders equity to tangible assets |
5.59 | % | 5.66 | % | ||||
Tangible stockholders equity |
$ | 1,697,648 | $ | 1,695,065 | ||||
Add back: AOCL |
76,301 | 87,319 | ||||||
Adjusted tangible stockholders equity |
$ | 1,773,949 | $ | 1,782,384 | ||||
Tangible assets |
$ | 30,347,105 | $ | 29,942,725 | ||||
Add back: AOCL |
76,301 | 87,319 | ||||||
Adjusted tangible assets |
$ | 30,423,406 | $ | 30,030,044 | ||||
Adjusted tangible stockholders equity to adjusted tangible assets |
5.83 | % | 5.94 | % | ||||
Critical Accounting Policies
Certain accounting policies are considered to be critically important to the portrayal of our financial condition and results of operations, since they require management to make complex or subjective judgments, some of which may relate to matters that are inherently uncertain. The inherent sensitivity of our consolidated financial statements to these critical accounting policies, and the judgments, estimates, and assumptions used therein, could have a material impact on our financial condition or results of operations.
We have identified the following to be critical accounting policies: the determination of the allowance for loan losses; the determination of whether an impairment of securities is other than temporary; the determination of the amount, if any, of goodwill impairment; and the valuation allowance for deferred tax assets.
The judgments used by management in applying these critical accounting policies may be influenced by a further and prolonged deterioration in the economic environment, which may result in changes to future financial results.
Allowance for Loan Losses
The allowance for loan losses is increased by provisions for loan losses that are charged against earnings, and is reduced by net charge-offs and/or reversals, if any, that are credited to earnings. Our loans are held by either the Community Bank or the Commercial Bank, and a separate loan loss allowance is established for each. In addition, except as otherwise noted below, the process for establishing the allowance for loan losses is the same for each of the Community Bank and the Commercial Bank. In determining the respective allowances for loan losses, management considers the Community Banks and the Commercial Banks current business strategies and credit processes, including compliance with guidelines established by the respective Boards of Directors with regard to credit limitations, loan approvals, underwriting criteria, and loan workout procedures.
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Our allowances for loan losses are established based on our evaluation of the probable inherent losses in our portfolio in accordance with Statement of Financial Accounting Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a Loan an amendment of Financial Accounting Standards Board (FASB) Statement Nos. 5 and 15 and SFAS No. 5, Accounting for Contingencies. The allowances for loan losses are comprised of both specific valuation allowances and general valuation allowances. Specific valuation allowances are established based on the SFAS No. 114 analyses. General valuation allowances are established by applying our loan provisioning methodology and reflect the inherent risk in loans not considered for impairment under SFAS No. 114. Our loan provisioning methodology takes into account our historical loss experience, delinquency levels and trends, and loan type, among other factors that are part of our judgment in developing quantified risk factors which result in allocations to the allowance for loan losses for each loan type within our portfolio.
Several factors are considered in this process, including the level of defaulted loans at the close of each quarter; recent trends in loan performance; historical levels of loan losses; the factors underlying such loan losses and loan defaults; projected default rates and loss severities; internal risk ratings; loan size; economic, industry, and environmental factors; and loan impairment, as defined under SFAS No. 114.
Under SFAS No. 114, a loan is classified as impaired when, based on current information and events, it is probable that we will be unable to collect both the principal and interest due under the contractual terms of the loan agreement. We apply SFAS No. 114 as necessary to certain larger multi-family; commercial real estate; acquisition, development, and construction; and commercial and industrial loans, and exclude any smaller balance homogeneous loans and any loans carried at the lower of cost or fair value. We generally measure impairment by comparing the loans outstanding balance to the fair value of the collateral, less the estimated cost to sell, or to the present value of expected cash flows, discounted at the loans effective interest rate.
A valuation allowance is established when the fair value of the collateral, net of estimated costs, or the present value of the expected cash flows is less than the recorded investment in the loan. If a loan is deemed to be impaired, management is required to measure the amount of the associated loss, if any. For loans that are not considered to be impaired, a different process is used, involving:
1. | Periodic inspections of the loan collateral by qualified in-house property appraisers/inspectors, as applicable; |
2. | Regular meetings of executive management with the pertinent Board committee, during which observable trends in the local economy and/or the real estate market are discussed; |
3. | Assessment by the pertinent Board of Directors of the aforementioned factors when making a business judgment regarding the impact of anticipated changes of the future level of the allowance for loan losses; and |
4. | Analysis of the portfolio in the aggregate, as well as on an individual loan basis, taking into consideration payment history, underwriting analyses, and internal risk ratings. |
In accordance with the pertinent policies, the loan loss allowances are segmented to correspond to the various types of loans in the loan portfolios. These loan categories are assessed with specific emphasis on the internal risk ratings, underlying collateral, credit underwriting, and loan type, and these factors correspond to the respective levels of quantified and inherent risk.
The assessments take into consideration loans that have been adversely rated, primarily through the valuation of the collateral supporting each loan. Adversely rated loans are loans that are either non-performing or that exhibit certain weaknesses that could jeopardize payment in accordance with the original terms. Larger loans are assigned risk ratings based upon a periodic review of the credit files, while smaller loans exceeding 90 days in arrears are assigned risk ratings based upon an aging schedule. Quantified risk factors are assigned for each risk-rating category to provide an allocation to the overall loan loss allowance.
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The remainder of each loan portfolio is then assessed, by loan type, with similar risk factors being considered, including the borrowers ability to pay and our past loan loss experience with each type of loan. These loans are also assigned quantified risk factors, which result in allocations to the allowances for loan losses for each particular loan or loan type in the portfolio.
In order to determine their overall adequacy, each of the respective loan loss allowances is reviewed quarterly by management and by the Mortgage and Real Estate Committee of the Community Banks Board of Directors or the Credit Committee of the Board of Directors of the Commercial Bank, as applicable.
While management uses the best available information to recognize losses on loans, future additions to the respective loan loss allowances may be necessary, based on changes in economic and local market conditions beyond managements control, including declines in real estate values, and increases in vacancy rates and unemployment. In addition, the Community Bank and/or the Commercial Bank may be required to take certain charge-offs and/or recognize additions to their loan loss allowances, based on the judgment of regulatory agencies with regard to information provided to them during their examinations.
We recognize interest income on loans using the interest method over the life of the loan. Using this method, we defer certain loan origination and commitment fees and certain loan origination costs, and amortize the net fee or cost as an adjustment to the loan yield over the term of the related loan. When a loan is sold or repaid, the remaining net unamortized fee or cost is recognized in interest income.
A loan generally is classified as a non-accrual loan when it is over 90 days past due. When a loan is placed on non-accrual status, the Company ceases the accrual of interest owed, and previously accrued interest is charged against interest income. A loan is generally returned to accrual status when the loan is less than 90 days past due and/or the Company has reasonable assurance that the loan will be fully collectible. Interest income on non-accrual loans is recorded when received in cash.
We charge off loans, or portions of loans, in the period that such loans, or portions thereof, are deemed uncollectible. The collectability of individual loans is determined through an estimate of the fair value of the underlying collateral and/or an assessment of the financial condition of the borrower.
Investment Securities
The securities portfolio primarily consists of mortgage-related securities and, to a lesser extent, debt and equity (other) securities. Securities that are classified as available for sale are carried at their estimated fair value, with any unrealized gains and losses, net of taxes, reported as accumulated other comprehensive income or loss in stockholders equity. Securities that we have the intent and ability to hold to maturity are classified as held to maturity and carried at amortized cost, less the non-credit portion of OTTI recorded in AOCL.
The fair values of our securitiesand particularly our fixed-rate securitiesare affected by changes in market interest rates and credit spreads. In general, as interest rates rise and/or credit spreads widen, the fair value of fixed-rate securities will decline; as interest rates fall and/or credit spreads tighten, the fair value of fixed-rate securities will increase. We conduct a periodic review and evaluation of the securities portfolio to determine if the decline in the fair value of any security below its carrying value is other than temporary. If we deem any decline in value to be other than temporary, the security is written down to its current fair value, creating a new cost basis. The portion of the loss attributable to credit factors is charged against earnings and recorded in non-interest income; the remainder of the loss is charged against other comprehensive income.
At June 30, 2009, the net unrealized losses on available-for-sale and held-to-maturity securities were $29.4 million and $34.2 million, respectively. The respective impairments were deemed to be temporary principally based on the direct relationship of the declines in fair value to the movements in interest rates, including wider credit spreads in some cases; the effect of illiquidity on the market; the estimated remaining life and the credit quality of the investments; and our ability to hold, and our intent not to sell, before anticipated full recovery of fair value, which may not be until maturity.
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Goodwill Impairment
Goodwill is presumed to have an indefinite useful life and is tested for impairment, rather than amortized, at the reporting unit level, at least once a year. The goodwill impairment analysis is a two-step test. The first step (Step 1) is used to identify potential impairment, and involves comparing each reporting units estimated fair value to its carrying value, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is considered not to be impaired. If the carrying value exceeds the estimated fair value, there is an indication of potential impairment and the second step (Step 2) is performed to measure the amount.
Step 2 involves calculating an implied fair value of goodwill for each reporting unit for which impairment was indicated in Step 1. The implied fair value of goodwill is determined in a manner similar to the amount of goodwill calculated in a business combination, i.e., by measuring the excess of the estimated fair value of the reporting unit, as determined in Step 1, over the aggregate estimated fair values of the individual assets, liabilities, and identifiable intangibles, as if the reporting unit was being acquired in a business combination at the impairment test date. If the implied fair value of goodwill exceeds the carrying value of goodwill assigned to the reporting unit, there is no impairment. If the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. An impairment loss cannot exceed the carrying value of goodwill assigned to a reporting unit, and the loss establishes a new basis in the goodwill. Subsequent reversal of goodwill impairment losses is not permitted.
According to SFAS No. 142, Goodwill and Other Intangible Assets, quoted market prices in active markets are the best evidence of fair value and are to be used as the basis for measurement, when available. Other acceptable valuation methods include present-value measurements based on multiples of earnings or revenues, or similar performance measures. Differences in the identification of reporting units and in valuation techniques could result in materially different evaluations of impairment.
For the purpose of goodwill impairment testing, management has determined that the Company has one reporting unit. We performed our annual goodwill impairment test as of January 1, 2009, and determined that the fair value of the reporting unit was in excess of its carrying value. Accordingly, as of the annual impairment test date, there was no indication of goodwill impairment.
Income Taxes
We estimate income taxes payable based on the amount we expect to owe the various taxing authorities (i.e., federal, state, and local). Income taxes represent the net estimated amount due to, or to be received from, such taxing authorities. In estimating income taxes, management assesses the relative merits and risks of the tax treatment of transactions, taking into account statutory, judicial, and regulatory guidance in the context of our tax position. In this process, management also relies on tax opinions, recent audits, and historical experience. Although we use the best available information to record income taxes, underlying estimates and assumptions can change over time as a result of unanticipated events or circumstances such as changes in tax laws and judicial guidance influencing our overall or transaction-specific tax position.
We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and the carryforward of certain tax attributes such as net operating losses. A valuation allowance is maintained for deferred tax assets that we estimate are more likely than not to be unrealizable, based on available evidence at the time the estimate is made. In assessing the need for a valuation allowance, we estimate future taxable income, considering the feasibility of tax planning strategies and the realizability of tax loss carryforwards. Valuation allowances related to deferred tax assets can be affected by changes to tax laws, statutory tax rates, and future taxable income levels. In the event that we were to determine that we would not be able to realize all or a portion of our net deferred tax assets in the future, we would reduce such amounts through a charge to income tax expense in the period in which that determination was made. Conversely, if we were to determine that we would be able to realize our deferred tax assets in the future in excess of the net carrying amounts, we would decrease the recorded valuation allowance through a decrease in income tax expense in the period in which that determination was made.
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Subsequently recognized tax benefits associated with valuation allowances recorded in a business combination would be recorded as an adjustment to goodwill.
In July 2009, new tax laws were enacted which are effective for the determination of our New York City income tax liability for calendar year 2009. In general, these laws conformed the New York City tax rules to those of New York State. Included in these new tax laws is a provision which requires the inclusion of income earned by a subsidiary taxed as a Real Estate Investment Trust (REIT) for federal tax purposes, regardless of the location in which the REIT subsidiary conducts its business or the timing of its distribution of earnings. The inclusion of such income is phased in with full inclusion of income starting in 2011.
This new tax law will likely increase our effective tax rate, beginning in the third quarter of 2009 (period of enactment). Absent any change in the manner in which we conduct our business, current income tax expense is expected to increase by approximately $2 million for each of 2009 and 2010, with a larger increase starting in 2011. We expect approximately 75% of the 2009 increase in current income tax expense to be recorded in the third quarter of this year. As a result of the new law, we expect to record an offsetting deferred tax benefit of approximately $400,000 in the third quarter of 2009.
Recent Events
Dividend Payment
On July 28, 2009, the Board of Directors declared a quarterly cash dividend of $0.25 per share, payable on August 18, 2009 to shareholders of record at the close of business on August 7, 2009.
Exchange Offer
On July 29, 2009, we announced that we had commenced an offer to exchange shares of our common stock for any and all of the 5,498,544 outstanding units of our Bifurcated Option Note Unit SecuritiESSM (the BONUSES units). The BONUSES units were issued on November 4, 2002 by the Company and are listed on the New York Stock Exchange under the symbol NYB.PrU. Each unit consists of a trust preferred security issued by New York Community Capital Trust V and a warrant to purchase shares of our common stock.
All holders of BONUSES units are eligible to participate in the exchange offer, the terms and conditions of which are set forth in an Offer to Exchange and a related Letter of Transmittal that were sent to current holders of the BONUSES units and filed on July 29, 2009 with the SEC on a Schedule TO. Any BONUSES unit that is not exchanged will remain outstanding. Any BONUSES unit that is validly tendered and accepted for exchange in the Exchange Offer will be retired and cancelled.
The Exchange Ratio to be used to determine the number of shares of our common stock to be exchanged for each BONUSES unit will be calculated at 4:30 p.m., New York City time, on the second trading day immediately preceding the expiration date for the Exchange Offer, as such date may be extended (the Pricing Date). As more fully described in the Offer to Exchange and Letter of Transmittal, the minimum Exchange Ratio will be 2.4953 common shares for each BONUSES unit that is validly tendered and accepted, and the maximum Exchange Ratio will be 4.4953 common shares. The Exchange Ratio will be rounded to the nearest fourth decimal place.
The Exchange Offer is expected to expire at 11:59 p.m., New York City time on August 25, 2009, unless extended by us, and the settlement date is expected to be three days following the expiration date.
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Executive Summary
With assets of $32.9 billion at June 30, 2009, we are the 24th largest bank holding company in the nation and the fifth largest headquartered in New York State. We serve both consumers and businesses through two primary subsidiaries: New York Community Bank, a thrift, with 178 locations in New York City, Long Island, Westchester County, and New Jersey; and New York Commercial Bank, with 35 locations in New York City, Westchester County, and Long Island, including 17 branches that operate under the name Atlantic Bank.
Reflecting our growth through a series of accretive business combinations, we currently operate our Community Bank franchise through five local divisionsfour in New York and one in New Jersey. In New York, our divisional banks are Queens County Savings Bank, with 34 branches in Queens County; Roslyn Savings Bank, with 56 branches on Long Island; Richmond County Savings Bank, with 22 branches on Staten Island; and Roosevelt Savings Bank, with eight branches in Brooklyn. We also operate two branches each in the Bronx and Westchester County directly under the name New York Community Bank. In New Jersey, we operate Garden State Community Bank, with 54 branches in Essex, Hudson, Mercer, Middlesex, Monmouth, Ocean, and Union Counties.
Second Quarter 2009 Performance Highlights
Year-over-year, our second quarter 2009 performance was favorably impacted by:
| An $87.0 million, or 66.7%, increase in net interest income to $217.6 million; |
| A 125-basis point increase in our interest rate spread, to 2.89%; and |
| A 112-basis point increase in our net interest margin, to 3.06%. |
Among the factors contributing to these improvements were increases in the average balances of loans and interest-earning assets, and the strategic management of our funding costs in a steep yield curve environment. Reflecting the historically low level of the federal funds rate, and our replacement of higher-cost funding with lower-cost wholesale borrowings and retail deposits, our average cost of funds declined by 150 basis points to 2.76% in the second quarter of 2009. Additionally, in the second quarter of 2008, our net interest income was adversely impacted by a debt repositioning charge of $39.6 million, which increased that quarters interest expense by a like amount, and reduced our spread and margin by 65 and 60 basis points, respectively.
The benefit of the rise in net interest income and the expansion of our spread and margin was tempered by a $12.0 million provision for loan losses, which exceeded the year-earlier level by $10.3 million. Reflecting the impact of the recession on certain of our borrowers, net charge-offs rose to $9.2 million during the quarter from $1.2 million in the year-earlier three months. The bulk of the increase was due to a charge-off of $5.2 million on an out-of-state multi-family loan.
In addition to the higher loan loss provision, our second quarter 2009 earnings were reduced by a pre-tax OTTI of $39.7 million on certain trust preferred and other debt securities, a reflection of declining market values and the unlikelihood of recovering such market value. The OTTI charge resulted in our recording a second quarter 2009 non-interest loss of $17.7 million in the quarter, and reduced our second quarter 2009 earnings by $24.2 million, or $0.07 per basic and diluted share.
Our second quarter 2009 earnings were further reduced by a pre-tax FDIC special assessment of $14.0 million, which increased our non-interest expense to $107.4 million. On an after-tax basis, the impact of the FDIC special assessment was an $8.4 million, or $0.03, reduction in our second quarter 2009 earnings and basic and diluted earnings per share.
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Reflecting the combination of these factors, and income tax expense of $24.0 million, we recorded earnings of $56.4 million in the three months ended June 30, 2009, equivalent to basic and diluted earnings per share of $0.16.
Our balance sheet at the end of June reflected the following highlights:
| Loans grew at an annualized rate of 8.7% in the current second quarter, partly reflecting loan originations of $1.0 billion; |
| Loans represented $22.8 billion, or 69.3%, of total assets at the end of June; |
| Securities represented $5.6 billion, or 17.2%, of total assets at the end of the quarter, representing a 4.4% decline from the balance at year-end 2008; |
| Stockholders equity totaled $4.2 billion and represented 12.81% of total assets; and |
| Tangible stockholders equity amounted to $1.7 billion and represented 5.59% of tangible assets; excluding AOCL, adjusted tangible stockholders equity represented 5.83% of adjusted tangible assets. |
Please see the discussion and reconciliations of stockholders equity and tangible stockholders equity, total assets and tangible assets, and the related capital measures earlier in this report.
While our second quarter 2009 performance reflected an increase in non-performing loans and assets, our asset quality measures continued to compare well with those of our industry as a whole. Non-performing assets represented 1.04% of total assets at the end of the quarter, and non-performing loans represented 1.49% of total loans. By comparison, with 462 banks and thrifts reporting, the SNL Bank and Thrift Index measures were 2.72% and 3.05%, respectively, at June 30, 2009.
Reflecting six-month net charge-offs of $14.3 million and six-month loan loss provisions of $18.0 million, the allowance for loan losses rose $3.7 million from the year-end 2008 balance to $98.1 million at June 30, 2009. Our net charge-offs represented 0.06% of average loans in the current six-month period as compared to the SNL Bank and Thrift Index measure of 1.45%.
Although the level of non-performing loans increased substantially in the current second quarter, the level of loans 30 to 89 days delinquent declined during this time. We continue to carefully monitor our loan portfolio for signs of weakness. While we believe that the level of non-performing loans and assets may continue to rise in the current economic climate, we do not expect to see a corresponding increase in the level of net charge-offs, given the historical difference between our level of non-performing loans and net charge-offs, the nature of our primary lending niche, our underwriting standards, and our determination to obtain the highest possible collateral value on our loans.
The Economic Environment
The degree to which the global recession has impacted our local market is reflected in recent unemployment and housing statistics for New York State, Long Island, New York City, and New Jersey.
In June 2008, the respective unemployment rates for New York State, Long Island, and New York City were 5.1%, 4.7%, and 5.1%; in June 2009, the rates were 8.6%, 7.5%, and 9.3%, respectively. After seasonal adjustment, New York States private sector job count decreased month-over-month by 17,700, or 0.2%, to 7,078,300 in June 2009; it has now dropped for ten consecutive months. Since the states private sector job count peaked in August 2008, New York State has lost 235,900 private sector jobs, erasing more than half of the 400,000 jobs added during the last economic expansion from 2003 to 2008. A continued increase in unemployment could have an adverse impact on our asset quality measures, while a decline in unemployment could benefit our asset quality.
In June 2008, the respective unemployment rates for New Jerseys Essex, Hudson, and Union counties were 6.5%, 6.3%, and 5.5%; in June 2009, the rates were substantially higher, at 10.5%, 10.9%, and 9.5%, respectively. For the state as a whole, the unemployment rate rose to 9.2% year-over-year.
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The national unemployment rate, which stood at 5.6% in June 2008, increased to 9.5% in June 2009, a rate last seen in August 1983. Since the recession began in December 2007, the number of unemployed persons has increased by 7.2 million; the unemployment rate has risen by 4.6 percentage points; and payroll employment has fallen by 6.5 million.
The real estate statistics are also revealing. Through May 2009, home prices declined 12.2% year-over-year in the New York metropolitan region and in Manhattan, the overall vacancy rate for offices reached 10.5% in the second quarter of 2009, the highest rate since the fourth quarter of 2004.
Nationally, home prices declined 17.1% through May 2009; however, the annual rate of decline improved for the fourth consecutive month in June 2009. Nonetheless, foreclosure filings were up 9.46% in the first six months of this year from the trailing six-month level, and up 14.66% from the year-earlier six-month period. In the first half of 2009, one in every 84 housing units in the nation received a foreclosure filing, and June 2009 was the fourth consecutive month that the number of housing units receiving foreclosure filings exceeded 300,000. In the second quarter of 2009, foreclosure filings increased 10.75% on a linked-quarter basis and 20.29% from the year-earlier period.
On a positive note, as home prices have fallen, new home sales have risen. According to the U.S. Commerce Department, home sales rose 11% month-over-month in June 2009.
Additionally, the Federal Reserve Beige Book Report, dated July 29, 2009, indicates that while economic activity remains weak in most districts of the nation, the pace of decline has slowed and activity in some areas has begun to stabilize.
Summary of Financial Condition at June 30, 2009
Assets totaled $32.9 billion at the end of June, and were up $393.2 million from the balance recorded at December 31, 2008.
Loans
Loans represented $22.8 billion, or 69.3%, of total assets at the close of the second quarter, up $483.8 million from the March 31, 2009 balance and $585.0 million from the balance recorded at December 31, 2008. While repayments totaled $1.1 billion in the first six months of 2009, including repayments of $527.1 million in the second quarter, these amounts were exceeded by loan originations of $1.7 billion and $1.0 billion, respectively, during the six- and three-month periods.
Multi-family Loans
Multi-family loans represented $16.2 billion, or 71.2%, of total loans at the close of the second quarter, a linked-quarter increase of $366.6 million and a six-month increase of $497.8 million, or 3.2%. Multi-family loans accounted for $553.1 million of loans produced in the current second quarter, as compared to $317.8 million and $783.0 million, respectively, in the trailing and year-earlier three months. At June 30, 2009, the average multi-family loan had a principal balance of $3.9 million, and the portfolio had an average loan-to-value ratio (LTV) of 61.1%. Values are based on appraisals that were primarily received at the time of origination. In addition, 92.8% of our multi-family loans were secured by properties in the Metro New York region at quarter-end.
Multi-family loans are typically made to long-term owners of buildings with apartments that are subject to certain rent-control and stabilization laws. The funds we lend are typically used by the borrower to make improvements to the building and the apartments therein. Upon completion of the improvements, the property owner has the opportunity to increase the rents paid by the tenants and, in doing so, creates more cash flows to borrow against in future years.
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In addition to underwriting a multi-family loan on the basis of the buildings income and condition, we consider the borrowers credit history, profitability, and building management expertise. Borrowers are required to present evidence of their ability to repay the loan from the buildings current rent rolls, their financial statements, and related documents. Furthermore, the origination of multi-family loans typically requires an assignment of the rents and/or leases.
Our multi-family loans typically feature a term of ten years, with a fixed rate of interest for the first five years of the loan, and an alternative rate of interest in years six through ten. The rate charged in the first five years is generally based on the five-year Constant Maturity Treasury rate (the five-year CMT) plus a spread. During years six through ten, the borrower has had the option of selecting an annually adjustable rate that is tied to the prime rate of interest, as reported in The New York Times, plus a spread, or a fixed rate that is tied to the five-year CMT, plus a spread. Since January 2009, for new originations, the fixed rate in years six through ten has been tied to the fixed advance rate of the Federal Home Loan Bank of New York (the FHLB-NY) plus a spread. The fixed-rate option also requires the payment of an amount equal to one percentage point of the then-outstanding loan balance. In either case, the minimum rate at repricing is equivalent to the rate in the initial five-year term.
As the rent roll increases, the typical property owner seeks to refinance the mortgage, and generally does so before the loan reprices in year six. Accordingly, the expected weighted average life of the multi-family loan portfolio was 3.7 years at June 30, 2009. While this refinancing cycle has repeated itself over the course of many decades, regardless of market interest rates and conditions, refinancing activity was constrained by economic uncertainty in the first half of 2009, as it was in 2008.
Multi-family loans that refinance within the first five years are typically subject to an established prepayment penalty schedule. Depending on the remaining term of the loan at the time of prepayment, the penalties normally range from five percentage points to one percentage point of the then-current loan balance. If a loan extends past the fifth year and the borrower selects the fixed rate option, the prepayment penalties typically reset to a range of five points to one point over years six through ten.
Prepayment penalties are recorded as interest income and are therefore reflected in the average yields on our loans and assets, as well as our interest rate spread and net interest margin.
Commercial Real Estate (CRE) Loans
CRE loans accounted for $4.8 billion, or 21.0%, of total loans at the close of the second quarter, and were up $167.1 million and $221.7 million, respectively, over the three and six months ended June 30, 2009. The increase was due to organic loan production, with three-month originations totaling $231.4 million, as compared to $135.3 million and $374.2 million, respectively, in the trailing and year-earlier three months. For the six months ended June 30, 2009, CRE loan originations totaled $366.8 million, signifying a $196.6 million decrease from the year-earlier amount. At June 30, 2009, the average CRE loan had a principal balance of $2.7 million and the CRE loan portfolio had an average LTV of 54.3%. Values are based on appraisals that were primarily received at the time of origination. In addition, 92.3% of our CRE loans were secured by properties in the Metro New York region at quarter-end.
The pricing of our CRE loans is structured along the same lines as our multi-family credits, i.e., with a fixed rate of interest for the first five years of the loan that is generally tied to the five-year CMT, plus a spread. For years six through ten, the borrower generally has had the option of selecting an annually adjustable rate that is based on the prime rate of interest, or a fixed rate that is tied to the five-year CMT, plus a spread. Since January 2009, for new CRE loan originations, the fixed rate in years six through ten has been tied to the fixed advance rate of the FHLB-NY, plus a spread. The fixed-rate option also requires the payment of an amount equal to one percentage point of the then-outstanding loan balance. The minimum rate at repricing is equivalent to the rate featured in the initial five-year term.
Prepayment penalties also apply, with five percentage points of the then-current balance generally being charged on loans that refinance in the first year, scaling down to one percentage point of the then-current balance on loans that refinance in year five. Our CRE loans tend to refinance within five years of origination. Accordingly, the expected weighted average life of the portfolio was 3.4 years at June 30, 2009. If a loan extends into a sixth
36
year and the borrower selects the fixed-rate option, a schedule of prepayment penalties ranging from five points to one point begins again in year six.
Acquisition, Development, and Construction (ADC) Loans
ADC loans represented $727.5 million, or 3.2%, of total loans at the end of June, a $3.2 million increase from the March 31, 2009 balance and a reduction of $50.8 million from the balance recorded at December 31, 2008.
In the interest of reducing our exposure to credit risk at a time when real estate values have been declining, we have been limiting our production of ADC loans. ADC loan originations, primarily consisting of previously committed advances, totaled $28.9 million in the current second quarter, a $7.2 million increase from the volume produced in the trailing quarter and a $67.1 million reduction from the year-earlier amount.
The ADC loans we originate are primarily used for land acquisition, development, and construction of multi-family and residential tract projects and, to a lesser extent, for the construction of owner-occupied one- to four-family homes and commercial properties. Such loans are typically originated for terms of 18 to 24 months and feature a floating rate of interest tied to the prime rate of interest, and a floor. They also generate origination fees that are recorded as interest income and amortized over the life of the loan. At June 30, 2009, 57.8% of the loans in our ADC portfolio were for land acquisition and development; the remaining 42.2% consisted of ADC loans that were provided for the construction of homes and commercial properties. In addition, 95.9% of our ADC loans were secured by properties in the Metro New York region at that date. The loans that we have originated outside our immediate market have generally been made to developers and builders with whom we have had successful lending relationships within our local marketplace.
Because ADC loans are generally considered to have a higher degree of credit risk, especially during a downturn in the credit cycle, borrowers are required to provide a personal guarantee of repayment and completion during construction. The risk of loss on an ADC loan is largely dependent upon the accuracy of the initial appraisal of the propertys value upon completion of construction; the estimated cost of construction, including interest; and the estimated time to complete and/or sell or lease such property. If the appraised value proves to be inaccurate, the cost of completion is greater than expected, or the length of time to complete and/or sell or lease the collateral property is greater than anticipated, the property could have a value upon completion that is insufficient to assure full repayment of the loan.
When applicable, as a condition to closing a construction loan, it is our practice to require that residential properties be pre-sold or that borrowers secure permanent financing commitments from a recognized lender for an amount equal to, or greater than, the amount of our loan. In some cases, we ourselves may provide permanent financing. We typically require pre-leasing for loans on commercial properties.
One- to Four-Family Loans
One- to four-family loans represented $240.5 million, or 1.1%, of total loans at the close of the second quarter, down $15.9 million and $25.9 million, respectively, from the balances recorded at March 31, 2009 and December 31, 2008. The reduction in one- to four-family loans was due to repayments. In addition, while we originate one- to four-family loans as a customer service, we do not retain the loans we produce. Rather, one- to four-family loans are originated on a pass-through basis and sold without recourse, servicing released, to a third-party conduit shortly after they close.
Other Loans
Other loans represented $814.6 million, or 3.6%, of outstanding loans at the end of June, signifying three- and six-month reductions of $37.8 million and $58.9 million, respectively. Commercial and industrial (C&I) loans accounted for $672.3 million of other loans at the end of the second quarter, and were down $30.1 million and $40.8 million from the balances recorded at March 31, 2009 and December 31, 2008, respectively. C&I loan originations totaled $159.2 million in the current second quarter, down from $167.9 million and $285.9 million, respectively, in the trailing and year-earlier three months.
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A broad range of C&I loans, both collateralized and unsecured, are made available to small and mid-size businesses for working capital, business expansion, and the purchase or lease of machinery and equipment. The purpose of the loan is considered in determining its term and structure, and the pricing is generally tied to LIBOR or the prime rate of interest plus a spread.
Asset Quality
Net charge-offs totaled $9.2 million in the current second quarter, as compared to $5.1 million and $1.2 million, respectively, in the trailing and year-earlier three months. Notwithstanding the increase, the level of net charge-offs recorded in the current second quarter continued to represent a modest percentage of average loans. For the second quarter of 2009, net charge-offs represented 0.04% of average loans, as compared to 0.02% and 0.006%, respectively, in the trailing and year-earlier three-month periods. While second quarter net charge-offs were up both year-over-year and linked-quarter, $5.2 million of the increase was attributable to a single loan secured by a multi-family building, geographically distant from our primary multi-family niche in Metropolitan New York. C&I and other consumer loans accounted for $2.0 million and $256,000, respectively, of second quarter 2009 net charge-offs. There were no CRE or ADC loans charged off in the quarter, and no CRE loans have been charged off year-to-date.
Non-performing loans totaled $340.2 million at June 30, 2009, including non-accrual mortgage loans of $320.7 million and non-accrual other loans of $19.4 million. At March 31, 2009, non-accrual mortgage and other loans totaled $160.6 million and $14.7 million, respectively; the comparable amounts were $101.9 million and $11.8 million at December 31, 2008. Non-performing loans represented 1.49% of total loans at the close of the second quarter, as compared to 0.79% at March 31, 2009 and 0.51% at December 31, 2008.
Other real estate owned totaled $1.5 million at both June 30 and March 31, 2009, up $360,000 from the balance at December 31, 2008. Other real estate owned refers to properties that are acquired by foreclosure, and is recorded at the lower of the unpaid principal balance or fair value at the date of acquisition, less the estimated cost of selling the property at that time.
Reflecting the increase in non-performing loans and other real estate owned, non-performing assets rose to $341.6 million at the close of the current second quarter, from $176.8 million at March 31, 2009 and $114.8 million at December 31, 2008. The respective amounts were equivalent to 1.04%, 0.55%, and 0.35% of total assets at the corresponding dates.
In accordance with our methodology for determining the allowance for loan losses, we recorded a loan loss provision of $12.0 million in the current second quarter, as compared to $6.0 million and $1.7 million in the trailing and year-earlier three-months. Reflecting the current second quarter provision and the aforementioned net charge-offs, the allowance for loan losses rose to $98.1 million at June 30, 2009. The loan loss allowance totaled $95.3 million and $94.4 million at March 31, 2009 and December 31, 2008, respectively. The respective loan loss allowances were equivalent to 28.83%, 54.35%, and 83.00% of non-performing loans and to 0.43% of total loans for all three periods.
The manner in which the allowance for loan losses is established and the assumptions made in that process are considered critical to our financial condition and results of operations. Such assumptions are based on judgments that are difficult, complex, and subjective, regarding various matters of inherent uncertainty. Accordingly, the policies that govern managements assessment of the allowance for loan losses are considered Critical Accounting Policies and are discussed under that heading earlier in this report.
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The following table presents information regarding our consolidated allowance for loan losses and non-performing assets at June 30, 2009 and December 31, 2008:
(dollars in thousands) | At or For the Six Months Ended June 30, 2009 |
At or For the Year Ended December 31, 2008 |
||||||
Allowance for Loan Losses: |
||||||||
Balance at beginning of period |
$ | 94,368 | $ | 92,794 | ||||
Provision for loan losses |
18,000 | 7,700 | ||||||
Charge-offs: |
||||||||
Multi-family |
(7,237 | ) | (175 | ) | ||||
Commercial real estate |
| (16 | ) | |||||
Acquisition, development, and construction |
(3,199 | ) | (2,517 | ) | ||||
1-4 family |
(203 | ) | | |||||
Other loans |
(3,657 | ) | (3,460 | ) | ||||
Total charge-offs |
(14,296 | ) | (6,168 | ) | ||||
Recoveries |
10 | 42 | ||||||
Balance at end of period |
$ | 98,082 | $ | 94,368 | ||||
Non-performing Assets: |
||||||||
Non-accrual mortgage loans: |
||||||||
Multi-family |
$ | 159,280 | $ | 53,153 | ||||
Commercial real estate |
67,655 | 12,785 | ||||||
Acquisition, development, and construction |
79,577 | 24,839 | ||||||
1-4 family |
14,209 | 11,155 | ||||||
Total non-accrual mortgage loans (1) |
320,721 | 101,932 | ||||||
Other non-accrual loans |
19,434 | 11,765 | ||||||
Total non-performing loans |
340,155 | 113,697 | ||||||
Other real estate owned |
1,467 | 1,107 | ||||||
Total non-performing assets |
$ | 341,622 | $ | 114,804 | ||||
Ratios: |
||||||||
Non-performing loans to total loans |
1.49 | % | 0.51 | % | ||||
Non-performing assets to total assets |
1.04 | 0.35 | ||||||
Allowance for loan losses to non-performing loans |
28.83 | 83.00 | ||||||
Allowance for loan losses to total loans |
0.43 | 0.43 | ||||||
Net charge-offs to average loans |
0.06 | (2) | 0.03 | |||||
(1) | The June 30, 2009 amount includes troubled debt restructurings of $5.4 million. There were no troubled debt restructurings at December 31, 2008. |
(2) | Presented on a non-annualized basis. |
Historically, our level of charge-offs has been relatively low in adverse credit cycles, even when the volume of non-performing loans has increased. This distinction primarily has been due to (1) the nature of our primary lending niche, i.e., multi-family loans collateralized by non-luxury residential apartment buildings in the New York Metropolitan region having a preponderance of apartments with below-market rents; and (2) our conservative underwriting practices that require, among other things, low LTVs. In view of these factors, we believe that a significant increase in non-performing loans will not necessarily result in a comparable increase in net charge-offs and, accordingly, will not necessarily require a significant increase in our loan loss allowance. For example, while non-performing loans represented 1.49% of total loans at the end of the second quarter, the ratio of net charge-offs to average loans in the quarter remained relatively low at 0.04%.
At June 30, 2009, approximately 75% of the multi-family loan portfolio was secured by properties in New York City, with Manhattan accounting for approximately 32% of the New York City portfolio. In New York City, the amount of rent that tenants may be charged on the apartments in certain buildings is restricted under certain rent-control or rent-stabilization laws. As a result, the average rents that tenants pay in such apartments are generally below current market rates. Buildings with a preponderance of such rent-regulated apartments are, therefore, less likely to experience vacancies in times of economic adversity.
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The repayment of loans secured by commercial real estate is often dependent on the successful operation and management of the underlying properties. To minimize our credit risk, we originate CRE loans in adherence with conservative underwriting standards, and require that such loans qualify on the basis of the propertys current income stream and debt service coverage ratio. The approval of a loan also depends on the borrowers credit history, profitability, and expertise in property management, and generally requires a debt service coverage ratio of 130% and a maximum LTV of 65%. In addition, the origination of CRE loans typically requires an assignment of the rents and/or leases.
As noted in Critical Accounting Policies earlier in this discussion, our loan loss allowance is determined and validated by analyses performed in accordance with SFAS No. 114 and SFAS No. 5. Accordingly, despite the rise in non-performing loans in the first six months of this year and last, our SFAS No. 114 analyses indicated only limited impairment. This was primarily due to the strength of the underlying collateral for our loans and the collateral structure upon which our loans are based. Low LTVs provide a greater likelihood of full recovery and reduce the possibility of incurring a severe loss. In many cases, low LTVs result in fewer loans with walk-away potential; although borrowers may default on loan payments, they have a greater incentive to protect their equity in the collateral property and to return the loan to performing status.
Our CRE lending practices provide the basis for a well-collateralized loan portfolio. As a result, an increase in CRE originations would not necessarily result in a corresponding increase in our loan loss allowance. In the twelve months ended December 31, 2008, the percentage of CRE loans to total loans increased by a modest 171 basis points to 20.5%. At June 30, 2009, the percentage was nominally higher, at 21.0%. In addition, we had no CRE loan charge-offs in the first six months of 2009 and only $16,000 of CRE loan charge-offs in the twelve months ended December 31, 2008. We believe this favorable loan loss experience reflects our historical practice of underwriting CRE loans in accordance with similar standards to those that we follow in underwriting our multi-family loans, as described above. Importantly, our allowance for loan losses at June 30, 2009 represented 10.6 times the level of charge-offs we recorded in the three months ended at that date.
In the first six months of 2009, we continued to de-emphasize the production of ADC, one- to four-family, and other loans in order to mitigate credit risk in the loan portfolio. At June 30, 2009, ADC, one- to four-family, and other loans represented 3.2%, 1.1%, and 3.6%, respectively of loans outstanding, as compared to 3.5%, 1.2%, and 3.9%, respectively, at December 31, 2008. In addition, at June 30, 2009, 10.9%, 5.9%, and 2.4% of ADC, one- to four-family, and other loans were non-performing, respectively. Although ADC, one- to four-family, and other loans each represented a smaller percentage of loans outstanding, the level of the loan loss allowance for such loans increased at the end of the second quarter, reflecting our ongoing assessment of the risk inherent in these loan types.
As a result of these factors, an increase in our ratio of non-performing loans to total loans would not necessarily result in a comparable increase in our allowance for loan losses or the provision for loan losses recorded in any given period. The allowance for loans losses is determined in accordance with the methodology described earlier in this report under Critical Accounting Policies.
Securities
Securities represented $5.6 billion, or 17.2%, of total assets at June 30, 2009, and were down $115.6 million and $262.6 million, respectively, from the balances recorded at March 31, 2009 and December 31, 2008.
Available-for-sale securities represented $849.1 million, or 15.1%, of total securities at the close of the second quarter, and were down $121.7 million and $161.4 million, respectively, over the three- and six-month periods. Held-to-maturity securities accounted for the remaining $4.8 billion of total securities at the close of the second quarter, up $6.1 million on a linked-quarter basis and down $101.2 million from the year-end 2008 amount. In view of the volatility and uncertainty in the financial markets, we have been limiting our securities investments to government-sponsored enterprise (GSE) securities for several quarters. Accordingly, approximately 90% of the securities portfolio consisted of GSE securities at June 30, 2009.
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At the end of the quarter, mortgage-related securities represented $749.7 million, or 88.3%, of available-for-sale securities and $2.8 billion, or 58.7%, of securities held to maturity. Other securities accounted for $99.4 million of available-for-sale securities and for $2.0 billion of held-to-maturity securities at the same date. At June 30, 2009, the respective fair values of mortgage-related securities and other securities held to maturity were $2.9 billion and $1.9 billion, representing 102.3% and 95.0% of their respective carrying values.
The estimated weighted average life of the available-for-sale securities portfolio was 3.9 years at the close of the current second quarter, as compared to 5.1 years at March 31, 2009 and 5.6 years at December 31, 2008. The estimated weighted average life of available-for-sale mortgage-related securities was 3.0 years at the close of the current second quarter, as compared to 4.1 years and 5.0 years, respectively, at the earlier dates.
Sources of Funds
On a stand-alone basis, the Company has four primary funding sources for the payment of dividends, share repurchases, and other corporate uses: dividends paid to the Company by the Banks; capital raised through the issuance of stock; funding raised through the issuance of debt instruments; and repayments of, and income from, investment securities owned by the Company.
On a consolidated basis, our funding primarily stems from the cash flows generated through the repayment of loans and securities; the cash flows generated through the sale of securities; deposits that are gathered through our branch network or acquired in business combinations, as well as brokered deposits; and the use of borrowed funds, particularly in the form of wholesale borrowings. Our primary sources of wholesale borrowings are FHLB-NY advances and repurchase agreements, and repurchase agreements with Wall Street brokerage firms.
Depending on the availability and attractiveness of wholesale funding sources, we have typically refrained from pricing our retail deposits at the higher end of the market in order to contain our funding costs. While we have the capacity to increase deposits through our extensive branch network, we often utilize wholesale funds, including brokered deposits, when the interest rates on such funds are more attractively priced.
Deposits totaled $14.4 billion at the close of the current second quarter, signifying a three-month increase of $101.8 million and a six-month decrease of $21.6 million. Certificates of deposit (CDs) totaled $6.0 billion at the end of June and declined by $731.9 million and $750.3 million, respectively, from the balances recorded at March 31, 2009 and December 31, 2008. Included in the June 30, 2009 amount were brokered CDs of $761.5 million, signifying a three-month decrease of $553.2 million and a six-month decrease of $837.8 million.
Core deposits (defined as all deposits other than CDs) represented $8.3 billion, or 57.9%, of the June 30, 2009 total and were up $833.7 million and $728.8 million, respectively, from the balances at March 31, 2009 and December 31, 2008. The three-month increase was primarily due to an $809.1 million rise in NOW and money market accounts to $4.4 billion, including a $428.4 million increase in brokered money market accounts to $1.8 billion. In addition, savings accounts rose $122.4 million to $2.8 billion during this time. These increases were offset by a $97.8 million decline in non-interest-bearing accounts to $1.1 billion.
The six-month increase in core deposits reflects a $605.5 million rise in NOW and money market accounts, including a $243.3 million increase in brokered money market accounts, and a $124.6 million increase in savings accounts. These increases were tempered by a $1.3 million decline in non-interest-bearing accounts.
At June 30, 2009, borrowed funds totaled $14.1 billion, representing a three-month increase of $352.5 million and an increase of $562.3 million over the six-month period. Wholesale borrowings accounted for $12.9 billion of the June 30, 2009 total, and were up $352.6 million and $562.5 million, respectively, from the March 31, 2009 and December 31, 2008 amounts. FHLB-NY advances and repurchase agreements accounted for $12.7 billion of total
41
wholesale borrowings at the end of the current second quarter, as compared to $12.3 billion and $12.2 billion, respectively, at the earlier dates.
Junior subordinated debentures and other borrowings totaled $484.0 million and $669.5 million, respectively, at the close of the current second quarter, comparable to the balances at March 31, 2009 and December 31, 2008.
Loan repayments generated cash flows of $527.1 million in the current second quarter, bringing the six-month total to $1.1 billion. Securities generated cash flows of $1.1 billion in the current second quarter, increasing the six-month total to $2.1 billion. The cash flows from each of these sources were primarily invested in loan production and, to a lesser extent, in GSE securities.
Asset and Liability Management and the Management of Interest Rate Risk
We manage our assets and liabilities to reduce our exposure to changes in market interest rates. The asset and liability management process has three primary objectives: to evaluate the interest rate risk inherent in certain balance sheet accounts; to determine the appropriate level of risk, given our business strategy, operating environment, capital and liquidity requirements, and performance objectives; and to manage that risk in a manner consistent with guidelines approved by the Boards of Directors of the Company, the Community Bank, and the Commercial Bank, as applicable.
Market Risk
As a financial institution, we are focused on reducing our exposure to interest rate volatility, which represents a significant market risk. Changes in market interest rates represent the greatest challenge to our financial performance, as such changes can have a significant impact on the level of income and expense recorded on a large portion of our interest-earning assets and interest-bearing liabilities, and on the market value of all interest-earning assets, other than those possessing a short term to maturity. To reduce our exposure to changing rates, the Board of Directors and management monitor interest rate sensitivity on a regular and as needed basis so that adjustments in the asset and liability mix of each entity can be made when deemed appropriate.
The actual duration of mortgage loans and mortgage-related securities can be significantly impacted by changes in prepayment levels and market interest rates. The volume of prepayments may be impacted by a variety of factors, including the economy in the region where the underlying mortgages were originated; seasonal factors; demographic variables; and the assumability of the underlying mortgages. However, the largest determinants of prepayments are market interest rates and the availability of refinancing opportunities.
To manage our interest rate risk in the second quarter, we continued to pursue certain core components of our business model: (1) We placed an emphasis on the origination and retention of intermediate-term assets, primarily in the form of multi-family and CRE loans; (2) We utilized the cash flows from loan and securities repayments to fund our loan production, as well as our more limited investments in GSE securities; (3) We capitalized on the low level of the federal funds rate to reduce our retail funding costs; and (4) We utilized wholesale funding sources, most notably FHLB-NY advances and brokered deposits, to support our loan production when such funding presented an attractively priced alternative or supplement to retail funds.
Interest Rate Sensitivity Analysis
The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are interest rate sensitive and by monitoring a banks interest rate sensitivity gap. An asset or liability is said to be interest rate sensitive within a specific time frame if it will mature or reprice within that period of time. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time frame and the amount of interest-bearing liabilities maturing or repricing within that same period of time.
In a rising interest rate environment, an institution with a negative gap would generally be expected, absent the effects of other factors, to experience a greater increase in the cost of its interest-bearing liabilities than it would
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in the yield on its interest-earning assets, thus producing a decline in its net interest income. Conversely, in a declining rate environment, an institution with a negative gap would generally be expected to experience a lesser reduction in the yield on its interest-earning assets than it would in the cost of its interest-bearing liabilities, thus producing an increase in its net interest income.
In a rising interest rate environment, an institution with a positive gap would generally be expected to experience a greater increase in the yield on its interest-earning assets than it would in the cost of its interest-bearing liabilities, thus producing an increase in its net interest income. Conversely, in a declining rate environment, an institution with a positive gap would generally be expected to experience a lesser reduction in the cost of its interest-bearing liabilities than it would in the yield on its interest-earning assets, thus producing a decline in its net interest income.
At June 30, 2009, our one-year gap was a negative 3.33%, as compared to a negative 0.37% at March 31, 2009 and a positive 0.16% at December 31, 2008.
The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at June 30, 2009 which, based on certain assumptions stemming from our historical experience, are expected to reprice or mature in each of the future time periods shown. Except as stated below, the amounts of assets and liabilities shown as repricing or maturing during a particular time period were determined in accordance with the earlier of (1) the term to repricing, or (2) the contractual terms of the asset or liability. The table provides an approximation of the projected repricing of assets and liabilities at June 30, 2009 on the basis of contractual maturities, anticipated prepayments (including anticipated calls on wholesale borrowings), and scheduled rate adjustments within a three-month period and subsequent selected time intervals. For loans and mortgage-related securities, prepayment rates were assumed to range up to 18% annually. Savings accounts, Super NOW accounts, and NOW accounts were assumed to decay at an annual rate of 5% for the first five years and 15% for the years thereafter. With the exception of those accounts having specified repricing dates, money market accounts were assumed to decay at an annual rate of 20% for the first five years and 50% in the years thereafter.
Prepayment and deposit decay rates can have a significant impact on our estimated gap. While we believe our assumptions to be reasonable, there can be no assurance that the assumed prepayment and decay rates noted above will approximate actual future loan prepayments and deposit withdrawal activity.
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Interest Rate Sensitivity Analysis
At June 30, 2009 | |||||||||||||||||||||||||||
Three Months |
Four to Twelve |
More Than One Year |
More Than Three Years |
More Than Five Years |
More Than |
||||||||||||||||||||||
(dollars in thousands) | or Less | Months | to Three Years | to Five Years | to 10 Years | 10 Years | Total | ||||||||||||||||||||
INTEREST-EARNING ASSETS: |
|||||||||||||||||||||||||||
Mortgage and other loans(1) |
$ | 2,790,548 | $ | 4,476,930 | $ | 9,161,044 | $ | 5,356,896 | $ | 497,365 | $ | 154,225 | $ | 22,437,008 | |||||||||||||
Mortgage-related securities(2)(3) |
296,894 | 673,505 | 1,254,038 | 738,436 | 519,228 | 80,956 | 3,563,057 | ||||||||||||||||||||
Other securities and money market investments(2) |
654,755 | 4,000 | 20,000 | 234,675 | 1,567,297 | 43,343 | 2,524,070 | ||||||||||||||||||||
Total interest-earning assets |
3,742,197 | 5,154,435 | 10,435,082 | 6,330,007 | 2,583,890 | 278,524 | 28,524,135 | ||||||||||||||||||||
INTEREST-BEARING LIABILITIES: |
|||||||||||||||||||||||||||
Savings accounts |
419,739 | 88,744 | 219,199 | 197,827 | 1,018,668 | 812,497 | 2,756,674 | ||||||||||||||||||||
NOW and Super NOW accounts |
12,795 | 38,386 | 94,813 | 85,569 | 440,617 | 351,440 | 1,023,620 | ||||||||||||||||||||
Money market accounts |
1,910,264 | 235,350 | 451,872 | 289,198 | 498,063 | 16,066 | 3,400,813 | ||||||||||||||||||||
Certificates of deposit |
2,280,880 | 2,837,048 | 741,161 | 158,816 | 28,741 | | 6,046,646 | ||||||||||||||||||||
Borrowed funds |
1,865,803 | 300,460 | 2,716,507 | 1,275,024 | 7,538,907 | 362,302 | 14,059,003 | ||||||||||||||||||||
Total interest-bearing liabilities |
6,489,481 | 3,499,988 | 4,223,552 | 2,006,434 | 9,524,996 | 1,542,305 | 27,286,756 | ||||||||||||||||||||
Interest rate sensitivity gap per period(4) |
$ | (2,747,284 | ) | $ | 1,654,447 | $ | 6,211,530 | $ | 4,323,573 | $ | (6,941,106 | ) | $ | (1,263,781 | ) | $ | 1,237,379 | ||||||||||
Cumulative interest sensitivity gap |
$ | (2,747,284 | ) | $ | (1,092,837 | ) | $ | 5,118,693 | $ | 9,442,266 | $ | 2,501,160 | $ | 1,237,379 | |||||||||||||
Cumulative interest sensitivity gap as a percentage of total assets |
(8.36 | )% | (3.33 | )% | 15.58 | % | 28.73 | % | 7.61 | % | 3.77 | % | |||||||||||||||
Cumulative net interest-earning assets as a percentage of net interest-bearing liabilities |
57.67 | % | 89.06 | % | 136.01 | % | 158.22 | % | 109.72 | % | 104.53 | % | |||||||||||||||
(1) | For the purpose of the gap analysis, non-performing loans and the allowance for loan losses have been excluded. |
(2) | Mortgage-related and other securities, including FHLB-NY stock, are shown at their respective carrying values. |
(3) | Expected amount based, in part, on historical experience. |
(4) | The interest rate sensitivity gap per period represents the difference between interest-earning assets and interest-bearing liabilities. |
44
Certain shortcomings are inherent in the method of analysis presented in the preceding Interest Rate Sensitivity Analysis. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of the market, while interest rates on other types may lag behind changes in market interest rates. Additionally, certain assets, such as adjustable-rate loans, have features that restrict changes in interest rates both on a short-term basis and over the life of the asset. Furthermore, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate from those assumed in calculating the table. Finally, the ability of some borrowers to repay their adjustable-rate loans may be adversely impacted by an increase in market interest rates.
Management also monitors interest rate sensitivity through the use of a model that generates estimates of the change in our net portfolio value (NPV) over a range of interest rate scenarios. NPV is defined as the net present value of expected cash flows from assets, liabilities, and off-balance sheet contracts. The model makes assumptions regarding estimated loan prepayment rates, reinvestment rates, and deposit decay rates.
To monitor our overall sensitivity to changes in interest rates, we model the effect of instantaneous increases and decreases in interest rates on our assets and liabilities. While the NPV analysis provides an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to, and do not, provide a precise forecast of the effect of changes in market interest rates on our net interest income, and may very well differ from actual results.
Based on the information and assumptions in effect at June 30, 2009, the following table reflects the estimated percentage change in our NPV, assuming the changes in interest rates noted:
Change in Interest Rates (in basis points) (1) |
Estimated Percentage Change in Net Portfolio Value | |
+200 over one year |
(13.49)% | |
+100 over one year |
(6.11) |
(1) | The impact of 100- and 200-basis point reductions in interest rates is not presented in view of the current level of the federal funds rate and other short-term interest rates. |
We also utilize an internal net interest income simulation to manage our sensitivity to interest rate risk. The simulation incorporates various market-based assumptions regarding the impact of changing interest rates on future levels of our financial assets and liabilities. The assumptions used in the net interest income simulation are inherently uncertain. Actual results may differ significantly from those presented in the table below, due to the frequency, timing, and magnitude of changes in interest rates; changes in spreads between maturity and repricing categories; and prepayments, among other factors, coupled with any actions taken to counter the effects of any such changes.
Based on the information and assumptions in effect at June 30, 2009, the following table reflects the estimated percentage change in future net interest income for the next twelve months, assuming a gradual increase or decrease in interest rates during such time:
Change in Interest Rates (in basis points)(1)(2) |
Estimated Percentage Change in Future Net Interest Income | |
+200 over one year |
(1.24)% | |
+100 over one year |
(0.48) |
(1) | In general, short- and long-term rates are assumed to increase or decrease in parallel fashion across all four quarters and then remain unchanged. |
(2) | The impact of 100- and 200-basis point reductions in interest rates is not presented in view of the current level of the federal funds rate and other short-term interest rates. |
No assurances can be given that future changes in our mix of assets and liabilities will not result in greater changes to our gap, NPV, or net interest income simulation.
45
Liquidity, Off-balance Sheet Arrangements and Contractual Commitments, and Capital Position
Liquidity
On a consolidated basis, we manage our liquidity to ensure that cash flows are sufficient to support our operations, and to compensate for any temporary mismatches between sources and uses of funds caused by erratic loan and deposit demand, among other factors.
We monitor our liquidity daily to ensure that sufficient funds are available to meet our financial obligations. Our most liquid assets are cash and cash equivalents, which totaled $162.8 million at June 30, 2009, as compared to $167.3 million at March 31, 2009 and $203.2 million at December 31, 2008. Additional liquidity stems from our portfolio of available-for-sale securities, which totaled $849.1 million at the close of the second quarter, as compared to $970.8 million and $1.0 billion, respectively, at the earlier period-ends.
In the first six months of 2009, our loan and securities portfolios continued to be significant sources of liquidity, with loan repayments generating cash flows of $1.1 billion and the securities portfolio generating cash flows of $2.1 billion during the same time. Included in these amounts were second quarter cash flows of $527.1 million and $1.1 billion, respectively.
Additional liquidity stemmed from the deposits we gathered through our branches and from our use of wholesale funding sources, including brokered deposits and wholesale borrowings. We also have access to the Banks approved lines of credit with various counterparties, including the FHLB-NY.
Our primary investing activity is loan production, and in the first six months of 2009, the volume of loans originated exceeded the volume of loan repayments received. In the six months ended June 30, 2009, the net cash used in investing activities totaled $390.3 million. During this time, our financing activities provided net cash of $368.7 million. In addition, our operating activities used net cash of $18.9 million in the first six months of 2009.
CDs due to mature in one year or less from June 30, 2009 totaled $5.1 billion, representing 84.6% of total CDs at that date. Our ability to retain these CDs and to attract new deposits depends on numerous factors, including customer satisfaction, the rates of interest we pay on our deposits, the types of products we offer, and the attractiveness of their terms. As previously mentioned, there are times that we may choose not to compete for deposits, depending on the availability of lower-cost funding sources, the competitiveness of the market and its impact on pricing, and our need for such deposits to fund loan demand.
On a stand-alone basis, the Company is a separate legal entity from each of the Banks and must provide for its own liquidity. In addition to operating expenses and any share repurchases, the Company is responsible for paying any dividends declared to our shareholders. Dividends from the Banks are the Companys primary source of income. The amount of dividends that each Bank may declare and pay to the Company in any calendar year, without the receipt of prior approval from the New York Superintendent of Banks, cannot exceed the total of the respective Banks net income for that year, combined with its retained profits for the preceding two calendar years, less prior dividends paid. On a stand-alone basis, the Company had liquid assets of $115.1 million at June 30, 2009.
Off-balance Sheet Arrangements and Contractual Commitments
At June 30, 2009, we had outstanding loan commitments of $984.9 million and outstanding letters of credit totaling $58.2 million. In addition, we continue to be obligated under numerous non-cancelable operating lease and license agreements. The amounts involved in our operating lease and license agreements at the close of the current second quarter were comparable to the amounts at December 31, 2008, as disclosed in our 2008 Annual Report on Form 10-K.
46
Capital Position
We recorded stockholders equity of $4.2 billion at the close of the second quarter, representing a $25.2 million decrease from the March 31, 2009 balance and an $8.6 million increase from the balance recorded at December 31, 2008. The June 30th balance was equivalent to 12.81% of total assets and a book value of $12.21 per share. By comparison, the December 31, 2008 balance was equivalent to 13.00% of total assets and a book value of $12.25 per share.
We calculate book value by subtracting the number of unallocated Employee Stock Ownership Plan (ESOP) shares at the end of a period from the number of shares outstanding at the same date, and then dividing our total stockholders equity by the resultant number of shares. At June 30, 2009, the number of unallocated ESOP shares was 465,275; at December 31, 2008, the number of unallocated ESOP shares was 631,303. We calculate book value in this manner to be consistent with our calculations of basic and diluted earnings per share, both of which exclude unallocated ESOP shares from the number of shares outstanding.
Excluding goodwill of $2.4 billion and core deposit intangibles (CDI) of $76.6 million, we reported tangible stockholders equity of $1.7 billion at June 30, 2009, equivalent to 5.59% of tangible assets and a tangible book value of $4.92 per share. At December 31, 2008, we reported tangible stockholders equity of $1.7 billion, equivalent to 5.66% of tangible assets and a tangible book value of $4.92 per share. The reductions were due to the aforementioned FDIC special assessment and OTTI charge.
Excluding AOCL in the amount of $76.3 million, our adjusted tangible stockholders equity was equivalent to 5.83% of adjusted tangible assets at June 30, 2009. Excluding AOCL of $87.3 million, the ratio of adjusted tangible stockholders equity to adjusted tangible assets was 5.94% at December 31, 2008. (Please see the reconciliations of stockholders equity, tangible stockholders equity, and adjusted tangible stockholders equity; total assets, tangible assets, and adjusted tangible assets; and the related capital measures provided earlier in this report.)
Consistent with our historical performance, our capital levels exceeded the minimum federal requirements for a bank holding company at June 30, 2009. On a consolidated basis, our leverage capital equaled $2.3 billion, representing 7.74% of adjusted average assets, and our Tier 1 and total risk-based capital equaled $2.3 billion and $2.4 billion, representing 11.10% and 11.57%, respectively, of risk-weighted assets. At December 31, 2008, our leverage capital, Tier 1 risk-based capital, and total risk-based capital amounted to $2.3 billion, $2.3 billion, and $2.4 billion, representing 7.84% of adjusted average assets, 11.49% of risk-weighted assets, and 11.96% of risk-weighted assets, respectively.
In addition, as of June 30, 2009, both the Community Bank and the Commercial Bank were categorized as well capitalized under the FDICs regulatory framework for prompt corrective action. To be categorized as well capitalized, a bank must maintain a minimum leverage capital ratio of 5.00%, a minimum Tier 1 risk-based capital ratio of 6.00%, and a minimum total risk-based capital ratio of 10.00%.
The following regulatory capital analyses set forth the leverage, Tier 1 risk-based, and total risk-based capital levels at June 30, 2009 for the Company, the Community Bank, and the Commercial Bank, each in comparison with the minimum federal requirements.
Regulatory Capital Analysis (the Company)
At June 30, 2009 | ||||||||||||||||||
Risk-based Capital | ||||||||||||||||||
Leverage Capital | Tier 1 | Total | ||||||||||||||||
(dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||
Total capital |
$ | 2,324,471 | 7.74 | % | $ | 2,324,471 | 11.10 | % | $ | 2,422,553 | 11.57 | % | ||||||
Regulatory capital requirement |
1,201,394 | 4.00 | 837,561 | 4.00 | 1,675,121 | 8.00 | ||||||||||||
Excess |
$ | 1,123,077 | 3.74 | % | $ | 1,486,910 | 7.10 | % | $ | 747,432 | 3.57 | % | ||||||
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Regulatory Capital Analysis (the Community Bank)
At June 30, 2009 | ||||||||||||||||||
Risk-based Capital | ||||||||||||||||||
Leverage Capital | Tier 1 | Total | ||||||||||||||||
(dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||
Total capital |
$ | 1,965,251 | 7.00 | % | $ | 1,965,251 | 10.16 | % | $ | 2,052,661 | 10.62 | % | ||||||
Regulatory capital requirement |
1,122,822 | 4.00 | 773,387 | 4.00 | 1,546,775 | 8.00 | ||||||||||||
Excess |
$ | 842,429 | 3.00 | % | $ | 1,191,864 | 6.16 | % | $ | 505,886 | 2.62 | % | ||||||
Regulatory Capital Analysis (the Commercial Bank)
At June 30, 2009 | ||||||||||||||||||
Risk-based Capital | ||||||||||||||||||
Leverage Capital | Tier 1 | Total | ||||||||||||||||
(dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||
Total capital |
$ | 264,872 | 12.19 | % | $ | 264,872 | 12.20 | % | $ | 275,720 | 12.70 | % | ||||||
Regulatory capital requirement |
86,931 | 4.00 | 86,810 | 4.00 | 173,619 | 8.00 | ||||||||||||
Excess |
$ | 177,941 | 8.19 | % | $ | 178,062 | 8.20 | % | $ | 102,101 | 4.70 | % | ||||||
Earnings Summary for the Three Months Ended June 30, 2009
We generated earnings of $56.4 million, or $0.16 per diluted share, in the current second quarter, as net interest income in the amount of $217.6 million was tempered by the impact of an $8.4 million after-tax FDIC special assessment and a $24.2 million after-tax OTTI charge, which were respectively equivalent to $0.03 and $0.07 per diluted share. Equivalent to $14.0 million on a pre-tax basis, the FDIC special assessment increased our non-interest expense to $107.4 million, while the pre-tax credit-related OTTI charge of $39.7 million resulted in our recording a $17.7 million non-interest loss. Total OTTI was $51.1 million in the quarter, with the remaining $11.3 million non-credit loss being recorded in other comprehensive income. In addition, we recorded a $12.0 million loan loss provision in the quarter, as previously discussed under Asset Quality.
In the second quarter of 2008, we engaged in a strategic debt repositioning which contributed to the immediate growth of our net interest income and net interest margin, and continues to benefit these measures today. In connection with the prepayment of wholesale and other borrowings totaling $4.0 billion, we incurred an after-tax debt repositioning charge of $199.2 million in the quarter, which was equivalent to $0.60 per diluted share. On a pre-tax basis, the debt repositioning charge equaled $325.0 million, including $285.4 million that was recorded in non-interest expense in connection with the prepayment of wholesale and other borrowings totaling $3.3 billion, and $39.6 million that was recorded in interest expense in connection with the prepayment of $700.0 million in wholesale borrowings.
Our second quarter 2008 earnings were also reduced by an after-tax OTTI charge of $29.8 million and by an after-tax litigation settlement charge of $2.3 million, together equivalent to $0.10 per diluted share. The pre-tax OTTI charge equaled $49.6 million and resulted in our recording a second quarter 2008 non-interest loss of $22.7 million, while the pre-tax litigation settlement charge added $3.4 million to our second quarter 2008 non-interest expense.
Reflecting the combined impact of the three charges, we recorded a net loss of $154.8 million, or $0.47 per diluted share, in the second quarter of 2008.
In contrast, our first quarter 2009 earnings were $88.7 million, equivalent to $0.26 per diluted share.
Net Interest Income
Net interest income is our primary source of income. Its level is largely a function of the average balance of our interest-earning assets, the average balance of our interest-bearing liabilities, and the spread between the yield
48
on such assets and the cost of such liabilities. These factors are influenced by the pricing and mix of our interest-earning assets and interest-bearing liabilities which, in turn, may be impacted by such external factors as economic conditions, competition for loans and deposits, market interest rates, and the monetary policy of the Federal Open Market Committee (the FOMC).
The cost of our deposits and borrowed funds is largely based on short-term rates of interest, the level of which is partially impacted by the actions of the FOMC. The FOMC reduces, maintains, or increases the target federal funds rate as it deems necessary. As a result of the economic crisis, the federal funds rate was reduced in 2008 from 4.25% at the start of January to an historical range of zero to 0.25% on December 16th. The federal funds rate has remained at this level since that date.
While the federal funds rate generally impacts the cost of our short-term borrowings and deposits, the yields on our loans and other interest-earning assets are typically impacted by intermediate-term market interest rates. As previously indicated, the pricing of our multi-family and CRE loans is generally based on the five-year CMT plus a spread, with the interest rate fixed at the date of origination for the first five years of the loan. The yields on the multi-family and CRE loans originated during the second quarter of 2009 exceeded the average five-year CMT by 379 basis points on average, as compared to an average of 438 basis points in the trailing quarter and 257 basis points in the second quarter of 2008.
The level of net interest income is also influenced by the level of prepayment penalty income recorded, primarily in connection with the prepayment of multi-family and CRE loans. Since prepayment penalty income is recorded as interest income, an increase or decrease in its level will also be reflected in the average yields on our loans and interest-earning assets, and therefore, in the levels of our interest rate spread and net interest margin.
Year-over-Year Comparison
We recorded net interest income of $217.6 million in the current second quarter, signifying a linked-quarter increase of $10.7 million and an $87.0 million increase from $130.6 million in the year-earlier three months. In the second quarter of 2008, our net interest income was reduced by the impact of the $39.6 million debt repositioning charge recorded in interest expense in connection with the strategic prepayment of $700.0 million of wholesale borrowings.
Absent the second quarter 2008 debt repositioning charge, the year-over-year increase in second quarter 2009 net interest income was driven by an increase in average loans outstanding and a continuing decline in the cost of funds. During the quarter, we continued to take advantage of the steeper yield curve and a decline in competition to increase our loan production, while also capitalizing on the historically low level of short-term interest rates to reduce our funding costs.
Interest income rose $8.4 million year-over-year, to $401.7 million, as a $1.7 billion, or 6.5%, increase in the average balance of interest-earning assets to $28.4 billion exceeded the impact of a 25-basis point decline in the average yield to 5.65%. While the average yield on loans fell 32 basis points year-over-year to 5.75%, the average balance of such assets rose $1.9 billion to $22.4 billion; as a result, the interest income from loans rose $11.2 million to $321.6 million in the second quarter of 2009. The increase in the interest income produced by loans occurred despite a $6.1 million decline in prepayment penalty income to $2.1 million, as the economic environment continued to inhibit refinancing activity. Prepayment penalty income added four basis points to the average yield on loans in the current second quarter, down from 16 basis points in the second quarter of 2008. The average yield on loans was also reduced by the reversal of interest on loans that moved to non-accrual status during the current three-month period.
The higher interest income produced by loans was modestly tempered by a $2.8 million decline in the interest income produced by securities and money market investments, as the average balance of such assets fell $178.9 million to $6.0 billion and the average yield declined three basis points to 5.31%.
Interest expense totaled $184.1 million in the current second quarter, representing a $78.6 million reduction from the year-earlier amount. The second quarter 2008 debt repositioning charge accounted for $39.6 million of
49
the $262.8 million in interest expense recorded in that quarter, and accounted for 65 basis points of the average cost of funds, 4.26%.
The year-over-year reduction in interest expense was the net effect of a $1.9 billion increase in the average balance of interest-bearing liabilities to $26.7 billion and a 150-basis point decline in the average cost of interest-bearing liabilities to 2.76%. In addition to the impact of the debt repositioning charge in the year-earlier quarter, the reduction in the cost of funds reflects the decline in the federal funds rate over the past four quarters, together with our strategic replacement of higher-cost funding with lower-cost retail deposits and wholesale borrowings.
The interest expense produced by interest-bearing deposits declined $29.3 million year-over-year to $55.5 million, as the impact of a $1.0 billion increase in the average balance to $13.0 billion was outweighed by the benefit of a 113-basis point decline in the average cost of such funds to 1.71%. CDs accounted for $44.6 million of the interest expense generated by deposits in the current second quarter, representing a year-over-year reduction of $21.2 million. The latter decline was the result of a $105.4 million reduction in the average balance of CDs to $6.3 billion and a 129-basis point reduction in the average cost to 2.84%.
In addition, the interest expense produced by NOW and money market accounts declined by $5.8 million to $7.3 million, as the impact of a $1.0 billion increase in the average balance to $4.0 billion was exceeded by the benefit of a 103-basis point reduction in the average cost to 0.73%. Furthermore, the interest expense stemming from savings accounts fell $2.3 million to $3.6 million, as the impact of a $97.4 million increase in the average balance to $2.7 billion was exceeded by the benefit of a 38-basis point decline in the average cost of such deposits to 0.53%.
The interest expense produced by borrowed funds fell $49.3 million to $128.6 million in the current second quarter, the net effect of an $889.2 million rise in the average balance to $13.7 billion and a 182-basis point decline in the average cost to 3.77%. The debt repositioning charge accounted for $39.6 million of the $177.9 million interest expense produced by borrowed funds in the year-earlier quarter, and for 125 basis points of the average cost of such funds, which was 5.59%.
The same factors that contributed to the year-over-year increase in second quarter 2009 net interest income contributed to the expansion of the Companys interest rate spread and net interest margin during this time. At 2.89%, our spread was 125 basis points wider than the year-earlier measure, and at 3.06%, our margin was up 112 basis points year-over-year. The second quarter 2008 debt repositioning charge reduced our spread and margin for that quarter by 65 and 60 basis points, respectively, to 1.64% and 1.94%. In addition, prepayment penalty income contributed three basis points to our margin in the current second quarter, as compared to 12 basis points in the year-earlier three months.
Linked-quarter Comparison
On a linked-quarter basis, the Company realized a $10.7 million increase in net interest income, as a $1.6 million rise in interest income combined with a $9.1 million decline in interest expense.
During the quarter, the average balance of interest-earning assets rose $109.4 million, driven by the aforementioned increase in loan production, while the average yield declined a single basis point. The interest income produced by loans declined modestly over the quarter, as the benefit of a $274.1 million increase in the average balance was offset by an eight-basis point reduction in the average yield. Prepayment penalty income increased $836,000 on a linked-quarter basis, and added four and two basis points, respectively, to the average yield on loans in the three months ended June 30 and March 31, 2009. In addition, the interest income produced by securities and money market investments rose $1.7 million, the net effect of a $164.8 million reduction in the average balance and a 25-basis point increase in the average yield.
The linked-quarter reduction in interest expense was the net effect of a $32.4 million increase in the average balance of interest-bearing liabilities and a 17-basis point decline in the average cost of funds. The growth in the average balance was due to a $377.9 million increase in the average balance of interest-bearing deposits, tempered by a $345.5 million decline in the average balance of borrowed funds. While the average cost of interest-bearing
50
deposits fell 36 basis points on a linked-quarter basis, the average cost of borrowed funds rose a modest six basis points during this time. As a result, the interest expense produced by interest-bearing deposits fell $9.0 million on a linked-quarter basis, while the interest expense produced by borrowed funds remained relatively flat.
CDs accounted for $8.1 million of the linked-quarter decline in interest expense from interest-bearing deposits, as a $94.7 million reduction in the average balance of such deposits combined with a 51-basis point decline in the average cost. The interest expense from NOW and money market accounts fell a more modest $249,000, as an 11-basis point decline in the average cost of such deposits outweighed the impact of a $375.3 million increase in the average balance. Similarly, the interest expense from savings accounts declined $651,000 over the course of the quarter, the net effect of a $97.4 million increase in the average balance and a 13-basis point reduction in the average cost of such funds.
Reflecting the same factors that influenced the linked-quarter rise in net interest income, our spread rose 16 basis points over the course of the quarter, while our margin rose 17 basis points.
The following tables set forth certain information regarding our average balance sheet for the periods indicated, including the average yields on our interest-earning assets and the average costs of our interest-bearing liabilities. Average yields are calculated by dividing the interest income produced by the average balance of interest-earning assets. Average costs are calculated by dividing the interest expense produced by the average balance of interest-bearing liabilities. The average balances for the period are derived from average balances that are calculated daily. The average yields and costs include fees that are considered adjustments to such average yields and costs.
Net Interest Income Analysis (Year-over-Year Comparison)
For the Three Months Ended June 30, | ||||||||||||||||||
2009 | 2008 | |||||||||||||||||
(dollars in thousands) | Average Balance |
Interest | Average Yield/ Cost |
Average Balance |
Interest | Average Yield/ Cost |
||||||||||||
Assets: |
||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||
Mortgage and other loans, net (1) |
$ | 22,382,786 | $ | 321,640 | 5.75 | % | $ | 20,478,132 | $ | 310,396 | 6.07 | % | ||||||
Securities and money market investments(2)(3) |
6,035,990 | 80,056 | 5.31 | 6,214,920 | 82,904 | 5.34 | ||||||||||||
Total interest-earning assets |
28,418,776 | 401,696 | 5.65 | 26,693,052 | 393,300 | 5.90 | ||||||||||||
Non-interest-earning assets |
3,958,436 | 3,871,259 | ||||||||||||||||
Total assets |
$ | 32,377,212 | $ | 30,564,311 | ||||||||||||||
Liabilities and Stockholders Equity: |
||||||||||||||||||
Interest-bearing deposits: |
||||||||||||||||||
NOW and money market accounts |
$ | 4,038,172 | $ | 7,314 | 0.73 | % | $ | 3,010,497 | $ | 13,144 | 1.76 | % | ||||||
Savings accounts |
2,699,431 | 3,565 | 0.53 | 2,601,991 | 5,869 | 0.91 | ||||||||||||
Certificates of deposit |
6,295,936 | 44,617 | 2.84 | 6,401,287 | 65,799 | 4.13 | ||||||||||||
Total interest-bearing deposits |
13,033,539 | 55,496 | 1.71 | 12,013,775 | 84,812 | 2.84 | ||||||||||||
Borrowed funds |
13,696,028 | 128,615 | 3.77 | 12,806,797 | 177,938 | 5.59 | ||||||||||||
Total interest-bearing liabilities |
26,729,567 | 184,111 | 2.76 | 24,820,572 | 262,750 | 4.26 | ||||||||||||
Non-interest-bearing deposits |
1,217,281 | 1,410,106 | ||||||||||||||||
Other liabilities |
239,840 | 136,340 | ||||||||||||||||
Total liabilities |
28,186,688 | 26,397,018 | ||||||||||||||||
Stockholders equity |
4,190,524 | 4,197,293 | ||||||||||||||||
Total liabilities and stockholders equity |
$ | 32,377,212 | $ | 30,564,311 | ||||||||||||||
Net interest income/interest rate spread |
$ | 217,585 | 2.89 | % | $ | 130,550 | 1.64 | % | ||||||||||
Net interest-earning assets/net interest margin |
$ | 1,689,209 | 3.06 | % | $ | 1,872,480 | 1.94 | % | ||||||||||
Ratio of interest-earning assets to interest-bearing liabilities |
1.06 | x | 1.08 | x | ||||||||||||||
(1) | Amounts are net of net deferred loan origination costs/(fees) and the allowance for loan losses, and include loans held for sale and non-performing loans. |
(2) | Amounts are at amortized cost. |
(3) | Includes FHLB-NY stock. |
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Net Interest Income Analysis (Linked-Quarter Comparison)
For the Three Months Ended | ||||||||||||||||||
June 30, 2009 | March 31, 2009 | |||||||||||||||||
(dollars in thousands) | Average Balance |
Interest | Average Yield/ Cost |
Average Balance |
Interest | Average Yield/ Cost |
||||||||||||
Assets: |
||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||
Mortgage and other loans, net (1) |
$ | 22,382,786 | $ | 321,640 | 5.75 | % | $ | 22,108,647 | $ | 321,717 | 5.83 | % | ||||||
Securities and money market investments(2)(3) |
6,035,990 | 80,056 | 5.31 | 6,200,776 | 78,389 | 5.06 | ||||||||||||
Total interest-earning assets |
28,418,776 | 401,696 | 5.65 | 28,309,423 | 400,106 | 5.66 | ||||||||||||
Non-interest-earning assets |
3,958,436 | 3,887,498 | ||||||||||||||||
Total assets |
$ | 32,377,212 | $ | 32,196,921 | ||||||||||||||
Liabilities and Stockholders Equity: |
||||||||||||||||||
Interest-bearing deposits: |
||||||||||||||||||
NOW and money market accounts |
$ | 4,038,172 | $ | 7,314 | 0.73 | % | $ | 3,662,920 | $ | 7,563 | 0.84 | % | ||||||
Savings accounts |
2,699,431 | 3,565 | 0.53 | 2,602,051 | 4,216 | 0.66 | ||||||||||||
Certificates of deposit |
6,295,936 | 44,617 | 2.84 | 6,390,655 | 52,723 | 3.35 | ||||||||||||
Total interest-bearing deposits |
13,033,539 | 55,496 | 1.71 | 12,655,626 | 64,502 | 2.07 | ||||||||||||
Borrowed funds |
13,696,028 | 128,615 | 3.77 | 14,041,521 | 128,689 | 3.71 | ||||||||||||
Total interest-bearing liabilities |
26,729,567 | 184,111 | 2.76 | 26,697,147 | 193,191 | 2.93 | ||||||||||||
Non-interest-bearing deposits |
1,217,281 | 1,143,996 | ||||||||||||||||
Other liabilities |
239,840 | 193,567 | ||||||||||||||||
Total liabilities |
28,186,688 | 28,034,710 | ||||||||||||||||
Stockholders equity |
4,190,524 | 4,162,211 | ||||||||||||||||
Total liabilities and stockholders equity |
$ | 32,377,212 | $ | 32,196,921 | ||||||||||||||
Net interest income/interest rate spread |
$ | 217,585 | 2.89 | % | $ | 206,915 | 2.73 | % | ||||||||||
Net interest-earning assets/net interest margin |
$ | 1,689,209 | 3.06 | % | $ | 1,612,276 | 2.89 | % | ||||||||||
Ratio of interest-earning assets to interest-bearing liabilities |
1.06 | x | 1.06 | x | ||||||||||||||
(1) | Amounts are net of net deferred loan origination costs/(fees) and the allowance for loan losses, and include loans held for sale and non-performing loans. |
(2) | Amounts are at amortized cost. |
(3) | Includes FHLB-NY stock. |
Provision for Loan Losses
The provision for loan losses is based on managements assessment of the adequacy of the loan loss allowance. This assessment is made periodically and considers several factors, including the current and historical performance of the loan portfolio and its inherent risk characteristics; the level of non-performing loans and charge-offs; local economic conditions; the direction of real estate values; and current trends in regulatory supervision.
Reflecting managements assessment, which considered the severity of the current credit cycle and the increase in non-performing loans and net charge-offs, among other factors, we recorded a $12.0 million provision for loan losses in the current second quarter, up $6.0 million on a linked-quarter basis and $10.3 million year-over-year. During the three months ended June 30, 2009, the Company recorded net charge-offs of $9.2 million, as compared to $5.1 million and $1.2 million in the three months ended March 31, 2009 and June 30, 2008.
Reflecting the current second quarter provision and the level of charge-offs recorded, the allowance for loan losses rose $2.8 million over the course of the quarter to $98.1 million at June 30, 2009. Together with management, the Mortgage and Real Estate Committee of the Community Banks Board of Directors and the Credit Committee of the Commercial Banks Board of Directors monitor the loan loss allowance on a regular basis, and believe that the
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balance at June 30, 2009 represents the best estimate of losses inherent in the portfolio, given the nature of our lending niche, the standards we follow in underwriting our loans, and our evaluation of the other factors considered in determining its adequacy.
Please see Critical Accounting Policies earlier in this report for a detailed discussion of the factors considered by management in determining the allowance for loan losses, together with the discussion of asset quality in the balance sheet summary.
Non-interest (Loss) Income
Non-interest income consists of three primary components: fee income, income from bank-owned life insurance (BOLI), and other income, which primarily consists of revenues from the sale of third-party investment products, and revenues from our investment management subsidiary, Peter B. Cannell & Co., Inc. (PBC). The non-interest income from these three ongoing revenue sources totaled $22.0 million in the current second quarter, comparable to the $22.2 million recorded in the trailing quarter, and $4.4 million lower than the level recorded in the second quarter of 2008.
The year-over-year reduction was primarily due to a $3.0 million decline in other income to $6.0 million, including a $1.4 million reduction in PBC revenues and a $783,000 decline in revenues from investment product sales. In addition, fee income declined by $928,000 year-over-year to $9.3 million and BOLI income fell $406,000 to $6.7 million during this time. Furthermore, we recorded a net gain of $568,000 on the sale of securities in the second quarter of 2008; no such gains were recorded in the second quarter of this year.
In the second quarter of 2009, the combined revenues from the three ongoing components of non-interest income were offset by a charge of $39.7 million for the OTTI of certain pooled trust preferred and other debt securities. Similarly, in the year-earlier quarter, we recorded a charge of $49.6 million on the OTTI of certain corporate bonds, capital trust notes (including income notes), common stock, and preferred stock.
As a result of the respective OTTI charges, we recorded a non-interest loss of $17.7 million in the current second quarter and a non-interest loss of $22.7 million in the second quarter of 2008. As no OTTI charges were recorded in the trailing quarter, we recorded non-interest income of $22.2 million in the three months ended March 31, 2009.
The following table summarizes the components of non-interest income for the three months ended June 30, 2009, March 31, 2009, and June 30, 2008:
For the Three Months Ended | |||||||||||
June 30, | March 31, | June 30, | |||||||||
(in thousands) |
2009 | 2009 | 2008 | ||||||||
Fee income |
$ | 9,282 | $ | 9,291 | $ | 10,210 | |||||
BOLI income |
6,728 | 6,840 | 7,134 | ||||||||
Net gain on sale of securities |
| | 568 | ||||||||
Loss on OTTI of securities |
(39,728 | ) | | (49,595 | ) | ||||||
Other income: |
|||||||||||
PBC |
2,509 | 2,226 | 3,881 | ||||||||
Third-party investment product sales |
2,732 | 2,761 | 3,515 | ||||||||
Other |
766 | 1,058 | 1,628 | ||||||||
Total other income |
6,007 | 6,045 | 9,024 | ||||||||
Total non-interest (loss) income |
$ | (17,711 | ) | $ | 22,176 | $ | (22,659 | ) | |||
Non-interest Expense
Non-interest expense generally consists of two primary components: operating expenses, which include compensation and benefits, occupancy and equipment, and general and administrative (G&A) expenses; and the amortization of the CDI stemming from our business combinations.
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We recorded non-interest expense of $107.4 million in the current second quarter, up $17.8 million on a linked-quarter basis, and down $266.3 million from the year-earlier amount. The linked-quarter increase was largely attributable to the $14.0 million FDIC special assessment that was recorded in second quarter 2009 G&A expense.
In the second quarter of 2008, non-interest expense was significantly increased by the debt repositioning charge of $285.4 million we recorded in connection with the strategic prepayment of $3.3 billion of wholesale and other borrowings. While operating expenses and CDI amortization totaled $88.3 million in the quarter, the charge increased our second quarter 2008 non-interest expense to $373.7 million.
Primarily reflecting the impact of the FDIC special assessment, operating expenses rose to $101.9 million in the current quarter, from $83.9 million and $82.5 million, respectively, in the trailing and year-earlier three months. Compensation and benefits expense represented $45.0 million of operating expenses in the current second quarter, and was down $2.6 million and $1.7 million, respectively, from the trailing quarter and year-earlier amounts. Occupancy and equipment expense rose $695,000 year-over-year to $17.9 million, but declined $829,000 linked-quarter. At $39.0 million, G&A expense was up $16.2 million and $17.0 million, respectively, from the earlier amounts. In addition to the aforementioned FDIC special assessment, the higher levels of G&A expense were due to an increase in ongoing FDIC insurance premiums.
CDI amortization totaled $5.5 million in the current second quarter, and was down $211,000 linked-quarter and $345,000 year-over-year.
Income Tax Expense
The Company recorded income tax expense of $24.0 million and $44.8 million, respectively, in the three months ended June 30 and March 31, 2009, in contrast to an income tax benefit of $112.7 million in the second quarter of 2008.
The linked-quarter reduction in income tax expense was attributable to a $53.0 million decline in pre-tax income to $80.5 million, and a decline in the effective tax rate from 33.5% to 29.9%. The decline in the effective tax rate was predominantly due to the application of a higher marginal tax rate in determining the tax benefit attributable to the aforementioned OTTI charge and special FDIC assessment.
The income tax benefit recorded in the second quarter of 2008 was primarily due to the tax benefit attributed to the debt repositioning charge of $325.0 million and the OTTI charge of $49.6 million recorded during that time. In the second quarter of 2008, the tax benefit attributed to those charges was at a higher tax rate than the effective tax rate relating to the net income from all other operations. Since the net charges exceeded the net income from all other operations during the quarter, the charges resulted in a higher effective tax rate during that period. The Company recorded a pre-tax loss of $267.5 million in the year-ago second quarter, and an effective tax rate of 42.1%.
Please see the discussion entitled Income Taxes under Critical Accounting Policies earlier in this report.
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Earnings Summary for the Six Months Ended June 30, 2009
In the six months ended June 30, 2009, we generated earnings of $145.1 million, equivalent to $0.42 per basic and diluted share. The level of earnings generated during this period reflects the impact of the aforementioned OTTI charge of $39.7 million and the FDIC special assessment of $14.0 million. On an after-tax basis, these charges were equivalent to $24.2 million and $8.4 million, respectively, or $0.07 and $0.03 per basic and diluted share.
In the six months ended June 30, 2008, we recorded a loss of $82.4 million, or $0.25 per basic and diluted share. The loss reflected the after-tax impact of the three charges recorded in the second quarter of that year, which totaled $231.3 million, or $0.70 per basic and diluted share: the $199.2 million debt repositioning charge; the $29.8 million OTTI charge; and the $2.3 million litigation settlement charge, which were respectively equivalent to $0.60, $0.09, and $0.01 per basic and diluted share.
Net Interest Income
We recorded net interest income of $424.5 million in the current six-month period, signifying a $132.5 million increase from the year-earlier amount. The increase was the net effect of a $6.2 million rise in interest income to $801.8 million and a $126.3 million reduction in interest expense to $377.3 million. In the six months ended June 30, 2008, interest expense was increased to $503.6 million by the $39.6 million debt repositioning charge recorded in connection with the second quarter prepayment of $700.0 million of wholesale borrowings.
The increase in six-month 2009 interest income was the net effect of a $1.7 billion rise in the average balance of interest-earning assets to $28.4 billion, and a 31-basis point drop in the average yield to 5.66%.
Loans produced interest income of $643.4 million in the current six-month period, representing a $20.0 million increase from the year-earlier amount. The increase was driven by a $1.9 billion rise in the average loan balance to $22.2 billion, which more than offset the impact of a 34-basis point decline in the average yield to 5.79%. The lower yield reflects a $15.2 million decline in prepayment penalty income to $3.3 million, an indication of the decline in refinancing activity. Prepayment penalty income added three basis points to the average yield on loans in the current six-month period, down from 18 basis points in the six months ended June 30, 2008.
Securities and money market investments produced interest income of $158.4 million in the current six-month period, representing a year-over-year reduction of $13.8 million. The reduction was the result of a $202.9 million decline in the average balance of such assets to $6.1 billion and a 27-basis point decline in the average yield to 5.18%.
The year-over-year decline in interest expense was the net effect of a $1.8 billion increase in average interest-bearing liabilities to $26.7 billion and a 122-basis point decline in the average cost of funds to 2.85%. The aforementioned debt repositioning charge added 32 basis points to the average cost of funds in the six months ended June 30, 2008.
Interest-bearing deposits generated six-month 2009 interest expense of $120.0 million, signifying a year-over-year reduction of $61.6 million. The reduction was the net effect of an $800.6 million increase in the average balance of such funds to $12.8 billion and a 115-basis point decline in the average cost to 1.88%. The higher average balance was primarily due to a $1.0 billion rise in average NOW and money market accounts to $3.9 billion, which more than offset a $343.0 million decline in average CDs to $6.3 billion. The interest expense produced by NOW and money market accounts declined $12.4 million year-over-year, to $14.9 million, as the impact of the higher average balance was outweighed by the benefit of a 117-basis point reduction in the average cost of such funds to 0.78%. The interest expense produced by CDs fell $45.0 million year-over-year to $97.3 million, not only reflecting the lower average balance, but also a 119-basis point decline in the average cost of such funds to 3.09%. In addition, the interest expense produced by savings accounts declined $4.1 million to $7.8 million, the net effect of a $105.5 million rise in the average balance to $2.7 billion and a 35-basis point decline in the average cost of such funds to 0.59%. Non-interest-bearing accounts averaged $1.2 billion in the first six months of 2009, signifying a $197.3 million decrease year-over-year.
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In the first six months of 2009, the interest expense produced by borrowed funds totaled $257.3 million, signifying a $64.8 million decline from the year-earlier amount. In the six months ended June 30, 2008, the interest expense produced by borrowed funds included the aforementioned $39.6 million debt repositioning charge, which added 62 basis points to the average cost of such funds. Thus, while the average balance of borrowed funds rose $1.0 billion year-over-year, to $13.9 billion, the average cost of such funds declined to 3.74% in the current six-month period from 5.04% in the first six months of 2008.
The same factors that contributed to the year-over-year growth of our net interest income contributed to the expansion of our spread and margin in the six months ended June 30, 2009. At 2.81%, our spread was 91 basis points higher than the six-month 2008 measure and, at 2.98%, our margin was up 81 basis points year-over-year. The debt repositioning charge recorded in the second quarter of 2008 reduced our six-month 2008 spread and margin by 32 and 30 basis points, respectively.
The following table sets forth certain information regarding our average balance sheet for the periods indicated, including the average yields on our interest-earning assets and the average costs of our interest-bearing liabilities. Average yields are calculated by dividing the interest income produced by the average balance of interest-earning assets. Average costs are calculated by dividing the interest expense produced by the average balance of interest-bearing liabilities. The average balances for the period are derived from average balances that are calculated daily. The average yields and costs include fees that are considered adjustments to such average yields and costs.
In the net interest income analysis for the six months ended June 30, 2008, the following line items reflect the impact of the $39.6 million debt repositioning charge recorded in second quarter 2008 interest expense: the average cost of borrowed funds and the average cost of interest-bearing liabilities; the interest expense produced by borrowed funds and the interest expense produced by interest-bearing liabilities; net interest income; interest rate spread; and net interest margin.
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Net Interest Income Analysis
Six Months Ended June 30, | ||||||||||||||||||
2009 | 2008 | |||||||||||||||||
(dollars in thousands) | Average Balance |
Interest | Average Yield/ Cost |
Average Balance |
Interest | Average Yield/ Cost |
||||||||||||
Assets: |
||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||
Mortgage and other loans, net (1) |
$ | 22,246,474 | $ | 643,357 | 5.79 | % | $ | 20,361,198 | $ | 623,384 | 6.13 | % | ||||||
Securities and money market investments(2)(3) |
6,117,928 | 158,445 | 5.18 | 6,320,784 | 172,240 | 5.45 | ||||||||||||
Total interest-earning assets |
28,364,402 | 801,802 | 5.66 | 26,681,982 | 795,624 | 5.97 | ||||||||||||
Non-interest-earning assets |
3,923,162 | 3,930,506 | ||||||||||||||||
Total assets |
$ | 32,287,564 | $ | 30,612,488 | ||||||||||||||
Liabilities and Stockholders Equity: |
||||||||||||||||||
Interest-bearing deposits: |
||||||||||||||||||
NOW and money market accounts |
$ | 3,851,583 | $ | 14,877 | 0.78 | % | $ | 2,813,586 | $ | 27,312 | 1.95 | % | ||||||
Savings accounts |
2,651,010 |