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 September 30, 2002 ------------------------------------------------- Commission File Number 0-22278 ------------------------------ NEW YORK COMMMUNITY BANCORP, INC. --------------------------------- (Exact name of registrant as specified in its charter) Delaware 06-1377322 -------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 615 Merrick Avenue, Westbury, New York 11590 -------------------------------------------- (Address of principal executive offices) (Registrant's telephone number, including area code) 516: 683-4100 ------------- Securities registered pursuant to Section 12(b) of the Act: Common Stock, $0.01 par value ----------------------------- (Title of Class) Securities registered pursuant to Section 12(g) of the Act: None ---- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes ___ No --- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). X Yes ___ No --- 107,179,722 ----------------------------------------- Number of shares outstanding at November 8, 2002NEW YORK COMMUNITY BANCORP, INC. FORM 10-Q ---------- Quarter Ended September 30, 2002 --------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934For the Quarterly Period Ended March 31, 2003
Commission File Number 1-31565
NEW YORK COMMUNITY BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)06-1377322
(I.R.S. Employer Identification No.)
615 Merrick Avenue, Westbury, New York 11590
(Address of principal executive offices)(Registrant’s telephone number, including area code) 516: 683-4100
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_|
105,267,209
——————————————
Number of shares outstanding at
May 8, 2003
NEW YORK COMMUNITY BANCORP, INC.
FORM 10-Q
Quarter Ended March 31, 2003
NEW YORK COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CONDITION
(in thousands, except share data)
March 31,
2003
(unaudited)December 31,
2002
Assets Cash and due from banks $ 142,179 $ 96,497 Money market investments 30,000 1,148 Securities held to maturity ($478,707 and $214,486 pledged at March 31, 2003 and December 31, 2002, respectively) 963,931 699,445 Mortgage-backed securities held to maturity ($32,434 and $38,489 pledged at March 31, 2003 and December 31, 2002, respectively) 32,434 36,947 Securities available for sale ($3,512,361 and $2,522,419 pledged at March 31, 2003 and December 31, 2002, respectively) 4,078,658 3,952,130 Mortgage loans: Multi-family 4,776,047 4,494,332 Commercial real estate 534,851 533,327 1-4 family 232,635 265,724 Construction 119,311 117,013 Total mortgage loans 5,662,844 5,410,396 Other loans 72,769 78,787 Less: Unearned loan fees (4,065 ) (5,111 ) Allowance for loan losses (40,500 ) (40,500 ) Loans, net 5,691,048 5,443,572 Premises and equipment, net 73,826 74,531 Goodwill 624,518 624,518 Core deposit intangible 50,000 51,500 Deferred tax asset, net 2,232 9,508 Other assets 330,799 323,296 Total assets $ 12,019,625 $ 11,313,092 Liabilities and Stockholders’ Equity Deposits: NOW and money market accounts $ 1,195,923 $ 1,198,068 Savings accounts 1,678,152 1,643,696 Certificates of deposit 1,812,175 1,949,138 Non-interest-bearing accounts 496,238 465,140 Total deposits 5,182,488 5,256,042 Official checks outstanding 22,650 11,544 Borrowings 5,308,057 4,592,069 Mortgagors’ escrow 45,207 13,749 Other liabilities 112,675 116,176 Total liabilities 10,671,077 9,989,580 Stockholders’ equity: Preferred stock at par $0.01 (5,000,000 shares authorized; none issued) — — Common stock at par $0.01 (150,000,000 shares authorized; 108,224,425 shares issued; 104,858,653 and 105,664,464 shares outstanding at March 31, 2003 and December 31, 2002, respectively) 1,082 1,082 Paid-in capital in excess of par 1,106,282 1,104,899 Retained earnings (substantially restricted) 314,688 275,097 Less: Treasury stock (3,365,772 and 2,559,961 shares, respectively) (92,411 ) (69,095 ) Unallocated common stock held by ESOP (19,841 ) (20,169 ) Common stock held by SERP (3,113 ) (3,113 ) Unearned common stock held by RRPs (41 ) (41 ) Accumulated other comprehensive income, net of tax effect 41,902 34,852 Total stockholders’ equity 1,348,548 1,323,512 Total liabilities and stockholders’ equity $ 12,019,625 $ 11,313,092
See accompanying notes to unaudited consolidated financial statements.
1
NEW YORK COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(in thousands, except per share data)
(unaudited)
For the
Three Months Ended
March 31,2003 2002 Interest Income: Mortgage and other loans $103,256 $100,452 Securities 18,610 8,242 Mortgage-backed securities 44,425 32,313 Money market investments 283 123 Total interest income 166,574 141,130 Interest Expense: NOW and money market accounts 3,786 3,527 Savings accounts 4,175 5,827 Certificates of deposit 10,777 19,612 Borrowings 39,536 29,097 Mortgagors’ escrow — 5 Total interest expense 58,274 58,068 Net interest income 108,300 83,062 Provision for loan losses — — Net interest income after provision for loan losses 108,300 83,062 Other Operating Income: Fee income 11,639 11,161 Net securities gains 6,485 1,530 Other 8,318 7,104 Total other operating income 26,442 19,795 Non-interest Expense: Operating expenses: Compensation and benefits 18,726 16,487 Occupancy and equipment 6,076 6,093 General and administrative 7,630 9,561 Other 1,507 1,521 Total operating expenses 33,939 33,662 Amortization of core deposit intangible 1,500 1,500 Total non-interest expense 35,439 35,162 Income before income taxes 99,303 67,695 Income tax expense 31,935 21,374 Net income $ 67,368 $ 46,321 Comprehensive income, net of tax: Unrealized gain on securities 7,050 1,567 Comprehensive income $ 74,418 $ 47,888 Basic earnings per share $0.67 $0.47 Diluted earnings per share $0.66 $0.47
See accompanying notes to unaudited consolidated financial statements.
2
NEW YORK COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands, except per share data) Three Months Ended
March 31, 2003
(unaudited)Common Stock (Par Value: $0.01): Balance at beginning of year $ 1,082 Shares issued — Balance at end of period 1,082 Paid-in Capital in Excess of Par: Balance at beginning of year 1,104,899 Allocation of ESOP stock 1,383 Balance at end of period 1,106,282 Retained Earnings: Balance at beginning of year 275,097 Net income 67,368 Tax benefit effect of stock plans 806 Dividends paid on common stock (25,434 ) Exercise of stock options (342,067 shares) (3,149 ) Balance at end of period 314,688 Treasury Stock: Balance at beginning of year (69,095 ) Purchase of common stock (1,147,878 shares) (33,302 ) Exercise of stock options (342,067 shares) 9,986 Balance at end of period (92,411 ) Employee Stock Ownership Plan: Balance at beginning of year (20,169 ) Earned portion of ESOP 328 Balance at end of period (19,841 ) SERP Plan: Balance at beginning of year (3,113 ) Earned portion of SERP — Balance at end of period (3,113 ) Recognition and Retention Plans: Balance at beginning of year (41 ) Earned portion of RRPs — Balance at end of period (41 ) Accumulated Comprehensive Income, Net of Tax: Balance at beginning of year 34,852 Net unrealized appreciation in securities, net of tax 7,050 Balance at end of period 41,902 Total stockholders’ equity $1,348,548
See accompanying notes to unaudited consolidated financial statements.
3
NEW YORK COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,2003 2002 (in thousands) (unaudited) Cash Flows from Operating Activities: Net income $ 67,368 $ 46,321 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,710 1,677 Amortization of premiums, net 7,840 2,405 (Accretion) amortization of net deferred loan origination fees (1,046 ) 1,515 Amortization of core deposit intangible 1,500 1,500 Net securities gains (6,485 ) (1,530 ) Net gain on sale of loans (862 ) (523 ) Tax benefit effect of stock plans 806 14,727 Earned portion of ESOP 1,711 1,429 Changes in assets and liabilities: Goodwill recognized in the Peter B. Cannell & Co., Inc. acquisition and other goodwill addition — (10,459 ) Decrease in deferred income taxes 7,276 2,111 (Increase) decrease in other assets (7,503 ) 32,708 Increase (decrease) in official checks outstanding 11,106 (33,026 ) Decrease in other liabilities (3,501 ) (53,417 ) Total adjustments 12,552 (40,883 ) Net cash provided by operating activities 79,920 5,438 Cash Flows from Investing Activities: Proceeds from redemption of securities and mortgage-backed securities held to maturity 4,687 39,703 Proceeds from redemption and sales of securities available for sale 1,170,835 512,116 Purchase of securities held to maturity, net (264,395 ) (45,660 ) Purchase of securities available for sale (1,285,559 ) (482,014 ) Net increase in loans (322,746 ) (195,236 ) Proceeds from sale of loans 70,804 64,230 Purchase or acquisition of premises and equipment, net (1,005 ) (977 ) Net cash used in investing activities (627,379 ) (107,838 ) Cash Flows from Financing Activities: Net increase in mortgagors’ escrow 31,458 27,032 Net decrease in deposits (73,554 ) (78,330 ) Net increase in borrowings 715,988 192,452 Cash dividends and stock options exercised (28,583 ) (59,819 ) Purchase of Treasury stock, net of stock options exercised (23,316 ) 8,803 Net cash provided by financing activities 621,993 90,138 Net increase (decrease) in cash and cash equivalents 74,534 (12,262 ) Cash and cash equivalents at beginning of period 97,645 178,615 Cash and cash equivalents at end of period $ 172,179 $ 166,353 Supplemental information: Cash paid for: Interest $54,454 $58,022 Income taxes 33,951 12,585
See accompanying notes to unaudited consolidated financial statements.
4
For the Three Months Ended
March 31,(in thousands, except per share data) 2003 2002 Net income As reported $67,368 $46,321 Deduct: Stock-based employee compensation expense determined under fair value-based method, net of related tax effects 3,177 704 Pro forma $64,191 $45,617 Basic earnings per share As reported $0.67 $0.47 Pro forma 0.63 0.46 Diluted earnings per share As reported $0.66 $0.47 Pro forma 0.63 0.46
5
On April 22, 2003, the Financial Accounting Standards Board (the “FASB”) voted unanimously that stock options are “payments for goods and services” and that those costs should be “recognized” in earnings reports. The FASB anticipates that the process of determining how to measure the value of stock options will be completed in 2004, at which time an effective date will be established. Accordingly, the Company has not yet determined the impact of expensing stock options on its financial condition or results of operations.
6
4-for-3 Stock Split
On April 22, 2003, the Board of Directors declared a 4-for-3 stock split in the form of a 33-1/3% stock dividend, payable on May 21, 2003 to shareholders of record at May 5, 2003, subject to shareholder approval of an amendment to the Company’s amended and restated Certificate of Incorporation increasing the number of authorized shares of common stock from 150 million to 300 million. The amendment was presented for a vote at the Company’s Annual Meeting of Shareholders, held on May 14, 2003, and approved. Cash in lieu of fractional shares will be based on $26.37, which is the average of the high and low executed bids at the date of record, as adjusted for the split.
Forward-looking Statements and Associated Risk Factors
This filing, like many written and oral communications presented by the Company and its authorized officials, contains certain forward-looking statements with regard to the Company’s prospective performance and strategies within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of said safe harbor provisions.
Forward-looking statements, which are based on certain assumptions and describe future plans, strategies, and expectations of the Company, are generally identified by use of the words “plan,” “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” or similar expressions. The Company’s ability to predict results or the actual effects of its plans or strategies is inherently uncertain. Accordingly, actual results may differ materially from anticipated results.
Factors that could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to, changes in market interest rates, general economic conditions, legislation, and regulation; changes in the monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board; changes in the quality or composition of the loan and investment portfolios; changes in deposit flows, competition, and demand for financial services and loan, deposit, and investment products in the Company’s local markets; changes in real estate values; changes in accounting principles and guidelines; war or terrorist activities; and other economic, competitive, governmental, regulatory, geopolitical, and technological factors affecting the Company’s operations, pricing, and services.
Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this filing. Except as required by applicable law or regulation, the Company undertakes no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date on which such statements were made.
Critical Accounting Policies
The accounting principles followed by the Company and the methods of applying these principles conform with accounting principles generally accepted in the United States of America (“GAAP”), and with general practices within the banking industry.
Critical accounting policies relate to loans, securities, the allowance for loan losses, and accounting for intangible assets. A description of these policies, which significantly affect the determination of the Company’s financial position, results of operations, and cash flows, are summarized in Note 1 (“Summary of Significant Accounting Policies”) to the Consolidated Financial Statements in the Company’s 2002 Annual Report to Shareholders.
8
Financial Condition
The Company recorded total assets of $12.0 billion at March 31, 2003, up $706.5 million, or 6.2%, from the balance recorded at December 31, 2002. Mortgage loans represented $5.7 billion of the 2003 total, having risen $252.4 million, or 4.7%, over the three-month period, after first quarter 2003 originations of $771.1 million. Multi-family loans totaled $4.8 billion at March 31, 2003, representing 84.3% of mortgage loans outstanding, signifying an increase of $281.7 million, or 6.3%, since December 31, 2002. The increase reflects first quarter originations of $655.4 million, equivalent to 85.0% of total originations during the first three months of 2003.
The quality of the loan portfolio continued to be solid, as the balance of non-performing loans declined $1.5 million to $14.9 million, representing 0.26% of loans, net, at March 31, 2003. At the same time, foreclosed real estate declined $54,000 to $121,000; the combined effect was a $1.5 million reduction in total non-performing assets to $15.0 million, representing 0.12% of total assets at quarter’s end.
In the absence of any net charge-offs or provisions for loan losses, the loan loss allowance was maintained at $40.5 million, equivalent to 272.67% of non-performing loans and 0.71% of loans, net, at March 31, 2003.
Asset growth was also fueled by a $126.5 million rise in securities available for sale to $4.1 billion and by a $264.5 million increase in securities held to maturity to $963.9 million. The growth in securities reflects the leveraging of the proceeds of the BONUSES units that were issued in the prior year’s fourth quarter, and the Company’s current strategy of capitalizing on the steep yield curve by investing borrowed funds into securities at an attractive spread.
Other assets totaled $330.8 million at March 31, 2003, up $7.5 million from the year-end 2002 level. Included in the March 31, 2003 amount was the Company’s investment in Bank-owned Life Insurance (“BOLI”), which totaled $207.1 million, and mortgage servicing rights, which totaled $4.4 million.
In connection with the aforementioned leveraging strategy, the Company’s borrowings rose $716.0 million to $5.3 billion at March 31, 2003, including a $1.0 billion rise in reverse repurchase agreements to $3.0 billion and a $60.0 million increase in preferred securities to $428.8 million. These increases were partly offset by a $368.7 million decline in Federal Home Loan Bank of New York (“FHLB-NY”) advances to $1.9 billion.
At the same time, the Company recorded a $63.4 million increase in core deposits to $3.4 billion, representing 65.0% of total deposits at March 31, 2003. The increase in core deposits was offset by a $137.0 million decline in certificates of deposit (“CDs”) to $1.8 billion. In addition to management’s emphasis on attracting low-cost core deposits, the decline in CDs reflects management’s focus on replacing higher cost CDs with alternative low-cost sources of funds, in the form of borrowings.
Stockholders’ equity totaled $1.3 billion at March 31, 2003, up $25.0 million from the level recorded at December 31, 2002. The increase reflects first quarter net income of $67.4 million, which was partly offset by the allocation of $25.4 million toward the payment of a $0.25 per share quarterly cash dividend on February 15, 2003. In addition, the Company allocated $33.3 million toward its share repurchase program, buying back 1,147,878 shares at an average price of $29.01 per share in the first quarter of 2003.
At March 31, 2003, the Company continued to exceed the minimum federal requirements for categorization as an “adequately capitalized” institution, with leverage capital equal to 6.94% of adjusted average assets, and Tier 1 and total risk-based capital equal to 14.73% and 15.52% of risk-weighted assets, respectively. To be adequately capitalized, the Company must maintain a minimum leverage capital ratio of 5.00%, a minimum Tier 1 capital ratio of 6.00%, and a minimum total risk-based capital ratio of 10.00%. At March 31, 2003, the Company’s BONUSES units were not yet eligible for Tier 1 leverage capital treatment and, accordingly, had no impact on the Tier 1 capital ratio at that date.
9
Mortgage and Other Loans
At March 31, 2003, the Company had outstanding mortgage loans of $5.7 billion, up $252.4 million, or 4.7%, from the balance recorded at December 31, 2002. The increase was driven by a record level of first-quarter mortgage loan production: originations totaled $771.1 million in the current first quarter, up 50.3% from $513.1 million in the year-earlier three months.
In the first quarter of 2003, the Company took a significant step toward achieving its objective of growing its portfolio of multi-family loans by approximately 20% by the end of the year. Multi-family loans rose $281.7 million, or 6.3%, from the year-end 2002 balance to $4.8 billion, representing 84.3% of total mortgage loans at March 31, 2003. The increase was fueled by first quarter 2003 originations of $655.4 million, up 62.9% from first quarter 2002 originations of $402.4 million. At March 31, 2003, the average multi-family loan had a principal balance of $2.0 million and a loan-to-value ratio of 58.0%.
The balance of mortgage loans at March 31, 2003 also reflects commercial real estate and construction loans totaling $534.9 million and $119.3 million, up from $533.3 million and $117.0 million, respectively, at December 31, 2002. The combined $285.5 million increase in multi-family, commercial real estate, and construction loans outweighed a $33.1 million reduction in one-to-four family loans to $232.6 million and a $6.0 million decline in other loans to $72.8 million. In addition to repayments, the declining balance of one-to-four family and other loans reflects the Company’s practice of originating such loans on a conduit basis, i.e., selling the loans to a third party within ten days of being closed.
The Company had a mortgage pipeline of approximately $743.2 million two weeks into the second quarter, the majority of which were multi-family loans. The Company’s ability to close such loans may be impacted by a change in interest rates or economic conditions, and by an increase in competition from other thrifts and banks.
Asset Quality
At March 31, 2003, the Company recorded non-performing loans of $14.9 million, or 0.26% of loans, net, as compared to $16.3 million, or 0.30% of loans, net, at December 31, 2002. The $1.5 million improvement stemmed from a $2.9 million decline in mortgage loans in foreclosure to $9.1 million, which offset a $1.4 million increase in loans 90 days or more delinquent to $5.8 million. The latter increase was partly tempered by the sale, at par, during the current first quarter of a multi-family loan in the amount of $2.3 million.
At the same time, foreclosed real estate declined $54,000 to $121,000. The combined reduction in non-performing loans and foreclosed real estate resulted in a $1.5 million, or 9.3%, decline in non-performing assets to $15.0 million, and contributed to a three-basis point improvement in the ratio of non-performing assets to total assets to 0.12% at March 31, 2003.
The current quality of the Company’s assets is further reflected in the continued absence of any net charge-offs against the loan loss allowance. In the absence of any net charge-offs or provisions for loan losses, the allowance was maintained at $40.5 million, representing 272.67% of non-performing loans and 0.71% of loans, net, at March 31, 2003. At December 31, 2002, the same allowance represented 247.83% of non-performing loans and 0.74% of loans, net.
The allowance for loan losses is increased by the provision for loan losses charged to operations and reduced by reversals or by net charge-offs. Management establishes the allowance for loan losses through a process that begins with estimates of probable loss inherent in the portfolio, based on various statistical analyses. These analyses consider historical and projected default rates and loss severities; internal risk ratings; and geographic, industry, and other environmental factors. In establishing the allowance for loan losses, management also considers the Company’s current business strategy and credit process, including compliance with stringent guidelines it has established with regard to credit limitations, credit approvals, loan underwriting criteria, and loan workout procedures.
10
The allowance for loan losses is composed of five separate categories corresponding to the Company’s various loan classifications. The policy of the Bank is to segment the allowance to correspond to the various types of loans in the loan portfolio. These loan categories are assessed with specific emphasis on the underlying collateral, which corresponds to the respective levels of quantified and inherent risk. The initial assessment takes into consideration non-performing loans and the valuation of the collateral supporting each loan. Non-performing loans are risk-weighted based upon an aging schedule that typically depicts either (1) delinquency, a situation in which repayment obligations are at least 90 days in arrears, or (2) serious delinquency, a situation in which legal foreclosure action has been initiated. Based upon this analysis, a quantified risk factor is assigned to each type of non-performing loan. This results in an allocation to the overall allowance for the corresponding type and severity of each non-performing loan category.
Performing loans are also reviewed by collateral type, with similar risk factors being assigned. These risk factors take into consideration, among other matters, the borrower’s ability to pay and the Bank’s past loan loss experience with each type of loan. The performing loan categories are also assigned quantified risk factors, which result in allocations to the allowance that correspond to the individual types of loans in the portfolio.
In order to determine its overall adequacy, the allowance for loan losses is reviewed by management on a quarterly basis and by the Mortgage and Real Estate Committee of the Board of Directors.
Various factors are considered in determining the appropriate level of the allowance for loan losses. These factors include, but are not limited to:
1) End-of-period levels and observable trends in non-performing loans;
2) Charge-offs experienced over prior periods, including an analysis of the underlying factors leading to the delinquencies and subsequent charge-offs (if any);
3) Analysis of the portfolio in the aggregate as well as on an individual loan basis, which considers:
i. payment history;
ii. underwriting analysis based upon current financial information; and
iii. current inspections of the loan collateral by qualified in-house property appraisers/inspectors;
4) Bi-weekly, and occasionally more frequent, meetings of executive management with the Mortgage and Real Estate Committee (which includes four outside directors, each possessing over 30 Part II.years of complementary real estate experience), during which observable trends in the local economy and their effect on the real estate market are discussed;
5) Discussions with, and periodic review by, various governmental regulators (e.g., the Federal Deposit Insurance Corporation, the New York State Banking Department); and
6) Full Board assessment of the preceding factors when making a business judgment regarding the impact of anticipated changes on the future level of the allowance for loan losses.
While management uses available information to recognize losses on loans, future additions to the allowance may be necessary, based on changes in economic and local market conditions beyond management’s control. In addition, various regulatory agencies periodically review the Bank’s loan loss allowance as an integral part of the examination process. Accordingly, the Bank may be required to take certain charge-offs and/or recognize additions to the allowance based on the judgment of the regulators with regard to information provided to them during their examinations. Based upon all relevant and presently available information, management believes that the current allowance for loan losses is adequate.
11
For more information regarding asset quality and the coverage provided by the loan loss allowance, see the asset quality analysis that follows and the discussion of the provision for loan losses on page 20 of this report.
Asset Quality Analysis
(dollars in thousands) At or For the
Three Months Ended
March 31, 2003
(unaudited)At or For the
Year Ended
December 31, 2002Allowance for Loan Losses: Balance at beginning of period $40,500 $40,500 Acquired allowance — — Balance at end of period $40,500 $40,500 Non-performing Assets at Period-end: Mortgage loans in foreclosure $ 9,057 $11,915 Loans 90 days or more delinquent 5,796 4,427 Total non-performing loans 14,853 16,342 Foreclosed real estate 121 175 Total non-performing assets $14,974 $16,517 Ratios: Non-performing loans to loans, net 0.26 % 0.30 % Non-performing assets to total assets 0.12 0.15 Allowance for loan losses to non-performing loans 272.67 247.83 Allowance for loan losses to loans, net 0.71 0.74
Securities and Mortgage-backed Securities
The Company continued to capitalize on the steepest yield curve in more than a decade by investing its borrowings in short-term mortgage-backed and investment securities at attractive spreads. In the three months ended March 31, 2003, securities available for sale rose $126.5 million to $4.1 billion, while securities held to maturity rose $264.5 million to $963.9 million. The combined $391.0 million increase was consistent with the Company’s stated objective of leveraging the $275.0 million in proceeds from its issuance of BONUSES units in the fourth quarter of 2002; the $147.5 million of proceeds from its secondary offering in the second quarter of 2002; and the $60.0 million of proceeds from the issuance of REIT-preferred securities by a second-tier subsidiary of the Company in the first quarter of 2003.
Mortgage-backed securities represented $3.7 billion, or 89.8%, of total securities available for sale at the close of the current first quarter, as compared to $3.6 billion, representing 91.0%, at December 31, 2002. Capital trust notes represented $240.2 million and $216.1 million of the available for sale balance at March 31, 2003 and December 31, 2002, respectively. The increase in securities available for sale was partly offset by first quarter 2003 sales, prepayments, and redemptions totaling $1.2 billion, which represented a significant source of funding for the production of multi-family loans. The sale of securities generated net gains of $6.5 million in the current first quarter, equivalent, on an after-tax basis, to $4.2 million or $0.04 per diluted share.
The $963.9 million portfolio of securities held to maturity consisted primarily of capital trust notes totaling $264.9 million, corporate bonds totaling $242.9 million, Federal Home Loan Bank (“FHLB”) stock totaling $251.3 million, and U.S. Government agency securities totaling $199.8 million. At March 31, 2003 and December 31, 2002, the market values of securities held to maturity were $990.7 million and $717.6 million, equivalent to 102.8% and 102.6% of carrying value, respectively.
12
The growth in securities available for sale and held to maturity was partly offset by a $4.5 million reduction in the portfolio of mortgage-backed securities held to maturity to $32.4 million. In addition to principal repayments, the reduction reflects the classification of new investments in mortgage-backed securities during the quarter as available for sale. At March 31, 2003 and December 31, 2002, the market value of the portfolio of mortgage-backed securities held to maturity was $33.9 million and $38.5 million, equivalent to 104.6% and 104.2% of carrying value, respectively.
Sources of Funds
The Company has four primary sources of funding for the payment of dividends and share repurchases: dividends paid to the Company by the Bank; capital raised through the issuance of trust preferred securities; capital raised through the issuance of stock; and maturities of, and income from, investments.
The Bank’s traditional sources of funds are the deposits it gathers and the line of credit it maintains with the FHLB-NY. The Bank’s line of credit is collateralized by stock in the FHLB and by certain securities and mortgage loans under a blanket pledge agreement in an amount equal to 110% of outstanding borrowings. In recent quarters, the Bank has obtained additional funding in the form of reverse repurchase agreements. Additional funding has stemmed from the interest and principal payments received on loans and the interest on, and maturity of, mortgage-backed and other investment securities.
The Bank gathers its deposits through a network of 110 banking offices serving customers throughout New York City, Long Island, Westchester County, and New Jersey. The Bank is the second largest thrift depository in the New York City boroughs of Queens and Staten Island and is a leading depository in several of New Jersey’s densely populated communities.
In the first quarter of 2003, the Company maintained its emphasis on attracting core deposits while continuing to de-emphasize CDs. Core deposits totaled $3.4 billion at quarter’s end, representing 65.0% of total deposits, up from $3.3 billion, representing 63.0% of the total, at December 31, 2002. The $63.4 million increase stemmed from a $34.5 million rise in savings accounts to $1.7 billion and a $31.1 million rise in non-interest-bearing accounts to $496.2 million. The combined $65.6 million increase served to offset a $2.1 million decline in NOW and money market accounts to $1.2 billion at March 31, 2003.
During this time, the balance of CDs declined $137.0 million to $1.8 billion, representing 35.0% of total deposits at March 31, 2003. The reduction is consistent with management’s focus on attracting lower-cost core deposits and the replacement of higher-cost CDs with alternative, lower-cost sources of funds. In addition to encouraging customers to invest in third party investment products, which generate fee income, the Company has taken advantage of the steep yield curve by increasing its use of low-cost borrowings.
The Company recorded borrowings of $5.3 billion at March 31, 2003, up $716.0 million from the balance recorded at December 31, 2002. The increase was consistent with the Company’s leveraged growth strategy, and primarily reflects a $1.0 billion increase in reverse repurchase agreements to $3.0 billion and, to a lesser extent, a $60.0 million increase in preferred securities to $428.8 million. The latter increase stemmed from the sale of REIT-preferred securities by CFS Investments New Jersey, Inc., a second-tier subsidiary of the Company. The sale was a private placement transaction and was completed on March 31, 2003. The increase in reverse repurchase agreements and trust preferred securities was partly offset by a $368.7 million decline in FHLB-NY advances to $1.9 billion.
Asset and Liability Management and the Management of Interest Rate Risk
The Company manages its assets and liabilities to reduce its exposure to changes in market interest rates. The asset and liability management process has three primary objectives: to evaluate the interest rate risk inherent in certain balance sheet accounts; to determine the appropriate level of risk, given the Company’s business strategy, operating environment, capital and liquidity requirements, and performance objectives; and to manage that risk in a manner consistent with the Board of Directors’ approved guidelines.
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As a financial institution, the Company’s primary market risk lies in its exposure to interest rate volatility. The Company accordingly manages its assets and liabilities to reduce its exposure to changes in market interest rates.
In the process of managing its interest rate risk, the Company has pursued the following strategies: (1) empha-sizing the origination and retention of multi-family and commercial real estate loans, which tend to refinance within three to five years; (2) originating one-to-four family and consumer loans on a conduit basis and selling them without recourse; and (3) investing in fixed rate mortgage-backed and mortgage-related securities with estimated weighted average lives of two to seven years. These strategies take into consideration the stability of the Company’s core deposits and its non-aggressive pricing policy with regard to CDs.
The actual duration of mortgage loans and mortgage-backed securities can be significantly impacted by changes in prepayment levels and market interest rates. Mortgage prepayments will vary due to a number 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 prevailing interest rates and the related mortgage refinancing opportunities. Management monitors interest rate sensitivity so that adjustments in the asset and liability mix can be made on a timely basis when deemed appropriate. The Company does not currently participate in hedging programs, interest rate swaps, or other activities involving the use of off-balance sheet derivative financial instruments.
The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest rate sensitive” and by monitoring a bank’s interest rate sensitivity “gap.” An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that period of time. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time frame and the amount of interest-bearing liabilities maturing or repricing within that same period of time. In a rising interest rate environment, an institution with a negative gap would generally be expected, absent the effects of other factors, to experience a greater increase in the cost of its interest-bearing liabilities than it would in the yield on its interest-earning assets, thus producing a decline in its net interest income. Conversely, in a declining rate environment, an institution with a negative gap would generally be expected to experience a lesser reduction in the yield on its interest-earning assets than it would in the cost of its interest-bearing liabilities, thus producing an increase in its net interest income.
In the first quarter of 2003, the Company continued to grow its portfolio of multi-family loans while, at the same time, realizing a reduction in the portfolio of one-to-four family and consumer loans. In addition, the Company continued to emphasize securities investments in assets of shorter duration, primarily in the form of mortgage-backed securities and, to a lesser extent, corporate bonds. At the same time, the Company continued to take advantage of the favorable yield curve, maintaining its strategy of leveraged asset growth. Due to the resultant increase in short-term borrowings, the Company’s one-year interest rate sensitivity gap at March 31, 2003 was a negative 17.49%, as compared to a negative 16.03% at December 31, 2002.
The Company also monitors changes in the net present value of the expected future cash flows of its assets and liabilities, which is referred to as the net portfolio value, or NPV. To monitor its overall sensitivity to changes in interest rates, the Company models the effect of instantaneous increases and decreases in interest rates of 200 basis points on its assets and liabilities. As of March 31, 2003, a 200-basis point increase in interest rates would have reduced the NPV by approximately 6.18% (as compared to 8.17% at the end of December). There can be no assurances that future changes in the Company’s mix of assets and liabilities will not result in greater changes to the NPV.
Liquidity and Capital Position
Liquidity
Liquidity is managed to ensure that cash flows are sufficient to support the Bank’s operations and to compensate for any temporary mismatches with regard to sources and uses of funds caused by erratic loan and deposit demand.
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As previously indicated, the Bank’s primary funding sources are deposits and borrowings. Additional funding stems from interest and principal payments on loans, securities, and mortgage-backed securities, and the sale of securities and loans. While borrowings and scheduled amortization of loans and securities are predictable funding sources, deposit flows and mortgage prepayments are subject to such external factors as market interest rates, competition, and economic conditions and, accordingly, are less predictable.
The principal investing activities of the Bank are the origination of mortgage loans (primarily secured by multi-family buildings) and, to a lesser extent, the purchase of mortgage-backed and other investment securities. In the three months ended March 31, 2003, the net cash used in investing activities totaled $627.4 million, largely reflecting the purchase of securities available for sale totaling $1.3 billion and a $322.7 million net increase in loans, which were offset by proceeds from the redemption and sale of securities totaling $1.2 billion. The net increase in loans primarily reflects first quarter 2003 mortgage originations of $771.1 million, offset by repayments and prepayments totaling $448.9 million.
The Bank’s investing activities were funded by internal cash flows generated by its operating and financing activities. In the first quarter of 2003, the net cash provided by operating activities totaled $79.9 million, while the net cash provided by financing activities totaled $622.0 million. The latter amount largely reflects a $716.0 million net increase in borrowings, in keeping with the Company’s leveraging strategy.
The Bank monitors its liquidity on a daily basis to ensure that sufficient funds are available to meet its financial obligations, including withdrawals from depository accounts, outstanding loan commitments, contractual long-term debt payments, and operating leases. The Bank’s most liquid assets are cash and due from banks and money market investments, which collectively totaled $172.2 million at March 31, 2003, as compared to $97.6 million at December 31, 2002. Additional liquidity stems from the Bank’s portfolio of securities available for sale, which totaled $4.1 billion at the close of the current first quarter, and from the Bank’s approved line of credit with the FHLB-NY, which amounted to $4.8 billion at March 31, 2003.
CDs due to mature in one year or less from March 31, 2003 totaled $1.5 billion; based upon recent retention rates as well as current pricing, management believes that a significant portion of such deposits will either roll over or be reinvested in alternative investment products sold through the Bank’s branch offices.
The Bank’s off-balance sheet commitments at March 31, 2003 consisted of outstanding mortgage loan commitments of $590.3 million and commitments to purchase mortgage-backed and investment securities in the amount of $696.0 million.
Capital Position
The Company recorded stockholders’ equity of $1.3 billion at March 31, 2003, up $25.0 million from the level recorded at December 31, 2002. The March 31, 2003 amount was equivalent to 11.22% of total assets and a book value of $13.31 per share, based on 101,311,670 shares. The year-end 2002 amount was equivalent to 11.70% of total assets and a book value of $12.97 per share, based on 102,058,843 shares. The Company calculates book value by subtracting the number of unallocated ESOP shares at the end of the period from the number of shares outstanding at the same date. At March 31, 2003, the number of unallocated ESOP shares was 3,546,983; at December 31, 2002, the number of unallocated ESOP shares was 3,605,621. The Company calculates book value in this manner to be consistent with its calculations of basic and diluted earnings per share, both of which exclude unallocated ESOP shares from the number of shares outstanding in accordance with Statement of Financial Accounting Standards No. 128, “Earnings Per Share.”
The Company also recorded tangible stockholders’ equity of $674.0 million, or $6.65 per share, at the close of the first quarter, as compared to $647.5 million, or $6.34 per share, at December 31, 2002. To calculate its tangible stockholders’ equity and tangible book value per share at March 31, 2003 and December 31, 2002, the Company subtracted from total stockholders’ equity its goodwill and core deposit intangible (“CDI”) at the corresponding dates, as reflected in the reconciliation of stockholders’ equity and tangible stockholders’ equity on page 16.
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Reconciliation of Stockholders’ Equity and Tangible Stockholders’ Equity
(dollars in thousands, except per share data) March 31,
2003
(unaudited)December 31,
2002Total stockholders’ equity $1,348,548 $1,323,512 Subtract: Goodwill 624,518 624,518 Core deposit intangible 50,000 51,500 Tangible stockholders’ equity $ 674,030 $ 647,494 Number of shares used for book value computation 101,311,670 102,058,843 Book value per share $13.31 $12.97 Tangible book value per share 6.65 6.34
Three Months Ended
March 31,(dollars in thousands) 2003 2002 Average stockholders’ equity $1,332,946 $981,412 Subtract: Goodwill 624,518 625,112 Core deposit intangible 50,000 56,000 Average tangible stockholders’ equity $ 658,428 $300,300 Net income $67,368 $46,321 Return on average stockholders’ equity 20.22 % 18.88 % Return on average tangible stockholders’ equity 40.93 61.70
The Company believes that tangible stockholders’ equity is useful to investors seeking to evaluate its capital position and to compare its capital position with other companies in the industry that also report tangible stockholders’ equity, tangible book value per share, and return on average tangible stockholders’ equity. Tangible stockholders’ equity should not be considered in isolation or as a substitute for stockholders’ equity, which is prepared in accordance with GAAP. Moreover, the manner in which the Company calculates tangible stockholders’ equity may differ from that of other companies reporting similarly named measures.
The increase in stockholders’ equity reflects first quarter 2003 net income of $67.4 million and additional contributions to tangible stockholders’ equity of $4.9 million, including $1.5 million in connection with the amortization of the CDI stemming from the Company’s July 2001 merger with Richmond County Financial Corp. and $1.7 million stemming from the amortization and appreciation of shares held in the Company’s stock-related benefit plans.
Also reflected in stockholders’ equity at March 31, 2003 are the distribution of cash dividends totaling $25.4 million and the repurchase of 1,147,878 shares totaling $33.3 million. Under the 5.0 million share repurchase authorized by the Board of Directors on November 12, 2002, there were 2,831,375 shares still available for repurchase at the close of the first quarter.
The level of stockholders’ equity at March 31, 2003 exceeded the minimum federal requirements for a bank holding company. The Company’s leverage capital totaled $787.4 million, or 6.94% of adjusted average assets; its Tier 1 and total risk-based capital amounted to $787.4 million and $829.4 million, representing 14.73% and 15.52% of risk-weighted assets, respectively. At December 31, 2002, the Company’s leverage capital, Tier 1 risk-based capital, and total risk-based capital amounted to $707.8 million, $707.8 million, and $749.0 million, representing 7.03% of adjusted average assets, 13.90% of risk-weighted assets, and 14.71% of risk-weighted assets, respectively.
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In addition, as of March 31, 2003, the Bank was categorized as “well capitalized” under the FDIC regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain a minimum leverage capital ratio of 5.00%, a minimum Tier 1 risk-based capital ratio of 6.00%, and a minimum total risk-based capital ratio of 10.00%.
The following regulatory capital analyses set forth the Company’s and the Bank’s leverage, Tier 1 risk-based, and total risk-based capital levels in comparison with the minimum federal requirements.
Regulatory Capital Analysis (Company)
At March 31, 2003 Risk-Based Capital Leverage Capital Tier 1 Total (dollars in thousands) Amount Ratio Amount Ratio Amount Ratio Total equity $787,371 6.94 % $787,371 14.73 % $829,420 15.52 % Regulatory capital requirement 567,600 5.00 320,703 6.00 534,505 10.00 Excess $219,771 1.94 % $466,668 8.73 % $294,915 5.52 %
Regulatory Capital Analysis (Bank Only)
At March 31, 2003 Risk-Based Capital Leverage Capital Tier 1 Total (dollars in thousands) Amount Ratio Amount Ratio Amount Ratio Total savings bank equity $963,828 8.50 % $963,828 18.10 % $1,005,777 18.89 % Regulatory capital requirement 453,542 4.00 213,011 4.00 426,022 8.00 Excess $510,286 4.50 % $750,817 14.10 % $ 579,755 10.89 %
In the second quarter of 2003, the Company solicited, and received, the consent of its BONUSES unit holders to an amendment that resulted in the proceeds of its fourth quarter 2002 BONUSES units offering being eligible for Tier 1 capital treatment. The impact of the unit holders’ consent was not retroactive to March 31, 2003.
Comparison of the Three Months Ended March 31, 2003 and 2002
Earnings Summary
In the first quarter of 2003, the Company continued to demonstrate its capacity to generate earnings by producing a 45.4% year-over-year increase in net income and a 40.4% year-over-year increase in diluted earnings per share. Net income rose from $46.3 million in the first quarter of 2002 to $67.4 million in the current first quarter, equivalent to a $0.19 increase in diluted earnings per share to $0.66. The Company’s first quarter 2003 earnings generated a 2.24% return on average assets and a 20.22% return on average stockholders’ equity. These returns compared favorably with the year-earlier measures, which were 2.00% and 18.88%, respectively.
Earnings growth was primarily driven by a $25.2 million, or 30.4%, rise in net interest income to $108.3 million, the net effect of a $25.4 million, or 18.0%, rise in interest income to $166.6 million, and a far more modest $206,000 increase in interest expense to $58.3 million. The growth in interest income was largely fueled by a $2.4 billion, or 30.2%, rise in the average balance of interest-earning assets to $10.5 billion, which was tempered by a 67-basis point drop in the average yield on such assets to 6.41%. The modest rise in interest expense was the net effect of a $2.3 billion, or 30.1%, rise in average interest-bearing liabilities to $9.9 billion, and a 70-basis point decline in the average cost of such funds to 2.38%.
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The growth in net interest income was supported by the leveraged growth of the balance sheet over the past four quarters and by the comparatively low cost of funding during this time. These factors also combined to support the Company’s interest rate spread and net interest margin, which rose three and one basis points, respectively, from the year-earlier measures to 4.03% and 4.17% in the first quarter of 2003.
Earnings growth was further supported by a $6.6 million, or 33.6%, rise in other operating income to $26.4 million, reflecting growth in all three sources of revenues. Fee income rose $478,000 year-over-year to $11.6 million, while net securities gains rose $5.0 million to $6.5 million and other income rose $1.2 million to $8.3 million.
Revenue growth was only partly offset by a modest rise in non-interest expense and by an increase in income tax expense. Non-interest-expense totaled $35.4 million in the current first quarter, up $277,000 from $35.2 million in the year-earlier three months. The amortization of CDI accounted for $1.5 million of non-interest-expense in each of the respective first quarters; operating expenses accounted for $33.9 million and $33.7 million, respectively. The modest rise in operating expenses was the net effect of a $2.2 million increase in compensation and benefits expense to $18.7 million, and a combined $2.0 million decline in the remaining operating expense categories. The higher level of operating expenses was significantly offset by the growth in net interest income and other operating income, resulting in a 754-basis point improvement in the efficiency ratio to 25.19%.
Reflecting a $31.6 million rise in pre-tax income to $99.3 million and a 32.2% effective tax rate, income tax expense totaled $31.9 million in the current first quarter, up $10.6 million from the year-earlier amount.
The provision for loan losses had no bearing on the Company’s first quarter 2003 or 2002 earnings, having been suspended since the third quarter of 1995.
Interest Income
The level of interest income in any given period depends upon the average balance and mix of the Company’s interest-earning assets, the yield on said assets, and the current level of market interest rates.
The Company recorded interest income of $166.6 million in the current first quarter, up $25.4 million, or 18.0%, from the level recorded in the first quarter of 2002. The increase was fueled by a $2.4 billion, or 30.2%, rise in the average balance of interest-earning assets to $10.5 billion, and tempered by a 67-basis point reduction in the average yield to 6.41%. While the lower yield was a function of the year-over-year reduction in market interest rates already noted, the higher average balance reflects the significant level of mortgage loan production and the leveraged growth of the Company’s mortgage-backed and investment securities portfolios. With the restructuring of the asset mix having been completed in the fourth quarter of 2002, the first quarter 2003 focus was on interest-earning asset growth.
Mortgage and other loans generated interest income of $103.3 million in the current first quarter, up $2.8 million from the year-earlier amount. The increase stemmed from a $133.3 million rise in the average balance to $5.5 billion and from a two-basis point rise in the average yield to 7.56%. The Company’s ability to generate a higher yield on loans in a lower interest rate environment is indicative of the way its multi-family and commercial real estate loans are structured with regard to embedded yield maintenance and points.
Mortgage-backed securities generated interest income of $44.4 million, up $12.1 million from the level recorded in the first quarter of 2002. The increase was fueled by a $1.6 billion rise in the average balance to $3.8 billion, and tempered by a 132-basis point drop in the average yield to 4.71%.
The interest income produced by investment securities rose $10.4 million year-over-year to $18.6 million, the net effect of a $648.7 million rise in the average balance to $1.1 billion and a 29-basis point decline in the average yield to 6.69%.
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Interest Expense
The level of interest expense is a function of the average balance and composition of the Company’s interest-bearing liabilities and the respective costs of the funding sources found within this mix. These factors are influenced, in turn, by competition for deposits and by the level of market interest rates.
The Company recorded first quarter 2003 interest expense of $58.3 million, as compared to $58.1 million in the first quarter of 2002. While the average balance of interest-bearing liabilities rose $2.3 billion, or 30.1%, year-over-year to $9.9 billion, the increase was largely offset by a 70-basis point decline in the average cost of such funds to 2.38%. While the lower cost was indicative of the lower market interest rates prevailing during the quarter, the higher average balance was primarily boosted by an increase in borrowed funds. The latter increase was consistent with the Company’s leveraging program, which has taken advantage of the steep yield curve as a means of generating interest-earning asset growth.
In connection with the Company’s leveraged growth strategy, the average balance of borrowings rose $2.5 billion year-over-year to $5.1 billion, while the average cost of such funds fell 134 basis points to 3.12%. The net effect was a $10.4 million rise in borrowings-related interest expense to $39.5 million, representing 67.9% of total interest expense for the first three months of 2003.
The average balance of CDs, meanwhile, declined $387.0 million year-over-year to $1.9 billion, while the average cost of such funds fell 117 basis points to 2.29%. As a result, the interest expense produced by CDs declined $8.8 million to $10.8 million in the first quarter of 2003.
The average balance of core deposits, meanwhile, rose $216.5 million to $3.3 billion, including a $23.5 million, or 5.3%, rise in non-interest-bearing accounts to $470.2 million. The interest expense produced by core deposits declined $1.4 million year-over-year to $8.0 million, as the higher average balance was offset by a 25-basis point decline in the average cost of such funds to 0.97%.
NOW and money market accounts generated first quarter 2003 interest expense of $3.8 million, up $259,000, the net effect of a $200.3 million rise in the average balance to $1.2 billion and a 15-basis point decline in the average cost of such funds to 1.29%. The interest expense generated by savings accounts, meanwhile, declined $1.7 million to $4.2 million, reflecting a $7.2 million drop in the average balance to $1.7 billion and a 40-basis point decline in the average cost to 1.02%.
Net Interest Income
Net interest income is the Company’s primary source of income. Its level is a function of the average balance of interest-earning assets, the average balance of interest-bearing liabilities, and the spread between the yield on said assets and the cost of said liabilities. These factors are influenced by the pricing and mix of the Company’s interest-earning assets and interest-bearing liabilities which, in turn, may be impacted by such external factors as economic conditions, competition for loans and deposits, and the monetary policy of the Federal Open Market Committee of the Federal Reserve Board of Governors (the “FOMC”). The FOMC reduces, maintains, or increases the federal funds rate (the rate at which banks borrow funds from one another), as it deems necessary. The federal funds rate held steady at 1.25% in the current first quarter and was 50 basis points below the prevailing rate in the first quarter of 2002.
In the first quarter of 2003, the Company recorded net interest income of $108.3 million, up $12.4 million, or 12.9% on a linked-quarter basis and up $25.2 million, or 30.4%, from the year-earlier amount. The increase was primarily driven by the leveraged growth of the Company’s average interest-earning assets, and supported by the lower cost of the Company’s interest-bearing liabilities.
The same factors that boosted the Company’s net interest income combined to support the Company’s spread and margin in the first quarter of 2003. At 4.03%, the spread was two basis points narrower than the linked-quarter measure, but up three basis points from the measure recorded in the year-earlier three months. Similarly, at 4.17%, the Company’s margin was five basis points narrower on a linked-quarter basis, but up a single basis point year-
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over-year. The modest linked-quarter declines are indicative of the aforementioned leveraging program, the 6% coupon on the BONUSES units, and the allocation of $33.3 million toward share repurchases in the first three months of the year.
Net Interest Income Analysis
Three Months Ended March 31, 2003 2002 Average
BalanceInterest Average
Yield/
CostAverage
BalanceInterest Average
Yield/
CostAssets: Interest-earning assets: Mortgage and other loans, net $ 5,539,543 $ 103,256 7.56 % $ 5,406,223 $ 100,452 7.54 % Securities 1,127,774 18,610 6.69 479,123 8,242 6.98 Mortgage-backed securities 3,823,870 44,425 4.71 2,173,978 32,313 6.03 Money market investments 41,739 283 2.75 29,133 123 1.71 Total interest-earning assets 10,532,926 166,574 6.41 8,088,457 141,130 7.08 Non-interest-earning assets 1,494,655 1,161,647 Total assets $ 12,027,581 $ 9,250,104 Liabilities and Stockholders’ Equity: Interest-bearing deposits: NOW and money market accounts $ 1,194,886 $ 3,786 1.29 % $ 994,633 $ 3,527 1.44 % Savings accounts 1,653,844 4,175 1.02 1,661,027 5,827 1.42 Certificates of deposit 1,909,387 10,777 2.29 2,296,377 19,612 3.46 Borrowings 5,143,143 39,536 3.12 2,647,000 29,097 4.46 Mortgagors’ escrow 33,039 — — 37,110 5 0.05 Total interest-bearing liabilities 9,934,299 58,274 2.38 7,636,147 58,068 3.08 Non-interest-bearing deposits 470,186 446,712 Other liabilities 290,149 185,833 Total liabilities 10,694,635 8,268,692 Stockholders’ equity 1,332,946 981,412 Total liabilities and stockholders’ equity $ 12,027,581 $ 9,250,104 Net interest income/interest rate spread $ 108,300 4.03 % $ 83,062 4.00 % Net interest-earning assets/net interest margin $598,626 4.17 % $452,310 4.16 % Ratio of interest-earning assets to interest-bearing liabilities 1.06 x 1.06 x
Provision for Loan Losses
The provision for loan losses is based on management’s periodic assessment of the adequacy of the loan loss allowance which, in turn, is based on such interrelated factors as the composition of the loan portfolio and its inherent risk characteristics; the level of non-performing loans and charge-offs, both current and historic; local economic conditions; the direction of real estate values; and current trends in regulatory supervision.
At March 31, 2003, the Company recorded non-performing loans of $14.9 million, down from $16.3 million at December 31, 2002. The $1.5 million reduction contributed to a four-basis point improvement in the ratio of non-performing loans to loans, net, over the course of the quarter, to 0.26% from 0.30%.
Based on the current and historic quality of the loan portfolio, and on management’s assessment of the coverage provided by the allowance for loan losses, the loan loss provision was suspended in the current first quarter, continuing management’s practice since the third quarter of 1995.
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In the absence of any net charge-offs or provisions for loan losses, the loan loss allowance was maintained at $40.5 million, consistent with the allowance at December 31, 2002. The loan loss allowance represented 272.67% of non-performing loans and 0.71% of loans, net at the close of the current first quarter, as compared to 247.83% and 0.74% at year-end.
For additional information about the allowance for loan losses, please see the discussion of “Asset Quality” beginning on page 10.
Other Operating Income
The Company derives other operating income from several sources which are classified into one of three categories: fee income, which is generated by service charges on loans and traditional banking products; net gains on the sale of securities; and other income, which includes revenues derived from the sale of third-party investment products and through the Company’s 100% equity interest in Peter B. Cannell & Co., Inc. (“PBC”), an investment advisory firm. Also included in other income are the income derived from the Company’s investment in BOLI and from the origination of one-to-four family and consumer loans on a conduit basis, as previously discussed under “Mortgage and Other Loans” on page 10.
The Company recorded other operating income of $26.4 million in the current first quarter, up from $19.8 million in the first quarter of 2002. The $6.6 million, or 33.6%, increase stemmed from a $478,000 rise in fee income to $11.6 million; a $5.0 million rise in net securities gains to $6.5 million; and a $1.2 million rise in other income to $8.3 million. Included in the latter amount were $862,000 stemming from the sale of loans originated on a conduit basis; $3.2 million in revenues derived from the Company’s BOLI investment; $2.2 million derived from third-party investment product sales; and $1.6 million in revenues derived from PBC.
Other operating income represented 19.6% of total revenues in the current first quarter, as compared to 19.2% in the first quarter of 2002.
Non-interest Expense
Non-interest expense has two primary components: operating expenses, consisting of compensation and benefits, occupancy and equipment, general and administrative (“G&A”), and other expenses; and the amortization of the CDI stemming from the Company’s merger-of-equals with Richmond County.
The Company recorded first quarter 2003 non-interest expense of $35.4 million, as compared to $35.2 million in the first quarter of 2002. The amortization of CDI accounted for $1.5 million of the first quarter 2003 and 2002 totals, and will continue at a rate of $1.5 million per quarter through June 30, 2011.
Operating expenses totaled $33.9 million in the current first quarter, representing 1.13% of average assets, as compared to $33.7 million, representing 1.46%, in the year-earlier three months. The modest increase in the first quarter 2003 amount was the net effect of a $2.2 million rise in compensation and benefits expense to $18.7 million and a combined $2.0 million reduction in the remaining three expense categories. G&A expense fell $1.9 million year-over-year to $7.6 million, while occupancy and equipment expense and other expenses dropped $17,000 and $14,000, respectively, to $6.1 million and $1.5 million. In addition to normal salary increases, the rise in compensation and benefits expense primarily stemmed from higher pension and health care expenditures. The reduction in the remaining expense categories reflects the benefits of the Company’s cost containment program and a year-over-year reduction in the number of branches from 119 to 110.
The net effect of the $277,000 increase in operating expenses and the $31.9 million combined increase in net interest income and other operating income was a 754-basis point improvement in the efficiency ratio to 25.19%.
The number of full-time equivalent employees at March 31, 2003 was 1,455, as compared to 1,554 at March 31, 2002.
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(a) Exhibits
Exhibit 3.1: Amended and Restated Certificate of Incorporation (1)
Exhibit 3.2: Certificate of Amendment of Certificate of Incorporation – filed herewith
Exhibit 3.3: Bylaws (2)
Exhibit 4.1: Specimen Stock Certificate (3)
Exhibit 4.2: Shareholder Rights Agreement, dated as of January 16, 1996 and amended on March 27, 2001 and August 1, 2001 between New York Community Bancorp, Inc. and Registrar and Transfer Company, as Rights Agent (4)
Exhibit 4.3: Amended and Restated Declaration of Trust of New York Community Capital Trust V, dated as of November 4, 2002, as amended (5)
Exhibit 4.4: Indenture relating to the Junior Subordinated Debentures between New York Community Bancorp, Inc. and Wilmington Trust Company, as Trustee, dated November 4, 2002, as amended (5)
Exhibit 4.5: First Supplemental Indenture between New York Community Bancorp, Inc. and Wilmington Trust Company, as Trustee, dated as of November 4, 2002, as amended (5)
Exhibit 4.6: Form of Preferred Security (included in Exhibit 4.3)
Exhibit 4.7: Form of Warrant (included in Exhibit 4.11)
Exhibit 4.8: Form of Unit Certificate (included in Exhibit 4.10)
Exhibit 4.9: Guarantee Agreement, issued in connection with the BONUSESSM units, dated as of November 4, 2002, as amended (5)
Exhibit 4.10: Unit Agreement among New York Community Bancorp, Inc., New York Community Capital Trust V and Wilmington Trust Company, as Warrant Agent, Property Trustee and Agent, dated as of November 4, 2002, as amended (5)
Exhibit 4.11: Warrant Agreement between New York Community Bancorp, Inc. and Wilmington Trust Company, as Agent, dated as of November 4, 2002, as amended (5)
Exhibit 4.12: Registrant will furnish, upon request, copies of all instruments defining the rights of holders of long-term debt instruments of registrant and its consolidated subsidiaries.
23
Exhibit 11: Statement re: Computation of Per Share Earnings - filed herewith
Exhibit 99.1: Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 99.2: Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(1) Incorporated by reference to the Exhibit filed with the Company’s Form 10-Q for the quarterly period ended March 31, Signatures 33 Certifications 342001 (File No. 0-22278).
(2) Incorporated by reference to the Exhibits 36NEW YORK COMMUNITY BANCORP, INC. CONSOLIDATED STATEMENTS OF CONDITION (in thousands, except share data)
September 30,filed with the Company’s Form 10-K for the year ended December 31, 2002 (File No. 1-31565).
(3) Incorporated by reference to Exhibits filed with the Company’s Registration Statement on Form S-1 (Registration No. 33-66852).
(4) Incorporated by reference to Exhibits filed with the Company’s Form 8-A filed with the Securities and Exchange Commission on January 24, 1996, amended as reflected in Exhibit 4.2 to the Company’s Registration Statement on Form S-4 filed with the Securities and Exchange Commission on April 25, 2001 (unaudited) -------------- -------------Assets Cash(Registration No. 333-59486) anddue from banks $ 114,781 $ 168,449 Money market investments 28,452 10,166as reflected in Exhibit 4.3 to the Company’s Form 8-A filed with the Securitiesheldand Exchange Commission on December 12, 2002 (File No. 1-31565).
(5) Incorporated by reference to maturity ($176,457 and $114,881 pledged atthe Company’s Form 10-Q for the quarterly period ended September 30, 2002 (File No. 0-22278) and the Company’s Form 8-K filed on April 17, 2003 (File No. 1-31565).
(b) Reports on Form 8-K
On January 22, 2003, the Company furnished a Current Report on Form 8-K reporting its earnings for the three months and full year ended December 31, 2001, respectively) 460,485 203,195 Mortgage-backed securities held to maturity ($42,116 and $50,801 pledged at September 30,2002 andDecemberalso announcing a 25% increase in its quarterly cash dividend to $0.25 per share.
On January 31, 2001, respectively) 42,116 50,8652003, the Company filed a Current Report on Form 8-K regarding the date of the Company’s 2003 Annual Meeting of Shareholders and the related voting record date.
On April 2, 2003, the Company filed a Current Report on Form 8-K regarding the solicitation of the requisite consent of the holders of its BONUSES units to an amendment that would enable the units to be treated as Tier 1 Capital by the Federal Reserve.
On April 14, 2003, the Company filed a Current Report on Form 8-K regarding the receipt of the requisite consent of the holders of its BONUSES units to an amendment that would enable the units to be treated as Tier 1 Capital by the Federal Reserve.
On April 16, 2003, the Company furnished a Current Report on Form 8-K reporting its earnings for the three months ended March 31, 2003.
On April 17, 2003, the Company filed a Current Report on Form 8-K regarding the receipt of the requisite consent of its BONUSES units holders to an amendment that would enable the units to be treated as Tier 1 Capital by the Federal Reserve. Amendments to the instruments governing the units were included by exhibit.
On April 22, 2003, the Company filed a Current Report on Form 8-K regarding the Board of Directors’ declaration of a 4-for-3 stock split in the form of a 33-1/3% stock dividend, payable on May 21, 2003 to shareholders of record at May 5, 2003, and a 12% increase in its quarterly cash dividend to $0.28 per share.
On April 29, 2003, the Company filed a Current Report on Form 8-K regarding the Company’s announcement that its BONUSES units had been approved for listing on the New York Stock Exchange and would begin trading on the NYSE under the symbol “NYB PrU” on May 5, 2003.
On May 5, 2003, the Company filed a Current Report on Form 8-K regarding the Company’s announcement that its BONUSES units would begin trading that day on the New York Stock Exchange under the symbol “NYB PrU”.
24
New York Community Bancorp, Inc.
(Registrant)DATE: May 15, 2003 BY: /s/ Joseph R. Ficalora
—————————
Joseph R. Ficalora
President andDecember 31, 2001, respectively) 3,035,206 2,374,782 Mortgage loans: Multi-family 4,156,361 3,255,167 1-4 family 430,437 1,318,295 Commercial real estate 538,141 561,944 Construction 137,596 152,367 ------------ ------------ Total mortgage loans 5,262,535 5,287,773 Other loans 85,451 116,969 Less: Unearned loan fees (5,648) (3,055) Allowance for loan losses (40,500) (40,500) ------------ ------------ Loans, net 5,301,838 5,361,187 Premises
Chief Executive Officer
(Duly Authorized Officer)DATE: May 15, 2003 BY: /s/ Robert Wann
—————————
Robert Wann
Executive Vice President andequipment, net 75,683 69,010 Goodwill, net 624,518 614,653 Core deposit intangible, net 53,000 57,500 Deferred tax asset, net 13,125 40,396 Other assets 291,023 252,432 ------------ ------------ Total assets $ 10,040,227 $ 9,202,635 ============ ============ Liabilities and Stockholders' Equity Deposits: NOW and money market accounts $ 1,174,857 $ 948,324 Savings accounts 1,639,588 1,639,239 Certificates
Chief Financial Officer
(Principal Financial Officer)
25
NEW YORK COMMUNITY BANCORP, INC.
CERTIFICATIONS
I, Joseph R. Ficalora, certify that:
1. I have reviewed this quarterly report on Form 10-Q of deposit 1,860,002 2,407,906 Non-interest-bearing accounts 466,758 455,133 ------------ ------------ Total deposits 5,141,205 5,450,602 ------------ ------------ Official checks outstanding 10,656 87,647 Borrowings 3,450,898 2,506,828 Mortgagors' escrow 39,051 21,496 Other liabilities 167,350 152,928 ------------ ------------ Total liabilities 8,809,160 8,219,501 ------------ ------------ Stockholders' equity: Preferred stock at par $0.01 (5,000,000 shares authorized; none issued) -- -- Common stock at par $0.01 (150,000,000 shares authorized; 108,224,425 shares issued; 107,274,197 and 101,845,276 shares outstanding at September 30, 2002 and December 31, 2001, respectively 1,082 1,082 Paid-in capitalNew York Community Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in excesslight ofpar 1,013,263 898,830 Retained earnings (substantially restricted) 222,278 167,511 Less: Treasury stock (950,228 and 6,379,149 shares, respectively) (24,011) (78,294) Unallocated common stock heldthe circumstances under which such statements were made, not misleading with respect to the period covered byESOP (20,866) (6,556) Common stock held by SERP (3,113) (3,113) Unearned common stock held by RRPs (41) (41) Accumulated other comprehensive income, net of tax effect 42,475 3,715 ------------ ------------ Total stockholders' equity 1,231,067 983,134 ------------ ------------ Total liabilities and stockholders' equity $ 10,040,227 $ 9,202,635 ============ ============this quarterly report;See accompanying notes to unaudited consolidated financial statements. 1NEW YORK COMMUNITY BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (in thousands, except per share data) (unaudited)
For3. Based on my knowledge, the For the Three Months Ended Nine Months Ended September 30, September 30, -------------------------- -------------------------- 2002 2001 2002 2001 ------------- ------------ ------------- -----------Interest Income: Mortgagefinancial statements, and otherloans $ 99,862 $ 90,180 $ 305,991 $ 223,787 Securities 8,754 7,944 26,465 22,077 Mortgage-backed securities 45,353 22,206 114,670 32,300 Money market investments 377 684 654 5,523 --------- --------- --------- --------- Total interest income 154,346 121,014 447,780 283,687 --------- --------- --------- --------- Interest Expense: NOWfinancial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations andmoney market accounts 4,403 4,264 11,994 11,214 Savings accounts 5,434 6,842 17,126 11,163 Certificatescash flows ofdeposit 11,519 28,864 46,247 80,842 Borrowings 34,130 21,604 95,045 49,682 Mortgagors' escrow 3 1 12 13 --------- --------- --------- --------- Total interest expense 55,489 61,575 170,424 152,914 --------- --------- --------- --------- Net interest income 98,857 59,439 277,356 130,773 Provisionthe registrant as of, and for,loan losses -- -- -- -- --------- --------- --------- --------- Net interest income after provisionthe periods presented in this quarterly report;
4. The registrant’s other certifying officer and I are responsible for loan losses 98,857 59,439 277,356 130,773 --------- --------- --------- --------- Other Operating Income: Fee income 10,816 8,805 32,799 24,527 Net securities gains 3,903 16,354 11,685 25,300 Other 8,887 6,864 26,898 21,805 --------- --------- --------- --------- Totalestablishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other operating income 23,606 32,023 71,382 71,632 --------- --------- --------- --------- Non-interest Expense: Operating expense: Compensationcertifying officer andbenefits 18,982 35,656 54,635 53,198 OccupancyI have disclosed, based on our most recent evaluation, to the registrant’s auditors andequipment 6,043 5,321 17,712 12,410 General and administrative 7,748 8,002 24,322 19,011 Other 1,076 763 4,168 2,111 --------- --------- --------- --------- Total operating expense 33,849 49,742 100,837 86,730 --------- --------- --------- --------- Amortizationthe audit committee ofcore deposit intangible and goodwill 1,500 2,482 4,500 5,446 --------- --------- --------- --------- Total non-interest expense 35,349 52,224 105,337 92,176 --------- --------- --------- --------- Income before income taxes 87,114 39,238 243,401 110,229 Income tax expense 26,756 23,631 78,593 48,283 --------- --------- --------- --------- Net income $ 60,358 $ 15,607 $ 164,808 $ 61,946 ========= ========= ========= ========= Comprehensive income, netregistrant’s board oftax: Unrealized (loss) gain on securities (4,449) 19,296 38,760 23,268 --------- --------- --------- --------- Comprehensive income $ 55,909 $ 34,903 $ 203,568 $ 85,214 ========= ========= ========= ========= Earnings per share $ 0.58 $ 0.18 $ 1.63 $ 0.90 Diluted earnings per share $ 0.58 $ 0.18 $ 1.61 $ 0.87 ========= ========= ========= =========directors (or persons performing the equivalent function):See accompanying notes to unaudited consolidated financial statements. 2NEW YORK COMMUNITY BANCORP, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Nine Months Ended September 30, 2002 (in thousands, except per share data) (unaudited) - ---------------------------------------------------------------------------------------------------------Common Stock (Par Value: $0.01): Balance at beginning of year $ 1,082 Shares issued -- ----------- Balance at end of period 1,082 ----------- Paid-in Capital in Excess of Par: Balance at beginning of year 898,830 Shares issued in secondary offering and fractional shares 95,569 Tax benefit effect on stock plans 14,727 Allocation of ESOP stock 4,137 ----------- Balance at end of period 1,013,263 ----------- Retained Earnings: Balance at beginning of year 167,511 Net income 164,808 Dividends paid on common stock (57,681) Exercise of stock options (2,160,937 shares) (52,360) ----------- Balance at end of period 222,278 ----------- Treasury Stock: Balance at beginning of year (78,294) Purchase of common stock (2,597,016 shares) (71,302) Common stock issued in secondary offering 67,303 Exercise of stock options (2,160,937 shares) 58,282 ----------- Balance at end of period (24,011) ----------- Employee Stock Ownership Plan: Balance at beginning of year (6,556) Common stock acquired by ESOP (14,790) Allocation of ESOP stock 480 ----------- Balance at end of period (20,866) ----------- SERP Plan: Balance at beginning of year (3,113) Common stock acquired by SERP -- ----------- Balance at end of period (3,113) ----------- Recognition and Retention Plans: Balance at beginning of year (41) Earned portion of RRPs -- ----------- Balance at end of period (41) ----------- Accumulated Comprehensive Income, Net of Tax: Balance at beginning of year 3,715 Net unrealized appreciation in securities, net of tax 38,760 ----------- Balance at end of year 42,475 ----------- Total stockholders' equity $ 1,231,067 ===========See accompanying notes to unaudited consolidated financial statements. 3NEW YORK COMMUNITY BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2002 2001 (in thousands) (unaudited) - ----------------------------------------------------------------------------------------------------------------------------------Cash Flows from Operating Activities: Net income $ 164,808 $ 61,946 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 4,978 3,700 Amortization of premiums, net 5,518 210 Amortization of net deferred loan origination fees 2,684 884 Amortization of core deposit intangible and goodwill 4,500 5,446 Net gain on redemption and sales of securities and mortgage-backed securities (11,685) (25,300) Net gain on sale of loans (843) (10,315) Net gain on sale of Bank property -- (1,101) Tax benefit effect on stock plans 14,727 11,000 Earned portion of ESOP 4,617 25,525 Earned portion of SERP -- 657 Changes in assets and liabilities: Goodwill recognizeda) all significant deficiencies in the Peter B. Cannell & Co.,design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003 BY: /s/ Joseph R. Ficalora
—————————
Joseph R. Ficalora
President and
Chief Executive Officer
(Duly Authorized Officer)
26
I, Robert Wann, certify that:
1. I have reviewed this quarterly report on Form 10-Q of New York Community Bancorp, Inc. acquisition;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other goodwill addition (9,865) -- Goodwill recognizedfinancial information included inmerger with Richmond County -- (504,087) Core deposit intangible recognizedthis quarterly report, fairly present inmerger with Richmond County -- (60,000) Acquired allowance -- 22,434 Decreaseall material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented indeferred income taxes 27,271 8,440 Increasethis quarterly report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other assets (38,591) (129,862) (Decrease) increase in official checks outstanding (76,991) 8,060 Increase in other liabilities 14,422 64,425 ----------- ----------- Total adjustments (59,258) (579,884) ----------- ----------- Net cash provided by (used in) operating activities 105,550 (517,938) ----------- ----------- Cash Flows from Investing Activities: Proceeds from redemptionfactors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies andsales of mortgage-backed securities held to maturity 8,723 112,573 Proceeds from redemptionmaterial weaknesses.
Date: May 15, 2003 BY: /s/ Robert Wann
—————————
Robert Wann
Executive Vice President andsales of securities held to maturity 47,170 -- Proceeds from redemption and sales of securities available for sale 1,641,718 1,057,288 Purchase of securities held to maturity (308,276) -- Purchase of securities available for sale (1,674,658) (2,949,168) Net increase in loans (593,480) (1,673,748) Proceeds from sale of loans 72,273 610,581 Purchase or acquisition of premises and equipment, net (11,651) (35,030) ----------- ----------- Net cash used in investing activities (818,181) (2,877,504) ----------- ----------- Cash Flows from Financing Activities: Net increase in mortgagors' escrow 17,555 22,591 Net (decrease) increase in deposits (309,397) 2,253,943 Net increase in borrowings 944,070 1,189,370 Cash dividends and stock options exercised (110,041) (61,823) Purchase of Treasury stock, net of stock options exercised (13,020) (60,075) Proceeds from issuance of common stock in secondary offering 95,569 -- Treasury stock issued in secondary offering 67,303 -- Common stock acquired by ESOP (14,790) -- ----------- ----------- Net cash provided by (used in) financing activities 677,249 (3,344,006) ----------- ----------- Net decrease in cash and cash equivalents (35,382) (51,436) Cash and cash equivalents at beginning of period 178,615 257,715 ----------- ----------- Cash and cash equivalents at end of period $ 143,233 $ 206,279 =========== =========== Supplemental information: Cash paid for: Interest $ 155,683 $ 152,595 Income taxes 14,318 3,500 Non-cash investing activities: Securitization of mortgage loans to mortgage-backed securities 569,554 -- Transfer of securities from available for sale to held to maturity 1,011 -- Reclassification from other loans to securities available for sale 460 --
Chief Financial Officer
(Principal Financial Officer)See accompanying notes to unaudited consolidated financial statements. 4NEW YORK COMMUNITY BANCORP, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- Note 1. Basis of Presentation - ------------------------------ The accompanying unaudited consolidated financial statements include the accounts of New York Community Bancorp, Inc. (the "Company") and its wholly-owned subsidiary, New York Community Bank (the "Bank"). The 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 nine months ended September 30, 2002 are not necessarily indicative of the results of operations that may be expected for all of 2002. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's 2001 Annual Report to Shareholders and incorporated by reference into the Company's 2001 Annual Report on Form 10-K. Note 2. Impact of Accounting Pronouncements - -------------------------------------------- Business Combinations, Goodwill, and Other Intangible Assets The Company acquired Haven Bancorp, Inc. ("Haven") in a purchase transaction on November 30, 2000 and merged with Richmond County Financial Corp. ("Richmond County") in a purchase transaction on July 31, 2001. Effective July 1, 2001, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 141 and certain provisions of SFAS No. 142 as required for goodwill and intangible assets resulting from business combinations consummated after June 30, 2001. These rules require that all business combinations consummated after June 30, 2001 be accounted for under the purchase method. The non-amortization provisions of the rules affecting goodwill and intangible assets deemed to have indefinite lives are effective for all purchase business combinations completed after June 30, 2001. Accordingly, no goodwill is being amortized in connection with the Richmond County merger. The Company adopted the remaining provisions of SFAS No. 142 when the rules became effective for calendar-year companies on January 1, 2002. Under these rules, goodwill and intangible assets deemed to have indefinite lives are no longer amortized, but are subject to annual impairment tests. Other intangible assets continue to be amortized over their useful lives. The Company applied the new rules on accounting for goodwill and other intangible assets with regard to the Haven acquisition on January 1, 2002, at which time the amortization of goodwill stemming from this acquisition, in the amount of $1.5 million per quarter or $5.9 million per year, was discontinued. Additionally, SFAS No. 142 requires that the Company complete an initial impairment assessment on all goodwill recognized in its consolidated financial statements within six months of the statement's adoption to determine if a transition impairment charge needs to be recognized. In the second quarter of 2002, management completed the initial assessment as of January 1, 2002 and determined that no impairment charge was needed. The Company did not have indefinite lived intangible assets other than goodwill as of September 30, 2002. 5Net income and earnings per share for the three and nine months ended September 30, 2002 and 2001, as adjusted to exclude amortization expense (net of taxes) related to goodwill, are as follows:
For the For the Three Months Ended Nine Months Ended September 30, September 30, ---------------------------- --------------------------- (in thousands, except per share data) 2002 2001 2002 2001 --------- -------- --------- --------Net income Reported net income $ 60,358 $ 15,607 $ 164,808 $ 61,946 Add back: goodwill amortization -- 963 -- 2,890 --------- -------- --------- -------- Adjusted net income $ 60,358 $ 16,570 $ 164,808 $ 64,836 ========= ======== ========= ======== Basic earnings per share Reported basic earnings per share $ 0.58 $ 0.18 $ 1.63 $ 0.90 Add back: goodwill amortization -- 0.01 -- 0.04 --------- -------- --------- -------- Adjusted basic earnings per share $ 0.58 $ 0.19 $ 1.63 $ 0.94 ========= ======== ========= ======== Diluted earnings per share Reported diluted earnings per share $ 0.58 $ 0.18 $ 1.61 $ 0.87 Add back: goodwill amortization -- 0.01 -- 0.04 --------- -------- --------- -------- Adjusted diluted earnings per share $ 0.58 $ 0.19 $ 1.61 $ 0.91 ========= ======== ========= ========27
Goodwill The changes in the carrying amount of goodwill for the nine months ended September 30, 2002 are as follows: (in thousands) Balance as of January 1, 2002 $614,653 Goodwill acquired in the Peter B. Cannell & Co., Inc. acquisition 9,753 Addition resulting from goodwill re-evaluation subsequent to Richmond County merger 112 -------- Balance as of September 30, 2002 $624,518 ======== During the third quarter of 2002, certain severance payments were made in connection with the Richmond County merger. At that time, the Company re-evaluated its goodwill and determined that it should be increased by $112,000. Acquired Intangible Assets The Company has a core deposit intangible ("CDI") and mortgage servicing rights stemming from the Richmond County merger. In addition, the Company has other identifiable intangibles of approximately $677,000 related to a branch purchase. The mortgage servicing rights and other identifiable intangibles are included in "other assets" on the Consolidated Statements of Condition as of September 30, 2002. The following table summarizes the gross carrying and accumulated amortization amounts of the Company's intangible assets as of September 30, 2002. Gross Carrying Accumulated Amount Amortization -------------- ------------ (in thousands) Amortizing intangible assets Core deposit intangible $60,000 $(7,000) Mortgage servicing rights 2,640 (259) Other intangible assets 1,325 (648) ------- ------- Total $63,965 $(7,907) ======= ======= 6Aggregate amortization expense related to the CDI was $4.5 million for the nine months ended September 30, 2002. Aggregate amortization expense related to the mortgage servicing rights was $232,915 for the nine months ended September 30, 2002. Aggregate amortization expense for the other identifiable intangibles was $66,249 for the nine months ended September 30, 2002. The CDI, mortgage servicing rights, and other intangibles are being amortized over periods of ten years, eight and a half years, and fifteen years, respectively. The Company assessed the appropriateness of the useful lives of the intangible assets as of January 1, 2002 and determined them to be adequate. No residual value is estimated for these intangible assets. Estimated future amortization expense related to the CDI, merger-related mortgage servicing rights, and other identifiable intangibles is as follows:
Core Deposit Mortgage Other Intangible Servicing Rights Intangibles Total -------------- ---------------- ----------- ---------(in thousands) 2002 $ 1,500 $ 77 $ 22 $ 1,599 2003 6,000 311 88 6,399 2004 6,000 311 88 6,399 2005 6,000 311 88 6,399 2006 6,000 311 88 6,399 2007 and thereafter 27,500 1,060 303 28,863 -------- -------- ----- -------- Total remaining intangible assets $ 53,000 $ 2,381 $ 677 $ 56,058 ======== ======== ===== ========Accounting for the Impairment or Disposal of Long-lived Assets In August 2001, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets." SFAS No. 144 established more stringent criteria than those then in existence under GAAP for determining when a long-lived asset is held for sale. While SFAS No. 144 also broadens the definition of "discontinued operations," it does not allow for the accrual of future operating losses as was previously permitted. The provisions of the new standard were to be applied prospectively. The adoption of SFAS No. 144 on January 1, 2002 has not had a material impact on the Company's consolidated financial statements. Rescission of FASB Statements Nos. 4, 44, and 64 - Amendment of FASB Statement No. 13 and Technical Corrections In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements Nos. 4, 44, and 64 - Amendment of FASB Statement No. 13 and Technical Corrections," which was effective as of May 15, 2002. SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and an amendment of that statement, SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." SFAS No. 145 also amends SFAS No. 13, "Accounting for Leases," to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. In addition, SFAS No. 145 amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The adoption of SFAS No. 145 has not had a material impact on the Company's consolidated financial condition or results of operations. Note 3. Transfers of Financial Assets - -------------------------------------- On May 31, 2002, the Company securitized $572.5 million of one-to-four family loans into mortgage-backed securities. At the transaction date, this amount represented the historical carrying amount of the loans, net of any unamortized fees, plus accrued interest. Of the $572.5 million, $569.6 million was allocated to mortgage-backed securities and $2.9 million was allocated to capitalized mortgage servicing rights, in proportion to their relative fair values. In connection with the securitization, the Company recognized mortgage servicing rights under SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which replaces SFAS No. 125. According to SFAS No. 7140, the retained interests in a securitization are initially measured at their allocated carrying amount, based upon relative fair values of the retained interests received at the date of securitization. Capitalized servicing rights are reported in other assets and amortized into other operating income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying servicing assets by predominant risk characteristics, such as interest rates and terms. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Impairment is recognized through a valuation allowance for an individual stratum. The amount of impairment recognized is the amount by which the carrying amount of servicing assets for a stratum exceeds its fair value. The valuation allowance is adjusted to reflect changes in the measurement of impairment subsequent to the initial measurement and charged to earnings. As of June 30, 2002, the mortgage servicing portfolio was segregated into valuation tranches based on predominant risk characteristics of the underlying mortgages, such as loan type and interest rate. Those tranches were further segregated between performing loans and non-performing loans. The fair value of the servicing portfolio was determined by estimating the future cash flows associated with the servicing rights and discounting the cash flows using market discount rates. The portfolio was valued using all relevant positive and negative cash flows including service fees, miscellaneous income and float, marginal costs of servicing, the cost of carry on advances, and foreclosure losses. The following table summarizes the key assumptions used at the time of valuation: Prepayment speed 33.63% Discount rate 10.08% Cost of carry 1.75% As of September 30, 2002, the carrying value of the mortgage servicing rights stemming from the second quarter 2002 securitization of one-to-four family loans was $2,635,047. The mortgage servicing rights are included in "other assets" on the Consolidated Statements of Condition as of September 30, 2002. Aggregate amortization expense for the nine months ended September 30, 2002 was $271,847. Estimated future amortization expense related to securitization-related mortgage servicing rights is as follows: Mortgage Servicing Rights ---------------- (in thousands) 2002 $ 245 2003 773 2004 523 2005 348 2006 235 2007 and thereafter 511 ------- Total remaining $ 2,635 ======= Combining the mortgage servicing rights acquired in the Richmond County merger and the mortgage servicing rights stemming from the second quarter 2002 securitization of one-to-four family loans, the Company had total mortgage servicing rights of $5.0 million at September 30, 2002. 8NEW YORK COMMUNITY BANCORP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS ------------------------------------ OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ------------------------------------------------ Overview - -------- New York Community Bancorp, Inc. (the "Company"), formerly known as Queens County Bancorp, Inc., is the holding company for New York Community Bank (the "Bank"), a New York State-chartered financial institution with 109 banking offices serving customers in New York City, Long Island, Westchester County, and New Jersey. In addition to operating the largest supermarket banking franchise in the region, with 54 in-store branches, the Bank is the largest producer of multi-family mortgage loans for portfolio in New York City. The Bank operates its branches through six community divisions: Queens County Savings Bank, Richmond County Savings Bank, CFS Bank, First Savings Bank of New Jersey, Ironbound Bank, and South Jersey Bank. In the third quarter of 2002, the Company sustained its record of solid financial performance, with earnings of $60.4 million, or $0.58 per diluted share. The $60.4 million reflects three months of combined operations with Richmond County Financial Corp. ("Richmond County"), which merged with and into the Company on July 31, 2001. In the third quarter of 2001, which included two months of combined operations with Richmond County, the Company recorded earnings of $15.6 million, or $0.18 per diluted share. Included in the latter amount was a net charge of $13.0 million, or $0.15 per share, primarily stemming from the merger; excluding this charge, the Company's third quarter 2001 earnings would have totaled $28.6 million, or $0.33 per diluted share. Based on the strength of its third quarter performance, and management's expectations with regard to revenues and expenses in the fourth quarter of the year, the Company has projected 2002 diluted GAAP earnings per share in the range of $2.16 to $2.18, and 2003 diluted GAAP earnings per share in the range of $2.52 to $2.55. These estimates do not reflect any benefit of the proceeds generated by the offering of Bifurcated Option Note Unit SecuritiES(SM) (BONUSES(SM)) Units discussed below under "Recent Events." Recent Events - ------------- On November 4, 2002, the Company raised net proceeds of approximately $268.0 million and completed the public offering of 5,500,000 units of Bifurcated Option Note Unit SecuritiES(SM) (BONUSES(SM)) Units at $50.00 per unit. Each BONUSES unit consists of a trust preferred security issued by New York Community Capital Trust V (a trust formed by the Company) and a warrant to purchase 1.4036 shares of common stock of the Company at any time prior to May 7, 2051 at an initial effective offering price of approximately $35.62 per share. Each trust preferred security has a maturity of 49 years, with a distribution rate of 6.00% on the $50.00 per security liquidation amount. Assuming that the Company had received the net proceeds of the BONUSES offering as of September 30, 2002, such net proceeds would have increased, on a pro forma basis at that date, the Company's tangible stockholders' equity to approximately $646.0 million, representing 6.32% of total assets, and increased its tangible book value per share to approximately $6.23. The Company's stockholders' equity would have increased to approximately $1.3 billion, representing 13.18% of total assets, and its book value per share would have increased to approximately $12.77. In addition, the Company believes the net proceeds from the sale of the BONUSES units will be available for inclusion as regulatory capital; however, no assurance can be given that the Federal Reserve Board will agree with the Company's treatment for regulatory purposes of the BONUSES units and their separate components. Assuming such regulatory capital treatment of the components of the BONUSES units based on their allocated initial purchase prices, the Company's Tier 1 capital would have risen to $970.9 million, or 20.08% of risk-weighted assets. Forward-looking Statements and Associated Risk Factors - ------------------------------------------------------ This filing contains certain forward-looking statements with regard to the Company's prospective performance and strategies within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of said safe harbor provisions. 9Forward-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 "believe," "expect," "intend," "anticipate," "estimate," "project," or similar expressions. The Company's ability to predict results or the actual effects of its plans or strategies is inherently uncertain. Accordingly, actual results may differ materially from anticipated results. Factors that could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to, changes in market interest rates, general economic conditions, legislation, and regulation; changes in the monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board; changes in the quality or composition of the loan and investment portfolios; changes in deposit flows, competition, and demand for financial services and loan, deposit, and investment products in the Company's local markets; changes in real estate values; changes in accounting principles and guidelines; war or terrorist activities; and other economic, competitive, governmental, regulatory, geopolitical, and technological factors affecting the Company's operations, pricing, and services. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this filing. Except as required by applicable law or regulation, the Company undertakes no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date on which such statements were made. Critical Accounting Policies - ---------------------------- The accounting principles followed by the Company and the methods of applying these principles conform with accounting principles generally accepted in the United States of America, and with general practices within the banking industry. Critical accounting policies relate to loans, securities, the allowance for loan losses, and accounting for intangible assets. A description of these policies, which significantly affect the determination of the Company's financial position, results of operations, and cash flows, are summarized in Note 1 ("Summary of Significant Accounting Policies") to the Consolidated Financial Statements in the Company's 2001 Annual Report to Shareholders. Financial Condition - ------------------- The Company recorded total assets of $10.0 billion at September 30, 2002, up from $9.2 billion at December 31, 2001. The 2002 amount reflects the benefits of the Company's strategic balance sheet restructuring program, which has been substantially completed, and the leveraged growth of its mortgage loan and securities portfolios. Mortgage originations totaled $1.9 billion in the current nine-month period, up from $807.4 million in the year-earlier nine-months. Included in the 2002 amount were third-quarter originations totaling $462.9 million, including multi-family loan originations of $345.2 million. Multi-family loan originations represented $1.5 billion, or 78.8%, of year-to-date mortgage loan production, and 74.6% of the third quarter amount. While the portfolio of multi-family mortgage loans rose $901.2 million to $4.2 billion, the portfolio of one-to-four family mortgage loans declined $887.9 million to $430.4 million at September 30, 2002. In addition to repayments, the reduction represents the second quarter 2002 securitization of $572.5 million of one-to-four family loans, a key component of the Company's balance sheet restructuring program. The growth in multi-family mortgage loans was further offset by declines in commercial real estate and construction loans of $23.8 million and $14.8 million, respectively; the net effect was a $25.2 million reduction in total mortgage loans to $5.3 billion. The Company's record of asset quality was extended in the third quarter, as the balance of non-performing assets and loans continued to decline. Non-performing assets totaled $11.1 million at September 30, 2002, representing 0.11% of total assets, while non-performing loans totaled $11.0 million, representing 0.21% of loans, net. Included in the latter amount were mortgage loans in foreclosure totaling $9.3 million and loans 90 days or more delinquent totaling $1.7 million. 10In the absence of any net charge-offs or provisions for loan losses during the current nine-month period, the allowance for loan losses was maintained at $40.5 million, representing 367.90% of non-performing loans and 0.76% of loans, net, at September 30, 2002. The leveraged growth of the balance sheet is partially reflected in the higher balance of securities available for sale and held to maturity at September 30, 2002. Available-for-sale securities rose $660.4 million from the December 31, 2001 level to $3.0 billion, while securities held to maturity rose $257.3 million to $460.5 million. The higher balance of available-for-sale securities reflects new investments, and the reclassification of the securitized one-to-four family loans. The growth in securities available for sale and held to maturity was partly offset by an $8.7 million reduction in the portfolio of mortgage-backed securities held to maturity to $42.1 million. Primarily reflecting the first quarter 2002 acquisition of the remaining 53% equity interest in Peter B. Cannell & Co., Inc. ("PBC"), an investment advisory firm, goodwill, net, rose to $624.5 million at September 30, 2002 from $614.7 million at December 31, 2001. Pursuant to the Company's adoption of SFAS Nos. 141 and 142 on January 1, 2002, the amortization of goodwill has been discontinued; however, the amortization of core deposit intangibles ("CDI") will continue at a rate of $1.5 million per quarter through 2011. Accordingly, the balance of CDI declined $4.5 million to $53.0 million at September 30, 2002 from the level recorded at December 31, 2001. In addition, based on its second-quarter 2002 assessment of the goodwill recognized in the Company's consolidated financial statements, management determined that no impairment charge was required. The Company's continuing emphasis on low-cost core deposits is reflected in its deposit mix at September 30, 2002. Core deposits rose $238.5 million to $3.3 billion, representing 63.8% of total deposits at quarter's end. At the same time, certificates of deposit ("CDs") fell $547.9 million to $1.9 billion, representing 36.2% of total deposits at that date. The decline in CDs was partially due to the Company's emphasis on the sale of revenue-producing investment products in lieu of higher cost depository accounts. The net effect of the drop in CDs and the rise in core deposits was a $309.4 million reduction in total deposits to $5.1 billion. Consistent with the Company's ongoing leveraging program, borrowings rose $944.1 million to $3.5 billion, including Federal Home Loan Bank ("FHLB") advances of $1.8 billion, reverse repurchase agreements of $1.5 billion, and trust preferred obligations of $187.8 million. Stockholders' equity rose to $1.2 billion at September 30, 2002, equivalent to 12.26% of total assets and a book value of $11.88 per share, based on 103,623,122 shares. The increase reflects nine-month cash earnings of $190.6 million and net proceeds of $147.5 million stemming from the sale of 5,865,000 shares in the Company's secondary offering in the second quarter of the year. Tangible stockholders' equity rose 78.0% to $553.5 million, representing 5.51% of total assets at quarter's end. In addition, the Company continued to exceed the minimum federal requirements for categorization as "adequately capitalized," with leverage capital equal to 7.39% of adjusted average assets, and a Tier 1 and total risk-based capital equal to 15.27% and 16.19% of risk-weighted assets, respectively. To be "adequately capitalized", the Company must maintain a minimum leverage capital ratio of 5%, a minimum Tier 1 capital ratio of 6%, and a minimum total capital ratio of 10%. Loans - ----- The results of the Company's balance sheet restructuring are apparent in the mix of mortgage loans at September 30, 2002. Multi-family loans rose $901.2 million, or 27.7%, to $4.2 billion from the year-end 2001 level, while one-to-four family loans fell $887.9 million, or 67.4%, to $430.4 million during the nine-month period. Multi-family mortgage loans represented 79.0% of total mortgage loans at quarter's end, up from 61.6% at the end of December, while one-to-four family loans declined to 8.2% from 24.9%. The rise in multi-family loans was fueled by a record volume of originations, indicative of management's emphasis on this market niche. Of the $1.9 billion of mortgage loans originated in the first nine months of the year, $1.5 billion, or 78.8%, were secured by multi-family buildings, including $345.2 million, or 74.6%, of the $462.9 million of mortgage loans originated in the third quarter of the year. 11The decline in one-to-four family loans largely reflects the securitization of $572.5 million of loans in the second quarter, as well as prepayments in a declining rate environment. While the Company offers an extensive menu of one-to-four family loans through its branch network, such loans are primarily made on a conduit basis and not retained for portfolio. The growth in multi-family loans was also offset by modest reductions in the balance of commercial real estate and construction loans. Commercial real estate loans fell $23.8 million to $538.1 million, after year-to-date originations of $141.5 million; construction loans fell $14.8 million to $137.6 million, after year-to-date originations of $76.2 million. The net effect was a $25.2 million reduction in total mortgage loans outstanding to $5.3 billion at September 30, 2002. The portfolio of other loans declined $31.5 million from the year-end 2001 level to $85.5 million at September 30, 2002. The reduction reflects the Company's practice of originating such loans on a conduit basis, as well as the sale of home equity loans totaling $71.4 million in the second quarter of the year. While loan growth was temporarily constrained by the balance sheet restructuring program, management believes that the resultant portfolio of mortgage loans is better positioned to withstand the pressure of a changing economy and interest rate volatility. In addition, at October 16, 2002, the Company had a pipeline of approximately $680.0 million, primarily consisting of multi-family loans. With the restructuring of the balance sheet now substantially completed, management expects that the mortgage loan portfolio will reflect growth in the quarters ahead. Asset Quality - ------------- The quality of the Company's assets is reflected in the absence of any net charge-offs during the current third quarter and in the balance of non-performing assets recorded at September 30, 2002. Non-performing assets totaled $11.1 million at that date, as compared to $13.8 million at June 30, 2002 and to $17.7 million at December 31, 2001. The September 30, 2002 balance was equivalent to 0.11% of total assets, as compared to 0.14% and 0.19% at the earlier dates. The decline in non-performing assets reflects reductions in the balance of non-performing loans and in the balance of foreclosed real estate. At September 30, 2002, non-performing loans declined to $11.0 million from $13.7 million at June 30, 2002 and $17.5 million at December 31, 2001, representing 0.21%, 0.26%, and 0.33% of loans, net, at the respective dates. Included in the September 30, 2002 amount were mortgage loans in foreclosure totaling $9.3 million (versus $11.2 million and $10.6 million) and loans 90 days or more delinquent totaling $1.7 million (versus $2.5 million and $6.9 million). At September 30, 2002, foreclosed real estate totaled $121,000, down from $145,000 and $249,000, at June 30, 2002 and December 31, 2001, respectively. In the absence of any net charge-offs or provisions for loan losses year-to-date, the allowance for loan losses was maintained at $40.5 million, representing 367.90% of non-performing loans and 0.76% of loans, net, at September 30, 2002, as compared to 295.73% and 0.76% at June 30, 2002, and to 231.46% and 0.76% at December 31, 2001. The allowance for loan losses is increased by the provision for loan losses charged to operations and reduced by reversals or by net charge-offs. Management establishes the allowance for loan losses through a process that begins with estimates of probable loss inherent in the portfolio, based on various statistical analyses. These analyses consider historical and projected default rates and loss severities; internal risk ratings; geographic, industry, and other environmental factors; and model imprecision. In establishing the allowance for loan losses, management also considers the Company's current business strategy and credit process, including compliance with stringent guidelines it has established with regard to credit limitations, credit approvals, loan underwriting criteria, and loan workout procedures. The policy of the Bank is to segment the allowance to correspond to the various types of loans in the loan portfolio. These loan categories are assessed with specific emphasis on the underlying collateral, which corresponds to the respective levels of quantified and inherent risk. The initial assessment takes into consideration non-performing loans and the valuation of the collateral supporting each loan. Non-performing loans are risk-weighted based upon 12an aging schedule that typically depicts either (1) delinquency, a situation in which repayment obligations are at least 90 days in arrears, or (2) serious delinquency, a situation in which legal foreclosure action has been initiated. Based upon this analysis, a quantified risk factor is assigned to each type of non-performing loan. This results in an allocation to the overall allowance for the corresponding type and severity of each non-performing loan category. Performing loans are also reviewed by collateral type, with similar risk factors being assigned. These risk factors take into consideration, among other matters, the borrower's ability to pay and the Bank's past loan loss experience with each type of loan. The performing loan categories are also assigned quantified risk factors, which result in allocations to the allowance that correspond to the individual types of loans in the portfolio. In order to determine its overall adequacy, the allowance for loan losses is reviewed by management on a quarterly basis, and by the Mortgage and Real Estate Committee of the Board of Directors. Various factors are considered in determining the appropriate level of the allowance for loan losses. These factors include, but are not limited to: 1) End-of-period levels and observable trends in non-performing loans; 2) Charge-offs experienced over prior periods, including an analysis of the underlying factors leading to the delinquencies and subsequent charge-offs (if any); 3) Analysis of the portfolio in the aggregate as well as on an individual loan basis, which considers: i. payment history; ii. underwriting analysis based upon current financial information; and iii. current inspections of the loan collateral by qualified in-house property appraisers/inspectors. 4) Bi-weekly meetings of executive management with the Mortgage and Real Estate Committee (which includes five outside directors, each possessing over 30 years of complementary real estate experience), during which observable trends in the local economy and their effect on the real estate market are discussed; 5) Discussions with, and periodic review by, various governmental regulators (e.g., the Federal Deposit Insurance Corporation, the New York State Banking Department); and 6) Full Board assessment of all of the preceding factors when making a business judgment regarding the impact of anticipated changes on the future level of the allowance for loan losses. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary, based on changes in economic and local market conditions beyond management's control. In addition, various regulatory agencies periodically review the Bank's loan loss allowance as an integral part of the examination process. Accordingly, the Bank may be required to take certain charge-offs and/or recognize additions to the allowance based on the judgment of regulators with regard to information provided to them during their examinations. Based upon all relevant and presently available information, management believes that the current allowance for loan losses is adequate. For more information regarding asset quality and the coverage provided by the loan loss allowance, see the asset quality analysis that follows and the discussion of the provision for loan losses on page 23 of this report. 13Asset Quality Analysis
At or For the At or For the Nine Months Ended Year Ended September 30, 2002 December 31, 2001 (dollars in thousands) (unaudited) - --------------------------------------------------------------------------------------------------------Allowance for Loan Losses: Balance at beginning of period $40,500 $18,064 Acquired allowance -- 22,436 ------- ------- Balance at end of period $40,500 $40,500 ======= ======= Non-performing Assets at Period-end: Mortgage loans in foreclosure $ 9,296 $10,604 Loans 90 days or more delinquent 1,712 6,894 ------- ------- Total non-performing loans 11,008 17,498 Foreclosed real estate 121 249 ------- ------- Total non-performing assets $11,129 $17,747 ======= ======= Ratios: Non-performing loans to loans, net 0.21% 0.33% Non-performing assets to total assets 0.11 0.19 Allowance for loan losses to non-performing loans 367.90 231.46 Allowance for loan losses to loans, net 0.76 0.76 ======= =======Securities, Mortgage-backed Securities, and Money Market Investments - -------------------------------------------------------------------- In the third quarter of 2002, the Company continued taking advantage of the attractive yield curve to enhance its earnings with investments in securities with favorable yields. Available-for-sale securities thus rose $660.4 million from the December 31, 2001 level to $3.0 billion at September 30, 2002, while securities held to maturity rose $257.3 million to $460.5 million. The increase in securities available for sale reflects new investments and the Company's second quarter 2002 securitization of one-to-four family loans totaling $572.5 million. Mortgage-backed securities represented $2.7 billion, or 90.5%, of the $3.0 billion total, while capital trust notes represented $187.5 million of the total amount. The increase in securities available for sale was partly tempered by year-to-date securities sales, prepayments, and redemptions of $1.6 billion, including $675.2 million in the third quarter of the year. The sale of securities generated nine-month after-tax net gains of $7.6 million, and contributed $0.07 per share to nine-month 2002 diluted earnings per share. The portfolio of securities held to maturity consisted primarily of capital trust notes totaling $182.2 million, corporate bonds totaling $96.9 million, and Federal Home Loan Bank ("FHLB") of New York stock totaling $176.5 million. At September 30, 2002 and December 31, 2001, the market values of securities held to maturity were $466.7 million and $203.6 million, equivalent to 101.4% and 100.2% of carrying value, respectively. The growth in securities available for sale and held to maturity was partly offset by an $8.7 million reduction in the portfolio of mortgage-backed securities held to maturity. While the Company continues to invest in such assets, they typically are classified as available for sale. At September 30, 2002 and December 31, 2001, the market value of the portfolio of mortgage-backed securities held to maturity was $43.6 million and $51.1 million, equivalent to 103.6% and 100.5% of carrying value, respectively. Reflecting management's preference for investments in higher-yielding assets, the quarter-end balance of money market investments was a modest $28.5 million, as compared to $10.2 million at year-end 2001. 14Available-for-Sale Securities Portfolio Analysis Securities available for sale at September 30, 2002 and December 31, 2001 are summarized as follows:
September 30, 2002 ------------------------------------------------------------------------- Amortized Gross Gross Estimated (in thousands) Cost Unrealized Gain Unrealized Loss Market Value --------------- ------------------ ------------------- ------------------Debt and equity securities available for sale: U.S. Government and agency obligations $ 113 $ 27 $ -- $ 140 Corporate bonds 9,793 59 -- 9,852 Capital trust notes 181,051 6,899 474 187,476 Preferred stock 75,494 1,222 113 76,503 Common stock 14,370 3,602 2,827 15,145 Other 382 -- -- 382 --------------- ------------------ ------------------- ------------------ Total $ 281,203 $ 11,709 $ 3,414 $ 289,498 --------------- ------------------ ------------------- ------------------ Mortgage-backed securities available for sale: GNMA certificates $ 84,370 $ 2,365 $ -- $ 86,735 FNMA certificates 39,887 1,280 -- 41,167 FHLMC certificates 541,354 21,962 -- 563,316 CMOs and REMICs 2,025,459 30,669 1,638 2,054,490 --------------- ------------------ ------------------- ------------------ Total $ 2,691,070 $ 56,276 $ 1,638 $ 2,745,708 --------------- ------------------ ------------------- ------------------ Total securities available for sale $ 2,972,273 $ 65,200 $ 2,267 $ 3,035,206 =============== ================== =================== ==================December 31, 2001 ----------------------------------- ------------------- ------------------ Amortized Gross Gross Estimated (in thousands) Cost Unrealized Gain Unrealized Loss Market Value ---------------- ------------------ ------------------- ------------------Debt and equity securities available for sale: U.S. Government and agency obligations $ 25,113 $ -- $ 230 $ 24,883 Corporate bonds 13,387 182 2 13,567 Capital trust notes 120,171 4,809 722 124,258 Preferred stock 79,857 392 78 80,171 Common stock 9,137 1,575 256 10,456 --------------- ------------------ ------------------- ------------------ Total $ 247,665 $ 6,958 $ 1,288 $ 253,335 --------------- ------------------ ------------------- ------------------ Mortgage-backed securities available for sale: GNMA certificates $ 143,179 $ 667 $ 4 $ 143,842 FNMA certificates 78,258 468 2 78,724 FHLMC certificates 47,528 418 -- 47,946 CMOs and REMICs 1,841,727 10,140 932 1,850,935 ---------------- ------------------ ------------------- ------------------ Total $ 2,110,692 $ 11,693 $ 938 $ 2,121,447 ---------------- ------------------ ------------------- ------------------ Total securities available for sale $ 2,358,357 $ 18,651 $ 2,226 $ 2,374,782 ================ ================== =================== ==================Sources of Funds - ---------------- The Company has four principal funding sources for the payment of dividends and share repurchases: dividends paid to the Company by the Bank; capital raised through the issuance of trust preferred securities; capital raised through the issuance of stock; and maturities of, and income from, investments. The Bank's primary sources of funds are the deposits it gathers and the line of credit it maintains with the FHLB. The Bank's line of credit is collateralized by stock in the FHLB and by certain securities and mortgage loans under a blanket pledge agreement in an amount equal to 110% of outstanding borrowings. Additional funding stems from interest and principal payments on loans and the interest on, and maturity of, mortgage-backed and other investment securities. The Bank gathers its deposits through a network of 109 banking offices serving customers throughout New York City, Long Island, Westchester County, and New Jersey. The Bank is the second largest thrift depository in the boroughs of Queens and Staten Island and the fourth largest thrift depository in the metropolitan New York region, overall. 15The Company's continuing emphasis on low-cost core deposits was reflected in its deposit mix at September 30, 2002. Core deposits totaled $3.3 billion at that date, representing 63.8% of total deposits, as compared to $3.0 billion, representing 55.8%, at December 31, 2001. The increase in core deposits stemmed from a $226.5 million rise in NOW and money market accounts to $1.2 billion; a $349,000 rise in savings accounts to $1.6 billion; and an $11.6 million rise in non-interest-bearing accounts to $466.8 million. The growth in core deposits was offset by a decline of $547.9 million in the balance of CDs. CDs totaled $1.9 billion at September 30, 2002, representing 36.2% of total deposits, as compared to $2.4 billion, representing 44.2%, at year-end 2001. The net effect of the drop in CDs and the rise in core deposits was a $309.4 million reduction in total deposits to $5.1 billion. The decline in CDs was partially due to the Company's ongoing focus on the sale of third-party investment products, including annuities. Such products offer customers higher yields than traditional banking products, while generating revenues for the Company. In the first nine months of 2002, gross sales of such third-party products totaled $146.5 million, generating gross revenues of $8.6 million. The decline in CDs also reflects the divestiture of 14 in-store branches during the second quarter. With the opening of a traditional branch office in July 2002 and another set to open in the first quarter, the Company expects to have 110 banking offices serving metropolitan New York and New Jersey by March 31, 2003. The decline in deposits was largely offset by an increase in the balance of borrowings at September 30, 2002. Reflecting the continuation of the Company's leveraging program, borrowings rose $944.1 million to $3.5 billion from the balance recorded at December 31, 2001. Included in the 2002 amount were FHLB borrowings of $1.8 billion, reverse repurchase agreements of $1.5 billion, and trust preferred obligations of $187.8 million. Asset and Liability Management and the Management of Interest Rate Risk - ----------------------------------------------------------------------- The Company's primary component of market risk is interest rate volatility. Accordingly, the Company manages its assets and liabilities to reduce its exposure to changes in market interest rates. The asset and liability management process has three primary objectives: to evaluate the interest rate risk inherent in certain balance sheet accounts; to determine the level of risk that is appropriate, given the Company's business strategy, operating environment, capital and liquidity requirements, and performance objectives; and to manage that risk in a manner consistent with the Board of Directors' approved guidelines. In the process of managing its interest rate risk, the Company has pursued the following strategies: (1) emphasizing the origination and retention of multi-family loans with a fixed rate of interest in the first five years of the loan and a rate that adjusts annually in each of years six through ten; (2) originating the majority of one-to-four family loans on a conduit basis; and (3) investing in fixed rate mortgage-backed and mortgage-related securities with estimated weighted average lives of 2.5 to seven years. These strategies take into consideration the stability of the Company's core deposit base. The actual duration of mortgage loans and mortgage-backed securities can be significantly impacted by changes in prepayment levels and market interest rates. Mortgage prepayments will vary due to a number 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 prevailing interest rates and related mortgage refinancing opportunities. Management monitors interest rate sensitivity so that adjustments in the asset and liability mix can be made on a timely basis when deemed appropriate. The Company does not currently participate in hedging programs, interest rate swaps, or other activities involving the use of off-balance-sheet derivative financial instruments. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest rate sensitive" and by monitoring a bank's interest rate sensitivity "gap." An asset or liability is said to be interest rate sensitive within a specific time period 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 16same period of time. In a rising interest rate environment, an institution with a negative gap would generally be expected, absent the effects of other factors, to experience a greater increase in the cost of its interest-bearing liabilities than it would in the yield on its interest-earning assets, thus producing a decline in its net interest income. Conversely, in a declining rate environment, an institution with a negative gap would generally be expected to experience a lesser reduction in the yield on its interest-earning assets than it would in the cost of its interest-bearing liabilities, thus producing an increase in its net interest income. In the nine months ended September 30, 2002, the Company continued the balance sheet restructuring which began with the acquisition of Haven Bancorp, Inc. ("Haven") on November 30, 2000. The portfolio of multi-family loans was significantly increased through originations, and the portfolio of one-to-four family loans significantly reduced through securitization, repayments, and sales. In addition, the Company continued to emphasize securities investments in assets of shorter duration, primarily in the form of mortgage-backed securities. At the same time, however, the Company continued to take advantage of the favorable yield curve, maintaining its strategy of leveraged asset growth. Due to the resultant increase in short-term borrowings, the Company's one-year interest rate sensitivity gap at September 30, 2002 was a negative 12.71%, as compared to a negative 17.78% and a negative 8.69% at June 30, 2002 and December 31, 2001, respectively. The Company also monitors changes in the net present value of the expected future cash flows of its assets and liabilities, which is referred to as the net portfolio value, or NPV. To monitor its overall sensitivity to changes in interest rates, the Company models the effect of instantaneous increases and decreases in interest rates of 200 basis points on its assets and liabilities. As of September 30, 2002, a 200-basis point increase in interest rates would have reduced the NPV by approximately 7.20 % (as compared to 10.09% and 14.36%, the June 30, 2002 and December 31, 2001 impacts); a 200-basis point reduction would have increased the NPV by 12.27% (as compared to 5.10% and 6.74% at the corresponding dates). There can be no assurances that future changes in the Company's mix of assets and liabilities will not result in greater changes to the NPV. Liquidity and Capital Position - ------------------------------ Liquidity Liquidity is managed to ensure that cash flows are sufficient to support the Bank's operations and to compensate for any temporary mismatches with regard to sources and uses of funds caused by erratic loan and deposit demand. As previously indicated, the Bank's primary funding sources are deposits and borrowings. Additional funding stems from interest and principal payments on loans, securities, and mortgage-backed securities, and the sale of securities, loans, and foreclosed real estate. While borrowings and scheduled amortization of loans and securities are predictable funding sources, deposit flows and mortgage prepayments are subject to such external factors as market interest rates, competition, and economic conditions and, accordingly, are less predictable. The principal investing activities of the Bank are the origination of mortgage loans (primarily secured by multi-family buildings) and, to a lesser extent, the purchase of mortgage-backed and other investment securities. In the nine months ended September 30, 2002, the net cash used in investing activities totaled $818.2 million, largely reflecting a $593.5 million net increase in loans, the purchase of securities available for sale totaling $1.7 billion, and proceeds from the redemption and sale of securities totaling $1.6 billion. The net increase in loans primarily reflects nine-month mortgage originations of $1.9 billion, offset by repayments and prepayments totaling $1.3 billion. The Bank's investing activities were funded by internal cash flows generated by its operating and financing activities. In the first nine months of 2002, the net cash provided by operating activities totaled $105.6 million, while the net cash provided by financing activities totaled $677.2 million. The latter amount largely reflects a $944.1 million increase in borrowings, and the proceeds from the Company's secondary stock offering in the second quarter of the year. 17The Bank monitors its liquidity on a daily basis to ensure that sufficient funds are available to meet its financial obligations, including withdrawals from depository accounts, outstanding loan commitments, contractual long-term debt payments, and operating leases. The Bank's most liquid assets are cash and due from banks and money market investments, which collectively totaled $143.2 million at September 30, 2002 as compared to $178.6 million at December 31, 2001. Additional liquidity stems from the Bank's portfolio of securities available for sale, which totaled $3.0 billion at the close of the third quarter, and from the Bank's approved line of credit with the FHLB, which totaled $4.0 billion. CDs due to mature in one year or less from September 30, 2002 totaled $1.5 billion; based upon recent retention rates as well as current pricing, management believes that a significant portion of such deposits will either roll over or be reinvested in alternative investment products sold through the Bank's branch offices. The Bank's off-balance-sheet commitments at September 30, 2002 consisted of outstanding loan commitments of $460.1 million and commitments to purchase mortgage-backed and investment securities in the amount of $1.5 billion. Capital Position The Company recorded stockholders' equity of $1.2 billion at September 30, 2002, up 25.2% from $983.1 million at December 31, 2001. The 2002 amount was equivalent to 12.26% of total assets and a book value of $11.88 per share, based on 103,623,122 shares. The 2001 amount was equivalent to 10.68% of total assets and a book value of $10.05 per share, based on 97,774,030 shares. Excluding the goodwill and CDI stemming from the aforementioned Haven, Richmond County, and PBC transactions, the Company recorded tangible stockholders' equity of $553.5 million, or $5.34 per share, at the close of the third quarter, up from $311.0 million, or $3.18 per share, at year-end 2001. In addition to nine-month 2002 cash earnings of $190.6 million, the higher level of tangible stockholders' equity reflects the net proceeds of the Company's secondary stock offering in the second quarter of the year. The Company realized $147.5 million, after expenses, through the sale of 5,865,000 shares from its Treasury account at a price of $29.00 per share. Of this amount, $14.8 million was loaned to the Company's Employee Stock Ownership Plan ("ESOP") for the purchase of 510,000 shares of common stock sold in the offering. Also reflected in stockholders' equity at September 30, 2002 are the distribution of cash dividends totaling $57.7 million and the repurchase of 2,597,016 shares totaling $71.3 million. Under the share repurchase authorized by the Board of Directors on February 19, 2002, there were 719,771 shares still available for repurchase at September 30, 2002. On November 12, 2002, the Board authorized the repurchase of up to an additional 5.0 million shares of Company stock. At September 30, 2002, the level of stockholders' equity exceeded the minimum federal requirements for a bank holding company. The Company's leverage capital totaled $696.6 million, or 7.39% of adjusted average assets; its Tier 1 and total risk-based capital amounted to $696.6 million and $738.4 million, representing 15.27% and 16.19% of risk-weighted assets, respectively. At December 31, 2001, the Company's leverage capital, Tier 1 risk-based capital, and total risk-based capital amounted to $497.2 million, $497.2 million, and $542.4 million, representing 5.95% of adjusted average assets, 10.37% of risk-weighted assets, and 11.31% of risk-weighted assets, respectively. In addition, as of September 30, 2002, the Bank was categorized as "well capitalized" under the FDIC regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain a minimum leverage capital ratio of 5.00%, a minimum Tier 1 capital ratio of 6.00%, and a minimum total risk-based capital ratio of 10.00%. The following regulatory capital analyses set forth the Company's and the Bank's leverage, Tier 1 risk-based, and total risk-based capital levels in comparison with the minimum federal requirements. 18Regulatory Capital Analysis (Company)
At September 30, 2002 --------------------- Risk-Based Capital ------------------ Leverage Capital Tier 1 Total ---------------- ------ ----- (dollars in thousands) Amount Ratio Amount Ratio Amount Ratio ---------- -------- ---------- ------- --------- --------Total equity $ 696,628 7.39% $ 696,628 15.27% $ 738,379 16.19% Regulatory capital requirement 471,450 5.00 273,676 6.00 456,127 10.00 ---------- -------- ---------- ------- --------- -------- Excess $ 225,178 2.39% $ 422,952 9.27% $ 282,252 6.19% ========== ======== ========== ======= ========= ========Regulatory Capital Analysis (Bank Only)
At September 30, 2002 --------------------- Risk-Based Capital ------------------ Leverage Capital Tier 1 Total ---------------- ------ ----- (dollars in thousands) Amount Ratio Amount Ratio Amount Ratio ---------- -------- ---------- ------- --------- --------Total savings bank equity $ 636,238 6.76% $ 636,238 14.00% $ 677,934 14.91% Regulatory capital requirement 282,455 3.00 181,836 4.00 363,672 8.00 ---------- -------- ---------- ------- --------- -------- Excess $ 353,783 3.76% $ 454,402 10.00% $ 314,262 6.91% ========== ======== ========== ======= ========= ========The Company's capital position has been further enhanced by its offering of BONUSES Units in October 2002, which generated gross proceeds of $275.0 million. Assuming that the Company had received the net proceeds of the BONUSES offering as of September 30, 2002, such net proceeds would have increased, on a pro forma basis at that date, the Company's tangible stockholders' equity 16.7% to approximately $646.0 million, representing 6.32% of total assets and a tangible book value per share of approximately $6.23. The Company's stockholders' equity would have increased 7.5% to approximately $1.3 billion, representing 13.18% of total assets and a book value per share of approximately $12.77. In addition, the Company believes the net proceeds from the sale of the BONUSES units will be available for inclusion as regulatory capital; however, no assurance can be given that the Federal Reserve Board will agree with the Company's treatment for regulatory purposes of the BONUSES units and their separate components. Assuming such regulatory capital treatment of the components of the BONUSES units based on their allocated initial purchase prices, the Company's Tier 1 capital would have risen to $970.9 million, or 20.08% of risk-weighted assets. Comparison of the Three Months Ended September 30, 2002 and 2001 - ---------------------------------------------------------------- The following line item discussions reflect three months of consolidated operations with Richmond County in the third quarter of 2002, as compared to two months of consolidated operations with Richmond County in the third quarter of 2001. Earnings Summary - ---------------- In the third quarter of 2002, the Company sustained its record of solid financial performance, with earnings of $60.4 million, or $0.58 per diluted share, representing a return on average assets ("ROA") of 2.39% and a return on average stockholders' equity ("ROE") of 19.79%. In addition to the record level of mortgage loans produced, and the continuing leveraging program, the $60.4 million reflects three months of combined operations with Richmond County, which merged with and into the Company on July 31, 2001. In the third quarter of 2001, which included two months of combined operations with Richmond County, the Company recorded earnings of $15.6 million, or $0.18 per diluted share. Included in the latter amount were a non-recurring merger-related charge of $22.0 million and a $3.0 million charge related to a tax rate adjustment; these charges were partly offset by combined after-tax gains of $12.0 million on the sale of securities, loans, and a Bank-owned property. Excluding the resultant $13.0 million, or $0.15 per share, net charge, the Company's earnings rose 111.2% from $28.6 million in the third quarter of 2001 to $60.4 million in the current third quarter, equivalent to a 75.8% rise in diluted earnings per share from $0.33 to $0.58. The Company also recorded a 33.5% increase in third quarter 2002 cash earnings to $64.3 million, equivalent to a 10.9% rise in diluted cash earnings per share to $0.61. Cash earnings are calculated by adding back to net income certain operating expenses, net of tax, stemming from the amortization and appreciation of shares held in the Company's stock-related benefit plans, as well as the CDI and goodwill stemming from its merger-of-equals with 19Richmond County on July 31, 2001 and the acquisition of Haven on November 30, 2000, respectively. Although cash earnings are not a measure of performance calculated in accordance with GAAP, the Company believes that cash earnings are useful to an investor in evaluating its operating performance and in comparing it with other companies in the banking industry who report similar measures. Cash earnings should not be considered in isolation or as a substitute for operating income, cash flows from operating activities, or other income or cash flow statements data prepared in accordance with GAAP. Moreover, the way in which the Company calculates cash earnings may differ from that of other companies reporting similarly named measures. Cash Earnings Analysis
For the Three Months Ended September 30, -------------------------------- (in thousands, except per share data) 2002 2001 -------- --------Net income $ 60,358 $ 15,607 Additional contributions to tangible stockholders' equity: Amortization and appreciation of stock-related benefit plans 1,629 23,486 Tax benefit effect on stock plans -- 6,000 Dividends on unallocated ESOP shares 763 571 -------- -------- Total additional contributions to tangible stockholders' equity $ 2,392 $ 30,057 Amortization of core deposit intangible and goodwill 1,500 2,482 -------- -------- Cash earnings $ 64,250 $ 48,146 ======== ======== Cash earnings per share $ 0.62 $ 0.56 Diluted cash earnings per share $ 0.61 $ 0.55 ======== ========Earnings growth was primarily driven by a 66.3% increase in net interest income, the result of a $33.3 million, or 27.5%, rise in interest income to $154.3 million and a $6.1 million, or 9.9%, decline in interest expense to $55.5 million. The higher level of interest income stemmed from a $2.4 billion rise in the average balance of interest-earning assets to $8.9 billion, which served to offset a 47-basis point drop in the average yield to 6.93%. The reduction in interest expense was driven by a 131-basis point drop in the average cost of funds to 2.65%, which served to offset a $2.1 billion rise in the average balance of interest-bearing liabilities to $8.3 billion. The growth in net interest income was accompanied by an 84-basis point rise in the Company's interest rate spread to 4.28% and an 81-basis point rise in its net interest margin to 4.44%. Other operating income totaled $23.6 million in the current third quarter, as compared to $32.0 million in the third quarter of 2001. While the 2002 amount included net securities gains of $3.9 million, the 2001 amount included net securities gains of $16.4 million and $2.0 million in gains on the sale of loans and a Bank-owned property. Excluding the respective gains, the Company recorded a $6.0 million rise in other operating income to $19.7 million, reflecting a $2.0 million rise in fee income to $10.8 million and a $4.0 million rise in other income to $8.9 million. Non-interest expense totaled $35.3 million and $52.2 million, respectively, in the current and year-earlier third quarters, including operating expense of $33.8 million and $49.7 million. Included in the 2001 amounts was a non-recurring charge of $22.0 million, stemming from the allocation of ESOP shares pursuant to the Richmond County merger. Excluding this charge, the Company's third quarter 2001 non-interest expense totaled $30.2 million and its operating expense totaled $27.7 million. Also reflected in third quarter 2001 non-interest expense was amortization of goodwill and CDI in the amount of $2.5 million, as compared to CDI amortization of $1.5 million in the third quarter of 2002. The difference reflects the Company's adoption of SFAS Nos. 141 and 142 on January 1, 2002, which resulted in the discontinuation of goodwill amortization as of that date. 20Income tax expense rose $3.1 million to $26.8 million in the current third quarter, reflecting a $47.9 million rise in pre-tax income to $87.1 million, and an effective tax rate of 30.7%. The provision for loan losses had no bearing on the Company's third quarter 2002 or 2001 earnings, having been suspended since the third quarter of 1995. Interest Income - --------------- The level of interest income in any given period depends upon the average balance and mix of the Company's interest-earning assets, the yield on said assets, and the current level of market interest rates. In the third quarter of 2002, the Company recorded interest income of $154.3 million, up from $121.0 million in the third quarter of 2001. The 27.5% increase was driven by a $2.4 billion, or 37.4%, rise in the average balance of interest-earning assets to $8.9 billion, and tempered by a 47-basis point drop in the average yield to 6.93%. While the lower yield reflects the decline in market interest rates and the restructuring of the Company's assets, the higher balance reflects the three-month benefit of the Richmond County merger, and the leveraged growth of the Company's loan and mortgage-backed securities portfolios. Reflecting the record volume of loans produced over the last four quarters, mortgage and other loans generated $99.9 million, or 64.7%, of total third quarter 2002 interest income, up $9.7 million, or 10.7%, from the third quarter 2001 amount. The increase was fueled by a $679.6 million, or 14.6%, rise in the average balance of loans to $5.3 billion, which offset a 20-basis point decline in the average yield to 7.50%. The growth in the average balance occurred despite the second quarter securitization of one-to-four family loans totaling $572.5 million. Mortgage-backed securities accounted for $45.4 million, or 29.4%, of total interest income in the current third quarter, up from $22.2 million, representing 18.4%, in the year-earlier three months. The increase stemmed from a $1.6 billion rise in the average balance to $2.9 billion, outweighing a 48-basis point drop in the average yield to 6.15%. The higher average balance reflects both new investments and the re-classification of the securitized one-to-four family loans. Securities generated third quarter 2002 interest income of $8.8 million, up $810,000 from the year-earlier amount. The increase was the net effect of a $205.2 million rise in the average balance to $609.9 million and a 205-basis point decline in the average yield to 5.74%. Money market accounts produced interest income of $377,000 in the current third quarter, down $307,000 from the level recorded in the third quarter of 2001. The decrease was the net effect of a 218-basis point rise in the average yield to 4.65% and a $77.5 million decline in the average balance to $32.2 million. Interest Expense - ---------------- The level of interest expense is a function of the average balance and composition of the Company's interest-bearing liabilities and the respective costs of the funding sources found within this mix. These factors are influenced, in turn, by competition for deposits and by the level of market interest rates. The Company recorded third quarter 2002 interest expense of $55.5 million, down $6.1 million, or 9.9%, from the third quarter 2001 amount. While the average balance of interest-bearing liabilities rose $2.1 billion, or 34.7%, to $8.3 billion, the increase was largely offset by a 131-basis point decline in the average cost of funds to 2.65%. The reduction in interest expense was supported by three primary factors: a shift in the deposit mix in favor of low-cost core deposits; the downward repricing of CDs during a period of declining market interest rates; and the Company's emphasis on the sale of third-party investment products in lieu of higher cost CDs. 21In the third quarter of 2002, the interest expense derived from CDs fell $17.3 million to $11.5 million, the result of a $397.2 million decline in the average balance to $1.9 billion and a 257-basis point decline in the average cost of such funds to 2.40%. CDs generated 20.8% of total interest expense in the current third quarter, as compared to 46.9% in the year-earlier three months. The interest expense derived from other deposits (NOW and money market accounts, savings accounts, and mortgagors' escrow) fell $1.3 million to $9.8 million, primarily reflecting the year-over-year decline in market interest rates. While the average balance of other deposits rose $883.4 million to $3.3 billion, the increase was offset by a 64-basis point decline in the average cost of such funds to 1.19%. The higher average balance includes a $108.8 million increase in average non-interest-bearing deposits to $463.0 million. NOW and money market accounts generated third quarter 2002 interest expense of $4.4 million, up $139,000 from the third quarter 2001 amount. The increase was the net effect of a $315.3 million rise in the average balance to $1.1 billion and a 52-basis point decline in the average cost to 1.53%. Savings accounts generated interest expense of $5.4 million in the current third quarter, down $1.4 million from the year-earlier amount. While the average balance of such funds rose $447.7 million to $1.7 billion, the increase was offset by a 94-basis point decline in the average cost of such funds to 1.30%. The interest expense generated by mortgagors' escrow rose $2,000 to $3,000, the result of an $11.7 million rise in the average balance to $30.7 million and a two-basis point rise in the average cost to four basis points. In connection with the Company's yearlong leveraging program, the average balance of borrowings rose $1.8 billion to $3.6 billion, generating a $12.5 million increase in interest expense to $34.1 million. The higher balance was tempered, in part, by a 95-basis point reduction in the average cost of borrowings to 3.80%. Net Interest Income - ------------------- Net interest income is the Company's primary source of income. Its level is a function of the average balance of interest-earning assets, the average balance of interest-bearing liabilities, and the spread between the yield on said assets and the cost of said liabilities. These factors are influenced by the pricing and mix of the Company's interest-earning assets and interest-bearing liabilities which, in turn, may be impacted by such external factors as economic conditions, competition for loans and deposits, and the monetary policy of the Federal Open Market Committee of the Federal Reserve Board of Governors (the "FOMC"). The FOMC reduces, maintains, or increases the federal funds rate (the rate at which banks borrow funds from one another), as it deems necessary. While the federal funds rate held steady at 1.75% in the current third quarter, the rate ranged from a high of 3.75% in July to a low of 3.00% in September 2001. The Company's net interest income rose 66.3% to $98.9 million in the current third quarter from $59.4 million in the third quarter of 2001. The increase was fueled by the leveraged growth of the Company's interest-earning assets, as the Company parlayed the increase in short-term borrowings and low-cost core deposits into the production of multi-family loans and investments in securities. These factors also combined to expand the Company's interest rate spread and net interest margin, which rose 84 and 81 basis points, respectively, to 4.28% and 4.44%. At $98.9 million, the Company's third quarter 2002 net interest income was $3.4 million higher than the second quarter 2002 level, and thus contributed to the year-over-year increase. At the same time, its spread and margin were one and four basis points lower, respectively, than the linked-quarter measures, largely reflecting the planned leveraging of the capital raised in the aforementioned secondary offering. While the restructuring of the balance sheet also contributed to the modest linked-quarter drop in spread and margin, management believes that the resultant mix of assets is better positioned to withstand the pressures of economic adversity and interest rate volatility. 22Net Interest Income Analysis
Three Months Ended September 30, ----------------------------------------------------------------------------------- 2002 2001 ---------------------------------------- --------------------------------------- Average Average Average Yield/ Average Yield/ (dollars in thousands) Balance Interest Cost Balance Interest Cost -------------- ---------- ---------- ------------- ---------- ----------Assets: Interest-earning assets: Mortgage and other loans, net $ 5,324,162 $ 99,862 7.50% $ 4,644,558 $ 90,180 7.70% Securities 609,915 8,754 5.74 404,761 7,944 7.79 Mortgage-backed securities 2,948,337 45,353 6.15 1,329,680 22,206 6.63 Money market investments 32,184 377 4.65 109,726 684 2.47 -------------- ---------- ---------- ------------- ---------- ---------- Total interest-earning assets 8,914,598 154,346 6.93 6,488,725 121,014 7.40 Non-interest-earning assets 1,192,603 832,914 -------------- ------------- Total assets $10,107,201 $ 7,321,639 ============== ============= Liabilities and Stockholders' Equity: Interest-bearing liabilities: NOW and money market accounts $ 1,140,190 $ 4,403 1.53% $ 824,892 $ 4,264 2.05% Savings accounts 1,659,270 5,434 1.30 1,211,617 6,842 2.24 Certificates of deposit 1,906,057 11,519 2.40 2,303,219 28,864 4.97 Borrowings 3,567,339 34,130 3.80 1,804,426 21,604 4.75 Mortgagors' escrow 30,686 3 0.04 19,031 1 0.02 -------------- ---------- ---------- ------------- ---------- ---------- Total interest-bearing liabilities 8,303,542 55,489 2.65 6,163,185 61,575 3.96 Non-interest-bearing deposits 462,981 354,198 Other liabilities 117,523 65,744 -------------- ------------- Total liabilities 8,884,046 6,583,127 Stockholders' equity 1,223,155 738,512 -------------- ------------- Total liabilities and stockholders' equity $10,107,201 $ 7,321,639 ============== ============= Net interest income/interest rate spread $ 98,857 4.28% $ 59,439 3.44% ========== ========== ========== ========== Net interest-earning assets/net interest margin $ 611,056 4.44% $ 325,540 3.63% ============== ========== ============= ========== Ratio of interest-earning assets to interest-bearing liabilities 1.07x 1.05x ========== ==========Provision for Loan Losses - ------------------------- The provision for loan losses is based on management's periodic assessment of the adequacy of the loan loss allowance which, in turn, is based on such interrelated factors as the composition of the loan portfolio and its inherent risk characteristics; the level of non-performing loans and charge-offs, both current and historic; local economic conditions; the direction of real estate values; and current trends in regulatory supervision. Over the course of the third quarter of 2002, the balance of non-performing loans declined to $11.0 million, or 0.21% of loans, net, from $13.7 million, or 0.26% of loans, net, at June 30, 2002. Based on the quality of the Company's loans, and management's assessment of the coverage provided by the allowance for loan losses, the provision for loan losses was suspended in the current third quarter, as it has been since the third quarter of 1995. In the absence of any year-to-date net charge-offs or provisions for loan losses, the allowance for loan losses was maintained at $40.5 million, consistent with the allowance at December 31, 2001. The loan loss allowance represented 367.90% of non-performing loans at September 30, 2002, as compared to 231.46% at the end of December, and 0.76% of loans, net, at both September 30, 2002 and December 31, 2001. For additional information about the allowance for loan losses, please see the discussion of asset quality beginning on page 12 of this report. 23Other Operating Income - ---------------------- The Company has traditionally supplemented its net interest income with other operating income derived from service fees and fees charged on loans and depository accounts. Since the Haven acquisition, these income sources have been augmented by income from the Company's increased investment in Bank-owned Life Insurance ("BOLI") and revenues from the sale of banking and third-party investment products in an expanded branch network. More recently, the level of other operating income has been bolstered by revenues generated by the sale of securities, and from the Company's 100% equity interest in PBC, which had assets under management of $643.5 million at September 30, 2002. The Company acquired a 47% equity interest in PBC in the Richmond County merger and increased its interest to 100% on January 3, 2002. The Company recorded other operating income of $23.6 million in the current third quarter, as compared to $32.0 million in the third quarter of 2001. While the 2002 amount included net securities gains of $3.9 million (equivalent to $2.5 million, or $0.02 per share, on an after-tax basis), the 2001 amount included net securities gains of $16.4 million, and an additional $2.0 million in gains on the sale of loans and a Bank-owned property that were recorded in other income. Excluding the respective gains, the Company's other operating income rose to $19.7 million in the current third quarter from $13.6 million in the year-earlier three months. The 44.6% increase was boosted by a $2.0 million rise in fee income to $10.8 million and a $4.0 million rise in other income to $8.9 million (i.e., excluding the aforementioned $2.0 million gains on the sale of loans). While the higher level of other operating income partly reflects the three-month benefit of the Richmond County merger, the higher level of other income also reflects an increase in revenues derived from the sale of third-party investment products, from the Company's BOLI investment, and from the Company's 100% equity interest in PBC. Third-party product sales contributed $2.5 million to other income in the current third quarter, while BOLI and PBC contributed $2.8 million and $1.4 million, respectively. In the third quarter of 2001, the contributions to other income from third-party product sales and BOLI equaled $1.9 million and $1.6 million, respectively. While revenues from third-party product sales declined $923,000 on a linked-quarter basis, they continue to represent a meaningful source of revenues. The linked-quarter decline is consistent with the industry-wide reaction of customers to investment products during a period of stock market volatility. Non-interest Expense - -------------------- Non-interest expense has two primary components: operating expense, consisting of compensation and benefits, occupancy and equipment, general and administrative ("G&A"), and other expenses; and the amortization of the CDI stemming from the Company's merger-of-equals with Richmond County. In connection with the Company's adoption of SFAS Nos. 141 and 142, the amortization of the Richmond County-related CDI will continue through the second quarter of 2011; the amortization of the goodwill stemming from the Haven acquisition was discontinued on January 1, 2002. The Company recorded non-interest expense of $35.3 million in the current third quarter and $52.2 million in the third quarter of 2001. Included in the 2002 amount was CDI amortization of $1.5 million; by comparison, the 2001 amount included CDI and goodwill amortization of $2.5 million. Operating expense totaled $33.8 million in the current third quarter, representing 1.34% of average assets, down from $49.7 million, representing 2.72% of average assets, in the third quarter of 2001. Included in the 2001 amount was the aforementioned merger-related charge of $22.0 million, which was recorded in compensation and benefits expense. Excluding this charge, the Company's third quarter 2001 core operating expense amounted to $27.7 million and its core compensation and benefits expense amounted to $13.7 million. The Company's third quarter 2002 operating expense thus reflected a $5.3 million increase in compensation and benefits expense to $19.0 million; a $722,000 increase in occupancy and equipment expense to $6.0 million; and a $313,000 increase in other expense to $1.1 million. These increases were partly offset by a $254,000 decline in G&A expense to $7.7 million. The higher levels of compensation and benefits, occupancy and equipment, and other expenses largely reflect the three-month impact of the Richmond County merger and, to a lesser extent, the increased equity interest in PBC. 24Notwithstanding the increase in operating expense, as compared to the core 2001 level, the efficiency ratio improved to 27.64% in the current third quarter from a core efficiency ratio of 37.98% in the third quarter of 2001. The calculation of the third quarter 2001 core efficiency ratio excludes the net gains on the sale of securities, loans, and a Bank-owned property recorded in other operating income and the non-recurring merger-related charge recorded in operating expense. The number of full-time equivalent employees at September 30, 2002 was 1,481. Income Tax Expense - ------------------ The Company recorded income tax expense of $26.8 million in the current third quarter, up from $23.6 million in the three months ended September 30, 2001. The 2002 amount reflects a $47.9 million rise in pre-tax income to $87.1 million and a decline in the effective tax rate to 30.7% from 60.2%. The higher effective tax rate in 2001 reflects the aforementioned $3.0 million tax rate adjustment and the non-deductibility of the aforementioned merger-related expense. Comparison of the Nine Months Ended September 30, 2002 and 2001 - --------------------------------------------------------------- The following line item comparisons reflect nine and two months of combined operations with Richmond County in the nine months ended September 30, 2002 and 2001, respectively. Earnings Summary - ---------------- In the nine months ended September 30, 2002, the Company enjoyed the full benefit of the Richmond County merger, and continued to take advantage of the favorable yield curve to leverage the growth of its loan and securities portfolios. The Company recorded nine-month 2002 net income of $164.8 million, or $1.61 per diluted share, providing a 2.25% ROA and a 19.79% ROE. By comparison, the Company recorded net income of $61.9 million, or $0.87 per diluted share, in the first nine months of 2001. The latter amount reflected two months of combined operations with Richmond County, and included a net charge of $2.7 million, or $0.04 per share. The latter charge was the net effect of the aforementioned merger-related charge of $22.0 million and $3.0 million tax rate adjustment, and net gains on the sale of securities, loans, and a Bank-owned property totaling $36.7 million. On an after-tax basis, the $36.7 million net gain was equivalent to $23.9 million, or $0.34 per share. Excluding the $2.7 million, or $0.04 per share, net charge, the Company's earnings rose 154.9% from $64.7 million in the first nine months of 2001 to $164.8 million in the current nine-month period, equivalent to a 76.9% increase in diluted earnings per share from $0.91 to $1.61. The Company also recorded cash earnings of $190.6 million in the current nine-month period, up 80.6% from $105.5 million in the year-earlier nine months. On a diluted per share basis, the Company's nine-month cash earnings rose 24.8% to $1.86 from $1.49. 25Cash Earnings Analysis
For the Nine Months Ended September 30, ----------------------------------- (in thousands, except per share data) 2002 2001 ---------- ----------Net income $164,808 $ 61,946 Additional contributions to tangible stockholders' equity: Amortization and appreciation of stock-related benefit plans 4,617 25,525 Tax benefit effect on stock plans 14,727 11,000 Dividends on unallocated ESOP shares 1,954 1,618 ---------- ---------- Total additional contributions to tangible stockholders' equity 21,298 38,143 Amortization of core deposit intangible and goodwill 4,500 5,446 ---------- ---------- Cash earnings $190,606 $105,535 ========== ========== Cash earnings per share $ 1.88 $ 1.53 Diluted cash earnings per share $ 1.86 $ 1.49 ========== ==========The growth in nine-month 2002 earnings was primarily driven by a $146.6 million, or 112.1%, increase in net interest income to $277.4 million. The increase was the net effect of a $164.1 million rise in interest income to $447.8 million, and a $17.5 million rise in interest expense to $170.4 million. The growth in net interest income was accompanied by a 92-basis point rise in interest rate spread and an 89-basis point rise in net interest margin to 4.18% and 4.36%, respectively. The increase in interest income was fueled by the leveraged growth of the Company's interest-earning assets, which more than offset the impact of lower yields in a declining rate environment. The average balance of interest-earning assets rose $3.5 billion to $8.5 billion, tempering a 50-basis point drop in the average yield to 7.04%. The growth in interest expense was the net effect of a $3.2 billion rise in the average balance of interest-bearing liabilities to $8.0 billion and a 142-basis point drop in the average cost of funds to 2.86%. Other operating income totaled $71.4 million in the current nine-month period, as compared to $71.6 million in the year-earlier nine months. The 2002 amount included net securities gains of $11.7 million, while the 2001 amount included net gains of $36.7 million on the sale of securities, one-to-four family loans, and a Bank-owned property. Excluding the respective gains, the Company recorded other operating income of $59.7 million, as compared to $34.9 million in the first nine months of 2001. The growth in revenues was partly offset by a $13.2 million rise in non-interest expense to $105.3 million and by a $30.3 million rise in income tax expense to $78.6 million. In addition to CDI amortization in the amount of $4.5 million, the Company's nine-month 2002 non-interest expense included operating expense of $100.8 million, up from $86.7 million in the first nine months of 2001. Excluding the aforementioned merger-related charge of $22.0 million, nine-month 2001 core operating expense totaled $64.7 million, including core compensation and benefits expense of $31.2 million. The higher level of operating expense in 2002 primarily reflects the nine-month impact of the Richmond County merger, versus the two-month impact in 2001. The increase in income tax expense reflects a $133.2 million rise in pre-tax income to $243.4 million, and a decline in the effective tax rate to 32.3% from 43.8%. The higher effective tax rate in 2001 reflects the aforementioned $3.0 million tax rate adjustment and the non-deductibility of the aforementioned merger-related expense. The provision for loan losses had no impact on the Company's nine-month 2002 or 2001 earnings, having been suspended since the third quarter of 1995. Interest Income - --------------- The Company recorded nine-month 2002 interest income of $447.8 million, up from $283.7 million in the year-earlier nine months. The 57.8% increase was fueled by a $3.5 billion, or 68.9%, rise in average interest-earning 26assets to $8.5 billion, which served to offset a 50-basis point decline in the average yield to 7.04%. While the lower yield reflects the decline in market interest rates and the restructuring of the Company's assets, the higher balance reflects the record volume of loans produced in the past year, the full benefit of the assets acquired in the Richmond County merger, and the Company's subsequent investments in mortgage-backed securities. Mortgage and other loans produced interest income of $306.0 million, representing 68.3% of the nine-month 2002 total, up from $223.8 million, representing 78.9% of the nine-month 2001 amount. The 36.7% increase was fueled by a $1.5 billion, or 39.8%, rise in the average balance of loans to $5.4 billion, which served to offset a 17-basis point decline in the average yield to 7.55%. The interest income produced by mortgage-backed securities rose to $114.7 million, representing 25.6% of total interest income in the current nine-month period, from $32.3 million, representing 11.4% of the year-earlier amount. The increase was fueled by a $1.9 billion rise in the average balance to $2.5 billion, and tempered by a 57-basis point reduction in the average yield to 6.05%. Securities generated nine-month 2002 interest income of $26.5 million, up $4.4 million from the year-earlier amount. The increase stemmed from a $192.2 million rise in the average balance to $523.6 million, tempered by a 215-basis point decline in the average yield to 6.76%. The interest income provided by money market investments totaled $654,000, down from $5.5 million in the year-earlier nine months. The reduction reflects a $148.7 million decline in the average balance to $22.8 million and a 48-basis point decline in the average cost to 3.83%. The significant reduction in money market investments is indicative of management's preference for investments in higher-yielding interest-earning assets, as detailed above. Interest Expense - ---------------- In the nine months ended September 30, 2002, the Company recorded interest expense of $170.4 million, up 11.5% from $152.9 million in the nine months ended September 30, 2001. The increase was the net effect of a $3.2 billion, or 67.0%, rise in the average balance of interest-bearing liabilities to $8.0 billion, and a 142-basis point decline in the average cost of funds to 2.86%. The higher balance reflects the full impact of the Richmond County merger and the Company's ongoing leveraging strategy. The lower cost was a function of the same factors that served to reduce the average cost of funds in the third quarter: the increasing concentration of core deposits within the mix of total deposits; the sale of third-party investment products in lieu of higher cost deposits; and the downward repricing of CDs during a time of declining interest rates. CDs generated interest expense of $46.2 million, representing 27.1% of the nine-month 2002 total, down from $80.8 million, representing 52.9%, in the year-earlier nine months. While the average balance of CDs grew $106.3 million year-over-year to $2.1 billion, the increase was offset by a 252-basis point reduction in the average cost of such funds to 2.99%. Other deposits (as previously defined) generated nine-month 2002 interest expense of $29.1 million, representing 17.1% of the total, up from $22.4 million, representing 14.6%, in the first nine months of 2001. The 30.1% increase was the net effect of a $1.5 billion, or 83.1%, rise in the average balance to $3.2 billion and a 49-basis point decline in the average cost to 1.20%. Included in the higher average balance of other deposits was a $213.2 million increase in average non-interest-bearing deposits to $463.5 million. NOW and money market accounts generated nine-month 2002 interest expense of $12.0 million, up $780,000 from the year-earlier amount. The increase stemmed from a $315.0 million rise in the average balance to $1.1 billion, which was tempered by a 49-basis point decline in the average cost to 1.50%. Savings accounts generated interest expense of $17.1 million, up $6.0 million, the net effect of a $927.5 million rise in the average balance to $1.7 billion and a 65-basis point reduction in the average cost to 1.37%. The interest expense generated by mortgagors' escrow dropped $1,000 to $12,000, the net effect of a $16.0 million rise in the average balance to $43.0 million and a two-basis point drop in the average cost to four basis points. 27Borrowings generated interest expense of $95.0 million, representing 55.8% of the nine-month 2002 total, up from $49.7 million, representing 32.5%, in the first nine months of 2001. The increase was driven by a $1.8 billion rise in the average balance to $3.1 billion, in connection with the aforementioned leveraging program, and partly offset by a 108-basis point decline in the average cost of such funds to 4.07%. Net Interest Income - ------------------- The Company's net interest income rose 112.1% to $277.4 million in the current nine-month period from $130.8 million in the nine months ended September 30, 2001. In addition to the full benefit of the Richmond County merger, the increase reflects the leveraged growth of the Company's interest-earning assets, primarily in the form of multi-family loans and securities. The increase was also supported by the significant shift in favor of lower cost core deposits and by the comparatively low cost of funds associated with the Company's CDs during a time of declining market interest rates. The Company's spread and margin showed similar year-over-year improvement, expanding 92 and 89 basis points, respectively, to 4.18% and 4.36%. For additional information regarding the factors contributing to the growth of net interest income, spread, and margin, see the discussion of third quarter 2002 and 2001 net interest income beginning on page 22 of this report. Net Interest Income Analysis
Nine Months Ended September 30, ---------------------------------------------------------------------------------- 2002 2001 -------------------------------------- --------------------------------------- Average Average Average Yield/ Average Yield/ (dollars in thousands) Balance Interest Cost Balance Interest Cost ------------ ---------- ---------- ------------ ---------- ----------Assets: Interest-earning assets: Mortgage and other loans, net $5,421,713 $305,991 7.55% $3,877,189 $223,787 7.72% Securities 523,568 26,465 6.76 331,396 22,077 8.91 Mortgage-backed securities 2,533,921 114,670 6.05 652,347 32,300 6.62 Money market investments 22,801 654 3.83 171,495 5,523 4.31 ---------- -------- ------ ---------- -------- ---- Total interest-earning assets 8,502,003 447,780 7.04 5,032,428 283,687 7.54 Non-interest-earning assets 1,270,401 487,055 ---------- ---------- Total assets $9,772,404 $5,519,483 ========== ========== Liabilities and Stockholders' Equity: Interest-bearing liabilities: NOW and money market accounts $1,069,407 $ 11,994 1.50% $ 754,449 $ 11,214 1.99% Savings accounts 1,667,570 17,126 1.37 740,116 11,163 2.02 Certificates of deposit 2,069,431 46,247 2.99 1,963,119 80,842 5.51 Borrowings 3,125,106 95,045 4.07 1,290,772 49,682 5.15 Mortgagors' escrow 42,983 12 0.04 27,026 13 0.06 ---------- -------- ------ ---------- -------- ---- Total interest-bearing liabilities 7,974,497 170,424 2.86 4,775,482 152,914 4.28 Non-interest-bearing deposits 463,531 250,324 Other liabilities 223,748 56,528 ---------- ---------- Total liabilities 8,661,776 5,082,334 Stockholders' equity 1,110,628 437,149 ---------- ---------- Total liabilities and stockholders' equity $9,772,404 $5,519,483 ========== ========== Net interest income/interest rate spread $277,356 4.18% $130,773 3.26% ======== ====== ======== ==== Net interest-earning assets/net interest margin $ 527,506 4.36% $ 256,946 3.47% ========== ====== ========== ==== Ratio of interest-earning assets to interest-bearing liabilities 1.07x 1.05x ====== ====28Provision for Loan Losses - ------------------------- As noted in the discussion of the provision for loan losses for the third quarter, the Company has recorded no loan loss provisions since the third quarter of 1995. For additional information about the provision for loan losses, please see the discussion that appears on page 23 of this filing, and the discussion of asset quality beginning on page 12. Other Operating Income - ---------------------- Other operating income totaled $71.4 million in the first nine months of 2002 and $71.6 million in the first nine months of 2001. While the 2002 amount included net securities gains of $11.7 million, the 2001 amount included net securities gains of $25.3 million and gains of $11.4 million on the sale of one-to-four family loans and a Bank-owned property. The 2002 amount was equivalent to $7.6 million, or $0.07 per share, on an after-tax basis; the combined 2001 amount was equivalent to $23.9 million, or $0.34 per share, after tax. Excluding the respective gains, the Company recorded other operating income of $59.7 million in the current nine-month period, up from $34.9 million in the year-earlier nine months. The increase stemmed from an $8.3 million rise in fee income to $32.8 million and a $16.5 million rise in other income to $26.9 million. While the higher level of fee income reflects the nine-month benefit of the Richmond County merger, the higher level of other income also reflects revenues from third-party product sales, BOLI, and PBC. Third-party investment product sales generated gross revenues of $8.6 million in the current nine-month period, while BOLI and PBC generated revenues of $6.7 million and $4.4 million, respectively. In the nine months ended September 30, 2001, the sale of third-party products generated other income of $5.0 million, while BOLI generated other income of $3.5 million. Non-interest Expense - -------------------- The Company recorded non-interest expense of $105.3 million in the current nine-month period, as compared to $92.2 million in the first nine months of 2001. While the 2002 amount includes CDI amortization of $4.5 million, the 2001 amount includes CDI and goodwill amortization of $5.4 million combined. The difference reflects the Company's January 1, 2002 adoption of SFAS Nos. 141 and 142 and the resultant discontinuation of the amortization of goodwill as of that date. Operating expense totaled $100.8 million, representing 1.38% of average assets, in the current nine-month period, as compared to $86.7 million, representing 2.10%, in the nine months ended September 30, 2001. Included in the 2001 amount was the aforementioned merger-related charge of $22.0 million; excluding this charge, nine-month 2001 core operating expense totaled $64.7 million, and core compensation and benefits expense totaled $31.2 million. The higher level of operating expense in the first nine months of 2002 thus reflects a $23.4 million increase in core compensation and benefits expense to $54.6 million; a $5.3 million increase in occupancy and equipment expense to $17.7 million; a $5.3 million increase in G&A expense to $24.3 million; and a $2.1 million increase in other expense to $4.2 million. The higher costs primarily reflect the nine-month impact of the Richmond County merger (versus two-months in the year-earlier period) and the impact of the PBC acquisition in January 2002. Income Tax Expense - ------------------ The Company recorded income tax expense of $78.6 million in the current nine-month period, up from $48.3 million in the first nine months of 2001. The 2002 amount reflects a $133.2 million rise in pre-tax income to $243.4 million and a decline in the effective tax rate to 32.3% from 43.8%. The higher effective tax rate in 2001 reflects the aforementioned $3.0 million tax rate adjustment and the non-deductibility of the merger-related expense. Management anticipates that the effective tax rate for the twelve months ended December 31, 2002 will range between 32.0% and 32.5%. 29QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ---------------------------------------------------------- Quantitative and qualitative disclosures about the Company's market risk were presented in the discussion and analysis of Market Risk and Interest Rate Sensitivity that appear on pages 20 - 23 of the Company's 2001 Annual Report to Shareholders, filed on April 1, 2002. Subsequent changes in the Company's market risk profile and interest rate sensitivity are detailed in the discussion entitled "Asset and Liability Management and the Management of Interest Rate Risk," beginning on page 16 of this quarterly report. CONTROLS AND PROCEDURES ----------------------- (a) Evaluation of Disclosure Controls and Procedures ------------------------------------------------ The Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon their evaluation of those controls and procedures performed within 90 days of the filing date of this report, the chief executive officer and the chief financial officer of the Company concluded that the Company's disclosure controls and procedures were adequate. (b) Changes in Internal Controls ---------------------------- The Company made no significant changes in its internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation of those controls by the chief executive officer and chief financial officer. 30NEW YORK COMMUNITY BANCORP, INC. PART 2 - OTHER INFORMATION -------------------------- Item 1. Legal Proceedings - ------------------------- The Bank is involved in various legal actions arising in the ordinary course of its business. All such actions, in the aggregate, involve amounts that are believed by management to be immaterial to the financial condition and results of operations of the Bank. Item 2. Changes in Securities - ----------------------------- Not applicable. Item 3. Defaults Upon Senior Securities - --------------------------------------- Not applicable. Item 4. Submission of Matters to a Vote of Security Holders - ----------------------------------------------------------- Not applicable. Item 5. Other Information - ------------------------- Not applicable. Item 6. Exhibits and Reports on Form 8-K - ---------------------------------------- (a) Exhibits Exhibit 1.1: Underwriting Agreement for offering of BONUSES(SM) Units/(1)/ Exhibit 3.1: Articles of Incorporation/(2)/ Exhibit 3.2: Bylaws/(3)/ Exhibit 4.1: Amended and Restated Declaration of Trust of New York Community Capital Trust V, dated as of November 4, 2002. Exhibit 4.2: Indenture relating to the Junior Subordinated Debentures between New York Community Bancorp, Inc. and Wilmington Trust Company, as Trustee, dated as of November 4, 2002. Exhibit 4.3: First Supplemental Indenture between New York Community Bancorp, Inc. and Wilmington Trust Company, as Trustee, dated as of November 4, 2002. Exhibit 4.4: Form of Preferred Security (included in Exhibit 4.1). Exhibit 4.5: Form of Warrant (included in Exhibit 4.9). Exhibit 4.6: Form of Unit Certificate (Included in Exhibit 4.8). Exhibit 4.7: Guarantee Agreement, issued in connection with the BONUSES Units, between New York Community Bancorp, Inc., as Guarantor and Wilmington Trust Company, as Guarantee Trustee dated as of November 4, 2002. Exhibit 4.8: Unit Agreement among New York Community Bancorp, Inc., New York Community Capital Trust V, and Wilmington Trust Company, as Warrant Agent, Property Trustee and Unit Agent, dated as of November 4, 2002. ----------- /(1)/ Incorporated by reference to Exhibits filed with the Company's Form 8-K filed with the SEC on November 4, 2002. /(2)/ Incorporated by reference to the Exhibits filed with the Company's Form 10-Q for the quarterly period ended March 31, 2001. /(3)/ Incorporated by reference to the Exhibits filed with the Company's Form 10-K for the year ended December 31, 2001, File No. 0-22278. 31Exhibit 4.9: Warrant Agreement between New York Community Bancorp, Inc. and Wilmington Trust Company, as Warrant Agent, dated as of November 4, 2002. Exhibit 4.10: Debenture Subscription Agreement, dated as of November 4, 2002, between New York Community Bancorp, Inc. and New York Community Capital Trust V. Exhibit 4.11: Common Securities Subscription Agreement, dated as of November 4, 2002, between New York Community Capital Trust V and New York Community Bancorp, Inc. Exhibit 11: Statement re: Computation of Per Share Earnings Exhibit 99.1: Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Exhibit 99.2: Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K On July 18, 2002, the Company filed a Form 8-K to disclose its earnings release for the quarterly period ended June 30, 2002. On July 22, 2002, the Company furnished a Form 8-K to disclose, under Item 9, a written presentation made available and distributed to current and prospective investors and posted to its web site. On July 25, 2002 the Company filed a Form 8-K to disclose its press release announcing the declaration of a quarterly cash dividend of $0.20 per share, payable on August 15, 2002 to shareholders of record as of August 5, 2002. On September 19, 2002, the Company furnished a Form 8-K to disclose, under Item 9, a written presentation made available and distributed to participants at the RBC Capital Markets Financial Institutions Conference, and posted to its web site. 32SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. New York Community Bancorp, Inc. -------------------------------- (Registrant) DATE: November 14, 2002 BY: /s/ Joseph R. Ficalora ---------------------- Joseph R. Ficalora President and Chief Executive Officer (Duly Authorized Officer) DATE: November 14, 2002 BY: /s/ Robert Wann --------------- Robert Wann Executive Vice President and Chief Financial Officer (Principal Financial Officer) 33NEW YORK COMMUNITY BANCORP, INC. CERTIFICATIONS -------------- I, Joseph R. Ficalora, certify that: 1. I have reviewed this quarterly report on Form 10-Q of New York Community Bancorp, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 BY: /s/ Joseph R. Ficalora ---------------------- Joseph R. Ficalora President and Chief Executive Officer (Duly Authorized Officer) 34NEW YORK COMMUNITY BANCORP, INC. CERTIFICATIONS -------------- I, Robert Wann, certify that: 1. I have reviewed this quarterly report on Form 10-Q of New York Community Bancorp, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 BY: /s/ Robert Wann --------------- Robert Wann Executive Vice President and Chief Financial Officer (Principal Financial Officer) 35