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
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Commission File Number 0-22278
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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
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(Address of principal executive offices)
(Registrant's telephone number, including area code) 516: 683-4100
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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, 2002
NEW YORK COMMUNITY BANCORP, INC.
FORM 10-Q
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Quarter Ended September 30, 2002
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INDEX Page No.
- ----- --------
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Condition as of September 30,
2002 (unaudited) and December 31, 2001 1
Consolidated Statements of Income and Comprehensive
Income for the Three and Nine Months Ended September 30,
2002 and 2001 (unaudited) 2
Consolidated Statement of Changes in Stockholders'
Equity for the Nine Months Ended September 30, 2002
(unaudited) 3
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2002 and 2001 (unaudited) 4
Notes to Unaudited Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 30
Item 4. Controls and Procedures 30
Part II. OTHER INFORMATION 31
Item 1. Legal Proceedings 31
Item 2. Changes in Securities and Use of Proceeds 31
Item 3. Defaults Upon Senior Securities 31
Item 4. Submission of Matters to a Vote of Security Holders 31
Item 5. Other Information 31
Item 6. Exhibits and Reports on Form 8-K 31
Signatures 33
Certifications 34
Exhibits 36
NEW YORK COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CONDITION
(in thousands, except share data)
September 30, December 31,
2002 2001
(unaudited)
-------------- -------------
Assets
Cash and due from banks $ 114,781 $ 168,449
Money market investments 28,452 10,166
Securities held to maturity ($176,457 and $114,881 pledged at
September 30, 2002 and December 31, 2001, respectively) 460,485 203,195
Mortgage-backed securities held to maturity ($42,116 and $50,801
pledged at September 30, 2002 and December 31, 2001, respectively) 42,116 50,865
Securities available for sale ($2,132,669 and $1,381,356 pledged at
September 30, 2002 and December 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 and equipment, 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 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 capital in excess of par 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 held by ESOP (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
============ ============
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 For the
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2002 2001 2002 2001
------------- ------------ ------------- -----------
Interest Income:
Mortgage and other loans $ 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:
NOW and money market accounts 4,403 4,264 11,994 11,214
Savings accounts 5,434 6,842 17,126 11,163
Certificates of deposit 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
Provision for loan losses -- -- -- --
--------- --------- --------- ---------
Net interest income after
provision 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
--------- --------- --------- ---------
Total other operating income 23,606 32,023 71,382 71,632
--------- --------- --------- ---------
Non-interest Expense:
Operating expense:
Compensation and benefits 18,982 35,656 54,635 53,198
Occupancy and equipment 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
--------- --------- --------- ---------
Amortization of core 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, net of tax:
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
========= ========= ========= =========
See accompanying notes to unaudited consolidated financial statements.
2
NEW 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.
3
NEW 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 recognized in the Peter B. Cannell & Co., Inc. acquisition and other
goodwill addition (9,865) --
Goodwill recognized in merger with Richmond County -- (504,087)
Core deposit intangible recognized in merger with Richmond County -- (60,000)
Acquired allowance -- 22,434
Decrease in deferred income taxes 27,271 8,440
Increase 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 redemption and sales of mortgage-backed securities
held to maturity 8,723 112,573
Proceeds from redemption and sales 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 --
See accompanying notes to unaudited consolidated financial statements.
4
NEW 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.
5
Net 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
========= ======== ========= ========
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)
======= =======
6
Aggregate 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.
7
140, 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.
8
NEW 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.
9
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 "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.
10
In 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.
11
The 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
12
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 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.
13
Asset 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.
14
Available-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.
15
The 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
16
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 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.
17
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 $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.
18
Regulatory 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
19
Richmond 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.
20
Income 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.
21
In 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.
22
Net 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.
23
Other 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.
24
Notwithstanding 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.
25
Cash 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
26
assets 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.
27
Borrowings 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
====== ====
28
Provision 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%.
29
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
Quantitative and qualitative disclosures about the Company's market risk were
presented in the discussion and analysis of Market Risk and Interest Rate
Sensitivity that appear on pages 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.
30
NEW 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.
31
Exhibit 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.
32
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
New York Community Bancorp, Inc.
--------------------------------
(Registrant)
DATE: 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)
33
NEW 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)
34
NEW 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