ITEM 7.
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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For the purpose of this discussion and analysis, the words we, us, our, and the Company
are used to refer to New York Community Bancorp, Inc. and our consolidated subsidiaries, including New York Community Bank (the Community Bank) and New York Commercial Bank (the Commercial Bank) (collectively, the
Banks).
Executive Summary
In 2012, the U.S. economy showed certain signs of improvement, as the unemployment rate declined from 8.5% in December 2011 to 7.8% in December 2012. Although unemployment rates declined year-over-year in
Florida, Arizona, and Ohiothree of the five states served by our branch networkunemployment rates rose slightly in New York and New Jersey, the other two. In New York City, where most of our branches and most of the properties and
businesses securing our held-for-investment loans are located, unemployment was 8.8% in December 2011 and 2012.
The changes
in certain other local economic indices were mixed in their direction. For example, personal bankruptcy filings throughout Metro New York fell 14.3% in the twelve months ended September 30, 2012 (the most recent month at which such data was
available at this writing), while the number of business bankruptcy filings was essentially unchanged. In Manhattan, which is home to 35.9% of our multi-family loans and 56.3% of our commercial real estate credits, the office vacancy rate rose to
11.2% in the fourth quarter of 2012 from 10.4% in the year-earlier three months.
Through December 2012, average home prices
rose 6.8% year-over-year throughout the nation, according to the S&P/Case-Shiller Home Price Indices. While home prices fell 0.5% in Metro New York, home prices rose in Greater Cleveland, Miami, and Phoenix by 2.9%, 10.6%, and 23.0%,
respectively. Meanwhile, the volume of new home sales rose nearly 20% nationwide from the volume reported for 2011, to an estimated 367,000 in 2012, according to a U.S. Commerce Department report.
In addition, the Consumer Confidence Index
®
was modestly higher in 2012 than it was in 2011. An index level of 90 or more is considered indicative of a strong economy; the Consumer Confidence Index
®
was 64.5 in December 2011 and 65.1 in December 2012.
Also, in 2012, the target federal funds rate was maintained by the Federal Open Market Committee (the FOMC) at a range of
zero to 25 basis pointsthe same range to which it was lowered in the fourth quarter of 2008. Market interest rates, meanwhile, declined to record lows from the already-low levels we saw in 2011, encouraging homeowners throughout the U.S. to
refinance or purchase new homes. The low level of market interest rates also prompted an increase in the refinancing of multi-family loans in New York City, where most of our multi-family loans are produced.
Against this backdrop, we delivered a strong financial performance. Earnings rose to $501.1 million, or $1.13 per diluted share, in 2012
from the level recorded in 2011, which was $480.0 million, or $1.09 per diluted share.
We attribute our year-over-year
earnings growth to our two-pronged approach to lending: originating multi-family loans for investment, primarily in New York City; and originating one-to-four family loans throughout the U.S., primarily for sale.
In 2012, we originated $9.0 billion of held-for-investment loans, including $5.8 billion of loans secured by multi-family buildings, the
latter amount exceeding the year-earlier volume by $30.0 million. While our net interest income and margin declined, as our balance sheet was replenished with lower-yielding assets, the impact was substantially offset by an increase in income from
prepayment penalties, as refinancing activity in our multi-family lending niche surged. In 2012, prepayment penalty income contributed $120.4 million to our net interest income and 33 basis points to our net interest margin, exceeding the
year-earlier measures by $33.8 million and eight basis points, respectively. Net interest income declined $40.4 million, or 3.4%, year-over-year, to $1.2 billion, while our margin declined 25 basis points to 3.21%.
Notwithstanding the volume of loans that prepaid during the yearincluding two loans to a single borrower totaling $545.5 million,
our portfolio of held for investment loans rose $1.7 billion, or 6.9%, from the balance recorded at December 31, 2011 to $27.3 billion at December 31, 2012.
44
The decline in net interest income was more than offset by an increase in mortgage banking
income, as the decline in residential mortgage rates also prompted a surge in the production of one-to-four family loans for sale. As more consumers refinanced or purchased new homes, the volume of one-to-four family loans produced for sale rose
$3.7 billion, or 51.9%, to $10.9 billion. During this time, the income produced by our mortgage banking business rose $98.0 million, or 121.4%, to $178.6 million.
We also attribute the strength of our 2012 performance to the quality of our assets, which reflected substantial improvement over the course of the year. For example, net charge-offs declined $59.3
million year-over-year, to $41.3 million, and the ratio of net charge-offs to average loans improved to 0.13% from 0.35% . In addition, non-performing non-covered assets totaled $290.6 million at the end of December, reflecting a year-over-year
reduction of $119.8 million, or 29.2%. The balance at December 31, 2012 represented 0.71% of total non-covered assets, an improvement from 1.07% at the year-earlier date.
While the improvements in asset quality were partly due to the improvement in economic and market conditions, they also reflect our ability to successfully restructure troubled assets and to dispose of
certain other real estate owned (OREO) without incurring a material loss. In addition, while several of the communities we serve in New Jersey and Metro New York were hurt by Hurricane Sandy, the impact on the properties and businesses
securing our loans, and the effect on our branches, was, thankfully, negligible.
Two additional features of our 2012
performance were the growth of our deposits and the strategic reduction of our funding costs. For example, in connection with our assumption of $2.2 billion in deposits from Aurora Bank FSB (Aurora Bank) at the end of the second quarter,
we received a payment of $24.0 million which was utilized to reduce the cost of the acquired funds. The deposits we assumed were used, in part, to reduce our balance of FHLB-NY advances and, with it, the average cost of such funds.
Another important step we took in 2012 was redeeming $69.2 million of trust preferred securities at the end of December, and beginning
the process of repositioning certain of our wholesale borrowings. In addition to the $3.5 billion of wholesale borrowings that were repositioned in late December, another $2.4 billion of such funds were repositioned in January 2013. All told, we
reduced the weighted average cost of these borrowed funds by 117 basis points, and extended the weighted average call and maturity dates by approximately four years.
Consistent with our interest in returning value to our investors, we distributed total cash dividends of $438.5 million over the course of 2012, in the form of four quarterly dividends of $0.25 per share,
or $1.00 annualized. Stockholders equity nonetheless rose $90.6 million year-over-year to $5.7 billion, and tangible stockholders equity rose $110.2 million to $3.2 billion at December 31, 2012. (Please see the reconciliations of our
GAAP and non-GAAP capital measures that appear on the last page of this discussion and analysis of financial condition and results of operations).
In addition, the Companys regulatory capital ratios each exceeded the minimum levels required, and each of our bank subsidiaries exceeded the regulatory requirements for classification as well
capitalized banks.
Recent Events
On January 29, 2013, the Board of Directors declared a quarterly cash dividend of $0.25 per share, payable on February 22, 2013 to shareholders of record at the close of business on
February 11, 2013.
Critical Accounting Policies
We consider certain accounting policies to be critically important to the portrayal of our financial condition and results of operations, since they require management to make complex or subjective
judgments, some of which may relate to matters that are inherently uncertain. The inherent sensitivity of our consolidated financial statements to these critical accounting policies, and the judgments, estimates, and assumptions used therein, could
have a material impact on our financial condition or results of operations.
We have identified the following to be critical
accounting policies: the determination of the allowances for loan losses; the valuation of loans held for sale; the determination of whether an impairment of securities is other than temporary; the determination of the amount, if any, of goodwill
impairment; and the determination of the valuation allowance for deferred tax assets.
The judgments used by management in
applying these critical accounting policies may be influenced by further and prolonged deterioration in the economic environment, which may result in changes to future financial results. In addition, the current economic environment has increased
the degree of uncertainty inherent in our judgments, estimates, and assumptions.
45
Allowances for Loan Losses
Allowance for Losses on Non-Covered Loans
The allowance for losses on
non-covered loans is increased by provisions for non-covered loan losses that are charged against earnings, and is reduced by net charge-offs and/or reversals, if any, that are credited to earnings. Although non-covered loans are held by either the
Community Bank or the Commercial Bank, and a separate loan loss allowance is established for each, the total of the two allowances is available to cover all losses incurred. In addition, except as otherwise noted below, the process for
establishing the allowance for losses on non-covered loans is the same for each of the Community Bank and the Commercial Bank. In determining the respective allowances for loan losses, management considers the Community Banks and the
Commercial Banks current business strategies and credit processes, including compliance with guidelines approved by the respective Boards of Directors with regard to credit limitations, loan approvals, underwriting criteria, and loan workout
procedures.
The allowance for losses on non-covered loans is established based on our evaluation of the probable inherent
losses in our portfolio in accordance with GAAP, and are comprised of both specific valuation allowances and general valuation allowances.
Specific valuation allowances are established based on managements analyses of individual loans that are considered impaired. If a non-covered loan is deemed to be impaired, management measures the
extent of the impairment and establishes a specific valuation allowance for that amount. A non-covered loan is classified as impaired when, based on current information and events, it is probable that we will be unable to collect both
the principal and interest due under the contractual terms of the loan agreement. We apply this classification as necessary to non-covered loans individually evaluated for impairment in our portfolios of multi-family; commercial real estate;
acquisition, development, and construction; and commercial and industrial loans. Smaller balance homogenous loans and loans carried at the lower of cost or fair value are evaluated for impairment on a collective, rather than individual, basis.
We generally measure impairment on an individual loan and determine the extent to which a specific valuation allowance is
necessary by comparing the loans outstanding balance to either the fair value of the collateral, less the estimated cost to sell, or the present value of expected cash flows, discounted at the loans effective interest rate. A specific
valuation allowance is established when the fair value of the collateral, net of the estimated costs to sell, or the present value of the expected cash flows is less than the recorded investment in the loan.
We also follow a process to assign general valuation allowances to non-covered loan categories. General valuation allowances are
established by applying our loan loss provisioning methodology, and reflect the inherent risk in outstanding held-for-investment loans. This loan loss provisioning methodology considers various factors in determining the appropriate quantified risk
factors to use to determine the general valuation allowances. The factors assessed begin with the historical loan loss experience for each of the major loan categories we maintain. Our historical loan loss experience is then adjusted by considering
qualitative or environmental factors that are likely to cause estimated credit losses associated with the existing portfolio to differ from historical loss experience, including, but not limited to:
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Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices;
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Changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the
portfolio, including the condition of various market segments;
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Changes in the nature and volume of the portfolio and in the terms of loans;
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Changes in the volume and severity of past due loans, the volume of non-accrual loans, and the volume and severity of adversely classified or graded
loans;
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Changes in the quality of our loan review system;
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Changes in the value of the underlying collateral for collateral-dependent loans;
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The existence and effect of any concentrations of credit, and changes in the level of such concentrations;
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Changes in the experience, ability, and depth of lending management and other relevant staff; and
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The effect of other external factors, such as competition and legal and regulatory requirements, on the level of estimated credit losses in the
existing portfolio.
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By considering the factors discussed above, we determine quantifiable risk factors that
are applied to each non-impaired loan or loan type in the loan portfolio to determine the general valuation allowances.
46
In recognition of prevailing macroeconomic and real estate market conditions, the time
periods considered for historical loss experience continue to be the last three years and the current period. We also evaluate the sufficiency of the overall allocations used for the allowance for losses on non-covered loans by considering the loss
experience in the current and prior calendar year.
The process of establishing the allowance for losses on non-covered loans
also involves:
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Periodic inspections of the loan collateral by qualified in-house and external property appraisers/inspectors, as applicable;
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Regular meetings of executive management with the pertinent Board committee, during which observable trends in the local economy and/or the real estate
market are discussed;
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Assessment of the aforementioned factors by the pertinent members of the Boards of Directors and executive management when making a business judgment
regarding the impact of anticipated changes on the future level of loan losses; and
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Analysis of the portfolio in the aggregate, as well as on an individual loan basis, taking into consideration payment history, underwriting analyses,
and internal risk ratings.
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In order to determine their overall adequacy, each of the respective loan loss
allowances is reviewed quarterly by management and by the Mortgage and Real Estate Committee of the Community Banks Board of Directors (the Mortgage Committee) or the Credit Committee of the Board of Directors of the Commercial
Bank (the Credit Committee), as applicable.
We charge off loans, or portions of loans, in the period that such
loans, or portions thereof, are deemed uncollectible. The collectability of individual loans is determined through an assessment of the financial condition and repayment capacity of the borrower and/or through an estimate of the fair value of any
underlying collateral. Generally, the time period in which this assessment is made is within the same quarter that the loan is considered impaired and quarterly thereafter. For non-real estate-related consumer credits, the following past-due time
periods determine when charge-offs are typically recorded: (1) closed-end credits are charged off in the quarter that the loan becomes 120 days past due; (2) open-end credits are charged off in the quarter that the loan becomes 180 days
past due; and (3) both closed-end and open-end credits are typically charged off in the quarter that the credit is 60 days past the date we received notification that the borrower has filed for bankruptcy.
The level of future additions to the respective non-covered loan loss allowances is based on many factors, including certain factors that
are beyond managements control such as changes in economic and local market conditions, including declines in real estate values, and increases in vacancy rates and unemployment. Management uses the best available information to recognize
losses on loans or to make additions to the loan loss allowances; however, the Community Bank and/or the Commercial Bank may be required to take certain charge-offs and/or recognize further additions to their loan loss allowances, based on the
judgment of regulatory agencies with regard to information provided to them during their examinations of the Banks.
Allowance for Losses
on Covered Loans
We have elected to account for the loans acquired in the AmTrust Bank (AmTrust) and Desert
Hills Bank (Desert Hills) acquisitions (i.e., our covered loans) based on expected cash flows. This election is in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification
(ASC) Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (ASC 310-30). In accordance with ASC 310-30, we will maintain the integrity of a pool of multiple loans accounted for as a
single asset and with a single composite interest rate and an aggregate expectation of cash flows.
Under our loss sharing
agreements with the FDIC, covered loans are reported exclusive of the FDIC loss share receivable. The covered loans acquired in the AmTrust and Desert Hills acquisitions are, and will continue to be, reviewed for collectability based on the
expectations of cash flows from these loans. Covered loans have been aggregated into pools of loans with common characteristics. In determining the allowance for losses on covered loans, we periodically perform an analysis to estimate the expected
cash flows for each of the loan pools. We record a provision for losses on covered loans to the extent that the expected cash flows from a loan pool have decreased for credit-related items since the acquisition date. Accordingly, if there is a
decrease in expected cash flows due to an increase in estimated credit losses compared to the estimates made at the respective acquisition dates, the decrease in the present value of expected cash flows will be recorded as a provision for covered
loan losses charged to earnings, and the allowance for covered loan losses will be increased. A related credit to non-interest income and an increase in the FDIC loss share receivable will be recognized at the same time, and will be measured based
on the loss sharing agreement percentages.
47
Please see Note 5, Allowances for Loan Losses for a further discussion of our
allowance for losses on covered loans as well as additional information about our allowances for losses on non-covered loans.
Loans
Held for Sale
We carry at fair value the one-to-four family mortgage loans we originate for sale to investors. The
fair value of such loans is primarily based on quoted market prices for securities backed by similar types of loans. Changes in fair value, which are recorded as a component of mortgage banking income, are largely driven by changes in interest rates
subsequent to loan funding and changes in the fair value of servicing associated with mortgage loans held for sale. In addition, we use various derivative instruments to mitigate the economic effect of changes in the fair value of the underlying
loans.
Investment Securities
The securities portfolio primarily consists of mortgage-related securities and, to a lesser extent, debt and equity (together, other) securities. Securities that are classified as
available for sale are carried at their estimated fair value, with any unrealized gains or losses, net of taxes, reported as accumulated other comprehensive income or loss in stockholders equity. Securities that we have the intent
and ability to hold to maturity are classified as held to maturity and carried at amortized cost, less the non-credit portion of OTTI recorded in AOCL.
The fair values of our securitiesand particularly our fixed-rate securitiesare affected by changes in market interest rates and credit spreads. In general, as interest rates rise and/or credit
spreads widen, the fair value of fixed-rate securities will decline; as interest rates fall and/or credit spreads tighten, the fair value of fixed-rate securities will rise. We regularly conduct a review and evaluation of our securities portfolio to
determine if the decline in the fair value of any security below its carrying amount is other than temporary. If we deem any decline in value to be other than temporary, the security is written down to its current fair value, creating a new cost
basis, and the resultant loss (other than the OTTI on debt securities attributable to non-credit factors) is charged against earnings and recorded in non-interest income. Our assessment of a decline in fair value includes judgment as to the
financial position and future prospects of the entity that issued the investment security, as well as a review of the securitys underlying collateral. Broad changes in the overall market or interest rate environment generally will not lead to
a write-down.
In accordance with OTTI accounting guidance, unless we have the intent to sell, or it is more likely than not
that we may be required to sell a security before recovery, OTTI is recognized as a realized loss on the income statement to the extent that the decline in fair value is credit-related. If there is a decline in fair value of a security below its
carrying amount and we have the intent to sell it, or it is more likely than not that we may be required to sell the security before recovery, the entire amount of the decline in fair value is charged to earnings.
Goodwill Impairment
Goodwill is presumed to have an indefinite useful life and is tested for impairment, rather than amortized, at the reporting unit level, at least once a year. In addition to being tested annually,
goodwill would be tested if there were a triggering event. The goodwill impairment analysis is a two-step test. However, a company can, under Accounting Standards Update (ASU) No. 2011-08, Testing Goodwill for
Impairment, first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under this amendment, an entity would not be required to calculate the fair value of a reporting
unit unless the entity determined, based on a qualitative assessment, that it was more likely than not that its fair value was less than its carrying amount. The Company did not elect to perform a qualitative assessment in 2012. The first step
(Step 1) is used to identify potential impairment, and involves comparing each reporting segments estimated fair value to its carrying amount, including goodwill. If the estimated fair value of a reporting segment exceeds its
carrying amount, goodwill is considered not to be impaired. If the carrying amount exceeds the estimated fair value, there is an indication of potential impairment and the second step (Step 2) is performed to measure the amount.
Step 2 involves calculating an implied fair value of goodwill for each reporting segment for which impairment was indicated
in Step 1. The implied fair value of goodwill is determined in a manner similar to the amount of goodwill calculated in a business combination, i.e., by measuring the excess of the estimated fair value of the reporting segment, as determined in Step
1, over the aggregate estimated fair values of the individual assets, liabilities, and identifiable intangibles, as if the reporting segment were being acquired in a business combination at the impairment test date. If the implied fair value of
goodwill exceeds the carrying amount of goodwill assigned to the reporting segment, there is no impairment. If the carrying amount of goodwill assigned to a reporting segment exceeds the implied fair value of the goodwill, an impairment charge is
recorded for the excess. An impairment loss
48
cannot exceed the carrying amount of goodwill assigned to a reporting segment, and the loss establishes a new basis in the goodwill. Subsequent reversal of goodwill impairment losses is not
permitted.
Quoted market prices in active markets are the best evidence of fair value and are used as the basis for
measurement, when available. Other acceptable valuation methods include present-value measurements based on multiples of earnings or revenues, or similar performance measures. Differences in the identification of reporting units and in valuation
techniques could result in materially different evaluations of impairment.
For the purpose of goodwill impairment testing,
management has determined that the Company has two reporting segments: Banking Operations and Residential Mortgage Banking. All of our recorded goodwill has resulted from prior acquisitions and, accordingly, is attributed to Banking Operations.
There is no goodwill associated with Residential Mortgage Banking, as this segment was acquired in our FDIC-assisted AmTrust acquisition, which resulted in a bargain purchase gain. In order to perform our annual goodwill impairment test, we
determined the carrying value of the Banking Operations segment to be the carrying value of the Company and compared it to the fair value of the Banking Operations segment as the fair value of the Company.
We performed our annual goodwill impairment test as of December 31, 2012 and found no indication of goodwill impairment at that
date.
Income Taxes
In estimating income taxes, management assesses the relative merits and risks of the tax treatment of transactions, taking into account statutory, judicial, and regulatory guidance in the context of our
tax position. In this process, management also relies on tax opinions, recent audits, and historical experience. Although we use the best available information to record income taxes, underlying estimates and assumptions can change over time as a
result of unanticipated events or circumstances such as changes in tax laws and judicial guidance influencing our overall or transaction-specific tax position.
We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their
respective tax bases, and the carryforward of certain tax attributes such as net operating losses. A valuation allowance is maintained for deferred tax assets that we estimate are more likely than not to be unrealizable, based on available evidence
at the time the estimate is made. In assessing the need for a valuation allowance, we estimate future taxable income, considering the prudence and feasibility of tax planning strategies and the realizability of tax loss carryforwards. Valuation
allowances related to deferred tax assets can be affected by changes to tax laws, statutory tax rates, and future taxable income levels. In the event we were to determine that we would not be able to realize all or a portion of our net deferred tax
assets in the future, we would reduce such amounts through a charge to income tax expense in the period in which that determination was made. Conversely, if we were to determine that we would be able to realize our deferred tax assets in the future
in excess of the net carrying amounts, we would decrease the recorded valuation allowance through a decrease in income tax expense in the period in which that determination was made. Subsequently recognized tax benefits associated with valuation
allowances recorded in a business combination would be recorded as an adjustment to goodwill.
49
FINANCIAL CONDITION
Balance Sheet Summary
At December 31, 2012, our assets totaled
$44.1 billion, reflecting a year-over-year increase of $2.1 billion, or 5.0%. The increase was largely attributable to a $1.5 billion increase in total loans to $31.8 billion and a $373.0 million increase in total securities to $4.9 billion.
Total deposits rose $2.6 billion year-over-year, to $24.9 billion, reflecting the assumption of deposits in the Aurora Bank
transaction as well as organic retail deposit growth. Certificates of deposit (CDs) represented $9.1 billion, or 36.7%, of the year-end 2012 total, with NOW and money market accounts, savings accounts, and non-interest bearing deposits
together representing the remaining $15.8 billion, or 63.3%. During this time, borrowed funds declined by $530.2 million, reflecting a $371.2 million decline in wholesale borrowings to $13.1 billion and more modest declines in the balances of junior
subordinated debentures and other borrowings.
Stockholders equity rose $90.6 million year-over-year to $5.7 billion,
representing 12.81% of total assets and a book value per share of $12.88. Tangible stockholders equity rose $110.2 million year-over-year, to $3.2 billion, representing 7.65% of tangible assets and a tangible book value per share of $7.26.
(Please see the discussion and reconciliations of stockholders equity and tangible stockholders equity, total assets and tangible assets, and the related capital measures that appear on the last page of this discussion and analysis of
financial condition and results of operations.)
Loans
Notwithstanding the prepayment of our largest loan relationship in the amount of $545.5 million, total loans rose $1.5 billion, or 4.8%, year-over-year to $31.8 billion, representing 72.0% of total assets
at December 31, 2012. Covered loans represented $3.3 billion, or 10.3%, of the year-end 2012 balance, while non-covered loans accounted for the remaining $28.5 billion, or 89.7%. Included in non-covered loans were $27.3 billion of loans held
for investment, representing 85.9% of the total loan balance, and $1.2 billion of loans held for sale.
Covered Loans
Covered loans refers to the loans we acquired in our FDIC-assisted AmTrust Bank (AmTrust) and
Desert Hills Bank (Desert Hills) acquisitions, and are referred to as such because they are covered by loss sharing agreements with the FDIC. At December 31, 2012, covered loans represented $3.3 billion, or 10.3%, of the total loan
balance, a $469.0 million reduction from the year-earlier amount.
One-to-four family loans represented $3.0 billion of total
covered loans at the end of this December, with all other types of covered loans representing $308.0 million, combined. Covered one-to-four family loans include both fixed and adjustable rate loans. Covered other loans consist of commercial real
estate (CRE) loans; acquisition, development, and construction (ADC) loans; multi-family loans; commercial and industrial (C&I) loans; home equity lines of credit (HELOCs); and consumer loans.
At December 31, 2012, $2.4 billion, or 72.8%, of the loans in our covered loan portfolio were variable rate loans, with
a weighted average interest rate of 3.86%. The remainder of the covered loan portfolio consisted of fixed rate loans.
At
December 31, 2012, the interest rates on 88.8% of our covered variable rate loans were scheduled to reprice within twelve months and annually thereafter. We expect such loans to reprice at lower interest rates. The interest rates on the
variable rate loans in the covered loan portfolio are indexed to either the one-year LIBOR or the one-year Treasury rate, plus a spread in the range of 2% to 5%, subject to certain caps.
The AmTrust and Desert Hills loss sharing agreements each require the FDIC to reimburse us for 80% of losses up to a specified threshold,
and for 95% of losses beyond that threshold, with respect to covered loans and covered other real estate owned (OREO).
In 2012, we recorded a provision for losses on covered loans of $18.0 million, as compared to $21.4 million in the prior year. The reduction was largely attributable to a $3.3 million recovery in the
fourth quarter, reflecting an increase in expected cash flows from certain pools of acquired loans. The respective provisions were largely offset by FDIC indemnification income of $14.4 million and $17.6 million, recorded in non-interest income in
the corresponding years.
50
Geographical Analysis of the Covered Loan Portfolio
The following table presents a geographical analysis of our covered loan portfolio at December 31, 2012:
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(in thousands)
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California
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$
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582,924
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Florida
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570,423
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Arizona
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273,316
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Ohio
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212,511
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Massachusetts
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150,275
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Michigan
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146,920
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Illinois
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113,146
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New York
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106,233
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Nevada
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83,064
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Texas
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80,967
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Maryland
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79,173
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New Jersey
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75,798
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Colorado
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70,190
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Washington
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69,594
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All other states
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669,527
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Total covered loans
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$
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3,284,061
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Loan Maturity and Repricing: Covered Loans
The following table sets forth the maturity or period to repricing of our covered loan portfolio at December 31, 2012. Loans that
have adjustable rates are shown as being due or repricing in the period during which the interest rates are next subject to change.
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Covered Loans at December 31, 2012
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(in thousands)
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One-to-Four
Family
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All Other
Loans
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Total
Loans
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Amount due or repricing:
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Within one year
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$
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1,706,086
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$
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273,858
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$
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1,979,944
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After one year:
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One to five years
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25,538
|
|
|
|
25,881
|
|
|
|
51,419
|
|
Over five years
|
|
|
1,244,443
|
|
|
|
8,255
|
|
|
|
1,252,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total due or repricing after one year
|
|
|
1,269,981
|
|
|
|
34,136
|
|
|
|
1,304,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amounts due or repricing, gross
|
|
$
|
2,976,067
|
|
|
$
|
307,994
|
|
|
$
|
3,284,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth, as of December 31, 2012, the dollar amount of all covered loans due
or repricing after December 31, 2013, and indicates whether such loans have fixed or adjustable rates of interest.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due or Repricing after December 31, 2013
|
|
(in thousands)
|
|
Fixed
|
|
|
Adjustable
|
|
|
Total
|
|
One-to-four family
|
|
$
|
964,185
|
|
|
$
|
305,796
|
|
|
$
|
1,269,981
|
|
All other loans
|
|
|
11,444
|
|
|
|
22,692
|
|
|
|
34,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
975,629
|
|
|
$
|
328,488
|
|
|
$
|
1,304,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Covered Loans Held for Investment
At December 31, 2012, non-covered loans held for investment totaled $27.3 billion, representing 85.9% of total loans, 61.8% of total
assets, and a 6.9% increase from the year-earlier balance of $25.5 billion. In addition to multi-family loans and CRE loans, the held-for-investment portfolio includes substantially smaller balances of ADC loans, one-to-four family loans, and other
loans, with C&I loans comprising the bulk of the other loan portfolio. The vast majority of our non-covered loans held for investment consist of loans that we ourselves originated or, in some cases, acquired in our business
combinations prior to 2009.
Originations of held-for-investment loans totaled $9.0 billion in 2012, comparable to the volume
produced in the prior year. While portfolio growth was limited by an increase in repayments, we benefited from the related rise in prepayment penalty income, as further discussed under Net Interest Income later in this discussion and
analysis of financial condition and results of operations.
51
Multi-Family Loans
Multi-family loans are our principal asset, and non-luxury residential apartment buildings with below-market rents in New York City constitute our primary lending niche. Consistent with our emphasis on
multi-family lending, multi-family loan originations represented $5.8 billion, or 64.6%, of the loans we produced in 2012 for investment, modestly exceeding the year-earlier amount. Although most of the loans we produced in 2012 were the result of
borrowers refinancing, an increase in property sales and other transactions also played a part. This was especially true late in the fourth quarter, as many of our borrowers anticipated changes being made to the U.S. tax code that could have an
adverse impact on their investments in real estate.
At December 31, 2012, the balance of multi-family loans represented
$18.6 billion, or 68.2%, of total non-covered loans held for investment, reflecting a year-over-year increase of $1.2 billion, despite the prepayment of our then-largest loan relationship in the fourth quarter of the year. The average multi-family
loan had a principal balance of $4.1 million at the end of this December, comparable to the average principal balance at December 31, 2011.
The vast majority of our multi-family loans are made to long-term owners of buildings with apartments that are subject to rent regulation, and therefore feature below-market rents. Our borrowers typically
use the funds we provide to make improvements to certain apartments, as a result of which they are able to increase the rents their tenants pay. In doing so, the borrower creates more cash flows to borrow against in future years. We also make loans
to building owners seeking to expand their real estate holdings with the purchase of additional properties.
In addition to
underwriting multi-family loans on the basis of the buildings income and condition, we consider the borrowers credit history, profitability, and building management expertise. Borrowers are required to present evidence of their ability
to repay the loan from the buildings current rent rolls, their financial statements, and related documents.
Our
multi-family loans typically feature a term of ten or twelve years, with a fixed rate of interest for the first five or seven years of the loan, and an alternative rate of interest in years six through ten or eight through twelve. The rate charged
in the first five or seven years is generally based on intermediate-term interest rates plus a spread. During the remaining years, the loan resets to an annually adjustable rate that is tied to the prime rate of interest, as reported in
The New
York Times
, plus a spread. Alternately, the borrower may opt for a fixed rate that is tied to the five-year fixed advance rate of the Federal Home Loan Bank (FHLB) of New York (the FHLB-NY), plus a spread. The fixed-rate
option also requires the payment of an amount equal to one percentage point of the then-outstanding loan balance. In either case, the minimum rate at repricing is equivalent to the rate in the initial five- or seven-year term.
As the rent roll increases, the typical property owner seeks to refinance the mortgage, and generally does so before the loan reprices in
year six or eight. Notably, the expected weighted average life of the multi-family loan portfolio was 2.9 years at December 31, 2012, as compared to 3.3 years at December 31, 2011, an indication of the increase in refinancing activity and
property transactions over the course of the year.
Multi-family loans that refinance within the first five or seven years are
typically subject to an established prepayment penalty schedule. Depending on the remaining term of the loan at the time of prepayment, the penalties normally range from five percentage points to one percentage point of the then-current loan
balance. If a loan extends past the fifth or seventh year and the borrower selects the fixed rate option, the prepayment penalties typically reset to a range of five points to one point over years six through ten or eight through twelve. For
example, a ten-year multi-family loan that prepays in year three would generally be expected to pay a prepayment penalty equal to three percentage points of the remaining principal balance. A twelve-year multi-family loan that prepays in year one or
two would generally be expected to pay a penalty equal to five percentage points.
Prepayment penalties are recorded as
interest income and are therefore reflected in the average yields on our loans and assets, our interest rate spread and net interest margin, and the level of net interest income we record. No assumptions are involved in the recognition of prepayment
penalty income, as such income is only recorded when cash is received.
Our success as a multi-family lender partly reflects
the solid relationships we have developed with the markets leading mortgage brokers, who are familiar with our lending practices, our underwriting standards, and our long-standing practice of basing our loans on the cash flows produced by the
properties. Because the multi-family market is largely broker-driven, the process of producing such loans is expedited, with loans generally taking four to six weeks to process, and the related expenses being substantially reduced.
52
At December 31, 2012, the vast majority of our multi-family loans were secured by
rental apartment buildings. In addition, 79.0% of our multi-family loans were secured by buildings in New York City, with Manhattan accounting for the largest share. Of the loans secured by buildings outside New York City, the State of New York was
home to 4.8%, with New Jersey and Pennsylvania accounting for 7.6% and 3.5%, respectively. The remaining 5.1% of multi-family loans were secured by buildings outside these markets, including the three other states served by our retail branch
offices.
Our emphasis on multi-family loans is driven by several factors, including their structure, which reduces our
exposure to interest rate volatility to some degree. Another factor driving our focus on multi-family lending has been the comparative quality of the loans we produce. Reflecting the nature of the buildings securing our loans, our underwriting
standards, and the generally conservative LTV ratios our multi-family loans feature at origination, a relatively small percentage of the multi-family loans that have transitioned to non-performing status have actually resulted in losses during the
most recent downturn in the credit cycle, as well as historically.
We primarily underwrite our multi-family loans based on
the current cash flows produced by the collateral property, with a reliance on the income approach to appraising the properties, rather than the sales approach. The sales approach is subject to fluctuations in the real estate
market, as well as general economic conditions, and is therefore likely to be more risky in the event of a downward credit cycle turn. We also consider a variety of other factors, including the physical condition of the underlying property; the net
operating income of the mortgaged premises prior to debt service and depreciation; the debt service coverage ratio, which is the ratio of the propertys net operating income to its debt service; and the ratio of the loan amount to the appraised
value of the property. The multi-family loans we are originating today generally represent no more than 75% of the lower of the appraised value or the sales price of the underlying property, and typically feature an amortization period of up to 30
years. In addition to requiring a minimum debt service coverage ratio of 120% on multi-family buildings, we obtain a security interest in the personal property located on the premises, and an assignment of rents and leases.
Accordingly, while our multi-family lending niche has not been immune to downturns in the credit cycle, we continue to believe that the
multi-family loans we produce involve less credit risk than certain other types of loans. In general, buildings that are subject to rent regulation have tended to be stable, with occupancy levels remaining more or less constant over time. Because
the rents are typically below market and the buildings securing our loans are generally maintained in good condition, we believe that they are reasonably likely to retain their tenants in adverse economic times. In addition, we underwrite our
multi-family loans on the basis of the current cash flows generated by the underlying properties, and exclude any partial property tax exemptions and abatement benefits the property owners receive.
Commercial Real Estate Loans
In 2012, CRE loans represented $2.4 billion, or 26.8%, of loans originated for investment, a $39.5 million increase from the year-earlier amount. Although the growth of the portfolio was somewhat tempered
by the level of repayments, the balance of CRE loans rose $581.4 million, or 8.5%, year-over-year to $7.4 billion at the end of this past December, representing 27.3% of the total held-for-investment portfolio at that date. At December 31,
2012, the average CRE loan had a principal balance of $4.6 million, as compared to $3.9 million at the prior year-end. The increase in CRE loan production was primarily due to the low level of market interest rates, continued improvement in local
market conditions, and the origination of certain larger CRE loans.
The CRE loans we produce are secured by income-producing
properties such as office buildings, retail centers, mixed-use buildings, and multi-tenanted light industrial properties. At December 31, 2012, 74.2% of our CRE loans were secured by properties in New York City, primarily in Manhattan, while
properties on Long Island and in New Jersey accounted for 12.4% and 6.1%, respectively. Another 2.7% of CRE properties were located in Pennsylvania, while properties outside New York, New Jersey, and Pennsylvania accounted for 2.0%.
The pricing of our CRE loans is similar to the pricing of our multi-family credits, i.e., with a fixed rate of interest for the first
five or seven years of the loan that is generally based on intermediate-term interest rates plus a spread. During years six through ten or eight through twelve, the loan resets to an annually adjustable rate that is tied to the prime rate of
interest, as reported in
The New York Times
, plus a spread
.
Alternately, the borrower may opt for a fixed rate that is tied to the five-year fixed advance rate of the FHLB-NY plus a spread. The fixed-rate option also requires the
payment of an amount equal to one percentage point of the then-outstanding loan balance. In either case, the minimum rate at repricing is equivalent to the rate in the initial five-year term.
53
Prepayment penalties also apply to CRE loans, as they do to our multi-family credits.
Depending on the remaining term of the loan at the time of prepayment, the penalties normally range from five percentage points to one percentage point of the then-current loan balance. If a loan extends past the fifth or seventh year and the
borrower selects the fixed rate option, the prepayment penalties typically reset to a range of five points to one point over years six through ten or eight through twelve. Our CRE loans tend to refinance within three to four years of origination; in
fact, the expected weighted average life of the CRE portfolio was 3.4 years at both December 31, 2012 and 2011.
The
repayment of loans secured by commercial real estate is often dependent on the successful operation and management of the underlying properties. To minimize our credit risk, we originate CRE loans in adherence with conservative underwriting
standards, and require that such loans qualify on the basis of the propertys current income stream and debt service coverage ratio. The approval of a loan also depends on the borrowers credit history, profitability, and expertise in
property management, and generally requires a minimum debt service coverage ratio of 130% and a maximum LTV ratio of 65%. In addition, the origination of CRE loans typically requires a security interest in the fixtures, equipment, and other personal
property of the borrower and/or an assignment of the rents and/or leases.
Acquisition, Development, and Construction Loans
In the interest of reducing our exposure to credit risk, we have limited our production of ADC loans to loans that have limited market
risk and low LTV ratios, and that are made to reputable borrowers with significant development experience. In 2012, ADC loans represented $153.2 million, or 1.7%, of the loans we produced for investment, and the portfolio of such loans declined
$47.8 million year-over-year, to $397.9 million, representing 1.5% of total loans held for investment, at December 31, 2012.
At December 31, 2012, 60.4% of the loans in our ADC portfolio were for land acquisition and development; the remaining 39.6%
consisted of loans that were provided for the construction of owner-occupied homes and commercial properties. Such loans are typically originated for terms of 18 to 24 months, and feature a floating rate of interest tied to prime, with a floor. They
also generate origination fees that are recorded as interest income and amortized over the lives of the loans.
In addition,
76.2% of the loans in the ADC portfolio were for properties in New York City, with Manhattan accounting for more than half of New York Citys share. Long Island accounted for 12.1% of our ADC loans, with New Jersey accounting for 8.4%.
Reflecting the limited extent to which ADC loans have been originated beyond our immediate market, 3.3% of our ADC loans are secured by properties beyond New Jersey and New York.
Because ADC loans are generally considered to have a higher degree of credit risk, especially during a downturn in the credit cycle,
borrowers are required to provide a guarantee of repayment and completion. In the twelve months ended December 31, 2012, we recovered losses against guarantees of $3.0 million, in contrast to $120,000 in the prior year. The risk of loss on an
ADC loan is largely dependent upon the accuracy of the initial appraisal of the propertys value upon completion of construction; the estimated cost of construction, including interest; and the estimated time to complete and/or sell or lease
such property. If the appraised value proves to be inaccurate, the cost of completion is greater than expected, or the length of time to complete and/or sell or lease the collateral property is greater than anticipated, the property could have a
value upon completion that is insufficient to assure full repayment of the loan. Reflecting the disposition of certain non-performing assets, 3.0% of the loans in our ADC loan portfolio were non-performing at the end of this December, as compared to
6.7% at December 31, 2011.
When applicable, as a condition to closing an ADC loan, it is our practice to require that
residential properties be pre-sold or that borrowers secure permanent financing commitments from a recognized lender for an amount equal to, or greater than, the amount of our loan. In some cases, we ourselves may provide permanent financing. We
typically require pre-leasing for ADC loans on commercial properties.
One-to-Four Family Loans
To meet the needs of our customers, we originate agency-conforming one-to-four family loans through our mortgage banking business in
Cleveland or, in some states, directly through the Community Bank. The vast majority of the one-to-four family loans we produce are aggregated for sale with others produced by our mortgage banking clients throughout the country. These loans are
generally sold, servicing retained, to government-sponsored enterprises (GSEs). (For more detailed information about our production of one-to-four family loans for sale, please see Non-Covered Loans Held for Sale later in
this section.)
54
Until last year, the vast majority of the one-to-four family loans we held for investment
were loans that we acquired in our merger transactions prior to 2009. However, in 2012, we began to originate hybrid jumbo one-to-four family loans for our own portfolio. As a result, the balance of one-to-four family loans held for investment rose
$76.1 million year-over-year to $203.4 million, representing 0.75% of total held-for-investment loans at December 31st.
Other Loans
Largely reflecting our focus on the production of multi-family and CRE loans, we originated other loans for investment of
$519.2 million in 2012, representing a $196.0 million decrease from the year-earlier amount. C&I loans represented $514.3 million of the 2012 total, and were down $191.5 million year-over-year. As a result, the portfolio of other loans declined
$30.0 million from the balance at year-end 2011, to $639.9 million, representing 2.3% of total loans held for investment at December 31, 2012. Included in the latter balance were C&I loans of $590.0 million, reflecting a $9.9 million
reduction from the year-earlier amount.
The vast majority of our C&I loans are made to small and mid-size businesses in
New York City and Long Island, and are tailored to meet the specific needs of our borrowers. The loans we produce include term loans, demand loans, revolving lines of credit, letters of credit, and, to a lesser extent, loans that are partly
guaranteed by the Small Business Administration. A broad range of C&I loans, both collateralized and unsecured, are made available to businesses for working capital (including inventory and accounts receivable), business expansion, the purchase
of machinery and equipment, and other general corporate needs. In determining the term and structure of a C&I loan, several factors are considered, including its purpose, the collateral, and the anticipated sources of repayment. C&I loans
are typically secured by business assets and personal guarantees of the borrower, and include financial covenants to monitor the borrowers financial stability.
The interest rates on C&I loans can be fixed or floating, with floating rate loans being tied to prime or some other market index, plus an applicable spread. Our floating rate loans may or may not
feature a floor rate of interest. The decision to require a floor on C&I loans depends on the level of competition we face for such loans from other institutions, the direction of market interest rates, and the profitability of our relationship
with the borrower.
A benefit of C&I lending is the opportunity to establish full-scale banking relationships with our
C&I customers. As a result, many of our borrowers provide us with deposits, and many take advantage of our fee-based cash management, investment, and trade finance services.
The remainder of the portfolio of other loans consists primarily of home equity loans and lines of credit, as well as a variety of
consumer loans, most of which were originated by our pre-2009 merger partners prior to their joining the Company. We currently do not offer home equity loans or lines of credit.
Lending Authority
The loans we originate for investment are subject to
federal and state laws and regulations, and are underwritten in accordance with loan underwriting policies and procedures approved by the Mortgage Committee, the Credit Committee, and the respective Boards of Directors.
In accordance with the Banks policies, all loans are presented to the Mortgage Committee or the Credit Committee, as applicable,
for approval, and all loans of $10.0 million or more are reported to the respective Boards of Directors. In 2012, 177 loans of $10.0 million or more were originated by the Banks, with an aggregate loan balance of $4.9 billion at origination. In
2011, 145 loans of $10.0 million or more were originated by the Banks, with an aggregate loan balance at origination of $5.0 billion.
At December 31, 2012, the largest amount of credit extended to a single borrower was $500.0 million; of this amount, $485.0 million had been funded at that date. The loan was originated by the
Community Bank on July 28, 2011 to the owner of a commercial property located in Manhattan, and has been current since that date. The interest rate on the loan was 4.375% at December 31, 2012.
55
Geographical Analysis of the Portfolio of Non-Covered Loans Held for Investment
(1)
The following table presents a geographical analysis of the multi-family, CRE, and ADC loans in our held-for-investment portfolio at
December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2012
|
|
|
|
Multi-Family Loans
|
|
|
Commercial
Real Estate Loans
|
|
|
Acquisition, Development,
and Construction Loans
|
|
(dollars in thousands)
|
|
Amount
|
|
|
Percent
of Total
|
|
|
Amount
|
|
|
Percent
of Total
|
|
|
Amount
|
|
|
Percent
of Total
|
|
New York City:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manhattan
|
|
$
|
6,675,788
|
|
|
|
35.90
|
%
|
|
$
|
4,185,351
|
|
|
|
56.28
|
%
|
|
$
|
156,466
|
|
|
|
39.32
|
%
|
Brooklyn
|
|
|
3,505,741
|
|
|
|
18.85
|
|
|
|
450,314
|
|
|
|
6.06
|
|
|
|
87,407
|
|
|
|
21.97
|
|
Bronx
|
|
|
2,403,780
|
|
|
|
12.93
|
|
|
|
191,286
|
|
|
|
2.57
|
|
|
|
3,308
|
|
|
|
0.83
|
|
Queens
|
|
|
1,987,604
|
|
|
|
10.69
|
|
|
|
621,372
|
|
|
|
8.36
|
|
|
|
47,561
|
|
|
|
11.95
|
|
Staten Island
|
|
|
123,765
|
|
|
|
0.66
|
|
|
|
72,004
|
|
|
|
0.97
|
|
|
|
8,598
|
|
|
|
2.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total New York City
|
|
$
|
14,696,678
|
|
|
|
79.03
|
%
|
|
$
|
5,520,327
|
|
|
|
74.24
|
%
|
|
$
|
303,340
|
|
|
|
76.23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long Island
|
|
|
380,709
|
|
|
|
2.05
|
|
|
|
923,094
|
|
|
|
12.41
|
|
|
|
47,989
|
|
|
|
12.06
|
|
Other New York State
|
|
|
507,722
|
|
|
|
2.73
|
|
|
|
189,627
|
|
|
|
2.55
|
|
|
|
|
|
|
|
|
|
New Jersey
|
|
|
1,406,035
|
|
|
|
7.56
|
|
|
|
455,319
|
|
|
|
6.12
|
|
|
|
33,603
|
|
|
|
8.45
|
|
Pennsylvania
|
|
|
650,496
|
|
|
|
3.50
|
|
|
|
197,948
|
|
|
|
2.66
|
|
|
|
|
|
|
|
|
|
All other states
|
|
|
954,193
|
|
|
|
5.13
|
|
|
|
150,283
|
|
|
|
2.02
|
|
|
|
12,985
|
|
|
|
3.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,595,833
|
|
|
|
100.00
|
%
|
|
$
|
7,436,598
|
|
|
|
100.00
|
%
|
|
$
|
397,917
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The majority of our other loans held for investment are secured by properties and/or businesses in the Metro New York region.
|
Loan Maturity and Repricing Analysis of the Portfolio of Non-Covered Loans Held for Investment
The following table sets forth the maturity or period to repricing of our portfolio of non-covered loans held for investment at
December 31, 2012. Loans that have adjustable rates are shown as being due in the period during which the interest rates are next subject to change:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Covered Loans Held for Investment at December 31, 2012
|
|
(in thousands)
|
|
Multi-
Family
|
|
|
Commercial
Real Estate
|
|
|
Acquisition,
Development,
and Construction
|
|
|
One-to-Four
Family
|
|
|
Other
|
|
|
Total
Loans
|
|
Amount due:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within one year
|
|
$
|
941,982
|
|
|
$
|
836,222
|
|
|
|
$351,132
|
|
|
$
|
31,784
|
|
|
$
|
261,455
|
|
|
$
|
2,422,575
|
|
After one year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to five years
|
|
|
11,610,810
|
|
|
|
3,386,838
|
|
|
|
45,069
|
|
|
|
46,575
|
|
|
|
222,856
|
|
|
|
15,312,148
|
|
Over five years
|
|
|
6,043,041
|
|
|
|
3,213,538
|
|
|
|
1,716
|
|
|
|
125,076
|
|
|
|
155,613
|
|
|
|
9,538,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total due or repricing after one year
|
|
|
17,653,851
|
|
|
|
6,600,376
|
|
|
|
46,785
|
|
|
|
171,651
|
|
|
|
378,469
|
|
|
|
24,851,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amounts due or repricing, gross
|
|
$
|
18,595,833
|
|
|
$
|
7,436,598
|
|
|
|
$397,917
|
|
|
$
|
203,435
|
|
|
$
|
639,924
|
|
|
$
|
27,273,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth, as of December 31, 2012, the dollar amount of all non-covered loans
held for investment that are due after December 31, 2013, and indicates whether such loans have fixed or adjustable rates of interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due after December 31, 2013
|
|
(in thousands)
|
|
Fixed
|
|
|
Adjustable
|
|
|
Total
|
|
Mortgage Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
$
|
5,161,455
|
|
|
$
|
12,492,396
|
|
|
$
|
17,653,851
|
|
Commercial real estate
|
|
|
2,639,039
|
|
|
|
3,961,337
|
|
|
|
6,600,376
|
|
Acquisition, development, and construction
|
|
|
46,785
|
|
|
|
|
|
|
|
46,785
|
|
One-to-four family
|
|
|
62,971
|
|
|
|
108,680
|
|
|
|
171,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans
|
|
|
7,910,250
|
|
|
|
16,562,413
|
|
|
|
24,472,663
|
|
Other loans
|
|
|
286,413
|
|
|
|
92,056
|
|
|
|
378,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
8,196,663
|
|
|
$
|
16,654,469
|
|
|
$
|
24,851,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
Non-Covered Loans Held for Sale
Although one-to-four family loans represented 0.75% of our total loans held for investment, we are actively engaged in the origination of
one-to-four family loans for sale. Our mortgage banking business serves approximately 900 clientscommunity banks, credit unions, mortgage companies, and mortgage brokerswho utilize our proprietary web-accessible mortgage banking platform
to originate full-documentation, prime credit one-to-four family loans in all 50 states.
In 2012, we originated one-to-four
family loans for sale of $10.9 billion, reflecting a year-over-year increase of $3.7 billion, or 51.9%. The increase was primarily attributable to refinancing activity and, to a lesser extent, home purchases, which were driven by the nearly
year-long decline in mortgage interest rates. The vast majority of the held-for-sale loans we produced were agency-conforming loans sold to GSEs. To a much lesser extent, we utilized our mortgage banking platform to originate jumbo loans under
contract for sale to other financial institutions.
At December 31, 2012 and 2011, the respective balances of one-to-four
family loans held for sale were $1.2 billion and $1.0 billion, representing 3.8% and 3.4%, respectively, of total loans at the corresponding dates.
To mitigate the risks inherent in originating and reselling residential mortgage loans, we utilize processes, proprietary technologies, and third-party software application tools that seek to ensure that
the loans meet investors program eligibility, underwriting, and collateral requirements. In addition, compliance verification and fraud detection tools are utilized throughout the processing, underwriting, and loan closing stages to assist in
the determination that the loans we originate and acquire are in compliance with applicable local, state, and federal laws and regulations. Controlling, auditing, and validating the data upon which the credit decision is made (and the loan documents
created) substantially mitigates the risk of our originating or acquiring a loan that subsequently is deemed to be in breach of loan sale representations and warranties made by us to loan investors.
We require the use of our proprietary processes, origination systems, and technologies for all loans we close. Collectively, these tools
and processes are known internally as our proprietary Gemstone system. By mandating usage of Gemstone for all table-funded loan originations, we are able to tightly control key risk aspects across the spectrum of loan origination
activities. Our clients access Gemstone via secure Internet protocols, and initiate the process by submitting required loan application data and other required income, asset, debt, and credit documents to us electronically. Key data is then verified
by a combination of trusted third-party validations and internal reviews conducted by our loan underwriters and quality control specialists. Once key data is independently verified, it is locked down within the Gemstone system to further
ensure the integrity of the transaction.
In addition, all trusted source third-party vendors are directly
connected to the Gemstone system via secure electronic data interfaces. Within the Gemstone system, these trusted sources provide key risk and control services throughout the origination process, including ordering and receipt of credit report
information, independent collateral appraisals, and private mortgage insurance, automated underwriting and program eligibility determinations, flood insurance determination, fraud detection, local/state/federal regulatory compliance, predatory or
high cost loan reviews, and legal document preparation services. Our employees augment the automated system controls by performing audits during the process, which include the final underwriting of the loan file (the credit decision),
and various other pre-funding and post-funding quality control reviews.
Both the agency-conforming and non-conforming (i.e.,
jumbo) one-to-four family loans we originate for sale require that we make certain representations and warranties with regard to the underwriting, documentation, and legal/regulatory compliance, and we may be required to repurchase a loan or loans
if it is found that a breach of the representations and warranties has occurred. In such case, we would be exposed to any subsequent credit loss on the mortgage loans that might or might not be realized in the future.
As governed by our agreements with the GSEs and other third parties to whom we sell loans, the representations and warranties we make
relate to several factors, including, but not limited to, the ownership of the loan; the validity of the lien securing the loan; the absence of delinquent taxes or liens against the property securing the loan as of its closing date; the process used
to select the loan for inclusion in a transaction; and the loans compliance with any applicable criteria, including underwriting standards, loan program guidelines, and compliance with applicable federal, state, and local laws.
We record a liability for estimated losses relating to these representations and warranties, which is included in other
liabilities in the accompanying Consolidated Statements of Condition. The related expense is recorded in mortgage banking income in the accompanying Consolidated Statements of Income and Comprehensive Income. At
December 31, 2012 and December 31, 2011, the respective liabilities for estimated possible future losses
57
relating to these representations and warranties were $8.3 million and $5.3 million. The methodology used to estimate the liability for representations and warranties is a function of the
representations and warranties given and considers a variety of factors, including, but not limited to, actual default experience, estimated future defaults, historical loan repurchase rates and the frequency and potential severity of defaults,
probability that a repurchase request will be received, and the probability that a loan will be required to be repurchased.
The following table sets forth the activity in our representation and warranty reserve during the periods indicated:
Representation and Warranty Reserve
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
December 31,
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
Balance, beginning of period
|
|
$
|
5,320
|
|
|
$
|
3,537
|
|
Provision for repurchase losses:
|
|
|
|
|
|
|
|
|
Loan sales
|
|
|
2,952
|
|
|
|
1,783
|
|
Change in estimates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
8,272
|
|
|
$
|
5,320
|
|
|
|
|
|
|
|
|
|
|
Because the level of mortgage loan repurchase losses is dependent on economic factors, investor demand
strategies, and other external conditions that may change over the lives of the underlying loans, the level of the liability for mortgage loan repurchase losses is difficult to estimate and requires considerable management judgment. However, we
believe the amount and range of reasonably possible losses in excess of our reserve is not material to our operations or to our financial condition or results of operations.
The following table sets forth our GSE repurchase requests during the periods indicated:
Repurchase Request Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Twelve Months Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
(dollars in thousands)
|
|
Number
of Loans
|
|
|
Amount
(1)
|
|
|
Number
of Loans
|
|
|
Amount
(1)
|
|
Balance, beginning of period
|
|
|
8
|
|
|
$
|
1,583
|
|
|
|
1
|
|
|
$
|
155
|
|
New repurchase requests
(2)
|
|
|
100
|
|
|
|
24,443
|
|
|
|
95
|
|
|
|
21,913
|
|
Successful rebuttal/rescission
|
|
|
(77
|
)
|
|
|
(18,427
|
)
|
|
|
(82
|
)
|
|
|
(18,928
|
)
|
Indemnifications
(3)
|
|
|
(3
|
)
|
|
|
(585
|
)
|
|
|
(5
|
)
|
|
|
(1,392
|
)
|
Loan repurchases
(4)
|
|
|
(8
|
)
|
|
|
(1,941
|
)
|
|
|
(1
|
)
|
|
|
(165
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
(
5
)
|
|
|
20
|
|
|
$
|
5,073
|
|
|
|
8
|
|
|
$
|
1,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents the loan balance as of the repurchase request date.
|
(2)
|
All requests are from GSEs and relate to one-to-four family loans originated for sale.
|
(3)
|
An indemnification agreement is an arrangement whereby the Company protects the GSEs against future losses.
|
(4)
|
Of the eight loans repurchased during the twelve months ended 2012, two were originated through our mortgage banking operation and six were originated by a bank we
acquired in 2007.
|
(5)
|
Of the twenty period-end requests as of December 31, 2012, all were from Fannie Mae. Effective January 1, 2013, both Fannie Mae and Freddie Mac allow 60
days to respond to a repurchase request. Failure to respond to a request in a timely manner could result in the Company having an obligation to repurchase a loan.
|
58
Indemnified and Repurchased Loan Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
(dollars in thousands)
|
|
Number of
Loans
|
|
|
Amount
(1)
|
|
|
Number
of Loans
|
|
|
Amount
|
|
Balance, beginning of period
|
|
|
5
|
|
|
$
|
1,084
|
|
|
|
|
|
|
$
|
|
|
Indemnifications
|
|
|
3
|
|
|
|
585
|
|
|
|
5
|
|
|
|
1,392
|
|
Repurchases
|
|
|
8
|
|
|
|
1,941
|
|
|
|
1
|
|
|
|
165
|
|
Principal payoffs
|
|
|
(4
|
)
|
|
|
(1,082
|
)
|
|
|
(1
|
)
|
|
|
(368
|
)
|
Principal payments
|
|
|
|
|
|
|
(242
|
)
|
|
|
|
|
|
|
(105
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
(1)
|
|
|
12
|
|
|
$
|
2,286
|
|
|
|
5
|
|
|
$
|
1,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Of the twelve indemnified and repurchased loans, all were performing at December 31, 2012.
|
Please see Item 7A, Quantitative and Qualitative Disclosures about Market Risk, for a discussion of the strategies we
employ to mitigate the interest rate risk associated with our production of one-to-four family loans for sale.
Loan Origination Analysis
The following table summarizes our production of loans held for investment and loans held for sale in the years ended
December 31, 2012 and 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
(dollars in thousands)
|
|
Amount
|
|
|
Percent
of Total
|
|
|
Amount
|
|
|
Percent
of Total
|
|
Mortgage Loan Originations for Investment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
$
|
5,790,590
|
|
|
|
29.11
|
%
|
|
$
|
5,761,004
|
|
|
|
35.69
|
%
|
Commercial real estate
|
|
|
2,401,043
|
|
|
|
12.07
|
|
|
|
2,361,541
|
|
|
|
14.63
|
|
Acquisition, development, and construction
|
|
|
153,230
|
|
|
|
0.77
|
|
|
|
150,363
|
|
|
|
0.93
|
|
One-to-four family
|
|
|
104,420
|
|
|
|
0.52
|
|
|
|
147
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loan originations for investment
|
|
|
8,449,283
|
|
|
|
42.47
|
|
|
|
8,273,055
|
|
|
|
51.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Loan Originations for Investment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
514,250
|
|
|
|
2.58
|
|
|
|
705,794
|
|
|
|
4.37
|
|
Other
|
|
|
4,995
|
|
|
|
0.03
|
|
|
|
9,416
|
|
|
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other loan originations for investment
|
|
|
519,245
|
|
|
|
2.61
|
|
|
|
715,210
|
|
|
|
4.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loan originations for investment
|
|
$
|
8,968,528
|
|
|
|
45.08
|
%
|
|
$
|
8,988,265
|
|
|
|
55.69
|
%
|
Originations for sale
|
|
|
10,925,837
|
|
|
|
54.92
|
|
|
|
7,151,083
|
|
|
|
44.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loan originations
|
|
$
|
19,894,365
|
|
|
|
100.00
|
%
|
|
$
|
16,139,348
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59
Loan Portfolio Analysis
The following table summarizes the composition of our loan portfolio at each year-end for the five years ended December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
(dollars in thousands)
|
|
Amount
|
|
|
Percent
of Total
Loans
|
|
|
Percent of
Non-
Covered
Loans
|
|
|
Amount
|
|
|
Percent
of Total
Loans
|
|
|
Percent of
Non-
Covered
Loans
|
|
|
Amount
|
|
|
Percent
of Total
Loans
|
|
|
Percent of
Non-
Covered
Loans
|
|
|
Amount
|
|
|
Percent
of Total
Loans
|
|
|
Percent of
Non-
Covered
Loans
|
|
|
Amount
|
|
|
Percent
of Total
Loans
|
|
Non-Covered Mortgage Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
$
|
18,595,833
|
|
|
|
58.55
|
|
|
|
65.30
|
%
|
|
$
|
17,430,628
|
|
|
|
57.49
|
%
|
|
|
65.61
|
%
|
|
$
|
16,807,913
|
|
|
|
57.52
|
%
|
|
|
67.44
|
%
|
|
$
|
16,737,721
|
|
|
|
58.94
|
%
|
|
|
71.59
|
%
|
|
$
|
15,728,264
|
|
|
|
70.85
|
%
|
Commercial real estate
|
|
|
7,436,598
|
|
|
|
23.41
|
|
|
|
26.11
|
|
|
|
6,855,244
|
|
|
|
22.61
|
|
|
|
25.81
|
|
|
|
5,439,611
|
|
|
|
18.62
|
|
|
|
21.83
|
|
|
|
4,988,649
|
|
|
|
17.57
|
|
|
|
21.34
|
|
|
|
4,553,550
|
|
|
|
20.51
|
|
Acquisition, development, and construction
|
|
|
397,917
|
|
|
|
1.25
|
|
|
|
1.40
|
|
|
|
445,671
|
|
|
|
1.47
|
|
|
|
1.68
|
|
|
|
569,537
|
|
|
|
1.95
|
|
|
|
2.29
|
|
|
|
666,440
|
|
|
|
2.35
|
|
|
|
2.85
|
|
|
|
778,364
|
|
|
|
3.51
|
|
One-to-four family
|
|
|
203,435
|
|
|
|
0.64
|
|
|
|
0.71
|
|
|
|
127,361
|
|
|
|
0.42
|
|
|
|
0.48
|
|
|
|
170,392
|
|
|
|
0.58
|
|
|
|
0.68
|
|
|
|
216,078
|
|
|
|
0.76
|
|
|
|
0.92
|
|
|
|
266,307
|
|
|
|
1.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-covered mortgage loans
|
|
|
26,633,783
|
|
|
|
83.85
|
|
|
|
93.52
|
|
|
|
24,858,904
|
|
|
|
81.99
|
|
|
|
93.58
|
|
|
|
22,987,453
|
|
|
|
78.67
|
|
|
|
92.24
|
|
|
|
22,608,888
|
|
|
|
79.62
|
|
|
|
96.70
|
|
|
|
21,326,485
|
|
|
|
96.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Covered Other Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
590,044
|
|
|
|
1.86
|
|
|
|
2.07
|
|
|
|
599,986
|
|
|
|
1.98
|
|
|
|
2.26
|
|
|
|
641,663
|
|
|
|
2.20
|
|
|
|
2.58
|
|
|
|
653,159
|
|
|
|
2.30
|
|
|
|
2.79
|
|
|
|
713,099
|
|
|
|
3.21
|
|
Other loans
|
|
|
49,880
|
|
|
|
0.16
|
|
|
|
0.18
|
|
|
|
69,907
|
|
|
|
0.23
|
|
|
|
0.26
|
|
|
|
85,559
|
|
|
|
0.29
|
|
|
|
0.34
|
|
|
|
118,445
|
|
|
|
0.42
|
|
|
|
0.51
|
|
|
|
160,340
|
|
|
|
0.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-covered other loans
|
|
|
639,924
|
|
|
|
2.02
|
|
|
|
2.25
|
|
|
|
669,893
|
|
|
|
2.21
|
|
|
|
2.52
|
|
|
|
727,222
|
|
|
|
2.49
|
|
|
|
2.92
|
|
|
|
771,604
|
|
|
|
2.72
|
|
|
|
3.30
|
|
|
|
873,439
|
|
|
|
3.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
|
1,204,370
|
|
|
|
3.79
|
|
|
|
4.23
|
|
|
|
1,036,918
|
|
|
|
3.42
|
|
|
|
3.90
|
|
|
|
1,207,077
|
|
|
|
4.13
|
|
|
|
4.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-covered loans
|
|
$
|
28,478,077
|
|
|
|
|
|
|
|
100.00
|
%
|
|
$
|
26,565,715
|
|
|
|
87.62
|
|
|
|
100.00
|
%
|
|
$
|
24,921,752
|
|
|
|
85.29
|
|
|
|
100.00
|
%
|
|
$
|
23,380,492
|
|
|
|
82.34
|
|
|
|
100.00
|
%
|
|
$
|
22,199,924
|
|
|
|
100.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Covered loans
|
|
|
3,284,061
|
|
|
|
10.34
|
|
|
|
|
|
|
|
3,753,031
|
|
|
|
12.38
|
|
|
|
|
|
|
|
4,297,869
|
|
|
|
14.71
|
|
|
|
|
|
|
|
5,016,100
|
|
|
|
17.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
31,762,138
|
|
|
|
100.00
|
%
|
|
|
|
|
|
$
|
30,318,746
|
|
|
|
100.00
|
%
|
|
|
|
|
|
$
|
29,219,621
|
|
|
|
100.00
|
%
|
|
|
|
|
|
$
|
28,396,592
|
|
|
|
100.00
|
%
|
|
|
|
|
|
$
|
22,199,924
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred loan origination costs/(fees)
|
|
|
10,757
|
|
|
|
|
|
|
|
|
|
|
|
4,021
|
|
|
|
|
|
|
|
|
|
|
|
(7,181
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,893
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,712
|
)
|
|
|
|
|
Allowance for losses on non-covered loans
|
|
|
(140,948
|
)
|
|
|
|
|
|
|
|
|
|
|
(137,290
|
)
|
|
|
|
|
|
|
|
|
|
|
(158,942
|
)
|
|
|
|
|
|
|
|
|
|
|
(127,491
|
)
|
|
|
|
|
|
|
|
|
|
|
(94,368
|
)
|
|
|
|
|
Allowance for losses on covered loans
|
|
|
(51,311
|
)
|
|
|
|
|
|
|
|
|
|
|
(33,323
|
)
|
|
|
|
|
|
|
|
|
|
|
(11,903
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, net
|
|
$
|
31,580,636
|
|
|
|
|
|
|
|
|
|
|
$
|
30,152,154
|
|
|
|
|
|
|
|
|
|
|
$
|
29,041,595
|
|
|
|
|
|
|
|
|
|
|
$
|
28,265,208
|
|
|
|
|
|
|
|
|
|
|
$
|
22,097,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
Outstanding Loan Commitments
At December 31, 2012, we had outstanding loan commitments of $3.0 billion, a year-over-year increase of $208.5 million. Included in
the current year-end amount were commitments to originate loans for investment of $1.4 billion and commitments to originate loans for sale of $1.6 billion, as compared to $1.6 billion and $1.1 billion, respectively, at the prior year-end.
Multi-family and CRE loans together represented $946.6 million of held-for-investment loan commitments at December 31, 2012, while ADC loans and other loans represented $103.5 million, and $278.6 million, respectively.
In addition to loan commitments, we had commitments to issue financial stand-by, performance, and commercial letters of credit totaling
$188.9 million at December 31, 2012, as compared to $172.9 million at December 31, 2011.
Financial stand-by letters
of credit primarily are issued for the benefit of other financial institutions or municipalities, on behalf of certain of our current borrowers, and obligate us to guarantee payment of a specified financial obligation.
Performance letters of credit are primarily issued for the benefit of local municipalities on behalf of certain of our borrowers. These
borrowers are mainly developers of residential subdivisions with whom we currently have a lending relationship. Performance letters of credit obligate us to make payments in the event that a specified third party fails to perform under non-financial
contractual obligations.
Commercial letters of credit act as a means of ensuring payment to a seller upon shipment of goods
to a buyer. Although commercial letters of credit are used to effect payment for domestic transactions, the majority are used to settle payments in international trade. Typically, such letters of credit require the presentation of documents that
describe the commercial transaction, and provide evidence of shipment and the transfer of title.
The fees we collect in
connection with the issuance of letters of credit are included in fee income in the Consolidated Statements of Income and Comprehensive Income.
Asset Quality
Non-Covered Loans Held for Investment and Non-Covered Other
Real Estate Owned
In 2012, the quality of our assets improved from the year-earlier level as our primary markets
continued to recover, albeit slowly, from the economic crisis, enabling more of our delinquent borrowers to bring their loans current and facilitating the disposition and sale of certain foreclosed loans and properties.
Specifically, non-performing non-covered loans declined $64.5 million, or 19.8%, year-over-year to $261.3 million at December 31,
2012, representing 0.96% of total non-covered loans at that date. At the prior year-end, non-performing non-covered loans totaled $325.8 million and represented 1.28% of total non-covered loans.
Non-performing multi-family loans accounted for the bulk of this improvement, having declined $41.6 million year-over-year to $163.5
million. Non-performing ADC and CRE loans declined $17.8 million and $11.2 million, respectively, from the balances at December 31, 2011, and non-performing one-to-four family loans declined more modestly. Non-accrual mortgage loans thus
declined $71.5 million year-over-year, to $243.4 million, at December 31, 2012. The only offset was a $7.0 million increase in the balance of non-accrual other loans, to $18.0 million, primarily reflecting non-performance in the C&I loan
portfolio.
The following table sets forth the changes in non-performing loans for the twelve months ended December 31,
2012:
|
|
|
|
|
(in thousands)
|
|
|
|
Balance at December 31, 2011
|
|
$
|
325,815
|
|
New non-accrual in the period
|
|
|
128,495
|
|
Charge-offs
|
|
|
(21,311
|
)
|
Transferred to other real estate owned
|
|
|
(17,108
|
)
|
Loan payoffs, including dispositions and principal amortization
|
|
|
(125,492
|
)
|
Restored to performing status
|
|
|
(29,069
|
)
|
|
|
|
|
|
Balance at December 31, 2012
|
|
$
|
261,330
|
|
|
|
|
|
|
61
A loan generally is classified as a non-accrual loan when it is over 90 days
past due. When a loan is placed on non-accrual status, we cease the accrual of interest owed, and previously accrued interest is reversed and charged against interest income. At December 31, 2012 and 2011, all of our non-performing loans were
non-accrual loans. A loan is generally returned to accrual status when the loan is less than 90 days past due and we have reasonable assurance that the loan will be fully collectible.
We monitor non-accrual loans both within and beyond our primary lending area in the same manner. Monitoring loans generally involves
inspecting and re-appraising the collateral properties; holding discussions with the principals and managing agents of the borrowing entities and/or retained legal counsel, as applicable; requesting financial, operating, and rent roll information;
confirming that hazard insurance is in place or force-placing such insurance; monitoring tax payment status and advancing funds as needed; and appointing a receiver, whenever possible, to collect rents, manage the operations, provide information,
and maintain the collateral properties.
It is our policy to order updated appraisals for all non-performing loans,
irrespective of loan type, that are collateralized by multi-family buildings, CRE properties, or land, in the event that such a loan is more than 90 days past due, and if the most recent appraisal on file for the property is more than one year old.
Appraisals are ordered annually until such time as the loan becomes performing and is returned to accrual status. It is not our policy to obtain updated appraisals for performing loans. However, appraisals may be ordered for performing loans when a
borrower requests an increase in the loan amount, or when a borrower requests an extension of a maturing loan. We do not analyze current LTV ratios on a portfolio-wide basis.
Non-performing loans are reviewed regularly by management and reported on a monthly basis to the Mortgage Committee, the Credit Committee, and the Boards of Directors of the Banks. In accordance with our
charge-off policy, non-performing loans are written down to their current appraised values, less certain transaction costs. Workout specialists from our Loan Workout Unit actively pursue borrowers who are delinquent in repaying their loans in an
effort to collect payment. In addition, outside counsel with experience in foreclosure proceedings are retained to institute such action with regard to such borrowers.
Properties that are acquired through foreclosure are classified as OREO, and are recorded at the lower of the unpaid principal balance or fair value at the date of acquisition, less the estimated cost of
selling the property. It is our policy to require an appraisal and environmental assessment of properties classified as OREO before foreclosure, and to re-appraise the properties on an as-needed basis until they are sold. We dispose of such
properties as quickly and prudently as possible, given current market conditions and the propertys condition.
At
December 31, 2012, OREO totaled $29.3 million, reflecting a year-over-year reduction of $55.3 million, or 65.4%. As a result, the balance of non-performing assets improved to $290.6 million at December 31, 2012 from $410.4 million at
December 31, 2011, a year-over-year reduction of 29.2%. Non-performing non-covered assets thus represented 0.71% and 1.07% of total non-covered assets at December 31, 2012 and 2011, respectively.
The improvement in asset quality also was reflected in the improvement in loans 30 to 89 days past due at December 31, 2012. Loans
30-89 days past due totaled $27.6 million at that date, in contrast to $111.7 million at December 31, 2011, primarily reflecting a $52.1 million decline in CRE loans 30 to 89 days past due to $1.7 million and a $26.8 million decline in
multi-family loans 30 to 89 days past due to $19.9 million. In addition, the balance of 30-to-89 days past due ADC loans fell $5.3 million year-over-year, to $1.2 million, while one-to-four family loans 30 to 89 days past due declined a more modest
amount.
The reductions in loans 30 to 89 days past due were due to the migration of certain loans to non-accrual status,
certain other loans being brought current, and the general improvement in the local economy. Reflecting the improvement in non-performing loans and the improvement in loans 30 to 89 days delinquent, total delinquencies declined $203.8 million, or
39.0%, year-over-year to $318.2 million at December 31, 2012.
To mitigate the potential for credit losses, we underwrite
our loans in accordance with credit standards that we consider prudent. In the case of multi-family and CRE loans, we look first at the consistency of the cash flows being generated by the property to determine its economic value, and then at the
market value of the property that collateralizes the loan. The amount of the loan is then based on the lower of the two values, with the economic value more typically used.
62
The condition of the collateral property is another critical factor. Multi-family buildings
and CRE properties are inspected from rooftop to basement as a prerequisite to approval by management and the Mortgage or Credit Committee, as applicable. A member of the Mortgage or Credit Committee participates in inspections on multi-family loans
to be originated in excess of $4.0 million. Similarly, a member of the Mortgage or Credit Committee participates in inspections on CRE loans to be originated in excess of $2.5 million. Furthermore, independent appraisers, whose appraisals are
carefully reviewed by our experienced in-house appraisal officers, perform appraisals on collateral properties. When the amount of the loan exceeds $5.0 million, a second independent appraisal is performed.
In addition, we work with a select group of mortgage brokers who are familiar with our credit standards and whose track record with our
lending officers is typically greater than ten years. Furthermore, in New York City, where the majority of the buildings securing our multi-family loans are located, the rents that tenants may be charged on certain apartments are typically
restricted under certain rent-control or rent-stabilization laws. As a result, the rents that tenants pay for such apartments are generally lower than current market rents. Buildings with a preponderance of such rent-regulated apartments are less
likely to experience vacancies in times of economic adversity.
To further manage our credit risk, our lending policies limit
the amount of credit granted to any one borrower, and typically require a minimum debt service coverage ratio of 120% for multi-family loans and 130% for CRE loans. Although we typically will lend up to 75% of the appraised value on multi-family
buildings and up to 65% on commercial properties, the average LTV ratios of such credits at origination were below those amounts at December 31, 2012. Exceptions to these LTV limitations are reviewed on a case-by-case basis, and require the
approval of the Mortgage or Credit Committee, as applicable.
The repayment of loans secured by commercial real estate is
often dependent on the successful operation and management of the underlying properties. To minimize our credit risk, we originate CRE loans in adherence with conservative underwriting standards, and require that such loans qualify on the basis
of the propertys current income stream and debt service coverage ratio. The approval of a loan also depends on the borrowers credit history, profitability, and expertise in property management.
Although the reasons for a loan to default will vary from credit to credit, our multi-family and CRE loans, in particular, typically have
not resulted in significant losses. Such loans are generally originated at conservative LTV ratios, as previously stated. Furthermore, in the case of multi-family loans, the cash flows generated by the properties generally have significant value.
The Boards of Directors also take part in the ADC lending process, with all ADC loans requiring the approval of the Mortgage
or Credit Committee, as applicable. In addition, a member of the pertinent committee participates in inspections when the loan amount exceeds $2.5 million. ADC loans primarily have been made to well-established builders who have borrowed from us in
the past. We typically lend up to 75% of the estimated as-completed market value of multi-family and residential tract projects; however, in the case of home construction loans to individuals, the limit is 80%. With respect to commercial
construction loans, which are not our primary focus, we typically lend up to 65% of the estimated as-completed market value of the property. Credit risk is also managed through the loan disbursement process. Loan proceeds are disbursed periodically
in increments as construction progresses, and as warranted by inspection reports provided to us by our own lending officers and/or consulting engineers.
Our loan portfolio has been structured to manage our exposure to both credit and interest rate risk. The vast majority of the loans in our portfolio are intermediate-term credits, with multi-family and
CRE loans typically repaying or refinancing within three to four years of origination, and the duration of ADC loans ranging up to 36 months, with 18 to 24 months more the norm. Furthermore, our multi-family loans are largely secured by buildings
with rent-regulated apartments that tend to maintain a high level of occupancy, regardless of economic conditions in our marketplace.
C&I loans are typically underwritten on the basis of the cash flows produced by the borrowers business, and are generally collateralized by various business assets, including, but not limited
to, inventory, equipment, and accounts receivable. As a result, the capacity of the borrower to repay is substantially dependent on the degree to which the business is successful. Furthermore, the collateral underlying the loan may depreciate over
time, may not be conducive to appraisal, and may fluctuate in value, based upon the operating results of the business. Accordingly, personal guarantees are also a normal requirement for C&I loans.
The procedures we follow with respect to delinquent loans are generally consistent across all categories, with late charges assessed, and
notices mailed to the borrower, at specified dates. We attempt to reach the borrower by
63
telephone to ascertain the reasons for delinquency and the prospects for repayment. When contact is made with a borrower at any time prior to foreclosure or recovery against collateral property,
we attempt to obtain full payment, and will consider a repayment schedule to avoid taking such action. Delinquencies are addressed by our Loan Workout Unit and every effort is made to collect rather than initiate foreclosure proceedings.
Fair values for all multi-family buildings, CRE properties, and land are determined based on the appraised value. If an appraisal is more
than one year old and the loan is classified as either non-performing or as an accruing troubled debt restructuring (TDR), then an updated appraisal is required to determine fair value. Estimated disposition costs are deducted from the
fair value of the property to determine estimated net realizable value. In the instance of an outdated appraisal on an impaired loan, we adjust the original appraisal by using a third-party index value to determine the extent of impairment until an
updated appraisal is received.
While we strive to originate loans that will perform fully, changes in the economy and market
conditions, among other factors, can adversely impact a borrowers ability to repay. In 2012, net charge-offs declined $59.3 million, or 58.9%, year-over-year, to $41.3 million; during this time, the ratio of net charge-offs to average loans
improved to 0.13% from 0.35%. In 2012, multi-family loans represented $26.4 million of total net charge-offs, while CRE, ADC, and other loans represented $4.9 million, $6.0 million, and $4.0 million, respectively.
Reflecting the $45.0 million provision for losses on non-covered loans recorded in 2012 and the years net charge-offs, our
allowance for losses on non-covered loans rose to $140.9 million at the end of December from $137.3 million at the prior year-end. The respective balances were equivalent to 53.93% and 42.14% of non-performing non-covered loans.
Although our asset quality improved in 2012, the allowance for losses on non-covered loans was modestly increased to a level deemed
sufficient to cover losses inherent in the loan portfolio. Based upon all relevant and available information at the end of this December, management believes that the allowance for losses on non-covered loans was appropriate at that date.
Historically, our level of charge-offs has been relatively low in adverse credit cycles, even when the volume of
non-performing loans has increased. This distinction has largely been due to the nature of our primary lending niche (multi-family loans collateralized by non-luxury apartment buildings in New York City that feature below-market rents), and
to our conservative underwriting practices that require, among other things, low LTV ratios.
Reflecting the strength of
the underlying collateral for these loans and the collateral structure, a relatively small percentage of our non-performing multi-family loans have resulted in losses over time. Low LTV ratios provide a greater likelihood of full recovery and reduce
the possibility of incurring a severe loss on a credit. Furthermore, in many cases, low LTV ratios result in our having fewer loans with a potential for the borrower to walk away from the property. Although borrowers may default on loan
payments, they have a greater incentive to protect their equity in the collateral property and to return their loans to performing status.
Given that our CRE loans are underwritten in accordance with underwriting standards that are similar to those that apply to our multi-family credits, an increase in non-performing CRE loans historically
has not resulted in a corresponding increase in losses on such loans.
In addition, at December 31, 2012, ADC loans,
other loans, and one-to-four family loans represented 1.46%, 2.34%, and 0.75%, respectively, of total non-covered loans held for investment, as compared to 1.75%, 2.62%, and 0.50%, respectively, at the prior year-end. At the current year-end, 3.04%,
2.81%, and 5.38% of ADC loans, other loans, and one-to-four family loans, respectively, were non-performing loans.
In view of
these factors, we do not believe that the level of our non-performing non-covered loans will result in a comparable level of loan losses and will not necessarily require a significant increase in our loan loss provision or allowance for non-covered
loans in any given period. As indicated, non-performing non-covered loans represented 0.96% of total non-covered loans at December 31, 2012; the ratio of net charge-offs to average loans for the twelve months ended at that date was 0.13%.
64
The following tables present the number and amount of non-accrual CRE and multi-family loans
by originating bank at December 31, 2012 and December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2012
|
|
Non-Performing
Multi-Family
Loans
|
|
|
Non-Performing
Commercial
Real Estate
Loans
|
|
(dollars in thousands)
|
|
Number
|
|
|
Amount
|
|
|
Number
|
|
|
Amount
|
|
New York Community Bank
|
|
|
73
|
|
|
$
|
162,513
|
|
|
|
37
|
|
|
$
|
45,418
|
|
New York Commercial Bank
|
|
|
2
|
|
|
|
947
|
|
|
|
8
|
|
|
|
11,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total for New York Community Bancorp
|
|
|
75
|
|
|
$
|
163,460
|
|
|
|
45
|
|
|
$
|
56,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2011
|
|
Non-Performing
Multi-Family
Loans
|
|
|
Non-Performing
Commercial
Real Estate
Loans
|
|
(dollars in thousands)
|
|
Number
|
|
|
Amount
|
|
|
Number
|
|
|
Amount
|
|
New York Community Bank
|
|
|
85
|
|
|
$
|
204,116
|
|
|
|
49
|
|
|
$
|
58,437
|
|
New York Commercial Bank
|
|
|
2
|
|
|
|
948
|
|
|
|
6
|
|
|
|
9,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total for New York Community Bancorp
|
|
|
87
|
|
|
$
|
205,064
|
|
|
|
55
|
|
|
$
|
68,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents information about our five largest non-performing loans at December 31,
2012, all of which are non-covered held-for-investment loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan No. 1
|
|
|
Loan No. 2
|
|
|
Loan No. 3
|
|
|
Loan No. 4
|
|
|
Loan No. 5
|
|
Type of Loan
|
|
Multi-Family
|
|
|
Multi-Family
|
|
|
C&I
|
|
|
C&I
|
|
|
CRE
|
|
Origination Date
|
|
|
6/29/05
|
|
|
|
6/30/04
|
|
|
|
11/30/05
|
|
|
|
12/17/04
|
|
|
|
09/11/08
|
|
Origination Balance
|
|
|
$41,116,000
|
|
|
|
$11,250,000
|
|
|
|
$16,360,000
|
|
|
|
$8,176,198
|
|
|
$
|
6,300,000
|
|
Full Commitment Balance
|
|
|
$45,531,750
|
|
|
|
$11,250,000
|
|
|
|
$16,360,000
|
|
|
|
$8,176,198
|
|
|
$
|
6,300,000
|
|
Balance at December 31, 2012
|
|
|
$41,636,000
|
|
|
|
$ 9,371,972
|
|
|
|
$7,137,625
|
|
|
|
$7,100,777
|
|
|
$
|
6,197,016
|
|
Associated Allowance
|
|
|
None
|
|
|
|
$7,160
|
|
|
|
$1,199,000
|
|
|
|
None
|
|
|
|
None
|
|
Non-Accrual Date
|
|
|
February 2009
|
|
|
|
December 2012
|
|
|
|
September 2012
|
|
|
|
September 2012
|
|
|
|
May 2010
|
|
Origination LTV Ratio
|
|
|
76
|
%
|
|
|
75
|
%
|
|
|
N/A
|
|
|
|
39
|
%
|
|
|
75
|
%
|
Current LTV Ratio
|
|
|
78
|
%
|
|
|
95
|
%
|
|
|
N/A
|
|
|
|
24
|
%
|
|
|
69
|
%
|
Last Appraisal
|
|
|
August 2012
|
|
|
|
October 2012
|
|
|
|
N/A
|
|
|
|
March 2012
|
|
|
|
April 2012
|
|
The following is a description of the five loans identified in the preceding table:
|
|
|
No. 1 -
|
|
The borrower is an owner of real estate throughout the nation, and is based in New Jersey. This loan is collateralized by a complex of four multi-family buildings containing 672
residential and four commercial units in Washington, D.C. No allocation for the allowance for losses on non-covered loans was deemed necessary, as determined by using the fair value of collateral method in accordance with ASC
310-10/40.
|
|
|
No. 2 -
|
|
The borrower is an owner of real estate and is based in Florida. This loan is collateralized by a multi-family complex containing 248 residential units in Daytona, Florida. An
allocation of $7,160 for the allowance for losses on non-covered loans was deemed necessary, as determined by using the fair value of collateral method in accordance with ASC 310-10/40.
|
|
|
No. 3 -
|
|
The borrower is an owner and operator of fuel terminals and distribution centers and is based in New York. This loan is collateralized by accounts receivable, inventory, and
intangible assets. An allocation of $1,199,000 for the allowance for losses on non-covered loans was deemed necessary, as determined by an internally calculated value using an estimated liquidation schedule in accordance with ASC
310-10/40.
|
|
|
No. 4 -
|
|
The borrower is an owner and operator of fuel terminals and distribution centers and is based in New York. This loan is collateralized by a fuel storage facility containing several
small industrial buildings in Brooklyn, New York. No allocation for the allowance for losses on non-covered loans was deemed necessary, as determined by using the fair value of collateral method in accordance with ASC
310-10/40.
|
65
|
|
|
|
|
No. 5 -
|
|
The borrower is an owner of real estate and is based in New York. The loan is collateralized by an 11,000-square foot commercial building with excess development rights in
Manhattan. No allocation for the allowance for losses on non-covered loans was deemed necessary, as determined by using the fair value of collateral method in accordance with ASC 310-10/40.
|
Troubled Debt Restructurings
In an effort to proactively manage delinquent loans, we have selectively extended to certain borrowers concessions such as rate reductions and extension of maturity dates, as well as forbearance
agreements. As of December 31, 2012, loans on which concessions were made with respect to rate reductions and/or extension of maturity dates amounted to $239.2 million; loans in connection with which forbearance agreements were reached amounted
to $21.1 million. At December 31, 2012, the Company had success rates for multi-family, CRE, and all other loans (including ADC loans) of 77%, 91%, and 100%, respectively.
The eligibility of a borrower for work-out concessions of any nature depends upon the facts and circumstances of each transaction, which
may change from period to period, and involve judgment regarding the likelihood that the concession will result in the maximum recovery for the Company.
In accordance with GAAP, we are required to account for certain loan modifications or restructurings as TDRs. In general, a modification or restructuring of a loan constitutes a TDR if we grant a
concession to a borrower experiencing financial difficulty. Loans modified as TDRs are placed on non-accrual status until we determine that future collection of principal and interest is reasonably assured, which generally requires that the borrower
demonstrate performance according to the restructured terms for at least six consecutive months.
Loans modified as TDRs
totaled $260.3 million at December 31, 2012, including accruing loans of $105.0 million and non-accrual loans of $155.3 million.
Analysis of Troubled Debt Restructurings
The following table presents information regarding our TDRs as of December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Accruing
|
|
|
Non-Accrual
|
|
|
Total
|
|
Multi-family
|
|
$
|
66,092
|
|
|
$
|
114,556
|
|
|
$
|
180,648
|
|
Commercial real estate
|
|
|
37,457
|
|
|
|
39,127
|
|
|
|
76,584
|
|
Acquisition, development, and construction
|
|
|
|
|
|
|
510
|
|
|
|
510
|
|
Commercial and industrial
|
|
|
1,463
|
|
|
|
|
|
|
|
1,463
|
|
One-to-four family
|
|
|
|
|
|
|
1,101
|
|
|
|
1,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
105,012
|
|
|
$
|
155,294
|
|
|
$
|
260,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents information regarding our TDRs as of December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Accruing
|
|
|
Non-Accrual
|
|
|
Total
|
|
Multi-family
|
|
$
|
60,454
|
|
|
$
|
166,248
|
|
|
$
|
226,702
|
|
Commercial real estate
|
|
|
3,389
|
|
|
|
39,054
|
|
|
|
42,443
|
|
Acquisition, development, and construction
|
|
|
|
|
|
|
15,886
|
|
|
|
15,886
|
|
Commercial and industrial
|
|
|
|
|
|
|
667
|
|
|
|
667
|
|
One-to-four family
|
|
|
|
|
|
|
1,411
|
|
|
|
1,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
63,843
|
|
|
$
|
223,266
|
|
|
$
|
287,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the changes in TDRs for the twelve months ended December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Accruing
|
|
|
Non-Accrual
|
|
|
Total
|
|
Balance at December 31, 2011
|
|
$
|
63,843
|
|
|
$
|
223,266
|
|
|
$
|
287,109
|
|
New loans
|
|
|
53,065
|
|
|
|
11,134
|
|
|
|
64,199
|
|
Charge-offs
|
|
|
|
|
|
|
(14,675
|
)
|
|
|
(14,675
|
)
|
Transferred to other real estate owned
|
|
|
|
|
|
|
(261
|
)
|
|
|
(261
|
)
|
Loan payoffs, including dispositions and principal amortization
|
|
|
(10,847
|
)
|
|
|
(53,437
|
)
|
|
|
(64,284
|
)
|
Loans transferred to accruing troubled debt restructurings
|
|
|
|
|
|
|
(10,733
|
)
|
|
|
(10,733
|
)
|
Loans transferred to non-accrual troubled debt restructurings
|
|
|
(1,049
|
)
|
|
|
|
|
|
|
(1,049
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
$
|
105,012
|
|
|
$
|
155,294
|
|
|
$
|
260,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The year-over-year increase in accruing loans reflected in the preceding table was primarily attributable
to a single CRE loan in the amount of $35.2 million that was placed on accruing TDR status in the second quarter of 2012.
66
On a limited basis, we may lend additional credit to a borrower after the loan has been
placed on non-accrual status or modified as a TDR if, in managements judgment, the value of the property after the additional loan funding is greater than the initial value of the property plus the additional loan funding amount. In 2012, the
number and amounts of such additions were immaterial. In addition, the terms of our restructured loans typically would not restrict us from cancelling outstanding commitments for other credit facilities in the event of non-payment of the
restructured loan.
Except for the non-accrual loans, loans over 90 days past due and still accruing interest, and TDRs
disclosed in this filing, we did not have any potential problem loans at December 31, 2012 that would have caused management to have serious doubts as to the ability of a borrower to comply with present loan repayment terms and that would have
resulted in such disclosure if that were the case.
67
Asset Quality Analysis (Excluding Covered Loans, Covered OREO, and Non-Covered Loans Held for Sale)
The following table presents information regarding our consolidated allowance for losses on non-covered loans, our
non-performing non-covered assets, and our non-covered loans 30 to 89 days past due at each year-end in the five years ended December 31, 2012. Covered loans are considered to be performing due to the application of the yield accretion method,
as discussed elsewhere in this report. Therefore, covered loans are not reflected in the amounts or ratios provided in this table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
(dollars in thousands)
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Allowance for Losses on Non-Covered Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
137,290
|
|
|
$
|
158,942
|
|
|
$
|
127,491
|
|
|
$
|
94,368
|
|
|
$
|
92,794
|
|
Provision for losses on non-covered loans
|
|
|
45,000
|
|
|
|
79,000
|
|
|
|
91,000
|
|
|
|
63,000
|
|
|
|
7,700
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
(27,939
|
)
|
|
|
(71,187
|
)
|
|
|
(27,042
|
)
|
|
|
(15,261
|
)
|
|
|
(175
|
)
|
Commercial real estate
|
|
|
(5,046
|
)
|
|
|
(11,900
|
)
|
|
|
(3,359
|
)
|
|
|
(530
|
)
|
|
|
(16
|
)
|
Acquisition, development, and construction
|
|
|
(5,974
|
)
|
|
|
(9,153
|
)
|
|
|
(9,884
|
)
|
|
|
(5,990
|
)
|
|
|
(2,517
|
)
|
One-to-four family
|
|
|
(574
|
)
|
|
|
(1,208
|
)
|
|
|
(931
|
)
|
|
|
(322
|
)
|
|
|
|
|
Other loans
|
|
|
(6,685
|
)
|
|
|
(12,462
|
)
|
|
|
(19,569
|
)
|
|
|
(7,828
|
)
|
|
|
(3,460
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs
|
|
|
(46,218
|
)
|
|
|
(105,910
|
)
|
|
|
(60,785
|
)
|
|
|
(29,931
|
)
|
|
|
(6,168
|
)
|
Recoveries
|
|
|
4,876
|
|
|
|
5,258
|
|
|
|
1,236
|
|
|
|
54
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(41,342
|
)
|
|
|
(100,652
|
)
|
|
|
(59,549
|
)
|
|
|
(29,877
|
)
|
|
|
(6,126
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
140,948
|
|
|
$
|
137,290
|
|
|
$
|
158,942
|
|
|
$
|
127,491
|
|
|
$
|
94,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Performing Non-Covered Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-accrual non-covered mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
$
|
163,460
|
|
|
$
|
205,064
|
|
|
$
|
327,892
|
|
|
$
|
393,113
|
|
|
$
|
53,153
|
|
Commercial real estate
|
|
|
56,863
|
|
|
|
68,032
|
|
|
|
162,400
|
|
|
|
70,618
|
|
|
|
12,785
|
|
Acquisition, development, and construction
|
|
|
12,091
|
|
|
|
29,886
|
|
|
|
91,850
|
|
|
|
79,228
|
|
|
|
24,839
|
|
One-to-four family
|
|
|
10,945
|
|
|
|
11,907
|
|
|
|
17,813
|
|
|
|
14,171
|
|
|
|
11,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-accrual non-covered mortgage loans
|
|
|
243,359
|
|
|
|
314,889
|
|
|
|
599,955
|
|
|
|
557,130
|
|
|
|
101,932
|
|
Other non-accrual non-covered loans
|
|
|
17,971
|
|
|
|
10,926
|
|
|
|
24,476
|
|
|
|
20,938
|
|
|
|
11,765
|
|
Loans 90 days or more past due and still accruing interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing non-covered loans
(1)
|
|
$
|
261,330
|
|
|
$
|
325,815
|
|
|
$
|
624,431
|
|
|
$
|
578,068
|
|
|
$
|
113,697
|
|
Other real estate owned
(2)
|
|
|
29,300
|
|
|
|
84,567
|
|
|
|
28,066
|
|
|
|
15,205
|
|
|
|
1,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing non-covered assets
|
|
$
|
290,630
|
|
|
$
|
410,382
|
|
|
$
|
652,497
|
|
|
$
|
593,273
|
|
|
$
|
114,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Quality Measures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing non-covered loans to total non-covered loans
|
|
|
0.96
|
%
|
|
|
1.28
|
%
|
|
|
2.63
|
%
|
|
|
2.47
|
%
|
|
|
0.51
|
%
|
Non-performing non-covered assets to total non-covered assets
|
|
|
0.71
|
|
|
|
1.07
|
|
|
|
1.77
|
|
|
|
1.41
|
|
|
|
0.35
|
|
Allowance for losses on non-covered loans to non-performing non-covered loans
|
|
|
53.93
|
|
|
|
42.14
|
|
|
|
25.45
|
|
|
|
22.05
|
|
|
|
83.00
|
|
Allowance for losses on non-covered loans to total non-covered loans
|
|
|
0.52
|
|
|
|
0.54
|
|
|
|
0.67
|
|
|
|
0.55
|
|
|
|
0.43
|
|
Net charge-offs during the period to average loans outstanding during the period
|
|
|
0.13
|
|
|
|
0.35
|
|
|
|
0.21
|
|
|
|
0.13
|
|
|
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans 30-89 Days Past Due:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
$
|
19,945
|
|
|
$
|
46,702
|
|
|
$
|
121,188
|
|
|
$
|
155,790
|
|
|
$
|
37,266
|
|
Commercial real estate
|
|
|
1,679
|
|
|
|
53,798
|
|
|
|
8,207
|
|
|
|
42,324
|
|
|
|
29,090
|
|
Acquisition, development, and construction
|
|
|
1,178
|
|
|
|
6,520
|
|
|
|
5,194
|
|
|
|
48,838
|
|
|
|
21,380
|
|
One-to-four family
|
|
|
2,645
|
|
|
|
2,712
|
|
|
|
5,723
|
|
|
|
5,019
|
|
|
|
4,885
|
|
Other loans
|
|
|
2,138
|
|
|
|
1,925
|
|
|
|
10,728
|
|
|
|
21,036
|
|
|
|
10,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans 30-89 days past due
(3)
|
|
$
|
27,585
|
|
|
$
|
111,657
|
|
|
$
|
151,040
|
|
|
$
|
273,007
|
|
|
$
|
102,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The December 31, 2012, 2011, 2010, and 2009 amounts exclude loans 90 days or more past due of $312.6 million, $347.4 million, $360.8 million, and $56.2 million,
respectively, that are covered by FDIC loss sharing agreements.
|
(2)
|
The December 31, 2012, 2011, and 2010 amounts exclude OREO totaling $45.1 million, $71.4 million, and $62.4 million, respectively, that is covered by FDIC loss
sharing agreements.
|
(3)
|
The December 31, 2012, 2011, 2010, and 2009 amounts exclude loans 30 to 89 days past due of $81.2 million, $112.0 million, $130.5 million, and $110.1 million,
respectively, that are covered by FDIC loss sharing agreements.
|
68
Summary of the Allowance for Losses on Non-Covered Loans
The following table sets forth the allocation of the consolidated allowance for losses on non-covered loans at each year-end in the five
years ended December 31, 2012. At December 31, 2008, all of our loans were non-covered loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
(dollars in thousands)
|
|
Amount
|
|
|
Percent of
Loans
in
Each
Category
to Total
Non-
Covered
Loans Held
for
Investment
|
|
|
Amount
|
|
|
Percent of
Loans
in
Each
Category
to
Total
Non-
Covered
Loans
Held
for
Investment
|
|
|
Amount
|
|
|
Percent of
Loans
in
Each
Category
to
Total
Non-
Covered
Loans
Held
for
Investment
|
|
|
Amount
|
|
|
Percent of
Loans
in
Each
Category
to Total
Non-
Covered
Loans Held
for
Investment
|
|
|
Amount
|
|
|
Percent of
Loans
in
Each
Category
to Total
Loans
|
|
Multi-family loans
|
|
$
|
79,618
|
|
|
|
68.18
|
%
|
|
$
|
66,745
|
|
|
|
68.28
|
%
|
|
$
|
75,314
|
|
|
|
70.88
|
%
|
|
$
|
75,567
|
|
|
|
71.59
|
%
|
|
$
|
43,908
|
|
|
|
70.85
|
%
|
Commercial real estate loans
|
|
|
38,426
|
|
|
|
27.27
|
|
|
|
43,262
|
|
|
|
26.85
|
|
|
|
42,145
|
|
|
|
22.94
|
|
|
|
32,079
|
|
|
|
21.34
|
|
|
|
29,622
|
|
|
|
20.51
|
|
Acquisition, development, and construction loans
|
|
|
8,418
|
|
|
|
1.46
|
|
|
|
11,016
|
|
|
|
1.75
|
|
|
|
20,302
|
|
|
|
2.40
|
|
|
|
8,276
|
|
|
|
2.85
|
|
|
|
10,289
|
|
|
|
3.51
|
|
One-to-four family loans
|
|
|
1,519
|
|
|
|
0.75
|
|
|
|
972
|
|
|
|
0.50
|
|
|
|
1,190
|
|
|
|
0.72
|
|
|
|
1,530
|
|
|
|
0.92
|
|
|
|
1,685
|
|
|
|
1.20
|
|
Other loans
|
|
|
12,967
|
|
|
|
2.34
|
|
|
|
15,295
|
|
|
|
2.62
|
|
|
|
19,991
|
|
|
|
3.06
|
|
|
|
10,039
|
|
|
|
3.30
|
|
|
|
8,864
|
|
|
|
3.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
140,948
|
|
|
|
100.00
|
%
|
|
$
|
137,290
|
|
|
|
100.00
|
%
|
|
$
|
158,942
|
|
|
|
100.00
|
%
|
|
$
|
127,491
|
|
|
|
100.00
|
%
|
|
$
|
94,368
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The preceding allocation is based upon an estimate of various factors, as discussed in Critical
Accounting Policies earlier in this report, and a different allocation methodology may be deemed to be more appropriate in the future. In addition, it should be noted that the portion of the allowance for losses on non-covered loans allocated
to each non-covered loan category does not represent the total amount available to absorb losses that may occur within that category, since the total loan loss allowance is available for the entire non-covered loan portfolio.
69
Covered Loans and Covered Other Real Estate Owned
The credit risk associated with the assets acquired in our AmTrust and Desert Hills transactions has been substantially mitigated by our
loss sharing agreements with the FDIC. Under the terms of the loss sharing agreements, the FDIC agreed to reimburse us for 80% of losses (and share in 80% of any recoveries) up to a specified threshold with respect to the loans and OREO acquired in
the transactions, and to reimburse us for 95% of any losses (and share in 95% of any recoveries) with respect to the acquired assets beyond that threshold. The loss sharing (and reimbursement) agreements applicable to one-to-four family mortgage
loans and HELOCs are effective for a ten-year period from the date of acquisition. Under the loss sharing agreements applicable to other loans and OREO, the FDIC will reimburse us for losses for a five-year period from the date of acquisition; the
period for sharing in recoveries on other loans and OREO extends for a period of eight years.
We consider our covered loans
to be performing due to the application of the yield accretion method under ASC 310-30, which allows us to aggregate credit-impaired loans acquired in the same fiscal quarter into one or more pools, provided that the loans have common risk
characteristics. A pool is then accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. Accordingly, loans that may have been classified as non-performing loans by AmTrust or Desert
Hills were no longer classified as non-performing at the respective dates of acquisition because we believed at that time that we would fully collect the new carrying value of those loans. The new carrying value represents the contractual balance,
reduced by the portion expected to be uncollectible (referred to as the non-accretable difference) and by an accretable yield (discount) that is recognized as interest income. It is important to note that managements judgment is
required in reclassifying loans subject to ASC 310-30 as performing loans, and is dependent on having a reasonable expectation about the timing and amount of the cash flows to be collected, even if a loan is contractually past due.
In connection with the AmTrust and Desert Hills loss sharing agreements, we established FDIC loss share receivables of $740.0 million and
$69.6 million, which were the acquisition date fair values of the respective loss sharing agreements (i.e., the expected reimbursements from the FDIC over the terms of the agreements). The loss share receivables may increase if the losses increase,
and may decrease if the losses fall short of the expected amounts. Increases in estimated reimbursements will be recognized in income in the same period that they are identified and that the allowance for losses on the related covered loans is
recognized. In 2012, indemnification income of $14.4 million was recorded in non-interest income as a result of an increase in expected reimbursements from the FDIC under our loss sharing agreements. This benefit partially offset a
provision for losses on covered loans of $18.0 million.
Decreases in estimated reimbursements from the FDIC, if any, will be
recognized in income prospectively over the life of the related covered loans (or, if shorter, over the remaining term of the loss sharing agreement). Related additions to the accretable yield on the covered loans will be recognized in income
prospectively over the lives of the loans. Gains and recoveries on covered assets will offset losses, or be paid to the FDIC at the applicable loss share percentage at the time of recovery.
The loss share receivables may also increase due to accretion, or decrease due to amortization. In 2012, we recorded net amortization of
$2.1 million and in 2011 we recorded net accretion of $24.0 million. Accretion of the FDIC loss share receivable relates to the difference between the discounted, versus the undiscounted, expected cash flows of covered loans subject to the FDIC loss
sharing agreements. Amortization occurs when the expected cash flows from the covered loan portfolio improves, thus reducing the amounts receivable from the FDIC. These cash flows were discounted to reflect the uncertainty of the timing and receipt
of the loss sharing reimbursements from the FDIC. In the twelve months ended December 31, 2012, we received FDIC reimbursements of $141.0 million, as compared to $160.5 million in the prior year.
70
Asset Quality Analysis (Including Covered Loans and Covered OREO)
The following table presents information regarding our non-performing assets and loans past due at December 31, 2012 and
December 31, 2011, including covered loans and covered OREO (collectively, covered assets):
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
At or For the
Year Ended
December 31, 2012
|
|
|
At or For the
Year Ended
December 31, 2011
|
|
Covered Loans 90 Days or More Past Due:
|
|
|
|
|
|
|
|
|
Multi-family
|
|
$
|
|
|
|
$
|
161
|
|
Commercial real estate
|
|
|
2,501
|
|
|
|
8,599
|
|
Acquisition, development, and construction
|
|
|
1,249
|
|
|
|
5,082
|
|
One-to-four family
|
|
|
297,265
|
|
|
|
314,821
|
|
Other
|
|
|
11,558
|
|
|
|
18,779
|
|
|
|
|
|
|
|
|
|
|
Total covered loans 90 days or more past due
|
|
|
312,573
|
|
|
|
347,442
|
|
Covered other real estate owned
|
|
|
45,115
|
|
|
|
71,400
|
|
|
|
|
|
|
|
|
|
|
Total covered non-performing assets
|
|
$
|
357,688
|
|
|
$
|
418,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Performing Assets (including covered assets):
|
|
|
|
|
|
|
|
|
Non-performing loans:
|
|
|
|
|
|
|
|
|
Multi-family
|
|
$
|
163,460
|
|
|
$
|
205,225
|
|
Commercial real estate
|
|
|
59,364
|
|
|
|
76,631
|
|
Acquisition, development, and construction
|
|
|
13,340
|
|
|
|
34,968
|
|
One-to-four family
|
|
|
308,210
|
|
|
|
326,728
|
|
Other
|
|
|
29,529
|
|
|
|
29,705
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans
|
|
|
573,903
|
|
|
|
673,257
|
|
Other real estate owned
|
|
|
74,415
|
|
|
|
155,967
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets (including covered assets)
|
|
$
|
648,318
|
|
|
$
|
829,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Quality Ratios (including covered loans
and the allowance for losses on covered loans):
|
|
|
|
|
|
|
|
|
Total non-performing loans to total loans
|
|
|
1.88
|
%
|
|
|
2.30
|
%
|
Total non-performing assets to total assets
|
|
|
1.47
|
|
|
|
1.97
|
|
Allowance for loan losses to non-performing loans
|
|
|
33.50
|
|
|
|
25.34
|
|
Allowance for loan losses to total loans
|
|
|
0.63
|
|
|
|
0.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Covered Loans 30-89 Days Past Due:
|
|
|
|
|
|
|
|
|
Multi-family
|
|
$
|
517
|
|
|
$
|
|
|
Commercial real estate
|
|
|
137
|
|
|
|
1,054
|
|
Acquisition, development, and construction
|
|
|
463
|
|
|
|
272
|
|
One-to-four family
|
|
|
75,129
|
|
|
|
103,495
|
|
Other loans
|
|
|
4,940
|
|
|
|
7,168
|
|
|
|
|
|
|
|
|
|
|
Total covered loans 30-89 days past due
|
|
$
|
81,186
|
|
|
$
|
111,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans 30-89 Days Past Due (including covered loans):
|
|
|
|
|
|
|
|
|
Multi-family
|
|
$
|
20,462
|
|
|
$
|
46,702
|
|
Commercial real estate
|
|
|
1,816
|
|
|
|
54,852
|
|
Acquisition, development, and construction
|
|
|
1,641
|
|
|
|
6,792
|
|
One-to-four family
|
|
|
77,774
|
|
|
|
106,207
|
|
Other loans
|
|
|
7,078
|
|
|
|
9,093
|
|
|
|
|
|
|
|
|
|
|
Total loans 30-89 days past due (including covered loans)
|
|
$
|
108,771
|
|
|
$
|
223,646
|
|
|
|
|
|
|
|
|
|
|
71
Geographical Analysis of Total Non-Performing Loans (Covered and Non-Covered)
The following table presents a geographical analysis of our non-performing loans at December 31, 2012:
|
|
|
|
|
(in thousands)
|
|
|
|
New York
|
|
$
|
172,233
|
|
Florida
|
|
|
118,807
|
|
New Jersey
|
|
|
51,656
|
|
Washington, D.C.
|
|
|
41,865
|
|
California
|
|
|
31,966
|
|
Connecticut
|
|
|
21,654
|
|
Arizona
|
|
|
19,162
|
|
Ohio
|
|
|
19,004
|
|
Nevada
|
|
|
15,435
|
|
Massachusetts
|
|
|
13,827
|
|
All other states
|
|
|
68,294
|
|
|
|
|
|
|
Total non-performing loans
|
|
$
|
573,903
|
|
|
|
|
|
|
Securities
At December 31, 2012, securities represented $4.9 billion, or 11.1%, of total assets, as compared to $4.5 billion, or 10.8%, of total assets at the prior year-end.
The investment policies of the Company and the Banks are established by the respective Boards of Directors and implemented by their
respective Investment Committees, in concert with the respective Asset and Liability Management Committees. The Investment Committees generally meet quarterly or on an as-needed basis to review the portfolios and specific capital market
transactions. In addition, the securities portfolios are reviewed monthly by the Boards of Directors as a whole. Furthermore, the policies guiding the Companys and the Banks investments are reviewed at least annually by the respective
Investment Committees, as well as by the respective Boards. While the policies permit investment in various types of liquid assets, neither the Company nor the Banks currently maintain a trading portfolio.
Our general investment strategy is to purchase liquid investments with various maturities to ensure that our overall interest rate risk
position stays within the required limits of our investment policies. We generally limit our investments to GSE obligations (defined as GSE certificates; GSE collateralized mortgage obligations, or CMOs; and GSE debentures). At
December 31, 2012 and 2011, GSE obligations represented 91.3% and 93.7%, respectively, of total securities. The remainder of the portfolio was comprised of private label CMOs, corporate bonds, trust preferred securities, corporate equities, and
municipal obligations. We have no investment securities that are backed by subprime or Alt-A loans.
Depending on
managements intent at the time of purchase, securities are classified as either available for sale or held to maturity. While available-for-sale securities are intended to generate earnings, they also represent a
significant source of cash flows and liquidity for future loan production, the reduction of higher-cost funding, and general operating activities. These cash flows stem from the repayment of principal and interest, in addition to the sale of such
securities. Held-to-maturity securities also generate cash flows from repayments and serve as a source of earnings.
Securities that management intends to hold for an indefinite period of time are classified as available for sale. A decision to purchase
or sell these securities is based on economic conditions, including changes in interest rates, liquidity, and our asset and liability management strategy. At December 31, 2012, available-for-sale securities represented $429.3 million, or 8.7%,
of total securities, down from $724.7 million, or 16.0%, at the prior year-end. Included in the respective year-end amounts were mortgage-related securities of $177.3 million and $192.0 million, and other securities of $252.0 million and $532.7
million, respectively.
Primarily reflecting calls of agency debentures that occurred in 2012, the estimated weighted average
life of the available-for-sale securities portfolio rose to 9.4 years at December 31, 2012 from 3.0 years at December 31, 2011. Held-to-maturity securities, which are securities that management has the positive intent to hold to maturity,
represented $4.5 billion, or 91.3% of total securities at December 31, 2012, as compared to $3.8 billion, or 84.0%, of total securities at the prior year-end. At the current year-end, the fair value of securities held to maturity represented
104.94% of their carrying value, as compared to 103.94% at December 31, 2011. Mortgage-related securities accounted for $3.2 billion and $3.0 billion of securities held to maturity at the end of December 2012 and 2011,
72
while other securities represented $1.3 billion and $819.6 million at the respective year-ends. Included in the year-end 2012 and 2011 amounts were GSE obligations of $4.3 billion and $3.6
billion; capital trust notes of $109.9 million and $131.6 million; and corporate bonds of $72.5 million and $54.8 million, respectively. The estimated weighted average lives of the held-to-maturity securities portfolio were 4.6 years and 4.7 years
at the corresponding dates.
Federal Home Loan Bank Stock
The Community Bank and the Commercial Bank are members of the FHLB-NY, one of 12 regional FHLBs comprising the FHLB system. Each regional
FHLB manages its customer relationships, while the 12 FHLBs use their combined size and strength to obtain their necessary funding at the lowest possible cost.
As members of the FHLB-NY, the Community Bank and the Commercial Bank are required to acquire and hold shares of its capital stock. In addition, the Community Bank acquired shares of the capital stock of
the FHLB-Cincinnati and the FHLB-San Francisco in connection with the AmTrust and Desert Hills acquisitions, respectively.
At
December 31, 2012, the Community Bank held $458.8 million of FHLB stock, including $433.6 million of stock in the FHLB-NY, $23.1 million of stock in the FHLB-Cincinnati, and $2.1 million of stock in the FHLB-San Francisco. The Commercial Bank
had $10.3 million of FHLB stock at December 31, 2012, all of which was with the FHLB-NY. FHLB stock continued to be valued at par, with no impairment required, at that date.
In 2012 and 2011, dividends from the FHLB to the Community Bank totaled $19.9 million and $19.5 million, respectively. Dividends from the
FHLB-NY to the Commercial Bank were $387,000 and $374,000, respectively, in the corresponding years.
Bank-Owned Life Insurance
At December 31, 2012, our investment in bank-owned life insurance (BOLI) was $867.3 million, as
compared to $769.0 million at December 31, 2011. The increase reflects the purchase of additional BOLI totaling $80.0 million in the fourth quarter, and the rise in the cash surrender value of the underlying policies over the course of the
year.
BOLI is recorded at the total cash surrender value of the policies in the Consolidated Statements of Condition, and the
income generated by the increase in the cash surrender value of the policies is recorded in non-interest income in the Consolidated Statements of Income and Comprehensive Income.
FDIC Loss Share Receivable
In connection with our loss sharing
agreements with the FDIC with respect to the loans and OREO acquired in the AmTrust and Desert Hills acquisitions, we recorded FDIC loss share receivables of $566.5 million and $695.2 million, respectively, at December 31, 2012 and 2011. The
loss share receivables represent the present values of the reimbursements we expected to receive under the combined loss sharing agreements at those dates.
Goodwill and Core Deposit Intangibles
We record goodwill and core
deposit intangibles (CDI) in our Consolidated Statements of Condition in connection with our various business combinations.
Goodwill totaled $2.4 billion at both December 31, 2012 and 2011. Reflecting amortization, CDI declined $19.6 million year-over-year, to $32.0 million.
Sources of Funds
The Parent Company (i.e., the Company on an unconsolidated basis) has four primary funding sources for the payment of dividends, share
repurchases, and other corporate uses: dividends paid to the Company by the Banks; capital raised through the issuance of stock; funding raised through the issuance of debt instruments; and repayments of, and income from, investment securities.
On a consolidated basis, our funding primarily stems from a combination of the following sources: the deposits we gather
through our branch network or acquire in business combinations, as well as brokered deposits; borrowed funds, primarily in the form of wholesale borrowings; the cash flows generated through the repayment and sale of loans; and the cash flows
generated through the repayment and sale of securities.
73
Loan repayments and sales totaled $18.5 billion in 2012, as compared to
$15.0 billion in 2011. Repayments and sales accounted for $7.7 billion and $10.8 billion, respectively, of the 2012 total and for $7.7 billion and $7.3 billion, respectively, of the year-earlier amount. The increase in cash flows from sales is
indicative of the aforementioned increase in the production of one-to-four family loans for sale during the year.
In 2012,
cash flows from the repayment and sale of securities respectively totaled $2.9 billion and $822.6 million, while purchases of securities totaled $4.1 billion over the course of the year. In 2011, the cash flows from the repayment and sale of
securities totaled $3.0 billion and $1.1 billion, respectively, and were partially offset by purchases of securities totaling $3.9 billion.
Consistent with our business model, the cash flows from loans and securities were primarily deployed into loan production and, to a much lesser extent, the purchase of GSE obligations and other
securities.
Deposits
Our ability to retain and attract deposits depends on numerous factors, including customer satisfaction, the rates of interest we pay, the types of products we offer, and the attractiveness of their
terms. There are times we may choose not to compete aggressively for deposits, depending on our access to deposits through acquisitions, the availability of lower-cost funding sources, the competitiveness of the market and its impact on pricing, and
our need for such deposits to fund our loan demand.
While the vast majority of our deposits have been acquired through
business combinations or gathered through our branch network, our mix of deposits has also included brokered deposits. Depending on the availability and pricing of such wholesale funding sources, we typically refrain from pricing our retail deposits
at the higher end of the market, in order to contain or reduce our funding costs.
Deposits rose from $22.3 billion at
December 31, 2011 to $24.9 billion at December 31, 2012. While some of the growth in deposits was organic in nature, the increase also reflects deposits assumed in the aforementioned transaction with Aurora Bank. At the time of the transaction, we
acquired $2.2 billion of deposits, including $1.4 billion of brokered CDs, $766.7 million of retail CDs, and $11.3 million of retail money market accounts. At December 31, 2012, the Aurora Bank transaction accounted for $1.3 billion of total
deposits, including brokered CDs of $793.8 million. We had no brokered CDs at the prior year-end.
CDs rose $1.7 billion
year-over-year, to $9.1 billion, representing 36.7% of total deposits at December 31, 2012. NOW and money market accounts represented $8.8 billion of total deposits at that date, reflecting a modest year-over-year increase, while savings accounts
and non-interest-bearing deposits rose more meaningfully. At December 31, 2012, savings accounts and non-interest-bearing deposits respectively totaled $4.2 billion and $2.8 billion, reflecting year-over-year increases of $260.1 million and $517.5
million.
Included in the year-end balances of money market accounts and non-interest-bearing deposits were brokered deposits
of $3.7 billion and $189.2 million, as compared to $3.8 billion and $61.6 million, respectively, at December 31, 2011.
Borrowed Funds
Borrowed funds consist primarily of wholesale borrowings (i.e., FHLB advances, repurchase agreements, and federal
funds purchased); junior subordinated debentures; and other borrowings (consisting of preferred stock of subsidiaries and senior notes). At December 31, 2012, borrowed funds totaled $13.4 billion, reflecting a $530.2 million reduction from the
year-earlier amount.
Wholesale Borrowings
Wholesale borrowings declined $371.2 million year-over-year, to $13.1 billion, representing 29.6% of total assets at December 31, 2012. FHLB advances accounted for $8.8 billion of the year-end 2012 total,
and were down $471.2 million from the year-earlier amount. In addition to FHLB-NY advances, the year-end 2012 balance included FHLB-Cincinnati advances of $602.4 million that were acquired in the AmTrust acquisition in December 2009.
The Community Bank and the Commercial Bank are both members of, and have lines of credit with, the FHLB-NY. Pursuant to blanket
collateral agreements with the Banks, our FHLB advances and overnight advances are secured by pledges of certain eligible collateral in the form of loans and securities.
74
Also included in wholesale borrowings at December 31, 2012 were repurchase agreements
of $4.1 billion, consistent with the balance at the prior year-end. Repurchase agreements are contracts for the sale of securities owned or borrowed by the Banks with an agreement to repurchase those securities at agreed-upon prices and dates. Our
repurchase agreements are primarily collateralized by GSE obligations, and may be entered into with the FHLB-NY or certain brokerage firms. The brokerage firms we utilize are subject to an ongoing internal financial review to ensure that we borrow
funds only from those dealers whose financial strength will minimize the risk of loss due to default. In addition, a master repurchase agreement must be executed and on file for each of the brokerage firms we use.
In late December 2012, we began the process of repositioning certain wholesale borrowings. Reflecting the repositioning and the
redemption of certain trust preferred securities at the end of December, we reduced the weighted average interest rate on $6.0 billion of borrowed funds by 117 basis points, and extended the weighted average call and maturity dates by approximately
four years. At December 31, 2012, $8.0 billion of our wholesale borrowings were callable in 2013, including $2.4 billion that were subsequently repositioned in January 2013. Given the current interest rate environment, we do not expect our
callable wholesale borrowings to be called.
Junior Subordinated Debentures
Reflecting the redemption of certain trust preferred securities in the fourth quarter, as mentioned, junior subordinated debentures
declined $69.0 million from the balance at December 31, 2011 to $357.9 million at December 31, 2012.
Other Borrowings
Other borrowings declined from $94.3 million at December 31, 2011 to $4.3 million at December 31, 2012. The
reduction reflects the maturity of fixed rate senior notes that had been issued in 2008 under the Temporary Liquidity Guarantee Program on June 22, 2012.
Please see Note 7, Borrowed Funds, in Item 8, Financial Statements and Supplementary Data for a further discussion of our wholesale borrowings, junior subordinated debentures,
and other borrowings.
Liquidity, Contractual Obligations and Off-Balance Sheet Commitments, and Capital Position
Liquidity
We
manage our liquidity to ensure that cash flows are sufficient to support our operations, and to compensate for any temporary mismatches between sources and uses of funds caused by variable loan and deposit demand.
We monitor our liquidity daily to ensure that sufficient funds are available to meet our financial obligations. Our most liquid assets
are cash and cash equivalents, which totaled $2.4 billion and $2.0 billion, respectively, at December 31, 2012 and 2011. In 2012, as in the prior year, our portfolios of loans and securities were meaningful sources of liquidity, with cash flows
from the repayment and sale of loans totaling $18.5 billion and cash flows from the repayment and sale of securities totaling $3.7 billion.
Additional liquidity stems from the deposits we gather through our branches or acquire in business combinations, and from our use of wholesale funding sources, including brokered deposits and wholesale
borrowings. We also have access to the Banks approved lines of credit with various counterparties, including the FHLB-NY. The availability of these wholesale funding sources is generally based on the amount of mortgage loan collateral
available under a blanket lien we have pledged to the respective institutions and, to a lesser extent, the amount of available securities that may be pledged to collateralize our borrowings. At December 31, 2012, our available borrowing
capacity with the FHLB-NY was $5.8 billion. In addition, the Community Bank and the Commercial Bank had $426.6 million in available-for-sale securities, combined, at that date.
Furthermore, in the fourth quarter of 2012, the Community Bank entered into an agreement with the Federal Reserve Bank of New York (the
FRB-NY) that will enable it to access the discount window as a further means of enhancing its liquidity if need be. In connection with this agreement, the Community Bank has pledged certain loans to collateralize any funds it may borrow.
While the Community Bank had not yet borrowed any funds from the FRB-NY at the end of December, the maximum amount it could borrow at that date was $166.0 million.
Our primary investing activity is loan production, and in 2012, the volume of loans originated for sale and for investment totaled $19.9 billion. During this time, the net cash used in investing
activities totaled $1.7
75
billion. Our financing activities provided net cash of $1.6 billion and our operating activities provided net cash of $576.0 million.
CDs due to mature in one year or less from December 31, 2012 totaled $5.6 billion, representing 61.2% of total CDs at that date. Our
ability to retain these CDs and to attract new deposits depends on numerous factors, including customer satisfaction, the rates of interest we pay on our deposits, the types of products we offer, and the attractiveness of their terms. However, there
are times when we may choose not to compete for deposits, depending on the availability of lower-cost funding, the competitiveness of the market and its impact on pricing, and our need for such deposits to fund loan demand.
On a stand-alone basis, the Company (the Parent Company) is a separate legal entity from each of the Banks and must provide
for its own liquidity. In addition to operating expenses and any share repurchases, the Parent Company is responsible for paying any dividends declared to our shareholders. As a Delaware corporation, the Parent Company is able to pay dividends
either from surplus or, in case there is no surplus, from net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. In addition, the Parent Company is not required to obtain prior Federal Reserve
approval to pay a dividend unless the declaration and payment of a dividend could raise supervisory concerns about the safe and sound operation of the Company and the Banks, where the dividend declared for a period is not supported by earnings for
that period, or where the Company plans to declare an increase in its dividend.
The Parent Companys ability to pay
dividends may depend, in part, upon dividends it receives from the Banks. The ability of the Community Bank and the Commercial Bank to pay dividends and other capital distributions to the Parent Company is generally limited by New York State
banking law and regulations, and by certain regulations of the FDIC. In addition, the Superintendent of the New York State Department of Financial Services (the Superintendent), the FDIC, and the Federal Reserve, for reasons of safety
and soundness, may prohibit the payment of dividends that are otherwise permissible by regulations.
Under New York State
Banking Law, a New York State-chartered stock-form savings bank or commercial bank may declare and pay dividends out of its net profits, unless there is an impairment of capital. However, the approval of the Superintendent is required if the total
of all dividends declared in a calendar year would exceed the total of a banks net profits for that year, combined with its retained net profits for the preceding two years. In 2012, the Banks paid dividends totaling $485.0 million to the
Parent Company, leaving $301.8 million that they could dividend to the Parent Company without regulatory approval at year-end. Additional sources of liquidity available to the Parent Company at December 31, 2012 included $113.7 million in cash
and cash equivalents and $2.7 million of available-for-sale securities. If either of the Banks were to apply to the Superintendent for approval to make a dividend or capital distribution in excess of the dividend amounts permitted under the
regulations, there can be no assurance that such application would be approved.
Contractual Obligations and Off-Balance Sheet
Commitments
In the normal course of business, we enter into a variety of contractual obligations in order to manage
our assets and liabilities, fund loan growth, operate our branch network, and address our capital needs.
For example, we
offer CDs with contractual terms to our customers, and borrow funds under contract from the FHLB and various brokerage firms. These contractual obligations are reflected in the Consolidated Statements of Condition under deposits and
borrowed funds, respectively. At December 31, 2012, we had CDs of $9.1 billion and long-term debt (defined as borrowed funds with an original maturity in excess of one year) of $12.2 billion.
We also are obligated under certain non-cancelable operating leases on the buildings and land we use in operating our branch network and
in performing our back-office responsibilities. These obligations are not included in the Consolidated Statements of Condition and totaled $135.5 million at December 31, 2012.
76
Contractual Obligations
The following table sets forth the maturity profile of the aforementioned contractual obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Certificates of
Deposit
|
|
|
Long-Term
Debt
(1)
|
|
|
Operating
Leases
|
|
|
Total
|
|
One year or less
|
|
$
|
5,581,619
|
|
|
$
|
785,265
|
|
|
$
|
24,701
|
|
|
$
|
6,391,585
|
|
One to three years
|
|
|
2,865,483
|
|
|
|
804,565
|
|
|
|
40,153
|
|
|
|
3,710,201
|
|
Three to five years
|
|
|
619,671
|
|
|
|
3,918,517
|
|
|
|
30,060
|
|
|
|
4,568,248
|
|
More than five years
|
|
|
54,141
|
|
|
|
6,671,844
|
|
|
|
40,547
|
|
|
|
6,766,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,120,914
|
|
|
$
|
12,180,191
|
|
|
$
|
135,461
|
|
|
$
|
21,436,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes FHLB advances, repurchase agreements, junior subordinated debentures, and preferred stock of subsidiaries.
|
At December 31, 2012, we had contractual obligations to purchase $22.4 million of GSE securities. We also had commitments to extend
credit in the form of mortgage and other loan originations. These off-balance sheet commitments consist of agreements to extend credit, as long as there is no violation of any condition established in the contract under which the loan is made.
Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.
At
December 31, 2012, commitments to originate mortgage loans totaled $2.7 billion, including $1.6 billion of one-to-four family loans held for sale. Commitments to originate other loans totaled $278.6 million, including unadvanced lines of
credit. The majority of our loan commitments were expected to be funded within 90 days of year-end. We also had off-balance sheet commitments to issue commercial, performance, and financial stand-by letters of credit of $132.3 million, $13.1
million, and $43.5 million, respectively.
The following table sets forth our off-balance sheet commitments relating to
outstanding loan commitments and letters of credit at December 31, 2012:
|
|
|
|
|
(in thousands)
|
|
|
|
Mortgage Loan Commitments:
|
|
|
|
|
Multi-family and commercial real estate
|
|
$
|
946,630
|
|
Acquisition, development, and construction
|
|
|
103,534
|
|
One-to-four family held for sale
|
|
|
1,622,463
|
|
|
|
|
|
|
Total mortgage loan commitments
|
|
$
|
2,672,627
|
|
Other loan commitments
|
|
|
278,644
|
|
|
|
|
|
|
Total loan commitments
|
|
$
|
2,951,271
|
|
Commercial, performance, and financial stand-by letters of credit
|
|
|
188,933
|
|
|
|
|
|
|
Total commitments
|
|
$
|
3,140,204
|
|
|
|
|
|
|
Based upon the current strength of our liquidity position, we expect that our funding will be sufficient
to fulfill these obligations and commitments when they are due.
Derivative Financial Instruments
We use various financial instruments, including derivatives, in connection with our strategies to reduce market risk resulting from
changes in interest rates. Our derivative financial instruments consist of financial forward and futures contracts, IRLCs, swaps, and options. These derivatives relate to our mortgage banking operation, MSRs, and other risk management activities,
and seek to mitigate or reduce our exposure to losses from adverse changes in interest rates. These activities will vary in scope based on the level and volatility of interest rates, the types of assets held, and other changing market
conditions. At December 31, 2012, we held derivative financial instruments with a notional value of $5.8 billion. (Please see Note 14, Derivative Financial Instruments, in Item 8, Financial Statements and
Supplementary Data for a further discussion of our use of such financial instruments.)
Capital Position
Notwithstanding the distribution of cash dividends totaling $438.5 million, our stockholders equity rose $90.6 million
year-over-year, to $5.7 billion, and our tangible stockholders equity rose $110.2 million to $3.2 billion, at December 31, 2012. (Please see the discussion and reconciliations of stockholders equity and tangible stockholders
equity, total assets and tangible assets, and the related capital measures that appear on the last page of this discussion and analysis of financial condition and results of operations.)
77
At December 31, 2012, stockholders equity represented 12.81% of total assets and
a book value per share of $12.88. At the prior year-end, stockholders equity represented 13.24% of total assets and a book value per share of $12.73. Our calculations of book value per share are based on the number of shares outstanding at the
end of each December: 439,050,966 shares at December 31, 2012 and 437,344,796 shares at December 31, 2011. (Please see the definition of book value per share that appears in the Glossary earlier in this report.)
We calculate tangible stockholders equity by subtracting the amount of goodwill and CDI recorded at the end of a period from the
amount of stockholders equity recorded at the same date. At December 31, 2012, we recorded goodwill of $2.4 billion, consistent with the balance at the prior year-end. CDI totaled $32.0 million at the end of this December, reflecting a
$19.6 million reduction from the balance at December 31, 2011.
At December 31, 2012, tangible stockholders equity
represented 7.65% of tangible assets and a tangible book value per share of $7.26. By comparison, tangible stockholders equity represented 7.78% of tangible assets and a tangible book value per share of $7.04 at December 31, 2011.
Excluding AOCL from the calculations, the ratio of adjusted tangible stockholders equity to adjusted tangible assets was 7.79% at December 31, 2012 and 7.95% at the prior year-end. (Please see the discussion and reconciliations of our GAAP and
non-GAAP capital measures that appear on the last page of this discussion and analysis of financial condition and results of operations.)
AOCL fell $10.2 million year-over-year, to $61.7 million, as the net unrealized gain on available-for-sale securities rose $11.3 million year-over-year, to $12.6 million, far exceeding the impact of a
$1.2 million increase in the net unrealized loss on pension and post-retirement obligations, net of tax.
At December 31,
2012, our capital measures continued to exceed the minimum federal requirements for a bank holding company, as reflected in the following table. The table sets forth our total risk-based, Tier 1 risk-based, and leverage capital amounts and ratios on
a consolidated basis at December 31, 2012 and 2011, as well as the respective minimum regulatory capital requirements:
Regulatory
Capital Analysis
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2012
|
|
Actual
|
|
|
Minimum Required
|
(dollars in thousands)
|
|
Amount
|
|
|
Ratio
|
|
|
Ratio
|
Total risk-based capital
|
|
$
|
3,800,221
|
|
|
|
14.11
|
%
|
|
8.00%
|
Tier 1 risk-based capital
|
|
|
3,605,671
|
|
|
|
13.38
|
|
|
4.00
|
Leverage capital
|
|
|
3,605,671
|
|
|
|
8.84
|
|
|
4.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2011
|
|
Actual
|
|
|
Minimum Required
|
(dollars in thousands)
|
|
Amount
|
|
|
Ratio
|
|
|
Ratio
|
Total risk-based capital
|
|
$
|
3,750,915
|
|
|
|
14.23
|
%
|
|
8.00%
|
Tier 1 risk-based capital
|
|
|
3,580,302
|
|
|
|
13.59
|
|
|
4.00
|
Leverage capital
|
|
|
3,580,302
|
|
|
|
9.09
|
|
|
4.00
|
|
|
|
|
|
|
|
|
|
|
|
In addition, the capital ratios for the Community Bank and the Commercial Bank continued to exceed the
minimum levels required for classification as well capitalized institutions at December 31, 2012, as defined under the Federal Deposit Insurance Corporation Improvement Act of 1991, and as further discussed in Note 17,
Regulatory Matters, in Item 8, Financial Statements and Supplementary Data.
Basel III Proposal
In the summer of 2012, our primary federal regulators published two notices of proposed rulemaking (the 2012
Capital Proposals) that would substantially revise the risk-based capital requirements applicable to bank holding companies and depository institutions, including the Company and the Banks, compared to the current U.S. risk-based capital
rules, which are based on the international capital accords of the Basel Committee on Banking Supervision (the Basel Committee) which are generally referred to as Basel I.
One of the 2012 Capital Proposals (the Basel III Proposal) addresses the components of capital and other issues affecting the
numerator in banking institutions regulatory capital ratios, and would implement the Basel Committees December 2010 framework, known as Basel III, for strengthening international capital standards. The other proposal (the
Standardized Approach Proposal) addresses risk weights and other issues affecting the denominator in banking institutions regulatory capital ratios, and would replace the existing Basel I-derived risk
78
weighting approach with a more risk-sensitive approach based, in part, on the standardized approach in the Basel Committees 2004 Basel II capital accords. Although the Basel III
Proposal was proposed to come into effect on January 1, 2013, the federal banking agencies jointly announced on November 9, 2012 that they did not expect any of the proposed rules to become effective on that date. As proposed, the
Standardized Approach Proposal would come into effect on January 1, 2015.
The federal banking agencies have not proposed
rules implementing the final liquidity framework of Basel III, and have not determined to what extent they will apply to U.S. banks that are not large, internationally active banks.
We believe that, as of December 31, 2012, the Company, the Community Bank, and the Commercial Bank would meet all capital adequacy
requirements under the Basel III and Standardized Approach Proposals on a fully phased-in basis if such requirements were currently effective. The regulations ultimately applicable to financial institutions may be substantially different from the
Basel III final framework as published in December 2010 and the proposed rules issued in June 2012. Management will continue to monitor these and any future proposals submitted by our regulators.
RESULTS OF OPERATIONS: 2012 and 2011
Earnings Summary
In 2012, our earnings rose $21.1 million year-over-year, to $501.1 million, equivalent to a $0.04 increase in diluted earnings per share
to $1.13. The increase was primarily due to a $98.0 million, or 121.4%, rise in mortgage banking income to $178.6 million, which more than offset the impact of a $40.4 million, or 3.4%, decline in net interest income to $1.2 billion and a $12.7
million, or 2.1%, increase in non-interest expense to $613.5 million.
The increase in mortgage banking income was
attributable to the decline in mortgage interest rates from the levels in 2011, which triggered a significant increase in the production of one-to-four family loans for sale through most of 2012. At the same time, the decline in market interest
rates was largely responsible for the decline in net interest income, as our balance sheet was replenished with assets that featured lower yields. Reflecting the increase in refinancing activity in our multi-family market, prepayment penalty income
contributed a record $120.4 million to our 2012 net interest income, tempering the impact of the decline in asset yields.
Partly reflecting the aforementioned improvement in the quality of our assets, we also reduced our provision for losses on non-covered
loans from $79.0 million in 2011 to $45.0 million in 2012. In addition, the provision for losses on covered loans fell $3.4 million year-over-year, to $18.0 million. In connection with the latter decline, we recorded FDIC indemnification income of
$14.4 million in non-interest income, down $3.2 million from the year-earlier amount.
Primarily reflecting the increase in
mortgage banking income, non-interest income rose from $235.3 million in 2011 to $297.4 million in 2012. In addition to the decline in FDIC indemnification income, the benefit of the increase in mortgage banking income was tempered by a $4.1 million
decline in the combined total of fee income, BOLI income, and other income to $104.6 million; a $34.6 million decline in net securities gains to $2.0 million; and a $2.3 million loss on the redemption of trust preferred securities in the fourth
quarter of the year.
Reflecting these factors, and others discussed in the following pages, pre-tax income rose $46.3 million
year-over-year to $780.9 million, and the effective tax rate rose from 34.7% in 2011 to 35.8% in 2012.
Net Interest Income
Net interest income is our primary source of income. Its level is a function of the average balance of our
interest-earning assets, the average balance of our interest-bearing liabilities, and the spread between the yield on such assets and the cost of such liabilities. These factors are influenced by both the pricing and mix of our interest-earning
assets and our interest-bearing liabilities which, in turn, are impacted by various external factors, including the local economy, competition for loans and deposits, the monetary policy of the Federal Open Market Committee of the Federal Reserve
Board of Governors (the FOMC), and market interest rates.
The cost of our deposits and borrowed funds is largely
based on short-term rates of interest, the level of which is partially impacted by the actions of the FOMC. The FOMC reduces, maintains, or increases the target fed funds rate (the rate at which banks borrow funds overnight from one another) as it
deems necessary. The target fed funds rate has been maintained at a range of zero to 0.25% since the fourth quarter of 2008.
79
While the target fed funds rate generally impacts the cost of our short-term borrowings and
deposits, the yields on our held-for-investment loans and other interest-earning assets are typically impacted by intermediate-term market interest rates.
Net interest income is also influenced by the level of prepayment penalty income generated, primarily in connection with the prepayment of our multi-family and CRE loans. Since prepayment penalty income
is recorded as interest income, an increase or decrease in its level will also be reflected in the average yields on our loans and other interest-earning assets, and therefore, in our interest rate spread and net interest margin.
In 2012, we generated net interest income of $1.2 billion, which was $40.4 million, or 3.4%, less than the year-earlier amount. While
interest expense declined $35.2 million year-over-year, to $631.1 million, the benefit was exceeded by the impact of a $75.6 million decrease in interest income to $1.8 billion. Similarly, our net interest margin declined to 3.21% in 2012 from 3.46%
in 2011, as a 16-basis point decline in the average cost of interest-bearing liabilities was exceeded by a 42-basis point decline in the average yield on our interest-earning assets, as further discussed below.
The following factors contributed to the changes in net interest income and margin in the twelve months ended December 31, 2012:
|
|
|
The five- and ten-year Constant Maturity Treasury (CMT) rates averaged 1.52% and 2.78% in the twelve months ended December 31, 2011,
and declined to 0.76% and 1.80%, respectively, in 2012. The result was an increase in refinancing activity and property transactions in the markets for our multi-family and CRE loans. Although prepayment penalty income rose dramatically as
refinancing activity increased, our balance sheet was replenished with loans that featured lower yields. The average yield on loans declined to 5.17% in 2012 from 5.64% in 2011, and the average yield on interest-earning assets fell to 4.96% from
5.38%.
|
|
|
|
The reduction in interest-earning asset yields was substantially tempered by a $33.8 million, or 35.0%, increase in prepayment penalty income to $120.4
million in 2012.
|
|
|
|
In addition, prepayment penalty income added 33 basis points to our net interest margin, as compared to 25 basis points in the prior year.
|
|
|
|
The year-over-year declines in our net interest income and margin were also tempered by a $1.4 billion increase in the average balance of
interest-earning assets to $36.1 billion, including a $1.8 billion increase in the average balance of loans to $30.9 billion.
|
|
|
|
In addition, the year-over-year decline in our net interest income and margin were tempered by a 16-basis point decline in the average cost of our
interest-bearing liabilities to 1.85%, even as the average balance of such funds rose $954.4 million to $34.1 billion. The degree to which we reduced our average cost of funds was partially due to the payment received from Aurora Bank for assuming
their deposits, as well as the downward repricing of our own depository accounts.
|
It should be noted that
the level of prepayment penalty income recorded in any given period depends on the volume of loans that refinance or prepay during that time. Such activity is largely dependent on such external factors as current market conditions, including real
estate values, and the perceived or actual direction of market interest rates. In addition, while a decline in market interest rates may trigger an increase in refinancing and, therefore, prepayment penalty income, so too may an increase in market
interest rates. It is not unusual for borrowers to lock in lower interest rates when they expect, or see, that market interest rates are rising rather than risk refinancing later at a still higher interest rate.
Furthermore, the level of prepayment penalty income recorded when a loan prepays is a function of the remaining principal balance as well
as the number of years remaining on the loan. The number of years dictates the number of prepayment penalty points that are charged on the remaining principal balance, based on a sliding scale of five percentage points to one, as discussed under
Multi-Family Loans and Commercial Real Estate Loans earlier in this report. Among the loans prepaying in 2012 were two loans to a single borrower totaling $545.5 million; the prepayment of these loans accounted for $17.9
million of the prepayment penalty income recorded in 2012.
80
Net Interest Income Analysis
The following table sets forth certain information regarding our average balance sheet for the years indicated, including the average yields on our interest-earning assets and the average costs of our
interest-bearing liabilities. Average yields are calculated by dividing the interest income produced by the average balance of interest-earning assets. Average costs are calculated by dividing the interest expense produced by the average balance of
interest-bearing liabilities. The average balances for the year are derived from average balances that are calculated daily. The average yields and costs include fees, as well as premiums and discounts (including mark-to-market adjustments from
acquisitions), that are considered adjustments to such average yields and costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
(dollars in thousands)
|
|
Average
Balance
|
|
|
Interest
|
|
|
Average
Yield/
Cost
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Average
Yield/
Cost
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Average
Yield/
Cost
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage and other loans, net
(1)
|
|
$
|
30,906,145
|
|
|
$
|
1,597,504
|
|
|
|
5.17
|
%
|
|
$
|
29,079,468
|
|
|
$
|
1,638,651
|
|
|
|
5.64
|
%
|
|
$
|
28,735,155
|
|
|
$
|
1,669,871
|
|
|
|
5.81
|
%
|
Securities and money market investments
(2)(3)
|
|
|
5,210,297
|
|
|
|
193,597
|
|
|
|
3.72
|
|
|
|
5,608,502
|
|
|
|
228,013
|
|
|
|
4.07
|
|
|
|
5,437,610
|
|
|
|
243,923
|
|
|
|
4.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
36,116,442
|
|
|
|
1,791,101
|
|
|
|
4.96
|
|
|
|
34,687,970
|
|
|
|
1,866,664
|
|
|
|
5.38
|
|
|
|
34,172,765
|
|
|
|
1,913,794
|
|
|
|
5.60
|
|
Non-interest-earning assets
|
|
|
6,377,013
|
|
|
|
|
|
|
|
|
|
|
|
6,443,040
|
|
|
|
|
|
|
|
|
|
|
|
7,670,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
42,493,455
|
|
|
|
|
|
|
|
|
|
|
$
|
41,131,010
|
|
|
|
|
|
|
|
|
|
|
$
|
41,843,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW and money market accounts
|
|
$
|
8,833,412
|
|
|
$
|
36,609
|
|
|
|
0.41
|
%
|
|
$
|
8,641,022
|
|
|
$
|
39,285
|
|
|
|
0.45
|
%
|
|
$
|
8,210,197
|
|
|
$
|
56,991
|
|
|
|
0.69
|
%
|
Savings accounts
|
|
|
4,089,019
|
|
|
|
13,677
|
|
|
|
0.33
|
|
|
|
3,946,965
|
|
|
|
15,488
|
|
|
|
0.39
|
|
|
|
3,883,327
|
|
|
|
20,833
|
|
|
|
0.54
|
|
Certificates of deposit
|
|
|
8,405,143
|
|
|
|
93,880
|
|
|
|
1.12
|
|
|
|
7,420,397
|
|
|
|
102,400
|
|
|
|
1.38
|
|
|
|
8,575,238
|
|
|
|
138,716
|
|
|
|
1.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
|
21,327,574
|
|
|
|
144,166
|
|
|
|
0.68
|
|
|
|
20,008,384
|
|
|
|
157,173
|
|
|
|
0.79
|
|
|
|
20,668,762
|
|
|
|
216,540
|
|
|
|
1.05
|
|
Borrowed funds
|
|
|
12,771,311
|
|
|
|
486,914
|
|
|
|
3.81
|
|
|
|
13,136,067
|
|
|
|
509,070
|
|
|
|
3.88
|
|
|
|
13,535,790
|
|
|
|
517,291
|
|
|
|
3.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
34,098,885
|
|
|
|
631,080
|
|
|
|
1.85
|
|
|
|
33,144,451
|
|
|
|
666,243
|
|
|
|
2.01
|
|
|
|
34,204,552
|
|
|
|
733,831
|
|
|
|
2.15
|
|
Non-interest-bearing deposits
|
|
|
2,575,841
|
|
|
|
|
|
|
|
|
|
|
|
2,222,280
|
|
|
|
|
|
|
|
|
|
|
|
1,914,842
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
287,674
|
|
|
|
|
|
|
|
|
|
|
|
262,640
|
|
|
|
|
|
|
|
|
|
|
|
331,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
36,962,400
|
|
|
|
|
|
|
|
|
|
|
|
35,629,371
|
|
|
|
|
|
|
|
|
|
|
|
36,451,308
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
5,531,055
|
|
|
|
|
|
|
|
|
|
|
|
5,501,639
|
|
|
|
|
|
|
|
|
|
|
|
5,392,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
42,493,455
|
|
|
|
|
|
|
|
|
|
|
$
|
41,131,010
|
|
|
|
|
|
|
|
|
|
|
$
|
41,843,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/interest rate spread
|
|
|
|
|
|
$
|
1,160,021
|
|
|
|
3.11
|
%
|
|
|
|
|
|
$
|
1,200,421
|
|
|
|
3.37
|
%
|
|
|
|
|
|
$
|
1,179,963
|
|
|
|
3.45
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
3.21
|
%
|
|
|
|
|
|
|
|
|
|
|
3.46
|
%
|
|
|
|
|
|
|
|
|
|
|
3.45
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of interest-earning assets to interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
1.06x
|
|
|
|
|
|
|
|
|
|
|
|
1.05x
|
|
|
|
|
|
|
|
|
|
|
|
1.00x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Amounts are net of net deferred loan origination costs/(fees) and the allowances for loan losses, and include loans held for sale and non-performing loans.
|
(2)
|
Amounts are at amortized cost.
|
81
Rate/Volume Analysis
The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected our interest income and
interest expense during the periods indicated. Information is provided in each category with respect to (i) the changes attributable to changes in volume (changes in volume multiplied by prior rate); (ii) the changes attributable to
changes in rate (changes in rate multiplied by prior volume); and (iii) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to
rate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, 2012
Compared to Year Ended
December 31, 2011
|
|
|
Year Ended
December 31, 2011
Compared to Year Ended
December 31, 2010
|
|
|
|
Increase/(Decrease)
|
|
|
Increase/(Decrease)
|
|
|
|
Due to
|
|
|
|
|
|
Due to
|
|
|
|
|
(in thousands)
|
|
Volume
|
|
|
Rate
|
|
|
Net
|
|
|
Volume
|
|
|
Rate
|
|
|
Net
|
|
INTEREST-EARNING ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage and other loans, net
|
|
$
|
129,798
|
|
|
$
|
(170,945
|
)
|
|
$
|
(41,147
|
)
|
|
$
|
20,405
|
|
|
$
|
(51,625
|
)
|
|
$
|
(31,220
|
)
|
Securities and money market investments
|
|
|
(15,559
|
)
|
|
|
(18,857
|
)
|
|
|
(34,416
|
)
|
|
|
8,028
|
|
|
|
(23,938
|
)
|
|
|
(15,910
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
114,239
|
|
|
|
(189,802
|
)
|
|
|
(75,563
|
)
|
|
|
28,433
|
|
|
|
(75,563
|
)
|
|
|
(47,130
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST-BEARING LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW and money market accounts
|
|
$
|
901
|
|
|
$
|
(3,577
|
)
|
|
$
|
(2,676
|
)
|
|
$
|
3,176
|
|
|
$
|
(20,882
|
)
|
|
$
|
(17,706
|
)
|
Savings accounts
|
|
|
584
|
|
|
|
(2,395
|
)
|
|
|
(1,811
|
)
|
|
|
347
|
|
|
|
(5,692
|
)
|
|
|
(5,345
|
)
|
Certificates of deposit
|
|
|
19,526
|
|
|
|
(28,046
|
)
|
|
|
(8,520
|
)
|
|
|
(17,369
|
)
|
|
|
(18,947
|
)
|
|
|
(36,316
|
)
|
Borrowed funds
|
|
|
(13,991
|
)
|
|
|
(8,165
|
)
|
|
|
(22,156
|
)
|
|
|
(15,686
|
)
|
|
|
7,465
|
|
|
|
(8,221
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
7,020
|
|
|
|
(42,183
|
)
|
|
|
(35,163
|
)
|
|
|
(29,532
|
)
|
|
|
(38,056
|
)
|
|
|
(67,588
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net interest income
|
|
$
|
107,219
|
|
|
$
|
(147,619
|
)
|
|
$
|
(40,400
|
)
|
|
$
|
57,965
|
|
|
$
|
(37,507
|
)
|
|
$
|
20,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provisions for Loan Losses
Provision for Losses on Non-Covered Loans
The provision for losses
on non-covered loans is based on managements periodic assessment of the adequacy of the allowance for losses on such loans which, in turn, is based on its evaluation of inherent losses in the held-for-investment loan portfolio in accordance
with GAAP. This evaluation considers several factors, including the current and historical performance of the portfolio; its inherent risk characteristics; the level of non-performing non-covered loans and charge-offs; delinquency levels and trends;
local economic and market conditions; declines in real estate values; and the levels of unemployment and vacancy rates.
As a
result of managements assessment of these factors, including the year-over-year decline in non-performing non-covered loans and assets, we reduced our provision for losses on non-covered loans from $79.0 million in 2011 to $45.0 million in
2012. Nonetheless, the allowance for losses on non-covered loans rose $3.7 million year-over-year, to $140.9 million, as the $34.0 million reduction in the provision for non-covered loan losses occurred in tandem with a $59.3 million decrease in net
charge-offs to $41.3 million.
Provision for Losses on Covered Loans
A provision for losses on covered loans is recorded when the cash flows from certain loan portfolios acquired in our FDIC-assisted
acquisitions are expected to be less than the cash flows we expected at the time of acquisition, as a result of a deterioration in credit quality.
If we had reason to believe that the cash flows from acquired loans would exceed our original
expectations, we would reverse the previously established covered loan loss allowance and increase our interest income as a prospective yield adjustment over the remaining life of the loan or pool of loans.
Primarily reflecting a recovery of $3.3 million in the fourth quarter, the provision for losses on covered loans fell $3.4 million
year-over-year to $18.0 million in the twelve months ended December 31, 2012.
For additional information about our
provisions for loan losses, please see the discussion of the respective loan loss allowances under Critical Accounting Policies and the discussion of Asset Quality that appear earlier in this report.
82
Non-Interest Income
Non-interest income rose $62.0 million, or 26.4%, from the level recorded in 2011 to $297.4 million in 2012. The non-interest income we produce stems from several sources, some of which are recurring and
some of which are not.
Our primary source of non-interest income is mortgage banking income, which includes income from the
origination of one-to-four family loans for sale, and income from the servicing of these and other one-to-four family loans. In 2012, mortgage banking income accounted for $178.6 million of total non-interest income, and exceeded the year-earlier
level by $98.0 million or 121.4%. The increase was largely due to the rise in income from originations, as the low level of mortgage interest rates encouraged a high level of refinancing activity and home purchases through most of the year. While
income from originations rose $113.1 million year-over-year to $193.2 million, we also recorded a servicing loss of $14.6 million in 2012. By comparison, income from originations totaled $80.2 million in 2011, and was complemented by servicing
income of $517,000. The servicing loss in 2012 reflects a decrease in the fair value of MSRs due to the accelerated refinancing of residential mortgage loans noted in the Loans Held for Sale discussion, and was partially offset by a
gain on derivatives and servicing fee income.
Our other recurring sources of non-interest income are fee income (in the form
of retail deposit fees and charges on loans); income from our investment in BOLI; and other income, which is derived from various sources, including the sale of third-party investment products in our branches, and the revenues from our wholly-owned
subsidiary, Peter B. Cannell & Co., Inc., an investment advisory firm. In 2012, the non-interest income produced by fee income, BOLI income, and other income together totaled $104.6 million, reflecting a $4.1 million decline from the
year-earlier amount.
We also generated non-interest income in the form of net securities gains and FDIC indemnification
income, which fell from $36.6 million and $17.6 million, respectively in 2011 to $2.0 million and $14.4 million, respectively, in 2012. In addition, our non-interest income was reduced in 2012 by a $2.3 million loss on the redemption of certain
trust preferred securities in the fourth quarter, and in 2011 by an $18.1 million OTTI loss on certain securities. The OTTI loss was somewhat offset by a $9.8 million gain on the disposition of our insurance premium financing business.
The following table summarizes our sources of non-interest income in 2012, 2011, and 2010:
Non-Interest Income Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Mortgage banking income
|
|
$
|
178,643
|
|
|
$
|
80,674
|
|
|
$
|
183,883
|
|
Fee income
|
|
|
38,348
|
|
|
|
44,874
|
|
|
|
54,584
|
|
BOLI
|
|
|
30,502
|
|
|
|
28,384
|
|
|
|
28,015
|
|
Net gain on sales of securities
|
|
|
2,041
|
|
|
|
36,608
|
|
|
|
22,430
|
|
FDIC indemnification income
|
|
|
14,390
|
|
|
|
17,633
|
|
|
|
11,308
|
|
Gain on business disposition
|
|
|
|
|
|
|
9,823
|
|
|
|
|
|
Loss on OTTI loss of securities
|
|
|
|
|
|
|
(18,124
|
)
|
|
|
(1,971
|
)
|
Gain on business acquisitions
|
|
|
|
|
|
|
|
|
|
|
2,883
|
|
(Loss)/gain on debt redemptions
|
|
|
(2,313
|
)
|
|
|
|
|
|
|
3,008
|
|
Other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Peter B. Cannell & Co., Inc.
|
|
|
14,837
|
|
|
|
14,022
|
|
|
|
12,711
|
|
Third-party investment product sales
|
|
|
15,422
|
|
|
|
13,387
|
|
|
|
10,486
|
|
Other
|
|
|
5,483
|
|
|
|
8,044
|
|
|
|
10,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
35,742
|
|
|
|
35,453
|
|
|
|
33,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income
|
|
$
|
297,353
|
|
|
$
|
235,325
|
|
|
$
|
337,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
While we expect mortgage banking income to remain our single largest source of non-interest income, it
should be noted that the amount we record in any given year or quarter is likely to vary and therefore is difficult to predict. The mortgage banking income we record depends in large part on the volume of loans originated which, in turn, depends on
a variety of factors, including changes in market interest rates and economic conditions, competition, refinancing activity, and loan demand.
83
Non-Interest Expense
Non-interest expense has two primary components: operating expenses, which include compensation and benefits, occupancy and equipment, and general and administrative (G&A) expenses; and
the amortization of the CDI stemming from certain of our business combinations prior to 2009. In 2012, non-interest expense rose $12.7 million year-over-year, to $613.5 million, the net effect of a $19.2 million increase in operating expenses to
$593.8 million and a $6.4 million reduction in CDI amortization to $19.6 million.
Compensation and benefits expense accounted
for $296.9 million of 2012 operating expenses, 1.2% higher than the $293.3 million recorded in the prior year. Occupancy and equipment expense rose $3.8 million year-over-year, to $90.7 million, while G&A expenses rose $11.8 million to $206.2
million.
The increase in G&A expense was due to a combination of factors, including higher deposit insurance assessments,
a rise in OREO write-downs, and an increase in expenses related to our mortgage banking business as one-to-four family loan production rose year-over-year.
Income Tax Expense
Income tax expense includes federal, New York
State, and New York City income taxes, as well as non-material income taxes from other jurisdictions where we have branch operations and/or conduct our mortgage banking business.
In 2012, income tax expense rose $25.3 million year-over-year to $279.8 million as pre-tax income rose $46.3 million to $780.9 million,
and the effective tax rate rose to 35.8% from 34.7%. The increase in the effective tax rate reflects the increase in pre-tax income as well as the expiration of certain tax credits.
RESULTS OF OPERATIONS: 2011 and 2010
Earnings Summary
In the twelve months ended December 31, 2011, we generated earnings of $480.0 million, or $1.09 per diluted share, as compared to
$541.0 million, or $1.24 per diluted share, in the twelve months ended December 31, 2010.
Although our 2011 performance
benefited from a modest increase in net interest income and a decline in our non-covered loan loss provision, these benefits were exceeded by the impact of a substantial decline in non-interest income and a more modest increase in non-interest
expense.
Net interest income rose $20.5 million year-over-year to $1.2 billion, as a $47.1 million decline in interest income
was exceeded by a $67.6 million reduction in interest expense. Among the factors contributing to the rise in net interest income were an increase in the average balance of interest-earning assets and a significant rise in prepayment penalty income,
as a decline in market interest rates triggered an increase in property transactions and refinancing activity in our multi-family space. The rise in net interest income was also fueled by a decline in the average balance and cost of our
interest-bearing deposits, together with a decline in the average balance of borrowed funds. In view of our liquidity, which was fueled by an increase in cash flows from loans and securities, we were able to reduce certain higher-cost funding
sources and to refrain from competing for deposits by paying higher interest rates.
The year-over-year decline in the
non-covered loan loss provision was attributable to the significant improvement in the quality of our assets. Specifically, in 2011, the provision for losses on non-covered loans totaled $79.0 million, reflecting a $12.0 million reduction from the
year-earlier amount.
In contrast to the modest increase in net interest income, non-interest income declined to $235.3
million in 2011 from $337.9 million in 2010. The reduction was primarily due to a $103.2 million decrease in mortgage banking income to $80.7 million, as the volume of one-to-four family loans produced for sale declined from the prior years
level, the result of continued weakness in the U.S. housing market and an increase in residential mortgage interest rates in the first six months of the year. Servicing income also declined in 2011, reflecting the expiration of our mortgage
servicing arrangement with the FDIC in the fourth quarter of 2010.
While non-interest income was also reduced by a $9.7
million decline in fee income and an OTTI loss of $18.1 million, these declines were somewhat offset by a $14.2 million increase in net securities gains to $36.6 million and a $9.8 million gain on the disposition of our insurance premium financing
subsidiary during the year. On an after-tax basis, the respective gains were equivalent to $21.8 million and $5.9 million, or $0.05 and $0.01 per
84
diluted share, respectively. By comparison, the OTTI loss was equivalent to $10.8 million, or $0.02 per diluted share, after-tax. In 2010, net securities gains added $22.4 million to non-interest
income, while a gain on the Desert Hills acquisition added $2.9 million. On an after-tax basis, the respective gains were $13.5 million and $1.8 million, equivalent to $0.03 and $0.01 per diluted share, respectively.
Non-interest expense rose $23.2 million year-over-year, to $600.7 million, as a $28.4 million increase in operating expenses to $574.7
million exceeded a $5.2 million reduction in the amortization of CDI to $26.1 million. Compensation and benefits expense accounted for $18.5 million of the year-over-year increase in operating expenses, while G&A expense accounted for $11.1
million of this increase. In addition to reflecting normal salary increases and incentive stock award grants, the rise in 2011 compensation and benefits expense reflected severance charges of $2.3 million (or $1.4 million after-tax) in connection
with a reduction in staff in the fourth quarter of the year.
The year-over-year increase in G&A expense for the twelve
months ended December 31, 2011 was primarily due to legal and other expenses stemming from the acquisition and management of foreclosed real estate. Although such expenses were also incurred in 2010, the level of G&A expense during that
year was increased by acquisition-related costs of $11.5 million stemming from the FDIC-assisted acquisitions of AmTrust and Desert Hills. On an after-tax basis, these costs were equivalent to $7.0 million, or $0.02 per diluted share.
Reflecting the resultant decline in pre-tax income, income tax expense fell to $254.5 million in 2011 from $296.5 million in 2010.
Net Interest Income
In 2011, we recorded net interest income of $1.2 billion, reflecting a year-over-year increase of $20.5 million. Although interest income declined $47.1 million year-over-year to $1.9 billion, the decline
was exceeded by a $67.6 million reduction in interest expense to $666.2 million.
A description of the factors contributing to
the modest growth of our net interest income follows:
Interest Income
Notwithstanding a $515.2 million rise in the average balance of interest-earning assets to $34.7 billion, interest income declined $47.1
million in 2011 to $1.9 billion, as the average yield on interest-earning assets fell 22 basis points to 5.38%.
The yields
generated by our loans and other interest-earning assets are typically driven by intermediate-term interest rates, which are set by the market and generally vary from day to day. Reflecting a decline in market interest rates from the year-earlier
level, the average yield on loans fell 17 basis points to 5.64% in 2011 and the average yield on securities and money market investments fell 42 basis points to 4.07%. The impact of the respective declines was tempered by a $344.3 million increase
in the average balance of loans to $29.1 billion, and a $170.9 million increase in the average balance of securities and money market investments to $5.6 billion.
The increase in the average balance of loans was driven by multi-family and CRE loan production, as the decline in market interest rates triggered an increase in property transactions, together with a
significant increase in refinancing activity. As a result, prepayment penalty income rose $63.9 million, or 282.4%, in 2011 from the year-earlier level, adding $86.6 million to the interest income generated by loans and 30 basis points to their
average yield. In contrast, prepayment penalty income added $22.6 million to the interest income generated by loans in 2010, and eight basis points to the average yield on loans.
Although the purchase of GSE securities contributed to the increase in the average balance of securities and money market investments,
the benefit was largely tempered by calls and repayments as the level of market interest rates declined over the course of the year.
Interest Expense
The year-over-year decline in interest expense was the result of a $1.1 billion decrease in the average balance of interest-bearing
liabilities to $33.1 billion and a 14-basis point decrease in the average cost of such funds to 2.01%.
The average balance of
interest-bearing deposits fell $660.4 million year-over-year to $20.0 billion, as a $1.2 billion reduction in the average balance of CDs, to $7.4 billion, exceeded more modest increases in the average
85
balances of NOW and money market accounts and savings accounts. In addition, the average balance of borrowed funds fell $399.7 million year-over-year to $13.1 billion. Both declines were
consistent with our efforts to reduce our higher-cost funding sources while, at the same time, increasing the balances of lower-cost deposits and non-interest-bearing accounts.
The cost of our deposits and borrowed funds is largely based on short-term rates of interest, the level of which is partially impacted by
the actions of the FOMC. The FOMC reduces, maintains, or increases the target federal funds rate (the rate at which banks borrow from one another) as it deems necessary to promote the health of the U.S. economy. Although economic conditions
reflected modest improvement in certain markets, the pace of economic recovery continued to be slow. Real estate values remained well below pre-2007 levels, and unemployment rates ranged from a high of 9.1% in January and the entire third quarter to
a low of 8.5% in December 2011. As a result, the FOMC maintained the target federal funds rate at the same historically low level it initially established in the fourth quarter of 2008, zero to 0.25%.
Although the degree to which we reduced our funding costs was greater in 2010 than in 2011, the average cost of our CDs fell 24 basis
points year-over-year to 1.38%, while the average costs of our NOW and money market accounts and savings accounts fell 24 and 15 basis points, respectively, to 0.45% and 0.39%. The benefit of these declines was partly tempered by a six-basis point
rise in the average cost of borrowed funds to 3.88%.
In addition to the low level of short-term interest rates, the decline
in the average cost of our interest-bearing deposits reflects our ability to refrain from paying higher rates for deposits. In 2011, that ability was reinforced by the liquidity provided by our other funding sources, including the cash flows from
the repayment and sale of loans and the repayment and sale of securities.
Interest Rate Spread and Net Interest Margin
The same factors that contributed to the modest increase in net interest income in 2011 contributed to a modest
increase in our net interest margin. At 3.46%, our margin was one basis point higher than the year-earlier measure, even as our interest rate spread fell eight basis points to 3.37%.
While our margin and spread typically move in the same direction, the increase in our margin, albeit modest, reflects the benefits of
having grown our average interest-earning assets while, at the same time, having reduced our average interest-bearing liabilities.
Prepayment penalty income contributed 25 basis points each to our margin and spread in 2011; in 2010, prepayment penalty income added six basis points to our margin and seven basis points to our spread.
Provisions for Loan Losses
Provision for Losses on Non-Covered Loans
Reflecting
managements assessment of the adequacy of the allowance for losses on non-covered loans, we reduced our losses on non-covered loans to $79.0 million in 2011 from $91.0 million in 2010. The allowance for losses on non-covered loans declined to
$137.3 million as a result of this reduction and the $41.1 million increase in net charge-offs during the year.
Provision for Losses on
Covered Loans
The provision for losses on covered loans grew to $21.4 million in 2011 from $11.9 million in the prior
year. Reflecting the $9.5 million increase in this provision, the allowance for losses on covered loans rose to $33.3 million at December 31, 2011 from $11.9 million at December 31, 2010.
Non-Interest Income
In 2011, as in 2010, the income generated by our mortgage banking operation was our largest source of non-interest income, totaling $80.7 million in the current twelve-month period and $183.9 million in
the year-earlier twelve months. Income from originations accounted for $80.2 million and $136.5 million of the respective totals, while servicing income accounted for $517,000 and $47.4 million, respectively.
The decline in income from originations was attributable to ongoing weakness in the U.S. housing market as the nation continued to be
faced with high levels of unemployment and the inventory of one-to-four family homes continued to exceed demand. In addition, residential mortgage interest rates were higher in the first half of 2011 than they were in the prior period, discouraging
both the purchase and the refinancing of one-to-four family homes. The
86
decline in servicing income was largely due to the expiration of a loan servicing arrangement with the FDIC in the fourth quarter of 2010.
Fee income declined $9.7 million year-over-year, to $44.9 million, primarily reflecting a reduction in lending fee income in connection
with accounts serviced for the FDIC. The reductions in mortgage banking income and fee income were nominally tempered by modest increases in BOLI income and other income over the course of the year.
In 2011, the non-interest income generated by our ongoing sources was complemented by net securities gains of $36.6 million, exceeding
the year-earlier level by $14.2 million. In addition, FDIC indemnification income contributed $17.6 million to non-interest income in 2011, exceeding the year-earlier level by $6.3 million. While non-interest income was also increased by a $9.8
million gain on the disposition of our insurance premium financing business in the second quarter, the benefit was exceeded by an OTTI loss of $18.1 million, as compared to an OTTI loss of $2.0 million in 2010.
Reflecting these factors, non-interest income totaled $235.3 million in the twelve months ended December 31, 2011, as compared to
$337.9 million in the twelve months ended December 31, 2010.
Non-Interest Expense
In 2011, non-interest expense totaled $600.7 million, reflecting a year-over-year increase of $23.2 million, or 4.0%. While operating
expenses rose $28.4 million to $574.7 million, representing 1.40% of average assets, the impact was somewhat tempered by a $5.2 million decline in the amortization of CDI to $26.1 million.
Although occupancy and equipment expense declined $1.2 million year-over-year, to $86.9 million, the decline was far exceeded by an $18.5
million increase in compensation and benefits expense to $293.3 million and an $11.1 million increase in G&A expense to $194.4 million. Included in 2010s G&A expense were acquisition-related costs of $11.5 million stemming from the
AmTrust and Desert Hills transactions in December 2009 and March 2010, respectively.
In addition to normal salary increases,
the year-over-year increase in compensation and benefits expense reflects stock awards that were granted to employees in accordance with our shareholder-approved stock incentive plan. Also included in 2011 compensation and benefits expense were
severance charges of $2.3 million in connection with a reduction in staff that was primarily necessitated by changes in the way our customers do their banking as a result of advances in technology.
While several factors contributed to the rise in G&A expenseincluding a $5.6 million increase in FDIC deposit insurance
premiums to $54.3 millionprimary among them was an increase in legal and other expenses incurred in the acquisition and management of foreclosed property.
Reflecting the levels of net interest income, non-interest income, and operating expenses recorded in 2011, our efficiency ratio was 40.03%.
Income Tax Expense
Income tax expense declined $41.9 million
year-over-year to $254.5 million in the twelve months ended December 31, 2011. In addition to reflecting a $102.9 million reduction in pre-tax income to $734.6 million, the level of income tax expense recorded in 2011 reflects a decline in the
effective tax rate to 34.7% from 35.4%.
87
QUARTERLY FINANCIAL DATA
The following table sets forth selected unaudited quarterly financial data for the years ended December 31, 2012 and 2011:
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2012
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2011
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(in thousands, except per share data)
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4th
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3rd
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2nd
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1st
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4th
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3rd
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2nd
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1st
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Net interest income
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$
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290,001
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$
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284,950
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$
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296,656
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$
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288,414
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$
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300,258
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$
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294,967
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$
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301,944
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$
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303,252
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Provisions for loan losses
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1,720
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12,820
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33,448
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15,000
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|
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32,712
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18,000
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23,708
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26,000
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Non-interest income
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55,495
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81,657
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98,205
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61,996
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59,758
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58,069
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58,888
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58,610
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Non-interest expense
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154,550
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153,321
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155,429
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150,177
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146,387
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152,616
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155,044
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146,702
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Income before income taxes
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189,226
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200,466
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205,984
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185,233
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180,917
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182,420
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182,080
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189,160
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Income tax expense
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66,383
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71,668
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74,772
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66,980
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63,265
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62,670
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62,621
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65,984
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Net income
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$
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122,843
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$
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128,798
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$
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131,212
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$
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118,253
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$
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117,652
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$
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119,750
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$
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119,459
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$
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123,176
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Basic earnings per share
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$0.28
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$0.29
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$0.30
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$0.27
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$0.27
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$0.27
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$0.27
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$0.28
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Diluted earnings per share
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$0.28
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$0.29
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$0.30
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$0.27
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$0.27
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$0.27
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$0.27
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$0.28
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IMPACT OF INFLATION
The consolidated financial statements and notes thereto presented in this report have been prepared in accordance with GAAP, which requires that we measure our financial condition and operating results in
terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, nearly all of a
banks assets and liabilities are monetary in nature. As a result, the impact of interest rates on our performance is greater than the impact of general levels of inflation. Interest rates do not necessarily move in the same direction, or to
the same extent, as the prices of goods and services.
IMPACT OF ACCOUNTING PRONOUNCEMENTS
Please refer to Note 2, Summary of Significant Accounting Policies, in Item 8, Financial Statements and
Supplementary Data, for a discussion of the impact of recent accounting pronouncements on our financial condition and results of operations.
88
RECONCILIATIONS OF STOCKHOLDERS EQUITY AND TANGIBLE STOCKHOLDERS EQUITY, TOTAL ASSETS AND
TANGIBLE ASSETS, AND THE RELATED MEASURES
Although tangible stockholders equity, adjusted tangible
stockholders equity, tangible assets, and adjusted tangible assets are not measures that are calculated in accordance with GAAP, management uses these non-GAAP measures in their analysis of our performance. We believe that these non-GAAP
measures are important indications of our ability to grow both organically and through business combinations and, with respect to tangible stockholders equity and adjusted tangible stockholders equity, our ability to pay dividends and to
engage in various capital management strategies.
We calculate tangible stockholders equity by subtracting from
stockholders equity the sum of our goodwill and CDI, and calculate tangible assets by subtracting the same sum from our total assets. To calculate our ratio of tangible stockholders equity to tangible assets, we divide our tangible
stockholders equity by our tangible assets, both of which include AOCL. AOCL consists of after-tax net unrealized losses on securities and pension and post-retirement obligations, and is recorded in our Consolidated Statements of Condition. We
also calculate our ratio of tangible stockholders equity to tangible assets excluding AOCL, as its components are impacted by changes in market conditions, including interest rates, which fluctuate. This ratio is referred to earlier in this
report and below as the ratio of adjusted tangible stockholders equity to adjusted tangible assets.
Tangible stockholders equity, adjusted tangible stockholders equity, tangible assets, adjusted tangible assets, and the
related tangible capital measures, should not be considered in isolation or as a substitute for stockholders equity or any other capital measure prepared in accordance with GAAP. Moreover, the manner in which we calculate these non-GAAP
capital measures may differ from that of other companies reporting measures of capital with similar names.
Reconciliations of
our stockholders equity, tangible stockholders equity, and adjusted tangible stockholders equity; our total assets, tangible assets, and adjusted tangible assets; and the related capital measures at December 31, 2012 and
December 31, 2011 follow:
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December 31,
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(dollars in thousands)
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2012
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2011
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Stockholders Equity
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$
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5,656,264
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$
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5,565,704
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Less: Goodwill
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(2,436,131
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)
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(2,436,131
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)
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Core deposit intangibles
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(32,024
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)
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(51,668
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)
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Tangible stockholders equity
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$
|
3,188,109
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$
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3,077,905
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Total Assets
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|
$
|
44,145,100
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$
|
42,024,302
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Less: Goodwill
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(2,436,131
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)
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|
|
(2,436,131
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)
|
Core deposit intangibles
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|
(32,024
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)
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(51,668
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)
|
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Tangible assets
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|
$
|
41,676,945
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|
|
$
|
39,536,503
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|
|
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|
Stockholders equity to total assets
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|
|
12.81
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%
|
|
|
13.24
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%
|
Tangible stockholders equity to tangible assets
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|
|
7.65
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%
|
|
|
7.78
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%
|
|
|
|
Tangible Stockholders Equity
|
|
$
|
3,188,109
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|
|
$
|
3,077,905
|
|
Add back: Accumulated other comprehensive loss, net of tax
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|
|
61,705
|
|
|
|
71,910
|
|
|
|
|
|
|
|
|
|
|
Adjusted tangible stockholders equity
|
|
$
|
3,249,814
|
|
|
$
|
3,149,815
|
|
|
|
|
Tangible Assets
|
|
$
|
41,676,945
|
|
|
$
|
39,536,503
|
|
Add back: Accumulated other comprehensive loss, net of tax
|
|
|
61,705
|
|
|
|
71,910
|
|
|
|
|
|
|
|
|
|
|
Adjusted tangible assets
|
|
$
|
41,738,650
|
|
|
$
|
39,608,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted stockholders equity to adjusted tangible assets
|
|
|
7.79
|
%
|
|
|
7.95
|
%
|
89