Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2011

Commission File Number 1-31565

 

 

NEW YORK COMMUNITY BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   06-1377322

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

615 Merrick Avenue, Westbury, New York 11590

(Address of principal executive offices)

(Registrant’s telephone number, including area code) (516) 683-4100

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer   x    Accelerated Filer   ¨
Non-accelerated Filer   ¨    Smaller Reporting Company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

437,426,665

Number of shares of common stock outstanding at

August 3, 2011

 

 

 


Table of Contents

NEW YORK COMMUNITY BANCORP, INC.

FORM 10-Q

Quarter Ended June 30, 2011

 

INDEX

   Page No.  
Part I.    FINANCIAL INFORMATION   

Item 1.

   Financial Statements   
   Consolidated Statements of Condition as of June 30, 2011 (unaudited) and December 31, 2010      1   
   Consolidated Statements of Income and Comprehensive Income for the Three and Six Months Ended June 30, 2011 and 2010 (unaudited)      2   
   Consolidated Statement of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2011 (unaudited)      3   
   Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010 (unaudited)      4   
   Notes to the Unaudited Consolidated Financial Statements      5   
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      39   
Item 3.    Quantitative and Qualitative Disclosures about Market Risk      82   
Item 4.    Controls and Procedures      82   
Part II.    OTHER INFORMATION      83   
Item 1.    Legal Proceedings      83   
Item 1A.    Risk Factors      83   
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      83   
Item 3.    Defaults Upon Senior Securities      83   
Item 4.    Removed and Reserved      83   
Item 5.    Other Information      83   
Item 6.    Exhibits      84   
Signatures      85   
Exhibits   


Table of Contents

NEW YORK COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CONDITION

(in thousands, except share data)

 

     June 30,
2011
    December 31,
2010
 
     (unaudited)        

Assets:

    

Cash and cash equivalents

   $ 710,113      $ 1,927,542   

Securities:

    

Available-for-sale ($49,459 and $500,811 pledged, respectively)

     162,272        652,956   

Held to maturity ($4,972,930 and $3,881,139 pledged, respectively) (fair value of $5,562,091 and $4,157,322, respectively)

     5,506,643        4,135,935   
  

 

 

   

 

 

 

Total securities

     5,668,915        4,788,891   
  

 

 

   

 

 

 

Non-covered loans held for sale

     491,724        1,207,077   

Non-covered loans held for investment, net of deferred loan fees and costs

     24,493,938        23,707,494   

Less: Allowance for losses on non-covered loans

     (134,471     (158,942
  

 

 

   

 

 

 

Non-covered loans held for investment, net

     24,359,467        23,548,552   

Covered loans

     4,008,287        4,297,869   

Less: Allowance for losses on covered loans

     (20,611     (11,903
  

 

 

   

 

 

 

Covered loans, net

     3,987,676        4,285,966   
  

 

 

   

 

 

 

Total loans, net

     28,838,867        29,041,595   

Federal Home Loan Bank stock, at cost

     424,737        446,014   

Premises and equipment, net

     245,799        233,694   

FDIC loss share receivable

     759,790        814,088   

Goodwill

     2,436,131        2,436,159   

Core deposit intangibles, net

     63,205        77,734   

Mortgage servicing rights

     127,657        107,378   

Bank-owned life insurance

     755,424        742,481   

Other real estate owned (includes $81,435 and $62,412, respectively, covered by loss sharing agreements)

     138,076        90,478   

Other assets

     433,911        484,635   
  

 

 

   

 

 

 

Total assets

   $ 40,602,625      $ 41,190,689   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity:

    

Deposits:

    

NOW and money market accounts

   $ 8,637,555      $ 8,235,825   

Savings accounts

     3,965,527        3,885,785   

Certificates of deposit

     7,230,447        7,835,161   

Non-interest-bearing accounts

     1,964,182        1,852,280   
  

 

 

   

 

 

 

Total deposits

     21,797,711        21,809,051   

Borrowed funds:

    

Wholesale borrowings:

    

Federal Home Loan Bank advances

     7,856,912        8,375,659   

Repurchase agreements

     4,125,000        4,125,000   
  

 

 

   

 

 

 

Total wholesale borrowings

     11,981,912        12,500,659   

Junior subordinated debentures

     426,846        426,992   

Other borrowings

     608,526        608,465   
  

 

 

   

 

 

 

Total borrowed funds

     13,017,284        13,536,116   

Other liabilities

     227,527        319,302   
  

 

 

   

 

 

 

Total liabilities

     35,042,522        35,664,469   
  

 

 

   

 

 

 

Stockholders’ equity:

    

Preferred stock at par $0.01 (5,000,000 shares authorized; none issued)

     —          —     

Common stock at par $0.01 (600,000,000 shares authorized; 437,423,850 and 435,646,845 shares issued, and 437,414,149 and 435,646,845 shares outstanding, respectively)

     4,374        4,356   

Paid-in capital in excess of par

     5,300,199        5,285,715   

Retained earnings

     306,082        281,844   

Treasury stock, at cost (9,701 shares)

     (150     —     

Accumulated other comprehensive loss, net of tax:

    

Net unrealized (loss) gain on securities available for sale, net of tax

     (798     12,600   

Net unrealized loss on the non-credit portion of other-than-temporary impairment (“OTTI”) losses on securities, net of tax

     (13,365     (20,572

Net unrealized loss on pension and post-retirement obligations, net of tax

     (36,239     (37,723
  

 

 

   

 

 

 

Total accumulated other comprehensive loss, net of tax

     (50,402     (45,695
  

 

 

   

 

 

 

Total stockholders’ equity

     5,560,103        5,526,220   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 40,602,625        $41,190,689   
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

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Table of Contents

NEW YORK COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(in thousands, except per share data)

(unaudited)

 

     For the
Three Months Ended
June 30,
    For the
Six Months Ended
June 30,
 
     2011     2010     2011     2010  

Interest Income:

        

Mortgage and other loans

   $ 408,292      $ 417,168      $ 824,234      $ 830,843   

Securities and money market investments

     60,716        66,019        115,697        134,722   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     469,008        483,187        939,931        965,565   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest Expense:

        

NOW and money market accounts

     10,398        16,413        21,552        32,844   

Savings accounts

     4,206        5,800        8,333        11,545   

Certificates of deposit

     24,952        37,327        51,926        74,880   

Borrowed funds

     127,508        129,446        252,924        257,511   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     167,064        188,986        334,735        376,780   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     301,944        294,201        605,196        588,785   

Provision for losses on non-covered loans

     15,000        22,000        41,000        42,000   

Provision for losses on covered loans

     8,708        —          8,708        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provisions for loan losses

     278,236        272,201        555,488        546,785   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-Interest Income:

        

Total loss on OTTI of securities

     (18,124     (481     (18,124     (13,666

Less: Non-credit portion of OTTI recorded in other comprehensive income (before taxes)

     —          59        —          12,521   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss on OTTI recognized in earnings

     (18,124     (422     (18,124     (1,145

Fee income

     12,143        14,088        24,042        28,053   

Bank-owned life insurance

     7,564        6,775        14,453        14,176   

Mortgage banking income

     11,774        39,499        31,712        67,032   

Net gain (loss) on sale of securities

     18,743        —          28,735        (8

Gain on business disposition

     9,823        —          9,823        —     

FDIC indemnification income

     7,624        —          7,624        —     

Gain on business acquisition

     —          2,883        —          2,883   

Gain on debt repurchase

     —          —          —          293   

Other

     9,341        9,693        19,233        16,276   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

     58,888        72,516        117,498        127,560   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-Interest Expense:

        

Operating expenses:

        

Compensation and benefits

     73,218        67,797        145,286        134,697   

Occupancy and equipment

     21,770        22,115        43,710        43,780   

General and administrative

     52,912        43,576        98,221        83,866   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     147,900        133,488        287,217        262,343   

Amortization of core deposit intangibles

     7,144        7,883        14,529        15,775   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expense

     155,044        141,371        301,746        278,118   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     182,080        203,346        371,240        396,227   

Income tax expense

     62,621        71,919        128,605        140,651   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

   $ 119,459      $ 131,427      $ 242,635      $ 255,576   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, net of tax:

        

Change in net unrealized (loss) gain on securities and non-credit portion of OTTI for the period

     (621     212        (6,191     (4,571

Change in pension and post-retirement obligations

     740        835        1,484        1,669   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income, net of tax

   $ 119,578      $ 132,474      $ 237,928      $ 252,674   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share

   $ 0.27      $ 0.30      $ 0.55      $ 0.59   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share

   $ 0.27      $ 0.30      $ 0.55      $ 0.59   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

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NEW YORK COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands, except share data)

(unaudited)

 

     Six Months Ended
June 30, 2011
 

Common Stock (Par Value: $0.01):

  

Balance at beginning of year

   $ 4,356   

Shares issued for exercise of stock options (168,001 shares)

     2   

Shares issued for restricted stock awards (1,609,004 shares)

     16   
  

 

 

 

Balance at end of period

     4,374   
  

 

 

 

Paid-in Capital in Excess of Par:

  

Balance at beginning of year

     5,285,715   

Shares issued for restricted stock awards, net of forfeitures

     (43

Compensation expense related to restricted stock awards

     7,919   

Stock options

     4,356   

Tax effect of stock plans

     2,252   
  

 

 

 

Balance at end of period

     5,300,199   
  

 

 

 

Retained Earnings:

  

Balance at beginning of year

     281,844   

Net income

     242,635   

Dividends paid on common stock ($0.50 per share)

     (218,397
  

 

 

 

Balance at end of period

     306,082   
  

 

 

 

Treasury Stock:

  

Balance at beginning of year

     —     

Purchase of common stock (146,359 shares)

     (2,677

Exercise of stock options (135,162 shares)

     2,500   

Shares issued for restricted stock awards (1,496 shares)

     27   
  

 

 

 

Balance at end of period

     (150
  

 

 

 

Accumulated Other Comprehensive Loss, net of tax:

  

Balance at beginning of year

     (45,695

Other comprehensive loss, net of tax:

  

Change in net unrealized gain/loss on securities available for sale, net of tax of $7,643

     (11,276

Change in the non-credit portion of OTTI losses recognized in other comprehensive income, net of tax of $4,825

     7,207   

Change in pension and post-retirement obligations, net of tax of $1,006

     1,484   

Reclassification adjustment for net gain on sale of securities and loss on OTTI of securities, net of tax of $1,428

     (2,122
  

 

 

 

Total other comprehensive loss, net of tax

     (4,707
  

 

 

 

Balance at end of period

     (50,402
  

 

 

 

Total stockholders’ equity

   $ 5,560,103   
  

 

 

 

See accompanying notes to the consolidated financial statements.

 

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NEW YORK COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

     Six Months Ended
June 30,
 
     2011     2010  

Cash Flows from Operating Activities:

    

Net income

   $ 242,635      $ 255,576   

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

    

Provision for loan losses

     49,708        42,000   

Depreciation and amortization

     11,876        9,752   

(Accretion) amortization of discounts and premiums, net

     (850     2,763   

Amortization of core deposit intangibles

     14,529        15,775   

Net (gain) loss on sale of securities

     (28,735     8   

Net gain on sale of loans

     (25,213     (25,814

Gain on business disposition

     (9,823     —     

Gain on business acquisition

     —          (2,883

Stock plan-related compensation

     7,919        8,062   

Loss on OTTI of securities recognized in earnings

     18,124        1,145   

Changes in assets and liabilities:

    

Decrease in deferred tax asset, net

     38,358        12,200   

Increase in other assets

     (11,574     (189,344

(Decrease) increase in other liabilities

     (83,978     144,793   

Origination of loans held for sale

     (2,640,272     (3,507,401

Proceeds from sale of loans originated for sale

     3,379,810        2,953,595   
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     962,514        (279,773
  

 

 

   

 

 

 

Cash Flows from Investing Activities:

    

Proceeds from repayment of securities held to maturity

     963,317        1,780,505   

Proceeds from repayment of securities available for sale

     81,642        588,726   

Proceeds from sale of securities held to maturity

     284,406        —     

Proceeds from sale of securities available for sale

     544,149        660   

Purchase of securities held to maturity

     (2,609,676     (1,331,059

Purchase of securities available for sale

     (142,178     —     

Net redemption of Federal Home Loan Bank stock

     21,277        53,484   

Net increase in loans

     (653,405     (9,942

Purchase of premises and equipment, net

     (24,027     (4,820

Net cash acquired in business transactions

     100,027        140,895   
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (1,434,468     1,218,449   
  

 

 

   

 

 

 

Cash Flows from Financing Activities:

    

Net decrease in deposits

     (11,340     (263,385

Net decrease in short-term borrowed funds

     (500,000     —     

Net decrease in long-term borrowed funds

     (18,832     (542,706

Tax effect of stock plans

     2,252        1,103   

Cash dividends paid on common stock

     (218,397     (216,870

Treasury stock purchases

     (2,677     (2,758

Net cash received from stock option exercises

     3,519        3,539   

Proceeds from issuance of common stock, net

     —          28,935   
  

 

 

   

 

 

 

Net cash used in financing activities

     (745,475     (992,142
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (1,217,429     (53,466

Cash and cash equivalents at beginning of period

     1,927,542        2,670,857   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 710,113      $ 2,617,391   
  

 

 

   

 

 

 

Supplemental information:

    

Cash paid for interest

   $ 346,984      $ 414,470   

Cash paid for income taxes

     89,958        147,548   

Non-cash investing and financing activities:

    

Transfers to other real estate owned from loans

     111,612        20,890   

 

Note: Excluding the core deposit intangible and FDIC loss share receivable, the fair values of non-cash assets acquired, and of liabilities assumed, in the acquisition of Desert Hills Bank on March 26, 2010 were $230.5 million and $442.5 million, respectively.

See accompanying notes to the consolidated financial statements.

 

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NEW YORK COMMUNITY BANCORP, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Organization and Basis of Presentation

Organization

Formerly known as Queens County Bancorp, Inc., New York Community Bancorp, Inc. (on a stand-alone basis, the “Parent Company” or, collectively with its subsidiaries, the “Company”) was organized under Delaware law on July 20, 1993 and is the holding company for New York Community Bank and New York Commercial Bank (hereinafter referred to as the “Community Bank” and the “Commercial Bank,” respectively, and collectively as the “Banks”). In addition, for the purpose of these Consolidated Financial Statements, the “Community Bank” and the “Commercial Bank” refer not only to the respective banks but also to their respective subsidiaries.

The Community Bank is the primary banking subsidiary of the Company. Founded on April 14, 1859 and formerly known as Queens County Savings Bank, the Community Bank converted from a state-chartered mutual savings bank to the capital stock form of ownership on November 23, 1993, on which date the Company completed its initial offering of common stock (par value: $0.01 per share) at a price of $25.00 per share. The Commercial Bank was established on December 30, 2005.

Reflecting nine stock splits, the Company’s initial offering price adjusts to $0.93 per share. All share and per share data presented in this report have been adjusted to reflect the impact of the stock splits.

The Company changed its name to New York Community Bancorp, Inc. on November 21, 2000 in anticipation of completing the first of eight business combinations that expanded its footprint well beyond Queens County to encompass all five boroughs of New York City, Long Island, and Westchester County in New York, and seven counties in the northern and central parts of New Jersey. The Company expanded beyond this region to south Florida, northeast Ohio, and central Arizona through its FDIC-assisted acquisition of certain assets and assumption of certain liabilities of AmTrust Bank (“AmTrust”) in December 2009, and extended its Arizona franchise through its FDIC-assisted acquisition of certain assets and assumption of certain liabilities of Desert Hills Bank (“Desert Hills”) in March 2010.

Reflecting this strategy of growth through acquisitions, the Community Bank currently operates 242 branches, four of which operate directly under the Community Bank name. The remaining 238 branches operate through seven divisional banks—Queens County Savings Bank, Roslyn Savings Bank, Richmond County Savings Bank, and Roosevelt Savings Bank (in New York), Garden State Community Bank in New Jersey, AmTrust Bank in Florida and Arizona, and Ohio Savings Bank in Ohio.

The Commercial Bank currently operates 34 branches in Manhattan, Queens, Brooklyn, Westchester County, and Long Island (all in New York), including 17 branches that operate under the name “Atlantic Bank.”

Basis of Presentation

The following is a description of the significant accounting and reporting policies that the Company and its wholly-owned subsidiaries follow in preparing and presenting their consolidated financial statements, which conform to U.S. generally accepted accounting principles (“GAAP”) and to general practices within the banking industry. The preparation of financial statements in conformity with GAAP requires the Company to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Estimates that are particularly susceptible to change in the near term are used in connection with the determination of the allowance for losses on non-covered loans; the evaluation of goodwill for impairment; the evaluation of other-than-temporary impairment (“OTTI”) on securities; and the evaluation of the need for a valuation allowance on the Company’s deferred tax assets. The current economic environment has increased the degree of uncertainty inherent in these material estimates.

The unaudited consolidated financial statements include the accounts of the Company and other entities in which the Company has a controlling financial interest. All inter-company accounts and transactions are eliminated in consolidation. These unaudited consolidated financial statements should be read in conjunction with the audited

 

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consolidated financial statements and notes thereto included in the Company’s 2010 Annual Report on Form 10-K. The Company currently has unconsolidated subsidiaries in the form of nine wholly-owned statutory business trusts, which were formed to issue guaranteed capital debentures (“capital securities”). Please see Note 6, “Borrowed Funds,” for additional information regarding these trusts.

When necessary, certain reclassifications have been made to prior-year amounts to conform to the current-year presentation.

Note 2. Computation of Earnings per Share

Basic earnings per share (“EPS”) is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Weighted-average common shares are adjusted to exclude unallocated Employee Stock Ownership Plan (“ESOP”) shares. Diluted EPS is computed using the same method as basic EPS, however, the computation reflects the potential dilution that would occur if outstanding in-the-money stock options were exercised and converted into common stock.

Unvested stock-based compensation awards containing non-forfeitable rights to dividends are considered participating securities and therefore are included in the two-class method for calculating EPS. Under the two-class method, all earnings (distributed and undistributed) are allocated to common shares and participating securities based on their respective rights to receive dividends. The Company grants restricted stock to certain employees under its stock-based compensation plans. Recipients receive cash dividends during the vesting periods of these awards (i.e., including on the unvested portion of such awards). Since these dividends are non-forfeitable, the unvested awards are considered participating securities and have earnings allocated to them.

The following table presents the Company’s computation of basic and diluted EPS for the periods indicated:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
(in thousands, except share and per share data)    2011     2010     2011     2010  

Net income

   $ 119,459      $ 131,427      $ 242,635      $ 255,576   

Less: Dividends paid on and earnings allocated to participating securities

     (921     (766     (1,815     (1,464
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings applicable to common stock

   $ 118,538      $ 130,661      $ 240,820      $ 254,112   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding

     436,179,448        434,184,751        435,872,952        433,137,053   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per common share

   $ 0.27      $ 0.30      $ 0.55      $ 0.59   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings applicable to common stock

   $ 118,538      $ 130,661      $ 240,820      $ 254,112   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding

     436,179,448        434,184,751        435,872,952        433,137,053   

Potential dilutive common shares(1)

     437,504        438,776        646,914        351,309   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total shares for diluted earnings per share computation

     436,616,952        434,623,527        436,519,866        433,488,362   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per common share and common share equivalents

   $ 0.27      $ 0.30      $ 0.55      $ 0.59   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Options to purchase 744,838 and 736,938 shares, respectively, of the Company’s common stock that were outstanding in the three and six months ended June 30, 2011, at respective weighted average exercise prices of $21.37 and $21.42, were excluded from the respective computations of diluted EPS because their inclusion would have had an antidilutive effect. Options to purchase 2,822,923 and 5,304,612 shares, respectively, of the Company’s common stock that were outstanding in the three and six months ended June 30, 2010, at respective weighted average exercise prices of $19.18 and $17.72, were excluded from the respective computations of diluted EPS because their inclusion would have had an antidilutive effect.

 

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Note 3: Securities

The following table summarizes the Company’s portfolio of securities available for sale at June 30, 2011:

 

     June 30, 2011  
(in thousands)    Amortized
Cost
     Gross
Unrealized

Gain
     Gross
Unrealized
Loss
     Fair Value  

Mortgage-Related Securities:

           

GSE(1) certificates

   $ 47,369       $ 1,735       $ 20       $ 49,084   

Private label CMOs(2)

     33,855         —           304         33,551   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage-related securities

   $ 81,224       $ 1,735       $ 324       $ 82,635   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other Securities:

           

GSE debentures

   $ 618       $ —         $ 10       $ 608   

State, county, and municipal

     1,309         55         2         1,362   

Capital trust notes

     38,842         2,880         4,376         37,346   

Preferred stock

     —           455         —           455   

Common stock

     42,202         1,509         3,845         39,866   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other securities

   $ 82,971       $ 4,899       $ 8,233       $ 79,637   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale(3)

   $ 164,195       $ 6,634       $ 8,557       $ 162,272   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Government-sponsored enterprises
(2) Collateralized mortgage obligations
(3) The non-credit portion of OTTI was $570,000 (before taxes).

As of June 30, 2011, the fair value of marketable equity securities included common stock of $39.9 million and Freddie Mac preferred stock of $455,000. Common stock primarily consisted of an investment in a large cap equity fund and certain other funds that are Community Reinvestment Act (“CRA”) eligible. The Freddie Mac preferred stock was recognized by the Company as other-than-temporarily impaired in the fourth quarter of 2008.

The following table summarizes the Company’s portfolio of securities available for sale at December 31, 2010:

 

     December 31, 2010  
(in thousands)    Amortized
Cost
     Gross
Unrealized

Gain
     Gross
Unrealized
Loss
     Fair Value  

Mortgage-Related Securities:

           

GSE certificates

   $ 203,480       $ 8,067       $ 32       $ 211,515   

GSE CMOs

     213,839         8,464         —           222,303   

Private label CMOs

     51,657         110         405         51,362   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage-related securities

   $ 468,976       $ 16,641       $ 437       $ 485,180   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other Securities:

           

U.S. Treasury obligations

   $ 57,859       $ 694       $ —         $ 58,553   

GSE debentures

     620         —           —           620   

Corporate bonds

     4,814         —           564         4,250   

State, county, and municipal

     1,304         41         11         1,334   

Capital trust notes

     38,843         8,550         5,389         42,004   

Preferred stock

     30,574         2,129         11,964         20,739   

Common stock

     42,044         3,786         5,554         40,276   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other securities

   $ 176,058       $ 15,200       $ 23,482       $ 167,776   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale(1)

   $ 645,034       $ 31,841       $ 23,919       $ 652,956   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The non-credit portion of OTTI was $12.5 million (before taxes).

 

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The following tables summarize the Company’s portfolio of securities held to maturity at June 30, 2011 and December 31, 2010:

 

     June 30, 2011  
(in thousands)    Amortized
Cost
     Carrying
Amount
     Gross
Unrealized
Gain
     Gross
Unrealized
Loss
     Fair Value  

Mortgage-Related Securities:

              

GSE certificates

   $ 682,503       $ 682,503       $ 12,732       $ 2,759       $ 692,476   

GSE CMOs

     2,560,606         2,560,606         56,597         15,921         2,601,282   

Other mortgage-related securities

     3,990         3,990         —           —           3,990   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage-related securities

   $ 3,247,099       $ 3,247,099       $ 69,329       $ 18,680       $ 3,297,748   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other Securities:

              

GSE debentures

   $ 2,044,524       $ 2,044,524       $ 10,549       $ 10,314       $ 2,044,759   

Corporate bonds

     83,502         83,502         6,421         36         89,887   

Capital trust notes

     153,329         131,518         14,483         16,304         129,697   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other securities

   $ 2,281,355       $ 2,259,544       $ 31,453       $ 26,654       $ 2,264,343   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total securities held to maturity(1)

   $ 5,528,454       $ 5,506,643       $ 100,782       $ 45,334       $ 5,562,091   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Held-to-maturity securities are reported at a carrying amount equal to amortized cost less the non-credit portion of OTTI recorded in accumulated other comprehensive loss, net of tax (“AOCL”). The non-credit portion of OTTI was $21.8 million (before taxes).

 

     December 31, 2010  
(in thousands)    Amortized
Cost
     Carrying
Amount
     Gross
Unrealized
Gain
     Gross
Unrealized
Loss
     Fair Value  

Mortgage-Related Securities:

              

GSE certificates

   $ 208,993       $ 208,993       $ 12,206       $ 1,094       $ 220,105   

GSE CMOs

     2,763,545         2,763,545         47,352         28,345         2,782,552   

Other mortgage-related securities

     6,777         6,777         —           —           6,777   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage-related securities

   $ 2,979,315       $ 2,979,315       $ 59,558       $ 29,439       $ 3,009,434   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other Securities:

              

GSE debentures

   $ 924,663       $ 924,663       $ 4,524       $ 10,592       $ 918,595   

Corporate bonds

     86,483         86,483         8,647         13         95,117   

Capital trust notes

     167,355         145,474         11,410         22,708         134,176   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other securities

   $ 1,178,501       $ 1,156,620       $ 24,581       $ 33,313       $ 1,147,888   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total securities held to maturity(1)

   $ 4,157,816       $ 4,135,935       $ 84,139       $ 62,752       $ 4,157,322   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The non-credit portion of OTTI was $21.9 million (before taxes).

The Company had $424.7 million and $446.0 million of Federal Home Loan Bank (“FHLB”) stock, at cost, at June 30, 2011 and December 31, 2010, respectively. The Company is required to maintain this investment in order to have access to funding resources provided by the FHLB.

The following table summarizes the gross proceeds, gross realized gains, and gross realized losses from the sale of available-for-sale securities during the six months ended June 30, 2011 and 2010:

 

     For the Six Months Ended
June 30, 2011
 
(in thousands)    2011      2010  
Gross proceeds    $ 544,149       $ 660   
Gross realized gains      20,243         —     
Gross realized losses      11         8   
  

 

 

    

 

 

 

In addition, during the six months ended June 30, 2011, the Company sold held-to-maturity securities with gross proceeds totaling $284.4 million and gross realized gains of $8.5 million. These sales occurred as the Company either had collected a substantial portion (at least 85%) of the initial principal balance or there was evidence of significant deterioration in the issuer’s creditworthiness.

 

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Included in the capital trust note portfolio at June 30, 2011 were three pooled trust preferred securities. The following table details the pooled trust preferred securities that had at least one credit rating below investment grade as of June 30, 2011:

 

     INCAPS
Funding I
    Alesco Preferred
Funding VII Ltd.
    Preferred Term
Securities II
 
(dollars in thousands)    Class B-2 Notes     Class C-1 Notes     Mezzanine Notes  

Book value

   $ 14,964      $ 553      $ 627   

Fair value

     17,828        374        904   

Unrealized gain (loss)

     2,864        (179     277   

Lowest credit rating assigned to security

     CCC-        C        C   

Number of banks/insurance companies currently performing

     24        61        24   

Actual deferrals and defaults as a percentage of original collateral

     11     30     36

Expected deferrals and defaults as a percentage of remaining performing collateral

     20        26        19   

Expected recoveries as a percentage of remaining performing collateral

     —          —          2   

Excess subordination as a percentage of remaining performing collateral

     27        —          —     

As of June 30, 2011, after taking into account the Company’s best estimates of future deferrals, defaults, and recoveries, two of its pooled trust preferred securities had no excess subordination in the classes it owns and one had excess subordination of 27%. Excess subordination is calculated after taking into account the deferrals, defaults, and recoveries noted in the table above, and indicates whether there is sufficient additional collateral to cover the outstanding principal balance of the class owned, after taking into account these projected deferrals, defaults, and recoveries.

The following table presents a roll-forward, from December 31, 2010 through June 30, 2011, of the credit loss component of OTTI on debt securities for which a non-credit component of OTTI was recognized in AOCL. The beginning balance represents the credit loss component for debt securities for which OTTI occurred prior to January 1, 2011. For credit-impaired debt securities, OTTI recognized in earnings after that date is presented as an addition in two components, based upon whether the current period is the first time a debt security was credit-impaired (initial credit impairment) or is not the first time a debt security was credit-impaired (subsequent credit impairment). There were no changes in the credit loss component of credit-impaired debt securities in the three months ended June 30, 2011:

 

(in thousands)         For the Six Months Ended
June 30, 2011
 

Beginning credit loss amount as of December 31, 2010

   $ 201,854   

Add:

   Initial other-than-temporary credit losses      —     
   Subsequent other-than-temporary credit losses      6,160   
   Amount previously recognized in AOCL      11,964   

Less:

   Realized losses for securities sold      —     
   Securities intended or required to be sold      —     
   Increases in expected cash flows on debt securities      —     
     

 

 

 
Ending credit loss amount as of June 30, 2011    $ 219,978   
     

 

 

 

OTTI losses on securities (consisting entirely of preferred stock) totaled $18.1 million. As this entire amount was related to credit, it was recognized in earnings during the six months ended June 30, 2011. OTTI was determined based on the Company’s expectation that it will no longer receive any cash flows from the impaired security.

 

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The following table summarizes the carrying amount and estimated fair value of held-to-maturity debt securities, and the amortized cost and estimated fair value of available-for-sale debt securities, at June 30, 2011 by contractual maturity. Mortgage-related securities held to maturity and available for sale, all of which have prepayment provisions, are distributed to a maturity category based on the ends of the estimated average lives of such securities. Principal and amortization prepayments are not shown in maturity categories as they occur, but are considered in the determination of estimated average life.

 

     Carrying Amount at June 30, 2011        
(dollars in thousands)    Mortgage-
Related
Securities
     Average
Yield
    U.S. Treasury
and GSE
Obligations
     Average
Yield
    State, County,
and Municipal
     Average
Yield(1)
    Other  Debt
Securities(2)
     Average
Yield
    Fair Value  

Held-to-Maturity Securities:

                      

Due within one year

   $ —           —     $ —           —     $ —           —     $ 8,756         7.79   $ 8,864   

Due from one to five years

     —           —          —           —          —           —          23,983         5.80        24,892   

Due from five to ten years

     869,483         3.76        2,044,524         3.88        —           —          20,023         5.98        2,928,283   

Due after ten years

     2,377,616         3.78        —           —          —           —          162,258         7.18        2,600,052   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total debt securities held to maturity

   $ 3,247,099         3.77   $ 2,044,524         3.88   $ —           —     $ 215,020         6.94   $ 5,562,091   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Available-for-Sale Securities:(3)

                      

Due within one year

   $ —           —     $ —           —     $ 125         5.39   $ —           —     $ 127   

Due from one to five years

     10,095         7.20        —           —          631         6.10        —           —          10,788   

Due from five to ten years

     3,410         4.15        —           —          553         6.56        —           —          4,185   

Due after ten years

     67,719         4.85        618         5.26        —           —          38,842         4.84        106,851   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total debt securities available for sale

   $ 81,224         5.12   $ 618         5.26   $ 1,309         6.22   $ 38,842         4.84   $ 121,951   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) Not presented on a tax-equivalent basis.
(2) Includes corporate bonds and capital trust notes. Included in capital trust notes are $15.5 million and $627,000 of pooled trust preferred securities available for sale and held to maturity, respectively, all of which are due after ten years. The remaining capital trust notes consist of single-issue trust preferred securities.
(3) As equity securities have no contractual maturity, they have been excluded from this table.

The Company had no commitments to purchase securities at June 30, 2011.

 

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The following tables present held-to-maturity and available-for-sale securities having a continuous unrealized loss position for less than twelve months and for twelve months or longer as of June 30, 2011:

 

At June 30, 2011    Less than Twelve Months      Twelve Months or Longer      Total  
(in thousands)    Fair Value      Unrealized Loss      Fair Value      Unrealized Loss      Fair Value      Unrealized Loss  

Temporarily Impaired Held-to-Maturity Debt Securities:

                 

GSE debentures

   $ 1,045,736       $ 10,314       $ —         $ —         $ 1,045,736       $ 10,314   

GSE certificates

     355,482         2,759         —           —           355,482         2,759   

GSE CMOs

     945,147         15,921         —           —           945,147         15,921   

Corporate bonds

     24,987         36         —           —           24,987         36   

Capital trust notes

     —           —           72,085         16,304         72,085         16,304   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired held-to-maturity debt securities

   $ 2,371,352       $ 29,030       $ 72,085       $ 16,304       $ 2,443,437       $ 45,334   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Temporarily Impaired Available-for-Sale Securities:

                 

Debt Securities:

                 

GSE certificates

   $ 9,364       $ 19       $ 15       $ 1       $ 9,379       $ 20   

Private label CMOs

     33,551         304         —           —           33,551         304   

GSE debentures

     608         10         —           —           608         10   

State, county, and municipal

     133         2         —           —           133         2   

Capital trust notes

     2,463         179         9,940         4,197         12,403         4,376   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired available-for-sale debt securities

   $ 46,119       $ 514       $ 9,955       $ 4,198       $ 56,074       $ 4,712   

Equity securities

     40         —           26,241         3,845         26,281         3,845   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired available-for-sale securities

   $ 46,159       $ 514       $ 36,196       $ 8,043       $ 82,355       $ 8,557   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The twelve months or longer unrealized losses of $3.8 million at June 30, 2011 relate to available-for-sale equity securities that primarily consisted of a large cap equity fund at that date. The twelve months or longer unrealized loss on this large cap equity fund was $3.4 million.

 

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The following tables present held-to-maturity and available-for-sale securities having a continuous unrealized loss position for less than twelve months and for twelve months or longer as of December 31, 2010:

 

At December 31, 2010    Less than Twelve Months      Twelve Months or Longer      Total  
(in thousands)    Fair Value      Unrealized Loss      Fair Value      Unrealized Loss      Fair Value      Unrealized Loss  

Temporarily Impaired Held-to-Maturity Debt Securities:

                 

GSE debentures

   $ 569,361       $ 10,592       $ —         $ —         $ 569,361       $ 10,592   

GSE certificates

     54,623         1,094         —           —           54,623         1,094   

GSE CMOs

     1,251,850         28,345         —           —           1,251,850         28,345   

Corporate bonds

     4,987         13         —           —           4,987         13   

Capital trust notes

     —           —           66,698         22,708         66,698         22,708   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired held-to-maturity debt securities

   $ 1,880,821       $ 40,044       $ 66,698       $ 22,708       $ 1,947,519       $ 62,752   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Temporarily Impaired Available-for-Sale Securities:

                 

Debt Securities:

                 

GSE certificates

   $ 12,809       $ 28       $ 779       $ 4       $ 13,588       $ 32   

Private label CMOs

     —           —           35,511         405         35,511         405   

Corporate bonds

     —           —           4,250         564         4,250         564   

State, county, and municipal

     399         11         —           —           399         11   

Capital trust notes

     1,988         102         8,848         5,287         10,836         5,389   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired available-for-sale debt securities

   $ 15,196       $ 141       $ 49,388       $ 6,260       $ 64,584       $ 6,401   

Equity securities

     79         11         25,339         17,507         25,418         17,518   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired available-for-sale securities

   $ 15,275       $ 152       $ 74,727       $

 

 

23,767

  

  

   $ 90,002       $ 23,919   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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An OTTI loss on impaired securities must be fully recognized in earnings if an investor has the intent to sell the debt security or if it is more likely than not that the investor will be required to sell the debt security before recovery of its amortized cost. However, even if an investor does not expect to sell a debt security, it must evaluate the expected cash flows to be received and determine if a credit loss has occurred. In the event that a credit loss occurs, only the amount of impairment associated with the credit loss is recognized in earnings. Amounts relating to factors other than credit losses are recorded in AOCL. Financial Accounting Standards Board (“FASB”) guidance also requires additional disclosures regarding the calculation of credit losses, as well as factors considered by the investor in reaching a conclusion that an investment is not other-than-temporarily impaired.

Available-for-sale securities in unrealized loss positions are analyzed as part of the Company’s ongoing assessment of OTTI. When the Company intends to sell such available-for-sale securities, the Company recognizes an impairment loss equal to the full difference between the amortized cost basis and the fair value of those securities. When the Company does not intend to sell available-for-sale equity or debt securities in an unrealized loss position, potential OTTI is considered based on a variety of factors, including the length of time and extent to which the fair value has been less than the cost; adverse conditions specifically related to the industry, the geographic area, or financial condition of the issuer, or the underlying collateral of a security; the payment structure of the security; changes to the rating of the security by a rating agency; the volatility of the fair value changes; and changes in fair value of the security after the balance sheet date. For debt securities, the Company estimates cash flows over the remaining life of the underlying collateral to assess whether credit losses exist and, where applicable, to determine if any adverse changes in cash flows have occurred. The Company’s cash flow estimates take into account expectations of relevant market and economic data as of the end of the reporting period. As of June 30, 2011, the Company did not intend to sell the securities with an unrealized loss position in AOCL, and it was more likely than not that the Company would not be required to sell these securities before recovery of their amortized cost basis. The Company believes that the securities with an unrealized loss position in AOCL were not other-than- temporarily impaired as of June 30, 2011.

Other factors considered in determining whether a loss is temporary include the length of time and the extent to which fair value has been below cost; the severity of the impairment; the cause of the impairment; the financial condition and near-term prospects of the issuer; activity in the market of the issuer that may indicate adverse credit conditions; and the forecasted recovery period using current estimates of volatility in market interest rates (including liquidity and risk premiums).

Management’s assertion regarding its intent not to sell, or that it is not more likely than not that the Company will be required to sell the security before its anticipated recovery, considers a number of factors, including a quantitative estimate of the expected recovery period (which may extend to maturity) and management’s intended strategy with respect to the identified security or portfolio. If management does have the intent to sell, or believes it is more likely than not that the Company will be required to sell the security before its anticipated recovery, the unrealized loss is charged directly to earnings in the Consolidated Statement of Income and Comprehensive Income.

The unrealized losses on the Company’s GSE debentures and GSE CMOs at June 30, 2011 were primarily caused by movements in market interest rates and spread volatility, rather than credit risk. The Company purchased these investments either at par or at a discount relative to their face amount, and the contractual cash flows of these investments are guaranteed by the GSEs. Accordingly, it is expected that these securities would not be settled at a price that is less than the amortized cost of the Company’s investment. Because the Company does not have the intent to sell the investments and it is not more likely than not that the Company will be required to sell the investments before anticipated recovery of fair value, which may be at maturity, the Company did not consider these investments to be other-than-temporarily impaired at June 30, 2011.

The Company reviews quarterly financial information related to its investments in capital securities as well as other information that is released by each financial institution to determine the continued creditworthiness of the issuer of the securities. The contractual terms of these investments do not permit settling the securities at prices that are less than the amortized costs of the investments; therefore, the Company expects that these investments would not be settled at prices that are less than their amortized costs. The Company continues to monitor these investments and currently estimates that the present value of expected cash flows is not less than the amortized cost of the securities. Because the Company does not have the intent to sell the investments and it is not more likely than

 

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not that the Company will be required to sell them before the anticipated recovery of fair value, which may be at maturity, it did not consider these investments to be other-than-temporarily impaired at June 30, 2011. It is possible that these securities will perform worse than is currently expected, which could lead to adverse changes in cash flows from these securities and potential OTTI losses in the future. Events that may occur in the future at the financial institutions that issued these securities could trigger material unrecoverable declines in fair values for the Company’s investments and therefore could result in future potential OTTI losses. Such events include, but are not limited to, government intervention, deteriorating asset quality and credit metrics, significantly higher levels of default and loan loss provisions, losses in value on the underlying collateral, deteriorating credit enhancement, net operating losses, and further illiquidity in the financial markets.

The unrealized losses on the Company’s private label CMOs were insignificant at June 30, 2011. Current characteristics of each security owned, such as delinquency and foreclosure levels, credit enhancement, and projected losses and coverage, are reviewed periodically by management. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment. Because the Company does not have the intent to sell the investments and it is not more likely than not that the Company will be required to sell the investments before anticipated recovery of fair value, which may be at maturity, the Company did not consider these investments to be other-than-temporarily impaired at June 30, 2011. It is possible that the underlying loan collateral of these securities will perform worse than is currently expected, which could lead to adverse changes in cash flows from these securities and potential OTTI losses in the future. Events that could trigger material unrecoverable declines in fair values, and therefore potential OTTI losses for these securities in the future, include, but are not limited to, deterioration of credit metrics, significantly higher levels of default, loss in value on the underlying collateral, deteriorating credit enhancement, and further illiquidity in the financial markets.

At June 30, 2011, the Company’s equity securities portfolio consisted of perpetual preferred and common stock, and mutual funds. The Company considers a decline in fair value of available-for-sale equity securities to be other than temporary if the Company does not expect to recover the entire amortized cost basis of the security. In analyzing its investments in perpetual preferred stock for OTTI, the Company uses an impairment model that is applied to debt securities, consistent with guidance provided by the SEC, provided that there has been no evidence of deterioration in the creditworthiness of the issuer. The unrealized losses on the Company’s equity securities were primarily caused by market volatility. In addition, perpetual preferred stock was impacted by widening interest rate spreads across market sectors related to the continued illiquidity and uncertainty in the marketplace. The Company evaluated the near-term prospects of a recovery of fair value for each security in the portfolio, together with the severity and duration of impairment to date. Based on this evaluation, and the Company’s ability and intent to hold these investments for a reasonable period of time sufficient to realize a near-term forecasted recovery of fair value, the Company did not consider these investments to be other-than-temporarily impaired at June 30, 2011. Nonetheless, it is possible that these equity securities will perform worse than is currently expected, which could lead to adverse changes in their fair values or the failure of the securities to fully recover in value as presently forecasted by management, causing the Company to record potential OTTI losses in future periods. Events that could trigger material declines in the fair values of these securities include, but are not limited to, deterioration in the equity markets; a decline in the quality of the loan portfolios of the issuers in which the Company has invested; and the recording of higher loan loss provisions and net operating losses by such issuers.

The investment securities designated as having a continuous loss position for twelve months or more at June 30, 2011 consisted of 11 capital trust notes, five equity securities, and one mortgage-backed security. At December 31, 2010, the investment securities designated as having a continuous loss position for twelve months or more consisted of two mortgage-related securities, one corporate debt obligation, eleven capital trust notes, and seven equity securities. At June 30, 2011 and December 31, 2010, the combined market value of these securities represented unrealized losses of $24.3 million and $46.5 million, respectively. At June 30, 2011, the fair value of securities having a continuous loss position for twelve months or more was 18.4% below their collective amortized cost of $132.0 million. At December 31, 2010, the fair value of such securities was 24.0% below their collective amortized cost of $193.5 million.

 

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Note 4: Loans

The following table sets forth the composition of the loan portfolio at June 30, 2011 and December 31, 2010:

 

     June 30, 2011     December 31, 2010  
(dollars in thousands)    Amount     Percent of
Non-Covered
Loans Held for
Investment
    Amount     Percent of
Non-Covered
Loans Held for
Investment
 

Non-Covered Loans Held for Investment:

        

Mortgage Loans:

        

Multi-family

   $ 17,055,571        69.62   $ 16,807,913        70.88

Commercial real estate

     6,123,594        25.00        5,439,611        22.94   

Acquisition, development, and construction

     524,077        2.14        569,537        2.40   

One-to-four family

     148,194        0.61        170,392        0.72   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total mortgage loans held for investment

     23,851,436        97.37        22,987,453        96.94   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Loans:

        

Commercial and industrial

     571,200        2.33        641,663        2.70   

Other

     73,980        0.30        85,559        0.36   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other loans held for investment

     645,180        2.63        727,222        3.06   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-covered loans held for investment

     24,496,616        100.00     23,714,675        100.00
    

 

 

     

 

 

 

Net deferred loan origination fees

     (2,678       (7,181  

Allowance for losses on non-covered loans

     (134,471       (158,942  
  

 

 

     

 

 

   

Non-covered loans held for investment, net

     24,359,467          23,548,552     

Covered loans

     4,008,287          4,297,869     

Allowance for losses on covered loans

     (20,611       (11,903  
  

 

 

     

 

 

   

Total covered loans, net

     3,987,676          4,285,966     

Loans held for sale

     491,724          1,207,077     
  

 

 

     

 

 

   

Total loans, net

   $ 28,838,867        $ 29,041,595     
  

 

 

     

 

 

   

Non-Covered Loans

Non-Covered Loans Held for Investment

The majority of the loans the Company originates for investment are multi-family loans, most of which are collateralized by non-luxury apartment buildings in New York City that feature below-market rents.

The Company also originates the following types of loans for investment: commercial real estate (“CRE”) loans, primarily in New York City, Long Island, and New Jersey; and, to a lesser extent, acquisition, development, and construction (“ADC”) loans and commercial and industrial (“C&I”) loans. ADC loans are primarily originated for multi-family and residential tract projects in New York City and Long Island, while C&I loans are made to small and mid-size businesses in New York City, Long Island, New Jersey, and Arizona, on both a secured and unsecured basis, for working capital, business expansion, and the purchase of machinery and equipment.

Payments on multi-family and CRE loans generally depend on the income produced by the underlying properties which, in turn, depends on their successful operation and management. The ability of the Company’s borrowers to repay these loans may be impacted by adverse conditions in the local real estate market and the local economy. While the Company generally requires that such loans be qualified on the basis of the collateral property’s current cash flows, appraised value, and debt service coverage ratio, among other factors, there can be no assurance that its underwriting policies will protect the Company from credit-related losses or delinquencies.

ADC loans typically involve a higher degree of credit risk than financing on improved, owner-occupied real estate. The risk of loss on an ADC loan is largely dependent upon the accuracy of the initial appraisal of the property’s value upon completion of construction or development; the estimated cost of construction, including interest; and the estimated time to complete and/or sell or lease such property. The Company seeks to minimize these risks by maintaining consistent lending policies and rigorous underwriting standards. However, if the estimate of value proves to be inaccurate, the cost of completion is greater than expected, the length of time to complete and/or sell or lease the collateral property is greater than anticipated, or if there is a downturn in the local economy or real estate market, the property could have a value upon completion that is insufficient to assure full repayment

 

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of the loan. This could have a material adverse effect on the quality of the ADC loan portfolio, and could result in significant losses or delinquencies.

The Company seeks to minimize the risks involved in C&I lending by underwriting such loans on the basis of the cash flows produced by the business; by requiring that such loans be collateralized by various business assets, including inventory, equipment, and accounts receivable, among others; and by requiring personal guarantees. However, the capacity of a borrower to repay a C&I loan is substantially dependent on the degree to which his or her business is successful. In addition, the collateral underlying such loans may depreciate over time, may not be conducive to appraisal, or may fluctuate in value, based upon the results of operations of the business.

The Company sold $92.1 million of C&I loans in the second quarter of 2011, in connection with the disposition of the assets and liabilities of the Company’s insurance premium financing subsidiary, Standard Funding Corp. The Company recognized a gain of $9.8 million ($5.9 million after-tax) as a result of this business disposition during the three months ended June 30, 2011.

The markets served by the Company have been impacted by widespread economic weakness and high unemployment, which have contributed to it recording a higher level of charge-offs and non-performing assets. The ability of the Company’s borrowers to repay their loans, and the value of the collateral securing such loans, could be further adversely impacted by continued or more significant economic weakness in its local markets as a result of increased unemployment, declining real estate values, or increased residential and office vacancies. This not only could result in the Company experiencing a further increase in charge-offs and/or non-performing assets, but also could necessitate an increase in the provision for losses on covered loans. These events, if they were to occur, would have an adverse impact on the Company’s results of operations and its capital.

One-to-Four Family Loans Originated for Sale

The Community Bank’s mortgage banking subsidiary, NYCB Mortgage Company, LLC, is one of the 20 largest aggregators of one-to-four family loans for sale to GSEs in the United States. Community banks, credit unions, mortgage companies, and mortgage brokers use the subsidiary’s proprietary web-accessible mortgage banking platform to originate one-to-four family loans in all 50 states.

Prior to December 2010, the Company originated one-to-four family loans in its branches and on its web site on a pass-through, or conduit, basis, and would sell the loans to the third-party conduit shortly after they closed. Since December 2010, the Company has been originating one-to-four family loans in its branches and on its web site through several selected clients of its mortgage banking operation, rather than through the single third-party conduit with which it previously worked. The one-to-four family loans produced for its customers are aggregated with loans produced by its mortgage banking clients throughout the nation, and sold.

The Company also services mortgage loans for various third parties. At June 30, 2011, the unpaid principal balance of serviced loans amounted to $12.1 billion as compared to $9.5 billion at December 31, 2010.

Asset Quality

The following table presents information regarding the quality of the Company’s non-covered loans at June 30, 2011:

 

(in thousands)    30-89 Days
Past Due
     Non-
Accrual
     90 Days or More
Delinquent and Still
Accruing Interest
     Total
Past Due
Loans
     Total
Current
Loans
     Total Loans
Receivable
 

Multi-family

   $ 14,678       $ 304,695       $ —         $ 319,373       $ 16,736,198       $ 17,055,571   

Commercial real estate

     13,496         105,167         —           118,663         6,004,931         6,123,594   

Acquisition, development, and construction

     16,535         63,001         —           79,536         444,541         524,077   

One-to-four family

     3,261         16,126         —           19,387         128,807         148,194   

Commercial and industrial

     4,621         11,936         —           16,557         554,643         571,200   

Other

     550         2,056         —           2,606         71,374         73,980   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 53,141       $ 502,981       $ —         $ 556,122       $ 23,940,494       $ 24,496,616   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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The following table presents information regarding the quality of the Company’s non-covered loans at December 31, 2010:

 

(in thousands)    30-89 Days
Past Due
     Non-
Accrual
     90 Days or More
Delinquent and Still
Accruing Interest
     Total
Past Due
Loans
     Total
Current
Loans
     Total Loans
Receivable
 

Multi-family

   $ 121,188       $ 327,892       $ —         $ 449,080       $ 16,358,833       $ 16,807,913   

Commercial real estate

     8,207         162,400         —           170,607         5,269,004         5,439,611   

Acquisition, development, and construction

     5,194         91,850         —           97,044         472,493         569,537   

One-to-four family

     5,723         17,813         —           23,536         146,856         170,392   

Commercial and industrial

     9,324         22,804         —           32,128         609,535         641,663   

Other

     1,404         1,672         —           3,076         82,483         85,559   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 151,040       $ 624,431       $ —         $ 775,471       $ 22,939,204       $ 23,714,675   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

In accordance with GAAP, the Company is required to account for certain loan modifications or restructurings as troubled debt restructurings (“TDRs”). In general, a modification or restructuring of a loan constitutes a TDR if the Company grants a concession to a borrower experiencing financial difficulty. Loans modified in TDRs are placed on non-accrual status until the Company determines that future collection of principal and interest is reasonably assured, which generally requires that the borrower demonstrate performance according to the restructured terms for a period of at least six months.

The following table presents additional information regarding the Company’s TDRs as of June 30, 2011:

 

(in thousands)    Accruing      Non-Accrual      Total  

Multi-family

   $ 60,845       $ 175,060       $ 235,905   

Commercial real estate

     3,464         63,250         66,714   

Acquisition, development, and construction

     —           17,666         17,666   

Commercial and industrial

     —           3,917         3,917   

One-to-four family

     —           1,520         1,520   
  

 

 

    

 

 

    

 

 

 

Total

   $ 64,309       $ 261,413       $ 325,722   
  

 

 

    

 

 

    

 

 

 

In an effort to proactively manage delinquent loans, the Company has selectively extended to certain borrowers concessions such as rate reductions, extension of maturity dates, capitalizing interest, and forbearance agreements. As of June 30, 2011, loans on which concessions were made with respect to rate reductions amounted to $235.5 million; loans on which maturities were extended or interest was capitalized amounted to $53.3 million; and loans in connection with which forbearance agreements were reached amounted to $36.9 million.

Most of the Company’s TDRs involve rate reductions and/or forbearance of arrears, which thus far have proven the most successful in enabling selected borrowers to emerge from delinquency and keep their loans current.

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 by Company personnel regarding the likelihood that the concession will result in the maximum recovery for the Company.

 

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The following table summarizes the Company’s non-covered loan portfolio by credit quality indicator at June 30, 2011:

 

(in thousands)    Multi-Family      Commercial
Real Estate
     Acquisition,
Development, and
Construction
     One-to-
Four
Family
     Total
Mortgage
Segment
     Commercial
and
Industrial
     Other      Total Other
Loan Segment
 

Credit Quality Indicator:

                       

Pass

   $ 16,602,460       $ 5,930,036       $ 434,077       $ 136,458       $ 23,103,031       $ 537,415       $ 71,924       $ 609,339   

Special mention

     56,001         66,810         21,968         —           144,779         16,626         —           16,626   

Substandard

     397,015         126,748         68,032         11,736         603,531         17,159         2,056         19,215   

Doubtful

     95         —           —           —           95         —           —           —     

Loss

     —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 17,055,571       $ 6,123,594       $ 524,077       $ 148,194       $ 23,851,436       $ 571,200       $ 73,980       $ 645,180   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes the Company’s non-covered loan portfolio by credit quality indicator at December 31, 2010:

 

(in thousands)    Multi-Family      Commercial
Real Estate
     Acquisition,
Development, and
Construction
     One-to-
Four
Family
     Total
Mortgage
Segment
     Commercial
and
Industrial
     Other      Total Other
Loan Segment
 

Credit Quality Indicator:

                       

Pass

   $ 16,097,834       $ 5,239,936       $ 454,570       $ 158,240       $ 21,950,580       $ 594,373       $ 83,887       $ 678,260   

Special mention

     172,713         22,650         6,650         —           202,013         21,224         —           21,224   

Substandard

     535,366         176,797         108,317         12,152         832,632         23,564         1,672         25,236   

Doubtful

     2,000         228         —           —           2,228         2,502         —           2,502   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 16,807,913       $ 5,439,611       $ 569,537       $ 170,392       $ 22,987,453       $ 641,663       $ 85,559       $ 727,222   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The preceding classifications follow regulatory guidelines and can be generally described as follows: pass loans are of satisfactory quality; special mention loans have a potential weakness or risk that may result in the deterioration of future repayment; substandard loans are inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged (these loans have a well defined weakness and there is a distinct possibility that the Company will sustain some loss); doubtful loans, based on existing circumstances, have weaknesses that make collection or liquidation in full highly questionable and improbable. In addition, one-to-four family residential loans are classified utilizing an inter-regulatory agency methodology that incorporates the extent of delinquency and the loan-to-value ratios. These classifications are the most current available and have been generally updated within the last twelve months.

Covered Loans

The following table presents the balance of covered loans acquired in the AmTrust and Desert Hills acquisitions as of June 30, 2011:

 

(dollars in thousands)    Amount      Percent of
Covered Loans
 

Loan Category:

     

One-to-four family

   $ 3,622,087         90.4 

All other loans

     386,200         9.6   
  

 

 

    

 

 

 

Total covered loans

   $ 4,008,287         100.0 
  

 

 

    

 

 

 

The Company refers to the loans acquired in the AmTrust and Desert Hills acquisitions as “covered loans” because the Company will be reimbursed for a substantial portion of any future losses on these loans under the terms of the FDIC loss sharing agreements. Covered loans are accounted for under FASB Accounting Standards Codification (“ASC”) 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality,” and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the lives of the loans. Under ASC 310-30, purchasers are permitted to aggregate acquired loans 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.

At June 30, 2011 and December 31, 2010, the outstanding balance of covered loans (representing amounts owed to the Company) totaled $4.8 billion and $5.2 billion, respectively. The carrying values of such loans were $4.0 billion and $4.3 billion, respectively, at June 30, 2011 and December 31, 2010.

 

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At the respective acquisition dates, the Company estimated the fair values of the AmTrust and Desert Hills loan portfolios, which represented the expected cash flows from the portfolios discounted at market-based rates. In estimating such fair value, the Company (a) calculated the contractual amount and timing of undiscounted principal and interest payments (the “undiscounted contractual cash flows”); and (b) estimated the amount and timing of undiscounted expected principal and interest payments (the “undiscounted expected cash flows”). The amount by which the undiscounted expected cash flows exceed the estimated fair value (the “accretable yield”) is accreted into interest income over the lives of the loans. The difference between the undiscounted contractual cash flows and the undiscounted expected cash flows is referred to as the “non-accretable difference.” The non-accretable difference represents an estimate of the credit risk in the loan portfolios at the acquisition date.

The accretable yield is affected by changes in interest rate indices for variable rate loans, changes in prepayment assumptions, and changes in expected principal and interest payments over the estimated lives of the loans. Prepayments affect the estimated lives of covered loans and could change the amount of interest income, and possibly principal, expected to be collected. Changes in the expected principal and interest payments over the estimated lives are driven by the credit outlook and actions taken with borrowers. The Company periodically evaluates the estimates of cash flows expected to be collected. Expected future cash flows from interest payments are based on the variable rates at the time of the periodic evaluation. Estimates of expected cash flows that are impacted by changes in interest rate indices for variable rate loans and prepayment assumptions are treated as prospective yield adjustments and included in interest income.

Changes in the accretable yield for acquired loans were as follows for the six months ended June 30, 2011:

 

(in thousands)    Accretable Yield  

Balance at beginning of period

   $ 1,356,844   

Reclassification from nonaccretable difference

     142,294   

Accretion

     (101,870
  

 

 

 

Balance at end of period

   $ 1,397,268   
  

 

 

 

In connection with the Desert Hills acquisition, the Company also acquired other real estate owned (“OREO”), all of which is covered under an FDIC loss sharing agreement. Covered OREO was initially recorded at its estimated fair value on the acquisition date, based on independent appraisals less the estimated selling costs. Any subsequent write-downs due to declines in fair value are charged to non-interest expense, and partially offset by the loss reimbursement under the FDIC loss sharing agreement. Any recoveries of previous write-downs are credited to non-interest expense and partially offset by the portion of the recovery that is due to the FDIC.

The FDIC loss share receivable represents the present value of the estimated losses on covered loans to be reimbursed by the FDIC. The estimated losses were based on the same cash flow estimates used in determining the fair value of the covered loans. The FDIC loss share receivable will be reduced as losses are recognized on covered loans and loss sharing payments are received from the FDIC. Realized losses in excess of acquisition-date estimates will result in an increase in the FDIC loss share receivable. Conversely, if realized losses are less than acquisition-date estimates, the FDIC loss share receivable will be reduced.

The following table presents information regarding the Company’s covered loans 90 days or more past due at June 30, 2011 and December 31, 2010:

 

(in thousands)    June 30,
2011
     December 31,
2010
 

Covered Loans 90 Days or More Past Due:

     

One-to-four family

   $ 308,902       $ 310,929   

Other loans

     47,360         49,898   
  

 

 

    

 

 

 

Total covered loans 90 days or more past due

   $ 356,262       $ 360,827   
  

 

 

    

 

 

 

 

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The following table presents information regarding the Company’s covered loans that were 30 to 89 days past due at June 30, 2011 and December 31, 2010:

 

(in thousands)    June 30,
2011
     December 31,
2010
 

Covered Loans 30-89 Days Past Due:

     

One-to-four family

   $ 109,857       $ 108,691   

Other loans

     14,343         21,851   
  

 

 

    

 

 

 

Total covered loans 30-89 days past due

   $ 124,200       $ 130,542   
  

 

 

    

 

 

 

At June 30, 2011, the Company had $124.2 million of covered loans that were 30 to 89 days past due, and covered loans of $356.3 million that were 90 days or more past due but considered to be performing due to the application of the yield accretion method under ASC 310-30. The remaining portion of the Company’s covered loan portfolio totaled $3.5 billion at June 30, 2011 and is considered current. ASC 310-30 allows the Company 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 are no longer classified as non-performing because, at the respective dates of acquisition, the Company believed that it would fully collect the new carrying value of these 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 management’s 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 the loan is contractually past due.

The Company recorded an $8.7 million provision for losses on covered loans during the three months ended June 30, 2011. This provision was largely due to credit deterioration in the C&I loan portfolio acquired in the Desert Hills transaction, and in the portfolios of home equity lines of credit acquired in the acquisitions of both Desert Hills and AmTrust. The provision for covered loans was largely offset by FDIC indemnification income of $7.6 million that was recorded in non-interest income for the three months ended June 30, 2011.

Note 5: Allowance for Loan Losses

The following tables provide additional information regarding the Company’s allowance for loan losses, based upon the method of evaluating loan impairment:

 

(in thousands)    Mortgage      Other      Total  

Allowance for Loan Losses at June 30, 2011:

        

Individually evaluated for impairment

   $ 8,605       $ —         $ 8,605   

Collectively evaluated for impairment

     111,695         14,171         125,866   

Loans acquired with deteriorated credit quality

     7,386         13,225         20,611   
  

 

 

    

 

 

    

 

 

 

Total

   $ 127,686       $ 27,396       $ 155,082   
  

 

 

    

 

 

    

 

 

 
(in thousands)    Mortgage      Other      Total  

Allowance for Loan Losses at December 31, 2010:

        

Individually evaluated for impairment

   $ 15,877       $ 130       $ 16,007   

Collectively evaluated for impairment

     124,957         17,978         142,935   

Loans acquired with deteriorated credit quality

     4,873         7,030         11,903   
  

 

 

    

 

 

    

 

 

 

Total

   $ 145,707       $ 25,138       $ 170,845   
  

 

 

    

 

 

    

 

 

 

 

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The following tables provide additional information regarding the methods used to evaluate the Company’s loan portfolio for impairment:

 

(in thousands)    Mortgage      Other      Total  

Loans Receivable at June 30, 2011:

        

Individually evaluated for impairment

   $ 485,055       $ 6,568       $ 491,623   

Collectively evaluated for impairment

     23,366,381         638,612         24,004,993   

Loans acquired with deteriorated credit quality

     3,622,087         386,200         4,008,287   
  

 

 

    

 

 

    

 

 

 

Total

   $ 27,473,523       $ 1,031,380       $ 28,504,903   
  

 

 

    

 

 

    

 

 

 
(in thousands)    Mortgage      Other      Total  

Loans Receivable at December 31, 2010:

        

Individually evaluated for impairment

   $ 747,869       $ 12,929       $ 760,798   

Collectively evaluated for impairment

     22,239,584         714,293         22,953,877   

Loans acquired with deteriorated credit quality

     3,874,449         423,420         4,297,869   
  

 

 

    

 

 

    

 

 

 

Total

   $ 26,861,902       $ 1,150,642       $ 28,012,544   
  

 

 

    

 

 

    

 

 

 

Non-Covered Loans

The following table summarizes activity in the allowance for losses on non-covered loans for the six months ended June 30, 2011:

 

(in thousands)    Mortgage     Other     Total  

Beginning balance at December 31, 2010

   $ 140,834      $ 18,108      $ 158,942   

Charge-offs

     (60,051     (8,211     (68,262

Recoveries

     772        2,019        2,791   

Provision for loan losses

     38,745        2,255        41,000   
  

 

 

   

 

 

   

 

 

 

Ending balance at June 30, 2011

   $ 120,300      $ 14,171      $ 134,471   
  

 

 

   

 

 

   

 

 

 

Non-accrual loans amounted to $503.0 million and $624.4 million, respectively, at June 30, 2011 and December 31, 2010. There were no loans over 90 days past due and still accruing interest at either of these dates.

The following table presents additional information regarding the Company’s impaired loans at or for the six months ended June 30, 2011:

 

(in thousands)    Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

Impaired loans with no related allowance:

              

Multi-family

   $ 325,905       $ 355,025       $ —         $ 386,521       $ 3,596   

Commercial real estate

     79,773         84,700         —           99,930         1,099   

Acquisition, development, and construction

     37,477         40,407         —           51,465         —     

One-to-four family

     3,985         4,080         —           3,798         8   

Commercial and industrial

     6,568         11,657         —           8,743         139   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans with no related allowance

   $ 453,708       $ 495,869       $ —         $ 550,457       $ 4,842   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans with an allowance recorded:

              

Multi-family

   $ 4,916       $ 5,163       $ 2,636       $ 27,534       $ —     

Commercial real estate

     7,999         7,999         64         16,849         —     

Acquisition, development, and construction

     25,000         25,000         5,905         30,178         —     

One-to-four family

     —           —           —           187         —     

Commercial and industrial

     —           —           —           1,005         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans with an allowance recorded

   $ 37,915       $ 38,162       $ 8,605       $ 75,753       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Impaired Loans:

              

Multi-family

   $ 330,821       $ 360,188       $ 2,636       $ 414,055       $ 3,596   

Commercial real estate

     87,772         92,699         64         116,779         1,099   

Acquisition, development, and construction

     62,477         65,407         5,905         81,643         —     

One-to-four family

     3,985         4,080         —           3,985         8   

Commercial and industrial

     6,568         11,657         —           9,748         139   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 491,623       $ 534,031       $ 8,605       $ 626,210       $ 4,842   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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The following table presents additional information regarding the Company’s impaired loans at December 31, 2010:

 

(in thousands)    Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
 

Loans with no related allowance:

        

Multi-family

   $ 447,137       $ 464,011       $ —     

Commercial real estate

     120,087         122,486         —     

Acquisition, development, and construction

     65,453         71,541         —     

One-to-four family

     3,611         3,707         —     

Commercial and industrial

     10,919         15,197         —     
  

 

 

    

 

 

    

 

 

 

Total impaired loans with no related allowance

   $ 647,207       $ 676,942       $ —     
  

 

 

    

 

 

    

 

 

 

Loans with an allowance recorded:

        

Multi-family

   $ 50,153       $ 52,209       $ 6,756   

Commercial real estate

     25,700         25,894         1,555   

Acquisition, development, and construction

     35,355         37,634         7,553   

One-to-four family

     373         373         13   

Commercial and industrial

     2,010         2,010         130   
  

 

 

    

 

 

    

 

 

 

Total impaired loans with an allowance recorded

   $ 113,591       $ 118,120       $ 16,007   
  

 

 

    

 

 

    

 

 

 

Total Impaired Loans:

        

Multi-family

   $ 497,290       $ 516,220       $ 6,756   

Commercial real estate

     145,787         148,380         1,555   

Acquisition, development, and construction

     100,808         109,175         7,553   

One-to-four family

     3,984         4,080         13   

Commercial and industrial

     12,929         17,207         130   
  

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 760,798       $ 795,062       $ 16,007   
  

 

 

    

 

 

    

 

 

 

The interest income recorded on these loans was not materially different from cash-basis interest income.

Covered Loans

Under the 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. As a result, 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 losses on covered loans charged to earnings, and an allowance for losses on covered loans will be established. 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.

The following table summarizes activity in the allowance for losses on covered loans for the six months ended June 30, 2011 and the twelve months ended December 31, 2010:

 

(in thousands)    June 30,
2011
     December 31,
2010
 

Balance, beginning of period

   $ 11,903       $ —     

Provision for loan losses

     8,708         11,903   
  

 

 

    

 

 

 

Balance, end of period

   $ 20,611       $ 11,903   
  

 

 

    

 

 

 

 

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Note 6: Borrowed Funds

The following table summarizes the Company’s borrowed funds at June 30, 2011 and December 31, 2010:

 

(in thousands)    June 30,
2011
     December 31,
2010
 

FHLB advances

   $ 7,856,912       $ 8,375,659   

Repurchase agreements

     4,125,000         4,125,000   

Junior subordinated debentures

     426,846         426,992   

Senior notes

     601,926         601,865   

Preferred stock of subsidiaries

     6,600         6,600   
  

 

 

    

 

 

 

Total borrowed funds

   $ 13,017,284       $ 13,536,116   
  

 

 

    

 

 

 

At June 30, 2011, the Company had $426.8 million of outstanding junior subordinated deferrable interest debentures (“junior subordinated debentures”) held by nine statutory business trusts (the “Trusts”) that issued guaranteed capital securities. The capital securities qualified as Tier 1 capital of the Company at that date. However, with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) in July 2010, the qualification of capital securities as Tier 1 capital is expected to be phased out over a three-year period beginning January 1, 2013 and ending January 1, 2016.

The Trusts are accounted for as unconsolidated subsidiaries in accordance with GAAP. The proceeds of each issuance were invested in a series of junior subordinated debentures of the Company and the underlying assets of each statutory business trust are the relevant debentures. The Company has fully and unconditionally guaranteed the obligations under each trust’s capital securities to the extent set forth in a guarantee by the Company to each trust. The Trusts’ capital securities are each subject to mandatory redemption, in whole or in part, upon repayment of the debentures at their stated maturity or earlier redemption.

The following table provides a summary of the outstanding capital securities issued by each trust and the carrying amounts of the junior subordinated debentures issued by the Company to each trust as of June 30, 2011:

 

Issuer

   Interest Rate of
Capital Securities
and Debentures
    Junior
Subordinated

Debenture
Carrying
Amount
     Capital
Securities
Amount
Outstanding
     Date of
Original Issue
   Stated Maturity    First Optional
Redemption Date
           (dollars in thousands)                 

Haven Capital Trust II

     10.250   $ 23,333       $ 22,550       May 26, 1999    June 30, 2029    June 30, 2009(1)

Queens County Capital Trust I

     11.045        10,309         10,000       July 26, 2000    July 19, 2030    July 19, 2010(2)

Queens Statutory Trust I

     10.600        15,464         15,000       September 7, 2000    September 7, 2030    September 7, 2010(1)

New York Community Capital Trust V

     6.000        143,710         137,359       November 4, 2002    November 1, 2051    November 4, 2007(2)

New York Community Capital Trust X

     1.847        123,712         120,000       December 14, 2006    December 15, 2036    December 15, 2011(3)

LIF Statutory Trust I

     10.600        7,732         7,500       September 7, 2000    September 7, 2030    September 7, 2010(1)

PennFed Capital Trust II

     10.180        12,372         12,000       March 28, 2001    June 8, 2031    June 8, 2011(1)

PennFed Capital Trust III

     3.497        30,928         30,000       June 2, 2003    June 15, 2033    June 15, 2008(3)

New York Community Capital Trust XI

     1.896        59,286         57,500       April 16, 2007    June 30, 2037    June 30, 2012(3)
    

 

 

    

 

 

          
     $ 426,846       $ 411,909            
    

 

 

    

 

 

          

 

(1) Callable at a premium from this date forward.
(2) Callable subject to certain conditions as described in the prospectus filed with the SEC on November 4, 2002.
(3) Callable from this date forward.

Senior notes totaled $608.5 million at June 30, 2011, comparable to the balance at December 31, 2010. Included in the respective amounts were $602.0 million of fixed rate senior notes that were issued under the FDIC’s Temporary Liquidity Guarantee Program in December 2008. Of this amount, $512.0 million are due at December 16, 2011 and $90.0 million are due at June 22, 2012.

 

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Table of Contents

Note 7: Mortgage Servicing Rights

The Company had mortgage servicing rights (“MSRs”) of $127.7 million at June 30, 2011. The Company has two classes of MSRs (residential and securitized) for which it separately manages the economic risk.

Residential MSRs are carried at fair value, with changes in fair value recorded as a component of non-interest income in each period. The Company uses various derivative instruments to mitigate the income statement-effect of changes in fair value due to changes in valuation inputs and assumptions regarding its residential MSRs. MSRs do not trade in an active open market with readily observable prices. Accordingly, the Company utilizes a valuation model that calculates the present value of estimated future cash flows. The model incorporates various assumptions, including estimates of prepayment speeds, discount rates, refinance rates, servicing costs, and ancillary income. The Company reassesses and periodically adjusts the underlying inputs and assumptions in the model to reflect market conditions and assumptions that a market participant would consider in valuing the MSR asset.

The value of MSRs is significantly affected by mortgage interest rates available in the marketplace, which influence mortgage loan prepayment speeds. In general, during periods of declining interest rates, the value of MSRs declines due to a rise in prepayments attributable to increased mortgage refinancing activity. Conversely, during periods of rising interest rates, the value of MSRs generally increases due to reduced mortgage refinancing activity.

Securitized MSRs are carried at the lower of the initial carrying value, adjusted for amortization or fair value, and are amortized in proportion to, and over the period of, estimated net servicing income. Such MSRs are periodically evaluated for impairment based on the difference between the carrying amount and current fair value. If it is determined that impairment exists, the resultant loss is charged against earnings.

The following table sets forth the changes in residential and securitized MSRs for the six months ended June 30, 2011 and the year ended December 31, 2010:

 

     For the Six Months
Ended June 30, 2011
    For the Year Ended
December 31, 2010
 
(in thousands)    Residential     Securitized     Residential     Securitized  

Carrying value, beginning of year

   $ 106,186      $ 1,192      $ 8,617      $ 1,965   

Additions

     37,319        —          100,767        —     

Change in fair value

     (16,734     —          (3,198     —     

Amortization

     —          (306     —          (773
  

 

 

   

 

 

   

 

 

   

 

 

 

Carrying value, end of period

   $ 126,771      $ 886      $ 106,186      $ 1,192   
  

 

 

   

 

 

   

 

 

   

 

 

 

Note 8. Pension and Other Post-Retirement Benefits

The following table sets forth certain disclosures for the Company’s pension and post-retirement plans for the periods indicated:

 

     For the Three Months Ended June 30,  
     2011     2010  
(in thousands)    Pension
Benefits
    Post-Retirement
Benefits
    Pension
Benefits
    Post-Retirement
Benefits
 

Components of net periodic (credit) expense:

        

Interest cost

   $ 1,491      $ 180      $ 1,515      $ 198   

Service cost

     —          1        —          1   

Expected return on plan assets

     (3,133     —          (2,866     —     

Unrecognized past service liability

     —          (62     49        (62

Amortization of unrecognized loss

     1,190        103        1,286        78   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic (credit) expense

   $ (452   $ 222      $ (16   $ 215   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     For the Six Months Ended June 30,  
     2011     2010  
(in thousands)    Pension
Benefits
    Post-Retirement
Benefits
    Pension
Benefits
    Post-Retirement
Benefits
 

Components of net periodic (credit) expense:

        

Interest cost

   $ 2,982      $ 360      $ 3,028      $ 397   

Service cost

     —          3        —          2   

Expected return on plan assets

     (6,265     —          (5,731     —     

Unrecognized past service liability

     —          (125     98        (125

Amortization of unrecognized loss

     2,379        205        2,572        157   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic (credit) expense

   $ (904   $ 443      $ (33   $ 431   
  

 

 

   

 

 

   

 

 

   

 

 

 

As discussed in the notes to the consolidated financial statements presented in the Company’s 2010 Annual Report on Form 10-K, the Company expects to contribute $1.4 million to its post-retirement plan to pay premiums and claims for the fiscal year ending December 31, 2011. The Company does not expect to contribute to its pension plan in 2011.

Note 9: Stock-Based Compensation

At June 30, 2011, the Company had 3,017,958 shares available for grant as options, restricted stock, or other forms of related rights under the New York Community Bancorp, Inc. 2006 Stock Incentive Plan (the “2006 Stock Incentive Plan”), which was approved by the Company’s shareholders at its Annual Meeting on June 7, 2006 and reapproved at its Annual Meeting on June 2, 2011. Under the 2006 Stock Incentive Plan, the Company granted 1,643,000 shares of restricted stock in the six months ended June 30, 2011, with an average fair value of $18.40 per share on the date of grant and a vesting period of five years. There were no shares granted in the second quarter of this year. Compensation and benefits expense related to restricted stock grants is recognized on a straight-line basis over the vesting period, and totaled $4.3 million and $2.8 million, respectively, in the three months ended June 30, 2011 and 2010, and $7.9 million and $5.7 million, respectively, in the six months ended at those dates.

A summary of activity with regard to restricted stock awards in the six months ended June 30, 2011 is presented in the following table:

 

     For the Six Months Ended
June 30, 2011
 
     Number of
Shares
    Weighted Average
Grant Date Fair Value
 

Unvested at beginning of year

     2,636,700      $ 14.17   

Granted

     1,643,000        18.40   

Vested

     (400,400     15.16   

Cancelled

     (45,400     16.63   
  

 

 

   

 

 

 

Unvested at end of period

     3,833,900        15.85   
  

 

 

   

 

 

 

As of June 30, 2011, unrecognized compensation cost relating to unvested restricted stock totaled $54.1 million. This amount will be recognized over a remaining weighted average period of 3.6 years.

In addition, the Company had eight stock option plans at June 30, 2011: the 1993 and 1997 New York Community Bancorp, Inc. Stock Option Plans; the 1993 Haven Bancorp, Inc. Stock Option Plan; the 1998 Richmond County Financial Corp. Stock Compensation Plan; the 2001 Roslyn Bancorp, Inc. Stock-based Incentive Plan; the 1998 Long Island Financial Corp. Stock Option Plan; and the 2003 and 2004 Synergy Financial Group Stock Option Plans (all eight plans collectively referred to as the “Stock Option Plans”). All stock options granted under the Stock Option Plans expire ten years from the date of grant.

The Company uses the modified prospective approach to recognize compensation costs related to share-based payments at fair value on the date of grant, and recognizes such costs in the financial statements over the vesting period during which the employee provides service in exchange for the award. As there were no unvested options at any time during the six months ended June 30, 2011 or the year ended December 31, 2010, the Company did not record any compensation and benefits expense relating to stock options during those periods.

 

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Table of Contents

Currently, the Company issues new shares of common stock to satisfy the exercise of options. The Company may also use common stock held in Treasury to satisfy the exercise of options. In such event, the difference between the average cost of Treasury shares and the exercise price is recorded as an adjustment to retained earnings or paid-in capital on the date of exercise. At June 30, 2011, there were 9,920,890 stock options outstanding. The number of shares available for future issuance under the Stock Option Plans was 10,400 at June 30, 2011.

The status of the Stock Option Plans at June 30, 2011 and changes that occurred during the six months ended at that date are summarized below:

 

     For the Six Months Ended
June 30, 2011
 
     Number of Stock
Options
    Weighted Average
Exercise Price
 

Stock options outstanding, beginning of year

     12,443,676      $ 15.75   

Exercised

     (349,923     12.54   

Expired/forfeited

     (2,172,863     18.24   
  

 

 

   

Stock options outstanding, end of period

     9,920,890        15.32   

Options exercisable, end of period

     9,920,890        15.32   
  

 

 

   

 

 

 

The intrinsic value of stock options outstanding and exercisable at June 30, 2011 was $5.5 million. The intrinsic values of options exercised during the six months ended June 30, 2011 and 2010 were $1.9 million and $1.5 million, respectively.

Note 10: Fair Value Measurements

The FASB has issued guidance that, among other things, defined fair value, established a consistent framework for measuring fair value, and expanded disclosure for each major asset and liability category measured at fair value on either a recurring or non-recurring basis. The standard clarified that fair value is an “exit” price, representing the amount that would be received when selling an asset, or paid when transferring a liability, in an orderly transaction between market participants. Fair value is thus a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the standard established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 

   

Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

   

Level 2 – Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

 

   

Level 3 – Inputs to the valuation methodology are significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants use in pricing an asset or liability.

A financial instrument’s categorization within this valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

 

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Table of Contents

The following tables present assets and liabilities that were measured at fair value on a recurring basis as of June 30, 2011 and December 31, 2010, and that were included in the Company’s Consolidated Statements of Condition at those dates:

 

     Fair Value Measurements at June 30, 2011 Using  
(in thousands)    Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Netting
Adjustments
     Total
Fair Value
 

Mortgage-Related Securities Available for Sale:

              

GSE certificates

   $ —         $ 49,084       $ —         $ —         $ 49,084   

GSE CMOs

     —           —           —           —           —     

Private label CMOs

     —           33,551         —           —           33,551   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage-related securities

   $ —         $ 82,635       $ —         $ —         $ 82,635   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other Securities Available for Sale:

              

GSE debentures

   $ —         $ 608       $ —         $ —         $ 608   

Corporate bonds

     —           —           —           —           —     

U. S. Treasury obligations

     —           —           —           —           —     

State, county, and municipal

     —           1,362         —           —           1,362   

Capital trust notes

     —           19,214         18,132         —           37,346   

Preferred stock

     —           455         —           —           455   

Common stock

     39,866         —           —           —           39,866   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other securities

   $ 39,866       $ 21,639       $ 18,132       $ —         $ 79,637   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 39,866       $ 104,274       $ 18,132       $ —         $ 162,272   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other Assets:

              

Loans held for sale

   $ —         $ 491,724       $ —         $ —         $ 491,724   

Mortgage servicing rights

     —           —           126,771         —           126,771   

Derivative assets

     2,870         1,372         700         —           4,942   

Liabilities:

              

Derivative liabilities

   $ —         $ 3,870       $ —         $ —         $ 3,870   

 

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Table of Contents
     Fair Value Measurements at December 31, 2010 Using  
(in thousands)    Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
    Significant
Other
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs

(Level 3)
     Netting
Adjustments
     Total
Fair Value
 

Mortgage-Related Securities Available for Sale:

            

GSE certificates

   $ —        $ 211,515      $ —         $ —         $ 211,515   

GSE CMOs

     —          222,303        —           —           222,303   

Private label CMOs

     —          51,362        —           —      &n