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NYCB > SEC Filings for NYCB > Form 10-Q on 8-Nov-2013All Recent SEC Filings

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Form 10-Q for NEW YORK COMMUNITY BANCORP INC


8-Nov-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

For the purpose of this discussion and analysis, the words "we," "us," "our," and the "Company" are used to refer to New York Community Bancorp, Inc. and our consolidated subsidiaries, including New York Community Bank (the "Community Bank") and New York Commercial Bank (the "Commercial Bank") (collectively, the "Banks").

Forward-Looking Statements and Associated Risk Factors

This report, like many written and oral communications presented by New York Community Bancorp, Inc. and our authorized officers, may contain certain forward-looking statements regarding our prospective performance and strategies within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of said safe harbor provisions.

Forward-looking statements, which are based on certain assumptions and describe future plans, strategies, and expectations of the Company, are generally identified by use of the words "anticipate," "believe," "estimate," "expect," "intend," "plan," "project," "seek," "strive," "try," or future or conditional verbs such as "will," "would," "should," "could," "may," or similar expressions. Our ability to predict results or the actual effects of our plans or strategies is inherently uncertain. Accordingly, actual results may differ materially from anticipated results.

There are a number of factors, many of which are beyond our control, that could cause actual conditions, events, or results to differ significantly from those described in our forward-looking statements. These factors include, but are not limited to:

- general economic conditions, either nationally or in some or all of the areas in which we and our customers conduct our respective businesses;

- conditions in the securities markets and real estate markets or the banking industry;

- changes in real estate values, which could impact the quality of the assets securing the loans in our portfolio;

- changes in interest rates, which may affect our net income, prepayment penalty income, mortgage banking income, and other future cash flows, or the market value of our assets, including our investment securities;

- changes in the quality or composition of our loan or securities portfolios;

- changes in our capital management policies, including those regarding business combinations, dividends, and share repurchases, among others;

- our use of derivatives to mitigate our interest rate exposure;

- changes in competitive pressures among financial institutions or from non-financial institutions;

- changes in deposit flows and wholesale borrowing facilities;

- changes in the demand for deposit, loan, and investment products and other financial services in the markets we serve;

- our timely development of new lines of business and competitive products or services in a changing environment, and the acceptance of such products or services by our customers;

- changes in our customer base or in the financial or operating performances of our customers' businesses;

- any interruption in customer service due to circumstances beyond our control;

- our ability to retain key personnel;

- potential exposure to unknown or contingent liabilities of companies we have acquired or may acquire in the future;

- the outcome of pending or threatened litigation, or of other matters before regulatory agencies, whether currently existing or commencing in the future;

- environmental conditions that exist or may exist on properties owned by, leased by, or mortgaged to the Company;

- any interruption or breach of security resulting in failures or disruptions in customer account management, general ledger, deposit, loan, or other systems;

- operational issues stemming from, and/or capital spending necessitated by, the potential need to adapt to industry changes in information technology systems, on which we are highly dependent;

- the ability to keep pace with, and implement on a timely basis, technological changes;

- changes in legislation, regulation, policies, or administrative practices, whether by judicial, governmental, or legislative action, including, but not limited to, the Dodd-Frank Wall Street Reform and Consumer Protection Act, and other changes pertaining to banking, securities, taxation, rent regulation and housing, financial accounting and reporting, environmental protection, and insurance, and the ability to comply with such changes in a timely manner;

- changes in the monetary and fiscal policies of the U.S. Government, including policies of the U.S. Department of the Treasury and the Board of Governors of the Federal Reserve System;


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- changes in accounting principles, policies, practices, or guidelines;

- any breach in performance by the Community Bank under our loss sharing agreements with the FDIC;

- changes in our estimates of future reserves based upon the periodic review thereof under relevant regulatory and accounting requirements;

- changes in regulatory expectations relating to predictive models we use in connection with stress testing and other forecasting or in the assumptions on which such modeling and forecasting are predicated;

- the ability to successfully integrate any assets, liabilities, customers, systems, and management personnel of any banks we may acquire into our operations, and our ability to realize related revenue synergies and cost savings within expected time frames;

- changes in our credit ratings or in our ability to access the capital markets;

- war or terrorist activities; and

- other economic, competitive, governmental, regulatory, technological, and geopolitical factors affecting our operations, pricing, and services.

It should be noted that we routinely evaluate opportunities to expand through acquisitions and frequently conduct due diligence activities in connection with such opportunities. As a result, acquisition discussions and, in some cases, negotiations, may take place at any time, and acquisitions involving cash or our debt or equity securities may occur.

In addition, the timing and occurrence or non-occurrence of events may be subject to circumstances beyond our control.

Please see Item 1A, "Risk Factors," for a further discussion of factors that could affect the actual outcome of future events.

Readers are cautioned not to place undue reliance on the forward-looking statements contained herein, which speak only as of the date of this report. Except as required by applicable law or regulation, we undertake no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date on which such statements were made.


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RECONCILIATIONS OF STOCKHOLDERS' EQUITY AND TANGIBLE STOCKHOLDERS' EQUITY, TOTAL ASSETS AND TANGIBLE ASSETS, AND THE RELATED MEASURES

Although tangible stockholders' equity, adjusted tangible stockholders' equity, tangible assets, and adjusted tangible assets are not measures that are calculated in accordance with generally accepted accounting principles in the U.S. ("GAAP"), management uses these non-GAAP measures in their analysis of our performance. We believe that these non-GAAP measures are important indications of our ability to grow both organically and through business combinations and, with respect to tangible stockholders' equity and adjusted tangible stockholders' equity, our ability to pay dividends and to engage in various capital management strategies.

We calculate tangible stockholders' equity by subtracting from stockholders' equity the sum of our goodwill and core deposit intangibles ("CDI"), and calculate tangible assets by subtracting the same sum from our total assets. To calculate our ratio of tangible stockholders' equity to tangible assets, we divide our tangible stockholders' equity by our tangible assets, both of which include accumulated other comprehensive loss ("AOCL"). AOCL consists of after-tax net unrealized gains (losses) on securities and losses on pension and post-retirement obligations, and is recorded in our Consolidated Statements of Condition. We also calculate our ratio of tangible stockholders' equity to tangible assets excluding AOCL, as its components are impacted by changes in market conditions, including interest rates, which fluctuate. This ratio is referred to in this report and below as the ratio of "adjusted tangible stockholders' equity to adjusted tangible assets."

Tangible stockholders' equity, adjusted tangible stockholders' equity, tangible assets, adjusted tangible assets, and the related tangible capital measures, should not be considered in isolation or as a substitute for stockholders' equity or any other capital measure prepared in accordance with GAAP. Moreover, the manner in which we calculate these non-GAAP capital measures may differ from that of other companies reporting measures of capital with similar names.

Reconciliations of our stockholders' equity, tangible stockholders' equity, and adjusted tangible stockholders' equity; our total assets, tangible assets, and adjusted tangible assets; and the related capital measures at September 30, 2013 and December 31, 2012 follow:

                                                       September 30,        December 31,
                                                           2013                 2012
(in thousands)
Stockholders' Equity                                    $ 5,697,045          $ 5,656,264
Less: Goodwill                                           (2,436,131)          (2,436,131)
Core deposit intangibles                                    (19,305)             (32,024)

Tangible stockholders' equity                           $ 3,241,609          $ 3,188,109

Total Assets                                            $45,764,133          $44,145,100
Less: Goodwill                                           (2,436,131)          (2,436,131)
Core deposit intangibles                                    (19,305)             (32,024)

Tangible assets                                         $43,308,697          $41,676,945

Stockholders' equity to total assets                           12.45%               12.81%
Tangible stockholders' equity to tangible assets                7.48%                7.65%

Tangible Stockholders' Equity                            $3,241,609           $3,188,109
Add back: Accumulated other comprehensive loss,
net of tax                                                   59,542               61,705

Adjusted tangible stockholders' equity                   $3,301,151           $3,249,814

Tangible Assets                                         $43,308,697          $41,676,945
Add back: Accumulated other comprehensive loss,
net of tax                                                   59,542               61,705

Adjusted tangible assets                                $43,368,239          $41,738,650


Adjusted stockholders' equity to adjusted tangible
assets                                                          7.61%                7.79%


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Executive Summary

New York Community Bancorp, Inc. is the holding company for New York Community Bank, a thrift, with 236 branches in Metro New York, New Jersey, Ohio, Florida, and Arizona; and New York Commercial Bank, with 35 branches in Metro New York. With assets of $45.8 billion at September 30, 2013, we rank among the 20 largest bank holding companies in the nation and, with deposits of $25.3 billion at that date, we rank among its 25 largest depositories.

Both of our banks are New York State-chartered and both are subject to regulation by the FDIC, the Consumer Financial Protection Bureau, and the New York State Department of Financial Services. In addition, the holding company is subject to regulation by the Federal Reserve Board, and to the requirements of the New York Stock Exchange, where shares of our common stock are traded under the symbol "NYCB". With the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") in 2010 and its subsequent implementation, the Company and the Banks have been subject to heightened regulation and scrutiny.

As a publicly traded company, our mission is to provide our shareholders with a solid return on their investment by producing a strong financial performance, maintaining a solid capital position, and engaging in corporate strategies that enhance the value of their shares. In furtherance of this mission, we maintain a business model that has been consistent over the course of decades, as described below:

- We originate multi-family loans on non-luxury apartment buildings in New York City that are subject to rent regulation and therefore feature below-market rents;

- We underwrite our loans in accordance with conservative credit standards in order to maintain a high level of asset quality;

- We grow through accretive acquisitions of other financial institutions, branches, and/or deposits; and

- We operate at a high level of efficiency.

The merits of this time-tested business model are reflected in the following achievements:

- We are the leading producer of multi-family loans for portfolio in New York City;

- We have produced a consistent record of above-average asset quality;

- We consistently rank among the nation's most efficient bank holding companies; and

- We have generated solid earnings and maintained a consistent position of capital strength.

In January 2010, we added a fifth component to our business model: originating one-to-four family mortgage loans through NYCB Mortgage Company, LLC, our mortgage banking subsidiary, and selling the vast majority of those loans, servicing retained, to government-sponsored enterprises ("GSEs"). With $34.3 billion of one-to-four family loans produced since the inception of this business, we have typically ranked among the nation's top 15 aggregators of one-to-four family mortgage loans.

Among the external factors that tend to influence our performance, the interest rate environment is key. Just as short-term interest rates affect the cost of our deposits and that of the funds we borrow, market interest rates affect the yields on the loans we produce for investment and on the securities in which we invest. In the third quarter of 2013, the average 5-year Constant Maturity Treasury rate (the "CMT") rose to 1.50% from 0.91% and 0.67%, respectively, in the trailing and year-earlier quarters. The highs in the respective quarters were 1.85%, 1.49%, and 0.83%.

In addition, residential market interest rates impact the volume of one-to-four family mortgage loans we originate in any given quarter, in view of their impact on new home purchases and refinancing activity. Accordingly, when residential mortgage interest rates are low, refinancing activity will likely increase; as residential mortgage interest rates begin to rise, the refinancing of one-to-four family mortgage loans will typically decline. In the third quarter of 2013, residential mortgage interest rates were substantially higher than they were in the trailing and year-earlier quarters and, as a result, our production of one-to-four family loans declined.

In our multi-family market niche, refinancing activity may be likely to rise as market interest rates move lower, but may also grow when market interest rates begin to rise. Because the multi-family and commercial real estate loans we produce generate prepayment penalty income when they prepay, the impact of such activity can be especially meaningful. This has certainly proved to be the case year-to-date. In the nine months ended September 30, 2013, prepayment penalty income contributed $103.9 million to interest income, including $39.6 million in the third quarter, as compared to $81.1 million in the nine months ended September 30, 2012, including $31.5 million in the three months ended at that date.


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Economic factors also can influence a bank's financial performance, and particularly its asset quality. Because of our unique lending niche and our conservative underwriting standards, the losses we experienced in the years of and since the Great Recession have been well below the industry averages. In the current third quarter, for example, net charge-offs declined to $4.4 million, representing 0.01% of average loans, from $8.9 million, representing 0.03% of average loans, in the year-earlier three months. In addition, non-performing non-covered loans declined to $124.4 million at the end of September from $261.3 million at December 31, 2012.

While the markets we serve have experienced economic improvement, the pace of that improvement continues to be slow. The following table shows the primarily downward trend in unemployment rates, as reported by the U.S. Department of Labor, both nationally and in the various markets that comprise our footprint, for the months indicated:

                                       For the Month Ended
                       August 31,       December 31,         September 30,
                        2013(1)             2012                 2012
Unemployment rate:
United States             7.3%               7.8%                  7.8%
New York City            8.7                 8.8                  8.8
Arizona                  8.7                 7.9                  8.0
Florida                  7.1                 7.9                  8.6
New Jersey               8.3                 9.3                  9.2
New York                 7.5                 8.2                  8.2
Ohio                     6.9                 6.6                  6.5

(1) Unemployment data for September 2013 was not available at the time of this filing.

As depicted in the two tables that follow, the changes in certain other local economic indices were mixed in their direction.

For example, home prices have been increasing in the U.S., and more specifically, in our local markets, according to the S&P/Case-Shiller Home Price Index.

                                  For the Twelve Months Ended
                           August          December         September
                            2013             2012             2012
Change in home prices:
U.S.*                       12.8%             6.8%              3.0%
Greater Cleveland            3.7              2.9              1.4
Greater Miami               13.5             10.6              7.4
Metro New York               3.6             (0.5)            (2.3)
Greater Phoenix             18.6             23.0             20.4

* 20-City Composite

However, as reported by Jones Lang LaSalle, the level of office vacancy rates in Manhattan (where 36.0% of our multi-family loans and 53.3% of our commercial real estate credits are located) has been moving upward. At the same time, residential vacancy rates, as reported by the U.S. Department of Commerce, have, in general, been decreasing within the majority of states we serve.

                                                          For the Three Months Ended
                                          September 30,          December 31,          September 30,
                                              2013                   2012                  2012
Manhattan office vacancy rate:                11.8%                 11.2%                  10.6%

Residential rental vacancy rates:
Arizona                                       9.7                   10.8                  11.1
Florida                                      11.1                   11.9                  12.6
New Jersey                                    6.9                   11.7                  10.8
New York                                      5.8                    5.2                   5.0
Ohio                                          9.6                    9.8                   9.0

Meanwhile, the volume of new home sales nationwide was at a seasonally adjusted annual rate of 421,000 in August 2013, exceeding the August 2012 level by 12.6%, according to the estimates set forth in a U.S. Commerce Department report issued on September 25, 2013.


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In addition, the Consumer Confidence Index® was higher in September 2013 than it was in September 2012, but lower than it had been in June 2013. An index level of 90 or more is considered indicative of a strong economy; the Consumer Confidence Index® was 79.7 in September 2013 as compared to 81.4 in the trailing quarter and 70.3 in the year-earlier three months.

Against this backdrop, we generated earnings of $114.2 million, or $0.26 per diluted share, in the current third quarter, and $355.4 million, or $0.80 per diluted share, in the current nine-month period. A detailed discussion and analysis of our performance in the three and nine months ended September 30, 2013 follows.

Recent Events

On October 22, 2013, the Board of Directors declared a quarterly cash dividend of $0.25 per share, payable on November 19, 2013 to shareholders of record at the close of business on November 7, 2013.

Critical Accounting Policies

We consider certain accounting policies to be critically important to the portrayal of our financial condition and results of operations, since they require management to make complex or subjective judgments, some of which may relate to matters that are inherently uncertain. The inherent sensitivity of our consolidated financial statements to these critical accounting policies, and the judgments, estimates, and assumptions used therein, could have a material impact on our financial condition or results of operations.

We have identified the following to be critical accounting policies: the determination of the allowances for loan losses; the valuation of loans held for sale; the determination of whether an impairment of securities is other than temporary; the determination of the amount, if any, of goodwill impairment; and the determination of the valuation allowance for deferred tax assets.

The judgments used by management in applying these critical accounting policies may be influenced by changes in the economic environment, which may increase the degree of uncertainty inherent in our judgments, estimates, and assumptions, and may result in changes to future financial results.

Allowances for Loan Losses

Allowance for Losses on Non-Covered Loans

The allowance for losses on non-covered loans is increased by provisions for non-covered loan losses that are charged against earnings, and is reduced by net charge-offs and/or reversals, if any, that are credited to earnings. Although non-covered loans are held by either the Community Bank or the Commercial Bank, and a separate loan loss allowance is established for each, the total of the two allowances is available to cover all losses incurred. In addition, except as otherwise noted below, the process for establishing the allowance for losses on non-covered loans is the same for each of the Community Bank and the Commercial Bank. In determining the respective allowances for loan losses, management considers the Community Bank's and the Commercial Bank's current business strategies and credit processes, including compliance with applicable regulatory guidelines and with guidelines approved by the respective Boards of Directors with regard to credit limitations, loan approvals, underwriting criteria, and loan workout procedures.

The allowance for losses on non-covered loans is established based on our evaluation of the probable inherent losses in our portfolio in accordance with GAAP, and are comprised of both specific valuation allowances and general valuation allowances.

Specific valuation allowances are established based on management's analyses of individual loans that are considered impaired. If a non-covered loan is deemed to be impaired, management measures the extent of the impairment and establishes a specific valuation allowance for that amount. A non-covered loan is classified as "impaired" when, based on current information and events, it is probable that we will be unable to collect both the principal and interest due under the contractual terms of the loan agreement. We apply this classification as necessary to non-covered loans individually evaluated for impairment in our portfolios of multi-family; commercial real estate; acquisition, development, and construction; and commercial and industrial loans. Smaller balance homogenous loans and loans carried at the lower of cost or fair value are evaluated for impairment on a collective, rather than individual, basis.

We generally measure impairment on an individual loan and determine the extent to which a specific valuation allowance is necessary by comparing the loan's outstanding balance to either the fair value of the collateral, less the estimated cost to sell, or the present value of expected cash flows, discounted at the loan's effective interest rate. A specific valuation allowance is established when the fair value of the collateral, net of the estimated costs to sell, or the present value of the expected cash flows is less than the recorded investment in the loan.


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We also follow a process to assign general valuation allowances to non-covered loan categories. General valuation allowances are established by applying our loan loss provisioning methodology, and reflect the inherent risk in outstanding held-for-investment loans. This loan loss provisioning methodology considers various factors in determining the appropriate quantified risk factors to use to determine the general valuation allowances. The factors assessed begin with the historical loan loss experience for each of the major loan categories we maintain. Our historical loan loss experience is then adjusted by considering qualitative or environmental factors that are likely to cause estimated credit losses associated with the existing portfolio to differ from historical loss experience, including, but not limited to:

- Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-offs, and recovery practices;

- Changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments;

- Changes in the nature and volume of the portfolio and in the terms of loans;

- Changes in the volume and severity of past due loans, the volume of non-accrual loans, and the volume and severity of adversely classified or graded loans;

- Changes in the quality of our loan review system;

. . .

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