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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 PERIOD ENDED: JUNE 30, 2002
NORTH FORK BANCORPORATION, INC.
(Exact name of Company as specified in its charter)
DELAWARE 36-3154608
-------- ----------
(State or other Jurisdiction of (I.R.S. Employer incorporation or
organization) Identification No.)
275 BROADHOLLOW ROAD, MELVILLE, NEW YORK 11747
- ---------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(631) 844-1004
--------------
(Company's telephone number, including area code)
Indicate by check mark whether the Company (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 Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes (X) No ( )
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OF COMMON STOCK NUMBER OF SHARES OUTSTANDING - 8/05/02
--------------------- --------------------------------------
$.01 PAR VALUE 163,409,680
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS (UNAUDITED)
North Fork Bancorporation, Inc. (the "Company") and Subsidiaries.
1) Consolidated Balance Sheets.
2) Consolidated Statements of Income.
3) Consolidated Statements of Cash Flows.
4) Consolidated Statements of Changes in Stockholders' Equity.
5) Consolidated Statements of Comprehensive Income.
6) Notes to Consolidated Financial Statements.
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is contained throughout Item 2,
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" and is incorporated by reference herein.
PART II. OTHER INFORMATION
ITEM 1.LEGAL PROCEEDINGS Not Applicable.
ITEM 2.CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable.
ITEM 3.DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5.OTHER INFORMATION
Not Applicable.
ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are submitted herewith:
Exhibit Description
------- -----------
(3.2) By-Laws of North Fork Bancorporation, Inc., as amended,
effective July 23, 2002.
(11) Statement Re: Computation of Per Share Earnings.
(99.1) Certification of CEO Pursuant to 18 U.S.C. Section 1350,
as adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(99.2) Certification of CFO Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Current Reports on Form 8-K
1. Current Report on Form 8-K dated May 31, 2002.
(Announcing that the Company will be presenting at the Goldman
Sachs & Co. Bank Conference on June 3, 2002).
2. Current Report on Form 8-K dated July 3, 2002.
(Announcing that Standard & Poor's raised the credit ratings
of the Company and its subsidiaries).
3. Current Report on Form 8-K dated July 15, 2002.
(Announcing that the Company reported earnings for the quarter
ended June 30, 2002, and that it was included in the S&P 500
Index. Additionally, announcing that Moody's Investors Service
raised its credit ratings on the Company and its
subsidiaries).
4. Current Report on Form 8-K dated July 31, 2002.
(Announcing that the Company has agreed to sell $500 Million
of Subordinated Notes. Additionally, announcing that the
principal executive officer and principal financial officer
submitted to the Securities and Exchange Commission their
sworn statements relating to the accuracy of documents
previously filed under the Securities Exchange Act of 1934,
as amended.)
2
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30, DECEMBER 31, JUNE 30,
(in thousands, except per share amounts) 2002 2001 2001
- ---------------------------------------- ---- ---- ----
ASSETS:
Cash & Due from Banks .................................................. $ 377,870 $ 333,250 $ 313,708
Money Market Investments ............................................... 19,990 17,684 17,708
Securities:
Available-for-Sale ($2,783,564, $1,618,979 and $1,451,672 pledged at
June 30, 2002, December 31, 2001 and June 30, 2001, respectively) 6,562,072 5,043,557 4,385,911
Held-to-Maturity ($344,094, $472,423 and $564,664 pledged at
June 30, 2002, December 31, 2001 and June 30, 2001, respectively) 522,296 709,965 860,891
------------ ------------ ------------
Total Securities ................................................. 7,084,368 5,753,522 5,246,802
------------ ------------ ------------
Loans, Net of Unearned Income .......................................... 11,041,392 10,399,691 9,835,080
Less: Allowance for Loan Losses ............................ 109,998 103,801 92,853
------------ ------------ ------------
Net Loans ............................................ 10,931,394 10,295,890 9,742,227
------------ ------------ ------------
Goodwill ............................................................... 398,783 398,785 318,518
Identifiable Intangibles ............................................... 26,215 28,489 18,356
Premises & Equipment ................................................... 118,205 110,779 102,711
Accrued Income Receivable .............................................. 100,710 93,400 93,165
Other Assets ........................................................... 154,009 200,304 114,790
------------ ------------ ------------
Total Assets ...................................................... $ 19,211,544 $ 17,232,103 $ 15,967,985
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Demand Deposits ........................................................ $ 3,026,061 $ 2,702,753 $ 2,162,881
Savings Deposits ....................................................... 3,316,204 3,131,471 2,914,540
NOW & Money Market Deposits ........................................... 2,817,384 2,037,518 1,873,534
Time Deposits .......................................................... 2,094,068 2,340,883 2,346,616
Certificates of Deposit, $100,000 & Over ............................... 978,497 1,090,681 884,471
------------ ------------ ------------
Total Deposits .................................................... 12,232,214 11,303,306 10,182,042
------------ ------------ ------------
Federal Funds Purchased & Securities Sold Under
Agreements to Repurchase ............................................ 3,025,200 2,142,182 2,112,122
Other Borrowings ....................................................... 1,550,000 1,550,000 1,552,155
Due To Brokers ......................................................... 140,791 200,602 322,918
Accrued Expenses & Other Liabilities ................................... 404,106 354,641 215,793
------------ ------------ ------------
Total Liabilities ................................................ $ 17,352,311 $ 15,550,731 $ 14,385,030
------------ ------------ ------------
Capital Securities ..................................................... $ 252,374 $ 244,364 $ 244,351
------------ ------------ ------------
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $1.00; authorized 10,000,000 shares, unissued -- -- --
Common stock, par value $0.01; authorized 500,000,000 shares;
issued 174,580,778 shares at June 30, 2002 ......................... 1,746 1,746 1,746
Additional Paid in Capital ............................................. 371,342 364,345 358,296
Retained Earnings ...................................................... 1,459,840 1,337,564 1,235,924
Accumulated Other Comprehensive Income ................................. 43,204 10,341 25,413
Deferred Compensation .................................................. (55,961) (42,535) (29,494)
Treasury Stock at cost; 10,622,978 shares at June 30, 2002 ............. (213,312) (234,453) (253,281)
------------ ------------ ------------
Total Stockholders' Equity ....................................... 1,606,859 1,437,008 1,338,604
------------ ------------ ------------
Total Liabilities and Stockholders' Equity ....................... $ 19,211,544 $ 17,232,103 $ 15,967,985
============ ============ ============
See Accompanying Notes to Consolidated Financial Statements
3
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
(in thousands, except per share amounts) 2002 2001 2002 2001
- ---------------------------------------- ---- ---- ---- ----
INTEREST INCOME:
Loans .................................................................. $199,918 $195,836 $394,589 $390,385
Mortgage-Backed Securities ............................................. 81,456 62,291 160,619 122,746
Other Securities ....................................................... 8,499 10,097 17,105 22,374
U.S. Treasury & Government Agency Securities ........................... 324 1,815 794 4,141
State & Municipal Obligations .......................................... 2,789 2,092 5,450 4,162
Money Market Investments ............................................... 173 729 401 1,541
-------- -------- -------- --------
Total Interest Income ............................................... 293,159 272,860 578,958 545,349
-------- -------- -------- --------
INTEREST EXPENSE:
Savings, NOW & Money Market Deposits ................................... 16,068 22,929 30,684 45,067
Time Deposits .......................................................... 14,726 30,674 34,121 62,176
Certificates of Deposit, $100,000 & Over ............................... 6,334 11,379 14,222 21,000
Federal Funds Purchased & Securities Sold Under Agreements to Repurchase 21,433 22,250 41,688 53,653
Other Borrowings ....................................................... 19,488 21,601 39,136 46,141
-------- -------- -------- --------
Total Interest Expense .............................................. 78,049 108,833 159,851 228,037
-------- -------- -------- --------
Net Interest Income ................................................. 215,110 164,027 419,107 317,312
Provision for Loan Losses .............................................. 6,250 4,000 12,500 7,750
-------- -------- -------- --------
Net Interest Income after Provision for Loan Losses ................. 208,860 160,027 406,607 309,562
-------- -------- -------- --------
NON-INTEREST INCOME:
Customer Related Fees & Service Charges ................................ 18,918 14,066 37,304 27,084
Investment Management, Commissions & Trust Fees ........................ 4,844 4,034 9,594 8,008
Mortgage Banking Operations ............................................ 1,361 1,097 2,629 2,087
Check Cashing Fees ..................................................... 713 822 1,476 1,587
Other Operating Income ................................................. 3,519 2,514 6,025 4,995
Securities Gains, net .................................................. 353 1,336 1,381 5,208
Derivative Gain ........................................................ -- -- -- 7,943
-------- -------- -------- --------
Total Non-Interest Income ......................................... 29,708 23,869 58,409 56,912
-------- -------- -------- --------
NON-INTEREST EXPENSE:
Employee Compensation & Benefits ....................................... 43,148 30,232 83,813 59,681
Occupancy & Equipment, net ............................................. 13,968 10,347 26,880 20,583
Other Operating Expenses ............................................... 16,158 13,281 32,676 25,831
Capital Securities Costs ............................................... 4,689 5,140 9,829 10,280
Amortization of Identifiable Intangibles ............................... 1,137 710 2,274 1,420
Amortization of Goodwill ............................................... -- 4,768 -- 9,525
-------- -------- -------- --------
Total Non-Interest Expense ......................................... 79,100 64,478 155,472 127,320
-------- -------- -------- --------
Income Before Income Taxes ............................................. 159,468 119,418 309,544 239,154
Provision for Income Taxes ............................................. 55,017 41,199 106,793 82,508
-------- -------- -------- --------
Net Income ........................................................ $104,451 $ 78,219 $202,751 $156,646
======== ======== ======== ========
EARNINGS PER SHARE - BASIC ............................................. $ 0.65 $ 0.49 $ 1.26 $ 0.98
EARNINGS PER SHARE - DILUTED ........................................... $ 0.64 $ 0.49 $ 1.25 $ 0.97
Weighted Average Shares Outstanding - Basic ............................ 160,578 159,392 160,445 159,300
Weighted Average Shares Outstanding - Diluted .......................... 162,488 161,173 162,333 160,970
See Accompanying Notes to Consolidated Financial Statements
4
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
FOR THE SIX MONTHS ENDED JUNE 30, 2002 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income ....................................................... $ 202,751 $ 156,646
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH PROVIDED BY OPERATING ACTIVITIES:
Provision for Loan Losses ........................................ 12,500 7,750
Depreciation and Amortization .................................... 10,859 8,219
Amortization of Goodwill & Identifiable Intangible Assets ........ 2,274 10,945
Amortization of Securities Premiums .............................. 9,933 3,864
Accretion of Discounts and Net Deferred Loan Fees ................ (25,708) (15,464)
Net Security Gains ............................................... (1,381) (5,208)
Purchases of Trading Assets ...................................... (16,685) --
Sales of Trading Assets .......................................... 18,091 --
Derivative Gains ................................................. -- (7,943)
Other, Net ....................................................... 65,616 16,000
----------- -----------
Net Cash Provided by Operating Activities .................... 278,250 174,809
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Securities Held-to-Maturity ......................... (51) (4,557)
Maturities, Redemptions, Calls and Principal Repayments on
Securities Held-to-Maturity .................................. 187,201 128,755
Purchases of Securities Available-for-Sale ....................... (2,849,113) (1,074,835)
Proceeds from Sales of Securities Available-for-Sale ............. 85,862 157,375
Maturities, Redemptions, Calls and Principal Repayments on
Securities Available-for-Sale ................................ 1,257,648 465,338
Loans Originated, Net of Principal Repayments and Charge-offs .... (765,410) (467,931)
Proceeds from the Sale of Loans .................................. 124,802 29,102
Transfers to Other Real Estate, net of sales ..................... (77) (67)
Purchases of Premises and Equipment, net ......................... (13,977) (11,380)
----------- -----------
Net Cash Used in Investing Activities ........................ (1,973,115) (778,200)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase in Customer Deposits Liabilities .................... 928,908 1,012,847
Net Increase/(Decrease) in Borrowings ............................ 883,018 (339,870)
Purchase of Treasury Stock ....................................... -- (4,996)
Exercise of Options and Common Stock Sold for Cash ............... 8,444 19,839
Cash Dividends Paid .............................................. (78,579) (63,047)
----------- -----------
Net Cash Provided by Financing Activities .................... 1,741,791 624,773
----------- -----------
Net Increase in Cash and Cash Equivalents .................... 46,926 21,382
Cash and Cash Equivalents at Beginning of the Period ............. 350,934 310,034
----------- -----------
Cash and Cash Equivalents at End of the Period ................... $ 397,860 $ 331,416
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid During the Period for:
Interest Expense ............................................. $ 167,185 $ 230,833
=========== ===========
Income Taxes ................................................. 23,225 86,255
=========== ===========
Securities Transferred from Held-to-Maturity to Available-for-Sale
In Accordance with SFAS No. 133 .............................. -- 119,578
=========== ===========
During the Period the Company Purchased Various Securities which
Settled in the Subsequent Period ............................. 140,791 332,918
=========== ===========
See Accompanying Notes to Consolidated Financial Statements
5
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
(Dollars in thousands, except per share amounts)
Additional Other
Common Paid in Retained Comprehensive Deferred Treasury
Stock Capital Earnings Income Compensation Stock Total
BALANCE, DECEMBER 31, 2000 ....... $1,746 $359,679 $1,147,375 $ 9,694 ($32,474) ($272,102) $1,213,918
Net Income ....................... -- -- 156,646 -- -- -- 156,646
Cash Dividends ($.42 per share) .. -- -- (68,097) -- -- -- (68,097)
Issuance of Stock (84,240 shares) -- 533 -- -- -- 1,675 2,208
Purchases of Treasury
Stock (200,000 shares)............ -- -- -- -- -- (4,996) (4,996)
Restricted Stock Activity, net ... -- 16 -- -- 2,980 (625) 2,371
Stock Based Compensation
Activity, net .................... -- (1,932) -- -- -- 22,767 20,835
Accumulated Other
Comprehensive Income ............. -- -- -- 15,719 -- -- 15,719
------ -------- ---------- ------- -------- --------- ----------
BALANCE, JUNE 30, 2001 ........... $1,746 $358,296 $1,235,924 $25,413 ($29,494) ($253,281) $1,338,604
====== ======== ========== ======= ======== ========= ==========
BALANCE, DECEMBER 31, 2001 ....... $1,746 $364,345 $1,337,564 $10,341 ($42,535) ($234,453) $1,437,008
Net Income ....................... -- -- 202,751 -- -- -- 202,751
Cash Dividends ($.49 per share) .. -- -- (80,475) -- -- -- (80,475)
Issuance of Stock (72,092 shares) -- 1,209 -- -- -- 1,446 2,655
Restricted Stock Activity, net ... -- 7,470 -- -- (13,426) 9,839 3,883
Stock Based Compensation
Activity, net .................... -- (1,682) -- -- -- 9,856 8,174
Accumulated Other
Comprehensive Income ............. -- -- -- 32,863 -- -- 32,863
------ -------- ---------- ------- -------- --------- ----------
BALANCE, JUNE 30, 2002 ........... $1,746 $371,342 $1,459,840 $43,204 ($55,961) ($213,312) $1,606,859
====== ======== ========== ======= ======== ========= ==========
See Accompanying Notes to Consolidated Financial Statements
6
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30, JUNE 30, JUNE 30,
2002 2001 2002 2001
---- ---- ---- ----
Net Income ......................................................... $ 104,451 $ 78,219 $ 202,751 $ 156,646
--------- --------- --------- ---------
OTHER COMPREHENSIVE INCOME/(LOSS), BEFORE TAXES:
UNREALIZED GAINS/(LOSSES) ON SECURITIES:
Changes in Unrealized Gains/(Losses) Arising During The Period ... 82,119 (10,923) 63,823 32,107
Less: Reclassification Adjustment For Gains Included in Net Income (353) (1,336) (1,381) (5,208)
--------- --------- --------- ---------
81,766 (12,259) 62,442 26,899
========= ========= ========= =========
UNREALIZED GAINS/(LOSSES) ON DERIVATIVE INSTRUMENTS:
Transitional Gain Recognized From The Effect of A Change in
Accounting Principle ........................................... -- -- -- 2,161
Changes in Unrealized Gains/(Losses) Arising During the Period ... (13,691) 2,652 (4,789) (1,484)
Less: Reclassification Adjustment for Gains Included in Net Income -- -- -- --
--------- --------- --------- ---------
(13,691) 2,652 (4,789) 677
========= ========= ========= =========
Other Comprehensive Income/(Loss), before taxes .................. $ 68,075 ($9,607) $ 57,653 $ 27,576
Income Tax (Expense)/Benefit on Items of Other
Comprehensive Income ........................................... (29,272) 4,131 (24,790) (11,857)
--------- --------- --------- ---------
Other Comprehensive Income/(Loss), net of taxes .................. $ 38,803 ($5,476) $ 32,863 $ 15,719
--------- --------- --------- ---------
Comprehensive Income ............................................. $ 143,254 $ 72,743 $ 235,614 $ 172,365
========= ========= ========= =========
See accompanying notes to Consolidated Financial Statements.
7
NORTH FORK BANCORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2002 AND 2001
FORWARD LOOKING STATEMENTS
This document, including information included or incorporated by reference,
contains forward-looking statements (as that term is defined in the Private
Securities Litigation Reform Act of 1995). In addition, senior management may
make forward-looking statements verbally to analysts, investors, the media, and
others. Example of forward looking statements include, but are not limited to,
estimates with respect to our financial condition, expected or anticipated
revenues, results of operations and our business, including with respect to:
- - Projections of revenues, income, earnings per share, capital expenditures,
liabilities, dividends, capital structure, or other financial items;
- - Descriptions of plans or objectives of management for future operations,
products, or services, including pending acquisition transactions;
- - Forecasts of future economic performance; and
- - Descriptions of assumptions underlying or relating to any of the
foregoing.
These forward looking statements may be identified by the use of such words as
"believe", "expect", "anticipate", "intend", "plan", "estimate", or words of
similar meaning, or future or conditional verbs such as "will", "would",
"should", "could", or "may".
Forward-looking statements present management's expectations or predictions of
future conditions, events or results. They are not guarantees of future
performance. By their nature, forward-looking statements are subject to risks
and uncertainties. There are a number of factors, many of which are beyond the
Company's control, that could cause actual conditions, events, or results to
differ significantly from those described in the forward-looking statements.
Factors that may cause or contribute to such differences include the following
possibilities: (1) changes in general business and economic conditions on both a
regional and national level; (2) worldwide political and social unrest,
including acts of war and terrorism; (3) increased competition in the products
and services offered and the markets in which the Company conducts its business;
(4) changes in the interest rate environment; (5) fluctuations in the capital
markets, which may directly or indirectly affect the asset portfolio; (6)
legislative or regulatory developments, including changes in laws concerning
taxes, banking, securities, insurance and other aspects of the financial
services industry; (7) technological changes, including the impact of the
Internet; (8) monetary and fiscal policies of the U.S. Government, including
policies of the U.S. Treasury and the Federal Reserve Board; and (9) changes in
accounting principles, policies, practices or guidelines.
These forward-looking statements are made as of the date of the applicable
document, and, except as required by applicable law, the Company assumes no
obligation to update the forward-looking statements or to update the reasons
why actual results could differ from those projected in the forward-looking
statements. Users of these financial statements should consider these risks and
uncertainties in evaluating forward-looking statements and should not place
undue reliance on these statements.
COMPANY DESCRIPTION
North Fork Bancorporation, Inc. (the "Company") is a $19.2 billion
multi-bank holding company headquartered in Melville, New York. The Company
operates from 167 branches in the New York Metropolitan area, substantially all
of which are North Fork Bank ("North Fork") branches, its primary subsidiary. At
June 30, 2002, North Fork's assets and revenues constitute in excess of 90% of
consolidated assets and revenue. Other subsidiaries offer financial services
related products such as asset management, brokerage and sales of alternative
investment products. The Company's other banking subsidiary, Superior Savings of
New England, N.A., is a nationally chartered bank that focuses on gathering
deposits throughout the northeast.
The Company conducts its business in a dense geographic area in, and
contiguous to, New York City. Total deposits approximate $378 billion in the
eight New York counties where the Company pursues its strategy (Manhattan,
Queens, Brooklyn, Bronx, Nassau, Suffolk, Westchester and Rockland).
Additionally, this geographic area has a population exceeding 11 million people
comprising over 4 million households. It is a market where a few multi-national
banking organizations control the significant portion of deposits. This
competitively attractive environment provides multiple opportunities to gain
market share through organic growth and from mergers and acquisitions. In
November 2001, North Fork acquired the domestic business of Commercial Bank of
New York ("CBNY") for $175 million in cash. In the transaction, North Fork
acquired $1.2 billion in total assets, including $310 million in loans, as well
as $898 million in deposits. The primary focus of this acquisition was the
addition of nine branch locations and CBNY's customer base in the lucrative
borough of Manhattan, where the Company has been concentrating on generating
deposit growth by opening new branches and hiring experienced bankers. The
operating results of CBNY were not significant to the consolidated operating
results, consequently, pro forma results for CBNY are not presented.
Double digit percentage growth and superior returns were achieved for
the quarter ended June 30, 2002, despite the negative impact the tragic events
of September 11, 2001 had on the local economy, including weakening employment
and other negative economic developments uniquely affecting the New York
metropolitan area. Management believes that similar returns should continue in
the future because of its competitive position as a regional commercial bank
dedicated to this market.
8
BASIS OF PRESENTATION
The accounting and reporting policies are in conformity with accounting
principles generally accepted in the United States of America and prevailing
practices within the financial services industry. The preparation of financial
statements requires that management make estimates and assumptions that affect
the reported amounts of assets and liabilities, and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of income and expenses during the reporting period. Such estimates are
subject to change in the future as additional information becomes available or
previously existing circumstances are modified. Actual results could differ from
those estimates. The Company does not have any unconsolidated subsidiaries or
unconsolidated special purpose entities.
Results of operations for the three and six months ended June 30, 2002,
are not necessarily indicative of operating results which may be expected for
the full year 2002 or any other interim periods.
These statements should be read in conjunction with the Company's 2001
Annual Report on Form 10-K, which is incorporated herein by reference.
RECENT ACCOUNTING DEVELOPMENTS
BUSINESS COMBINATIONS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141 "Business Combinations" ("SFAS 141"). SFAS 141 addresses the
financial accounting and reporting for business combinations and requires that
all business combinations initiated after June 30, 2001 be accounted for using
the purchase method of accounting and prohibits the use of pooling-of-interests
method of accounting. Pooling transactions initiated prior to that date were not
affected. SFAS 141 also establishes guidelines as to how the purchase method is
to be applied. This guidance is similar to that previously contained in APB
Opinion No. 16, however, SFAS 141 establishes additional disclosure requirements
for transactions occurring after the effective date. SFAS 141 also requires
identifiable intangible assets acquired in a business combination to be
recognized as an asset apart from goodwill if they meet certain criteria. The
requirements of SFAS 141 were applied in the acquisition of CBNY.
GOODWILL AND OTHER INTANGIBLE ASSETS
On January 1, 2002, the Company adopted SFAS No. 142 "Goodwill and
Other Intangible Assets" ("SFAS 142"). SFAS 142 addresses the initial
recognition and measurement of intangible assets acquired individually or with a
group of other assets not constituting a business combination. In accordance
with the provisions of SFAS 142, all goodwill and identifiable intangible assets
recognized as having an indefinite useful life, including those acquired before
its effective date, will no longer be amortized but will be assessed for
impairment at least annually by applying a fair-value based test as defined in
the Statement. SFAS 142 requires that acquired intangible assets having an
estimated useful life, be separately recognized and amortized over their
estimated useful lives. Intangible assets that remain subject to amortization
shall continue to be reviewed for impairment in accordance with previous
pronouncements.
Additionally, SFAS 142 required that an initial impairment assessment
on all goodwill recognized in the consolidated financial statements be completed
within six months of the Statement's adoption to determine if a transition
impairment charge should be recognized. The initial impairment assessment was
completed by year end 2001 and management determined that no impairment charge
was needed. The consolidated balance sheets and the statements of income
presented herein disclose identifiable intangible assets and related
amortization expense. Effective January 1, 2002, the goodwill amortization
ceased, however, identifiable intangible assets will continue to be amortized
over the estimated useful lives.
At June 30, 2002, identifiable intangible assets of $26.2 million
($50.4 million original balance less $24.2 million in accumulated amortization)
remain subject to future amortization. Amortization expense recognized during
the three and six months ended June 30, 2002, was $1.1 million and $2.3 million,
respectively, and is projected to be $4.4 million for the full year. The full
year amount is expected to decline modestly over the next five years.
The consolidated statement of income for the three and six months ended
June 30, 2001, shown for comparative purposes, reclassifies amortization expense
of a continuing nature and the amount that was discontinued effective January 1,
2002. The consolidated balance sheets for the periods presented reflect the
reclassification of identifiable intangible assets which are subject to
amortization from goodwill.
9
Net income and earnings per share data adjusted to exclude that portion
of the discontinued amortization expense for the three and six months ended June
30, 2001, are as follows:
(dollars in thousands except per share amounts) THREE MONTHS ENDED SIX MONTHS ENDED
Net Income, as reported .... $78,219 $156,646
Amortization of Goodwill ... 4,768 9,525
------- --------
Net Income, as adjusted .... $82,987 $166,171
======= ========
Adjusted Earnings per Share:
Basic ............. $ 0.52 $ 1.04
Diluted ........... $ 0.52 $ 1.03
ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations" ("SFAS 143"). SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. SFAS 143 is effective for financial
statements issued for fiscal years beginning after June 15, 2002. Management
believes that the adoption of this statement will not affect its earnings or
financial position.
ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
The Company adopted SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144") effective January 1, 2002. SFAS 144
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets and resolves accounting and implementation issues related to
previous pronouncements. More specifically, it: (a) eliminates the allocation of
goodwill to long-lived assets to be tested for impairment; and (b) details both
a probability - weighted and primary asset approach to estimate cash flows in
testing for impairment of a long-lived asset. The adoption of SFAS 144 has had
no effect on the consolidated financial statements.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
OVERVIEW
The following table sets forth selected financial highlights for the
three and six months ended June 30, 2002 and 2001, respectively. The succeeding
discussion and analysis describes the changes in components of operating results
giving rise to net income.
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
(in thousands, except ratios & per share amounts) 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------
EARNINGS:
Net Income ........................... $104,451 $ 78,219 $202,751 $156,646
- --------------------------------------------------------------------------------------------------------
PER SHARE:
Earnings Per Share - Basic ........... $ 0.65 $ 0.49 $ 1.26 $ 0.98
Earnings Per Share - Diluted ......... $ 0.64 $ 0.49 $ 1.25 $ 0.97
Cash Dividends ....................... $ 0.25 $ 0.21 $ 0.49 $ 0.42
Dividend Payout Ratio ................ 38.89% 42.86% 39.23% 43.30%
Book Value ........................... $ 9.80 $ 8.27 $ 9.80 $ 8.27
Average Equivalent Shares - Basic .... 160,578 159,392 160,445 159,300
Average Equivalent Shares - Diluted .. 162,488 161,173 162,333 160,970
- --------------------------------------------------------------------------------------------------------
SELECTED RATIOS:
Return on Average Total Assets ....... 2.34% 2.07% 2.33% 2.10%
Return on Average Stockholders' Equity 26.08% 23.28% 25.89% 23.92%
Yield on Interest Earning Assets ..... 7.16% 7.84% 7.28% 7.93%
Cost of Funds ........................ 2.45% 3.87% 2.56% 4.08%
Net Interest Margin .................. 5.29% 4.77% 5.31% 4.67%
Core Efficiency Ratio ................ 31.65% 31.18% 31.91% 31.73%
------------------------------------------------
Recent corporate developments are as follows:
- The Board of Directors declared a 4% increase in the regular
quarterly cash dividend to $.25 per common share. (see the
"Capital" section for a further discussion)
- Upgraded ratings were received from both Standard & Poor's and
Moody's Investors Service. Additionally, Fitch Ratings revised
its future outlook on the Company to positive. (see the
"Capital" section for a further discussion)
- The Company was added to the S&P 500 Index and removed from
the S&P 400 Midcap Index as of the close of business on July
16, 2002.
- The Company agreed to sell $500 million in subordinated notes
on July 31, 2002 (see the "Capital" section for a further
discussion).
Net income for the quarter ended June 30, 2002 improved 34% to $104.5
million, or diluted earnings per share of $.64, when compared to $78.2 million,
or diluted earnings per share of $.49, for the same period of 2001. Return on
average stockholders' equity and average total assets rose to 26.1% and 2.3%,
respectively during the second quarter of 2002 as compared to 23.3% and 2.1%,
respectively for the second quarter of 2001.
Net income for the six months ended June 30, 2002 improved 30% to
$202.8 million, or diluted earnings per share of $1.25, when compared to $156.6
million, or diluted earnings per share of $.97, for the comparable prior year
period. Return on average stockholders' equity and average total assets were
25.9% and 2.3%, respectively during the six months ended June 30, 2002, as
compared to 23.9% and 2.1% respectively for the comparable prior year period.
The improved earnings during the most recent quarter reflect multiple
factors including: (a) significant improvement in the net interest margin driven
by the continuing decline in the cost of funds, (b) interest earning asset
growth from both loans and securities, (c) growth in low cost core deposits, in
part due to new branch openings, (d) operating results of the former CBNY
locations, (e) continued control of operating expenses, reflected by a 31.7%
core efficiency ratio, and (f) minimal exposure to credit losses resulting in an
annualized net charge-off ratio of 10 basis points for the quarter. Each of
these elements is discussed in the succeeding sections.
11
NET INTEREST INCOME
Net interest income is the difference between interest earned on
interest earning assets and interest incurred on interest bearing liabilities
and constitutes 88% of total revenue. Net interest income is affected by the
level and composition of assets, liabilities and equity, as well as changes in
market interest rates.
Net interest margin is determined by dividing tax equivalent net
interest income by average interest-earning assets. The interest rate spread is
the difference between the average equivalent yield earned on interest-earning
assets and the average rate paid on interest-bearing liabilities. The net
interest margin is generally greater than the interest rate spread due to the
additional income earned on those assets funded by non-interest-bearing
liabilities, primarily demand deposits and stockholders' equity.
The following table presents an analysis of net interest income by each
major category of interest earning assets and interest-bearing liabilities for
the three months ended June 30;
FOR THE THREE MONTHS ENDED JUNE 30, 2002 2001
-------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
(dollars in thousands) BALANCE INTEREST RATE BALANCE INTEREST RATE
-------------------------------------------------------------------------
INTEREST EARNING ASSETS:
Securities (2) ................................. $ 5,856,302 $98,083 6.72% $ 4,380,057 $80,783 7.40%
Loans, net (1) ................................. 10,825,814 200,248 7.42% 9,761,554 196,050 8.06%
Money Market Investments ....................... 40,199 213 2.13% 67,901 808 4.77%
----------------------- ------------------------
Total Interest Earning Assets (3) ............ 16,722,315 298,544 7.16% 14,209,512 277,641 7.84%
----------------------- ------------------------
NON INTEREST EARNING ASSETS:
Cash and Due from Banks ........................ 350,342 273,930
Other Assets (2) ............................... 822,814 661,684
----------- -----------
Total Assets ................................. $17,895,471 $15,145,126
=========== ===========
INTEREST BEARING LIABILITIES:
Savings, NOW & Money Market Deposits ........... $5,920,735 $16,068 1.09% $4,592,345 $22,929 2.00%
Time Deposits .................................. 3,203,699 21,060 2.64% 3,304,022 42,053 5.11%
----------------------- ------------------------
Total Savings and Time Deposits .............. 9,124,434 37,128 1.63% 7,896,367 64,982 3.30%
Federal Funds Purchased & Securities Sold
Under Agreements to Repurchase ............... 2,109,765 21,433 4.07% 1,704,272 22,250 5.24%
Other Borrowings ............................... 1,550,000 19,488 5.04% 1,692,672 21,601 5.12%
----------------------- ------------------------
Total Borrowings ............................. 3,659,765 40,921 4.48% 3,396,944 43,851 5.18%
----------------------- ------------------------
Total Interest Bearing Liabilities ......... 12,784,199 78,049 2.45% 11,293,311 108,833 3.87%
----------------------- ------------------------
Rate Spread .................................... 4.71% 3.97%
NON-INTEREST BEARING LIABILITIES
Demand Deposits ................................ 2,857,358 2,040,803
Other Liabilities .............................. 376,929 193,382
----------- -----------
Total Liabilities ............................. 16,018,486 13,527,496
Capital Securities ............................. 244,373 244,349
Stockholders' Equity .......................... 1,632,612 1,373,281
----------- -----------
Total Liabilities and Stockholders' Equity ... $17,895,471 $15,145,126
=========== ===========
Net Interest Income and Net Interest Margin (3) 220,495 5.29% 168,808 4.77%
Less: Tax Equivalent Adjustment ................ (5,385) (4,781)
-------- --------
Net Interest Income ....................... $215,110 $164,027
======== ========
(1) For purposes of these computations, non-accrual loans are included in
average loans.
(2) For purposes of these computations, unrealized gains/(losses) on
available-for-sale securities are recorded in other assets.
(3) Interest income on a tax equivalent basis includes the additional amount
of income that would have been earned if investment in tax exempt money
market investments and securities, state and municipal obligations,
non-taxable loans, public equity and debt securities, and U.S. Treasuries
had been made in securities and loans subject to Federal, State, and Local
income taxes yielding the same after tax income. The tax equivalent amount
for $1.00 of those aforementioned categories was $1.77, $1.66, $1.55,
$1.23, and $1.03 for the three months ended June 30, 2002; and $1.77 ,
$1.61, $1.55,$1.24, and $1.03 for the three months ended June 30, 2001.
12
The following table represents an analysis of net interest income by each major
category of interest earning assets and interest-bearing liabilities for the
six-months ended June 30;
FOR THE SIX MONTHS ENDED JUNE 30, 2002 2001
--------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
(dollars in thousands) BALANCE INTEREST RATE BALANCE INTEREST RATE
--------------------------------------------------------------------------
INTEREST EARNING ASSETS:
Securities (2) ............................. $ 5,624,821 $ 193,800 6.95% $ 4,402,833 $162,543 7.44%
Loans, net (1) ............................ 10,657,229 395,231 7.48% 9,640,382 390,818 8.18%
Money Market Investments ................... 49,005 469 1.93% 64,049 1,683 5.30%
------------------------ ------------------------
Total Interest Earning Assets(3) ......... 16,331,055 589,500 7.28% 14,107,264 555,044 7.93%
------------------------ ------------------------
NON INTEREST EARNING ASSETS:
Cash and Due from Banks .................... 350,538 266,741
Other Assets (2) ........................... 865,647 652,199
----------- -----------
Total Assets ............................. $17,547,240 $15,026,204
=========== ===========
INTEREST BEARING LIABILITIES:
Savings, NOW and Money Market Deposits ..... $5,661,782 $ 30,684 1.09% $ 4,425,686 $ 45,067 2.05%
Time Deposits .............................. 3,321,072 48,343 2.94% 3,181,947 83,176 5.27%
------------------------ ------------------------
Total Savings and Time Deposits .......... 8,982,854 79,027 1.77% 7,607,633 128,243 3.40%
Federal Funds Purchased and Securities Sold
Under Agreements to Repurchase ........... 2,075,169 41,688 4.05% 1,961,358 53,653 5.52%
Other Borrowings ........................... 1,550,000 39,136 5.09% 1,700,031 46,141 5.47%
------------------------ ------------------------
Total Borrowings ......................... 3,625,169 80,824 4.50% 3,661,389 99,794 5.50%
------------------------ ------------------------
Total Interest Bearing Liabilities ..... $12,608,023 $ 159,851 2.56% $11,269,022 $228,037 4.08%
------------------------ ------------------------
Rate Spread ................................ 4.72% 3.85%
NON-INTEREST BEARING LIABILITIES:
Demand Deposits ............................ 2,740,892 1,973,259
Other Liabilities .......................... 349,432 195,361
----------- -----------
Total Liabilities ......................... 15,698,347 13,437,642
Capital Securities ......................... 244,370 244,346
Stockholders' Equity ...................... 1,604,523 1,344,216
----------- -----------
Total Liabilities and Stockholders' Equity $17,547,240 $15,026,204
=========== ===========
Net Interest Income and Net Interest Margin $429,649 5.31% $327,007 4.67%
Less: Tax Equivalent Adjustment (3) ........ (10,542) (9,695)
-------- --------
Net Interest Income .................... $419,107 $317,312
======== ========
(1) For purposes of these computations, non-accrual loans are included in
average loans.
(2) For purposes of these computations, unrealized gains/(losses) on
available-for-sale securities are recorded in other assets.
(3) Interest income on a tax equivalent basis includes the additional amount
of income that would have been earned if investment in tax exempt money
market investments and securities, state and municipal obligations,
non-taxable loans, public equity and debt securities, and U.S. Treasuries
had been made in securities and loans subject to Federal, State, and Local
income taxes yielding the same after tax income. The tax equivalent amount
for $1.00 of those aforementioned categories was $1.77, $1.66, $1.55,
$1.24, and $1.03 for the six months ended June 30, 2002; and $1.77, $1.61,
$1.55, $1.24, and $1.03 for the six months ended June 30, 2001.
13
The following table summarizes the net interest margin components over the
last five quarters. Factors contributing to the net interest margin improvement
are outlined in the succeeding discussion and analysis.
2002 2001
-------------------------------------------------------
2ND QTR 1st Qtr 4th Qtr 3rd Qtr 2nd Qtr
-------------------------------------------------------
INTEREST EARNING ASSETS:
Securities .............................. 6.72% 7.20% 7.04% 7.22% 7.40%
Loans, net .............................. 7.42% 7.54% 7.62% 7.89% 8.06%
Money Market Investments ................ 2.13% 1.79% 2.51% 3.76% 4.77%
-------------------------------------------------------
Total Interest Earning Assets ......... 7.16% 7.40% 7.41% 7.65% 7.84%
=======================================================
INTEREST BEARING LIABILITIES:
Savings, NOW & Money Market Deposits .... 1.09% 1.10% 1.20% 1.70% 2.00%
Time Deposits ........................... 2.64% 3.22% 3.84% 4.52% 5.11%
-------------------------------------------------------
Total Savings and Time Deposits ....... 1.63% 1.92% 2.28% 2.85% 3.30%
Federal Funds Purchased & Securities Sold
Under Agreements to Repurchase ........ 4.07% 4.03% 4.11% 4.77% 5.24%
Other Borrowings ........................ 5.04% 5.14% 5.10% 5.10% 5.12%
-------------------------------------------------------
Total Borrowings ...................... 4.48% 4.51% 4.50% 4.91% 5.18%
-------------------------------------------------------
Total Interest Bearing Liabilities .... 2.45% 2.67% 2.99% 3.51% 3.87%
=======================================================
Interest Rate Spread .................... 4.71% 4.73% 4.42% 4.14% 3.97%
Net Interest Margin ..................... 5.29% 5.32% 5.06% 4.87% 4.77%
The following table sets forth a summary analysis of the relative
impact on net interest income of changes in the average volume of interest
earning assets and interest bearing liabilities and changes in average rates on
such assets and liabilities. Because of the numerous simultaneous volume and
rate changes during the period analyzed, it is not possible to precisely
allocate changes to volume or rate. For presentation purposes, changes which are
not solely due to volume changes or rate changes have been allocated to these
categories based on the respective percentage changes in average volume and
average rates as they compare to each other.
THREE MONTHS ENDED SIX MONTHS ENDED
2002 VS. 2001 2002 VS. 2001
------------------------------------------------------------------------------
CHANGE IN CHANGE IN
AVERAGE AVERAGE NET INTEREST AVERAGE AVERAGE NET INTEREST
(in thousands) VOLUME RATE INCOME VOLUME RATE INCOME
------------------------------------------------------------------------------
INTEREST INCOME FROM EARNING ASSETS:
Securities ................................ $ 25,243 ($7,943) $ 17,300 $ 42,618 ($11,361) $ 31,257
Loans, net (2) ............................ 20,396 (16,198) 4,198 39,280 (34,867) 4,413
Money Market Investments .................. (252) (343) (595) (327) (887) (1,214)
------------------------------------------------------------------------------
Total Interest Income .................. 45,387 (24,484) 20,903 81,571 (47,115) 34,456
------------------------------------------------------------------------------
INTEREST EXPENSE ON LIABILITIES:
Savings, NOW & Money Market Deposits ...... 5,458 (12,319) (6,861) 10,386 (24,769) (14,383)
Time Deposits ............................. (1,282) (19,711) (20,993) 2,246 (37,079) (34,833)
Federal Funds Purchased and Securities Sold
Under Agreements to Repurchase .......... 4,704 (5,521) (817) 2,967 (14,932) (11,965)
Other Borrowings .......................... (1,799) (314) (2,113) (3,913) (3,092) (7,005)
------------------------------------------------------------------------------
Total Interest Expense ................. 7,081 (37,865) (30,784) 11,686 (79,872) (68,186)
------------------------------------------------------------------------------
Net Change in Net Interest Income ......... $ 38,306 $ 13,381 $ 51,687 $ 69,885 $ 32,757 $102,642
==============================================================================
(1) The above table is presented on a tax equivalent basis.
(2) Non-accrual loans are included in average loans, net.
Net interest income rose $51.1 million, or 31.1% to $215.1 million
during the second quarter of 2002 from $164.0 million in the prior year quarter.
The net interest margin improved by 52 basis points to 5.29%, from 4.77% during
the same period. These positive developments are a direct result of management's
strategy to grow the level of interest earning assets, funded with core
deposits, and reposition its asset/liability mix to benefit from the Federal
Reserve's recent rate reductions. The strategy of generating core deposits
includes increasing market share through the opening of new branch locations and
cultivating both existing and acquired branches. The Federal Reserve's 450 basis
point reduction in short-term interest rates has provided stimulus to a
weakening economy and has positively impacted the net interest margin. The
favorable interest rate environment has contributed to increased loan demand,
growth in core deposits and a reduction in the overall cost of funds.
14
Interest income in the quarter rose $20.3 million or 7.4% to $293.2
million compared to the prior year period. Average interest earning assets grew
by $ 2.5 billion, while the yield declined by 68 basis points to 7.16% compared
to the second quarter of 2001.
Average loans increased $ 1.1 billion or 10.9% to $10.8 billion, as
loan yields declined 64 basis points to 7.42% during the period. Accordingly,
the impact of higher loan balances on net interest income was partially offset
by the decline in loan yields. Generally, as a result of the loan portfolio
composition, loan yields tend to decline at a slower pace than the corresponding
decline in cost of funds. Strong growth has been experienced in substantially
all loan categories. Expansion into new markets has broadened the Company's
customer base, while the introduction of additional products has allowed the
Company to leverage its existing customer base in its mature markets. The
commercial portfolios have benefited from the expanded presence in the New York
City market, growth in the equipment and lessor financing area, and expansion of
small business lending initiatives. The over-consolidation within the market has
also provided opportunities to prudently expand the commercial portfolios.
Consumer loans have benefited from the geographic expansion and broadening
network of active automobile dealers within its market. Loan growth also
provides opportunities for deposit growth as many products require mandatory
levels of compensating deposit balances. Loans represented 64.7% of average
interest earning assets during the second quarter of 2002 as compared to 68.7%
in the second quarter of 2001. The continued expansion and current interest rate
environment should continue to have a favorable impact on loan growth, but the
current rate environment will result in lower loan yields during the remainder
of 2002.
Securities averaged $5.9 billion in the second quarter of 2002
representing an increase of $1.5 billion, or 33.7% compared with $4.4 billion in
the second quarter of 2001. During this period, yields declined 68 basis points
to 6.72%. The growth in securities was due in part to management's decision to
leverage a portion of its excess capital by purchasing approximately $1.0
billion in securities, yielding 5.65%, during the latter part of the second
quarter. During the quarter, this decision added approximately $2.4 million in
net interest income and lowered the net interest margin by 8 basis points. The
programs full impact will be reflected in the third quarter, further reducing
the net interest margin, while improving net interest income. These securities
were funded with short and medium term borrowings with an overall funding cost
of 3.30%, resulting in a net interest rate spread of 235 basis points. The
remainder of the increase in average securities was due to the investment of
cash flows generated from growth in core deposits.
Interest expense during the second quarter of 2002 declined $30.8
million, or 28.3% to $78.0 million when compared to $108.8 million in the same
period of 2001, while overall funding costs improved 142 basis points to 2.45%.
These improvements resulted mainly from rates resetting on both deposits and
borrowings, as well as growth in core deposits.
The continued growth in core deposits is due in large measure to the
current economic and interest environment, the over consolidation within the
Company's market area, an emphasis on developing deposit relationships with
borrowers, the introduction of new cash management products and services and a
focused effort on expanding the branch network, particularly in Manhattan. In
addition, the use of incentive compensation plans and the maturity of previously
acquired branches positively impacted aggregate deposit balances. Average demand
deposits increased $816.6 million, or 40.0%, to $2.9 billion during the current
quarter when compared to $2.0 billion for the comparable prior year period. At
June 30, 2002, demand deposits represented 24.7% of total deposits, as compared
to 21.2% at June 30, 2001. Average Savings, NOW and Money Market deposits
increased $ 1.3 billion, or 28.9% to $ 5.9 billion during the 2002 second
quarter when compared to $ 4.6 billion for the 2001 second quarter. During this
same period, the corresponding cost of funds declined by 91 basis points to
1.09%.
Average time deposits declined $ 100.3 million, or 3.0%, to $ 3.2
billion at a cost of funds of 2.64% during the second quarter of 2002 from $3.3
billion costing 5.11% during the second quarter of 2001. The 247 basis point
change in the cost of funds reflects the decline in short-term market interest
rates discussed above. The average cost of funds is expected to remain
relatively stable for the balance of 2002.
Average total borrowings increased by $262.8 million, or 7.7%, to $3.7
billion, while borrowing costs declined by 70 basis points to 4.48%. As
previously discussed, borrowing levels have been impacted by the growth
strategy.
The decision to maintain a higher level of short-term borrowings has
positively impacted the net interest margin. The majority of these LIBOR based
borrowings have reset downward with changes in the Federal Funds rate. However,
further reductions in borrowing costs are not anticipated due to the current
economic outlook, the Federal Reserve's current bias towards interest rates, and
management's decision to extend and fix the cost on $1.4 billion of these
borrowings through the use of interest rate swaps. These factors, coupled with
the aforementioned leverage strategy, while positively impacting net interest
income, will reduce the net interest margin in the third quarter.
There can be no assurance as to the actual impact market interest rates
will have on net interest income and the net interest margin in future periods.
However, management anticipates, that given the pricing sensitivity and the
change in the asset/liability mix due to the aforementioned growth strategy, the
net interest margin will compress in future quarters, while net interest income
should continue to improve.
15
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses in the second quarter of 2002 was $6.3
million, up from $4.0 million for the comparable prior year period. The
provision for loan losses for the six months ended June 30, 2002 increased $4.7
million to $12.5 million when compared to $7.8 million for the comparable prior
year period. The increase in the level of provisioning is consistent with the
growth experienced in the loan portfolio during the past year and the
methodology outlined below. Net charge-offs as an annualized percentage of
average loans were 10 basis points in the recent quarter, compared with 9 basis
points in the comparable prior year quarter.
Management is responsible for determining the adequacy of the allowance
for loan losses and the periodic provisioning for estimated losses included in
the consolidated financial statements. The evaluation process is undertaken on a
quarterly basis, but may increase in frequency should conditions arise that
would require management's prompt attention. Conditions giving rise to such
action are business combinations, opportunities to dispose of non-performing and
marginally performing loans by bulk sale or any development which may indicate
an adverse trend.
During the last several years, several mergers and acquisitions of
commercial banks and thrift companies were completed. Generally, in these
transactions, the merged entity's loan underwriting standards were less
restrictive than the Company's, thereby increasing the level of risk in the
portfolio.
The methodology employed for assessing the appropriateness of the
allowance consists of the following criteria:
- Establishment of reserve amounts for all specifically
identified criticized loans, including those arising from
business combinations and those that have been designated as
requiring attention by management's internal loan review
program, bank regulatory examinations or the Company's
external auditors.
- An average loss factor is applied to smaller balance
homogenous types of loans not subject to specific review.
These loans include residential 1-4 family properties and
consumer loans.
- An allocation to the remaining loans giving effect to
historical loss experience over several years and linked to
cyclical trends.
Recognition is also given to the changed risk profile brought about
from previous business combinations, customer knowledge, the results of the
ongoing credit-quality monitoring processes and the cyclical nature of economic
and business conditions. An important consideration in applying these
methodologies is the concentration of real estate related loans located in the
New York metropolitan area.
The initial allocation or specific-allowance methodology commences with
loan officers and underwriters grading the quality of their loans on an
eight-category risk classification scale. Loans identified from this process as
below investment grade are referred to the Company's independent Loan Review
Department (LRD) for further analysis and identification of those factors that
may ultimately affect the full recovery or collectibility of principal and/or
interest. These loans are subject to continuous review and monitoring while they
remain in the criticized category. Additionally, LRD is responsible for
performing periodic reviews of the loan portfolio that are independent from the
identification process employed by loan officers and underwriters. Gradings that
fall into criticized categories are further evaluated and a range of reserve
amounts is established for each loan.
The second allocation or loss factor approach to common or homogenous
loans is made by applying the average loss factor to the outstanding balances in
each loan category, principally residential 1-4 family mortgages and consumer
loans.
The final allocation of the allowance is made by applying several years
of loss experience to categories of loans. It gives recognition to the loss
experience of acquired businesses, business cycle changes and the real estate
components of loans.
Since many of the loans depend upon the sufficiency of collateral, any
adverse trend in the real estate markets could seriously affect underlying
values available to protect the Company from loss. This condition existed in the
early 1990's when the Company experienced sizable real estate loan losses.
Other evidence used to support the amount of the allowance and its
components is as follows:
- Regulatory examinations.
- Amount and trend of criticized loans.
- Actual losses.
- Peer comparisons with other financial institutions.
- Economic data associated with the real estate market in the
Company's market area.
- Opportunities to dispose of marginally performing loans for
cash consideration.
Based upon the process employed and giving recognition to all attendant
factors associated with the loan portfolio, management considers the allowance
for loan losses at June 30, 2002 to be adequate.
16
The following table represents a summary of the changes in the
allowance for loan losses and net charge-offs by loan type for the three and six
months ended June 30, 2002 and 2001:
THREE MONTHS ENDED SIX MONTHS ENDED
2002 2001 2002 2001
---------------------------------------------------
(dollars in thousands)
Balance at Beginning of Period .................... $106,352 $90,941 $103,801 $89,653
Provision for Loan Losses ......................... 6,250 4,000 12,500 7,750
NET LOANS CHARGED-OFF:
Mortgage Loans - Commercial .................... 272 (106) 974 (81)
Consumer Loans ................................. 1,392 1,479 3,900 3,440
Commercial Loans ............................... 897 700 991 1,031
Mortgage Loans Residential ..................... 43 14 435 157
Mortgage Loans - Multi-Family .................. - 1 3 3
Construction and Land Loans .................... - - - -
---------------------------------------------------
Balance at End of Period .......................... $109,998 $92,853 $109,998 $92,853
===================================================
Annualized Net Charge-Offs to Average Loans, net .. 0.10% 0.09% 0.12% 0.10%
===================================================
NON-INTEREST INCOME
Non-interest income, exclusive of securities gains expanded by $6.9
million or 30.7% to $29.4 million in the second quarter of 2002 compared to
$22.5 million in the same period of 2001. The growth in non-interest income was
achieved through a $4.9 million, or 35.0% increase in customer related fees and
service charges to $18.9 million, resulting from continued growth in deposits,
expansion of the customer base using fee based services and revisions to fee
schedules. Investment management, commissions and trust fees grew $.8 million or
20.1% as sales of alternative investment products, which includes mutual funds
and annuities, continue to improve. Other operating income contained a $.9
million gain on the sale of securities that were classified as trading
securities. At June 30, 2002, the Company had no securities classified as held
for trading.
Mortgage banking income rose $.3 million or 24.1% due to the favorable
impact the low interest rate environment has had on loan origination and
refinancing activity. The decline in check cashing fees is due in part to the
impact the tragic events of September 11th have had on business activity in
lower Manhattan, where six check cashing facilities are located.
Net security gains declined $.9 million to $.4 million during the most
recent quarter when compared to the $1.3 million recognized in the comparable
prior year period. Gains recognized during the most recent quarter were derived
from the sale of certain mortgage backed securities, while prior year gains were
derived primarily from the sale of equity securities of certain publicly traded
companies.
NON-INTEREST EXPENSE
Non-interest expense, exclusive of amortization of intangibles and
goodwill, increased by $19.0 million or 32.2% to $78.0 million in the second
quarter of 2002 compared to $59.0 million for the second quarter of 2001.
Contributing to the increase was an additional $12.9 million in employee
compensation benefits, $3.6 million in occupancy and equipment costs and $2.9
million in other operating expenses. Employee compensation and benefits rose
42.7% over the comparable prior year period as a result of increases in
incentive based compensation linked to deposit growth and related fee income,
annual merit awards, rising costs associated with providing employee benefits,
the de novo branch expansion and the acquisition of CBNY. During the most recent
quarter, incentive compensation represented approximately 30% of total employee
compensation and benefits as compared to 23% for the comparable prior year
period. Increases in occupancy and equipment and other operating expenses are
partially due to the de novo growth strategy, the acquisition of CBNY and costs
associated with new business initiatives. This growth was partially offset by a
$.4 million decline in capital security costs to $4.7 million. This decline was
achieved through the use of interest rate swaps, which resulted in $200 million
in capital securities being converted from paying fixed rates to paying floating
(see the "Derivatives" section for a further discussion).
As previously discussed, the Company adopted SFAS 142 on January 1,
2002. Accordingly, no amortization expense was recorded in 2002 on goodwill and
identifiable intangible assets which have an indefinite life. Goodwill
amortization recorded in the three and six-month periods ended June 30, 2001,
was $4.8 million and $9.5 million, respectively.
The Company's core efficiency ratio, which represents the ratio of
non-interest expense, excluding other real estate costs and other non-recurring
charges, to net interest income on a tax equivalent basis and non-interest
income, excluding securities gains and losses and other non-recurring income,
was 31.7% and 31.9% for the three and six months ended June 30, 2002,
respectively, remaining substantially unchanged when compared to prior year
levels. The core efficiency ratio demonstrates management's ability to maintain
a disciplined approach to monitoring its operating structure, while controlling
related costs and continuing to grow revenue.
17
INCOME TAXES
The effective tax rate for the three and six months ended June 30, 2002
and 2001 was 34.5%. Management anticipates that the effective tax rate for the
remainder of 2002 will be approximately 34.5%.
FINANCIAL CONDITION
LOAN PORTFOLIO
Loans, net of unearned income increased $1.2 billion, or 12.3% to $11.0
billion, when compared to $9.8 billion at June 30, 2001. The Company continues
to experience strong loan demand in virtually all loan categories, despite
several signs of a local economic downturn. Loans are extended almost
exclusively within the Company's market place. It does not participate in
nationally syndicated loan arrangements. All loan categories showed improvement,
with the exception of residential mortgages, when compared to prior year levels.
Mortgage loans are secured by real estate in the New York metropolitan
area. The segments of the real estate portfolio are diversified in terms of risk
and repayment sources. The underlying collateral is balanced between
multi-family apartment buildings, residential 1-4 family homes and owner
occupied/non-owner occupied commercial properties. The risks inherent in these
portfolios are dependent on both regional and general economic stability, which
affects property values, and the financial well being and creditworthiness of
the borrowers.
The continued strength in the local real estate markets, both
residential and commercial, has led to record property values. Management
periodically monitors the impact that this trend has on its loan portfolio and
origination pipeline. Further reviews of its underwriting standards are
conducted to ensure that the quality of the loan portfolio is not jeopardized by
unrealistic loan to value ratios or debt service levels. To date, there has been
no deterioration in the performance or risk characteristics of the Company's
real estate portfolio.
The following table represents the components of the loan portfolio for the
periods indicated,
-----------------------------------------------------------------------------
JUNE 30, % OF DECEMBER 31, % OF JUNE 30, % OF
(dollars in thousands) 2002 TOTAL 2001 TOTAL 2001 TOTAL
-----------------------------------------------------------------------------
Mortgage Loans-Multi-Family ..... $ 3,566,676 32% $ 3,414,209 33% $3,306,790 34%
Mortgage Loans-Residential ...... 2,667,377 24% 2,647,190 26% 2,694,767 27%
Mortgage Loans-Commercial ....... 2,049,776 19% 1,766,991 17% 1,595,783 16%
Commercial Loans ............... 1,585,146 14% 1,487,819 14% 1,217,479 12%
Consumer Loans .................. 957,836 9% 876,241 8% 835,744 9%
Construction & Land Loans ...... 231,569 2% 221,381 2% 197,216 2%
-----------------------------------------------------------------------------
Total ....................... $11,058,380 100% $10,413,831 100% $9,847,779 100%
-----------------------------------------------------------------------------
Less:
Unearned Income & Fees ........ 16,988 14,140 12,699
-----------------------------------------------------------------------------
Loans, Net ................. $11,041,392 $10,399,691 $9,835,080
=============================================================================
Origination activity has been positively impacted by the interest rate
environment and initiatives introduced over the last several years to expand our
product offerings and attract new customers while continuing to leverage our
existing customer base. The impact of lower interest rates on absolute growth
levels in each major loan category has been mixed. Steady growth has been
experienced in the commercial, commercial real estate, construction and land
development and consumer loan categories. Multi-family growth levels have been
tempered by management's decision not to compete with more aggressive pricing
and/or what appear to be relaxed underwriting standards by competitors.
Residential mortgage loans have declined modestly, but origination volumes have
remained at record levels due to refinancing activity. The commercial and
commercial real estate portfolios have benefited from the expanded presence in
the New York City market, growth in the equipment and lessor financing area, the
expansion of the small business lending initiatives and the fall-out arising
from the over-consolidation within its market. Consumer loans continue to
benefit from management's initiative to expand the geographic footprint of its
automobile financing activities combined with broadening its automobile dealer
network.
To further minimize the risk inherent in the real estate portfolios,
management utilizes prudent underwriting standards and diversifies the type and
locations of loan collateral. Multi-family mortgage loans generally are for
$1-$5 million and include loans on various types of geographically diverse
apartment complexes located in the New York metropolitan area. Multi-family
mortgages are dependent largely on sufficient rental income to cover operating
expenses and may be affected by government regulation, such as rent control
regulations, which could impact the future cash flows of the property. Most
multi-family mortgages do not fully amortize; therefore, the principal
outstanding is not significantly reduced prior to contractual maturity. The
residential mortgage portfolio is comprised primarily of first mortgage loans on
owner occupied 1-4 family residences located in the Company's market. The
commercial mortgage portfolio contains loans secured by professional office
buildings, retail stores, shopping centers and industrial developments.
Commercial loans consist primarily of loans to small and medium size businesses,
as well as loans secured by security interest in lease finance receivables. The
commercial mortgage and commercial loan portfolios do not contain foreign loans
to developing countries ("LDC") loans. Consumer loans are primarily issued to
finance new and used automobiles and
18
are originated through the Company's network of automobile dealers. The credit
risk in auto lending is dependent on the creditworthiness of the borrower and
the value of the collateral. The average loan originated is generally between
$15-$30 thousand for periods ranging from 36-60 months. The consumer loan
portfolio does not contain higher risk credit card or sub prime loans. Land
loans are used to finance the acquisition of vacant land for future residential
and commercial development. Construction loans finance the construction and
rehabilitation of both residential and multi-family projects, and to a lesser
extent, commercial developments. The construction and land development
portfolios do not contain any high risk equity participation loans ("AD&C"
loans).
Real estate underwriting standards include various limits on the
loan-to-value ratios based on the type of property and consideration of the
creditworthiness of the borrower, the location of the real estate, the condition
and value of the security property, the quality of the organization managing the
property, and the viability of the project including occupancy rates, tenants
and lease terms. Additionally, underwriting standards require appraisals,
periodic inspections of the properties and ongoing monitoring of operating
results.
RELATED PARTY LOANS
Loans to related parties include loans to directors and their related
companies and executive officers of the Company and its subsidiaries. Such loans
are made in the ordinary course of business on substantially the same terms as
loans to other individuals and businesses of comparable risks. Related party
loans, primarily residential mortgage loans, aggregated $3.8 million at June 30,
2002 and 2001, respectively. The Company does not extend loans to directors or
executive officers to finance the purchase of Company stock.
ASSET QUALITY
Non-performing assets include loans ninety days past due and still
accruing, non-accrual loans and other real estate. Other real estate consists of
property acquired through foreclosure or deed in lieu of foreclosure.
Non-performing assets are detailed in the table below:
----------------------------------------
JUNE 30, DECEMBER 31, JUNE 30,
(in thousands) 2002 2001 2001
----------------------------------------
Loans Ninety Days Past Due and Still Accruing ....... $ 6,183 $4,146 $ 4,973
Non-Accrual Loans ................................... 8,727 10,490 10,657
----------------------------------------
Non-Performing Loans ................................ 14,910 14,636 15,630
Other Real Estate ................................... 392 315 566
----------------------------------------
Non-Performing Assets ............................... $15,302 $14,951 $16,196
========================================
Allowance for Loan Losses to Non-Performing Loans ... 738% 709% 594%
Allowance for Loan Losses to Total Loans, net ....... 1.00% 1.00% 0.94%
Non-Performing Loans to Total Loans, net ............ 0.14% 0.14% 0.16%
Non-Performing Assets to Total Assets ............... 0.08% 0.09% 0.10%
Non-performing assets at June 30, 2002, were $15.3 million, or .14% of
total loans, remaining substantially unchanged on a linked quarter basis and
down $.9 million when compared to $16.2 million or .16% of total loans at June
30, 2001. As depicted in the table above, the level of non-performing loans to
total loans has remained constant as the loan portfolio grows and reserve
coverage ratios remain adequate. The modest level of non-performing assets over
the past several years is a result of an effective loan administration and
workout process, as well as continued strength in the local real estate market.
The following table represents the components of non-performing loans:
JUNE 30, DECEMBER 31, JUNE 30,
(in thousands) 2002 2001 2001
-------------------------------------
Mortgage Loans-Residential ....... $ 2,882 $ 5,563 $ 4,672
Consumer Loans ................... 5,545 3,951 4,848
Commercial Loans ................. 3,548 2,928 3,585
Mortgage Loans - Commercial ...... 2,920 2,025 2,509
Construction and Land Loans ..... - 124 -
Mortgage Loans-Multi-Family ...... 15 45 16
-------------------------------------
Total Non-Performing Loans .... $14,910 $14,636 $15,630
=====================================
19
SECURITIES PORTFOLIO
The composition, the amortized cost and estimated fair values of
available-for-sale and held-to-maturity securities portfolios are as follows:
JUNE 30, 2002 DECEMBER 31, 2001 JUNE 30, 2001
------------------------------------------------------------------------------------
AVAILABLE-FOR-SALE AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
(in thousands) COST VALUE COST VALUE COST VALUE
------------------------------------------------------------------------------------
CMO Private Issuances ............... $3,443,812 $3,514,518 $2,611,300 $2,648,545 $2,164,241 $2,209,416
CMO Agency Issuances ................ 1,515,082 1,539,254 827,756 837,706 821,141 833,063
Mortgage-Backed Securities .......... 600,636 616,832 709,165 717,208 508,044 509,365
U.S. Government Agencies' Obligations 35,513 36,049 71,585 72,101 97,826 98,708
U.S. Treasury Securities ............ 4,057 4,070 14,968 14,983 10,007 10,047
State & Municipal Obligations ....... 258,437 261,796 181,645 183,143 120,391 121,665
Equity Securities (1) ............... 215,779 214,505 221,763 223,006 254,410 254,284
Other Securities .................... 383,838 375,048 362,899 346,865 365,945 349,363
------------------------------------------------------------------------------------
$6,457,154 $6,562,072 $5,001,081 $5,043,557 $4,342,005 $4,385,911
====================================================================================
(1) Amortized cost and fair value includes $160.3 million, $165.3 million and
$197.4 million at June 30, 2002, December 31, 2001 and June 30, 2001,
respectively in Federal Home Loan Bank stock.
------------------------------------------------------------------------------
HELD-TO-MATURITY AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
(in thousands) COST VALUE COST VALUE COST VALUE
------------------------------------------------------------------------------
CMO Private Issuances ....... $272,845 $276,639 $404,010 $405,681 $506,798 $508,669
Mortgage-Backed Securities .. 180,353 184,816 224,995 226,928 271,038 269,958
State & Municipal Obligations 57,959 59,932 66,877 68,129 70,419 71,287
Other Securities ............ 11,139 11,133 14,083 14,138 12,636 12,606
------------------------------------------------------------------------------
$522,296 $532,520 $709,965 $714,876 $860,891 $862,520
==============================================================================
The strategy for the securities portfolio is to maintain a short
duration, thereby minimizing exposure to sustained increases in interest rates.
This is achieved through investments in securities with predictable cash flows
and short average lives and the purchase of certain adjustable rate
instruments. The duration of the portfolio at June 30, 2002 was 3.2 years.
The amortizing securities are almost exclusively mortgage-backed
securities ("MBS"). These instruments provide a relatively stable source of cash
flows, although they may be impacted by changes in interest rates. Such MBS
securities are either guaranteed by FHLMC, GNMA or FNMA, or represent
collateralized mortgage-backed obligations ("CMO's") backed by government agency
securities or jumbo whole loans. These CMO's by virtue of the underlying
collateral or structure are principally AAA rated and are conservative current
pay sequentials or PAC structures.
Equity securities maintained in the available-for-sale portfolio are
comprised principally of Federal Home Loan Bank common stock and common and
preferred stock of certain publicly traded companies. Other securities
maintained in the available-for-sale portfolio consist of capital securities of
certain financial institutions and corporate bonds.
The Company maintains a Bank Owned Life Insurance trust (commonly
referred to as BOLI). The BOLI was formed to offset future employee benefit
costs and provide additional benefit due to its tax-exempt nature. Only officer
level employees who have consented have been insured under the program.
Approximately $180 million in securities support the program and are included in
the available-for-sale portfolio. Its impact on net income has not been
significant.
When purchasing investment securities, management considers its overall
interest-rate risk profile as well as the adequacy of expected returns relative
to risks assumed, including prepayments. In managing the investment securities
portfolio, management occasionally sells investment securities as a result of
changes in interest rates and spreads, actual or anticipated prepayments, or
credit risk associated with a particular security, or following completion of a
business combination.
At June 30, 2002, securities carried at $4.0 billion were pledged to
secure securities sold under agreements to repurchase, other borrowings, and for
other purposes as required by law. Securities pledged for which the collateral
may be sold or repledged by the secured parties approximated $3.1 billion, while
securities pledged which the secured parties may not sell or repledge
approximated $.9 billion at June 30, 2002.
20
DERIVATIVE FINANCIAL INSTRUMENTS
In managing interest rate risk, management periodically uses various
interest rate agreements, including interest rate swaps, caps, and floors to
modify the repricing characteristics of specific assets and liabilities. During
the most recent quarter, management entered into an additional $650 million in
interest rate swaps increasing to $1.7 billion the total notional amount of
derivatives outstanding.
FIXED VARIABLE
NOTIONAL INTEREST RATE INTEREST RATE
MATURITY AMOUNT RANGE RANGE
- --------------------------------------------------------------------------------------
(dollars in thousands)
PAY FIXED SWAPS-MATURING:
2003 $ 850,000 2.65% - 4.88% 1.88% - 1.92%
2004 400,000 3.59% - 5.23% 1.90% - 1.92%
2005 100,000 4.24% - 4.26% 1.92%
2008 75,000 6.14% 1.92%
----------
$1,425,000
==========
PAY FLOATING SWAPS-MATURING:
2002 $ 75,000 3.00% 2.12%
2026 100,000 8.70% 3.59%
2027 100,000 8.00% 2.96%
----------
$ 275,000
==========
At June 30, 2002, $1.4 billion in pay fixed swaps, designated as cash
flow hedges were outstanding and entered into to change the repricing
characteristics of certain borrowings. These agreements require the Company to
make periodic fixed rate payments, while receiving periodic variable rate
payments indexed to the three month LIBOR rate based on a common notional amount
and maturity date. These swaps have original maturities of up to 10 years and,
as of June 30, 2002, had an unrealized loss of $29.1 million. The $275 million
in pay floating swaps are designated as fair value hedges. One swap of $75
million hedges certain time deposits and requires the Company to make periodic
floating rate payments, while receiving periodic fixed rate payments indexed to
the six month LIBOR rate.
The remaining $200 million of pay floating swaps changed the repricing
characteristics of a comparable amount of capital securities from fixed to
variable. The swaps contain imbedded call options held by the counterparty and
are exercisable in approximately five years, which is identical to the call
provisions contained in the capital securities. At June 30, 2002, the fair value
of these agreements was $8.0 million representing an unrealized gain, which is
reflected as a component of other assets. Also, the capital securities reflected
an $8.0 million fair value adjustment, increasing the reported amount of capital
securities from $244.4 million to $252.4 million at June 30, 2002.
The credit risk associated with these financial instruments is the risk
of non-performance by the counterparties to the agreements. However, management
does not anticipate non-performance by the counterparties and monitors the
associated risk through its asset/liability management procedures.
21
DEPOSITS
Deposits gathered throughout the retail branch network represent the
most significant source of funding. The strategy of generating deposits,
specifically core deposits, includes increasing market share through the opening
of new branch locations and cultivating both existing and acquired branches. The
following table depicts a comparison of deposit growth in Manhattan and other
regions:
-----------------------------------------------------------------
(in thousands) JUNE 30, MARCH 31, DECEMBER 31, JUNE 30,
2002 2002 2001 2001
-----------------------------------------------------------------
MANHATTAN DEPOSITS
Demand Deposits ......... $ 541,034 $ 499,846 $ 478,875 $ 272,065
Interest Bearing Deposits 1,339,387 1,232,234 1,156,694 457,294
-----------------------------------------------------------------
Total Deposits ...... 1,880,421 1,732,080 1,635,569 729,359
ALL OTHER LOCATIONS
Demand Deposits ......... 2,485,027 2,214,949 2,223,878 1,890,816
Interest Bearing Deposits 7,866,766 7,667,065 7,443,859 7,561,867
-----------------------------------------------------------------
Total Deposits ...... 10,351,793 9,882,014 9,667,737 9,452,683
TOTAL DEPOSITS
Demand Deposits ......... 3,026,061 2,714,795 2,702,753 2,162,881
Interest Bearing Deposits 9,206,153 8,899,299 8,600,553 8,019,161
-----------------------------------------------------------------
Total Deposits ...... $12,232,214 $11,614,094 $11,303,306 $10,182,042
=================================================================
Total deposits increased by $618 million to $12.2 billion on a linked
quarter basis for an annualized growth rate of 21.2%. This growth has been
fueled in part by the Manhattan locations, which had annualized growth rate of
34.3%, contributing $148.3 million or 24% of the overall increase on a linked
quarter basis. At June 30, 2002, Manhattan deposits comprised 15.4% of total
deposits. In recent years, the Company's strategy has included de novo branch
expansion program, focused on Manhattan, supplemented by strategic acquisitions
similar to CBNY. Management believes that this over consolidated, yet fragmented
market provides great growth opportunities.
Total deposits increased by $2.0 billion, or 20.1% to $12.2 billion,
when compared to $10.2 billion in the comparable prior year period. Additional
factors contributing to the growth in core deposits are the current economic and
interest rate environment, an emphasis on developing deposit relationships with
borrowers, and the introduction of new cash management products. In addition,
the use of incentive compensation plans and the maturity of previously acquired
branches positively impacted aggregate deposit balances.
At June 30, 2002, the Company operated from 167 branch locations with
19 located in Manhattan. The Company plans to open nine (9) branches by December
31, 2002, with six scheduled for Manhattan. While the branch expansion
initiative has concentrated on Manhattan, certain other strategic locations are
being added throughout the Company's geographic footprint over the next several
quarters.
ASSET/LIABILITY MANAGEMENT
The net interest margin is directly affected by changes in the level of
interest rates, the relationship between rates, the impact of interest rate
fluctuations on asset prepayments, the level and composition of assets and
liabilities, and the credit quality of the loan portfolio. Management's
asset/liability objectives are to maintain a strong, stable net interest margin,
to utilize its capital effectively without taking undue risks, and to maintain
adequate liquidity.
The risk assessment program includes a coordinated approach to the
management of liquidity, capital, and interest rate risk. This process is
governed by policies and limits established by senior management, which are
reviewed at least annually by the Board of Directors. The Asset/Liability
Committee of the Board of Directors ("ALCO") provides guidance for the day to
day asset/liability activities. ALCO periodically evaluates the impact of
changes in market interest rates on interest earning assets and interest bearing
liabilities, net interest margin, capital and liquidity, and evaluates
management's strategic plan. The balance sheet structure is primarily short-term
with most assets and liabilities repricing or maturing in less than five years.
Management monitors the sensitivity of net interest income by utilizing a
dynamic simulation model complemented by a traditional gap analysis.
The simulation model measures the sensitivity of net interest income to
changes in market interest rates. The simulation involves a degree of estimation
based on certain assumptions that management believes to be reasonable. Factors
considered include contractual maturities, prepayments, repricing
characteristics, deposit retention, the relative sensitivity of assets and
liabilities to changes in market interest rates, and cash flows from derivative
instruments.
The Board has established certain policy limits for the potential
volatility of net interest income as projected by the simulation model.
Volatility is measured from a base case where rates are assumed to be flat.
Volatility is expressed as the percentage change,
22
from the base case in net interest income over a 12-month period. As of June 30,
2002 management was operating within the policy limits.
The model is kept static with respect to the composition of the balance
sheet and, therefore does not reflect management's ability to proactively manage
in changing market conditions. Management may choose to extend or shorten the
maturities of the Company's funding sources and redirect cash flows into assets
with shorter or longer durations. Management may also use certain derivative
instruments to reduce the repricing mismatches of its assets and liabilities
including interest rate swaps, interest rate caps/floors, and interest rate
collars.
The following table reflects the estimated net interest income impact
based on gradual increase and decrease in interest rates over the next twelve
months. These estimates are based on the information and assumptions used in the
simulation modeling process as of June 30, 2002.
CHANGE IN INTEREST RATES ESTIMATED DECREASE % CHANGE
-------------------------------------------------------------
+ 200 Basis Points $14.9 million 1.7%
+ 100 Basis Points 5.4 million 0.6%
- 100 Basis Points 6.4 million 0.7%
The assumptions used are inherently uncertain and, as a result, the
Company cannot precisely predict the impact of changes in interest rates on net
interest income. Actual results may differ significantly from those presented
due to the timing, magnitude and frequency of interest rate changes; changes in
market conditions and interest rate differentials (spreads) between
maturity/repricing categories; and any actions, such as those previously
described, which management may take to counter such changes.
LIQUIDITY
The objective of liquidity management is to ensure the availability of
sufficient resources by the Company and its subsidiaries to meet their financial
commitments and to capitalize on opportunities for business expansion. Liquidity
management addresses the ability to meet deposit withdrawals either on demand or
at contractual maturity, to repay other borrowings as they mature and to make
new loans and investments as opportunities arise.
Sources of liquidity include dividends from its subsidiaries,
borrowings, the sale of available-for-sale securities, and funds available
through the capital markets. Dividends from the Company's banking subsidiaries
are limited by regulatory guidelines. Pursuant to these regulations, the banking
subsidiaries had $385.1 million of retained earnings available for dividends as
of July 1, 2002.
The banking subsidiaries have numerous sources of liquidity including
loan and security principal repayments and maturities, lines-of-credit with
other financial institutions, the ability to borrow under repurchase agreements
and Federal Home Loan Bank ("FHLB") advances utilizing their unpledged
securities and mortgage related loan portfolios, the sale of available-for-sale
securities, the securitization or sale of loans, and growth in deposits.
The banking subsidiaries currently have the ability to borrow an
additional $6.1 billion on a secured basis, utilizing mortgage related loans and
securities as collateral. At June 30, 2002, the Company had $3.2 billion in
outstanding borrowings with the FHLB.
The Company and its banking subsidiaries' liquidity positions are
monitored daily to ensure the maintenance of an optimum level and efficient use
of available funds. Management believes that sufficient liquidity exists to meet
their operating requirements.
UPGRADED CREDIT RATINGS
In July 2002, the Company and its subsidiaries received upgraded
ratings from both Standard and Poor's and Moody's Investors Service.
Additionally, Fitch Ratings revised its future outlook to positive.
The current ratings of the Company and North Fork are as follows:
Moody's S&P Fitch
------- --- -----
North Fork Bancorporation
Issuer/Counterparty .......................... A2 BBB+/A-2 B/5
Long-term/Short-term Senior Obligations ...... A2 BBB+/A-2 A-/F1
Subordinated Debt ............................ A3 BBB BBB+
Preferred Stock /Trups ....................... A3 BBB- BBB+
North Fork Bank
Issuer/Counterparty .......................... A1 A-/A-2 B/5
Long-term/Short-term Deposits ................ A1/P-1 A-/A-2 A/F1
Long-term/Short-term Senior Obligations ...... A1/P-1 A-/A-2 A-/F1
Financial Strength ........................... B- - -
Outlook .............................................. Stable Stable Positive
23
CAPITAL
The Company and its banking subsidiaries are subject to the risk based
capital guidelines administered by the bank regulatory agencies. The risk based
capital guidelines are designed to make regulatory capital requirements more
sensitive to differences in risk profiles among banks and bank holding
companies, to account for off-balance sheet exposure and to minimize
disincentives for holding liquid assets. Under these guidelines, assets and
off-balance sheet items are assigned to broad risk categories, each with
appropriate weights. The resulting capital ratios represent capital as a
percentage of total risk weighted assets and off-balance sheet items. The
guidelines require all banks and bank holding companies to maintain a minimum
ratio of total risk based capital to total risk weighted assets of 8%, including
a minimum ratio of Tier I capital to total risk weighted assets of 4% and a Tier
I capital to average assets of 4% ("Leverage Ratio"). Failure to meet minimum
capital requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators, that, if undertaken, could have a direct
material effect on the Company's financial statements. As of June 30, 2002, the
most recent notification from the various bank regulators categorized the
Company and its banking subsidiaries as well capitalized under the regulatory
framework for prompt corrective action. Under the capital adequacy guidelines, a
well capitalized institution must maintain a minimum total risk based capital to
total risk weighted assets ratio of at least 10%, a minimum Tier I capital to
total risk weighted assets ratio of at least 6%, a minimum leverage ratio of at
least 5% and not be subject to any written order, agreement or directive. There
are no conditions or events since such notification that management believes
have changed this classification.
The following table sets forth the Company's regulatory capital at June
30, 2002, under the rules applicable at such date. Management believes that the
Company and its banking subsidiaries meet all capital adequacy requirements to
which they are subject.
JUNE 30, 2002 JUNE 30, 2001
---------------------------------------------------------
(dollars in thousands) AMOUNT RATIO Amount Ratio
---------------------------------------------------------
Tier 1 Capital .................... $ 1,382,308 13.21% $1,220,586 12.67%
Regulatory Requirement ............ 418,492 4.00% 385,347 4.00%
---------------------------------------------------------
Excess ............................ $ 963,816 9.21% $835,239 8.67%
=========================================================
Total Risk Adjusted Capital ....... $ 1,492,306 14.26% $1,313,439 13.63%
Regulatory Requirement ............ 836,984 8.00% 770,694 8.00%
---------------------------------------------------------
Excess ............................ $655,322 6.26% $542,745 5.63%
=========================================================
Risk Weighted Assets .............. $10,462,300 $9,633,678
=========== ==========
The Company's Leverage Capital Ratio at June 30, 2002, was 7.91%. North
Fork's Tier 1, Total Risk-Based and Leverage Capital Ratios were 11.09%, 12.17%,
and 6.55%, respectively, at June 30, 2002.
Superior's Tier 1, Total Risk Based and Leverage Capital Ratios were
12.21%, 12.47% and 5.73%, respectively, at June 30, 2002.
Effective January 1, 2002, revisions were made to the regulatory risk
based capital guidelines that lowered the risk weighting on several AAA rated
CMO investments included in the securities portfolio. The change resulted in an
improvement of approximately 125 basis points on the Company's and North Fork's
Tier 1 and Total Risk Based Capital Ratios.
On July 31, 2002, the Company agreed to sell $350 million aggregate
principal amount of 5.875% subordinated notes and $150 million aggregate
principal amount of 5% fixed rate/floating rate subordinated notes in a private
offering to qualified institutional buyers under Rule 144A of the Securities
Act of 1933. Both note issues qualify as Tier II capital under the risk based
capital guidelines.
Both series of notes mature in 2012. The 5.875% subordinated notes
will bear interest at a fixed rate through maturity and will not be redeemable
prior to maturity. The fixed rate/floating rate notes bear interest at a fixed
rate of 5% per annum for the first five years, and convert to a floating rate
thereafter until maturity based on the US dollar three-month LIBOR plus 1.87%.
Beginning in the sixth year the Company has the right to redeem the fixed
rate/floating rate notes at par plus accrued interest.
The Company's Tier 1, Total Risk Adjusted and Leverage Capital Ratios
on a pro forma basis would have been 13.09%, 18.83% and 7.91%, respectively,
assuming that the subordinated notes were issued on June 30, 2002 and the
proceeds invested in money market instruments.
Management continues to apply the provisions of Accounting Principles
Board Opinion No. 25 "Accounting For Stock Issued to Employees" and related
interpretations in accounting for its stock option plans. Accordingly, no
compensation expense has been recognized for its stock based compensation plans,
other than for restricted stock awards. Had the Company reflected the impact of
stock option awards during the previous three years, the full years impact on
earnings per share would have been $.02, $.01, and $.02 in 2001, 2000 and 1999,
respectively.
In the first quarter of 2002, approximately sixty senior officers
accepted offers extended to them to modify their holdings of restricted stock.
The offers, which were made as part of the Company's key management retention
program, essentially permitted certain senior officers to obtain additional
shares of restricted stock if they agreed to extend the vesting periods for
their existing shares of restricted stock. This program was adopted to help
ensure continued employment of key management while having their interests
closely aligned with the long-term interests of the Company and its
shareholders. For those who accepted, their existing shares, with vesting
periods ranging from 1 to 6 years, were modified to extend the vesting period
to 10 years. In return for accepting the offer, each officer received one
additional share of restricted stock, with a vesting period of 10 years, for
each existing share of restricted stock. Approximately 467,000 additional
restricted shares were issued under the program with a market value of
approximately $15.7 million. This has been reflected in the deferred
compensation component of stockholders' equity and will be amortized over a
10-year period. None of the Company's executive officers were involved in the
program.
In September 2001, the Board of Directors approved a 5 million share
increase to its previously announced share repurchase program. This approval
brought the remaining shares authorized for repurchase to approximately 8
million, or 5% of the common
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shares presently outstanding. Although no additional shares were repurchased
during the most recent quarter, 600,000 shares were repurchased in July 2002, at
an average price of $35.15.
LITIGATION MATTERS
The Company and its subsidiaries are subject to certain pending and
threatened legal actions which arise out of the normal course of business.
Management believes that the resolutions of any pending or threatened litigation
will not have a material adverse effect on its financial condition or results of
operations.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Date: August 6, 2002 /s/ Daniel M. Healy
-------------------
Daniel M. Healy
Executive Vice President &
Chief Financial Officer
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