Item 1
- Business
General Description of Our Company and Business
North Fork Bancorporation, Inc. is a regional bank holding company organized under the laws of the State of Delaware and registered as a “bank holding company” under the Bank Holding Company Act of 1956, as amended. It is not a “financial holding company” as defined under the federal law. We are committed to providing superior customer service, while offering a full range of banking products and financial services, to both our consumer and commercial customers. Our primary subsidiary, North Fork Bank, operates from 353 retail bank branches in the New York Metropolitan area. We also operate a nationwide mortgage business GreenPoint Mortgage Funding Inc. (“GreenPoint Mortgage” or “GPM”). Through our other non-bank subsidiaries, we offer financial products and services to our customers including asset management, securities brokerage, and the sale of alternative investment products. We also operate a second subsidiary bank, Superior Savings of New England, N.A. (“Superior”), which focuses on telephonic and media-based generation of deposits.
In 2004, we completed two strategically important and accretive acquisitions more than doubling our total assets, expanded our geographic presence in northern and central New Jersey and transformed our institution into one of the twenty largest banking organizations in the United States with $58 billion in assets at December 31, 2005.
Our operating activities are divided into two primary business segments (Retail Banking and Mortgage Banking):
Retail Banking - Our retail banking operation is conducted principally through North Fork Bank. North Fork Bank operates 353 branches located in the New York Metropolitan area, through which we provide a full range of banking products and services to both commercial and consumer clients. We are a significant provider of commercial and commercial real estate loans, multi-family mortgages, construction and land development loans, asset based lending services, lease financing and business credit services, including lines of credit. Our consumer lending operations emphasize indirect automobile loans. We offer our customers a complete range of deposit products through our branch network and on-line banking services. We provide our clients, both commercial and consumer, with a full complement of cash management services including on-line banking, and offer directly or through our securities and insurance affiliates a full selection of alternative investment products. We also provide trust, investment management and custodial services through North Fork Bank’s Trust Department and investment advisory services through our registered investment advisor.
Revenue from our retail banking operations, principally net interest income, is the difference between the interest income we earn on our loan and investment portfolios and the cost of funding those portfolios. Our primary source of such funds are deposits and collateralized borrowings. We also earn income from fees charged on the various deposit and loan products. Other income includes the sale of alternative investment products (mutual funds and annuities), trust services, discount brokerage and investment management. The primary delivery channel for these products is the retail bank’s branches.
We actively participate in community development lending, both through North Fork Bank and through a separate community development subsidiary.
Mortgage Banking - In October 2004, we assumed a national mortgage business with the GreenPoint acquisition. Our national mortgage banking segment originates, sells and services a wide variety of mortgages secured by 1-4 family residences and small commercial properties. Most loans are originated through a national wholesale loan broker and correspondent lender network. We offer a broad range of mortgage loan products, to provide maximum flexibility to borrowers, including Jumbo A, specialty, conforming agency mortgage loans, home equity loans and commercial loans. Originations are generally sold into the secondary market and from time to time securitized if market conditions warrant such execution. Certain products including commercial mortgages, are retained in the Bank’s loan portfolio. GPM has established loan distribution channels with various financial institutions including banks, investment banks, broker-dealers, and real estate investment trusts (REITs), as well as both Fannie Mae and Freddie Mac. During 2005, we originated $42.3 billion in loans and sold $37.1 billion at an average gain on sale totaling 116 basis points. The
composition of total loan originations was: 45% Specialty, 35% Jumbo A, 13% Home Equity and 7% Agency. Option ARMS, both Alt-A and Jumbo A, accounted for 30% of originations during 2005. All option ARM originations are sold into the secondary market, servicing released. Mortgage originations for new purchases represented 48% of production in 2005. The weighted average FICO score for all originations was 720. We do not originate sub prime loans, nor will we sacrifice quality to drive origination volume and gain on sales.
GPM also engages in mortgage loan servicing, which includes customer service, escrow administration, default administration, payment processing, investor reporting and other ancillary services related to the general administration of mortgage loans. As of December 31, 2005, GPM’s mortgage loan servicing portfolio consisted of mortgage loans with an aggregate unpaid principal balance of $50.1 billion, of which $33.3 billion was serviced for investors other than North Fork. Loans held-for-sale totaled $4.4 billion, while the pipeline was $5.3 billion ($2.4 billion was covered under interest rate lock commitments) at December 31, 2005.
Competition
Competition in retail banking comes from other major commercial banks and thrifts engaged in the New York Metropolitan area. We also compete with smaller independent commercial banks for loans and deposits, local savings and loan associations and savings banks for deposits, credit unions for deposits and consumer loans, insurance companies and money market funds for deposits, and consumer finance organizations and the financing affiliates of consumer goods manufacturers (especially automobile manufacturers) for consumer loans. Notwithstanding our recent acquisitions, our competitors are substantially larger institutions with easier access to funding sources and greater capital bases enabling them to better withstand periods of severe market pressure. In setting rate structures for our retail banking products, we refer to a wide variety of financial information and indices, including the rates charged or paid by the other major commercial banks in the region and those fixed periodically by smaller, local competitors. Our second subsidiary bank, Superior Savings, competes with the other telephonic and media-based banks for the generation of deposits in the Northeast.
GreenPoint Mortgage’s competition is primarily other large mortgage banking companies with nationwide origination networks, as well as commercial banks and savings and loans with significant mortgage banking operations. Competition in the mortgage industry may occur on various levels, including loan origination, mortgage servicing, marketing and pricing. Many of our mortgage banking competitors are substantially larger, have more capital, additional resources and are well established in the specialty mortgage loan market. Other competitors are recent entrants into that market seeking the relatively attractive profit margins currently associated with specialty mortgage loan products. To the extent market pricing for specialty mortgage loan products becomes more competitive, it may be more difficult for us to originate and purchase mortgage loans with attractive yields in sufficient volume to maintain historical profit margins.
Our ability to compete effectively in both retail banking and mortgage banking depends on the relative performance of our products and services, the degree our products and services appeal to customers and the extent we are able to meet customers’ objectives and needs. In addition, our ability to compete depends on our ability to continue to attract and retain our senior management as well as other key personnel.
Capital and Liquidity
Information regarding our capital and liquidity is included elsewhere in this Form 10-K, in Item 7, Management’s Discussion and Analysis - “Capital,” Item 7A, Quantitative & Qualitative Disclosures about Market Risk - “Liquidity Risk Management”, and Item 8, Notes to Consolidated Financial Statements, Note 20 - “Capital.”
Recent Acquisitions
In October 2004, we acquired GreenPoint Financial Corp. (“GreenPoint”). GreenPoint operated two primary businesses, a New York based retail bank (“GreenPoint Bank”) and a separate nationwide mortgage banking business (“GreenPoint Mortgage” or “GPM”). GreenPoint Bank maintained 95 retail bank branches in the New York Metropolitan area. At the date of merger, GreenPoint had $27 billion in assets, $6.8 billion in securities, $5.1 billion in loans held-for-sale, $12.8 billion in loans held-for-investment, $12.8 billion in deposits, and
$11.4 billion in borrowings. On February 21, 2005, the operations of GreenPoint Bank were merged with and into North Fork Bank. GreenPoint Mortgage continues to operate as a separate subsidiary.
In May 2004, we acquired The Trust Company of New Jersey (“TCNJ”) and simultaneously merged its operations into North Fork Bank. TCNJ was the fourth largest commercial bank headquartered in New Jersey and operated primarily in the northern and central New Jersey market area. TCNJ represented our first significant expansion into a state other than New York. At the date of merger, TCNJ had $4.1 billion in total assets, $1.4 billion in securities, $2.1 billion in net loans, $3.2 billion in deposits and $.7 billion in borrowings.
In addition to the 2004 transactions, we have also completed thirteen acquisition transactions since 1988. Twelve of these acquired entities were either thrift companies or smaller commercial banks. We also acquired one investment advisory entity.
In November 2001, we purchased the domestic banking business of Commercial Bank of New York (“CBNY”) for approximately $175 million in cash. The acquired business consisted of $1.2 billion in total assets, $310 million in loans and $898 million in deposits. At closing of the transaction, we merged CBNY into North Fork Bank. Also acquired were CBNY’s fourteen retail bank branches, nine of which were located in the New York City borough of Manhattan.
Stockholder Access to Additional Company Information
We make available, free of charge, on or through the Investor Relations section of our website, our periodic and current reports filed with, or furnished to, the Securities and Exchange Commission (i.e., earlier annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K). Our internet address is www.northforkbank.com and the Investor Relations section of our website is accessed from the home page by clicking on Investor Relations. We post such reports on our website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. Also posted on our website or available in print upon request of any shareholder to our Corporate Secretary’s office, are our Corporate Governance Guidelines, Code of Conduct, and the Charters of our Audit Committee, Compensation and Stock Committee, and Nominating and Governance Committee. Our Corporate Secretary’s office can be contacted at North Fork Bancorporation, Inc.; Attention: Corporate Secretary’s office; 275 Broadhollow Road, Melville, NY 11747 by mail or by calling 631-531-2041 or through e-mail: through the Investor Relations section of our website, listed above.
SUPERVISION AND REGULATION
Laws and Regulations Applicable to Bank Holding Companies
General. As a registered bank holding company under the Bank Holding Company Act of 1956, as amended (the “BHC Act”), we are subject to regulation and supervision by the Federal Reserve Board (the “FRB”). The FRB has the authority to issue cease and desist orders or take other enforcement action against our holding company if it determines that our actions represent unsafe and unsound practices or violations of law. Regulation by the FRB is intended to protect depositors of our subsidiary banks and the safety and soundness of the U.S. banking system, not our stockholders.
Limitation on Acquisitions. The BHC Act requires a bank holding company to obtain prior approval of the FRB before: (1) taking any action that causes a bank to become a controlled subsidiary of the bank holding company; (2) acquiring direct or indirect ownership or control of voting shares of any bank or bank holding company, if the acquisition results in the acquiring bank holding company having control of more than 5% of the outstanding shares of any class of voting securities of such bank or bank holding company, unless such bank or bank holding company is majority-owned by the acquiring bank holding company before the acquisition; (3) acquiring all or substantially all the assets of a bank; or (4) merging or consolidating with another bank holding company.
Limitation on Activities. The activities of bank holding companies are generally limited to the business of banking, managing or controlling banks, and other activities that the FRB has determined to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Bank holding companies that qualify
and register as “financial holding companies” are also able to engage in certain additional financial activities, such as merchant banking and securities and insurance underwriting, subject to limitations set forth in federal law. We are not at this date a “financial holding company.”
Regulatory Capital Requirements. The FRB has promulgated capital adequacy guidelines for use in its examination and supervision of bank holding companies. If a bank holding company’s capital falls below minimum required levels, then the bank holding company must implement a plan to increase its capital, and its ability to pay dividends, make acquisitions of new banks or engage in certain other activities such as issuing brokered deposits may be restricted or prohibited.
The FRB currently uses two types of capital adequacy guidelines for holding companies, a two-tiered risk-based capital guideline and a leverage capital ratio guideline. The two-tiered risk-based capital guideline assigns risk weightings to all assets and certain off-balance sheet items of the holding company’s operations, and then establishes a minimum ratio of the holding company’s “Tier 1” Capital to the aggregate dollar amount of risk-weighted assets (which amount is usually less than the aggregate dollar amount of such assets without risk weighting) and a minimum ratio of the holding company’s total capital (“Tier 1” Capital plus “Tier 2” Capital, as adjusted) to the aggregate dollar amount of such risk-weighted assets. The leverage ratio guideline establishes a minimum ratio of the holding company’s Tier 1 Capital to its total tangible assets (total assets less goodwill and certain identifiable intangibles), without risk-weighting.
Under both guidelines, Tier 1 Capital (sometimes referred to as “core capital”) is defined to include: common shareholders’ equity (including retained earnings), qualifying non-cumulative perpetual preferred stock and related surplus, qualifying cumulative perpetual preferred stock and related surplus, trust preferred securities, and minority interests in the equity accounts of consolidated subsidiaries (limited to a maximum of 25% of Tier 1 Capital). Goodwill and most intangible assets are deducted from Tier 1 Capital.
For purposes of the total risk-based capital guidelines, Tier 2 Capital (sometimes referred to as “supplementary capital”) is defined to include: allowances for loan and lease losses (limited to 1.25% of risk-weighted assets), perpetual preferred stock not included in Tier 1 Capital, intermediate-term preferred stock and any related surplus, certain hybrid capital instruments, perpetual debt and mandatory convertible debt securities, and intermediate-term subordinated debt instruments (subject to limitations). The maximum amount of qualifying Tier 2 Capital is 100% of qualifying Tier 1 Capital. For purposes of the total capital guideline, total capital equals Tier 1 Capital, plus qualifying Tier 2 Capital, minus investments in unconsolidated subsidiaries, reciprocal holdings of bank holding company capital securities, and deferred tax assets and other deductions.
The FRB’s current capital adequacy guidelines require that a bank holding company maintain a Tier 1 risk-based capital ratio of at least 4%, a total risk-based capital ratio of at least 8%, and a Tier 1 leverage capital ratio of 3% to 5%. Top performing companies may be permitted to operate with slightly lower Tier 1 leverage capital ratios, while poor performing or troubled institutions may be required to maintain or build higher Tier 1 leverage capital ratios.
As of December 31, 2005, our holding company was in compliance with all of the FRB’s capital adequacy guidelines. Additional information on capital adequacy requirements is included elsewhere in this Form 10-K, in Item 7, Management’s Discussion and Analysis - “Capital,” and in Item 8, Notes to Consolidated Financial Statements, Note 20 - “Capital.”
Source of Strength. FRB policy requires a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks. Under this “source of strength doctrine,” a bank holding company is expected to stand ready to use its available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity, and to maintain resources and the capacity to raise capital that it can commit to its subsidiary banks. Furthermore, the FRB has the right to order a bank holding company to terminate any activity that the FRB believes is a serious risk to the financial safety, soundness or stability of any subsidiary bank.
Liability of Commonly Controlled Institutions. Under cross-guaranty provisions of the Federal Deposit Insurance Act (the “FDIA”), each bank subsidiary of a bank holding company is liable for any loss incurred by the Federal Deposit Insurance Corporation’s insurance fund for banks in connection with the failure of any other bank subsidiary of the bank holding company.
Laws and Regulations Applicable to the Company’s Subsidiary Banks
General. North Fork Bank, a New York state non-member bank, is subject to regulation, supervision and periodic examinations by the New York State Banking Department (“NYSBD”) and the Federal Deposit Insurance Corporation (“FDIC”). Superior Savings of New England, a nationally chartered bank, is subject to regulation, supervision and periodic examinations by the Office of the Comptroller of the Currency (“OCC”). These bank regulatory agencies are empowered to issue cease and desist orders or take other enforcement action against the banks if they determine that the banks’ activities represent unsafe and unsound banking practices or violations of law. Regulation by these agencies is designed to protect the depositors of the banks and the safety and soundness of the U.S. banking system, not shareholders of the Company.
Bank Regulatory Capital Requirements. The FDIC and the OCC have adopted minimum capital requirements applicable to state non-member banks and national banks, respectively. These bank capital requirements are similar to the capital adequacy guidelines established by the FRB for bank holding companies, discussed above under “Laws and Regulations Applicable to Bank Holding Companies - Regulatory Capital Requirements.”
The federal bank regulators have established a five-category classification system for purposes of grading the capital adequacy of individual banks. Depending on the status of a bank’s capitalization under this classification system, federal law may require or permit the regulators to take certain corrective actions against the bank. The following are the five capital classifications:
A bank is:
•
“well-capitalized” if it has a total Tier 1 leverage ratio of 5% or greater, a Tier 1 risk-based capital ratio of 6% or greater and a total risk-based capital ratio of 10% or greater (and is not subject to any order or written directive specifying any higher capital ratio);
•
“adequately capitalized” if it has a total Tier 1 leverage ratio of 4% or greater (or a Tier 1 leverage ratio of 3% or greater, if the bank has a CAMELS rating of 1), a Tier 1 risk-based capital ratio of 4% or greater and a total risk-based capital ratio of 8% or greater;
•
“undercapitalized” if it has a total Tier 1 leverage ratio that is less than 4% (or a Tier 1 leverage ratio that is less than 3%, if the bank has a CAMELS rating of 1) or a Tier 1 risk-based capital ratio that is less than 4% or a total risk-based capital ratio that is less than 8%;
•
“significantly undercapitalized” if it has a total Tier 1 leverage ratio that is less than 3% or a Tier 1 risk based capital ratio that is less than 3% or a total risk-based capital ratio that is less than 6%; and
•
“critically undercapitalized” if it has a Tier 1 leverage ratio that is equal to or less than 2%.
Federal banking laws require the federal regulatory agencies to take prompt corrective action against undercapitalized banks, that is, banks falling into one of the latter three categories set forth above. As of December 31, 2005, our bank subsidiaries were “well capitalized” under applicable requirements.
Deposit Insurance and Assessments. The deposits of North Fork Bank and Superior Savings are insured by the FDIC’s Bank Insurance Fund, in general up to a maximum of $100,000 per insured depositor. Under federal banking regulations, insured banks are required to pay semi-annual assessments to the FDIC for deposit insurance. The FDIC’s assessment system requires insured banks to pay varying assessment rates, depending upon the level of the bank’s capital, the degree of supervisory concern over the bank, and the portion, if any, of the bank’s deposits attributable to the bank’s earlier acquisition of institutions insured under the FDIC’s Savings Association Insurance Fund. The FDIC has the authority to increase the annual assessment rates as necessary to ensure the safety of its insurance fund, without limitation.
Limitations on Interest Rates and Loans to One Borrower. The rate of interest a bank may charge on certain classes of loans may be limited by state and federal law. If and when they apply, they may serve to restrict net interest income earned on certain classes of loans. Federal and state laws impose additional restrictions on the lending activities of banks including, among others, the maximum amount that a bank may loan to one borrower.
Payment of Dividends. Our subsidiary banks are subject to federal and state bank corporation laws limiting the payment of cash dividends by banks. Typically, such laws restrict dividends to undivided profits generally or profits earned during preceding periods. In addition, under federal banking law, an FDIC-insured institution may not pay dividends while it is undercapitalized or if payment would cause it to become undercapitalized. The FDIC and the OCC also have authority to prohibit or to limit the payment of dividends by a bank if, in the banking regulator’s opinion, payment of a dividend would constitute an unsafe or unsound practice in light of the financial condition of the banking organization.
The USA Patriot Act. The USA Patriot Act of 2001, as amended (the “Patriot Act”), has broadened existing anti-money laundering legislation while imposing new compliance and due diligence obligations on banks and other financial institutions, with a particular focus on detecting and reporting money-laundering transactions involving domestic or international customers. The U.S. Treasury Department has issued and will continue to issue regulations clarifying the Patriot Act’s requirements. The Patriot Act requires all “financial institutions,” as defined, to establish certain anti-money laundering compliance and due diligence programs.
Recently, the regulatory agencies have intensified their examination procedures in light of the Patriot Act’s anti-money laundering and bank secrecy act requirements. The Company believes that its controls and procedures are in compliance with the Patriot Act.
Community Reinvestment Act. Our subsidiary banks are subject to the federal Community Reinvestment Act (the “CRA”) and implementing regulations. CRA regulations establish the framework and criteria by which the federal bank regulatory agencies assess an institution’s record of helping to meet the credit needs of its community, including low- and moderate-income neighborhoods. Some states have enacted their own community reinvestment laws and regulations applicable to financial institutions doing business within their borders. A banking institution’s performance under the federal CRA and any applicable state community reinvestment act laws is taken into account by regulators in reviewing certain applications made by the institution, including applications for approval of expansion transactions such as mergers and branch acquisitions.
Transactions with Affiliates. Our subsidiary banks are subject to federal laws which limit certain transactions between banks and their affiliated companies, including loans, other extensions of credit, investments or asset purchases. Among other things, these laws place a ceiling on the aggregate dollar amount of such transactions expressed as a percentage of the bank’s capital and surplus. Furthermore, loans and extensions of credit from banks to their non-bank affiliates, as well as certain other transactions, are required to be secured in specified amounts. Finally, the laws require that such transactions with affiliates be on terms and conditions that are or would be offered to nonaffiliated parties. We carefully monitor our compliance with these restrictions on transactions between our banks and their affiliates.
Other Laws. Our subsidiary banks are subject to a variety of other laws particularly affecting banks and financial institutions, including laws regarding permitted investments; loans to officers, directors and their affiliates; security requirements; anti-tying limitations; anti-money laundering, financial privacy and customer identity verification; truth-in-lending; permitted types of interest bearing deposit accounts; trust department operations; brokered deposits; and audit requirements.
Laws Governing Interstate Banking and Branching
Under federal law, a bank holding company generally is permitted to acquire additional banks located anywhere in the United States, including in states other than the acquiring holding company’s home state. There are a few limited exceptions to this ability, such as interstate acquisitions of newly-organized banks (if the law of the acquired bank’s home state prohibits such acquisitions), interstate acquisitions of banks where the acquiring holding company would control more than 10% of the total amount of insured deposits in the United States, and interstate acquisitions where the acquiring holding company would control more than 30% of the insured deposits in the acquired bank’s home state (or any lower percentage established by the acquired bank’s home state), unless such acquisition represents the initial entry of the acquiring holding company into the acquired bank’s home state or where the home state waives such limit by regulatory approval or by setting a higher percentage threshold for the insured deposit limit.
Under federal law, banks generally are permitted to merge with banks headquartered in other states, thereby creating interstate branches. The principal exception to this ability is a merger with a bank in another state that is a newly organized bank, if the laws of the other state prohibit such mergers. Interstate bank mergers are subject to the same type of limits on the acquiring bank and its bank affiliates controlling deposits in the acquired institution’s home state as interstate bank acquisitions. In addition, banks may acquire one or more branches from a bank headquartered in another state or establish de novo branches in another state, if the laws of the other state permit such branch acquisitions or the establishment of such de novo branches.
States may prohibit acquisitions of an in-state bank or bank branches by an out-of state bank or bank holding company controlling only out-of state banks, if such acquisition would result in the acquiring institution’s controlling more than a specified percentage of in-state deposits, provided such restriction applies as well to acquisitions of in-state banks or bank branches by in-state banking organizations.
Regulation of Mortgage Banking
As a subsidiary of our principal bank, North Fork Bank, GreenPoint Mortgage is subject to regulation and supervision by the bank’s regulators, the NYSBD and the FDIC. As a separate subsidiary engaged in the business of mortgage banking on a nationwide basis, we are subject from time to time to licensing and other legal and regulatory requirements imposed by states in which we engage in significant business operations. These laws and regulations, which often are intended to protect consumers, may restrict our ability to change the fees or rates we would otherwise charge by agreement with customers, in connection with providing them mortgage lending services and products.
Regulation of Other Non-Banking Activities
Federal and state banking laws affect the ability of bank holding companies and their subsidiary banks to engage, directly or indirectly through non-bank subsidiaries, in activities of a non-traditional banking nature, such as insurance agency, securities brokerage, or investment advisory activities. To the extent that we are authorized to engage and do engage in such activities, through our bank or non-bank subsidiaries, we comply with the applicable banking laws, as well as any other laws and regulations specifically regulating the conduct of these non-banking activities, such as the federal and state securities laws, regulations of self-regulatory organizations such as the National Association of Securities Dealers and state insurance laws and regulations. These laws and regulations are principally focused on protecting consumers rather than shareholders or other investors.
Regulatory Matters
United States anti-money laundering (“AML”) laws, including The Bank Secrecy Act, as amended by the USA Patriot Act, and related implementing regulations, have imposed significant, additional requirements on financial institutions. The Federal Deposit Insurance Corporation (“FDIC”) and the New York State Banking Department (“NYSBD”) have identified certain supervisory issues with respect to the Bank’s AML compliance program that require management’s attention. Management has been engaged in discussions with the FDIC and the NYSBD concerning this matter and has initiated appropriate action to address the issues raised. The Bank entered into an informal memorandum of understanding (“MOU”) with both the FDIC and the NYSBD with respect to these matters effective as of August 23, 2005. A memorandum of understanding is characterized by regulatory authorities as an informal action that is neither published nor made publicly available by agencies and is used when circumstances warrant a milder form of action than a formal supervisory action, such as a formal written agreement or cease and desist order. Management has developed a remediation plan to comply with the requirements of the MOU and has made significant progress to implement the plan as well as to implement additional enhancements to its AML compliance program.
Changes in Law and Regulation Affecting the Company Generally
Future Legislation. Various legislation is from time to time introduced in Congress and in the legislatures of states in which we do business. Such legislation may change our operating environment and the operating environment of our subsidiaries in substantial and unpredictable ways. We cannot determine the ultimate effect that
potential legislation, if enacted, or implementing regulations, would have upon our financial condition or results of operations or upon our shareholders.
Fiscal and Monetary Policies. Our business and earnings are affected significantly by the fiscal and monetary policies of the federal government and its agencies. We are particularly affected by the policies of the FRB, which regulates the supply of money and credit in the United States. Among the instruments of monetary policy available to the FRB are conducting open market operations in United States government securities, changing the discount rates of borrowings of depository institutions, imposing or changing reserve requirements against depository institutions’ deposits, and imposing or changing reserve requirements against certain borrowings by banks and their affiliates.
These methods are used in varying degrees and combinations to directly effect the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits. The policies of the FRB have a material effect on our business, results of operations and financial condition.
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 imposed significant new responsibilities on publicly held companies such as North Fork, particularly in the area of corporate governance. We, like other public companies, have reviewed and reinforced our internal controls and financial reporting procedures in response to the various requirements of Sarbanes-Oxley and implementing regulations issued by the Securities and Exchange Commission and the New York Stock Exchange. We have observed and will continue to observe full compliance with these new legal requirements. We have always emphasized best practices in corporate governance as the most effective way of assuring shareholders that their investment is properly managed and their interests remain paramount.
The discussion in the preceding pages of various aspects of law and regulation is merely a summary which does not purport to be complete and which is qualified in its entirety by reference to the actual statutes and regulations.
Certification to the New York Stock Exchange on Corporate Governance
The Chief Executive Officer of the Company has certified to the New York Stock Exchange under the NYSE’s Rule 303A.12, that he is not aware of any violation by the Company of NYSE corporate governance listing standards.
Employees
As of December 31, 2005, we had 7,546 full-time employees and 1,380 part-time employees. We do not maintain collective bargaining agreements with any groups of employees. We consider our relationship with our employees to be very good, allowing us to retain key employees, while attracting talented new personnel.
Item 1A
Item 1A
- Risk Factors
Risk is an inherent part of our business and activities. Certain risks such as geographic diversity, liquidity, assets/liability management and capital adequacy are explained more fully in other sections of the Managements Discussion and Analysis. Additional factors effecting our company include:
Changes in the interest rate environment may negatively affect interest margins, mortgage loan originations and the valuation of mortgage servicing rights. Our net interest income from loans and investments is significantly affected by market rates of interest, which in turn are affected by prevailing economic conditions and by the fiscal and monetary policies of the deferral government and various regulatory agencies. Volatility in interest rates can also result in the flow of funds away from financial institutions into direct investments. Changes in interest rates can effect the origination of loans and the rates received on loans.
The allowance for loan losses may not be adequate to cover actual losses. Our allowance for loan losses is based on historical loss experience, as well as an evaluation of the risks associated with the loan portfolio. Our allowance for loan losses may not be adequate to cover actual loan losses, and this could adversely and materially affect our financial results.
Acquisitions may not produce revenue enhancements and may result in unforeseen integration difficulties. We have made several recent acquisitions, and are always exploring opportunities to expand. Difficulty in integrating an acquired business may cause us not to realize expected revenue increases and cost savings, and may cause higher than expected deposit attrition, disruption of the our business, and may otherwise adversely affect our ability to achieve the anticipated benefits of the acquisition.
We face system failure risks and security risks. The computer systems and network infrastructure we and others use could be vulnerable to unforeseen problems. Fire, power loss or other failures may effect our computer equipment and other technology. Also, our computer systems and network infrastructure could be damaged by “hacking” and “identity theft.”
Our business could suffer if we fail to retain skilled people. Our success depends on our ability to retain key employees. Competition for the best people is intense, and we may not be able to retain the best possible employees.
Future governmental regulation and legislation and changes in monetary policy could limit growth. We are subject to extensive state and federal regulation, supervision and legislation that govern all aspects of its operation. Changes to these laws could affect us and diminish the value of our business. Also, actions by monetary and fiscal authorities, including the Federal Reserve, could have an adverse effect on our business and earnings.
Competitive pressures among financial services companies which may increase significantly. We operate in a highly competitive industry that could become more competitive as a result of legislative, regulatory and technological changes. We compete with several types of financial institutions, and technological changes have lowered the barriers to entry and made it possible for non-banks to offer products traditionally provided by banks.
Acts or threats of terrorism, military activity, and other political actions could adversely affect general economic or industry conditions. Geopolitical conditions may affect our earnings. Furthermore, acts of terrorism, and the government’s reaction to such acts, could affect our business and earnings.
A natural disaster could harm our business. Natural disasters could harm our operations directly through interference with communications, including the interruption or loss of our websites, which would prevent us from gathering deposits, originating loans and processing and controlling its flow of business, as well as through the destruction of facilities and our operational, financial and management information systems.
The risks factors described above are not the only risks that may have a material adverse effect us. Additional risks and uncertainties also could adversely affect our business and results. If any of these risks actually occur, our business, financial condition or results of operations could be negatively affected, the market price for your securities could decline, and you could lose all or a part of your investment. Further, to the extent that any of the information contained in this Annual Report on Form 10-K constitutes forward-looking statements, the risk factors set forth above also are cautionary statements identifying important factors that could cause our actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of the Company.
Item 1B
Item 1B
- Unresolved Staff Comments
None.
Item 2
Item 2
- Properties
Our principal executive and administrative offices are located in two adjacent facilities located in Melville, New York. These facilities comprise approximately 260,000 square feet of leased space, pursuant to lease agreements expiring in 2018 (with options to renew for up to 10 additional years). We occupy a 75,000 square foot operations center that we own in Mattituck, New York. The main office of North Fork Bank also is in Mattituck and the main office of Superior Savings of New England, N.A. is in Branford, Connecticut, of which both are owned facilities. The principal offices of GreenPoint Mortgage are located in Novato, California and is comprised
125,000 square feet of leased space, pursuant to a lease agreement that expires in 2011 (with options to renew for up to 10 additional years). GPM also occupies a 35,000 square foot servicing center, that we own, in Columbus, Georgia.
At December 31, 2005, of our 355 retail bank branches, 117 were owned and 238 were leased under long-term lease arrangements expiring at various times through 2026. In addition, GreenPoint Mortgage operates 45 retail and wholesale branches throughout the United States, all of which are leased.
Additional information regarding properties is included elsewhere in this Form 10-K, in Item 8, Notes to Consolidated Financial Statements, Note 6 - “Premises and Equipment” and Note 17 - “Other Commitments and Contingent Liabilities.” We are also subject to leases for other facilities that have been vacated as a result of consolidation following acquisitions. We have subleased certain of these vacated facilities.
Item 3
Item 3
- Legal Proceedings
We are subject to certain pending and threatened legal actions which arise out of the normal course of our business, including typical customer claims and counterclaims arising out of the retail banking and mortgage banking business. We believe that the resolution of any pending or threatened litigation will not have a material adverse effect on our financial condition or results of operations.
Item 4
Item 4
- Submission of Matters To a Vote of Security Holders
No matters were submitted to a vote of stockholders during the fourth quarter of 2005.
Item 4A
- Executive Officers of the Registrant
The following information is provided for the holding company’s executive officers as of January 1, 2006. Each of the listed executives is also a director of the holding company. The executives are elected annually by the Board of Directors.
John A. Kanas, 59, has been the President of our holding company since it was organized in 1981, and the President of North Fork Bank since 1977. He has been the Chairman of the Board of the holding company since 1986 and of North Fork Bank since 1987, and the Chief Executive Officer of the holding company and North Fork Bank since 1988.
John Bohlsen, 63, has been the Vice Chairman of the Board of our holding company and of North Fork Bank since 1992 and a member of the Board of Directors since 1986.
Daniel M. Healy, 63, has been the Executive Vice President and Chief Financial Officer of our holding company and of North Fork Bank since 1992 and a member of the Board of Directors since 2000.
PART II
Item 5
Item 5 -
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The outstanding shares of our common stock are listed and traded on the New York Stock Exchange under the symbol NFB. Information relating to the high and low sales prices of our common stock for each full quarterly period during 2005 and 2004 is set forth under Item 8, “Notes to Consolidated Financial Statements”, Note 22 - “Quarterly Financial Information” of the Annual Report on Form 10-K. As of March 3, 2006, there were 13,712 holders of record of North Fork common stock.
On December 13, 2005, the Board of Directors approved a 14% increase in its regular quarterly cash dividend to $.25 per common share. We declared quarterly cash dividends on our common stock in the amount of $.22 per share for each of the first three quarters of 2005. Quarterly cash dividends paid in 2004, were $.20 per share for each of the first two quarters and $.22 per share for the third and fourth quarters. Additional information regarding dividends and restrictions thereon, and market price information is included elsewhere in this Form 10-K, in Item 7,
Management’s Discussion and Analysis - “Capital‘ Item 7A, Quantitative and Qualitative Disclosures About Market Risk - “Liquidity Risk Management” and Item 8, Notes to Consolidated Financial Statements, Note 20 - “Capital,” and Note 22 - “Quarterly Financial Information”.
Issuer Purchases of Equity Securities
The following table provides common stock repurchases made by us or on our behalf during the fourth quarter:
(1)
Under the provisions of our share repurchase program previously authorized by the Board of Directors, we repurchased 14.9 million shares at an average cost of $26.24 during 2005. As of December 31, 2005, 2.4 million shares were available to be purchased under the program. On January 24, 2006, the Board of Directors authorized the repurchase of an additional 12 million shares increasing the total remaining authorized for repurchase to 14.4 million. As of March 6, 2006, 5.1 million shares remain available to be purchased under the program. The current program has no fixed expiration date. Repurchases are made in the open market or through privately negotiated transactions.
Item 6
Item 6 -
Selected Financial Data
Selected financial data for each of the years in the five-year period ended December 31, 2005 are set forth below. Our consolidated financial statements and notes thereto as of December 31, 2005 and 2004 and for each of the years in the three-year period ended December 31, 2005 are included elsewhere in this Form 10-K.
The 10-K contains supplemental financial information, described in the following notes, which has been determined by methods other than U.S. Generally Accepted Accounting Principles (“GAAP”) that management uses in its analysis of the Company’s performance. Management believes these non-GAAP financial measures provide information useful to investors in understanding the underlying operational performance of the Company, its business and performance trends and facilitates comparisons with the performance of others in the financial services industry.
(1)
Interest income on a tax equivalent basis includes the additional amount of interest income that would have been earned if our investment in certain tax-exempt interest earning assets had been made in tax-exempt assets subject to federal, state and local income taxes yielding the same after-tax income.
(2)
The efficiency ratio is used by the financial services industry to measure an organization’s operating efficiency. The efficiency ratio represents non-interest expense, net of amortization of identifiable intangible assets and goodwill, facility closures expense and debt restructuring costs to net interest income on a tax equivalent basis and non-interest income, net of securities and facilities gains, temporary impairment on mortgage servicing rights and gain on sale of other investments.
(3)
Return on average tangible assets and return on average tangible equity, which represent non-GAAP measures are computed on an annualized basis as follows:
Return on average tangible assets is computed by dividing net income, as reported plus amortization of identifiable intangible assets, net of taxes, by average total assets less average goodwill and average identifiable intangible assets.
Return on average tangible equity is computed by dividing net income, as reported, plus amortization of identifiable intangible assets, net of taxes, by average total stockholders’ equity less average goodwill and average identifiable intangible assets.
(4)
Tangible Book Value is calculated by dividing period end stockholders’ equity, less period end goodwill and identifiable intangible assets, by period end shares outstanding.
Item 7
Item 7
- Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless specifically stated otherwise, all references to 2005, 2004 and 2003 refer to our fiscal year ended. When we use the terms “North Fork”, “we”, “us” and “our” we mean North Fork Bancorporation, Inc. and its subsidiaries.
In this discussion, we have included statements that may constitute “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward looking statements are not historical facts but instead represent only our beliefs regarding future events, many of which by their nature, are inherently uncertain and beyond our control. These statements relate to our future plans and objectives, among other things. By identifying these statements for you in this manner, we are alerting you to the possibility that our actual results may differ, possibly materially, from those indicated in the forward-looking statements. Additional information and examples of statements that may constitute forward-looking statements and important risk factors
which could cause our results to differ from those indicated can be found elsewhere in this Form 10-K, in the section entitled “Forward-Looking Statements”.
Business Overview
North Fork Bancorporation, Inc. is a regional bank holding company organized under the laws of the State of Delaware and registered as a “bank holding company” under the Bank Holding Company Act of 1956, as amended. It is not a “financial holding company” as defined under the federal law. We are committed to providing superior customer service, while offering a full range of banking products and financial services, to both our consumer and commercial customers. Our primary subsidiary, North Fork Bank, operates from 353 retail bank branches in the New York Metropolitan area. We also operate a nationwide mortgage business GreenPoint Mortgage Funding Inc. (“GreenPoint Mortgage” or “GPM”). Through our other non-bank subsidiaries, we offer financial products and services to our customers including asset management, securities brokerage, and the sale of alternative investment products. We also operate a second subsidiary bank, Superior Savings of New England, N.A., which focuses on telephonic and media-based generation of deposits.
In 2004, we completed two strategically important and accretive acquisitions more than doubling our total assets, expanded our geographic presence in northern and central New Jersey and transformed our institution into one of the twenty largest banking organizations in the United States with $58 billion in assets at December 31, 2005.
On March 12, 2006, North Fork announced that it had entered into an Agreement and Plan of Merger with Capital One Financial Corporation (Capital One) pursuant to which North Fork would merge with and into Capital One, with Capital One continuing as the surviving corporation. Capital One, headquartered in McLean, Virginia, is a financial holding company whose banking and non-banking subsidiaries market a variety of financial products and services. Its primary products and services offered through its subsidiaries include credit card products, deposit products, consumer and commercial lending, automobile and other motor vehicle financing, and a variety of other financial products and services to consumers, small business and commercial clients.
Subject to the terms and conditions of the merger agreement, each holder of North Fork common stock will have the right, subject to proration, to elect to receive, for each share of North Fork common stock, cash or Capital One common stock, in either case having a value equal to $11.25 plus the product of 0.2216 times the average closing sales price of Capital One’s common stock for the five trading days immediately preceding the merger date. Based on Capital One’s closing NYSE stock price of $89.92 on March 10, 2006, the transaction is valued at $31.18 per North Fork share, for a total transaction value of approximately $14.6 billion. North Fork stock options vest upon a change in control and will be converted into options on shares of Capital One’s common stock in connection with the closing, if not exercised before that time. North Fork’s restricted shares outstanding also vest upon a change in control. Each outstanding North Fork restricted share will be converted into the right to receive the per share merger consideration elected by the holder of the North Fork restricted share, subject to proration.
The merger is subject to certain conditions, including approval by North Fork stockholders and Capital One stockholders, receipt of regulatory approvals and other customary closing conditions, and is expected to close in the fourth quarter of 2006.
Our operating activities are divided into two primary business segments, Retail Banking and Mortgage Banking:
Retail Banking - Retail banking is conducted principally through North Fork Bank. North Fork Bank operates 353 branches located in the New York Metropolitan area, through which we provide a full range of banking products and services to both commercial and consumer clients. We are a significant provider of commercial and commercial real estate loans, multi-family mortgages, construction and land development loans, asset based lending services, lease financing and business credit services, including lines of credit. Our consumer lending operations emphasize indirect automobile loans. We offer our customers a complete range of deposit products through our branch network and on-line banking services. We provide our clients, both commercial and consumer, with a full complement of cash management services including on-line banking, and offer directly or through our securities and insurance affiliates a full selection of alternative investment
products. We also provide trust, investment management and custodial services through North Fork Bank’s Trust Department and investment advisory services through our registered investment advisor.
Revenue from our retail banking operations, principally net interest income, is the difference between the interest income we earn on our loan and investment portfolios and the cost of funding those portfolios. Our primary source of such funds are deposits and collateralized borrowings. We also earn income from fees charged on the various deposit and loan products. Other income includes the sale of alternative investment products (mutual funds and annuities), trust services, discount brokerage and investment management. The primary delivery channel for these products is the retail bank’s branches.
We actively participate in community development lending, both through North Fork Bank and through a separate community development subsidiary.
Mortgage Banking - Our mortgage banking segment originates, sells and services a wide variety of mortgages secured by 1-4 family residences and small commercial properties. Most loans are originated through a national wholesale loan broker and correspondent lender network. We offer a broad range of mortgage loan products, to provide maximum flexibility to borrowers, including Jumbo A, specialty, conforming agency mortgage loans, home equity loans and commercial loans. Originations are generally sold into the secondary market and, from time to time, are securitized if market conditions warrant such execution. Certain products including commercial mortgages, are retained in the Bank’s loan portfolio. We have established loan distribution channels with various financial institutions including banks, investment banks, broker-dealers, and real estate investment trusts (REITs), as well as both Fannie Mae and Freddie Mac. During 2005, we originated $42.3 billion and sold $37.1 billion in loans at an average gain on sale totaling 116 basis points. The composition of total loan originations was: 45% Specialty, 35% Jumbo A, 13% Home Equity and 7% Agency. Option ARMs, both Alt-A and Jumbo A, accounted for 30% of originations during 2005. All option ARM originations are sold into the secondary market, servicing released. Mortgage originations for new purchases represented 48% of production in 2005. The weighted average FICO score for all originations was 720. We do not originate sub prime loans, nor will we sacrifice quality to drive origination volume and gain on sales.
GPM also engages in mortgage loan servicing, which includes customer service, escrow administration, default administration, payment processing, investor reporting and other ancillary services related to the general administration of mortgage loans. As of December 31, 2005, GPM’s mortgage loan servicing portfolio consisted of mortgage loans with an aggregate unpaid principal balance of $50.1 billion, of which $33.3 billion was serviced for investors other than North Fork. Loans held-for-sale totaled $4.4 billion, while the pipeline was $5.3 billion ($2.4 billion was covered under interest rate lock commitments) at December 31, 2005.
The following table sets forth a summary reconciliation of each business segment’s contribution to consolidated pre-tax earnings as reported:
Segment Results
(1)
Excludes net inter-company activity of $28.0 million.
(2)
Represents a gain on sale, net of tax from our minority interest in a non-public finance entity.
Estimates
Our significant accounting polices are described in Item 8, Notes to Consolidated Financial Statement, Note 1 - “Business and Summary of Significant Accounting Policies”. Some of these policies require us to make estimates and assumptions are based on difficult, complex or subjective judgments, of which some are inherently uncertain and can materially affect asset and liability valuations, revenues and expense levels, contingent assets and liabilities and disclosures. We have established certain policies and procedures to ensure that the information used in these estimates and assumptions is appropriate.
Critical Accounting Policies
We have identified four accounting policies that are critical to the presentation of our financial statements and that require critical accounting estimates, involving significant valuation adjustments, on the part of management. The following is a description of those policies:
Provision and Allowance for Loan Losses
The allowance for loan losses is available to cover probable losses inherent in the loans held-for-investment portfolio. Loans held-for-investment, or portions thereof, deemed uncollectible are charged to the allowance for loan losses, while recoveries, if any, of amounts previously charged-off are added to the allowance. Amounts are charged-off after giving consideration to such factors as the customer’s financial condition, underlying collateral values and guarantees, and general economic conditions.
The evaluation process for determining the adequacy of the allowance for loan losses and the periodic provisioning for estimated losses is undertaken on a quarterly basis, but may increase in frequency should conditions arise that would require our prompt attention. Conditions giving rise to such action are business combinations or other acquisitions or dispositions of large quantities of loans, dispositions of non-performing and marginally performing loans by bulk sale or any development which may indicate an adverse trend. Recognition is also given to the changing risk profile resulting from business combinations, customer performance, results of ongoing credit-quality monitoring processes and the cyclical nature of economic and business conditions.
The loan portfolio is categorized according to collateral type, loan purpose or borrower type (i.e. commercial, consumer). The categories used include Multi-Family Mortgages, Residential 1-4 Family Mortgages, Commercial Mortgages, Commercial and Industrial, Consumer, and Construction and Land, which are more fully described in the section entitled Management’s Discussion and Analysis, - “Loans Held-for-Investment.” An important consideration is our concentration of real estate related loans.
The methodology employed for assessing the adequacy of the allowance consists of the following criteria:
•
Establishment of reserve amounts for specifically identified criticized loans, including those arising from business combinations and those designated as requiring special attention by our internal loan review program, or bank regulatory examinations (specific-allowance method).
•
An allocation to the remaining loans giving effect to historical losses experienced in each loan category, cyclical trends and current economic conditions which may impact future losses (loss experience factor method).
The initial allocation or specific-allowance methodology commences with loan officers and underwriters grading the quality of their loans on a risk classification scale ranging from 1 - 8. Loans identified as below investment grade are referred to our 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 a criticized category. Additionally, LRD is responsible for performing periodic reviews of the loan portfolio independent from the identification process employed by loan officers and underwriters. Loans that fall into criticized categories are further evaluated for impairment in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 114, “Accounting by Creditors for Impairment of a Loan.” The portion of the allowance allocated to impaired loans is based on the most appropriate of the following measures: discounted cash flows from the loan
using the loan’s effective interest rate, the fair value of the collateral for collateral dependent loans, or the observable market price of the impaired loan.
The remaining allocation applies a category specific loss experience factor to loans which have not been specifically reviewed for impairment, including smaller balance homogeneous loans that we have identified as residential and consumer, which are not specifically reserved for impairment. These category specific factors give recognition to our historical loss experience, as well as that of acquired businesses, cyclical trends, current economic conditions and our exposure to real estate values. These factors are reviewed on a quarterly basis with senior lenders to ensure that the factors applied to each loan category are reflective of trends or changes in the current business environment which may affect these categories.
Upon completion of both allocation processes, the specific and loss experience factor method allocations are combined, producing the allocation of the allowance for loan losses by loan category. Other factors used to evaluate the adequacy of the allowance for loan losses include the amount and trend of criticized loans, results of regulatory examinations, peer group comparisons and economic data associated with the relevant markets, specifically the local real estate market. Because many loans depend upon the sufficiency of collateral, any adverse trend in the relevant real estate markets could have a significant adverse effect on the quality of our loan portfolio. This may lead management to consider that the overall allowance level should be greater than the amount determined by the allocation process described above.
Accounting for Derivative Financial Instruments
Derivative financial instruments are recorded at fair value as either assets or liabilities on the balance sheet. The accounting for changes in the fair value of a derivative instrument is determined by whether it has been designated and qualifies as part of a hedging relationship and on the type of hedging relationship. Transactions hedging changes in the fair value of a recognized asset, liability, or firm commitment are classified as fair value hedges. Derivative instruments hedging exposure to variable cash flows of recognized assets, liabilities or forecasted transactions are classified as cash flow hedges.
Fair value hedges result in the immediate recognition through earnings of gains or losses on the derivative instrument, as well as corresponding losses or gains on the hedged financial instrument to the extent they are attributable to the hedged risk. The gain or loss on the effective portion of a derivative instrument designated as a cash flow hedge is reported as a component of other comprehensive income, and reclassified to earnings in the same period that the hedged transaction affects earnings. The gain or loss on the ineffective portion of the derivative instrument, if any, is recognized in earnings for both fair value and cash flow hedges. Derivative instruments not qualifying for hedge accounting treatment are recorded at fair value and classified as trading assets or liabilities with the resultant changes in fair value recognized in earnings during the period of change.
In the event of early termination of a derivative contract, previously designated as part of a cash flow hedging relationship, any resulting gain or loss is deferred as an adjustment to the carrying value of the assets or liabilities, against which the hedge had been designated with a corresponding offset to other comprehensive income, and reclassified to earnings over the shorter of the remaining life of the designated assets or liabilities, or the derivative contract. However, if the hedged item is no longer on balance sheet (i.e. sold or canceled), the derivative gain or loss is immediately reclassified to earnings.
As part of our mortgage banking operations, we enter into commitments to originate or purchase loans whereby the interest rate on the loan is determined prior to funding (“interest rate lock commitment”). Interest rate lock commitments related to loans that we intend to sell in the secondary market are considered free-standing derivatives. These derivatives are required to be recorded at fair value, with changes in fair value recorded in current period earnings. In accordance with Staff Accounting Bulletin No. 105, “Application of Accounting Principles to Loan Commitments”, interest rate lock commitments are initially valued at zero. Changes in fair value subsequent to inception are based on changes in the fair value of loans with similar characteristics and changes in the probability that the loan will fund within the terms of the commitment, which is affected primarily by changes in interest rates and passage of time. In general, the probability that a loan will fund increases if mortgage rates rise and decreases if mortgage rates fall. The initial value inherent in the loan commitment at origination is recognized through gain on sale of loans when the underlying loan is sold.
We are exposed to interest rate risk from the time an interest rate lock commitment is made to a borrower to the time the resulting mortgage loan is sold in the secondary market. To manage this risk, we use derivatives, primarily forward sales contracts on mortgage backed securities and forward delivery commitments, in an amount equal to the portion of interest rate contracts expected to close. The duration of these derivatives are selected to have the changes in their fair value correlate closely with the changes in fair value of the interest rate lock commitments on loans to be sold. These derivatives are also required to be recorded at fair value, with changes in fair value recorded in current period earnings.
Representation and Warranty Reserve
The representation and warranty reserve is available to cover probable losses inherent with the sale of loans in the secondary market. In the normal course of business, certain representations and warranties are made to investors at the time of sale, which permit the investor to return the loan to the seller or require the seller to indemnify the investor (make whole) for any losses incurred by the investor while the loan remains outstanding.
The evaluation process for determining the adequacy of the representation and warranty reserve and the periodic provisioning for estimated losses is performed for each product type on a quarterly basis. Factors considered in the evaluation process include historical sales volumes, aggregate repurchase and indemnification activity and actual losses incurred. Additions to the reserve are recorded as a reduction to the gain on sale of loans. Losses incurred on loans where we are required to either repurchase the loan or make payments to the investor under the indemnification provisions are charged against the reserve. The representation and warranty reserve is included in accrued expenses and other liabilities in the consolidated balance sheet.
Mortgage Servicing Rights
The right to service mortgage loans for others, or Mortgage Servicing Rights (“MSRs”), is recognized when mortgage loans are sold in the secondary market and the right to service those loans for a fee is retained. The MSRs initial carrying value is determined by allocating the recorded investment in the underlying mortgage loans between the assets sold and the interest retained based on their relative fair values at the date of transfer. Fair value of the MSRs is determined using the present value of the estimated future cash flows of net servicing income. MSRs are carried at the lower of the initial carrying value, adjusted for amortization, or fair value. MSRs are amortized in proportion to, and over the period of, estimated net servicing income. The amortization of MSRs is periodically analyzed and adjusted to reflect changes in prepayment speeds.
To determine fair value, a valuation model that calculates the present value of estimated future net servicing income is utilized. We use assumptions in the valuation model that market participants use when estimating future net servicing income, including prepayment speeds, discount rates, default rates, cost to service, escrow account earnings, contractual servicing fee income, ancillary income and late fees.
MSRs are periodically evaluated for impairment based on the difference between the carrying amount and current fair value. To evaluate and measure impairment, the underlying loans are stratified based on certain risk characteristics, including loan type, note rate and investor servicing requirements. If it is determined that temporary impairment exists, a valuation allowance is established through a charge to earnings for any excess of amortized cost over the current fair value, by risk stratification. If determined in future periods that all or a portion of the temporary impairment no longer exists for a particular risk stratification, the valuation allowance is reduced by increasing earnings. However, if impairment for a particular risk stratification is deemed other-than-temporary (recovery of a recorded valuation allowance is remote), a direct write-down, permanently reducing the carrying value of the MSRs is recorded. The periodic evaluation of MSRs for other-than-temporary impairment considers both historical and projected trends in interest rates, payoff activity and whether impairment could be recovered through increases in market interest rates.
Financial Overview
In reading management’s discussion and analysis consideration should be given to the GreenPoint and TCNJ acquisitions and their impact on comparative operating results. Net income for 2005 was $948.8 million or diluted earnings per share of $2.01 as compared to $553.0 million or diluted earnings per share of $1.85 for 2004. Returns
on average tangible assets and average tangible equity for 2005 were 1.81% and 31.02%, respectively as compared to 1.82% and 33.88%, respectively for 2004.
Major accomplishments achieved during 2005 include the following:
•
Increased net income 72% for 2005 compared to 2004, with a 9% increase in diluted earnings per share
•
Experienced 30% growth in commercial loans
•
Reduced non-performing assets 77%
•
Originated $42.3 billion in loans through our mortgage banking subsidiary
•
Increased quarterly cash dividends 14% to $.25 per common share
•
Initiated a balance sheet repositioning and capital management program due to the prevailing interest rate environment
•
Redeployed excess capital by repurchasing 14.9 million shares at an average cost of $26.24
•
Successfully integrated GreenPoint’s systems and operations
Balance Sheet Repositioning
In response to the Federal Reserve Bank raising short-term interest rates, while long-term rates remained fairly constant, we reevaluated our asset/liability strategy. To stabilize the net interest margin, which has been declining and reduce our interest rate risk exposure, we liquidated lower yielding assets through portfolio sales and cash flows. The liquidity generated throughout 2005 was utilized to repay short-term borrowings, fund commercial loan growth and redeploy excess capital through share repurchases.
This balance sheet repositioning started in the second quarter of 2005 with the sale of $2.4 billion in securities and residential loans held-for-investment. As this interest rate environment persisted throughout the remainder of 2005, we continued to reduce lower yielding assets through portfolio cash flows. In 2005, securities and borrowings declined by $4.2 billion and $5.0 billion, respectively, while commercial loans grew by $2.5 billion. Commercial loans represented 33% of total loans at December 31, 2005 compared to 28% in the prior period. In addition, we reduced our reliance on residential mortgage loans during the year. Residential mortgages represented 45% of total loans at December 31, 2005 compared to 51% at December 31, 2004. We also repurchased 14.9 million shares at an average price of $26.24 during 2005. As a result of this strategy, we have elected to reduce current earnings in exchange for a more prudent balance sheet. We anticipate this strategy will remain unchanged in the near term.
It is important to note that future net interest income, margin trends and earnings per share trends will continue to be dependent upon the magnitude of commercial loan demand, deposit growth and the movement of market interest rates. Future operating results will also be impacted by trends in the overall economy.
Net Interest Income
Net interest income is the difference between interest income earned on assets, such as loans and securities and interest expense paid on liabilities, such as deposits and borrowings. It constituted 72% of total revenue (defined as net interest income plus non-interest income) during 2005. Net interest income is affected by the level and composition of assets, liabilities and equity, as well as the general level of interest rates and changes in 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 years ended December 31,
(1)
Unrealized gains/(losses) on available-for-sale securities are included in other assets.
(2)
For purposes of these computations, non-accrual loans are included in both loans held-for-sale and loans held-for-investment, net. Average loans held-for-sale and related interest income during 2003 was not meaningful.
(3)
Interest income on a tax equivalent basis includes the additional amount of income that would have been earned if investments in tax exempt money market investments and securities, state and municipal obligations, non-taxable loans, 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 $1.78, $1.72, $1.57, $1.27 and $1.05 during 2005; $1.77, $1.69, $1.63, $1.22 and $1.08 during 2004; and $1.77, $1.66, $1.55, $1.23 and $1.08 during 2003.
The following table highlights, on a tax equivalent basis, the relative impact on net interest income brought about by changes in average interest earning assets and interest bearing liabilities as well as changes in average rates on such assets and liabilities. Due to the numerous simultaneous volume and rate changes during the periods analyzed, it is not possible to precisely allocate changes due 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.
During 2005, net interest income rose $634.7 million or 54% to $1.8 billion when compared to $1.2 billion in 2004, while the net interest margin declined 46 basis points from 4.09% to 3.63%. Net interest income growth resulted primarily from the GreenPoint and TCNJ acquisitions, commercial loan growth funded with core deposits (especially demand deposits) and to a lesser extent higher securities yields. Factors contributing to the decline in net interest margin included: (a) the 2004 acquisitions of GreenPoint and TCNJ, as both companies historically operated with net interest margins significantly lower than ours; (b) the impact of higher short-term interest rates on our funding costs (both deposits and borrowings); (c) the pressure placed on interest earning asset yields due to the flat yield curve and; (d) the impact of intense competition on deposit and loan pricing.
Interest income during 2005 increased $1.2 billion to $2.8 billion compared to the prior year. During this same period, the yield on average interest earning assets increased 6 basis points from 5.46% to 5.52%.
During 2005, average loans held-for-sale were $5.3 billion, with an average yield of 5.34%, resulting from GPM’s first full year of operations as part of North Fork. Period end loan balances totaled $4.4 billion and were funded principally with short-term borrowings. The yield and level of loans held-for-sale will fluctuate with changes in origination volumes and timing of loan sales.
Loans held-for-investment averaged $32.3 billion for 2005 representing an increase of $14.3 billion or 79% from 2004, while yields declined 15 basis points to 5.85%. A significant portion of the growth in average loans held-for-investment was due to the GreenPoint and TCNJ acquisitions. The acquired loan portfolios were concentrated in lower yielding residential mortgages, as compared to commercial loans, due to their risk profile, thereby contributing to the decline in loan yields. Since December 31, 2004, actual loan growth was $2.8 billion or 9% and resulted principally from higher yielding commercial loan growth. As of December 31, 2005 our loans
held-for-investments to deposits ratio was 90%, demonstrating our continued ability to fund loan growth with deposits. (See Financial Condition - Loans Held-For-Investment section for additional information).
Securities averaged $13.5 billion for 2005, representing a $3.5 billion or 35% increase from the prior year. The increase in securities resulted from the 2004 acquisitions. At December 31, 2005, securities were $11.4 billion, a decrease $4.2 billion or 27% when compared to December 31, 2004. This decline was due to our balance sheet and capital management program previously discussed. Yields improved 22 basis points to 4.82%, as we sold lower yielding securities and opportunistically reinvested in securities at current market interest rates.
Average interest bearing liabilities rose $18.9 billion to $42.4 billion, while overall funding costs increased 57 basis points to 2.28% during 2005. The increase in the interest bearing liabilities resulted from the 2004 acquisitions and significant organic deposit growth. The increase in funding costs was attributable to higher costing retail deposits acquired from GreenPoint, an increase in market interest rates, and the impact of intense competitions for deposits in our market.
Average demand deposits grew $2.1 billion or 41% to $7.4 billion in 2005. This growth is attributable to strong commercial loan activity which enhanced our net interest income and margin. Total demand deposits contributed 45 basis points to our net interest margin this year compared to 46 basis points in 2004. At year end, demand deposits represented 21% of total deposits. Average Savings, NOW and Money Market (“Core”) deposits increased $9.0 billion or 72% to $21.4 billion, while the corresponding cost of funds rose 70 basis points to 1.61%. The increase in funding costs was attributable to higher costing retail deposits acquired from GreenPoint, rising short-term interest rates and intense competition for deposits in our markets. Continued growth in core deposits was due in large measure to our focused effort on expanding the existing branch network, developing long-term deposit relationships with borrowers as demonstrated by commercial loan growth, the use of incentive compensation plans, and the introduction of new cash management products and services. Core deposits have traditionally provided us with a low cost funding source, benefiting our net interest margin and income. Average time deposits grew $3.7 billion or 85% to $8.0 billion, while the corresponding cost of funds increased 72 basis points to 2.26%. These increases were due to the acquisitions and the impact of higher short-term interest rates.
Average federal funds purchased and collateralized borrowings rose $5.6 billion in 2005, while the cost of funds remained unchanged. This increase resulted from the funding requirements of loans held-for-sale. Accordingly, borrowing levels will fluctuate with the size of the loans held-for-sale portfolio. At December 31, 2005, actual federal funds purchased and collateralized borrowings declined $4.9 billion to $9.7 billion as compared to the same period of 2004, due to our balance sheet and capital management program and deposit growth. The use of interest rate swaps increased interest expense by approximately $2.6 million and $8.0 million in 2005 and 2004, respectively.
Average other borrowings increased $557.7 million to $1.5 billion in 2005, while the cost of funds rose 143 basis points to 5.35%. The increase in other borrowings resulted from the assumption of long-term debt from GreenPoint ($350 million in senior notes , $200 million in junior subordinated debt, and $150 million in subordinated debt). The use of interest rate swaps decreased interest expense by $8.7 million and $22.9 million, respectively, during 2005 and 2004.
Provision and Allowance for Loan Losses
The allowance for loan losses is available to cover probable losses inherent in the current loans held-for-investment portfolio. Loans held-for-investment, or portions thereof, deemed uncollectible are charged to the allowance for loan losses, while recoveries, if any, of amounts previously charged off are added to the allowance. Amounts are charged off after giving consideration to such factors as the customer’s financial condition, underlying collateral values and guarantees, and general economic conditions.
The evaluation process for determining the adequacy of the allowance for loan losses and the periodic provisioning for estimated losses is undertaken on a quarterly basis, but may increase in frequency should conditions arise that would require our prompt attention. Conditions giving rise to such action are business combinations or other acquisitions or dispositions of large quantities of loans, dispositions of non-performing and marginally performing loans by bulk sale or any development which may indicate an adverse trend. Recognition is
also given to the changed risk profile resulting from previous business combinations, customer knowledge, results of ongoing credit-quality monitoring processes and the cyclical nature of economic and business conditions.
The loan portfolio is categorized according to collateral type, loan purpose or borrower type (i.e. commercial, consumer). The categories used include Multi-Family Mortgages, Residential Mortgages, Commercial Mortgages, Commercial and Industrial, Consumer, and Construction and Land, which are more fully described in the section entitled Management’s Discussion and Analysis - “Loan Portfolio.” An important consideration is our concentration of real estate related loans.
The methodology employed for assessing the appropriateness of the allowance consists of the following criteria:
•
Establishment of reserve amounts for specifically identified criticized loans, including those arising from business combinations and those designated as requiring special attention by our internal loan review program, or bank regulatory examinations (specific-allowance method).
•
An allocation to the remaining loans giving effect to historical losses experienced in each loan category, cyclical trends and current economic conditions which may impact future losses (loss experience factor method).
The initial allocation or specific-allowance methodology commences with loan officers and underwriters grading the quality of their loans on a risk classification scale ranging from 1-8. Loans identified as below investment grade are referred to our 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 a criticized category. Additionally, LRD is responsible for performing periodic reviews of the loan portfolio independent from the identification process employed by loan officers and underwriters. Loans that fall into criticized categories are further evaluated for impairment in accordance with the provisions of Statement of Financial Accounting Standards No. 114, “Accounting by Creditors for Impairment of a Loan.” The portion of the allowance allocated to impaired loans is based on the most appropriate of the following measures: discounted cash flows from the loan using the loan’s effective interest rate, the fair value of the collateral for collateral dependent loans, or the observable market price of the impaired loan.
The remaining allocation applies a category specific loss experience factor to loans which have not been specifically reviewed for impairment, including smaller balance homogeneous loans that we have identified as residential and consumer, which are not specifically reserved for impairment. These category specific factors give recognition to our historical loss experience, as well as that of acquired businesses, cyclical trends, current economic conditions and our exposure to real estate values. These factors are reviewed on a quarterly basis with senior lenders to ensure that the factors applied to each loan category are reflective of trends or changes in the current business environment which may affect these categories.
Upon completion of both allocation processes, the specific and loss experience factor method allocations are combined, producing the allocation of the allowance for loan losses by loan category reflected in the table below. Other factors used to evaluate the adequacy of the allowance for loan losses include the amount and trend of criticized loans, results of regulatory examinations, peer group comparisons and economic data associated with the relevant markets, specifically the local real estate market. Because many loans depend upon the sufficiency of collateral, any adverse trend in the relevant real estate markets could have a significant adverse effect on the quality of our loan portfolio. This information may lead management to consider that the overall allowance level should be greater than the amount determined by the allocation process described above.
The following table presents the allocation of the allowance for loan losses and the related percentage of loans in each category to total loans held-for-investment.
The following tables presents the impact of allocating the allowance for loan losses into our two primary portfolio segments for the years ended,
The provision for loan losses totaled $36.0 million for 2005, an increase of $8.8 million from 2004. The increase in the provision is consistent with the growth experienced in the loans held-for-investment portfolio. As of December 31, 2005, the ratio of the allowance for loan losses to non-performing loans held-for-investment increased to 703% when compared to 158%, at December 31, 2004. This improved coverage ratio resulted from our success in significantly decreasing our non-performing loans, while maintaining modest net charge-offs in 2005. Net charge-offs, as a percentage of average loans held-for-investment, was 9 basis points during 2005 compared
with 13 basis points in 2004. The allowance for loan losses to total loan held-for-investment was 66 basis points and 69 basis points, respectively for the same period.
The allowance for loan losses as a percentage of total loans held-for-investment for 2005 and 2004 was impacted by the level of comparatively low risk residential and multi-family loans acquired from GreenPoint. Residential and multi-family loans represented 60% and 65% of the total portfolio at December 31, 2005 and 2004, respectively. Historically, losses incurred on residential and multi-family loans have represented only a small percentage of net charge offs. (See the table below for additional detail regarding losses by loan type).
As a result of the process employed and giving recognition to all attendant factors associated with the loan portfolio, the allowance for loan losses at December 31, 2005 is considered to be adequate by management.
Transactions in the Allowance for Loan Losses are summarized as follows for the years ended December 31,:
Non-Interest Income
Non-interest income increased $457.0 million or 184% to $705.5 million for 2005 when compared to 2004. A significant portion of the growth achieved in each component of non-interest income resulted from the 2004 acquisitions. Mortgage banking income increased $360.0 million to $420.8 million compared to $60.8 million in 2004. Mortgage banking income is comprised of gains on sales of loans held-for-sale and mortgage servicing fees, net of amortization of mortgage servicing rights and changes for temporary impairment charges on mortgage servicing rights and is more fully explained in the “Mortgage Banking” section of this discussion and analysis. Customer related fees and service charges improved due to the organic growth in our commercial client base and the impact of GreenPoint’s consumer customers. Investment management, commissions and trust fees benefited from the acquisitions, increasing our consumer customer base and the demand for alternative investment products. Other operating income improved $21.6 million or 67.5% to $53.6 million in 2005 due to (a) $7.0 million increase in accretion on the net residual assets on corporate guarantees related to GreenPoint Credit LLC (See Notes to the Consolidated Financial Statements - Note 21- for additional information); (b) $4.0 million in additional income from Bank Owned Life Insurance Trusts; (c) $3.7 million increase in income from a minority interest in a non public mortgage finance company acquired in the GreenPoint acquisition and; (d) $5.2 million in gains recognized from the sale of loans held-for-investment. (See Balance Sheet and Capital Management section for additional information). Net securities gains, were $10.1 million for 2005 compared to $12.7 million in 2004. Securities gains were derived principally from the sale of mortgage-backed securities and certain debt and equity securities. These gains were partially offset by a $6.0 million write-down on approximately $577.0 million in securities that were identified as permanently impaired as of December 31, 2005. The gain on sale of other investments of $15.1 million resulted from the sale of our minority interest in a non-public mortgage finance entity.
Non-Interest Expense
Non-interest expense was $1.0 billion during 2005 representing an increase of $469.0 million when compared to 2004. A significant portion of the increase in non-interest expense resulted from the 2004 acquisitions. Several additional factors also contributed to the increase in each non-interest expense category. Employee compensation and benefits was impacted by the hiring of several senior lenders and support staff to pursue new business initiatives, new branch openings, annual merit increases, increased health insurance costs and incentive based compensation growth linked to deposit and fee income generation. Increases in occupancy and equipment costs of $85.9 million and other operating costs of $103.0 million are also due to the new branch openings, upgrades to existing branches and facilities, technology investments, new business initiatives and support systems, and compliance costs associated with new regulatory matters. We have made, and will continue to make, significant investments in technology and delivery channels providing our customers with a wide array of easy to use and competitively priced products and services. Amortization of identifiable intangibles and related core deposit intangibles from the acquisitions. We incurred a facility and branch consolidation charges totaling $15.4 million in connection with the GreenPoint and TCNJ conversions into North Fork.
Our efficiency ratio which remains among the lowest in the banking industry was 37.98% and 37.56% for 2005 and 2004, respectively.
Income Taxes
The effective tax rate for 2005 was 34.8% as compared to 34.2% for 2004. (See Item 8, Notes to Consolidated Financial Statements Note 11 - “Income Taxes” for additional information).
Mortgage Banking
The following table sets forth certain financial highlights, inclusive of inter-company transactions, for our mortgage banking segment for the periods indicated:
(1)
GreenPoint Mortgage was acquired on October 1, 2004.
(2)
Includes purchase accounting adjustments of $(.5) million and $56.4 million for the years ended December 31, 2005 and 2004, respectively.
For the years ended December 31, 2005 and 2004, the mortgage banking segment recognized net income of $185.5 million and $36.6 million, respectively. Net interest income for this segment was $109.1 million and $42.4 million, including inter-company interest expense of $178.2 million and $23.2 million during 2005 and 2004, respectively. Net interest income was the result of $5.3 billion and $1.2 billion in average loans held-for-sale, yielding 5.34% and 5.24% for the years ended December 31, 2005 and 2004, respectively. The gain on sale of loans totaled $479.3 million and $72.3 million, including $48.2 million and $18.6 million in inter-company loan sales during 2005 and 2004, respectively. Mortgage banking fees were $144.1 million and $31.1 million, including $43.9 million and $3.1 million in inter-company mortgage servicing fees, for the years ended December 31, 2005 and 2004, respectively.
During 2005, a $23.1 million temporary impairment charge on mortgage servicing rights was recognized due primarily to the adjustment of underlying loan prepayment assumptions caused by the increases in both the 2 year and 10 year treasury yields.
Loan originations in 2005 totaled $42.3 billion, while loans sold aggregated $37.1 billion with an average gain on sale margin of 116 basis points. The gain on sale margin was impacted by increased competition as certain of our competitors were willing to accept lower spreads in the specialty segment to maintain volume and to offset narrower spreads in their other product offerings.
The composition of loans originationed during 2005 was: 45% Specialty, 35% Jumbo A, 13% Home Equity and 7% Agency. Option ARMs, both Alt-A and Jumbo accounted for 30% of originations. All option ARM
originations are sold into the secondary market, servicing released. Mortgage originations for new purchases represented 48% of production during the year. The weighted average FICO score for all originations was 720. We do not originate sub-prime loans, nor will we sacrifice quality to drive origination volume and gain on sales.
Gain on Sale of Loans
We sell whole loans or from time to time, may securitize loans, which involves the private placement or public offering of pass-through asset backed securities. This approach allows us to capitalize on favorable conditions in either the securitization or whole loan sale market. During 2005 and 2004, we have executed only whole loan sales. These sales are completed with no direct credit enhancements, but do include certain standard representations and warranties, which permit the purchaser to return the loan if certain deficiencies exist in the loan documentation or in the event of early payment default. Gain on sale and related margins are affected by changes in the valuation of mortgage loans held-for-sale and interest rate lock commitments, the impact of the valuation of derivatives utilized to manage the exposure to interest rate risk associated with mortgage loan commitments and mortgage loans held-for-sale, and the impact of adjustments related to liabilities established for representations and warranties made in conjunction with the loan sale. Gain on sale and related sale margins are also impacted by pricing pressures caused by competition within the mortgage origination business.
The following table summarizes loans originated, sold, average margins and gains for the periods indicated:
(1)
The gain on sale for the years ended December 31, 2005 and 2004 differs from the amounts reported under U.S. generally accepted accounting principles in the accompanying Consolidated Statements of Income due to a fair value adjustments of $(.5) million and $56.4 million on loans held-for-sale at October 1, 2004 which were sold during 2005 and 2004.
(2)
Excludes $48.2 million and $18.6 million of inter-company gain on sale of loans for the years ended December 31, 2005 and 2004, respectively
Financial Condition
Loans Held-for-Sale
The following table represents the components of loans held-for-sale at December 31,:
(1)
Residential loans classified as held-for-sale were $4.1 million, $30.7 million and $25.5 million for the years ended 2003, 2002 and 2001, respectively.
Loans Held-for-Investment
The following table represents the components of loans held-for-investment at December 31,:
Loans held-for-investment increased $2.8 billion or 9.1% when compared to $30.5 billion in 2004. Consistent with our balance sheet management strategy, commercial loans grew $2.5 billion or 30% during the year, while residential mortgages declined $600 million or 4%. Commercial loans as a percentage of total loans increased to 33% during 2005 from 28% during 2004, while residential loans declined from 51% to 45%. We anticipate this trend to continue in the near term.
Commercial loan growth benefited from our expanded presence in the New York City market, small business lending initiatives, robust lease financing activity and the hiring of several lenders and support staff during 2004. This initiative was undertaken by management to expand our commercial loan and deposit gathering capabilities in New Jersey, strengthen our middle market commercial lending division in New York and enter the asset based lending and structured finance business through our subsidiary, North Fork Business Capital Corp.
Although we have deemphasized residential loans in favor of higher yielding commercial loans, the quality of our residential mortgage portfolio remains excellent. The weighted average FICO score at December 31, 2005 was 731. Approximately 77% of the portfolio is comprised of Jumbo/Agency conforming mortgages and 93% of the total portfolio is owner occupied. Interest only loans constitute 37% of the portfolio, while the average loan amount was $274 thousand. We do not portfolio option ARMs, negative amortization loans or home equity loans. Future decisions to retain residential loans will be impacted by mortgage origination volumes, growth in other loan categories and deposit growth.
Consumer loans, which are mostly comprised of indirect auto loans, have begun to stabilize in volume as automobile manufacturers are no longer offering the aggressive incentives and financing programs they had in the past.
The risk inherent in the mortgage portfolio is managed by prudent underwriting standards and diversification in loan collateral type and location. Multi-family mortgages, collateralized by various types of apartment complexes located in the New York Metropolitan area, are largely dependent on sufficient rental income to cover operating expenses. They may be affected by rent control or rent stabilization regulations, which could impact 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. Residential mortgages represent first liens on owner occupied 1-4 family residences located throughout the United States, with a concentration in the New York Metropolitan area and California. Commercial mortgages are secured by professional office buildings, retail stores, shopping centers and industrial developments.
Multi-family loans grew $567.2 million or 13.3% during 2005, despite our decision not to compete with the more liberal underwriting terms and rate structures offered by certain competitors. Multi-family and commercial mortgage loans are primarily secured by real estate in the New York Metropolitan area and are diversified in terms of risk and repayment sources. The underlying collateral includes multi-family apartment buildings and owner occupied/non-owner occupied commercial properties. The risks inherent in these portfolios are dependent on both regional and general economic stability, which affect property values, and our borrowers’ financial well being and creditworthiness.
Real estate underwriting standards include various limits on loan-to-value ratios based on property type, real estate location, property condition, quality of the organization managing the property, and the borrower’s creditworthiness. They also address the viability of the project including occupancy rates, tenants and lease terms. Additionally, underwriting standards require appraisals, periodic property inspections and ongoing monitoring of operating results.
Commercial loans are made to small and medium sized businesses and include loans collateralized by security interests in lease finance receivables. The commercial mortgage and commercial loan portfolios contain no foreign loans to developing countries (“LDC”). Consumer loans consist primarily of new and used automobile loans originated through a network of automobile dealers. The credit risk in auto lending is dependent on the borrower’s creditworthiness and collateral values. The average consumer loan originated is $19,400 and has a contractual life of approximately 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 building and rehabilitation of 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).
We are selective in originating loans, emphasizing conservative lending practices and fostering customer deposit relationships. Our success in attracting new customers while leveraging our existing customer base and the current interest rate environment have contributed to sustained loan demand.
We periodically monitor our underwriting standards to ensure that the quality of the loan portfolio and commitment pipeline 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 our real estate loan portfolio.
The following are approximate contractual maturities and sensitivities to changes in interest rates of certain loans, exclusive of non-commercial real estate mortgages, consumer and non-accrual loans as of December 31, 2005:
Non-Performing Assets
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. The components of non-performing assets are detailed below:
Non-performing assets totaled $49.0 million, a reduction of $163.1 million or 77% when compared to $212.1 million at December 31, 2004. The increase at December 31, 2004 in non-performing assets to $212.1 million resulted from the GreenPoint acquisition and consisted primarily of residential and commercial mortgages, and other real estate. Throughout 2005, we methodically reduced non-performing assets primarily through bulk sales of non-performing and sub-performing loans in both the held-for-sale and held-for-investment portfolios. We were able to accomplish this significant reduction while incurring only modest losses as demonstrated by our historically
low net charge-off ratio of 9 basis points for 2005. The $13.3 million decline in other real estate was achieved through the sale of properties previously acquired in foreclosure.
Future levels of non-performing assets will be influenced by prevailing economic conditions and the impact of those conditions on our customers, prevailing interest rates, unemployment rates, property values and other internal and external factors.
Interest forgone on non-accrual loans, or the amount of income that would have been recorded had these loans been current in accordance with their original terms, aggregated approximately $2.2 million in 2005, $2.9 million in 2004 and $1 million in 2003 and 2002, respectively. The amount of interest income included in net income on these non-accrual loans was not significant for the periods presented. We did not have any restructured loans for any of the periods presented above.
Securities
The following table shows the total securities portfolio composition based on the financial statement carrying amount at December 31,
Securities decreased $4.2 billion or 27% to $11.4 billion from December 31, 2004. During the current year, approximately $1.4 billion in securities were sold as a direct result of our balance sheet and capital management program. The proceeds from the sale of the securities as well as portfolio cash flows were utilized to fund commercial loan growth, repurchase common stock and pay down short-term borrowings. (See financial overview section - Balance Sheet and Capital Management for additional information). In December 2005, approximately $570 million in securities were identified as other than temporary impaired, resulting in a realized loss of $6.0 million. Theses securities were sold in January 2006.
Mortgage Backed Securities represented 78% of total securities at December 31, 2005, and included pass-through certificates guaranteed by GNMA, FHLMC or FNMA and collateralized mortgage-backed obligations (“CMOs”) backed by government agency pass-through certificates or whole loans. The pass-through certificates included both fixed and adjustable rate instruments. CMOs, by virtue of the underlying collateral or structure, are AAA rated and are either fixed rate current pay sequentials and PAC structures or adjustable rate issues. (See Item 1, Notes to the Consolidated Financial Statements Note 2, “Securities” for additional information). The adjustable rate pass-throughs and CMOs are principally Hybrid ARMs. Hybrid ARMs typically have a fixed initial rate of interest from 3 through 7 years and at the end of that term convert to a one year adjustable rate of interest indexed to short term benchmarks (i.e. LIBOR or 1 year Treasuries). Hybrid ARMs included in Pass-throughs and CMOs as of December 31, 2005 aggregated $2.6 billion.
Our goal is to maintain a securities portfolio with a short weighted average life and duration. This is accomplished using instruments with short final maturities, predictable cash flows and adjustable interest rates. These attributes allow us to proactively manage as market conditions change so that cash flows may either be reinvested in securities at current market interest rates, used to fund loan growth or pay off short-term borrowings. These characteristics have contributed to the 3.0 year weighted average life and 2.5 year duration of the MBS portfolio as of December 31, 2005.
The yield and fair value of securities, specifically the MBS portfolio, are impacted by changes in market interest rates and related prepayment activity. Given the portfolio’s composition, related prepayment activity would moderately decrease in a rising interest rate environment, extending the portfolio’s weighted average life. Conversely, the opposite would occur in a declining interest rate environment. The resultant impact of these changes would be to either extend or shorten the period over which net premiums would be amortized, thereby affecting income and yields. The impact of any changes would be minimal as net premiums totaled $28.8 million or approximately 31 basis points of outstanding MBS balances at December 31, 2005.
Municipal securities represent a combination of short-term debentures issued by local municipalities (purchased as part of a strategy to expand relationships with these governmental entities) and highly rated obligations of New York State and related authorities. Equity securities held in the available-for-sale portfolio include $332.3 million of FNMA and FHLMC (“GSE”) Preferred stock, $265.8 million in Federal Home Loan Bank common stock, and common and preferred stocks of certain publicly traded companies. Other securities held in the available-for-sale portfolio include capital securities (trust preferred securities) of certain financial institutions and corporate bonds.
When purchasing securities, the overall interest-rate risk profile is considered, as well as the adequacy of expected returns relative to risks assumed, including prepayments. In managing the securities portfolio, available-for-sale securities may be sold as a result of changes in interest rates and spreads, actual or anticipated prepayments, credit risk associated with a particular security, and/or following the completion of a business combination.
The tables that follow depict the amortized cost, contractual maturities and approximate weighted average yields (on a tax equivalent basis) of the available-for-sale and held-to-maturity securities portfolios at December 31, 2005:
Available-for-Sale(1)
(1)
Unrealized gains/(losses) have been excluded for presentation purposes.
Held-to-Maturity
Deposits
Customer deposits represent our primary funding source. The following table presents the composition of total deposits for the three years ended December 31,:
At December 31, 2005, total deposits increased $1.8 billion or 5.2% to $36.6 billion when compared to December 31, 2004. This growth was achieved despite aggressive pricing by our competitors, offering higher deposit rates and free services to attract consumers. Despite our competitors’ actions, we have chosen to remain disciplined and selective in pricing deposits, continuing to concentrate on growing our commercial customer base. Commercial accounts constituted approximately 27% of total deposits at December 31, 2005. We do not anticipate any imminent strategic change from our competitors. Factors contributing to deposit growth include: (i) the continued expansion of our retail branch network (opened 15 de novo branches in 2005) (ii) the ongoing branch upgrade and relocation program providing for greater marketplace identity, (iii) expanded branch hours providing additional accessibility and convenience, (iv) commercial loan growth (v) the introduction of new cash management products and services and (vi) the use of incentive based compensation linked to deposit growth. Offsetting the growth achieved in 2005 was the repayment of $146 million in brokered deposits.
The following table shows the classification of the average deposits and average rates paid for each of the last three years ended December 31,:
Contractual Obligations and Commitments
We have certain obligations and commitments to make future payments under contracts. At December 31, 2005, aggregate contractual obligations and commitments, excluding the impact of purchase accounting and hedge fair value adjustments, were as follows:
Contractually Obligated Payments
(1)
Excludes federal funds purchased of $2.6 billion.
Other Commitments
Capital
We are subject to the risk based capital guidelines administered by bank regulatory agencies. The 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 certain 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 certain 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 (“Total Risk Adjusted Capital Ratio”) of 8%, including Tier 1 capital to total risk weighted assets (“Tier 1 Capital Ratio”) of 4% and a Tier 1 capital to average total assets (“Leverage Ratio”) of at least 4%. 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 us.
The regulatory agencies have amended the risk-based capital guidelines to provide for interest rate risk consideration when determining a banking institution’s capital adequacy. The amendments require institutions to effectively measure and monitor their interest rate risk and to maintain capital adequate for that risk.
As of December 31, 2005, the most recent notification from the various regulators categorized the Company and its subsidiary banks as well capitalized under the regulatory framework for prompt corrective action. Under the capital adequacy guidelines require a well capitalized institution to maintain a Total Risk Adjusted Capital Ratio of at least 10%, a Tier 1 Capital Ratio of at least 6%, a Leverage Ratio of at least 5%, and not be subject to any written order, agreement or directive. Since such notification, there are no conditions or events that management believes would change this classification.
The following table sets forth our risk-based capital amounts and rates as of December 31,:
The Company’s Leverage Ratio at December 31, 2005 and 2004 was 6.70% and 6.22%, respectively.
The following table sets forth the capital ratios for our banking subsidiaries at December 31, 2005:
On December 13, 2005, the Board of Directors approved a 14% increase in its regular quarterly cash dividend to $.25 per common share. The dividend was paid on February 15, 2006 to shareholders of record at the close of business on January 27, 2006.
Under the provisions of our share repurchase program previously authorized by the Board of Directors, we repurchased 14.9 million shares at an average cost of $26.24 during 2005. As of December 31, 2005, 2.4 million shares were available to be purchased under the program. On January 24, 2006, the Board of Directors authorized the repurchase of an additional 12 million shares, increasing the total remaining authorized for repurchase to
14.4 million. As of March 6, 2006, 5.1 million shares remain available to be purchased under the program. The current program has no fixed expiration date. Repurchases are made in the open market or through privately negotiated transactions.
There are various federal and state banking laws and guidelines limiting the extent to which a bank subsidiary can finance or otherwise supply funds to its holding company.
FRB policy provides that, as a matter of prudent banking practice, a bank holding company generally should not maintain a rate of cash dividends unless its net income available to common stockholders is sufficient to fund the dividends, and the prospective rate of earnings retention appears to be consistent with the holding company’s capital needs, asset quality and overall financial condition. In addition, among other things, dividends from a New York-chartered bank, such as North Fork Bank, are limited to the bank’s net profits for the current year plus its prior two years’ retained net profits.
Under federal law, a depository institution is prohibited from paying a dividend if the depository institution would thereafter be “undercapitalized” as determined by the federal bank regulatory agencies. The relevant federal regulatory agencies and the state regulatory agency, the Banking Department, also have the authority to prohibit a bank or bank holding company from engaging in what, in the opinion of such regulatory body, constitutes an unsafe or unsound practice in conducting its business.
Comparison Between 2004 and 2003
In reading management’s discussion and analysis, consideration should be given to the GreenPoint and TCNJ acquisitions and their impact on our comparative operating results. Net income for 2004 was $553.0 million or diluted earnings per share of $1.85 as compared to $396.4 million or diluted earnings per share of $1.73 for 2003. Returns on average tangible assets and average tangible equity for 2004 were 1.82% and 33.88%, respectively as compared to 1.91% and 36.54%, respectively for 2003.
Net Interest Income
During 2004, net interest income rose $359.7 million or 44% to $1.2 billion when compared to $815.5 million in 2003, while the net interest margin declined 15 basis points from 4.24% to 4.09%. The growth in net interest income during 2004 was primarily due to the GreenPoint and TCNJ acquisitions, commercial loan growth and higher securities yields. The 15 basis points decline in the net interest margin resulted from GreenPoint’s lower yielding mortgage loans and higher costing deposits, which were acquired on October 1, 2004.
Interest income increased $467.2 million to $1.6 billion in 2004 compared to the prior year. During this same period, the yield on average interest earning assets declined 27 basis points from 5.73% to 5.46%.
During 2004, average loans held-for-sale was $1.2 billion, with an average yield of 5.24% and was the direct result of the GreenPoint acquisition. Period end loan balances totaled $5.8 billion and were funded with short-term borrowings.
Loans held-for-investment averaged $18.0 billion for 2004, representing an increase of $6.2 billion or 52.7% from 2003, while yields declined 70 basis points to 6.00%. GreenPoint and TCNJ added approximately $4.6 billion in average loans during 2004. Core growth was approximately $1.6 billion exclusive of these acquisitions. Growth was achieved in all loan categories, especially higher yielding commercial loans. The lower yields resulted from refinancing activity and new originations that occurred at lower interest rates and the GreenPoint acquired loan portfolio, primarily residential mortgages, carried a lower yield than our traditional loan portfolio.
Securities averaged $10.0 billion for 2004, representing a $2.0 billion increase from the prior year, while yields improved 27 basis points to 4.60%. The change in the securities balance was due to approximately $2.6 billion in average securities added in the GreenPoint and TCNJ acquisitions offset by a redeployment of our portfolio cash flows into higher yielding loans. The yield improvement was due in part to slower prepayment activity and lower levels of premium amortization. Net premium amortization affected security yields by 24 basis points during the year compared to 98 basis points in 2003.
Average interest bearing liabilities rose $7.8 billion to $23.6 billion, while overall funding costs declined 16 basis points to 1.71% during 2004. Although we experienced an increase in market interest rates during the period, overall funding costs declined due to the growth in low cost core deposits.
Average demand deposits grew $1.6 billion or 42.4% to $5.2 billion in 2004 primarily due to core growth of $1.1 billion and $534 million acquired from GreenPoint and TCNJ. Total demand deposits contributed 46 basis points to the net interest margin in 2004 compared to 52 basis points in 2003. At December 31, 2004, demand deposits represented 19% of total deposits. Average Savings, NOW and Money Market deposits increased $4.9 billion or 65% to $12.4 billion, while the corresponding cost of funds increased 14 basis points to .91%. Average time deposits, net of the $1.8 billion acquired from GreenPoint and TCNJ, declined $441 million while the cost of funds decreased 29 basis points from the prior year.
Average borrowings, net of the $3.4 billion acquired from GreenPoint and TCNJ, declined $1.8 billion while the cost of funds decreased 19 basis points from 2003 levels. This net decline in borrowings resulted from our focused strategy of growing core deposits. However, since short-term borrowings are used to fund loans held-for-sale, their levels will fluctuate with changes in these balances. Certain collateralized borrowings have their costs fixed through the use of interest rate swaps, increasing interest expense by approximately $8.0 million and $23.9 million in 2004 and 2003, respectively. The decline in swap related interest expense is primarily due to the maturity of $850 million of these swaps in June 2003. Certain other borrowings were converted from fixed to floating indexed to three-month LIBOR utilizing interest rate swaps. These swaps decreased interest expense by approximately $22.9 million and $17.6 million, respectively, during 2004 and 2003.
Provision and Allowance for Loan Losses
The provision for loan losses totaled $27.2 million for 2004, an increase of $.9 million when compared to $26.3 million for 2003. The allowance for loan losses increased $88.4 million during 2004 to $211.1 million when compared to 2003, of which $85 million was assumed in the TCNJ and GreenPoint acquisitions. The allowance for loan losses as a percentage of total loans held-for-investment declined from 99 basis points at December 31, 2003 to 69 basis points at December 31, 2004.
The allowance for loan losses as a percentage of total loans held-for-investment was directly impacted by the level of comparatively low risk residential and multi-family loans acquired from GreenPoint. Residential and multi-family loans represented 88% of the GreenPoint’s held-for-investment portfolio. Accordingly, residential and multi-family mortgage loans increased to 65% of our total portfolio at December 31, 2004 as compared to 49% at year end 2003. Historically, losses incurred on residential and multi-family loans have represented only a small percentage of our net charge offs. Similarly, GreenPoint’s historical losses (or net charge-offs) in these categories averaged approximately 4 basis points in each of the prior three years.
As of December 31, 2004, $76 million of the allowance for loan losses was allocated to residential and multi-family loans, while $135.1 million was allocated to all other loans. Accordingly, the allocated allowance for loan losses to residential and multi-family, and all other loans was 38 basis points and 129 basis points, respectively.
Non-Interest Income
Non-interest income was $248.5 million for 2004, representing an increase of $92.7 million when compared to 2003. A significant portion of the growth achieved in the components comprising non-interest income resulted from the GreenPoint and TCNJ acquisitions. Customer related fees and service charges also improved due to continued growth in core deposits, expansion of both our retail and commercial client base and a broadened use of our fee based services. Gain on sale of loans of $53.7 million in 2004 was achieved primarily in the fourth quarter of 2004 from activity at GreenPoint Mortgage. Investment management, commissions and trust fees benefited from both acquisitions. TCNJ provided us with a successful corporate trust services program based in New Jersey. Additionally we benefited from increased customer demand for alternative investment products due to our increased customer base. Included in other operating income during 2004 was $3.3 million in income derived from our investment in Bank Owned Life Insurance (“BOLI”), and $3.5 million gain recognized on the sale of our 85% interest in a re-factoring business. During 2003, other operating income included an $11.0 million gain on the sale of certain facilities.
Securities gains were $12.7 million for 2004 as compared to $15.8 million in 2003. Gains recognized were derived principally from the sale of mortgage-backed securities and certain debt and equity securities.
Non-Interest Expense
Non-interest expense was $555.8 million during 2004, representing an increase of $209.9 million when compared to 2003. A significant portion of this overall increase resulted from the GreenPoint and TCNJ acquisitions. Several additional factors also contributed to the increase in each non-interest expense category. Employee compensation and benefits was impacted by the hiring of several senior lenders and support staff to pursue new business initiatives, opening 12 branches, annual merit increases, increased health insurance costs and growth in incentive based compensation linked to deposit and fee income generation. Additional increases in occupancy and equipment costs were recognized due to the opening of new branches, upgrades made to existing facilities, investment in new technology and the implementation of new business initiatives and support systems. The increase in amortization of identifiable intangibles was due to the core deposit intangibles recorded with the TCNJ and GreenPoint acquisitions.
The efficiency ratio was 37.55% for 2004, as compared to 34.30% in 2003. The efficiency ratio in 2004 was impacted by the additional expenses incurred with operating GreenPoint Bank as a separate company during the fourth quarter of 2004 and the hiring of several senior lenders and back office staff to support new business initiatives.
Income Taxes
Our effective tax rate for 2004 was 34.2% as compared to 33.9% for 2003.
Recent Accounting Pronouncements
The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments
In November 2005, the FASB issued FSP No. 115-1, which addresses the determination of when an investment is considered impaired, whether the impairment is other-than-temporary and how to measure an impairment loss. FSP No. 115-1 also addresses accounting considerations subsequent to the recognition of an other-than-temporary impairment on a debt security and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. FSP No. 115-1 replaces the impairment guidance in Emerging Issues Task Force Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” with references to existing authoritative literature concerning other-than-temporary impairment determinations (principally SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and SEC Staff Accounting Bulletin No. 59, “Accounting for Noncurrent Marketable Securities”). Under FSP No. 115-1, impairment losses must be recognized in earnings for the difference between the security’s cost and its fair value at the financial statement date, without considering partial recoveries subsequent to that date. FSP No. 115-1 also requires that an investor recognize an other-than-temporary impairment loss when a decision to sell a security has been made and the investor does not expect the fair value of the security to fully recover prior to the expected time of sale. FSP No 115-1 is effective for reporting periods beginning after December 15, 2005. We do not expect our application of FSP No. 115-1 to have a material impact on our financial condition or results of operations.
Accounting for Stock Based Compensation
In December 2004, FASB issued SFAS No. 123R - “Accounting for Stock Based Compensation, Share Based Payment”, (SFAS 123R) which replaces the guidance prescribed in SFAS 123. SFAS 123R requires that compensation costs relating to share-based payment transactions be recognized in the financial statements. The associated costs will be measured based on the fair value of the equity or liability instruments issued. SFAS 123R covers wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. SFAS 123R is effective as of the first interim or annual reporting period beginning after June 15, 2005. Adoption of this pronouncement is not expected to have a material impact on our financial condition or results of operations. (See Item 8, Notes to Consolidated Financial Statements, Note 1 - “Business and Summary of Significant Accounting Policies - Accounting for Stock Based Compensation”, for disclosure of our current accounting policy and Note 16 - Commons Stock Plans for the historical impact of expensing stock based awards or our consolidated financial statements).
Item 7A
Item 7A
- Quantitative and Qualitative Disclosures About Market Risk
Asset/Liability Management
The net interest margin is directly affected by changes in the level of interest rates, the shape of the yield curve, 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. Our asset/liability objectives are to maintain a strong, stable net interest margin, to utilize our 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 (“ALCO”) provides guidance for 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. We monitor the sensitivity of net interest income by utilizing a dynamic simulation model complemented by a traditional gap analysis.
The simulation model measures the volatility of net interest income to changes in market interest rates. Simulation modeling involves a degree of estimation based on certain assumptions that we believe to be reasonable. Factors considered include contractual maturities, prepayments, repricing characteristics, deposit retention and 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 and is expressed as the percentage change, from the base case, in net interest income over a twelve-month period. As of December 31, 2005, we were operating within policy limits.
The simulation model is kept static with respect to the composition of the balance sheet and, therefore does not reflect our ability to proactively manage in changing market conditions. We may choose to extend or shorten the maturities of our funding sources. We may also choose to redirect cash flows into assets with shorter or longer durations or repay borrowings. As part of our overall interest rate risk management strategy, we periodically use derivative instruments to minimize significant unplanned fluctuations in earnings and cash flows caused by interest rate volatility. This interest rate risk management strategy can involve modifying the repricing characteristics of certain assets and liabilities utilizing interest rate swaps, caps and floors.
The assumptions used are inherently uncertain and, as a result, we 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, prepayments, and any actions we may take to counter such changes. The specific assumptions utilized in the simulation model include:
•
The balance sheet composition remains static.
•
Parallel yield curve shifts for market rates (i.e. treasuries, LIBOR, swaps, etc.) with an assumed floor of 50 basis points.
•
Maintaining our current asset or liability spreads to market interest rates.
•
The model considers the magnitude and timing of the repricing of financial instruments, loans and deposit products, including the effect of changing interest rates on expected prepayments and maturities.
•
NOW deposit rates experience a 15% impact of market rate movements immediately and have a floor of 10 basis points.
The following table reflects the estimated change in projected net interest income for the next twelve months assuming a gradual increase or decrease in interest rates over a twelve-month period.
The traditional gap analysis complements income simulation modeling, primarily focusing on the longer-term structure of the balance sheet. The gap analysis does not assess the relative sensitivity of assets and liabilities to changes in the interest rates and also fails to account for the embedded options, caps and floors, if any. We have not established gap policy limits since it does not appropriately depict interest rate risk as changes in interest rates do not necessarily affect all categories of interest earnings assets and interest bearing liabilities equally.
The gap analysis is prepared based on the maturity and repricing characteristics of interest earning assets and interest bearing liabilities for selected time periods. The mismatch between repricings or maturities within a time period is commonly referred to as the “gap” for that period. A positive gap (asset sensitive), where interest-rate sensitive assets exceed interest-rate sensitive liabilities, generally will result in the net interest margin increasing in a rising rate environment and decreasing in a falling rate environment. A negative gap (liability sensitive) will generally have the opposite results on the net interest margin.
The following table reflects the re-pricing of the balance sheet, or gap position at December 31, 2005:
(1)
Based upon (a) historical price, (b) contractual maturity, (c) repricing date, if applicable, and (d) projected repayments of principal based upon experience.
(2)
Excludes non-accrual loans totaling $27.6 million.
(3)
Based upon (a) contractual maturity, (b) repricing date, if applicable, and (c) estimated principal prepayments.
(4)
Interest-bearing deposits without stated maturities are assigned to categories based on observed historical rate sensitivity. To represent the observed rate sensitivity of these deposits in the gap table, 40% of the savings, 41% of money market and 36% of now account balances were placed in the “0 - 90 Days” category. The remainder of the balance was assigned to the “Over 5 Years” category to represent the relative insensitivity of these products to changes in short-term rates.
Our philosophy toward interest rate risk management is to limit the variability of net interest income in future periods under various interest rate scenarios. Another measure we monitor is based on market risk. Market risk is the risk of loss from adverse changes in market prices primarily driven by changes in interest rates. We calculate the value of assets and liabilities using net present value analysis with upward and downward shocks of 200 basis points to market interest rates. The net changes in the calculated values of the assets and liabilities are tax affected and reflected as an impact to the market value of equity.
As part of our overall interest rate risk management strategy, we periodically use derivative instruments to minimize significant unplanned fluctuations in earnings and cash flows caused by interest rate volatility. The interest rate risk management strategy at times involves modifying the repricing characteristics of certain assets and liabilities utilizing interest rate swaps, caps and floors.
The credit risk associated with derivative instruments is the risk of non-performance by the counterparty to the agreements. Management does not anticipate non-performance by any of the counterparties and monitors/controls the risk through its asset/liability management procedures. (See Item 8, Notes to Consolidated Financial Statements, Note 10 - “Derivative Financial Instruments” for additional information on all derivative transactions).
Liquidity Risk Management
The objective of liquidity risk management is to meet our financial obligations and capitalize on new business opportunities. These obligations include the payment of deposits on demand or at their contractual maturity, the repayment of borrowings as they mature and the ability to fund new and existing loans and investments as opportunities arise.
The Company’s primary funding source is dividends from North Fork Bank. There are various federal and state banking laws and guidelines limiting the extent to which a bank subsidiary can finance or otherwise supply funds to its holding company. At December 31, 2005, dividends for North Fork Bank were limited under such guidelines to $1.3 billion. From a regulatory standpoint, North Fork Bank, with its current balance sheet structure, had the ability to dividend approximately $1.1 billion, while still meeting the criteria for designation as a well-capitalized institution under existing regulatory capital guidelines. Additional sources of liquidity for the Company include borrowings, the sale of available-for-sale securities, and funds available through the capital markets.
Customer deposits are the primary source of liquidity for our banking subsidiaries. Other sources of liquidity at the bank level include loan and security principal repayments and maturities, lines-of-credit with certain financial institutions, the ability to borrow under repurchase agreements, Federal Home Loan Bank (“FHLB”) advances utilizing unpledged mortgage backed securities and certain mortgage loans, funds available through the capital markets and the sale of available-for-sale securities and the securitization or sale of loans.
Our banking subsidiaries currently have the ability to borrow an additional $12.0 billion on a secured basis, utilizing mortgage related loans and securities as collateral. At December 31, 2005, our banking subsidiaries had $4.1 billion in advances and repurchase agreements outstanding with the FHLB.
We also maintain arrangements with correspondent banks to provide short-term credit for regulatory liquidity requirements. These available lines of credit aggregated $1.3 billion at December 31, 2005. We continually monitor our liquidity position as well as the liquidity positions of our bank subsidiaries and believe that sufficient liquidity exists to meet all of our operating requirements.
Item 8
Item 8
- Financial Statements and Supplementary Data
CONSOLIDATED STATEMENTS OF INCOME
See accompanying notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(1)
Gain on sale of securities, net, includes a $6.0 million permanent impairment charge in 2005.
(2)
Excludes loans retained in the held-for-investment portfolio totaling $5.3 billion and $1.9 billion in 2005 and 2004, respectively.
(3)
Excludes goodwill and identifiable intangibles established in the acquisitions. See Notes to Consolidated Financial Statements, Note 2 - “Business Combinations” for additional information.
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -
Business and Summary of Significant Accounting Policies
North Fork Bancorporation, Inc. is a regional bank holding company organized under the laws of the State of Delaware and registered as a “bank holding company” under the Bank Holding Company Act of 1956, as amended. North Fork Bank, our principal bank subsidiary, operates from 353 retail bank branches in the New York Metropolitan area. We also operate a nationwide mortgage business (GreenPoint Mortgage Funding Inc.). GreenPoint Mortgage is in the business of originating, selling and servicing a wide variety of mortgages secured by 1-4 family residences and small commercial properties. Through our other non-bank subsidiaries, we offer financial products and services to our customers including asset management, securities brokerage, and the sale of alternative investment products. We operate a second subsidiary bank, Superior Savings of New England, N.A., which focuses on telephonic and media-based generation of deposits.
In May 2004, we acquired The Trust Company of New Jersey (“TCNJ”). TCNJ was the fourth largest commercial bank headquartered in New Jersey and operated in the northern and central New Jersey market area. TCNJ represented our first significant expansion into a state other than New York. At the date of merger, TCNJ had $4.1 billion in total assets, $1.4 billion in securities, $2.1 billion in net loans, $3.2 billion in deposits and $.7 billion in borrowings.
In October 2004, we acquired GreenPoint Financial Corp. (“GreenPoint”). GreenPoint operated two primary businesses, a New York based retail bank (“GreenPoint Bank”) and a separate mortgage banking business (“GreenPoint Mortgage” or “GPM”) with nationwide operations. GreenPoint Bank maintained 95 retail bank branches in the New York Metropolitan area. At the date of merger, GreenPoint had $27 billion in assets, $6.8 billion in securities, $5.1 billion in loans held-for-sale, $12.8 billion in loans held-for-investment, $12.8 billion in deposits, and $11.4 billion in borrowings.
Basis of Presentation
The accounting and financial reporting policies of the Company and its subsidiaries are in conformity with accounting principles generally accepted in the United States of America. The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities, the 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. Additionally, where applicable, the policies conform to the accounting and reporting guidelines prescribed by bank regulatory authorities. All significant inter-company accounts and transactions have been eliminated. Certain prior period amounts have been reclassified to conform to current period presentation.
Significant Accounting Policies
Securities
Securities that we have the positive intent and ability to hold to maturity are classified as held-to-maturity and carried at amortized cost. Securities that may be sold in response to, or in anticipation of, changes in interest rates and resulting prepayment risk, or other factors, and marketable equity securities, are classified as available-for-sale and carried at fair value. Unrealized gains and losses on these securities are reported, net of applicable taxes, as a separate component of accumulated other comprehensive income, a component of stockholders’ equity. Equity securities that do not have a readily determinable fair value are reported at cost. Debt and equity securities that are purchased and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value. Unrealized gains and losses on trading securities are reported as a component of other non-interest income. Management determines the appropriate classification of securities at the time of purchase, and at each reporting date, management reassesses the appropriateness of the classification.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Interest income on securities, including amortization of premiums and accretion of discounts, is recognized using the level yield method over the lives of the individual securities. Realized gains and losses on sales of securities are computed using the specific identification method. The cost basis of individual held-to-maturity and available-for-sale securities are reduced through write-downs to reflect other-than-temporary impairments in value. These write-downs are reported as a component of securities gains, net.
Accounting for Derivative Financial Instruments
Derivative financial instruments are recorded at fair value as either assets or liabilities on the balance sheet. The accounting for changes in the fair value of a derivative instrument is determined by whether it has been designated and qualifies as part of a hedging relationship and based on the type of hedging relationship. Transactions hedging changes in the fair value of a recognized asset, liability, or firm commitment are classified as fair value hedges. Derivative instruments hedging exposure to variable cash flows of recognized assets, liabilities or forecasted transactions are classified as cash flow hedges.
Fair value hedges result in the immediate recognition through earnings of gains or losses on the derivative instrument, as well as corresponding losses or gains on the hedged financial instrument to the extent they are attributable to the hedged risk. The gain or loss on the effective portion of a derivative instrument designated as a cash flow hedge is reported as a component of other comprehensive income, and reclassified to earnings in the same period that the hedged transaction affects earnings. The gain or loss on the ineffective portion of the derivative instrument, if any, is recognized in earnings for both fair value and cash flow hedges. Changes in the fair value of the derivative instruments are recorded as changes in both the fair value of the swap and the hedged financial instrument. Derivative instruments not qualifying for hedge accounting treatment are recorded at fair value and classified as trading assets or liabilities with the resultant changes in fair value recognized in earnings during the period of change.
In the event of early termination of a derivative contract, previously designated as part of a cash flow hedging relationship, any resulting gain or loss is deferred as an adjustment to the carrying value of the assets or liabilities, against which the hedge had been designated with a corresponding offset to other comprehensive income, and reclassified to earnings over the shorter of the remaining life of the designated assets or liabilities, or the derivative contract. However, if the hedged item is no longer on balance sheet (i.e. sold or canceled), the derivative gain or loss is immediately reclassified to earnings.
As part of our mortgage banking business, we enter into commitments to originate or purchase loans whereby the interest rate on the loan is determined prior to funding (“interest rate lock commitment”). Interest rate lock commitments related to loans that we intend to sell in the secondary market are considered free-standing derivatives. These derivatives are required to be recorded at fair value, with changes in fair value recorded in current period earnings. In accordance with Staff Accounting Bulletin No. 105, “Application of Accounting Principles to Loan Commitments”, interest rate lock commitments are initially valued at zero. Changes in fair value subsequent to inception are based on changes in the fair value of loans with similar characteristics and changes in the probability that the loan will fund within the terms of the commitment, which is affected primarily by changes in interest rates and passage of time. In general, the probability that a loan will fund increases if mortgage rates rise and decreases if mortgage rates fall. The initial value inherent in the loan commitment at origination is recognized through gain on sale of loans when the underlying loan is sold.
We are exposed to interest rate risk from the time an interest rate lock commitment is made to a borrower to the time the resulting mortgage loan is sold in the secondary market. To manage this risk, we use derivatives, primarily forward sales contracts on mortgage backed securities and forward delivery commitments, in an amount equal to the portion of interest rate contracts expected to close. The duration of these derivatives is selected to have the changes in their fair value correlate closely with the changes in fair value of the interest rate lock commitments on loans to be sold. These derivatives are also required to be recorded at fair value, with changes in fair value recorded in current period earnings.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Loans Held-for-Sale
Loans held-for-sale consist primarily of residential mortgage loans, secured by one-to-four family residential properties located throughout the United States. Loans originated with the intent of selling in the secondary market are classified as held-for-sale. Loans held-for-sale are carried at the lower of aggregate cost, net of deferred fees, deferred origination costs and effects of hedge accounting, or fair value. The fair value of loans held-for-sale are determined using current secondary market prices for loans with similar coupons, maturities and credit quality.
The fair value of loans held-for-sale is impacted by changes in market interest rates. The exposure to changes in market interest rates is hedged primarily by selling forward contracts on agency securities. These derivative instruments, designated as fair value hedges, are recorded on the balance sheet at fair value with changes in fair value being recorded in gain on sale of loans in current earnings. Also changes in the fair value of loans held-for-sale are recorded as an adjustment to the loans’ carrying basis through gain on sale of loans in current earnings.
As part of our mortgage banking operations, commitments to purchase or originate loans are entered into whereby the interest rate on the loans is determined prior to funding (“interest rate lock commitments”). Interest rate lock commitments on loans we intend to sell are recorded as derivative instruments as defined in Statement of Financial Accounting Standards (“SFAS”) No. 133 - “Accounting for Derivative Instruments and Hedging Activities” and the fair value of interest rate lock commitments are determined using current secondary market prices for underlying loans with similar coupons, maturity and credit quality, subject to the anticipated loan funding probability, or pull through rate.
Similar to loans held-for-sale, the fair value of interest rate lock commitments is subject to change due to changes in market interest rates. In addition, the value of interest rate lock commitments is affected by changes in the anticipated loan funding probability or pull through rate. These changes in fair value are also hedged primarily by selling forward contracts on agency securities. Both the interest rate lock commitments and the related forward contracts are recorded at fair value with changes in fair value being recorded in current earnings in gain on sale of loans.
Accounting for Sales of Loans Held-for-Sale
Loans originated for sale are primarily sold in the secondary market as whole loans. Whole loan sales are executed with either the servicing rights being retained or released to the buyer. For sales where the loans are sold with the servicing released to the buyer, the gain or loss on the sale is equal to the difference between the proceeds received and the carrying value of the loans sold. If the loans are sold with the servicing rights retained, the gain or loss on the sale is also impacted by the fair value attributed to the servicing rights.
Mortgage Servicing Rights
The right to service mortgage loans for others, or Mortgage Servicing Rights (“MSRs”), is recognized when mortgage loans are sold in the secondary market and the right to service these loans are retained for a fee. The MSRs initial carrying value is determined by allocating the recorded investment in the underlying mortgage loans between the assets sold and the interest retained based on their relative fair values at the date of transfer. Fair value of the MSRs is determined using the present value of the estimated future cash flows of net servicing income. MSRs are carried at the lower of the initial carrying value, adjusted for amortization, or fair value. MSRs are amortized in proportion to, and over the period of, estimated net servicing income. The amortization of MSRs is periodically analyzed and adjusted to reflect changes in prepayment speeds.
To determine fair value, a valuation model that calculates the present value of estimated future net servicing income is utilized. We use assumptions in the valuation model that market participants use when estimating future net servicing income, including prepayment speeds, discount rates, default rates, cost to service, escrow account earnings, contractual servicing fee income, ancillary income and late fees.
MSRs are periodically evaluated for impairment based on the difference between the carrying amount and current fair value. To evaluate and measure impairment, the underlying loans are stratified based on certain risk
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
characteristics, including loan type, note rate and investor servicing requirements. If it is determined that temporary impairment exists, a valuation allowance is established by risk stratification through a charge to earnings for any excess of amortized cost over the current fair value. If determined in future periods that all or a portion of the temporary impairment no longer exists for a particular risk stratification, the valuation allowance is reduced by increasing earnings. However, if impairment for a particular risk stratification is deemed other-than-temporary (recovery of a recorded valuation allowance is remote), a direct write-down, permanently reducing the carrying value of the MSRs is recorded. The periodic evaluation of MSRs for other-than-temporary impairment considers both historical and projected trends in interest rates, payoff activity and whether impairment could be recovered through increases in market interest rates.
Representation and Warranty Reserve
The representation and warranty reserve is available to cover probable losses inherent with the sale of loans in the secondary market. In the normal course of business, certain representations and warranties are made to investors at the time of sale, which permit the investor to return the loan to the seller or require the seller to indemnify the investor (make whole) for any losses incurred by the investor while the loan remains outstanding.
The evaluation process for determining the adequacy of the representation and warranty reserve and the periodic provisioning for estimated losses is performed for each product type on a quarterly basis. Factors considered in the evaluation process include historical sales volumes, aggregate repurchase and indemnification activity and actual losses incurred. Additions to the reserve are recorded as a reduction to the gain on sale of loans. Losses incurred on loans we are required to either repurchase or make payments to the investor under the indemnification provisions are charged against the reserve. The representation and warranty reserve is included in accrued expenses and other liabilities in the consolidated balance sheet.
Loans Held-for-Investment
Loans are stated at the principal amount outstanding, net of unearned income and net deferred loan fees and costs. Interest income is recognized using the interest method or a method that approximates a level rate of return over the loan term. Net deferred loan fees and origination costs are recognized in interest income over the loan term as a yield adjustment.
Non-Accrual and Restructured Loans
Loans are generally placed on non-accrual status when payments become 90 days past due, unless they are well secured and in the process of collection. Loans may also be placed on non-accrual status if management has doubt as to the collectibility of interest and principal prior to a loan becoming 90 days past due. Interest and fees previously accrued, but not collected, are generally reversed and charged against interest income at the time a loan is placed on non-accrual status. Interest payments received on non-accrual loans are recorded as reductions of principal if, in management’s judgment, principal repayment is doubtful. Loans may be reinstated to an accrual or performing status if future payments of principal and interest are reasonably assured and the loan has a demonstrated period of performance.
Loans are classified as restructured when management grants, for economic or legal reasons related to the borrower’s financial condition, concessions to the borrower that we would not otherwise consider. Generally, this occurs when the cash flows of the borrower are insufficient to service the loan under its original terms. Restructured loans are reported as such in the year of restructuring. In subsequent reporting periods, the loan is removed from restructured status if the loan yields a market rate of interest, is performing in accordance with the restructured terms, and such performance is expected to continue.
Provision and Allowance for Loan Losses
The allowance for loan losses is available to cover probable losses inherent in the loans held-for-investment portfolio. Loans held-for-investment, or portions thereof, deemed uncollectible are charged to the allowance for
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
loan losses, while recoveries, if any, of amounts previously charged-off are added to the allowance. Amounts are charged-off after giving consideration to such factors as the customer’s financial condition, underlying collateral values and guarantees, and general economic conditions.
The evaluation process for determining the adequacy of the allowance for loan losses and the periodic provisioning for estimated losses is undertaken on a quarterly basis, but may increase in frequency should conditions arise that would require our prompt attention. Conditions giving rise to such action are business combinations or other acquisitions or dispositions of large quantities of loans, dispositions of non-performing and marginally performing loans by bulk sale or any development which may indicate an adverse trend. Recognition is also given to the changing risk profile resulting from business combinations, customer performance, results of ongoing credit-quality monitoring processes and the cyclical nature of economic and business conditions.
The loan portfolio is categorized according to collateral type, loan purpose or borrower type (i.e. commercial, consumer). The categories used include Multi-Family Mortgages, Residential 1-4 Family Mortgages, Commercial Mortgages, Commercial and Industrial, Consumer, and Construction and Land. An important consideration is our concentration of real estate related loans.
The methodology employed for assessing the adequacy of the allowance consists of the following criteria:
•
Establishment of reserve amounts for specifically identified criticized loans, including those arising from business combinations and those designated as requiring special attention by our internal loan review program, or bank regulatory examinations (specific-allowance method).
•
An allocation to the remaining loans giving effect to historical losses experienced in each loan category, cyclical trends and current economic conditions which may impact future losses (loss experience factor method).
The initial allocation or specific-allowance method commences with loan officers and underwriters grading the quality of their loans on a risk classification scale ranging from 1 - 8. Loans identified as below investment grade are referred to our 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 a criticized category. Additionally, LRD is responsible for performing periodic reviews of the loan portfolio independent from the identification process employed by loan officers and underwriters. Loans that fall into criticized categories are further evaluated for impairment in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 114, “Accounting by Creditors for Impairment of a Loan.” The portion of the allowance allocated to impaired loans is based on the most appropriate of the following measures: discounted cash flows from the loan using the loan’s effective interest rate, the fair value of the collateral for collateral dependent loans, or the observable market price of the impaired loan.
The remaining allocation applies a category specific loss experience factor to loans which have not been specifically reviewed for impairment, including smaller balance homogeneous loans that we have identified as residential and consumer, which are not specifically reserved for impairment. These category specific factors give recognition to our historical loss experience, as well as that of acquired businesses, cyclical trends, current economic conditions and our exposure to real estate values. These factors are reviewed on a quarterly basis with senior lenders to ensure that the factors applied to each loan category are reflective of trends or changes in the current business environment which may affect these categories.
Upon completion of both allocation processes, the specific and loss experience factor method allocations are combined, producing the allocation of the allowance for loan losses by loan category. Other factors used to evaluate the adequacy of the allowance for loan losses include the amount and trend of criticized loans, results of regulatory examinations, peer group comparisons and economic data associated with the relevant markets, specifically the local real estate market. Because many loans depend upon the sufficiency of collateral, any adverse trend in the relevant real estate markets could have a significant adverse effect on the quality of our loan portfolio. This may lead
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
management to consider that the overall allowance level should be greater than the amount determined by the allocation process described above.
Premises and Equipment
Premises and equipment, including leasehold improvements, are stated at cost, net of accumulated depreciation and amortization. Equipment, which includes furniture and fixtures, are depreciated over the assets’ estimated useful lives using the straight-line method (3 to 10 years). Bank premises and leasehold improvements are amortized, using the straight line method, over the estimated useful life of the related asset or the lease term, whichever is shorter. Maintenance, repairs and minor improvements are charged to non- interest expense in the period incurred.
Impairment
Long-lived assets including goodwill and certain identifiable intangibles are periodically evaluated for impairment in value. Long-lived assets and deferred costs are typically measured whenever events or circumstances indicate that the carrying amount may not be recoverable. No such events have occurred during the periods reported. Certain identifiable intangibles and goodwill are evaluated for impairment at least annually utilizing the “market approach” as prescribed by SFAS No. 142, “Goodwill and Other Intangible Assets.” Asset impairment is recorded when required.
Other Real Estate
Other real estate consists of property acquired through foreclosure or deed in lieu of foreclosure. Prior to foreclosure, the recorded amount of the loan is written down, if necessary, to the fair value of the property based on the appraised value adjusted for estimated disposition costs, by a charge to the allowance for loan losses.
Income Taxes
Income taxes are provided for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period the change occurs. Deferred tax assets are reduced, through a valuation allowance, if necessary, by the amount of such benefits that are not expected to be realized based on current available evidence.
Earnings Per Share (“EPS”)
Basic EPS is computed by dividing net income available to common stockholders’ by the weighted average number of common shares, as adjusted for restricted shares outstanding during the period. Diluted EPS is computed by dividing net income available to common stockholders’ by the weighted average number of common shares outstanding as, adjusted for restricted shares, and common stock equivalents (i.e. stock options) outstanding during the period and accounted for under the treasury stock method. The weighted average number of common shares outstanding used in the computation of Basic EPS was 467,306,335, 294,490,840 and 226,304,234 for 2005, 2004, and 2003, respectively. The weighted average number of common shares outstanding used in the computation of Diluted EPS was 472,790,713, 299,219,291 and 228,774,213 for 2005, 2004 and 2003, respectively.
Accounting for Stock-Based Compensation
Stock-based compensation plans are accounted for in accordance with the requirements specified in SFAS No. 123 “Accounting for Stock-Based Compensation” (“SFAS 123”), as amended by SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure” (“SFAS 148”). As permitted under these Statements, we have elected to apply the intrinsic value method in accounting for option-based stock
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
compensation plans. Accordingly, compensation expense has not been recognized in the accompanying consolidated financial statements for stock-based compensation plans, other than restricted stock awards. Restricted stock awards are recorded as deferred compensation, a component of stockholders’ equity, at fair value as of the date of grant and amortized to compensation expense over the awards’ specified vesting periods. Since the intrinsic value method is used, we are required to disclose the pro-forma impact on net income and earnings per share that the fair value-based method would have had, if it was applied rather than the intrinsic value method. See Note 16 - “Common Stock Plans”, for additional information.
Accordingly, the following table illustrates the effect on net income and earnings per share as if the fair value-based method had been applied to all outstanding awards in each period.
Goodwill and Identifiable Intangible Assets
Goodwill and identifiable intangible assets (primarily core deposit intangibles) reflected on the consolidated balance sheets arose from previous acquisitions. At the date of acquisition, we recorded the assets acquired and liabilities assumed at fair value. The excess of cost over the fair value of the net assets acquired is recorded on the balance sheet as goodwill. The cost includes the consideration paid and all direct costs associated with the acquisition. Indirect costs relating to the acquisition are expensed when incurred based on the nature of the item.
In accordance with the requirements specified in SFAS No. 142 “Goodwill and Other Intangible Assets”, goodwill and identifiable intangible assets having an indefinite useful life are no longer amortized but are periodically assessed for impairment. Identifiable intangible assets having an estimated useful life are separately recognized and amortized over their estimated useful lives. The required assessment of goodwill impairment, was completed as of December 31, 2005 and management determined that no impairment exists.
Statement of Cash Flows
For purposes of the accompanying consolidated statements of cash flows, cash and cash equivalents are defined as the amounts included in the consolidated balance sheets under the captions “Cash & Due from Banks” and “Money Market Investments”, with contractual maturities of less than 90 days.
Cash flows associated with derivative financial instruments are classified in the accompanying consolidated statements of cash flows in the same category as the cash flows from the assets or liabilities being hedged.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 2 -
Business Combinations
The Trust Company of New Jersey
In May 2004, The Trust Company of New Jersey (“TCNJ”), a New Jersey state-chartered bank was acquired, in a tax free merger. TCNJ shareholders received one share of the Company’s common stock for each share of TCNJ common stock held or 27.8 million shares, adjusted for the three-for-two stock split. At the merger date, TCNJ had $4.1 billion in total assets, $1.4 billion in securities, $2.1 billion in loans, $3.2 billion in deposits and $.7 billion in borrowings.
GreenPoint Financial Corp.
In October 2004, GreenPoint Financial Corp. (“GreenPoint”) was acquired, in a tax free merger. GreenPoint’s shareholders received 1.0514 shares of the Company’s common stock for each of share of GreenPoint common stock held, for a total issuance of 210.3 million shares (adjusted for the three-for-two stock split). GreenPoint operated two primary businesses, a retail savings bank (GreenPoint Bank) and a national mortgage company (GreenPoint Mortgage Funding, Inc.). At the merger date, GreenPoint had $27 billion in assets, $6.8 billion in securities, $5.1 billion in loans held-for-sale, $12.8 billion in loans held-for-investment, $12.8 billion in deposits and $11.4 billion in borrowings. On February 21, 2005, the operations of GreenPoint Bank were merged with and into North Fork Bank. GreenPoint Mortgage continues to operate as a separate subsidiary.
Identifiable Intangibles
The following table represents a roll forward of identifiable intangibles, which is comprised primarily of core deposits intangibles from previous acquisitions.
(1)
The GreenPoint core deposit intangible is being amortized over 11 years on an accelerated basis.
(2)
The TCNJ core deposit intangible is being amortized over 8 years on an accelerated basis.
Amortization expense of identifiable intangibles was $36.6 million, $15.1 million and $3.6 million for 2005, 2004 and 2003, respectively. The aggregate amortization expense is projected to be $33.6 million, $25.6 million, $20.5 million, $16.1 million and $6.6 million in 2006, 2007, 2008, 2009 and 2010, respectively.
Goodwill
Goodwill was $5.9 billion for both 2005 and 2004, respectively. Any changes in goodwill during 2005 were insignificant and resulted from the final purchase accounting adjustments for facility and compensation related matters that were not available at the time we closed the acquisition of GreenPoint. Goodwill is analyzed for impairment on an annually basis. No impairment loss was recorded in 2005 or 2004.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 3 -
Securities
Available-for-Sale Securities
The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair values of available-for-sale securities were as follows at December 31:
(1)
Amortized cost and fair value includes $265.8 million and $351.7 million in Federal Home Loan Bank stock at December 31, 2005 and 2004, respectively.
(2)
Amortized cost and fair value includes $332.3 million and $342.8 million at December 31, 2005 and $369.6 million and $371.2 million at December 31, 2004 in Freddie Mac and Fannie Mae Preferred Stock, respectively.
Held-to-Maturity Securities
The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair values of held-to-maturity securities were as follows at December 31:
Mortgage backed securities represented 78% of total securities at December 31, 2005, and included pass-through certificates guaranteed by GNMA, FHLMC or FNMA and collateralized mortgage-backed obligations (“CMOs”) backed by government agency pass-through certificates or whole loans. The pass-through certificates included both fixed and adjustable rate instruments. CMOs, by virtue of the underlying collateral or structure, are AAA rated and are either fixed rate current pay sequentials and planned amortization class (PAC) structures or adjustable rate issues. The adjustable rate pass-throughs and CMOs are principally Hybrid adjustable rate mortgages (ARMs). Hybrid ARMs typically have a fixed initial rate of interest from 3 through 7 years and at the end of that term convert to a one year adjustable rate of interest indexed to short term benchmarks (i.e. LIBOR or
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
one-year Treasuries). Hybrid ARMs included in Pass-throughs and CMOs as of December 31, 2005 aggregated $2.6 billion.
At December 31, 2005, securities carried at $7.3 billion were pledged to secure securities sold under agreements to repurchase, other borrowings, and for other purposes as required by law. Securities pledged under agreements pursuant to which the collateral may be sold or re-pledged by the secured parties approximated $4.1 billion, while securities pledged under agreements pursuant to which the secured parties may not sell or re-pledge the collateral approximated $3.2 billion at December 31, 2005.
At December 31, 2005, the amortized cost and estimated fair value of securities by contractual maturity are presented in the table below. Expected maturities will differ from contractual maturities since issuers may have the right to call or prepay obligations without call or prepayment penalties.
The proceeds from realized gains and losses on securities were as follows at December 31,
In December 2005, $577 million in securities were identified as other than temporarily impaired resulting in a realized loss of $6.0 million. Theses securities were sold in January 2006. Gross realized gains and losses for 2005, 2004 and 2003 resulted from sales of mortgage backed securities, corporate bonds and certain equity and capital securities.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table provides the gross unrealized losses and fair value, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position, as of December 31, 2005:
As of December 31, 2005, approximately 93% of the unrealized losses in the securities portfolio was comprised of mortgage-backed securities. The remaining 7% of the unrealized losses is concentrated in corporate bonds and state and municipal obligations. Management reviews these securities at least annually and there are no instances of credit or rating agency downgrades. Management believes these price movements can be attributed to the increase in current market credit spreads on similar issuances.
When purchasing investment securities, the Company’s overall interest-rate risk profile is considered as well as the adequacy of expected returns relative to risks assumed, including prepayments. In continuously managing the investment securities portfolio, management occasionally sells investment securities as a result of changes in interest rates and spreads, actual or anticipated prepayments, credit risk associated with a particular security, and/or following the completion of a business combination.
NOTE 4 -
Loans
The composition of loans designated as held-for-sale are summarized as follows at December 31,:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The composition of loans designated as held-for investment are summarized as follows at December 31,:
The loan portfolio is concentrated primarily in loans secured by real estate. The segments of the real estate portfolio are diversified in terms of risk and repayment sources. The underlying collateral includes residential 1-4 family mortgages, and multi-family apartment buildings, owner occupied/non-owner occupied commercial properties and construction and land loans. The risks inherent in the loan portfolio are dependent on both regional and general economic stability, which affect property values and the financial well being and creditworthiness of the borrowers.
At December 31, 2005, loans secured by real estate of $4.0 billion were pledged as collateral under borrowing arrangements with the Federal Home Loan Bank of New York.
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. We do not extend loans to directors and executive officers for purposes of financing the purchase of the company’s common stock. Related party loans, consisting principally of residential mortgage loans, aggregated $4.9 million and $4.8 million at December 31, 2005 and 2004, respectively.
Non-Performing Assets
Non-performing assets include loans ninety days past due and still accruing, non-accrual loans and other real estate. Other real estate consists of properties acquired through foreclosure or deed in lieu of foreclosure. Other real estate is carried at the lower of the recorded amount of the loan or the fair value of the property based on the appraised value adjusted for estimated disposition costs. Other real estate is reflected on the accompanying balance sheet as a component of other assets.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table represents the components of non-performing assets at December 31,:
Interest foregone on non-accrual loans aggregated $2.2 million in 2005, $2.9 million in 2004 and $1.0 million in 2003 and 2002, respectively. As part of the analysis for loan losses, certain loans are assessed for impairment as specified by the criteria established in SFAS No. 114 “Accounting by Creditors for Impairment of a Loan”. The level of loans identified as impaired and the related valuation was not significant at December 31, 2005 and 2004.
At December 31, 2005, there were no commitments to lend additional funds to borrowers whose loans were non-performing. Additionally, there were no restructured, accruing loans outstanding at December 31, 2005 and 2004.
NOTE 5 -
Allowance for Loan Losses
A summary of changes in the allowance for loan losses is shown below for the years ended December 31,:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 6 -
Premises and Equipment
The following is a summary of premises and equipment at December 31,:
Depreciation and amortization of premises and equipment, is reflected as a component of occupancy and equipment, net in the consolidated statements of income, was $43.1 million, $24.8 million and $15.4 million for 2005, 2004 and 2003, respectively.
NOTE 7 -
Deposits
The following table represents the composition of customer deposit liabilities at December 31,:
The aggregate amount of overdrawn deposit balances reclassified as loans was $35.4 million and $24.0 million as of December 31, 2005 and 2004, respectively.
The following is a summary of the remaining maturity of time deposits including certificates of deposits, $100,000 and over as of December 31, 2005:
(1)
Excludes $29.1 million in purchase accounting adjustments.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The remaining maturities of certificate of deposits in amounts of $100,000 and over at December 31, 2005, were as follows:
NOTE 8 -
Federal Funds Purchased and Collateralized Borrowings
The following table summarizes the components of federal funds purchased & collateralized borrowings at December 31,:
The following is a summary of federal funds purchased and securities sold under agreements to repurchase (“Repos”) at and for the years ended December 31,:
Interest swaps were used to convert certain Repos from variable rates to fixed rates. (See Note 10 - “Derivative Financial Instruments” for additional information). The impact of these swaps was to change the weighted average interest rate paid in the above table to 3.19%, 2.81% and 2.85%, at December 31, 2005, 2004 and 2003, respectively.
Qualifying Repos are treated as financings and the obligations to repurchase securities sold are reflected as liabilities on the consolidated balance sheets. The dollar amount of securities underlying the agreements remain in
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
the asset accounts, although the securities underlying the agreements are delivered to the brokers who arranged the transactions. In certain instances, the brokers may have sold, loaned, or disposed of the securities to other parties in the normal course of their operations, and have agreed to resell substantially similar securities at the maturity of the agreements to the Company.
The following is a summary of the amortized cost and fair value of securities collateralizing Repos, in addition to the amounts of and the contractual interest rates on the related borrowings.
(1)
Excludes accrued interest receivable of $16.4 million.
(2)
Excludes accrued interest payable of $14.9 million.
(3)
Excludes $47.4 million in purchase accounting discounts.
(4)
The weighted average interest rate at year end 2005 with purchase accounting adjustments was 3.68%.
The contractual maturity of Federal Home Loan Bank (“FHLB”) Advances at December 31, 2005 is as follows:
(1)
Excludes $108.6 million in purchase accounting discounts.
(2)
The weighted average interest rate at year end including purchase accounting adjustments was 3.57%.
Our banking subsidiaries have the ability to borrow an additional $11.9 billion on a secured basis, utilizing mortgage related loans and securities as collateral. At December 31, 2005, $4.1 billion in advances and repurchase agreements were outstanding with the FHLB.
Arrangements with correspondent banks are maintained to provide short-term credit for regulatory liquidity requirements. These available lines of credit aggregated $1.3 billion at December 31, 2005. We continually monitor our liquidity position as well as the liquidity positions of our banking subsidiaries and believe that sufficient liquidity exists to meet all of our operating requirements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 9 -
Other Borrowings
The following tables summarize other borrowings outstanding as of December 31,:
Subordinated Notes:
$350 million of 5.875% Subordinated Notes and $150 million of 5% Fixed Rate/Floating Rate Subordinated Notes which mature in 2012, were issued in August 2002. These issuances qualify as Tier II capital for regulatory purposes. The 5.875% Subordinated Notes bear interest at a fixed rate through maturity, pay interest semi-annually and are not 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 three-month LIBOR plus 1.87%. Beginning in the sixth year, we have the right to redeem the Fixed Rate/Floating Rate Notes at par plus accrued interest. There are $500 million in pay floating swaps, designated as fair value hedges, that were used to convert the stated fixed rate on these Notes to variable rates indexed to three-month LIBOR. (See Note 10 - “Derivative Financial Instruments” for additional information).
$150 million of 9.25% Subordinated Bank Notes were assumed from GreenPoint. The 9.25% Subordinated Bank Notes mature in 2010, pay interest semi-annually and currently $120 million qualifies as Tier II capital for regulatory purposes. The 9.25% Subordinated Bank Notes were recorded at fair value as of the acquisition date and includes the remaining fair value discount of $28.6 million and $34.6 million at December 31, 2005 and December 31, 2004, respectively, which reduced the effective cost of funds to 4.61%.
Junior Subordinated Debt (Related to Trust Preferred Securities):
Capital Securities (or “Trust Preferred Securities”), which qualify as Tier I Capital for regulatory purposes, were issued through Wholly-Owned Statutory Business Trusts (the “Trusts”). The Trusts were initially capitalized with common stock and the proceeds of both the common stock and Capital Securities were used to acquire Junior Subordinated Debt issued by the Company. The Capital Securities are obligations of the Trusts. The Junior Subordinated Debt and Capital Securities bear the same interest rates, are due concurrently and are non-callable at
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
any time in whole or in part for ten years from the date of issuance, except in certain limited circumstances. They may be redeemed annually thereafter, in whole or in part, at declining premiums to maturity. The costs associated with these issuances have been capitalized and are being amortized to maturity using the straight-line method.
$200 million of 9.10% Capital Securities were assumed from GreenPoint. The corresponding Junior Subordinated Debt of $206.2 million previously issued was recorded at fair value as of the acquisition date and includes the remaining fair value discount of $29.7 million and $31.1 million at December 31, 2005 and December 31, 2004, respectively, which reduced the effective cost of funds to 7.63%.
Pay floating swaps of $245 million, designated as fair value hedges, were used to convert a corresponding amount in Junior Subordinated Debt from their stated fixed rates to variable rates indexed to three-month LIBOR. (See Note 10 - “Derivative Financial Instruments” for additional information.)
Senior Notes:
$350 million of 3.20% Senior Notes were assumed from GreenPoint. The 3.20% Senior Notes mature in 2008, and pay interest semi-annually. These notes were recorded at fair value as of the acquisition date and include the remaining fair value premium of $5.1 million and $7.1 million at December 31, 2005 and December 31, 2004, respectively, which increased the effective cost of funds to 3.84%.
Pay floating swaps of $350 million, designated as fair value hedges, were used to convert the stated fixed rate on these notes to variable rates indexed to the three-month LIBOR. (See Note 10 - “Derivative Financial Instruments” for additional information).
NOTE 10 -
Derivative Financial Instruments
The use of derivative financial instruments creates exposure to credit risk. This credit exposure relates to losses that would be recognized if the counterparties fail to perform their obligations under the contracts. To mitigate this exposure to non-performance, we deal only with counterparties of good credit standing and establish counterparty credit limits. In connection with our interest rate risk management process, we periodically enter into interest rate derivative contracts. These derivative interest rate contracts may include interest rate swaps, caps, and floors and are used to modify the repricing characteristics of specific assets and liabilities.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table details the interest rate swaps and the associated hedged liabilities outstanding as of December 31, 2005:
At December 31, 2005, $75 million in pay fixed swaps, designated as cash flow hedges, were outstanding. These agreements change the repricing characteristics of certain repurchase agreements, requiring us to make periodic fixed rate payments and receive periodic variable rate payments indexed to three-month LIBOR, based on a common notional amount and identical payment and maturity dates. As of December 31, 2005, these swaps had an unrealized loss of $2.2 million, which is recorded as a component of other liabilities (the net of tax amount of $1.2 million is reflected in stockholders’ equity as a component of accumulated other comprehensive loss). The use of pay fixed swaps outstanding increased interest expense by $2.6 million, $8.0 million and $23.9 million for the years ended December 31, 2005, 2004 and 2003, respectively. The decline in swap related interest expense was due primarily to the maturity of $100 million in the second quarter of 2004. Based upon the current interest rate environment, approximately $.6 million of the $1.2 million after tax unrealized loss is expected to be reclassified from accumulated other comprehensive loss during the next twelve months.
At December 31, 2005, $1.1 billion of pay floating swaps, designated as fair value hedges, was outstanding. $350 million in pay floating swaps was used to convert the stated fixed rate on the 5.88% subordinated notes to variable rates indexed to three-month LIBOR. The swap term and payment dates match the related terms of the subordinated notes. $150 million in pay floating swaps were used to convert the stated fixed rate on the 5% subordinated notes to variable rates indexed to three-month LIBOR. The swap terms are for five years, matching the period of time the subordinated notes pay a fixed rate. Beginning in the sixth year, we have the right to redeem the fixed rate/floating rate notes at par plus accrued interest or the interest rate converts to a spread over three month LIBOR. At December 31, 2005, the fair value adjustment on these swaps resulted in a loss of $31.0 million and is reflected as a component of other liabilities. The carrying amount of the $500 million in subordinated notes was decreased by an identical amount. These swaps increased interest expense by approximately $.3 million and reduced interest expense by $9.0 million and $5.3 million for the years ended December 31, 2005, 2004 and 2003, respectively. There was no hedge ineffectiveness recorded in the Consolidated Statements of Income on these transactions for all periods reported.
$350 million of pay floating swaps was used to convert the stated fixed rate on the 3.20% senior notes to variable rates indexed to three-month LIBOR. The swap term and payment dates match the related terms of the senior notes. At December 31, 2005, the fair value adjustment on the swaps resulted in a loss of $10.1 million and is reflected as a component of other liabilities. The carrying amount of the $350 million in senior notes was decreased by an identical amount. For the years ended December 31, 2005 and 2004, these swaps reduced interest expense by $.9 million and $1.3 million, respectively. There was no hedge ineffectiveness recorded in the Consolidated Statements of Income on these transactions for all periods reported.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Interest rate swap agreements were also used to change the repricing characteristics of $245 million in Junior Subordinated Debt from their stated fixed rates to variable rates indexed to three-month LIBOR. The swaps contain payment dates, maturity dates and embedded call options held by the counterparty (exercisable in approximately two years), which are identical to the terms and call provisions contained in the Junior Subordinated Debt. At December 31, 2005, the fair value adjustment on these swaps resulted in a gain totaling $7.4 million and is reflected as a component of other assets. The carrying amount of the $245 million in Junior Subordinated Debt was increased by an identical amount. For the years ended December 31, 2005, 2004 and 2003 these swaps reduced interest expense by $8.1 million, $12.6 million and $12.3 million, respectively. There was no hedge ineffectiveness recorded in the Consolidated Statements of Income from these transactions for each period reported.
As part of our mortgage banking operations, we enter into commitments to originate or purchase loans whereby the interest rate on the loan is determined prior to funding (“interest rate lock commitment”). Interest rate lock commitments on mortgage loans that we intend to sell in the secondary market are considered free-standing derivatives. These derivatives are carried at fair value with changes in fair value recorded as a component of gain on sale of loans. In accordance with Staff Accounting Bulletin No. 105, “Application of Accounting Principles to Loan Commitments”, interest rate lock commitments are initially valued at zero. Changes in fair value subsequent to inception are determined based upon current secondary market prices for underlying loans with similar coupons, maturity and credit quality, subject to the anticipated probability that the loan will fund within the terms of the commitment. The initial value inherent in the loan commitments at origination is recognized through gain on sale of loans when the underlying loan is sold. Both the interest rate lock commitments and the related hedging instruments are recorded at fair value with changes in fair value recorded in current earnings as a component of gain on sale of loans.
Generally, if interest rates increase, the value of our interest rate lock commitments and funded loans decrease and loan sale margins are adversely impacted. We hedge the risk of overall changes in fair value of loans held-for-sale and interest rate lock commitments generally by entering into mandatory commitments to deliver mortgage whole loans to various investors, selling forward contracts on mortgage backed securities of Fannie Mae and Freddie Mac and, to a lesser extent, by using futures and options to economically hedge the fair value of interest rate lock commitments. In accordance with SFAS 133, certain of these positions qualify as fair value hedges against a portion of the funded held-for-sale loan portfolio and result in adjustments to the carrying value of designated loans through gain on sale based on fair value changes attributable to the hedged risk. The forward contracts, futures and options used to economically hedge the loan commitments are accounted for as economic hedges and naturally offset loan commitment mark-to-market gains and losses recognized as a component of gain on sale.
The notional amount of all forward contracts was $1.9 billion at December 31, 2005. Forward contracts designated as fair value hedges associated with mortgage loans held-for-sale had a notional value of $1.5 billion at December 31, 2005. The notional amount of forward contracts used to manage the risk associated with interest rate lock commitments on mortgage loans was $407 million at December 31, 2005.
The following table shows hedge ineffectiveness on fair value hedges included in gain on sale of loans for the years ended December 31,:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 11 -
Income Taxes
The components of the consolidated provision for income taxes are shown below for the years ended December 31,:
The following table reconciles the statutory federal tax rate to the effective tax rate on income before income taxes for the years ended December 31,:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The components of the net deferred tax asset or liability included in “Other Assets” or “Accrued Expenses & Other Liabilities” on the accompanying consolidated balance sheets at December 31, are as follows:
During 2005, the valuation allowance remained at $4.6 million. Management continues to reserve a portion of the New York State and City deferred tax asset due to uncertainties of realization. Additionally, as a result of merging with and acquiring thrifts, retained earnings at December 31, 2005 and 2004 includes approximately $276 million, for which no Federal income tax liability has been recognized. This amount represents the balance of acquired thrift bad debt reserves created for tax purposes as of December 31, 1987. These amounts are subject to recapture in the unlikely event that the Bank makes distributions in excess of earnings and profits, redeems its stock, or liquidates.
NOTE 12 -
Business Segments
In October 2004, we assumed a national mortgage business with the Green Point acquisition. As a result, we have divided our operating activity into two primary business segments: Retail Banking and Mortgage Banking.
The retail banking business provides a full range of banking products and services principally through 355 branches located throughout the New York Metropolitan area. The mortgage banking segment is conducted through GreenPoint Mortgage, which originates, sells and services a wide variety of mortgages secured by 1-4 family residences and small commercial properties, on a nationwide basis.
We changed our segment reporting structure in the fourth quarter of 2004, to reclassify our financial services division into the retail banking segment. The financial services division had previously been reported as a separate operating segment. The products offered by this segment included the sale of alternative investment products (mutual funds and annuities), trust services, discount brokerage and investment management. The primary delivery channel for these products is the retail bank’s branches. As a result of the previously mentioned realignment, this
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
area reports directly to the head of retail banking and from a budgeting and performance measurement perspective it is viewed as a component of the retail bank.
The segment information presented in the table below is prepared according to the following methodologies:
•
Revenues and expenses directly associated with each segment are included in determining net income.
•
Transactions between segments are based on specific criteria or appropriate third party rates.
•
Inter-company eliminations and the sale of our minority interest in a non-public finance company are reflected in the “Other” column.
The following table provides information necessary for a reasonable representation of each segment’s contribution to consolidated net income for the years ended December 31, 2005 and 2004, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The table below represents the components of mortgage banking income for the years ended December 31,:
(1)
GreenPoint Mortgage was acquired on October 1, 2004.
(2)
In accordance with U.S accounting principles, we were required to adjust the historical carrying value of loans classified by GreenPoint as held-for-sale as of the acquisition date to fair value. As a result, the economic gain from the sale of these mortgage loans that would ordinarily be reflected as a component of non-interest income at the date of sale was recorded as a fair value adjustment to the loans, historical carrying vales and reflected as a reduction to goodwill. This fair value adjustment was $(.5) million and $56.4 million at December 31, 2005 and 2004, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 13 -
Mortgage Servicing Rights
Mortgage Servicing Rights (“MSRs”), are recognized when mortgage loans are sold in the secondary market and the right to service these loans are retained for a fee. MSRs are carried at the lower of the initial carrying value, adjusted for amortization or fair value. MSRs are amortized in proportion to, and over the period of, estimated net servicing income. The amortization of MSRs is periodically analyzed and adjusted to reflect changes in prepayment speeds.
MSRs are periodically evaluated for impairment based on the difference between the carrying amount and current fair value. To evaluate and measure impairment, the underlying loans are stratified based on certain risk characteristics, including loan type, note rate and investor servicing requirements. If it is determined that temporary impairment exists, a valuation allowance is established by risk stratification through a charge to earnings for any excess of amortized cost over the current fair value. If determined in future periods that all or a portion of the temporary impairment no longer exists for a particular risk stratification, the valuation allowance is reduced by increasing earnings.
The following table sets forth the changes in the carrying value and fair value of mortgage servicing rights at December 31,:
The significant assumptions used in estimating the fair value of the servicing assets at December 31, 2005 and 2004 were as follows:
At December 31, 2005, the sensitivities to immediate 10% and 20% increases in the weighted average prepayment rates would decrease the fair value of mortgage servicing rights by $12.9 million and $24.2 million, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes our estimate of amortization of MSR’s for the five-year period ending December 31, 2010. This projection was developed using the assumptions made by management in its December 31, 2005, valuation of MSR’s. The assumptions underlying the following estimate will be affected as market conditions and portfolio composition and behavior change, causing both actual and projected amortization levels to change over time. Therefore, the following estimates will change in a manner and amount not presently determinable by management.
NOTE 14 -
Representation and Warranty Reserve
The representation and warranty reserve is available to cover probable losses inherent with the sale of loans in the secondary market. In the normal course of business, certain representations and warranties are made to investors at the time of sale, which permit the investor to return the loan to us or require us to indemnify the investor (make whole) for any losses incurred by the investor while the loan remains outstanding. The representation and warranty reserve is included in accrued expenses and other liabilities on the consolidated balance sheet.
A summary of the changes in the representation and warranty reserve is shown below for the years ended December 31,:
NOTE 15 -
Retirement and Other Employee Benefit Plans
We maintain a defined benefit pension plan (the “Plan” or the “North Fork Plan”) covering substantially all full-time employees. Pension expense is recognized over the employee’s service life utilizing the projected unit cost actuarial method. Participants accrue a benefit each year equal to five percent of their annual compensation, as defined, plus a rate of interest based on the one-year Treasury Bill rate, credited quarterly. Plan assets are invested in a diversified portfolio of mutual funds, fixed income securities, and equity securities. Contributions are periodically made to the Plan so as to comply with the Employee Retirement Income Security Act (“ERISA”) funding standards and the Internal Revenue Code of 1986, as amended.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
TCNJ maintained two defined benefit retirement plans covering substantially all employees who completed one year of continuous service. Effective June 30, 2004, benefits under these plans were frozen and participants in these plans became eligible to participate in the North Fork Plan effective July 1, 2004.
GreenPoint maintained a defined benefit retirement plan covering substantially all employees who completed one year of service. Effective October 1, 2004, the GreenPoint Cash Balance Plan was merged into the North Fork Plan. The plan provisions for former GreenPoint employees were unchanged after the merger.
Health care and life insurance benefits are also provided to eligible retired employees. Health care benefits received range up to 100% of coverage premiums based on an employee’s age, years of service and retirement date.
The following table sets forth changes in the benefit obligations, plan assets and a reconciliation of the funded status and the assumptions used in determining the net periodic cost included in the accompanying consolidated financial statements at December 31 for the Company’s retirement and post-retirement plans. The Plans were valued using a December 31 measurement date.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
To develop the expected long-term rate of return on plan assets assumption, consideration was given to the current level of expected returns on risk free investments (primarily government bonds), the historical level of the risk premium associated with the other asset classes in which the portfolio is invested and the expectations for future returns of each asset class. The expected return for each asset class was then weighted based on the target asset allocation to develop the expected long-term rate of return on assets assumption for the portfolio. This resulted in the selection of the 7.50% assumption for the year ended December 31, 2005.
The components of net periodic benefit cost follow for the years ended December 31,
The following table sets forth the assumed health care costs trend rates at December 31,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage point change in assumed health care cost trend would have the following effects:
Cash Flows
The following benefit payments, which reflect expected future service are expected to be paid:
Contributions
No contributions are expected to be made to the qualified pension plan during 2006, while $.7 million and $1.9 million are expected to be made to the non-qualified pension plan and other post-retirement benefit plan, respectively, in 2006.
Plan Asset Allocation
The plan’s weighted-average asset allocations at December 31, 2005 and 2004, by asset category are as follows:
The investment guidelines adopted by the Retirement Committee for the Plan provide the following asset allocation requirements and limitations:
•
Equity Securities: Not more than 60% of assets
•
Debt Securities: Not more than 40% of assets
The guidelines specify equity allocations as follows: 1) Large Capitalization Value of 30% to 40%, 2) Large Capitalization Growth of 20% to 30%, 3) Middle Capitalization of 10% to 20%, 4) Smaller Capitalization of 5% to 15% and, 5) Diversified International of 10% to 20%.
Debt securities are limited by the investment guidelines to United States Government obligations or corporate issues rated Baa or higher by Standard & Poor’s or Moody’s. Cash equivalent securities may be viewed as
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
alternative investment vehicles and are limited by the guidelines to mutual funds consisting of instruments issued by the United States Government, United States Treasury, Federal Reserve System or Federal Home Loan Bank, or mutual funds consisting of commercial paper issued by a domestic corporation rated “prime” by the National Credit Office, or of individual fixed income instruments rated A or P1 or higher, maturing in 180 days or less.
The guidelines require that the Plan’s performance be reviewed periodically by comparing total rates of return to specified market indices.
The Company maintains a Supplemental Executive Retirement Plan (“SERP”), that restores to specified senior executives the full level of retirement benefits they would have been entitled to receive absent the ERISA provision limiting maximum payouts under tax qualified plans. The projected benefit obligation, which is unfunded, was $632 thousand at December 31, 2005 and $585 thousand at December 31, 2004. Net periodic pension expense of $104 thousand was recognized in 2005 and net periodic pension income of $41 thousand was recognized in 2004, while net periodic expense incurred in 2003 for the SERP was $103 thousand. The weighted average discount rate utilized in determining the projected benefit obligation was 5.50%, 5.75% and 6.00% at December 31, 2005, 2004 and 2003, respectively. The assumed rate of future compensation increases was 4.50% at December 31, 2005, 2004 and 2003. The Company expects to make a contribution to this plan of $.7 million in 2006.
A savings plan is maintained under section 401(k) of the Internal Revenue Code and covers substantially all current full-time and certain part-time employees. Newly hired employees can elect to participate in the savings plan after completing three months of service. Under the provisions of the savings plan, employee contributions are partially matched by the Company with cash contributions. Participants can invest their account balances into several investment alternatives, including shares of the Company’s common stock. 401(k) plan expense was $9.7 million, $4.7 million and $3.4 million for the years ended December 31, 2005, 2004, and 2003, respectively.
Bank Owned Life Insurance
At December 31, 2005 and 2004, we maintained three Bank Owned Life Insurance Trusts (commonly referred to as BOLI) on the consolidated balance sheet. The BOLI trusts were formed to offset future employee benefit costs and to provide additional benefits due to its tax exempt nature. Only officer level employees, who have consented, have been insured under the program.
The underlying structure of the initial BOLI trust formed requires that the assets supporting the insurance policies be reported on the consolidated balance sheets, principally as a component of the available-for-sale securities portfolio and the related income to be characterized as either interest income or gain/(loss) on sale of securities. At December 31, 2005 and 2004, $216.8 million and $215.1 million, respectively were held by the trust and are principally included in the available-for-sale securities portfolio. Based on the underlying structures of the other two BOLI trusts the cash surrender values (“CSV”) of the life insurance policies held by the trusts are required to be classified as other assets on the consolidated balance sheet and the related income/(loss) be characterized as other income. The cash surrender value of the policies held by these trusts were $208.8 million and $203.4 million at December 31, 2005 and 2004, respectively.
NOTE 16 -
Common Stock Plans
The Company maintains stock incentive plans for all eligible employees providing for grants of stock options and restricted stock awards. Options to purchase common stock are granted by the Compensation Committee of the Board of Directors at the average market price on the date of grant, generally vest within six months from issuance and have a ten-year expiration period. The Company has not, nor does it anticipate, repricing any stock options.
Restricted stock awards granted by the Compensation Committee are forfeitable and subject to certain restrictions on the part of the recipient until ownership of the shares vest. The Committee can, at its discretion, accelerate the removal of any and all restrictions. If the Company is party to a merger, consolidation, sale of substantially all assets, or similar transaction, all restrictions will lapse.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
New Employee Stock Compensation Plan
The plan provides for non-qualified stock options and restricted stock awards, to be granted either separately or in combination to all eligible persons not previously employed by the Company in connection with their entering into such an employment relationship. The number of shares issuable thereunder, either as restricted stock or non-qualified stock options is 1,500,000 shares. At December 31, 2005, 822,650 shares remain authorized and unissued.
Stock Compensation Plan
The plan provides for non-qualified stock options and restricted stock awards, to be granted either separately or in combination to all eligible employees. The number of shares issuable thereunder is 7,500,000, with no more than 4,950,000 authorized for restricted stock awards. At December 31, 2005, 1,987,456 shares remained authorized and unissued.
GreenPoint 1999 Stock Incentive Plan
This plan was assumed and retained as part of the GreenPoint acquisition. The plan provides for non-qualified stock options and restricted stock awards, to be granted either separately or in combination to all eligible employees. The number of shares issuable thereunder is 1,228,193, with no more than 300,000 authorized for restricted stock awards. At December 31, 2005, 707,922 shares remained authorized and unissued.
Stock Compensation Plan
The plan provides for non-qualified stock options and restricted stock awards, to be granted either separately or in combination to all eligible employees. The number of shares issuable thereunder is 7,500,000, with no more than 4,950,000 authorized for restricted stock awards. At December 31, 2005, 25,185 shares remained authorized and unissued.
Stock Compensation Plan
The plan provides for non-qualified stock options and restricted stock awards, to be granted either separately or in combination to all eligible employees. The number of shares issuable thereunder is 2,250,000 with no more than 1,500,000 authorized for restricted stock awards. At December 31, 2005, 6,984 shares remain authorized and unissued.
Acquired Stock Plans
Certain previously acquired companies maintained incentive and non-qualified stock option plans for their officers, directors, and other key employees. Options outstanding, under these plans at the acquisition date were vested upon change in control. At December 31, 2005, 7,817,392 stock options remained outstanding under these plans at an average price of $17.52. No further awards will be made under these assumed plans.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following is a summary of the activity in the aforementioned stock option plans for the three-year period ended December 31,
The following is a summary of the information concerning outstanding and exercisable stock options as of December 31, 2005:
The following is a summary of activity in restricted stock for the years ended December 31,
Restricted stock awards are recorded as deferred compensation, a component of stockholders’ equity, at fair value at the date of grant and amortized to compensation expense over the specified vesting periods.
Compensation expense related to restricted stock awards included in employee compensation and benefits was $21.2 million, $14.7 million, and $10.3 million in 2005, 2004 and 2003, respectively.
As permitted under SFAS 123, as amended by SFAS 148, management has elected to apply the intrinsic value method in accounting for its stock-based compensation plans. Accordingly, compensation expense has not been
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
recognized in the accompanying statements of income for its stock-based compensation plans, other than for restricted stock awards. Had compensation expense been recognized for the fair value of options awarded consistent with the methodology prescribed, pro-forma net income and earnings per share would have been as follows for the years ended December 31,
For purposes of the pro-forma amounts, the fair value of stock options granted were estimated using the Black-Scholes option-pricing model at the date of grants. The weighted average assumptions used in the computations are as follows:
Dividend Reinvestment and Stock Purchase Plan
The Dividend Reinvestment and Stock Purchase Plan provides stockholders with a method of purchasing additional common stock through the reinvestment of cash dividends and/or making optional cash payments, within certain specified limits, without brokerage commissions. At December 31, 2005, 2,350,780 shares remain authorized and unissued.
Change-in-Control Arrangements
Certain key executive officers have arrangements that provide for the payment of a multiple of base salary, should a change-in control, as defined, occur. These payments are limited under guidelines for deductibility pursuant to the Internal Revenue Code. Also, in connection with a potential change-in-control, certain performance plans were adopted in which substantially all employees could participate in a cash distribution. The amount of the performance plan cash fund would be established when a change-in-control transaction occurs that exceeds industry averages and achieves an above average return for shareholders. A limitation is placed on the amount of the fund and no performance pool is created if the transaction does not exceed industry averages.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 17 -
Other Commitments and Contingent Liabilities
Credit Related Commitments
We offer traditional off-balance sheet financial products to meet the financing needs of our customers through both our retail banking and mortgage banking segments. They include commitments to extend credit, lines of credit and letters of credit. Funded commitments are reflected in the consolidated balance sheets as loans.
Retail Banking
Our retail banking segment provides the following types of off-balance sheet financial products to customers:
Commitments to extend credit are agreements to lend to customers in accordance with contractual provisions. These commitments usually have fixed expiration dates or other termination clauses and may require the payment of a fee. Total commitments outstanding do not necessarily represent future cash flow requirements, since many commitments expire without being funded.
Each customer’s creditworthiness is evaluated prior to issuing these commitments and may require the customer to pledge certain collateral prior to the extension of credit. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing properties. Fixed rate commitments are subject to interest rate risk based on changes in prevailing rates during the commitment period. We are subject to credit risk in the event that the commitments are drawn upon and the customer is unable to repay the obligation.
Letters of credit are irrevocable commitments issued at the request of customers. They authorize the beneficiary to draw drafts for payment in accordance with the stated terms and conditions. Letters of credit substitute a bank’s creditworthiness for that of the customer and are issued for a fee commensurate with the risk.
We typically issue two types of letters of credit: Commercial (documentary) Letters of Credit and Standby Letters of Credit. Commercial Letters of Credit are commonly issued to finance the purchase of goods and are typically short term in nature. Standby letters of credit are issued to back financial or performance obligations of a bank customer, and are typically issued for periods up to one year. Due to their long-term nature, standby letters of credit require adequate collateral in the form of cash or other liquid assets. In most instances, standby letters of credit expire without being drawn upon. The credit risk involved in issuing letters of credit is essentially the same as extending credit facilities to comparable customers.
The following table presents total commitments and letters of credit outstanding for the retail banking segment at December 31, 2005:
(1)
At December 31, 2005, commitments to extend credit on loans held-for-investment with maturities of less than one year totaled $2.3 billion, while $1.9 billion mature between one to three years.
(2)
Standby letters of credit are considered guarantees and are reflected in other liabilities in the accompanying Consolidated Balance Sheet at their estimated fair value of $1.7 million as of December 31, 2005. The fair value of these instruments is recognized as income over the initial term of the guarantee.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Mortgage Banking
At December 31, 2005, the pipeline of residential mortgage loans (including Home Equity Lines of Credit) was $5.3 billion and included $1.3 billion of fixed rate loans and $4.0 billion of adjustable rate loans. The pipeline represents total applications received but not yet funded.
We are also contractually committed to fund the undrawn portion of Home Equity Lines of Credit (HELOCs), which were previously originated. This commitment extends to both HELOCs held-for-sale and those previously sold with servicing retained.
The following table presents the mortgage banking segment’s commitments and home equity lines of credit outstanding at December 31, 2005:
(1)
At December 31, 2005 commitments to originate mortgage loans held-for-sale, included $1.3 billion in fixed rate mortgages and $4.0 billion of adjustable rate mortgage loans.
Lease Commitments
At December 31, 2005, we were obligated under a number of non-cancelable leases for certain premises and equipment. The minimum annual rental commitments, exclusive of taxes and other charges, under non-cancelable lease agreements for premises at December 31, 2005, are summarized as follows:
The majority of these leases contain periodic escalation clauses and it is anticipated that expiring leases should be renewed or replaced by leases on other properties.
Rent expense for the years ended December 31, 2005, 2004 and 2003 amounted to $71.6 million, $39.8 million and $24.5 million, respectively.
Litigation
We are subject to certain pending and threatened legal actions that arise out of the normal course of business. Management believes that the resolution of any pending or threatened litigation will not have a material adverse effect on the Company’s financial condition or results of operations.
NOTE 18 -
Disclosures About Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107 “Disclosures About Fair Value of Financial Instruments” (“SFAS 107”) requires the Company to disclose estimated fair values for its financial instruments. Fair value
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
estimates are made at a specific point in time, based on relevant market data and information about the financial instrument. SFAS 107 has no effect on the financial position or results of operations in the current year or any future period. Furthermore, the fair values disclosed under SFAS 107 are not representative of the total value of the Company.
If quoted market prices are not available, SFAS 107 permits using the present value of anticipated future cash flows to estimate fair value. Accordingly, the estimated fair value will be influenced by prepayment and discount rate assumptions. This method may not provide the actual amount that would be realized in the ultimate sale of the financial instrument.
Cash, Cash Equivalents and Securities
The carrying amounts for cash and cash equivalents are reasonable estimates of fair value. The fair value of securities is estimated based on quoted market prices as published by various quotation services, or if quoted market prices are not available, on dealer quotes. The following table presents the carrying value and estimated fair value of cash, cash equivalents and securities at December 31,
Loans
Fair values are estimated for portfolios of loans with similar financial characteristics. The fair value of performing loans is calculated by discounting the estimated cash flows through expected maturity or repricing using the current rates at which similar loans would be made to borrowers with similar credit risks. For non-performing loans, the present value is separately discounted consistent with management’s assumptions in evaluating the adequacy of the allowance for loan losses. The following table presents the carrying amount and the estimated fair value of the loan portfolio as of December 31,
Mortgage Servicing Rights
To determine fair value, a valuation model that calculates the present value of estimated future net servicing income, is utilized. We use assumptions in the valuation model that market participants use when estimating future
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
net servicing income, including prepayment speeds, discount rates, default rates, cost to service, escrow account earnings, contractual servicing fee income, ancillary income and late fees.
Deposit Liabilities and Borrowings
The carrying amounts for demand deposits, savings, NOW, money market accounts and borrowings with an interest sensitive period of 90 days or less are reasonable estimates of their fair values. Fair values for time deposits and borrowings are estimated by discounting the future cash flows using the rates currently offered for deposits and borrowings of similar remaining maturities.
The following table presents the carrying amount and estimated fair value of the deposits and borrowings as of December 31,
Commitments to Extend Credit and Letters of Credit
These financial instruments generally are not sold or traded, and estimated fair values are not readily available. However, the fair value of commitments to extend credit and letters of credit is based on fees currently charged to enter into similar agreements with comparable credit risks and the current creditworthiness of the counterparties. Commitments to extend credit issued by the Company are generally short-term in nature and, if drawn upon, are issued under current market terms and conditions for credits with comparable risks. At December 31, 2005 and 2004, there was no significant unrealized appreciation or depreciation on these financial instruments.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 19 -
Parent Company Only
Condensed Balance Sheets at December 31,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Condensed Statements of Income For the Years Ended December 31,
Condensed Statements of Cash Flows For the Years Ended December 31,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 20 -
Capital
We are subject to the risk based capital guidelines administered by bank regulatory agencies. The 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 certain 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 certain 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 (“Total Risk Adjusted Capital Ratio”) of 8%, including Tier 1 capital to total risk weighted assets (“Tier 1 Capital Ratio”) of 4% and a Tier 1 capital to average total assets (“Leverage Ratio”) of at least 4%. 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 us.
The regulatory agencies have amended the risk-based capital guidelines to provide for interest rate risk consideration when determining a banking institution’s capital adequacy. The amendments require institutions to effectively measure and monitor their interest rate risk and to maintain capital adequate for that risk.
As of December 31, 2005, the most recent notification from the various regulators categorized the Company and its subsidiary banks as well capitalized under the regulatory framework for prompt corrective action. Under the capital adequacy guidelines require a well capitalized institution to maintain a Total Risk Adjusted Capital Ratio of at least 10%, a Tier 1 Capital Ratio of at least 6%, a Leverage Ratio of at least 5%, and not be subject to any written order, agreement or directive. Since such notification, there are no conditions or events that management believes would change this classification.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table sets forth the Company’s risk-based capital amounts and ratios as of December 31,:
The Leverage Ratio at December 31, 2005 and 2004 was 6.70% and 6.22%, respectively.
The capital ratios of the subsidiary banks are as follows at December 31, 2005:
Under the provisions of our share repurchase program previously authorized by the Board of Directors, we repurchased 14.9 million shares at an average cost of $26.24 during 2005. As of December 31, 2005, 2.4 million shares were available to be purchased under the program. On January 24, 2006, the Board of Directors authorized the repurchase of an additional 12 million shares increasing the total remaining authorized for repurchase to 14.4 million. As of March 6, 2005, 5.1 million shares remain available to be purchased under the program. The current program has no fixed expiration date. Repurchases are made in the open market or through privately negotiated transactions.
The primary funding source of the Company is dividends from North Fork Bank. There are various federal and state banking laws and guidelines limiting the extent to which a bank subsidiary can finance or otherwise supply funds to its holding company. At December 31, 2005, dividends from North Fork Bank were limited under such guidelines to $1.3 billion. From a regulatory standpoint, North Fork Bank with its current balance sheet structure had the ability to dividend approximately $1.1 billion while still meeting the criteria for designation as a well-capitalized institution under existing regulatory capital guidelines. Additional sources of liquidity include borrowings, the sale of available-for-sale securities, mortgage loans held-for-sale, funds available through the capital markets and dividends from other subsidiaries.
Federal Reserve Board policy provides that, as a prudent banking practice, a bank holding company generally should not maintain a rate of cash dividends unless its net income available to common stockholders is sufficient to fund the dividends, and the prospective rate of earnings retention appears to be consistent with the holding company’s capital needs, asset quality and overall financial condition. In addition, among other things, dividends from a New York-chartered bank, such as North Fork Bank, are limited to the bank’s net profits for the current year plus its prior two years’ retained net profits.
Under federal law, a depository institution is prohibited from paying a dividend if the depository institution would thereafter be “undercapitalized” as determined by the federal bank regulatory agencies. The relevant federal regulatory agencies and the state regulatory agency, the Banking Department, also have the authority to prohibit a bank or bank holding company from engaging in what, in the opinion of such regulatory body, constitutes an unsafe or unsound practice in conducting its business.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
North Fork Bank and Superior Savings of New England were required to maintain, in aggregate, required reserves, either in cash or on deposit with the Federal Reserve Bank $295 million and $225 million in 2005 and 2004, respectively.
NOTE 21 -
Sale of Manufactured Housing Operations
In the fourth quarter of 2004, we completed the sale of the manufactured housing operating platform of GreenPoint Credit LLC, (“GPC”), previously accounted for as discontinued operations by GreenPoint. As a condition of the transaction, the purchaser assumed the obligation to reimburse us, if necessary, for the final $165 million of losses on $399 million of corporate guarantees related to $2.5 billion of GPC securitizations remaining as of December 31, 2005. Certain corporate guarantees have been funded and the residual remains unfunded letters of credit. The expected letter of credit draws that remain unfunded are recorded as liabilities for recourse, and included in accrued expenses and other liabilities, while the expected net residual balances on funded corporate guarantees are reflected in other assets in the consolidated balance sheet. Additionally, the purchaser assumed all recourse obligations related to former GPC sales of certain whole loans to Freddie Mac and commitments to exercise the mandatory clean-up calls on certain of the securitizations.
North Fork retains the primary obligation for all of the provisions of the corporate guarantees, recourse sales and clean-up calls. Management will continue to monitor the underlying assets for trends in delinquencies and related losses. In addition, we will review the purchaser’s financial strength and their performance in servicing the loans. These factors will be considered in assessing the appropriateness of the reserves established against these obligations and the valuations of the assets.
As of December 31, 2005, the principal balance outstanding for these securitizations totaled $2.5 billion, the recorded liabilities for expected unfunded draws were $45 million and the funded net receivable balances amounted to $100 million. These amounts were calculated utilizing weighted average prepayment and default rates of 5.9% and 8.4% respectively. These factors along with assumed loss severity and weighted average loss rates of 93% and 7.9% respectively, result in an estimated cumulative loss rate of 33%. The discount rate used to establish these amounts was 10%.
NOTE 22 -
Quarterly Financial Information - (Unaudited)
Selected Quarterly Financial Information for the years ended December 31, 2005 and 2004 are as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 23 -
Recent Accounting Pronouncements
The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments
In November 2005, the FASB issued Financial Staff Position No. 115-1, which addresses the determination of when an investment is considered impaired, whether the impairment is other-than-temporary and how to measure an impairment loss. FSP No. 115-1 also addresses accounting considerations subsequent to the recognition of an other-than-temporary impairment on a debt security and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. FSP No. 115-1 replaces the impairment guidance in Emerging Issues Task Force Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” with references to existing authoritative literature concerning other-than-temporary impairment determinations (principally SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and SEC Staff Accounting Bulletin No. 59, “Accounting for Non-current Marketable Securities”). Under FSP No. 115-1, impairment losses must be recognized in earnings for the difference between the security’s cost and its fair value at the financial statement date, without considering partial recoveries subsequent to that date. FSP No. 115-1 also requires that an investor recognize an other-than-temporary impairment loss when a decision to sell a security has been made and the investor does not expect the fair value of the security to fully recover prior to the expected time of sale. FSP No 115-1 is effective for reporting periods beginning after December 15, 2005. We do not expect our application of FSP No. 115-1 to have a material impact on our financial condition or results of operations.
Accounting for Stock Based Compensation
In December 2004, FASB issued SFAS No. 123R - “Accounting for Stock Based Compensation, Share Based Payment”, (SFAS 123R) which replaces the guidance prescribed in SFAS 123. SFAS 123R requires that compensation costs relating to share-based payment transactions be recognized in the financial statements. The associated costs will be measured based on the fair value of the equity or liability instruments issued. SFAS 123R covers wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. SFAS 123R is effective as of the first interim or annual reporting period beginning after June 15, 2005. Adoption of this pronouncement is not expected to have a material impact on our financial condition or results of operations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 24 -
Subsequent Event
On March 12, 2006, North Fork announced that it had entered into an Agreement and Plan of Merger with Capital One Financial Corporation (Capital One) pursuant to which North Fork would merge with and into Capital One, with Capital One continuing as the surviving corporation. Capital One, headquartered in McLean, Virginia, is a financial holding company whose banking and non-banking subsidiaries market a variety of financial products and services. Its primary products and services offered through its subsidiaries include credit card products, deposit products, consumer and commercial lending, automobile and other motor vehicle financing, and a variety of other financial products and services to consumers, small business and commercial clients.
Subject to the terms and conditions of the merger agreement, each holder of North Fork common stock will have the right, subject to proration, to elect to receive, for each share of North Fork common stock, cash or Capital One common stock, in either case having a value equal to $11.25 plus the product of 0.2216 times the average closing sales price of Capital One’s common stock for the five trading days immediately preceding the merger date. Based on Capital One’s closing NYSE stock price of $89.92 on March 10, 2006, the transaction is valued at $31.18 per North Fork share, for a total transaction value of approximately $14.6 billion. North Fork stock options vest upon a change in control and will be converted into options on shares of Capital One’s common stock in connection with the closing, if not exercised before that time. North Fork’s restricted shares outstanding also vest upon a change in control. Each outstanding North Fork restricted share will be converted into the right to receive the per share merger consideration elected by the holder of the North Fork restricted share, subject to proration.
The merger is subject to certain conditions, including approval by North Fork stockholders and Capital One stockholders, receipt of regulatory approvals and other customary closing conditions, and is expected to close in the fourth quarter of 2006.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
North Fork Bancorporation, Inc.:
We have audited the accompanying consolidated balance sheets of North Fork Bancorporation, Inc. and subsidiaries (the “Company”) as of December 31, 2005 and 2004, and the related consolidated statements of income, stockholders’ equity, cash flows, and comprehensive income for each of the years in the three-year period ended December 31, 2005. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of North Fork Bancorporation, Inc. and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 14, 2006 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.
/s/ KPMG LLP
New York, New York
March 14, 2006
Item 9
Item 9
- Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There were no changes in or disagreements with accountants on accounting and financial disclosure as defined in Item 304 of Regulation S-K.
Item 9A
Item 9A
- Controls and Procedures
Management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
a)
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Our system of internal control is designed under the supervision of management, including the Chief Executive Officer and Chief Financial Officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.
Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures are made only in accordance with the authorization of management and the Board of Directors; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that the controls may become inadequate because of changes in conditions or that the degree of compliance with policies and procedures may deteriorate.
As of December 31, 2005, management assessed the effectiveness of the Company’s internal control over financial reporting based upon the framework established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based upon its assessment, management believes that the Company’s internal control over financial reporting as of December 31, 2005 is effective using these criteria.
Management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2005 has been audited by KPMG LLP, an independent registered public accounting firm that audited the consolidated financial statements as of and for the year ended December 31, 2005 as stated in their report below, which expresses unqualified opinions on management’s assessment of and the effectiveness of the internal control over financial reporting as of December 31, 2005.
b) Report Of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
North Fork Bancorporation, Inc.:
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that North Fork Bancorporation, Inc. and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that North Fork Bancorporation, Inc. maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, North Fork Bancorporation, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of North Fork Bancorporation, Inc. and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of income, stockholders’ equity, cash flows, and comprehensive income for each of the years in the three-year period ended December 31, 2005, and our report dated March 14, 2006 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
New York, New York
March 14, 2006
c) Changes in Internal Control Over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B
Item 9B
- Other Information
None
PART III
Item 10
Item 10
- Directors and Executive Officers of the Registrant
For information on the officers of the Company, please see Part I of this Form 10-K under the caption Item 4A - “Executive Officers” of the Registrant. Further information is available regarding both the officers and directors under the caption “Election of Directors and Information with Respect to Directors and Officers” in our Definitive Proxy Statement for our Annual Meeting of Stockholders to be held on April 26, 2006, which is incorporated herein by reference. The Board of Directors has adopted a Code of Ethics for Principal Executives and Senior Financial Officers which is attached hereto as Exhibit 14.
Item 11
Item 11
- Executive Compensation
The information required by this item is set forth in the following sections of our Definitive Proxy Statement for our 2006 Annual Meeting of Stockholders: “Compensation of Directors”, “Executive Compensation”, and “Retirement Plans”, which is incorporated herein by reference.
Item 12
Item 12 -
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
(a) Certain information required by item 12 (a) is set forth in the following sections of our Definitive Proxy Statement for our 2006 Annual Meeting of Stockholders: “Certain Beneficial Ownership” and “Nominees for Director and Directors Continuing in Office”, which is incorporated herein by reference.
(b) Equity Compensation Plan Information
The following table sets forth certain information regarding our equity compensation plans as of December 31, 2005. North Fork’s stockholders approved our 1989 Executive Management Compensation Plan and 1994 Key Employee Stock Plan. No additional grants of awards may be made under these two plans. Our stockholders did not approve our 1997 Non-Officer Stock Plan, 1998, 1999 and 2003 Stock Compensation Plans, New Employee Stock Compensation Plan and 2004 Outside Directors Stock in Lieu of Fees Plan. Additional grants may be made under these plans, although in some cases only if outstanding awards are forfeited or expire unexercised.
We assumed GreenPoint’s 1999 Stock Incentive Plan under which we continue to have the ability to make additional awards. This Plan was approved by GreenPoint’s stockholders but has not been specifically approved by our stockholders. When we acquired GreenPoint, we also assumed several other GreenPoint stock plans, but only for purposes of administering the stock awards made under those plans before the acquisition, which remained outstanding as awards for North Fork stock after acquisition. The plans themselves were frozen; i.e., no new awards may be made thereunder after the acquisition. North Fork has assumed other stock plans of acquired companies in the past, but in each case the plans were frozen at the time of the acquisition.
(1)
Does not include 9,891,488 shares of restricted stock previously awarded under these plans that have not vested as of the specified date. Does not include shares subject to options previously granted under these plans and previously exercised on a deferred delivery basis, even if such shares have not been delivered as of the specified date.
(2)
Includes shares issuable under GreenPoint’s 1999 Plan, which was approved by GreenPoint’s stockholders, but not North Fork’s stockholders. Does not include 7,817,391 shares to be issued upon the exercise of outstanding options awarded under various stock plans of predecessor companies, including GreenPoint, that were assumed by North Fork but “frozen” at the time of the acquisition. The outstanding options issued under “frozen” plans have a weighted average exercise price of $17.52 per share.
Description of Non-Stockholder Approved Plans
We maintain the following seven equity compensation plans that have not been approved by North Fork stockholders (excluding frozen plans of predecessor companies): the 1997 Non-Officer Stock Plan (“1997 Plan”), the 1998 Stock Compensation Plan (“1998 Plan”), the 1999 Stock Compensation Plan (“1999 Plan”), the New Employee Stock Compensation Plan (“New Employee Stock Plan”), the 2003 Stock Compensation Plan (“2003 Plan”), the 2004 Outside Directors Stock in Lieu of Fees Plan (“Directors Plan”), and GreenPoint’s 1999 Plan (although this latter plan was approved by GreenPoint’s stockholders). All of our equity compensation plans are administered by the Compensation and Stock Committee (the “Committee”) of our Board of Directors which determines the amounts and recipients of non-qualified stock options and restricted stock awarded under the plans. In addition, all of the plans operate under similar general terms. For example, each plan authorizes the Committee to grant and establish the terms of awards of non-qualified stock options and restricted stock, within certain limitations. Each plan expressly prohibits the grant of “below market options” (i.e., stock options with an exercise price less than the market price of our common stock on the day of the grant).
There are distinctions among the various plans, including the total number of shares of common stock authorized for grant and the persons eligible to receive awards thereunder. The New Employee Stock Plan authorized the issuance of 1,500,000 shares of common stock, in the form of stock options or restricted stock, and is reserved for grants to newly hired salaried employees to induce them to accept an offer of employment. The 1997 Plan initially authorized the issuance of 375,000 shares of common stock, in the form of stock options or restricted stock, exclusively to employees who are not also “officers” as defined under the plan. The Committee has determined not to grant any additional awards under this plan. The 1998 Plan, 1999 Plan and 2003 Plan permit grants of stock options and restricted stock to all employees. The 1998 Plan authorized a total of 2,250,000 shares, no more than 1,500,000 of which may be granted in the form of restricted stock. The 1999 Plan authorized a total of 7,500,000 shares with no more than 4,950,000 of such shares to be granted in the form of restricted stock. The 2003 Plan authorized a total of 7,500,000 shares; no more than 4,950,000 of such shares may be granted in the form of restricted stock. All share amounts have been adjusted for subsequent stock splits.
We also maintain the 2004 outside Directors Stock in Lieu of Fees Plan that has not been approved by North Fork stockholders. Under the Plan, directors of the Company and its subsidiaries may elect to receive all or a portion
of the fees due to them for their service as directors in the form of North Fork common stock. There are 750,000 shares reserved for issuance under the plan.
In 2004, the Company also assumed GreenPoint’s 1999 Plan. North Fork continues to have the ability to make further grants of stock awards under this plan solely to former GreenPoint employees or to new North Fork employees. The plan authorizes the grant of up to 4,050,000 of shares of common stock in the form of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, performance units and other common stock-based awards.
Additional information required by this item is included elsewhere in this Form 10-K in Item 7, Management’s Discussion and Analysis, - Recent Accounting Pronouncements, and in Item 8, Notes to Consolidated Financial Statements, - Note 1 - “Business and Summary of Significant Accounting Policies” and Note 16 - “Common Stock Plans”.
Item 13
Item 13
- Certain Relationships and Related Transactions
The information required by this item is set forth under the caption “Transactions with Directors, Executive Officers and Associated Persons” in our Definitive Proxy Statement for our 2006 Annual Meeting of Stockholders, which is incorporated herein by reference.
Item 14
Item 14
- Principal Accountant Fees and Services
The information required by this item is set forth under the caption “Audit Fees” in our Definitive Proxy Statement for our 2006 Annual Meeting of Stockholders, which is incorporated herein by reference.
PART IV
Item 15
Item 15
- Exhibits and Financial Statement Schedules
(a) The consolidated financial statements, including notes thereto, and financial schedules required in response to this item are set forth in Part II, Item 8 of this Form 10-K, and can be found on the following pages:
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NORTH FORK BANCORPORATION, INC.
By:
/s/ John A. Kanas
JOHN A. KANAS
President and Chief Executive Officer
Dated: March 10, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
EXHIBIT INDEX
(a)
Management contract or compensatory plan or arrangement.
(b)
The performance plan was amended by the Registrant’s Board of Directors on December 13, 2005. The text amended plan is being finalized and will be filed shortly.