UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

 

 

Commission File No. 001-33732

Northfield Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

 

(732) 499-7200

(Registrant’s telephone number, including area code)

 

Securities Registered Pursuant to Section 12(b) of the Act:

 

 

Securities Registered Pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  YES o     NO þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES o     NO þ

 

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

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

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

 

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES o     NO þ

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, computed by reference to price at which the common equity was last sold on June 30, 2008 was $481,632,906.

 

As of March 2, 2009, there were outstanding 45,544,061 shares of the Registrant’s common stock.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Proxy Statement for the 2009 Annual Meeting of Stockholders of the Registrant (Part III).

 

 

NORTHFIELD BANCORP, INC.

 

ANNUAL REPORT ON FORM 10-K

 

TABLE OF CONTENTS

 

 

 

Forward Looking Statements

 

This Annual Report contains certain “forward-looking statements,” which can be identified by the use of such words as estimate, project, believe, intend, anticipate, plan, seek, and similar expressions. These forward looking statements include:

 

 

These forward-looking statements are subject to significant risks, assumptions, and uncertainties, including, among other things, the following important factors that could affect the actual outcome of future events:

 

 

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

 

Northfield Bancorp, MHC

 

Northfield Bancorp, MHC is a federally-chartered mutual holding company and owns 55.0% of the outstanding shares of common stock of Northfield Bancorp, Inc., as of December 31, 2008. Northfield Bancorp, MHC has not engaged in any significant business activity other than owning the common stock of Northfield Bancorp, Inc., and does not intend to expand its business activities at this time. So long as Northfield Bancorp, MHC exists, it is required to own a majority of the voting stock of Northfield Bancorp, Inc. The home office of Northfield Bancorp, MHC is located at 1731 Victory Boulevard, Staten Island, New York, and its telephone number is (718) 448-1000. Northfield Bancorp, MHC is subject to comprehensive regulation and examination by the Office of Thrift Supervision.

 

Northfield Bancorp, Inc.

 

Northfield Bancorp, Inc. is a federal corporation that completed its initial public stock offering on November 7, 2007. Northfield Bancorp, Inc.’s home office is located at 1410 St. Georges Avenue, Avenel, New Jersey 07001 and the telephone number is (732) 499-7200. Northfield Bancorp, Inc.’s significant business

activities have been holding the common stock of Northfield Bank (the Bank) and investing the proceeds from its initial public offering in short-term investments. Northfield Bancorp, Inc., as the holding company of Northfield Bank, is authorized to pursue other business activities permitted by applicable laws and regulations for subsidiaries of federally-chartered mutual holding companies, which may include the acquisition of banking and financial services companies. We have no plans for any mergers or acquisitions, or other diversification of the activities of Northfield Bancorp, Inc. at the present time. In addition to the Bank, Northfield Bancorp, Inc. also owns Northfield Investments, Inc., a New Jersey investment company, which currently is inactive. When we use the term “Company,” “We,” or “Our” we are referring to the activities of Northfield Bancorp, Inc. and its consolidated subsidiaries. When we refer to the holding company we are referring to the stand-alone activities of Northfield Bancorp, Inc. When we refer to the “Bank” we are referring to the activities of Northfield Bank and its consolidated subsidiaries.

 

Our cash flow depends on the cash proceeds we retained from our initial public stock offering, earnings on our investments, and from dividends received from Northfield Bank. Northfield Bancorp, Inc. neither owns nor leases any property from outside parties, but instead uses the premises, equipment, and furniture of Northfield Bank. At the present time, we employ as officers only certain persons who are also officers of Northfield Bank and we use the support staff of Northfield Bank from time to time. These persons are not separately compensated by Northfield Bancorp, Inc. Northfield Bancorp, Inc. reimburses Northfield Bank for significant costs incurred by the Bank on its behalf. Northfield Bancorp, Inc. may hire additional employees, as appropriate, to the extent it expands its business in the future.

 

Northfield Bank

 

Northfield Bank was organized in 1887 and is currently a federally chartered savings bank. Northfield Bank conducts business from its home office located at 1731 Victory Boulevard, Staten Island, New York and its 17 additional branch offices located in New York and New Jersey. The branch offices are located in the New York counties of Richmond (Staten Island) and Kings (Brooklyn) and the New Jersey counties of Union and Middlesex. The telephone number at Northfield Bank’s home office is (718) 448-1000.

 

Northfield Bank’s principal business consists of originating commercial real estate loans and multifamily real estate loans, purchasing investment securities including mortgage-backed securities and corporate bonds, as well as depositing funds in other financial institutions. Northfield Bank also offers construction and land loans, commercial and industrial loans, one- to four-family residential mortgage loans, and home equity loans and lines of credit. Northfield Bank offers a variety of deposit accounts, including certificates of deposit, passbook, statement, and money market savings accounts, transactions deposit accounts (Negotiable Orders of Withdrawal (NOW) accounts and non-interest bearing demand accounts), and individual retirement accounts. Deposits are Northfield Bank’s primary source of funds for its lending and investing activities. Northfield Bank also uses borrowed funds as a source of funds, principally from the Federal Home Loan Bank of New York. In addition to traditional banking services, Northfield Bank offers insurance products through NSB Insurance Agency, Inc. Northfield Bank owns 100% of NSB Services Corp., which, in turn, owns 100% of the voting common stock of a real estate investment trust, NSB Realty Trust, which holds mortgage loans and other investments.

 

Available Information

 

Northfield Bancorp, Inc. is a public company, and files interim, quarterly, and annual reports with the Securities and Exchange Commission. These respective reports are on file and a matter of public record with the Securities and Exchange Commission and may be read and copied at the Securities and Exchange Commission’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the Securities and Exchange Commission at 1-800-SEC-0330. The Securities and Exchange Commission maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC (http://www.sec.gov).

Our website address is www.eNorthfield.com. Information on our website should not be considered a part of this annual report.

 

Market Area and Competition

 

We have been in business for over 120 years, offering a variety of financial products and services to meet the needs of the communities we serve. Our retail banking network consists of multiple delivery channels including full-service banking offices, automated teller machines, and telephone and internet banking capabilities. We consider our competitive products and pricing, branch network, reputation for superior customer service, and financial strength, as our major strengths in attracting and retaining customers in our market areas.

 

We face intense competition in our market areas both in making loans and attracting deposits. Our market areas have a high concentration of financial institutions, including large money center and regional banks, community banks, and credit unions. We face additional competition for deposits from money market funds, brokerage firms, mutual funds, and insurance companies. Some of our competitors offer products and services that we do not offer, such as trust services and private banking.

 

In addition, recent turmoil in the United States and world economies, and more specifically in the financial services industry, has resulted in financial services companies such as investment banking institutions, and automobile and real estate finance companies, electing to become bank holding companies. These financial services companies have traditionally received their funding from sources other than insured bank deposits. Many of the alternative funding sources traditionally utilized by these companies is no longer available and has resulted in these companies relying more on insured bank deposits to fund their operations, increasing competition for deposits and related costs of such deposits.

 

Our deposit sources are primarily concentrated in the communities surrounding our banking offices in the, New York Counties of Richmond (Staten Island) and Kings (Brooklyn), and Union, and Middlesex Counties in New Jersey. As of June 30, 2008 (the latest date for which information is publicly available), we ranked fifth in deposit market share, with a 7.61% market share, in the Staten Island market area. In Middlesex and Union Counties in New Jersey, as of June 30, 2008, we ranked 23rd, on a combined basis, with a 0.66% market share.

 

Lending Activities

 

Our principal lending activity is the origination of commercial real estate loans and multifamily real estate loans. We also originate one- to four-family residential real estate loans, construction and land loans, commercial and industrial loans, and home equity loans and lines of credit.

Loan Portfolio Composition.  The following table sets forth the composition of our loan portfolio, by type of loan at the dates indicated, excluding loans held for sale of $0, $270,000, $125,000, $0, and $99,000 at December 31, 2008, 2007, 2006, 2005, and 2004, respectively.

 

 

Loan Portfolio Maturities.  The following table summarizes the scheduled repayments of our loan portfolio at December 31, 2008. Demand loans (loans having no stated repayment schedule or maturity) and overdraft loans are reported as being due in the year ending December 31, 2009. Maturities are based on the final contractual payment date and do not reflect the effect of prepayments and scheduled principal amortization.

 

 

 

The following table sets forth the scheduled repayments of fixed- and adjustable-rate loans at December 31, 2008, that are contractually due after December 31, 2009.

 

 

Commercial Real Estate Loans.  Prior to 2008 our principal lending activity had been the origination of commercial real estate loans. During 2008, the Company focused on originating multifamily real estate loans. Commercial real estate loans totaled $289.1 million, or 49.05% of our loan portfolio as of December 31, 2008. Commercial real estate loans at December 31, 2008 included $31.3 million in hotels and motels, $44.6 million in office buildings, and $128.9 million in owner-occupied businesses. At December 31, 2008, our commercial real estate loan portfolio consisted of 333 loans with an average loan balance of approximately $868,000 although there are a large number of loans with balances substantially greater than this average. At December 31, 2008, our largest commercial real estate loan had a principal balance of $9.9 million, and was secured by a hotel. At December 31, 2008, this loan was performing in accordance with its original contractual terms.

 

Substantially all of our commercial real estate loans are secured by properties located in our primary market areas.

 

Our commercial real estate loans typically amortize over 20- to 25-years with interest rates that adjust after an initial five- or 10-year period, and every five years thereafter. Margins generally range from 275 basis points to 350 basis points above the average yield on United States Treasury securities, adjusted to a constant maturity of similar term, as published by the Federal Reserve Board. Recently, variable rate loan originations have been indexed to the five year London Interbank Offering Rate (LIBOR) swaps rate plus a negotiated margin, as published in the Federal Reserve Statistical Release. We also originate, to lesser extent, 10- to 15-year fixed-rate, fully amortizing loans. In general, our commercial real estate loans have interest rate floors

equal to the interest rate on the date the loan is originated, and have prepayment penalties should the loan be repaid in the first three to five years.

 

In the underwriting of commercial real estate loans, we lend up to the lesser of 75% of the property’s appraised value or purchase price. We base our decision to lend primarily on the economic viability of the property and the creditworthiness of the borrower. In evaluating a proposed commercial real estate loan, we emphasize the ratio of the property’s projected net cash flow to the loan’s debt service requirement (generally requiring a minimum ratio of 120%), computed after deduction for a vacancy factor, where applicable, and property expenses we deem appropriate. Personal guarantees are usually obtained from commercial real estate borrowers. We require title insurance, fire and extended coverage casualty insurance, and, if appropriate, flood insurance, in order to protect our security interest in the underlying property. Although a significant portion of our commercial real estate loans are referred by brokers, we underwrite all commercial real estate loans in accordance with our underwriting standards.

 

Commercial real estate loans generally carry higher interest rates and have shorter terms than one- to four-family residential real estate loans. Commercial real estate loans generally have greater credit risks compared to one- to four-family residential real estate loans, as they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment of loans secured by income-producing properties typically depends on the successful operation of the property, as repayment of the loan generally is dependent, in large part, on sufficient income from the property to cover operating expenses and debt service. Changes in economic conditions that are not in the control of the borrower or lender could affect the value of the collateral for the loan or the future cash flow of the property. Additionally, any decline in real estate values may be more pronounced for commercial real estate than residential properties.

 

Multifamily Real Estate Loans.  Loans secured by multifamily and mixed use properties real estate loans totaled approximately $108.5 million, or 18.41% of our total loan portfolio, at December 31, 2008. Mixed use properties classified as mulitfamily are defined by the Company as having more than four residential family units and a business or businesses. At December 31, 2008, we had 100 multifamily real estate loans with an average loan balance of approximately $1.1 million. At December 31, 2008, our largest multifamily real estate loan had a principal balance of $8.0 million and was performing in accordance with its original contractual terms. Substantially all of our multifamily real estate loans are secured by properties located in our market areas.

 

Our multifamily real estate loans typically amortize over 20- to 25-years with interest rates that adjust after an initial five- or 10-year period, and every five years thereafter. Margins generally range from 275 basis points to 350 basis points above the average yield on United States Treasury securities, adjusted to a constant maturity of similar term, as published by the Federal Reserve Board. Recently, variable rate loan originations have been indexed to the five year LIBOR swaps rate plus a negotiated margin, as published in the Federal Reserve Statistical Release. We also originate, to lesser extent, 10- to 15-year fixed-rate, fully amortizing loans. In general, our multifamily real estate loans have interest rate floors equal to the interest rate on the date the loan is originated, and have prepayment penalties should the loan be prepaid in the first three to five years.

 

In underwriting multifamily real estate loans, we consider a number of factors, including the projected net cash flow to the loan’s debt service requirement (generally requiring a minimum ratio of 115%), the age and condition of the collateral, the financial resources and income level of the borrower, and the borrower’s experience in owning or managing similar properties. Multifamily real estate loans are originated in amounts up to 75% of the appraised value of the property securing the loan. We typically do not obtain personal guarantees from multifamily real estate borrowers.

 

Loans secured by multifamily real estate properties generally have greater credit risk than one- to four-family residential real estate loans. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income producing properties, and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by multifamily real estate properties typically

depends on the successful operation of the property. If the cash flow from the project is reduced, the borrower’s ability to repay the loan may be impaired.

 

Construction and Land Loans.  At December 31, 2008, construction and land loans totaled $52.2 million, or 8.85% of total loans receivable. At December 31, 2008, the additional unadvanced portion of these construction loans totaled $20.1 million. At December 31, 2008, we had 63 construction and loan loans with an average loan balance of approximately $828,000. At December 31, 2008, our largest construction and land loan had a principal balance of $5.0 million and was for the purpose of purchasing land. This loan is performing in accordance with its original contractual terms.

 

Our construction and land loans are typically interest only loans with interest rates that are tied to an index that typically is prime. Margins generally range from zero basis points to 200 basis points above the prime rate index. We also originate, to lesser extent, 10- to 15-year fixed-rate, fully amortizing land loans. In general, our construction and land loans have interest rate floors equal to the interest rate on the date the loan is originated, and we do not typically charge prepayment penalties.

 

We grant construction and land loans to experienced developers for the construction of single-family residences including condominiums, and commercial properties. Construction and land loans are also made to individuals for the construction of their personal residences. Advances on construction loans are made in accordance with a schedule reflecting the cost of construction, but are generally limited to a loan-to-completed-appraised-value ratio of 70%. Repayment of construction loans on residential properties is normally expected from the sale of units to individual purchasers or in the case of individuals building their own, with a permanent mortgage. In the case of income-producing property, repayment is usually expected from permanent financing upon completion of construction. We typically offer the permanent mortgage financing on our construction loans on income-producing properties.

 

Land loans also help finance the purchase of land intended for future development, including single-family houses, multifamily housing, and commercial property. In some cases, we may make an acquisition loan before the borrower has received approval to develop the land. In general, the maximum loan-to-value ratio for a land acquisition loan is 50% of the appraised value of the property, and the maximum term of these loans is two years. If the maturity of the loan exceeds two years, the loan must be an amortizing loan.

 

In underwriting a construction loan, we require an appraisal of the property by a independent licensed appraiser approved by the Company’s board of directors . We review and inspect properties before disbursement of funds during the term of a construction loan.

 

Construction and land loans generally carry higher interest rates have shorter terms than one- to four- family residential real estate loans. Construction and land loans have greater credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction costs is inaccurate, we may decide to advance additional funds beyond the amount originally committed in order to protect the value of the property. Moreover, if the estimated value of the completed project is inaccurate, the borrower may hold a property with a value that is insufficient to assure full repayment of the construction loan upon the sale of the property. In the event we make a land acquisition loan on property that is not yet approved for the planned development, there is the risk that approvals will not be granted or will be delayed. Construction loans also expose us to the risk that improvements will not be completed on time in accordance with specifications and projected costs. In addition, the ultimate sale or rental of the property may not occur as anticipated and the market value of collateral, when completed, may be less that the outstanding loans against the property. Substantially all of our construction and land loans are secured by property located in our primary market areas.

 

Commercial and Industrial Loans.  At December 31, 2008, commercial and industrial loans totaled $11.0 million, or 1.87% of the total loan portfolio. As of December 31, 2008, we had 61 commercial and industrial loans with an average loan balance of approximately $181,000, although we originate these types of loans in amounts substantially greater and smaller than this average. At December 31, 2008, our largest

commercial and industrial loan had a principal balance of $1.0 million and was performing in accordance with its original contractual terms.

 

Our commercial and industrial loans typically amortize over 10 years with interest rates that are tied to an index that is typically prime. Margins generally range from zero basis points to 300 basis points above the prime rate index. We also originate, to lesser extent, 10 year fixed-rate, fully amortizing loans. In general, our commercial and industrial loans have interest rate floors equal to the interest rate on the date the loan is originated and have prepayment penalties.

 

We make various types of secured and unsecured commercial and industrial loans to customers in our market area for the purpose of working capital and other general business purposes. The terms of these loans generally range from less than one year to a maximum of 15 years. The loans are either negotiated on a fixed-rate basis or carry adjustable interest rates indexed to a market rate index.

 

Commercial credit decisions are based on our credit assessment of the applicant. We evaluate the applicant’s ability to repay in accordance with the proposed terms of the loan and assess the risks involved. Personal guarantees of the principals are typically obtained. In addition to evaluating the loan applicant’s financial statements, we consider the adequacy of the primary and secondary sources of repayment for the loan. Credit agency reports of the guarantors personal credit history supplement our analysis of the applicant’s creditworthiness. We also perform credit checks with other banks and conduct trade investigations. Collateral supporting a secured transaction also is analyzed to determine its marketability.

 

Commercial and industrial loans generally carry higher interest rates than one- to four- family residential real estate loans of like maturity because they have a higher risk of default since their repayment generally depends on the successful operation of the borrower’s business. Commercial and industrial loans have greater credit risk than one- to four- family residential real estate loans.

 

One- to Four-Family Residential Real Estate Loans.  At December 31, 2008, we had 654 one- to four-family residential real estate loans outstanding with an aggregate balance of $103.1 million, or 17.49% of our total loan portfolio. As of December 31, 2008, the average balance of one- to four-family residential mortgage real estate loans was approximately $158,000, although we originate this type of loan in amounts substantially greater and smaller than this average. At December 31, 2008, our largest loan of this type had a principal balance of $2.5 million and was performing in accordance with its original terms.

 

One- to four-family residential mortgage real estate loans are generally underwritten according to Freddie Mac guidelines using their proprietary automated underwriting software “LP”, and we refer to loans that conform to such guidelines as “conforming loans.” We generally originate both fixed- and adjustable-rate loans in amounts up to the maximum conforming loan limits as established by the Office of Federal Housing Enterprise Oversight, which is $417,0000 as of December 31, 2008 for single-family homes. We also originate loans above the lending limit for conforming loans, which are referred to as “jumbo loans.” Jumbo loans are common in our market area. We originate fixed-rate jumbo loans with terms up to 15 years and adjustable-rate jumbo loans with an initial fixed-rate period of 10 years. We generally underwrite jumbo loans in a manner similar to conforming loans. These loans are generally eligible for sale to various firms that specialize in purchasing non-conforming loans. Jumbo loans are common in our market area although we have never sold jumbo loans to any third parties.

 

We will originate loans with loan-to-value ratios in excess of 80%, up to and including a loan-to-value ratio of 95%. We require private mortgage insurance for all loans with loan-to-value ratios exceeding 80%. Generally, we will retain in our portfolio loans with loan-to-value ratios up to and including 90%, and sell loans with loan-to-value ratios that exceed 90%. We currently retain the servicing rights on loans sold which generates fee income or income tax credits.

 

We do not offer “interest only” mortgage loans on one- to four-family residential properties, where the borrower pays interest for an initial period, after which the loan converts to a fully amortizing loan. We also do not offer loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on their loan, resulting in an increased principal balance during the life of the loan. We do not offer “subprime loans” (loans that generally target borrowers with weakened

credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios).

 

Home Equity Loans and Lines of Credit.  At December 31, 2008, we had 361 home equity loans and lines of credits with an aggregate outstanding balance of $24.2 million, or 4.10% of our total loan portfolio, including the outstanding balance of home equity lines of credit of $9.9 million, or 1.68% of our total loan portfolio. At December 31, 2008, the average home equity loans and lines of credit balance was approximately $67,000 although we originate these types of loans in amounts substantially greater and lower than this average. At December 31, 2008, our largest home equity line of credit was $1.5 million and our largest home equity loan was $368,000 and both were performing in accordance with their original terms.

 

We offer home equity loans and home equity lines of credit that are secured by the borrower’s primary residence or second home. Historically, we have not focused on originating these types of loans; but in 2007 we hired an experienced loan officer in an effort to increase our origination of these loans. Home equity lines of credit have a maximum term of 20 years during which time the borrower is required to make principal payments based on a 20-year amortization, and are variable rate loans. The borrower is permitted to draw against the line during the entire term. Our home equity lines of credit have a ceiling rate and in 2008, we instituted a floor rate. Our home equity loans are typically fully amortizing with fixed terms to 20 years. Home equity loans and lines of credit are generally underwritten with the same criteria that we use to underwrite fixed-rate, one- to four-family residential real estate loans. Home equity loans and lines of credit may be underwritten with a loan-to-value ratio of 80% when combined with the principal balance of the existing mortgage loan. We appraise the property securing the loan at the time of the loan application to determine the value of the property. At the time we close a home equity loan or line of credit, we record a mortgage to perfect our security interest in the underlying collateral.

 

Loan Originations, Purchases, Sales, Participations and Servicing.  Lending activities are conducted in our Staten Island, New Jersey, and Brooklyn branch office locations. All loans we originate for our portfolio are underwritten pursuant to our policies and procedures. Freddie Mac underwriting standards are utilized for loans we originate to sell in the secondary market. We may, based on proper approvals, make exceptions to our policies and procedures. We originate both adjustable-rate and fixed-rate loans. Our ability to originate fixed- or adjustable-rate loans is dependent on the relative customer demand for such loans, which is affected by various factors including current market interest rates as well as anticipated future market interest rates. Our loan origination and sales activity may be adversely affected by a rising interest rate environment that typically results in decreased loan demand. A significant portion of our commercial real estate loans and multifamily real estate loans are generated by referrals from loan brokers, accountants, and other professional contacts. Most of our one- to four-family residential real estate loans are generated through referrals from branch personnel. Our home equity loans and lines of credit are typically generated through direct mail advertisements, newspaper advertisements, and referrals from branch personnel.

 

We generally retain in our portfolio all adjustable-rate loans we originate, as well as shorter-term, fixed-rate residential loans (terms of 10 years or less). Loans we sell consist primarily of conforming, longer-term, fixed-rate residential loans. However, due to market conditions in the secondary market throughout 2008, we held in portfolio substantially all fixed rate residential loans that we originated. We sold $4.1 million of one- to four-family residential real estate loans (all fixed-rate loans, with terms of 15 years or longer) during the year ended December 31, 2008, and had no loans held-for-sale at December 31, 2008.

 

We sell our loans without recourse, except for standard representations and warranties provided in secondary market transactions. Currently, we retain the servicing rights on one- to four-family residential real estate loans we sell. At December 31, 2008, we were servicing loans owned by others with a principal balance of $77.5 million, consisting of $77.3 million of one- to four-family residential mortgage loans and $250,000 of construction and land loans. We have entered into a limited number of loan participations in recent years. Historically, the origination of loans held for sale and related servicing activity has not been material to our operations. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, contacting delinquent borrowers, supervising foreclosures and property dispositions in the event of

unremedied defaults, making certain insurance and tax payments on behalf of the borrowers and generally administering the loans. We retain a portion of the interest paid by the borrower on the loans we service as consideration for our servicing activities or receive a tax credit.

 

Loan Approval Procedures and Authority.  Northfield Bank’s lending activities follow written, non-discriminatory underwriting standards established by Northfield Bank’s board of directors. The loan approval process is intended to assess the borrower’s ability to repay the loan and value of the property that will secure the loan, if any. To assess the borrower’s ability to repay, we review the borrower’s employment and credit history, and information on the historical and projected income and expenses of the borrower.

 

Northfield Bank’s lending officers have individual lending authority that is approved by the Board of Directors. 1^st Vice Presidents may approve aggregate lending relationships for loans up to $1 million secured by properly margined real estate, which includes loans for construction, land, or multifamily purposes, and $250 thousand for loans that are not secured by properly margined real estate which includes loans that are unsecured. Loans in excess of those thresholds require the concurrence of the Chief Lending Officer when the aggregate relationship is up to $2.5 million or $500 thousand, respectively and the approval of the Chief Executive Officer for those instances when the aggregation thresholds exceed those established for the Chief Lending Officer, up to $10 million. Extensions of credit of over $10 million requires the board of directors to approve an exception to the Chief Lending Officer and Chief Executive Officer lending authorities. All loans are reported to the board of directors in the month following the closing.

 

Northfield Bank also uses automated underwriting systems to assist in the underwriting of one- to four-family residential real estate loans, home equity loans, and home equity lines of credit. Applications for loan amounts in excess of the conforming loan limit may be approved, subject to an appraisal of the subject property. We require appraisals by independent, licensed, third-party appraisers of all real property securing loans greater than $250,000. Management evaluates and the board of directors approves all appraisers annually.

 

Non-Performing and Problem Assets

 

When a loan is over 15 days delinquent, we generally send the borrower a late charge notice. When the loan is 30 days past due, we generally mail the borrower a letter reminding the borrower of the delinquency and, except for loans secured by one- to four-family residential real estate, we attempt personal, direct contact with the borrower to determine the reason for the delinquency, to ensure that the borrower correctly understands the terms of the loan, and to emphasize the importance of making payments on or before the due date. If necessary, additional late charges and delinquency notices are issued and the account will be monitored periodically. After the 90^th day of delinquency, we will send the borrower a final demand for payment and refer the loan to legal counsel to commence foreclosure proceedings. Our loan officers can shorten these time frames in consultation with the Chief Lending Officer.

 

Generally, loans are placed on non-accrual status when payment of principal or interest is 90 days or greater delinquent unless the loan is considered well-secured and in the process of collection. Loans also are placed on non-accrual status at any time if the ultimate collection of principal or interest in full is in doubt. When loans are placed on non-accrual status, unpaid accrued interest is reversed, and further income is recognized only to the extent received, if the principal balance is deemed fully collectible. The loan may be returned to accrual status if both principal and interest payments are brought current and factors indicating doubtful collection no longer exist, including performance by the borrower under the loan terms for a six-month period. Our Chief Lending Officer reports monitored loans, including all loans rated watch, special mention, substandard, doubtful or loss, to the board of directors on a monthly basis.

 

For economic reasons and to maximize the recovery of a loan, the Company works with borrowers experiencing financial difficulties, and will consider modifications to a borrower’s existing loan terms and conditions that it would not otherwise consider, commonly referred to as troubled debt restructurings. The Company records an impairment loss, if any, based on the present value of expected future cash flows discounted at the original loan’s effective interest rate. The Company will report the loan as a troubled debt restructuring through the end of the calendar year that the restructuring takes place and until such time that the

loan yield’s a market rate of interest (a rate equal to or greater than the rate the Company was willing to accept at the time of the restructuring for a new loan with comparable risk).

 

Government legislation is currently being considered that could, by law or court ruling, require the Company to make loan concessions that it would not ordinarily consider, including the forgiveness of principal, extension of loan terms, and/or the reduction of a loan’s contractual interest rate. The Company cannot, at this time, estimate the effect such legislation could have on the Company’s financial condition or results of operations. Also, the Company cannot, at this time, estimate the effect such legislation could have on its mortgage-backed securities portfolio.

 

Non-Performing and Restructured Assets.  The table below sets forth the amounts and categories of our non-performing assets at the dates indicated. At December 31, 2008, 2007, 2006, 2005, and 2004, we had troubled debt restructurings of $1.0 million, $1.3 million, $1.7 million, $885,000, and $0, respectively, all of which appear within the caption of non-accrual loans.

 

For the year ended December 31, 2008, gross interest income that would have been recorded had our non-accruing loans been current in accordance with their original terms was $911,000. No interest income was recognized on such non-accruing loans on a cash basis.

 

Other Real Estate Owned.  Real estate acquired by us as a result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned. At the date property is acquired it is recorded at the lower of cost or estimated fair value, establishing a new cost basis. Estimated fair value generally represents the sale price a buyer would be willing to pay on the basis of current market conditions, including normal terms from other financial institutions, less the estimated costs to sell the property. Holding costs and declines in estimated fair value result in charges to expense after acquisition. At December 31, 2008, the Company owned with a combined carrying value of $1.1 million. The properties consist of six mixed use properties and six 1-4 family properties residential units located in Trenton, New Jersey. The Company is currently renting certain of the properties and has contracted with a third party to assist the Company in evaluating its options for disposal of the properties. The Company did not have any other real estate owned in four years preceding 2008.

 

Potential Problem Loans.  The current economic environment is negatively affecting certain borrowers. Our loan officers continue to monitor their loan portfolios, including the evaluation of borrowers’ business operations, current financial condition, underlying values of any collateral, and assessment of their financial prospects in the current and deteriorating economic environment. Based on this evaluation, we determine an appropriate strategy to assist borrowers, with the objective of maximizing the recovery of the related loan balances.

 

At December 31, 2008, management has begun negotiations with a borrower who is a developer in our market area to restructure certain loans within their total relationship. The borrower has relationships totaling $14.3 million at December 31, 2008. The borrower has requested to restructure loans totaling $6.5 million. At December 31, 2008, all loans within the relationship are performing in accordance with their original contractual terms and management believes each loan is well secured. Impairment, if any, on the restructured loans is not expected to have a significant affect on our financial condition or results of operations.

 

Classification of Assets.  Our policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality as substandard, doubtful, or loss assets. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those assets characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Assets (or portions of assets) classified as loss are those considered uncollectible and of such little value that their continuance as assets is not warranted. Assets that do not expose us to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve our close attention, are designated as special mention. On the basis of our review of our assets at December 31, 2008, classified assets (which are not reported as non-performing assets in the preceding table) consisted of substandard assets of $3.0 million ,no doubtful or loss assets, and $2.6 million of assets designated as special mention.

 

Our determination as to the classification of our assets (and the amount of our loss allowances) will be subject to review by our principal federal regulator, the Office of Thrift Supervision, which can require that we adjust our classification and related loss allowances. We regularly review our asset portfolio to determine whether any assets require classification in accordance with applicable regulations.

 

Allowance for Loan Losses

 

We provide for loan losses based on the consistent application of our documented allowance for loan loss methodology. Loan losses are charged to the allowance for loans losses and recoveries are credited to it. Additions to the allowance for loan losses are provided by charges against income based on various factors which, in our judgment, deserve current recognition in estimating probable losses. We regularly review the

loan portfolio and make adjustments for loan losses in order to maintain the allowance for loan losses in accordance with U.S. generally accepted accounting principles (“GAAP”). The allowance for loan losses consists primarily of the following two components:

 

(1) Allowances are established for impaired loans (generally defined as non-accrual loans with an outstanding balance of $500,000 or greater). The amount of impairment provided for as an allowance is represented by the deficiency, if any, between the present value of expected future cash flows discounted at the original loan’s effective interest rate or the underlying collateral (less estimated costs to sell,) if the loan is collateral dependent, and the carrying value of the loan. Impaired loans that have no impairment losses are not considered for general valuation allowances described below.

 

(2) General allowances are established for loan losses on a portfolio basis for loans that do not meet the definition of impaired. The portfolio is grouped into similar risk characteristics, primarily loan type, loan-to-value, if collateral dependent, and delinquency status. We apply an estimated loss rate to each loan group. The loss rates applied are based on our loss experience adjusted, as appropriate, for the environmental factors discussed below. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant revisions based upon changes in economic and real estate market conditions. Actual loan losses may be significantly more than the allowance for loan losses we have established, which could have a material negative effect on our financial results.

 

The adjustments to our loss experience are based on our evaluation of several environmental factors, including:

 

 

We evaluate the allowance for loan losses based on the combined total of the impaired and general components. Generally when the loan portfolio increases, absent other factors, our allowance for loan loss methodology results in a higher dollar amount of estimated probable losses than would be the case without the increase. Generally when the loan portfolio decreases, absent other factors, our allowance for loan loss methodology results in a lower dollar amount of estimated probable losses than would be the case without the decrease.

 

On a quarterly basis we evaluate the allowance for loan losses and adjust the allowance as appropriate through a provision or recovery for loan losses. While we use the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the information used in making the evaluations. In addition, as an integral part of their examination process, the Office of Thrift Supervision will periodically review the allowance for loan losses. The Office of Thrift Supervision may require us to adjust the allowance based on their analysis of information available to them at the time of their examination.

The following table sets forth activity in our allowance for loan losses for the years indicated.

 

 

Allocation of Allowance for Loan Losses.  The following tables set forth the allowance for loan losses allocated by loan category, the total loan balances by category, and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.

 

 

Investments

 

Management has established a management asset liability committee comprised of our Treasurer, who chairs this Committee, our Chief Executive Officer, our Executive Vice President and Chief Financial Officer, our Executive Vice President and Chief Lending Officer, and our Executive Vice President of Operations. This committee is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for recommending to the asset liability management committee of our board of director’s the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the board of directors. This committee reports to our asset liability committee of the board of directors, consisting of four non-employee board members, which has primary responsibility, among other things, for establishing and overseeing our investment policy, subject to oversight by our entire board of directors. The investment policy is reviewed at least annually by the asset liability committee, and any changes to the policy are subject to ratification by the full board of directors. This policy dictates that investment decisions give consideration to the safety of the investment, liquidity requirements, potential returns, the ability to provide collateral for pledging requirements, and consistency with our interest rate risk management strategy. Our Treasurer executes our securities portfolio transactions, within policy requirements, with the approval of either the Chief Executive Officer or the Chief Financial Officer. NSB Services Corp.’s and NSB Realty Trust’s Investment Officers execute securities portfolio transactions in accordance with investment policies that substantially mirror Northfield Bank’s investment policy. All purchase and sale transactions are formally reviewed by the asset liability committee at least quarterly.

 

Our current investment policy permits investments in mortgage-backed securities, including pass-through securities and real estate mortgage investment conduits (“REMICs”). The investment policy also permits, with certain limitations, investments in debt securities issued by the United States Government, agencies of the United States Government or United States Government-sponsored enterprises (GSEs), asset-backed securities, money market mutual funds, federal funds, investment grade corporate bonds, reverse repurchase agreements and certificates of deposit.

 

Northfield Bank’s investment policy does not permit investment in municipal bonds, preferred and common stock of other entities including U.S. Government sponsored enterprises or equity securities other than our required investment in the common stock of the Federal Home Loan Bank of New York, or as permitted for community reinvestment purposes or for the purposes of funding the Bank’s deferred compensation plan. Northfield Bancorp, Inc. may invest in equity securities of other financial institutions up to certain

limitations. As of December 31, 2008, we held no asset-backed securities other than mortgage-backed securities. Our board of directors may make changes to these limitations in the future.

 

Our current investment policy does not permit hedging through the use of such instruments as financial futures, interest rate options, and swaps.

 

SFAS No. 115 “Accounting for Certain Investments in Debt and Equity Securities” requires that, at the time of purchase, we designate a security as either held-to-maturity, available-for-sale, or trading, based upon our ability and intent to hold such securities. Trading securities and securities available-for-sale are reported at estimated fair value, and securities held-to-maturity are reported at amortized cost. A periodic review and evaluation of the available-for-sale and held-to-maturity securities portfolios is conducted to determine if the estimated fair value of any security has declined below its carrying value and whether such impairment is other-than-temporary. If such impairment is deemed to be other-than-temporary, the security is written down to a new cost basis and the resulting loss is charged against earnings. The estimated fair values of our securities are obtained from an independent nationally recognized pricing service (see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies” for further discussion). At December 31, 2008, our investment portfolio consisted primarily of mortgage-backed securities guaranteed by U.S. Government sponsored enterprises and to a lesser extent mutual funds, corporate securities and private label mortgaged-backed securities. The market for these securities primarily consists of other financial institutions, insurance companies, real estate investment trusts, and mutual funds.

 

Our available-for-sale securities portfolio at December 31, 2008, consisted of securities with the following amortized cost: $597.9 million of pass-through mortgage-backed securities, of which $532.9 million were issued or guaranteed by GSEs and $65.0 million issued by non-GSEs; $333.0 million of REMICs, of which $242.6 million were issued or guaranteed by GSEs and $90.4 million issued by non-GSEs; and $26.3 million of other securities, consisting of corporate obligations and equity securities which primarily consisted of a money market mutual fund.

 

Included in the above available-for-sale security amounts, at December 31, 2008, were 16 residential mortgage-backed senior class securities issued by non-GSE’s with an amortized cost of $155.5 million and an estimated fair value of $139.5 million. Twelve of these securities were in an unrealized loss position with an amortized cost of $110.7 million and estimated fair value of $93.8 million. Management has evaluated each of these 12 securities and concluded that as of December 31, 2008, the unrealized losses on these securities were temporary.

 

Of the 12 non-GSE securities in an unrealized loss position all but two were rated AAA at December 31, 2008. These two securities had a total amortized cost of $17.7 million. Both of these securities were rated investment grade at December 31, 2008. The first security, with an amortized cost of $9.5, and estimated fair value of $5.4 million, was rated Aa2 at December 31, 2008, and was subsequently downgraded to Baa2 (investment grade) as of February 28, 2009. The second security with an amortized cost of $8.2 million, and estimated fair value of $5.8 million, was rated Baa3 at December 31, 2008.

 

Management has evaluated each of the 12 securities in an unrealized loss position at December 31, 2008. Seven of the 12 securities experienced unrealized losses of less than ten percent at December 31, 2008. These seven securities, with an amortized cost of $58.8 million, and estimated fair value of $55.9 million, were reviewed for key underlying loan risk characteristics including origination dates, interest rates levels and composition of variable and fixed rates, reset dates (including related pricing indexes), current loan to original collateral values, locations of collateral, delinquency status of loans, and current credit support. These seven securities experienced a majority of their unrealized losses in the fourth quarter of 2008.

 

The remaining five residential mortgage backed securities issued by non-GSEs at December 31, 2008, had an amortized cost of $51.9 million, and estimated fair value of $37.9 million, representing unrealized losses of 10% or more of their amortized cost. In addition to reviewing the underlying loan risk characteristics described above for non-GSEs with realized losses of less than 10%, management also reviewed historical and expected default rates and related historical and expected losses on the disposal of the underlying collateral on

defaulted loans. Based on this evaluation, management believes that it is not probable that the Company will not receive all amounts due under the contractual terms of the securities.

 

We purchase mortgage-backed securities insured or guaranteed primarily by Fannie Mae, Freddie Mac or Ginnie Mae and to a lesser extent securities issued by private companies (private label). We invest in mortgage-backed securities to achieve positive interest rate spreads with minimal administrative expense, and to lower our credit risk as a result of the guarantees provided by Fannie Mae, Freddie Mac, or Ginnie Mae.

 

Mortgage-backed securities are securities sold in the secondary market that are collateralized by pools of mortgages. Certain types of mortgage-backed securities are commonly referred to as “pass-through” certificates because the principal and interest of the underlying loans is “passed through” pro rata to investors, net of certain costs, including servicing and guarantee fees, in proportion to an investor’s ownership in the entire pool. The issuers of such securities pool and resell the participation interests in the form of securities to investors such as us. The interest rate of the security is lower than the interest rates of the underlying loans to allow for payment of servicing and guaranty fees. Ginnie Mae, a United States Government agency, and GSEs, such as Fannie Mae and Freddie Mac, may guarantee the payments or guarantee the timely payment of principal and interest to investors.

 

Mortgage-backed securities generally yield less than the loans that underlie such securities because of the cost of servicing fees, payment guarantees, and credit enhancements. However, mortgage-backed securities are more liquid than individual mortgage loans since there is a trading mechanism for such securities. In addition, mortgage-backed securities may be used to collateralize our specific liabilities and obligations. Investments in mortgage-backed securities issued or guaranteed by GSEs involve a risk that actual payments will be greater or less than the prepayment rate estimated at the time of purchase, which may require adjustments to the amortization of any premium or accretion of any discount relating to such interests, thereby affecting the net yield on our securities. We periodically review current prepayment speeds to determine whether prepayment estimates require modification that could cause adjustment of amortization or accretion.

 

REMICs are a type of mortgage-backed security issued by special-purpose entities that aggregate pools of mortgages and mortgage-backed securities and creates different classes of securities with varying maturities and amortization schedules, as well as a residual interest, with each class possessing different risk characteristics. The cash flows from the underlying collateral are generally divided into “tranches” or classes that have descending priorities with respect to the distribution of principal and interest cash flows, while cash flows on pass-through mortgage-backed securities are distributed pro rata to all security holders.

 

The timely payment of principal and interest on these REMICs are generally supported (credit enhanced) in varying degrees by either insurance issued by a financial guarantee insurer, letters of credit, over collateralization, or subordination techniques. Substantially all of these securities are triple “A” rated by Standard & Poors or Moodys at the time of purchase. Privately issued REMICs and pass-throughs can be subject to certain credit-related risks normally not associated with United States Government agency and United States Government-sponsored enterprise mortgage-backed securities. The loss protection generally provided by the various forms of credit enhancements is limited, and losses in excess of certain levels are not protected. Furthermore, the credit enhancement itself may be subject to the creditworthiness of the credit enhancer. Thus, in the event a credit enhancer does not fulfill its obligations, the holder could be subject to risk of loss similar to a purchaser of a whole loan pool. Management believes that the credit enhancements are adequate to protect us from material losses on our privately issued mortgage-backed securities.

 

At December 31, 2008, our corporate bond portfolio consisted of $17.4 million of short-term investment grade securities. Our investment policy provides that we may invest up to 15% of our tier-one risk-based capital in corporate bonds from individual issuers which, at the time of purchase, are within the three highest investment-grade ratings from Standard & Poors or Moodys. The maturity of these bonds may not exceed 10 years, and there is no aggregate limit for this security type. Corporate bonds from individual issuers with investment-grade ratings, at the time of purchase, below the top three ratings are limited to the lesser of 1% of our total assets or 15% of our tier-one risk-based capital and must have a maturity of less than one year. Aggregate holdings of this security type cannot exceed 5% of our total assets. Bonds that subsequently

experience a decline in credit rating below investment grade are monitored at least monthly to determine whether we should continue to hold the bond.

 

The following table sets forth the amortized cost and estimated fair value of our available-for-sale and held-to-maturity securities portfolios (excluding Federal Home Loan Bank of New York common stock) at the dates indicated. As of December 31, 2008, 2007, and 2006, we had a trading portfolio with a market value of $2.5 million, $3.6 million and $2.7 million, respectively, consisting of mutual funds quoted in actively traded markets. These securities are utilized to fund non-qualified deferred compensation obligations.

 

 

 

 

Portfolio Maturities and Yields.  The composition and maturities of the investment securities portfolio at December 31, 2008, are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the effect of scheduled principal repayments, prepayments, or early redemptions that may occur. All of our securities at December 31, 2008, were taxable securities.

 

 

Sources of Funds

 

General.  Deposits traditionally have been our primary source of funds for our investment and lending activities. We also borrow from the Federal Home Loan Bank of New York and other financial institutions to supplement cash flow needs, to lengthen the maturities of liabilities for interest rate risk management purposes, and to manage our cost of funds. Our additional sources of funds are the proceeds of loan sales, scheduled loan payments, maturing investments, loan prepayments, and retained income on other earning assets.

 

Deposits.  We accept deposits primarily from the areas in which our offices are located. We rely on our convenient locations, customer service, and competitive products and pricing to attract and retain deposits. We offer a variety of deposit accounts with a range of interest rates and terms. Our deposit accounts consist of transaction accounts (NOW and non-interest bearing checking accounts), savings accounts (money market, passbook, and statement savings), and certificates of deposit, including individual retirement accounts. We accept brokered deposits on a limited basis. At December 31, 2008, we had no brokered deposits.

 

Interest rates offered are generally established weekly, maturity terms, service fees, and withdrawal penalties are reviewed on a periodic basis. Deposit rates and terms are based primarily on current operating strategies and market interest rates, liquidity requirements, and our deposit growth goals.

 

At December 31, 2008, we had a total of $417.6 million in certificates of deposit, of which $377.9 million had remaining maturities of one year or less. Based on our experience and current pricing strategy, we believe we will retain a significant portion of these accounts at maturity.

The following tables set forth the distribution of our average total deposit accounts, by account type, for the years indicated.