North Fork Bancorporation, Inc.

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North Fork Bancorporation, Inc.

275 Broad Hollow Road
Melville, New York 11747
U.S.A.
Telephone: (516) 844-1000
Toll Free: (800) 223-9363
Fax:(516)694-1536
Web site: http://www.northforkbank.com

Public Company
Incorporated: 1905 as Mattituck Bank
Employees: 2,300
Total Assets: $1.18 billion (2000)
Stock Exchanges: New York
Ticker Symbol: NFB
NAIC: 551111 Offices of Bank Holding Companies; 52211 Commercial Banking

North Fork Bancorporation, Inc. is a bank holding company that principally operates commercial banks on Long Island, New York, and in the New York City area. It runs over 150 North Fork Banks, and maintains a telebanking operation through its Superior Savings of New England subsidiary. North Fork is a relatively small bank in a market dominated by large players, yet it has consistently outperformed its higher profile peers. It maintains a somewhat old-fashioned, low-tech image, emphasizing face-to-face customer contact. The company offers traditional banking products such as checking and savings accounts, and provides commercial and consumer loans and commercial and residential mortgages. It maintains branches in small communities up and down Long Island and does substantial business in Brooklyn and the Bronx. North Fork was rated number one among banks and thrifts by industry journal U.S. Banker in 2000, and it has been noted since the 1980s for its remarkable efficiency and high level of return on equity. The bank grew aggressively through acquisitions beginning in the late 1980s, and has also expanded by building new branches.

Early Years

The company was founded in 1905 in Mattituck, New York, a small Long Island town in Suffolk County on the north fork of eastern Long Island. The area was primarily rural and home to many duck farms. Suffolk County was also a popular summer vacation spot for New Yorkers. The company operated as Mattituck Bank until 1950, when it became the North Fork Bank and Trust Company. North Fork Bank and Trust grew slowly, over the 1950s consolidating with three other banks also located on the north fork of the island. The four banks combined under the North Fork Bank and Trust name, and opened new branches in other parts of Long Island. By 1963, there were 31 banks based on Long Island. These combined and consolidated over the next decades, until there were only 11 by 1984. North Fork managed to survive in large part because of high real estate values in Suffolk County’s Hamptons district, where many New Yorkers kept summer homes.

There seemed little else to distinguish North Fork until it met up with John Kanas, who became its president at age 29 and spearheaded its phenomenal transformation into one of the country’s leading banks. Kanas was a native Long Islander, the son of a duck farmer. He had owned a deli and been a school teacher when, in 1971, North Fork Bank and Trust announced plans to open a branch in his home town, East Moriches. The bank at the time had just $20 million in assets. It offered a training program for new branch managers. Kanas quit his teaching post to enter the training program, learning the banking business while the branch was being built. Kanas was attracted to banking almost by his contempt for it. He told a story to Forbes explaining the origin of his yen to work in the industry. While he was still a deli owner, Kanas’s wife went to the bank to withdraw $5,000. She was turned away because she needed her husband’s signature to take that large an amount from their joint account. Kanas suggested she go back the next day and see if she could get out $10,000 instead, which would close the account. Apparently the bank’s policy for withdrawal was different than its policy for closing an account, and Mrs. Kanas got the full amount. This seemed ludicrous to John Kanas. “I thought, hey, these people don’t know what they’re doing,” he told Forbes. “This is the industry for me.” Despite his scant background in banking, Kanas quickly made an impression at North Fork. He went from branch bank manager in 1971 to president of the company in 1977. At the former president’s death, Kanas was promoted, though he was only 29 years old. He was the youngest bank president in the entire country.

Kanas quickly made changes at North Fork. He fired managers who were not pulling their weight and hired younger people to replace them. These he lured with incentives tied to the bank’s future profitability. Three years after taking over the top job, Kanas reorganized North Fork as North Fork Bancorp. This then became the holding company for North Fork Bank and Trust in 1981. North Fork Bancorp went public in 1982 and began trading on the NASDAQ. Kanas was exceedingly adept at bringing in new business. Between 1979 and 1984, assets tripled, and over 1982 alone, deposits increased over 80 percent. The bank had a healthy business in commercial real estate loans, primarily in hotels, condominiums, and co-op apartments. The real estate market in the Hamptons was thriving, and North Fork attracted many wealthy customers for home mortgages. The bank had been paying dividends to shareholders since 1971. After the company reorganized, dividends increased every year through the early 1980s. In 1983, North Fork became one of only a few banks to make it onto Forbes magazine’s annual list of the country’s best small public companies. The bank’s assets had grown to $260 million, and its return on assets (1.7 percent in 1984) ran at twice the industry norm for banks of North Fork’s size.

Banking in the Late 1980s and Early 1990s

Bank deregulation in the 1980s let North Fork expand into new financial areas, such as securities. But it also threatened the small bank with direct competition from big New York banks. Kanas voiced a variety of possible schemes to enlarge North Fork, including moving into suburban Connecticut, New Jersey, or Florida. But eventually North Fork settled on an acquisition campaign that gave it more branches in its native Long Island, and then in other areas of suburban New York.

In 1988, North Fork Bancorp had 22 Long Island branches and about $696 million in assets. That year it bought a neighboring institution, the oldest savings bank in Suffolk County, Southold Savings Bank. Southold had $603 million in assets, and operated through five Long Island branches. The acquisition, in cash and stock, cost North Fork something over $110 million. Southold continued to operate under its old name, as a subsidiary of the North Fork Bancorp holding company, until 1992.

North Fork switched its stock from the NASDAQ to the New York Stock Exchange in 1990, increasing its visibility by trading on the most prestigious exchange. Shortly after, North Fork announced plans to acquire the Eastchester Savings Bank, headquartered in White Plains, New York. Eastchester had nine branches in suburban Westchester and Rockland counties, and assets of $531 million. But the local real estate market began to sour shortly after the deal was announced. North Fork took a second quarter loss, stung by bad loans, and the bank had to cut costs by letting 100 employees go. Eastchester too announced a loss, and the merger was temporarily scuttled. Eventually North Fork picked up Eastchester for about $62 million, rather than the $80 million it had originally offered. Eastchester became part of North Fork’s Southold subsidiary.

This was a rough period for North Fork Bancorp. The turn down in the real estate market led to a large percentage of bad, or “nonperforming,” loans. Nonperforming loans rose from $154 million by the end of 1991 to over $171 million by the next quarter. The bank’s management was scrutinized by federal regulators over how it had disclosed the bad loans. North Fork lost over $40 million between 1990 and mid-1992. The bank ultimately hired a team of specialists from Texas to remedy North Fork’s hemorrhaging loan portfolio. Kanas himself took a pay cut until the bank went back in the black. The company also merged its two subsidiaries, North Fork Bank and Trust and Southold Savings Bank, into one subsidiary company. All Southold and Eastchester branches took the North Fork name.

Acquisition Spree in the 1990s

By late 1992, the amount of North Fork’s bad loans had fallen substantially, and the bank returned to profitability. With this bad patch behind it, North Fork began expanding rapidly through more acquisitions. In 1994, it bought the Bayside Federal Savings Bank, and the next year acquired the Bank of Great Neck. North Fork acquired certain branches of Extebank in 1996, which gave it its first foothold in Manhattan. It also acquired 10 branches of First Nationwide. The next year, it moved into New York’s borough of the Bronx with its acquisition of North Side Savings Bank, and began doing business in Brooklyn in 1998 when it bought Home Federal Savings Bank.

Company Perspectives:

We intend to continue to concentrate our focus on expanding our business model of transforming thrift branches into commercial bank delivery platforms by placing a strong emphasis on people centric efforts driven by attractive incentive compensation programs.

North Fork followed a pattern when it made these acquisitions. Generally, top management at the acquired bank was let go. But North Fork made every effort to retain tellers, so that customers did not notice or resent the change in ownership. And most of North Fork’s personnel worked for incentive pay, something rare in the banking industry. Some employees worked purely on commission, while branch managers, for example, could earn big bonuses in addition to their salary, based on the branch’s profitability. North Fork also emphasized customer service and face-to-face interaction, even as its competitors added high-tech services like on-line banking. One analyst who followed North Fork described the bank’s customers to the Wall Street Journal as being “… more like people 20 years ago.” Many branches were in blue-collar neighborhoods, and many loan customers were small businesses. North Fork persuaded a good percentage of its customers to hold their money in so-called demand deposit accounts, which were interest-free checking accounts. These were cheaper for the bank to maintain. North Fork operated relatively few automated teller machines and built them primarily in hightraffic locations that tended to generate fees from non-North Fork customers.

This rather unconventional approach seemed to work. By the mid-1990s, North Fork had consolidated its reputation as a remarkable money machine. It consistently bested bigger area banks in efficiency. A bank’s efficiency is measured as a ratio of how much money it must spend to generate one dollar of operating income. In 1997, North Fork’s efficiency ratio was 39.54, meaning it spent less than 40 cents to generate each dollar of income. Its competitor Chase Manhattan, by comparison, had an efficiency ratio of 59.

North Fork had assets of $4.1 billion by 1997, and it continued to expand by acquiring smaller banks. It bought Branford Savings Bank that year for $38 million, giving it its first territory in Connecticut. Branford had struggled with bad loans in the early 1990s but was profitable again by the time of the merger. John Kanas told American Banker that he hoped to use Branford as a base “to pursue a vigorous campaign of deposit-gathering throughout New England.” In March 1998, North Fork closed on a deal to acquire New York Bancorp, a 35-branch bank based on Long Island, with $3.3 billion in assets. In 1999, North Fork made two deals within two weeks of each other. First it spent $570 million to acquire JSB Financial Inc., which was the parent company of Jamaica Savings Bank, with 13 branches in the New York metropolitan area. Jamaica had a strong customer base among immigrants, many of them small businessmen. Then North Fork announced it had picked up Reliance Bancorp, based in Garden City, New York. Reliance had 29 branches, mostly in Queens and elsewhere on Long Island. North Fork paid $352 million to acquire Reliance. Reliance had assets of $2.5 billion. These two deals together swelled North Fork to 152 branches and gave it a total of $9.2 billion in deposits and $15.5 billion in total assets. North Fork continued to manage to integrate its newly acquired banks into its operations. Its efficiency ratio remained very low. At 35 in 1998, North Fork’s efficiency ratio was about half the average for the top 50 banks in the country. North Fork’s earnings per share also rose rapidly, outpacing bigger banks like Chase Manhattan.

Aiming for the Manhattan Market

North Fork’s various acquisitions had given it branches throughout Long Island, including Brooklyn and Queens, by the late 1990s. But it only had two branches in the lucrative market of Manhattan. One it had acquired when it bought certain assets of Extebank in 1995, and another North Fork opened in 1999. Building its own branches, called “de novo” branching, was a more difficult and expensive way to enter the Manhattan market than to take over an existing Manhattan bank. But three times since 1997 other banks had beat out North Fork in acquiring Manhattan targets. Astoria Financial Corp. snatched Greater New York Savings Bank away from a potential North Fork merger in 1997, and then the next year got to Long Island Savings Bank, scuttling North Fork’s plans. In 1999, North Fork lost out again, this time to Roslyn Bancorp, when it attempted to buy T R Financial Corp. So that year North Fork announced it would go the de novo route, with plans to build 12 branches in Manhattan and Brooklyn. A series of mergers and consolidations had left Manhattan banking mainly in the hands of giant banks, which spelled an excellent opportunity for a smaller, service-oriented bank like North Fork. Chemical Bank, Manufacturers Hanover, and Chase Manhattan had all become part of Chase Manhattan Corp., which had an almost 40 percent share of the deposits in Manhattan by early 2000. Another 16 percent share of deposits was held by Citibank. North Fork had less than half of one percent of the Manhattan deposit market. Nevertheless, its two Manhattan branches accounted for close to 20 percent of all business checking accounts at North Fork. It was not a market North Fork could afford to be shut out of.

In March 2000, North Fork offered to buy Dime Bancorp, a bank twice its size, with nine branches in Manhattan. Dime was on the eve of a takeover deal with Hudson United Bancorp, a New Jersey bank, and North Fork’s offer was unwelcome. Dime fought off North Fork’s takeover, selling a stake to a private equity firm and hiring an esteemed retired banking executive as its new chairman. After six months, North Fork backed off. It continued to work on its de novo branches, and then in June 2001 announced that it would acquire another bank with several Manhattan branches, Commercial Bank of New York.

Principal Subsidiaries

North Fork Bank; Superior Savings of New England; Amivest Corp.; Compass Investment Services Corp.

Principal Competitors

Citigroup Inc.; Chase Manhattan Corp.; Independence Community Bank.

Key Dates:

1905:: Mattituck Bank founded.
1950:: Name changed to North Fork Bank & Trust Co.
1971:: John Kanas joins the bank as a branch manager.
1977:: Kanas becomes president of the bank.
1982:: North Fork goes public.
1988:: North Fork buys Southold Savings Bank, marking the first of several acquisitions.
1990:: North Fork stock moves to New York Stock Exchange.
1999:: The company announces two acquisition deals in two weeks.