NYCB 2017 Annual Report

66 Another factor that impacts the yields on our interest-earning assets — and our net interest income — is the income generated by our multi-family and CRE loans and securities when they prepay. Since prepayment income is recorded as interest income, an increase or decrease in its level will also be reflected in the average yields (as applicable) on our loans, securities, and interest-earning assets, and therefore in our net interest income, our net interest rate spread, and our net interest margin. It should be noted that the level of prepayment income on loans recorded in any given period depends on the volume of loans that refinance or prepay during that time. Such activity is largely dependent on such external factors as current market conditions, including real estate values, and the perceived or actual direction of market interest rates. In addition, while a decline in market interest rates may trigger an increase in refinancing and, therefore, prepayment income, so too may an increase in market interest rates. It is not unusual for borrowers to lock in lower interest rates when they expect, or see, that market interest rates are rising rather than risk refinancing later at a still higher interest rate. In 2017, net interest income decreased 12% to $1.1 billion as compared to $1.3 billion in 2016. Similar to the fourth quarter 2017 trends, the decline in the full-year 2017 net interest income was driven by a 17% increase in interest expense due to higher funding costs. Year-Over-Year Comparison The following factors contributed to the year-over-year reduction in net interest income: • Interest income fell $92.6 million year-over-year as a $37.8 million decline in interest income from securities and money market investments was coupled with a $54.8 million decline in interest income from loans. • The decline in interest income from loans was largely due to a $676.3 million decline in the average balance and an eight-basis point decline in the average yield. In addition, prepayment income contributed $47.0 million to the interest income from loans and 12 basis points to the average yield on such assets compared to $60.9 million and 16 basis points in 2016. • The year-over-year reduction in interest income from securities was driven by a $936.0 million decrease in the average balance, coupled with a 40-basis point drop in the average yield. • As a result, the average balance of interest-earning assets declined $396.5 million from the year-earlier level and the average yield fell 18 basis points. • Interest expense rose $64.7 million year-over-year as interest expense on deposits rose $58.8 million and the interest expense on borrowed funds rose $6.0 million. • The year-over-year rise in interest expense stemming from deposits was due to a 23-basis point rise in the average cost of such funds due to higher short-term interest rates, offset by a $14.5 million decrease in the average balance. Additionally, the average balance of lower cost deposits such as savings accounts, interest- bearing checking and money market accounts declined, while the average balance of higher cost CDs increased by $1.3 billion. • The increase in the interest income from borrowed funds was driven by a 19-basis point rise in the average cost of such funding and mitigated by a $1.2 billion decline in the average balance from the year-earlier amount. • As a result, the average balance of interest-bearing liabilities fell $1.2 billion and the average cost of funds rose 20 basis points year-over-year.