FORM 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2014

Commission File Number 1-31565

NEW YORK COMMUNITY BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

Delaware     06-1377322

(State or other jurisdiction of

incorporation or organization)

    (I.R.S. Employer Identification No.)

615 Merrick Avenue, Westbury, New York 11590

(Address of principal executive offices)

(Registrant’s telephone number, including area code) (516) 683-4100

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  X  No      

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  X  No      

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.  Large Accelerated Filer  X   Accelerated Filer        Non-accelerated Filer         Smaller Reporting Company     

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes        No  X

 

442,656,612

 
   Number of shares of common stock outstanding at  May 2, 2014  


Table of Contents

NEW YORK COMMUNITY BANCORP, INC.

FORM 10-Q

Quarter Ended March 31, 2014

 

INDEX

          Page No.  

Part I.

   FINANCIAL INFORMATION   

Item 1.

   Financial Statements   
   Consolidated Statements of Condition as of March 31, 2014 (unaudited) and December 31, 2013    1
   Consolidated Statements of Income and Comprehensive Income for the Three Months Ended March 31, 2014 and 2013 (unaudited)    2
   Consolidated Statement of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2014 (unaudited)    3
   Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2014 and 2013 (unaudited)    4
   Notes to the Unaudited Consolidated Financial Statements    5

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    41

Item 3.

   Quantitative and Qualitative Disclosures about Market Risk    86

Item 4.

   Controls and Procedures    86

Part II.

   OTHER INFORMATION   

Item 1.

   Legal Proceedings    87

Item 1A.

   Risk Factors    87

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    87

Item 3.

   Defaults Upon Senior Securities    87

Item 4.

   Mine Safety Disclosures    87

Item 5.

   Other Information    87

Item 6.

   Exhibits    88

Signatures

   89

Exhibits

  


Table of Contents

NEW YORK COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CONDITION

(in thousands, except share data)

 

     March 31,
2014
(unaudited)
   December 31,
2013

Assets:

         

Cash and cash equivalents

     $ 672,872         $ 644,550   

Securities:

         

Available-for-sale ($63,421 and $79,905 pledged, respectively)

       245,321           280,738   

Held-to-maturity ($4,916,515 and $4,945,905 pledged, respectively) (fair value of $7,629,929 and $7,445,244, respectively)

       7,707,092           7,670,282   
    

 

 

      

 

 

 

Total securities

       7,952,413           7,951,020   
    

 

 

      

 

 

 

Non-covered loans held for sale

       266,240           306,915   

Non-covered loans held for investment, net of deferred loan fees and costs

       30,867,631           29,837,989   

Less: Allowance for losses on non-covered loans

       (139,361)          (141,946)  
    

 

 

      

 

 

 

Non-covered loans held for investment, net

       30,728,270           29,696,043   

Covered loans

       2,695,158           2,788,618   

Less: Allowance for losses on covered loans

       (49,439)          (64,069)  
    

 

 

      

 

 

 

Covered loans, net

       2,645,719           2,724,549   
    

 

 

      

 

 

 

Total loans, net

       33,640,229           32,727,507   

Federal Home Loan Bank stock, at cost

       545,113           561,390   

Premises and equipment, net

       278,216           273,299   

FDIC loss share receivable

       460,426           492,674   

Goodwill

       2,436,131           2,436,131   

Core deposit intangibles, net

       13,918           16,240   

Mortgage servicing rights

       238,004           241,018   

Bank-owned life insurance

       899,649           893,522   

Other real estate owned (includes $36,134 and $37,477, respectively, covered by loss sharing agreements)

       106,789           108,869   

Other assets

       323,710           342,067   
    

 

 

      

 

 

 

Total assets

     $ 47,567,470         $ 46,688,287   
    

 

 

      

 

 

 

Liabilities and Stockholders’ Equity:

         

Deposits:

         

NOW and money market accounts

     $ 11,180,217         $ 10,536,947   

Savings accounts

       6,193,669           5,921,437   

Certificates of deposit

       6,934,692           6,932,096   

Non-interest-bearing accounts

       2,444,988           2,270,512   
    

 

 

      

 

 

 

Total deposits

       26,753,566           25,660,992   

Borrowed funds:

         

Wholesale borrowings:

         

Federal Home Loan Bank advances

       10,514,899           10,872,576   

Repurchase agreements

       3,425,000           3,425,000   

Fed funds purchased

       525,000           445,000   
    

 

 

      

 

 

 

Total wholesale borrowings

       14,464,899           14,742,576   

Other borrowings

       362,481           362,426   
    

 

 

      

 

 

 

Total borrowed funds

       14,827,380           15,105,002   

Other liabilities

       243,872           186,631   
    

 

 

      

 

 

 

Total liabilities

       41,824,818           40,952,625   
    

 

 

      

 

 

 

Stockholders’ equity:

         

Preferred stock at par $0.01 (5,000,000 shares authorized; none issued)

       --           --   

Common stock at par $0.01 (600,000,000 shares authorized; 442,659,460 and 440,873,285 shares issued, and
442,654,213 and 440,809,365 shares outstanding, respectively)

       4,427           4,409   

Paid-in capital in excess of par

       5,347,183           5,346,017   

Retained earnings

       426,251           422,761   

Treasury stock, at cost (5,247 and 63,920 shares, respectively)

       (84)          (1,032)  

Accumulated other comprehensive loss, net of tax:

         

Net unrealized gain on securities available for sale, net of tax of $732 and $171, respectively

       1,102           277   

Net unrealized loss on the non-credit portion of other-than-temporary impairment (“OTTI”) losses on securities,
net of tax of $3,575 and $3,586, respectively

       (5,587)          (5,604)  

Net unrealized loss on pension and post-retirement obligations, net of tax of $20,769 and $21,126, respectively

       (30,640)          (31,166)  
    

 

 

      

 

 

 

Total accumulated other comprehensive loss, net of tax

       (35,125)          (36,493)  
    

 

 

      

 

 

 

Total stockholders’ equity

       5,742,652           5,735,662   
    

 

 

      

 

 

 

Total liabilities and stockholders’ equity

     $ 47,567,470         $ 46,688,287   
    

 

 

      

 

 

 

See accompanying notes to the consolidated financial statements.

 

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NEW YORK COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(in thousands, except per share data)

(unaudited)

 

     For the Three Months
Ended March 31,
 
         2014              2013      

Interest Income:

     

Mortgage and other loans

      $345,530             $366,999      

Securities and money market investments

     69,781            45,808      
  

 

 

    

 

 

 

Total interest income

     415,311            412,807      
  

 

 

    

 

 

 

Interest Expense:

     

NOW and money market accounts

     8,396            9,175      

Savings accounts

     6,473            4,021      

Certificates of deposit

     19,060            22,235      

Borrowed funds

     97,232            102,200      
  

 

 

    

 

 

 

Total interest expense

     131,161            137,631      
  

 

 

    

 

 

 

Net interest income

     284,150            275,176      

Provision for losses on non-covered loans

     --            5,000      

(Recovery of) provision for losses on covered loans

     (14,630)           4,502      
  

 

 

    

 

 

 

Net interest income after (recovery of) provision for loan losses

     298,780            265,674      
  

 

 

    

 

 

 

Non-Interest Income:

     

Mortgage banking income

     14,610            26,109      

Fee income

     8,894            8,772      

Bank-owned life insurance

     6,829            7,253      

Net gain on sales of securities

     4,873            16,622      

FDIC indemnification (expense) income

     (11,704)           3,602      

Gain on Visa shares sold

     3,856            --      

Other income

     9,877            13,193      
  

 

 

    

 

 

 

Total non-interest income

     37,235            75,551      
  

 

 

    

 

 

 

Non-Interest Expense:

     

Operating expenses:

     

Compensation and benefits

     75,740            83,506      

Occupancy and equipment

     25,998            23,600      

General and administrative

     42,264            44,569      
  

 

 

    

 

 

 

Total operating expenses

     144,002            151,675      

Amortization of core deposit intangibles

     2,323            4,421      
  

 

 

    

 

 

 

Total non-interest expense

     146,325            156,096      
  

 

 

    

 

 

 

Income before income taxes

     189,690            185,129      

Income tax expense

     74,436            66,454      
  

 

 

    

 

 

 

Net income

      $115,254             $118,675      
  

 

 

    

 

 

 

Other comprehensive income (loss), net of tax:

     

Change in net unrealized gain on securities available for sale, net of tax of $2,529 and $463, respectively

     3,729            685      

Change in the non-credit portion of OTTI losses recognized in other comprehensive income, net of tax of $11
and $17, respectively

     17            28      

Change in pension and post-retirement obligations, net of tax of $357 and $1,008, respectively

     526            1,486      

Less:   Reclassification adjustment for sales of available-for-sale securities, net of tax of $1,969 and $2,048,
respectively

     (2,904)           (3,022)     
  

 

 

    

 

 

 

Total other comprehensive income (loss), net of tax

     1,368            (823)     
  

 

 

    

 

 

 

Total comprehensive income, net of tax

      $116,622             $117,852      
  

 

 

    

 

 

 

Basic earnings per share

      $0.26             $0.27      
  

 

 

    

 

 

 

Diluted earnings per share

      $0.26             $0.27      
  

 

 

    

 

 

 

See accompanying notes to the consolidated financial statements.

 

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NEW YORK COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands, except share data)

(unaudited)

 

     For the Three Months
 Ended March 31, 2014 

Common Stock (Par Value: $0.01):

    

Balance at beginning of year

     $ 4,409    

Shares issued for restricted stock awards (1,782,601 shares)

       18    

Shares issued for exercise of stock options (3,574 shares)

       --    
    

 

 

 

Balance at end of period

       4,427    
    

 

 

 

Paid-in Capital in Excess of Par:

    

Balance at beginning of year

       5,346,017    

Shares issued for restricted stock awards, net of forfeitures

       (6,994)    

Compensation expense related to restricted stock awards

       6,664    

Tax effect of stock plans

       1,496    
    

 

 

 

Balance at end of period

       5,347,183    
    

 

 

 

Retained Earnings:

    

Balance at beginning of year

       422,761    

Net income

       115,254    

Dividends paid on common stock ($0.25 per share)

       (110,461)    

Effect of adoption of Accounting Standards Update 2014-01

       (1,303)    
    

 

 

 

Balance at end of period

       426,251    
    

 

 

 

Treasury Stock:

    

Balance at beginning of year

       (1,032)    

Purchase of common stock (358,461 shares)

       (6,029)    

Exercise of stock options (37 shares)

       1    

Shares issued for restricted stock awards (417,097 shares)

       6,976    
    

 

 

 

Balance at end of period

       (84)    
    

 

 

 

Accumulated Other Comprehensive Loss, net of tax:

    

Balance at beginning of year

       (36,493)    

Other comprehensive income, net of tax

       1,368    
    

 

 

 

Balance at end of period

       (35,125)    
    

 

 

 

Total stockholders’ equity

      $  5,742,652    
    

 

 

 

See accompanying notes to the consolidated financial statements.

 

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NEW YORK COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

     For the Three Months Ended
March 31,
 
     2014      2013  

Cash Flows from Operating Activities:

     

Net income

    $ 115,254          $ 118,675     

Adjustments to reconcile net income to net cash provided by operating activities:

     

(Recovery of) provision for loan losses

     (14,630)          9,502     

Depreciation and amortization

     6,765           6,880     

Amortization of discounts and premiums, net

     (2,007)          (199)    

Amortization of core deposit intangibles

     2,323           4,421     

Net gain on sales of securities

     (4,873)          (16,622)    

Gain on sale of loans

     (3,778)          (25,883)    

Gain on Visa shares sold

     (3,856)          --     

Stock plan-related compensation

     6,664           5,537     

Deferred tax expense

     10,587           7,259     

Changes in assets and liabilities:

     

Decrease in other assets

     49,571           11,170     

Increase in other liabilities

     45,305           11,234     

Origination of loans held for sale

     (636,855)          (2,361,315)    

Proceeds from sale of loans originated for sale

     617,633           2,861,356     
  

 

 

    

 

 

 

Net cash provided by operating activities

     188,103           632,015     
  

 

 

    

 

 

 

Cash Flows from Investing Activities:

     

Proceeds from repayment of securities held to maturity

     103,577           313,394     

Proceeds from repayment of securities available for sale

     3,918           48,852     

Proceeds from sale of securities held to maturity

     --           191,142     

Proceeds from sale of securities available for sale

     136,747           335,064     

Purchase of securities held to maturity

     (138,342)          (1,148,160)    

Purchase of securities available for sale

     (99,000)          (278,000)    

Proceeds from sale of Visa shares

     3,856           --     

Net redemption of Federal Home Loan Bank stock

     16,277           12,588     

Net increase in loans

     (875,092)          (706,193)    

Purchase of premises and equipment, net

     (11,682)          (7,391)    
  

 

 

    

 

 

 

Net cash used in investing activities

     (859,741)          (1,238,704)    
  

 

 

    

 

 

 

Cash Flows from Financing Activities:

     

Net increase in deposits

     1,092,574           600,151     

Net decrease in short-term borrowed funds

     (276,100)          (225,000)    

Net decrease in long-term borrowed funds

     (1,522)          (26,623)    

Tax effect of stock plans

     1,496           (64)    

Cash dividends paid on common stock

     (110,461)          (109,955)    

Treasury stock purchases

     (6,029)          (4,079)    

Net cash received from stock option exercises

     2           59     
  

 

 

    

 

 

 

Net cash provided by financing activities

     699,960           234,489     
  

 

 

    

 

 

 

Net increase(decrease) in cash and cash equivalents

     28,322           (372,200)    

Cash and cash equivalents at beginning of period

     644,550           2,427,258     
  

 

 

    

 

 

 

Cash and cash equivalents at end of period

    $ 672,872          $ 2,055,058     
  

 

 

    

 

 

 

Supplemental information:

     

Cash paid for interest

      $135,424            $130,989     

Cash paid for income taxes

     17,418           10,270     

Non-cash investing and financing activities:

     

Transfers to other real estate owned from loans

     45,917           49,587     

See accompanying notes to the consolidated financial statements.

 

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Table of Contents

NEW YORK COMMUNITY BANCORP, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Organization and Basis of Presentation

Organization

Formerly known as Queens County Bancorp, Inc., New York Community Bancorp, Inc. (on a stand-alone basis, the “Parent Company” or, collectively with its subsidiaries, the “Company”) was organized under Delaware law on July 20, 1993 and is the holding company for New York Community Bank and New York Commercial Bank (hereinafter referred to as the “Community Bank” and the “Commercial Bank,” respectively, and collectively as the “Banks”). In addition, for the purpose of these Consolidated Financial Statements, the “Community Bank” and the “Commercial Bank” refer not only to the respective banks but also to their respective subsidiaries.

The Community Bank is the primary banking subsidiary of the Company. Founded on April 14, 1859 and formerly known as Queens County Savings Bank, the Community Bank converted from a state-chartered mutual savings bank to the capital stock form of ownership on November 23, 1993, at which date the Company issued its initial offering of common stock (par value: $0.01 per share) at a price of $25.00 per share. The Commercial Bank was established on December 30, 2005.

Reflecting nine stock splits between September 30, 1994 and February 17, 2004, the Company’s initial offering price adjusts to $0.93 per share. All share and per share data presented in this report have been adjusted to reflect the impact of the stock splits.

The Company changed its name to New York Community Bancorp, Inc. on November 21, 2000 in anticipation of completing the first of eight business combinations that expanded its footprint well beyond Queens County to encompass all five boroughs of New York City, Long Island, and Westchester County in New York, and seven counties in the northern and central parts of New Jersey. The Company expanded beyond this region to south Florida, northeast Ohio, and central Arizona through its FDIC-assisted acquisition of certain assets and its assumption of certain liabilities of AmTrust Bank (“AmTrust”) in December 2009, and extended its Arizona franchise through its FDIC-assisted acquisition of certain assets and its assumption of certain liabilities of Desert Hills Bank (“Desert Hills”) in March 2010. On June 28, 2012, the Company completed its 11th transaction when it assumed the deposits of Aurora Bank FSB.

Reflecting its growth through acquisitions, the Community Bank currently operates 242 branches, four of which operate directly under the Community Bank name. The remaining 238 Community Bank branches operate through seven divisional banks: Queens County Savings Bank, Roslyn Savings Bank, Richmond County Savings Bank, and Roosevelt Savings Bank (in New York); Garden State Community Bank in New Jersey; AmTrust Bank in Florida and Arizona; and Ohio Savings Bank in Ohio.

The Commercial Bank currently operates 30 branches in Manhattan, Queens, Brooklyn, Westchester County, and Long Island (all in New York), including 18 branches that operate under the name “Atlantic Bank.”

Basis of Presentation

The following is a description of the significant accounting and reporting policies that the Company and its wholly-owned subsidiaries follow in preparing and presenting their consolidated financial statements, which conform to U.S. generally accepted accounting principles (“GAAP”) and to general practices within the banking industry. The preparation of financial statements in conformity with GAAP requires the Company to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Estimates that are particularly susceptible to change in the near term are used in connection with the determination of the allowances for loan losses; the valuation of mortgage servicing rights (“MSRs”); the evaluation of goodwill for impairment; the evaluation of other-than-temporary impairment (“OTTI”) on securities; and the evaluation of the need for a valuation allowance on the Company’s deferred tax assets.

The unaudited consolidated financial statements include the accounts of the Company and other entities in which the Company has a controlling financial interest. All inter-company accounts and transactions are eliminated in consolidation. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s 2013 Annual Report on Form 10-K. The Company currently has certain unconsolidated subsidiaries in the form of wholly-owned statutory business trusts, which were formed to issue guaranteed capital debentures (“capital securities”). Please see Note 7, “Borrowed Funds,” for additional information regarding these trusts.

 

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Table of Contents

Effects of New Accounting Pronouncements

In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-01, “Investments – Equity Method and Joint Ventures (Topic 323), Accounting for Investments in Qualified Affordable Housing Projects.” The amendments in ASU No. 2014-01 provide guidance on accounting for investments by a reporting entity in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the low-income housing tax credit. The amendments permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. The Company has chosen to apply this new guidance for the current period beginning on January 1, 2014.

The impact of applying this new guidance included a $1.3 million reduction in the balance of retained earnings as of January 1, 2014. The total amount of affordable housing tax credits and other tax benefits projected to be recognized during calendar year 2014, and the related amount of amortization recognized as a component of income tax expense for calendar year 2014, are $4.0 million and $2.8 million, respectively. The commitment of additional anticipated equity contributions of $9.4 million relating to current investments is reflected in “Other liabilities.” Retrospective application of the new amortization methodology would not result in a material change to prior-period presentations.

Note 2. Computation of Earnings per Share

Basic earnings per share (“EPS”) is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS is computed using the same method as basic EPS, however, the computation reflects the potential dilution that would occur if outstanding in-the-money stock options were exercised and converted into common stock.

Unvested stock-based compensation awards containing non-forfeitable rights to dividends are considered participating securities, and therefore are included in the two-class method for calculating EPS. Under the two-class method, all earnings (distributed and undistributed) are allocated to common shares and participating securities, based on their respective rights to receive dividends. The Company grants restricted stock to certain employees under its stock-based compensation plans. Recipients receive cash dividends during the vesting periods of these awards, including on the unvested portion of such awards. Since these dividends are non-forfeitable, the unvested awards are considered participating securities and therefore have earnings allocated to them.

The following table presents the Company’s computation of basic and diluted EPS for the periods indicated:

 

     Three Months Ended
March 31,
 
(in thousands, except share and per share amounts)    2014      2013  

Net income

     $115,254           $118,675     

Less: Dividends paid on and earnings allocated to participating securities

     (796)          (1,212)    
  

 

 

    

 

 

 

Earnings applicable to common stock

     $114,458           $117,463     
  

 

 

    

 

 

 

Weighted average common shares outstanding

     440,570,598           438,703,468     
  

 

 

    

 

 

 

Basic earnings per common share

     $0.26           $0.27     
  

 

 

    

 

 

 

Earnings applicable to common stock

     $114,458           $117,463     
  

 

 

    

 

 

 

Weighted average common shares outstanding

     440,570,598           438,703,468     

Potential dilutive common shares (1)

     --           5,052     
  

 

 

    

 

 

 

Total shares for diluted earnings per share computation

     440,570,598           438,708,520     
  

 

 

    

 

 

 

Diluted earnings per common share and common share equivalents

     $0.26           $0.27     
  

 

 

    

 

 

 

 

(1) Options to purchase 57,400 and 253,500 shares, of the Company’s common stock that were outstanding as of March 31, 2014 and 2013, respectively, at weighted average exercise prices of $18.08 and $22.14, were excluded from the respective computations of diluted EPS because their inclusion would have had an antidilutive effect.

 

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Note 3. Reclassifications Out of Accumulated Other Comprehensive Loss (“AOCL”)

 

(in thousands)    For the Three Months Ended March 31, 2014

                        Details about

Accumulated Other Comprehensive Loss

   Amount Reclassified
from Accumulated Other
Comprehensive Loss (1)
  

Affected Line Item in the

      Consolidated Statement of Income      

and Comprehensive Income

Unrealized gains on available-for-sale securities

     $   4,873        Net gain on sales of securities
       (1,969)        Tax expense
    

 

 

    
     $ 2,904        Net gain on sales of securities, net of tax
    

 

 

    

Amortization of defined benefit pension items:

       

Prior-service costs

     $ 62       

Included in the computation of net periodic (credit) expense (2)

Actuarial losses

       (940)       

Included in the computation of net periodic (credit) expense (2)

    

 

 

    
       (878)       

Total before tax

       355       

Tax benefit

    

 

 

    
     $ (523)       

Amortization of defined benefit pension items, net of tax

    

 

 

    

Total reclassifications for the period

     $ 2,381       
    

 

 

    

 

(1) Amounts in parentheses indicate expense items.
(2) Please see Note 9, Pension and Other Post-Retirement Benefits, for additional information.

 

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Note 4. Securities

The following table summarizes the Company’s portfolio of securities available for sale at March 31, 2014:

 

     March 31, 2014
(in thousands)     Amortized
Cost
       Gross
 Unrealized
Gain
       Gross
 Unrealized
Loss
        Fair Value 

Mortgage-Related Securities:

                         

GSE(1) certificates

      $ 22,659           $ 1,445           $ ---           $ 24,104  

GSE CMOs(2)

       59,561            672            1,684            58,549  

Private label CMOs

       10,178            --            90            10,088  
    

 

 

        

 

 

        

 

 

        

 

 

 

Total mortgage-related securities

      $ 92,398           $ 2,117           $ 1,774           $ 92,741  
    

 

 

        

 

 

        

 

 

        

 

 

 

Other Securities:

                         

Municipal bonds

      $ 959           $ 99           $ --           $ 1,058  

Capital trust notes

       13,422            63            1,591            11,894  

Preferred stock

       118,205            3,295            792            120,708  

Common stock

       18,504            644            228            18,920  
    

 

 

        

 

 

        

 

 

        

 

 

 

Total other securities

      $ 151,090           $ 4,101           $ 2,611           $ 152,580  
    

 

 

        

 

 

        

 

 

        

 

 

 

Total securities available for sale

      $ 243,488           $ 6,218           $ 4,385           $ 245,321  
    

 

 

        

 

 

        

 

 

        

 

 

 

 

(1) Government-sponsored enterprise
(2) Collateralized mortgage obligations

At March 31, 2014, the fair value of marketable equity securities included corporate preferred stock of $120.7 million and common stock of $18.9 million, with the latter primarily consisting of mutual fund investments that are deemed to be qualified under the Community Reinvestment Act (“CRA”).

The following table summarizes the Company’s portfolio of securities available for sale at December 31, 2013:

 

     December 31, 2013
(in thousands)     Amortized 
Cost
       Gross
 Unrealized 
Gain
       Gross
 Unrealized 
Loss
        Fair Value 

Mortgage-Related Securities:

                         

GSE certificates

      $ 23,759           $ 1,442           $ 1           $ 25,200  

GSE CMOs

       62,082            598            1,861            60,819  

Private label CMOs

       10,214            --            12            10,202  
    

 

 

        

 

 

        

 

 

        

 

 

 

Total mortgage-related securities

      $ 96,055           $ 2,040           $ 1,874           $ 96,221  
    

 

 

        

 

 

        

 

 

        

 

 

 

Other Securities:

                         

Municipal bonds

      $ 957           $ 69           $ --           $ 1,026  

Capital trust notes

       13,419            60            1,681            11,798  

Preferred stock

       118,205            1,936            3,902            116,239  

Common stock

       51,654            4,093            293            55,454  
    

 

 

        

 

 

        

 

 

        

 

 

 

Total other securities

      $ 184,235           $ 6,158           $ 5,876           $ 184,517  
    

 

 

        

 

 

        

 

 

        

 

 

 

Total securities available for sale

      $ 280,290           $ 8,198           $ 7,750           $ 280,738  
    

 

 

        

 

 

        

 

 

        

 

 

 

 

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The following tables summarize the Company’s portfolio of securities held to maturity at March 31, 2014 and December 31, 2013:

 

     March 31, 2014
(in thousands)     Amortized 
Cost
     Carrying  
Amount
   Gross
    Unrealized    
Gain
   Gross
   Unrealized   
Loss
    Fair Value 

Mortgage-Related Securities:

                        

GSE certificates

      $ 2,527,673         $ 2,527,673         $ 48,962         $ 35,013         $ 2,541,622  

GSE CMOs

       1,846,549          1,846,549          41,725          11,344          1,876,930  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total mortgage-related securities

      $ 4,374,222         $ 4,374,222         $ 90,687         $ 46,357         $ 4,418,552  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Other Securities:

                        

GSE debentures

      $ 3,124,191         $ 3,124,191         $ 10,512         $ 137,118         $ 2,997,585  

Corporate bonds

       73,003          73,003          12,301          --          85,304  

Municipal bonds

       60,168          60,168          1          3,295          56,874  

Capital trust notes

       84,670          75,508          4,079          7,973          71,614  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total other securities

      $ 3,342,032         $ 3,332,870         $ 26,893         $ 148,386         $ 3,211,377  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total securities held to maturity (1)

      $ 7,716,254         $ 7,707,092         $ 117,580         $ 194,743         $ 7,629,929  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

 

(1) Held-to-maturity securities are reported at a carrying amount equal to amortized cost less the non-credit portion of OTTI recorded in AOCL. At March 31, 2014, the non-credit portion of OTTI recorded in AOCL was $9.2 million (before taxes).

 

     December 31, 2013
(in thousands)     Amortized 
Cost
     Carrying  
Amount
   Gross
    Unrealized    
Gain
   Gross
   Unrealized   
Loss
    Fair Value 

Mortgage-Related Securities:

                        

GSE certificates

      $ 2,529,102         $ 2,529,102         $ 30,145         $ 61,280         $ 2,497,967  

GSE CMOs

       1,878,885          1,878,885          29,330          22,520          1,885,695  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total mortgage-related securities

      $ 4,407,987         $ 4,407,987         $ 59,475         $ 83,800         $ 4,383,662  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Other Securities:

                        

GSE debentures

      $ 3,053,253         $ 3,053,253         $ 6,512         $ 208,506         $ 2,851,259  

Corporate bonds

       72,899          72,899          11,063          --          83,962  

Municipal bonds

       60,462          60,462          19          3,849          56,632  

Capital trust notes

       84,871          75,681          3,134          9,086          69,729  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total other securities

      $ 3,271,485         $ 3,262,295         $ 20,728         $ 221,441         $ 3,061,582  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total securities held to maturity (1)

      $ 7,679,472         $ 7,670,282         $ 80,203         $ 305,241         $ 7,445,244  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

 

(1) Held-to-maturity securities are reported at a carrying amount equal to amortized cost less the non-credit portion of OTTI recorded in AOCL. At December 31, 2013, the non-credit portion of OTTI recorded in AOCL was $9.2 million (before taxes).

The Company had $545.1 million and $561.4 million of Federal Home Loan Bank (“FHLB”) stock, at cost, at March 31, 2014 and December 31, 2013, respectively. The Company is required to maintain this investment in order to have access to the funding resources provided by the FHLB.

The following table summarizes the gross proceeds, gross realized gains, and gross realized losses from the sale of available-for-sale securities during the three months ended March 31, 2014 and 2013:

 

     For the Three Months Ended
March 31,
(in thousands)          2014                2013      

Gross proceeds

       $136,747          $335,064  

Gross realized gains

       4,873          5,070  

Gross realized losses

       --          --  

In addition, during the three months ended March 31, 2013, the Company sold held-to-maturity securities with gross proceeds of $191.1 million and gross realized gains of $11.5 million, all of which were securities on which the Company had collected a substantial portion (at least 85%) of the initial principal balance. No comparable sales occurred in the first three months of 2014.

 

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In the following table, the beginning balance represents the credit loss component for debt securities on which OTTI occurred prior to January 1, 2013. For credit-impaired debt securities, OTTI recognized in earnings after that date is presented as an addition in two components, based upon whether the current period is the first time a debt security was credit-impaired (initial credit impairment) or is not the first time a debt security was credit-impaired (subsequent credit impairment).

 

 

(in thousands)    For the
Three Months Ended
March 31, 2014

Beginning credit loss amount as of December 31, 2013

        $216,334  

Add:    Initial other-than-temporary credit losses

       --  

            Subsequent other-than-temporary credit losses

       --  

            Amount previously recognized in AOCL

       --  

Less:    Realized losses for securities sold

       --  

            Securities intended or required to be sold

       --  

            Increases in expected cash flows on debt securities

       --  
    

 

 

 

Ending credit loss amount as of March 31, 2014

        $216,334  
    

 

 

 

 

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The following table summarizes the carrying amounts and estimated fair values of held-to-maturity debt securities, and the amortized costs and estimated fair values of available-for-sale debt securities, at March 31, 2014, by contractual maturity. Mortgage-related securities held to maturity and available for sale, all of which have prepayment provisions, are distributed to a maturity category based on the ends of the estimated average lives of such securities. Principal and amortization prepayments are not shown in maturity categories as they occur, but are considered in the determination of estimated average life.

 

     At March 31, 2014    
(dollars in thousands)    Mortgage-
Related
Securities
  Average
Yield
  U.S. Treasury
and GSE
Obligations
  Average
Yield
  Municipal
Bonds
  Average
Yield (1)
  Other Debt
Securities (2)
  Average
Yield
  Fair Value

Held-to-Maturity Securities:

                                    

    Due within one year

     $ --          --%         $ --          --%          $ --          --%         $ --          --%         $ --   

    Due from one to five years

       --          --              60,317          4.17              1,177          2.96              --          --              67,447   

    Due from five to ten years

       3,241,420          3.24              2,864,014          2.77              --          --              47,080          3.14              6,048,216   

    Due after ten years

       1,132,802          3.36              199,860          3.61              58,991          2.86              101,431          5.81              1,514,266   
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total debt securities held to maturity

     $ 4,374,222          3.27%         $ 3,124,191            2.85%         $ 60,168          2.86%         $ 148,511          4.96%         $ 7,629,929   
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Available-for-Sale Securities: (3)

                                    

    Due within one year

     $ --          --%         $ --          --%         $ 124          6.09%         $ --          --%         $ 129   

    Due from one to five years

       5,926          6.87              --          --              555          6.45              --          --              6,867   

    Due from five to ten years

       16,361          3.78              --          --              280          6.63              --          --              17,532   

    Due after ten years

       70,111          3.94              --          --              --          --              13,422          5.68              81,165   
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total debt securities available for sale

     $ 92,398          4.10%         $ --            --%         $ 959          6.46%         $ 13,422          5.68%         $ 105,693   
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

 

(1) Not presented on a tax-equivalent basis.
(2) Consists of corporate bonds and capital trust notes. Included in capital trust notes are $206,000 of pooled trust preferred securities held to maturity, all of which are due after ten years. The remaining capital trust notes consist of single-issue trust preferred securities.
(3) As equity securities have no contractual maturity, they have been excluded from this table.

 

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The following table presents held-to-maturity and available-for-sale securities having a continuous unrealized loss position for less than twelve months and for twelve months or longer as of March 31, 2014:

 

At March 31, 2014

(in thousands)

   Less than Twelve Months    Twelve Months or Longer    Total
      Fair Value        Unrealized Loss        Fair Value        Unrealized Loss        Fair Value       Unrealized Loss

Temporarily Impaired Held-to-Maturity Debt Securities:

                             

GSE debentures

       $2,433,954           $137,118           $        --           $      --           $2,433,954           $137,118   

GSE certificates

       951,596           35,013           --           --           951,596           35,013   

GSE CMOs

       677,733           11,344           --           --           677,733           11,344   

Municipal bonds

       55,696           3,295           --           --           55,696           3,295   

Capital trust notes

       --           --           38,198           7,973           38,198           7,973   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total temporarily impaired held-to-maturity debt securities

       $4,118,979           $186,770           $38,198           $7,973           $4,157,177           $194,743   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Temporarily Impaired Available-for-Sale Securities:

                             

Debt Securities:

                             

   Private label CMOs

       $     10,087           $         90           $        --           $      --           $     10,087           $         90   

   GSE CMOs

       44,915           1,684           --           --           44,915           1,684   

   Capital trust notes

       --           --           5,831           1,591           5,831           1,591   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total temporarily impaired available-for-sale debt securities

       $     55,002           $    1,774           $  5,831           $1,591           $     60,833           $    3,365   

Equity securities

       79,102           1,020           --           --           79,102           1,020   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total temporarily impaired available-for-sale securities

       $   134,104           $    2,794           $  5,831           $1,591           $   139,935           $    4,385   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

 

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The following table presents held-to-maturity and available-for-sale securities having a continuous unrealized loss position for less than twelve months and for twelve months or longer as of December 31, 2013:

 

At December 31, 2013    Less than Twelve Months    Twelve Months or Longer    Total
(in thousands)      Fair Value       Unrealized Loss        Fair Value        Unrealized Loss        Fair Value       Unrealized Loss

Temporarily Impaired Held-to-Maturity Debt Securities:

                             

GSE debentures

      $ 2,777,417          $ 208,506          $ --          $ --          $ 2,777,417          $ 208,506   

GSE certificates

       1,684,793           61,280           --           --           1,684,793           61,280   

GSE CMOs

       936,691           22,520           --           --           936,691           22,520   

Municipal bonds

       55,333           3,849           --           --           55,333           3,849   

Capital trust notes

       24,900           100           37,181           8,986           62,081           9,086   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total temporarily impaired held-to-maturity debt securities

      $ 5,479,134          $ 296,255          $ 37,181          $ 8,986          $ 5,516,315          $ 305,241   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Temporarily Impaired Available-for-Sale Securities:

                             

Debt Securities:

                             

   GSE certificates

      $ --          $ --          $ 110          $ 1          $ 110          $ 1   

   Private label CMOs

       10,202           12           --           --           10,202           12   

   GSE CMOs

       44,725           1,861           --           --           44,725           1,861   

   Capital trust notes

       1,992           8           5,746           1,673           7,738           1,681   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total temporarily impaired available-for-sale debt securities

      $ 56,919          $ 1,881          $ 5,856          $ 1,674          $ 62,775          $ 3,555   

Equity securities

       75,886           4,195           --           --           75,886           4,195   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total temporarily impaired available-for-sale securities

      $ 132,805          $ 6,076          $ 5,856          $ 1,674          $ 138,661          $ 7,750   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

 

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An OTTI loss on impaired securities must be fully recognized in earnings if an investor has the intent to sell the debt security, or if it is more likely than not that the investor will be required to sell the debt security before recovery of its amortized cost. However, even if an investor does not expect to sell a debt security, it must evaluate the expected cash flows to be received and determine if a credit loss has occurred. In the event that a credit loss occurs, only the amount of impairment associated with the credit loss is recognized in earnings. Amounts relating to factors other than credit losses are recorded in AOCL. FASB guidance also requires additional disclosures regarding the calculation of credit losses, as well as factors considered by the investor in reaching a conclusion that an investment is not other-than-temporarily impaired.

Securities in unrealized loss positions are analyzed as part of the Company’s ongoing assessment of OTTI. When the Company intends to sell such securities, the Company recognizes an impairment loss equal to the full difference between the amortized cost basis and the fair value of those securities. When the Company does not intend to sell equity or debt securities in an unrealized loss position, potential OTTI is considered based on a variety of factors, including the length of time and extent to which the fair value has been less than the cost; adverse conditions specifically related to the industry, the geographic area, or financial condition of the issuer, or the underlying collateral of a security; the payment structure of the security; changes to the rating of the security by a rating agency; the volatility of the fair value changes; and changes in fair value of the security after the balance sheet date. For debt securities, the Company estimates cash flows over the remaining life of the underlying collateral to assess whether credit losses exist and, where applicable, to determine if any adverse changes in cash flows have occurred. The Company’s cash flow estimates take into account expectations of relevant market and economic data as of the end of the reporting period. As of March 31, 2014, the Company did not intend to sell its securities with an unrealized loss position, and it was more likely than not that the Company would not be required to sell these securities before recovery of their amortized cost basis. The Company believes that the securities with an unrealized loss position were not other-than-temporarily impaired as of March 31, 2014.

Other factors considered in determining whether or not an impairment is temporary include the length of time and the extent to which fair value has been below cost; the severity of the impairment; the cause of the impairment; the financial condition and near-term prospects of the issuer; activity in the market of the issuer that may indicate adverse credit conditions; and the forecasted recovery period using current estimates of volatility in market interest rates (including liquidity and risk premiums).

Management’s assertion regarding its intent not to sell, or that it is not more likely than not that the Company will be required to sell a security before its anticipated recovery, is based on a number of factors, including a quantitative estimate of the expected recovery period (which may extend to maturity), and management’s intended strategy with respect to the identified security or portfolio. If management does have the intent to sell, or believes it is more likely than not that the Company will be required to sell the security before its anticipated recovery, the unrealized loss is charged directly to earnings in the Consolidated Statement of Income and Comprehensive Income.

The unrealized losses on the Company’s GSE mortgage-related securities and GSE debentures at March 31, 2014 were primarily caused by movements in market interest rates and spread volatility, rather than credit risk. The Company purchased these investments either at par or at a discount or premium relative to their face amount, and the contractual cash flows of these investments are guaranteed by the GSEs. Accordingly, it is expected that these securities will not be settled at a price that is less than the amortized cost of the Company’s investment. Because the Company does not have the intent to sell the investments, and it is not more likely than not that the Company will be required to sell them before the anticipated recovery of fair value, which may be at maturity, the Company did not consider these investments to be other than temporarily impaired at March 31, 2014.

The Company reviews quarterly financial information related to its investments in municipal bonds and capital trust notes, as well as other information that is released by each of the issuers of such bonds and notes, to determine their continued creditworthiness. The contractual terms of these investments do not permit settling the securities at prices that are less than the amortized costs of the investments; therefore, the Company expects that these investments will not be settled at prices that are less than their amortized costs. The Company continues to monitor these investments and currently estimates that the present value of expected cash flows is not less than the amortized cost of the securities. Because the Company does not have the intent to sell the investments, and it is not more likely than not that the Company will be required to sell them before the anticipated recovery of fair value, which may be at maturity, it did not consider these investments to be other-than-temporarily impaired at March 31, 2014. It is possible that these securities will perform worse than is currently expected, which could lead to adverse changes in cash flows from these securities and potential OTTI losses in the future. Future events that could trigger material unrecoverable declines in the fair values of the Company’s investments, and result in potential OTTI losses, include, but are not limited to, government intervention; deteriorating asset quality and credit metrics; significantly higher levels of default and loan loss provisions; losses in value on the underlying collateral; deteriorating credit enhancement; net operating losses; and further illiquidity in the financial markets.

 

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At March 31, 2014, the Company’s equity securities portfolio consisted of perpetual preferred stock, common stock, and mutual funds. The Company considers a decline in the fair value of available-for-sale equity securities to be other than temporary if the Company does not expect to recover the entire amortized cost basis of the security. The unrealized losses on the Company’s equity securities at the end of March 2014 were primarily caused by market volatility. The Company evaluated the near-term prospects of a recovery of fair value for each security in the portfolio, together with the severity and duration of impairment to date. Based on this evaluation, and its ability and intent to hold these investments for a reasonably sufficient period of time to realize a near-term forecasted recovery of fair value, the Company did not consider these investments to be other-than-temporarily impaired at March 31, 2014. Nonetheless, it is possible that these equity securities will perform worse than is currently expected, which could lead to adverse changes in their fair values, or the failure of the securities to fully recover in value as presently forecasted by management. This potentially would cause the Company to record OTTI losses in future periods. Events that could trigger material declines in the fair values of these securities include, but are not limited to, deterioration in the equity markets; a decline in the quality of the loan portfolios of the issuers in which the Company has invested; and the recording of higher loan loss provisions and net operating losses by such issuers.

The investment securities designated as having a continuous loss position for twelve months or more at March 31, 2014 consisted of six capital trust notes. At December 31, 2013, the investment securities designated as having a continuous loss position for twelve months or more consisted of six capital trust notes and one mortgage-backed security. At March 31, 2014 and December 31, 2013, the combined market value of the respective securities represented unrealized losses of $9.6 million and $10.7 million. At March 31, 2014, the fair value of securities having a continuous loss position for twelve months or more was 17.8% below the collective amortized cost of $53.6 million. At December 31, 2013, the fair value of such securities was 19.9% below the collective amortized cost of $53.7 million.

Note 5. Loans

The following table sets forth the composition of the loan portfolio at March 31, 2014 and December 31, 2013:

 

     March 31, 2014    December 31, 2013
(dollars in thousands)         Amount         Percent of
Non-Covered
 Loans Held for 
Investment
        Amount         Percent of
Non-Covered
 Loans Held for 
Investment

Non-Covered Loans Held for Investment:

                   

Mortgage Loans:

                   

Multi-family

     $ 21,454,697             69.55%          $ 20,699,927             69.41%   

Commercial real estate

       7,488,692             24.27                 7,364,231             24.70       

One-to-four family

       626,975             2.03               560,730             1.88       

Acquisition, development, and construction

       373,849             1.21               344,100             1.15       
    

 

 

      

 

 

      

 

 

      

 

 

 

Total mortgage loans held for investment

       29,944,213             97.06               28,968,988             97.14       
    

 

 

      

 

 

      

 

 

      

 

 

 

Other Loans:

                   

Commercial and industrial

       763,418             2.48               712,260             2.39       

Lease financing, net of unearned income of $5,690 and $5,723

       104,925             0.34               101,431             0.34       
    

 

 

      

 

 

      

 

 

      

 

 

 

Total commercial and industrial loans

       868,343             2.82               813,691             2.73       
    

 

 

      

 

 

      

 

 

      

 

 

 

Other

       37,351             0.12               39,036             0.13       
    

 

 

      

 

 

      

 

 

      

 

 

 

Total other loans held for investment

       905,694             2.94               852,727             2.86       
    

 

 

      

 

 

      

 

 

      

 

 

 

Total non-covered loans held for investment

     $ 30,849,907             100.00%          $ 29,821,715             100.00%    
         

 

 

           

 

 

 

Net deferred loan origination costs

       17,724                  16,274          

Allowance for losses on non-covered loans

       (139,361)                 (141,946)         
    

 

 

           

 

 

      

Non-covered loans held for investment, net

     $ 30,728,270                $ 29,696,043          
    

 

 

           

 

 

      

Covered loans

       2,695,158                  2,788,618          

Allowance for losses on covered loans

       (49,439)                 (64,069)         
    

 

 

           

 

 

      

Total covered loans, net

     $   2,645,719                $ 2,724,549          

Loans held for sale

       266,240                  306,915          
    

 

 

           

 

 

      

Total loans, net

     $ 33,640,229                $ 32,727,507          
    

 

 

           

 

 

      

 

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Non-Covered Loans

Non-Covered Loans Held for Investment

The vast majority of the loans the Company originates for investment are multi-family loans, most of which are collateralized by non-luxury apartment buildings in New York City that are rent-regulated and feature below-market rents. In addition, the Company originates commercial real estate (“CRE”) loans, most of which are collateralized by properties located in New York City and Long Island.

The Company also originates one-to-four family loans; acquisition, development, and construction (“ADC”) loans; and commercial and industrial (“C&I”) loans for investment. ADC loans are primarily originated for multi-family and residential tract projects in New York City and on Long Island, while one-to-four family loans are originated both within and beyond the markets served by its branch offices. C&I loans consist of asset-based loans, equipment loans and leases, and dealer floor plan loans (together, “specialty finance loans and leases”) that are made to nationally recognized borrowers throughout the U.S. and are senior debt-secured; and other C&I loans, both secured and unsecured, that primarily are made to small and mid-size businesses in Metro New York. Such C&I loans are typically made for working capital, business expansion, and the purchase of machinery and equipment.

Payments on multi-family and CRE loans generally depend on the income produced by the underlying properties which, in turn, depends on their successful operation and management. Accordingly, the ability of the Company’s borrowers to repay these loans may be impacted by adverse conditions in the local real estate market and the local economy. While the Company generally requires that such loans be qualified on the basis of the collateral property’s current cash flows, appraised value, and debt service coverage ratio, among other factors, there can be no assurance that its underwriting policies will protect the Company from credit-related losses or delinquencies.

The one-to-four family loans that are held for investment consist primarily of hybrid loans (both jumbo and agency-conforming) that have been made at conservative loan-to-value ratios to borrowers with a documented history of repaying their debts.

ADC loans typically involve a higher degree of credit risk than loans secured by improved or owner-occupied real estate. Accordingly, borrowers are required to provide a guarantee of repayment and completion, and loan proceeds are disbursed as construction progresses, as certified by in-house or third-party engineers. The risk of loss on an ADC loan is largely dependent upon the accuracy of the initial appraisal of the property’s value upon completion of construction or development; the estimated cost of construction, including interest; and the estimated time to complete and/or sell or lease such property. The Company seeks to minimize these risks by maintaining conservative lending policies and rigorous underwriting standards. However, if the estimate of value proves to be inaccurate, the cost of completion is greater than expected, the length of time to complete and/or sell or lease the collateral property is greater than anticipated, or if there is a downturn in the local economy or real estate market, the property could have a value upon completion that is insufficient to assure full repayment of the loan. This could have a material adverse effect on the quality of the ADC loan portfolio, and could result in losses or delinquencies.

To minimize the risk involved in specialty finance lending and leasing, the Company primarily participates in broadly syndicated asset-based loans, equipment loan and lease financing, and dealer floor plan loans that are presented by an approved list of select, nationally recognized sources with which its lending officers have established long-term funding relationships. The loans and leases, which are secured by a perfected first security interest in the underlying collateral and structured as senior debt, are made to large corporate obligors, the majority of which are publicly traded, carry investment grade or near-investment grade ratings, participate in stable industries, and are located nationwide. To further minimize the risk involved in specialty finance lending and leasing, the Company re-underwrites each transaction; in addition, it retains outside counsel to conduct a further review of the underlying documentation.

To minimize the risks involved in other C&I lending, the Company underwrites such loans on the basis of the cash flows produced by the business; requires that such loans be collateralized by various business assets, including inventory, equipment, and accounts receivable, among others; and requires personal guarantees. However, the capacity of a borrower to repay such a C&I loan is substantially dependent on the degree to which his or her business is successful. In addition, the collateral underlying such loans may depreciate over time, may not be conducive to appraisal, or may fluctuate in value, based upon the results of operations of the business.

Included in non-covered loans held for investment at March 31, 2014 and December 31, 2013 were loans to non-officer directors of $148.7 million and $149.4 million, respectively.

 

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Table of Contents

Loans Held for Sale

Established in January 2010, the Community Bank’s mortgage banking operation ranks among the 20 largest aggregators of one-to-four family loans for sale in the nation. Community banks, credit unions, mortgage companies, and mortgage brokers use its proprietary web-accessible mortgage banking platform to originate and close one-to-four family loans throughout the U.S. These loans are generally sold, servicing retained, to GSEs. To a much lesser extent, the Community Bank uses its mortgage banking platform to originate fixed-rate jumbo loans under contract for sale to other financial institutions. The volume of jumbo loan originations has been insignificant to date, and the Company does not expect such loans to represent a material portion of the held-for-sale loans it originates. The Company also services mortgage loans for various third parties, primarily including those it sells to GSEs. The unpaid principal balance of loans serviced for others was $21.7 billion at March 31, 2014 and $21.5 billion at December 31, 2013.

Asset Quality

The following table presents information regarding the quality of the Company’s non-covered loans held for investment at March 31, 2014:

 

(in thousands)    Loans
 30-89 Days 
Past Due
   Non-
 Accrual 
Loans
   Loans
 90 Days or More 
Delinquent and
Still Accruing
Interest
    Total Past 
Due

Loans
      Current   
Loans
   Total Loans
Receivable

Multi-family

      $ 3,644         $ 68,012         $ --         $ 71,656         $ 21,383,041          $ 21,454,697  

Commercial real estate

       11,843          27,014          --          38,857          7,449,835          7,488,692  

One-to-four family

       1,430          9,640          --          11,070          615,905          626,975  

Acquisition, development, and construction

       --          2,328          --          2,328          371,521          373,849  

Commercial and industrial(1)

       1,067          5,051          --          6,118          862,225          868,343  

Other

       615          1,334          --          1,949          35,402          37,351  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total

      $ 18,599         $ 113,379         $ --         $ 131,978         $ 30,717,929          $ 30,849,907  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

 

(1) Includes lease financing receivables, all of which were current loans.

The following table presents information regarding the quality of the Company’s non-covered loans held for investment at December 31, 2013:

 

(in thousands)    Loans
 30-89 Days 
Past Due
   Non-
 Accrual 
Loans
   Loans
 90 Days or More 
Delinquent and
Still Accruing
Interest
    Total Past 
Due

Loans
      Current   
Loans
   Total Loans
Receivable

Multi-family

      $ 33,678         $ 58,395         $ --         $ 92,073         $ 20,607,854          $ 20,699,927  

Commercial real estate

       1,854          24,550          --          26,404          7,337,827          7,364,231  

One-to-four family

       1,076          10,937          --          12,013          548,717          560,730  

Acquisition, development, and construction

       --          2,571          --          2,571          341,529          344,100  

Commercial and industrial(1)

       1          5,735          --          5,736          807,955          813,691  

Other

       480          1,349          --          1,829          37,207          39,036  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total

      $ 37,089         $ 103,537         $ --         $ 140,626         $ 29,681,089          $ 29,821,715  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

 

(1) Includes lease financing receivables, all of which were current loans.

 

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Table of Contents

The following table summarizes the Company’s portfolio of non-covered held-for-investment loans by credit quality indicator at March 31, 2014:

 

(in thousands)    Multi-Family      Commercial  
Real Estate
   One-to-Four 
Family
  Acquisition,
 Development, and 
Construction
  Total
  Mortgage  
Loans
   Commercial 
and
Industrial(1)
  Other   Total Other
Loan Segment

Credit Quality Indicator:

                               

Pass

       $21,340,444          $7,427,159          $621,789          $371,191          $29,760,583          $849,359          $36,159          $885,518  

Special mention

      36,643         21,050         --         --         57,693         7,412         --         7,412  

Substandard

      77,610         40,123         5,186         2,658         125,577         11,506         1,192         12,698  

Doubtful

      --         360         --         --         360         66         --         66  
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total

       $21,454,697          $7,488,692          $626,975          $373,849          $29,944,213          $868,343          $37,351          $905,694  
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

 

(1) Includes lease financing receivables, all of which were classified as “pass.”

The following table summarizes the Company’s portfolio of non-covered held-for-investment loans by credit quality indicator at December 31, 2013:

 

(in thousands)   Multi-Family     Commercial  
Real Estate
   One-to-Four 
Family
  Acquisition,
 Development, and 
Construction
  Total
Mortgage  
Loans
   Commercial 
and
Industrial(1)
  Other   Total Other
Loan Segment

Credit Quality Indicator:

                               

Pass

      $20,527,460       $ 7,304,502       $ 554,132       $ 333,805       $ 28,719,899       $ 793,693       $ 37,688       $ 831,381  

Special mention

      73,549         25,407         --         7,400         106,356         13,036         --         13,036  

Substandard

      98,918         33,822         6,598         2,895         142,233         6,808         1,348         8,156  

Doubtful

      --         500         --         --         500         154         --         154  
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total

      $20,699,927       $ 7,364,231       $ 560,730       $ 344,100       $ 28,968,988       $ 813,691       $ 39,036       $ 852,727  
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

 

(1) Includes lease financing receivables, all of which were classified as “pass.”

The preceding classifications follow regulatory guidelines and can be generally described as follows: pass loans are of satisfactory quality; special mention loans have a potential weakness or risk that may result in the deterioration of future repayment; substandard loans are inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged (these loans have a well-defined weakness and there is a distinct possibility that the Company will sustain some loss); and doubtful loans, based on existing circumstances, have weaknesses that make collection or liquidation in full highly questionable and improbable. In addition, one-to-four family residential loans are classified utilizing an inter-regulatory agency methodology that incorporates the extent of delinquency and the loan-to-value ratios. These classifications are the most current available and generally have been updated within the last twelve months.

Troubled Debt Restructurings

The Company is required to account for certain held-for-investment loan modifications or restructurings as Troubled Debt Restructurings (“TDRs”). In general, a modification or restructuring of a loan constitutes a TDR if the Company grants a concession to a borrower experiencing financial difficulty. Loans modified as TDRs generally are placed on non-accrual status until the Company determines that future collection of principal and interest is reasonably assured, which requires that the borrower demonstrate performance according to the restructured terms for a period of at least six consecutive months.

In an effort to proactively manage delinquent loans, the Company has selectively extended to certain borrowers concessions such as rate reductions, extension of maturity dates, and forbearance agreements. As of March 31, 2014, loans on which concessions were made with respect to rate reductions and/or extension of maturity dates amounted to $74.1 million; loans on which forbearance agreements were reached amounted to $7.4 million.

The following table presents information regarding the Company’s TDRs as of March 31, 2014 and December 31, 2013:

 

     March 31, 2014    December 31, 2013
(in thousands)     Accruing     Non-Accrual    Total    Accruing    Non-Accrual    Total

Loan Category:

                             

Multi-family

        $10,042           $50,391           $60,433           $10,083           $50,548           $60,631  

Commercial real estate

       2,180          15,524          17,704          2,198          15,626          17,824  

One-to-four family

       --          --          --          --          --          --  

Acquisition, development, and construction

       --          935          935          --          --          --  

Commercial and industrial

       1,043          1,376          2,419          1,129          758          1,887  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total

        $13,265           $68,226           $81,491           $13,410           $66,932           $80,342  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

 

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Table of Contents

The eligibility of a borrower for work-out concessions of any nature depends upon the facts and circumstances of each transaction, which may change from period to period, and involves judgment by Company personnel regarding the likelihood that the concession will result in the maximum recovery for the Company.

In the three months ended March 31, 2014, the Company classified one ADC loan in the amount of $935,000, and three C&I loans totaling $638,000, as non-accrual TDRs. While other concessions were granted to the borrowers, the interest rates on the loans were maintained. As a result, these TDRs did not have a financial impact on the Company’s results of operations during the first quarter of this year.

At March 31, 2014, none of the loans that had been modified as TDRs during the twelve months ended at that date were in payment default. A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms.

The Company does not consider a payment to be in default when the loan is in forbearance, or otherwise granted a delay of payment, when the agreement to forebear or allow a delay of payment is part of a modification. Subsequent to the modification, the loan is not considered to be in default until payment is contractually past due in accordance with the modified terms. However, the Company does consider a loan with multiple modifications or forbearance periods to be in default, and would also consider a loan to be in default if it was in bankruptcy or was partially charged off subsequent to modification.

Covered Loans

The following table presents the carrying value of covered loans acquired in the AmTrust and Desert Hills acquisitions as of March 31, 2014:

 

(dollars in thousands)      Amount     Percent of
Covered Loans

Loan Category:

        

One-to-four family

      $ 2,453,548         91.0%   

All other loans

       241,610           9.0    
    

 

 

     

 

 

 

Total covered loans

      $ 2,695,158         100.0%   
    

 

 

     

 

 

 

The Company refers to the loans acquired in the AmTrust and Desert Hills transactions as “covered loans” because the Company is being reimbursed for a substantial portion of losses on these loans under the terms of the FDIC loss sharing agreements. Covered loans are accounted for under Accounting Standards Codification (“ASC”) Topic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310-30”) and are initially measured at fair value, which includes estimated future credit losses expected to be incurred over the lives of the loans. Under ASC 310-30, purchasers are permitted to aggregate acquired loans into one or more pools, provided that the loans have common risk characteristics. A pool is then accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows.

At March 31, 2014 and December 31, 2013, the unpaid principal balances of covered loans were $3.2 billion and $3.3 billion, respectively. The carrying values of such loans were $2.7 billion and $2.8 billion, respectively, at the corresponding dates.

At the respective acquisition dates, the Company estimated the fair values of the AmTrust and Desert Hills loan portfolios, which represented the expected cash flows from the portfolios, discounted at market-based rates. In estimating such fair values, the Company (a) calculated the contractual amount and timing of undiscounted principal and interest payments (the “undiscounted contractual cash flows”); and (b) estimated the expected amount and timing of undiscounted principal and interest payments (the “undiscounted expected cash flows”). The amount by which the undiscounted expected cash flows exceed the estimated fair value (the “accretable yield”) is accreted into interest income over the lives of the loans. The amount by which the undiscounted contractual cash flows exceed the undiscounted expected cash flows is referred to as the “non-accretable difference.” The non-accretable difference represents an estimate of the credit risk in the loan portfolios at the respective acquisition dates.

The accretable yield is affected by changes in interest rate indices for variable rate loans, changes in prepayment assumptions, and changes in expected principal and interest payments over the estimated lives of the loans. Changes in interest rate indices for variable rate loans increase or decrease the amount of interest income expected to be collected, depending on the direction of interest rates. Prepayments affect the estimated lives of covered loans and could change the amount of interest income and principal expected to be collected. Changes in expected principal and interest payments over the estimated lives of covered loans are driven by the credit outlook and by actions that may be taken with borrowers.

The Company periodically evaluates the estimates of the cash flows it expects to collect. Expected future cash flows from interest payments are based on variable rates at the time of the periodic evaluation. Estimates of expected cash flows that are impacted by changes in interest rate indices for variable rate loans and prepayment assumptions are treated as prospective yield adjustments and included in interest income.

 

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Changes in the accretable yield for covered loans in the three months ended March 31, 2014 were as follows:

 

(in thousands)    Accretable Yield

Balance at beginning of period

       $796,993    

Reclassification from non-accretable difference

       151,499    

Accretion

       (34,742)    
    

 

 

 

Balance at end of period

       $913,750    
    

 

 

 

In the preceding table, the line item “reclassification from non-accretable difference” includes changes in cash flows that the Company expects to collect due to changes in prepayment assumptions, changes in interest rates on variable rate loans, and changes in loss assumptions. As the underlying credit assumptions have improved, the projected loss assumptions on defaulting loans have declined which, in turn, has resulted in an increase in the accretable yield. Furthermore, as of the Company’s most recent periodic evaluation, prepayment assumptions declined, which resulted in an increase in future expected interest cash flows and, consequently, an increase in the accretable yield. The effect of these increases was partially offset by the coupon rates on variable rate loans having reset lower, which resulted in a decrease in future expected interest cash flows and, consequently, a decrease in the accretable yield.

In connection with the AmTrust and Desert Hills acquisitions, the Company also acquired other real estate owned (“OREO”), all of which is covered under FDIC loss sharing agreements. Covered OREO was initially recorded at its estimated fair value on the acquisition date, based on independent appraisals, less the estimated selling costs. Any subsequent write-downs due to declines in fair value have been charged to non-interest expense, and partially offset by loss reimbursements under the FDIC loss sharing agreements. Any recoveries of previous write-downs have been credited to non-interest expense and partially offset by the portion of the recovery that was due to the FDIC.

The FDIC loss share receivable represents the present value of the estimated losses to be reimbursed by the FDIC. The estimated losses were based on the same cash flow estimates used in determining the fair value of the covered loans. The FDIC loss share receivable is reduced as losses on covered loans are recognized and as loss sharing payments are received from the FDIC. Realized losses in excess of acquisition-date estimates result in an increase in the FDIC loss share receivable. Conversely, if realized losses are lower than the acquisition-date estimates, the FDIC loss share receivable is reduced by amortization to interest income.

The following table presents information regarding the Company’s covered loans that were 90 days or more past due at March 31, 2014 and December 31, 2013:

 

(in thousands)    March 31, 2014    December 31, 2013 

Covered Loans 90 Days or More Past Due:

        

One-to-four family

        $182,585          $201,425  

Other loans

       9,410         10,060  
    

 

 

     

 

 

 

Total covered loans 90 days or more past due

        $191,995          $211,485  
    

 

 

     

 

 

 

The following table presents information regarding the Company’s covered loans that were 30 to 89 days past due at March 31, 2014 and December 31, 2013:

 

(in thousands)    March 31, 2014    December 31, 2013 

Covered Loans 30-89 Days Past Due:

        

One-to-four family

           $39,632          $52,250  

Other loans

       5,012         5,679  
    

 

 

     

 

 

 

Total covered loans 30-89 days past due

           $44,644          $57,929  
    

 

 

     

 

 

 

At March 31, 2014, the Company had $44.6 million of covered loans that were 30 to 89 days past due, and covered loans of $192.0 million that were 90 days or more past due but considered to be performing due to the application of the yield accretion method under ASC 310-30. The remaining portion of the Company’s covered loan portfolio totaled $2.5 billion at March 31, 2014 and was considered current at that date. ASC 310-30 allows the Company to aggregate credit-impaired loans acquired in the same fiscal quarter into one or more pools, provided that the loans have common risk characteristics. A pool is then accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows.

 

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Loans that may have been classified as non-performing loans by AmTrust or Desert Hills were no longer classified as non-performing by the Company because, at the respective dates of acquisition, the Company believed that it would fully collect the new carrying value of these loans. The new carrying value represents the contractual balance, reduced by the portion that is expected to be uncollectible (i.e., the non-accretable difference) and by an accretable yield (discount) that is recognized as interest income. It is important to note that management’s judgment is required in reclassifying loans subject to ASC 310-30 as performing loans, and such judgment is dependent on having a reasonable expectation about the timing and amount of the cash flows to be collected, even if the loan is contractually past due.

The primary credit quality indicator for covered loans is the expectation of underlying cash flows. The Company recovered $14.6 million from the allowance for losses on covered loans during the three months ended March 31, 2014 and $5.8 million during the three months ended December 31, 2013. The respective recoveries were recorded in connection with an increase in expected cash flows on certain pools of loans acquired in the Company’s FDIC-assisted transactions, and were largely offset by FDIC indemnification expense of $11.7 million and $4.7 million, which was recorded in non-interest income in the corresponding periods.

Note 6. Allowances for Loan Losses

The following tables provide additional information regarding the Company’s allowances for losses on non-covered and covered loans, based upon the method of evaluating loan impairment:

 

(in thousands)      Mortgage       Other        Total  

Allowances for Loan Losses at March 31, 2014:

             

Loans individually evaluated for impairment

      $ 428        $ --         $ 428  

Loans collectively evaluated for impairment

       126,798         12,135          138,933  

Acquired loans with deteriorated credit quality

       43,871         5,568          49,439  
    

 

 

     

 

 

      

 

 

 

Total

      $ 171,097       $ 17,703         $ 188,800  
    

 

 

     

 

 

      

 

 

 

 

(in thousands)      Mortgage       Other        Total  

Allowances for Loan Losses at December 31, 2013:

             

Loans individually evaluated for impairment

      $ --          $ --           $ --    

Loans collectively evaluated for impairment

       127,840         14,106          141,946  

Acquired loans with deteriorated credit quality

       56,705         7,364          64,069  
    

 

 

     

 

 

      

 

 

 

Total

      $ 184,545       $ 21,470         $ 206,015  
    

 

 

     

 

 

      

 

 

 

 

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The following tables provide additional information regarding the methods used to evaluate the Company’s loan portfolio for impairment:

 

(in thousands)      Mortgage        Other        Total  

Loans Receivable at March 31, 2014:

              

Loans individually evaluated for impairment

      $ 106,669         $ 12,119         $ 118,788  

Loans collectively evaluated for impairment

       29,837,544          893,575          30,731,119  

Acquired loans with deteriorated credit quality

       2,453,548          241,610          2,695,158  
    

 

 

      

 

 

      

 

 

 

Total

      $ 32,397,761         $ 1,147,304         $ 33,545,065  
    

 

 

      

 

 

      

 

 

 

 

(in thousands)      Mortgage        Other        Total  

Loans Receivable at December 31, 2013:

              

Loans individually evaluated for impairment

      $ 109,389         $ 6,996         $ 116,385  

Loans collectively evaluated for impairment

       28,859,599          845,731          29,705,330  

Acquired loans with deteriorated credit quality

       2,529,200          259,418          2,788,618  
    

 

 

      

 

 

      

 

 

 

Total

      $ 31,498,188         $ 1,112,145         $ 32,610,333  
    

 

 

      

 

 

      

 

 

 

Allowance for Losses on Non-Covered Loans

The following table summarizes activity in the allowance for losses on non-covered loans for the three months ended March 31, 2014 and 2013:

 

     March 31,
     2014         2013
(in thousands)    Mortgage    Other    Total         Mortgage    Other    Total

Balance, beginning of period

        $127,840              $14,106              $141,946                 $127,934              $13,014              $140,948     

Charge-offs

       (950)            (2,032)            (2,982)               (1,431)            (6,173)            (7,604)    

Recoveries

       336             61             397                1,675             368             2,043     

Provision for loan losses

       --             --             --                (277)            5,277             5,000     
    

 

 

      

 

 

      

 

 

         

 

 

      

 

 

      

 

 

 

Balance, end of period

        $127,226              $12,135              $139,361                 $127,901              $12,486              $140,387     
    

 

 

      

 

 

      

 

 

         

 

 

      

 

 

      

 

 

 

Please see “Critical Accounting Policies” for additional information regarding the Company’s allowance for losses on non-covered loans.

 

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The following table presents additional information about the Company’s impaired non-covered loans at March 31, 2014:

 

(in thousands)    Recorded
  Investment  
   Unpaid
  Principal  
Balance
   Related
  Allowance  
   Average
Recorded
  Investment  
   Interest
Income
  Recognized  

Impaired loans with no related allowance:

                        

Multi-family

     $ 71,263        $ 87,555        $ --        $ 75,018        $ 336  

Commercial real estate

       31,299          33,334          --          30,958          352  

One-to-four family

       1,348          1,348          --          674          --  

Acquisition, development, and construction

       --          --          --          --          --  

Commercial and industrial

       12,119          27,732          --          9,557          136  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total impaired loans with no related allowance

     $ 116,029        $ 149,969        $ --        $ 116,207        $ 824  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Impaired loans with an allowance recorded:

                        

Multi-family

     $ --        $ --        $ --        $ --        $ --  

Commercial real estate

       2,453          2,453          392          1,226          12  

One-to-four family

       306          306          36          153          --  

Acquisition, development, and construction

       --          --          --          --          --  

Commercial and industrial

       --          --          --          --          --  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total impaired loans with an allowance recorded

     $ 2,759        $ 2,759        $ 428        $ 1,379        $ 12  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total impaired loans:

                        

Multi-family

     $ 71,263        $ 87,555        $ --        $ 75,018        $ 336  

Commercial real estate

       33,752          35,787          392          32,184          364  

One-to-four family

       1,654          1,654          36          827          --  

Acquisition, development, and construction

       --          --          --          --          --  

Commercial and industrial

       12,119          27,732          --          9,557          136  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total impaired loans

     $  118,788        $  152,728        $  428        $  117,586        $  836  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

The following table presents additional information about the Company’s impaired non-covered loans at December 31, 2013:

 

(in thousands)    Recorded
  Investment  
   Unpaid
  Principal  
Balance
   Related
  Allowance  
   Average
Recorded
  Investment  
   Interest
Income
  Recognized  

Impaired loans with no related allowance:

                        

Multi-family

     $ 78,771        $ 94,265        $ --        $ 117,208        $ 1,991  

Commercial real estate

       30,619          32,474          --          43,566          1,604  

One-to-four family

       --          --          --          3,611          89  

Acquisition, development, and construction

       --          --          --          275          --  

Commercial and industrial

       6,995          34,199          --          6,890          366  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total impaired loans with no related allowance

     $ 116,385        $ 160,938        $ --        $ 171,550        $ 4,050  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Impaired loans with an allowance recorded:

                        

Multi-family

     $ --        $ --        $ --        $ 2,442        $ --  

Commercial real estate

       --          --          --          900          --  

One-to-four family

       --          --          --          --          --  

Acquisition, development, and construction

       --          --          --          --          --  

Commercial and industrial

       --          --          --          --          --  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total impaired loans with an allowance recorded

     $ --        $ --        $ --        $ 3,342        $ --  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total impaired loans:

                        

Multi-family

     $ 78,771        $ 94,265        $ --        $ 119,650        $ 1,991  

Commercial real estate

       30,619          32,474          --          44,466          1,604  

One-to-four family

       --          --          --          3,611          89  

Acquisition, development, and construction

       --          --          --          275          --  

Commercial and industrial

       6,995          34,199          --          6,890          366  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total impaired loans

     $  116,385        $  160,938        $      --        $  174,892        $  4,050  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

 

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Allowance for Losses on Covered Loans

Covered loans are reported exclusive of the FDIC loss share receivable. The covered loans acquired in the AmTrust and Desert Hills acquisitions are, and will continue to be, reviewed for collectability based on the expectations of cash flows from these loans. Covered loans have been aggregated into pools of loans with common characteristics. In determining the allowance for losses on covered loans, the Company periodically performs an analysis to estimate the expected cash flows for each of the loan pools. The Company records a provision for losses on covered loans to the extent that the expected cash flows from a loan pool have decreased since the acquisition date. Accordingly, if there is a decrease in expected cash flows due to an increase in estimated credit losses, as compared to the estimates made at the respective acquisition dates, the decrease in the present value of expected cash flows is recorded as a provision for covered loan losses charged to earnings, and an allowance for covered loan losses is established. A related credit to non-interest income and an increase in the FDIC loss share receivable is recognized at the same time, and measured based on the applicable loss sharing agreement percentage.

The following table summarizes activity in the allowance for losses on covered loans for the three months ended March 31, 2014 and 2013:

 

     March 31,
(in thousands)    2014   2013

Balance, beginning of period

     $ 64,069       $ 51,311  

(Recovery of) provision for losses on covered loans

       (14,630 )       4,502  
    

 

 

     

 

 

 

Balance, end of period

     $ 49,439       $ 55,813  
    

 

 

     

 

 

 

Note 7. Borrowed Funds

The following table summarizes the Company’s borrowed funds at March 31, 2014 and December 31, 2013:

 

(in thousands)    March 31,
2014
   December 31,
2013

Wholesale borrowings:

         

FHLB advances

     $ 10,514,899        $ 10,872,576  

Repurchase agreements

       3,425,000          3,425,000  

Fed funds purchased

       525,000          445,000  
    

 

 

      

 

 

 

Total wholesale borrowings

     $ 14,464,899        $ 14,742,576  
    

 

 

      

 

 

 

Other borrowings:

         

Junior subordinated debentures

     $ 358,181        $ 358,126  

Preferred stock of subsidiaries

       4,300          4,300  
    

 

 

      

 

 

 

Total other borrowings

     $ 362,481        $ 362,426  
    

 

 

      

 

 

 

Total borrowed funds

     $ 14,827,380        $ 15,105,002  
    

 

 

      

 

 

 

At March 31, 2014 and December 31, 2013, the Company had $358.2 million and $358.1 million, respectively, of outstanding junior subordinated deferrable interest debentures (“junior subordinated debentures”) held by statutory business trusts (the “Trusts”) that issued guaranteed capital securities. The capital securities qualified as Tier 1 capital of the Company at that date. However, with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the qualification of capital securities as Tier 1 capital is expected to be phased out by January 1, 2016.

The Trusts are accounted for as unconsolidated subsidiaries in accordance with GAAP. The proceeds of each issuance were invested in a series of junior subordinated debentures of the Company and the underlying assets of each statutory business trust are the relevant debentures. The Company has fully and unconditionally guaranteed the obligations under each trust’s capital securities to the extent set forth in a guarantee by the Company to each trust. The Trusts’ capital securities are each subject to mandatory redemption, in whole or in part, upon repayment of the debentures at their stated maturity or earlier redemption.

 

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The following junior subordinated debentures were outstanding at March 31, 2014:

 

Issuer   Interest Rate of
Capital Securities
and Debentures
      

Junior

Subordinated

Debenture

Carrying

Amount

 

Capital

Securities

Amount

Outstanding

 

Date of

    Original Issue    

   Stated Maturity        First Optional    
 Redemption Date 
            (dollars in thousands)            

New York Community Capital Trust V (BONUSESSM Units)

        6.000 %           $144,255         $137,904     Nov. 4, 2002   Nov. 1, 2051   Nov. 4, 2007 (1)

New York Community Capital Trust X

        1.833           123,712         120,000     Dec. 14, 2006   Dec. 15, 2036   Dec. 15, 2011 (2)

PennFed Capital Trust III

        3.483           30,928         30,000     June 2, 2003   June 15, 2033   June 15, 2008 (2)  

New York Community Capital Trust XI

        1.884           59,286         57,500     April 16, 2007   June 30, 2037   June 30, 2012 (2)  
         

 

 

     

 

 

             

Total junior subordinated debentures

            $358,181         $345,404        
         

 

 

     

 

 

             

 

(1) Callable subject to certain conditions as described in the prospectus filed with the SEC on November 4, 2002.
(2) Callable from this date forward.

Note 8. Mortgage Servicing Rights

The Company had MSRs of $238.0 million and $241.0 million, respectively, at March 31, 2014 and December 31, 2013, with both balances consisting entirely of residential MSRs.

Residential MSRs are carried at fair value, with changes in fair value recorded as a component of non-interest income in each period. The Company uses various derivative instruments to mitigate the income statement-effect of changes in fair value due to changes in valuation inputs and assumptions regarding its residential MSRs. The effects of changes in the fair value of the derivatives are recorded in “Non-interest income.” MSRs do not trade in an active open market with readily observable prices. Accordingly, the Company bases the fair value of its MSRs on the present value of estimated future net servicing income cash flows. The Company estimates future net servicing income cash flows with assumptions that market participants would use to estimate fair value, including estimates of prepayment speeds, discount rates, default rates, refinance rates, servicing costs, escrow account earnings, contractual servicing fee income, and ancillary income. The Company reassesses, and periodically adjusts, the underlying inputs and assumptions to reflect market conditions and assumptions that a market participant would consider in valuing the MSR asset.

The value of residential MSRs at any given time is significantly affected by the mortgage interest rates that are then currently available in the marketplace which, in turn, influence mortgage loan prepayment speeds. During periods of declining interest rates, the value of MSRs generally declines as an increase in mortgage refinancing activity results in an increase in prepayments. Conversely, during periods of rising interest rates, the value of MSRs generally increases as mortgage refinancing activity declines.

During the twelve months ended December 31, 2013, the Company also had securitized MSRs, which were carried at the lower of the initial carrying value, adjusted for amortization, or fair value, and were amortized in proportion to, and over the period of, estimated net servicing income. Such MSRS were periodically evaluated for impairment, based on the difference between their carrying amount and their current fair value. If it was determined that impairment existed, the resultant loss was charged to earnings. Reflecting amortization, the Company had no securitized MSRs at December 31, 2013.

 

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The following table sets forth the changes in the balances of residential and securitized MSRs for the periods indicated:

 

     For the Three Months
Ended March 31, 2014
   For the Year Ended
December 31, 2013
(in thousands)    Residential    Securitized    Residential    Securitized

Carrying value, beginning of year

       $241,018           $  --            $144,520           $ 193   

Additions

       6,808           --            80,799           --   

Increase (decrease) in fair value:

                   

Due to changes in interest rates and valuation assumptions

       43           --            70,218           --   

Due to other changes(1)

       (9,865)          --            (54,519)          --   

Amortization

       --           --            --           (193)  
    

 

 

      

 

 

      

 

 

      

 

 

 

Carrying value, end of period

       $238,004           $  --            $241,018           $    --   
    

 

 

      

 

 

      

 

 

      

 

 

 

 

(1) Net servicing cash flows, including loan payoffs, and the passage of time.

The following table presents the key assumptions used in calculating the fair value of the Company’s residential MSRs at the dates indicated:

 

         March 31, 2014           December 31, 2013    

Expected Weighted Average Life

       91 months         93 months  

Assumed Prepayment Speed

       8.7 %       8.3 %

Discount Rate

       10.5         10.5  

Primary Mortgage Rate to Refinance

       4.4         4.5  

Cost to Service (per loan per year):

        

Current

       $  53         $  53  

30-59 days or less delinquent

       103         103  

60-89 days delinquent

       203         203  

90-119 days delinquent

       303         303  

Over 120 days delinquent

       553         553  

As indicated in the preceding table, there were no changes in the assumed servicing costs.

Note 9. Pension and Other Post-Retirement Benefits

The following tables set forth certain disclosures for the Company’s pension and post-retirement plans for the periods indicated:

 

     For the Three Months Ended March 31,  
     2014     2013  
(in thousands)    Pension
Benefits
    Post-Retirement
Benefits
    Pension
Benefits
    Post-Retirement
Benefits
 

Components of net periodic (credit) expense:

        

Interest cost

     $ 1,474        $190        $ 1,364        $171   

Service cost

     --        1        --        1   

Expected return on plan assets

     (4,859     --        (4,147     --   

Amortization of prior-service costs

     --        (62     --        (62

Amortization of net actuarial loss

     822        118        2,351        164   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic (credit) expense

     $(2,563     $247        $   (432     $274   
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company expects to contribute $1.5 million to its post-retirement plan to pay premiums and claims for the fiscal year ending December 31, 2014. The Company does not expect to make any contributions to its pension plan in 2014.

 

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Note 10. Stock-Based Compensation

At March 31, 2014, the Company had a total of 14,450,253 shares available for grants as options, restricted stock, or other forms of related rights under the New York Community Bancorp, Inc. 2012 Stock Incentive Plan (the “2012 Stock Incentive Plan”), which was approved by the Company’s shareholders at its Annual Meeting on June 7, 2012. Included in this amount were 1,030,673 shares that were transferred from the New York Community Bancorp, Inc. 2006 Stock Incentive Plan (the “2006 Stock Incentive Plan”), which was approved by the Company’s shareholders at its Annual Meeting on June 7, 2006 and reapproved at its Annual Meeting on June 2, 2011. The Company granted 2,314,498 shares of restricted stock during the three months ended March 31, 2014. The shares had an average fair value of $16.82 on the date of grant and a vesting period of five years. Compensation and benefits expense related to the restricted stock grants is recognized on a straight-line basis over the vesting period, and totaled $6.7 million and $5.5 million, respectively, in the three months ended March 31, 2014 and 2013.

A summary of activity with regard to restricted stock awards in the three months ended March 31, 2014 is presented in the following table:

 

     For the Three Months Ended
March 31, 2014
      Number of Shares    Weighted Average
Grant Date Fair Value

Unvested at beginning of year

       5,043,642       $ 14.27  

Granted

       2,314,498         16.82  

Vested

       (1,173,471 )       14.71  

Cancelled

       (10,200 )       16.02  
    

 

 

     

Unvested at end of period

       6,174,469         15.14  
    

 

 

     

As of March 31, 2014, unrecognized compensation cost relating to unvested restricted stock totaled $87.4 million. This amount will be recognized over a remaining weighted average period of 3.7 years.

In addition, the Company had the following stock option plans at March 31, 2014: the 1998 Richmond County Financial Corp. Stock Compensation Plan; the 1998 Long Island Financial Corp. Stock Option Plan; and the 2004 Synergy Financial Group Stock Option Plans (all plans collectively referred to as the “Stock Option Plans”). All stock options granted under the Stock Option Plans expire ten years from the date of grant.

The Company uses the modified prospective approach to recognize compensation costs related to share-based payments at fair value on the date of grant, and recognizes such costs in the financial statements over the vesting period during which the employee provides service in exchange for the award. As there were no unvested options at any time during the three months ended March 31, 2014, or the year ended December 31, 2013, the Company did not record any compensation and benefits expense relating to stock options during those periods.

To satisfy the exercise of options, the Company either issues new shares of common stock or uses common stock held in Treasury. In the event that Treasury stock is used, the difference between the average cost of Treasury shares and the exercise price is recorded as an adjustment to retained earnings or paid-in capital on the date of exercise. At March 31, 2014, there were 108,619 stock options outstanding. The number of shares available for future issuance under the Stock Option Plans was 11,453 at that date.

The status of the Stock Option Plans at March 31, 2014, and changes that occurred during the three months ended at that date, are summarized below:

 

     For the Three Months Ended
March 31, 2014
     Number of Stock
Options  
   Weighted Average
Exercise Price

Stock options outstanding, beginning of year

       126,821          $ 15.21  

Granted

       --            --  

Exercised

       (16,462)           12.69  

Expired/forfeited

       (1,740)           16.38  
    

 

 

      

Stock options outstanding, end of period

       108,619            15.58  

Options exercisable, end of period

       108,619            15.58  
    

 

 

      

The intrinsic value of stock options outstanding and exercisable at March 31, 2014 was $166,000. The intrinsic value of options exercised during the three months ended March 31, 2014 and 2013 was $58,000 and $60,000, respectively.

 

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Note 11. Fair Value Measurements

GAAP set forth a definition of fair value, established a consistent framework for measuring fair value, and expanded disclosure for each major asset and liability category measured at fair value on either a recurring or non-recurring basis. GAAP also clarified that fair value is an “exit” price, representing the amount that would be received when selling an asset, or paid when transferring a liability, in an orderly transaction between market participants. Fair value is thus a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 

    Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
    Level 2 – Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
    Level 3 – Inputs to the valuation methodology are significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants use in pricing an asset or liability.

A financial instrument’s categorization within this valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The following tables present assets and liabilities that were measured at fair value on a recurring basis as of March 31, 2014 and December 31, 2013, and that were included in the Company’s Consolidated Statements of Condition at those dates:

 

     Fair Value Measurements at March 31, 2014 Using
(in thousands)    Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
   Netting
Adjustments(1)
   Total
Fair Value

Assets:

                        

Mortgage-Related Securities Available for Sale:

                        

GSE certificates

      $ --          $ 24,104          $ --          $ --          $ 24,104   

GSE CMOs

       --           58,549           --           --           58,549   

Private label CMOs

       --           10,088           --           --           10,088   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total mortgage-related securities

      $ --          $ 92,741          $ --          $ --          $ 92,741   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Other Securities Available for Sale:

                        

Municipal bonds

      $ --          $ 1,058          $ --          $ --          $ 1,058   

Capital trust notes

       --           11,894           --           --           11,894   

Preferred stock

       93,245           27,463           --           --           120,708   

Common stock

       16,761           2,159           --           --           18,920   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total other securities

      $ 110,006          $ 42,574          $ --          $ --          $ 152,580   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total securities available for sale

      $ 110,006          $  135,315          $ --          $ --          $ 245,321   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Other Assets:

                        

Loans held for sale

      $ --          $ 266,240          $ --          $ --          $  266,240   

Mortgage servicing rights

       --           --           238,004           --           238,004   

Interest rate lock commitments

       --           --           1,611           --           1,611   

Derivative assets-other(2)

       1,678           1,398           --           (1,564)           1,512   

Liabilities:

                        

Derivative liabilities

      $ (699)          $ (1,007)          $ --          $ 1,418          $ (288)   

 

(1) Includes cash collateral received and pledged.
(2) Includes $1.5 million to purchase Treasury options.

 

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Table of Contents
     Fair Value Measurements at December 31, 2013 Using
(in thousands)    Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
   Netting
Adjustments(1)
   Total
Fair Value

Assets:

                        

Mortgage-Related Securities Available for Sale:

                        

GSE certificates

      $ --           $ 25,200           $ --           $ --           $ 25,200    

GSE CMOs

       --            60,819            --            --            60,819    

Private label CMOs

       --            10,202            --            --            10,202    
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total mortgage-related securities

      $ --           $ 96,221           $ --           $ --           $ 96,221    
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Other Securities Available for Sale:

                        

Municipal bonds

      $ --           $ 1,026           $ --           $ --           $ 1,026    

Capital trust notes

       --            11,798            --            --            11,798    

Preferred stock

       89,942            26,297            --            --            116,239    

Common stock

       52,740            2,714            --            --            55,454    
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total other securities

      $ 142,682           $ 41,835           $ --           $ --           $ 184,517    
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total securities available for sale

      $ 142,682           $ 138,056           $ --           $ --           $ 280,738    
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Other Assets:

                        

Loans held for sale

      $ --           $  306,915           $ --           $ --           $ 306,915    

Mortgage servicing rights

       --            --            241,018            --            241,018    

Interest rate lock commitments

       --            --            258            --            258    

Derivative assets-other(1)

       1,267            5,155            --            (4,848)           1,574    

Liabilities:

                        

Derivative liabilities

      $ (590)          $ (7,422)          $ --           $ 7,624           $ (388)   

 

(1) Includes cash collateral received and pledged.
(2) Includes $1.3 million to purchase Treasury options.

The Company reviews and updates the fair value hierarchy classifications for its assets on a quarterly basis. Changes from one quarter to the next that are related to the observability of inputs for a fair value measurement may result in a reclassification from one hierarchy level to another.

A description of the methods and significant assumptions utilized in estimating the fair values of available-for-sale securities follows:

Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid government securities, exchange-traded securities, and derivatives.

If quoted market prices are not available for the specific security, then fair values are estimated by using pricing models. These pricing models primarily use market-based or independently sourced market parameters as inputs, including, but not limited to, yield curves, interest rates, equity or debt prices, and credit spreads. In addition to observable market information, models incorporate transaction details such as maturity and cash flow assumptions. Securities valued in this manner would generally be classified within Level 2 of the valuation hierarchy, and primarily include such instruments as mortgage-related and corporate debt securities.

In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. In valuing capital trust notes, which may include pooled trust preferred securities, collateralized debt obligations (“CDOs”), and certain single-issue capital trust notes, the determination of fair value may require benchmarking to similar instruments or analyzing default and recovery rates. Therefore, capital trust notes are valued using a model based on the specific collateral composition and cash flow structure of the securities. Key inputs to the model consist of market spread data for each credit rating, collateral type, and other relevant contractual features. In instances where quoted price information is available, the price is considered when arriving at a security’s fair value. Where there is limited activity or less transparency around the inputs to the valuation of preferred stock, the valuation is based on a discounted cash flow model.

 

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Periodically, the Company uses fair values supplied by independent pricing services to corroborate the fair values derived from the pricing models. In addition, the Company reviews the fair values supplied by independent pricing services, as well as their underlying pricing methodologies, for reasonableness. The Company challenges pricing services’ valuations that appear to be unusual or unexpected.

The Company carries loans held for sale originated by the Residential Mortgage Banking segment at fair value, in accordance with ASC Topic 825, “Financial Instruments.” The fair value of held-for-sale loans is primarily based on quoted market prices for securities backed by similar types of loans. Changes in the fair value of these assets are largely driven by changes in interest rates subsequent to loan funding, and changes in the fair value of servicing associated with the mortgage loans held for sale. Loans held for sale are classified within Level 2 of the valuation hierarchy.

MSRs do not trade in an active open market with readily observable prices. The Company bases the fair value of its MSRs on the present value of estimated future net servicing income cash flows, utilizing an internal valuation model. The Company estimates future net servicing income cash flows with assumptions that market participants would use to estimate fair value, including estimates of prepayment speeds, discount rates, default rates, refinance rates, servicing costs, escrow account earnings, contractual servicing fee income, and ancillary income. The Company reassesses and periodically adjusts the underlying inputs and assumptions to reflect market conditions and assumptions that a market participant would consider in valuing the MSR asset. MSR fair value measurements use significant unobservable inputs and, accordingly, are classified within Level 3.

Exchange-traded derivatives that are valued using quoted prices are classified within Level 1 of the valuation hierarchy. The majority of the Company’s derivative positions are valued using internally developed models that use readily observable market parameters as their basis. These are parameters that are actively quoted and can be validated by external sources, including industry pricing services. Where the types of derivative products have been in existence for some time, the Company uses models that are widely accepted in the financial services industry. These models reflect the contractual terms of the derivatives, including the period to maturity, and market-based parameters such as interest rates, volatility, and the credit quality of the counterparty. Furthermore, many of these models do not contain a high level of subjectivity, as the methodologies used in the models do not require significant judgment, and inputs to the models are readily observable from actively quoted markets, as is the case for “plain vanilla” interest rate swaps and option contracts. Such instruments are generally classified within Level 2 of the valuation hierarchy. Derivatives that are valued based on models with significant unobservable market parameters, and that are normally traded less actively, have trade activity that is one-way, and/or are traded in less-developed markets, are classified within Level 3 of the valuation hierarchy.

The fair value of interest rate lock commitments (“IRLCs”) for residential mortgage loans that the Company intends to sell is based on internally developed models. The key model inputs primarily include the sum of the value of the forward commitment based on the loans’ expected settlement dates and the projected values of the MSRs, loan level price adjustment factors, and historical IRLC closing ratios. The closing ratio is computed by the Company’s mortgage banking operation and is periodically reviewed by management for reasonableness. Such derivatives are classified as Level 3.

While the Company believes its valuation methods are appropriate and consistent with those of other market participants, the use of different methodologies or assumptions to determine the fair values of certain financial instruments could result in different estimates of fair values at the reporting date.

Fair Value Option

Loans Held for Sale

The Company has elected the fair value option for its loans held for sale. The Company’s loans held for sale consist of one-to-four family mortgage loans, none of which was more than 90 days past due at December 31, 2013. Management believes the mortgage banking business operates on a short-term cycle. Therefore, in order to reflect the most relevant valuations for the key components of this business, and to reduce timing differences in amounts recognized in earnings, the Company has elected to record loans held for sale at fair value to match the recognition of IRLCs, MSRs, and derivatives, all of which are recorded at fair value in earnings. Fair value is based on independent quoted market prices of mortgage-backed securities comprised of loans with similar features to those of the Company’s loans held for sale, where available, and adjusted as necessary for such items as servicing value, guaranty fee premiums, and credit spread adjustments.

 

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The following table reflects the difference between the fair value carrying amount of loans held for sale for which the Company has elected the fair value option, and the unpaid principal balance:

 

     March 31, 2014    December 31, 2013
(in thousands)    Fair Value
Carrying
Amount
   Aggregate
Unpaid
Principal
   Fair Value
Carrying Amount
Less Aggregate
Unpaid Principal
   Fair Value
Carrying
Amount
   Aggregate
Unpaid Principal
   Fair Value
Carrying Amount
Less Aggregate
Unpaid Principal

Loans held for sale

     $266,240        $260,548        $5,692        $306,915        $303,805        $3,110  

Gains and Losses Included in Income for Assets Where the Fair Value Option Has Been Elected

The assets accounted for under the fair value option are initially measured at fair value. Gains and losses from the initial measurement and subsequent changes in fair value are recognized in earnings. For loans held for sale and MSRs, the changes in fair value related to initial measurement, and the subsequent changes in fair value included in earnings, are shown for the periods indicated below:

 

     Gain (Loss) Included in Mortgage Banking Income
from Changes in Fair Value(1)
     For the Three Months
Ended March 31,
(in thousands)    2014   2013

Loans held for sale

   $ 1,667    $ 9,672 

Mortgage servicing rights

     (9,822)     (3,272)
  

 

 

 

Total (loss) gain

   $(8,155)   $ 6,400 
  

 

 

 

 

(1) Does not include the effect of hedging activities.

The Company has determined that there is no instrument-specific credit risk related to its loans held for sale, due to the short duration of such assets.

 

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Changes in Level 3 Fair Value Measurements

The following tables present, for the three months ended March 31, 2014 and 2013, a roll-forward of the balance sheet amounts (including changes in fair value) for financial instruments classified in Level 3 of the valuation hierarchy:

 

    Fair Value   Total Realized/Unrealized
Gains/(Losses) Recorded in
          Transfers   Fair Value   Change in
Unrealized Gains/
(Losses) Related to
(in thousands)   January 1,
2014
  Income/
(Loss)
  Comprehensive
(Loss) Income
  Issuances   Settlements   to/(from)
Level 3
  at Mar. 31,
2014
  Instruments Held at
March 31, 2014

Mortgage servicing rights

    $ 241,018           $ (9,822 )     $ --       $ 6,808         $ --         $ --         $ 238,004       $ 43  

Interest rate lock commitments

      258             1,353         --         --           --           --           1,611         1,606  
    Fair Value   Total Realized/Unrealized
Gains/(Losses) Recorded in
          Transfers   Fair Value   Change in
Unrealized Gains/
(Losses) Related to
(in thousands)   January 1,
2013
  Income/
(Loss)
  Comprehensive
(Loss) Income
  Issuances   Settlements   to/(from)
Level 3
  at Mar. 31,
    2013    
  Instruments Held at
March 31, 2013

Available-for-sale capital securities

    $ 18,569           $ --       $ 931       $ --         $ --         $ --         $ 19,500         $ 931  

Mortgage servicing rights

      144,520             (3,272 )       --         31,601           --           --           172,849           13,094  

Interest rate lock commitments

      21,446             (9,026 )       --         --           --           --           12,420           12,224  

The Company’s policy is to recognize transfers in and out of Levels 1, 2, and 3 as of the end of the reporting period. There were no transfers in or out of Level 3 during the three months ended March 31, 2014 or 2013. During the three months ended March 31, 2013, the Company transferred certain preferred stock to Level 1 from Level 2 as a result of increased observable market activity for these securities. There were no gains or losses recognized as a result of the transfer of securities during the three months ended March 31, 2013.

 

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For Level 3 assets and liabilities measured at fair value on a recurring basis as of March 31, 2014, the significant unobservable inputs used in the fair value measurements were as follows:

 

(dollars in thousands)   Fair Value at
  March 31, 2014  
  Valuation Technique  

Significant Unobservable Inputs

  Significant
Unobservable
Input Value

Mortgage Servicing Rights

    $ 238,004     Discounted Cash Flow  

Weighted Average Constant Prepayment Rate (1)

        8.70%  
       

Weighted Average Discount Rate

      10.50      

Interest Rate Lock Commitments

      1,611     Pricing Model  

Weighted Average Closing Ratio

      73.06      

 

(1) Represents annualized loan repayment rate assumptions.

The significant unobservable inputs used in the fair value measurement of the Company’s MSRs are the weighted average constant prepayment rate and the weighted average discount rate. Significant increases or decreases in either of those inputs in isolation could result in significantly lower or higher fair value measurements. Although the constant prepayment rate and the discount rate are not directly interrelated, they generally move in opposite directions.

The significant unobservable input used in the fair value measurement of the Company’s IRLCs is the closing ratio, which represents the percentage of loans currently in an interest rate lock position that management estimates will ultimately close. Generally, the fair value of an IRLC is positive if the prevailing interest rate is lower than the IRLC rate, and the fair value of an IRLC is negative if the prevailing interest rate is higher than the IRLC rate. Therefore, an increase in the closing ratio (i.e., a higher percentage of loans estimated to close) will result in the fair value of the IRLC increasing if in a gain position, or decreasing if in a loss position. The closing ratio is largely dependent on the stage of processing that a loan is currently in, and the change in prevailing interest rates from the time of the interest rate lock.

Assets Measured at Fair Value on a Non-Recurring Basis

Certain assets are measured at fair value on a non-recurring basis. Such instruments are subject to fair value adjustments under certain circumstances (e.g., when there is evidence of impairment). The following tables present assets and liabilities that were measured at fair value on a non-recurring basis as of March 31, 2014 and December 31, 2013, and that were included in the Company’s Consolidated Statements of Condition at those dates:

 

    Fair Value Measurements at March 31, 2014 Using
(in thousands)   Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
  Significant Other
Observable Inputs
(Level 2)
  Significant
  Unobservable Inputs  
(Level 3)
   Total Fair 
Value

Certain impaired loans

    $ --       $         --       $ 15,314       $ 15,314  

Other assets (1)

      --         13,863         --         13,863  
   

 

 

     

 

 

     

 

 

     

 

 

 

Total

    $ --       $ 13,863       $ 15,314       $ 29,177  
   

 

 

     

 

 

     

 

 

     

 

 

 

 

(1) Represents the fair value of OREO, based on the appraised value of the collateral subsequent to its initial classification as OREO.

 

    Fair Value Measurements at December 31, 2013 Using
(in thousands)   Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
  Significant Other
Observable Inputs
(Level 2)
  Significant
  Unobservable Inputs  
(Level 3)
   Total Fair 
Value

Certain impaired loans

    $ --       $         --       $ 47,535       $ 47,535  

Other assets (1)

      --         19,810         --         19,810  
   

 

 

     

 

 

     

 

 

     

 

 

 

Total

    $ --       $ 19,810       $ 47,535       $ 67,345  
   

 

 

     

 

 

     

 

 

     

 

 

 

 

(1) Represents the fair value of OREO, based on the appraised value of the collateral subsequent to its initial classification as OREO.

The fair values of collateral-dependent impaired loans are determined using various valuation techniques, including consideration of appraised values and other pertinent real estate market data.

 

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Other Fair Value Disclosures

FASB guidance requires the disclosure of fair value information about the Company’s on- and off-balance sheet financial instruments. When available, quoted market prices are used as the measure of fair value. In cases where quoted market prices are not available, fair values are based on present-value estimates or other valuation techniques. Such fair values are significantly affected by the assumptions used, the timing of future cash flows, and the discount rate.

Because assumptions are inherently subjective in nature, estimated fair values cannot be substantiated by comparison to independent market quotes. Furthermore, in many cases, the estimated fair values provided would not necessarily be realized in an immediate sale or settlement of such instruments.

The following tables summarize the carrying values, estimated fair values, and fair value measurement levels of financial instruments that were not carried at fair value on the Company’s Consolidated Statements of Condition at March 31, 2014 and December 31, 2013:

 

     March 31, 2014
               Fair Value Measurement Using
(in thousands)    Carrying
Value
   Estimated
Fair Value
   Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
  Significant
Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)

Financial Assets:

                      

Cash and cash equivalents

     $ 672,872        $ 672,872        $ 672,872       $ --       $ --    

Securities held to maturity

       7,707,092          7,629,929          --         7,622,111         7,818    

FHLB stock(1)

       545,113          545,113          --         545,113         --    

Loans, net

       33,640,229          33,612,172          --         --         33,612,172    

Financial Liabilities:

                      

Deposits

     $ 26,753,566        $ 26,789,591        $ 19,818,874 (2)     $ 6,970,717 (3)     $ --    

Borrowed funds

       14,827,380          15,813,816          --         15,813,816         --    

 

(1) Carrying value and estimated fair value are at cost.
(2) NOW and money market accounts, savings accounts, and non-interest-bearing accounts.
(3) Certificates of deposit.

 

     December 31, 2013
               Fair Value Measurement Using
(in thousands)    Carrying
Value
   Estimated
Fair Value
   Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
  Significant
Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)

Financial Assets:

                      

Cash and cash equivalents

     $ 644,550        $ 644,550        $ 644,550       $ --       $ --    

Securities held to maturity

       7,670,282          7,445,244          --         7,438,091         7,153    

FHLB stock(1)

       561,390          561,390          --         561,390         --    

Loans, net

       32,727,507          32,628,361          --         --         32,628,361    

Financial Liabilities:

                      

Deposits

     $ 25,660,992        $ 25,712,388        $ 18,728,896 (2)     $ 6,983,492 (3)     $ --    

Borrowed funds

       15,105,002          16,058,931          --         16,058,931         --    

 

(1) Carrying value and estimated fair value are at cost.
(2) NOW and money market accounts, savings accounts, and non-interest-bearing accounts.
(3) Certificates of deposit.

 

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The methods and significant assumptions used to estimate fair values for the Company’s financial instruments follow:

Cash and Cash Equivalents

Cash and cash equivalents include cash and due from banks and federal funds sold. The estimated fair values of cash and cash equivalents are assumed to equal their carrying values, as these financial instruments are either due on demand or have short-term maturities.

Securities

If quoted market prices are not available for a specific security, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. These pricing models primarily use market-based or independently sourced market parameters as inputs, including, but not limited to, yield curves, interest rates, equity or debt prices, and credit spreads. In addition to observable market information, pricing models also incorporate transaction details such as maturity and cash flow assumptions.

Federal Home Loan Bank Stock

Ownership in equity securities of the FHLB is restricted and there is no established market for their resale. The carrying amount approximates the fair value.

Loans

The loan portfolio is segregated into various components for valuation purposes in order to group loans based on their significant financial characteristics, such as loan type (mortgage or other) and payment status (performing or non-performing). The estimated fair values of mortgage and other loans are computed by discounting the anticipated cash flows from the respective portfolios. The discount rates reflect current market rates for loans with similar terms to borrowers of similar credit quality. The estimated fair values of non-performing mortgage and other loans are based on recent collateral appraisals.

The methods used to estimate the fair value of loans are extremely sensitive to the assumptions and estimates used. While management has attempted to use assumptions and estimates that best reflect the Company’s loan portfolio and current market conditions, a greater degree of subjectivity is inherent in these values than in those determined in active markets. Accordingly, readers are cautioned in using this information for purposes of evaluating the financial condition and/or value of the Company in and of itself or in comparison with any other company.

Mortgage Servicing Rights

MSRs do not trade in an active market with readily observable prices. Accordingly, the Company utilizes a valuation model that calculates the present value of estimated future cash flows. The model incorporates various assumptions, including estimates of prepayment speeds, discount rates, refinance rates, servicing costs, and ancillary income. The Company reassesses and periodically adjusts the underlying inputs and assumptions to reflect current market conditions and assumptions that a market participant would consider in valuing the MSR asset.

Derivative Financial Instruments

For exchange-traded futures and exchange-traded options, fair value is based on observable quoted market prices in an active market. For forward commitments to buy and sell loans and mortgage-backed securities, fair value is based on observable market prices for similar loans and securities in an active market. The fair value of IRLCs for one-to-four family mortgage loans that the Company intends to sell is based on internally developed models. The key model inputs primarily include the sum of the value of the forward commitment based on the loans’ expected settlement dates, the value of MSRs arrived at by an independent MSR broker, government agency price adjustment factors, and historical IRLC fall-out factors.

Deposits

The fair values of deposit liabilities with no stated maturity (i.e., NOW and money market accounts, savings accounts, and non-interest-bearing accounts) are equal to the carrying amounts payable on demand. The fair values of certificates of deposit (“CDs”) represent contractual cash flows, discounted using interest rates currently offered on deposits with similar characteristics and remaining maturities. These estimated fair values do not include the intangible value of core deposit relationships, which comprise a significant portion of the Company’s deposit base.

 

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Borrowed Funds

The estimated fair value of borrowed funds is based either on bid quotations received from securities dealers or the discounted value of contractual cash flows with interest rates currently in effect for borrowed funds with similar maturities and structures.

Off-Balance-Sheet Financial Instruments

The fair values of commitments to extend credit and unadvanced lines of credit are estimated based on an analysis of the interest rates and fees currently charged to enter into similar transactions, considering the remaining terms of the commitments and the creditworthiness of the potential borrowers. The estimated fair values of such off-balance-sheet financial instruments were insignificant at March 31, 2014 and December 31, 2013.

Note 12. Derivative Financial Instruments

The Company’s derivative financial instruments consist of financial forward and futures contracts, IRLCs, and options. These derivatives relate to mortgage banking operations, MSRs, and other risk management activities, and seek to mitigate or reduce the Company’s exposure to losses from adverse changes in interest rates. These activities will vary in scope based on the level and volatility of interest rates, the type of assets held, and other changing market conditions.

In accordance with the applicable accounting guidance, the Company takes into account the impact of collateral and master netting agreements that allow it to settle all derivative contracts held with a single counterparty on a net basis, and to offset the net derivative position with the related collateral when recognizing derivative assets and liabilities. As a result, the Company’s Statements of Financial Condition could reflect derivative contracts with negative fair values included in derivative assets, and contracts with positive fair values included in derivative liabilities.

The Company held derivatives with a notional amount of $1.8 billion at March 31, 2014. Changes in the fair value of these derivatives are reflected in current-period earnings. None of these derivatives are designated as hedges for accounting purposes.

The following table sets forth information regarding the Company’s derivative financial instruments at March 31, 2014:

 

     March 31, 2014  
(in thousands)    Notional      Unrealized (1)  
   Amount      Gain      Loss  

Treasury options

   $ 410,000       $ 125       $ 584   

Eurodollar futures

     95,000         18         115   

Forward commitments to sell loans/mortgage-backed securities

     484,033         1,005         254   

Forward commitments to buy loans/mortgage-backed securities

     470,000         393         753   

Interest rate lock commitments

     312,197         1,611         --   
  

 

 

    

 

 

    

 

 

 

Total derivatives

   $ 1,771,230       $ 3,152       $ 1,706   
  

 

 

    

 

 

    

 

 

 

 

(1) Derivatives in a net gain position are recorded as “Other assets” and derivatives in a net loss position are recorded as “Other liabilities” in the Consolidated Statements of Condition.

The Company uses various financial instruments, including derivatives, in connection with its strategies to reduce pricing risk resulting from changes in interest rates. Derivative instruments may include IRLCs entered into with borrowers or correspondents/brokers to acquire agency-conforming fixed and adjustable rate residential mortgage loans that will be held for sale. Other derivative instruments include Treasury options and Eurodollar futures.

The Company enters into forward contracts to sell fixed rate mortgage-backed securities to protect against changes in the prices of agency-conforming fixed rate loans held for sale. Forward contracts are entered into with securities dealers in an amount related to the portion of IRLCs that is expected to close. The value of these forward sales contracts moves inversely with the value of the loans in response to changes in interest rates.

To manage the price risk associated with fixed rate non-conforming mortgage loans, the Company generally enters into forward contracts on mortgage-backed securities or forward commitments to sell loans to approved investors. Short positions in Eurodollar futures contracts are used to manage price risk on adjustable rate mortgage loans held for sale.

The Company also purchases put and call options to manage the risk associated with variations in the amount of IRLCs that ultimately close.

 

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In addition, the Company mitigates a portion of the risk associated with changes in the value of MSRs. The general strategy for mitigating this risk is to purchase derivative instruments, the value of which changes in the opposite direction of interest rates, thus partially offsetting changes in the value of our servicing assets, which tends to move in the same direction as interest rates. Accordingly, the Company purchases Eurodollar futures and call options on Treasury securities, and enters into forward contracts to purchase mortgage-backed securities.

The following table sets forth the effect of derivative instruments on the Consolidated Statements of Income and Comprehensive Income for the periods indicated:

 

        Gain (Loss) Included in Mortgage Banking Income      
    For the Three Months Ended
March 31,
 
(in thousands)   2014     2013  

Treasury options

    $  (399)         $  (3,588

Eurodollar futures

    (55)         15   

Forward commitments to buy/sell loans/mortgage-backed securities

    3,495         8,979   
 

 

 

   

 

 

 

Total gain

    $  3,041         $   5,406   
 

 

 

   

 

 

 

The Company has in place an enforceable master netting arrangement with every counterparty. All master netting arrangements include rights to offset associated with the Company’s recognized derivative assets, derivative liabilities, and cash collateral received and pledged. Accordingly, the Company, where appropriate, offsets all derivative asset and liability positions with the cash collateral received and pledged.

The following tables present the effect the master netting arrangements had on the presentation of the derivative assets in the Consolidated Statements of Financial Condition as of the dates indicated:

 

     March 31, 2014
                    Gross Amounts Not
Offset in the
Consolidated Statement
of Condition
    
(in thousands)    Gross
Amounts of
Recognized
Assets
   Gross Amounts
Offset in the
Statement of
Condition
   Net Amounts of
Assets Presented
in the Statement
of Condition
   Financial
Instruments
   Cash
Collateral
Received
   Net
Amount

Derivatives

       $ 4,687        $ 1,564        $ 3,123        $ --        $ --        $ 3,123  

 

     December 31, 2013
                    Gross Amounts Not
Offset in the
Consolidated Statement
of Condition
    
(in thousands)    Gross
Amounts of
Recognized
Assets
   Gross Amounts
Offset in the
Statement of
Condition
   Net Amounts of
Assets Presented
in the Statement
of Condition
   Financial
Instruments
   Cash
Collateral
Received
   Net
Amount

Derivatives

       $ 6,680        $ 4,848        $ 1,832        $ --        $ --        $ 1,832  

 

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The following tables present the effect the master netting arrangements have on the presentation of the derivative liabilities in the Consolidated Statements of Financial Condition as of the dates indicated:

 

     March 31, 2014
(in thousands)                         
   Gross
Amounts of
Recognized
Liabilities
   Gross Amounts
Offset in the
Statement