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 JUNE 30, 2016

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

487,067,889

Number of shares of common stock outstanding at

August 1, 2016

 

 

 


Table of Contents

NEW YORK COMMUNITY BANCORP, INC.

FORM 10-Q

Quarter Ended June 30, 2016

 

INDEX

       Page No.  

Part I.

 

FINANCIAL INFORMATION

  

Item 1.

 

Financial Statements

  
 

Consolidated Statements of Condition as of June 30, 2016 (unaudited) and December 31, 2015

     1   
 

Consolidated Statements of Income and Comprehensive Income for the Three and Six Months Ended June 30, 2016 and 2015 (unaudited)

     2   
 

Consolidated Statement of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2016 (unaudited)

     3   
 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015 (unaudited)

     4   
 

Notes to the Consolidated Financial Statements

     5   

Item 2.

 

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

     40   

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

     83   

Item 4.

 

Controls and Procedures

     84   

Part II.

 

OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

     85   

Item 1A.

 

Risk Factors

     85   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     85   

Item 3.

 

Defaults upon Senior Securities

     86   

Item 4.

 

Mine Safety Disclosures

     86   

Item 5.

 

Other Information

     86   

Item 6.

 

Exhibits

     86   

Signatures

       87   

Exhibits

    


Table of Contents

NEW YORK COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CONDITION

(in thousands, except share data)

 

     June 30,
2016
    December 31,
2015
 
     (unaudited)        

Assets:

    

Cash and cash equivalents

   $ 674,289      $ 537,674   

Securities:

    

Available-for-sale

     154,270        204,255   

Held-to-maturity ($1,741,622 and $2,152,939 pledged, respectively) (fair value of $4,093,734 and $6,108,529, respectively)

     3,822,561        5,969,390   
  

 

 

   

 

 

 

Total securities

     3,976,831        6,173,645   
  

 

 

   

 

 

 

Non-covered loans held for sale

     609,894        367,221   

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

     36,800,530        35,763,204   

Less: Allowance for losses on non-covered loans

     (153,059     (147,124
  

 

 

   

 

 

 

Non-covered loans held for investment, net

     36,647,471        35,616,080   

Covered loans

     1,890,883        2,060,089   

Less: Allowance for losses on covered loans

     (26,649     (31,395
  

 

 

   

 

 

 

Covered loans, net

     1,864,234        2,028,694   
  

 

 

   

 

 

 

Total loans, net

     39,121,599        38,011,995   

Federal Home Loan Bank stock, at cost

     586,835        663,971   

Premises and equipment, net

     366,921        322,307   

FDIC loss share receivable

     280,942        314,915   

Goodwill

     2,436,131        2,436,131   

Core deposit intangibles, net

     1,146        2,599   

Mortgage servicing rights

     193,994        247,734   

Bank-owned life insurance

     939,875        931,627   

Other real estate owned (includes $20,083 and $25,817, respectively, covered by loss sharing agreements)

     32,897        39,882   

Other assets

     424,287        635,316   
  

 

 

   

 

 

 

Total assets

   $ 49,035,747      $ 50,317,796   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity:

    

Deposits:

    

NOW and money market accounts

   $ 13,408,815      $ 13,069,019   

Savings accounts

     5,782,697        7,541,566   

Certificates of deposit

     7,017,413        5,312,487   

Non-interest-bearing accounts

     2,674,067        2,503,686   
  

 

 

   

 

 

 

Total deposits

     28,882,992        28,426,758   
  

 

 

   

 

 

 

Borrowed funds:

    

Wholesale borrowings:

    

Federal Home Loan Bank advances

     11,614,400        13,463,800   

Repurchase agreements

     1,500,000        1,500,000   

Fed funds purchased

     435,000        426,000   
  

 

 

   

 

 

 

Total wholesale borrowings

     13,549,400        15,389,800   

Junior subordinated debentures

     358,739        358,605   
  

 

 

   

 

 

 

Total borrowed funds

     13,908,139        15,748,405   

Other liabilities

     205,504        207,937   
  

 

 

   

 

 

 

Total liabilities

     42,996,635        44,383,100   
  

 

 

   

 

 

 

Stockholders’ equity:

    

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

     —          —     

Common stock at par $0.01 (900,000,000 shares authorized; 487,016,052 and 484,968,024 shares issued, and 487,009,706 and 484,943,308 shares outstanding, respectively)

     4,870        4,850   

Paid-in capital in excess of par

     6,031,540        6,023,882   

Retained earnings (accumulated deficit)

     54,866        (36,568

Treasury stock, at cost (6,346 and 24,716 shares, respectively)

     (94     (447

Accumulated other comprehensive loss, net of tax:

    

Net unrealized gain on securities available for sale, net of tax of $3,735 and $2,153, respectively

     5,273        3,031   

Net unrealized loss on the non-credit portion of other-than-temporary impairment (“OTTI”) losses on securities, net of tax of $3,376 and $3,400, respectively

     (5,280     (5,318

Net unrealized loss on pension and post-retirement obligations, net of tax of $35,388 and $37,279, respectively

     (52,063     (54,734
  

 

 

   

 

 

 

Total accumulated other comprehensive loss, net of tax

     (52,070     (57,021
  

 

 

   

 

 

 

Total stockholders’ equity

     6,039,112        5,934,696   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 49,035,747      $ 50,317,796   
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

1


Table of Contents

NEW YORK COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(in thousands, except per share data)

(unaudited)

 

     For the     For the  
     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2016     2015     2016     2015  

Interest Income:

        

Mortgage and other loans

   $ 370,482      $ 357,999      $ 731,205      $ 722,503   

Securities and money market investments

     49,133        63,621        112,220        128,030   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     419,615        421,620        843,425        850,533   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest Expense:

        

NOW and money market accounts

     15,286        11,727        29,905        22,779   

Savings accounts

     7,354        12,925        17,562        25,258   

Certificates of deposit

     18,738        15,729        34,628        32,845   

Borrowed funds

     52,664        96,142        107,891        191,786   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     94,042        136,523        189,986        272,668   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     325,573        285,097        653,439        577,865   

Provision for (recovery of) losses on non-covered loans

     2,744        (1,872     5,465        (2,742

(Recovery of) provision for losses on covered loans

     (1,849     2,206        (4,746     3,083   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provisions for (recoveries of) loan losses

     324,678        284,763        652,720        577,524   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-Interest Income:

        

Mortgage banking income

     6,957        15,968        11,095        34,374   

Fee income

     7,917        8,778        15,840        17,172   

Bank-owned life insurance

     6,843        6,774        16,179        13,478   

Net gain on sales of loans

     5,878        8,757        11,653        14,703   

Net gain on sales of securities

     13        592        176        803   

FDIC indemnification (expense) income

     (1,479     1,764        (3,797     2,466   

Other income

     11,237        19,268        21,457        31,139   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

     37,366        61,901        72,603        114,135   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-Interest Expense:

        

Operating expenses:

        

Compensation and benefits

     85,847        83,067        175,151        170,276   

Occupancy and equipment

     23,675        25,941        49,490        51,240   

General and administrative

     49,533        41,577        90,803        84,321   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     159,055        150,585        315,444        305,837   

Amortization of core deposit intangibles

     606        1,345        1,452        2,929   

Merger-related expenses

     1,250        —          2,463        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expense

     160,911        151,930        319,359        308,766   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     201,133        194,734        405,964        382,893   

Income tax expense

     74,673        71,030        149,595        139,930   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 126,460      $ 123,704      $ 256,369      $ 242,963   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax:

        

Change in net unrealized gain/loss on securities available for sale, net of tax of $836; $1,294; $1,582; and $133, respectively

     1,180        (2,098     2,242        (383

Change in the non-credit portion of OTTI losses recognized in other comprehensive income (loss), net of tax of $12; $11; $24; and $22, respectively

     19        17        38        34   

Change in pension and post-retirement obligations, net of tax of $946; $915; $1,891; and $1,759, respectively

     1,335        1,177        2,671        2,425   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income, net of tax

     2,534        (904     4,951        2,076   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income, net of tax

   $ 128,994      $ 122,800      $ 261,320      $ 245,039   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share

   $ 0.26      $ 0.28      $ 0.52      $ 0.55   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share

   $ 0.26      $ 0.28      $ 0.52      $ 0.55   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

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Table of Contents

NEW YORK COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands, except share data)

(unaudited)

 

     For the
Six Months Ended
June 30, 2016
 

Common Stock (Par Value: $0.01):

  

Balance at beginning of year

   $ 4,850   

Shares issued for restricted stock awards (2,048,028 shares)

     20   
  

 

 

 

Balance at end of period

     4,870   
  

 

 

 

Paid-in Capital in Excess of Par:

  

Balance at beginning of year

     6,023,882   

Shares issued for restricted stock awards, net of forfeitures

     (8,709

Compensation expense related to restricted stock awards

     16,367   
  

 

 

 

Balance at end of period

     6,031,540   
  

 

 

 

Retained Earnings:

  

Balance at beginning of year

     (36,568

Net income

     256,369   

Dividends paid on common stock ($0.34 per share)

     (165,347

Effect of adopting Accounting Standards Update (“ASU”) No. 2016-09 (1)

     412   
  

 

 

 

Balance at end of period

     54,866   
  

 

 

 

Treasury Stock:

  

Balance at beginning of year

     (447

Purchase of common stock (543,154 shares)

     (8,336

Shares issued for restricted stock awards (561,524 shares)

     8,689   
  

 

 

 

Balance at end of period

     (94
  

 

 

 

Accumulated Other Comprehensive Loss, net of tax:

  

Balance at beginning of year

     (57,021

Other comprehensive income, net of tax

     4,951   
  

 

 

 

Balance at end of period

     (52,070
  

 

 

 

Total stockholders’ equity

   $ 6,039,112   
  

 

 

 

 

(1) See Note 14, “Impact of Recent Accounting Pronouncements” for a discussion of the Company’s adoption of ASU No. 2016-09.

See accompanying notes to the consolidated financial statements.

 

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Table of Contents

NEW YORK COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

     For the Six Months Ended
June 30,
 
     2016     2015  

Cash Flows from Operating Activities:

    

Net income

   $ 256,369      $ 242,963   

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

    

Provision for loan losses

     719        341   

Depreciation and amortization

     16,325        15,402   

Amortization of discounts and premiums, net

     (15,983     (3,405

Amortization of core deposit intangibles

     1,452        2,929   

Net gain on sales of securities

     (176     (803

Gain on sales of loans

     (35,460     (40,778

Stock plan-related compensation

     16,367        14,627   

Deferred tax expense (benefit)

     20,250        (940

Changes in assets and liabilities:

    

Decrease in other assets

     297,480        5,781   

(Decrease) increase in other liabilities

     (21,206     6,608   

Origination of loans held for sale

     (2,176,235     (2,887,032

Proceeds from sales of loans originated for sale

     1,927,800        2,820,718   
  

 

 

   

 

 

 

Net cash provided by operating activities

     287,702        176,411   
  

 

 

   

 

 

 

Cash Flows from Investing Activities:

    

Proceeds from repayment of securities held to maturity

     2,176,943        262,797   

Proceeds from repayment of securities available for sale

     49,959        8,004   

Proceeds from sales of securities held to maturity

     —          19,730   

Proceeds from sales of securities available for sale

     112,676        166,760   

Purchase of securities held to maturity

     (10,086     (14,097

Purchase of securities available for sale

     (112,500     (166,500

Net redemption of Federal Home Loan Bank stock

     77,136        5,122   

Proceeds from sales of loans

     1,037,760        1,045,613   

Other changes in loans, net

     (1,864,187     (1,283,633

Purchase of premises and equipment, net

     (60,939     (22,157
  

 

 

   

 

 

 

Net cash provided by investing activities

     1,406,762        21,639   
  

 

 

   

 

 

 

Cash Flows from Financing Activities:

    

Net increase in deposits

     456,234        268,439   

Net decrease in short-term borrowed funds

     (2,021,400     (616,800

Proceeds from long-term borrowed funds

     181,000        503,900   

Repayments of long-term borrowed funds

     —          (102,164

Tax effect of stock plans (1)

     —          1,674   

Cash dividends paid on common stock

     (165,347     (221,849

Payments relating to treasury shares received for restricted stock award tax payments (1)

     (8,336     (6,682
  

 

 

   

 

 

 

Net cash used in financing activities

     (1,557,849     (173,482
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     136,615        24,568   

Cash and cash equivalents at beginning of period

     537,674        564,150   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 674,289      $ 588,718   
  

 

 

   

 

 

 

Supplemental information:

    

Cash paid for interest

   $ 185,450      $ 276,654   

Cash paid for income taxes

     125,209        116,722   

Non-cash investing and financing activities:

    

Transfers to other real estate owned from loans

   $ 15,233      $ 29,481   

Transfer of loans from held for investment to held for sale

     1,026,107        1,030,910   

Transfer of loans from held for sale to held for investment

     —          153,578   

Shares issued for restricted stock awards

     8,709        7,691   

 

(1) See Note 14, “Impact of Recent Accounting Pronouncements” for a discussion of the Company’s adoption of ASU No. 2016-09.

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 ($0.93 per share on a split-adjusted basis, reflecting the impact of nine stock splits between 1994 and 2004). The Commercial Bank was established on December 30, 2005.

Reflecting its growth through acquisitions, the Community Bank currently operates 226 branches, two of which operate directly under the Community Bank name. The remaining 224 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.”

On September 17, 2015, the Company submitted an application to the FDIC and the New York State Department of Financial Services requesting approval to merge the Commercial Bank with and into the Community Bank. The merger of the Company’s two bank subsidiaries is not expected to impact either bank’s customers or employees.

On October 29, 2015, the Company announced the signing of a definitive merger agreement with Astoria Financial Corporation (“Astoria Financial”). The merger was approved by shareholders of both companies on April 26, 2016. Pending receipt of the necessary regulatory approvals and subject to the terms of the Agreement and Plan of Merger, Astoria Financial will merge with and into the Company, and Astoria Bank will merge with and into the Community 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 accompanying 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. 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.

When necessary, certain reclassifications are made to prior-year amounts to conform to the current-year presentation. The presentation of long-term borrowings in the Consolidated Statements of Cash Flows for the six months ended June 30, 2015 is presented on a gross basis to conform to the presentation of long-term borrowings for the six months ended June 30, 2016.

 

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Table of Contents

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      Six Months Ended  
     June 30,      June 30,  
(in thousands, except share and per share data)    2016      2015      2016      2015  

Net income

   $ 126,460       $ 123,704       $ 256,369       $ 242,963   

Less: Dividends paid on and earnings allocated to participating securities

     (983      (911      (1,962      (1,760
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings applicable to common stock

   $ 125,477       $ 122,793       $ 254,407       $ 241,203   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding

     485,303,073         442,721,173         484,954,235         442,357,774   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per common share

   $ 0.26       $ 0.28       $ 0.52       $ 0.55   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings applicable to common stock

   $ 125,477       $ 122,793       $ 254,407       $ 241,203   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding

     485,303,073         442,721,173         484,954,235         442,357,774   

Potential dilutive common shares (1)

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total shares for diluted earnings per share computation

     485,303,073         442,721,173         484,954,235         442,357,774   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per common share and common share equivalents

   $ 0.26       $ 0.28       $ 0.52       $ 0.55   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) At June 30, 2016, there were no stock options outstanding. Options to purchase 10,000 shares of the Company’s common stock that were outstanding in the three and six months ended June 30, 2015, at weighted average exercise prices of $18.41 per share were excluded from the computation of diluted EPS because their inclusion would have had an antidilutive effect.

Note 3. Reclassifications Out of Accumulated Other Comprehensive Loss

 

(in thousands)    For the Six Months Ended June 30, 2016

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

Amortization of defined benefit pension plan items:

    

Prior-service costs

   $ 124     

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

Actuarial losses

     (4,686  

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

  

 

 

   
     (4,562  

Total before tax

     1,891     

Tax benefit

  

 

 

   
     (2,671  

Amortization of defined benefit pension plan items, net of tax

  

 

 

   

Total reclassifications for the period

   $ (2,671  
  

 

 

   

 

(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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Table of Contents

Note 4. Securities

The following tables summarize the Company’s portfolio of securities available for sale at June 30, 2016 and December 31, 2015:

 

     June 30, 2016  
(in thousands)    Amortized
Cost
     Gross
Unrealized
Gain
     Gross
Unrealized
Loss
     Fair Value  

Municipal bonds

   $ 729       $ 82       $ —         $ 811   

Capital trust notes

     9,451         —           2,658         6,793   

Preferred stock

     118,205         10,869         31         129,043   

Mutual funds and common stock (1)

     16,877         746         —           17,623   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 145,262       $ 11,697       $ 2,689       $ 154,270   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Primarily consists of mutual funds that are Community Reinvestment Act-qualified investments.

 

     December 31, 2015  
(in thousands)    Amortized
Cost
     Gross
Unrealized
Gain
     Gross
Unrealized
Loss
     Fair Value  

Mortgage-Related Securities:

           

GSE certificates (1)

   $ 53,820       $ 33       $ 1       $ 53,852   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other Securities:

           

Municipal bonds

   $ 725       $ 70       $ —         $ 795   

Capital trust notes

     9,444         —           2,480         6,964   

Preferred stock

     118,205         7,415         248         125,372   

Common stock

     16,877         470         75         17,272   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other securities

   $ 145,251       $ 7,955       $ 2,803       $ 150,403   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 199,071       $ 7,988       $ 2,804       $ 204,255   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Government-sponsored enterprise.

The following tables summarize the Company’s portfolio of securities held to maturity at June 30, 2016 and December 31, 2015:

 

     June 30, 2016  
(in thousands)    Amortized
Cost
     Carrying
Amount
     Gross
Unrealized
Gain
     Gross
Unrealized
Loss
     Fair Value  

Mortgage-Related Securities:

              

GSE certificates

   $ 2,239,688       $ 2.239,688       $ 169,049       $ —         $ 2,408,737   

GSE CMOs (1)

     1,190,119         1,190,119         86,810         —           1,276,929   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage-related securities

   $ 3,429,807       $ 3,429,807       $ 255,859       $ —         $ 3,685,666   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other Securities:

              

GSE debentures

   $ 179,366       $ 179,366       $ 14,326       $ —         $ 193,692   

Municipal bonds

     73,792         73,792         2,984         —           76,776   

Corporate bonds

     73,983         73,983         10,706         —           84,689   

Capital trust notes

     74,269         65,613         3,320         16,022         52,911   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other securities

   $ 401,410       $ 392,754       $ 31,336       $ 16,022       $ 408,068   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total securities held to maturity (2)

   $ 3,831,217       $ 3,822,561       $ 287,195       $ 16,022       $ 4,093,734   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Collateralized mortgage obligations.
(2) Held-to-maturity securities are reported at a carrying amount equal to amortized cost less the non-credit portion of OTTI recorded in Accumulated Other Comprehensive Loss (“AOCL”). At June 30, 2016, the non-credit portion of OTTI recorded in AOCL was $8.7 million, pre-tax.

 

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Table of Contents
     December 31, 2015  
(in thousands)    Amortized
Cost
     Carrying
Amount
     Gross
Unrealized
Gain
     Gross
Unrealized
Loss
     Fair Value  

Mortgage-Related Securities:

              

GSE certificates

   $ 2,269,828       $ 2,269,828       $ 76,827       $ 4,722       $ 2,341,933   

GSE CMOs

     1,325,033         1,325,033         53,236         57         1,378,212   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage-related securities

   $ 3,594,861       $ 3,594,861       $ 130,063       $ 4,779       $ 3,720,145   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other Securities:

              

GSE debentures

   $ 2,159,856       $ 2,159,856       $ 23,892       $ 7,568       $ 2,176,180   

Municipal bonds

     75,317         75,317         262         1,084         74,495   

Corporate bonds

     73,756         73,756         10,503         —           84,259   

Capital trust notes

     74,317         65,600         3,750         15,900         53,450   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other securities

   $ 2,383,246       $ 2,374,529       $ 38,407       $ 24,552       $ 2,388,384   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total securities held to maturity (1)

   $ 5,978,107       $ 5,969,390       $ 168,470       $ 29,331       $ 6,108,529   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(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, 2015, the non-credit portion of OTTI recorded in AOCL was $8.7 million, pre-tax.

At June 30, 2016 and December 31, 2015, respectively, the Company had $586.8 million and $664.0 million of Federal Home Loan Bank of New York (“FHLB-NY”) stock, at cost. In order to have access to the funding provided by the FHLB-NY, the Company is required to maintain an investment in FHLB-NY stock.

The following table summarizes the gross proceeds and gross realized gains from the sale of available-for-sale securities during the six months ended June 30, 2016 and 2015:

 

     For the Six Months Ended
June 30,
 
(in thousands)    2016      2015  

Gross proceeds

   $ 112,676       $ 166,760   

Gross realized gains

     176         260   

In addition, during the six months ended June 30, 2015, the Company sold held-to-maturity securities with gross proceeds of $19.7 million and gross realized gains of $543,000, 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 six months of 2016.

In the following table, the beginning balance represents the credit loss component for debt securities on which OTTI occurred prior to January 1, 2016. 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
Six Months Ended
June 30, 2016
 

Beginning credit loss amount as of January 1, 2016

   $ 198,766   

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

     —     

Increase in expected cash flows on debt securities

     —     
  

 

 

 

Ending credit loss amount as of June 30, 2016

   $ 198,766   
  

 

 

 

 

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The following table summarizes the carrying amounts and estimated fair values of held-to-maturity mortgage-backed securities and debt securities, and the amortized costs and estimated fair values of available-for-sale securities, at June 30, 2016, by contractual maturity.

 

    At June 30, 2016        
(dollars in thousands)   Mortgage-
Related
Securities
    Average
Yield
    U.S. Treasury
and GSE
Obligations
    Average
Yield
    State, County,
and Municipal
    Average
Yield (1)
    Other Debt
Securities (2)
    Average
Yield
    Fair Value  

Held-to-Maturity Securities:

                 

Due within one year

  $ —          —     $ —          —     $ 219        2.96   $ —          —     $ 219   

Due from one to five years

    555,797        3.76        66,673        4.14        —          —          —          —          676,824   

Due from five to ten years

    2,482,830        3.11        112,693        3.45        —          —          64,313        4.75        2,867,505   

Due after ten years

    391,180        2.98        —          —          73,573        2.89        75,283        5.20        549,186   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total securities held to maturity

  $ 3,429,807        3.20   $ 179,366        3.71   $ 73,792        2.89   $ 139,596        4.99   $ 4,093,734   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Available-for-Sale Securities: (3)

                 

Due within one year

  $ —          —     $ —          —     $ 149        6.39   $ —          —     $ 153   

Due from one to five years

    —          —          —          —          580        6.56        —          —          658   

Due from five to ten years

    —          —          —          —          —          —          —          —          —     

Due after ten years

    —          —          —          —          —          —          9,451        4.48        6,793   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total securities available for sale

  $ —          —     $ —          —     $ 729        6.52   $ 9,451        4.48   $ 7,604   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Not presented on a tax-equivalent basis.
(2) Includes corporate bonds and capital trust notes
(3) As equity securities have no contractual maturity, they have been excluded from this table.

 

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Table of Contents

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 June 30, 2016:

 

At June 30, 2016    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 Securities:

                 

GSE certificates

   $ —         $ —         $ —         $ —         $ —         $ —     

GSE CMOs

     —           —           —           —           —           —     

Municipal bonds

     —           —           —           —           —           —     

Capital trust notes

     —           —           45,201         16,022         45,201         16,022   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired held-to-maturity securities

   $ —         $ —         $ 45,201       $ 16,022       $ 45,201       $ 16,022   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Temporarily Impaired Available-for-Sale Securities:

                 

Capital trust notes

   $ —         $ —         $ 6,793       $ 2,658       $ 6,793       $ 2,658   

Equity securities

     15,262         31         —           —           15,262         31   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired available-for-sale securities

   $ 15,262       $ 31       $ 6,793       $ 2,658       $ 22,055       $ 2,689   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

10


Table of Contents

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, 2015:

 

At December 31, 2015    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 Securities:

                 

GSE debentures

   $ 547,484       $ 728       $ 1,176,949       $ 6,840       $ 1,724,433       $ 7,568   

GSE certificates

     299,019         4,608         3,899         114         302,918         4,722   

GSE CMOs

     9,943         57         —           —           9,943         57   

Municipal bonds

     42,083         1,084         —           —           42,083         1,084   

Capital trust notes

     24,601         399         20,710         15,501         45,311         15,900   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired held-to-maturity securities

   $ 923,130       $ 6,876       $ 1,201,558       $ 22,455       $ 2,124,688       $ 29,331   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Temporarily Impaired Available-for-Sale Securities:

                 

GSE certificates

   $ 51,959       $ 1       $ —         $ —         $ 51,959       $ 1   

Capital trust notes

     1,968         32         4,997         2,448         6,965         2,480   

Equity securities

     51,775         323         —           —           51,775         323   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired available-for-sale securities

   $ 105,702       $ 356       $ 4,997       $ 2,448       $ 110,699       $ 2,804   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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 of impairment relating to factors other than credit losses are recorded in AOCL.

At June 30, 2016, the Company had unrealized losses on certain capital trust notes, and equity securities.

The Company reviews quarterly financial information related to its investments in capital trust notes, as well as other information that is released by each of the issuers of such notes, to determine their continued creditworthiness. 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. 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 thus 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 illiquidity in the financial markets.

The Company considers a decline in the fair value of 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 June 30, 2016 were primarily caused by market volatility. The Company evaluated the near-term prospects of recovering the fair value of these securities, together with the severity and duration of impairment to date, and determined that they were not other than temporarily impaired. Nonetheless, it is possible that these equity securities will perform worse than is currently expected, which could lead to adverse changes in their fair value, or the failure of the securities to fully recover in value as currently forecasted by management. Either event could cause the Company to record an OTTI loss in a future period. Events that could trigger a material decline in the fair value of these securities include, but are not limited to, deterioration in the equity markets; a decline in the quality of the loan portfolio of the issuer in which the Company has invested; and the recording of higher loan loss provisions and net operating losses by such issuer.

The investment securities designated as having a continuous loss position for twelve months or more at June 30, 2016 consisted of six capital trust notes. At December 31, 2015, the investment securities designated as having a continuous loss position for twelve months or more consisted of seven agency debt securities, five capital trust notes, and two agency mortgage-backed securities. At June 30, 2016 and December 31, 2015, the combined market value of the respective securities represented unrealized losses of $18.7 million and $24.9 million. At June 30, 2016, the fair value of securities having a continuous loss position for twelve months or more was 26.4% below the collective amortized cost of $70.7 million. At December 31, 2015, the fair value of such securities was 2.0% below the collective amortized cost of $1.2 billion.

 

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Table of Contents

Note 5: Loans

The following table sets forth the composition of the loan portfolio at June 30, 2016 and December 31, 2015:

 

     June 30, 2016     December 31, 2015  
     Amount      Percent of
Non-Covered
Loans Held
for Investment
    Amount      Percent of
Non-Covered
Loans Held
for Investment
 
(dollars in thousands)                           

Non-Covered Loans Held for Investment:

          

Mortgage Loans:

          

Multi-family

   $ 26,750,593         72.73   $ 25,971,629         72.67

Commercial real estate

     7,793,610         21.19        7,857,204         21.98   

Acquisition, development, and construction

     361,523         0.98        311,676         0.87   

One-to-four family

     246,183         0.67        116,841         0.33   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total mortgage loans held for investment

   $ 35,151,909         95.57      $ 34,257,350         95.85   
  

 

 

    

 

 

   

 

 

    

 

 

 

Other Loans:

          

Commercial and industrial

     1,174,180         3.19        1,085,529         3.04   

Lease financing, net of unearned income of $47,492 and $43,553, respectively

     425,047         1.16        365,027         1.02   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total commercial and industrial loans (1)

     1,599,227         4.35        1,450,556         4.06   

Purchased credit-impaired loans

     5,983         0.02        8,344         0.02   

Other

     21,282         0.06        24,239         0.07   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total other loans held for investment

     1,626,492         4.43        1,483,139         4.15   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total non-covered loans held for investment

   $ 36,778,401         100.00   $ 35,740,489         100.00
     

 

 

      

 

 

 

Net deferred loan origination costs

     22,129           22,715      

Allowance for losses on non-covered loans

     (153,059        (147,124   
  

 

 

      

 

 

    

Non-covered loans held for investment, net

   $ 36,647,471         $ 35,616,080      
  

 

 

      

 

 

    

Covered loans

     1,890,883           2,060,089      

Allowance for losses on covered loans

     (26,649        (31,395   
  

 

 

      

 

 

    

Covered loans, net

   $ 1,864,234         $ 2,028,694      

Loans held for sale

     609,894           367,221      
  

 

 

      

 

 

    

Total loans, net

   $ 39,121,599         $ 38,011,995      
  

 

 

      

 

 

    

 

(1) Includes specialty finance loans of $1.0 billion and $880.7 million and other C&I loans of $592.4 million and $569.9 million, respectively, at June 30, 2016 and December 31, 2015.

Non-Covered Loans

Non-Covered Loans Held for Investment

The 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 income-producing properties such as office buildings, retail centers, mixed-use buildings, and multi-tenanted light industrial properties that are located in New York City and on Long Island.

The Company also originates 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. C&I loans consist of asset-based loans, equipment loans and leases, and dealer floor-plan loans (together, “specialty finance loans and leases”) that generally are made to large corporate obligors, many of which are publicly traded, carry investment grade or near-investment grade ratings, and participate in stable industries nationwide; and “other” C&I loans that primarily are made to small and mid-size businesses in Metro New York. “Other” C&I loans are typically made for working capital, business expansion, and the purchase of machinery and equipment.

The repayment of multi-family and CRE loans generally depends on the income produced by the underlying properties which, in turn, depends on their successful operation and management. To mitigate the potential for credit losses, the Company underwrites its loans in accordance with credit standards it considers to be prudent, looking first at the consistency of the cash flows being produced by the underlying property. In addition, multi-family buildings and CRE properties are inspected as a prerequisite to approval, and independent appraisers, whose appraisals are carefully reviewed by the Company’s in-house appraisers, perform appraisals on the collateral properties. In many cases, a second independent appraisal review is performed. To further manage its credit risk, the Company’s lending policies limit the amount of credit granted to any one borrower and

 

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typically require conservative debt service coverage ratios and loan-to-value ratios. Nonetheless, 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. Accordingly, there can be no assurance that its underwriting policies will protect the Company from credit-related losses or delinquencies.

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 Company seeks to minimize the credit risk on ADC loans 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, or the length of time to complete and/or sell or lease the collateral property is greater than anticipated, 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 participates in syndicated loans that are brought to it, and equipment loans and leases that are assigned to it, by a select group of nationally recognized sources who have had long-term relationships with its experienced lending officers. Each of these credits is secured with a perfected first security interest or outright ownership in the underlying collateral, and structured as senior debt or as a non-cancelable lease. To further minimize the risk involved in specialty finance lending and leasing, each transaction is re-underwritten. In addition, outside counsel is retained 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 the 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 June 30, 2016 and December 31, 2015, respectively, were loans of $93.7 million and $105.6 million to executive officers, directors, and their related interests and parties. There were no loans to principal shareholders at either of those dates.

Non-covered purchased credit-impaired (“PCI”) loans, which had a carrying value of $6.0 million and an unpaid principal balance of $7.5 million at June 30, 2016, are loans that had been covered under an FDIC loss sharing agreement that expired in March 2015 and that now are included in non-covered loans. Such loans continue to be accounted for under Accounting Standards Codification (“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.

Loans Held for Sale

The Community Bank’s mortgage banking division originates, aggregates, and services one-to-four family loans. 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 to GSEs, servicing retained. To a much lesser extent, the Community Bank has used its mortgage banking platform to originate jumbo loans which it typically has sold to other financial institutions. Such loans have not represented, nor are they expected to represent, a material portion of the held-for-sale loans originated by the Community Bank. In addition, the Community Bank services mortgage loans for various third parties, primarily including GSEs.

 

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Asset Quality

The following table presents information regarding the quality of the Company’s non-covered loans held for investment (excluding non-covered PCI loans) at June 30, 2016:

 

(in thousands)    Loans
30-89 Days
Past Due
     Non-
Accrual
Loans (1)
     Loans
90 Days or More
Delinquent and
Still Accruing
Interest
     Total
Past Due
Loans
     Current
Loans
     Total Loans
Receivable
 

Multi-family

   $ 2,253       $ 13,771       $ —         $ 16,024       $ 26,734,569       $ 26,750,593   

Commercial real estate

     —           11,811         —           11,811         7,781,799         7,793,610   

One-to-four family

     574         9,952         —           10,526         235,657         246,183   

Acquisition, development, and construction

     —           —           —           —           361,523         361,523   

Commercial and industrial (2)

     1,883         1,677         —           3,560         1,595,667         1,599,227   

Other

     122         8,692         —           8,814         12,468         21,282   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,832       $ 45,903       $ —         $ 50,735       $ 36,721,683       $ 36,772,418   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Excludes $991,000 of non-covered PCI loans that were 90 days or more past due.
(2) Includes lease financing receivables, all of which were current.

The following table presents information regarding the quality of the Company’s non-covered loans held for investment at December 31, 2015:

 

(in thousands)    Loans
30-89 Days
Past Due
     Non-
Accrual
Loans (1)
     Loans
90 Days or More
Delinquent and
Still Accruing
Interest
     Total
Past Due
Loans
     Current
Loans
     Total Loans
Receivable
 

Multi-family

   $ 4,818       $ 13,904       $ —         $ 18,722       $ 25,952,907       $ 25,971,629   

Commercial real estate

     178         14,920         —           15,098         7,842,106         7,857,204   

One-to-four family

     1,117         12,259         —           13,376         103,465         116,841   

Acquisition, development, and construction

     —           27         —           27         311,649         311,676   

Commercial and industrial (2)

     —           4,473         —           4,473         1,446,083         1,450,556   

Other

     492         1,242         —           1,734         22,505         24,239   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,605       $ 46,825       $ —         $ 53,430       $ 35,678,715       $ 35,732,145   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Excludes $969,000 of non-covered PCI loans that were 90 days or more past due.
(2) Includes lease financing receivables, all of which were current.

The following table summarizes the Company’s portfolio of non-covered loans held for investment (excluding non-covered PCI loans) by credit quality indicator at June 30, 2016:

 

    Mortgage Loans     Other Loans  
(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
Loans
 

Credit Quality Indicator:

               

Pass

  $ 26,512,672      $ 7,750,219      $ 236,231      $ 360,763      $ 34,859,885      $ 1,527,439      $ 19,943      $ 1,547,382   

Special mention

    211,459        32,297        —          760        244,516        61,049        —          61,049   

Substandard

    26,462        11,094        9,952        —          47,508        10,739        1,339        12,078   

Doubtful

    —          —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 26,750,593      $ 7,793,610      $ 246,183      $ 361,523      $ 35,151,909      $ 1,599,227      $ 21,282      $ 1,620,509   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

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The following table summarizes the Company’s portfolio of non-covered loans held for investment by credit quality indicator at December 31, 2015:

 

    Mortgage Loans     Other Loans  
(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
Loans
 

Credit Quality Indicator:

               

Pass

  $ 25,936,423      $ 7,839,127      $ 104,582      $ 309,039      $ 34,189,171      $ 1,433,778      $ 22,996      $ 1,456,774   

Special mention

    6,305        3,883        —          —          10,188        11,771        —          11,771   

Substandard

    28,901        14,194        12,259        2,637        57,991        5,007        1,243        6,250   

Doubtful

    —          —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 25,971,629      $ 7,857,204      $ 116,841      $ 311,676      $ 34,257,350      $ 1,450,556      $ 24,239      $ 1,474,795   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

The preceding classifications are the most current ones available and generally have been updated within the last twelve months. In addition, they follow regulatory guidelines and can generally be 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 loans are classified based on the duration of the delinquency.

Troubled Debt Restructurings

The Company is required to account for certain held-for-investment loan modifications and 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. A loan modified as a TDR generally is placed on non-accrual status until the Company determines that future collection of principal and interest is reasonably assured, which requires, among other things, 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 June 30, 2016, loans on which concessions were made with respect to rate reductions and/or extension of maturity dates amounted to $15.6 million; loans on which forbearance agreements were reached amounted to $2.9 million.

The following table presents information regarding the Company’s TDRs as of June 30, 2016 and December 31, 2015:

 

     June 30, 2016      December 31, 2015  
(in thousands)    Accruing      Non-Accrual      Total      Accruing      Non-Accrual      Total  

Loan Category:

                 

Multi-family

   $ 1,999       $ 9,100       $ 11,099       $ 2,017       $ 635       $ 2,652   

Commercial real estate

     —           2,529         2,529         115         6,255         6,370   

One-to-four family

     —           1,605         1,605         —           987         987   

Acquisition, development, and construction

     —           —           —           —           27         27   

Commercial and industrial

     1,269         1,799         3,068         627         1,279         1,906   

Other

     —           206         206         —           213         213   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,268       $ 15,239       $ 18,507       $ 2,759       $ 9,396       $ 12,155   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

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The financial effects of the Company’s TDRs for the six months ended June 30, 2016 and the twelve months ended December 31, 2015 are summarized as follows:

 

     For the Six Months Ended June 30, 2016  
     Weighted Average Interest Rate     Charge-         
(dollars in thousands)    Number
of Loans
     Pre-Modification     Post-
Modification
    off
Amount
     Capitalized
Interest
 

Loan Category:

            

Multi-family

     1         4.63     4.00   $ —         $ —     

One-to-four family

     3         3.62        3.07        —           6   

Commercial and industrial

     2         3.30        3.20        47         —     
  

 

 

        

 

 

    

 

 

 

Total

     6           $ 47       $ 6   
  

 

 

        

 

 

    

 

 

 
     For the Twelve Months Ended December 31, 2015  
     Weighted Average Interest Rate     Charge-         
(dollars in thousands)    Number
of Loans
     Pre-Modification     Post-
Modification
    off
Amount
     Capitalized
Interest
 

Loan Category:

            

One-to-four family

     4         4.02     2.72   $ —         $ 6   

Commercial and industrial

     2         3.40        3.52        33         —     

Other

     2         4.58        2.00        —           2   
  

 

 

        

 

 

    

 

 

 

Total

     8           $ 33       $ 8   
  

 

 

        

 

 

    

 

 

 

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 were in bankruptcy or were 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 June 30, 2016:

 

(dollars in thousands)    Amount      Percent of
Covered Loans
 

Loan Category:

     

One-to-four family

   $ 1,775,616         93.9

Other loans

     115,267         6.1   
  

 

 

    

 

 

 

Total covered loans

   $ 1,890,883         100.0
  

 

 

    

 

 

 

The Company refers to certain 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 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 June 30, 2016 and December 31, 2015, the unpaid principal balance of covered loans was $2.3 billion and $2.5 billion, respectively. The carrying value of such loans was $1.9 billion and $2.1 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.

 

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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.

On a quarterly basis, the Company 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 quarterly 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.

In the six months ended June 30, 2016, changes in the accretable yield for covered loans were as follows:

 

(in thousands)    Accretable Yield  

Balance at beginning of period

   $ 803,145   

Reclassification from non-accretable difference

     8,348   

Accretion

     (66,193
  

 

 

 

Balance at end of period

   $ 745,300   
  

 

 

 

In the preceding table, the line item “Reclassification from non-accretable difference” includes changes in cash flows that the Company does not expect to collect due to changes in prepayment assumptions, changes in interest rates on variable rate loans, and changes in loss assumptions. As of the Company’s most recent quarterly evaluation, prepayment assumptions increased, which resulted in a decrease in future expected interest cash flows and, consequently, a decrease in the accretable yield. The effect of this decrease was more than offset by an improvement in the underlying credit assumptions coupled with coupon rates on variable rate loans resetting slightly higher, which resulted in an increase in future expected interest cash flows and, consequently, an increase in the accretable yield.

Reflecting the foreclosure of certain loans acquired in the AmTrust and Desert Hills acquisitions, the Company owns certain other real estate owned (“OREO”) that is covered under the its loss sharing agreements with the FDIC (“covered OREO”). Covered OREO was initially recorded at its estimated fair value on the respective dates of acquisition, 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 have been 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 June 30, 2016 and December 31, 2015:

 

(in thousands)    June 30, 2016      December 31, 2015  

Covered Loans 90 Days or More Past Due:

     

One-to-four family

   $ 126,615       $ 130,626   

Other loans

     6,524         6,556   
  

 

 

    

 

 

 

Total covered loans 90 days or more past due

   $ 133,139       $ 137,182   
  

 

 

    

 

 

 

 

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The following table presents information regarding the Company’s covered loans that were 30 to 89 days past due at June 30, 2016 and December 31, 2015:

 

(in thousands)    June 30,
2016
     December 31,
2015
 

Covered Loans 30-89 Days Past Due:

     

One-to-four family

   $ 26,658       $ 30,455   

Other loans

     1,063         2,369   
  

 

 

    

 

 

 

Total covered loans 30-89 days past due

   $ 27,721       $ 32,824   
  

 

 

    

 

 

 

At June 30, 2016, the Company had $27.7 million of covered loans that were 30 to 89 days past due, and covered loans of $133.1 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 $1.7 billion at June 30, 2016 and was considered current at that date.

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. In the three and six months ended June 30, 2016, the Company recorded recoveries of losses on covered loans of $1.8 million and $4.7 million, respectively. The recoveries were largely due to an increase in expected cash flows in the acquired portfolios of one-to-four family and home equity loans, and were partly offset by FDIC indemnification expense of $1.5 million and $3.8 million respectively, that was recorded in “Non-interest income.”

The Company recorded a provision for losses on covered loans of $2.2 million and $3.1 million, respectively, in the three and six months ended June 30, 2015. The provision was largely due to credit deterioration in the acquired portfolios of one-to-four family and home equity loans, and was partly offset by FDIC indemnification income of $1.8 million and $2.5 million, respectively, that was recorded in “Non-interest income” in the corresponding period.

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 June 30, 2016:

        

Loans individually evaluated for impairment

   $ —         $ —         $ —     

Loans collectively evaluated for impairment

     127,127         24,201         151,328   

Acquired loans with deteriorated credit quality

     13,300         15,080         28,380   
  

 

 

    

 

 

    

 

 

 

Total

   $ 140,427       $ 39,281       $ 179,708   
  

 

 

    

 

 

    

 

 

 

 

(in thousands)    Mortgage      Other      Total  

Allowances for Loan Losses at December 31, 2015:

        

Loans individually evaluated for impairment

   $ —         $ —         $ —     

Loans collectively evaluated for impairment

     122,712         22,484         145,196   

Acquired loans with deteriorated credit quality

     14,583         18,740         33,323   
  

 

 

    

 

 

    

 

 

 

Total

   $ 137,295       $ 41,224       $ 178,519   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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 June 30, 2016:

        

Loans individually evaluated for impairment

   $ 25,197       $ 10,628       $ 35,825   

Loans collectively evaluated for impairment

     35,126,712         1,609,882         36,736,594   

Acquired loans with deteriorated credit quality

     1,780,989         115,877         1,896,866   
  

 

 

    

 

 

    

 

 

 

Total

   $ 36,932,898       $ 1,736,387       $ 38,669,285   
  

 

 

    

 

 

    

 

 

 

 

(in thousands)    Mortgage      Other      Total  

Loans Receivable at December 31, 2015:

        

Loans individually evaluated for impairment

   $ 47,480       $ 4,474       $ 51,954   

Loans collectively evaluated for impairment

     34,209,870         1,470,321         35,680,191   

Acquired loans with deteriorated credit quality

     1,924,255         144,178         2,068,433   
  

 

 

    

 

 

    

 

 

 

Total

   $ 36,181,605       $ 1,618,973       $ 37,800,578   
  

 

 

    

 

 

    

 

 

 

Allowance for Losses on Non-Covered Loans

The following table summarizes activity in the allowance for losses on non-covered loans for the six months ended June 30, 2016 and 2015:

 

     June 30,  
     2016     2015  
(in thousands)    Mortgage     Other     Total     Mortgage     Other     Total  

Balance, beginning of period

   $ 124,478      $ 22,646      $ 147,124      $ 122,616      $ 17,241      $ 139,857   

Charge-offs

     (153     (1,098     (1,251     (655     (375     (1,030

Recoveries

     1,140        581        1,721        1,640        1,207        2,847   

Transfer from the allowance for losses on covered loans (1)

     —          —          —          2,250        166        2,416   

Provision for (recovery of) non-covered loan losses

     3,231        2,234        5,465        (8,156     5,414        (2,742
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 128,696      $ 24,363      $ 153,059      $ 117,695      $ 23,653      $ 141,348   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Represents the allowance associated with $14.2 million of loans acquired in the Desert Hills transaction that were transferred from covered loans to non-covered loans upon expiration of the related FDIC loss sharing agreement.

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

The following tables present additional information about the Company’s impaired non-covered loans at June 30, 2016 and December 31, 2015:

 

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

Impaired Loans with No Related Allowance:

              

Multi-family

   $ 11,106       $ 13,273       $ —         $ 17,190       $ 325   

Commercial real estate

     11,144         16,859         —           12,114         101   

One-to-four family

     2,948         3,597         —           3,064         47   

Acquisition, development, and construction

     —           —           —           879         —     

Other

     10,627         11,181         —           8,057         111   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 35,825       $ 44,910       $ —         $ 41,304       $ 584   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

Impaired Loans with No Related Allowance:

              

Multi-family

   $ 27,464       $ 29,379       $ —         $ 30,965       $ 1,320   

Commercial real estate

     13,995         15,480         —           25,066         383   

One-to-four family

     3,384         8,929         —           2,302         75   

Acquisition, development, and construction

     2,637         3,035         —           1,086         148   

Other

     4,474         4,794         —           8,386         118   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 51,954       $ 61,617       $ —         $ 67,805       $ 2,044   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As indicated in the preceding tables, the Company had no impaired non-covered loans with an allowance recorded at June 30, 2016 or December 31, 2015.

Allowance for Losses on Covered Loans

Covered loans are reported exclusive of the FDIC loss share receivable. The covered loans acquired in the AmTrust Bank and Desert Hills Bank 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 pools of loans. The Company records a provision for (recovery of) losses on covered loans to the extent that the expected cash flows from a loan pool have decreased or increased 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 are recognized at the same time, and measured based on the applicable loss sharing agreement percentage.

If there is an increase in expected cash flows due to a decrease in estimated credit losses (as compared to the estimates made at the respective acquisition dates), the increase in the present value of expected cash flows is recorded as a recovery of the prior-period impairment charged to earnings, and the allowance for covered loan losses is reduced. A related debit to non-interest income and a decrease in the FDIC loss share receivable are 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 six months ended June 30, 2016 and 2015:

 

     June 30,  
(in thousands)    2016      2015  

Balance, beginning of period

   $ 31,395       $ 45,481   

(Recovery of) provision for losses on covered loans

     (4,746      3,083   

Transfer to the allowance for losses on non-covered loans (1)

     —           (2,416
  

 

 

    

 

 

 

Balance, end of period

   $ 26,649       $ 46,148   
  

 

 

    

 

 

 

 

(1) Represents the allowance associated with $14.2 million of loans acquired in the Desert Hills Bank transaction that were transferred from covered loans to non-covered loans upon expiration of the related FDIC loss sharing agreement.

Note 7. Borrowed Funds

The following table summarizes the Company’s borrowed funds at June 30, 2016 and December 31, 2015:

 

(in thousands)    June 30,
2016
     December 31,
2015
 

Wholesale Borrowings:

     

FHLB advances

   $ 11,614,400       $ 13,463,800   

Repurchase agreements

     1,500,000         1,500,000   

Fed funds purchased

     435,000         426,000   
  

 

 

    

 

 

 

Total wholesale borrowings

   $ 13,549,400       $ 15,389,800   

Junior subordinated debentures

     358,739         358,605   
  

 

 

    

 

 

 

Total borrowed funds

   $ 13,908,139       $ 15,748,405   
  

 

 

    

 

 

 

 

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The following table summarizes the Company’s repurchase agreements accounted for as secured borrowings at June 30, 2016:

 

     Remaining Contractual Maturity of the Agreements  
(in thousands)    Overnight and
Continuous
     Up to
30 Days
     30–90 Days      Greater than
90 Days
 

GSE debentures and mortgage-related securities

   $ —         $ —         $ —         $ 1,500,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

At June 30, 2016, the Company had $75.2 million in restricted cash which serves as collateral for certain repurchase agreements. There was no restricted cash at December 31, 2015.

At June 30, 2016 and December 31, 2015, the Company had $358.7 million and $358.6 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 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. The following junior subordinated debentures were outstanding at June 30, 2016:

 

Issuer

   Interest
Rate

of Capital
Securities
and
Debentures
    Junior
Subordinated
Debentures
Amount
Outstanding
     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   $ 144,813       $ 138,463         Nov. 4, 2002         Nov. 1, 2051         Nov. 4, 2007 (1)   

New York Community Capital Trust X

     2.253        123,712         120,000         Dec. 14, 2006         Dec. 15, 2036         Dec. 15, 2011 (2)   

PennFed Capital Trust III

     3.903        30,928         30,000         June 2, 2003         June 15, 2033         June 15, 2008 (2)   

New York Community Capital Trust XI

     2.281        59,286         57,500         April 16, 2007         June 30, 2037         June 30, 2012 (2)   
    

 

 

    

 

 

          

Total junior subordinated debentures

     $ 358,739       $ 345,963            
    

 

 

    

 

 

          

 

(1) Callable subject to certain conditions as described in the prospectus filed with the U.S. Securities and Exchange Commission (the “SEC”) on November 4, 2002.
(2) Callable from this date forward.

Note 8. Mortgage Servicing Rights

In accordance with ASC 860-50, the Company records a separate servicing asset representing the right to service third-party loans. MSRs are initially recorded at their fair value as a component of the sale proceeds. The fair values of the MSRs are based on an analysis of discounted cash flows that incorporates estimates of (1) market servicing costs, (2) market-based estimates of ancillary servicing revenue, (3) market-based prepayment rates, and (4) market profit margins.

MSRs are subsequently measured at either fair value or amortized in proportion to, and over the period of, estimated net servicing income. The Company elects one of those methods on a class basis. A class is determined based on (1) the availability of market inputs used in determining the fair value of servicing assets, and/or (2) the Company’s method for managing the risks of servicing assets.

The Company had MSRs of $194.0 million and $247.7 million, respectively, at June 30, 2016 and December 31, 2015. Both period-end balances consisted of two classes of MSRs for which the Company separately managed the economic risk: residential MSRs and participation MSRs (i.e., MSRs on loans sold through participations).

The total unpaid principal balance of loans serviced for others was $25.1 billion and $24.2 billion at June 30, 2016 and December 31, 2015, respectively.

 

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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 as “Mortgage banking income” which is included in “Non-interest income” in the Consolidated Statements of Income and Comprehensive Income. MSRs do not trade in an active open market with readily observable prices. Accordingly, the Company utilizes a third-party valuation specialist to determine the fair value of its MSRs. This specialist determines fair value based on the present value of estimated future net servicing income cash flows, and incorporates 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 specialist and the Company evaluate, and periodically adjust, as necessary, these underlying inputs and assumptions to reflect market conditions and changes in the assumptions that a market participant would consider in valuing MSRs.

The value of residential MSRs at any given time is significantly affected by the mortgage interest rates that are then available in the marketplace; these, in turn, influence mortgage loan prepayment speeds. The rate of prepayment of residential loans serviced is the most significant estimate involved in the measurement process. Actual prepayment rates differ from those projected by management due to changes in a variety of economic factors, including prevailing interest rates and the availability of alternative financing sources to borrowers.

During periods of declining interest rates, the value of residential MSRs generally declines as an increase in mortgage refinancing activity results in an increase in prepayments and a decrease in the carrying value of residential MSRs through a charge to earnings in the current period. Conversely, during periods of rising interest rates, the value of residential MSRs generally increases as mortgage refinancing activity declines and actual prepayments of the loans being serviced occurs more slowly than had been projected, resulting in increases in the carrying value of residential MSRs and servicing income than previously projected amounts. Accordingly, the residential MSRs actually realized, could differ from the amounts initially recorded.

Participation MSRs are initially carried at fair value and are subsequently amortized and carried at the lower of their fair value or amortized amount. The amortization is recorded in proportion to, and over the period of, estimated net servicing income, with impairment of those servicing assets evaluated through an assessment of the fair value of those assets via a discounted cash-flow method. The net carrying value is compared to its discounted estimated future net cash flows to determine whether adjustments should be made to carrying values or amortization schedules. Impairment of participation MSRs is recognized through a valuation allowance and a charge to current-period earnings if it is considered to be temporary or through a direct write-down of the asset and a charge to current-period earnings if it is considered other than temporary. The predominant risk characteristics of the underlying loans that are used to stratify the participation MSRs for measurement purposes generally include the (1) loan origination date, (2) loan rate, (3) loan type and size, (4) loan maturity date, and (5) geographic location. Changes in the carrying value of participation MSRs due to amortization or declines in fair value (i.e., impairment), if any, are reported in “Other income” in the period during which such changes occur. In the six months ended June 30, 2016, there was no impairment related to the Company’s participation MSRs.

The following tables set forth the changes in the balances of residential MSRs and participation MSRs for the periods indicated:

 

     For the Three Months Ended  
     June 30, 2016      June 30, 2015  
(in thousands)    Residential      Participation      Residential      Participation  

Carrying value, beginning of period

   $ 208,087       $ 5,181       $ 220,371       $ —     

Additions

     11,232         1,018         15,981         2,828   

Increase (decrease) in fair value:

           

Due to changes in interest rates

     (13,521      —           25,957         —     

Due to model assumption changes (1)

     (4,250      —           —           —     

Due to loan payoffs

     (10,371      —           (10,263      —     

Due to passage of time and other changes

     (2,846      —           (1,083      —     

Amortization

     —           (536      —           (153
  

 

 

    

 

 

    

 

 

    

 

 

 

Carrying value, end of period

   $ 188,331       $ 5,663       $ 250,963       $ 2,675   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Represents changes in fair value driven by changes to the inputs to the valuation model related to assumed prepayment speeds.

 

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Table of Contents
     For the Six Months Ended  
     June 30, 2016      June 30, 2015  
(in thousands)    Residential      Participation      Residential      Participation  

Carrying value, beginning of period

   $ 243,389       $ 4,345       $ 227,297       $ —     

Additions

     19,180         2,268         30,998         2,828   

Increase (decrease) in fair value:

           

Due to changes in interest rates

     (37,807      —           14,859         —     

Due to model assumption changes (1)

     (13,088         —           —     

Due to loan payoffs

     (19,121         (20,479      —     

Due to passage of time and other changes

     (4,222      —           (1,712      —     

Amortization

     —           (950      —           (153
  

 

 

    

 

 

    

 

 

    

 

 

 

Carrying value, end of period

   $ 188,331       $ 5,663       $ 250,963       $ 2,675   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Represents changes in fair value driven by changes to the inputs to the valuation model related to assumed prepayment speeds.

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

 

     June 30, 2016     December 31, 2015  

Expected weighted average life

     71 months        92 months   

Constant prepayment speed

     11.54     7.35

Discount rate

     10.02        10.01   

Primary mortgage rate to refinance

     3.53        4.03   

Cost to service (per loan per year):

    

Current

   $ 64      $ 63   

30-59 days or less delinquent

     201        213   

60-89 days delinquent

     351        313   

90-119 days delinquent

     451        413   

120 days or more delinquent

     851        563   

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 June 30,  
     2016      2015  
(in thousands)    Pension
Benefits
     Post-Retirement
Benefits
     Pension
Benefits
     Post-Retirement
Benefits
 

Components of net periodic (credit) expense:

           

Interest cost

   $ 1,470       $ 160       $ 1,516       $ 175   

Service cost

     —           1         —           1   

Expected return on plan assets

     (3,906      —           (4,390      —     

Amortization of prior-service costs

     —           (62      —           (62

Amortization of net actuarial loss

     2,262         81         2,052         96   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic (credit) expense

   $ (174    $ 180       $ (822    $ 210   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     For the Six Months Ended June 30,  
     2016      2015  
(in thousands)    Pension
Benefits
     Post-Retirement
Benefits
     Pension
Benefits
     Post-Retirement
Benefits
 

Components of net periodic (credit) expense:

           

Interest cost

   $ 2,940       $ 320       $ 3,032       $ 350   

Service cost

     —           2         —           2   

Expected return on plan assets

     (7,812      —           (8,780      —     

Amortization of prior-service costs

     —           (124      —           (124

Amortization of net actuarial loss

     4,524         162         4,104         192   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic (credit) expense

   $ (348    $ 360       $ (1,644    $ 420   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company expects to contribute $1.3 million to its post-retirement plan to pay premiums and claims for the fiscal year ending December 31, 2016. The Company does not expect to make any contributions to its pension plan in 2016.

 

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Table of Contents

Note 10. Stock-Based Compensation

At June 30, 2016, the Company had 9,610,060 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 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 2,692,652 shares of restricted stock during the six months ended June 30, 2016. The shares had an average fair value of $15.22 per share on the date of grant and a vesting period of five years. The six-month amount includes 121,200 shares that were granted in the second quarter with an average fair value of $15.07 per share on the date of grant. Compensation and benefits expense related to the restricted stock grants is recognized on a straight-line basis over the vesting period, and totaled $16.4 million and $14.6 million, respectively, in the six months ended June 30, 2016 and 2015, including $8.2 million and $7.5 million, respectively, in the three months ended at those dates.

The following table provides a summary of activity with regard to restricted stock awards in the six months ended June 30, 2016:

 

     For the Six Months Ended
June 30, 2016
 
     Number of Shares      Weighted Average
Grant Date
Fair Value
 

Unvested at beginning of year

     6,362,117       $ 15.44   

Granted

     2,692,652         15.22   

Vested

     (1,935,663      15.38   

Canceled

     (75,200      15.17   
  

 

 

    

Unvested at end of period

     7,043,906         15.38   
  

 

 

    

As of June 30, 2016, unrecognized compensation cost relating to unvested restricted stock totaled $94.4 million. This amount will be recognized over a remaining weighted average period of 3.4 years.

The following table summarizes the changes that occurred during the six months ended at June 30, 2016 with regard to the Company’s outstanding stock options:

 

     For the Six Months Ended
June 30, 2016
 
     Number of Stock
Options
     Weighted Average
Exercise Price
 

Stock options outstanding, beginning of year

     2,400       $ 16.88   

Exercised

     —           —     

Expired

     (2,400      16.88   
  

 

 

    

Stock options outstanding, end of period

     —           —     

Options exercisable, end of period

     —           —     
  

 

 

    

There were no stock options outstanding at June 30, 2016 and no options exercised during the six months ended at that date.

Note 11. Fair Value Measurements

GAAP sets forth a definition of fair value, establishes a consistent framework for measuring fair value, and requires disclosure for each major asset and liability category measured at fair value on either a recurring or non-recurring basis. GAAP also clarifies 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.

 

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Table of Contents
    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 June 30, 2016 and December 31, 2015, and that were included in the Company’s Consolidated Statements of Condition at those dates:

 

     Fair Value Measurements at June 30, 2016  
(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:

           

Securities Available for Sale:

           

Municipal bonds

   $ —        $ 811      $ —         $ —        $ 811   

Capital trust notes

     —          6,793        —           —          6,793   

Preferred stock

     100,167        28,876        —           —          129,043   

Mutual funds and common stock

     —          17,623        —           —          17,623   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total securities available for sale

   $ 100,167      $ 54,103      $ —         $ —        $ 154,270   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Other Assets:

           

Loans held for sale

   $ —        $ 609,894      $ —         $ —        $ 609,894   

Mortgage servicing rights

     —          —          188,331         —          188,331   

Interest rate lock commitments

     —          —          10,133         —          10,133   

Derivative assets-other (2)

     9,303        8,184        —           (9,053     8,434   

Liabilities:

           

Derivative liabilities

   $ (635   $ (12,441   $ —         $ 11,985      $ (1,091

 

(1) Includes cash collateral received from, and paid to, counterparties.
(2) Includes $4.9 million to purchase Treasury options.

 

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Table of Contents
     Fair Value Measurements at December 31, 2015  
(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

   $ —        $ 53,852      $ —         $ —        $ 53,852   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total mortgage-related securities

   $ —        $ 53,852      $ —         $ —        $ 53,852   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Other Securities Available for Sale:

           

Municipal bonds

   $ —        $ 795      $ —         $ —        $ 795   

Capital trust notes

     —          6,964        —           —          6,964   

Preferred stock

     96,641        28,731        —           —          125,372   

Mutual funds and common stock

     —          17,272        —           —          17,272   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total other securities

   $ 96,641      $ 53,762      $ —         $ —        $ 150,403   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total securities available for sale

   $ 96,641      $ 107,614      $ —         $ —        $ 204,255   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Other Assets:

           

Loans held for sale

   $ —        $ 367,221      $ —         $ —        $ 367,221   

Mortgage servicing rights

     —          —          243,389         —          243,389   

Interest rate lock commitments

     —          —          2,526         —          2,526   

Derivative assets-other (2)

     1,875        1,342        —           (1,024     2,193   

Liabilities:

           

Derivative liabilities

   $ (1,539   $ (2,783   $ —         $ 3,986      $ (336

 

(1) Includes cash collateral received from, and paid to, counterparties.
(2) Includes $1.9 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 a 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.

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 service valuations that appear to be unusual or unexpected.

The Company carries loans held for sale originated by its mortgage banking operation at fair value. The fair value of loans held for sale 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.

 

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Mortgage servicing rights (“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 a third-party valuation specialist. The specialist 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 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 values of interest rate lock commitments (“IRLCs”) for residential mortgage loans that the Company intends to sell are 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 a 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 90 days or more past due at June 30, 2016. Management believes that 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.

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:

 

     June 30, 2016      December 31, 2015  
(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

   $ 609,894       $ 587,517       $ 22,377       $ 367,221       $ 359,587       $ 7,634   

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.

 

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The following table presents the changes in fair value related to initial measurement, and the subsequent changes in fair value included in earnings, for loans held for sale and MSRs for the periods indicated:

 

     Gain (Loss) Included in Mortgage Banking Income
from Changes in Fair Value (1)
 
     For the Three Months
Ended June 30,
     For the Six Months
Ended June 30,
 
(in thousands)    2016      2015      2016      2015  

Loans held for sale

   $ 12,143       $ 17       $ 19,043       $ 4,386   

Mortgage servicing rights

     (30,988      14,611         (74,238      (7,332
  

 

 

    

 

 

    

 

 

    

 

 

 

Total (loss) gain

   $ (18,845    $ 14,628       $ (55,195    $ (2,946
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Does not include the effect of hedging activities, which is included in “Other non-interest income.”

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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Table of Contents

Changes in Level 3 Fair Value Measurements

The following tables present, for the six months ended June 30, 2016 and 2015, a roll-forward of the balance sheet amounts (including changes in fair value) for financial instruments classified in Level 3 of the valuation hierarchy:

 

(in thousands)    Fair Value
January 1,
2016
     Total Realized/Unrealized
Gains/(Losses) Recorded in
     Issuances      Settlements      Transfers
to/(from)
Level 3
     Fair Value
at June 30,
2016
     Change in
Unrealized Gains/
(Losses) Related to
Instruments Held at
June 30, 2016
 
      Income/
(Loss)
    Comprehensive
(Loss) Income
                

Mortgage servicing rights

   $ 243,389       $ (74,238   $ —         $ 19,180       $ —         $ —         $ 188,331       $ (60,163

Interest rate lock commitments

     2,526         7,607        —           —           —           —           10,133         10,133   

 

(in thousands)    Fair Value
January 1,
2015
     Total Realized/Unrealized
Gains/(Losses) Recorded in
     Issuances      Settlements      Transfers
to/(from)
Level 3
     Fair Value
at June 30,
2015
     Change in
Unrealized Gains/
(Losses) Related to
Instruments Held at
June 30, 2015
 
      Income/
(Loss)
    Comprehensive
(Loss) Income
                

Mortgage servicing rights

   $ 227,297       $ (7,332   $ —         $ 30,998       $ —         $ —         $ 250,963       $ 23,289   

Interest rate lock commitments

     4,397         (2,477     —           —           —           —           1,920         1,920   

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 Levels 1, 2, or 3 during the six months ended June 30, 2016. During the six months ended June 30, 2015, the Company transferred certain mutual funds to Level 2 from Level 1 as a result of decreased observable market activity for these securities. There were no gains or losses recognized as a result of the transfer of securities during the six months ended June 30, 2015.

 

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For Level 3 assets and liabilities measured at fair value on a recurring basis as of June 30, 2016, the significant unobservable inputs used in the fair value measurements were as follows:

 

(dollars in thousands)    Fair Value at
Jun. 30, 2016
     Valuation Technique   

Significant Unobservable Inputs

   Significant
Unobservable
Input Value
 

Mortgage servicing rights

   $ 188,331       Discounted Cash Flow   

Weighted Average Constant Prepayment Rate (1)

     11.54
        

Weighted Average Discount Rate

     10.02   

Interest rate lock commitments

     10,133       Discounted Cash Flow   

Weighted Average Closing Ratio

     75.74   

 

(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 June 30, 2016 and December 31, 2015, and that were included in the Company’s Consolidated Statements of Condition at those dates:

 

     Fair Value Measurements at June 30, 2016 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 (1)

   $ —         $ —         $ 3,517       $ 3,517   

Other assets (2)

     —           —           9,109         9,109   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ 12,626       $ 12,626   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Represents the fair value of certain impaired loans, based on the value of the collateral.
(2) 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, 2015 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 (1)

   $ —         $ —         $ 3,930       $ 3,930   

Other assets (2)

     —           —           7,982         7,982   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ 11,912       $ 11,912   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Represents the fair value of certain impaired loans, based on the value of the collateral.
(2) 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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Table of Contents

Other Fair Value Disclosures

GAAP 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 June 30, 2016 and December 31, 2015:

 

     June 30, 2016  
            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

   $ 674,289       $ 674,289       $ 674,289      $ —        $ —     

Securities held to maturity

     3,822,561         4,093,734         —          4,092,947        787   

FHLB stock (1)

     586,835         586,835         —          586,835        —     

Loans, net

     39,121,599         39,569,245         —          —          39,569,245   

Financial Liabilities:

            

Deposits

   $ 28,882,992       $ 28,894,119       $ 21,865,579 (2)    $ 7,028,540 (3)    $ —     

Borrowed funds

     13,908,139         13,996,619         —          13,996,619        —     

 

(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, 2015  
            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

   $ 537,674       $ 537,674       $ 537,674      $ —        $ —     

Securities held to maturity

     5,969,390         6,108,529         —          6,107,697        832   

FHLB stock (1)

     663,971         663,971         —          663,971        —     

Loans, net

     38,011,995         38,245,434         —          —          38,245,434   

Financial Liabilities:

            

Deposits

   $ 28,426,758       $ 28,408,915       $ 23,114,271 (2)    $ 5,294,644 (3)    $ —     

Borrowed funds

     15,748,405         15,685,616         —          15,685,616        —     

 

(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.

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 fed 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.

 

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Table of Contents

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 maturities 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 values 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 that of any other company.

Mortgage Servicing Rights

MSRs do not trade in an active market with readily observable prices. Accordingly, the Company bases the fair value of its MSRs on a valuation performed by a third-party valuation specialist. This specialist determines fair value based on the present value of estimated future net servicing income cash flows, and incorporates 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 specialist and the Company evaluate, and periodically adjust, as necessary, these underlying inputs and assumptions to reflect market conditions and changes in the assumptions that a market participant would consider in valuing MSRs.

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.

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.

 

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Table of Contents

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 June 30, 2016 and December 31, 2015.

Note 12. Derivative Financial Instruments

The Company’s derivative financial instruments consist of financial forward and futures contracts, interest rate swaps, IRLCs, and options. These derivatives relate to mortgage banking operations, residential 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, other changing market conditions, and the types of assets held.

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 that are included in derivative assets, and contracts with positive fair values that are included in derivative liabilities.

The Company held derivatives with a notional amount of $3.6 billion at June 30, 2016. 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 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, as well as 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 uses interest rate swaps to hedge the fair value of its residential MSRs. The Company also purchases put and call options to manage the risk associated with variations in the amount of IRLCs that ultimately close.

The following table sets forth information regarding the Company’s derivative financial instruments at June 30, 2016:

 

     June 30, 2016  
(in thousands)    Notional
Amount
     Unrealized (1)  
      Gain      Loss  

Treasury options

   $ 595,000       $ 216       $ 497   

Treasury futures

     —           —           —     

Eurodollar futures

     175,000         —           138   

Swaps

     200,000         4,202         —     

Forward commitments to sell loans/mortgage-backed securities

     1,144,000         —           12,441   

Forward commitments to buy loans/mortgage-backed securities

     725,000         8,184         —     

Interest rate lock commitments

     739,902         10,133         —     
  

 

 

    

 

 

    

 

 

 

Total derivatives

   $ 3,578,902       $ 22,735       $ 13,076   
  

 

 

    

 

 

    

 

 

 

 

(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.

In addition, the Company mitigates a portion of the risk associated with changes in the value of its residential 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. This action partially offsets changes in the value of its 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.

 

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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
June 30,
     For the Six Months Ended
June 30,
 
(in thousands)    2016      2015      2016      2015  

Treasury options

   $ 2,633       $ (8,490    $ 9,864       $ (5,074

Treasury and Eurodollar futures

     (121      (22      (55      361   

Swaps

     2,682         —           4,178         —     

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

     (2,589      2,018         (1,720      3,790   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total gain/(loss)

   $ 2,605       $ (6,494    $ 12,267       $ (923
  

 

 

    

 

 

    

 

 

    

 

 

 

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 the 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 of the master netting arrangements on the presentation of the derivative assets in the Consolidated Statements of Condition as of the dates indicated:

 

     June 30, 2016  

(in thousands)

   Gross Amount
of Recognized
Assets (1)
     Gross Amount
Offset in the
Statement of
Condition
     Net Amount of
Assets Presented
in the Statement
of Condition
     Gross Amounts Not
Offset in the
Consolidated Statement
of Condition
     Net
Amount
 
            Financial
Instruments
     Cash
Collateral
Received
    

Derivatives

   $ 27,620       $ 9,053       $ 18,567       $ —         $ —         $ 18,567   

 

(1) Includes $4.9 million to purchase Treasury options.

 

     December 31, 2015  

(in thousands)

   Gross Amount
of Recognized
Assets (1)
     Gross Amount
Offset in the
Statement of
Condition
     Net Amount of
Assets Presented
in the Statement
of Condition
     Gross Amounts Not
Offset in the
Consolidated Statement
of Condition
     Net
Amount
 
            Financial
Instruments
     Cash
Collateral
Received
    

Derivatives

   $ 5,743       $ 1,024       $ 4,719       $ —         $ —         $ 4,719   

 

(1) Includes $1.9 million to purchase Treasury options.

 

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

 

     June 30, 2016  
(in thousands)    Gross
Amount of
Recognized
Liabilities
     Gross Amount
Offset in the
Statement of
Condition
     Net Amount of
Liabilities
Presented in
the Statement
of Condition
     Gross Amounts Not
Offset in the
Consolidated Statement
of Condition
     Net
Amount
 
            Financial
Instruments
     Cash
Collateral
Pledged
    

Derivatives

   $ 13,076       $ 11,985       $ 1,091       $ —         $ —         $ 1,091   
     December 31, 2015  
(in thousands)    Gross
Amount of
Recognized
Liabilities
     Gross Amount
Offset in the
Statement of
Condition
     Net Amount of
Liabilities
Presented in
the Statement
of Condition
     Gross Amounts Not
Offset in the
Consolidated Statement
of Condition
     Net
Amount
 
            Financial
Instruments
     Cash
Collateral
Pledged
    

Derivatives

   $ 4,322       $ 3,986       $ 336       $ —         $ —         $ 336   

Note 13. Segment Reporting

The Company’s operations are divided into two reportable business segments: Banking Operations and Residential Mortgage Banking. These operating segments have been identified based on the Company’s organizational structure. The segments require unique technology and marketing strategies, and offer different products and services. While the Company is managed as an integrated organization, individual executive managers are held accountable for the operations of these business segments.

The Company measures and presents information for internal reporting purposes in a variety of ways. The internal reporting system presently used by management in the planning and measurement of operating activities, and to which most managers are held accountable, is based on organizational structure.

The management accounting process uses various estimates and allocation methodologies to measure the performance of the operating segments. To determine financial performance for each segment, the Company allocates capital, funding charges and credits, certain non-interest expenses, and income tax provisions to each segment, as applicable. Allocation methodologies are subject to periodic adjustment as the internal management accounting system is revised and/or as business or product lines within the segments change. In addition, because the development and application of these methodologies is a dynamic process, the financial results presented may be periodically revised.

The Company seeks to maximize shareholder value by, among other means, optimizing the return on stockholders’ equity and managing risk. Capital is assigned to each segment, the combination of which is equivalent to the Company’s consolidated total, on an economic basis, using management’s assessment of the inherent risks associated with the segment. Capital allocations are made to cover the following risk categories: credit risk, liquidity risk, interest rate risk, option risk, basis risk, market risk, and operational risk.

The Company allocates expenses to the reportable segments based on various factors, including the volume and number of loans produced and the number of full-time equivalent employees. Income taxes are allocated to the various segments based on taxable income and statutory rates applicable to the segment.

Banking Operations Segment

The Banking Operations segment serves consumers and businesses by offering and servicing a variety of loan and deposit products and other financial services.

Residential Mortgage Banking Segment

The Residential Mortgage Banking segment originates, aggregates, sells, and services one-to-four family mortgage loans. Mortgage loan products consist primarily of agency-conforming, fixed- and adjustable-rate loans and, to a lesser extent, jumbo loans, for the purpose of purchasing or refinancing one-to-four family homes. The Residential Mortgage Banking segment earns interest on loans held in the warehouse and non-interest income from the origination and servicing of loans. It also recognizes gains or losses on the sale of such loans.

 

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The following table provides a summary of the Company’s segment results for the three months ended June 30, 2016, on an internally managed accounting basis:

 

     For the Three Months Ended June 30, 2016  
(in thousands)    Banking
Operations
     Residential
Mortgage Banking
     Total Company  

Net interest income

   $ 321,663       $ 3,910       $ 325,573   

Provision for loan losses

     895         —           895   

Non-interest income:

        

Third party (1)

     29,899         7,467         37,366   

Inter-segment

     (4,317      4,317         —     
  

 

 

    

 

 

    

 

 

 

Total non-interest income

     25,582         11,784         37,366   

Non-interest expense (2)

     144,152         16,759         160,911   
  

 

 

    

 

 

    

 

 

 

Income before income tax expense

     202,198         (1,065      201,133   

Income tax expense (benefit)

     75,097         (424      74,673   
  

 

 

    

 

 

    

 

 

 

Net income (loss)

   $ 127,101       $ (641    $ 126,460   
  

 

 

    

 

 

    

 

 

 

Identifiable segment assets (period-end)

   $ 48,137,359       $ 898,388       $ 49,035,747   
  

 

 

    

 

 

    

 

 

 

 

(1) Includes ancillary fee income.
(2) Includes both direct and indirect expenses.

The following table provides a summary of the Company’s segment results for the six months ended June 30, 2016, on an internally managed accounting basis:

 

     For the Six Months Ended June 30, 2016  
(in thousands)    Banking
Operations
     Residential
Mortgage Banking
     Total Company  

Net interest income

   $ 646,580       $ 6,859       $ 653,439   

Provision for loan losses

     719         —           719   

Non-Interest Income:

        

Third party(1)

     60,485         12,118         72,603   

Inter-segment

     (8,429      8,429         —     
  

 

 

    

 

 

    

 

 

 

Total non-interest income

     52,056         20,547         72,603   
  

 

 

    

 

 

    

 

 

 

Non-interest expense(2)

     286,202         33,157         319,359   
  

 

 

    

 

 

    

 

 

 

Income before income tax expense

     411,715         (5,751      405,964   

Income tax expense (benefit)

     151,912         (2,317      149,595   
  

 

 

    

 

 

    

 

 

 

Net income (loss)

   $ 259,803       $ (3,434    $ 256,369   
  

 

 

    

 

 

    

 

 

 

Identifiable segment assets (period-end)

   $ 48,137,359       $ 898,388       $ 49,035,747   
  

 

 

    

 

 

    

 

 

 

 

(1) Includes ancillary fee income.
(2) Includes both direct and indirect expenses.

 

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The following table provides a summary of the Company’s segment results for the three months ended June 30, 2015, on an internally managed accounting basis:

 

     For the Three Months Ended June 30, 2015  
(in thousands)    Banking
Operations
     Residential
Mortgage Banking
     Total Company  

Net interest income

   $ 280,006       $ 5,091       $ 285,097   

Provision for loan losses

     334         —           334   

Non-interest income:

        

Third party (1)

     45,355         16,546         61,901   

Inter-segment

     (4,061      4,061         —     
  

 

 

    

 

 

    

 

 

 

Total non-interest income

     41,294         20,607         61,901   

Non-interest expense (2)

     135,476         16,454         151,930   
  

 

 

    

 

 

    

 

 

 

Income before income tax expense

     185,490         9,244         194,734   

Income tax expense

     67,246         3,784         71,030   
  

 

 

    

 

 

    

 

 

 

Net income

   $ 118,244       $ 5,460       $ 123,704   
  

 

 

    

 

 

    

 

 

 

Identifiable segment assets (period-end)

   $ 48,011,913       $ 636,619       $ 48,648,532   
  

 

 

    

 

 

    

 

 

 

 

(1) Includes ancillary fee income.
(2) Includes both direct and indirect expenses.

The following table provides a summary of the Company’s segment results for the six months ended June 30, 2015, on an internally managed accounting basis:

 

     For the Six Months Ended June 30, 2015  
(in thousands)    Banking
Operations
     Residential
Mortgage Banking
     Total Company  

Net interest income

   $ 569,291       $ 8,574       $ 577,865   

Recovery of loan losses

     341         —           341   

Non-interest income:

        

Third party (1)

     78,509         35,626         114,135   

Inter-segment

     (8,231      8,231         —     
  

 

 

    

 

 

    

 

 

 

Total non-interest income

     70,278         43,857         114,135   

Non-interest expense (2)

     275,627         33,139         308,766   
  

 

 

    

 

 

    

 

 

 

Income before income tax expense

     363,601         19,292         382,893   

Income tax expense

     132,136         7,794         139,930   
  

 

 

    

 

 

    

 

 

 

Net income

   $ 231,465       $ 11,498       $ 242,963   
  

 

 

    

 

 

    

 

 

 

Identifiable segment assets (period-end)

   $ 48,011,913       $ 636,619       $ 48,648,532   
  

 

 

    

 

 

    

 

 

 

 

(1) Includes ancillary fee income.
(2) Includes both direct and indirect expenses.

Note 14. Impact of Recent Accounting Pronouncements

In June 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU No. 2016-13 amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, ASU No. 2016-13 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available for sale debt securities, credit losses should be measured in a manner similar to current GAAP, however ASU No. 2016-13 will require that credit losses be presented as an allowance rather than as a write-down. ASU No. 2016-13 affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. ASU No. 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Entities may adopt ASU No. 2016-13 earlier as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is in the process of evaluating the effects the adoption of ASU No. 2016-13 may have on the Company’s consolidated statements of condition and results of operations.

 

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In March 2016, the FASB issued ASU No. 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” ASU No. 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows, and accounting for forfeitures. The Company adopted ASU No. 2016-09 prospectively, effective for the first quarter of 2016. Upon adoption, the Company recorded an immaterial cumulative-effect adjustment to the opening balance of retained earnings. In addition, ASU No. 2016-09 requires that excess tax benefits and shortfalls be recorded as income tax benefit or expense in the income statement, rather than equity. This resulted in an immaterial benefit to income tax expense in the first quarter of 2016. Relative to forfeitures, ASU No. 2016-09 allows an entity’s accounting policy election to either continue to estimate the number of awards that are expected to vest, as under current guidance, or account for forfeitures when they occur. The Company has elected to continue its existing practice of estimating the number of awards that will be forfeited. The income tax effects of ASU No. 2016-09 on the statement of cash flows are now classified as cash flows from operating activities, rather than cash flows from financing activities. The Company elected to apply this cash flow classification guidance prospectively and, therefore, prior periods have not been adjusted. ASU No. 2016-09 also requires the presentation of certain employee withholding taxes as a financing activity on the Consolidated Statement of Cash Flows; this is consistent with the manner in which we have presented such employee withholding taxes in the past. Accordingly, no reclassification for prior periods is required.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” ASU No. 2016-02 will require organizations that lease assets (hereinafter referred to as “lessees”) to recognize as assets and liabilities on the balance sheet the respective rights and obligations created by those leases. Under ASU No. 2016-02, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than twelve months. ASU No. 2016-02 also will require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. ASU No. 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early application will be permitted. The Company is in the process of evaluating the effects the adoption of ASU No. 2016-02 may have on the Company’s consolidated statements of condition and results of operations.

In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments—Overall (Subtopic 825-10)—Recognition and Measurement of Financial Assets and Financial Liabilities.” The amendments in ASU No. 2016-01 require all equity investments to be measured at fair value, with changes in the fair value recognized through net income (other than those accounted for under the equity method of accounting or those resulting in consolidation of the investee). The amendments in ASU No. 2016-01 also require an entity to present separately in “Other comprehensive income” the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. In addition, the amendments in ASU No. 2016-01 eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities and the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public business entities. (ASU No. 2016-01 is the final version of Proposed ASU No. 2013-220—Financial Instruments—Overall (Subtopic 825-10) and Proposed ASU No. 2013-221—Financial Instruments—Overall (Subtopic 825-10).) ASU No. 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of ASU No. 2016-01 is not expected to have a material effect on the Company’s consolidated statements of condition or results of operations.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” The amendments in ASU No. 2014-09 create Topic 606, “Revenue from Contracts with Customers,” and supersede the revenue recognition requirements in Topic 605, “Revenue Recognition,” including most industry-specific revenue recognition guidance throughout the Industry Topics of the Accounting Standards Codification. In addition, the amendments supersede the cost guidance in Subtopic 605-35, “Revenue Recognition—Construction-Type and Production-Type Contracts,” and create new Subtopic 340-40, “Other Assets and Deferred Costs—Contracts with Customers.” In summary, the core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU No. 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is permitted only as of annual periods beginning after December 31, 2016, including interim reporting periods within that fiscal year. The Company is in the process of evaluating the effects the adoption of ASU No. 2014-09 may have on the Company’s consolidated statements of condition and results of operations.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

For the purpose of this discussion and analysis, the words “we,” “us,” “our,” and the “Company” are used to refer to New York Community Bancorp, Inc. and our consolidated subsidiaries, including New York Community Bank (the “Community Bank”) and New York Commercial Bank (the “Commercial Bank”) (collectively, the “Banks”).

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING LANGUAGE

This report, like many written and oral communications presented by New York Community Bancorp, Inc. and our authorized officers, may contain certain forward-looking statements regarding our prospective performance and strategies within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of said safe harbor provisions.

Forward-looking statements, which are based on certain assumptions and describe future plans, strategies, and expectations of the Company, are generally identified by use of the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “seek,” “strive,” “try,” or future or conditional verbs such as “will,” “would,” “should,” “could,” “may,” or similar expressions. Although we believe that our plans, intentions, and expectations as reflected in these forward-looking statements are reasonable, we can give no assurance that they will be achieved or realized.

Our ability to predict results or the actual effects of our plans and strategies is inherently uncertain. Accordingly, actual results, performance, or achievements could differ materially from those contemplated, expressed, or implied by the forward-looking statements contained in this report.

There are a number of factors, many of which are beyond our control, that could cause actual conditions, events, or results to differ significantly from those described in our forward-looking statements. These factors include, but are not limited to:

 

    general economic conditions, either nationally or in some or all of the areas in which we and our customers conduct our respective businesses;

 

    conditions in the securities markets and real estate markets or the banking industry;

 

    changes in real estate values, which could impact the quality of the assets securing the loans in our portfolio;

 

    changes in interest rates, which may affect our net income, prepayment income, mortgage banking income, and other future cash flows, or the market value of our assets, including our investment securities;

 

    changes in the quality or composition of our loan or securities portfolios;

 

    changes in our capital management policies, including those regarding business combinations, dividends, and share repurchases, among others;

 

    our use of derivatives to mitigate our interest rate exposure;

 

    changes in competitive pressures among financial institutions or from non-financial institutions;

 

    changes in deposit flows and wholesale borrowing facilities;

 

    changes in the demand for deposit, loan, and investment products and other financial services in the markets we serve;

 

    our timely development of new lines of business and competitive products or services in a changing environment, and the acceptance of such products or services by our customers;

 

    the ability to obtain shareholder and regulatory approval of any merger transactions we may propose (including regulatory approval of the proposed merger with Astoria Financial Corporation (“Astoria Financial”)) in a timely manner or otherwise;

 

    our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we may acquire, including from Astoria Financial, into our operations and our ability to realize related revenue synergies and cost savings within expected time frames;

 

    risks relating to unanticipated costs of integration;

 

    potential exposure to unknown or contingent liabilities of companies we have acquired, may acquire, or target for acquisition, including Astoria Financial;

 

    failure to satisfy other closing conditions to any mergers we may propose, including the proposed merger with Astoria Financial;

 

    the potential impact of the announcement or consummation of any merger we propose (including the proposed merger with Astoria Financial) on relationships with third parties, including customers, employees, and competitors;

 

    failure to obtain applicable regulatory approvals for the payment of future dividends;

 

    the ability to pay future dividends at currently expected rates;

 

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    the ability to hire and retain key personnel;

 

    the ability to attract new customers and retain existing ones in the manner anticipated;

 

    changes in our customer base or in the financial or operating performances of our customers’ businesses;

 

    any interruption in customer service due to circumstances beyond our control;

 

    the outcome of pending or threatened litigation, or of matters before regulatory agencies, whether currently existing or commencing in the future;

 

    environmental conditions that exist or may exist on properties owned by, leased by, or mortgaged to the Company;

 

    any interruption or breach of security resulting in failures or disruptions in customer account management, general ledger, deposit, loan, or other systems;

 

    operational issues stemming from, and/or capital spending necessitated by, the potential need to adapt to industry changes in information technology systems, on which we are highly dependent;

 

    the ability to keep pace with, and implement on a timely basis, technological changes;

 

    changes in legislation, regulation, policies, or administrative practices, whether by judicial, governmental, or legislative action, including, but not limited to, the Dodd-Frank Wall Street Reform and Consumer Protection Act, and other changes pertaining to banking, securities, taxation, rent regulation and housing, financial accounting and reporting, environmental protection, and insurance, and the ability to comply with such changes in a timely manner;

 

    changes in the monetary and fiscal policies of the U.S. Government, including policies of the U.S. Department of the Treasury and the Board of Governors of the Federal Reserve System;

 

    changes in accounting principles, policies, practices, or guidelines;

 

    a material breach in performance by the Community Bank under our loss sharing agreements with the FDIC;

 

    changes in our estimates of future reserves based upon the periodic review thereof under relevant regulatory and accounting requirements;

 

    changes in regulatory expectations relating to predictive models we use in connection with stress testing and other forecasting, or in the assumptions on which such modeling and forecasting are predicated;

 

    changes in our credit ratings or in our ability to access the capital markets;

 

    natural disasters, war, or terrorist activities; and

 

    other economic, competitive, governmental, regulatory, technological, and geopolitical factors affecting our operations, pricing, and services.

In addition, the timing and occurrence or non-occurrence of events may be subject to circumstances beyond our control.

Furthermore, we routinely evaluate opportunities to expand through acquisitions and conduct due diligence activities in connection with such opportunities. As a result, acquisition discussions and, in some cases, negotiations, may take place at any time, and acquisitions involving cash or our debt or equity securities may occur.

You should not place undue reliance on these forward-looking statements, which reflect our expectations only as of the date of this report. We do not assume any obligation to revise or update these forward-looking statements except as may be required by law.

 

 

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RECONCILIATIONS OF STOCKHOLDERS’ EQUITY AND TANGIBLE STOCKHOLDERS’ EQUITY;

TOTAL ASSETS AND TANGIBLE ASSETS; AND THE RELATED MEASURES

(unaudited)

While stockholders’ equity, total assets, and book value per share are financial measures that are recorded in accordance with U.S. generally accepted accounting principles (“GAAP”), tangible stockholders’ equity, tangible assets, and the related tangible measures are not. Nevertheless, it is management’s belief that these non-GAAP measures should be disclosed in our SEC filings, earnings releases, and other investor communications, for the following reasons:

 

  1. Tangible stockholders’ equity is an important indication of the Company’s ability to grow organically and through business combinations, as well as its ability to pay dividends and to engage in various capital management strategies.

 

  2. Tangible stockholders’ equity, tangible book value per share, and the ratio of tangible stockholders’ equity to tangible assets are among the capital measures considered by current and prospective investors, both independent of, and in comparison with, its peers.

We calculate tangible stockholders’ equity by subtracting from stockholders’ equity the sum of our goodwill and core deposit intangibles (“CDI”), and calculate tangible assets by subtracting the same sum from our total assets. To calculate our ratio of tangible stockholders’ equity to tangible assets, we divide our tangible stockholders’ equity by our tangible assets. To calculate our tangible book value per share, we divide our tangible stockholders’ equity at the end of a period by the number of common shares outstanding at the same date.

Tangible stockholders’ equity, tangible assets, and the related non-GAAP capital measures should not be considered in isolation or as a substitute for stockholders’ equity, total assets, or any other capital measure calculated in accordance with GAAP. Moreover, the manner in which we calculate these non-GAAP measures may differ from that of other companies reporting non-GAAP measures with similar names.

The following table presents reconciliations of our stockholders’ equity and tangible stockholders’ equity, our total assets and tangible assets, and the related GAAP and non-GAAP profitability and capital measures at June 30, 2016 and December 31, 2015:

 

     June 30,     December 31,  
(in thousands)    2016     2015  

Stockholders’ Equity

   $ 6,039,112      $ 5,934,696   

Less: Goodwill

     (2,436,131     (2,436,131

Core deposit intangibles

     (1,146     (2,599
  

 

 

   

 

 

 

Tangible stockholders’ equity

   $ 3,601,835      $ 3,495,966   

Total Assets

   $ 49,035,747      $ 50,317,796   

Less: Goodwill

     (2,436,131     (2,436,131

Core deposit intangibles

     (1,146     (2,599
  

 

 

   

 

 

 

Tangible assets

   $ 46,598,470      $ 47,879,066   

Stockholders’ equity to total assets

     12.32     11.79

Tangible stockholders’ equity to tangible assets

     7.73        7.30   

Book value per share

   $ 12.40      $ 12.24   

Tangible book value per share

     7.40        7.21   

Executive Summary

New York Community Bancorp, Inc. is the holding company for New York Community Bank (the “Community Bank”), with 226 branches in Metro New York, New Jersey, Ohio, Florida, and Arizona; and New York Commercial Bank (the “Commercial Bank”), with 30 branches in Metro New York. With assets of $49.0 billion at June 30, 2016, including loans, net, of $39.1 billion, we rank among the 25 largest U.S. bank holding companies.

Chartered in the State of New York, the Community Bank and the Commercial Bank are subject to regulation by the Federal Deposit Insurance Corporation (the “FDIC”), the Consumer Financial Protection Bureau, and the New York State Department of Financial Services. In addition, the holding company is subject to regulation by the Board of Governors of the Federal Reserve System (the “FRB”), the U.S. Securities and Exchange Commission (the “SEC”), and the requirements of the New York Stock Exchange, where shares of our common stock are traded under the symbol “NYCB”.

 

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As a publicly traded company, our mission is to provide our shareholders with a solid return on their investment by producing a strong financial performance, maintaining a solid capital position, and engaging in corporate strategies that enhance the value of their shares. In support of this mission, we maintain a consistent business model, as described below:

 

    We originate multi-family loans on non-luxury apartment buildings in New York City that are subject to rent regulation and feature below-market rents;

 

    We underwrite our loans in accordance with conservative credit standards in order to maintain a high level of asset quality;

 

    We originate one-to-four family loans through our proprietary web-based mortgage banking platform and sell the vast majority of those loans to go