New York Community Bancorp
Annual Report 2014

Plain-text annual report

POSITIONED FOR GROWTH 615 MERRICK AVENUE, WESTBURY, NEW YORK 11590 www.myNYCB.com ir@myNYCB.com (516) 683 - 4420 2014 ANNUAL REPORT N E W YO RK COMMU N I T Y BAN CO RP, I N C. New York Community Bancorp, Inc. (NYSE: NYCB) is a top-performing financial institution with assets of $48.6 billion, deposits of $28.3 billion, and a market cap of $7.1 billion at December 31, 2014. At the end of 1993, we were a $1.1 billion savings bank with seven branches in two counties. Today, we serve our customers through two banks with eight divisions and 272 branches in five states. Established in 1859, New York Community Bank is a New York State- chartered savings bank with 242 branches in Metro New York, New Jersey, Ohio, Florida, and Arizona. Established in 2005, and also New York State-chartered, New York Commercial Bank has 30 branches in Metro New York. Our growth, as well as our success, has stemmed from a business model that has served our shareholders well: We are a leading producer of multi-family loans for portfolio in New York City—and the only consistent lender in this niche for over 40 years. The majority of the multi-family loans we produce are secured by non-luxury apartment buildings that are rent-regulated and feature below-market rents. At December 31, 2014, multi-family loans represented $23.8 billion, or 72.2%, of our non-covered loans held for investment, and accounted for $7.6 billion, or 68.9%, of the non-covered held-for-investment loans we produced during the year. Our emphasis on this lending niche is closely aligned with our focus on quality assets, which also is supported by the conservative underwriting standards we maintain. The result is best reflected in our asset quality measures—not only those recorded during robust economic cycles, but also during times of economic distress. In 2014, we recorded net charge-offs of $2.1 million, which represented a modest 0.01% of our average loans. Our measures of efficiency are another Company hallmark and speak clearly to our focus on profitability. Our efficiency ratio was 43.16% in 2014—above our 21-year average, yet substantially better than the average for our industry. We also attribute our success to our aptitude for post-merger integration, with ten earnings- accretive transactions completed from 2000 to 2010. While five years have passed since then, they too were highly productive, as we set the stage to become a larger institution and to comply with the regulatory expectations of a $50+ billion bank holding company. We invite you to learn more about the Company, our 2014 performance, and the actions we’ve taken that lead us to say we are positioned for growth. IN 2014, WE GREW OUR ASSETS, DEPOSITS, AND EARNINGS—AND POSITIONED OURSELVES FOR STILL FURTHER GROWTH IN THE YEARS AHEAD. TOTAL ASSETS $48.6 B I L L I O N LOANS HELD FOR INVESTMENT $33.0 B I L L I O N MULTI-FAMILY LOANS $23.8 B I L L I O N We grew our assets 4.0% to $48.6 billion.(1) We grew our portfolio of loans held for investment 10.7% to $33.0 billion.(1) We grew our multi-family loan portfolio 15.1% to $23.8 billion.(1)(2) TOTAL DEPOSITS $28.3 B I L L I O N HELD-FOR-INVESTMENT LOAN PRODUCTION MULTI-FAMILY LOAN PRODUCTION $11.0 B I L L I O N $7.6 B I L L I O N We grew our deposits 10.4% to $28.3 billion.(1) We originated $11.0 billion of loans held for Investment.(3) We originated a record $7.6 billion of multi-family loans.(2)(3) EARNINGS DIVIDENDS $485.4 M I L L I O N 82 Q U A R T E R S TOTAL RETURN ON INVESTMENT 4,319% We grew our earnings to $485.4 million, or $1.09 per diluted share.(3) We paid our 82nd con- secutive quarterly cash dividend.(4) We provided our charter investors with a total return of 4,319%.(5) (1) From 12/31/2013 to 12/31/2014. (2) All multi-family loans are held-for-investment loans. (3) In the twelve months ended 12/31/2014. (4) In the fourth quarter of 2014. (5) From our IPO on 11/23/1993 through 12/31/2014. NYCB | 01 FELLOW SHAREHOLDERS: Growth has been a frequent theme in our investor communications— a fitting choice, given how much we’ve evolved over the past 21 years. From the very start of our public life, growth has been our intention—not for the sake of growth itself or for any reason other than that of providing a solid return to those who would own our shares. Much of the growth we’ve achieved since then has been through acquisitions: ten, in fact, from November 2000 to March 2010. During that time, our assets rose from $1.9 billion to $42.4 billion, our deposits rose from $3.3 billion to $22.7 billion, and our franchise expanded from seven branches to 272. Acquisitions have fueled our deposit growth and funded our loan production; they’ve augmented our product menu, as well as our revenue stream. They’ve greatly expanded our franchise and paved our way into new markets; they’ve brought us new directors and enhanced our manage- ment team. They’ve fueled the growth of our earn- ings, as well as our book value, and they’ve also been the catalyst for our strongest returns. While five years have come and gone since our last acquisition, we believe it would be wrong to infer that those years were not well spent. During that time, we continued to grow in obvious ways—see our balance sheet, for example—as well as in less obvi- ous ways that have set the stage for our future growth. In the pages ahead, we’ll first take a look at our financial achievements, and then at the important organizational advances we’ve made. DEEPENING our MULTI-FAMILY LENDING NICHE First, we increased our share of multi-family loans in New York City—a market we’ve been lending in for more than 40 years. From 2010 to 2014, the volume of multi-family loans we pro- duced exceeded $29 billion, including $7.6 billion in the last year alone. In addition to establishing a new record for originations, our 2014 volume demonstrates our leadership in a market that is both highly attractive and highly competitive. At December 31, 2014, multi-family loans represented $23.8 billion, or 72.2%, of our non-covered loans held for investment, exceeding the year-earlier balance by $3.1 billion, or 15.1%. The majority of the multi-family loans we produce are secured by non-luxury apartment buildings that are rent-regulated and feature below-market rents. Our emphasis on this lending niche is based on its characteristics. First, the build- ings that secure our loans tend to retain their tenants in adverse credit cycles, making it far more likely that the cash flows produced by these buildings will be maintained. Because we base the loans we make on cash flows that are current—rather than prospective—we are far less likely to experience a loss when the credit cycle turns. Next, the cost of producing multi-family loans is less than that of producing other assets; they also are less costly to service than certain other types of loans. Third, the majority of our borrowers are long-term property owners who tend to refinance their buildings fairly often—in fact, most of them refinance their loans within three to five years. Our multi-family loans are specifically structured to capitalize on this practice, which has not changed much in all the years we’ve been lending in this niche. The prepayment penalty income we receive when a loan prepays can be substantial: From 2010 to 2014, it accounted for $453.2 million of our net interest income, including $86.8 million in the last year alone. 02 | NYCB DIVERSIFYING our ASSET MIX and our REVENUES In 2010, we launched what was, for us, a new line of business: producing and aggregating one- to-four family loans for sale, servicing retained. It didn’t take long before we ranked among the nation’s top 20 aggregators, based on the volume of one-to-four family loans we produced, aggre- gated, and sold. From 2010 to 2014, we produced 145,852 loans for sale, totaling $38.0 billion, enabling homeowners in all 50 states to purchase or refinance their homes. The mortgage banking business quickly became our largest source of non-interest income, exceed- ing the revenues produced by such other sources as fees on loans and deposits, and revenues from third-party product sales. As residential mortgage interest rates have increased and declined, so too have the revenues we’ve derived from this busi- ness; nonetheless, mortgage banking accounted for $63.0 million of our non-interest income in 2014 and $584.4 million over the past five years. 15.99999 59.5 68.0 1.2 1.0 In 2013, we launched yet another new line of 51.0 business: specialty finance. When the opportunity arose to hire a team of industry veterans with a long and successful history of high-quality loan production, we performed our due diligence and 10.66666 34.0 42.5 0.8 0.6 25.5 0.4 0.2 0.0 5.33333 0.00000 17.0 8.5 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 decided to proceed. The specialty finance loans and leases we make are consistent with our risk- averse focus, and all of the loans we’ve made to date are performing as per their terms. In 2014, our first full year in the specialty finance business, we originated loans and leases of $848.5 million. UPHOLDING our RECORD of EXCEPTIONAL ASSET QUALITY Among our distinguishing features, the one most often mentioned is the quality of the assets we originate. We attribute our asset quality to our niche as a multi-family lender, as well as to the conservative underwriting standards we maintain for all the loans we produce. The magnitude of our commitment to quality served us well during and after the Great Recession, as reflected in the limited level of losses we took in general—and in contrast to the losses taken during those years by most other banks. For exam- ple, net charge-offs represented 0.91% of our aver- age loans from the start of the recession, which began in 2007, through the end of 2014, with the recovery still under way. During this time, the cumulative ratio of net charge-offs to average loans for the SNL U.S. Bank and Thrift Index was a substantially higher 12.33%. 0.625 0.875 1.000 0.500 0.750 1.5 1.2 0.9 0.6 0.3 0.375 0.250 0.125 0.000 KEY PROFITABILITY 0.0 0.0 0.0 AND ASSET QUALITY MEASURES 65.53% 1.08%(a) 14.77%(a) 0.63% 1.26% NYCB SNL U.S. Bank and Thrift Index 0.88% 43.16% 9.01% 0.30% 0.53% 0.23% RETURN ON AVERAGE TANGIBLE ASSETS 2014 RETURN ON AVERAGE TANGIBLE STOCKHOLDERS’ EQUITY EFFICIENCY RATIO NON-PERFORMING NON-COVERED ASSETS / TOTAL NON-COVERED ASSETS NON-PERFORMING NON-COVERED LOANS / TOTAL NON-COVERED LOANS 0.01% NET CHARGE-OFFS / AVERAGE LOANS 2014 2014 12/31/14 12/31/14 2014 (a) Please see the discussion and reconciliations of our GAAP and non-GAAP financial measures on page 13. NYCB | 03  Even in 2014, when the economy showed numerous signs of improvement, the difference between our asset quality and that of our peers was evident. At December 31, 2014, non-performing non-covered assets represented 0.30% of total non- covered assets; the industry average at that date was 0.63%. Similarly, our ratio of net charge-offs to average loans was 0.01% in 2014, as compared to the industry measure of 0.53%. MAINTAINING our EXCEPTIONAL EFFICIENCY Efficiency is yet another of our oft-mentioned characteristics; we consistently rank in the top 3% of U.S. bank holding companies, based on this key measure of profitability. This determination is based on a ratio that measures our operating expenses as a percentage of our net interest income and non-interest income, and essentially indicates the percentage of pre-provision revenues that we spend on overhead. Our efficiency ratio was 43.16% in 2014, above our historical average, yet substan- tially superior to the industry average of 65.53%. We attribute our ongoing efficiency to a variety of factors, including our tendency to add branches through acquisitions, rather than building de novo, and the comparatively low cost of originating and servicing multi-family loans. GROWING our DEPOSITS ORGANICALLY Although our primary source of deposit growth had long been acquisitions, we demonstrated our ability to grow deposits organically in 2014. Year- over-year, our deposits rose $2.7 billion, or 10.4%, to $28.3 billion, the result of a series of retail, insti- tutional, and municipal deposit campaigns. In addition to diversifying our sources of funds, the increase in deposits enabled us to reduce our wholesale borrowings. “ We attribute our asset quality to our niche as a multi-family lender, as well as to the conservative underwriting standards we maintain for all the loans we produce. THE MAGNITUDE OF OUR COMMITMENT TO QUALITY SERVED US WELL DURING AND AFTER THE GREAT RECESSION, AS REFLECTED IN THE LIMITED LEVEL OF LOSSES WE TOOK.” LOANS HELD FOR INVESTMENT (in millions) $1,654 $4,987 $1,467 $5,438 $1,244 $6,856 $1,243 $7,437 $1,539 $7,637 $1,758 $7,366 $16,736 $16,802 $17,433 $18,605 $20,714 $23,849 $293 $67 $429 TOTAL: $789 12/31/93 $23,377 12/31/09 $23,707 12/31/10 $25,533 12/31/11 $27,285 12/31/12 $29,838 12/31/13 $33,025 12/31/14 Multi-Family Loans Commercial Real Estate Loans All Other Loans Held for Investment 04 | NYCB 35000 30000 25000 20000 15000 10000 5000 0 MAINTAINING our EARNINGS and CAPITAL STRENGTH While the level of market interest rates has inhibited the growth of our earnings, our earnings and our capital have remained consistently strong. One of the primary reasons for this is the low level of loan losses we’ve taken which, once again, speaks to our focus on asset quality. We’ve also now paid a dividend for 83 consec- utive quarters, including forty-four $0.25 per share dividends since the second quarter of 2004. This is not only indicative of our commitment to provid- ing our investors with value, but also the strength of our earnings over this time. In 2014, we generated earnings of $485.4 million, and distributed cash dividends of $442.2 million. Although capital has always been critical for financial institutions, its importance has been magnified since the Great Recession and the enactment of Dodd-Frank. This is the reason that we, and many other banks, are required to stress test our balance sheets on an annual basis, and to submit the results of those tests to our regulators for their review. We submitted our 2014 stress test results less than two weeks ago, on March 27th, and will announce them publicly, as required, this coming June. PREPARING for the NEXT STEPS in our EVOLUTION The examples of growth we’ve cited above were primarily financial and, we believe, indicative of our fundamental strengths. Of equal importance are the actions we took in the last five years to pre- pare for our future, including the steps described here and in the pages ahead. The first of these are the steps we took to strengthen our corporate infrastructure to embrace the changes wrought by the enactment of Dodd-Frank. In the wake of the Great Recession, the Dodd- Frank Act was put in place to reduce the risk of another like crisis occurring by establishing an abundance of new regulations for banks. Five years later, the roll-out of regulations is still in progress, with more new regulations expected in the years to come. While some of the changes we’ve had to make required little effort, others have taken longer and required a greater investment of resources and thought. For example, before Dodd-Frank, being risk-averse was a claim we would make fairly often—a claim, we felt, was supported by our exceptional record of asset quality. Since Dodd-Frank, being risk-averse has become a national mandate—and supporting that claim now requires extensive documentation and a plethora of formal processes. Today, for example, we maintain what can aptly be called a robust Enterprise Risk Management program that operates under the watchful eye of a Board-level Risk Assessment Committee, as well as that of a Chief Risk Officer whose work the Committee Chairman oversees. DEPOSITS (in millions) $1,870 $3,788 $1,933 $2,242 $3,886 $3,954 $2,759 $2,271 $4,214 $5,921 $2,307 $7,051 $7,706 $8,236 $8,757 $8,784 $10,537 $12,550 $17 $347 $103 $360 $9,054 $7,835 $7,373 $9,121 $6,932 $6,421 $827 12/31/93 $22,418 12/31/09 $21,890 12/31/10 $22,326 12/31/11 $24,878 12/31/12 $25,661 12/31/13 $28,329 12/31/14 TOTAL: CDs NOW and Money Market Accounts Savings Accounts Non-Interest-Bearing Accounts NYCB | 05 30000 25000 20000 15000 10000 5000 0 5000 4000 3000 2000 1000 0 TOTAL RETURN ON INVESTMENT 3,843% 2,754% 2,670% 3,069% 4,265% 4,319% COMPOUND ANNUAL GROW TH RATE SINCE OUR IPO = 27.1% As a result of nine stock splits from September 30, 1994 to February 17, 2004, our charter shareholders have 2,700 shares of NYCB stock for every 100 shares originally purchased. NYCB (a) SNL U.S. Bank and Thrift Index (a) Bloomberg 60% 2% 209% 245% 168% 260% 393% 450% 11/23/93 12/31/94 12/31/09 12/31/10 12/31/11 12/31/12 12/31/13 12/31/14 Under Dodd-Frank, managing risk is a multi- faceted obligation that requires us to maintain a well-defined framework for the identification, measurement, analysis, monitoring, control, and reporting of risk. It obliges us to specify the risks we are willing to take in pursuit of creating value and fulfilling the goals and objectives set forth in our strategic plans. It requires that we have the systems in place to provide us with notification in the event that our risk parameters are at risk of being breached. It calls for the establishment of a culture of risk awareness and prevention, as well as for the annual stress testing of our balance sheet. In further connection with Dodd-Frank, we’ve also strengthened our corporate governance framework, the results of which are reflected in the policies on our website and in the Proxy Statement for our Annual Meeting, to be held the first week of June. While our Board of Directors has always played an active role in setting the Company’s direction, the responsibilities of directors have grown meaningfully under the Dodd-Frank Act. MANAGING our GROWTH While Dodd-Frank was the catalyst for each of these actions, it also was the catalyst for the way we managed our balance sheet in 2014. To ensure that financial institutions would main- tain sufficient capital to weather economic crises in the future, Dodd-Frank established certain rules for institutions with assets under $10 billion (i.e., “small” banks); between $10 billion and $50 billion (i.e., “DFAST” banks), and over $50 billion (i.e., “large” or “SIFI” banks). Under Dodd-Frank, a bank with average assets over the four most recent quarters in excess of $50 billion is deemed to be a “Systemically Important Financial Institution” and therefore is subject to more intense scrutiny and regulation than small and DFAST banks. With assets of $41.2 billion at the end of 2010, and a core strategy of growth through acquisition, we recognized the need to commence our prepa- rations for what was likely to be the next logical step in our public life. We started our preparations mid-way through 2011, and by the end of last year, had taken meaningful strides toward this end. Of course, during this time, we continued to grow our loans and our assets, bringing us closer to $50 billion and the threshold for classification as a SIFI bank. By June 30, 2014, our assets amounted to $48.6 billion—a $1.9 billion increase from the balance we’d recorded just six months before. Because we believe it makes more sense to leap beyond, rather than tip-toe through, the $50 billion threshold, we carefully managed our asset growth in the second half of the year. In the third quarter of 2014, we transferred certain one-to-four family loans to “held for sale” from “held for invest- ment” and subsequently sold $476.9 million of such loans in the fourth quarter of the year. We also sold $124.1 million of multi-family loans through partici- pations, and reduced our securities portfolio by $354.8 million through a combination of calls and sales. As an aside, it’s important to note that 06 | NYCB Seated left to right: Dominick Ciampa Chairman of the Board Joseph R. Ficalora President, Chief Executive Officer, and Director Standing left to right: James J. Carpenter Senior Executive Vice President and Chief Lending Officer Robert Wann Senior Executive Vice President, Chief Operating Officer, and Director Thomas R. Cangemi Senior Executive Vice President and Chief Financial Officer “ Whatever the future holds for us and the industry we work in, we are firm in our conviction that we are well positioned for growth. WE ALSO BELIEVE THAT AS WE GROW—AS WE HAVE ALWAYS INTENDED—WE WILL BE BETTER POSITIONED TO PROVIDE YOU, OUR INVESTORS, WITH A STRONG RETURN.” participations are an effective, and profitable, way to manage the growth of our assets while, at the same time, retaining our solid standing in our multi- family lending niche. At the same time as we were sell ing the above-mentioned assets, we continued to origi- nate, and to grow our portfolios of, multi-family, commercial real estate, and specialty finance loans. As a result, we ended the year with assets of $48.6 billion—consistent with the balance we’d recorded at the end of June. As we make our way through 2015, and continue our preparations for the future, there are a few more facts about SIFI status of which you should be aware. First, exceeding $50 billion in a single quarter will not change our status. Again, the average of our total consolidated assets over the four most recent quarters would need to exceed $50 billion in order for us to become a SIFI bank. Finally, as the roll-out of the Dodd-Frank Act continues, we are mindful that more changes may still lie ahead. Either way, we believe that the steps we have taken to prepare for SIFI status have resulted in our being an even better, stronger, and more risk-averse bank holding company. IN CONCLUSION Whatever the future holds for us and the indus- try we work in, we are firm in our conviction that we are well positioned for growth. We also believe that as we grow—as we have always intended— we will be even better positioned to provide you, our investors, with a strong return. On behalf of our Board and management team, and the 3,400+ employees who support our efforts, we thank you for your continued investment, as well as for the confidence in our leadership it conveys. Furthermore, a number of regulations to which Sincerely yours, we would be subject as a SIFI would be gradually rolled out during an “implementation” phase. In other words, we would have sufficient time to final- ize our preparations to comply with certain of the increased regulatory demands. JOSEPH R. FICALORA President and Chief Executive Officer DOMINICK CIAMPA Chairman NYCB | 07 SERVING OUR COMMUNITIES: GROWTH DOES GOOD One of the benefits we’ve enjoyed as a grow- families by providing solutions that foster and main- ing institution has been sharing the benefit of our tain vibrant, equitable, and sustainable communi- growth with the communities we serve. In the past ties. Founded in 1969—and a HUD-certified housing year alone, we supported the work of over 900 agency since 1997—CDCLI offers free classes on organizations by contributing time, talent, materi- such topics as first-time home ownership, rental als, and much needed funds. While the hours, assis- housing insurance, home improvement, and finan- tance, and supplies we gave challenge enumeration, cial management. The agency also provides assis- our financial contributions—including those of the tance to those who are struggling to cope with NYCB and Richmond County Savings Foundations— weather-related crises, such as those suffered when exceeded $7.6 million in 2014. Superstorm Sandy struck in 2012. As our Company and our Banks have evolved, Another prime example of our community involve- so too has our community involvement, with more ment is the support we provide to Providence House and more of our resources being invested in pro- in Cleveland, Ohio. Today, as in 1981, the year it was grams where the need is greatest or the largest established, Providence House seeks to end child number of people will be served. While hundreds abuse by protecting at-risk children, empowering of worthy community groups count us among their families in crisis, and building safe communities donors, there are some whose efforts have inspired for every child they serve. In addition to providing our long-lasting commitment, and whose services personal items, medical care, and educational have evolved as we ourselves have grown. enrichment, the organization offers a multitude of programs to stabilize, strengthen, and reunify families in distress. Among these are local chapters of non-profits that enjoy a national presence, as well as strictly local groups that serve a single community. Organizations whose missions range from providing affordable housing to feeding the homeless and hungry…from curing disabling diseases to promoting good men- tal health. Schools, museums, and youth groups that inspire an interest in science, the arts, or busi- ness—and neighborhood associations that foster good citizenship and financial stability. Among the organizations whose services have expanded with our involvement—and/or that of our two foundations—are the organizations featured here. The Community Development Corporation of Long Island has a lofty mission: to invest in the hous- ing and economic aspirations of individuals and 08 | NYCB At Left: To promote breast cancer aware ness through- out Long Island, our Plainview branch teamed up with Bosom Buddies, a non-profit organization dedicated to supporting breast cancer victims and survivors, by hosting a reception and fund-raiser in May. On a lighter note, we also support the program- to PCC goes well beyond the financial: Members ming at two popular performing arts venues where of our local staff serve on its board of advisors, musical tastes from pop and rock to classical are mentor its clients, or are engaged as financial liter- well served. One is the New Jersey Performing Arts acy volunteers. Center in the heart of Newark, New Jersey; the other is the Kupferberg Center for the Arts at Queens College in Flushing, New York. In addition to hosting concerts and recitals for audiences of all ages, the NJPAC and the Kupferberg Center are dedicated to promoting arts education as a means of inspiring creativity and a love of the arts in the young. Children and teens also are served in Tempe, Arizona, where our involvement in Junior Achievement takes a variety of forms. Aimed at children in grades K through 12, JA offers programs in finance and economics to promote positive attitudes toward the workplace—and to develop critical thinking skills in children and teens that will serve them well In Florida, we are proud to support two local as adults. In support of JA’s programs, several of our groups—the Housing Partnership, Inc. and the Parent- employees serve as mentors or on committees, Child Center—that together seek to “change the while yet another employee serves on the board. odds” by meeting the social and economic needs of children and families at risk. Located in Riviera Beach, the Housing Partnership helps residents in need of affordable housing, while the Parent-Child Center provides needed psychiatric, counseling, and case management services. The support we lend In every way that matters, these organizations make a difference to the people they are serving, and it’s clear that the resources we provide make a difference as well. As we continue to grow, it’s fair to say, we are gratified by the knowledge that our ability to do good also will grow. At Right: In each of the five states served by our deposit franchise, NYCB employees help make the dream of home ownership a reality by volun- teering their time—and muscle—for local branches of Habitat for Humanity. Top Left: In Arizona, where summer temperatures will soar as high as 120° and sometimes even higher, our 14 branches collected 976 cases of water—11,712 bottles—for the Phoenix Rescue Mission to distribute to the homeless and needy through- out the state. Bottom Left: When Providence House established a Wellness Nursery to serve the youngest of its “clients” in Cleveland, employees at our 28 branches in Ohio collected hundreds of needed items to make sure the new facility was well stocked. NYCB | 09 BALANCE SHEET HIGHLIGHTS (in thousands) Total assets Non-covered mortgage loans held for investment: Multi-family Commercial real estate One-to-four family Acquisition, development, and construction December 31, 2014 2013 2012 $ 48,559,217 $ 46,688,287 $ 44,145,100 $ 23,849,038 $ 20,714,197 $ 18,605,185 7,637,061 7,366,138 7,436,950 138,915 257,850 560,730 343,282 203,434 397,288 Total non-covered mortgage loans held for investment 31,882,864 28,984,347 26,642,857 Non-covered other loans held for investment: Specialty finance Other commercial and industrial Other 633,557 476,592 31,943 171,755 642,852 39,035 — 591,727 49,880 Total non-covered other loans held for investment 1,142,092 853,642 641,607 Total non-covered loans held for investment $ 33,024,956 $ 29,837,989 $ 27,284,464 379,399 2,428,622 306,915 2,788,618 1,204,370 3,284,061 $ 35,832,977 $ 32,933,522 $ 31,772,895 $ 139,857 $ 141,946 $ 140,948 45,481 64,069 51,311 $ 173,783 $ 280,738 $ 429,266 6,922,667 7,670,282 4,484,262 $ 7,096,450 $ 7,951,020 $ 4,913,528 $ 12,549,600 $ 10,536,947 $ 8,783,795 7,051,622 6,420,598 2,306,914 5,921,437 6,932,096 2,270,512 4,213,972 9,120,914 2,758,840 $ 28,328,734 $ 25,660,992 $ 24,877,521 $ 13,868,132 $ 14,742,576 $ 13,067,974 358,355 362,426 362,217 $ 14,226,487 $ 15,105,002 $ 13,430,191 $ 5,781,815 $ 5,735,662 $ 5,656,264 Loans held for sale Covered loans Total loans Allowance for losses on non-covered loans Allowance for losses on covered loans Securities: Available for sale Held to maturity Total securities Deposits: NOW and money market accounts Savings accounts Certificates of deposit Non-interest-bearing accounts Total deposits Borrowed funds: Wholesale borrowings Other borrowings Total borrowed funds Stockholders’ equity 10 | NYCB INCOME STATEMENT HIGHLIGHTS (dollars in thousands, except per share data) Interest Income: Mortgage and other loans Securities and money market investments Total interest income Interest Expense: NOW and money market accounts Savings accounts Certificates of deposit Borrowed funds Total interest expense Net interest income Provision for losses on non-covered loans (Recovery of) provision for losses on covered loans Non-Interest Income: Mortgage banking income Fee income BOLI income Net gain on sales of securities FDIC indemnification (expense) income All other sources of non-interest income Total non-interest income Non-Interest Expense: Operating expenses Amortization of core deposit intangibles Total non-interest expense Income tax expense Net income Basic earnings per share Diluted earnings per share For the Twelve Months Ended December 31, 2014 2013 2012 $ 1,414,884 $ 1,487,662 $ 1,597,504 268,183 220,436 193,597 1,683,067 1,708,098 1,791,101 39,508 35,727 74,511 392,968 542,714 35,884 21,950 83,805 36,609 13,677 93,880 399,843 486,914 541,482 631,080 1,140,353 1,166,616 1,160,021 — (18,587) 62,953 36,585 27,150 14,029 (14,870) 75,746 18,000 12,758 78,283 38,179 29,938 21,036 10,206 41,188 45,000 17,988 178,643 38,348 30,502 2,041 14,390 33,429 201,593 218,830 297,353 579,170 8,297 587,467 287,669 591,778 15,784 593,833 19,644 607,562 613,477 271,579 279,803 $ 485,397 $ 475,547 $ 501,106 $1.09 1.09 $1.08 1.08 $1.13 1.13 NYCB | 11 PERFORMANCE MEASURES Profitability Measures: Return on average assets Return on average tangible assets (1) Return on average stockholders’ equity Return on average tangible stockholders’ equity (1) Operating expenses to average assets Efficiency ratio Interest rate spread Net interest margin Dividends paid per common share Asset Quality Measures: Non-performing non-covered loans to total non-covered loans Non-performing non-covered assets to total non-covered assets Allowance for losses on non-covered loans to non-performing non-covered loans Allowance for losses on non-covered loans to total non-covered loans Net charge-offs to average loans Capital Measures: Book value per share Tangible book value per share (1) Stockholders’ equity to total assets Tangible stockholders’ equity to tangible assets (1) Other Balance Sheet Measures: Non-covered loans held for investment to total loans Total loans to total assets Securities to total assets Deposits to total assets Wholesale borrowings to total assets (1) Please see the discussion and reconciliations of our GAAP and non-GAAP financial measures on page 13. For the Twelve Months Ended December 31, 2014 2013 2012 1.01% 1.07% 1.18% 1.08 8.41 14.77 1.21 43.16 2.57 2.67 $1.00 1.16 8.46 15.35 1.33 42.71 2.90 3.01 $1.00 1.28 9.06 16.80 1.40 40.75 3.11 3.21 $1.00 At or for the Twelve Months Ended December 31, 2014 2013 2012 0.23% 0.30 0.35% 0.40 181.75 137.10 0.42 0.01 0.48 0.05 0.96% 0.71 53.93 0.52 0.13 $13.06 7.54 11.91% 7.24 $13.01 $ 12.88 7.45 7.26 12.29% 12.81% 7.42 7.65 92.2% 90.6% 85.9% 73.8 14.6 58.3 28.6 70.5 17.0 55.0 31.6 72.0 11.1 56.4 29.6 12 | NYCB DISCUSSION AND RECONCILIATIONS OF GAAP AND NON-GAAP FINANCIAL MEASURES Although tangible stockholders’ equity and tangible assets are not calculated in accordance with generally accepted accounting principles (“GAAP”), we use these non-GAAP financial measures in our analysis of our performance. We believe that these non-GAAP financial measures are an important indication of our ability to grow both organically and through business combinations, and, with respect to tangible stockholders’ equity, our ability to pay dividends and to engage in various capital management strategies. Tangible stockholders’ equity, tangible assets, and the related non-GAAP financial measures should not be considered in isolation or as a substitute for stockholders’ equity, total assets, or any other measure calculated in accordance with GAAP. Moreover, the manner in which we calculate these non-GAAP financial measures may differ from that of other companies reporting measures with similar names. The following table presents the reconciliations of our stockholders’ equity and tangible stockholders’ equity, total assets and tangible assets, and the related financial measures at or for the twelve months ended December 31, 2014, 2013, and 2012: (in thousands) Stockholders’ Equity Less: Goodwill Core deposit intangibles Tangible stockholders’ equity Total Assets Less: Goodwill Core deposit intangibles Tangible assets Average Stockholders’ Equity Less: Average goodwill and core deposit intangibles Average tangible stockholders’ equity Average Assets Less: Average goodwill and core deposit intangibles Average tangible assets Net Income Add back: Amortization of core deposit intangibles, net of tax Adjusted net income At or for the Twelve Months Ended December 31, 2014 2013 2012 $ 5,781,815 $ 5,735,662 $ 5,656,264 (2,436,131) (2,436,131) (2,436,131) (7,943) (16,240) (32,024) $ 3,337,741 $ 3,283,291 $ 3,188,109 $ 48,559,217 $ 46,688,287 $ 44,145,100 (2,436,131) (2,436,131) (2,436,131) (7,943) (16,240) (32,024) $ 46,115,143 $ 44,235,916 $ 41,676,945 $ 5,768,795 $ 5,620,445 $ 5,531,055 (2,448,322) (2,460,266) (2,478,523) $ 3,320,473 $ 3,160,179 $ 3,052,532 $ 48,038,072 $ 44,396,263 $ 42,493,455 (2,448,322) (2,460,266) (2,478,523) $ 45,589,750 $ 41,935,997 $ 40,014,932 $ 485,397 $ 475,547 $ 501,106 4,978 9,471 11,786 $ 490,375 $ 485,018 $ 512,892 NYCB | 13 CORPORATE DIRECTORY NEW YORK COMMUNITY BANCORP, INC. BOARD OF DIRECTORS(1) CHAIRMAN OF THE BOARD Dominick Ciampa(2) Principal and Partner Ciampa Organization MEMBERS Maureen E. Clancy(3) Chief Financial Officer and Owner Clancy & Clancy Brokerage Ltd. Hanif “Wally” Dahya(4) Chief Executive Officer The Y Company LLC Joseph R. Ficalora(5) President and Chief Executive Officer New York Community Bancorp, Inc. Max L. Kupferberg Chairman of the Board of Directors Kepco, Inc. Michael J. Levine(6) Principal, Norse Realty Group, Inc. & Affiliates; Partner, Levine & Schmutter, CPAs James J. O’Donovan Senior Executive Vice President and Chief Lending Officer (retired) New York Community Bancorp, Inc. Lawrence Rosano, Jr. President, Associated Development Corp. and Associated Properties, Inc. Ronald A. Rosenfeld Chairman (retired) Federal Housing Finance Board Lawrence J. Savarese(7) Senior Partner (retired) KPMG John M. Tsimbinos(8) Chairman and Chief Executive Officer (retired) TR Financial Corp. and Roosevelt Savings Bank Robert Wann Senior Executive Vice President and Chief Operating Officer New York Community Bancorp, Inc. EXECUTIVE OFFICERS Joseph R. Ficalora President and Chief Executive Officer Robert Wann Senior Executive Vice President and Chief Operating Officer Thomas R. Cangemi Senior Executive Vice President and Chief Financial Officer James J. Carpenter Senior Executive Vice President and Chief Lending Officer John J. Pinto Executive Vice President and Chief Accounting Officer EXECUTIVE VICE PRESIDENTS Ilene A. Angarola Director, Investor Relations Robert D. Brown Chief Information Officer William P. DiSalvatore Chief Risk Officer Anthony E. Donatelli Director, Enterprise Risk Management Frank Esposito Director, Loan Administration Cynthia S. Flynn Chief Administrative Officer Robert P. Gillespie Corporate Director, Employee Development Andrew Kaplan Director, Retail Products and Services; President, CFS Investments, Inc. Joyce Larson Chief Audit Executive Anthony M. Lewis Chief Credit Officer R. Patrick Quinn, Esq. Chief Corporate Governance Officer and Corporate Secretary Bernard A. Terlizzi Chief Human Resources Officer Barbara A. Tosi-Renna Assistant Chief Operating Officer Thomas J. Zammit Chief Appraiser (1) Directors of New York Community Bancorp, Inc. also serve as directors of (5) Mr. Ficalora also serves as a director on each of the Divisional Boards. New York Community Bank and New York Commercial Bank. (6) Mr. Levine chairs the Risk Assessment and Nominating and Corporate (2) Mr. Ciampa also serves as Chairman of the Boards of Directors of New York Governance Committees of the Board. Community Bank and New York Commercial Bank. (3) Mrs. Clancy chairs the Compensation and Insurance Committees of the Board. (4) Mr. Dahya chairs the Investment and Cyber Security Committees of the Board. (7) Mr. Savarese chairs the Audit and Capital Assessment Committees of the Board. (8) Mr. Tsimbinos also serves as a director on the Atlantic Bank Divisional Board. 14 | NYCB AFFILIATE OFFICERS NEW YORK COMMERCIAL BANK Athanassia “Nancy” Papaioannou President, Atlantic Bank Division Kenneth M. Scheriff Executive Vice President and Regional Manager, Commercial Lending NEW YORK COMMUNITY BANK NYCB MORTGAGE COMPANY, LLC Jon K. Baymiller President and Chief Executive Officer NYCB SPECIALTY FINANCE COMPANY, LLC John Francis Xavier Chipman Executive Vice President and Director, Specialty Finance PETER B. CANNELL & CO., INC. Joseph B. Werner Chairman, President, and Chief Executive Officer DIVISIONAL BANK DIRECTORS QUEENS COUNTY SAVINGS BANK/ ROSLYN SAVINGS BANK Joseph R. Ficalora President, QCSB Division Thomas J. Calabrese, Jr. President, RSLN Division; Vice President, Operations Daniel Gale Agency Hon. Claire Shulman Queens Borough President (retired); President & Chief Executive Officer Flushing Willets Point Corona LDC Michael R. Stoler Managing Director Madison Realty Capital RICHMOND COUNTY SAVINGS BANK Michael F. Manzulli Chairman; Former Chairman and Chief Executive Officer Richmond County Bancorp, Inc. and Richmond County Savings Bank Godfrey H. Carstens President (retired) Carstens Electrical Supply Peter J. Esposito Senior Mortgage Lending Officer (retired) New York Community Bank James L. Kelley, Esq. Partner Lahr, Dillon, Manzulli, Kelley & Penett, P.C. Hon. Guy V. Molinari Richmond County Borough President (retired); Former U.S. Congressman and New York State Assemblyman; Managing Partner, The Molinari Group; Of Counsel, Russo, Scamardella & D’Amato ATLANTIC BANK Nicolas Bornozis President Capital Link Inc. John Catsimatidis Chairman and Chief Executive Officer Red Apple Group Andrew J. Jacovides Former Ambassador, Cyprus Comin Nicholas “Nick” Kafes Director, Institutional Inter-Dealer Credit Brokerage Murphy & Durieu, LP Savas Konstantinides President and Chief Executive Officer Omega Brokerage Spiros Milonas President Ionian Management Inc. Mitchell Rutter President Essex Capital Partners OHIO SAVINGS BANK Ronald A. Rosenfeld Chairman Leslie D. Dunn Independent Director Federal Home Loan Bank of Cincinnati Robert P. Duvin Partner Littler Mendelson, PC Keith V. Mabee Group President Corporate Communications and Investor Relations Falls Communications Rev. Robert L. Niehoff, S.J. President John Carroll University NYCB | 15 SHAREHOLDER REFERENCE CORPORATE HEADQUARTERS 615 Merrick Avenue Westbury, NY 11590-6607 Phone: Fax: Online: www.myNYCB.com (516) 683-4100 (516) 683-8385 INVESTOR RELATIONS Shareholders, analysts, and others seeking information about New York Community Bancorp, Inc. are invited to contact our Investor Relations Department at: Phone: Fax: (516) 683-4420 (516) 683-4424 E-mail: Online: ir@myNYCB.com ir.myNYCB.com Copies of our earnings releases and other financial publications, including our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”), are available without charge upon request. Information about our financial performance may also be found at ir.myNYCB.com, the Investor Relations portion of our website, under “Strategies & Results.” Earnings releases, dividend announcements, and other press releases are typically available at this site upon issuance, and SEC documents are typically available within minutes of being filed. In addition, shareholders wishing to receive e-mail notification each time a press release, SEC filing, or other corpo- rate event is posted to our website may do so by clicking on “Register for E-mail Alerts,” and following the prompts. ONLINE DELIVERY OF PROXY MATERIALS To arrange to receive next year’s Annual Report to Shareholders and proxy materials electronically, rather than in hard copy, please visit ir.myNYCB.com, click on “Request Online Delivery of Proxy Materials,” and follow the prompts. SHAREHOLDER ACCOUNT INQUIRIES To review the status of your shareholder account, expedite a change of address, transfer shares, or perform various other account-related functions, please contact our stock registrar, transfer agent, and dividend disbursement agent, Computershare, directly. Computershare is available to assist you 24 hours a day, seven days a week, through its toll-free Interactive Voice Response system or through its online Investor Centre™. In addition, customer service representatives are available to assist you Monday through Friday, 9:00 a.m. to 7:00 p.m. (Eastern Time), except for New York Stock Exchange holidays. You may contact Computershare in any of the following ways: Online: www.computershare.com/investor By phone: In the U.S. & Canada: (866) 293-6077 International: (201) 680-6578 TDD lines for hearing-impaired investors: In the U.S. & Canada: (800) 231-5469 International: (201) 680-6610 By U.S. mail: P.O. Box 30170 College Station, TX 77842-3170 By overnight mail: 211 Quality Circle, Suite 210 College Station, TX 77845-4470 In all correspondence with Computershare, be sure to mention New York Community Bancorp and to provide your name as it appears on your shareholder account, along with your account number, daytime phone number, and current address. 16 | NYCB SHAREHOLDER REFERENCE DIVIDEND POLICY Dividends are typically declared and announced in January, April, July, and October, and are typically paid during the third or fourth weeks of the following months. Information regarding record and payable dates may be found in our earnings releases/dividend announcements, and by visiting ir.myNYCB.com, clicking on “About Your Investment,” and then on “Dividend History.” DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN Under our Dividend Reinvestment and Stock Purchase Plan (the “Plan”), registered shareholders may purchase additional shares of New York Community Bancorp by reinvesting their cash dividends, and by making optional cash purchases ranging from a minimum of $50 to a maximum of $10,000 per transaction, up to a maximum of $100,000 per calendar year. In addition, new investors may purchase their initial shares through the Plan. The Plan brochure is available from Computershare and may also be accessed by clicking on “Dividend Reinvestment and Stock Purchase Plan” at ir.myNYCB.com. DIRECT DEPOSIT OF DIVIDENDS Registered shareholders may arrange to have their quarterly cash dividends deposited directly into their checking or savings accounts on the payable date. For more information, please contact Computershare or click on “Shareholder Services” at ir.myNYCB.com. ANNUAL MEETING OF SHAREHOLDERS Our 2015 Annual Meeting of Shareholders will be held at 10:00 a.m. Eastern Daylight Time on Wednesday, June 3rd, at the Sheraton LaGuardia East Hotel, 135-20 39th Avenue, in Flushing, New York. Shareholders of record as of April 8, 2015 will be eligible to receive notice of, and to vote at, the 2015 Annual Meeting. INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM KPMG LLP 345 Park Avenue New York, NY 10154-0102 STOCK LISTING Shares of New York Community Bancorp common stock are traded under the symbol “NYCB” on the New York Stock Exchange. Price information appears daily in The Wall Street Journal under “NY CmntyBcp” and in other major news- papers under similar abbreviations of the Company’s name. Trading information may also be found at ir.myNYCB.com under “Stock Information” or by visiting www.nyse.com and entering our trading symbol. The Bifurcated Option Note Unit SecuritiESSM (“BONUSES units”) issued through the Company’s subsidiary, New York Community Capital Trust V, also trade on the New York Stock Exchange, under the symbol “NYCB PR U.” m o c . s r o n n o c - n a r r u c . w w w / . c n I , s r o n n o C & n a r r u C y b n g i s e D t r o p e R l a u n n A N E W YO RK COMMU N I T Y BANCORP, I N C. 2014 ANNUAL REPORT ON FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended: December 31, 2014 Commission File Number 1-31565 NEW YORK COMMUNITY BANCORP, INC. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 06-1377322 (I.R.S. Employer Identification No.) 615 Merrick Avenue, Westbury, New York 11590 (Zip code) (Address of principal executive offices) (Registrant’s telephone number, including area code) (516) 683-4100 Securities registered pursuant to Section 12(b) of the Act: Common Stock, $0.01 par value and Bifurcated Option Note Unit SecuritiESSM (Title of Class) New York Stock Exchange (Name of exchange on which registered) Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:95) No (cid:133)(cid:3) (cid:3) Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes(cid:133) No (cid:95)(cid:3) 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 (cid:95) No (cid:133) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:95)(cid:3) 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 (cid:95) No (cid:133) 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 “accelerated filer,” “large accelerated filer,” and “smaller reporting company” in Rule 12b- 2 of the Exchange Act. Large Accelerated Filer (cid:95) Accelerated Filer (cid:133) Non-Accelerated Filer (cid:133) Smaller Reporting Company (cid:133) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes(cid:133) No (cid:95)(cid:3) As of June 30, 2014, the aggregate market value of the shares of common stock outstanding of the registrant was $6.8 billion, excluding 15,208,090 shares held by all directors and executive officers of the registrant. This figure is based on the closing price of the registrant’s common stock on June 30, 2014, $15.98, as reported by the New York Stock Exchange. The number of shares of the registrant’s common stock outstanding as of February 20, 2015 was 443,733,981 shares. Portions of the definitive Proxy Statement for the Annual Meeting of Shareholders to be held on June 3, 2015 are incorporated by reference into Part III. Documents Incorporated by Reference CROSS REFERENCE INDEX Forward-Looking Statements and Associated Risk Factors Glossary PART I Item 1. Business Item 1A. Risk Factors Item 1B. Unresolved Staff Comments Item 2. Item 3. Item 4. Mine Safety Disclosures Properties Legal Proceedings PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities Selected Financial Data Item 6. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Item 7A. Quantitative and Qualitative Disclosures about Market Risk Item 8. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9A. Controls and Procedures Item 9B. Other Information Financial Statements and Supplementary Data PART III Item 10. Directors, Executive Officers, and Corporate Governance Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 13. Certain Relationships and Related Transactions, and Director Independence Item 14. Principal Accountant Fees and Services PART IV Item 15. Exhibits and Financial Statement Schedules Signatures Certifications Page 1 3 6 25 36 36 36 36 37 40 41 90 94 164 164 165 165 165 165 165 165 166 168 For the purpose of this Annual Report on Form 10-K, 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 and New York Commercial Bank (the “Community Bank” and the “Commercial Bank,” respectively, and collectively, the “Banks”). FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISK FACTORS 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. Our ability to predict results or the actual effects of our plans or strategies is inherently uncertain. Accordingly, actual results may differ materially from anticipated results. 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 penalty 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; 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; • • • our ability to retain key personnel; • potential exposure to unknown or contingent liabilities of companies we have acquired or may acquire in the future; the outcome of pending or threatened litigation, or of other 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, 1 • • • • • • 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; the ability to successfully integrate any assets, liabilities, customers, systems, and management personnel of any banks we may acquire into our operations, and our ability to realize related revenue synergies and cost savings within expected time frames; changes in our credit ratings or in our ability to access the capital markets; • • war or terrorist activities; and • other economic, competitive, governmental, regulatory, technological, and geopolitical factors affecting our operations, pricing, and services. In addition, 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. Furthermore, the timing and occurrence or non-occurrence of events may be subject to circumstances beyond our control. Please see Item 1A, “Risk Factors,” for a further discussion of factors that could affect the actual outcome of future events. Readers are cautioned not to place undue reliance on the forward-looking statements contained herein, which speak only as of the date of this report. Except as required by applicable law or regulation, we undertake no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date on which such statements were made. 2 BASIS POINT GLOSSARY Throughout this filing, the year-over-year changes that occur in certain financial measures are reported in terms of basis points. Each basis point is equal to one hundredth of a percentage point, or 0.01%. BOOK VALUE PER SHARE Book value per share refers to the amount of stockholders’ equity attributable to each outstanding share of common stock, and is calculated by dividing total stockholders’ equity at the end of a period by the number of shares outstanding at the same date. BROKERED DEPOSITS Refers to funds obtained, directly or indirectly, by or through deposit brokers that are then deposited into one or more deposit accounts at a bank. CHARGE-OFF Refers to the amount of a loan balance that has been written off against the allowance for losses on non- covered loans. COMMERCIAL REAL ESTATE (“CRE”) LOAN A mortgage loan secured by either an income-producing property owned by an investor and leased primarily for commercial purposes or, to a lesser extent, an owner-occupied building used for business purposes. The CRE loans in our portfolio are typically secured by office buildings, retail shopping centers, light industrial centers with multiple tenants, or mixed-use properties. COST OF FUNDS The interest expense associated with interest-bearing liabilities, typically expressed as a ratio of interest expense to the average balance of interest-bearing liabilities for a given period. COVERED LOANS AND OTHER REAL ESTATE OWNED (“OREO”) Refers to the loans and OREO we acquired in our AmTrust Bank (“AmTrust”) and Desert Hills Bank (“Desert Hills”) acquisitions, which are “covered” by loss sharing agreements with the FDIC. Please see the definition of “Loss Sharing Agreements” that appears later in this glossary. DEBT SERVICE COVERAGE RATIO (“DSCR”) An indication of a borrower’s ability to repay a loan, the DSCR generally measures the cash flows available to a borrower over the course of a year as a percentage of the annual interest and principal payments owed during that time. DERIVATIVE A term used to define a broad base of financial instruments, including swaps, options, and futures contracts, whose value is based upon, or derived from, an underlying rate, price, or index (such as interest rates, foreign currency, commodities, or prices of other financial instruments such as stocks or bonds). DIVIDEND PAYOUT RATIO The percentage of our earnings that is paid out to shareholders in the form of dividends. It is determined by dividing the dividend paid per share during a period by our diluted earnings per share during the same period of time. EFFICIENCY RATIO Measures total operating expenses as a percentage of the sum of net interest income and non-interest income. GOODWILL Refers to the difference between the purchase price and the fair value of an acquired company’s assets, net of the liabilities assumed. Goodwill is reflected as an asset on the balance sheet and is tested at least annually for impairment. 3 GOVERNMENT-SPONSORED ENTERPRISES (“GSEs”) Refers to a group of financial services corporations that were created by the United States Congress to enhance the availability, and reduce the cost, of credit to certain targeted borrowing sectors, including home finance. The GSEs include, but are not limited to, the Federal National Mortgage Association (“Fannie Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac”), and the Federal Home Loan Banks (the “FHLBs”). GSE OBLIGATIONS Refers to GSE mortgage-related securities (both certificates and collateralized mortgage obligations) and GSE debentures. INTEREST RATE LOCK COMMITMENTS (“IRLCs”) Refers to commitments we have made to originate new one-to-four family loans at specific (i.e., locked-in) interest rates. The volume of IRLCs at the end of a period is a leading indicator of loans to be originated in the near future. INTEREST RATE SENSITIVITY Refers to the likelihood that the interest earned on assets and the interest paid on liabilities will change as a result of fluctuations in market interest rates. INTEREST RATE SPREAD The difference between the yield earned on average interest-earning assets and the cost of average interest- bearing liabilities. LOAN-TO-VALUE RATIO (“LTV”) Measures the balance of a loan as a percentage of the appraised value of the underlying property. LOSS SHARING AGREEMENTS Refers to the agreements we entered into with the FDIC in connection with the loans and OREO we acquired in our AmTrust and Desert Hills acquisitions. The agreements call for the FDIC to reimburse us for 80% of any losses (and share in 80% of any recoveries) up to specified thresholds and to reimburse us for 95% of any losses (and share in 95% of any recoveries) beyond those thresholds with respect to the acquired assets, for specified periods of time. All of the loans and OREO acquired in the AmTrust and Desert Hills acquisitions are subject to these agreements and are referred to in this report either as “covered loans,” “covered OREO,” or, when discussed together, “covered assets.” MORTGAGE BANKING INCOME Refers to the income generated through our mortgage banking business, which is recorded in non-interest income. Mortgage banking income has two components: income generated from the origination of one-to-four family loans for sale (“income from originations”) and income generated by servicing such loans (“servicing income”). MORTGAGE SERVICING RIGHTS (“MSRs”) The right to service mortgage loans for others is recognized as an asset, and recorded at fair value, when our one-to-four family loans are sold or securitized, servicing retained. MULTI-FAMILY LOAN A mortgage loan secured by a rental or cooperative apartment building with more than four units. NET INTEREST INCOME The difference between the interest income generated by loans and securities and the interest expense produced by deposits and borrowed funds. NET INTEREST MARGIN Measures net interest income as a percentage of average interest-earning assets. 4 NON-ACCRUAL LOAN A loan generally is classified as a “non-accrual” loan when it is 90 days or more past due or when we no longer expect to collect all amounts due according to the contractual terms of the loan agreement. When a loan is placed on non-accrual status, we cease the accrual of interest owed, and previously accrued interest is reversed and charged against interest income. A loan generally is returned to accrual status when the loan is current and we have reasonable assurance that the loan will be fully collectible. NON-COVERED LOANS AND OREO Refers to all of the loans and OREO in our portfolio that are not covered by our loss sharing agreements with the FDIC. NON-PERFORMING LOANS AND ASSETS Non-performing loans consist of non-accrual loans and loans that are 90 days or more past due and still accruing interest. Non-performing assets consist of non-performing loans and OREO. RENT-REGULATED APARTMENTS In New York City, where the vast majority of the properties securing our multi-family loans are located, the amount of rent that tenants may be charged on the apartments in certain buildings is restricted under certain “rent- control” and “rent-stabilization” laws. Rent-control laws apply to apartments in buildings that were constructed prior to February 1947. An apartment is said to be “rent-controlled” if the tenant has been living continuously in the apartment for a period of time beginning prior to July 1971. When a rent-controlled apartment is vacated, it typically becomes “rent-stabilized.” Rent-stabilized apartments are generally located in buildings with six or more units that were built between February 1947 and January 1974. Rent-controlled and -stabilized (together, “rent-regulated”) apartments tend to be more affordable to live in because of the applicable regulations, and buildings with a preponderance of such rent-regulated apartments are therefore less likely to experience vacancies in times of economic adversity. REPURCHASE AGREEMENTS Repurchase agreements are contracts for the sale of securities owned or borrowed by the Banks with an agreement to repurchase those securities at an agreed-upon price and date. The Banks’ repurchase agreements are primarily collateralized by GSE obligations and other mortgage-related securities, and are entered into with either the FHLBs or various brokerage firms. RETURN ON AVERAGE ASSETS A measure of profitability determined by dividing net income by average assets for a given period. RETURN ON AVERAGE STOCKHOLDERS’ EQUITY A measure of profitability determined by dividing net income by average stockholders’ equity for a given period. SYSTEMICALLY IMPORTANT FINANCIAL INSTITUTION (“SIFI”) A bank holding company with total consolidated assets that average more than $50 billion over the four most recent quarters is designated a “Systemically Important Financial Institution” under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) of 2010. WHOLESALE BORROWINGS Refers to advances drawn by the Banks against their respective lines of credit with the FHLBs, their repurchase agreements with the FHLBs and various brokerage firms, and federal funds purchased. YIELD The interest income associated with interest-earning assets, typically expressed as a ratio of interest income to the average balance of interest-earning assets for a given period. 5 ITEM 1. BUSINESS General PART I With total assets of $48.6 billion at December 31, 2014, we rank among the nation’s 25 largest publicly traded bank holding companies. Primarily reflecting our growth through ten business combinations between November 30, 2000 and March 26, 2010, we currently have 272 branch offices in five states. We are organized under Delaware Law as a multi-bank holding company and have two primary subsidiaries: 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”). New York Community Bank Established in 1859, the Community Bank is a New York State-chartered savings bank with 242 branches that currently operate through seven local divisions. We compete for depositors in these diverse markets by emphasizing service and convenience, with a comprehensive menu of traditional and non-traditional products and services, and access to 24-hour banking both online and by phone. In New York, we currently serve our Community Bank customers through Roslyn Savings Bank, with 53 branches on Long Island, a suburban market east of New York City comprised of Nassau and Suffolk counties; Queens County Savings Bank, with 38 branches in the New York City borough of Queens; Richmond County Savings Bank, with 22 branches in the borough of Staten Island; and Roosevelt Savings Bank, with nine branches in the borough of Brooklyn. In the Bronx and neighboring Westchester County, we currently have four branches that operate directly under the name “New York Community Bank.” In New Jersey, we serve our Community Bank customers through 47 branches that operate under the name Garden State Community Bank. In Florida and Arizona, where we have 27 and 14 branches, respectively, we serve our customers through the AmTrust Bank division of the Community Bank. In Ohio, we serve our Community Bank customers through 28 branches of Ohio Savings Bank. We also are a leading producer of multi-family loans in New York City, with an emphasis on non-luxury apartment buildings that are rent-regulated and feature below-market rents. In addition to multi-family loans, which are our principal asset, we originate commercial real estate (“CRE”) loans (primarily in New York City, as well as on Long Island) and, to a much lesser extent, acquisition, development, and construction (“ADC”) loans, and commercial and industrial (“C&I”) loans. C&I loans consist of specialty finance loans and leases, and other C&I loans that are typically made to small and mid-size business in Metro New York. Unlike the aforementioned loans, which are originated for investment, the one-to-four family loans we produce are primarily originated for sale. In 2014, the vast majority of the one-to-four family loans we originated were agency-conforming loans sold to government-sponsored enterprises (“GSEs”), servicing retained. Although the vast majority of the loans we produce for investment (i.e., for our portfolio) are secured by properties or businesses in New York City and, to a lesser extent, on Long Island, the one-to-four family loans we originate are for the purchase or refinancing of homes throughout the United States. New York Commercial Bank The Commercial Bank is a New York State-chartered commercial bank with 30 branches in Manhattan, Queens, Brooklyn, Westchester County, and Long Island, including 18 that operate under the name “Atlantic Bank.” Established in December 2005, the Commercial Bank competes for customers by emphasizing personal service and by addressing the needs of small and mid-size businesses, professional associations, and government agencies with a comprehensive menu of business solutions, including installment loans, revolving lines of credit, and cash management services. In addition, the Commercial Bank offers 24-hour banking online and by phone. Customers of the Commercial Bank may transact their business at any of our 242 Community Bank branches, and Community Bank customers may transact their business at any of the 30 branches of the Commercial Bank. In addition, customers of the Banks have access to their accounts through our ATMs in all five states. 6 Online Information about the Company and the Banks We also serve our customers through three connected websites: www.myNYCB.com, www.NewYorkCommercialBank.com, and www.NYCBfamily.com. In addition to providing our customers with 24-hour access to their accounts, and information regarding our products and services, hours of service, and locations, these websites provide extensive information about the Company for the investment community. Earnings releases, dividend announcements, and other press releases are posted upon issuance to the Investor Relations portion of these websites. In addition, our filings with the U.S. Securities and Exchange Commission (the “SEC”) (including our annual report on Form 10-K; our quarterly reports on Form 10-Q; and our current reports on Form 8- K), and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are available without charge, and are posted to the Investor Relations portion of our websites within minutes of being filed. The websites also provide information regarding our Board of Directors and management team and the number of Company shares held by these insiders, as well as certain Board Committee charters and our corporate governance policies. The content of our websites shall not be deemed to be incorporated by reference into this Annual Report. Our Market Our current market for deposits consists of the 26 counties in the five states that are served by our branch network, including all five boroughs of New York City, Nassau and Suffolk Counties on Long Island, and Westchester County in New York; Essex, Hudson, Mercer, Middlesex, Monmouth, Ocean, and Union Counties in New Jersey; Maricopa and Yavapai Counties in Arizona; Cuyahoga, Lake, and Summit Counties in Ohio; and Broward, Collier, Lee, Miami-Dade, Palm Beach, and St. Lucie Counties in Florida. The market for the loans we produce varies, depending on the type of loan. For example, the vast majority of our multi-family loans are collateralized by rental apartment buildings in New York City, which is also home to the majority of the properties collateralizing our CRE and ADC loans. In contrast, we originate one-to-four family mortgage loans in all 50 states and the District of Columbia, and our specialty finance loans and leases are generally made to large corporate obligors that participate in stable industries nationwide. Competition for Deposits The combined population of the 26 counties where our branches are located is approximately 30.1 million, and the number of banks and thrifts we compete with currently exceeds 320. With total deposits of $28.3 billion at December 31, 2014, we ranked ninth among all bank and thrift depositories serving these 26 counties. We also ranked first among all banks and thrifts in Essex County, New Jersey, third in Richmond County, and fourth in both Queens and Nassau Counties in New York. (Market share information was provided by SNL Financial.) We also compete for deposits with other financial institutions, including credit unions, Internet banks, and brokerage firms. Our ability to attract and retain deposits is not only a function of short-term interest rates and industry consolidation, but also the competitiveness of the rates being offered by other financial institutions within our marketplace. Competition for deposits is also influenced by several internal factors, including the opportunity to assume or acquire deposits through business combinations; the cash flows produced through loan and securities repayments and sales; and the availability of attractively priced wholesale funds. In addition, the degree to which we compete for deposits is influenced by the liquidity needed to fund our loan production and other outstanding commitments. We vie for deposits and customers by placing an emphasis on convenience and service and, from time to time, by offering specific products at highly competitive rates. In addition to our 242 Community Bank branches and 30 Commercial Bank branches, we have 285 ATM locations, including 261 that operate 24 hours a day. Our customers also have 24-hour access to their accounts through our bank-by-phone service and online through our three websites, www.myNYCB.com, www.NewYorkCommercialBank.com, and www.NYCBfamily.com. We also offer certain higher-paying money market accounts and certificates of deposit (“CDs”) through two dedicated websites, www.myBankingDirect.com and www.AmTrustDirect.com. In addition, 38 of our Community Bank branches in New York and New Jersey are “in-store” branches, including 37 that are located in supermarkets and one in a drug store. Because of the proximity of these branches to our traditional locations, our customers have the option of doing their banking seven days a week in many of the communities we serve. This service model is an important component of our efforts to attract and maintain deposits in a highly competitive marketplace. We also compete by complementing our broad selection of traditional banking products with an extensive menu of alternative financial services, including annuities, life and long-term care insurance, and mutual funds of 7 various third-party service providers. Furthermore, customers who come to us seeking a residential mortgage can begin the application process by phone, online, or in any branch. In addition to checking and savings accounts, Individual Retirement Accounts, and CDs for both businesses and consumers, the Commercial Bank offers a suite of cash management products to address the needs of small and mid-size businesses, municipal and county governments, school districts, and professional associations. Another competitive advantage is our strong community presence, with April 14, 2014 having marked the 155th year of service of our forebear, Queens County Savings Bank. We have found that our longevity, as well as our strong capital position, are especially appealing to customers seeking a strong, stable, and service-oriented bank. Competition for Loans Our success as a lender is substantially tied to the economic health of the markets where we lend. Local economic conditions have a significant impact on loan demand, the value of the collateral securing our credits, and the ability of our borrowers to repay their loans. The competition we face for loans also varies with the type of loan we are originating. In New York City, where the majority of the buildings collateralizing our multi-family loans are located, we compete for such loans on the basis of timely service and the expertise that stems from being a specialist in this lending niche. In addition to the money center, regional, and local banks we compete with in this market, we also compete with insurance companies. Certain of the banks we compete with sell the loans they produce to Fannie Mae and Freddie Mac. While we anticipate that competition for multi-family loans will continue in the future, we believe that the significant volume of multi-family loans we produced in 2014 and that are in our year-end pipeline are indicative of our ability to compete for such loans. Similarly, our ability to compete for CRE loans on a go-forward basis depends on the same factors that impact our ability to compete for multi-family credits, and the degree to which other CRE lenders choose to increase their loan production as local market conditions continue to improve. While we continue to originate a limited number of one-to-four family, ADC, and C&I loans for investment, such loans represent a small portion of our loan portfolio. We also compete with a significant number of financial and non-financial institutions throughout the nation that originate and aggregate one-to-four family loans for sale. Reflecting the volume of loans funded in 2014 through our mortgage banking business, we ranked among the 16 largest aggregators of one-to-four family loans in the United States. Environmental Issues We encounter certain environmental risks in our lending activities. The existence of hazardous materials may make it unattractive for a lender to foreclose on the properties securing its loans. In addition, under certain conditions, lenders may become liable for the costs of cleaning up hazardous materials found on such properties. We attempt to mitigate such environmental risks by requiring either that a borrower purchase environmental insurance or that an appropriate environmental site assessment be completed as part of our underwriting review on the initial granting of CRE and ADC loans, regardless of location, and of any out-of-state multi-family loans we may produce. Depending on the results of an assessment, appropriate measures are taken to address the identified risks. In addition, we order an updated environmental analysis prior to foreclosing on such properties, and typically hold foreclosed multi-family, CRE, and ADC properties in subsidiaries. Our attention to environmental risks also applies to the properties and facilities that house our bank operations. Prior to acquiring a large-scale property, a Phase 1 Environmental Property Assessment is typically performed by a licensed professional engineer to determine the integrity of, and/or the potential risk associated with, the facility and the property on which it is built. Properties and facilities of a smaller scale are evaluated by qualified in-house assessors, as well as by industry experts in environmental testing and remediation. This two-pronged approach identifies potential risks associated with asbestos-containing material, above and underground storage tanks, radon, electrical transformers (which may contain PCBs), ground water flow, storm and sanitary discharge, and mold, among other environmental risks. These processes assist us in mitigating environmental risk by enabling us to identify and address potential issues. 8 Subsidiary Activities The Community Bank has formed, or acquired through merger transactions, 32 active subsidiary corporations. Of these, 21 are direct subsidiaries of the Community Bank and 11 are subsidiaries of Community Bank-owned entities. The 21 direct subsidiaries of the Community Bank are: Name DHB Real Estate, LLC Mt. Sinai Ventures, LLC Jurisdiction of Organization Arizona Delaware NYCB Mortgage Company, LLC Delaware Realty Funding Company, LLC Delaware Purpose Organized to own interests in real estate A joint venture partner in the development, construction, and sale of a 177-unit golf course community in Mt. Sinai, NY, all the units of which were sold by December 31, 2006 Originates and aggregates one-to-four family loans for sale, primarily servicing retained Holding company for subsidiaries owning an interest in real estate NYCB Specialty Finance Company, Massachusetts Originates asset-based loans, dealer floor-plan loans, LLC Eagle Rock Investment Corp. New Jersey Pacific Urban Renewal, Inc. Synergy Capital Investments, Inc. New Jersey New Jersey 1400 Corp. BSR 1400 Corp. Bellingham Corp. Blizzard Realty Corp. CFS Investments, Inc. Main Omni Realty Corp. NYB Realty Holding Company, LLC O.B. Ventures, LLC RCBK Mortgage Corp. RCSB Corporation New York New York New York New York New York New York New York New York New York New York New York RSB Agency, Inc. Richmond Enterprises, Inc. New York Roslyn National Mortgage Corporation New York and equipment loan and lease financing Formed to hold and manage investment portfolios for the Company Owns a branch building Formed to hold and manage investment portfolios for the Company Manages properties acquired by foreclosure while they are being marketed for sale Organized to own interests in real estate Organized to own interests in real estate Organized to own interests in real estate Sells non-deposit investment products Organized to own interests in real estate Holding company for subsidiaries owning an interest in real estate A joint venture partner in a 370-unit residential community in Plainview, New York, all the units of which were sold by December 31, 2004 Organized to own interests in certain multi-family loans Owns a branch building, Ferry Development Holding Company, and Woodhaven Investments, Inc. Sells non-deposit investment products Holding company for Peter B. Cannell & Co., Inc. Formerly operated as a mortgage loan originator and servicer and currently holds an interest in its former office space 9 The 11 subsidiaries of Community Bank-owned entities are: Name Columbia Preferred Capital Corporation Delaware Jurisdiction of Organization Ferry Development Holding Company Delaware Peter B. Cannell & Co., Inc. Delaware Roslyn Real Estate Asset Corp. Delaware Walnut Realty Holding Company, LLC Delaware Delaware Woodhaven Investments, Inc. Your New REO, LLC Delaware Ironbound Investment Company, Inc. New Jersey The Hamlet at Olde Oyster Bay, LLC New York The Hamlet at Willow Creek, LLC New York Richmond County Capital Corporation New York Purpose A real estate investment trust (“REIT”) organized for the purpose of investing in mortgage-related assets Formed to hold and manage investment portfolios for the Company Advises high net worth individuals and institutions on the management of their assets A REIT organized for the purpose of investing in mortgage-related assets Established to own Bank-owned properties Holding company for Roslyn Real Estate Asset Corp. and Ironbound Investment Company, Inc. Owns a website that lists bank-owned properties for sale A REIT organized for the purpose of investing in mortgage-related assets that also is the principal shareholder of Richmond County Capital Corp. Organized as a joint venture, part-owned by O.B. Ventures, LLC Organized as a joint venture, part-owned by Mt. Sinai Ventures, LLC A REIT organized for the purpose of investing in mortgage-related assets that also is the principal shareholder of Columbia Preferred Capital Corp. There are 86 additional entities that are subsidiaries of a Community Bank-owned entity organized to own interests in real estate. The Commercial Bank has four active subsidiary corporations, two of which are subsidiaries of Commercial Bank-owned entities. The two direct subsidiaries of the Commercial Bank are: Name Beta Investments, Inc. Jurisdiction of Organization Delaware Gramercy Leasing Services, Inc. New York Purpose Holding company for Omega Commercial Mortgage Corp. and Long Island Commercial Capital Corp. Provides equipment lease financing The two subsidiaries of Commercial Bank-owned entities are: Name Omega Commercial Mortgage Corp. Jurisdiction of Organization Delaware Long Island Commercial Capital Corp. New York Purpose A REIT organized for the purpose of investing in mortgage-related assets A REIT organized for the purpose of investing in mortgage-related assets There are four additional entities that are subsidiaries of the Commercial Bank that are organized to own interests in real estate. The Company owns special business trusts that were formed for the purpose of issuing capital and common securities and investing the proceeds thereof in the junior subordinated debentures issued by the Company. Please see Note 8, “Borrowed Funds,” in Item 8, “Financial Statements and Supplementary Data,” for a further discussion of the Company’s special business trusts. 10 The Company also has one non-banking subsidiary that was established in connection with the acquisition of Atlantic Bank of New York in 2006. Personnel At December 31, 2014, the number of full-time equivalent employees was 3,416. Our employees are not represented by a collective bargaining unit, and we consider our relationship with our employees to be good. Federal, State, and Local Taxation The Company is subject to federal, state, and local income taxes. Please see the discussion of “Income Taxes” in “Critical Accounting Policies” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” later in this annual report. Regulation and Supervision General The Community Bank is a New York State-chartered savings bank and its deposit accounts are insured under the Deposit Insurance Fund (the “DIF”) of the Federal Deposit Insurance Corporation (the “FDIC”) up to applicable legal limits. The Commercial Bank is a New York State-chartered commercial bank and its deposit accounts also are insured by the DIF up to applicable legal limits. Both the Community Bank and the Commercial Bank are subject to regulation and supervision by the New York State Department of Financial Services (the “NYDFS”), as their chartering agency; by the FDIC, as their insurer of deposits; and by the Consumer Financial Protection Bureau (the “CFPB”), which was created under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) in 2011 to implement and enforce consumer protection laws applying to banks. The Banks must file reports with the NYDFS, the FDIC, and the CFPB concerning their activities and financial condition, and are periodically examined by the NYDFS, the CFPB, and the FDIC to assess compliance with various regulatory requirements, including safety and soundness considerations. This regulation and supervision establishes a comprehensive framework of activities in which a savings bank and a commercial bank can engage, and is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss allowances for regulatory purposes. Moreover, the Banks would have to obtain regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions of, other depository institutions. Any changes in such regulations, whether by the NYDFS, the CFPB, the FDIC, or through legislation, could have a material adverse impact on the Company, the Banks and their operations, and the Company’s shareholders. The Company is subject to examination, regulation, and periodic reporting under the Bank Holding Company Act of 1956, as amended (the “BHCA”), as administered by the Board of Governors of the Federal Reserve System (the “FRB”). In addition, the Company is periodically examined by the Federal Reserve Bank of New York (the “FRB-NY”). Besides filing certain reports under, and otherwise complying with, the rules and regulations of the FRB, the Company is required to file certain reports under, and otherwise comply with, the rules and regulations of the FDIC, the NYDFS, and the SEC under federal securities laws. Furthermore, the Company would be required to obtain the prior approval of the FRB to acquire all, or substantially all, of the assets of any bank or bank holding company. In addition, on September 3, 2014, the FRB and other banking regulators adopted final rules implementing a U.S. version of the Basel Committee’s Liquidity Coverage Ratio (the “LCR”) requirement. The LCR requirement, including the modified version applicable to bank holding companies with $50 billion or more in total consolidated assets that have not opted to use the “advanced approaches” risk-based capital rule, requires a banking organization to maintain an amount of unencumbered “high-quality liquid assets” to be at least equal to the amount of its total net cash outflows over a 30-day stress period. Only specific classes of assets qualify under the rule as high-quality assets (the numerator of the LCR), with riskier classes of assets subject to haircuts and caps. The total net cash outflow amount (the denominator of the LCR) is determined under the rule by applying outflow and inflow rates that reflect certain standardized assumptions against the balances of the banking organization’s funding sources, obligations, transactions, and assets over a 30-day stress period. Inflows that can be included to offset outflows are limited to 11 75% of outflows (which effectively means that banking organizations must hold high-quality liquid assets equal to 25% of outflows even if outflows perfectly match inflows over the stress period). The initial compliance date for the modified LCR will be January 2016, with the requirement fully phased in by January 2017. Although we are not currently subject to the modified LCR requirements, were we to have average total consolidated assets over the four most recent quarters in excess of $50 billion, we would have to comply with the requirements of the modified LCR beginning on the first day of the first quarter after which we exceed that threshold. The modified LCR is a minimum requirement, and the FRB can impose additional liquidity requirements as a supervisory matter. Certain of the regulatory requirements applicable to the Community Bank, the Commercial Bank, and the Company are referred to below or elsewhere herein. However, such discussion is not meant to be a complete explanation of all laws and regulations and is qualified in its entirety by reference to the actual laws and regulations. The Dodd-Frank Act The Dodd-Frank Act has significantly changed the current bank regulatory structure and will continue to affect, into the immediate future, the lending and investment activities and general operations of depository institutions and their holding companies. In addition to creating the CFPB, the Dodd-Frank Act requires that the FRB establish minimum consolidated capital requirements for bank holding companies that are as stringent as those required for insured depository institutions; and that the components of Tier 1 capital be restricted to capital instruments that are currently considered to be Tier 1 capital for insured depository institutions. In addition, the proceeds of trust preferred securities will be excluded from Tier 1 capital unless (i) such securities are issued by bank holding companies with assets of less than $500 million, or (ii) such securities were issued prior to May 19, 2010 by bank or savings and loan holding companies with assets of less than $15 billion. As a result, only 25% of the Company’s trust preferred securities will be included in Tier 1 capital in 2015, and none will be included in 2016. Furthermore, the Dodd-Frank Act created a new supervisory structure for oversight of the U.S. financial system, including the establishment of a new council of regulators, the Financial Stability Oversight Council, to monitor and address systemic risks to the financial system. Non-bank financial companies that are deemed to be significant to the stability of the U.S. financial system and all bank holding companies with $50 billion or more in total consolidated assets will be subject to heightened supervision and regulation. The FRB will implement prudential requirements and prompt corrective action procedures for such companies. The Dodd-Frank Act made many additional changes in banking regulation, including: authorizing depository institutions, for the first time, to pay interest on business checking accounts; requiring originators of securitized loans to retain a percentage of the risk for transferred loans; establishing regulatory rate-setting for certain debit card interchange fees; and establishing a number of reforms for mortgage lending and consumer protection. The Dodd-Frank Act also broadened the base for FDIC insurance assessments. The FDIC was required to promulgate rules revising its assessment system so that it would be based not on deposits, but on the average consolidated total assets less the tangible equity capital of an insured institution. That rule took effect on April 1, 2011. The Dodd-Frank Act also permanently increased the maximum amount of deposit insurance for banks, savings institutions, and credit unions to $250,000 per depositor, retroactive to January 1, 2008. Many of the provisions of the Dodd-Frank Act are not yet effective. The Dodd-Frank Act requires various federal agencies to promulgate numerous and extensive implementing regulations over the next several years. Although it therefore is difficult to predict at this time what impact the Dodd-Frank Act and the implementing regulations will have on the Company and the Banks, they may have a material impact on operations through, among other things, heightened regulatory supervision and increased compliance costs. Current Capital Requirements FDIC Capital Requirements The FDIC has adopted risk-based capital guidelines to which the Community Bank and the Commercial Bank are subject. The guidelines establish a systematic analytical framework that makes regulatory capital requirements sensitive to differences in risk profiles among banking organizations. The Community Bank and the Commercial Bank are required to maintain certain levels of regulatory capital in relation to regulatory risk-weighted assets. The ratio of such regulatory capital to regulatory risk-weighted assets is referred to as a “risk-based capital ratio.” Risk- 12 based capital ratios are determined by allocating assets and specified off-balance sheet items to four risk-weighted categories ranging from 0% to 100%, with higher levels of capital being required for the categories perceived as representing greater risk. These guidelines divide an institution’s capital into two tiers. The first tier (“Tier 1”) includes common equity, retained earnings, certain non-cumulative perpetual preferred stock (excluding auction rate issues), and minority interests in equity accounts of consolidated subsidiaries, less goodwill and other intangible assets (except mortgage servicing rights and purchased credit card relationships subject to certain limitations). Supplementary (“Tier 2”) capital includes, among other items, cumulative perpetual and long-term limited-life preferred stock; mandatorily convertible securities; certain hybrid capital instruments; term subordinated debt; and the allowance for loan losses, subject to certain limitations; and up to 45% of pre-tax net unrealized gains on equity securities with readily determinable fair market values, less required deductions. Savings banks and commercial banks are required to maintain a total risk-based capital ratio of at least 8%, of which at least 4% must be Tier 1 capital. In addition, the FDIC has established regulations prescribing a minimum Tier 1 leverage capital ratio (the ratio of Tier 1 capital to adjusted average assets as specified in the regulations). These regulations provide for a minimum Tier 1 leverage capital ratio of 3% for institutions that meet certain specified criteria, including that they have the highest examination rating and are not experiencing or anticipating significant growth. All other institutions are required to maintain a Tier 1 leverage capital ratio of at least 4%. The FDIC may, however, set higher leverage and risk-based capital requirements on individual institutions when particular circumstances warrant. Institutions experiencing or anticipating significant growth are expected to maintain capital ratios, including tangible capital positions, well above the minimum levels. As of December 31, 2014, the Community Bank and the Commercial Bank were deemed to be well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, a bank must maintain a minimum Tier 1 leverage capital ratio of 5%, a minimum Tier 1 risk-based capital ratio of 6%, and a minimum total risk-based capital ratio of 10%. A summary of the regulatory capital ratios of the Banks at December 31, 2014 appears in Note 18, “Regulatory Matters” in Item 8, “Financial Statements and Supplementary Data.” The regulatory capital regulations of the FDIC and other federal banking agencies provide that the agencies will take into account the exposure of an institution’s capital and economic value to changes in interest rate risk in assessing capital adequacy. According to such agencies, applicable considerations include the quality of the institution’s interest rate risk management process, overall financial condition, and the level of other risks at the institution for which capital is needed. Institutions with significant interest rate risk may be required to hold additional capital. The agencies have issued a joint policy statement providing guidance on interest rate risk management, including a discussion of the critical factors affecting the agencies’ evaluation of interest rate risk in connection with capital adequacy. Institutions that engage in specified amounts of trading activity may be subject to adjustments in the calculation of the risk-based capital requirement to assure sufficient additional capital to support market risk. Federal Reserve Board Capital Requirements The FRB has adopted capital adequacy guidelines for bank holding companies (on a consolidated basis) that are substantially similar to, but somewhat less stringent than, those of the FDIC for the Community Bank and the Commercial Bank. At December 31, 2014, the Company’s consolidated Total and Tier 1 capital exceeded these requirements. The Dodd-Frank Act required the FRB to issue consolidated regulatory capital requirements for bank holding companies that are at least as stringent as those applicable to insured depository institutions. Such regulations eliminated the use of certain instruments, such as cumulative preferred stock and trust preferred securities, as Tier 1 holding company capital. However, instruments issued before May 19, 2010 by bank holding companies with more than $15 billion of consolidated assets are subject to a three-year phase-out from inclusion as Tier 1 capital, beginning January 1, 2013. As a result, only 25% of the Company’s trust preferred securities will be included in Tier 1 capital in 2015, and none will be included in 2016. Based on our balance of trust preferred securities at December 31, 2014, and absent any reduction in that balance during the period ending January 1, 2016, the elimination of such instruments would be expected to reduce our capital by $345.6 million, or 9.3%, at the end of the phase-in, and reduce our Tier 1 leverage capital ratio by 74 basis points at that date. Bank holding companies are generally required to give the FRB prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when 13 combined with the net consideration paid for all such purchases or redemptions during the preceding twelve months, is equal to 10% or more of the Company’s consolidated net worth. The FRB may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice, or would violate any law, regulation, FRB order or directive, or any condition imposed by, or written agreement with, the FRB or the FRB-NY. The FRB has adopted an exception to this approval requirement for well-capitalized bank holding companies that meet certain other conditions. Prompt Corrective Regulatory Action Federal law requires, among other things, that federal bank regulatory authorities take “prompt corrective action” with respect to institutions that do not meet minimum capital requirements. For such purposes, the law establishes five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. The FDIC has adopted regulations to implement prompt corrective action. Among other things, the regulations define the relevant capital measures for the five capital categories. For the period ended December 31, 2014, an institution was deemed to be “well capitalized” if it had a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater, and a leverage capital ratio of 5% or greater, and was not subject to a regulatory order, agreement, or directive to meet and maintain a specific capital level for any capital measure. An institution was deemed to be “adequately capitalized” if it had a total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4% or greater, and generally a leverage capital ratio of 4% or greater. An institution was deemed to be “undercapitalized” if it had a total risk-based capital ratio of less than 8%, a Tier 1 risk-based capital ratio of less than 4%, or generally a leverage capital ratio of less than 4%. An institution was deemed to be “significantly undercapitalized” if it had a total risk-based capital ratio of less than 6%, a Tier 1 risk-based capital ratio of less than 3%, or a leverage capital ratio of less than 3%. An institution was deemed to be “critically undercapitalized” if it had a ratio of tangible equity (as defined in the regulations) to total assets that was equal to or less than 2%. As a result of U.S. bank regulations implementing Basel III, new definitions of the relevant measures for the five capital categories will take effect on January 1, 2015, as further described below under “Basel III.” Effective that date, an institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 8% or greater, a common equity Tier 1 risk-based capital ratio of 6.5% or greater, and a leverage capital ratio of 5% or greater, and is not subject to a regulatory order, agreement, or directive to meet and maintain a specific capital level for any capital measure. An institution is deemed to be “adequately capitalized” if it has a total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 6% or greater, a common equity Tier 1 risk-based capital ratio of 4.5% or greater, and generally a leverage capital ratio of 4% or greater. An institution is deemed to be “undercapitalized” if it has a total risk-based capital ratio of less than 8%, a Tier 1 risk- based capital ratio of less than 6%, a common equity Tier 1 risk-based capital ratio of less than 4.5%, or generally a leverage capital ratio of less than 4%. An institution is deemed to be “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6%, a Tier 1 risk-based capital ratio of less than 4%, a common equity Tier 1 risk-based capital ratio of less than 3%, or a leverage capital ratio of less than 3%. An institution is deemed to be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2%. “Undercapitalized” institutions are subject to growth, capital distribution (including dividend), and other limitations, and are required to submit a capital restoration plan. An institution’s compliance with such a plan is required to be guaranteed by any company that controls the undercapitalized institution in an amount equal to the lesser of 5% of the bank’s total assets when deemed undercapitalized or the amount necessary to achieve the status of adequately capitalized. If an undercapitalized institution fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” Significantly undercapitalized institutions are subject to one or more additional restrictions including, but not limited to, an order by the FDIC to sell sufficient voting stock to become adequately capitalized; requirements to reduce total assets, cease receipt of deposits from correspondent banks, or dismiss directors or officers; and restrictions on interest rates paid on deposits, compensation of executive officers, and capital distributions by the parent holding company. Beginning 60 days after becoming “critically undercapitalized,” critically undercapitalized institutions also may not make any payment of principal or interest on certain subordinated debt, extend credit for a highly leveraged transaction, or enter into any material transaction outside the ordinary course of business. In addition, subject to a narrow exception, the appointment of a receiver is required for a critically undercapitalized institution within 270 days after it obtains such status. 14 Basel III On July 9, 2013, the federal bank regulatory agencies issued a final rule that revised their risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision (“Basel III”) and certain provisions of the Dodd-Frank Act. The final rule, which became effective on January 1, 2015, applies to all depository institutions, top-tier bank holding companies with total consolidated assets of $500 million or more, and top-tier savings and loan holding companies. The rule established a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increases the minimum Tier 1 capital to risk-based assets requirement (from 4.0% to 6.0% of risk-weighted assets), and assigned a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status, and to certain commercial real estate facilities that finance the acquisition, development, or construction of real property. The rule also changed what constitutes regulatory capital. These changes include the phasing-out of certain instruments as qualifying capital. In addition, Tier 2 capital is no longer limited to the amount of Tier 1 capital included in total capital. Mortgage servicing rights, certain deferred tax assets, and investments in unconsolidated subsidiaries over designated percentages of common stock are required to be deducted from capital. Finally, Tier 1 capital includes accumulated other comprehensive income (which includes all unrealized gains and losses on available-for-sale debt and equity securities). The capital requirements also changed the risk weights of assets to better reflect credit risk and other risk exposures. These include a 150% risk weight (up from 100%) for certain high-volatility commercial real estate acquisition, development, and construction loans and non-residential mortgage loans that are 90 days past due or otherwise on non-accrual status; a 20% (up from 0%) credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancelable; a 250% risk weight (up from 100%) for mortgage servicing rights and certain deferred tax assets that are not deducted from capital; and increased risk-weights (from 0% to up to 600%) for equity exposures. Finally, the rule limits capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement will be phased in beginning January 1, 2016, at 0.625% of risk- weighted assets, and increase each year until fully implemented at 2.5% on January 1, 2019. It is management’s belief that, as of December 31, 2014, we would have met all capital adequacy requirements under the new capital rules on a fully phased-in basis if such requirements had been effective at that date. In addition, reflecting a good faith estimate of the Company’s CET1 and risk-weighted assets, as computed in accordance with the methodologies set forth in the Basel III Capital Rules, management estimates that the Company’s ratio of CET1 to risk-weighted assets, on a fully phased-in basis, was approximately 10.85% at December 31, 2014. Stress Testing Stress Testing for Banks with Assets of $10 Billion to $50 Billion On October 9, 2012, the FDIC and the FRB issued final rules requiring certain large insured depository institutions and bank holding companies to conduct annual capital-adequacy stress tests. Recognizing that banks and their parent holding companies may have different primary federal regulators, the FDIC and FRB have attempted to ensure that the standards of the final rules are consistent and comparable in the areas of scope of application, scenarios, data collection, reporting, and disclosure. To implement section 165(i) of the Dodd-Frank Act, the rules would apply to FDIC-insured state non-member banks and bank holding companies with total consolidated assets of more than $10 billion (“covered institutions”). The final rules delayed implementation for covered institutions with total consolidated assets of between $10 billion and $50 billion until October 2013. The final rule requirement for public disclosure of a summary of the stress testing results for these $10 billion-$50 billion covered institutions will be implemented starting with the 2014 stress test, with the disclosure occurring by June 30, 2015. The final rules define a stress test as a process to assess the potential impact of economic and financial scenarios on the consolidated earnings, losses, and capital of the covered institution over a set planning horizon, taking into account the current condition of the covered institution and its risks, exposures, strategies, and activities. 15 Under the rules, each covered institution with between $10 billion and $50 billion in assets would be required to conduct annual stress tests using the bank’s and the bank holding company’s financial data as of September 30 of that year to assess the potential impact of different scenarios on the consolidated earnings and capital of that bank and its holding company and certain related items over a nine-quarter forward-looking planning horizon, taking into account all relevant exposures and activities. On or before March 31 of each year, each covered institution, including the Community Bank and the Company, would be required to report to the FDIC and the FRB, respectively, in the manner and form prescribed in the rules, the results of the stress tests conducted by the covered institution during the immediately preceding year. Based on the information provided by a covered institution in the required reports to the FDIC and the FRB, as well as other relevant information, the FDIC and FRB would conduct an analysis of the quality of the covered institution’s stress test processes and related results. The FDIC and FRB envision that feedback concerning such analysis would be provided to a covered institution through the supervisory process. Consistent with the requirements of the Dodd-Frank Act, the rule would require each covered institution to publish a summary of the results of its annual stress tests within 90 days of the required date for submitting its stress test report to the FDIC and the FRB. As discussed below, if the average of our total consolidated assets over the four most recent quarters were to exceed $50 billion, the Company would become subject to a different set of FRB stress test regulations. Stress Testing for Large Bank Holding Companies If the average of the Company’s total consolidated assets over the four most recent quarters were to reach or exceed $50 billion, the Company would become subject to a different set of stress testing regulations administered by the FRB under its capital plan rule and related supervisory process, the Comprehensive Capital Analysis and Review (“CCAR”). Under this scenario, the FRB will use its own models to evaluate whether each covered company has the capital, on a total consolidated basis, necessary to continue operating under the economic and financial market conditions of each scenario. The FRB’s analysis will include an assessment of the projected losses, net income, and pro forma capital levels and the regulatory capital ratio, tier 1 common ratio, and other capital ratios for the covered company, and use such analytical techniques that the FRB determines to be appropriate to identify, measure, and monitor risks of the covered company that may affect the financial stability of the United States. The aim of the annual review is to ensure that large, complex banking institutions have robust, forward- looking capital planning processes that account for their unique risks, and to help ensure that institutions have sufficient capital to continue operations throughout times of economic and financial stress. Covered companies will be expected to have credible plans that show they have sufficient capital to continue to lend to households and businesses even under severely adverse conditions, and are well prepared to meet Basel III regulatory capital standards as they are implemented in the United States. A covered company’s capital adequacy will be assessed against a number of quantitative and qualitative criteria, including projected performance under the stress scenarios provided by the FRB and the covered company’s internal scenarios. Boards of directors of covered companies are required to review and approve capital plans before submitting them to the FRB. If the Company were to exceed the $50 billion asset threshold described above on or before March 31st of a given year, it would be subject to these stress test requirements beginning on January 1st of the next calendar year (i.e., the first year after it became a large banking holding company). If the Company were to exceed the $50 billion asset threshold after March 31st of a given year, it would not be subject to these stress test requirements until January 1st of the second calendar year after the year in which it became a large banking holding company. Standards for Safety and Soundness Federal law requires each federal banking agency to prescribe, for the depository institutions under its jurisdiction, standards that relate to, among other things, internal controls; information and audit systems; loan documentation; credit underwriting; the monitoring of interest rate risk; asset growth; compensation; fees and benefits; and such other operational and managerial standards as the agency deems appropriate. The federal banking agencies adopted final regulations and Interagency Guidelines Establishing Standards for Safety and Soundness (the “Guidelines”) to implement these safety and soundness standards. The Guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the Guidelines, the agency may require the institution to provide it with an acceptable plan to achieve compliance with the standard, as required by the Federal Deposit Insurance Act, as 16 amended, (the “FDI Act”). The final regulations establish deadlines for the submission and review of such safety and soundness compliance plans. FDIC Regulations The discussion that follows pertains to FDIC Regulations other than those already discussed on the preceding pages. Real Estate Lending Standards The FDIC and the other federal banking agencies have adopted regulations that prescribe standards for extensions of credit that (i) are secured by real estate, or (ii) are made for the purpose of financing construction or improvements on real estate. The FDIC regulations require each institution to establish and maintain written internal real estate lending standards that are consistent with safe and sound banking practices, and appropriate to the size of the institution and the nature and scope of its real estate lending activities. The standards also must be consistent with accompanying FDIC Guidelines, which include loan-to-value limitations for the different types of real estate loans. Institutions are also permitted to make a limited amount of loans that do not conform to the proposed loan-to- value limitations so long as such exceptions are reviewed and justified appropriately. The Guidelines also list a number of lending situations in which exceptions to the loan-to-value standard are justified. The FDIC, the Office of the Comptroller of the Currency, and the FRB (collectively, the “Agencies”) also have issued joint guidance entitled “Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices” (the “CRE Guidance”). The CRE Guidance, which addresses land development, construction, and certain multi-family loans, as well as CRE loans, does not establish specific lending limits but, rather, reinforces and enhances the Agencies’ existing regulations and guidelines for such lending and portfolio management. Dividend Limitations The FDIC has authority to use its enforcement powers to prohibit a savings bank or commercial bank from paying dividends if, in its opinion, the payment of dividends would constitute an unsafe or unsound practice. Federal law prohibits the payment of dividends that will result in the institution failing to meet applicable capital requirements on a pro forma basis. The Community Bank and the Commercial Bank are also subject to dividend declaration restrictions imposed by, and as later discussed under, “New York State Law.” Investment Activities Since the enactment of the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), all state-chartered financial institutions, including savings banks, commercial banks, and their subsidiaries, have generally been limited to such activities as principal and equity investments of the type, and in the amount, authorized for national banks. State law, FDICIA, and FDIC regulations permit certain exceptions to these limitations. For example, certain state-chartered savings banks, such as the Community Bank, may, with FDIC approval, continue to exercise state authority to invest in common or preferred stocks listed on a national securities exchange and in the shares of an investment company registered under the Investment Company Act of 1940, as amended. Such banks may also continue to sell Savings Bank Life Insurance. In addition, the FDIC is authorized to permit institutions to engage in state-authorized activities or investments not permitted for national banks (other than non-subsidiary equity investments) for institutions that meet all applicable capital requirements if it is determined that such activities or investments do not pose a significant risk to the insurance fund. The Gramm-Leach-Bliley Act of 1999 and FDIC regulations impose certain quantitative and qualitative restrictions on such activities and on a bank’s dealings with a subsidiary that engages in specified activities. The Community Bank received grandfathering authority from the FDIC in 1993 to invest in listed stock and/or registered shares subject to the maximum permissible investments of 100% of Tier 1 capital, as specified by the FDIC’s regulations, or the maximum amount permitted by New York State Banking Law, whichever is less. Such grandfathering authority is subject to termination upon the FDIC’s determination that such investments pose a safety and soundness risk to the Community Bank, or in the event that the Community Bank converts its charter or undergoes a change in control. Enforcement The FDIC has extensive enforcement authority over insured banks, including the Community Bank and the Commercial Bank. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease and desist orders, and to remove directors and officers. In general, these enforcement actions may be initiated in response to violations of laws and regulations and unsafe or unsound practices. 17 The FDIC has authority under federal law to appoint a conservator or receiver for an insured institution under certain circumstances. The FDIC is required, with certain exceptions, to appoint a receiver or conservator for an insured institution if that institution was critically undercapitalized on average during the calendar quarter beginning 270 days after the date on which the institution became critically undercapitalized. For this purpose, “critically undercapitalized” means having a ratio of tangible equity to total assets of less than 2%. Please see “Prompt Corrective Regulatory Action” earlier in this report. The FDIC may also appoint a conservator or receiver for an insured institution on the basis of the institution’s financial condition or upon the occurrence of certain events, including (i) insolvency (whereby the assets of the bank are less than its liabilities to depositors and others); (ii) substantial dissipation of assets or earnings through violations of law or unsafe or unsound practices; (iii) existence of an unsafe or unsound condition to transact business; (iv) likelihood that the bank will be unable to meet the demands of its depositors or to pay its obligations in the normal course of business; and (v) insufficient capital, or the incurrence or likely incurrence of losses that will deplete substantially all of the institution’s capital with no reasonable prospect of replenishment of capital without federal assistance. Insurance of Deposit Accounts The deposits of the Community Bank and the Commercial Bank are insured up to applicable limits by the DIF. The DIF is the successor to the Bank Insurance Fund and the Savings Association Insurance Fund, which were merged in 2006. Due to the decline in economic conditions, the deposit insurance provided by the FDIC per account owner was raised to $250,000 for all types of accounts in 2008. That change, initially intended to be temporary, was made permanent by the Dodd-Frank Act. Under the FDIC’s risk-based assessment system, insured institutions are assigned to one of four risk categories based upon supervisory evaluations, regulatory capital level, and certain other factors, with less risky institutions paying lower assessments. An institution’s assessment rate depends upon the category to which it is assigned and certain other factors. On February 7, 2011, as required by the Dodd-Frank Act, the FDIC published a final rule to revise the deposit insurance assessment system. The rule, which took effect April 1, 2011, changed the assessment base used for calculating deposit insurance assessments from deposits to total assets less tangible (Tier 1) capital. Since the new base is larger than the previous base, the FDIC also lowered assessment rates so that the rule would not significantly alter the total amount of revenue collected from the industry. The range of adjusted assessment rates is now 2.5 to 45 basis points of the new assessment base; the Community Bank’s assessment was within the lower part of that range in 2014, as was the assessment of the Commercial Bank. The Dodd-Frank Act increased the minimum target DIF ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The FDIC must seek to achieve the 1.35% ratio by September 30, 2020. Insured institutions with assets of $10 billion or more are supposed to fund the increase. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, leaving it, instead, to the discretion of the FDIC. The FDIC has recently exercised that discretion by establishing a long-range fund ratio of 2%, which could result in our paying higher deposit insurance premiums in the future. Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC. Management does not know of any practice, condition, or violation that would lead to termination of the deposit insurance of either of the Banks. Holding Company Regulation Federal Regulation The Company is currently subject to examination, regulation, and periodic reporting under the BHCA, as administered by the FRB. The Company is required to obtain the prior approval of the FRB to acquire all, or substantially all, of the assets of any bank or bank holding company. Prior FRB approval would be required for the Company to acquire direct or indirect ownership or control of any voting securities of any bank or bank holding company if, after giving effect to such acquisition, it would, directly or indirectly, own or control more than 5% of any class of voting shares of such bank or bank holding company. In addition, before any bank acquisition can be completed, prior approval thereof may also be required to be obtained from other agencies having supervisory jurisdiction over the bank to be acquired, including the NYDFS. 18 FRB regulations generally prohibit a bank holding company from engaging in, or acquiring, direct or indirect control of more than 5% of the voting securities of any company engaged in non-banking activities. One of the principal exceptions to this prohibition is for activities found by the FRB to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the principal activities that the FRB has determined by regulation to be so closely related to banking are: (i) making or servicing loans; (ii) performing certain data processing services; (iii) providing discount brokerage services; (iv) acting as fiduciary, investment, or financial advisor; (v) leasing personal or real property; (vi) making investments in corporations or projects designed primarily to promote community welfare; and (vii) acquiring a savings and loan association. The FRB has issued a policy statement regarding the payment of dividends by bank holding companies. In general, the FRB’s policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the bank holding company appears consistent with the organization’s capital needs, asset quality, and overall financial condition. The FRB’s policies also require that a bank holding company serve as a source of financial strength to its subsidiary banks by standing ready to use available resources to provide adequate capital funds to those banks during periods of financial stress or adversity, and by maintaining the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks where necessary. The Dodd-Frank Act codifies the source of financial strength policy and requires regulations to facilitate its application. Under the prompt corrective action laws, the ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory policies could affect the ability of the Company to pay dividends or otherwise engage in capital distributions. Under the FDI Act, a depository institution may be liable to the FDIC for losses caused the DIF if a commonly controlled depository institution were to fail. The Community Bank and the Commercial Bank are commonly controlled within the meaning of that law. The status of the Company as a registered bank holding company under the BHCA does not exempt it from certain federal and state laws and regulations applicable to corporations generally, including, without limitation, certain provisions of the federal securities laws. The Company, the Community Bank, the Commercial Bank, and their respective affiliates are affected by the monetary and fiscal policies of various agencies of the United States government, including the Federal Reserve System. In view of changing conditions in the national economy and the money markets, it is difficult for management to accurately predict future changes in monetary policy or the effect of such changes on the business or financial condition of the Company, the Community Bank, or the Commercial Bank. New York State Regulation The Company is subject to regulation as a “multi-bank holding company” under New York State law since it controls two banking institutions. Among other requirements, this means that the Company must receive the approval of the New York State Banking Board prior to the acquisition of 10% or more of the voting stock of another banking institution, or to otherwise acquire a banking institution by merger or purchase. Transactions with Affiliates Under current federal law, transactions between depository institutions and their affiliates are governed by Sections 23A and 23B of the Federal Reserve Act and the FRB’s Regulation W promulgated thereunder. An affiliate of a savings bank or commercial bank is any company or entity that controls, is controlled by, or is under common control with, the institution, other than a subsidiary. Generally, an institution’s subsidiaries are not treated as affiliates unless they are engaged in activities as principal that are not permissible for national banks. In a holding company context, at a minimum, the parent holding company of an institution, and any companies that are controlled by such parent holding company, are affiliates of the institution. Generally, Section 23A limits the extent to which the institution or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of the institution’s capital stock and surplus, and contains an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus. The term “covered transaction” includes the making of loans or other extensions of credit to an affiliate; the purchase of assets from an affiliate; the purchase of, or an investment in, the securities of an affiliate; the acceptance of securities of an affiliate as collateral for a loan or extension of credit to any person; or issuance of a guarantee, acceptance, or letter of credit on behalf of an affiliate. Section 23A also establishes specific collateral requirements for loans or extensions of credit to, or guarantees or acceptances on letters of credit issued on behalf of, an affiliate. Section 23B requires that covered transactions and a broad list of other specified transactions be on terms substantially the same as, or at least as favorable to, the institution or its subsidiary as similar transactions with non-affiliates. 19 The Sarbanes-Oxley Act of 2002 generally prohibits loans by the Company to its executive officers and directors. However, the Sarbanes-Oxley Act contains a specific exemption for loans by an institution to its executive officers and directors in compliance with federal banking laws. Section 22(h) of the Federal Reserve Act, and FRB Regulation O adopted thereunder, govern loans by a savings bank or commercial bank to directors, executive officers, and principal shareholders. Under Section 22(h), loans to directors, executive officers, and shareholders who control, directly or indirectly, 10% or more of voting securities of an institution, and certain related interests of any of the foregoing, may not exceed, together with all other outstanding loans to such persons and affiliated entities, the institution’s total capital and surplus. Section 22(h) also prohibits loans above amounts prescribed by the appropriate federal banking agency to directors, executive officers, and shareholders who control 10% or more of the voting securities of an institution, and their respective related interests, unless such loan is approved in advance by a majority of the board of the institution’s directors. Any “interested” director may not participate in the voting. The loan amount (which includes all other outstanding loans to such person) as to which such prior board of director approval is required, is the greater of $25,000 or 5% of capital and surplus or any loans aggregating over $500,000. Further, pursuant to Section 22(h), loans to directors, executive officers, and principal shareholders must be made on terms substantially the same as those offered in comparable transactions to other persons. There is an exception for loans made pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to executive officers over other employees. Section 22(g) of the Federal Reserve Act places additional limitations on loans to executive officers. Community Reinvestment Act Federal Regulation Under the Community Reinvestment Act (“CRA”), as implemented by FDIC regulations, an institution has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions, nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the FDIC, in connection with its examinations, to assess the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution. The CRA requires public disclosure of an institution’s CRA rating and further requires the FDIC to provide a written evaluation of an institution’s CRA performance utilizing a four-tiered descriptive rating system. In its most recent FDIC CRA performance evaluation, the Community Bank received overall state ratings of “Satisfactory” for Ohio, Florida, Arizona, and New Jersey, as well as for the New York/New Jersey multi-state region. Furthermore, the most recent overall FDIC CRA ratings for the Community Bank and the Commercial Bank were “Satisfactory.” New York State Regulation The Community Bank and the Commercial Bank are also subject to provisions of the New York State Banking Law that impose continuing and affirmative obligations upon a banking institution organized in New York State to serve the credit needs of its local community (the “NYCRA”). Such obligations are substantially similar to those imposed by the CRA. The NYCRA requires the NYDFS to make a periodic written assessment of an institution’s compliance with the NYCRA, utilizing a four-tiered rating system, and to make such assessment available to the public. The NYCRA also requires the Superintendent of the NYDFS (the “Superintendent”) to consider the NYCRA rating when reviewing an application to engage in certain transactions, including mergers, asset purchases, and the establishment of branch offices or ATMs, and provides that such assessment may serve as a basis for the denial of any such application. The latest NYCRA rating received by the Community Bank was “satisfactory,” as was the latest rating received by the Commercial Bank. Federal Reserve System Under FRB regulations, the Community Bank and the Commercial Bank are required to maintain reserves against their transaction accounts (primarily NOW and regular checking accounts). Beginning January 22, 2015, the Banks are required to maintain average daily reserves equal to 3% on aggregate transaction accounts of up to $103.6 million, plus 10% on the remainder, and the first $14.5 million of otherwise reservable balances will both be exempt. These reserve requirements are subject to adjustment by the FRB. The Community Bank and the Commercial Bank are in compliance with the foregoing requirements. Federal Home Loan Bank System The Community Bank and the Commercial Bank are members of the Federal Home Loan Bank (“FHLB”) of New York (the “FHLB-NY”), one of 12 regional FHLBs comprising the FHLB system. Each regional FHLB 20 manages its customer relationships, while the 12 FHLBs use their combined size and strength to obtain their necessary funding at the lowest possible cost. As members of the FHLB-NY, the Community Bank and the Commercial Bank are required to acquire and hold shares of FHLB-NY capital stock. Including $19.1 million of FHLB-Cincinnati stock acquired in the AmTrust acquisition and $535,000 of FHLB-San Francisco stock acquired in the Desert Hills acquisition, the Community Bank held total FHLB stock of $466.0 million at December 31, 2014. In addition, the Commercial Bank held FHLB-NY stock of $49.3 million at that date. The FHLB stock held by the Banks at December 31, 2014 continued to be valued at par. For the fiscal years ended December 31, 2014 and 2013, dividends from the FHLBs to the Community Bank amounted to $22.4 million and $18.2 million, respectively. Dividends from the FHLB-NY to the Commercial Bank amounted to $614,000 and $343,000, respectively, in the corresponding years. New York State Law The Community Bank and the Commercial Bank derive their lending, investment, and other authority primarily from the applicable provisions of New York State Banking Law and the regulations of the NYDFS, as limited by FDIC regulations. Under these laws and regulations, banks, including the Community Bank and the Commercial Bank, may invest in real estate mortgages, consumer and commercial loans, certain types of debt securities (including certain corporate debt securities, and obligations of federal, state, and local governments and agencies), certain types of corporate equity securities, and certain other assets. The lending powers of New York State-chartered savings banks and commercial banks are not subject to percentage-of-assets or capital limitations, although there are limits applicable to loans to individual borrowers. The exercise by an FDIC-insured savings bank or commercial bank of the lending and investment powers under New York State Banking Law is limited by FDIC regulations and other federal laws and regulations. In particular, the applicable provisions of New York State Banking Law and regulations governing the investment authority and activities of an FDIC-insured state-chartered savings bank and commercial bank have been effectively limited by the FDICIA and the FDIC regulations issued pursuant thereto. With certain limited exceptions, a New York State-chartered savings bank may not make loans or extend credit for commercial, corporate, or business purposes (including lease financing) to a single borrower, the aggregate amount of which would be in excess of 15% of the bank’s net worth or up to 25% for loans secured by collateral having an ascertainable market value at least equal to the excess of such loans over the bank’s net worth. A commercial bank is subject to similar limits on all of its loans. The Community Bank and the Commercial Bank currently comply with all applicable loans-to-one-borrower limitations. Under New York State Banking Law, New York State-chartered stock-form savings banks and commercial banks may declare and pay dividends out of their net profits, unless there is an impairment of capital, but approval of the Superintendent is required if the total of all dividends declared by the bank in a calendar year would exceed the total of its net profits for that year combined with its retained net profits for the preceding two years less prior dividends paid. New York State Banking Law gives the Superintendent authority to issue an order to a New York State- chartered banking institution to appear and explain an apparent violation of law, to discontinue unauthorized or unsafe practices, and to keep prescribed books and accounts. Upon a finding by the NYDFS that any director, trustee, or officer of any banking organization has violated any law, or has continued unauthorized or unsafe practices in conducting the business of the banking organization after having been notified by the Superintendent to discontinue such practices, such director, trustee, or officer may be removed from office after notice and an opportunity to be heard. The Superintendent also has authority to appoint a conservator or a receiver for a savings or commercial bank under certain circumstances. Interstate Branching Federal law allows the FDIC, and New York State Banking Law allows the Superintendent, to approve an application by a state banking institution to acquire interstate branches by merger, unless, in the case of the FDIC, the state of the target institution has opted out of interstate branching. New York State Banking Law authorizes savings banks and commercial banks to open and occupy de novo branches outside the state of New York. Pursuant to the Dodd-Frank Act, the FDIC is authorized to approve a state bank’s establishment of a de novo interstate branch if the intended host state allows de novo branching by banks chartered by that state. The Community Bank currently maintains 47 branches in New Jersey, 27 branches in Florida, 28 branches in Ohio, and 14 branches in Arizona, in addition to its 126 branches in New York State. 21 Acquisition of the Holding Company Federal Restrictions Under the Federal Change in Bank Control Act (“CIBCA”), a notice must be submitted to the FRB if any person (including a company), or group acting in concert, seeks to acquire 10% or more of the Company’s shares of outstanding common stock, unless the FRB has found that the acquisition will not result in a change in control of the Company. Under the CIBCA, the FRB generally has 60 days within which to act on such notices, taking into consideration certain factors, including the financial and managerial resources of the acquirer; the convenience and needs of the communities served by the Company, the Community Bank, and the Commercial Bank; and the anti- trust effects of the acquisition. Under the BHCA, any company would be required to obtain approval from the FRB before it may obtain “control” of the Company within the meaning of the BHCA. Control generally is defined to mean the ownership or power to vote 25% or more of any class of voting securities of the Company or the ability to control in any manner the election of a majority of the Company’s directors. An existing bank holding company would, under the BHCA, be required to obtain the FRB’s approval before acquiring more than 5% of the Company’s voting stock. Please see “Holding Company Regulation” earlier in this report. New York State Change in Control Restrictions In addition to the CIBCA and the BHCA, New York State Banking Law generally requires prior approval of the New York State Banking Board before any action is taken that causes any company to acquire direct or indirect control of a banking institution which is organized in New York. Federal Securities Law The Company’s common stock and certain other securities listed on the cover page of this report are registered with the SEC under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Company is subject to the information and proxy solicitation requirements, insider trading restrictions, and other requirements under the Exchange Act. Registration of the shares of the common stock that were issued in the Community Bank’s conversion from mutual to stock form under the Securities Act of 1933, as amended (the “Securities Act”), does not cover the resale of such shares. Shares of the common stock purchased by persons who are not affiliates of the Company may be resold without registration. Shares purchased by an affiliate of the Company will be subject to the resale restrictions of Rule 144 under the Securities Act. If the Company meets the current public information requirements of Rule 144 under the Securities Act, each affiliate of the Company who complies with the other conditions of Rule 144 (including those that require the affiliate’s sale to be aggregated with those of certain other persons) would be able to sell in the public market, without registration, a number of shares not to exceed in any three-month period the greater of (i) 1% of the outstanding shares of the Company, or (ii) the average weekly volume of trading in such shares during the preceding four calendar weeks. Provision may be made by the Company in the future to permit affiliates to have their shares registered for sale under the Securities Act under certain circumstances. Consumer Protection Regulations The retail activities of banks, including lending and the gathering of deposits, are subject to a variety of statutes and regulations designed to protect consumers. Interest and other charges collected or contracted for by banks are subject to state usury laws and federal laws concerning interest rates. Loan operations, including our mortgage banking business, are also subject to federal laws applicable to credit transactions, such as: • The federal Truth-In-Lending Act and Regulation Z, governing disclosures of credit terms to consumer borrowers; • The Home Mortgage Disclosure Act and Regulation C, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves; • The Equal Credit Opportunity Act and Regulation B, prohibiting discrimination on the basis of race, creed, or other prohibited factors in extending credit; • The Fair Credit Reporting Act and Regulation V, governing the use and provision of information to consumer reporting agencies; • The Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; and • The guidance of the various federal agencies charged with the responsibility of implementing such federal laws. 22 Deposit operations also are subject to: • The Truth in Savings Act and Regulation DD, which requires disclosure of deposit terms to consumers; • Regulation CC, which relates to the availability of deposit funds to consumers; • The Right to Financial Privacy Act, which imposes a duty to maintain the confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; and • The Electronic Funds Transfer Act and Regulation E, which governs automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services. In addition, the Banks and their subsidiaries may be subject to certain state laws and regulations designed to protect consumers. Many of the foregoing laws and regulations are subject to change resulting from the provisions in the Dodd- Frank Act, which in many cases calls for revisions to implementing regulations. In addition, oversight responsibilities of these and other consumer protection laws and regulations have, in large measure, transferred from the Banks’ primary regulators to the CFPB. Consumer Financial Protection Bureau Created under the Dodd-Frank Act, and given extensive implementation and enforcement powers, the CFPB has broad rulemaking authority for a wide range of consumer financial laws that apply to all banks, including, among other things, the authority to prohibit “unfair, deceptive, or abusive” acts and practices. Abusive acts or practices are defined as those that (1) materially interfere with a consumer’s ability to understand a term or condition of a consumer financial product or service, or (2) take unreasonable advantage of a consumer’s (a) lack of financial savvy, (b) inability to protect himself in the selection or use of consumer financial products or services, or (c) reasonable reliance on a covered entity to act in the consumer’s interests. The CFPB has the authority to investigate possible violations of federal consumer financial law, hold hearings, and commence civil litigation. The CFPB can issue cease-and-desist orders against banks and other entities that violate consumer financial laws. The CFPB may also institute a civil action against an entity in violation of federal consumer financial law in order to impose a civil penalty or an injunction. The CFPB has examination and enforcement authority over all banks with more than $10 billion in assets, as well as their affiliates. Enterprise Risk Management The Board of Directors is actively engaged in the process of overseeing our efforts to identify, measure, monitor, and mitigate risk. In connection with our efforts to practice sound risk management and to incorporate strong internal controls with regard to those risks with the potential to adversely impact the achievement of our goals and objectives, we have established an Enterprise Risk Management (“ERM”) program, which follows the FRB’s guidance on the adequacy of risk management processes and internal controls. Risk Management Roles and Responsibilities Our ERM program is driven by our belief that the proper management of risk must start at, and be driven by, the highest organizational level. The following groups/individuals are responsible for ensuring our success in managing risk: Board of Directors The Board of Directors is responsible for the approval and oversight of the execution of the ERM Program; setting and revising the Company’s risk appetite in conjunction with the goals and objectives set forth in the Strategic Plan; and reviewing key risk indicators against established risk warning levels and limits, including those identified in the reports presented by the Chief Risk Officer (the “CRO”). Risk Assessment Committee The Risk Assessment Committee of the Board of Directors is responsible for assisting the Board in its oversight of the Company’s risk management framework, including the policies and procedures used to manage the following risks: interest rate, credit, liquidity, legal/compliance, market, strategic, operational, reputational, and loss share compliance. 23 Chief Risk Officer Reporting directly to both the Risk Assessment Committee of the Board of Directors and the Chief Executive Officer, the CRO is responsible for elevating the overall stature of risk awareness throughout the organization. The CRO focuses on the strategic and forward-looking nature of the Company’s and the Banks’ risk profiles and alignment with the Strategic Plan and Risk Appetite Statement, while communicating regularly with the Director of ERM to be kept fully aware of the daily and tactical issues and activities of the organization. The CRO has oversight over all risk categories and, in this capacity, attends various management and Board committee meetings and Board of Directors’ meetings. Director of Enterprise Risk Management The Director of ERM is responsible for establishing, implementing, directing, and managing the execution and further development of the Company’s ERM Policy and Program. Reporting to the CRO, the Director of ERM is expected to work closely with the Company’s and the Banks’ Business Process Owners to identify, assess, mitigate, and report the high priority risks of each. The Director of ERM is responsible for working with the CRO to guide the organization through the complete lifecycle of the ERM process, with a focus on integrating risk management techniques into the Company’s culture, strategy, budgeting, and operational processes. Executive Oversight Group The Executive Oversight Group (“EOG”) operates within the Office of the Chief Executive Officer. Its members are designated by the Chief Executive Officer or Chief Operating Officer, and are selected based on their knowledge and understanding of the Company’s business model and their expertise in the business areas each of them oversees. The members of the EOG are responsible for engaging in discussions with each Business Process Owner regarding new business objectives, material risks that currently exist or may be emerging in the future, and certain risk mitigants. Senior Management Senior Management (defined as the Chief Executive Officer, the Chief Operating Officer, and any other Senior Executive Vice President, or all or any group of them acting collectively) ensures that a risk management process with adequate resources is effectively implemented; that the Company’s corporate structure supports its risk management goals; and that a risk management process is integrated into the corporate culture. Business Process Owners Business Process Owners are officers of the Company who have primary responsibility for the day-to-day operations of their respective business units. Each Business Process Owner is responsible for ensuring that proper controls are in place to prudently mitigate risk, and for performing periodic self-assessments of risks and controls. Internal Audit Internal Audit is responsible for providing an independent assessment of ERM to the Audit Committee of the Board of Directors, and for validating the controls identified by the Business Process Owners when performing internal audits of their respective areas of responsibility. In addition, Internal Audit is responsible for communicating its audit findings to the Chief Risk Officer so that the self-assessment performed by each Business Process Owner may be revisited. The Key Elements of Enterprise Risk Management Our ERM program incorporates the principles set forth in the Enterprise Risk Management Integrated Framework established by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), which has eight key elements, described below: Internal Environment The commitment to integrating risk management at all levels is essential to the effective implementation of an ERM program. Our Board of Directors and management team play an integral role in setting the tone throughout the Company, which is carried through to our Business Process Owners and employees, all of whom are critical to maintaining a proper environment for the management of risk. 24 Objective Setting The ERM Program ensures that there is a process in place through which the Boards of the Company and the Banks establish a Strategic Plan to identify the goals and objectives that will support our overall mission; the strategies for achieving our goals and objectives; and the measures by which we will determine our success in fulfilling those goals and objectives. In addition, our ERM program ensures the alignment of the Strategic Plan with our Risk Appetite Statement and stress testing activities, as well as with our budget and our capital plan. Event Identification To recognize and identify risks to the achievement of our goals and objectives from internal and external sources, we survey our key Business Process Owners on a quarterly basis, and conduct monthly meetings of the EOG. In this way, we not only focus on the risks we are currently facing, but also on risks that may arise in the future from new business initiatives, as well as from changes in our size, structure, personnel, business, and other strategic interests. Risk Assessment We analyze the risks we face in order to formulate a basis for determining how they should be managed. Accordingly, risks are assessed on both an inherent and residual basis (i.e., before controls are established and after such controls are applied), with both the likelihood and the impact of the risk being gauged. The risk assessment process is collaborative in nature, and includes the Business Process Owners, the ERM Department, and the members of the EOG. Risk Response Management addresses cases where actual risk levels are approaching or exceeding established limits, and considers alternative risk response options in order to reduce residual risk to an acceptable risk tolerance level. This includes taking into account established contingency and/or remedial actions, as described within our policies. Control Activities Adequate controls are designed and effectively implemented and maintained to ensure that inherent risks are reduced to acceptable levels. These controls are management tools that can be adjusted if conditions or risk tolerances change. Information and Communication Relevant information is identified, captured, and communicated in a form and timeframe that enable all relevant parties across, up, and down the organization, to effectively carry out their responsibilities. The ERM Department utilizes various channels to communicate such information, and to document risk information derived from the quarterly ERM surveys and the ERM dashboard reports. Monitoring We monitor our actual performance metrics against Board-established warning levels and limits through the use of our ERM dashboard, and through the active engagement of the Risk Assessment and Capital Assessment Committees of the Boards. Reports are produced with sufficient frequency to ensure that timely action is taken, as needed. Internal Audit Internal Audit is responsible for validating the controls identified by Business Process Owners when performing internal audits of their respective areas of responsibility. In addition, Internal Audit is responsible for communicating its audit findings to the Chief Risk Officer and the ERM Department, who then revisit the self- assessment performed by each Business Process Owner. ITEM 1A. RISK FACTORS There are various risks and uncertainties that are inherent in our business. Following is a discussion of the material risks and uncertainties that could have a material adverse impact on our financial condition and results of operations, and that could cause the value of our common stock to decline significantly. Additional risks that are not currently known to us, or that we currently believe to be immaterial, also may have a material effect on our financial condition and results of operations. This report is qualified in its entirety by those risk factors. 25 Interest Rate Risks Changes in interest rates could reduce our net interest income and mortgage banking income, and negatively impact the value of our loans, securities, and other assets. This could have a material adverse effect on our cash flows, financial condition, results of operations, and capital. Our primary source of income is net interest income, which is the difference between the interest income generated by our interest-earning assets (consisting primarily of loans and, to a lesser extent, securities) and the interest expense produced by our interest-bearing liabilities (consisting primarily of deposits and wholesale borrowings). The cost of our deposits and short-term wholesale borrowings is largely based on short-term interest rates, the level of which is driven by the Federal Open Market Committee of the FRB. However, the yields generated by our loans and securities are typically driven by intermediate-term (e.g., five-year) interest rates, which are set by the market and generally vary from day to day. The level of net interest income is therefore influenced by movements in such interest rates, and the pace at which such movements occur. If the interest rates on our interest-bearing liabilities increase at a faster pace than the interest rates on our interest-earning assets, the result could be a reduction in net interest income and with it, a reduction in our earnings. Our net interest income and earnings would be similarly impacted were the interest rates on our interest-earning assets to decline more quickly than the interest rates on our interest-bearing liabilities. In addition, such changes in interest rates could affect our ability to originate loans and attract and retain deposits; the fair values of our securities and other financial assets; the fair values of our liabilities; and the average lives of our loan and securities portfolios. Changes in interest rates could also have an effect on loan refinancing activity which, in turn, would impact the amount of prepayment penalty income we receive on our multi-family and CRE loans, and the amount of mortgage banking income we generate as a result of originating and servicing one-to-four family loans for sale. Because prepayment penalties are recorded as interest income, the extent to which they increase or decrease during any given period could have a significant impact on the level of net interest income and net income we generate during that time. In addition, changes in interest rates could have an effect on the slope of the yield curve. If the yield curve were to invert or become flat, our net interest income and net interest margin could contract, adversely affecting our net income and cash flows and the value of our assets. Our use of derivative financial instruments to mitigate the exposure to interest rate risk that stems from our mortgage banking business may not be effective, and may adversely affect our mortgage banking income, earnings, and stockholders’ equity. We are actively engaged in the origination of one-to-four family loans for sale. In accordance with our operating policies, we may use various types of derivative financial instruments, including forward rate agreements, options, and other derivative transactions, to mitigate or reduce our exposure to losses from adverse changes in interest rates in connection with this business. These activities will vary in scope based on the types of assets held, the level and volatility of interest rates, and other changing market conditions. However, no strategy can completely insulate us from the interest rate risks to which we are exposed, and there is no guarantee that any strategy we implement will have the desired impact. Furthermore, although derivatives are intended to limit losses, they may actually have an adverse impact on our earnings, which could reduce our capital and the cash available to us for distribution to our shareholders in the form of dividends. Our derivative financial instruments also expose us to counterparty risk, which is the risk that other parties to the instruments will not fulfill their contractual obligations. Credit Risks A decline in the quality of our assets could result in higher losses and the need to set aside higher loan loss provisions, thus reducing our earnings and our stockholders’ equity. The inability of our borrowers to repay their loans in accordance with their terms would likely necessitate an increase in our provision for non-covered loan losses and therefore reduce our earnings. The non-covered loans we originate for investment are primarily multi-family loans and, to a lesser extent, CRE loans. Such loans are generally larger, and have higher risk-adjusted returns and shorter maturities, than the one-to-four family mortgage loans we produce for investment or for sale. Our credit risk would ordinarily be expected to increase with the growth of these loan portfolios. 26 Payments on multi-family and CRE loans generally depend on the income generated by the underlying properties which, in turn, depends on their successful operation and management. The ability of our borrowers to repay these loans may be impacted by adverse conditions in the local real estate market and the local economy. While we seek to minimize these risks through our underwriting policies, which generally require that such loans be qualified on the basis of the collateral property’s cash flows, appraised value, and debt service coverage ratio, among other factors, there can be no assurance that our underwriting policies will protect us from credit-related losses or delinquencies. We also originate ADC and C&I loans for investment, although to a far lesser degree than we originate multi- family and CRE loans. ADC financing typically involves a greater degree of credit risk than longer-term financing on multi-family and CRE properties. Risk of loss on an ADC loan largely depends upon the accuracy of the initial estimate of the property’s value at completion of construction or development, compared to the estimated costs (including interest) of construction. If the estimate of value proves to be inaccurate, the loan may be under-secured. While we seek to minimize these risks by maintaining consistent lending policies and procedures, and rigorous underwriting standards, an error in such estimates, among other factors, could have a material adverse effect on the quality of our ADC loan portfolio, thereby resulting in losses or delinquencies. To minimize the risks involved in our specialty finance lending and leasing, we participate in syndicated loans that are brought to us, and equipment loans and leases that are assigned to us, by a select group of nationally recognized sources, and 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. The loans we fund fall into three distinct categories (asset-based lending, dealer floor-plan lending, and equipment loan and lease financing) and each of our credits is secured with a perfected first security interest in the underlying collateral and structured as senior debt or as a non-cancelable lease. We seek to minimize the risks involved in our other C&I lending by underwriting such loans on the basis of the cash flows produced by the business; by requiring that such loans be collateralized by various business assets, including inventory, equipment, and accounts receivable, among others; and by requiring personal guarantees. However, the capacity of a borrower to repay such a C&I loan is substantially dependent on the degree to which his or her business is successful. In addition, the collateral underlying such loans may depreciate over time, may not be conducive to appraisal, or may fluctuate in value, based upon the results of operations of the business. Although losses on the non-covered loans we produce have been comparatively limited, even during periods of economic weakness in our markets, we cannot guarantee that this record will be maintained in future periods. The ability of our borrowers to repay their loans could be adversely impacted by a decline in real estate values and/or an increase in unemployment, which not only could result in our experiencing an increase in charge-offs, but also could necessitate our further increasing our provision for losses on non-covered loans. Either of these events would have an adverse impact on our net income. Economic weakness in the New York metropolitan region, where the majority of the properties collateralizing our multi-family and CRE loans are located, could have an adverse impact on our financial condition and results of operations. Unlike larger national or superregional banks that serve a broader and more diverse geographic region, our business depends significantly on general economic conditions in the New York metropolitan region, where the majority of the buildings and properties securing the multi-family, CRE, and ADC loans we originate for investment, and the businesses of the customers to whom we make our other C&I loans, are located. Accordingly, the ability of our borrowers to repay their loans, and the value of the collateral securing such loans, may be significantly affected by economic conditions in this region or by changes in the local real estate market. A significant decline in general economic conditions caused by inflation, recession, unemployment, acts of terrorism, extreme weather, or other factors beyond our control, could therefore have an adverse effect on our financial condition and results of operations. In addition, because multi-family and CRE loans represent the majority of the loans in our portfolio, a decline in tenant occupancy or rents due to such factors, or for other reasons, could adversely impact the ability of our borrowers to repay their loans on a timely basis, which could have a negative impact on our net income. 27 If our covered loan portfolio experiences greater losses than we expected at the time of acquisition, or experiences losses following the expiration of the FDIC loss sharing agreements to which it is subject, or if those agreements are not properly managed, our financial condition and results of operations could be adversely affected. The credit risk associated with the loans and other real estate owned (“OREO”) we acquired in our AmTrust and Desert Hills acquisitions is largely mitigated by our loss sharing agreements with the FDIC. Nonetheless, these assets are not without risk. Although the loans and OREO we acquired were initially accounted for at fair value, there is no assurance that they will not become impaired, which could result in their being charged off. Fluctuations in national, regional, and local economic conditions may increase the level of charge-offs on the loans we acquired in these transactions, and would therefore have an adverse impact on our net income. Such fluctuations are not predictable, cannot be controlled, and may have a material adverse impact on our operations and financial condition, even if other favorable events occur. In addition, although our loss sharing agreements call for the FDIC to bear a significant portion of any losses related to the acquired loan portfolios, we are not protected from all losses resulting from charge-offs with respect to the acquired loans. Also, the loss sharing agreements have limited terms. Charge-offs we experience on covered loans after the terms of the loss sharing agreements end may not be fully recoverable and this, too, could have an adverse impact on our net income. Our allowance for losses on non-covered loans might not be sufficient to cover our actual losses, which would adversely impact our financial condition and results of operations. In addition to mitigating credit risk through our underwriting processes, we attempt to mitigate such risk through the establishment of an allowance for losses on non-covered loans. The process of determining whether or not this allowance is sufficient to cover potential non-covered loan losses is based on our evaluation of incurred losses in the held-for-investment loan portfolio, which requires that management make certain assumptions, estimates, and judgments regarding several factors, including the current and historical performance of the portfolio; its inherent risk characteristics; the level of non-performing non-covered loans and charge-offs; delinquency levels and trends; local economic and market conditions; declines in real estate values; and the levels of unemployment and vacancy rates. If our assumptions, estimates, and judgments regarding such matters prove to be incorrect, our allowance for losses on such loans might not be sufficient, and additional non-covered loan loss provisions might need to be made. Depending on the amount of such loan loss provisions, the adverse impact on our earnings could be material. In addition, as we continue to grow our held-for-investment loan portfolio, it may be necessary to increase the allowance for losses on such non-covered loans by making additional provisions, which also could adversely impact our operating results. Furthermore, bank regulators may require us to make a provision for non-covered loan losses or otherwise recognize further loan charge-offs following their periodic review of our held-for-investment loan portfolio, our underwriting procedures, and our allowance for losses on such loans. Any increase in the non-covered loan loss allowance or loan charge-offs as required by such regulatory authorities could have a material adverse effect on our financial condition and results of operations. Liquidity Risks Failure to maintain an adequate level of liquidity could result in an inability to fulfill our financial obligations and also could subject us to material reputational and regulatory risk. “Liquidity” refers to our ability to generate sufficient cash flows to support our operations and to fulfill our obligations, including commitments to originate loans, to repay our wholesale borrowings and other liabilities, and to satisfy the withdrawal of deposits by our customers. Our primary sources of liquidity are the retail, institutional, and municipal deposits, we gather or acquire in connection with acquisitions, and the brokered deposits we accept; borrowed funds, primarily in the form of wholesale borrowings from the FHLB and various Wall Street brokerage firms; the cash flows generated through the repayment and sale of loans; and the cash flows generated through the repayment and sale of securities. In addition, and depending on current market conditions, we have the ability to access the capital markets from time to time. Deposit flows, calls of investment securities and wholesale borrowings, and the prepayment of loans and mortgage-related securities are strongly influenced by such external factors as the direction of interest rates, whether actual or perceived; local and national economic conditions; and competition for deposits and loans in the markets 28 we serve. Furthermore, changes to the FHLB’s underwriting guidelines for wholesale borrowings or lending policies may limit or restrict our ability to borrow, and could therefore have a significant adverse impact on our liquidity. In addition, replacing funds in the event of large-scale withdrawals of brokered deposits could require us to pay significantly higher interest rates on retail deposits or other wholesale funding sources, which would have an adverse impact on our net interest income and net income. A decline in available funding could adversely impact our ability to originate loans, invest in securities, and meet our expenses, or to fulfill such obligations as repaying our borrowings or meeting deposit withdrawal demands. If we were to defer payments on our trust preferred capital debt securities or were in default under the related indentures, we would be prohibited from paying dividends or distributions on our common stock. The terms of our outstanding trust preferred capital debt securities prohibit us from (1) declaring or paying any dividends or distributions on our capital stock, including our common stock; or (2) purchasing, acquiring, or making a liquidation payment on such stock, under the following circumstances: (a) if an event of default has occurred and is continuing under the applicable indenture; (b) if we are in default with respect to a payment under the guarantee of the related trust preferred securities; or (c) if we have given notice of our election to defer interest payments but the related deferral period has not yet commenced, or a deferral period is continuing. In addition, without notice to, or consent from, the holders of our common stock, we may issue additional series of trust preferred capital debt securities with similar terms, or enter into other financing agreements, that limit our ability to pay dividends on our common stock. Legal/Compliance Risks Inability to fulfill minimum capital requirements could limit our ability to conduct or expand our business, pay a dividend, or result in termination of our FDIC deposit insurance, and thus impact our financial condition, our results of operations, and the market value of our stock. We are subject to the comprehensive, consolidated supervision and regulation set forth by the FRB. Such regulation includes, among other matters, the level of leverage and risk-based capital ratios we are required to maintain. Our capital ratios can change, depending on general economic conditions, our financial condition, our risk profile, and our plans for growth. Compliance with the FRB’s capital requirements may limit our ability to engage in operations that require the intensive use of capital and therefore could adversely affect our ability to maintain our current level of business or expand. Furthermore, it is possible that future regulatory changes could result in more stringent capital requirements including, among others, an increase in the levels of regulatory capital we are required to maintain, changes in the way regulatory capital is calculated, and increases in liquidity requirements, any and all of which could adversely affect our business and our ability to expand. For example, the implementation of certain regulatory changes under the Dodd-Frank Act resulted in the disqualification of previously issued and outstanding trust preferred securities as Tier 1 capital by January 1, 2016. Additionally, in early July 2013, the FRB approved revisions to its capital adequacy guidelines and prompt corrective action rules that implement the revised standards of the Basel Committee on Banking Supervision, and address relevant provisions of the Dodd-Frank Act. Basel III and the regulations of the federal banking agencies require bank holding companies and banks to undertake significant activities to demonstrate compliance with the new and higher capital standards. Any additional requirements to increase our capital ratios or liquidity could have a material adverse effect on our financial condition, as this might necessitate our liquidating certain assets, perhaps on terms that are unfavorable to us or that are contrary to our business plans. Such a requirement could also compel us to issue additional securities, thus diluting the value of our common stock. In addition, failure to meet the established capital requirements could result in the FRB placing limitations or conditions on our activities and further restricting the commencement of new activities. The failure to meet applicable capital guidelines could subject us to a variety of enforcement remedies available to the federal regulatory authorities, including limiting our ability to pay dividends; issuing a directive to increase our capital; and terminating our FDIC deposit insurance. If we continue to grow and the average of our total consolidated assets over the four most recent quarters were to exceed $50 billion, we would be subject to stricter prudential standards required by the Dodd-Frank Act for large bank holding companies. Pursuant to the current requirements of the Dodd-Frank Act, a bank holding company whose total consolidated assets average more than $50 billion over the four most recent quarters is determined to be a Systemically Important Financial Institution, and therefore is subject to stricter prudential standards, primarily including capital requirements, liquidity requirements, risk-management requirements, dividend limits, and early 29 remediation regimes. The Dodd-Frank Act permits, but does not require, the FRB to apply heightened prudential standards in a number of other areas, including short-term debt limits and enhanced public disclosure. On September 3, 2014, the FRB and other banking regulators adopted final rules implementing a U.S. version of the Basel Committee’s Liquidity Coverage Ratio (the “LCR”) requirement. The LCR requirement, including the modified version applicable to bank holding companies with $50 billion or more in total consolidated assets that have not opted to use the “advanced approaches” risk-based capital rule, requires a banking organization to maintain an amount of unencumbered “high-quality liquid assets” to be at least equal to the amount of its total net cash outflows over a 30-day stress period. Only specific classes of assets qualify under the rule as high-quality assets (the numerator of the LCR), with riskier classes of assets subject to haircuts and caps. The total net cash outflow amount (the denominator of the LCR) is determined under the rule by applying outflow and inflow rates that reflect certain standardized assumptions against the balances of the banking organization’s funding sources, obligations, transactions, and assets over a 30-day stress period. Inflows that can be included to offset outflows are limited to 75% of outflows (which effectively means that banking organizations must hold high-quality liquid assets equal to 25% of outflows even if outflows perfectly match inflows over the stress period). The initial compliance date for the modified LCR will be January 2016, with the requirement fully phased-in by January 2017. Although we are not currently subject to the modified LCR requirements, were we to have average total consolidated assets over the four most recent quarters in excess of $50 billion, we would have to comply with the requirements of the modified LCR beginning on the first day of the first quarter after which we exceed that threshold. The modified LCR is a minimum requirement, and the Federal Reserve Board can impose additional liquidity requirements as a supervisory matter. Our results of operations could be adversely affected by further changes in bank regulation, or by our inability to comply with certain existing laws, rules, and regulations governing our industry. We are subject to regulation, supervision, and examination by the following entities: (1) the NYDFS, the chartering authority for both the Community Bank and the Commercial Bank; (2) the FDIC, as the insurer of the Banks’ deposits; (3) the FRB-NY, in accordance with objectives and standards of the U.S. Federal Reserve System; and (4) the CFPB, which was established in 2011 under the Dodd-Frank Act and given broad authority to regulate financial service providers and financial products. Such regulation and supervision governs the activities in which a bank holding company and its banking subsidiaries may engage, and is intended primarily for the protection of the DIF, the banking system in general, and bank customers, rather than for the benefit of a company’s stockholders. These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including with respect to the imposition of restrictions on the operation of a bank or a bank holding company, the imposition of significant fines, the ability to delay or deny merger or other regulatory applications, the classification of assets by a bank, and the adequacy of a bank’s allowance for loan losses, among other matters. Any failure to comply with, or any change in, such regulation and supervision, or change in regulation or enforcement by such authorities, whether in the form of policy, regulations, legislation, rules, orders, enforcement actions, ratings, or decisions, could have a material impact on the Company, our subsidiary banks and other affiliates, and our operations. Our operations are also subject to extensive legislation enacted, and regulation implemented, by other federal, state, and local governmental authorities, and to various laws and judicial and administrative decisions imposing requirements and restrictions on part or all of our operations. Future changes in such laws, rules, requirements, and regulations also could have a material impact on our results of operations. For example, in addition to creating the CFPB, the Dodd-Frank Act established new standards relating to regulatory oversight of systemically important financial institutions, derivatives transactions, asset-backed securitization, and mortgage origination and servicing, and limited the revenues banks can derive from debit card interchange fees. Extensive regulatory guidance is being implemented to clarify many of the provisions of the Dodd- Frank Act and certain U.S. agencies have begun to initiate the required administrative processes. Although it still is too early to fully assess the impact of the full scope of this legislation on our business, our industry, and the broader financial services system, the rules adopted thus far have dramatically increased risk management, capital, and other requirements for the banking industry. Furthermore, lawmakers in Washington, D.C. continue to discuss plans to dramatically transform the role of the government in the U.S. housing market, including by winding down Fannie Mae and Freddie Mac (which currently are well into their seventh year of government conservatorship), and by reducing other sources of government support to such markets. In addition, some representatives in Congress have expressed a view that the 30 current GSE housing finance system is unsustainable, and consider reform a priority in the near term. It is too early to determine the nature and scope of any legislation that may develop along these lines, or what roles Fannie Mae and Freddie Mac or the private sector will play in future housing markets. However, it is possible that legislation will be proposed that would result in the nature of GSE guarantees being considerably limited relative to historical measurements. Due to the significant influence of Fannie Mae and Freddie Mac in the primary and secondary housing finance markets, some of the legislative changes could have broad adverse implications for the market and significant implications for our business, including by necessitating the identification of alternative secondary markets into which to sell our one-to-four family loans. Our enterprise risk management framework may not be effective in mitigating the risks to which we are subject, based upon the size, scope, and complexity of the Company. As a financial institution, we are subject to a number of risks, including credit, interest rate, liquidity, market, operational, legal/compliance, loss sharing compliance, reputational, and strategic. Our ERM framework is designed to minimize the risks to which we are subject, as well as any losses stemming from such risks. Although we seek to identify, measure, monitor, report, and control our exposure to such risks, and employ a broad and diverse set of risk monitoring and mitigation techniques in the process, those techniques are inherently limited because they cannot anticipate the existence or development of risks that are currently unknown and unanticipated. For example, economic and market conditions, heightened legislative and regulatory scrutiny of the financial services industry, and increases in the overall complexity of our operations, among other developments, have resulted in the creation of a variety of risks that were previously unknown and unanticipated, highlighting the intrinsic limitations of our risk monitoring and mitigation techniques. As a result, the further development of previously unknown or unanticipated risks may result in our incurring losses in the future that could adversely impact our financial condition and results of operations. Furthermore, an ineffective ERM framework, as well as other risk factors, could result in a material increase in our FDIC insurance premiums. Market Risks A decline in economic conditions could adversely affect the value of the loans we originate and the securities in which we invest. Although economic and real estate conditions continued to improve in 2014, and although we have taken, and continue to take, steps to reduce our exposure to the risks that stem from adverse changes in such conditions, we nonetheless could be impacted by them to the degree that they affect the loans we originate, the securities we invest in, and our portfolios of covered and non-covered loans. Declines in real estate values and home sales, and an increase in the financial stress on borrowers stemming from high unemployment, among other economic conditions, could have an adverse effect on our borrowers or their customers, which could adversely impact the repayment of the loans in our portfolio. Deterioration in economic conditions also could subject us and our industry to increased regulatory scrutiny and could result in an increase in loan delinquencies, an increase in problem assets and foreclosures, and a decline in the value of the collateral for our loans, which could reduce our customers’ borrowing power. Deterioration in local economic conditions could drive the level of loan losses beyond the level we have provided for in our loan loss allowances; this, in turn, could necessitate an increase in our provisions for loan losses, which would reduce our earnings and capital. Furthermore, declines in the value of our investment securities could result in our recording losses on the other-than-temporary impairment (“OTTI”) of securities, which would reduce our earnings and, therefore, our capital. Additionally, continued economic weakness could reduce the demand for our products and services, which would adversely impact our liquidity and the revenues we produce. The market price and liquidity of our common stock could be adversely affected if the economy were to weaken or the capital markets were to experience volatility. The market price of our common stock could be subject to significant fluctuations due to changes in sentiment in the market regarding our operations or business prospects. Among other factors, these risks may be affected by: • Operating results that vary from the expectations of our management or of securities analysts and investors; • Developments in our business or in the financial services sector generally; • Regulatory or legislative changes affecting our industry generally or our business and operations; • Operating and securities price performance of companies that investors consider to be comparable to us; • Changes in estimates or recommendations by securities analysts or rating agencies; 31 • Announcements of strategic developments, acquisitions, dispositions, financings, and other material events by us or our competitors; • Changes or volatility in global financial markets and economies, general market conditions, interest or foreign exchange rates, stock, commodity, credit, or asset valuations; and • Significant fluctuations in the capital markets. Although the economy continued to show signs of improvement in 2014, economic or market turmoil could occur in the near or long term, which could negatively affect our business, our financial condition, and our results of operations, as well as volatility in the price and trading volume of our common stock. Strategic Risks Extreme competition for loans and deposits could adversely affect our ability to expand our business and therefore could adversely affect our financial condition and results of operations. We face significant competition for loans and deposits from other banks and financial institutions, both within and beyond our local markets. We compete with other commercial banks and savings banks, as well as with credit unions and investment banks, for deposits, and with the same financial institutions and others (including mortgage brokers and insurance companies) for loans. We also compete with companies that solicit loans and deposits over the Internet. Because our profitability stems from our ability to attract deposits and originate loans, our continued ability to compete for depositors and borrowers is critical to our success. Our success as a competitor depends on a number of factors, including our ability to develop, maintain, and build long-term relationships with our customers by providing them with convenience, in the form of multiple branch locations and extended hours of service; access, in the form of alternative delivery channels, such as online banking, banking by phone, and ATMs; a broad and diverse selection of products and services; interest rates and service fees that compare favorably with those of our competitors; and skilled and knowledgeable personnel to assist our customers with their financial needs. External factors that may impact our ability to compete include, among others, the entry of new lenders and depository institutions in our current markets and, with regard to lending, an increased focus on multi-family and CRE lending by existing competitors. In addition, our mortgage banking operation competes nationally with other major banks and mortgage brokers that also originate, aggregate, sell, and service one-to-four family loans. If our ability to grow our portfolios of multi-family and CRE loans were limited due to regulatory concerns about our concentrated position in such assets, our ability to generate interest income could be adversely affected, as would our financial condition and results of operations, perhaps materially. Although we also originate ADC, one-to-four family, and C&I loans, and invest in securities, our portfolios of multi-family and CRE loans represent the largest portion of our asset mix. Our position in these markets has been instrumental in our record of solid earnings generation and our consistent record of exceptional asset quality. Nonetheless, if we were instructed to limit or reduce our concentration of multi-family and CRE loans by our regulators, the impact on our interest income could be materially adverse. The inability to grow through acquisitions, or to realize the anticipated benefits of any acquisition we do engage in, could adversely affect our ability to compete with other financial institutions and therefore our financial condition and results of operations, perhaps materially. Mergers and acquisitions have contributed significantly to our growth in the past, and remain a component of our business model. Accordingly, it is possible that we could acquire other financial institutions, financial service providers, or branches of banks in the future. However, our ability to engage in future mergers and acquisitions depends on various factors, including: (1) our ability to identify suitable merger partners and acquisition opportunities; (2) our ability to finance and complete negotiated transactions on acceptable terms and at acceptable prices; (3) our ability to receive the necessary regulatory approvals; and (4) when, required, our ability to receive the necessary shareholder approvals. Our inability to engage in an acquisition or merger for any of these reasons could have an adverse impact on our financial condition and results of operations. As acquisitions have been a significant source of deposits, the inability to complete a business combination could require that we increase the interest rates we pay on deposits in order to attract such funding through our current branch network, or that we increase our use of wholesale funds. 32 Increasing our cost of funds could adversely impact our net interest income, and therefore our results of operations. Furthermore, the funding we obtain in acquisitions is generally used to fund our loan production or to reduce our higher funding costs. The absence of an acquisition could therefore impact our ability to meet our loan demand. Furthermore, mergers and acquisitions involve a number of risks and challenges, including: • Our ability to integrate the branches and operations we acquire, and the internal controls and regulatory functions, into our current operations; • Our ability to limit the outflow of deposits held by our new customers in the acquired branches, and to successfully retain and manage the loans we acquire; • Our ability to attract new deposits, and to generate new interest-earning assets, in geographic areas we have not previously served; • Our success in deploying any cash received in a transaction into assets bearing sufficiently high yields without incurring unacceptable credit or interest rate risk; • Our ability to control the incremental non-interest expense from the acquired branches in a manner that enables us to maintain a favorable efficiency ratio; • Our ability to retain and attract the appropriate personnel to staff the acquired branches and conduct any acquired operations; • Our ability to earn acceptable levels of interest and non-interest income, including fee income, from the acquired branches; • The diversion of management’s attention from existing operations; • Our ability to address an increase in working capital requirements; and • Limitations on our ability to successfully reposition the post-merger balance sheet, when deemed appropriate. Furthermore, no assurance can be given that the operation of acquired branches would not adversely affect our existing profitability; that we would be able to achieve results in the future similar to those achieved by our existing banking business; that we would be able to compete effectively in the market areas served by acquired branches; or that we would be able to manage any growth resulting from a transaction effectively. In particular, our ability to compete effectively in new markets is dependent on our ability to understand those markets and their competitive dynamics, and our ability to retain certain key employees from the acquired institution who know those markets better than we do. If our goodwill were determined to be impaired, it would result in a charge against earnings and thus a reduction in our stockholders’ equity. We test goodwill for impairment on an annual basis, or more frequently, if necessary. Quoted market prices in active markets are the best evidence of fair value and are to be used as the basis for measuring impairment, when available. Other acceptable valuation methods include present-value measurements based on multiples of earnings or revenues, discounted cash flows, or similar performance measures. If we were to determine that the carrying amount of our goodwill exceeded its implied fair value, we would be required to write down the value of the goodwill on our balance sheet, adversely affecting our earnings as well as our capital. The inability to receive dividends from our subsidiary banks could have a material adverse effect on our business, our financial condition, and our results of operations, as well as our ability to maintain or increase the current level of cash dividends we pay to our shareholders. The Parent Company (i.e., the company on an unconsolidated basis) is a separate and distinct legal entity from the Banks, and a substantial portion of the revenues the Parent Company receives consists of dividends from the Banks. These dividends are the primary funding source for the dividends we pay on our common stock and the interest and principal payments on our debt. Various federal and state laws and regulations limit the amount of dividends that a bank may pay to its parent company. In addition, our right to participate in a distribution of assets upon the liquidation or reorganization of a subsidiary may be subject to the prior claims of the subsidiary’s creditors. If the Banks are unable to pay dividends to the Parent Company, we might not be able to service our debt, pay our obligations, or pay dividends on our common stock. Furthermore, our current strategy of managing our assets below the SIFI threshold could result in a reduction in our earnings, thereby limiting our ability to maintain our current quarterly cash dividend. In addition, although the economy continued to show signs of improvement in 2014, renewed economic or market turmoil could occur in the near or long term. This could negatively affect our business, our financial 33 condition, and our results of operations, as well as our ability to maintain or increase the current level of cash dividends we pay to our shareholders. Reduction or elimination of our quarterly cash dividend could have an adverse impact on the market price of our common stock. Holders of our common stock are only entitled to receive such dividends as our Board of Directors may declare out of funds available for such payments under applicable law and regulatory guidance, and although we have historically declared cash dividends on our common stock, we are not required to do so. Furthermore, the payment of dividends falls under federal regulations that have grown more stringent in recent years. While we pay our quarterly cash dividend in compliance with current regulations, such regulations could change in the future. In addition, should the average of the Company’s total consolidated assets over the four most recent quarters reach or exceed $50 billion, we would be subject to the stricter prudential standards, including for CCAR and for dividend payments, required by the Dodd-Frank Act. Any reduction or elimination of our common stock dividend in the future could adversely affect the market price of our common stock. Operational Risks Our stress testing processes rely on analytical and forecasting models that may prove to be inadequate or inaccurate, which could adversely affect the effectiveness of our strategic planning and our ability to pursue certain corporate goals. In accordance with the Dodd-Frank Act, banking organizations with $10 billion to $50 billion in assets currently are required to perform annual capital stress tests and, beginning in 2015, to report the results of such tests. The results of our capital stress tests and the application of certain capital rules may result in constraints being placed on our capital distributions or require that we increase our regulatory capital under certain circumstances. In addition, the processes we use to estimate the effects of changing interest rates, real estate values, and economic indicators such as unemployment on our financial condition and results of operations depend upon the use of analytical and forecasting models. These models reflect assumptions that may not be accurate, particularly in times of market stress or other unforeseen circumstances. Furthermore, even if our assumptions are accurate predictors of future performance, the models they are based on may prove to be inadequate or inaccurate because of other flaws in their design or implementation. If the models we use in the process of managing our interest rate and other risks prove to be inadequate or inaccurate, we could incur increased or unexpected losses which, in turn, could adversely affect our earnings and capital. The occurrence of any failure, breach, or interruption in service involving our systems or those of our service providers could damage our reputation, cause losses, increase our expenses, and result in a loss of customers, an increase in regulatory scrutiny, or expose us to civil litigation and possibly financial liability, any of which could adversely impact our financial condition, results of operations, and the market price of our stock. Communications and information systems are essential to the conduct of our business, as we use such systems to manage our customer relationships, our general ledger, our deposits, and our loans. Our operations rely on the secure processing, storage, and transmission of confidential and other information in our computer systems and networks. Although we take protective measures and endeavor to modify them as circumstances warrant, the security of our computer systems, software, and networks may be vulnerable to breaches, unauthorized access, misuse, computer viruses, or other malicious code and cyber attacks that could have an impact on information security. In addition, breaches of security may occur through intentional or unintentional acts by those having authorized or unauthorized access to our confidential or other information, or that of our customers, clients, or counterparties. If one or more of such events were to occur, the confidential and other information processed and stored in, and transmitted through, our computer systems and networks could potentially be jeopardized, or could otherwise cause interruptions or malfunctions in our operations or the operations of our customers, clients, or counterparties. This could cause us significant reputational damage or result in our experiencing significant losses. Furthermore, we may be required to expend significant additional resources to modify our protective measures or investigate and remediate vulnerabilities or other exposures arising from operational and security risks. We also may be subject to litigation and financial losses that either are not insured against or not fully covered through any insurance we maintain. 34 In addition, we routinely transmit and receive personal, confidential, and proprietary information by e-mail and other electronic means. We have discussed, and worked with our customers, clients, and counterparties to develop, secure transmission capabilities, but we do not have, and may be unable to put in place, secure capabilities with all of these constituents, and we may not be able to ensure that these third parties have appropriate controls in place to protect the confidentiality of such information. While we have established policies and procedures to prevent or limit the impact of systems failures and interruptions, there can be no assurance that such events will not occur or that they will be adequately addressed if they do. We outsource certain aspects of our data processing to certain third-party providers which may expose us to additional risk. We outsource certain key aspects of our data processing to certain third-party providers. While we have selected these third-party providers carefully, we cannot control their actions. If our third-party providers encounter difficulties, including those that result from their failure to provide services for any reason or from their poor performance of such services, or if we have difficulty in communicating with them, our ability to adequately process and account for customer transactions could be affected, and our business operations could be adversely impacted. Replacing these third-party providers could also entail significant delay and expense. Our third-party providers may be vulnerable to unauthorized access, computer viruses, phishing schemes, and other security breaches. Threats to information security also exist in the processing of customer information through various other third-party providers and their personnel. We may be required to expend significant additional resources to protect against the threat of such security breaches and computer viruses, or to alleviate problems caused by such security breaches or viruses. To the extent that the activities of our third-party providers or the activities of our customers involve the storage and transmission of confidential information, security breaches and viruses could expose us to claims, regulatory scrutiny, litigation, and other possible liabilities. Failure to keep pace with technological changes could have a material adverse impact on our ability to compete for loans and deposits, and therefore on our financial condition and results of operations. Financial products and services have become increasingly technology-driven. To some degree, our ability to meet the needs of our customers competitively, and in a cost-efficient manner, is dependent on our ability to keep pace with technological advances and to invest in new technology as it becomes available. Many of our competitors have greater resources to invest in technology than we do and may be better equipped to market new technology- driven products and services. If federal, state, or local tax authorities were to determine that we did not adequately provide for our taxes, our income tax expense could be increased, adversely affecting our earnings. The amount of income taxes we are required to pay on our earnings is based on federal and state legislation and regulations. We provide for current and deferred taxes in our financial statements, based on our results of operations, business activity, legal structure, interpretation of tax statutes, assessment of risk of adjustment upon audit, and application of financial accounting standards. We may take tax return filing positions for which the final determination of tax is uncertain. Our net income and earnings per share may be reduced if a federal, state, or local authority assesses additional taxes that have not been provided for in our consolidated financial statements. There can be no assurance that we will achieve our anticipated effective tax rate either due to a change in tax law, a change in regulatory or judicial guidance, or an audit assessment that denies previously recognized tax benefits. The inability to attract and retain key personnel could adversely impact our financial condition and results of operations. To a large degree, our success depends on our ability to attract and retain key personnel whose expertise, knowledge of our markets, and years of industry experience would make them difficult to replace. Competition for skilled leaders in our industry can be intense, and we may not be able to hire or retain the people we would like to have working for us. The unexpected loss of services of one or more of our key personnel could have a material adverse impact on our business, given the specialized knowledge of such personnel and the difficulty of finding qualified replacements on a timely basis. To attract and retain personnel with the skills and knowledge to support our business, we offer a variety of benefits that may reduce our earnings. 35 Reputational Risk Damage to our reputation could significantly harm the businesses we engage in, as well as our competitive position and prospects for growth. Our ability to attract and retain investors, customers, clients, and employees could be adversely affected if our reputation were damaged. Significant harm to our reputation could arise from many sources, including employee misconduct, litigation, or regulatory outcomes; failure to deliver minimum standards of service and quality; compliance failures, unethical behavior, unintended disclosure of confidential information; and the activities of our clients, customers, and/or counterparties. Actions by the financial services industry in general, or by certain entities or individuals within it, also could have a significantly adverse impact on our reputation. Our actual or perceived failure to identify and address various issues also could give rise to reputational risk that could significantly harm us and our business prospects, including failure to properly address operational risks. These issues include legal and regulatory requirements; consumer protection, fair lending, and privacy issues; properly maintaining customer and associated personal information; record keeping; protecting against money laundering; sales and trading practices; and ethical issues. Loss Share Compliance Risk If the FDIC were to exercise its right to refuse or delay reimbursements for losses incurred on the loans acquired in our AmTrust and Desert Hills acquisitions, the impact on our earnings could be adverse. The loans we acquired in our AmTrust and Desert Hills acquisitions are covered by loss sharing agreements with the FDIC. Under the terms of the agreements, the FDIC will reimburse us for 80% of losses on such covered loans up to a certain threshold, and for 95% of losses incurred on such covered loans beyond the initial amount. However, our failure to manage the loss sharing agreements in accordance with their respective terms could result in the FDIC refusing to reimburse us, or delaying payment, either of which actions could adversely impact our earnings to varying degrees. To ensure that our loss sharing agreements are properly managed, we have established certain standards and procedures that are designed to effectively control our exposure to loss share compliance risk. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES Although we own certain of our branch offices as well as other buildings, the majority of our facilities are leased under various lease and license agreements that expire at various times. (Please see Note 10, “Commitments and Contingencies: Lease and License Commitments” in Item 8, “Financial Statements and Supplementary Data”.) We believe that our facilities are adequate to meet our present and immediately foreseeable needs. ITEM 3. LEGAL PROCEEDINGS The Company is involved in various legal actions arising in the ordinary course of its business. All such actions, in the aggregate, involve amounts that are believed by management to be immaterial to the financial condition and results of operations of the Company. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. 36 PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES The common stock of New York Community Bancorp, Inc. trades on the New York Stock Exchange (the “NYSE”) under the symbol “NYCB.” At December 31, 2014, the number of outstanding shares was 442,587,190 and the number of registered owners was approximately 12,800. The latter figure does not include those investors whose shares were held for them by a bank or broker at that date. Dividends Declared per Common Share and Market Price of Common Stock The following table sets forth the dividends declared per common share, and the intra-day high/low price range and closing prices for the Company’s common stock, as reported by the NYSE, in each of the four quarters of 2014 and 2013: Dividends Declared per Common Share $0.25 0.25 0.25 0.25 $0.25 0.25 0.25 0.25 Market Price High Low Close $17.35 16.30 16.58 16.39 $14.36 14.38 15.86 16.88 $15.25 13.77 15.35 14.62 $12.90 12.91 13.99 15.11 $16.07 15.98 15.87 16.00 $14.35 14.00 15.11 16.85 2014 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 2013 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Please see the discussion of “Liquidity” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for information regarding restrictions on the Company’s ability to pay dividends. On June 27, 2014, our President and Chief Executive Officer, Joseph R. Ficalora, submitted to the NYSE his Annual CEO certification confirming our compliance with the NYSE’s corporate governance listing standards, as required by Section 303A.12(a) of the NYSE Listed Company Manual. 37 Stock Performance Graph Notwithstanding anything to the contrary set forth in any of the Company’s previous filings under the Securities Act of 1933 or the Securities Exchange Act of 1934 that might incorporate future filings, including this Form 10-K, in whole or in part, the following stock performance graph shall not be incorporated by reference into any such filings. The following graph compares the cumulative total return on the Company’s stock in the five years ended December 31, 2014 with the cumulative total returns on a broad market index and a peer group index during the same time. The S&P Mid-Cap 400 Index was chosen as the broad market index in connection with the Company’s trading activity on the NYSE. The peer group index chosen was the SNL U.S. Bank and Thrift Index, which was comprised of 443 bank and thrift institutions, including the Company, as of the date of this report. The data for the indices included in the graph were provided to us by SNL Financial. The cumulative total returns are based on the assumption that $100.00 was invested in each of the three investments on December 31, 2009 and that all dividends paid since that date were reinvested. Such returns are based on historical results and are not intended to suggest future performance. Comparison of 5-Year Cumulative Total Return Among New York Community Bancorp, Inc., S&P Mid-Cap 400 Index, and SNL U.S. Bank and Thrift Index ASSUMES $100 INVESTED ON DECEMBER 31, 2009 ASSUMES DIVIDEND REINVESTED FISCAL YEAR ENDING DECEMBER 31, 2014 12/31/2009 12/31/2010 12/31/2011 12/31/2012 12/31/2013 12/31/2014 New York Community Bancorp, Inc. $100.00 S&P Mid-Cap 400 Index SNL U.S. Bank and Thrift Index $100.00 $100.00 $137.97 $126.65 $111.64 $96.82 $124.46 $86.81 $110.65 $146.71 $116.57 $152.53 $195.80 $159.61 $154.44 $214.87 $178.18 38 Share Repurchases Shares Repurchased Pursuant to the Company’s Stock-Based Incentive Plans Participants in the Company’s stock-based incentive plans may have shares of common stock withheld to fulfill the income tax obligations that arise in connection with their exercise of stock options and the vesting of their stock awards. Shares that are withheld for this purpose are repurchased pursuant to the terms of the applicable stock- based incentive plan, rather than pursuant to the share repurchase program authorized by the Board of Directors, described below. During the twelve months ended December 31, 2014, the Company allocated $7.3 million toward the repurchase of shares of its common stock, including $940,000 in the fourth quarter, as indicated in the following table: (dollars in thousands, except per share data) Period First Quarter 2014 Second Quarter 2014 Third Quarter 2014 Fourth Quarter 2014: October November December Total Fourth Quarter 2014 2014 Total Total Shares of Common Stock Repurchased 358,461 8,810 11,209 Average Price Paid per Common Share $16.82 15.43 15.82 722 -- 60,235 60,957 439,437 14.98 -- 15.42 15.42 $16.57 Total Allocation $6,029 136 177 11 -- 929 940 $7,282 Shares Repurchased Pursuant to the Board of Directors’ Share Repurchase Authorization On April 20, 2004, the Board of Directors authorized the repurchase of up to five million shares of the Company’s common stock. Of this amount, 1,659,816 shares were still available for repurchase at December 31, 2014. Under said authorization, shares may be repurchased on the open market or in privately negotiated transactions. No shares have been repurchased under this authorization since August 2006. Shares that are repurchased pursuant to the Board of Directors’ authorization, and those that are repurchased pursuant to the Company’s stock-based incentive plans, are held in our Treasury account and may be used for various corporate purposes, including, but not limited to, merger transactions and the vesting of restricted stock awards. 39 ITEM 6. SELECTED FINANCIAL DATA (dollars in thousands, except share data) EARNINGS SUMMARY: Net interest income Provision for losses on non-covered loans (Recovery of) provision for losses on covered loans Non-interest income Non-interest expense: Operating expenses Amortization of core deposit intangibles Income tax expense Net income Basic earnings per share Diluted earnings per share Dividends paid per common share SELECTED RATIOS: Return on average assets Return on average stockholders’ equity Average stockholders’ equity to average assets Operating expenses to average assets Efficiency ratio Interest rate spread Net interest margin Dividend payout ratio BALANCE SHEET SUMMARY: 2014 At or For the Years Ended December 31, 2011 2012 2013 2010 (1) $ 1,140,353 -- $ 1,166,616 18,000 $ 1,160,021 45,000 $ 1,200,421 79,000 $ 1,179,963 91,000 (18,587) 201,593 579,170 8,297 287,669 485,397 $1.09 1.09 1.00 1.01% 8.41 12.01 1.21 43.16 2.57 2.67 91.74 12,758 218,830 591,778 15,784 271,579 475,547 $1.08 1.08 1.00 1.07% 8.46 12.66 1.33 42.71 2.90 3.01 92.59 17,988 297,353 21,420 235,325 593,833 19,644 279,803 501,106 $1.13 1.13 1.00 1.18% 9.06 13.02 1.40 40.75 3.11 3.21 88.50 574,683 26,066 254,540 480,037 $1.09 1.09 1.00 1.17% 8.73 13.38 1.40 40.03 3.37 3.46 91.74 11,903 337,923 546,246 31,266 296,454 541,017 $1.24 1.24 1.00 1.29% 10.03 12.89 1.31 35.99 3.45 3.45 80.65 Total assets Loans, net of allowances for loan losses Allowance for losses on non-covered loans Allowance for losses on covered loans Securities Deposits Borrowed funds Stockholders’ equity Common shares outstanding Book value per share Stockholders’ equity to total assets $48,559,217 35,647,639 139,857 45,481 7,096,450 28,328,734 14,226,487 5,781,815 442,587,190 $13.06 $46,688,287 32,727,507 141,946 64,069 7,951,020 25,660,992 15,105,002 5,735,662 440,809,365 $13.01 $44,145,100 31,580,636 140,948 51,311 4,913,528 24,877,521 13,430,191 5,656,264 439,050,966 $12.88 $42,024,302 30,152,154 137,290 33,323 4,540,516 22,325,654 13,960,413 5,565,704 437,344,796 $12.73 $41,190,689 29,041,595 158,942 11,903 4,788,891 21,890,328 13,536,116 5,526,220 435,646,845 $12.69 11.91% 12.29% 12.81% 13.24% 13.42% ASSET QUALITY RATIOS (excluding covered assets): Non-performing non-covered loans to total non-covered loans Non-performing non-covered assets to total non-covered assets Allowance for losses on non-covered loans to non-performing non-covered loans Allowance for losses on non-covered loans to total non-covered loans Net charge-offs to average loans (2) ASSET QUALITY RATIOS (including covered assets): (cid:3) Total non-performing loans to total loans Total non-performing assets to total assets Allowances for loan losses to total non- performing loans Allowances for loan losses to total loans 0.23% 0.35% 0.96% 1.28% 2.63% 0.30 0.40 181.75 137.10 0.42 0.01 (cid:3) 0.66% 0.68 0.48 0.05 (cid:3) 0.97% 0.91 0.71 53.93 0.52 0.13 1.07 42.14 0.54 0.35 (cid:3) 1.88% 1.47 (cid:3) 2.30% 1.97 78.92 0.52 65.40 0.63 33.50 0.63 25.34 0.58 1.77 25.45 0.67 0.21 3.52% 2.61 17.34 0.61 (1) The Company acquired certain assets and assumed certain liabilities of Desert Hills Bank on March 26, 2010. Accordingly, the Company’s 2010 earnings reflect combined operations from that date. (2) Average loans include covered loans. 40 ITEM 7. 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”). Executive Summary New York Community Bancorp, Inc. is the holding company for New York Community Bank, a thrift, with 242 branches in Metro New York, New Jersey, Ohio, Florida, and Arizona; and New York Commercial Bank, with 30 branches in Metro New York. With assets of $48.6 billion at December 31, 2014, we rank among the 25 largest U.S. bank holding companies and, with deposits of $28.3 billion at that date, we also rank among its 25 largest depositories. Both of our banks are New York State-chartered and both are subject to regulation by 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”), and to the requirements of the New York Stock Exchange, where shares of our common stock are traded under the symbol “NYCB”. 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 government-sponsored enterprises (“GSEs”), servicing retained; • We are intent upon maintaining an efficient operation; and • We grow through accretive acquisitions of other financial institutions, branches, and/or deposits. The merits of this time-tested business model are reflected in the following achievements: • We are the leading producer of multi-family loans for portfolio in New York City; • We have produced a consistent record of above-average asset quality; • We rank among the nation’s top 15 aggregators of one-to-four family loans; • We consistently rank among the nation’s most efficient bank holding companies; and • We have generated solid earnings and maintained a consistent position of capital strength. Among the external factors that tend to influence our performance, the interest rate environment is key. Just as short-term interest rates affect the cost of our deposits and that of the funds we borrow, market interest rates affect the yields on the loans we produce for investment and the securities in which we invest. The following table summarizes the high, low, and average five- and ten-year Constant Maturity Treasury rates in 2014 and 2013: Constant Maturity Treasury Rates 10-Year 5-Year 2014 1.85% 1.37 1.64 2013 1.85% 0.65 1.17 2013 2014 3.01% 3.04% 2.07 2.54 1.66 2.35 High Low Average 41 In addition, residential market interest rates impact the volume of one-to-four family mortgage loans we originate in any given quarter, in view of their impact on new home purchases and refinancing activity. Accordingly, when residential mortgage interest rates are low, refinancing activity typically increases; as residential mortgage interest rates begin to rise, the refinancing of one-to-four family mortgage loans typically declines. In the first nine months of 2014, residential mortgage interest rates rose from the year-earlier level, only to fall in the fourth quarter of the year. As a result, the volume of one-to-four family loans produced was lower in 2014 than it was in the prior year. The impact of market interest rates on our multi-family and commercial real estate lending is far less overt than the impact on our production of one-to-four family mortgage loans. Because the multi-family and commercial real estate loans we produce generate prepayment penalty income when they repay, the impact of repayment activity can be especially meaningful. While prepayment penalty income reached $136.8 million in 2013—the third consecutive year in which we established a new record—the level declined to $86.8 million in 2014. Also less overt, but nonetheless having an impact on our operations, has been the significant increase in regulation and supervision required under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act” or, more simply “Dodd-Frank”). For example, as a bank holding company with assets in the range of $10 billion to $50 billion, we were required to submit our first Dodd-Frank Act Stress Test (“DFAST”) report, including the results of our stress tests, to the FRB in March 2014. Our second DFAST report will be submitted later this month (i.e., March 2015), and the results of our stress tests will be disclosed in June. With assets of $41.2 billion at December 31, 2010, and a fundamental focus on growth through acquisition, we began in 2011 to prepare for the possibility of exceeding the threshold for classification as a “Systemically Important Financial Institution” (“SIFI”) as such term is defined by the Dodd-Frank Act. Since then, we have invested significant human, technological, and financial resources into our enterprise risk management program, while also strengthening our corporate governance policies, procedures, and practices. We also have continued to grow our balance sheet. At December 31, 2014, we recorded total assets of $48.6 billion, a $1.9 billion, or 4.0%, increase from the balance at December 31, 2013. Essentially, a bank is designated a “SIFI” when the average of its total consolidated assets over the four most recent quarters exceeds $50 billion. In the third quarter of 2014, with our assets drawing closer to $50 billion, we decided to manage our assets below that level for the near-term as we continue to evaluate the impact of the SIFI threshold being crossed. Accordingly, in the fourth quarter of 2014, we reduced our loans by $601.0 million through a combination of sales and participations, and our securities by $354.8 million through a combination of sales and calls. These reductions were largely offset by an increase in the production of multi-family loans and specialty finance loans and leases for portfolio. While the costs of complying with Dodd-Frank have added meaningfully to our operating expenses, the impact was more than offset in 2014 by a decline in our FDIC deposit insurance assessments and the expenses associated with the management and sale of foreclosed real estate, as the quality of our assets continued to improve. Reflecting our unique lending niche and our conservative underwriting standards, net charge-offs declined $14.9 million from the year-earlier level to $2.1 million in 2014. In addition, non-performing non-covered assets declined $36.0 million year-over-year to $138.9 million at the end of this December, the lowest level we’ve recorded since December 31, 2008. Reflecting these improvements, net charge-offs represented 0.01% of average loans in 2014, and non-performing non-covered assets represented 0.30% of total non-covered assets at year-end. While the quality of our assets generally reflects the nature of our primary lending niche and the benefit of conservative underwriting, it also reflects certain economic improvements that occurred in 2014. Those improvements are reflected in the economic data cited on the following page. 42 The following table presents the downward trend in unemployment rates, as reported by the U.S. Department of Labor, both nationally and in the various markets that comprise our footprint, for the months indicated: (cid:3) Unemployment rate: United States New York City Arizona Florida New Jersey New York Ohio For the Month Ended December 31, 2014 2013 5.6% 6.4 6.5 5.4 5.7 5.7 4.7 6.7% 7.5 7.3 5.9 6.7 6.6 6.6 Yet another key economic indicator is the Consumer Price Index (the “CPI”), which measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. The following table indicates the change in the CPI for the twelve months ended at each of the indicated dates: Change in prices: For the Twelve Months Ended December 2014 0.8% December 2013 1.5% The recovery is also reflected in the S&P/Case-Shiller Home Price Index for the twelve months ended December 2014 and 2013. Home prices rose 4.6% across the U.S. in the twelve months ended December 2014, as compared to 11.3% in the year-earlier twelve months. Given the impact that home prices have on residential mortgage lending, we believe the S&P/Case-Shiller Home Price Index is a particularly important economic indicator for the Company. In addition, the volume of new home sales nationwide was at a seasonally adjusted annual rate of 481,000 in December 2014, according to estimates set forth in a U.S. Commerce Department report issued on January 27, 2015. The December 2014 rate was 8.8% higher than the rate reported in December 2013. Yet another pertinent economic indicator is the residential rental vacancy rate in New York, as reported by the U.S. Department of Commerce, and the office vacancy rate in Manhattan, as reported by a leading commercial real estate broker, Jones Lang LaSalle. These measures are important in view of the fact that 79.9% of our multi-family loans and 87.4% of our CRE loans are secured by properties in New York State, with Manhattan accounting for 35.1% and 50.8% of our multi-family and CRE loans, respectively. As reflected in the following table, rental vacancy rates have improved in these markets over the indicated periods: (cid:3) Residential rental vacancy rate in New York Manhattan office vacancy rate(cid:3) For the Three Months Ended December 31, 2014 4.7% 9.7 2013 5.8% 11.1 In addition, the Consumer Confidence Index® moved up to 93.1 in December 2014 from 78.1 in December 2013. An index level of 90 or more is considered indicative of a strong economy. Recent Events On January 26, 2015, the Board of Directors declared a quarterly cash dividend of $0.25 per share, payable on February 20, 2015 to shareholders of record at the close of business on February 9, 2015. Critical Accounting Policies We consider certain accounting policies to be critically important to the portrayal of our financial condition and results of operations, since they require management to make complex or subjective judgments, some of which may relate to matters that are inherently uncertain. The inherent sensitivity of our consolidated financial statements to these critical accounting policies, and the judgments, estimates, and assumptions used therein, could have a material impact on our financial condition or results of operations. 43 We have identified the following to be critical accounting policies: the determination of the allowances for loan losses; the valuation of mortgage servicing rights (“MSRs”); the determination of whether an impairment of securities is other than temporary; the determination of the amount, if any, of goodwill impairment; and the determination of the valuation allowance for deferred tax assets. The judgments used by management in applying these critical accounting policies may be influenced by adverse changes in the economic environment, which may result in changes to future financial results. Allowances for Loan Losses Allowance for Losses on Non-Covered Loans The allowance for losses on non-covered loans is increased by provisions for non-covered loan losses that are charged against earnings, and is reduced by net charge-offs and/or reversals, if any, that are credited to earnings. Although non-covered loans are held by either the Community Bank or the Commercial Bank, and a separate loan loss allowance is established for each, the total of the two allowances is available to cover all losses incurred. In addition, except as otherwise noted in the following discussion, the process for establishing the allowance for losses on non-covered loans is largely the same for each of the Community Bank and the Commercial Bank. The methodology used for the allocation of the allowance for non-covered loan losses at December 31, 2014, 2013, and 2012 was also generally comparable, whereby the Community Bank and the Commercial Bank segregated their loss factors (used for both criticized and non-criticized loans) into a component that was primarily based on historical loss rates and a component that was primarily based on other qualitative factors that were probable to affect loan collectability. In determining the respective allowances for non-covered loan losses, management considers the Community Bank’s and the Commercial Bank’s current business strategies and credit processes, including compliance with applicable regulatory guidelines and with guidelines approved by the respective Boards of Directors with regard to credit limitations, loan approvals, underwriting criteria, and loan workout procedures. The allowance for losses on non-covered loans is established based on our evaluation of incurred losses in our portfolio in accordance with GAAP, and is comprised of both specific valuation allowances and general valuation allowances. Specific valuation allowances are established based on management’s analyses of individual loans that are considered impaired. If a non-covered loan is deemed to be impaired, management measures the extent of the impairment and establishes a specific valuation allowance for that amount. A non-covered loan is classified as “impaired” when, based on current information and/or events, it is probable that we will be unable to collect both the principal and interest due under the contractual terms of the loan agreement. We apply this classification as necessary to non-covered loans individually evaluated for impairment in our portfolios. Smaller-balance homogenous loans and loans carried at the lower of cost or fair value are evaluated for impairment on a collective, rather than individual, basis. Loans to certain borrowers who have experienced financial difficulty and for which the terms have been modified, resulting in a concession, are considered troubled debt restructurings (“TDRs”) and are classified as impaired. We generally measure impairment on an individual loan and determine the extent to which a specific valuation allowance is necessary by comparing the loan’s outstanding balance to either the fair value of the collateral, less the estimated cost to sell, or the present value of expected cash flows, discounted at the loan’s effective interest rate. Generally, when the fair value of the collateral, net of the estimated costs to sell, or the present value of the expected cash flows is less than the recorded investment in the loan, any shortfall is promptly charged off. We also follow a process to assign general valuation allowances to non-covered loan categories. General valuation allowances are established by applying our loan loss provisioning methodology, and reflect the inherent risk in outstanding held-for-investment loans. This loan loss provisioning methodology considers various factors in determining the appropriate quantified risk factors to use to determine the general valuation allowances. The factors assessed begin with the historical loan loss experience for each major loan category. Our allowance for loan losses methodology also considers an estimate of the historical loss emergence period (which is the period of time between the event that triggers a loss and the confirmation and/or charge-off of that loss) for each loan portfolio segment. During 2014, this methodology was enhanced by estimating the loss emergence period using a more granular segmentation approach. The allocation methodology consists of the following components: First, we determine an allowance for loan losses based on a quantitative loss factor for loans evaluated collectively for impairment. This 44 quantitative loss factor is based primarily on historical loss rates, after considering loan type, historical loss and delinquency experience, and loss emergence periods. The quantitative loss factors applied in the methodology are periodically re-evaluated and adjusted to reflect changes in historical loss levels, loss emergence periods, or other risks. Lastly, we allocate an allowance for loan losses to qualitative loss factors. These qualitative loss factors are designed to account for losses that may not be provided for by the quantitative loss component due to other factors evaluated by management which include, but are not limited to: • Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices; • Changes in international, national, regional, and local economic and business conditions, and developments that affect the collectability of the portfolio, including the condition of various market segments; • Changes in the nature and volume of the portfolio and in the terms of loans; • Changes in the volume and severity of past-due loans, the volume of non-accrual loans, and the volume and severity of adversely classified or graded loans; • Changes in the quality of our loan review system; • Changes in the value of the underlying collateral for collateral-dependent loans; • The existence and effect of any concentrations of credit, and changes in the level of such concentrations; • Changes in the experience, ability, and depth of lending management and other relevant staff; and • The effect of other external factors, such as competition and legal and regulatory requirements, on the level of estimated credit losses in the existing portfolio. By considering the factors discussed above, we determine an allowance for non-covered loan loss that is applied to each significant loan portfolio segment to determine the total allowance for losses on non-covered loans. In 2014, we changed the historical loss period we use to determine the allowance for loan losses on non- covered loans to a rolling 16-quarter look-back period, as we believe this to be a more appropriate reflection of our historical loss experience. This change has not had a significant effect on the allowance for losses on non-covered loans, nor is it expected to do so. The process of establishing the allowance for losses on non-covered loans also involves: • Periodic inspections of the loan collateral by qualified in-house and external property appraisers and/or inspectors, as applicable; • Regular meetings of executive management with the pertinent Board committee, during which observable trends in the local economy and/or the real estate market are discussed; • Assessment of the aforementioned factors by the pertinent members of the Boards of Directors and management when making a business judgment regarding the impact of anticipated changes on the future level of loan losses; and • Analysis of the portfolio in the aggregate, as well as on an individual loan basis, taking into consideration payment history, underwriting analyses, and internal risk ratings. In order to determine their overall adequacy, each of the respective non-covered loan loss allowances is reviewed quarterly by management and the Board of Directors of the Community Bank or the Commercial Bank, as applicable. We charge off loans, or portions of loans, in the period that such loans, or portions thereof, are deemed uncollectible. The collectability of individual loans is determined through an assessment of the financial condition and repayment capacity of the borrower and/or through an estimate of the fair value of any underlying collateral. For non-real estate-related consumer credits, the following past-due time periods determine when charge-offs are typically recorded: (1) Closed-end credits are charged off in the quarter that the loan becomes 120 days past due; (2) Open-end credits are charged off in the quarter that the loan becomes 180 days past due; and (3) Both closed-end and open-end credits are typically charged off in the quarter that the credit is 60 days past the date we received notification that the borrower has filed for bankruptcy. 45 The level of future additions to the respective non-covered loan loss allowances is based on many factors, including certain factors that are beyond our control. These include changes in economic and local market conditions, including declines in real estate values, and increases in vacancy rates and unemployment. We use the best available information to recognize losses on loans or to make additions to the loan loss allowances; however, the Community Bank and/or the Commercial Bank may be required to take certain charge-offs and/or recognize further additions to their loan loss allowances, based on the judgment of regulatory agencies with regard to information provided to them during their examinations of the Banks. An allowance for unfunded commitments is maintained separate from the allowances for non-covered loan losses and is included in “Other liabilities” in the Consolidated Statements of Condition. Allowance for Losses on Covered Loans We account for the loans acquired in the AmTrust Bank (“AmTrust”) and Desert Hills Bank (“Desert Hills”) acquisitions (our “covered loans”) based on expected cash flows, in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310-30”). In accordance with ASC 310-30, we maintain the integrity of a pool of multiple loans accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. Covered loans are reported exclusive of the FDIC loss share receivable. The covered loans acquired in the AmTrust and Desert Hills acquisitions are, and will continue to be, reviewed for collectability based on the expectations of cash flows from these loans. Covered loans have been aggregated into pools of loans with common characteristics. In determining the allowance for losses on covered loans, we periodically perform an analysis to estimate the expected cash flows for each of the loan pools. A provision for losses on covered loans is recorded to the extent that the expected cash flows from a loan pool have decreased for credit-related items since the acquisition date. Accordingly, during the loss share recovery period, if there is a decrease in expected cash flows due to an increase in estimated credit losses compared to the estimates made at the respective acquisition dates, the decrease in the present value of expected cash flows will be recorded as a provision for covered loan losses charged to earnings, and the allowance for covered loan losses will be increased. During the loss share recovery period, a related credit to non-interest income and an increase in the FDIC loss share receivable will be recognized at the same time, and will be measured based on the applicable loss sharing agreement percentage. Please see Note 6, “Allowances for Loan Losses” for a further discussion of our allowance for losses on covered loans, as well as additional information about our allowance for losses on non-covered loans. Mortgage Servicing Rights (“MSRs”) We recognize the right to service mortgage loans for others as a separate asset referred to as mortgage servicing rights, or “MSRs.” MSRs are generally recognized when one-to-four family loans are sold or securitized, servicing retained, and are initially recorded, and subsequently carried, at fair value. We base the fair value of our MSRs on the present value of estimated future net servicing income cash flows, utilizing an internal valuation model. The model we utilize is based on 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. We reassess, and periodically adjust, these underlying inputs and assumptions to reflect market conditions and changes in the assumptions that a market participant would consider in valuing MSRs. Changes in the fair value of MSRs occur primarily in connection with the collection/realization of expected cash flows, as well as changes in the valuation inputs and assumptions. Changes in the fair value of MSRs are reported in “Mortgage banking income” in the period during which such changes occur. Investment Securities The securities portfolio primarily consists of mortgage-related securities and, to a lesser extent, debt and equity (together, “other”) securities. Securities that are classified as “available for sale” are carried at their estimated fair value, with any unrealized gains or losses, net of taxes, reported as accumulated other comprehensive income or loss in stockholders’ equity. Securities that we have the intent and ability to hold to maturity are classified as “held to maturity” and carried at amortized cost, less the non-credit portion of OTTI recorded in accumulated other comprehensive loss, net of tax (“AOCL”). 46 The fair values of our securities, and particularly our fixed-rate securities, are affected by changes in market interest rates, liquidity, and credit spreads. In general, as interest rates rise and/or credit spreads widen, the fair value of fixed-rate securities will decline; as interest rates fall and/or credit spreads tighten, the fair value of fixed-rate securities will rise. We regularly conduct a review and evaluation of our securities portfolio to determine if the decline in the fair value of any security below its carrying amount is other than temporary. If we deem any decline in value to be other than temporary, the security is written down to its current fair value, creating a new cost basis, and the resultant loss (other than the OTTI on debt securities attributable to non-credit factors) is charged against earnings and recorded in “Non-interest income.” Our assessment of a decline in fair value includes judgment as to the financial position and future prospects of the entity that issued the investment security, as well as a review of the security’s underlying collateral. Broad changes in the overall market or interest rate environment generally will not lead to a write-down. In accordance with OTTI accounting guidance, unless we have the intent to sell, or it is more likely than not that we may be required to sell a security before recovery, OTTI is recognized as a realized loss in earnings to the extent that the decline in fair value is credit-related. If there is a decline in fair value of a security below its carrying amount and we have the intent to sell it, or it is more likely than not that we may be required to sell the security before recovery, the entire amount of the decline in fair value is charged to earnings. Goodwill Impairment Goodwill is presumed to have an indefinite useful life and is tested for impairment, rather than amortized, at the reporting unit level, at least once a year. We performed our annual goodwill impairment test as of December 31, 2014 and found no indication of goodwill impairment at that date. Goodwill would be tested in less than one year’s time if there were a “triggering event.” There were no triggering events identified during the twelve months ended December 31, 2014. The goodwill impairment analysis is a two-step test. However, a company can, under Accounting Standards Update (“ASU”) No. 2011-08, “Testing Goodwill for Impairment,” first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under this amendment, an entity would not be required to calculate the fair value of a reporting unit unless the entity determined, based on a qualitative assessment, that it was more likely than not that its fair value was less than its carrying amount. The Company did not elect to perform a qualitative assessment in 2014. The first step (“Step 1”) is used to identify potential impairment, and involves comparing each reporting segment’s estimated fair value to its carrying amount, including goodwill. If the estimated fair value of a reporting segment exceeds its carrying amount, goodwill is not considered to be impaired. If the carrying amount exceeds the estimated fair value, there is an indication of potential impairment and the second step (“Step 2”) is performed to measure the amount. Step 2 involves calculating an implied fair value of goodwill for each reporting segment for which impairment was indicated in Step 1. The implied fair value of goodwill is determined in a manner similar to the amount of goodwill calculated in a business combination, i.e., by measuring the excess of the estimated fair value of the reporting segment, as determined in Step 1, over the aggregate estimated fair values of the individual assets, liabilities, and identifiable intangibles, as if the reporting segment were being acquired in a business combination at the impairment test date. If the implied fair value of goodwill exceeds the carrying amount of goodwill assigned to the reporting segment, there is no impairment. If the carrying amount of goodwill assigned to a reporting segment exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. An impairment loss cannot exceed the carrying amount of goodwill assigned to a reporting segment, and the loss establishes a new basis in the goodwill. Subsequent reversal of goodwill impairment losses is not permitted. Quoted market prices in active markets are the best evidence of fair value and are used as the basis for measurement, when available. Other acceptable valuation methods include present-value measurements based on multiples of earnings or revenues, or similar performance measures. Differences in the identification of reporting units and in valuation techniques could result in materially different evaluations of impairment. For the purpose of goodwill impairment testing, management has determined that the Company has two reporting segments: Banking Operations and Residential Mortgage Banking. All of our recorded goodwill has resulted from prior acquisitions and, accordingly, is attributed to Banking Operations. There is no goodwill associated with Residential Mortgage Banking, as this segment was acquired in our FDIC-assisted AmTrust acquisition, which resulted in a bargain purchase gain. In order to perform our annual goodwill impairment test, we determined the carrying value of the Banking Operations segment to be the carrying value of the Company and compared it to the fair value of the Company. 47 Income Taxes In estimating income taxes, management assesses the relative merits and risks of the tax treatment of transactions, taking into account statutory, judicial, and regulatory guidance in the context of our tax position. In this process, management also relies on tax opinions, recent audits, and historical experience. Although we use the best available information to record income taxes, underlying estimates and assumptions can change over time as a result of unanticipated events or circumstances such as changes in tax laws and judicial guidance influencing our overall or transaction-specific tax position. We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and the carryforward of certain tax attributes such as net operating losses. A valuation allowance is maintained for deferred tax assets that we estimate are more likely than not to be unrealizable, based on available evidence at the time the estimate is made. In assessing the need for a valuation allowance, we estimate future taxable income, considering the prudence and feasibility of tax planning strategies and the realizability of tax loss carryforwards. Valuation allowances related to deferred tax assets can be affected by changes to tax laws, statutory tax rates, and future taxable income levels. In the event we were to determine that we would not be able to realize all or a portion of our net deferred tax assets in the future, we would reduce such amounts through a charge to income tax expense in the period in which that determination was made. Conversely, if we were to determine that we would be able to realize our deferred tax assets in the future in excess of the net carrying amounts, we would decrease the recorded valuation allowance through a decrease in income tax expense in the period in which that determination was made. Subsequently recognized tax benefits associated with valuation allowances recorded in a business combination would be recorded as an adjustment to goodwill. On March 31, 2014, new tax legislation was enacted that changed the manner in which financial institutions and their affiliates are taxed in New York State. The most significant changes affecting the Company are summarized below: • New York State tax is now determined by measuring the apportioned income of the combined group of all domestic affiliates of a New York taxpayer that participate in a unitary business relationship, rather than by applying differing rules based on the tax status of each affiliate; • Taxable income is apportioned to New York State based on the location of the taxpayer’s customers, with special rules for income from certain financial transactions. The location of the taxpayer’s offices and branches are no longer relevant to the determination of income apportioned to New York State; • The statutory tax rate is reduced from 7.1% to 6.5%; and • Thrift institutions that maintain a qualified residential loan portfolio are entitled to a specially computed modification that reduces the income taxable to New York State. While most of the provisions of this legislation are effective for fiscal years beginning in 2015, the statutory tax rate will not be reduced until 2016. However, certain impacts of this tax law change were reflected in our 2014 income tax expense, in the form of a one-time charge of $3.5 million. That said, it is expected that this law will result in a modest reduction in our current income tax expense beginning in 2015. The amount of the impact on our future tax expense will be affected by any changes in our operations, structure, or profitability. In January 2015, new tax legislation was proposed by the Governor of the State of New York that would change the tax laws of New York City that are applicable to the Company in a manner similar to the changes that were made to the New York State laws described above. These changes would also be effective January 1, 2015. However, the New York City laws would differ from the New York State laws in certain ways. For example, the New York City laws would retain an alternative tax on capital; would reduce the statutory tax rate on financial institutions from 9.00% to 8.85%; and would determine the New York City apportionment of taxable income by applying a customer-based receipts factor that would become the exclusive indicator of business activity, but only after a three-year phase-out of other factors (i.e., payroll and property). Inclusive of the New York State tax law revisions described above, and absent any change in our operations, structure, or profitability, the proposed changes to the New York City tax laws would result in a modest increase in the Company’s New York City and State aggregate tax expense in 2015. 48 FINANCIAL CONDITION Balance Sheet Summary Our total assets rose $1.9 billion, or 4.0%, year-over-year, to $48.6 billion at December 31, 2014. The growth of our assets was primarily due to the production of loans held for investment and, more particularly, the production of held-for-investment multi-family loans. Including a $3.1 billion increase in the portfolio of multi-family loans to $23.8 billion, loans held for investment rose $3.2 billion to $33.0 billion at December 31, 2014. The benefit of the increase in loans held for investment was partly offset by an $854.6 million reduction in the balance of securities. The growth of our portfolio of loans held for investment was largely funded by the growth of our deposits, which rose $2.7 billion from the year-earlier balance to $28.3 billion at December 31, 2014. While certificates of deposit (“CDs”) declined $511.5 million year-over-year, the impact was more than offset by a $2.0 billion increase in NOW and money market accounts, a $1.1 billion increase in savings accounts, and a $36.4 million increase in non-interest-bearing accounts. In tandem with the increase in deposits, borrowed funds fell $878.5 million year- over-year to $14.2 billion. Stockholders’ equity rose $46.2 million year-over-year to $5.8 billion, representing 11.91% of total assets and a book value per share of $13.06. Tangible stockholders’ equity rose $54.5 million during this time, to $3.3 billion, representing 7.24% of tangible assets and a tangible book value per share of $7.54. (Please see the discussion and reconciliations of stockholders’ equity and tangible stockholders’ equity, total assets and tangible assets, and the related measures that appear on the last page of this discussion and analysis of financial condition and results of operations.) Loans Total loans grew $2.9 billion year-over-year, to $35.8 billion, representing 73.8% of total assets at December 31, 2014. Covered loans represented $2.4 billion, or 6.8%, of the year-end 2014 balance, and non-covered loans accounted for the remaining $33.4 billion, or 93.2%. Included in non-covered loans were $33.0 billion of loans held for investment, and $379.4 million of loans held for sale. Covered Loans In December 2009 and March 2010, we acquired certain assets and assumed certain liabilities of AmTrust and Desert Hills, respectively, in FDIC-assisted acquisitions. “Covered loans” refers to the loans we acquired in those transactions, and are referred to as such because they are covered by loss sharing agreements with the FDIC. The loss sharing agreements require the FDIC to reimburse us for 80% of losses up to a specified threshold, and for 95% of losses beyond that threshold, with respect to covered loans and covered other real estate owned (“OREO”). At December 31, 2014, covered loans represented $2.4 billion, or 6.8%, of the total loan balance, a decline from $2.8 billion, representing 8.5% of total loans, at the prior year-end. The decline in covered loans was primarily due to repayments. One-to-four family loans, originated at both fixed and adjustable rates, represented $2.2 billion of total covered loans at the end of this December, with all other types of covered loans representing $216.2 million, combined. Covered other loans consist of commercial real estate (“CRE”) loans; acquisition, development, and construction (“ADC”) loans; multi-family loans; commercial and industrial (“C&I”) loans; home equity lines of credit (“HELOCs”); and consumer loans. At December 31, 2014, $1.7 billion, or 70.8%, of the loans in our covered loan portfolio were variable-rate loans, with a contractual weighted average interest rate of 3.28%. The remainder of the portfolio consisted of fixed- rate loans. The interest rates on 84.1% of our covered variable rate loans were scheduled to reprice within twelve months and annually thereafter, and we generally expect such loans to reprice at lower interest rates. The interest rates on our variable-rate covered loans are indexed to either the one-year LIBOR or the one-year Treasury rate, plus a spread in the range of 2% to 5%, subject to certain caps. In 2014, we recovered $18.6 million from the allowance for covered loan losses, reflecting an increase in expected cash flows from certain pools of acquired loans that had previously experienced a decline in credit quality. The recovery was largely offset by FDIC indemnification expense of $14.9 million, recorded in “Non-interest income” in the corresponding year. In contrast, we recorded a provision for losses on covered loans of $12.8 million in 2013, as the expected cash flows from certain pools of acquired loans declined in connection with a decrease in 49 credit quality. The provision was largely offset by FDIC indemnification income of $10.2 million, recorded in “Non- interest income” in the corresponding year. While the loss sharing agreements with respect to our covered one-to-four family loans and home equity loans extend for ten years from the dates of acquisition, the loss sharing agreements with respect to all other covered loans and the OREO acquired in the Desert Hills transaction expire five years from the acquisition dates. Accordingly, in March 2015, approximately $23.4 million of other covered loans and $942,000 of OREO acquired in our Desert Hills transaction will transfer to held-for-investment as the loss sharing agreements to which they currently are subject will expire during said month. Geographical Analysis of the Covered Loan Portfolio The following table presents a geographical analysis of our covered loan portfolio at December 31, 2014: (in thousands) California Florida Arizona Ohio Massachusetts Michigan New York Illinois Maryland New Jersey Nevada Minnesota Washington Colorado North Carolina All other states Total covered loans $ 423,755 409,536 195,676 154,771 116,583 109,880 84,628 84,603 65,116 58,610 57,652 53,704 52,587 51,477 50,772 459,272 $2,428,622 Loan Maturity and Repricing Analysis: Covered Loans The following table sets forth the maturity or period to repricing of our covered loan portfolio at December 31, 2014. Loans that have adjustable rates are shown as being due or repricing in the period during which their interest rates are next subject to change. (in thousands) Amount due or repricing: Within one year After one year: One to five years Over five years Total due or repricing after one year Total amounts due or repricing, gross Covered Loans at December 31, 2014 One-to-Four Family All Other Loans Total Loans $1,147,394 $202,436 $1,349,830 217,681 847,367 1,065,048 $2,212,442 8,219 5,525 13,744 $216,180 225,900 852,892 1,078,792 $2,428,622 The following table sets forth, as of December 31, 2014, the dollar amount of all covered loans due or repricing after December 31, 2015, and indicates whether such loans have fixed or adjustable rates of interest. (in thousands) One-to-four family All other loans Total loans Due or Repricing after December 31, 2015 Adjustable $312,544 7,179 $319,723 Total $1,065,048 13,744 $1,078,792 Fixed $752,504 6,565 $759,069 50 Non-Covered Loans Held for Investment Non-covered loans held for investment totaled $33.0 billion at the end of this December, representing 92.1% of total loans and a $3.2 billion, or 10.7%, increase from the balance at December 31, 2013. In addition to multi- family loans and CRE loans, the held-for-investment portfolio includes substantially smaller balances of one-to-four family loans, ADC loans, and other loans, with C&I loans comprising the bulk of the “other loan” portfolio. In 2014, originations of held-for-investment loans represented $11.0 billion, or 77.5%, of total loan originations, a $140.2 million decrease from the volume produced in the prior year. Consistent with management’s focus on containing the growth of our assets in the near-term, the increase in the volume of multi-family loans and specialty finance loans and leases we originated was exceeded by reductions in the volume of CRE, one-to-four family, ADC, and other C&I loans produced. Multi-Family Loans Multi-family loans are our principal asset. The loans we produce are primarily secured by non-luxury, residential apartment buildings in New York City that are rent-regulated and feature below-market rents—a market we refer to as our “primary lending niche.” Consistent with our emphasis on multi-family lending, multi-family loan originations represented $7.6 billion, or 68.9%, of the loans we produced in 2014 for investment, exceeding the year-earlier volume by $167.4 million and establishing a new record with regard to the volume of multi-family loans produced in a single year. At December 31, 2014, multi-family loans represented $23.8 billion, or 72.2%, of total non-covered loans held for investment, reflecting a year-over-year increase of $3.1 billion, or 15.1%. At December 31, 2014 and 2013, respectively, the average multi-family loan had a principal balance of $5.0 million and $4.5 million; the expected weighted average life of the portfolio was 3.0 years and 2.9 years at the respective dates. The majority of our multi-family loans are made to long-term owners of buildings with apartments that are subject to rent regulation and feature below-market rents. Our borrowers typically use the funds we provide to make building-wide improvements and renovations to certain apartments, as a result of which they are able to increase the rents their tenants pay. In doing so, the borrower creates more cash flows to borrow against in future years. In addition to underwriting multi-family loans on the basis of the buildings’ income and condition, we consider the borrowers’ credit history, profitability, and building management expertise. Borrowers are required to present evidence of their ability to repay the loan from the buildings’ current rent rolls, their financial statements, and related documents. While a small percentage of our multi-family loans are ten-year fixed rate credits, the vast majority of our multi-family loans feature a term of ten or twelve years, with a fixed rate of interest for the first five or seven years of the loan, and an alternative rate of interest in years six through ten or eight through twelve. The rate charged in the first five or seven years is generally based on intermediate-term interest rates plus a spread. During the remaining years, the loan resets to an annually adjustable rate that is tied to the prime rate of interest, plus a spread. Alternately, the borrower may opt for a fixed rate that is tied to the five-year fixed advance rate of the Federal Home Loan Bank of New York (the “FHLB-NY”), plus a spread. The fixed-rate option also requires the payment of one percentage point of the then-outstanding loan balance. In either case, the minimum rate at repricing is equivalent to the rate in the initial five- or seven-year term. As the rent roll increases, the typical property owner seeks to refinance the mortgage, and generally does so before the loan reprices in year six or eight. The expected weighted average life of the portfolio at December 31, 2014 and 2013, as noted above, is indicative of this practice. Multi-family loans that refinance within the first five or seven years are typically subject to an established prepayment penalty schedule. Depending on the remaining term of the loan at the time of prepayment, the penalties normally range from five percentage points to one percentage point of the then-current loan balance. If a loan extends past the fifth or seventh year and the borrower selects the fixed rate option, the prepayment penalties typically reset to a range of five points to one point over years six through ten or eight through twelve. For example, a ten-year multi-family loan that prepays in year three would generally be expected to pay a prepayment penalty equal to three percentage points of the remaining principal balance. A twelve-year multi-family loan that prepays in year one or two would generally be expected to pay a penalty equal to five percentage points. 51 Prepayment penalties are recorded as interest income and are therefore reflected in the average yields on our loans and assets, our interest rate spread and net interest margin, and the level of net interest income we record. No assumptions are involved in the recognition of prepayment penalty income, as such income is only recorded when cash is received. Our success as a multi-family lender partly reflects the solid relationships we have developed with the market’s leading mortgage brokers, who are familiar with our lending practices, our underwriting standards, and our long-standing practice of basing our loans on the cash flows produced by the properties. The process of producing such loans is generally four to six weeks in duration and, because the multi-family market is largely broker-driven, the expense incurred in sourcing such loans is substantially reduced. At December 31, 2014, the vast majority of our multi-family loans were secured by rental apartment buildings. In addition, 75.1% of our multi-family loans were secured by buildings in New York City and 4.9% were secured by buildings elsewhere in New York State. The remaining 20.1% of multi-family loans were secured by buildings outside these markets, including in the four other states served by our retail branch offices. Our emphasis on multi-family loans is driven by several factors, including their structure, which reduces our exposure to interest rate volatility to some degree. Another factor driving our focus on multi-family lending has been the comparative quality of the loans we produce. Reflecting the nature of the buildings securing our loans, our underwriting standards, and the generally conservative loan-to-value ratios (“LTVs”) our multi-family loans feature at origination, a relatively small percentage of the multi-family loans that have transitioned to non-performing status have actually resulted in losses, even when the credit cycle has taken a downward turn. We primarily underwrite our multi-family loans based on the current cash flows produced by the collateral property, with a reliance on the “income” approach to appraising the properties, rather than the “sales” approach. The sales approach is subject to fluctuations in the real estate market, as well as general economic conditions, and is therefore likely to be more risky in the event of a downward credit cycle turn. We also consider a variety of other factors, including the physical condition of the underlying property; the net operating income of the mortgaged premises prior to debt service; the debt service coverage ratio (“DSCR”), which is the ratio of the property’s net operating income to its debt service; and the ratio of the loan amount to the appraised value of the property. The multi-family loans we are originating today generally represent no more than 75% of the lower of the appraised value or the sales price of the underlying property, and typically feature an amortization period of up to 30 years. In addition to requiring a minimum DSCR of 120% on multi-family buildings, we obtain a security interest in the personal property located on the premises, and an assignment of rents and leases. Accordingly, while our multi-family lending niche has not been immune to downturns in the credit cycle, we continue to believe that the multi-family loans we produce involve less credit risk than certain other types of loans. In general, buildings that are subject to rent regulation have tended to be stable, with occupancy levels remaining more or less constant over time. Because the rents are typically below market and the buildings securing our loans are generally maintained in good condition, they have been more likely to retain their tenants in adverse economic times. In addition, we underwrite our multi-family loans on the basis of the current cash flows generated by the underlying properties, and exclude any short-term property tax exemptions and abatement benefits the property owners receive. Commercial Real Estate Loans At December 31, 2014, CRE loans represented $7.6 billion, or 23.1%, of total loans held for investment, as compared to $7.4 billion, or 24.7%, at December 31, 2013. At the respective year-ends, the average CRE loan had a principal balance of $5.0 million and $4.7 million, and the portfolio had an expected weighted average life of 3.2 years and 3.3 years. In 2014, CRE loans represented $1.7 billion, or 15.1%, of the loans we produced for investment; in 2013, the comparable volume and percentage were $2.2 billion and 19.4%. The CRE loans we produce are secured by income-producing properties such as office buildings, retail centers, mixed-use buildings, and multi-tenanted light industrial properties. At December 31, 2014, 71.5% of our CRE loans were secured by properties in New York City, while properties on Long Island accounted for 13.2%. Other parts of New York State accounted for 2.7% of the properties securing our CRE credits, while all other states accounted for 12.6%, combined. The pricing of our CRE loans is similar to the pricing of our multi-family credits. While a small percentage of our CRE loans feature ten-year fixed-rate terms, they primarily feature a fixed rate of interest for the first five or seven years of the loan that is generally based on intermediate-term interest rates plus a spread. During years six 52 through ten or eight through twelve, the loan resets to an annually adjustable rate that is tied to the prime rate of interest, plus a spread. Alternately, the borrower may opt for a fixed rate that is tied to the five-year fixed advance rate of the FHLB-NY plus a spread. The fixed-rate option also requires the payment of an amount equal to one percentage point of the then-outstanding loan balance. In either case, the minimum rate at repricing is equivalent to the rate in the initial five- or seven-year term. Prepayment penalties apply to our CRE loans, as they do our multi-family credits. Depending on the remaining term of the loan at the time of prepayment, the penalties normally range from five percentage points to one percentage point of the then-current loan balance. If a loan extends past the fifth or seventh year and the borrower selects the fixed rate option, the prepayment penalties typically reset to a range of five points to one point over years six through ten or eight through twelve. Our CRE loans tend to refinance within three to four years of origination, as reflected in the expected weighted average life of the CRE portfolio noted above. The repayment of loans secured by commercial real estate is often dependent on the successful operation and management of the underlying properties. To minimize our credit risk, we originate CRE loans in adherence with conservative underwriting standards, and require that such loans qualify on the basis of the property’s current income stream and DSCR. The approval of a loan also depends on the borrower’s credit history, profitability, and expertise in property management, and generally requires a minimum DSCR of 130% and a maximum LTV of 65%. In addition, the origination of CRE loans typically requires a security interest in the fixtures, equipment, and other personal property of the borrower and/or an assignment of the rents and/or leases. One-to-Four Family Loans For many years, the vast majority of our one-to-four family loans held for investment were loans we had acquired in our merger transactions prior to 2009. However, in 2012, we began to capitalize on our proprietary mortgage banking platform to originate hybrid adjustable-rate one-to-four family loans for our own portfolio. While this practice continued through the first six months of 2014, we reclassified most of our one-to-four family loans that were held for investment as loans held for sale in the second half of the year. As our assets grew closer to $50 billion and the current SIFI threshold, we largely offset the growth of our multi-family and CRE loans, and our specialty finance loans and leases, by reducing the balance of held-for-investment one-to-four family loans. Accordingly, the balance of one-to-four family loans held for investment declined $421.8 million from the year-earlier balance to $138.9 million at December 31, 2014. The latter balance represented 0.42% of total loans held for investment, a decrease from 1.9% at the previous year-end. Acquisition, Development, and Construction Loans At December 31, 2014, ADC loans represented $258.1 million, or 0.78%, of total loans held for investment, reflecting an $86.0 million decrease from the balance at the prior year-end. Reflecting our primary focus on multi- family and CRE lending, we originated a modest $96.8 million of ADC loans over the course of the year. At December 31, 2014, 79.4% of the loans in our ADC portfolio were for land acquisition and development; the remaining 20.6% consisted of loans that were provided for the construction of owner-occupied homes and commercial properties. Loan terms vary based upon the scope of the construction, and generally range from 18 to 24 months; they also feature a floating rate of interest tied to prime, with a floor. In addition, 73.8% of the loans in the ADC portfolio were for properties in New York City, with Manhattan accounting for more than half of New York City’s share. Because ADC loans are generally considered to have a higher degree of credit risk, especially during a downturn in the credit cycle, borrowers are required to provide a guarantee of repayment and completion. In the twelve months ended December 31, 2014, we recovered losses against guarantees of $276,000, as compared to $1.4 million in the prior year. The risk of loss on an ADC loan is largely dependent upon the accuracy of the initial appraisal of the property’s value upon completion of construction; the developer’s experience; the estimated cost of construction, including interest; and the estimated time to complete and/or sell or lease such property. When applicable, as a condition to closing an ADC loan, it is our practice to require that residential properties be pre-sold and that commercial properties be pre-leased. 53 Other Loans Other loans totaled $1.1 billion at December 31, 2014, representing 3.5% of total loans held for investment and a $288.4 million, or 33.8%, increase from the year-earlier amount. C&I loans represented all but $31.9 million of the current year-end total, as compared to all but $39.0 million at the prior year-end. In other words, C&I loans accounted for $1.1 billion, or 97.2%, of other loans at the end of this December, as compared to $813.7 million, or 95.4%, at December 31, 2013. The increase in C&I loans was primarily due to the growth in specialty finance loans and leases, a tribute to NYCB Specialty Finance Company, LLC, which completed its first full year of operation as a subsidiary of New York Community Bank at December 31, 2014. Located in Foxboro, Massachusetts, the subsidiary is staffed by a group of industry veterans with expertise in originating and underwriting senior secured debt and equipment loans and leases. The subsidiary participates in syndicated loans that are brought to us, and equipment loans and leases that are assigned to us, by a select group of nationally recognized sources, and 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. The loans and leases we fund fall into three distinct categories (asset-based lending, dealer floor-plan lending, and equipment loan and lease financing) and each of our 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. The pricing of our asset-based and dealer floor-plan loans are at floating rates predominately tied to LIBOR, while our equipment financing credits are at fixed rates at a spread over treasuries. At December 31, 2014, specialty finance loans and leases represented $632.8 million of total C&I loans, including $208.7 million of equipment leases, and accounted for $848.5 million of the C&I loans we produced during the year. In contrast to the loans produced by our specialty finance subsidiary, the other C&I loans we produce are primarily made to small and mid-size businesses in the five boroughs of New York City and on Long Island. Other C&I loans represented $476.4 million of total C&I loans at December 31, 2014, and accounted for $530.3 million of all the C&I loans we produced over the course of the year. The other C&I loans we produce are tailored to meet the specific needs of our borrowers, and include term loans, demand loans, revolving lines of credit, and, to a lesser extent, loans that are partly guaranteed by the Small Business Administration. A broad range of other C&I loans, both collateralized and unsecured, are made available to businesses for working capital (including inventory and accounts receivable), business expansion, the purchase of machinery and equipment, and other general corporate needs. In determining the term and structure of other C&I loans, several factors are considered, including the purpose, the collateral, and the anticipated sources of repayment. Other C&I loans are typically secured by business assets and personal guarantees of the borrower, and include financial covenants to monitor the borrower’s financial stability. The interest rates on our other C&I loans can be fixed or floating, with floating rate loans being tied to prime or some other market index, plus an applicable spread. Our floating rate loans may or may not feature a floor rate of interest. The decision to require a floor on other C&I loans depends on the level of competition we face for such loans from other institutions, the direction of market interest rates, and the profitability of our relationship with the borrower. An added benefit of other C&I lending is the opportunity to establish full-scale banking relationships with our borrowers. Many of our borrowers provide us with deposits, and many take advantage of our fee-based cash management, investment, and trade finance services. The remainder of the “other” loan portfolio consists primarily of home equity loans and lines of credit, as well as a variety of consumer loans, most of which were originated by our pre-2009 merger partners prior to their joining the Company. We currently do not offer home equity loans or lines of credit. Lending Authority The loans we originate for investment are subject to federal and state laws and regulations, and are underwritten in accordance with loan underwriting policies and procedures approved by the Mortgage Committee, the Credit Committee, and the respective Boards of Directors. 54 In accordance with the Banks’ policies, all loans originated by the Banks are presented to the Mortgage Committee or the Credit Committee, as applicable. In addition, all loans of $20.0 million or more originated by the Community Bank, and all loans of $10.0 million or more originated by the Commercial Bank, are reported to the applicable Board of Directors. In 2014, 225 loans of $10.0 million or more were originated by the Banks, with an aggregate loan balance of $5.6 billion at origination. In 2013, 224 loans of $10.0 million or more were originated by the Banks, with an aggregate loan balance at origination of $5.3 billion. At December 31, 2014, as at the prior year-end, our largest loan was in the amount of $262.5 million; the interest rate on the credit was 3.7% at both dates. The loan was originated by the Community Bank on June 28, 2013 to the owner of a commercial office building located in Manhattan, and, as of the date of this report, has been current since origination. Geographical Analysis of the Portfolio of Non-Covered Loans Held for Investment The following table presents a geographical analysis of the multi-family and CRE loans in our held-for- investment loan portfolio at December 31, 2014: (dollars in thousands) New York City: Manhattan Brooklyn Bronx Queens Staten Island Total New York City Long Island Other New York State All other states Total At December 31, 2014 Multi-Family Loans Amount $ 8,367,265 4,126,649 2,794,688 2,526,475 70,554 $17,885,631 463,640 699,771 4,782,804 $23,831,846 Percent of Total 35.11% 17.32 11.73 10.60 0.29 75.05% 1.94 2.94 20.07 100.00% Commercial Real Estate Loans Percent of Total Amount $3,879,810 601,423 206,812 728,126 41,052 $5,457,223 1,007,514 205,530 964,053 $7,634,320 50.82% 7.88 2.71 9.54 0.53 71.48% 13.20 2.69 12.63 100.00 % At December 31, 2014, the largest concentration of one-to-four family loans held for investment was in California, with a total of $40.2 million; the largest concentration of ADC loans held for investment was in New York City, with a total of $190.5 million at that date. The majority of our other loans held for investment were secured by properties and/or businesses located in Metro New York. Loan Maturity and Repricing Analysis: Non-Covered Loans Held for Investment The following table sets forth the maturity or period to repricing of our portfolio of non-covered loans held for investment at December 31, 2014. Loans that have adjustable rates are shown as being due in the period during which their interest rates are next subject to change. Non-Covered Loans Held for Investment at December 31, 2014 Multi- Family Commercial Real Estate One-to-Four Family Acquisition, Development, and Construction Other Total Loans $ 496,891 $ 581,431 $ 19,213 $257,391 $ 666,084 $ 2,021,010 13,691,422 9,643,533 3,661,940 3,390,949 17,319 102,383 23,334,955 7,052,889 119,702 725 -- 725 340,730 134,350 17,712,136 13,271,215 475,080 30,983,351 (in thousands) Amount due: Within one year After one year: One to five years Over five years Total due or repricing after one year Total amounts due or repricing, gross $23,831,846 $7,634,320 $138,915 $258,116 $1,141,164 $33,004,361 55 The following table sets forth, as of December 31, 2014, the dollar amount of all non-covered loans held for investment that are due after December 31, 2015, and indicates whether such loans have fixed or adjustable rates of interest: (in thousands) Mortgage Loans: Multi-family Commercial real estate One-to-four family Acquisition, development, and construction Total mortgage loans Other loans Total loans Non-Covered Loans Held for Sale Due after December 31, 2015 Adjustable Total Fixed $4,186,410 1,958,697 42,021 -- 6,187,128 277,506 $6,464,634 $19,148,545 5,094,192 77,681 725 24,321,143 197,574 $24,518,717 $23,334,955 7,052,889 119,702 725 30,508,271 475,080 $30,983,351 Our portfolio of non-covered loans held for sale primarily consists of one-to-four family loans originated through our mortgage banking platform. The platform is not only used by the Bank to serve our retail customers in New York, New Jersey, Ohio, Florida, and Arizona, but also by approximately 890 clients—community banks, credit unions, mortgage companies, and mortgage brokers—to originate full-documentation, prime credit one-to- four family loans across the United States. While the vast majority of the one-to-four family loans held for sale we produce are agency-conforming loans sold to GSEs, we also utilize our mortgage banking platform to originate jumbo loans for sale to other private mortgage investors. To a lesser extent, the portfolio of loans held for sale includes certain C&I and one-to-four family loans that previously had been held for investment but were transferred to held for sale in the second half of 2014. Loans held for sale totaled $379.4 million at December 31, 2014, a $72.5 million increase from the balance at the prior year-end. At December 31, 2014 and 2013, loans held for sale represented 1.06% and 0.93% of total loans, respectively, with the increase largely reflecting the C&I loans held for investment that were transferred to held for sale. Specifically, one-to-four family loans represented $220.9 million, or 58.2%, of loans held for sale at the end of this December, while C&I loans represented the remaining $158.5 million, or 41.8%. While the production of one-to-four family loans was constrained in the first nine months of the year, as residential mortgage interest rates trended higher, loan demand increased markedly in the last three months of the year as such rates declined. Nonetheless, the volume of one-to-four family loans produced for sale in 2014 fell to $3.1 billion from $6.2 billion in the prior year. Of the one-to-four family loans we produced in 2014, $2.9 billion, or 92.8%, were agency-conforming loans and $220.7 million, or 7.2%, were non-conforming (i.e., jumbo) loans. To mitigate the risks inherent in originating and reselling residential mortgage loans, we utilize processes, proprietary technologies, and third-party software application tools that seek to ensure that the loans meet investors’ program eligibility, underwriting, and collateral requirements. In addition, compliance verification and fraud detection tools are utilized throughout the processing, underwriting, and loan closing stages to assist in the determination that the loans we originate and acquire are in compliance with applicable local, state, and federal laws and regulations. Controlling, auditing, and validating the data upon which the credit decision is made (and the loan documents created) substantially mitigates the risk of our originating or acquiring a loan that subsequently is deemed to be in breach of loan sale representations and warranties made by us to loan investors. We require the use of our proprietary processes, origination systems, and technologies for all loans we close. Collectively, these tools and processes are known internally as our proprietary “Gemstone” system. By mandating usage of Gemstone for all table-funded loan originations, we are able to tightly control key risk aspects across the spectrum of loan origination activities. Our clients access Gemstone via secure Internet protocols, and initiate the process by submitting required loan application data and other required income, asset, debt, and credit documents to us electronically. Key data is then verified by a combination of trusted third-party validations and internal reviews conducted by our loan underwriters and quality control specialists. Once key data is independently verified, it is “locked down” within the Gemstone system to further ensure the integrity of the transaction. In addition, all “trusted source” third-party vendors are directly connected to the Gemstone system via secure electronic data interfaces. Within the Gemstone system, these trusted sources provide key risk and control services 56 throughout the origination process, including ordering and receipt of credit report information, tax returns, independent collateral appraisals, private mortgage insurance certificates, automated underwriting and program eligibility determinations, flood insurance determination, fraud detection applications, local/state/federal regulatory compliance reviews, predatory or “high cost” loan reviews, and legal document preparation services. Our employees augment the automated system controls by performing audits during the process, which include the final underwriting of the loan file (the credit decision), and various other pre-funding and post-funding quality control reviews. Both the agency-conforming and non-conforming (i.e., jumbo) one-to-four family loans we originate for sale require that we make certain representations and warranties with regard to the underwriting, documentation, and legal/regulatory compliance, and we may be required to repurchase a loan or loans if it is found that a breach of the representations and warranties has occurred. In such case, we would be exposed to any subsequent credit loss on the mortgage loans that might or might not be realized in the future. As governed by our agreements with the GSEs and other third parties to whom we sell loans, the representations and warranties we make relate to several factors, including, but not limited to, the ownership of the loan; the validity of the lien securing the loan; the absence of delinquent taxes or liens against the property securing the loan as of its closing date; the process used to select the loan for inclusion in a transaction; and the loan’s compliance with any applicable criteria, including underwriting standards, loan program guidelines, and compliance with applicable federal, state, and local laws. We record a liability for estimated losses relating to these representations and warranties, which is included in “Other liabilities” in the accompanying Consolidated Statements of Condition. The related expense is recorded in “Mortgage banking income” in the accompanying Consolidated Statements of Income and Comprehensive Income. At December 31, 2014 and 2013, the respective liabilities for estimated possible future losses relating to these representations and warranties were $8.2 million and $8.5 million. The methodology used to estimate the liability for representations and warranties is a function of the representations and warranties given and considers a variety of factors, including, but not limited to, actual default experience, estimated future defaults, historical loan repurchase rates, the frequency and potential severity of defaults, the probability that a repurchase request will be received, and the probability that a loan will be required to be repurchased. Representation and Warranty Reserve The following table sets forth the activity in our representation and warranty reserve during the periods indicated: (in thousands)(cid:3) Balance, beginning of period Repurchase losses Provision for repurchase losses: Loan sales Change in estimates Balance, end of period For the Years Ended December 31, 2014 $8,460 (300) -- -- $8,160 2013 $8,272 (402) 590 -- $8,460 57 Indemnified and Repurchased Loans The following table sets forth our activity with regard to repurchased loans and the loans we indemnified for GSEs during the twelve months ended December 31, 2014 and 2013: (dollars in thousands) Balance, beginning of period New indemnifications New repurchases Transfers to REO Principal payoffs Principal payments Modifications/other Balance, end of period (1) For the Years Ended December 31, 2014 Number of Loans 29 -- 12 (3) (7) -- -- 31 Amount $ 7,143 -- 3,693 (545) (2,097) (278) -- $ 7,916 2013 Number of Loans 12 12 8 -- (3) -- -- 29 Amount $2,286 3,611 1,706 -- (286) (253) 79 $7,143 (1) Of the thirty-one period-end loans, eighteen loans with an aggregate principal balance of $4.4 million were repurchased, and are now held for investment. The other thirteen loans, with an aggregate principal balance of $3.5 million, were indemnified and are all performing as of the date of this report. Because the level of mortgage loan repurchase losses is dependent on economic factors, investor demand strategies, and other external conditions that may change over the lives of the underlying loans, the level of the liability for mortgage loan repurchase losses is difficult to estimate and requires considerable management judgment. However, we believe the amount and range of reasonably possible losses in excess of our reserve would not be material to our operations or to our financial condition or results of operations. Repurchase and Indemnification Requests The following table sets forth our repurchase and indemnification requests during the periods indicated: For the Years Ended December 31, (dollars in thousands) Balance, beginning of period New repurchase requests (2) Successful rebuttal/rescission New indemnifications (3) Loan repurchases (4) Balance, end of period (5) 2014 Number of Loans Amount (1) $ 4,057 19,548 (13,722) -- (3,693) $ 6,190 18 81 (63) -- (12) 24 2013 Number of Loans Amount (1) $ 5,073 16,785 (12,484) (3,611) (1,706) $ 4,057 20 71 (53) (12) (8) 18 (1) Represents the loan balance as of the repurchase request date. (2) All requests relate to one-to-four family loans originated for sale. (3) An indemnification agreement is an arrangement whereby the Company protects the GSEs against future losses. (4) Of the twelve loans repurchased during the year ended December 31, 2014, seven were originated through our mortgage banking operations and five were originated by a bank we acquired in 2007. Of the eight loans repurchased during the year ended December 31, 2013, six were originated through our mortgage banking operations and two were originated by a bank we acquired in 2007. (5) Of the twenty-four requests as of December 31, 2014, twenty were from Fannie Mae and four were from Freddie Mac. Both Fannie Mae and Freddie Mac allow 60 days to respond to a repurchase request. Failure to respond in a timely manner could result in our having an obligation to repurchase the loan. Please see Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” for a discussion of the strategies we employ to mitigate the interest rate risk associated with our production of one-to-four family loans for sale. 58 Loan Origination Analysis The following table summarizes our production of loans held for investment and loans held for sale in the years ended December 31, 2014 and 2013: (dollars in thousands) Mortgage Loan Originations for Investment: Multi-family Commercial real estate One-to-four family Acquisition, development, and construction Total mortgage loan originations for investment Other Loan Originations for Investment: Specialty finance Other commercial and industrial Other Total other loan originations for investment Total loan originations for investment Loan originations for sale Total loan originations For the Years Ended December 31, 2013 2014 Amount Percent of Total Amount Percent of Total $ 7,584,154 1,661,066 287,577 96,762 9,629,559 848,482 530,330 6,253 1,385,065 $11,014,624 3,189,694 53.39% 11.69 2.03 0.68 67.79 5.97 3.74 0.04 9.75 77.54% 22.46 $ 7,416,786 2,168,072 418,815 149,866 10,153,539 257,526 736,221 7,579 1,001,326 $11,154,865 6,247,936 42.62% 12.46 2.41 0.86 58.35 1.48 4.23 0.04 5.75 64.10% 35.90 $14,204,318 100.00% $17,402,801 100.00% 59 t n e c r e P - n o N f o t n e c r e P d e r e v o C l a t o T f o 0 1 0 2 t n e c r e P - n o N f o t n e c r e P d e r e v o C l a t o T f o 1 1 0 2 t n e c r e P - n o N f o t n e c r e P d e r e v o C l a t o T f o 2 1 0 2 , 1 3 r e b m e c e D t A s n a o L s n a o L t n u o m A s n a o L s n a o L t n u o m A s n a o L s n a o L t n u o m A t n e c r e P - n o N f o d e r e v o C s n a o L t n e c r e P l a t o T f o s n a o L 3 1 0 2 t n u o m A t n e c r e P - n o N f o d e r e v o C s n a o L t n e c r e P l a t o T f o s n a o L 4 1 0 2 t n u o m A % 4 4 . 7 6 % 2 5 . 7 5 3 1 9 , 7 0 8 , 6 1 $ % 1 6 . 5 6 % 9 4 . 7 5 8 2 6 , 0 3 4 , 7 1 $ % 0 3 . 5 6 % 5 5 . 8 5 3 3 8 , 5 9 5 , 8 1 $ % 1 7 . 8 6 % 9 8 . 2 6 7 2 9 , 9 9 6 , 0 2 $ % 9 3 . 1 7 % 4 5 . 6 6 6 4 8 , 1 3 8 , 3 2 $ 8 6 . 0 3 8 . 1 2 9 2 . 2 4 2 . 2 9 - - 8 5 . 2 4 3 . 0 2 9 . 2 4 8 . 4 6 1 . 5 9 % 0 0 . 0 0 1 8 5 . 0 2 6 . 8 1 2 9 3 , 0 7 1 1 1 6 , 9 3 4 , 5 5 9 . 1 7 6 . 8 7 7 3 5 , 9 6 5 3 5 4 , 7 8 9 , 2 2 - - 0 2 . 2 9 2 . 0 9 4 . 2 6 1 . 1 8 3 1 . 4 9 2 . 5 8 1 7 . 4 1 - - 9 5 5 , 5 8 3 6 6 , 1 4 6 2 2 2 , 7 2 7 7 7 0 , 7 0 2 , 1 5 7 6 , 4 1 7 , 3 2 $ 8 4 . 0 1 8 . 5 2 8 6 . 1 8 5 . 3 9 - - 6 2 . 2 6 2 . 0 2 5 . 2 0 9 . 3 0 1 . 6 9 9 6 8 , 7 9 2 , 4 2 5 7 , 1 2 9 , 4 2 $ % 0 0 . 0 0 1 2 4 . 0 1 6 . 2 2 7 4 . 1 9 9 . 1 8 - - 8 9 . 1 3 2 . 0 1 2 . 2 0 2 . 4 8 2 4 . 3 2 6 . 7 8 8 3 . 2 1 1 6 3 , 7 2 1 4 4 2 , 5 5 8 , 6 1 7 6 , 5 4 4 4 0 9 , 8 5 8 , 4 2 - - 7 0 9 , 9 6 6 8 9 , 9 9 5 3 9 8 , 9 6 6 8 1 9 , 6 3 0 , 1 7 9 7 , 8 2 5 , 5 2 $ 1 7 . 0 1 1 . 6 2 0 4 . 1 2 5 . 3 9 - - 7 0 . 2 8 1 . 0 5 2 . 2 3 2 . 4 7 7 . 5 9 1 3 0 , 3 5 7 , 3 5 1 7 , 5 6 5 , 6 2 $ % 0 0 . 0 0 1 4 6 . 0 1 4 . 3 2 5 2 . 1 5 8 . 3 8 - - 6 8 . 1 6 1 . 0 2 0 . 2 7 8 . 5 8 9 7 . 3 6 6 . 9 8 4 3 . 0 1 5 3 4 , 3 0 2 8 9 5 , 6 3 4 , 7 7 1 9 , 7 9 3 3 8 7 , 3 3 6 , 6 2 - - 0 8 8 , 9 4 4 4 0 , 0 9 5 4 2 9 , 9 3 6 0 7 3 , 4 0 2 , 1 7 0 7 , 3 7 2 , 7 2 $ 6 8 . 1 4 4 . 4 2 4 1 . 1 5 1 . 6 9 7 5 . 0 3 1 . 2 3 1 . 0 3 8 . 2 2 0 . 1 8 9 . 8 9 1 6 0 , 4 8 2 , 3 7 7 0 , 8 7 4 , 8 2 $ % 0 0 . 0 0 1 0 7 . 1 7 3 . 2 2 5 0 . 1 1 0 . 8 8 2 5 . 0 5 9 . 1 2 1 . 0 9 5 . 2 0 6 . 0 9 3 9 . 0 3 5 . 1 9 7 4 . 8 0 3 7 , 0 6 5 1 3 2 , 4 6 3 , 7 0 0 1 , 4 4 3 8 8 9 , 8 6 9 , 8 2 8 9 6 , 2 7 1 3 9 9 , 0 4 6 6 3 0 , 9 3 7 2 7 , 2 5 8 5 1 9 , 6 0 3 5 1 7 , 1 2 8 , 9 2 $ 1 4 . 0 7 8 . 2 2 7 7 . 0 4 4 . 5 9 9 8 . 1 3 4 . 1 0 1 . 0 2 4 . 3 4 1 . 1 6 8 . 8 9 8 1 6 , 8 8 7 , 2 0 3 6 , 8 2 1 , 0 3 $ % 0 0 . 0 0 1 9 3 . 0 2 3 . 1 2 2 7 . 0 7 9 . 8 8 7 7 . 1 3 3 . 1 9 0 . 0 9 1 . 3 6 1 . 2 9 6 0 . 1 2 2 . 3 9 8 7 . 6 5 1 9 , 8 3 1 0 2 3 , 4 3 6 , 7 6 1 1 , 8 5 2 7 9 1 , 3 6 8 , 1 3 7 2 8 , 2 3 6 4 9 3 , 6 7 4 3 4 9 , 1 3 4 6 1 , 1 4 1 , 1 9 9 3 , 9 7 3 2 2 6 , 8 2 4 , 2 0 6 7 , 3 8 3 , 3 3 $ % 0 0 . 0 0 1 1 2 6 , 9 1 2 , 9 2 $ % 0 0 . 0 0 1 6 4 7 , 8 1 3 , 0 3 $ % 0 0 . 0 0 1 8 3 1 , 2 6 7 , 1 3 $ % 0 0 . 0 0 1 8 4 2 , 7 1 9 , 2 3 $ % 0 0 . 0 0 1 2 8 3 , 2 1 8 , 5 3 $ 1 6 3 , 4 0 0 , 3 3 $ t n e m t s e v n i r o f d l e h s n a o l d e r e v o c - n o n l a t o T : s n a o L e g a g t r o M d e r e v o C - n o N ) s d n a s u o h t n i s r a l l o d ( e t a t s e l a e r l a i c r e m m o C y l i m a f r u o f - o t - e n O y l i m a f - i t l u M d n a , t n e m p o l e v e d , n o i t i s i u q c A n o i t c u r t s n o c s n a o l e g a g t r o m d e r e v o c - n o n l a t o T l a i r t s u d n i d n a l a i c r e m m o c r e h t O : s n a o L r e h t O d e r e v o C - n o N e c n a n i f y t l a i c e p S s n a o l r e h t o d e r e v o c - n o n l a t o T s n a o l r e h t O s n a o l d e r e v o c - n o n l a t o T e l a s r o f d l e h s n a o L s n a o l d e r e v o C s n a o l l a t o T : 4 1 0 2 , 1 3 r e b m e c e D d e d n e s r a e y e v i f e h t r o f d n e - r a e y h c a e t a o i l o f t r o p n a o l r u o f o n o i t i s o p m o c e h t s e z i r a m m u s e l b a t g n i w o l l o f e h T s i s y l a n A o i l o f t r o P n a o L ) 1 8 1 , 7 ( ) 3 0 9 , 1 1 ( ) 2 4 9 , 8 5 1 ( 5 9 5 , 1 4 0 , 9 2 $ 1 2 0 , 4 ) 3 2 3 , 3 3 ( ) 0 9 2 , 7 3 1 ( 4 5 1 , 2 5 1 , 0 3 $ 7 5 7 , 0 1 ) 1 1 3 , 1 5 ( ) 8 4 9 , 0 4 1 ( 6 3 6 , 0 8 5 , 1 3 $ 4 7 2 , 6 1 ) 9 6 0 , 4 6 ( ) 6 4 9 , 1 4 1 ( 7 0 5 , 7 2 7 , 2 3 $ 5 9 5 , 0 2 ) 1 8 4 , 5 4 ( ) 7 5 8 , 9 3 1 ( 9 3 6 , 7 4 6 , 5 3 $ s n a o l d e r e v o c - n o n n o s e s s o l r o f e c n a w o l l A ) s e e f ( / s t s o c n o i t a n i g i r o n a o l d e r r e f e d t e N s n a o l d e r e v o c n o s e s s o l r o f e c n a w o l l A t e n , s n a o l l a t o T 0 6 Outstanding Loan Commitments At December 31, 2014, we had outstanding loan commitments of $2.6 billion, an increase from $2.1 billion at the prior year-end. Loans held for investment represented $2.1 billion of the year-end 2014 total and $1.9 billion of the year-end 2013 amount. In contrast, loans held for sale represented $494.6 million of outstanding loan commitments at the end of this December, as compared to $231.5 million at December 31, 2013. At December 31, 2014, multi-family and CRE loans together represented $1.0 billion of our outstanding held-for-investment loan commitments; one-to-four family loans, ADC loans, and other loans held for investment represented $1.3 million, $301.8 million, and $734.3 million, respectively, of the total at that date. In addition to loan commitments, we had commitments to issue financial stand-by, performance stand-by, and commercial letters of credit totaling $201.0 million at December 31, 2014, as compared to $213.7 million at the prior year-end. Financial stand-by letters of credit primarily are issued for the benefit of other financial institutions or municipalities, on behalf of certain of our current borrowers, and obligate us to guarantee payment of a specified financial obligation. Performance stand-by letters of credit are primarily issued for the benefit of local municipalities on behalf of certain of our borrowers. These borrowers are mainly developers of residential subdivisions with whom we currently have a lending relationship. Performance letters of credit obligate us to make payments in the event that a specified third party fails to perform under non-financial contractual obligations. Commercial letters of credit act as a means of ensuring payment to a seller upon shipment of goods to a buyer. Although commercial letters of credit are used to effect payment for domestic transactions, the majority are used to settle payments in international trade. Typically, such letters of credit require the presentation of documents that describe the commercial transaction, and provide evidence of shipment and the transfer of title. The fees we collect in connection with the issuance of letters of credit are included in “Fee income” in the Consolidated Statements of Income and Comprehensive Income. Asset Quality Non-Covered Loans Held for Investment and Non-Covered Other Real Estate Owned With the ability of borrowers to repay their loans improving with the economy and local real estate values, the balance of non-performing non-covered assets declined at the end of this December to its lowest level since December 31, 2008. Specifically, non-performing non-covered assets represented $138.9 million, or 0.30%, of total non-covered assets at December 31, 2014, as compared to $174.9 million, or 0.40%, at December 31, 2013. The 20.6% decline in non-performing assets was the result of a $26.6 million decrease in non-performing loans to $77.0 million and a $9.4 million decline in non-covered OREO to $62.0 million. The improvement in the balance of non-performing non-covered loans was primarily due to a group of non-performing multi-family loans to a single borrower, in the amount of $32.2 million, that transitioned to OREO and was subsequently sold at a gain of $6.0 million during 2014. 61 The following table presents our non-performing loans by loan type and the changes in the respective balances from December 31, 2013 to December 31, 2014: (dollars in thousands) Non-Performing Non-Covered Loans: Non-accrual non-covered mortgage loans: Multi-family Commercial real estate One-to-four family Acquisition, development, and construction Total non-accrual non-covered mortgage loans Non-accrual non-covered other loans Total non-performing non-covered loans December 31, 2014 2013 Change from December 31, 2013 to December 31, 2014 Amount Percent $31,089 24,824 11,032 654 67,599 9,351 $76,950 $ 58,395 24,550 10,937 2,571 96,453 7,084 $103,537 $(27,306) 274 95 (1,917) (28,854) 2,267 $(26,587) (46.76)% 1.12 0.87 (74.56) (29.92) 32.00 (25.68)% Reflecting the reduction in the year-end balance, non-performing non-covered loans represented 0.23% of non-performing covered loans at the end of December, as compared to 0.35% at December 31, 2013. The following table sets forth the changes in non-performing non-covered loans over the twelve months ended December 31, 2014: (in thousands) Balance at December 31, 2013 New non-accrual Charge-offs Transferred to other real estate owned Loan payoffs, including dispositions and principal pay-downs Restored to performing status Balance at December 31, 2014 $103,537 65,263 (2,604) (38,831) (38,582) (11,833) $ 76,950 A loan generally is classified as a “non-accrual” loan when it is 90 days or more past due or when we no longer expect to collect all amounts due according to the contractual terms of the loan agreement. When a loan is placed on non-accrual status, we cease the accrual of interest owed, and previously accrued interest is reversed and charged against interest income. At December 31, 2014 and 2013, all of our non-performing loans were non-accrual loans. A loan is generally returned to accrual status when the loan is current and we have reasonable assurance that the loan will be fully collectible. We monitor non-accrual loans both within and beyond our primary lending area in the same manner. Monitoring loans generally involves inspecting and re-appraising the collateral properties; holding discussions with the principals and managing agents of the borrowing entities and/or retained legal counsel, as applicable; requesting financial, operating, and rent roll information; confirming that hazard insurance is in place or force-placing such insurance; monitoring tax payment status and advancing funds as needed; and appointing a receiver, whenever possible, to collect rents, manage the operations, provide information, and maintain the collateral properties. It is our policy to order updated appraisals for all non-performing loans, irrespective of loan type, that are collateralized by multi-family buildings, CRE properties, or land, in the event that such a loan is 90 days or more past due, and if the most recent appraisal on file for the property is more than one year old. Appraisals are ordered annually until such time as the loan becomes performing and is returned to accrual status. It is not our policy to obtain updated appraisals for performing loans. However, appraisals may be ordered for performing loans when a borrower requests an increase in the loan amount, a modification in loan terms, or an extension of a maturing loan. We do not analyze current LTVs on a portfolio-wide basis. Non-performing loans are reviewed regularly by management and reported on a monthly basis to the Mortgage Committee of the Community Bank, the Credit Committee of the Commercial Bank, and the Boards of Directors of the respective Banks. In accordance with our charge-off policy, collateral-dependent non-performing loans are written down to their current appraised values, less certain transaction costs. Workout specialists from our Loan Workout Unit actively pursue borrowers who are delinquent in repaying their loans in an effort to collect 62 payment. In addition, outside counsel with experience in foreclosure proceedings are retained to institute such action with regard to such borrowers. Properties that are acquired through foreclosure are classified as OREO, and are recorded at the lower of the unpaid principal balance or fair value at the date of acquisition, less the estimated cost of selling the property. It is our policy to require an appraisal and environmental assessment of properties classified as OREO before foreclosure, and to re-appraise the properties on an as-needed basis, and not less than annually, until they are sold. We dispose of such properties as quickly and prudently as possible, given current market conditions and the property’s condition. The improvement in asset quality was further reflected in the balance of non-covered loans 30 to 89 days past due at the end of this December as compared to the balance at December 31, 2013. The following table presents our loans 30 to 89 days past due by loan type and the changes in the respective balances from December 31, 2013 to December 31, 2014: (dollars in thousands) Non-Covered Loans 30-89 Days Past Due: Multi-family Commercial real estate One-to-four family Other loans Total non-covered loans 30-89 days past due Change from December 31, 2013 to December 31, 2014 December 31, 2014 2013 Amount Percent $ 464 1,464 3,086 1,178 $6,192 $33,678 1,854 1,076 481 $37,089 $(33,214) (390) 2,010 697 $(30,897) (98.62)% (21.04) 186.80 144.91 (83.31)% To mitigate the potential for credit losses, we underwrite our loans in accordance with credit standards that we consider to be prudent. In the case of multi-family and CRE loans, we look first at the consistency of the cash flows being generated by the property to determine its economic value using the “income approach,” and then at the market value of the property that collateralizes the loan. The amount of the loan is then based on the lower of the two values, with the economic value more typically used. The condition of the collateral property is another critical factor. Multi-family buildings and CRE properties are inspected from rooftop to basement as a prerequisite to approval, with a member of the Mortgage or Credit Committee participating in inspections on multi-family loans to be originated in excess of $7.5 million, and a member of the Mortgage or Credit Committee participating in inspections on CRE loans to be originated in excess of $4.0 million. Furthermore, independent appraisers, whose appraisals are carefully reviewed by our experienced in-house appraisal officers and staff, perform appraisals on collateral properties. In many cases, a second independent appraisal review is performed. In addition, we work with a select group of mortgage brokers who are familiar with our credit standards and whose track record with our lending officers is typically greater than ten years. Furthermore, in New York City, where the majority of the buildings securing our multi-family loans are located, the rents that tenants may be charged on certain apartments are typically restricted under certain rent-control or rent-stabilization laws. As a result, the rents that tenants pay for such apartments are generally lower than current market rents. Buildings with a preponderance of such rent-regulated apartments are less likely to experience vacancies in times of economic adversity. To further manage our credit risk, our lending policies limit the amount of credit granted to any one borrower, and typically require minimum DSCRs of 120% for multi-family loans and 130% for CRE loans. Although we typically will lend up to 75% of the appraised value on multi-family buildings and up to 65% on commercial properties, the average LTVs of such credits at origination were below those amounts at December 31, 2014. Exceptions to these LTV limitations are reviewed on a case-by-case basis. The repayment of loans secured by commercial real estate is often dependent on the successful operation and management of the underlying properties. To minimize our credit risk, we originate CRE loans in adherence with conservative underwriting standards, and require that such loans qualify on the basis of the property’s current income stream and DSCR. The approval of a CRE loan also depends on the borrower’s credit history, profitability, and expertise in property management. 63 Although the reasons for a loan to default will vary from credit to credit, our multi-family and CRE loans, in particular, typically have not resulted in significant losses. Such loans are generally originated at conservative LTVs and DSCRs, as previously stated. Furthermore, in the case of multi-family loans, the cash flows generated by the properties are generally below-market and have significant value. With regard to ADC loans, we typically lend up to 75% of the estimated as-completed market value of multi- family and residential tract projects; however, in the case of home construction loans to individuals, the limit is 80%. With respect to commercial construction loans, we typically lend up to 65% of the estimated as-completed market value of the property. Credit risk is also managed through the loan disbursement process. Loan proceeds are disbursed periodically in increments as construction progresses, and as warranted by inspection reports provided to us by our own lending officers and/or consulting engineers. Furthermore, our loan portfolio has been structured to manage our exposure to both credit and interest rate risk. The vast majority of the loans in our portfolio are intermediate-term credits, with multi-family and CRE loans typically repaying or refinancing within three to four years of origination. In addition, our multi-family loans are largely secured by buildings with rent-regulated apartments that tend to maintain a high level of occupancy, regardless of economic conditions in our marketplace. To minimize the risk involved in specialty finance lending and leasing, we participate in syndicated loans that are brought to us, and equipment loans and leases that are assigned to us, by a select group of nationally recognized sources who have had long-term relationships with our experienced lending officers. Our specialty finance loans and leases 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. In a credit downturn, the ability of these borrowers to generate cash flows may be diminished, and their ability to repay their obligations may deteriorate. Accordingly, each of our 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, we re-underwrite each transaction. In addition, we retain outside counsel to conduct a further review of the underlying documentation. Other C&I loans are typically underwritten on the basis of the cash flows produced by the borrower’s business, and are generally collateralized by various business assets, including, but not limited to, inventory, equipment, and accounts receivable. As a result, the capacity of the borrower to repay is substantially dependent on the degree to which the business is successful. Furthermore, the collateral underlying the loan may depreciate over time, may not be conducive to appraisal, and may fluctuate in value, based upon the operating results of the business. Accordingly, personal guarantees are also a normal requirement for other C&I loans. The procedures we follow with respect to delinquent loans are generally consistent across all categories, with late charges assessed, and notices mailed to the borrower, at specified dates. We attempt to reach the borrower by telephone to ascertain the reasons for delinquency and the prospects for repayment. When contact is made with a borrower at any time prior to foreclosure or recovery against collateral property, we attempt to obtain full payment, and will consider a repayment schedule to avoid taking such action. Delinquencies are addressed by our Loan Workout Unit and every effort is made to collect rather than initiate foreclosure proceedings. Fair values for all multi-family buildings, CRE properties, and land are determined based on the appraised value. If an appraisal is more than one year old and the loan is classified as either non-performing or as an accruing troubled debt restructuring (“TDR”), then an updated appraisal is required to determine fair value. Estimated disposition costs are deducted from the fair value of the property to determine estimated net realizable value. In the instance of an outdated appraisal on an impaired loan, we adjust the original appraisal by using a third-party index value to determine the extent of impairment until an updated appraisal is received. While we strive to originate loans that will perform fully, adverse economic and market conditions, among other factors, can adversely impact a borrower’s ability to repay. In 2014, net charge-offs fell $14.9 million year- over-year to $2.1 million, as charge-offs of $8.1 million were largely offset by recoveries of $6.0 million. As a result, the ratio of net charge-offs to average loans improved to 0.01% in 2014 from 0.05% in the prior year. Of the loans charged off in 2014, $755,000 and $1.6 million, respectively, were multi-family and CRE credits, while one- to-four family and other loans accounted for $410,000 and $5.3 million, respectively. Reflecting the net charge-offs mentioned above, and the absence of any provision, the allowance for losses on non-covered loans was $139.9 million at December 31, 2014, as compared to $141.9 million at the prior year-end. 64 Partly reflecting the decrease in non-performing non-covered loans mentioned earlier in this discussion, the allowance for losses on non-covered loans represented 181.75% of non-performing non-covered loans at the end of this December, as compared to 137.10% at December 31, 2013. In addition, the allowance for losses on non-covered loans represented 0.42% and 0.48% of total non-covered loans at December 31, 2014 and 2013, respectively. Based upon all relevant and available information at the end of this December, management believes that the allowance for losses on non-covered loans was appropriate at that date. Historically, our level of charge-offs has been relatively low in adverse credit cycles, even when the volume of non-performing loans has increased. This distinction has been largely due to the nature of our primary lending niche (multi-family loans collateralized by non-luxury apartment buildings in New York City that are rent-regulated and feature below-market rents), and to our conservative underwriting practices that require, among other things, low LTVs. Reflecting the strength of the underlying collateral for these loans and the collateral structure, a relatively small percentage of our non-performing multi-family loans have resulted in losses over time. Low LTVs provide a greater likelihood of full recovery and reduce the possibility of incurring a severe loss on a credit. Furthermore, in many cases, low LTVs result in our having fewer loans with a potential for the borrower to “walk away” from the property. Although borrowers may default on loan payments, they have a greater incentive to protect their equity in the collateral property and to return their loans to performing status. Given that our CRE loans are underwritten in accordance with underwriting standards that are similar to those that apply to our multi-family credits, an increase in non-performing CRE loans historically has not resulted in a corresponding increase in losses on such loans. In addition, at December 31, 2014, one-to-four family loans, ADC loans, and other loans represented 0.42%, 0.78%, and 3.5%, respectively, of total non-covered loans held for investment, as compared to 1.9%, 1.2%, and 2.9%, respectively, at December 31, 2013. Furthermore, 0.25% of our ADC loans were non-performing at the end of this December, while 7.9% and 0.82% of one-to-four family loans and other loans, respectively, were non- performing at that date. In view of these factors, we do not believe that our level of non-performing non-covered loans will result in a comparable level of loan losses, and will not necessarily require an increase in our loan loss provision or allowance for non-covered loans in any given period. As indicated, non-performing non-covered loans represented 0.23% of total non-covered loans at December 31, 2014; the ratio of net charge-offs to average loans for the twelve months ended at that date was 0.01%. The following tables present the number and amount of non-performing multi-family and CRE loans by originating bank at December 31, 2014 and 2013: As of December 31, 2014 (dollars in thousands) New York Community Bank New York Commercial Bank Total for New York Community Bancorp Non-Performing Multi-Family Loans Number 13 2 15 Amount $30,547 542 $31,089 Non-Performing Multi-Family Loans As of December 31, 2013 (dollars in thousands) New York Community Bank New York Commercial Bank Total for New York Community Bancorp Number Amount $58,093 302 $58,395 21 1 22 65 Non-Performing Commercial Real Estate Loans Number Amount $18,962 5,862 $24,824 22 4 26 Non-Performing Commercial Real Estate Loans Number Amount $15,898 8,652 $24,550 23 5 28 The following table presents information about our five largest non-performing loans at December 31, 2014, all of which are non-covered held-for-investment loans: Loan No. 1 Loan No. 2 Loan No. 3 Loan No. 4 Loan No. 5 Type of Loan Origination Date Origination Balance Full Commitment Balance (3) Balance at December 31, 2014 Multi-Family 1/05/06 $12,640,000 Multi-Family 5/23/11(1) $50,708,107 $12,640,000 $50,708,107 $10,217,022 $9,108,193 Associated Allowance None None CRE Various (2) $4,999,999 $4,999,999 $4,999,999 None Multi-Family 6/10/10 $3,600,000 $3,600,000 $3,138,781 $25,908 CRE 9/12/05 $4,300,000 $4,300,000 $2,840,977 None Non-Accrual Date Origination LTV Ratio Current LTV Ratio Last Appraisal March 2014 May 2013 December 2014 September 2014 September 2013 79% 90% 85% 64% 36% 36% 67% 58% 73% 54% March 2014 January 2014 June 2010 September 2014 September 2014 (1) Loan No. 2 consists of various loans with origination dates extending as far back as 2006 that were restructured into a TDR on May 23, 2011. The Company completed foreclosures on 30 of the 32 collateral properties in 2014, thereby reducing the balance to the level reflected in the table at December 31, 2014. (2) Loan No. 3 consists of two loans with origination dates of July 13, 2010 and September 8, 2011. (3) The full commitment balance represents the original amount committed to the borrower; however, due to the delinquency status of these loans, no additional funds can be advanced. The following is a description of the five loans identified in the preceding table: No. 1 - The borrower is an owner of real estate and is based in New Jersey. The loan is collateralized by a multi- family complex with 314 residential units and four retail stores in Atlantic City, New Jersey. No allocation for the non-covered loan loss allowance was necessary for this loan as determined by using the fair value of collateral method defined in ASC 301-10 and -35. No. 2 - The borrower is an owner of real estate and is based in Connecticut. The loan is collateralized by two multi- family complexes with 217 residential units in Hartford, Connecticut. No allocation for the non-covered loan loss allowance was necessary for this loan as determined by using the fair value of collateral method defined in ASC 301-10 and -35. No. 3 - The borrower is an owner of real estate and is based in New York. The loan is collateralized by an 87,500- square foot commercial building in Bethpage, New York. No allocation for the allowance for loan losses was necessary as determined by an internal value calculation using the fair value of collateral method defined in ASC 301-10 and -35. An updated appraisal has been ordered and we expect to receive it by March 31, 2015. No. 4 - The borrower is an owner of real estate and is based in New York. The loan is collateralized by a multi- family building with 40 residential units in Hempstead, New York. An allocation of $25,908 to the allowance for losses on non-covered loans was determined to be necessary, based on the total loan exposure, which includes negative escrow. No. 5 - The borrower is an owner of real estate and is based in New Jersey. The loan is collateralized by a 33,040-square foot medical/professional office building in Raritan, New Jersey. No allocation for the non- covered loan loss allowance was necessary for this loan as determined by using the fair value of collateral method defined in ASC 301-10 and -35. Troubled Debt Restructurings In an effort to proactively manage delinquent loans, we have selectively extended such concessions as rate reductions and extensions of maturity dates, as well as forbearance agreements, to certain borrowers who have experienced financial difficulty. In accordance with GAAP, we are required to account for such loan modifications or restructurings as TDRs. 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 involve management’s judgment regarding the likelihood that the concession will result in the maximum recovery for the Company. 66 Loans modified as TDRs are placed on non-accrual status until we determine that future collection of principal and interest is reasonably assured. This generally requires that the borrower demonstrate performance according to the restructured terms for at least six consecutive months. At December 31, 2014, loans modified as TDRs totaled $45.8 million, including accruing loans of $15.8 million and non-accrual loans of $29.9 million. Loans on which concessions were made with respect to rate reductions and/or extension of maturity dates totaled $39.4 million; loans in connection with which forbearance agreements were reached amounted to $6.4 million. At December 31, 2013, loans modified as TDRs totaled $80.3 million, including accruing loans and non-accrual loans of $13.4 million and $66.9 million, respectively. The significant reduction in TDRs was primarily due to a group of non-performing multi-family loans in the amount of $32.2 million that were transferred to OREO in 2014. Based on the number of loans performing in accordance with their revised terms, our success rate for restructured multi-family and CRE loans was 91.0% at the end of December. In addition, our success rate was 100% for all other loan types at the end of the year. Analysis of Troubled Debt Restructurings The following table presents information regarding our TDRs as of December 31, 2014: (in thousands) Multi-family Commercial real estate One-to-four family Acquisition, development, and construction Commercial and industrial Total Accruing $ 7,697 8,139 -- -- -- $15,836 Non-Accrual $17,879 9,939 260 654 1,195 $29,927 Total $25,576 18,078 260 654 1,195 $45,763 The following table presents information regarding our TDRs as of December 31, 2013: (in thousands) Multi-family Commercial real estate One-to-four family Acquisition, development, and construction Commercial and industrial Total Accruing Non-Accrual $10,083 2,198 -- -- 1,129 $13,410 $50,548 15,626 -- -- 758 $66,932 Total $60,631 17,824 -- -- 1,887 $80,342 The following table sets forth the changes in TDRs over the twelve months ended December 31, 2014: (in thousands) Balance at December 31, 2013 New TDRs Charge-offs Transferred from accruing to non-accrual Transferred to other real estate owned Transferred to accruing from non-accrual Loan payoffs, including dispositions and Accruing Non-Accrual $ 66,932 11,085 (334) 2,231 (33,485) (6,023) $13,410 -- -- (2,231) -- 6,023 Total $ 80,342 11,085 (334) -- (33,485) -- principal pay-downs Balance at December 31, 2014 (1,366) $15,836 (10,479) $ 29,927 (11,845) $ 45,763 67 On a limited basis, we may provide additional credit to a borrower after the loan has been placed on non- accrual status or modified as a TDR if, in management’s judgment, the value of the property after the additional loan funding is greater than the initial value of the property plus the additional loan funding amount. In 2014, no such additional credit was provided. Furthermore, the terms of our restructured loans typically would not restrict us from cancelling outstanding commitments for other credit facilities to a borrower in the event of non-payment of a restructured loan. Except for the non-accrual loans and TDRs disclosed in this filing, we did not have any potential problem loans at December 31, 2014 that would have caused management to have serious doubts as to the ability of a borrower to comply with present loan repayment terms and that would have resulted in such disclosure if that were the case. 68 Asset Quality Analysis (Excluding Covered Loans, Covered OREO, and Non-Covered Loans Held for Sale) The following table presents information regarding our consolidated allowance for losses on non-covered loans, our non-performing non-covered assets, and our non-covered loans 30 to 89 days past due at each year-end in the five years ended December 31, 2014. Covered loans are considered to be performing due to the application of the yield accretion method, as discussed elsewhere in this report. Therefore, covered loans are not reflected in the amounts or ratios provided in this table. (dollars in thousands) Allowance for Losses on Non-Covered Loans: Balance at beginning of year Provision for losses on non-covered loans Charge-offs: Multi-family Commercial real estate One-to-four family Acquisition, development, and construction Other loans Total charge-offs Recoveries Net charge-offs Balance at end of year Non-Performing Non-Covered Assets: Non-accrual non-covered mortgage loans: Multi-family Commercial real estate One-to-four family Acquisition, development, and construction Total non-accrual non-covered mortgage loans Other non-accrual non-covered loans Loans 90 days or more past due and still accruing interest Total non-performing non-covered loans (1) Non-covered other real estate owned (2) Total non-performing non-covered assets Asset Quality Measures: Non-performing non-covered loans to total non-covered loans Non-performing non-covered assets to total non-covered assets Allowance for losses on non-covered loans to non-performing non-covered loans Allowance for losses on non-covered loans to 2014 2013 At December 31, 2012 2011 2010 $141,946 -- $140,948 18,000 $137,290 45,000 $ 158,942 79,000 $127,491 91,000 (755) (1,615) (410) -- (5,296) (8,076) 5,987 (2,089) (12,922) (3,489) (351) (1,503) (7,092) (25,357) 8,355 (17,002) (27,939) (5,046) (574) (5,974) (6,685) (46,218) 4,876 (41,342) (71,187) (11,900) (1,208) (9,153) (12,462) (105,910) 5,258 (100,652) (27,042) (3,359) (931) (9,884) (19,569) (60,785) 1,236 (59,549) $158,942 $139,857 $141,946 $140,948 $ 137,290 $ 31,089 24,824 11,032 654 67,599 9,351 -- $ 76,950 61,956 $138,906 $ 58,395 24,550 10,937 2,571 96,453 7,084 $163,460 56,863 10,945 12,091 243,359 17,971 $ 205,064 68,032 11,907 29,886 314,889 10,926 $327,892 162,400 17,813 91,850 599,955 24,476 -- $103,537 71,392 $174,929 -- $261,330 29,300 $290,630 -- $ 325,815 84,567 $ 410,382 -- $624,431 28,066 $652,497 0.23% 0.35% 0.96% 1.28% 2.63% 0.30 0.40 0.71 1.07 1.77 181.75 137.10 53.93 42.14 25.45 total non-covered loans 0.42 Net charge-offs during the period to average loans outstanding during the period (3) Loans 30-89 Days Past Due: Multi-family Commercial real estate One-to-four family Acquisition, development, and construction Other loans Total loans 30-89 days past due (4) 0.01 $ 464 1,464 3,086 -- 1,178 $6,192 0.48 0.05 $33,678 1,854 1,076 -- 481 $37,089 0.52 0.13 0.54 0.35 0.67 0.21 $19,945 1,679 2,645 1,178 2,138 $27,585 $ 46,702 53,798 2,712 6,520 1,925 $111,657 $121,188 8,207 5,723 5,194 10,728 $151,040 (1) The December 31, 2014, 2013, 2012, 2011, and 2010 amounts exclude loans 90 days or more past due of $157.9 million, $211.5 million, $312.6 million, $347.4 million, and $360.8 million, respectively, that are covered by FDIC loss sharing agreements. (2) The December 31, 2014, 2013, 2012, 2011, and 2010 amounts exclude OREO of $32.0 million, $37.5 million, $45.1 million, $71.4 million, and $62.4 million, respectively, that is covered by FDIC loss sharing agreements. (3) Average loans include covered loans. (4) The December 31, 2014, 2013, 2012, 2011, and 2010 amounts exclude loans 30 to 89 days past due of $41.7 million, $57.9 million, $81.2 million, $112.0 million, and $130.5 million, respectively, that are covered by FDIC loss sharing agreements. 69 f o t n e c r e P h c a E n i s n a o L y r o g e t a C l a t o T o t d e r e v o C - n o N r o f d l e H s n a o L 0 1 0 2 f o t n e c r e P h c a E n i s n a o L y r o g e t a C l a t o T o t d e r e v o C - n o N r o f d l e H s n a o L 1 1 0 2 t n e m t s e v n I t n u o m A t n e m t s e v n I % 8 8 . 0 7 2 7 . 0 4 9 . 2 2 4 1 3 , 5 7 5 4 1 , 2 4 0 9 1 , 1 $ % 8 2 . 8 6 0 5 . 0 5 8 . 6 2 2 7 9 t n u o m A 5 4 7 , 6 6 2 6 2 , 3 4 $ 0 4 . 2 6 0 . 3 2 0 3 , 0 2 1 9 9 , 9 1 5 7 . 1 2 6 . 2 6 1 0 , 1 1 5 9 2 , 5 1 f o t n e c r e P h c a E n i s n a o L y r o g e t a C l a t o T o t d e r e v o C - n o N d l e H s n a o L t n e m t s e v n I r o f 2 1 0 2 % 8 1 . 8 6 5 7 . 0 7 2 . 7 2 6 4 . 1 4 3 . 2 t n u o m A 8 1 6 , 9 7 $ 9 1 5 , 1 6 2 4 , 8 3 8 1 4 , 8 7 6 9 , 2 1 f o t n e c r e P h c a E n i s n a o L y r o g e t a C l a t o T o t d e r e v o C - n o N d l e H s n a o L t n e m t s e v n I r o f 3 1 0 2 % 1 4 . 9 6 8 8 . 1 0 7 . 4 2 5 1 . 1 6 8 . 2 t n u o m A 5 4 7 , 9 7 $ 5 5 7 , 1 2 0 7 , 4 3 9 8 7 , 7 5 5 9 , 7 1 f o t n e c r e P h c a E n i s n a o L y r o g e t a C l a t o T o t d e r e v o C - n o N r o f d l e H s n a o L t n e m t s e v n I 4 1 0 2 % 1 2 . 2 7 2 4 . 0 3 1 . 3 2 2 6 5 t n u o m A 2 1 2 , 6 9 6 4 5 , 9 1 $ 8 7 . 0 6 4 . 3 6 9 2 , 6 1 4 2 , 7 1 % 0 0 . 0 0 1 2 4 9 , 8 5 1 $ % 0 0 . 0 0 1 0 9 2 , 7 3 1 $ % 0 0 . 0 0 1 8 4 9 , 0 4 1 $ % 0 0 . 0 0 1 6 4 9 , 1 4 1 $ % 0 0 . 0 0 1 7 5 8 , 9 3 1 $ s n a o l e t a t s e l a e r l a i c r e m m o C s n a o l y l i m a f r u o f - o t - e n O d n a , t n e m p o l e v e d , n o i t i s i u q c A s n a o l n o i t c u r t s n o c ) s d n a s u o h t n i s r a l l o d ( s n a o l y l i m a f - i t l u M s n a o l r e h t O s n a o l l a t o T d e d n e s r a e y e v i f e h t r o f d n e - r a e y h c a e t a s n a o l d e r e v o c - n o n n o s e s s o l r o f e c n a w o l l a d e t a d i l o s n o c e h t f o n o i t a c o l l a e h t h t r o f s t e s e l b a t g n i w o l l o f e h T . 4 1 0 2 , 1 3 r e b m e c e D a d n a , t r o p e r s i h t n i r e i l r a e ” s e i c i l o P g n i t n u o c c A l a c i t i r C “ n i d e s s u c s i d s a , s r o t c a f s u o i r a v f o e t a m i t s e n a n o p u d e s a b s a w s n o i t a c o l l a g n i d e c e r p e h t f o h c a E s e s s o l r o f e c n a w o l l a e h t f o n o i t r o p e h t t a h t d e t o n e b d l u o h s t i , n o i t i d d a n I . e r u t u f e h t n i e t a i r p o r p p a e r o m e b o t d e m e e d e b y a m y g o l o d o h t e m n o i t a c o l l a t n e r e f f i d t a h t n i h t i w r u c c o y a m t a h t s e s s o l b r o s b a o t e l b a l i a v a t n u o m a l a t o t e h t t n e s e r p e r t o n s e o d y r o g e t a c n a o l d e r e v o c - n o n h c a e o t d e t a c o l l a s n a o l d e r e v o c - n o n n o . o i l o f t r o p n a o l d e r e v o c - n o n e r i t n e e h t r o f e l b a l i a v a s i e c n a w o l l a s s o l n a o l l a t o t e h t e c n i s , y r o g e t a c 0 7 Covered Loans and Covered Other Real Estate Owned The credit risk associated with the assets acquired in our AmTrust and Desert Hills transactions has been substantially mitigated by our loss sharing agreements with the FDIC. Under the terms of the loss sharing agreements, the FDIC agreed to reimburse us for 80% of losses (and share in 80% of any recoveries) up to a specified threshold with respect to the loans and OREO acquired in the transactions, and to reimburse us for 95% of any losses (and share in 95% of any recoveries) with respect to the acquired assets beyond that threshold. The loss sharing (and reimbursement) agreements applicable to one-to-four family mortgage loans and HELOCs are effective for a ten-year period from the date of acquisition. Under the loss sharing agreements applicable to all other covered loans and the OREO acquired in the Desert Hills transaction, the FDIC will reimburse us for losses for a five-year period from the date of acquisition; the period for sharing in recoveries on all other covered loans and the Desert Hills OREO extends for a period of eight years from the acquisition date. We consider our covered loans to be performing due to the application of the yield accretion method under ASC 310-30, which allows us to aggregate credit-impaired loans acquired in the same fiscal quarter into one or more pools, provided that the loans have common risk characteristics. A pool is then accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. Accordingly, loans that may have been classified as non-performing loans by AmTrust or Desert Hills were no longer classified as non-performing at the respective dates of acquisition because we believed at that time that we would fully collect the new carrying value of those loans. The new carrying value represents the contractual balance, reduced by the portion expected to be uncollectible (referred to as 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 is dependent on having a reasonable expectation about the timing and amount of the cash flows to be collected, even if a loan is contractually past due. In connection with the AmTrust and Desert Hills loss sharing agreements, we established FDIC loss share receivables of $740.0 million and $69.6 million, which were the acquisition date fair values of the respective loss sharing agreements (i.e., the expected reimbursements from the FDIC over the terms of the agreements). The loss share receivables may increase if the losses increase, and may decrease if the losses fall short of the expected amounts. Increases in estimated reimbursements will be recognized in income in the same period that they are identified and that the allowance for losses on the related covered loans is recognized. In 2014, we recorded FDIC indemnification expense of $14.9 million in “Non-interest income” in connection with the recovery of $18.6 million from the allowance for losses on covered loans. The recovery was recorded to reflect our expectation that the cash flows generated by certain pools of covered loans would increase due to an improvement in credit quality. Conversely, in the twelve months ended December 31, 2013, we recorded FDIC indemnification income of $10.2 million in “Non-interest income” in connection with a $12.8 million provision for losses on covered loans. The provision was recorded to reflect our expectation that the cash flows generated by certain pools of covered loans would decline due to a decrease in credit quality. Decreases in estimated reimbursements from the FDIC, if any, will be recognized in income prospectively over the life of the related covered loans (or, if shorter, over the remaining term of the loss sharing agreement). Related additions to the accretable yield on the covered loans will be recognized in income prospectively over the lives of the loans. Gains and recoveries on covered assets will offset losses, or be paid to the FDIC at the applicable loss share percentage at the time of recovery. The loss share receivables may also increase due to accretion, or decrease due to amortization. In 2014 and 2013, we recorded net amortization of $42.2 million and $19.8 million, respectively. Accretion of the FDIC loss share receivable relates to the difference between the discounted, versus the undiscounted, expected cash flows of covered loans subject to the FDIC loss sharing agreements. Amortization occurs when the expected cash flows from the covered loan portfolio improve, thus reducing the amounts receivable from the FDIC. These cash flows are discounted to reflect the uncertainty of the timing and receipt of the FDIC loss sharing reimbursements. In the twelve months ended December 31, 2014, we received FDIC reimbursements of $37.8 million, as compared to $64.2 million in the prior year. 71 Asset Quality Analysis (Including Covered Loans and Covered OREO) The following table presents information regarding our non-performing assets and loans past due at December 31, 2014 and December 31, 2013, including covered loans and covered OREO (collectively, “covered assets”): At or For the Years Ended December 31, (dollars in thousands) Covered Loans 90 Days or More Past Due: Multi-family Commercial real estate One-to-four family Acquisition, development, and construction Other Total covered loans 90 days or more past due Covered other real estate owned Total covered non-performing assets Total Non-Performing Assets (including covered assets): Non-performing loans: Multi-family Commercial real estate One-to-four family Acquisition, development, and construction Other non-performing loans Total non-performing loans Other real estate owned Total non-performing assets (including covered assets) Asset Quality Ratios (including covered loans and the allowance for losses on covered loans): Total non-performing loans to total loans Total non-performing assets to total assets Allowances for loan losses to total non-performing loans Allowances for loan losses to total loans Covered Loans 30-89 Days Past Due: Multi-family Commercial real estate One-to-four family Acquisition, development, and construction Other loans Total covered loans 30-89 days past due Total Loans 30-89 Days Past Due (including covered loans): Multi-family Commercial real estate One-to-four family Acquisition, development, and construction Other loans Total loans 30-89 days past due (including covered loans) 2014 $ -- 1,464 148,967 709 6,749 $ 157,889 32,048 $ 189,937 $ 31,089 26,288 159,999 1,363 16,100 $ 234,839 94,004 $ 328,843 0.66% 0.68 78.92 0.52 $ -- 599 37,680 -- 3,417 $41,696 $ 464 2,063 40,766 -- 4,595 $47,888 2013 $ -- 1,607 201,425 1,029 7,424 $211,485 37,477 $248,962 $ 58,395 26,157 212,362 3,600 14,508 $315,022 108,869 $423,891 0.97% 0.91 65.40 0.63 $ -- -- 52,250 -- 5,679 $57,929 $33,678 1,854 53,326 -- 6,160 $95,018 72 Geographical Analysis of Non-Performing Loans (Covered and Non-Covered) The following table presents a geographical analysis of our non-performing loans at December 31, 2014: Non-Performing Loans (in thousands) New Jersey New York Florida California Ohio Arizona Massachusetts All other states Total non-performing loans Non-Covered Loan Portfolio $42,706 30,334 -- -- -- -- -- 3,910 $76,950 Covered Loan Portfolio $ 16,384 15,782 35,039 12,992 8,817 8,347 8,179 52,349 $157,889 Total $ 59,090 46,116 35,039 12,992 8,817 8,347 8,179 56,259 $234,839 Securities Securities represented $7.1 billion, or 14.6%, of total assets at December 31, 2014, a reduction from $8.0 billion, or 17.0%, of total assets, at the prior year-end. In addition to management’s focus on loan production, the decline was attributable to a combination of sales and calls over the course of the year. The investment policies of the Company and the Banks are established by the respective Boards of Directors and implemented by their respective Investment Committees, in concert with the respective Asset and Liability Management Committees. The Investment Committees generally meet quarterly or on an as-needed basis to review the portfolios and specific capital market transactions. In addition, the securities portfolios are reviewed monthly by the Boards of Directors as a whole. Furthermore, the policies guiding the Company’s and the Banks’ investments are reviewed at least annually by the respective Investment Committees, as well as by the respective Boards. While the policies permit investment in various types of liquid assets, neither the Company nor the Banks currently maintain a trading portfolio. Our general investment strategy is to purchase liquid investments with various maturities to ensure that our overall interest rate risk position stays within the required limits of our investment policies. We generally limit our investments to GSE obligations (defined as GSE certificates; GSE collateralized mortgage obligations, or “CMOs”; and GSE debentures). At both December 31, 2014 and 2013, GSE obligations represented 95.5% of total securities. The remainder of the portfolio at those dates was comprised of corporate bonds, trust preferred securities, corporate equities, and municipal obligations. None of our securities investments are backed by subprime or Alt-A loans. Depending on management’s intent at the time of purchase, securities are classified as either “held to maturity” or “available for sale.” Held-to-maturity securities are securities that management has the positive intent to hold to maturity, whereas available-for-sale securities are securities that management intends to hold for an indefinite period of time. Held-to-maturity securities generate cash flows from repayments and serve as a source of earnings; they also serve as collateral for our wholesale borrowings. Available-for-sale securities generate cash flows from sales, as well as from repayments of principal and interest. They also serve as a source of liquidity for future loan production, the reduction of higher-cost funding, and general operating activities. A decision to purchase or sell such securities is based on economic conditions, including changes in interest rates, liquidity, and our asset and liability management strategy. Held-to-maturity securities represented $6.9 billion, or 97.6%, of total securities at the end of this December, a $747.6 million reduction from the year-earlier balance, which represented 96.5% of total securities. At December 31, 2014 and 2013, the fair value of securities held to maturity represented 102.4% and 97.1%, respectively, of their carrying value, with the increase reflecting the decline in market interest rates. Mortgage-related securities and other securities accounted for $4.1 billion and $2.8 billion, respectively, of held-to-maturity securities at December 31, 2014, as compared to $4.4 billion and $3.3 billion, respectively, at December 31, 2013. Included in other securities at the respective year-ends were GSE obligations of $6.7 billion and $7.5 billion; capital trust notes of $75.6 million and $75.7 million; and corporate bonds of $73.3 million and $72.9 million, respectively. The estimated weighted average life of the held-to-maturity securities portfolio was 7.2 years and 8.2 years at the corresponding dates. 73 At December 31, 2014, available-for-sale securities represented the remaining $173.8 million, or 2.4% of total securities, as compared to $280.7 million, or 3.5%, of total securities, at the prior year-end. Included in the respective year-end amounts were mortgage-related securities of $19.7 million and $96.2 million, and other securities of $154.1 million and $184.5 million. At December 31, 2014 and 2013, the estimated weighted average life of the available-for-sale securities portfolio was 8.6 years and 7.3 years, respectively. Federal Home Loan Bank Stock As members of the FHLB-NY, the Community Bank and the Commercial Bank are required to acquire and hold shares of its capital stock. In addition, the Community Bank acquired shares of the capital stock of the FHLB- Cincinnati and the FHLB-San Francisco in connection with the AmTrust and Desert Hills acquisitions, respectively. At December 31, 2014, the Community Bank held $466.0 million of FHLB stock, including $446.4 million of stock in the FHLB-NY, $19.1 million of stock in the FHLB-Cincinnati, and $535,000 of stock in the FHLB-San Francisco. The Commercial Bank had $49.3 million of FHLB stock at the same date, all of which was with the FHLB-NY. FHLB stock continued to be valued at par. In 2014 and 2013, dividends from the three FHLBs to the Community Bank totaled $22.4 million and $18.2 million, respectively. Dividends from the FHLB-NY to the Commercial Bank were $614,000 and $343,000 in the corresponding years. Bank-Owned Life Insurance At December 31, 2014, our investment in bank-owned life insurance (“BOLI”) was $915.2 million, as compared to $893.5 million at December 31, 2013. The increase was attributable to a rise in the cash surrender value of the underlying policies. BOLI is recorded at the total cash surrender value of the policies in “Other assets” in the Consolidated Statements of Condition, and the income generated by the increase in the cash surrender value of the policies is recorded in “Non-interest income” in the Consolidated Statements of Income and Comprehensive Income. FDIC Loss Share Receivable In connection with our loss sharing agreements with the FDIC with respect to the loans and OREO acquired in connection with the AmTrust and Desert Hills transactions, we recorded FDIC loss share receivables of $397.8 million and $492.7 million, respectively, at December 31, 2014 and 2013. The loss share receivables represent the present values of the reimbursements we expected to receive under the combined loss sharing agreements at those dates. Goodwill and Core Deposit Intangibles We record goodwill and core deposit intangibles (“CDI”) in our Consolidated Statements of Condition in connection with certain of our business combinations. Goodwill totaled $2.4 billion at both December 31, 2014 and 2013. Reflecting amortization, CDI declined $8.3 million year-over-year, to $7.9 million. Sources of Funds The Parent Company (i.e., the Company on an unconsolidated basis) has four primary funding sources for the payment of dividends, share repurchases, and other corporate uses: dividends paid to the Company by the Banks; capital raised through the issuance of stock; funding raised through the issuance of debt instruments; and repayments of, and income from, investment securities. On a consolidated basis, our funding primarily stems from a combination of the following sources: retail, institutional, municipal, and brokered deposits; borrowed funds, primarily in the form of wholesale borrowings; the cash flows generated through the repayment and sale of loans; and the cash flows generated through the repayment and sale of securities. In 2014, loan repayments and sales totaled $11.3 billion, as compared to $16.2 billion in 2013, primarily reflecting a decline in the production of one-to-four family loans for sale as residential mortgage interest rates rose. Repayments and sales accounted for $7.5 billion and $3.8 billion, respectively, of the 2014 total and for $9.2 billion and $7.0 billion, respectively, of the total in the prior year. 74 In 2014, cash flows from the repayment and sale of securities respectively totaled $785.1 million and $473.0 million, while the purchase of securities amounted to $376.3 million for the year. In contrast, cash flows from the repayment and sale of securities totaled $740.1 million and $822.9 million, respectively, in 2013, and were offset by the purchase of $4.6 billion of securities. Consistent with our business model, the cash flows from loans and securities were primarily deployed into the production of multi-family loans held for investment, as well as held-for-investment CRE loans and specialty finance loans and leases. Deposits Our ability to retain and attract deposits depends on numerous factors, including customer satisfaction, the rates of interest we pay, the types of products we offer, and the attractiveness of their terms. While there have been times we have chosen not to compete actively for deposits (depending on our access to deposits through acquisitions, the availability of lower-cost funding sources, the impact of competition on pricing, and the need to fund our loan demand), we sought to increase our deposits substantially over the course of 2014. As a result, deposits rose 10.4% year-over-year to $28.3 billion at the end of this December from $25.7 billion at December 31, 2013. The balances at the respective dates represented 58.3% and 55.0% of total assets, reflecting a strategic shift in the Company’s funding mix. Reflecting the benefit of a series of deposit growth campaigns, NOW and money market accounts rose $2.0 billion year-over-year, to $12.5 billion, while savings accounts rose $1.1 billion to $7.1 billion, and non-interest- bearing accounts rose $36.4 million to $2.3 billion. The increase in deposits was only partly offset by a $511.5 million decrease in CDs to $6.4 billion at December 31, 2014. While the vast majority of our deposits are retail deposits we have gathered through our branch network or acquired through business combinations, institutional deposits and municipal deposits are also part of our deposit mix. Retail deposits rose $1.2 billion year-over-year, to $21.3 billion, while institutional deposits rose $1.7 billion to $2.2 billion at December 31, 2014. Municipal deposits represented $847.8 million of total deposits at the end of this December, a $71.1 million decrease from the year-earlier amount. Depending on their availability and pricing relative to other funding sources, we also include brokered deposits in our deposit mix. Brokered deposits accounted for $4.0 billion of our deposits at the end of this December, a $132.9 million decrease from the balance at December 31, 2013. Included in the year-end 2014 and 2013 balances were brokered NOW and money market accounts of $2.6 billion and $3.6 billion; brokered CDs of $3.5 million and $212.1 million; and brokered non-interest-bearing accounts of $1.4 billion and $260.5 million, respectively. Borrowed Funds Borrowed funds consist primarily of wholesale borrowings (i.e., FHLB advances, repurchase agreements, and federal funds purchased) and, to a far lesser extent, other borrowings. While other borrowings included junior subordinated debentures and preferred stock of subsidiaries at December 31, 2013, we redeemed all of our preferred stock of subsidiaries in the fourth quarter of 2014. Largely reflecting an $874.4 million decline in wholesale borrowings from the year-earlier balance, borrowed funds fell $878.5 million to $14.2 billion at December 31, 2014. Wholesale Borrowings At December 31, 2014 and 2013, wholesale borrowings totaled $13.9 billion and $14.7 billion, representing 28.6% and 31.6% of total assets at the respective dates. FHLB advances accounted for $10.2 billion of the year-end 2014 balance, as compared to $10.9 billion at the prior year-end. In addition to FHLB-NY advances, the year-end 2014 balance included FHLB-Cincinnati advances of $489.4 million that were assumed in the AmTrust acquisition in December 2009. The Community Bank and the Commercial Bank are both members of, and have lines of credit with, the FHLB-NY. Pursuant to blanket collateral agreements with the Banks, our FHLB advances and overnight advances are secured by pledges of certain eligible collateral in the form of loans and securities. Also included in wholesale borrowings at December 31, 2014 were repurchase agreements of $3.4 billion, consistent with the balance at the prior year-end. Repurchase agreements are contracts for the sale of securities owned or borrowed by the Banks with an agreement to repurchase those securities at agreed-upon prices and dates. 75 Our repurchase agreements are primarily collateralized by GSE obligations, and may be entered into with the FHLB-NY or certain brokerage firms. The brokerage firms we utilize are subject to an ongoing internal financial review to ensure that we borrow funds only from those dealers whose financial strength will minimize the risk of loss due to default. In addition, a master repurchase agreement must be executed and on file for each of the brokerage firms we use. Federal funds purchased accounted for $260.0 million of wholesale borrowings at the end of this December, a $185.0 million decrease from the year-earlier amount. At December 31, 2014, $5.2 billion of our wholesale borrowings were callable in 2015. Given the current interest rate environment, we do not expect our callable wholesale borrowings to be called. Other Borrowings Other borrowings totaled $358.4 million at the end of this December, a $4.1 million decrease from the balance at December 31, 2013. The year-end 2014 balance consisted entirely of junior subordinated debentures, while the year-earlier balance included $4.3 million of preferred stock of subsidiaries. The redemption of our preferred stock of subsidiaries in the fourth quarter of 2014 resulted in a modest gain. Please see Note 8, “Borrowed Funds,” in Item 8, “Financial Statements and Supplementary Data” for a further discussion of our wholesale borrowings and other borrowings. Liquidity, Contractual Obligations and Off-Balance Sheet Commitments, and Capital Position Liquidity We manage our liquidity to ensure that our cash flows are sufficient to support our operations, and to compensate for any temporary mismatches between sources and uses of funds caused by variable loan and deposit demand. We monitor our liquidity daily to ensure that sufficient funds are available to meet our financial obligations. Our most liquid assets are cash and cash equivalents, which totaled $564.2 million and $644.6 million, respectively, at December 31, 2014 and 2013. As in the past, our loan and securities portfolios provided meaningful liquidity in 2014, with cash flows from the repayment and sale of loans totaling $11.3 billion and cash flows from the repayment and sale of securities totaling $1.3 billion. Additional liquidity stems from the retail, institutional, and municipal deposits we gather or acquire through business combinations, and from our use of wholesale funding sources, including brokered deposits and wholesale borrowings. In addition, we have access to the Banks’ approved lines of credit with various counterparties, including the FHLB-NY. The availability of these wholesale funding sources is generally based on the amount of mortgage loan collateral available under a blanket lien we have pledged to the respective institutions and, to a lesser extent, the amount of available securities that may be pledged to collateralize our borrowings. At December 31, 2014, our available borrowing capacity with the FHLB-NY was $7.9 billion. In addition, the Community Bank and the Commercial Bank had available-for-sale securities of $171.8 million, combined, at that date. Furthermore, the Community Bank has an agreement with the Federal Reserve Bank of New York (the “FRB- NY”) that enables it to access the discount window as a further means of enhancing its liquidity if need be. In connection with that agreement, the Community Bank has pledged certain loans and securities to collateralize any funds it may borrow. At December 31, 2014, the maximum amount the Community Bank could borrow from the FRB-NY was $1.1 billion; there were no borrowings against this line of credit at that date. Our primary investing activity is loan production, and the volume of loans we originated for sale and for investment totaled $14.2 billion in 2014. During this time, the net cash used in investing activities totaled $2.1 billion. Our financing activities provided net cash of $1.3 billion and our operating activities provided net cash of $722.4 million during the same time. CDs due to mature in one year or less from December 31, 2014 totaled $5.0 billion, representing 77.5% of total CDs at that date. Our ability to retain these CDs and to attract new deposits depends on numerous factors, including customer satisfaction, the rates of interest we pay on our deposits, the types of products we offer, and the attractiveness of their terms. However, there are times when we may choose not to compete for deposits, depending on the availability of lower-cost funding, the competitiveness of the market and its impact on pricing, and our need for such deposits to fund loan demand. 76 The Parent Company is a separate legal entity from each of the Banks and must provide for its own liquidity. In addition to operating expenses and any share repurchases, the Parent Company is responsible for paying any dividends declared to our shareholders. As a Delaware corporation, the Parent Company is able to pay dividends either from surplus or, in case there is no surplus, from net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. In addition, the Parent Company is not required to obtain prior FRB approval to pay a dividend unless the declaration and payment of a dividend could raise supervisory concerns about the safe and sound operation of the Company and the Banks, where the dividend declared for a period is not supported by earnings for that period, or where the Company plans to declare an increase in its dividend. The Parent Company’s ability to pay dividends may depend, in part, upon dividends it receives from the Banks. The ability of the Community Bank and the Commercial Bank to pay dividends and other capital distributions to the Parent Company is generally limited by New York State banking law and regulations, and by certain regulations of the FDIC. In addition, the Superintendent of the New York State Department of Financial Services (the “Superintendent”), the FDIC, and the FRB, for reasons of safety and soundness, may prohibit the payment of dividends that are otherwise permissible by regulations. Under New York State Banking Law, a New York State-chartered stock-form savings bank or commercial bank may declare and pay dividends out of its net profits, unless there is an impairment of capital. However, the approval of the Superintendent is required if the total of all dividends declared in a calendar year would exceed the total of a bank’s net profits for that year, combined with its retained net profits for the preceding two years. In 2014, the Banks paid dividends totaling $410.0 million to the Parent Company, leaving $195.9 million that they could dividend to the Parent Company without regulatory approval at year-end. Additional sources of liquidity available to the Parent Company at December 31, 2014 included $89.5 million in cash and cash equivalents and $2.0 million of available-for-sale securities. If either of the Banks were to apply to the Superintendent for approval to make a dividend or capital distribution in excess of the dividend amounts permitted under the regulations, there can be no assurance that such application would be approved. Contractual Obligations and Off-Balance Sheet Commitments In the normal course of business, we enter into a variety of contractual obligations in order to manage our assets and liabilities, fund loan growth, operate our branch network, and address our capital needs. For example, we offer CDs with contractual terms to our customers, and borrow funds under contract from the FHLB and various brokerage firms. These contractual obligations are reflected in the Consolidated Statements of Condition under “Deposits” and “Borrowed funds,” respectively. At December 31, 2014, we had CDs of $6.4 billion and long-term debt (defined as borrowed funds with an original maturity in excess of one year) of $11.3 billion. We also are obligated under certain non-cancelable operating leases on the buildings and land we use in operating our branch network and in performing our back-office responsibilities. These obligations are not included in the Consolidated Statements of Condition and totaled $158.5 million at December 31, 2014. Contractual Obligations The following table sets forth the maturity profile of the aforementioned contractual obligations as of December 31, 2014: (in thousands) One year or less One to three years Three to five years More than five years Total Certificates of Deposit $4,974,122 1,292,563 123,176 30,737 $6,420,598 Long-Term Debt (1) $ 300,675 1,159,772 4,495,955 5,321,885 $11,278,287 Operating Leases $ 27,381 50,142 34,399 46,599 $158,521 Total $ 5,302,178 2,502,477 4,653,530 5,399,221 $17,857,406 (1) Includes FHLB advances, repurchase agreements, and junior subordinated debentures. At December 31, 2014, we also had commitments to extend credit in the form of mortgage and other loan originations. These off-balance sheet commitments consist of agreements to extend credit, as long as there is no violation of any condition established in the contract under which the loan is made. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. 77 Commitments to originate loans totaled $2.6 billion at the end of this December, including mortgage loans of $1.8 billion and other loans of $734.3 million, with unadvanced lines of credit included in the latter amount. Loans held for sale represented $494.6 million of the outstanding mortgage loan commitments; the remaining $2.1 billion were held-for-investment loans. The majority of our loan commitments were expected to be funded within 90 days of the end of the year. We also had off-balance sheet commitments to issue commercial, performance stand-by, and financial stand-by letters of credit of $79.1 million, $9.9 million, and $112.0 million, respectively. We had no commitments to purchase securities at the end of 2014. The following table summarizes our off-balance sheet commitments to extend credit in the form of loans and letters of credit at December 31, 2014: (in thousands) Mortgage Loan Commitments: Multi-family and commercial real estate One-to-four family Acquisition, development, and construction Total mortgage loan commitments Other loan commitments Total loan commitments Commercial, performance stand-by, and financial stand-by letters of credit Total commitments $1,018,223 495,854 301,763 $1,815,840 734,326 $2,550,166 200,983 $2,751,149 Based upon our current liquidity position, we expect that our funding will be sufficient to fulfill these obligations and commitments when they are due. Derivative Financial Instruments We use various financial instruments, including derivatives, in connection with our strategies to mitigate or reduce our exposure to losses from adverse changes in interest rates. Our derivative financial instruments consist of financial forward and futures contracts, interest rate lock commitments (“IRLCs”), swaps, and options, and relate to our mortgage banking operations, MSRs, and other related risk management activities. These activities will vary in scope based on the level and volatility of interest rates, the types of assets held, and other changing market conditions. At December 31, 2014, we held derivative financial instruments with a notional value of $3.4 billion. (Please see Note 15, “Derivative Financial Instruments,” in Item 8, “Financial Statements and Supplementary Data” for a further discussion of our use of such financial instruments.) Capital Position At December 31, 2014, stockholders’ equity totaled $5.8 billion, reflecting a $46.2 million increase from the balance at December 31, 2013. The year-end 2014 balance represented 11.91% of total assets and was equivalent to a book value per share of $13.06. At the prior year-end, stockholders’ equity represented 12.29% of total assets and was equivalent to a book value per share of $13.01. Tangible stockholders’ equity rose $54.5 million year-over-year, to $3.3 billion, after the distribution of four quarterly cash dividends totaling $442.2 million. The year-end 2014 balance represented 7.24% of tangible assets and a book value per share of $7.54; the year-end 2013 balance represented 7.42% of tangible assets and a tangible book value per share of $7.45. We calculate book value per share by dividing the amount of stockholders’ equity and tangible stockholders’ equity at the end of a period by the number of shares outstanding at the same date. At December 31, 2014, there were 442,587,190 shares outstanding; at the prior year-end, the number of outstanding shares was 440,809,365. We calculate tangible stockholders’ equity by subtracting the amount of goodwill and CDI recorded at the end of a period from the amount of stockholders’ equity recorded at the same date. At December 31, 2014 and 2013, we recorded goodwill of $2.4 billion; CDI totaled $7.9 million and $16.2 million at the respective dates. (Please see the discussion and reconciliations of stockholders’ equity and tangible stockholders’ equity, total assets and tangible assets, and the related financial measures that appear on the last page of this discussion and analysis of financial condition and results of operations.) 78 Stockholders’ equity and tangible stockholders’ equity both include accumulated other comprehensive loss (“AOCL”) or income, which is comprised of the net unrealized gain or loss on available-for-sale securities; the net unrealized gain or loss on the non-credit portion of OTTI securities; and the Company’s pension and post-retirement obligations at the end of a period. In the twelve months ended December 31, 2014, AOCL rose $19.2 million to $55.7 million, reflecting a $22.1 million increase in pension and post-retirement obligations to $53.3 million which, in turn, was due to a decline in market discount rates and an update to mortality assumptions to reflect new standard mortality tables released by the Society of Actuaries in October 2014. The increase in AOCL was only partly offset by a $2.7 million increase in the net unrealized gain on available-for-sale securities and by a modest decline in the net unrealized loss on the non-credit portion of OTTI. As reflected in the following table, our capital measures continued to exceed the minimum federal requirements for a bank holding company at December 31, 2014, as they did at December 31, 2013. The table sets forth our total risk-based, Tier 1 risk-based, and leverage capital amounts and ratios on a consolidated basis, as well as the respective minimum regulatory capital requirements, at the respective dates: At December 31, 2014 (dollars in thousands) Total risk-based capital Tier 1 risk-based capital Leverage capital At December 31, 2013 (dollars in thousands) Total risk-based capital Tier 1 risk-based capital Leverage capital Actual Amount $3,919,248 3,731,430 3,731,430 Ratio 12.92% 12.30 8.04 Actual Amount $3,870,921 3,664,082 3,664,082 Ratio 13.56% 12.84 8.39 Minimum Required Ratio 8.00% 4.00 4.00 Minimum Required Ratio 8.00% 4.00 4.00 In addition, the capital ratios for the Community Bank and the Commercial Bank continued to exceed the minimum levels required for classification as “well capitalized” institutions at December 31, 2013, as defined under the Federal Deposit Insurance Corporation Improvement Act of 1991, and as further discussed in Note 18, “Regulatory Matters,” in Item 8, “Financial Statements and Supplementary Data.” Basel III Capital Rules In July 2013, the Company’s primary federal regulator, the FRB, and the Banks’ primary federal regulator, the FDIC, published final rules (the “Basel III Capital Rules”) establishing a new comprehensive capital framework for U.S. banking organizations. The rules implement the Basel Committee’s December 2010 framework, known as “Basel III,” for strengthening international capital standards as well as certain provisions of the Dodd-Frank Act. The Basel III Capital Rules substantially revise the current U.S. risk-based capital rules and requirements applicable to bank holding companies and depository institutions, including the Company and the Banks, as indicated below: • They define the components of capital and address other issues affecting the numerator in banking institutions’ regulatory capital ratios; • They address risk weights and other issues affecting the denominator in banking institutions’ regulatory capital ratios; • They replace the existing risk-weighting approach, which was derived from the Basel I capital accords of the Basel Committee, with a more risk-sensitive approach based, in part, on the standardized approach in the Basel Committee’s 2004 “Basel II” capital accords; and • They implement the requirements of Section 939A of the Dodd-Frank Act to remove references to credit ratings from the federal banking agencies’ rules. The Basel III Capital Rules are effective for the Company and the Banks on January 1, 2015, and are subject to a phase-in period. In addition, and among other things, the Basel III Capital Rules: • Introduce a new capital measure called “Common Equity Tier 1” (“CET1”); 79 • Specify that Tier 1 capital consists of CET1 and “Additional Tier 1 Capital” instruments meeting specified requirements; • Define CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1, and not to the other components of capital; and • Expand the scope of the deductions/adjustments from capital as compared to existing regulations. The Basel III Capital Rules provide for a number of deductions from, and adjustments to, CET1. These include, for example, the requirement that MSRs, certain deferred tax assets dependent upon future taxable income, and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. In addition, under current capital standards, the effects of accumulated other comprehensive income items included in capital are excluded for the purposes of determining regulatory capital ratios. Under the Basel III Capital Rules, the effects of certain accumulated other comprehensive income items are not excluded; however, “non- advanced approach” banking organizations, including the Company and the Banks, may make a one-time permanent election to continue to exclude these items. We expect to make this election in order to avoid significant variations in the level of capital depending upon the impact of interest rate fluctuations on the fair value of our securities portfolio. The Basel III Capital Rules also exclude the inclusion of certain hybrid securities, such as trust preferred securities, as Tier 1 capital of bank holding companies, subject to phase-out. As a result, beginning in 2015, only 25% of the Company’s trust preferred securities will be included in Tier 1 capital and, in 2016, none of the Company’s trust preferred securities will be included in Tier 1 capital. Trust preferred securities no longer included in the Company’s Tier 1 capital may nonetheless be included as a component of Tier 2 capital on a permanent basis without phase-out. Implementation of the deductions and other adjustments to CET1 began on January 1, 2015 and will be phased in over a four-year period, starting at 40% on January 1, 2015 and continuing thereafter with an additional 20% per calendar year. The implementation of a capital conservation buffer will begin on January 1, 2016 at the 0.625% level and be phased in over a four-year period, increasing by that amount on each subsequent January 1st until it reaches 2.5% on January 1, 2019. Under the Basel III Capital Rules, the initial minimum capital ratios as of January 1, 2015 are as follows: • 4.5% CET1 to risk-weighted assets; • 6.0% Tier 1 capital to risk-weighted assets; and • 8.0% Total capital to risk-weighted assets. When fully phased in on January 1, 2019, the Basel III Capital Rules will require the Company and the Banks to maintain: • • • • a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” designed to absorb losses during periods of economic stress (which is added to the 4.5% CET1 ratio as that buffer is phased in, effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7% upon full implementation); a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation); a minimum ratio of Total capital (i.e., Tier 1 plus Tier 2) to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum Total capital ratio of 10.5% upon full implementation); and a minimum leverage capital ratio of 4.0%, calculated as the ratio of Tier 1 capital to average assets (as compared to a current minimum leverage capital ratio of 3.0% for banking organizations that either have the highest supervisory rating or have implemented the appropriate federal regulatory authority’s risk- adjusted measure for market risk). Management believes that, as of December 31, 2014, the Company and the Banks would meet all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis if such requirements were 80 effective as of that date. In addition, reflecting a good faith estimate of the Company’s CET1 and risk-weighted assets, as computed in accordance with the methodologies set forth in the Basel III Capital Rules, management estimates that the Company’s ratio of CET1 to risk-weighted assets, on a fully phased-in basis, was approximately 10.85% at December 31, 2014. RESULTS OF OPERATIONS: 2014 and 2013 Earnings Summary In 2014 and 2013, we generated earnings of $485.4 million and $475.5 million, respectively, equivalent to $1.09 and $1.08 per diluted share. Our 2014 earnings provided a 1.08% return on average tangible assets (“ROTA”) and a 14.77% return on average tangible stockholders’ equity (“ROTE”). (ROTA and ROTE are non-GAAP financial measures. Please see the discussion and reconciliation of our GAAP and non-GAAP financial measures on the last page of this discussion and analysis of financial condition and results of operations.) While net interest income fell year-over-year as the yield curve flattened, the impact was exceeded by the benefit of a decline in the provision for non-covered loan losses, together with the recovery of losses on covered loans. In addition, non-interest expense declined year-over-year, fueled by reductions in operating expenses and CDI amortization, exceeding the impact of a decrease in non-interest income year-over-year. Reflecting a rise in pre-tax income and the effective tax rate, income tax expense rose in 2014. Net Interest Income Net interest income is our primary source of income. Its level is a function of the average balance of our interest-earning assets, the average balance of our interest-bearing liabilities, and the spread between the yield on such assets and the cost of such liabilities. These factors are influenced by both the pricing and mix of our interest- earning assets and our interest-bearing liabilities which, in turn, are impacted by various external factors, including the local economy, competition for loans and deposits, the monetary policy of the Federal Open Market Committee of the Federal Reserve Board of Governors (the “FOMC”), and market interest rates. The cost of our deposits and borrowed funds is largely based on short-term rates of interest, the level of which is partially impacted by the actions of the FOMC. The FOMC reduces, maintains, or increases the target federal funds rate (the rate at which banks borrow funds overnight from one another) as it deems necessary. The target federal funds rate has been maintained at a range of zero to 0.25% since the fourth quarter of 2008. While the target federal funds rate generally impacts the cost of our short-term borrowings and deposits, the yields on our held-for-investment loans and other interest-earning assets are typically impacted by intermediate-term market interest rates. For example, in 2014, the five-year CMT ranged from a low of 1.37% to a high of 1.85%, with a 1.64% average. In 2013, the five-year CMT ranged from 0.65% to 1.85%, with an average of 1.17%. Net interest income is also influenced by the level of prepayment penalty income generated, primarily in connection with the prepayment of our multi-family and CRE loans. Since prepayment penalty income is recorded as interest income, an increase or decrease in its level will also be reflected in the average yields on our loans and other interest-earning assets, and therefore, in our interest rate spread and net interest margin. For example, 2013 was a record year for prepayment penalty income as the real estate market in New York City began to recover, resulting in a high level of property transactions as well as refinancing activity. In 2014, the level of property transactions and refinancing activity was lower and, as a result, prepayment penalty income declined substantially year-over-year. Specifically, prepayment penalty income totaled $86.8 million in 2014, reflecting a $50.1 million reduction from the year-earlier amount. 81 In 2014, we generated net interest income of $1.1 billion, reflecting a year-over-year decrease of $26.3 million. The reduction was the net effect of a $25.0 million decrease in interest income to $1.7 billion and a $1.2 million increase in interest expense to $542.7 million. Furthermore, our margin declined to 2.67% in 2014 from 3.01% in the prior year. The following factors contributed to the respective declines: • While the average balance of interest-earning assets rose $4.0 billion year-over-year, to $42.7 billion, the average yield on such assets fell 47 basis points to 3.94%. The lower yield was attributable to the replenishment of our asset mix with lower-yielding loans held for investment, as market interest rates trended lower, and to a 15-basis point decline in the contribution of prepayment penalty income to the average yield. • In 2014, loans accounted for $34.5 billion of average interest-earning assets, reflecting a year-over-year increase of $2.6 billion, or 8.3%. Nevertheless, the interest income produced by loans fell $72.8 million, or 4.9%, to $1.4 billion, as the average yield dropped 57 basis points to 4.10%. Prepayment penalty income contributed 25 basis points to the average yield on loans in 2014, as compared to 43 basis points in the prior year. The remainder of the decline in the average yield was attributable to the replenishment of the portfolio with lower-yielding loans. • Also included in 2014’s average balance of interest-earning assets were securities and money market investments of $8.2 billion, reflecting a year-over-year increase of $1.4 billion, or 20.7%. The interest income produced by such assets rose $47.7 million during this time to $268.2 million, as the increase in the average balance was accompanied by a three-basis point rise in the average yield to 3.26%. • The average balance of interest-bearing liabilities rose $3.6 billion year-over-year to $39.6 billion, while the average cost of funds fell 14 basis points to 1.37%. In addition to the low level of short-term interest rates, the decline reflects a decrease in the average cost of total interest-bearing deposits as well as a decrease in the average cost of borrowed funds. • In 2014, interest-bearing deposits accounted for $24.9 billion of average interest-bearing liabilities, reflecting a year-over-year increase of $2.2 billion, or 9.9%. While the average balance of CDs declined $1.2 billion during this time, to $6.7 billion, the decrease was exceeded by increases of $2.2 billion and $1.3 billion in the average balances of NOW and money market accounts and savings accounts, respectively. While the average costs of savings accounts and CDs respectively rose 13 and six basis points from the year-earlier levels, the average cost of NOW and money market accounts fell four basis points year-over-year. The net effect of the increase in the higher average balance and the lower cost of interest-bearing deposits was an $8.1 million increase in interest expense on deposits to $149.7 million. • While the average balance of borrowed funds rose $1.4 billion year-over-year to $14.7 billion, the average cost of such funds fell 33 basis points to 2.68%. As a result, the interest expense produced by borrowed funds declined $6.9 million to $393.0 million, tempering the impact of the increase in the interest expense produced by interest-bearing deposits. It should be noted that the level of prepayment penalty income recorded in any given period depends on the volume of loans that refinance or prepay during that time. Such activity is largely dependent on such external factors as current market conditions, including real estate values, and the perceived or actual direction of market interest rates. In addition, while a decline in market interest rates may trigger an increase in refinancing and, therefore, prepayment penalty income, so too may an increase in market interest rates. It is not unusual for borrowers to lock in lower interest rates when they expect, or see, that market interest rates are rising rather than risk refinancing later at a still higher interest rate. Furthermore, the level of prepayment penalty income recorded when a loan prepays is a function of the remaining principal balance as well as the number of years remaining on the loan. The number of years dictates the number of prepayment penalty points that are charged on the remaining principal balance, based on a sliding scale of five percentage points to one, as discussed under “Multi-Family Loans” and “Commercial Real Estate Loans” earlier in this report. In 2014, the largest loan to prepay was a $170.0 million loan to a single borrower, which accounted for $6.8 million of the prepayment penalty income recorded. In contrast, the largest loan repaying in 2013 was a $475.0 million loan to a single borrower, which accounted for $14.3 million of the prepayment penalty income recorded that year. 82 - t s e r e t n i r u o n o s d l e i y e g a r e v a e h t g n i d u l c n i , d e t a c i d n i s r a e y e h t r o f t e e h s e c n a l a b e g a r e v a r u o g n i d r a g e r n o i t a m r o f n i n i a t r e c h t r o f s t e s e l b a t g n i w o l l o f e h T d n a s m u i m e r p s a l l e w s a , s e e f e d u l c n i s t s o c d n a s d l e i y e g a r e v a e h T . y l i a d d e t a l u c l a c e r a t a h t s e c n a l a b e g a r e v a m o r f d e v i r e d e r a r a e y e h t r o f s e c n a l a b e g a r e v a e h T . s e i t i l i b a i l g n i r a e b - t s e r e t n i f o e c n a l a b e g a r e v a e h t y b d e c u d o r p e s n e p x e t s e r e t n i e h t g n i d i v i d y b d e t a l u c l a c e r a s t s o c e g a r e v A . s t e s s a g n i n r a e - t s e r e t n i f o e c n a l a b e g a r e v a e h t y b d e c u d o r p e m o c n i t s e r e t n i e h t g n i d i v i d y b d e t a l u c l a c e r a s d l e i y e g a r e v A . s e i t i l i b a i l g n i r a e b - t s e r e t n i r u o f o s t s o c e g a r e v a e h t d n a s t e s s a g n i n r a e . s t s o c d n a s d l e i y e g a r e v a h c u s o t s t n e m t s u j d a d e r e d i s n o c e r a t a h t , ) s n o i t i s i u q c a m o r f s t n e m t s u j d a t e k r a m - o t - k r a m g n i d u l c n i ( s t n u o c s i d s i s y l a n A e m o c n I t s e r e t n I t e N e g a r e v A / d l e i Y t s o C 2 1 0 2 t s e r e t n I e g a r e v A e c n a l a B e g a r e v A / d l e i Y t s o C t s e r e t n I e g a r e v A e c n a l a B , 1 3 r e b m e c e D d e d n E s r a e Y e h t r o F 3 1 0 2 e g a r e v A / d l e i Y t s o C 4 1 0 2 t s e r e t n I e g a r e v A e c n a l a B % 7 1 . 5 4 0 5 , 7 9 5 , 1 $ 5 4 1 , 6 0 9 , 0 3 $ % 7 6 . 4 2 6 6 , 7 8 4 , 1 $ 0 6 8 , 1 7 8 , 1 3 $ % 0 1 . 4 4 8 8 , 4 1 4 , 1 $ 1 1 6 , 0 1 5 , 4 3 $ 2 7 . 3 6 9 . 4 7 9 5 , 3 9 1 1 0 1 , 1 9 7 , 1 7 9 2 , 0 1 2 , 5 3 1 0 , 7 7 3 , 6 2 4 4 , 6 1 1 , 6 3 5 5 4 , 3 9 4 , 2 4 $ 3 2 . 3 1 4 . 4 6 3 4 , 0 2 2 8 9 0 , 8 0 7 , 1 1 9 9 , 4 0 8 , 6 2 1 4 , 9 1 7 , 5 1 5 8 , 6 7 6 , 8 3 3 6 2 , 6 9 3 , 4 4 $ 6 2 . 3 4 9 . 3 3 8 1 , 8 6 2 7 6 0 , 3 8 6 , 1 9 2 1 , 5 1 2 , 8 2 3 3 , 2 1 3 , 5 0 4 7 , 5 2 7 , 2 4 2 7 0 , 8 3 0 , 8 4 $ % 1 4 . 0 3 3 . 0 2 1 . 1 8 6 . 0 1 8 . 3 5 8 . 1 9 0 6 , 6 3 7 7 6 , 3 1 0 8 8 , 3 9 6 6 1 , 4 4 1 4 1 9 , 6 8 4 0 8 0 , 1 3 6 % 1 1 . 3 % 1 2 . 3 x 6 0 . 1 1 2 0 , 0 6 1 , 1 $ $ 2 1 4 , 3 3 8 , 8 $ % 8 3 . 0 $ 3 0 4 , 3 3 4 , 9 $ % 4 3 . 0 9 1 0 , 9 8 0 , 4 3 4 1 , 5 0 4 , 8 4 7 5 , 7 2 3 , 1 2 1 1 3 , 1 7 7 , 2 1 5 8 8 , 8 9 0 , 4 3 1 4 8 , 5 7 5 , 2 4 7 6 , 7 8 2 5 5 0 , 1 3 5 , 5 0 0 4 , 2 6 9 , 6 3 5 5 4 , 3 9 4 , 2 4 $ 1 4 . 0 6 0 . 1 3 6 . 0 1 0 . 3 1 5 . 1 % 0 9 . 2 % 1 0 . 3 x 8 0 . 1 4 8 8 , 5 3 0 5 9 , 1 2 5 0 8 , 3 8 9 3 6 , 1 4 1 3 4 8 , 9 9 3 2 8 4 , 1 4 5 6 1 6 , 6 6 1 , 1 $ 7 1 8 , 9 0 3 , 5 2 8 9 , 0 1 9 , 7 2 0 2 , 4 5 6 , 2 2 3 4 7 , 2 8 2 , 3 1 5 4 9 , 6 3 9 , 5 3 6 5 3 , 7 9 5 , 2 7 1 5 , 1 4 2 5 4 4 , 0 2 6 , 5 8 1 8 , 5 7 7 , 8 3 3 6 2 , 6 9 3 , 4 4 $ 4 5 . 0 2 1 . 1 0 6 . 0 8 6 . 2 7 3 . 1 % 7 5 . 2 % 7 6 . 2 x 8 0 . 1 8 0 5 , 9 3 7 2 7 , 5 3 1 1 5 , 4 7 6 4 7 , 9 4 1 8 6 9 , 2 9 3 4 1 7 , 2 4 5 $ 4 8 4 , 8 3 6 , 1 1 $ 4 3 3 , 5 9 5 , 6 8 8 1 , 3 6 6 , 6 6 0 0 , 7 9 8 , 4 2 9 8 8 , 7 8 6 , 4 1 5 9 8 , 4 8 5 , 9 3 1 5 7 , 1 8 4 , 2 1 3 6 , 2 0 2 5 9 7 , 8 6 7 , 5 7 7 2 , 9 6 2 , 2 4 ) 3 ( ) 2 ( s t n e m t s e v n i t e k r a m y e n o m d n a s e i t i r u c e S ) 1 ( t e n , s n a o l r e h t o d n a e g a g t r o M : s t e s s a g n i n r a e - t s e r e t n I s t e s s a g n i n r a e - t s e r e t n i l a t o T s t e s s a g n i n r a e - t s e r e t n i - n o N s t e s s a l a t o T : Y T I U Q E ’ S R E D L O H K C O T S D N A S E I T I L I B A I L ) s d n a s u o h t n i s r a l l o d ( : S T E S S A s t n u o c c a t e k r a m y e n o m d n a W O N : s e i t i l i b a i l g n i r a e b - t s e r e t n I s t i s o p e d g n i r a e b - t s e r e t n i l a t o T s d n u f d e w o r r o B s e i t i l i b a i l g n i r a e b - t s e r e t n i l a t o T s t i s o p e d g n i r a e b - t s e r e t n i - n o N t i s o p e d f o s e t a c i f i t r e C s t n u o c c a s g n i v a S y t i u q e ’ s r e d l o h k c o t S s e i t i l i b a i l r e h t O s e i t i l i b a i l l a t o T 3 8 . s n a o l g n i m r o f r e p - n o n d n a e l a s r o f d l e h s n a o l e d u l c n i d n a , s e s s o l n a o l r o f s e c n a w o l l a e h t d n a ) s e e f ( / s t s o c n o i t a n i g i r o n a o l d e r r e f e d t e n f o t e n . t s o c d e z i t r o m a t a e r a e r a s t n u o m A s t n u o m A . k c o t s B L H F s e d u l c n I ) 1 ( ) 2 ( ) 3 ( 3 5 3 , 0 4 1 , 1 $ d a e r p s e t a r t s e r e t n i / e m o c n i t s e r e t n i t e N 2 7 0 , 8 3 0 , 8 4 $ y t i u q e ’ s r e d l o h k c o t s d n a s e i t i l i b a i l l a t o T o t s t e s s a g n i n r a e - t s e r e t n i f o o i t a R s e i t i l i b a i l g n i r a e b - t s e r e t n i n i g r a m t s e r e t n i t e N Rate/Volume Analysis The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities affected our interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) the changes attributable to changes in volume (changes in volume multiplied by prior rate); (ii) the changes attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate. Year Ended December 31, 2014 Compared to Year Ended December 31, 2013 Increase/(Decrease) Due to Year Ended December 31, 2013 Compared to Year Ended December 31, 2012 Increase/(Decrease) Due to (in thousands) INTEREST-EARNING ASSETS: Mortgage and other loans, net Securities and money market investments Total INTEREST-BEARING LIABILITIES: NOW and money market accounts Savings accounts Certificates of deposit Borrowed funds Total Change in net interest income Volume Rate Net Volume Rate Net $155,096 $ (227,874) 2,384 (225,490) 45,363 200,459 $(72,778) 47,747 (25,031) $ 52,218 $(162,060) (20,053) (182,113) 46,892 99,110 $ (109,842) 26,839 (83,003) $ 6,715 6,037 (14,354) 133,964 132,362 $ 68,097 $ (3,091) 7,740 5,060 (140,839) (131,130) $ (94,360) $ 3,624 13,777 (9,294) (6,875) 1,232 $(26,263) $ 3,462 $ 4,621 (5,368) 20,463 23,178 (4,187) 3,652 (4,707) (107,534) (112,776) $ 75,932 $ (69,337) $ $ (725) 8,273 (10,075) (87,071) (89,598) 6,595 Provisions for (Recovery of ) Loan Losses Provision for Losses on Non-Covered Loans The provision for losses on non-covered loans is based on management’s periodic assessment of the adequacy of the allowance for losses on such loans which, in turn, is based on its evaluation of losses incurred in the held-for- investment loan portfolio, in accordance with GAAP. This evaluation considers several factors, including the current and historical performance of the portfolio; its inherent risk characteristics; the level of non-performing non-covered loans and charge-offs; delinquency levels and trends; local economic and market conditions; declines in real estate values; and the levels of unemployment and vacancy rates. In contrast to 2013, when an $18.0 million provision for non-covered loan losses was recorded, no provision was recorded in 2014. Reflecting the modest level of net charge-offs during the year, the allowance for losses on non-covered loans was $139.9 million at the end of this December, as compared to $141.9 million at December 31, 2013. (Recovery of) Provision for Losses on Covered Loans A provision for losses on covered loans is recorded when we have reason to believe that the cash flows from certain loans acquired in our FDIC-assisted transactions will fall short of our expectations due to a decline in their credit quality. Conversely, when we have reason to believe that the cash flows from certain loan portfolios acquired in our FDIC-assisted transactions will exceed our expectations due to an improvement in credit quality, we reverse the previously established covered loan loss allowance by recording a recovery. Reflecting a year-over-year improvement in the credit quality of certain covered loans, we recovered $18.6 million from the allowance for covered loan losses in 2014, in contrast to recording a $12.8 million provision for covered loan losses in the prior year. Because our FDIC loss sharing agreements call for the FDIC to reimburse us for a portion of our losses on covered loans—and for the FDIC to share in any recoveries of such losses—we record FDIC indemnification income in “Non-interest income” in the same period that a provision for covered loan losses is recorded, and we record FDIC indemnification expense in “Non-interest income” in the same period that a recovery has occurred. Accordingly, in 2014, we recorded FDIC indemnification expense of $14.9 million, in contrast to FDIC indemnification income of $10.2 million in the year-earlier twelve months. 84 For additional information about our provisions for (recoveries of) loan losses, please see the discussion of the respective loan loss allowances under “Critical Accounting Policies” and the discussion of “Asset Quality” that appear earlier in this report. Non-Interest Income We generate non-interest income through a variety of sources, including—among others—mortgage banking income (which consists of income from the origination of one-to-four family loans for sale and income from the servicing of these and other one-to-four family loans), fee income (in the form of retail deposit fees and charges on loans), income from our investment in BOLI, gains on the sale of securities, and revenues produced through the sale of third-party investment products and those produced through our wholly-owned subsidiary, Peter B. Cannell & Co., Inc. (“PBC”), an investment advisory firm. In 2014, non-interest income totaled $201.6 million, as compared to $218.8 million in the prior year. The reduction was attributable to the factors described below. Largely reflecting the higher level of residential mortgage interest rates, as compared to the year-earlier level, refinancing activity declined through most of 2014. As a result, mortgage banking income fell $15.3 million year- over-year, to $63.0 million, the net effect of a $26.8 million decrease in income from originations to $24.1 million and an $11.5 million increase in servicing income to $38.9 million. In addition to the reduction in mortgage banking income, the decline in non-interest income was primarily due to the $25.1 million difference between the FDIC indemnification expense recorded in 2014 and the FDIC indemnification income recorded in the prior year. Furthermore, net securities gains fell $7.0 million year-over-year, to $14.0 million, while BOLI income and fee income fell $4.4 million, combined. These declines were largely offset by a $33.9 million increase in other non-interest income to $75.7 million, as the revenues produced by PBC rose $9.6 million year-over-year to $26.2 million, and as we recovered $17.3 million on a single security we had written off in 2009. Also contributing to the year’s non-interest income were a $3.9 million gain on the sale of Class B Visa shares in the first quarter and a $6.0 million gain on the sale of an OREO property. Non-Interest Income Analysis The following table summarizes our sources of non-interest income in the twelve months ended December 31, 2014, 2013, and 2012: (in thousands) Mortgage banking income Fee income BOLI income Net gain on sale of securities FDIC indemnification (expense) income Loss on OTTI of securities Loss on debt redemptions Other income: Peter B. Cannell & Co., Inc. Third-party investment product sales Gain on Visa shares sold Recovery of OTTI of securities Other Total other income Total non-interest income 2014 2012 For the Years Ended December 31, 2013 $ 62,953 $ 78,283 $178,643 38,348 30,502 2,041 14,390 -- (2,313) 36,585 27,150 14,029 (14,870) -- -- 38,179 29,938 21,036 10,206 (612) -- 26,176 13,571 3,856 17,326 14,817 75,746 14,837 15,422 -- -- 5,483 35,742 $201,593 $218,830 $297,353 16,588 15,487 -- 4,255 5,470 41,800 It should be noted that the amount of mortgage banking income we record in any given year or quarter is likely to vary, and therefore is difficult to predict. The mortgage banking income we record depends in large part on the volume of loans originated which, in turn, depends on a variety of factors, including changes in market interest rates and economic conditions, competition, refinancing activity, and loan demand. 85 Non-Interest Expense Non-interest expense has two primary components: operating expenses, which include compensation and benefits, occupancy and equipment, and general and administrative (“G&A”) expenses; and the amortization of the CDI stemming from certain of our business combinations prior to 2009. In 2014, non-interest expense declined $20.1 million year-over-year to $587.5 million, the result of a $12.6 million reduction in operating expenses to $579.2 million and a $7.5 million reduction in the amortization of CDI to $8.3 million. The decline in operating expenses was the result of a $6.3 million decrease in compensation and benefits expense to $306.8 million, and an $8.0 million decrease in G&A expense to $173.3 million. Included in the prior year’s compensation and benefits expense were severance charges of $6.0 million; no comparable charges were recorded in 2014. The decline in G&A expense was largely due to a reduction in FDIC insurance premiums from the year-earlier level and a reduction in costs related to the management and disposition of foreclosed properties as our asset quality improved. The benefit of these declines was partly offset by a $1.8 million increase in occupancy and equipment expense to $99.0 million, primarily reflecting costs incurred in the consolidation of back-office departments that had been housed at several locations into a single facility. Income Tax Expense Income tax expense includes federal, New York State, and New York City income taxes, as well as non- material income taxes from other jurisdictions where we have branch operations and/or conduct our mortgage banking business. In 2014, our income tax expense rose $16.1 million year-over-year to $287.7 million. Pre-tax income rose $25.9 million during this time, to $773.1 million, while the effective tax rate rose to 37.21% from 36.35%. The level of income tax expense was also increased by a one-time charge of $3.5 million that was recorded in connection with the enactment of certain New York State tax laws on March 31, 2014. RESULTS OF OPERATIONS: 2013 and 2012 Earnings Summary We recorded earnings of $475.5 million, or $1.08 per diluted share, in 2013, as compared to $501.1 million, or $1.13 per diluted share, in 2012. While net interest income rose year-over-year, fueled by interest-earning asset growth and record prepayment penalty income, the increase was exceeded by a decline in mortgage banking income, as residential mortgage interest rates rose and the demand for one-to-four family mortgage loans declined. In addition to the increase in net interest income, the decline in mortgage banking income was tempered by a decrease in our provisions for both covered and non-covered loan losses, and by a reduction in our non-interest expense. Largely reflecting a resultant decline in pre-tax income, our income tax expense also decreased year-over- year. Net Interest Income Net interest income rose $6.6 million year-over-year, to $1.2 billion, in the twelve months ended December 31, 2013. While interest income fell $83.0 million during this time, to $1.7 billion, the decrease was exceeded by an $89.6 million decline in interest expense to $541.5 million. Notwithstanding the increase in our net interest income, our margin declined to 3.01% in 2013 from 3.21% in 2012. The factors contributing to the year- over-year rise in our net interest income and the year-over-year decline in our net interest margin are described below: • Prepayment penalty income contributed $136.8 million to our 2013 interest income, as compared to $120.4 million in 2012. The 2013 amount contributed 35 basis points to the year’s net interest margin; the 2012 amount contributed 33 basis points. Among the loans prepaying in 2013 was a $475.0 million loan to a single borrower, which accounted for $14.3 million of the prepayment penalty income recorded; in 2012, two loans to a single borrower accounted for $17.9 million of the prepayment penalty income recorded during that year. 86 • The average balance of interest-earning assets rose $2.6 billion year-over-year, to $38.7 billion, the result of a $965.7 million increase in average loans to $31.9 billion and a $1.6 billion increase in average securities and money market accounts to $6.8 billion. The benefit of increased interest-earning asset growth was exceeded by the impact of a 55-basis point decline in the average yield on such assets, as the average yield on loans fell 50 basis points, to 4.67%, and the average yield on securities and money market investments fell 49 basis points, to 3.23%. While prepayment penalty income added four more basis points to the average yield on loans in 2013 than it did in the year-earlier period, the benefit was exceeded by the impact of the replenishment of the balance sheet with lower-yielding loans. • While the five-year CMT rose in 2013, the yields on the loans we produced, and the securities in which we invested, were nonetheless lower than the yields on the loans and securities that repaid or matured during the year. • The average balance of interest-bearing liabilities rose $1.8 billion year-over-year to $35.9 billion, as average interest-bearing deposits rose $1.3 billion to $22.7 billion and average borrowings rose $511.4 million to $13.3 billion. The impact of the year-over-year rise was exceeded by the benefit of a 34-basis point decline in the average cost of interest-bearing liabilities, primarily reflecting an 80-basis point decline in the average cost of borrowed funds to 3.01%. Provisions for Loan Losses Provision for Losses on Non-Covered Loans In 2013, we reduced our provision for losses on non-covered loans to $18.0 million from $45.0 million in 2012. Nonetheless, the allowance for losses on non-covered loans rose $998,000 year-over-year, to $141.9 million, as the $27.0 million reduction in the provision for non-covered loan losses occurred in tandem with a $24.3 million decrease in net charge-offs to $17.0 million. Provision for Losses on Covered Loans In 2013 and 2012, we recorded provisions for losses on covered loans of $12.8 million and $18.0 million, respectively, reflecting a general improvement in the credit quality of the loans acquired in our FDIC-assisted transactions. The respective provisions were largely offset by FDIC indemnification income of $10.2 million and $14.4 million, recorded in non-interest income in the respective periods. For additional information about our provisions for loan losses, please see the discussion of the respective loan loss allowances under “Critical Accounting Policies” and the discussion of “Asset Quality” that appear earlier in this report. Non-Interest Income Non-interest income fell $78.5 million year-over-year, to $218.8 million, representing 15.8% of the total revenues we produced in 2013. The year-over-year reduction was primarily due to a decline in mortgage banking income, as a rise in residential mortgage interest rates resulted in a decline in refinancing activity. Specifically, mortgage banking income declined to $78.3 million in 2013 from $178.6 million in 2012. Income from originations accounted for the bulk of the decrease in mortgage banking income, falling to $50.9 million from $193.2 million in the prior year. The impact of the decrease in income from originations was somewhat offset by a rise in servicing income to $27.4 million from a $14.6 million servicing loss in 2012. The year-over-year decrease in non-interest income also reflects a $4.2 million decline in FDIC indemnification income to $10.2 million, and far more modest declines in fee income and BOLI income over the course of the year. The combined impact of these declines was somewhat offset by a $19.0 million increase in net securities gains to $21.0 million and a $6.1 million increase in other non-interest income to $41.8 million. In 2012, our non-interest income was slightly reduced by a $2.3 million loss on debt redemption; no comparable loss was recorded in 2013. Non-Interest Expense In 2013, our non-interest expense fell $5.9 million from the year-earlier level to $607.6 million, the result of a $2.1 million decline in operating expenses to $591.8 million, and a $3.9 million decline in the amortization of CDI to $15.8 million. Included in 2013 operating expenses were compensation and benefits expense of $313.2 million, occupancy and equipment expense of $97.3 million, and G&A expense of $181.3 million. 87 While compensation and benefits expense rose $16.3 million year-over-year and occupancy and equipment expense rose $6.5 million, the combination of these increases was exceeded by a $24.9 million reduction in G&A expense. The decline in G&A expense was primarily due to a decrease in our FDIC deposit insurance assessments, together with a reduction in the expenses incurred in managing and selling foreclosed real estate. In addition to severance charges of $6.0 million, the rise in compensation and benefits expense was due to normal salary increases, incentive stock award grants, and the expansion of certain back-office departments to address the increase in regulation resulting from the roll-out of the Dodd-Frank Act. Income Tax Expense Primarily reflecting a $33.8 million decline in pre-tax income to $747.1 million, income tax expense fell $8.2 million year-over-year to $271.6 million in 2013. During this time, the effective tax rate rose to 36.35% from 35.83%. QUARTERLY FINANCIAL DATA The following table sets forth selected unaudited quarterly financial data for the years ended December 31, 2014 and 2013: (in thousands, except per share data) Net interest income (Recovery of) provision for loan losses Non-interest income Non-interest expense Income before income taxes Income tax expense Net income Basic earnings per share Diluted earnings per share IMPACT OF INFLATION 2014 2013 4th $283,682 3rd $289,029 2nd 1st $283,492 $284,150 4th $297,325 (200) 70,479 148,111 206,250 75,053 $131,197 $0.30 $0.30 (3,945) 41,286 145,195 189,065 68,807 $120,258 $0.27 $0.27 188 52,593 147,836 188,061 69,373 (14,630) 37,235 146,325 189,690 74,436 $118,688 $115,254 $0.26 $0.26 $0.27 $0.27 (2,829) 38,810 149,474 189,490 69,335 $120,155 $0.27 $0.27 3rd 2nd $294,231 $299,884 $275,176 1st 14,467 50,724 150,327 180,161 65,961 9,502 9,618 53,745 75,551 151,665 156,096 192,346 185,129 66,454 $114,200 $122,517 $118,675 $0.27 $0.27 $0.28 $0.28 $0.26 $0.26 69,829 The consolidated financial statements and notes thereto presented in this report have been prepared in accordance with GAAP, which requires that we measure our financial condition and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, nearly all of a bank’s assets and liabilities are monetary in nature. As a result, the impact of interest rates on our performance is greater than the impact of general levels of inflation. Interest rates do not necessarily move in the same direction, or to the same extent, as the prices of goods and services. IMPACT OF ACCOUNTING PRONOUNCEMENTS Please refer to Note 2, “Summary of Significant Accounting Policies,” in Item 8, “Financial Statements and Supplementary Data,” for a discussion of the impact of recent accounting pronouncements on our financial condition and results of operations. 88 RECONCILIATIONS OF STOCKHOLDERS’ EQUITY AND TANGIBLE STOCKHOLDERS’ EQUITY, TOTAL ASSETS AND TANGIBLE ASSETS, AND THE RELATED CAPITAL MEASURES Although tangible stockholders’ equity and tangible assets are not measures that are calculated in accordance with GAAP, management uses these non-GAAP financial measures in their analysis of our performance. We believe that these non-GAAP financial measures are important indications of our ability to grow both organically and through business combinations and, with respect to tangible stockholders’ equity, our ability to pay dividends and to engage in various capital management strategies. We calculate tangible stockholders’ equity by subtracting from stockholders’ equity the sum of our goodwill and 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. Tangible stockholders’ equity, tangible assets, and the related tangible capital measures, should not be considered in isolation or as a substitute for stockholders’ equity or any other financial measure prepared in accordance with GAAP. Moreover, the manner in which we calculate these non-GAAP financial measures may differ from that of other companies reporting measures of capital with similar names. Reconciliations of our stockholders’ equity and tangible stockholders’ equity; our total assets and tangible assets; and the related financial measures at December 31, 2014 and 2013 follow: (dollars in thousands) Stockholders’ Equity Less: Goodwill Core deposit intangibles Tangible stockholders’ equity Total Assets Less: Goodwill Core deposit intangibles Tangible assets Stockholders’ equity to total assets Tangible stockholders’ equity to tangible assets Average Stockholders’ Equity Less: Average goodwill and core deposit intangibles Average tangible stockholders’ equity Average Assets Less: Average goodwill and core deposit intangibles Average tangible assets At or for the Twelve Months Ended December 31, 2014 $ 5,781,815 (2,436,131) (7,943) $ 3,337,741 2013 $ 5,735,662 (2,436,131) (16,240) $ 3,283,291 $48,559,217 (2,436,131) (7,943) $46,115,143 $46,688,287 (2,436,131) (16,240) $44,235,916 11.91% 7.24 12.29% 7.42 $ 5,768,795 (2,448,322) $ 3,320,473 $ 5,620,445 (2,460,266) $ 3,160,179 $48,038,072 (2,448,322) $45,589,750 $44,396,263 (2,460,266) $41,935,997 Net income Add back: Amortization of core deposit intangibles, net of tax Adjusted net income $485,397 4,978 $490,375 $475,547 9,471 $485,018 Return on average assets Return on average tangible assets Return on average stockholders’ equity Return on average tangible stockholders’ equity 1.01% 1.08 8.41% 14.77 1.07% 1.16 8.46% 15.35 89 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We manage our assets and liabilities to reduce our exposure to changes in market interest rates. The asset and liability management process has three primary objectives: to evaluate the interest rate risk inherent in certain balance sheet accounts; to determine the appropriate level of risk, given our business strategy, operating environment, capital and liquidity requirements, and performance objectives; and to manage that risk in a manner consistent with guidelines approved by the Boards of Directors of the Company, the Community Bank, and the Commercial Bank. Market Risk As a financial institution, we are focused on reducing our exposure to interest rate volatility, which represents our primary market risk. Changes in market interest rates represent the greatest challenge to our financial performance, as such changes can have a significant impact on the level of income and expense recorded on a large portion of our interest-earning assets and interest-bearing liabilities, and on the market value of all interest-earning assets, other than those possessing a short term to maturity. To reduce our exposure to changing rates, the Boards of Directors and management monitor interest rate sensitivity on a regular or as needed basis so that adjustments to the asset and liability mix can be made when deemed appropriate. The actual duration of held-for-investment mortgage loans and mortgage-related securities can be significantly impacted by changes in prepayment levels and market interest rates. The level of prepayments may, in turn, be impacted by a variety of factors, including the economy in the region where the underlying mortgages were originated; seasonal factors; demographic variables; and the assumability of the underlying mortgages. However, the factors with the most significant impact on prepayments are market interest rates and the availability of refinancing opportunities. In 2014, we continued to manage our interest rate risk by taking the following actions: (1) We continued to emphasize the origination and retention of intermediate-term assets, primarily in the form of multi-family and CRE loans; (2) We increased our portfolio of C&I loans, which feature floating rates; (3) We continued to deploy the cash flows from loan and securities repayments and sales into loan production and GSE obligations; and (4) We increased our deposits. In connection with the activities of our mortgage banking operations, we enter into contingent commitments to fund residential mortgage loans by a specified future date at a stated interest rate and corresponding price. Such commitments, which are generally known as IRLCs, are considered to be financial derivatives and, as such, are carried at fair value. To mitigate the interest rate risk associated with IRLCs, we enter into forward commitments to sell mortgage loans or mortgage-backed securities (“MBS”) by a specified future date and at a specified price. These forward sale agreements are also carried at fair value. Such forward commitments to sell generally obligate us to complete the transaction as agreed, and therefore pose a risk to us if we are not able to deliver the loans or MBS pursuant to the terms of the applicable forward-sale agreement. For example, if we are unable to meet our obligation, we may be required to pay a “make whole” fee to the counterparty. When we retain the servicing on the loans we sell, we capitalize an MSR asset. MSRs are recorded at fair value, with changes in fair value recorded as a component of non-interest income. We estimate the fair value of the MSR asset based upon a number of factors, including current and expected loan prepayment rates, economic conditions, and market forecasts, as well as relevant characteristics of the associated underlying loans. Generally, when market interest rates decline, loan prepayments increase as customers refinance their existing mortgages to take advantage of more favorable interest rate terms. When a mortgage prepays, or when loans are expected to prepay earlier than originally expected, a portion of the anticipated cash flows associated with servicing these loans is terminated or reduced, which can result in a reduction in the fair value of the capitalized MSRs and a corresponding reduction in earnings. To mitigate the prepayment risk inherent in MSRs, we could sell the servicing of the loans we originate, and thus minimize the potential for earnings volatility. Instead, we have opted to mitigate such risk by investing in exchange-traded derivative financial instruments that are expected to experience opposite and offsetting changes in fair value as related to the value of our MSRs. Interest Rate Sensitivity Analysis The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest rate sensitive” and by monitoring a bank’s interest rate sensitivity “gap.” An asset or liability 90 is said to be interest rate sensitive within a specific time frame if it will mature or reprice within that period of time. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time frame and the amount of interest-bearing liabilities maturing or repricing within that same period of time. In a rising interest rate environment, an institution with a negative gap would generally be expected, absent the effects of other factors, to experience a greater increase in the cost of its interest-bearing liabilities than it would in the yield on its interest-earning assets, thus producing a decline in its net interest income. Conversely, in a declining rate environment, an institution with a negative gap would generally be expected to experience a lesser reduction in the yield on its interest-earning assets than it would in the cost of its interest-bearing liabilities, thus producing an increase in its net interest income. In a rising interest rate environment, an institution with a positive gap would generally be expected to experience a greater increase in the yield on its interest-earning assets than it would in the cost of its interest-bearing liabilities, thus producing an increase in its net interest income. Conversely, in a declining rate environment, an institution with a positive gap would generally be expected to experience a lesser reduction in the cost of its interest- bearing liabilities than it would in the yield on its interest-earning assets, thus producing a decline in its net interest income. At December 31, 2014, our one-year gap was a negative 15.92%, as compared to a negative 13.66% at December 31, 2013. The difference was primarily attributable to an increase in the amount of deposits maturing in one year, which was partially offset by an increase in projected loan prepayments. The table on the following page sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 2014 which, based on certain assumptions stemming from our historical experience, are expected to reprice or mature in each of the future time periods shown. Except as stated below, the amounts of assets and liabilities shown as repricing or maturing during a particular time period were determined in accordance with the earlier of (1) the term to repricing, or (2) the contractual terms of the asset or liability. The table provides an approximation of the projected repricing of assets and liabilities at December 31, 2014 on the basis of contractual maturities, anticipated prepayments, and scheduled rate adjustments within a three-month period and subsequent selected time intervals. For residential mortgage-related securities, prepayment rates are forecasted at a weighted average constant prepayment rate (“CPR”) of 21% per annum; for multi-family and CRE loans, prepayment rates are forecasted at weighted average CPRs of 22% and 17% per annum, respectively. Borrowed funds were not assumed to prepay. Savings, NOW, and money market accounts were assumed to decay based on a comprehensive statistical analysis that incorporated our historical deposit experience. Based on the results of this analysis, savings accounts were assumed to decay at a rate of 56% for the first five years and 44% for years six through ten. NOW accounts were assumed to decay at a rate of 74% for the first five years and 26% for years six through ten. The comprehensive statistical analysis was updated in the second quarter of 2014 to incorporate updated deposit data and modeling assumptions, and resulted in no decay rates beyond ten years. The change in the decay assumptions was made due to the prolonged low interest rate environment and the uncertainty regarding future depositor behavior. Including those accounts having specified repricing dates, money market accounts were assumed to decay at a rate of 92% for the first five years and 8% for years six through ten. Prepayment and deposit decay rates can have a significant impact on our estimated gap. While we believe our assumptions to be reasonable, there can be no assurance that the assumed prepayment and decay rates noted above will approximate actual future loan and securities prepayments and deposit withdrawal activity. To validate our prepayment assumptions for our multi-family and CRE loan portfolios, we perform a monthly analysis, during which we review our historical prepayment rates and compare them to our projected prepayment rates. We continually review the actual prepayment rates to ensure that our projections are as accurate as possible, since prepayments on these types of loans are not as closely correlated to changes in interest rates as prepayments on one-to-four family loans tend to be. In addition, we review the call provisions in our borrowings and investment portfolios and, on a monthly basis, compare the actual calls to our projected calls to ensure that our projections are reasonable. As of December 31, 2014, the impact of a 100-basis point decline in market interest rates would have increased our projected prepayment rates by a constant prepayment rate of 1.63% per annum. Conversely, the impact of a 100-basis point increase in market interest rates would have reduced our projected prepayment rates by a constant prepayment rate of 1.77% per annum. 91 4 1 0 2 , 1 3 r e b m e c e D t A l a t o T s r a e Y 0 1 e r o M n a h T n a h T e r o M s r a e Y e v i F s r a e Y 0 1 o t n a h T e r o M s r a e Y e e r h T n a h T e r o M r a e Y e n O s r a e Y e v i F o t s r a e Y e e r h T o t o t r u o F e v l e w T s h t n o M e e r h T s h t n o M s s e L r o 4 3 7 , 8 9 0 , 4 7 2 0 , 6 5 7 , 5 3 $ 9 7 8 , 0 2 3 3 1 8 , 3 7 3 $ 1 8 6 , 5 8 0 , 3 2 3 9 , 3 3 8 , 4 $ 1 0 2 , 6 0 1 4 0 1 , 3 2 3 , 9 $ 5 6 4 , 5 6 3 7 8 5 , 5 7 7 , 1 1 $ 8 4 9 , 7 3 1 3 5 1 , 0 8 6 , 5 $ 0 6 5 , 2 8 8 3 4 , 9 6 7 , 3 $ 5 3 5 , 0 2 5 , 3 6 9 2 , 5 7 3 , 3 4 8 0 8 , 2 5 1 0 0 5 , 7 4 8 0 9 4 , 4 5 6 , 2 3 0 1 , 4 7 5 , 0 1 6 6 1 , 2 6 1 7 4 , 1 9 4 , 9 0 8 8 , 5 2 3 9 , 6 4 1 , 2 1 2 2 6 , 1 5 0 , 7 8 9 5 , 0 2 4 , 6 0 0 6 , 9 4 5 , 2 1 7 8 4 , 6 2 2 , 4 1 7 0 3 , 8 4 2 , 0 4 - - - - 9 8 0 , 1 4 4 4 , 4 4 1 3 3 5 , 5 4 1 9 8 9 , 6 2 1 , 3 $ 7 6 9 , 1 0 7 $ 0 6 1 , 6 2 8 2 6 , 8 0 2 , 2 8 6 5 , 4 2 1 , 3 3 3 4 , 3 6 9 , 4 9 8 7 , 2 2 3 , 0 1 4 1 3 , 1 5 2 $ 2 3 1 , 6 0 2 2 6 5 , 3 1 1 7 0 5 , 6 7 2 , 2 9 8 0 , 0 9 1 , 4 0 9 2 , 6 8 7 , 6 1 8 1 , 5 0 7 , 2 $ 9 5 1 , 2 7 7 6 9 0 , 2 3 9 , 1 3 6 5 , 0 6 2 , 1 7 5 4 , 3 8 9 5 7 2 , 8 4 9 , 4 9 8 9 , 6 2 1 , 3 $ 2 2 0 , 5 2 4 , 2 $ 8 0 7 , 3 7 1 , 2 $ ) 3 7 4 , 1 3 5 ( $ ) 0 3 1 , 0 3 7 , 7 ( $ 7 5 6 , 8 9 1 , 7 $ 2 7 2 , 1 7 $ 1 3 3 , 0 1 2 3 4 , 8 2 8 , 5 0 1 2 , 3 3 8 5 4 0 , 8 6 9 5 8 5 , 0 0 2 0 2 3 , 5 5 7 , 3 0 6 1 , 7 5 7 , 5 0 6 8 , 4 3 6 8 5 8 , 6 8 4 , 4 6 9 0 , 9 5 4 , 6 1 8 7 , 0 2 8 4 0 9 , 3 6 2 , 1 9 7 4 , 4 4 7 , 3 0 6 2 , 8 8 2 , 2 1 ) 2 0 4 , 1 0 8 , 7 ( $ ) 2 0 4 , 1 0 8 , 7 ( $ % 4 4 . 6 % 9 9 . 4 % 8 4 . 4 % ) 9 0 . 1 ( % ) 2 9 . 5 1 ( % ) 7 0 . 6 1 ( s i s y l a n A y t i v i t i s n e S e t a R t s e r e t n I ) s d n a s u o h t n i s r a l l o d ( t e k r a m y e n o m d n a s e i t i r u c e s r e h t O ) 3 ( ) 2 ( s e i t i r u c e s d e t a l e r - e g a g t r o M ) 1 ( s n a o l r e h t o d n a e g a g t r o M s t e s s a g n i n r a e - t s e r e t n i l a t o T ) 2 ( s t n e m t s e v n i I : S T E S S A G N N R A E - T S E R E T N I a s a p a g y t i v i t i s n e s e t a r t s e r e t n i e v i t a l u m u C p a g y t i v i t i s n e s e t a r t s e r e t n i e v i t a l u m u C a s a s t e s s a g n i n r a e - t s e r e t n i t e n e v i t a l u m u C s t e s s a l a t o t f o e g a t n e c r e p ) 4 ( d o i r e p r e p p a g y t i v i t i s n e s e t a r t s e r e t n I s e i t i l i b a i l g n i r a e b - t s e r e t n i l a t o T s t n u o c c a t e k r a m y e n o m d n a W O N t i s o p e d f o s e t a c i f i t r e C s t n u o c c a s g n i v a S s d n u f d e w o r r o B I : S E T I L I B A I L G N R A E B - T S E R E T N I % 7 7 . 7 0 1 % 5 0 . 6 0 1 % 0 3 . 7 0 1 % 9 6 . 7 9 % 6 1 . 7 5 % 1 5 . 6 3 s e i t i l i b a i l g n i r a e b - t s e r e t n i t e n f o e g a t n e c r e p . s e i t i l i b a i l g n i r a e b - t s e r e t n i d n a s t e s s a g n i n r a e - t s e r e t n i n e e w t e b e c n e r e f f i d e h t s t n e s e r p e r d o i r e p r e p p a g y t i v i t i s n e s e t a r t s e r e t n i e h T . d e d u l c x e n e e b e v a h s e s s o l n a o l r o f s e c n a w o l l a e h t d n a s n a o l d e r e v o c - n o n g n i m r o f r e p - n o n , s i s y l a n a p a g e h t f o e s o p r u p e h t r o F . s t n u o m a g n i y r r a c e v i t c e p s e r r i e h t t a n w o h s e r a , k c o t s B L H F g n i d u l c n i , s e i t i r u c e s r e h t o d n a d e t a l e r - e g a g t r o M . e c n e i r e p x e l a c i r o t s i h n o , t r a p n i , d e s a b t n u o m a d e t c e p x E ) 1 ( ) 2 ( ) 3 ( ) 4 ( 2 9 Certain shortcomings are inherent in the method of analysis presented in the preceding Interest Rate Sensitivity Analysis. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of the market, while interest rates on other types may lag behind changes in market interest rates. Additionally, certain assets, such as adjustable-rate loans, have features that restrict changes in interest rates both on a short-term basis and over the life of the asset. Furthermore, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate from those assumed in calculating the table. Also, the ability of some borrowers to repay their adjustable-rate loans may be adversely impacted by an increase in market interest rates. Interest rate sensitivity is also monitored through the use of a model that generates estimates of the change in our net portfolio value (“NPV”) over a range of interest rate scenarios. NPV is defined as the net present value of expected cash flows from assets, liabilities, and off-balance sheet contracts. The NPV ratio, under any interest rate scenario, is defined as the NPV in that scenario divided by the market value of assets in the same scenario. The model assumes estimated loan prepayment rates, reinvestment rates, and deposit decay rates similar to those utilized in formulating the preceding Interest Rate Sensitivity Analysis. The following table sets forth our NPV at December 31, 2014, based on the information and assumptions in effect at that date, and assuming the changes in interest rates noted: (dollars in thousands) Change in Interest Rates (in basis points) (1) -- +100 +200 Market Value of Assets $49,698,545 48,936,788 48,134,586 Market Value of Liabilities $43,739,738 43,277,952 42,912,955 Net Portfolio Value $5,958,807 5,658,836 5,221,631 Net Change $ -- (299,971) (737,176) Portfolio Market Value Projected % Change to Base -- % (5.03) (12.37) (1) The impact of 100- and 200-basis point reductions in interest rates is not presented in view of the current level of the federal funds rate and other short-term interest rates. The net changes in NPV presented in the preceding table are within the limits approved by the Boards of Directors of the Company and the Banks. As with the Interest Rate Sensitivity Analysis, certain shortcomings are inherent in the methodology used in the preceding interest rate risk measurements. Modeling changes in NPV requires that certain assumptions be made which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the NPV Analysis presented above assumes that the composition of our interest rate sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured, and also assumes that a particular change in interest rates is reflected uniformly across the yield curve, regardless of the duration to maturity or repricing of specific assets and liabilities. Furthermore, the model does not take into account the benefit of any strategic actions we may take to further reduce our exposure to interest rate risk. Accordingly, while the NPV Analysis provides an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to, and do not, provide a precise forecast of the effect of changes in market interest rates on our net interest income, and may very well differ from actual results. We also utilize an internal net interest income simulation to manage our sensitivity to interest rate risk. The simulation incorporates various market-based assumptions regarding the impact of changing interest rates on future levels of our financial assets and liabilities. The assumptions used in the net interest income simulation are inherently uncertain. Actual results may differ significantly from those presented in the following table, due to the frequency, timing, and magnitude of changes in interest rates; changes in spreads between maturity and repricing categories; and prepayments, among other factors, coupled with any actions taken to counter the effects of any such changes. 93 Based on the information and assumptions in effect at December 31, 2014, the following table reflects the estimated percentage change in future net interest income for the next twelve months, assuming the changes in interest rates noted: Change in Interest Rates (in basis points) (1)(2) +100 over one year +200 over one year Estimated Percentage Change in Future Net Interest Income (3.68)% (8.65) (1) In general, short- and long-term rates are assumed to increase in parallel fashion across all four quarters and then remain unchanged. (2) The impact of 100- and 200-basis point reductions in interest rates is not presented in view of the current level of the federal funds rate and other short-term interest rates. Future changes in our mix of assets and liabilities may result in other changes to our gap, NPV, and/or net interest income simulation. In the event that our interest rate sensitivity gap analysis or net interest income simulation were to indicate a variance in our NPV in excess of our internal policy limits, we would undertake the following actions to ensure that appropriate remedial measures were put in place: • Our Management Asset/Liability Committee (the “ALCO Committee”) would inform the Board of Directors of the variance, and present recommendations to the Board regarding proposed courses of action to restore conditions to within-policy tolerances. • In formulating appropriate strategies, the ALCO Committee would ascertain the primary causes of the variance from policy tolerances, the expected term of such conditions, and the projected effect on capital and earnings. Where temporary changes in market conditions or volume levels result in significant increases in interest rate risk, strategies may involve reducing open positions or employing synthetic hedging techniques to more immediately reduce risk exposure. Where variance from policy tolerances is triggered by more fundamental imbalances in the risk profiles of core loan and deposit products, a remedial strategy may involve restoring balance through natural hedges to the extent possible before employing synthetic hedging techniques. Other strategies might include: • Asset restructuring, involving sales of assets having higher risk profiles, or a gradual restructuring of the asset mix over time to affect the maturity or repricing schedule of assets; • Liability restructuring, whereby product offerings and pricing are altered or wholesale borrowings are employed to affect the maturity structure or repricing of liabilities; • Expansion or shrinkage of the balance sheet to correct imbalances in the repricing or maturity periods between assets and liabilities; and/or • Use or alteration of off-balance sheet positions, including interest rate swaps, caps, floors, options, and forward purchase or sales commitments. In connection with our net interest income simulation modeling, we also evaluate the impact of changes in the slope of the yield curve. At December 31, 2014, our analysis indicated that an immediate inversion of the yield curve would be expected to result in a 4.42% decrease in net interest income; conversely, an immediate steepening of the yield curve would be expected to result in a 2.36% increase. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Our Consolidated Financial Statements and notes thereto and other supplementary data begin on the following page. 94 NEW YORK COMMUNITY BANCORP, INC. CONSOLIDATED STATEMENTS OF CONDITION (in thousands, except share data) ASSETS: Cash and cash equivalents Securities: Available for sale ($11,436 and $79,905 pledged, respectively) Held-to-maturity ($4,584,886 and $4,945,905 pledged, respectively) (fair value of $7,085,971 and $7,445,244, respectively) Total securities Non-covered loans held for sale Non-covered loans held for investment, net of deferred loan fees and costs Less: Allowance for losses on non-covered loans Non-covered loans held for investment, net Covered loans Less: Allowance for losses on covered loans Covered loans, net Total loans, net Federal Home Loan Bank stock, at cost Premises and equipment, net FDIC loss share receivable Goodwill Core deposit intangibles Mortgage servicing rights Bank-owned life insurance Other real estate owned (includes $32,048 and $37,477, respectively, covered by loss sharing agreements) Other assets Total assets LIABILITIES AND STOCKHOLDERS’ EQUITY: Deposits: NOW and money market accounts Savings accounts Certificates of deposit Non-interest-bearing accounts Total deposits Borrowed funds: Wholesale borrowings: Federal Home Loan Bank advances Repurchase agreements Federal funds purchased Total wholesale borrowings Other borrowings Total borrowed funds Other liabilities Total liabilities Stockholders’ equity: Preferred stock at par $0.01 (5,000,000 shares authorized; none issued) Common stock at par $0.01 (600,000,000 shares authorized; 442,659,460 and 440,873,285 shares issued, and 442,587,190 and 440,809,365 shares outstanding, respectively) Paid-in capital in excess of par Retained earnings Treasury stock, at cost (72,270 and 63,920 shares, respectively) Accumulated other comprehensive loss, net of tax: Net unrealized gain on securities available for sale, net of tax of $2,022 and $171, respectively Net unrealized loss on the non-credit portion of other-than-temporary impairment (“OTTI”) losses on securities, net of tax of $3,444 and $3,586, respectively Net unrealized loss on pension and post-retirement obligations, net of tax of $36,118 and $21,126, respectively Total accumulated other comprehensive loss, net of tax Total stockholders’ equity Total liabilities and stockholders’ equity See accompanying notes to the consolidated financial statements. 95 December 31, 2014 2013 $ 564,150 $ 644,550 173,783 280,738 6,922,667 7,096,450 379,399 33,024,956 (139,857) 32,885,099 2,428,622 (45,481) 2,383,141 35,647,639 515,327 319,002 397,811 2,436,131 7,943 227,297 915,156 7,670,282 7,951,020 306,915 29,837,989 (141,946) 29,696,043 2,788,618 (64,069) 2,724,549 32,727,507 561,390 273,299 492,674 2,436,131 16,240 241,018 893,522 94,004 338,307 $48,559,217 108,869 342,067 $46,688,287 $12,549,600 7,051,622 6,420,598 2,306,914 28,328,734 $10,536,947 5,921,437 6,932,096 2,270,512 25,660,992 10,183,132 3,425,000 260,000 13,868,132 358,355 14,226,487 222,181 42,777,402 10,872,576 3,425,000 445,000 14,742,576 362,426 15,105,002 186,631 40,952,625 -- -- 4,427 5,369,623 464,569 (1,118) 4,409 5,346,017 422,761 (1,032) 2,990 277 (5,387) (5,604) (53,289) (55,686) 5,781,815 $48,559,217 (31,166) (36,493) 5,735,662 $46,688,287 NEW YORK COMMUNITY BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (in thousands, except per share data) INTEREST INCOME: Mortgage and other loans Securities and money market investments Total interest income INTEREST EXPENSE: NOW and money market accounts Savings accounts Certificates of deposit Borrowed funds Total interest expense Net interest income Provision for losses on non-covered loans (Recovery of) provision for losses on covered loans Net interest income after provisions for (recoveries of) loan losses NON-INTEREST INCOME: Total loss on OTTI of securities Less: Non-credit portion of OTTI recorded in other comprehensive income (before taxes) Net loss on OTTI recognized in earnings Mortgage banking income Fee income Bank-owned life insurance Net gain on sales of securities FDIC indemnification (expense) income Loss on debt redemption Other Total non-interest income NON-INTEREST EXPENSE: Operating expenses: Compensation and benefits Occupancy and equipment General and administrative Total operating expenses Amortization of core deposit intangibles Total non-interest expense Income before income taxes Income tax expense Net income Other comprehensive income, net of tax: Change in net unrealized gain (loss) on securities available for sale, net of tax of $4,343; $4,765; and $8,473, respectively Change in the non-credit portion of OTTI losses recognized in other comprehensive income, net of tax of $142; $5,028; and $65, respectively Change in pension and post-retirement obligations, net of tax of $14,992; $20,116; and $807, respectively Less: Reclassification adjustment for sales of available-for-sale securities and loss on OTTI of securities, net of tax of $2,492; $3,578; and $801, respectively Total other comprehensive (loss) income, net of tax Total comprehensive income, net of tax Years Ended December 31, 2013 2014 2012 $1,414,884 $1,487,662 $1,597,504 193,597 1,791,101 220,436 1,708,098 268,183 1,683,067 39,508 35,727 74,511 392,968 542,714 1,140,353 -- (18,587) 35,884 21,950 83,805 399,843 541,482 1,166,616 18,000 12,758 36,609 13,677 93,880 486,914 631,080 1,160,021 45,000 17,988 1,158,940 1,135,858 1,097,033 -- (612) -- -- -- 62,953 36,585 27,150 14,029 (14,870) -- 75,746 201,593 -- (612) 78,283 38,179 29,938 21,036 10,206 -- 41,800 218,830 -- -- 178,643 38,348 30,502 2,041 14,390 (2,313) 35,742 297,353 306,848 99,016 173,306 579,170 8,297 587,467 773,066 287,669 296,874 90,738 206,221 593,833 19,644 613,477 780,909 279,803 $ 485,397 $ 475,547 $ 501,106 313,196 97,252 181,330 591,778 15,784 607,562 747,126 271,579 6,407 (7,043) 12,533 217 7,921 102 (22,123) 29,628 (1,190) (3,694) (19,193) (1,240) 10,205 $ 466,204 $ 500,759 $ 511,311 (5,294) 25,212 Basic earnings per share Diluted earnings per share $1.09 $1.09 $1.08 $1.08 $1.13 $1.13 See accompanying notes to the consolidated financial statements. 96 NEW YORK COMMUNITY BANCORP, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (in thousands, except share data) COMMON STOCK (Par Value: $0.01): Years Ended December 31, 2013 2014 2012 Balance at beginning of year Shares issued for restricted stock awards (1,782,601; 1,729,950; and 1,707,286, $ 4,409 $ 4,391 $ 4,374 respectively) Shares issued for exercise of stock options (3,574; 9,384; and 0, respectively) Balance at end of year 18 -- 4,427 18 -- 4,409 17 -- 4,391 PAID-IN CAPITAL IN EXCESS OF PAR: Balance at beginning of year Shares issued for restricted stock awards, net of forfeitures Compensation expense related to restricted stock awards Stock options exercised Tax effect of stock plans Balance at end of year RETAINED EARNINGS: Balance at beginning of year Net income Dividends paid on common stock ($1.00 per share in each year) Stock options exercised Effect of adopting Accounting Standards Update No. 2014-01 Balance at end of year TREASURY STOCK: Balance at beginning of year Purchase of common stock (439,437; 383,640; and 272,991 shares, respectively) Exercise of stock options (8,990; 20,234; and 0 shares, respectively) Shares issued for restricted stock awards (422,097; 382,471; and 271,875 shares, respectively) Balance at end of year 5,346,017 (7,073) 27,454 -- 3,225 5,369,623 5,327,111 (5,093 ) 22,247 60 1,692 5,346,017 5,309,269 (3,430) 20,683 -- 589 5,327,111 422,761 485,397 (442,204) (82) (1,303) 464,569 387,534 475,547 (440,308 ) (12 ) -- 422,761 324,967 501,106 (438,539) -- -- 387,534 (1,032) (7,283) 142 7,055 (1,118) (1,067 ) (5,319 ) 279 5,075 (1,032 ) (996) (3,522) -- 3,451 (1,067) (36,493) (19,193) (55,686) (71,910) 10,205 (61,705) $5,781,815 $5,735,662 $5,656,264 (61,705 ) 25,212 (36,493 ) ACCUMULATED OTHER COMPREHENSIVE LOSS, NET OF TAX: Balance at beginning of year Other comprehensive (loss) income, net of tax Balance at end of year Total stockholders’ equity See accompanying notes to the consolidated financial statements. 97 NEW YORK COMMUNITY BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income Adjustments to reconcile net income to net cash provided by operating activities: (Recovery of) provision for loan losses Depreciation and amortization Amortization of discounts and premiums, net Amortization of core deposit intangibles Net gain on sales of securities Gain on sales of loans Gain on Visa shares sold Stock plan-related compensation Deferred tax expense Loss on OTTI of securities recognized in earnings Changes in operating assets and liabilities: Decrease (increase) in other assets (Decrease) increase in other liabilities Origination of loans held for sale Proceeds from sale of loans originated for sale Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from repayment of securities held to maturity Proceeds from repayment of securities available for sale Proceeds from sale of securities held to maturity Proceeds from sale of securities available for sale Purchase of securities held to maturity Purchase of securities available for sale Proceeds from sale of Visa shares Net redemption (purchase) of Federal Home Loan Bank stock Net increase in loans Proceeds from sale of loans Purchase of premises and equipment, net Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits Net (decrease) increase in short-term borrowed funds Net decrease in long-term borrowed funds Tax effect of stock plans Cash dividends paid on common stock Treasury stock purchases Net cash received from stock option exercises Net cash provided by financing activities Net (decrease) increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Supplemental information: Cash paid for interest Cash paid for income taxes Non-cash investing and financing activities: Years Ended December 31, 2013 2014 2012 $ 485,397 $ 475,547 $ 501,106 (18,587) 27,792 (8,293) 8,297 (14,029) (24,066) (3,856) 27,454 26,151 -- 105,575 (16,020) (3,189,694) 3,316,296 722,417 775,347 9,787 139,294 333,725 (150,338) (226,000) 3,856 46,063 (3,482,686) 478,605 (73,495) (2,145,842) 2,667,742 (767,900) (110,615) 3,225 (442,204) (7,283) 60 1,343,025 (80,400) 644,550 $ 564,150 30,758 28,092 (3,600) 15,784 (21,036) (50,885) -- 22,247 25,177 612 62,988 25,471 (2,788) 19,644 (2,041) (193,227) -- 20,721 38,713 -- (92,089) 49,442 (6,213,592) 7,109,473 1,375,930 33,108 6,597 (10,925,837) 10,991,561 576,016 680,715 59,362 191,142 631,802 (4,029,981) (554,239) -- (92,245) (2,022,625) -- (37,242) (5,173,311) 2,468,377 426,258 -- 822,618 (3,133,279) (932,997) -- 21,083 (1,363,967) -- (38,761) (1,730,668) 783,471 2,466,100 (791,289) 1,692 (440,308) (5,319) 326 2,014,673 (1,782,708) 2,427,258 2,551,867 (312,000) (218,222) 589 (438,539) (3,522) -- 1,580,173 425,521 2,001,737 $ 644,550 $ 2,427,258 $553,811 247,589 $552,501 212,181 $667,905 286,550 Transfers to other real estate owned from loans Transfer of loans from held for investment to held for sale $ 86,545 654,758 $115,215 -- $91,441 -- See accompanying notes to the consolidated financial statements. 98 NOTE 1: ORGANIZATION AND BASIS OF PRESENTATION Organization Formerly known as Queens County Bancorp, Inc., New York Community Bancorp, Inc. (on a stand-alone basis, the “Parent Company” or, collectively with its subsidiaries, the “Company”) was organized under Delaware law on July 20, 1993 and is the holding company for New York Community Bank and New York Commercial Bank (hereinafter referred to as the “Community Bank” and the “Commercial Bank,” respectively, and collectively as the “Banks”). In addition, for the purpose of these Consolidated Financial Statements, the “Community Bank” and the “Commercial Bank” refer not only to the respective banks but also to their respective subsidiaries. The Community Bank is the primary banking subsidiary of the Company. Founded on April 14, 1859 and formerly known as Queens County Savings Bank, the Community Bank converted from a state-chartered mutual savings bank to the capital stock form of ownership on November 23, 1993, at which date the Company issued its initial offering of common stock (par value: $0.01 per share) at a price of $25.00 per share. The Commercial Bank was established on December 30, 2005. Reflecting nine stock splits between September 30, 1994 and February 17, 2004, the Company’s initial offering price adjusts to $0.93 per share. All share and per share data presented in this report reflect the impact of the stock splits. The Company changed its name to New York Community Bancorp, Inc. on November 21, 2000 in anticipation of completing the first of eight business combinations that expanded its footprint well beyond Queens County to encompass all five boroughs of New York City, Long Island, and Westchester County in New York, and seven counties in the northern and central parts of New Jersey. The Company expanded beyond this region to south Florida, northeast Ohio, and central Arizona through its FDIC-assisted acquisition of certain assets and its assumption of certain liabilities of AmTrust Bank (“AmTrust”) in December 2009, and extended its Arizona franchise through its FDIC-assisted acquisition of certain assets and its assumption of certain liabilities of Desert Hills Bank (“Desert Hills”) in March 2010. On June 28, 2012, the Company completed its 11th transaction when it assumed certain deposits of Aurora Bank FSB. Reflecting its growth through acquisitions, the Community Bank currently operates 242 branches, four of which operate directly under the Community Bank name. The remaining 238 Community Bank branches operate through seven divisional banks: Queens County Savings Bank, Roslyn Savings Bank, Richmond County Savings Bank, and Roosevelt Savings Bank in New York; Garden State Community Bank in New Jersey; AmTrust Bank in Florida and Arizona; and Ohio Savings Bank in Ohio. The Commercial Bank currently operates 30 branches in Manhattan, Queens, Brooklyn, Westchester County, and Long Island (all in New York), including 18 branches that operate under the name “Atlantic Bank.” Basis of Presentation The following is a description of the significant accounting and reporting policies that the Company and its wholly-owned subsidiaries follow in preparing and presenting their consolidated financial statements, which conform to U.S. generally accepted accounting principles (“GAAP”) and to general practices within the banking industry. The preparation of financial statements in conformity with GAAP requires the Company to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Estimates that are particularly susceptible to change in the near term are used in connection with the determination of the allowances for loan losses; the valuation of mortgage servicing rights (“MSRs”); the evaluation of goodwill for impairment; the evaluation of other-than-temporary impairment (“OTTI”) on securities; and the evaluation of the need for a valuation allowance on the Company’s deferred tax assets. The 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 8, “Borrowed Funds,” for additional information regarding these trusts. When necessary, certain reclassifications have been made to prior-year amounts to conform to the current-year presentation. 99 Effects of New Accounting Pronouncements In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-01, “Investments – Equity Method and Joint Ventures (Topic 323), Accounting for Investments in Qualified Affordable Housing Projects.” The amendments in ASU No. 2014-01 provide guidance on accounting for investments by a reporting entity in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for a low-income housing tax credit. The amendments permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. The Company chose to apply this new guidance for the period beginning on January 1, 2014. The impact of applying this new guidance included a $1.3 million reduction in the balance of retained earnings as of January 1, 2014. The total amount of affordable housing tax credits and other tax benefits recognized during calendar year 2014, and the related amount of amortization recognized as a component of income tax expense for that year, were $3.9 million and $2.9 million, respectively. As of December 31, 2014, the commitment of additional anticipated equity contributions of $21.7 million relating to current investments is reflected in “Other liabilities.” Retrospective application of the new amortization methodology would not result in a material change to prior-period presentations. NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cash and Cash Equivalents For cash flow reporting purposes, cash and cash equivalents include cash on hand, amounts due from banks, and money market investments, which include federal funds sold and reverse repurchase agreements. At December 31, 2014 and 2013, the Company’s cash and cash equivalents totaled $564.2 million and $644.6 million, respectively. Included in cash and cash equivalents at those dates were $135.2 million and $208.0 million of interest-bearing deposits in other financial institutions, primarily consisting of balances due from the Federal Reserve Bank of New York. Also included in cash and cash equivalents at December 31, 2014 and 2013 were federal funds sold of $6.8 million and $4.8 million, respectively. In addition, the Company had $250.0 million in pledged reverse repurchase agreements outstanding at December 31, 2014 and 2013. In accordance with the monetary policy of the Board of Governors of the Federal Reserve System (the “FRB”), the Company was required to maintain total reserves with the Federal Reserve Bank of New York of $129.5 million and $133.7 million, respectively, at December 31, 2014 and 2013, in the form of deposits and vault cash. The Company was in compliance with this requirement at both dates. Securities Held to Maturity and Available for Sale The securities portfolio primarily consists of mortgage-related securities and, to a lesser extent, debt and equity (together, “other”) securities. Securities that are classified as “available for sale” are carried at their estimated fair value, with any unrealized gains or losses, net of taxes, reported as accumulated other comprehensive income or loss in stockholders’ equity. Securities that we have the intent and ability to hold to maturity are classified as “held to maturity” and carried at amortized cost, less the non-credit portion of OTTI recorded in accumulated other comprehensive loss, net of tax (“AOCL”). The fair values of our securities—and particularly our fixed-rate securities—are affected by changes in market interest rates and credit spreads. In general, as interest rates rise and/or credit spreads widen, the fair value of fixed- rate securities will decline; as interest rates fall and/or credit spreads tighten, the fair value of fixed-rate securities will rise. We regularly conduct a review and evaluation of our securities portfolio to determine if the decline in the fair value of any security below its carrying amount is other than temporary. If we deem any decline in value to be other than temporary, the security is written down to its current fair value, creating a new cost basis, and the resultant loss (other than the OTTI on debt securities attributable to non-credit factors) is charged against earnings and recorded in non-interest income. Our assessment of a decline in fair value includes judgment as to the financial position and future prospects of the entity that issued the investment security, as well as a review of the security’s underlying collateral. Broad changes in the overall market or interest rate environment generally will not lead to a write-down. In accordance with OTTI accounting guidance, unless we have the intent to sell, or it is more likely than not that we may be required to sell a security before recovery, OTTI is recognized as a realized loss in earnings to the extent that the decline in fair value is credit-related. If there is a decline in fair value of a security below its carrying 100 amount and we have the intent to sell it, or it is more likely than not that we may be required to sell the security before recovery, the entire amount of the decline in fair value is charged to earnings. Premiums and discounts on securities are amortized to expense and accreted to income over the remaining period to contractual maturity, using a method that approximates the interest method, and are adjusted for anticipated prepayments. Dividend and interest income are recognized when earned. The cost of securities sold is based on the specific identification method. Federal Home Loan Bank Stock As a member of the Federal Home Loan Bank of New York (the “FHLB-NY”), the Company is required to hold shares of Federal Home Loan Bank (“FHLB”) stock, which is carried at cost. The Company’s holding requirement varies based on certain factors, primarily including its outstanding borrowings from the FHLB-NY. In connection with the FDIC-assisted acquisitions of AmTrust and Desert Hills, the Company acquired stock in the FHLBs of Cincinnati and San Francisco, respectively. The Company conducts a periodic review and evaluation of its FHLB stock to determine if any impairment exists. The factors considered in this process include, among others, significant deterioration in FHLB earnings performance, credit rating, or asset quality; significant adverse changes in the regulatory or economic environment; and other factors that raise significant concerns about the creditworthiness and the ability of the applicable FHLB to continue as a going concern. Loans Loans, net, are carried at unpaid principal balances, including unearned discounts, purchase accounting (i.e., acquisition-date fair value) adjustments, net deferred loan origination costs or fees, and the allowances for loan losses. Loans held for sale are originated through our mortgage banking operation and, to a lesser extent, the Community Bank, and are sold primarily to government-sponsored enterprises (“GSEs”), with the servicing typically retained. The loans originated by the mortgage banking operation are carried at fair value. The fair value of held-for-sale loans is primarily based on quoted market prices for securities backed by similar types of loans. The changes in fair value of these assets are largely driven by changes in mortgage interest rates subsequent to loan funding, and changes in the fair value of the servicing rights associated with the mortgage loans held for sale. In addition, loans originated as held for investment and subsequently designated as held for sale are transferred to held for sale at fair value. The Company recognizes interest income on non-covered loans held for investment and held for sale using the interest method over the life of the loan. Accordingly, the Company defers certain loan origination and commitment fees, and certain loan origination costs, and amortizes the net fee or cost as an adjustment to the loan yield over the term of the related loan. When a loan is sold or repaid, the remaining net unamortized fee or cost is recognized in interest income. Prepayment penalty income is recorded in interest income and only when cash is received. Accordingly, there are no assumptions involved in the recognition of prepayment penalty income. Two factors are considered in determining the amount of prepayment penalty income: the prepayment penalty percentage set forth in the loan documents, and the principal balance of the loan at the time of prepayment. The volume of loans prepaying may vary from one period to another, often in connection with actual or perceived changes in the direction of market interest rates. In a low interest rate environment, or when interest rates are declining, prepayment penalties may increase as more borrowers opt to refinance. In a rising interest rate environment, or when rates are perceived to be rising, prepayment penalties may increase as borrowers seek to lock in current rates prior to further increases. A loan generally is classified as a “non-accrual” loan when it is 90 days or more past due or when the Company no longer expects to collect all amounts due according to the contractual terms of the loan agreement. When a loan is placed on non-accrual status, management ceases the accrual of interest owed, and previously accrued interest is charged against interest income. A loan is generally returned to accrual status when the loan is current and management has reasonable assurance that the loan will be fully collectible. Interest income on non- accrual loans is recorded when received in cash. 101 Allowances for Loan Losses Allowance for Losses on Non-Covered Loans The allowance for losses on non-covered loans is increased by provisions for non-covered loan losses that are charged against earnings, and is reduced by net charge-offs and/or reversals, if any, that are credited to earnings. Although non-covered loans are held by either the Community Bank or the Commercial Bank, and a separate loan loss allowance is established for each, the total of the two allowances is available to cover all losses incurred. In addition, except as otherwise noted in the following discussion, the process for establishing the allowance for losses on non-covered loans is largely the same for each of the Community Bank and the Commercial Bank. The methodology used for the allocation of the allowance for non-covered loan losses at December 31, 2014, 2013, and 2012 was also generally comparable, whereby the Community Bank and the Commercial Bank segregated their loss factors (used for both criticized and non-criticized loans) into a component that was primarily based on historical loss rates and a component that was primarily based on other qualitative factors that are probable to affect loan collectability. In determining the respective allowances for non-covered loan losses, management considers the Community Bank’s and the Commercial Bank’s current business strategies and credit processes, including compliance with applicable regulatory guidelines and with guidelines approved by the respective Boards of Directors with regard to credit limitations, loan approvals, underwriting criteria, and loan workout procedures. The allowance for losses on non-covered loans is established based on management’s evaluation of incurred losses in the portfolio in accordance with GAAP, and is comprised of both specific valuation allowances and general valuation allowances. Specific valuation allowances are established based on management’s analyses of individual loans that are considered impaired. If a non-covered loan is deemed to be impaired, management measures the extent of the impairment and establishes a specific valuation allowance for that amount. A non-covered loan is classified as “impaired” when, based on current information and/or events, it is probable that the Company will be unable to collect both the principal and interest due under the contractual terms of the loan agreement. The Company applies this classification as necessary to non-covered loans individually evaluated for impairment in its portfolios. Smaller- balance homogenous loans and loans carried at the lower of cost or fair value are evaluated for impairment on a collective, rather than individual, basis. Loans to certain borrowers who have experienced financial difficulty and for which the terms have been modified, resulting in a concession, are considered troubled debt restructurings (“TDRs”) and are classified as impaired. Management generally measures impairment on an individual loan and determines the extent to which a specific valuation allowance is necessary by comparing the loan’s outstanding balance to either the fair value of the collateral, less the estimated cost to sell, or the present value of expected cash flows, discounted at the loan’s effective interest rate. Generally, when the fair value of the collateral, net of the estimated costs to sell, or the present value of the expected cash flows is less than the recorded investment in the loan, any shortfall is promptly charged off. Management also follows a process to assign general valuation allowances to non-covered loan categories. General valuation allowances are established by applying management’s loan loss provisioning methodology, and reflect the inherent risk in outstanding held-for-investment loans. This loan loss provisioning methodology considers various factors in determining the appropriate quantified risk factors to use to determine the general valuation allowances. The factors assessed begin with the historical loan loss experience for each major loan category. Management’s allowance for loan losses methodology also considers an estimate of the historical loss emergence period (which is the period of time between the event that triggers a loss and the confirmation and/or charge-off of that loss) for each loan portfolio segment. During 2014, this methodology was enhanced by estimating the loss emergence period using a more granular segmentation approach. The allocation methodology consists of the following components: First, management determines an allowance for loan losses based on a quantitative loss factor for loans evaluated collectively for impairment. This quantitative loss factor is based primarily on historical loss rates, after considering loan type, historical loss and delinquency experience, and loss emergence periods. The quantitative loss factors applied in the methodology are periodically re-evaluated and adjusted to reflect changes in historical loss levels, loss emergence periods, or other risks. Lastly, management allocates an allowance for loan losses to qualitative loss factors. These qualitative loss 102 factors are designed to account for losses that may not be provided for by the quantitative loss component due to other factors evaluated by management which, include, but are not limited to: • Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices; • Changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments; • Changes in the nature and volume of the portfolio and in the terms of loans; • Changes in the volume and severity of past due loans, the volume of non-accrual loans, and the volume and severity of adversely classified or graded loans; • Changes in the quality of the Company’s loan review system; • Changes in the value of the underlying collateral for collateral-dependent loans; • The existence and effect of any concentrations of credit, and changes in the level of such concentrations; • Changes in the experience, ability, and depth of lending management and other relevant staff; and • The effect of other external factors, such as competition and legal and regulatory requirements, on the level of estimated credit losses in the existing portfolio. By considering the factors discussed above, management determines an allowance for non-covered loan loss that is applied to each significant loan portfolio segment to determine the total allowance for losses on non-covered loans. In 2014, management changed the historical loss period used to determine the allowance for loan losses on non-covered loans to a rolling 16-quarter look-back, as it believes this to be a more appropriate reflection of the Company’s historical loss experience. This change has not had a significant effect on the allowance for losses on non-covered loans, nor is it expected to do so. The process of establishing the allowance for losses on non-covered loans also involves: • Periodic inspections of the loan collateral by qualified in-house and external property appraisers and/or inspectors, as applicable; • Regular meetings of executive management with the pertinent Board committee, during which observable trends in the local economy and/or the real estate market are discussed; • Assessment of the aforementioned factors by the pertinent members of the Boards of Directors and management when making a business judgment regarding the impact of anticipated changes on the future level of loan losses; and • Analysis of the portfolio in the aggregate, as well as on an individual loan basis, taking into consideration payment history, underwriting analyses, and internal risk ratings. In order to determine their overall adequacy, each of the respective non-covered loan loss allowances is reviewed quarterly by management and the Board of Directors of the Community Bank or the Commercial Bank, as applicable. Loans, or portions of loans, are charged off in the period that such loans, or portions thereof, are deemed uncollectible. The collectability of individual loans is determined through an assessment of the financial condition and repayment capacity of the borrower and/or through an estimate of the fair value of any underlying collateral. For non-real estate-related consumer credits, the following past-due time periods determine when charge-offs are typically recorded: (1) Closed-end credits are charged off in the quarter that the loan becomes 120 days past due; (2) Open-end credits are charged off in the quarter that the loan becomes 180 days past due; and (3) Both closed-end and open-end credits are typically charged off in the quarter that the credit is 60 days past the date the Company received notification that the borrower has filed for bankruptcy. The level of future additions to the respective non-covered loan loss allowances is based on many factors, including certain factors that are beyond management’s control. These include changes in economic and local market conditions, including declines in real estate values, and increases in vacancy rates and unemployment. Management uses the best available information to recognize losses on loans or to make additions to the loan loss 103 allowances; however, the Community Bank and/or the Commercial Bank may be required to take certain charge- offs and/or recognize further additions to their loan loss allowances, based on the judgment of regulatory agencies with regard to information provided to them during their examinations of the Banks. An allowance for unfunded commitments is maintained separate from the allowances for non-covered loan losses and is included in “Other liabilities” in the Consolidated Statements of Condition. Allowance for Losses on Covered Loans The Company has elected to account for the loans acquired in the AmTrust and Desert Hills acquisitions (the “covered loans”) based on expected cash flows. This election is in accordance with FASB Accounting Standards Codification (“ASC”) Topic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310-30”). In accordance with ASC 310-30, the Company maintains the integrity of a pool of multiple loans accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. Covered loans are reported exclusive of the FDIC loss share receivable. The covered loans acquired in the AmTrust and Desert Hills acquisitions are, and will continue to be, reviewed for collectability based on the expectations of cash flows from these loans. Covered loans have been aggregated into pools of loans with common characteristics. In determining the allowance for losses on covered loans, the Company periodically performs an analysis to estimate the expected cash flows for each of the loan pools. A provision for losses on covered loans is recorded to the extent that the expected cash flows from a loan pool have decreased for credit-related items since the acquisition date. Accordingly, during the loss share recovery period, if there is a decrease in expected cash flows due to an increase in estimated credit losses compared to the estimates made at the respective acquisition dates, the decrease in the present value of expected cash flows will be recorded as a provision for covered loan losses charged to earnings, and the allowance for covered loan losses will be increased. During the loss share recovery period, a related credit to non-interest income and an increase in the FDIC loss share receivable will be recognized at the same time, and will be measured based on the applicable loss sharing agreement percentage. Please see Note 6, “Allowances for Loan Losses” for a further discussion of the allowance for losses on covered loans, as well as additional information about the allowance for losses on non-covered loans. FDIC Loss Share Receivable The FDIC loss share receivable is initially recorded at fair value and is measured separately from the covered loans acquired in the AmTrust and Desert Hills acquisitions as it is not contractually embedded in any of the covered loans. The loss share receivable related to estimated future loan losses is not transferable should the Company sell a loan prior to foreclosure or maturity. The loss share receivable represents the present value of the estimated cash payments expected to be received from the FDIC for future losses on covered assets, based on the credit adjustment estimated for each covered asset and the loss sharing percentages. These cash flows are then discounted at a market- based rate to reflect the uncertainty of the timing and receipt of the loss sharing reimbursements from the FDIC. The amount ultimately collected for this asset is dependent upon the performance of the underlying covered assets, the passage of time, and claims submitted to the FDIC. The FDIC loss share receivable is reduced as losses are recognized on covered loans and loss sharing payments are received from the FDIC. Realized losses in excess of acquisition-date estimates will result in an increase in the FDIC loss share receivable. Conversely, if realized losses are less than the acquisition-date estimates, the FDIC loss share receivable will be reduced. Decreases in estimated reimbursements from the FDIC, if any, are recognized in income prospectively over the life of the related covered loans (or, if shorter, over the remaining term of the related loss sharing agreement). Related additions to the accretable yield on the covered loans are recognized in income prospectively over the lives of the loans. Increases in estimated reimbursements will be recognized in interest income in the same period that they are identified, and an allowance for loan losses for the related loans recorded. Goodwill Impairment Goodwill is presumed to have an indefinite useful life and is tested for impairment, rather than amortized, at the reporting unit level at least once a year. We performed our annual goodwill impairment test as of December 31, 2014 and found no indication of goodwill impairment at that date. In addition to being tested annually, goodwill would be tested in less than one year’s time if there were a “triggering event.” During the year ended December 31, 2014, no triggering events were identified. 104 The goodwill impairment analysis is a two-step test. However, a company can, under ASU No. 2011-08, “Testing Goodwill for Impairment,” first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under this amendment, an entity would not be required to calculate the fair value of a reporting unit unless the entity determined, based on a qualitative assessment, that it was more likely than not that its fair value was less than its carrying amount. The Company did not elect to perform a qualitative assessment of its goodwill in 2014. The first step (“Step 1”) is used to identify potential impairment, and involves comparing each reporting segment’s estimated fair value to its carrying amount, including goodwill. If the estimated fair value of a reporting segment exceeds its carrying amount, goodwill is not considered to be impaired. If the carrying amount exceeds the estimated fair value, there is an indication of potential impairment and the second step (“Step 2”) is performed to measure the amount. Step 2 involves calculating an implied fair value of goodwill for each reporting segment for which impairment was indicated in Step 1. The implied fair value of goodwill is determined in a manner similar to the amount of goodwill calculated in a business combination, i.e., by measuring the excess of the estimated fair value of the reporting segment, as determined in Step 1, over the aggregate estimated fair values of the individual assets, liabilities, and identifiable intangibles, as if the reporting segment were being acquired in a business combination at the impairment test date. If the implied fair value of goodwill exceeds the carrying amount of goodwill assigned to the reporting segment, there is no impairment. If the carrying amount of goodwill assigned to a reporting segment exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. An impairment loss cannot exceed the carrying amount of goodwill assigned to a reporting segment, and the loss establishes a new basis in the goodwill. Subsequent reversal of goodwill impairment losses is not permitted. Quoted market prices in active markets are the best evidence of fair value and are used as the basis for measurement, when available. Other acceptable valuation methods include present-value measurements based on multiples of earnings or revenues, or similar performance measures. Differences in the identification of reporting units and in valuation techniques could result in materially different evaluations of impairment. For the purpose of goodwill impairment testing, management has determined that the Company has two reporting segments: Banking Operations and Residential Mortgage Banking. All of our recorded goodwill has resulted from prior acquisitions and, accordingly, is attributed to Banking Operations. There is no goodwill associated with Residential Mortgage Banking, as this segment was acquired in our FDIC-assisted AmTrust acquisition, which resulted in a bargain purchase gain. In order to perform our annual goodwill impairment test, we determined the carrying value of the Banking Operations segment to be the carrying value of the Company and compared it to the fair value of the Company. Core Deposit Intangibles Core deposit intangible (“CDI”) is a measure of the value of checking and savings deposits acquired in a business combination. The fair value of the CDI stemming from any given business combination is based on the present value of the expected cost savings attributable to the core deposit funding, relative to an alternative funding source. CDI is amortized over the estimated useful lives of the existing deposit relationships acquired, but does not exceed 10 years. The Company evaluates such identifiable intangibles for impairment when an indication of impairment exists. No impairment charges were required to be recorded in 2014, 2013, or 2012. If an impairment loss is determined to exist in the future, the loss will be reflected as an expense in the Consolidated Statement of Income and Comprehensive Income for the period in which such impairment is identified. Premises and Equipment, Net Premises, furniture, fixtures, and equipment are carried at cost, less the accumulated depreciation computed on a straight-line basis over the estimated useful lives of the respective assets (generally 20 years for premises and three to ten years for furniture, fixtures, and equipment). Leasehold improvements are carried at cost less the accumulated amortization computed on a straight-line basis over the shorter of the related lease term or the estimated useful life of the improvement. Depreciation and amortization are included in “Occupancy and equipment expense” in the Consolidated Statements of Income and Comprehensive Income, and amounted to $27.8 million, $28.1 million, and $25.5 million, respectively, in the years ended December 31, 2014, 2013, and 2012. 105 Mortgage Servicing Rights The Company recognizes the right to service mortgage loans for others as a separate asset referred to as an MSR. MSRs are generally recognized when one-to-four family loans are sold or securitized, servicing retained. The Company initially records, and subsequently carries, MSRs at fair value. At December 31, 2014, the Company had one class of MSRs, residential MSRs. The Company bases the fair value of its MSRs on the present value of estimated future net servicing income cash flows utilizing an internal valuation model. This model utilizes assumptions that market participants would use to estimate fair value, including estimates of prepayment speeds, discount rates, default rates, refinance rates, servicing costs, escrow account earnings, contractual servicing fee income, and ancillary income. The Company reassesses, and periodically adjusts, the underlying inputs and changes in the assumptions to reflect market conditions and assumptions that a market participant would consider in valuing the MSRs. Changes in the fair value of MSRs primarily occur in connection with the collection/realization of expected cash flows, as well as changes in the valuation inputs and assumptions. Changes in the fair value of MSRs are reported in “Non-interest income” as a component of mortgage banking income in the period during which such changes occur. Prior to December 31, 2014, the Company also had securitized MSRs. (Please see Note 11, “Intangible Assets,” for additional information regarding securitized MSRs.) Offsetting Derivative Positions 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 Consolidated Statements of Condition 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, on a net basis. Bank-Owned Life Insurance The Company has purchased life insurance policies on certain employees. These bank-owned life insurance (“BOLI”) policies are recorded in the Consolidated Statements of Condition at their cash surrender value. Income from these policies and changes in the cash surrender value are recorded in “Non-interest income” in the Consolidated Statements of Income and Comprehensive Income. At December 31, 2014 and 2013, the Company’s investment in BOLI was $915.2 million and $893.5 million, respectively. There were no additional purchases of BOLI during the years ended December 31, 2014 or 2013. The Company’s investment in BOLI generated income of $27.2 million, $29.9 million, and $30.5 million, respectively, during the years ended December 31, 2014, 2013, and 2012. Other Real Estate Owned Real estate properties acquired through, or in lieu of, foreclosure are sold or rented, and are reported at the lower of cost (i.e., the unpaid balance of the loan at the acquisition date plus the expenses incurred to bring the property to a saleable condition, when appropriate) or fair value, less the estimated selling costs, at the date of acquisition. Following foreclosure, management periodically performs a valuation of the property, and the real estate is carried at the lower of the carrying amount or fair value, less the estimated selling costs. Expenses and revenues from operations and changes in valuation, if any, are included in “General and administrative” expense in the Consolidated Statements of Income and Comprehensive Income. At December 31, 2014 and 2013, the Company had other real estate owned (“OREO”) of $94.0 million and $108.9 million, respectively. The respective amounts include OREO of $32.0 million and $37.5 million that is covered under the Company’s FDIC loss sharing agreements. Income Taxes Income tax expense consists of income taxes that are currently payable and deferred income taxes. Deferred income tax expense is determined by recognizing deferred tax assets and liabilities for future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates that are expected to apply to taxable income in years in which those temporary differences are expected to be recovered or settled. The Company assesses the deferred tax assets and establishes a valuation allowance when realization of a 106 deferred asset is not considered to be “more likely than not.” The Company considers its expectation of future taxable income in evaluating the need for a valuation allowance. The Company estimates income taxes payable based on the amount it expects to owe the various tax authorities (i.e., federal, state, and local). Income taxes represent the net estimated amount due to, or to be received from, such tax authorities. In estimating income taxes, management assesses the relative merits and risks of the appropriate tax treatment of transactions, taking into account statutory, judicial, and regulatory guidance in the context of the Company’s tax position. In this process, management also relies on tax opinions, recent audits, and historical experience. Although the Company uses the best available information to record income taxes, underlying estimates and assumptions can change over time as a result of unanticipated events or circumstances such as changes in tax laws and judicial guidance influencing its overall tax position. Stock Incentives 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, shares are available for grant as restricted stock or other forms of related rights. At December 31, 2014, the Company had 14,480,253 shares available for grant under the 2012 Stock Incentive Plan, including 1,030,673 shares that were transferred from the New York Community Bancorp, Inc. 2006 Stock Incentive Plan (the “2006 Stock Incentive Plan”), which was approved by the Company’s shareholders at its Annual Meeting on June 7, 2006 and reapproved at its Annual Meeting on June 2, 2011. Compensation cost related to restricted stock grants is recognized on a straight-line basis over the vesting period. For a more detailed discussion of the Company’s stock-based compensation, please see Note 13, “Stock-Related Benefit Plans.” Retirement Plans The Company’s pension benefit obligations and post-retirement health and welfare benefit obligations, and the related costs, are calculated using actuarial concepts in accordance with GAAP. The measurement of such obligations and expenses requires that certain assumptions be made regarding several factors, most notably including the discount rate and the expected return on plan assets. The Company evaluates these critical assumptions on an annual basis. Other factors considered by the Company in its evaluation include retirement patterns, mortality, turnover, and the rate of compensation increase. Under GAAP, actuarial gains and losses, prior service costs or credits, and any remaining transition assets or obligations that have not been recognized under previous accounting standards must be recognized in AOCL until they are amortized as a component of net periodic benefit cost. Earnings per Share (Basic and Diluted) 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. 107 The following table presents the Company’s computation of basic and diluted EPS for the years ended December 31, 2014, 2013, and 2012: (in thousands, except share and per share amounts) Net income Less: Dividends paid on and earnings allocated to participating securities Earnings applicable to common stock Weighted average common shares outstanding Basic earnings per common share Years Ended December 31, 2013 $475,547 2014 $485,397 2012 $501,106 (3,425) $481,972 (3,008) $472,539 (4,702) $496,404 440,988,102 439,251,238 437,706,702 $1.13 $1.09 $1.08 Earnings applicable to common stock $481,972 $472,539 $496,404 Weighted average common shares outstanding Potential dilutive common shares (1) Total shares for diluted earnings per share computation Diluted earnings per common share and common share equivalents 440,988,102 439,251,238 437,706,702 5,540 440,988,102 439,251,238 437,712,242 $1.13 $1.09 $1.08 -- -- (1) Options to purchase 58,560 shares, 60,300 shares, and 2,542,277 shares, respectively, of the Company’s common stock that were outstanding as of December 31, 2014, 2013, and 2012, at respective weighted average exercise prices of $18.04, $17.99, and $16.86, were excluded from the respective computations of diluted EPS because their inclusion would have had an antidilutive effect. Impact of Recent Accounting Pronouncements In June 2014, the FASB issued ASU No. 2014-11, “Transfers and Servicing (Topic 860)—Repurchase-to- Maturity Transactions, Repurchase Financings, and Disclosures.” The amendments in ASU No. 2014-11 require that repurchase-to-maturity transactions be accounted for as secured borrowings consistent with the accounting for other repurchase agreements. In addition, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty (a repurchase financing), which will result in secured borrowing accounting for the repurchase agreement. The amendments require an entity to disclose information about transfers accounted for as sales in transactions that are economically similar to repurchase agreements, in which the transferor retains substantially all of the exposure to the economic return on the transferred financial asset throughout the term of the transaction. In addition, the amendments require disclosure of the types of collateral pledged in repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions, and the tenor of those transactions. The accounting changes in ASU No. 2014-11 are effective for the first interim or annual period beginning after December 15, 2014. The disclosure for certain transactions accounted for as sales is required to be presented for interim and annual periods beginning after December 15, 2014, and the disclosure for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015. The adoption of ASU No. 2014-11 is not expected to have a material effect on the Company’s consolidated statement 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 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, 2016, including interim periods within that reporting period. Early application is not permitted. The Company is in the process of evaluating the effects the adoption of ASU No. 2014-09 may have on the Company’s consolidated statement of condition or results of operations. In January 2014, the FASB issued ASU No. 2014-01, “Investments – Equity Method and Joint Ventures (Topic 323), Accounting for Investments in Qualified Affordable Housing Projects.” The amendments in ASU No. 2014-01 provide guidance on accounting for investments by a reporting entity in flow-through limited liability 108 entities that manage or invest in affordable housing projects that qualify for low-income housing tax credits. The amendments permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method, if certain conditions are met. ASU No. 2014-01 is effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2014, with early adoption permitted; it should be applied retrospectively to all periods presented. The Company adopted ASU No. 2014-01 on January 1, 2014. ASU No. 2014-01 calls for additional disclosures that will enable the reader to understand the nature of the investment and the effect of its measurement and related tax credits on a company’s financial condition and results of operations. Please see Note 9, “Federal, State, and Local Taxes” for the presentation of such disclosures. In January 2014, the FASB issued ASU No. 2014-04, “Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40), Reclassification of Residential Real Estate-Collateralized Consumer Mortgage Loans upon Foreclosure.” The amendments in ASU No. 2014-04 clarify when an in-substance repossession or foreclosure occurs, i.e., when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. ASU No. 2014-04 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The adoption of ASU No. 2014-04 is not expected to have a material effect on the Company’s consolidated statement of condition or results of operations. NOTE 3: RECLASSIFICATIONS OUT OF ACCUMULATED OTHER COMPREHENSIVE LOSS (in thousands) For the Twelve Months Ended December 31, 2014 Details about Accumulated Other Comprehensive Loss Unrealized gains on available-for-sale securities Amortization of defined benefit pension plan items: Prior-service costs Actuarial losses Total reclassifications for the period Amount Reclassified from Accumulated Other Comprehensive Loss (1) $ 6,186 (2,492) $ 3,694 Affected Line Item in the Consolidated Statement of Income and Comprehensive Income Net gain on sales of securities Tax expense Net gain on sales of securities, net of tax Included in the computation of net periodic (credit) expense (2) Included in the computation of net periodic (credit) expense (2) Total before tax Tax benefit Amortization of defined benefit pension plan items, net of tax $ 249 (3,763) (3,514) 1,419 $(2,095) $ 1,599 (1) Amounts in parentheses indicate expense items. (2) Please see Note 12, “Employee Benefits,” for additional information. 109 NOTE 4: SECURITIES The following tables summarize the Company’s portfolio of securities available for sale at December 31, 2014 and 2013: (in thousands) Mortgage-Related Securities: GSE(1) certificates GSE CMOs(2) Private label CMOs Total mortgage-related securities Other Securities: Municipal bonds Capital trust notes Preferred stock Common stock Total other securities Total securities available for sale (1) Government-sponsored enterprise. (2) Collateralized mortgage obligations. December 31, 2014 Gross Unrealized Gain Gross Unrealized Loss Fair Value $ 1,350 -- -- $ 1,350 $ 101 31 5,246 748 $ 6,126 $ 7,476 $ $ -- -- -- -- $ -- 1,980 440 43 $ 2,463 $ 2,463 $ 19,700 -- -- $ 19,700 $ 942 11,482 123,011 18,648 $154,083 $173,783 Amortized Cost $ 18,350 -- -- $ 18,350 $ 841 13,431 118,205 17,943 $ 150,420 $ 168,770 As of December 31, 2014, the fair value of marketable equity securities included corporate preferred stock of $123.0 million and common stock of $18.6 million, with the latter primarily consisting of mutual funds that are Community Reinvestment Act-qualified investments. (in thousands) Mortgage-Related Securities: GSE certificates GSE CMOs Private label CMOs Total mortgage-related securities Other Securities: Municipal bonds Capital trust notes Preferred stock Common stock Total other securities Total securities available for sale December 31, 2013 Gross Unrealized Gain Gross Unrealized Loss Fair Value $ 1,442 598 -- $ 2,040 $ 69 60 1,936 4,093 $ 6,158 $ 8,198 $ 1 1,861 12 $ 1,874 $ -- 1,681 3,902 293 $ 5,876 $ 7,750 $ 25,200 60,819 10,202 $ 96,221 $ 1,026 11,798 116,239 55,454 $184,517 $280,738 Amortized Cost $ 23,759 62,082 10,214 $ 96,055 $ 957 13,419 118,205 51,654 $184,235 $280,290 110 The following tables summarize the Company’s portfolio of securities held to maturity at December 31, 2014 and 2013: (in thousands) Mortgage-Related Securities: GSE certificates GSE CMOs Total mortgage-related securities Other Securities: GSE debentures Corporate bonds Municipal bonds Capital trust notes Total other securities Total securities held to maturity (1) Amortized Cost Carrying Amount $2,468,791 1,610,243 $4,079,034 $2,468,791 1,610,243 $4,079,034 $2,635,989 73,317 58,682 84,476 $2,852,464 $6,931,498 $2,635,989 73,317 58,682 75,645 $2,843,633 $6,922,667 December 31, 2014 Gross Unrealized Gain Gross Unrealized Loss $ 106,414 65,075 $ 171,489 $ 24,173 12,113 -- 5,193 $ 41,479 $ 212,968 $ 3,838 711 $ 4,549 $32,920 -- 1,027 11,168 $45,115 $49,664 Fair Value $2,571,367 1,674,607 $4,245,974 $2,627,242 85,430 57,655 69,670 $2,839,997 $7,085,971 (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, 2014, the non-credit portion of OTTI recorded in AOCL was $8.8 million (before taxes). (in thousands) Mortgage-Related Securities: GSE certificates GSE CMOs Total mortgage-related securities Other Securities: GSE debentures Corporate bonds Municipal bonds Capital trust notes Total other securities Total securities held to maturity (1) Amortized Cost Carrying Amount $2,529,102 1,878,885 $4,407,987 $2,529,102 1,878,885 $4,407,987 $3,053,253 72,899 60,462 84,871 $3,271,485 $7,679,472 $3,053,253 72,899 60,462 75,681 $3,262,295 $7,670,282 December 31, 2013 Gross Unrealized Gain Gross Unrealized Loss Fair Value $30,145 29,330 $59,475 $ 6,512 11,063 19 3,134 $20,728 $80,203 $ 61,280 22,520 $ 83,800 $2,497,967 1,885,695 $4,383,662 $ 208,506 -- 3,849 9,086 $ 221,441 $ 305,241 $2,851,259 83,962 56,632 69,729 $3,061,582 $7,445,244 (1) Held-to-maturity securities are reported at a carrying amount equal to amortized cost less the non-credit portion of OTTI recorded in AOCL. At December 31, 2013, the non-credit portion of OTTI recorded in AOCL was $9.2 million (before taxes). At December 31, 2014 and 2013, respectively, the Company had $515.3 million and $561.4 million of FHLB stock, at cost, primarily consisting of stock in the FHLB-NY. The Company is required to maintain an investment in FHLB-NY stock in order to have access to the funding it provides. The following table summarizes the gross proceeds, gross realized gains, and gross realized losses from the sale of available-for-sale securities during the years ended December 31, 2014, 2013 and 2012: (in thousands) Gross proceeds Gross realized gains Gross realized losses December 31, 2013 2014 $333,725 $631,802 9,529 45 6,186 -- 2012 $822,618 2,041 -- In addition, during the twelve months ended December 31, 2014, the Company sold held-to-maturity securities with gross proceeds of $139.3 million and realized gains of $7.8 million. During the twelve months ended December 31, 2013, the Company sold held-to-maturity securities with gross proceeds of $191.1 million and realized gains of $11.6 million. All of the held-to-maturity securities sold in 2014 and 2013 were securities on which the Company had collected a substantial portion (at least 85%) of the initial principal balance. 111 In the following table, the beginning balance represents the credit loss component for debt securities on which OTTI occurred prior to January 1, 2014. 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) Beginning credit loss amount as of December 31, 2013 Add: Initial other-than-temporary credit losses Subsequent other-than-temporary credit losses Amount previously recognized in AOCL Less: Realized losses for securities sold Securities intended or required to be sold Increases in expected cash flows on debt securities Ending credit loss amount as of December 31, 2014 For the Twelve Months Ended December 31, 2014 $216,334 -- -- -- -- -- 17,326 $199,008 112 d e t a m i t s e d n a s t s o c d e z i t r o m a e h t d n a , s e i t i r u c e s t b e d y t i r u t a m - o t - d l e h f o s e u l a v r i a f d e t a m i t s e d n a s t n u o m a g n i y r r a c e h t s e z i r a m m u s e l b a t g n i w o l l o f e h T l a p i c n i r P . s e i t i r u c e s h c u s f o s e v i l e g a r e v a d e t a m i t s e e h t f o s d n e e h t n o d e s a b y r o g e t a c y t i r u t a m a o t d e t u b i r t s i d e r a , s n o i s i v o r p t n e m y a p e r p e v a h h c i h w f o l l a , e l a s r o f e l b a l i a v a d n a y t i r u t a m o t d l e h s e i t i r u c e s d e t a l e r - e g a g t r o M . y t i r u t a m l a u t c a r t n o c y b , 4 1 0 2 , 1 3 r e b m e c e D t a , s e i t i r u c e s t b e d e l a s - r o f - e l b a l i a v a f o s e u l a v r i a f . e f i l e g a r e v a d e t a m i t s e f o n o i t a n i m r e t e d e h t n i d e r e d i s n o c e r a t u b , r u c c o y e h t s a s e i r o g e t a c y t i r u t a m n i n w o h s t o n e r a s t n e m y a p e r p n o i t a z i t r o m a d n a - - - - 2 6 8 0 2 8 , 7 5 2 8 6 , 8 5 $ 4 2 1 7 7 5 0 4 1 - - 1 4 8 $ $ e u l a V r i a F 2 2 2 , 6 6 8 3 9 , 7 5 9 , 5 1 1 8 , 1 6 0 , 1 - - $ 4 1 0 2 , 1 3 r e b m e c e D t A e g a r e v A d l e i Y t b e D r e h t O ) 2 ( s e i t i r u c e S e g a r e v A ) 1 ( d l e i Y , y t n u o C , e t a t S l a p i c i n u M d n a e g a r e v A d l e i Y y r u s a e r T . . S U E S G d n a s n o i t a g i l b O e g a r e v A d l e i Y - e g a g t r o M d e t a l e R s e i t i r u c e S % - - - - - - - - 4 1 . 3 0 9 . 5 8 3 3 , 7 4 4 2 6 , 1 0 1 $ % - - 6 9 . 2 - - 5 8 . 2 $ % - - - - $ - - 7 1 . 4 0 7 . 2 - - 5 2 1 , 0 6 4 6 8 , 5 7 5 , 2 % - - - - - - - - $ 2 2 . 3 6 2 . 3 2 5 8 , 8 6 8 2 8 1 , 0 1 2 , 3 : s e i t i r u c e S y t i r u t a M - o t - d l e H s r a e y e v i f o t e n o m o r f e u D s r a e y n e t o t e v i f m o r f s r a e y n e t r e t f a e u D e u D r a e y e n o n i h t i w e u D ) s d n a s u o h t n i s r a l l o d ( 1 7 9 , 5 8 0 , 7 $ % 2 0 . 5 2 6 9 , 8 4 1 $ % 5 8 . 2 3 3 1 7 1 5 , 4 5 6 5 , 3 9 0 9 , 3 2 4 2 1 , 2 3 $ $ % - - - - - - % 0 7 . 5 0 7 . 5 - - - - - - 1 3 4 , 3 1 1 3 4 , 3 1 $ % 5 4 . 6 - - 9 4 . 6 6 6 . 6 $ % 1 5 . 6 % 3 7 . 2 9 8 9 , 5 3 6 , 2 $ % 3 2 . 3 4 3 0 , 9 7 0 , 4 $ y t i r u t a m o t d l e h s e i t i r u c e s t b e d l a t o T % - - - - - - - - % - - - - - - - - - - - - $ $ % 1 9 . 5 2 7 7 . 6 8 7 . 3 2 8 . 4 % 3 0 . 5 6 0 7 , 3 8 8 1 , 3 4 5 4 , 1 1 0 5 3 , 8 1 $ $ e l a s r o f e l b a l i a v a s e i t i r u c e s t b e d l a t o T ) 3 ( : s e i t i r u c e S e l a S - r o f - e l b a l i a v A s r a e y e v i f o t e n o m o r f e u D s r a e y n e t o t e v i f m o r f e u D r a e y e n o n i h t i w e u D s r a e y n e t r e t f a e u D r e t f a e u d e r a h c i h w f o l l a , y t i r u t a m o t d l e h s e i t i r u c e s d e r r e f e r p t s u r t d e l o o p f o 0 0 0 , 7 4 2 $ e r a s e t o n t s u r t l a t i p a c n i d e d u l c n I . s e t o n t s u r t l a t i p a c d n a s d n o b e t a r o p r o c s e d u l c n I . s i s a b t n e l a v i u q e - x a t a n o d e t n e s e r p t o N ) 1 ( ) 2 ( . s e i t i r u c e s d e r r e f e r p t s u r t e u s s i - e l g n i s f o t s i s n o c s e t o n t s u r t l a t i p a c g n i n i a m e r e h T . s r a e y n e t . e l b a t s i h t m o r f d e d u l c x e n e e b e v a h y e h t , y t i r u t a m l a u t c a r t n o c o n e v a h s e i t i r u c e s y t i u q e s A ) 3 ( 3 1 1 1 1 7 8 3 8 , 3 7 2 0 , 1 8 6 1 , 1 1 0 2 9 , 2 3 $ 9 0 2 , 2 7 3 9 7 , 6 5 9 1 0 , 5 2 9 0 9 , 2 4 2 9 9 3 , 4 0 2 , 2 $ 4 6 6 , 9 4 $ 9 2 3 , 1 0 6 , 2 $ - - - - 0 8 9 , 1 0 8 9 , 1 3 8 4 $ 3 6 4 , 2 $ - - - - 1 5 4 , 5 1 5 4 , 5 5 9 8 , 8 6 6 4 3 , 4 7 $ $ 8 3 8 , 3 0 2 9 , 2 3 $ 1 1 7 2 3 8 8 6 1 , 1 1 9 6 4 , 9 4 $ - - - - 0 8 9 , 1 0 8 9 , 1 9 1 1 $ 9 9 0 , 2 $ 9 0 2 , 2 7 8 5 0 , 3 4 9 1 0 , 5 2 9 0 9 , 2 4 2 9 9 3 , 4 0 2 , 2 $ 4 9 5 , 7 8 5 , 2 $ - - - - 1 5 4 , 5 1 5 4 , 5 4 7 1 , 5 1 5 2 6 , 0 2 $ $ - - - - - - $ - - 5 9 1 5 9 1 $ - - - - - - - - $ 4 6 3 4 6 3 $ 4 1 1 s s o L d e z i l a e r n U e u l a V r i a F s s o L d e z i l a e r n U e u l a V r i a F s s o L d e z i l a e r n U e u l a V r i a F l a t o T r e g n o L r o s h t n o M e v l e w T s h t n o M e v l e w T n a h t s s e L d n a s h t n o m e v l e w t n a h t s s e l r o f n o i t i s o p s s o l d e z i l a e r n u s u o u n i t n o c a g n i v a h s e i t i r u c e s e l a s - r o f - e l b a l i a v a d n a y t i r u t a m - o t - d l e h s t n e s e r p e l b a t g n i w o l l o f e h T - - - - - - $ - - 5 3 7 , 3 1 5 3 7 , 3 1 $ - - - - - - - - s e i t i r u c e s t b e d y t i r u t a m - o t - d l e h d e r i a p m i y l i r a r o p m e t l a t o T : s e i t i r u c e S e l a S - r o f - e l b a l i a v A d e r i a p m I y l i r a r o p m e T s O M C l e b a l e t a v i r P s e t o n t s u r t l a t i p a C s O M C E S G : s e i t i r u c e S t b e D s e r u t n e b e d E S G s e t a c i f i t r e c E S G s O M C E S G s e t o n t s u r t l a t i p a C s d n o b l a p i c i n u M : s e i t i r u c e S t b e D y t i r u t a M - o t - d l e H d e r i a p m I ) s d n a s u o h t n i ( y l i r a r o p m e T : 4 1 0 2 , 1 3 r e b m e c e D f o s a r e g n o l r o s h t n o m e v l e w t r o f 4 1 0 2 , 1 3 r e b m e c e D t A 1 2 7 , 3 5 1 2 7 , 3 5 $ s e i t i r u c e s e l a s - r o f - e l b a l i a v a d e r i a p m i y l i r a r o p m e t l a t o T s e i t i r u c e s y t i u q E $ s e i t i r u c e s t b e d e l a s - r o f - e l b a l i a v a d e r i a p m i y l i r a r o p m e t l a t o T d n a s h t n o m e v l e w t n a h t s s e l r o f n o i t i s o p s s o l d e z i l a e r n u s u o u n i t n o c a g n i v a h s e i t i r u c e s e l a s - r o f - e l b a l i a v a d n a y t i r u t a m - o t - d l e h s t n e s e r p e l b a t g n i w o l l o f e h T s s o L d e z i l a e r n U e u l a V r i a F s s o L d e z i l a e r n U e u l a V r i a F s s o L d e z i l a e r n U e u l a V r i a F l a t o T r e g n o L r o s h t n o M e v l e w T s h t n o M e v l e w T n a h t s s e L : 3 1 0 2 , 1 3 r e b m e c e D f o s a r e g n o l r o s h t n o m e v l e w t r o f 3 1 0 2 , 1 3 r e b m e c e D t A : s e i t i r u c e S t b e D y t i r u t a M - o t - d l e H d e r i a p m I ) s d n a s u o h t n i ( y l i r a r o p m e T 0 8 2 , 1 6 0 2 5 , 2 2 9 4 8 , 3 6 8 0 , 9 6 0 5 , 8 0 2 $ 3 3 3 , 5 5 1 8 0 , 2 6 1 9 6 , 6 3 9 3 9 7 , 4 8 6 , 1 7 1 4 , 7 7 7 , 2 $ 1 4 2 , 5 0 3 $ 5 1 3 , 6 1 5 , 5 $ 1 2 1 1 6 8 , 1 1 8 6 , 1 5 5 5 , 3 5 9 1 , 4 0 5 7 , 7 $ $ $ 0 1 1 2 0 2 , 0 1 5 2 7 , 4 4 8 3 7 , 7 5 7 7 , 2 6 6 8 8 , 5 7 1 6 6 , 8 3 1 $ $ $ 1 - - - - - - 3 7 6 , 1 4 7 6 , 1 $ 4 7 6 , 1 $ $ 0 1 1 $ - - - - - - 6 4 7 , 5 6 5 8 , 5 $ 6 5 8 , 5 $ - - - - - - - - $ - - - - - - - - 6 8 9 , 8 6 8 9 , 8 $ 1 8 1 , 7 3 1 8 1 , 7 3 $ $ 6 0 5 , 8 0 2 $ 0 0 1 0 8 2 , 1 6 0 2 5 , 2 2 9 4 8 , 3 5 1 1 5 5 2 , 6 9 2 $ 4 3 1 , 9 7 4 , 5 $ s e i t i r u c e s t b e d y t i r u t a m - o t - d l e h d e r i a p m i y l i r a r o p m e t l a t o T : s e i t i r u c e S e l a S - r o f - e l b a l i a v A d e r i a p m I y l i r a r o p m e T - - 2 1 8 1 6 8 , 1 1 8 8 , 1 5 9 1 , 4 6 7 0 , 6 $ $ $ - - 2 0 2 , 0 1 5 2 7 , 4 4 2 9 9 , 1 9 1 9 , 6 5 6 8 8 , 5 7 5 0 8 , 2 3 1 $ $ $ s e i t i r u c e s t b e d e l a s - r o f - e l b a l i a v a d e r i a p m i y l i r a r o p m e t l a t o T s e i t i r u c e s e l a s - r o f - e l b a l i a v a d e r i a p m i y l i r a r o p m e t l a t o T s e i t i r u c e s y t i u q E s O M C l e b a l e t a v i r P s e t a c i f i t r e c E S G s e t o n t s u r t l a t i p a C s O M C E S G : s e i t i r u c e S t b e D 3 3 3 , 5 5 0 0 9 , 4 2 1 9 6 , 6 3 9 3 9 7 , 4 8 6 , 1 7 1 4 , 7 7 7 , 2 $ s d n o b / s e t o n l a p i c i n u M s e t o n t s u r t l a t i p a C s e r u t n e b e d E S G s e t a c i f i t r e c E S G s O M C E S G An OTTI loss on impaired securities must be fully recognized in earnings if an investor has the intent to sell the debt security, or if it is more likely than not that the investor will be required to sell the debt security before recovery of its amortized cost. However, even if an investor does not expect to sell a debt security, it must evaluate the expected cash flows to be received and determine if a credit loss has occurred. In the event that a credit loss occurs, only the amount of impairment associated with the credit loss is recognized in earnings. Amounts relating to factors other than credit losses are recorded in AOCL. FASB guidance also requires additional disclosures regarding the calculation of credit losses, as well as factors considered by the investor in reaching a conclusion that an investment is not other-than-temporarily impaired. Securities in unrealized loss positions are analyzed as part of the Company’s ongoing assessment of OTTI. When the Company intends to sell such securities, the Company recognizes an impairment loss equal to the full difference between the amortized cost basis and the fair value of those securities. When the Company does not intend to sell equity or debt securities in an unrealized loss position, potential OTTI is considered based on a variety of factors, including the length of time and extent to which the fair value has been less than the cost; adverse conditions specifically related to the industry, the geographic area, or financial condition of the issuer, or the underlying collateral of a security; the payment structure of the security; changes to the rating of the security by a rating agency; the volatility of the fair value changes; and changes in fair value of the security after the balance sheet date. For debt securities, the Company estimates cash flows over the remaining life of the underlying collateral to assess whether credit losses exist and, where applicable, to determine if any adverse changes in cash flows have occurred. The Company’s cash flow estimates take into account expectations of relevant market and economic data as of the end of the reporting period. As of December 31, 2014, the Company did not intend to sell its securities with an unrealized loss position, and it was more likely than not that the Company would not be required to sell these securities before recovery of their amortized cost basis. The Company believes that the securities with an unrealized loss position were not other-than-temporarily impaired as of December 31, 2014. Other factors considered in determining whether or not an impairment is temporary include the severity of the impairment; the cause of the impairment; the near-term prospects of the issuer; and the forecasted recovery period using current estimates of volatility in market interest rates (including liquidity and risk premiums). Management’s assertion regarding its intent not to sell, or that it is not more likely than not that the Company will be required to sell a security before its anticipated recovery, is based on a number of factors, including a quantitative estimate of the expected recovery period (which may extend to maturity), and management’s intended strategy with respect to the identified security or portfolio. If management does have the intent to sell, or believes it is more likely than not that the Company will be required to sell the security before its anticipated recovery, the unrealized loss is charged directly to earnings in the Consolidated Statement of Income and Comprehensive Income. The unrealized losses on the Company’s GSE mortgage-related securities, GSE municipal bonds, and GSE debentures at December 31, 2014 were primarily caused by movements in market interest rates and spread volatility, rather than credit risk. It is expected that these securities will not be settled at a price that is less than the amortized cost of the Company’s investment. Because the Company does not have the intent to sell the investments, and it is not more likely than not that the Company will be required to sell them before the anticipated recovery of fair value, which may be at maturity, the Company did not consider these investments to be other than temporarily impaired at December 31, 2014. The Company reviews quarterly financial information related to its investments in municipal bonds and capital trust notes, as well as other information that is released by each of the issuers of such bonds and notes, to determine their continued creditworthiness. The contractual terms of these investments do not permit settling the securities at prices that are less than the amortized costs of the investments; therefore, the Company expects that these investments will not be settled at prices that are less than their amortized costs. The Company continues to monitor these investments and currently estimates that the present value of expected cash flows is not less than the amortized cost of the securities. Because the Company does not have the intent to sell the investments, and it is not more likely than not that the Company will be required to sell them before the anticipated recovery of fair value, which may be at maturity, it did not consider these investments to be other than temporarily impaired at December 31, 2014. It is possible that these securities will perform worse than is currently expected, which could lead to adverse changes in cash flows from these securities and potential OTTI losses in the future. Future events that could trigger material unrecoverable declines in the fair values of the Company’s investments, and 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. 116 At December 31, 2014, the Company’s equity securities portfolio consisted of perpetual preferred stock, common stock, and mutual funds. The Company considers a decline in the fair value of available-for-sale equity securities to be other than temporary if the Company does not expect to recover the entire amortized cost basis of the security. The unrealized losses on the Company’s equity securities at December 31, 2014 were primarily caused by market volatility. The Company evaluated the near-term prospects of a recovery of fair value for each security in the portfolio, together with the severity and duration of impairment to date. Based on this evaluation, and its ability and intent to hold these investments for a reasonably sufficient period of time to realize a near-term forecasted recovery of fair value, the Company did not consider these investments to be other than temporarily impaired at December 31, 2014. Nonetheless, it is possible that these equity securities will perform worse than is currently expected, which could lead to adverse changes in their fair values, or the failure of the securities to fully recover in value as presently forecasted by management. This potentially would cause the Company to record OTTI losses in future periods. Events that could trigger material declines in the fair values of these securities include, but are not limited to, deterioration in the equity markets; a decline in the quality of the loan portfolios of the issuers in which the Company has invested; and the recording of higher loan loss provisions and net operating losses by such issuers. The investment securities designated as having a continuous loss position for twelve months or more at December 31, 2014 consisted of sixteen agency mortgage-backed securities, seventeen GSE debt securities, three GSE CMOs, five capital trust notes, two GSE municipal bonds, and one preferred stock security. At December 31, 2013, the investment securities designated as having a continuous loss position for twelve months or more consisted of six capital trust notes and one mortgage-backed security. At December 31, 2014 and December 31, 2013, the combined market value of the respective securities represented unrealized losses of $51.6 million and $10.7 million. At December 31, 2014, the fair value of securities having a continuous loss position for twelve months or more was 1.9% below the collective amortized cost of $2.7 billion. At December 31, 2013, the fair value of such securities was 19.9% below the collective amortized cost of $53.7 million. NOTE 5: LOANS The following table sets forth the composition of the loan portfolio at December 31, 2014 and 2013: (dollars in thousands) Non-Covered Loans Held for Investment: Mortgage Loans: Multi-family Commercial real estate One-to-four family Acquisition, development, and construction Total mortgage loans held for investment Other Loans: Commercial and industrial Lease financing, net of unearned income of $18,913 and $5,723 Total commercial and industrial loans Other Total other loans held for investment Total non-covered loans held for investment Net deferred loan origination costs Allowance for losses on non-covered loans Non-covered loans held for investment, net Covered loans Allowance for losses on covered loans Covered loans, net Loans held for sale Total loans, net December 31, 2014 2013 Percent of Non-Covered Loans Held for Investment Amount Percent of Non-Covered Loans Held for Investment Amount $23,831,846 7,634,320 138,915 258,116 31,863,197 72.21% 23.13 0.42 0.78 96.54 $20,699,927 7,364,231 560,730 344,100 28,968,988 69.41% 24.70 1.88 1.15 97.14 900,551 2.73 712,260 2.39 0.34 2.73 0.13 2.86 100.00% 0.63 3.36 0.10 3.46 100.00% 101,431 813,691 39,036 852,727 $29,821,715 16,274 (141,946) $29,696,043 2,788,618 (64,069) $ 2,724,549 306,915 $32,727,507 208,670 1,109,221 31,943 1,141,164 $33,004,361 20,595 (139,857) $32,885,099 2,428,622 (45,481) $ 2,383,141 379,399 $35,647,639 117 Non-Covered Loans Non-Covered Loans Held for Investment The vast majority of the loans the Company originates for investment are multi-family loans, most of which are collateralized by non-luxury apartment buildings in New York City that are rent-regulated and feature below- market rents. In addition, the Company originates commercial real estate (“CRE”) loans, most of which are collateralized by properties located in New York City and on Long Island. The Company also originates one-to-four family loans; acquisition, development, and construction (“ADC”) loans; and commercial and industrial (“C&I”) loans for investment. ADC loans are primarily originated for multi- family and residential tract projects in New York City and on Long Island, while one-to-four family loans are originated both within and beyond the markets served by the Company’s branch offices. C&I loans consist of asset- based loans, equipment loans and leases, and dealer floor-plan loans (together, “specialty finance loans and leases”) that are made to nationally recognized borrowers throughout the U.S. and are senior debt-secured; and other C&I loans, both secured and unsecured, that primarily are made to small and mid-size businesses in Metro New York. Such C&I loans are typically made for working capital, business expansion, and the purchase of machinery and equipment. Payments on multi-family and CRE loans generally depend on the income produced by the underlying properties which, in turn, depends on their successful operation and management. Accordingly, the ability of the Company’s borrowers to repay these loans may be impacted by adverse conditions in the local real estate market and the local economy. While the Company generally requires that such loans be qualified on the basis of the collateral property’s current cash flows, appraised value, and debt service coverage ratio, among other factors, there can be no assurance that its underwriting policies will protect the Company from credit-related losses or delinquencies. The one-to-four family loans that are held for investment consist primarily of hybrid loans (both jumbo and agency-conforming) that have been made at conservative loan-to-value ratios to borrowers with a documented history of repaying their debts. ADC loans typically involve a higher degree of credit risk than loans secured by improved or owner-occupied real estate. Accordingly, borrowers are required to provide a guarantee of repayment and completion, and loan proceeds are disbursed as construction progresses, as certified by in-house or third-party engineers. The risk of loss on an ADC loan is largely dependent upon the accuracy of the initial appraisal of the property’s value upon completion of construction or development; the developer’s experience; the estimated cost of construction, including interest; and the estimated time to complete and/or sell or lease such property. The Company seeks to minimize these risks by maintaining conservative lending policies and rigorous underwriting standards. However, if the estimate of value proves to be inaccurate, the cost of completion is greater than expected, or the length of time to complete and/or sell or lease the collateral property is greater than anticipated (based, for example, on a downturn in the local economy or real estate market), the property could have a value upon completion that is insufficient to assure full repayment of the loan. This could have a material adverse effect on the quality of the ADC loan portfolio, and could result in losses or delinquencies. To minimize the risk involved in specialty finance lending and leasing, we participate in syndicated loans that are brought to us, and equipment loans and leases that are assigned to us, by a select group of nationally recognized sources who have had long-term relationships with our experienced lending officers. Our specialty finance loans and leases 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. Furthermore, each of our 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, we re-underwrite each transaction. In addition, we retain outside counsel to conduct a further review of the underlying documentation. To minimize the risks involved in other C&I lending, the Company underwrites such loans on the basis of the cash flows produced by the business; requires that such loans be collateralized by various business assets, including inventory, equipment, and accounts receivable, among others; and requires personal guarantees. However, the capacity of a borrower to repay such a C&I loan is substantially dependent on the degree to which his or her business is successful. In addition, the collateral underlying such loans may depreciate over time, may not be conducive to appraisal, or may fluctuate in value, based upon the results of operations of the business. 118 Included in non-covered loans held for investment at December 31, 2014 and 2013 were loans to non-officer directors of $129.5 million and $149.4 million, respectively. Loans Held for Sale The mortgage banking operation of the Community Bank was established in January 2010 to originate, aggregate, and service 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 uses its mortgage banking platform to originate jumbo loans which it typically sells to other financial institutions. The Company does not expect such loans to represent a material portion of the held-for- sale loans it originates. Included in the December 31, 2014 held-for-sale balance were $19.9 million of one-to-four family loans and $158.5 million of C&I loans that transferred from loans held for investment at fair value during the year. The Company also services mortgage loans for various third parties, primarily including GSEs. The unpaid principal balance of loans serviced for others was $22.4 billion and $21.5 billion at December 31, 2014 and 2013, respectively. Asset Quality The following table presents information regarding the quality of the Company’s non-covered loans held for investment at December 31, 2014: (in thousands) Multi-family Commercial real estate One-to-four family Acquisition, development, and construction Commercial and industrial(1) Other Total Loans 30-89 Days Past Due $ 464 1,464 3,086 -- 530 648 $6,192 Non- Accrual Loans $31,089 24,824 11,032 654 8,382 969 $76,950 Loans 90 Days or More Delinquent and Still Accruing Interest $-- -- -- Total Past Due Loans $31,553 26,288 14,118 Current Loans $23,800,293 7,608,032 124,797 Total Loans Receivable $23,831,846 7,634,320 138,915 -- -- -- $-- 654 8,912 1,617 $83,142 257,462 1,100,309 30,326 $32,921,219 258,116 1,109,221 31,943 $33,004,361 (1) 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, 2013: (in thousands) Multi-family Commercial real estate One-to-four family Acquisition, development, and construction Commercial and industrial(1) Other Total Loans 30-89 Days Past Due $33,678 1,854 1,076 -- 1 480 $37,089 Non- Accrual Loans $ 58,395 24,550 10,937 2,571 5,735 1,349 $103,537 Loans 90 Days or More Delinquent and Still Accruing Interest $-- -- -- Total Past Due Loans $ 92,073 26,404 12,013 Current Loans $20,607,854 7,337,827 548,717 Total Loans Receivable $20,699,927 7,364,231 560,730 -- -- -- $-- 2,571 5,736 1,829 $140,626 341,529 807,955 37,207 $29,681,089 344,100 813,691 39,036 $29,821,715 (1) Includes lease financing receivables, all of which were current. 119 The following table summarizes the Company’s portfolio of non-covered loans held for investment by credit quality indicator at December 31, 2014: (in thousands) Credit Quality Indicator: Multi-Family Commercial Real Estate One-to-Four Family Acquisition, Development, and Construction Total Mortgage Loans Commercial and Industrial(1) Other Total Other Loan Segment Pass Special mention Substandard Doubtful Total $23,777,569 6,798 47,479 -- $23,831,846 $7,591,223 9,123 33,974 -- $7,634,320 $127,883 -- 11,032 -- $138,915 $256,868 -- 1,248 -- $258,116 $31,753,543 15,921 93,733 -- $31,863,193 $1,083,173 $30,924 -- 17,032 969 9,016 -- -- $1,109,221 $31,943 $1,114,147 17,032 9,985 -- $1,141,164 (1) Includes lease financing receivables, all of which were classified as “pass.” The following table summarizes the Company’s portfolio of non-covered loans held for investment by credit quality indicator at December 31, 2013: (in thousands) Credit Quality Indicator: Multi-Family Commercial Real Estate One-to-Four Family Acquisition, Development, and Construction Total Mortgage Loans Commercial and Industrial(1) Other Total Other Loan Segment Pass Special mention Substandard Doubtful Total $20,527,460 73,549 98,918 -- $20,699,927 $7,304,502 25,407 33,822 500 $7,364,231 $554,132 -- 6,598 -- $560,730 $333,805 7,400 2,895 -- $344,100 $28,719,899 106,356 142,233 500 $28,968,988 $793,693 13,036 6,808 154 $813,691 $37,688 -- 1,348 -- $39,036 $831,381 13,036 8,156 154 $852,727 (1) Includes lease financing receivables, all of which were classified as “pass.” The preceding classifications follow regulatory guidelines and can be generally described as follows: pass loans are of satisfactory quality; special mention loans have a potential weakness or risk that may result in the deterioration of future repayment; substandard loans are inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged (these loans have a well-defined weakness and there is a distinct possibility that the Company will sustain some loss); and doubtful loans, based on existing circumstances, have weaknesses that make collection or liquidation in full highly questionable and improbable. In addition, one-to-four family loans are classified utilizing an inter-regulatory agency methodology that incorporates the extent of delinquency and the loan-to-value ratios. These classifications are the most current available and generally have been updated within the last twelve months. The interest income that would have been recorded under the original terms of non-accrual loans at the respective year-ends, and the interest income actually recorded on these loans in the respective years, is summarized below: (in thousands) Interest income that would have been recorded Interest income actually recorded Interest income foregone Troubled Debt Restructurings 2014 $ 3,997 (3,017) $ 980 December 31, 2013 $ 5,156 (2,721) $ 2,435 2012 $11,814 (5,506) $ 6,308 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 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 December 31, 2014, loans on which concessions were made with respect to rate reductions and/or extension of maturity dates amounted to $39.4 million; loans on which forbearance agreements were reached amounted to $6.4 million. 120 The following table presents information regarding the Company’s TDRs as of December 31, 2014 and 2013: (in thousands) Loan Category: Multi-family Commercial real estate One-to-four family Acquisition, development, and construction Commercial and industrial Total December 31, 2014 Accruing Non-Accrual Total Accruing 2013 Non-Accrual Total $ 7,697 8,139 -- -- -- $15,836 $17,879 9,939 260 654 1,195 $29,927 $25,576 18,078 260 654 1,195 $45,763 $10,083 2,198 -- -- 1,129 $13,410 $50,548 15,626 -- -- 758 $66,932 $60,631 17,824 -- -- 1,887 $80,342 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. The financial effects of the Company’s TDRs for the twelve months ended December 31, 2014 are summarized as follows: For the Twelve Months Ended December 31, 2014 (dollars in thousands) Loan Category: Multi-family Commercial real estate One-to-four family Acquisition, development, and construction Commercial and industrial Total Weighted Average Interest Rate Post- Modification Pre- Modification Number of Loans 2 2 1 2 1 8 5.61% 6.71 5.75 7.00 5.00 5.61% 5.54 4.27 7.00 5.00 Charge-off Amount Capitalized Interest $ -- 334 18 -- -- $ 352 $ -- -- 22 -- -- $22 In the twelve months ended December 31, 2013, the Company classified one CRE loan in the amount of $1.1 million, two C&I loans totaling $758,000, and one multi-family loan in the amount of $3.9 million as non-accrual TDRs. While other concessions were granted to the borrowers, the interest rates on the loans were maintained. As a result, these TDRs did not have a financial impact on the Company’s results of operations during the year. At December 31, 2014 and 2013, none of the loans that had been modified as TDRs during the twelve months ended at those dates were in payment default. A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms. The Company does not consider a payment to be in default when the loan is in forbearance, or otherwise granted a delay of payment, when the agreement to forebear or allow a delay of payment is part of a modification. Subsequent to the modification, the loan is not considered to be in default until payment is contractually past due in accordance with the modified terms. However, the Company does consider a loan with multiple modifications or forbearance periods to be in default, and would also consider a loan to be in default if it was in bankruptcy or was partially charged off subsequent to modification. 121 Covered Loans The following table presents the carrying value of covered loans acquired in the AmTrust and Desert Hills acquisitions as of December 31, 2014: (dollars in thousands) Loan Category: One-to-four family All other loans Total covered loans Amount $2,212,442 216,180 $2,428,622 Percent of Covered Loans 91.1% 8.9 100.0% The Company refers to the loans acquired in the AmTrust and Desert Hills transactions as “covered loans” because the Company is being reimbursed for a substantial portion of losses on these loans under the terms of the FDIC loss sharing agreements. Covered loans are accounted for under 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 December 31, 2014 and 2013, the unpaid principal balances of covered loans were $2.9 billion and $3.3 billion, respectively. The carrying values of such loans were $2.4 billion and $2.8 billion, respectively, at the corresponding dates. At the respective acquisition dates, the Company estimated the fair values of the AmTrust and Desert Hills loan portfolios, which represented the expected cash flows from the portfolios, discounted at market-based rates. In estimating such fair values, the Company: (a) calculated the contractual amount and timing of undiscounted principal and interest payments (the “undiscounted contractual cash flows”); and (b) estimated the expected amount and timing of undiscounted principal and interest payments (the “undiscounted expected cash flows”). The amount by which the undiscounted expected cash flows exceed the estimated fair value (the “accretable yield”) is accreted into interest income over the lives of the loans. The amount by which the undiscounted contractual cash flows exceed the undiscounted expected cash flows is referred to as the “non-accretable difference.” The non-accretable difference represents an estimate of the credit risk in the loan portfolios at the respective acquisition dates. The accretable yield is affected by changes in interest rate indices for variable rate loans, changes in prepayment assumptions, and changes in expected principal and interest payments over the estimated lives of the loans. Changes in interest rate indices for variable rate loans increase or decrease the amount of interest income expected to be collected, depending on the direction of interest rates. Prepayments affect the estimated lives of covered loans and could change the amount of interest income and principal expected to be collected. Changes in expected principal and interest payments over the estimated lives of covered loans are driven by the credit outlook and by actions that may be taken with borrowers. The Company periodically evaluates the estimates of the cash flows it expects to collect. Expected future cash flows from interest payments are based on variable rates at the time of the periodic evaluation. Estimates of expected cash flows that are impacted by changes in interest rate indices for variable rate loans and prepayment assumptions are treated as prospective yield adjustments and included in interest income. In the twelve months ended December 31, 2014, changes in the accretable yield for covered loans were as follows: (in thousands) Balance at beginning of period Reclassification from non-accretable difference Accretion Balance at end of period Accretable Yield $ 796,993 380,171 (140,141) $1,037,023 In the preceding table, the line item “Reclassification from non-accretable difference” includes changes in cash flows that the Company expects to collect due to changes in prepayment assumptions, changes in interest rates on variable rate loans, and changes in loss assumptions. As of the Company’s most recent periodic evaluation, the underlying credit assumptions improved, which resulted in an increase in future expected interest cash flows and, 122 consequently, an increase in the accretable yield. The effect of this increase was partially offset by the coupon rates on variable rate loans resetting lower, which resulted in a decrease in future expected interest cash flows and, consequently, a decrease in the accretable yield. In connection with the AmTrust and Desert Hills acquisitions, the Company also acquired other real estate owned (“OREO”), all of which is covered under the FDIC loss sharing agreements. Covered OREO was initially recorded at its estimated fair value on the acquisition date, based on independent appraisals, less the estimated selling costs. Any subsequent write-downs due to declines in fair value have been charged to non-interest expense, and 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 December 31, 2014 and 2013: (in thousands) Covered Loans 90 Days or More Past Due: One-to-four family Other loans Total covered loans 90 days or more past due December 31, 2014 2013 $148,967 $201,425 10,060 $157,889 $211,485 8,922 The following table presents information regarding the Company’s covered loans that were 30 to 89 days past due at December 31, 2014 and 2013: (in thousands) Covered Loans 30-89 Days Past Due: One-to-four family Other loans Total covered loans 30-89 days past due December 31, 2014 2013 $37,680 4,016 $41,696 $52,250 5,679 $57,929 At December 31, 2014, the Company had $41.7 million of covered loans that were 30 to 89 days past due, and covered loans of $157.9 million that were 90 days or more past due but considered to be performing due to the application of the yield accretion method under ASC 310-30. The remaining portion of the Company’s covered loan portfolio totaled $2.2 billion at December 30, 2014 and was considered current at that date. ASC 310-30 allows the Company to aggregate credit-impaired loans acquired in the same fiscal quarter into one or more pools, provided that the loans have common risk characteristics. A pool is then accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. Loans that may have been classified as non-performing loans by AmTrust or Desert Hills were no longer classified as non-performing by the Company because, at the respective dates of acquisition, the Company believed that it would fully collect the new carrying value of these loans. The new carrying value represents the contractual balance, reduced by the portion that is expected to be uncollectible (i.e., the non-accretable difference) and by an accretable yield (discount) that is recognized as interest income. It is important to note that management’s judgment is required in reclassifying loans subject to ASC 310-30 as performing loans, and such judgment is dependent on having a reasonable expectation about the timing and amount of the cash flows to be collected, even if the loan is contractually past due. The primary credit quality indicator for covered loans is the expectation of underlying cash flows. The Company recorded a recovery for losses on covered loans of $18.6 million in the twelve months ended December 31, 2014. The recovery was largely due to an increase in expected cash flows in the acquired portfolios of one-to-four family and home equity loans, and was partly offset by FDIC indemnification expense of $14.9 million 123 recorded in non-interest income in the corresponding period. The Company recorded a provision for losses on covered loans of $12.8 million in the twelve months ended December 31, 2013. 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 $10.2 million recorded in non-interest income in the corresponding period. NOTE 6: ALLOWANCES FOR LOAN LOSSES The following table provides additional information regarding the Company’s allowances for losses on non- covered loans and covered loans, based upon the method of evaluating loan impairment: (in thousands) Allowances for Loan Losses at December 31, 2014: Loans individually evaluated for impairment Loans collectively evaluated for impairment Acquired loans with deteriorated credit quality Total Mortgage Other Total 26 $ 122,590 23,538 $146,154 $ -- 17,241 21,943 $ 39,184 $ 26 139,831 45,481 $ 185,338 (in thousands) Allowances for Loan Losses at December 31, 2013: Loans individually evaluated for impairment Loans collectively evaluated for impairment Acquired loans with deteriorated credit quality Total Mortgage Other Total $ -- 123,991 56,705 $180,696 $ -- 17,955 7,364 $ 25,319 $ -- 141,946 64,069 $206,015 The following table provides additional information regarding the methods used to evaluate the Company’s loan portfolio for impairment: (in thousands) Loans Receivable at December 31, 2014: Mortgage Other Total Loans individually evaluated for impairment $ Loans collectively evaluated for impairment Acquired loans with deteriorated credit quality 81,574 31,781,623 2,227,572 $34,090,769 $ 6,806 1,134,358 201,050 $1,342,214 $ 88,380 32,915,981 2,428,622 $ 35,432,983 Total (in thousands) Loans Receivable at December 31, 2013: Loans individually evaluated for impairment Loans collectively evaluated for impairment Acquired loans with deteriorated credit quality Total Mortgage Other Total $ 109,389 28,859,599 2,545,522 $31,514,510 $ 6,996 845,731 243,096 $1,095,823 $ 116,385 29,705,330 2,788,618 $32,610,333 Non-Covered Loans Held for Investment The following table summarizes activity in the allowance for losses on non-covered loans held for investment for the twelve months ended December 31, 2014 and 2013: December 31, (in thousands) Balance, beginning of period Charge-offs Recoveries Provision for non-covered loan losses Balance, end of period Total Mortgage 2014 Other $123,991 $17,955 $141,946 (8,076) 5,987 -- $122,616 $17,241 $139,857 (2,780) 1,405 -- (5,296) 4,582 -- 2013 Mortgage Other $16,863 (7,092) 1,942 6,242 $17,955 $124,085 (18,265) 6,413 11,758 $123,991 Total $140,948 (25,357) 8,355 18,000 $141,946 Please see Note 2, “Summary of Significant Accounting Polices” for additional information regarding the Company’s allowance for losses on non-covered loans. 124 The following table presents additional information about the Company’s impaired non-covered loans at December 31, 2014: (in thousands) Impaired loans with no related allowance: Multi-family Commercial real estate One-to-four family Acquisition, development, and construction Commercial and industrial Total impaired loans with no related allowance Impaired loans with an allowance recorded: Multi-family Commercial real estate One-to-four family Acquisition, development, and construction Commercial and industrial Total impaired loans with an allowance recorded Total impaired loans: Multi-family Commercial real estate One-to-four family Acquisition, development, and construction Commercial and industrial Total impaired loans Recorded Investment $45,383 30,370 2,028 654 6,806 $85,241 $ 3,139 -- -- -- -- Unpaid Principal Balance $ 52,593 32,460 2,069 1,024 12,155 $100,301 $ 3,139 -- -- -- -- $ 3,139 $ 3,139 $48,522 30,370 2,028 654 6,806 $88,380 $ 55,732 32,460 2,069 1,024 12,155 $103,440 Related Allowance Average Recorded Investment Interest Income Recognized $ -- -- -- -- -- $ -- $26 -- -- -- -- $26 $26 -- -- -- -- $26 $54,051 29,935 1,254 505 7,749 $93,494 $ 628 490 61 -- -- $1,636 1,629 -- 218 307 $3,790 $ 72 -- -- -- -- $ 1,179 $ 72 $54,679 30,425 1,315 505 7,749 $94,673 $1,708 1,629 -- 218 307 $3,862 The following table presents additional information about the Company’s impaired non-covered loans at December 31, 2013: (in thousands) Impaired loans with no related allowance: Multi-family Commercial real estate One-to-four family Acquisition, development, and construction Commercial and industrial Total impaired loans with no related allowance Impaired loans with an allowance recorded: Multi-family Commercial real estate One-to-four family Acquisition, development, and construction Commercial and industrial Total impaired loans with an allowance recorded Total impaired loans: Multi-family Commercial real estate One-to-four family Acquisition, development, and construction Commercial and industrial Total impaired loans Recorded Investment $ 78,771 30,619 -- -- 6,995 $116,385 Unpaid Principal Balance $ 94,265 32,474 -- -- 34,199 $160,938 $ $ -- -- -- -- -- -- $ $ -- -- -- -- -- -- $ 94,265 32,474 -- -- 34,199 $160,938 $ 78,771 30,619 -- -- 6,995 $116,385 125 Related Allowance Average Recorded Investment Interest Income Recognized $ -- -- -- -- -- $ -- $ -- -- -- -- -- $ -- $ -- -- -- -- -- $ -- $117,208 43,566 3,611 275 6,890 $171,550 $ 2,442 900 -- -- -- $1,991 1,604 89 -- 366 $4,050 $ -- -- -- -- -- -- $ 3,342 $ $119,650 44,466 3,611 275 6,890 $174,892 $1,991 1,604 89 -- 366 $4,050 Allowance for Losses on Covered Loans Covered loans are reported exclusive of the FDIC loss share receivable. The covered loans acquired in the AmTrust and Desert Hills acquisitions are, and will continue to be, reviewed for collectability based on the expectations of cash flows from these loans. Covered loans have been aggregated into pools of loans with common characteristics. In determining the allowance for losses on covered loans, the Company periodically performs an analysis to estimate the expected cash flows for each of the 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 is 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 is recognized at the same time, and measured based on the applicable loss sharing agreement percentage. The following table summarizes activity in the allowance for losses on covered loans for the years ended December 31, 2014 and 2013: (in thousands) Balance, beginning of period (Recovery of) provision for losses on covered loans Balance, end of period December 31, 2014 $ 64,069 (18,588) $ 45,481 2013 $51,311 12,758 $64,069 NOTE 7: DEPOSITS The following table sets forth the weighted average interest rates for each type of deposit at December 31, 2014 and 2013: December 31, 2014 Percent of Total 44.30% 24.89 22.67 8.14 Weighted Average Interest Rate (1) 0.37% 0.60 1.15 -- 2013 Percent of Total 41.06% 23.08 27.01 8.85 Weighted Average Interest Rate (1) 0.32% 0.44 1.16 -- Amount $10,536,947 5,921,437 6,932,096 2,270,512 Amount $12,549,600 7,051,622 6,420,598 2,306,914 $28,328,734 100.00% 0.57% $25,660,992 100.00% 0.54% (dollars in thousands) NOW and money market accounts Savings accounts Certificates of deposit Non-interest-bearing accounts Total deposits (1) Excludes the effect of purchase accounting adjustments for certain certificates of deposits (“CDs”). At December 31, 2014 and 2013, the aggregate amounts of deposits that had been reclassified as loan balances (i.e., overdrafts) were $5.1 million and $4.7 million, respectively. 126 The scheduled maturities of CDs at December 31, 2014 were as follows: (in thousands) 1 year or less More than 1 year through 2 years More than 2 years through 3 years More than 3 years through 4 years More than 4 years through 5 years Over 5 years Total CDs $4,974,122 983,295 309,268 88,410 34,766 30,737 $6,420,598 The following table presents a summary of CDs in amounts of $100,000 or more, by remaining term to maturity, at December 31, 2014: (in thousands) Total 0 – 3 Months $628,443 CDs of $100,000 or More Maturing Within Over 6 to 12 Months $1,336,910 Over 3 to 6 Months $605,127 Over 12 Months $733,365 Total $3,303,845 At December 31, 2013, the aggregate amount of CDs of $100,000 or more was $3.4 billion. Included in total deposits at December 31, 2014 and 2013 were brokered deposits of $4.0 billion and $4.1 billion, respectively. Excluding purchase accounting adjustments, brokered deposits had weighted average interest rates of 0.21% and 0.24% at the respective year-ends. Brokered money market accounts represented $2.6 billion and $3.6 billion, respectively, of the year-end 2014 and 2013 totals, and brokered non-interest-bearing accounts represented $1.4 billion and $260.5 million, respectively. Brokered CDs represented $3.5 million and $212.1 million, respectively, of brokered deposits at December 31, 2014 and 2013. NOTE 8: BORROWED FUNDS The following table summarizes the Company’s borrowed funds at December 31, 2014 and 2013: (in thousands) Wholesale borrowings: FHLB advances Repurchase agreements Federal funds purchased Total wholesale borrowings Other borrowings: Junior subordinated debentures Preferred stock of subsidiaries Total other borrowings Total borrowed funds December 31, 2014 2013 $10,183,132 3,425,000 260,000 $13,868,132 $ 358,355 -- $ 358,355 $14,226,487 $10,872,576 3,425,000 445,000 $14,742,576 $ 358,126 4,300 $ 362,426 $15,105,002 FHLB advances at December 31, 2014 include acquisition accounting adjustments of $12.9 million. Accrued interest on borrowed funds is included in “Other liabilities” in the Consolidated Statements of Condition, and amounted to $38.1 million and $38.8 million, respectively, at December 31, 2014 and 2013. 127 FHLB Advances At December 31, 2014, the contractual maturities and the next call dates of FHLB advances outstanding were as follows: (dollars in thousands) Year of Maturity 2015 2016 2017 2018 2019 2020 2022 2023 2025 Total FHLB advances Contractual Maturity Amount $ 2,888,875 -- 627,772 930,955 1,865,000 650,000 1,410,000 1,810,312 218 $10,183,132 Weighted Average Interest Rate 0.54% -- 3.02 3.04 3.15 2.90 3.41 3.34 7.82 2.44% Earlier of Contractual Maturity or Next Call Date Amount $ 5,761,734 900,000 3,520,312 868 -- -- -- -- 218 $10,183,132 Weighted Average Interest Rate 1.80% 3.01 3.35 2.82 -- -- -- -- 7.82 2.44 % FHLB advances include both straight fixed-rate advances and advances under the FHLB convertible advance program, which gives the FHLB the option of either calling the advance after an initial lock-out period of up to five years and quarterly thereafter until maturity, or a one-time call at the initial call date. At December 31, 2014, the Company had $2.3 billion in short-term FHLB advances with a weighted average interest rate of 0.36%. During 2014, the average balance of short-term FHLB advances was $2.6 billion, with a weighted average interest rate of 0.37%, generating interest expense of $9.8 million. At December 31, 2013, the Company had $3.1 billion in short-term FHLB advances with a weighted average interest rate of 0.38%. During 2013, the average balance of short-term FHLB advances was $1.4 billion with a weighted average interest rate of 0.38%, generating interest expense of $5.2 million. At December 31, 2014 and 2013, respectively, the Banks had combined unused lines of available credit with the FHLB-NY of up to $7.9 billion and $5.4 billion. At December 31, 2014 and 2013, respectively, the Company had $388.2 million and $146.1 million outstanding in overnight advances with the FHLB-NY. During 2014, the average balance of overnight advances amounted to $245.3 million with a weighted average interest rate of 0.37%, generating interest expense of $895,000. During 2013, the average balance of overnight advances amounted to $106.3 million with a weighted average interest rate of 0.38%, generating interest expense of $400,000. During 2012, the average balance of overnight advances amounted to $29.2 million and had a weighted average interest rate of 0.38%, generating interest expense of $111,000. Total FHLB advances generated interest expense of $255.2 million, $252.6 million, and $311.8 million, respectively, in the years ended December 31, 2014, 2013, and 2012. 128 Repurchase Agreements The following table presents an analysis of the contractual maturities and the next call dates of the Company’s outstanding repurchase agreements at December 31, 2014: Contractual Maturity Earlier of Contractual Maturity or Next Call Date (dollars in thousands) Year of Maturity 2015 2016 2017 2018 2019 2020 2023 Amount $ 100,000 182,000 350,000 1,600,000 100,000 513,000 580,000 $3,425,000 Weighted Average Interest Rate 2.18% 3.26 3.92 3.48 3.67 3.32 3.24 3.41% Amount $2,200,000 595,000 380,000 250,000 -- -- -- $3,425,000 Weighted Average Interest Rate 3.45% 3.54 3.14 3.23 -- -- -- 3.41% The following table provides the contractual maturity and weighted average interest rate of repurchase agreements, and the amortized cost and fair value (including accrued interest) of the securities collateralizing the repurchase agreements, at December 31, 2014: (dollars in thousands) Contractual Maturity Over 90 days Amount $3,425,000 Weighted Average Interest Rate 3.41% Amortized Cost $2,621,760 Fair Value $2,727,437 Mortgage-Related and Other Securities GSE Debentures and U.S. Treasury Obligations Amortized Cost $1,220,701 Fair Value $1,210,308 The Company had no short-term repurchase agreements outstanding at or during the years ended December 31, 2014, 2013, or 2012. At December 31, 2014 and 2013, the accrued interest on repurchase agreements amounted to $11.8 million and $11.9 million, respectively. The interest expense on repurchase agreements was $119.3 million, $129.6 million, and $148.3 million, respectively, in the years ended December 31, 2014, 2013, and 2012. Federal Funds Purchased At December 31, 2014 and 2013, the balance of federal funds purchased was $260.0 million and $445.0 million, respectively. In 2014 and 2013, the average balances of federal funds purchased amounted to $430.1 million and $85.8 million, respectively, with weighted average interest rates of 0.25% and 0.27%. The interest expense produced by federal funds purchased was $1.1 million and $230,000, respectively, for the years ended December 31, 2014 and 2013. Junior Subordinated Debentures At December 31, 2014 and 2013, the Company had $358.4 million and $358.1 million, respectively, of outstanding junior subordinated deferrable interest debentures (“junior subordinated debentures”) held by statutory business trusts (the “Trusts”) that issued guaranteed capital securities. The capital securities qualified as Tier 1 capital of the Company at those dates. However, with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), the qualification of capital securities as Tier 1 capital will be phased out by January 1, 2016. The Trusts are accounted for as unconsolidated subsidiaries in accordance with GAAP. The proceeds of each issuance were invested in a series of junior subordinated debentures of the Company and the underlying assets of each statutory business trust are the relevant debentures. The Company has fully and unconditionally guaranteed the obligations under each trust’s capital securities to the extent set forth in a guarantee by the Company to each trust. The Trusts’ capital securities are each subject to mandatory redemption, in whole or in part, upon repayment of the debentures at their stated maturity or earlier redemption. 129 The following junior subordinated debentures were outstanding at December 31, 2014: Interest Rate of Capital Securities and Debentures Junior Subordinated Debentures Amount Outstanding Capital Securities Amount Outstanding (dollars in thousands) Date of Original Issue Stated Maturity First Optional Redemption Date 6.000% $144,429 $138,078 Nov. 4, 2002 Nov. 1, 2051 Nov. 4, 2007 (1) 1.841 3.491 1.907 123,712 30,928 120,000 30,000 Dec. 14, 2006 Dec. 15, 2036 Dec. 15, 2011 (2) June 15, 2033 June 15, 2008 (2) June 2, 2003 59,286 57,500 April 16, 2007 June 30, 2037 June 30, 2012 (2) $358,355 $345,578 Issuer New York Community Capital Trust V (BONUSESSM Units) New York Community Capital Trust X PennFed Capital Trust III New York Community Capital Trust XI Total junior subordinated debentures (1) Callable subject to certain conditions as described in the prospectus filed with the SEC on November 4, 2002. (2) Callable from this date forward. On November 4, 2002, the Company completed a public offering of 5,500,000 Bifurcated Option Note Unit SecuritiESSM (“BONUSES units”), including 700,000 that were sold pursuant to the exercise of the underwriters’ over-allotment option, at a public offering price of $50.00 per share. The Company realized net proceeds from the offering of approximately $267.3 million. Each BONUSES unit consists of a capital security issued by New York Community Capital Trust V, a trust formed by the Company, and a warrant to purchase 2.4953 shares of the common stock of the Company (for a total of approximately 13.7 million common shares) at an effective exercise price of $20.04 per share. Each capital security has a maturity of 49 years, with a coupon, or distribution rate, of 6.00% on the $50.00 per share liquidation amount. The warrants and capital securities were non-callable for five years from the date of issuance and were not called by the Company when the five-year period passed on November 4, 2007. The gross proceeds of the BONUSES units totaled $275.0 million and were allocated between the capital security and the warrant comprising such units in proportion to their relative values at the time of issuance. The value assigned to the warrants, $92.4 million, was recorded as a component of additional “paid-in capital” in the Company’s Consolidated Statement of Condition. The value assigned to the capital security component was $182.6 million. The $92.4 million difference between the assigned value and the stated liquidation amount of the capital securities was treated as an original issue discount, and amortized to interest expense over the 49-year life of the capital securities on a level-yield basis. At December 31, 2014, this discount totaled $67.3 million, reflecting the exchange offer described below. On July 29, 2009, the Company announced the commencement of an offer to exchange shares of its common stock for any and all of the 5,498,544 outstanding BONUSES units (the “Offer to Exchange”). All holders of BONUSES units were eligible to participate in the exchange offer. A total of 1,393,063 BONUSES units were validly tendered, not withdrawn, and accepted in the exchange offer, representing 25.3% of the 5,498,544 BONUSES units outstanding at the exchange offer’s expiration date. As a result, trust preferred securities totaling $48.6 million were extinguished in August 2009. In accordance with the terms of the Offer to Exchange, the Company issued 3.4144 shares of its common stock for each BONUSES unit that was tendered, not withdrawn, and accepted. The Company issued 4.8 million shares of its common stock as a result of the Offer to Exchange. In addition, the Company has three business trusts of which it owns all of the common securities (New York Community Capital Trust X, PennFed Capital Trust III, and New York Community Capital Trust XI) which were formed for the purpose of issuing Company Obligated Mandatorily Redeemable Capital Securities of Subsidiary Trusts Holding Solely Junior Subordinated Debentures (collectively, the “Capital Securities”), and are described in the table on the preceding page. Dividends on the Capital Securities are payable either quarterly or semi-annually and are deferrable, at the Company’s option, for up to five years. As of December 31, 2014, all dividends were current. As each of the Capital Securities was issued, the Trusts used the offering proceeds to purchase a like amount of Junior Subordinated Deferrable Interest Debentures (the “Debentures”) of the Company. The Debentures bear the same terms and interest rates as the related Capital Securities. The Company has fully and unconditionally guaranteed all of the obligations of the Trusts. Under current applicable regulatory guidelines, a portion of the Capital Securities qualifies as Tier I capital, and the remainder qualifies as Tier II capital. 130 Interest expense on junior subordinated debentures was $17.2 million, $17.3 million, and $25.0 million, respectively, for the years ended December 31, 2014, 2013, and 2012. NOTE 9: FEDERAL, STATE, AND LOCAL TAXES The following table summarizes the components of the Company’s net deferred tax liability at December 31, 2014 and 2013: (in thousands) Deferred Tax Assets: Allowance for loan losses Compensation and related benefit obligations Acquisition accounting and fair value adjustments on securities (including OTTI) Acquisition accounting adjustments on borrowed funds Non-accrual interest Other Gross deferred tax assets Valuation allowance Deferred tax asset after valuation allowance Deferred Tax Liabilities: Amortizable intangibles Acquisition accounting and fair value adjustments on loans (including the FDIC loss share receivable) Mortgage servicing rights Premises and equipment Prepaid pension cost Restructuring and retirement of borrowed funds Leases Other Gross deferred tax liabilities Net deferred tax liability December 31, 2014 2013 $ 74,508 $ 82,872 24,585 29,876 89 5,203 7,917 11,752 129,345 -- 30,356 7,609 11,550 10,228 167,200 -- $ 129,345 $ 167,200 $ (1,967) $ (3,753 ) (18,336) (47,966) (22,714) (26,607) (3,111) (24,117) (4,793) (35,459 ) (61,694 ) (24,015 ) (33,551 ) (3,883 ) (5,217 ) (5,439 ) $(149,611) $(173,011 ) (5,811 ) $ (20,266) $ The net deferred tax liability, which is included in “Other liabilities” in the Consolidated Statements of Condition at December 31, 2014 and 2013, represents the anticipated federal, state, and local tax expenses or benefits that are expected to be realized in future years upon the utilization of the underlying tax attributes comprising said balance. The Company has determined that all deductible temporary differences at December 31, 2014 are more likely than not to provide a benefit in reducing future federal, state, and local tax liabilities, as applicable. 131 The following table summarizes the Company’s income tax expense for the years ended December 31, 2014, 2013, and 2012: (in thousands) Federal – current State and local – current Total current Federal – deferred State and local – deferred Total deferred Income tax expense reported in net income Income tax expense (benefit) reported in stockholders’ equity related to: Adoption of ASU No. 2014-01 Securities available-for-sale Employee stock plans Pension liability adjustments Non-credit portion of OTTI losses Total income taxes 2014 $207,864 53,654 261,518 23,814 2,337 26,151 $287,669 1,303 1,851 (3,225) (14,992) 142 $272,748 December 31, 2013 2012 $205,985 $206,748 30,070 236,818 34,275 8,710 42,985 $271,579 $279,803 40,417 246,402 20,734 4,443 25,177 -- (8,343) (1,692) 20,116 5,028 -- 7,672 (589) (807) 65 $286,688 $286,144 The following table presents a reconciliation of statutory federal income tax expense to combined actual income tax expense for the years ended December 31, 2014, 2013, and 2012: (in thousands) Statutory federal income tax expense at 35% State and local income taxes, net of federal income tax effect Effect of tax deductibility of ESOP Non-taxable income and expense of BOLI Federal tax credits Adjustments relating to prior tax years Other, net Total income tax expense 2014 $270,573 36,394 (7,297) (9,415) (1,820) (1,166) 400 $287,669 December 31, 2013 2012 $261,494 $273,318 25,207 (6,910) (10,578) (2,083) (86) 763 $271,579 $279,803 29,159 (7,153) (10,381) (3,111) 150 1,421 The Company invests in affordable housing projects through limited partnerships which generate federal Low Income Housing Tax Credits. At December 31, 2014, the balance of these investments was $37.8 million and is included in “Other assets” in the Consolidated Statements of Condition. This balance includes commitments of $21.7 million, which are expected to be funded over the next four years. The Company elected to early adopt ASU No. 2014-01, effective January 1, 2014, and to apply the proportional amortization method to these investments. Retrospective application of the new accounting guidance would not result in a material change to the prior-period presentations. Furthermore, the balance in retained earnings as of January 1, 2014 was reduced by $1.3 million to reflect the reduction of deferred tax assets relating to these investments. For a further discussion, please see Note 1, “Organization and Basis of Presentation.” Recognized in the determination of income tax expense from operations for the year ended December 31, 2014 was $3.9 million of affordable housing tax credits and other tax benefits, and an offsetting $2.9 million for the amortization of the related investments. For the years ended December 31, 2014, 2013, and 2012, the Company did not recognize any impairment losses relating to these investments. In addition, none of these investments are accounted for under the “equity method.” On March 31, 2014, tax legislation was enacted that changed the manner in which financial institutions and their affiliates are taxed in New York State. While most of the provisions of this legislation are effective for fiscal years beginning in 2015, certain impacts of this tax law change were recognized by the Company in the year ended December 31, 2014. As a result, income tax expense reported in 2014 net income was increased by $3.5 million. GAAP prescribes a recognition threshold and measurement attribute for use in connection with the obligation of a company to recognize, measure, present, and disclose in its financial statements uncertain tax positions that the Company has taken or expects to take on a tax return. As of December 31, 2014, the Company had $24.8 million of unrecognized gross tax benefits. Gross tax benefits do not reflect the federal tax effect associated with state tax amounts. 132 The total amount of net unrecognized tax benefits at December 31, 2014 that would have affected the effective tax rate, if recognized, was $16.1 million. Interest and penalties (if any) related to the underpayment of income taxes are classified as a component of income tax expense in the Consolidated Statements of Income and Comprehensive Income. During the years ended December 31, 2014, 2013, and 2012, the Company recognized income tax expense attributed to interest and penalties of $700,000, $900,000, and $1.0 million, respectively. Accrued interest and penalties on tax liabilities were $3.4 million and $2.2 million, respectively, at December 31, 2014 and 2013. The following table summarizes changes in the liability for unrecognized gross tax benefits for the years ended December 31, 2014, 2013, and 2012: (in thousands) Uncertain tax positions at beginning of year Additions for tax positions relating to current-year operations Additions for tax positions relating to prior tax years Subtractions for tax positions relating to prior tax years Reductions in balance due to settlements Uncertain tax positions at end of year 2014 December 31, 2012 2013 $20,250 $ 24,220 $ 8,922 4,365 11,890 (457) (500) $24,779 $ 20,250 $24,220 2,436 6,218 (3,641) (8,983) 3,515 1,819 (929) 124 The Company and its subsidiaries have filed tax returns in many states. The following are the more significant tax filings that are open for examination: • Federal tax filings for tax years 2011 through the present; • New York State tax filings for tax years 2010 through the present; • New York City tax filings for tax years 2011 through the present; and • New Jersey tax filings for tax years 2012 through the present. In addition, while the Company and some of its subsidiaries are currently under examination by certain other states, their presence and tax exposure in those states are not significant. It is reasonably possible that there will be developments within the next twelve months that would necessitate an adjustment to the balance of unrecognized tax benefits. The Company does not expect that such settlements will have a material impact on tax expense. In addition, the Company does not believe that the ranges of possible adjustments for each federal, state, and local tax position would be material. As a savings institution, the Community Bank is subject to a special federal tax provision regarding its frozen tax bad debt reserve. At December 31, 2014, the Community Bank’s federal tax bad debt base-year reserve was $61.5 million, with a related net federal deferred tax liability of $21.5 million, which has not been recognized since the Community Bank does not expect that this reserve will become taxable in the foreseeable future. Events that would result in taxation of this reserve include redemptions of the Community Bank’s stock or certain excess distributions by the Community Bank to the Company. NOTE 10: COMMITMENTS AND CONTINGENCIES Pledged Assets The Company pledges securities to serve as collateral for its repurchase agreements. At December 31, 2014 and 2013, the Company had pledged mortgage-related securities held to maturity with a carrying value of $2.9 billion at both dates. The Company also had pledged other securities held to maturity with a carrying value of $1.7 billion at December 31, 2014 and a carrying value of $2.1 billion at the prior year end. In addition, at December 31, 2014 and 2013, the Company had pledged available-for-sale mortgage-related securities with carrying values of $11.4 million and $79.9 million, respectively. Loan Commitments and Letters of Credit At December 31, 2014 and 2013, the Company had commitments to originate loans, including unused lines of credit, of $2.6 billion and $2.1 billion, respectively. The majority of the outstanding loan commitments at December 31, 2014 and 2013 had adjustable interest rates, and were expected to close within 90 days. 133 The following table sets forth the Company’s off-balance sheet commitments relating to outstanding loan commitments and letters of credit at December 31, 2014: (in thousands) Mortgage Loan Commitments: Multi-family and commercial real estate One-to-four family Acquisition, development, and construction Total mortgage loan commitments Other loan commitments Total loan commitments Commercial, performance stand-by, and financial stand-by letters of credit Total commitments Lease Commitments $1,018,223 495,854 301,763 $1,815,840 734,326 $2,550,166 200,983 $2,751,149 At December 31, 2014, the Company was obligated under various non-cancelable operating lease and license agreements with renewal options on properties used primarily for branch operations. The Company currently expects to renew such agreements upon their expiration in the normal course of business. The agreements contain periodic escalation clauses that provide for increases in the annual rents, commencing at various times during the lives of the agreements, which are primarily based on increases in real estate taxes and cost-of-living indices. The projected minimum annual rental commitments under these agreements, exclusive of taxes and other charges, are summarized as follows: (in thousands) 2015 2016 2017 2018 2019 and thereafter Total minimum future rentals $ 27,381 26,511 23,631 18,729 62,269 $158,521 The rental expense under these leases is included in “Occupancy and equipment expense” in the Consolidated Statements of Income and Comprehensive Income, and amounted to $35.2 million, $33.7 million, and $32.5 million, respectively, in the years ended December 31, 2014, 2013, and 2012. Rental income on Company-owned properties, netted in occupancy and equipment expense, was approximately $3.6 million, $3.9 million, and $3.4 million in the corresponding periods. There was no minimum future rental income under non-cancelable sublease agreements at December 31, 2014. Financial Guarantees The Company provides guarantees and indemnifications to its customers to enable them to complete a variety of business transactions and to enhance their credit standings. These guarantees are recorded at their respective fair values in “Other liabilities” in the Consolidated Statements of Condition. The Company deems the fair value of the guarantees to equal the consideration received. The following table summarizes the Company’s guarantees and indemnifications at December 31, 2014: (in thousands) Financial stand-by letters of credit Performance stand-by letters of credit Commercial letters of credit Total letters of credit Expires Within One Year $28,144 9,901 13,832 $51,877 Expires After One Year $21,827 -- 198 $22,025 Total Outstanding Amount $49,971 9,901 14,030 $73,902 Maximum Potential Amount of Future Payments $112,022 9,885 79,076 $200,983 The maximum potential amount of future payments represents the notional amounts that could be funded under the guarantees and indemnifications if there were a total default by the guaranteed parties or if indemnification provisions were triggered, as applicable, without consideration of possible recoveries under recourse provisions, or from collateral held or pledged. 134 The Company collects a fee upon the issuance of letters of credit. These fees are initially recorded by the Company as a liability, and are recognized as income at the expiration date of the respective guarantees. In addition, the Company requires adequate collateral, typically in the form of real property or personal guarantees, upon its issuance of financial stand-by, performance stand-by, and commercial letters of credit. In the event that a borrower defaults, loans with recourse or indemnification obligate the Company to purchase loans that it has sold or otherwise transferred to a third party. Also outstanding at December 31, 2014 were $191,000 of bankers’ acceptances. In October 2007, Visa U.S.A., a subsidiary of Visa Inc. (“Visa”) completed a reorganization in contemplation of its initial public offering, which was subsequently completed in March 2008. As part of that reorganization, the Community Bank and the former Synergy Bank, along with many other banks across the nation, received shares of common stock of Visa. In accordance with GAAP, the Company did not recognize any value for this common stock ownership interest. Visa claims that all Visa U.S.A. member banks are obligated to share with it in losses stemming from certain litigation against it and certain other named member banks (the “Covered Litigation”). Visa continues to set aside amounts in an escrow account to fund any judgments or settlements that may arise from the Covered Litigation, and reduced the amount of shares allocated to the Visa U.S.A. member banks by amounts necessary to cover such liability. Nevertheless, Visa U.S.A. member banks were required to record a liability for the fair value of their related contingent obligation to Visa U.S.A., based on the percentage of their membership interest. The Company has a $423,000 liability based on its best estimate of the combined membership interest of the Community Bank and the former Synergy Bank with regard to both settled and pending litigation in which Visa is involved. Derivative Financial Instruments The Company uses various financial instruments, including derivatives, in connection with its strategies to mitigate or reduce price risk resulting from changes in interest rates. The Company’s derivative financial instruments consist of financial forward and futures contracts, interest rate lock commitments (“IRLCs”), swaps, and options, and relate to mortgage banking operations, MSRs, and other risk management activities. These instruments vary in scope based on the level and volatility of interest rates, the type of assets held, and other changing market conditions. Please see Note 15, “Derivative Financial Instruments” for further information about our use of derivative financial instruments. Legal Proceedings The Company is involved in various legal actions arising in the ordinary course of its business. All such actions, in the aggregate, involve amounts that are believed by management to be immaterial to the financial condition and results of operations of the Company. NOTE 11: INTANGIBLE ASSETS Goodwill Goodwill is presumed to have an indefinite useful life and is tested for impairment, rather than amortized, at the reporting unit level, at least once a year. There were no changes in the carrying amount of goodwill during the years ended December 31, 2014 and 2013. Goodwill totaled $2.4 billion at both of these dates. Core Deposit Intangibles As previously noted, the Company has CDI stemming from various business combinations with other banks and thrifts. CDI is a measure of the value of checking and savings deposits acquired in a business combination. The fair value of the CDI stemming from any given business combination is based on the present value of the expected cost savings attributable to the core deposit funding, relative to an alternative source of funding. CDI is amortized over the estimated useful lives of the existing deposit relationships acquired, but does not exceed 10 years. The Company evaluates such identifiable intangibles for impairment when an indication of impairment exists. No impairment charges were required to be recorded in 2014, 2013, or 2012. If an impairment loss is determined to exist in the future, the loss will be recorded in “Non-interest expense” in the Consolidated Statements of Income and Comprehensive Income for the period in which such impairment is identified. 135 Analysis of Core Deposit Intangibles The following table summarizes the gross carrying and accumulated amortization amounts of the Company’s CDI as of December 31, 2014: (in thousands) Core deposit intangibles Gross Carrying Amount $234,364 Accumulated Amortization $(226,421) Net Carrying Amount $7,943 For the year ended December 31, 2014, amortization expenses related to CDI totaled $8.3 million. The Company assessed the useful lives of its intangible assets at December 31, 2014 and deemed them to be appropriate. There were no impairment losses recorded for the years ended December 31, 2014, 2013, or 2012. The following table summarizes the estimated future expense stemming from the amortization of the Company’s CDI: (in thousands) 2015 2016 2017 Total remaining intangible assets Mortgage Servicing Rights Core Deposit Intangibles $5,345 2,391 207 $7,943 The Company had MSRs of $227.3 million and $241.0 million, respectively, at December 31, 2014 and 2013, with both balances consisting entirely of residential MSRs. Residential MSRs are carried at fair value, with changes in fair value recorded as a component of non-interest income in each period. The Company uses various derivative instruments to mitigate the income statement-effect of changes in fair value due to changes in valuation inputs and assumptions regarding its residential MSRs. The effects of changes in the fair value of the derivatives are recorded in “Non-interest income” 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 bases the fair value of its MSRs on the present value of estimated future net servicing income cash flows. The Company estimates future net servicing income cash flows with assumptions that market participants would use to estimate fair value, including estimates of prepayment speeds, discount rates, default rates, refinance rates, servicing costs, escrow account earnings, contractual servicing fee income, and ancillary income. The Company reassesses, and periodically adjusts, the underlying inputs and assumptions to reflect market conditions and assumptions that a market participant would consider in valuing the MSR asset. The value of residential MSRs at any given time is significantly affected by the mortgage interest rates that are then currently available in the marketplace which, in turn, influence mortgage loan prepayment speeds. During periods of declining interest rates, the value of MSRs generally declines as an increase in mortgage refinancing activity results in an increase in prepayments. Conversely, during periods of rising interest rates, the value of MSRs generally increases as mortgage refinancing activity declines. Up to and including the third quarter of 2013, the Company had securitized MSRs in addition to residential MSRs. Securitized MSRs were carried at the lower of the initial carrying value, adjusted for amortization, or fair value, and were amortized in proportion to, and over the period of, estimated net servicing income. Such MSRs were periodically evaluated for impairment, based on the difference between their carrying amount and their current fair value. If it was determined that impairment existed, the resultant loss was charged to earnings. Reflecting amortization, the Company had no securitized MSRs at December 31, 2014 and 2013. 136 The following table sets forth the changes in the balances of residential and securitized MSRs for the years ended December 31, 2014 and 2013: (in thousands) Carrying value, beginning of year Additions Increase (decrease) in fair value: For the Years Ended December 31, 2013 2014 Residential Securitized Residential Securitized $144,520 $241,018 80,799 34,821 $ 193 -- $ -- -- Due to changes in interest rates and valuation assumptions Due to other changes (1) Amortization Carrying value, end of period 7,377 (55,919) -- $227,297 -- -- -- $ -- 70,218 (54,519) -- $241,018 -- -- (193) -- $ (1) Net servicing cash flows, including loan payoffs, and the passage of time. The following table presents the key assumptions used in calculating the fair value of the Company’s residential MSRs at the dates indicated: Expected Weighted Average Life Constant Prepayment Speed Discount Rate Primary Mortgage Rate to Refinance Cost to Service (per loan per year): Current 30-59 days or less delinquent 60-89 days delinquent 90-119 days delinquent 120 days or more delinquent December 31, 2014 83 months 2013 93 months 9.3% 10.0 4.0 $ 63 213 313 413 563 8.3% 10.5 4.5 $ 53 103 203 303 553 137 NOTE 12: EMPLOYEE BENEFITS Retirement Plans On April 1, 2002, three separate pension plans for employees of the former Queens County Savings Bank, the former CFS Bank, and the former Richmond County Savings Bank were merged together and renamed the “New York Community Bancorp Retirement Plan” (the “Retirement Plan”). The pension plan for employees of the former Roslyn Savings Bank was merged into the Retirement Plan on September 30, 2004. The pension plan for employees of the former Atlantic Bank of New York was merged into the Retirement Plan on March 31, 2008. The Retirement Plan covers substantially all employees who had attained minimum age, service, and employment status requirements prior to the date when the individual plans were frozen by the banks of origin. Once frozen, the individual plans ceased to accrue additional benefits, service, and compensation factors, and became closed to employees who would otherwise have met eligibility requirements after the “freeze” date. The following table sets forth certain information regarding the Retirement Plan as of the dates indicated: (in thousands) Change in Benefit Obligation: Benefit obligation at beginning of year Interest cost Actuarial loss (gain) Annuity payments Settlements Benefit obligation at end of year Change in Plan Assets: Fair value of assets at beginning of year Actual return on plan assets Contributions Annuity payments Settlements Fair value of assets at end of year Funded status (included in “Other assets”) Changes recognized in other comprehensive income for the year ended December 31: Amortization of prior service cost Amortization of actuarial loss Net actuarial loss (gain) arising during the year Total recognized in other comprehensive loss for the year (pre-tax) December 31, 2014 2013 $126,841 5,895 31,544 5,827 (1,392) $157,061 $219,330 10,879 -- (5,827) (1,392) $222,990 $ 65,929 $142,614 5,455 (13,393) (6,300) (1,535) $126,841 $187,623 39,542 -- (6,300) (1,535) $219,330 $ 92,489 $ -- (3,289) 40,100 $ 36,811 $ -- (9,406) (36,346) $(45,752) Accumulated other comprehensive loss (pre-tax) not yet recognized in net periodic benefit cost at December 31: Prior service cost Actuarial loss, net Total accumulated other comprehensive loss (pre-tax) $ -- 83,938 $ 83,938 $ -- 47,127 $47,127 The decrease in the actuarial loss (gain) in the preceding table reflects a decline in market discount rates and an update to mortality assumptions to reflect new standard mortality tables released by the Society of Actuaries in October 2014. In 2015, an estimated $8.2 million of unrecognized net actuarial loss for the Retirement Plan will be amortized from AOCL into net periodic benefit cost. The comparable amount recognized as net periodic benefit cost in 2014 was $3.3 million. No prior service cost will be amortized in 2015 and none was amortized in 2014. The discount rates used to determine the benefit obligation at December 31, 2014 and 2013 were 4.0% and 4.8%, respectively. The discount rate reflects rates at which the benefit obligation could be effectively settled. To determine this rate, the Company considers rates of return on high-quality fixed-income investments that are currently available and are expected to be available during the period until payment of the pension benefits. The expected future payments are discounted based on a portfolio of high-quality rated bonds (above-median AA curve) for which the Company relies on the Citigroup Pension Liability Index published as of the measurement date. 138 The components of net periodic pension (credit) expense were as follows for the years indicated: (in thousands) Components of net periodic pension (credit) expense: Interest cost Expected return on plan assets Amortization of net actuarial loss Net periodic pension (credit) expense Years Ended December 31, 2013 2014 2012 $ 5,895 (19,435) 3,289 $(10,251) $ 5,455 (16,588) 9,406 $ (1,727) $ 5,885 (13,256) 9,737 $ 2,366 The following table indicates the weighted average assumptions used in determining the net periodic benefit cost for the years indicated: Discount rate Expected rate of return on plan assets Years Ended December 31, 2012 2013 2014 4.5% 3.9% 4.8% 9.0 9.0 9.0 As of December 31, 2014, Retirement Plan assets were invested in two diversified investment portfolios of the Pentegra Retirement Trust (the “Trust”, formerly known as “RSI Retirement Trust”), a private placement investment fund. The Company (in this context, the “Plan Sponsor”) chooses the specific asset allocation for the Retirement Plan within the parameters set forth in the Trust’s Investment Policy Statement. The long-term investment objectives are to maintain the Retirement Plan’s assets at a level that will sufficiently cover the Plan Sponsor’s long-term obligations, and to generate a return on those assets that will meet or exceed the rate at which the Plan Sponsor’s long-term obligations will grow. The Retirement Plan allocates its assets in accordance with the following targets: • To hold 60% of its assets in equity securities via investment in the Trust’s Long-Term Growth—Equity (“LTGE”) Portfolio, a diversified portfolio that invests in a number of actively and passively managed equity mutual funds and collective trusts in order to diversify within U.S. and non-U.S. equity markets; • To hold 39% of its assets in intermediate-term investment-grade bonds via investment in the Trust’s Long-Term Growth—Fixed Income (“LTGFI”) Portfolio, a diversified portfolio that invests in a number of fixed-income mutual funds and collective investment trusts, primarily including intermediate-term bond funds with a focus on U.S. investment grade securities and opportunistic allocations to below- investment grade and non-U.S. investments; and • To hold 1% of its assets in a cash-equivalent portfolio for liquidity purposes. In addition, the Retirement Plan holds Company shares, the value of which is roughly equal to 10% of the assets that are held by the Trust. The LTGE and LTGFI portfolios are designed to provide long-term growth of equity and fixed-income assets with the objective of achieving an investment return in excess of the cost of funding the active life, deferred vested, and all 30-year term and longer obligations of retired lives in the Trust. Risk and volatility are further managed in accordance with the distinct investment objectives of the Trust’s respective portfolios. 139 The following table presents information about the investments held by the Retirement Plan as of December 31, 2014: (in thousands) Equity: Large-cap value (1) Large-cap growth (2) Large-cap core (3) Mid-cap value (4) Mid-cap growth (5) Mid-cap core (6) Small-cap value (7) Small-cap growth (8) Small-cap core (9) International equity (10) Fixed Income Funds: Intermediate duration (11) Equity Securities: Company common stock Cash Equivalents: Money market * Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total $ 22,216 22,061 15,652 5,344 5,363 5,126 3,746 3,724 7,500 30,031 73,245 $ -- -- -- -- -- -- -- -- -- -- -- $ 22,216 22,061 15,652 5,344 5,363 5,126 3,746 3,724 7,500 30,031 73,245 24,115 24,115 -- 4,867 $ 222,990 916 $25,031 3,951 $197,959 $-- -- -- -- -- -- -- -- -- -- -- -- -- $-- * Includes cash equivalents investments in equity and fixed income strategies. (1) This category contains large-cap stocks with above-average yield. The portfolio typically holds between 60 and 70 stocks. (2) This category seeks long-term capital appreciation by investing primarily in large growth companies based in the U.S. (3) This fund tracks the performance of the S&P 500 Index by purchasing the securities represented in the Index in approximately the same weightings as the Index. (4) This category employs an indexing investment approach designed to track the performance of the CRSP U.S. Mid-Cap Value Index. (5) This category employs an indexing investment approach designed to track the performance of the CRSP U.S. Mid-Cap Growth Index. (6) This category seeks to track the performance of the S&P MidCap 400 Index. (7) This category consists of a selection of investments based on the Russell 2000 Value Index. (8) This category consists of a selection of investments based on the Russell 2000 Growth Index. (9) This category consists of an index fund designed to track the Russell 2000, along with a fund investing in readily marketable securities of U.S. companies with market capitalizations within the smallest 10% of the market universe, or smaller than the 1000th largest U.S. company. (10) This category has investments in medium to large non-U.S. companies, including high-quality, durable growth companies and companies based in countries with stable economic and political systems. A portion of this category consists of an index fund designed to track the MSC ACWI ex-U.S. Net Dividend Return Index. (11) This category consists of three funds. The first is a diversified portfolio of high-quality bonds and other fixed-income securities, including U.S. Government obligations, mortgage-related and asset backed securities, corporate and municipal bonds, CMOs, and other securities rated Baa or better. The second fund emphasizes a more globally diversified portfolio of higher-quality, intermediate-term bonds. The third fund seeks to track the Barclays Capital U.S. Corporate A or Better 5-20 Year, Bullets-only Index. 140 Current Asset Allocation The asset allocations for the Retirement Plan as of December 31, 2014 and 2013 were as follows: Equity securities Debt securities Cash equivalents Total At December 31, 2013 2014 72% 65% 28 33 -- 2 100% 100% Determination of Long-Term Rate of Return The long-term rate-of-return-on-assets assumption was set based on historical returns earned by equities and fixed income securities, adjusted to reflect expectations of future returns as applied to the Retirement Plan’s target allocation of asset classes. Equities and fixed income securities were assumed to earn long-term rates of return in the ranges of 6%-9% and 3%-5%, respectively, with an assumed long-term inflation rate of 2.5% reflected within these ranges. When these overall return expectations are applied to the Retirement Plan’s target allocation, the result is an expected rate of return of 5% to 8%. Expected Contributions The Company does not expect to contribute to the Retirement Plan in 2015. Expected Future Annuity Payments The following annuity payments, which reflect expected future service, as appropriate, are expected to be paid by the Retirement Plan during the years indicated: (in thousands) 2015 2016 2017 2018 2019 2020 and thereafter Total Qualified Savings Plan $ 7,139 7,205 7,284 7,394 7,595 40,101 $76,718 The Company maintains a defined contribution qualified savings plan (the “Savings Plan”) in which all full- time employees are able to participate after one year of service and having attained age 21. No matching contributions are made by the Company to this plan. Post-Retirement Health and Welfare Benefits The Company offers certain post-retirement benefits, including medical, dental, and life insurance (the “Health & Welfare Plan”) to retired employees, depending on age and years of service at the time of retirement. The costs of such benefits are accrued during the years that an employee renders the necessary service. 141 The following table sets forth certain information regarding the Health & Welfare Plan as of the dates indicated: (in thousands) Change in benefit obligation: Benefit obligation at beginning of year Service cost Interest cost Actuarial loss (gain) Premiums and claims paid Benefit obligation at end of year Change in plan assets: Fair value of assets at beginning of year Employer contribution Premiums and claims paid Fair value of assets at end of year Funded status (included in “Other liabilities”) Changes recognized in other comprehensive income for the year ended December 31: Amortization of prior service cost Amortization of actuarial gain Net actuarial loss (gain) arising during the year Total recognized in other comprehensive loss for the year (pre-tax) Accumulated other comprehensive loss (pre-tax) not yet recognized in net periodic benefit cost at December 31: Prior service cost Actuarial loss, net Total accumulated other comprehensive loss (pre-tax) December 31, 2014 2013 $ 18,322 4 759 238 (948) $ 18,375 $ -- 948 (948) -- $ $(18,375) $ 20,319 4 683 (1,972) (712) $ 18,322 $ -- 712 (712) -- $ $(18,322) $ $ 249 (474) 238 13 $ 249 (657) (1,972 ) $(2,380 ) $ (1,782) 7,400 $ 5,618 $ (2,031) 7,636 $ 5,605 The discount rates used in the preceding table were 4.0% and 4.3%, respectively, at December 31, 2014 and 2013. The estimated net actuarial loss and the prior service liability that will be amortized from AOCL into net periodic benefit cost over the next fiscal year are $383,000 and $249,000, respectively. The following table indicates the components of net periodic benefit cost for the years indicated: (in thousands) Components of Net Periodic Benefit Cost: Service cost Interest cost Amortization of past-service liability Amortization of net actuarial loss Net periodic benefit cost Years Ended December 31, 2012 2014 2013 $ 4 759 (249) 474 $ 988 $ 4 683 (249) 657 $1,095 $ 7 641 (249) 505 $ 904 The following table indicates the weighted average assumptions used in determining the net periodic benefit cost for the years indicated: Discount rate Current medical trend rate Ultimate trend rate Year when ultimate trend rate will be reached Years Ended December 31, 2012 2013 2014 3.9% 3.5% 4.3 % 8.0 7.5 7.0 5.0 5.0 5.0 2018 2018 2018 142 Had the assumed medical trend rate at December 31, 2014 increased by 1% for each future year, the accumulated post-retirement benefit obligation at that date would have increased by $890,000, and the aggregate of the benefits earned and the interest components of 2014 net post-retirement benefit cost would each have increased by $33,000. Had the assumed medical trend rate decreased by 1% for each future year, the accumulated post- retirement benefit obligation at December 31, 2014 would have declined by $750,000, and the aggregate of the benefits earned and the interest components of 2014 net post-retirement benefit cost would each have declined by $28,000. Investment Policies and Strategies The Health & Welfare Plan is an unfunded non-qualified pension plan and is not expected to hold assets for investment at any time. Any contributions made to the Health & Welfare Plan are used to immediately pay plan premiums and claims as they come due. Expected Contributions The Company expects to contribute $1.3 million to the Health & Welfare Plan to pay premiums and claims for the fiscal year ending December 31, 2015. Expected Future Payments for Premiums and Claims The following amounts are currently expected to be paid for premiums and claims during the years indicated under the Health & Welfare Plan: (in thousands) 2015 2016 2017 2018 2019 2020 and thereafter Total $ 1,310 1,300 1,284 1,263 1,233 5,751 $12,141 NOTE 13: STOCK-RELATED BENEFIT PLANS New York Community Bank Employee Stock Ownership Plan All full-time employees who have attained 21 years of age and who have completed twelve consecutive months of credited service are eligible to participate in the Employee Stock Ownership Plan (“ESOP”), with benefits vesting on a seven-year basis, starting with 20% in the third year of employment and continuing in 20% increments in each successive year. Benefits are payable upon death, retirement, disability, or separation from service, and may be paid in stock. However, in the event of a change in control, as defined in the ESOP, any unvested portion of benefits shall vest immediately. In 2014, 2013, and 2012, the Company allocated 560,228; 505,354; and 644,007 shares, respectively, to participants in the ESOP. For the years ended December 31, 2014, 2013, and 2012, the Company recorded ESOP- related compensation expense of $8.8 million, $8.5 million, and $8.4 million, respectively. Supplemental Executive Retirement Plan In 1993, the Community Bank established a Supplemental Executive Retirement Plan (“SERP”), which provided additional unfunded, non-qualified benefits to certain participants in the ESOP in the form of Company common stock. The SERP was frozen in 1999. Trust-held assets, consisting entirely of Company common stock, amounted to 1,560,294 and 1,464,641 shares at December 31, 2014 and 2013, respectively. The cost of these shares is reflected as a reduction of paid-in capital in excess of par in the Consolidated Statements of Condition. The Company recorded no SERP-related compensation expense in 2014, 2013, or 2012. Stock Incentive and Stock Option Plans At December 31, 2014, the Company had a total of 14,480,253 shares available for grants as options, restricted stock, or other forms of related rights under the New York Community Bancorp, Inc. 2012 Stock Incentive Plan (the “2012 Stock Incentive Plan”), which was approved by the Company’s shareholders at its Annual Meeting on June 7, 2012. Included in this amount were 1,030,673 shares that were transferred from the 2006 Stock Incentive 143 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 2,377,498 shares of restricted stock during the twelve months ended December 31, 2014, with an average fair value of $16.79 per share on the date of grant. During 2013 and 2012, the Company granted 2,327,522, shares and 2,040,425 shares, respectively, of restricted stock. The respective shares had average fair values of $13.64, and $12.78 per share on the respective grant dates. The shares of restricted stock that were granted during the years ended December 31, 2014, 2013, and 2012 vest over a period of five years. Compensation and benefits expense related to the restricted stock grants is recognized on a straight-line basis over the vesting period, and totaled $27.5 million, $22.2 million, and $20.7 million, respectively, for the years ended December 31, 2014, 2013, and 2012. The following table provides a summary of activity with regard to restricted stock awards in the year ended December 31, 2014: Unvested at beginning of year Granted Vested Cancelled Unvested at end of year For the Year Ended December 31, 2014 Number of Shares 5,043,642 2,377,498 (1,494,531) (124,200) 5,802,409 Weighted Average Grant Date Fair Value $14.27 16.79 14.44 15.30 15.24 As of December 31, 2014, unrecognized compensation cost relating to unvested restricted stock totaled $65.9 million. This amount will be recognized over a remaining weighted average period of 3.1 years. In addition, the Company had the following stock option plans at December 31, 2014: the 1998 Richmond County Financial Corp. Stock Compensation Plan; the 1998 Long Island Financial Corp. Stock Option Plan; and the 2004 Synergy Financial Group Stock Option Plans (all plans collectively referred to as the “Stock Option Plans”). All stock options granted under the Stock Option Plans expire ten years from the date of grant. The Company uses the modified prospective approach to recognize compensation costs related to share-based payments at fair value on the date of grant, and recognizes such costs in the financial statements over the vesting period during which the employee provides service in exchange for the award. As there were no unvested options at any time during 2014, 2013 or 2012, the Company did not record any compensation and benefits expense relating to stock options during those years. To satisfy the exercise of options, the Company either issues new shares of common stock or uses common stock held in Treasury. In the event that Treasury stock is used, the difference between the average cost of Treasury shares and the exercise price is recorded as an adjustment to retained earnings or paid-in capital on the date of exercise. At December 31, 2014, 2013, and 2012, respectively, there were 58,560; 126,821; and 2,641,344 stock options outstanding. There were no shares available for future issuance under the Stock Option Plans at December 31, 2014. The status of the Stock Option Plans at December 31, 2014, and the changes that occurred during the year ended at that date, are summarized below: Stock options outstanding, beginning of year Exercised Expired/forfeited Stock options outstanding, end of year Options exercisable at year-end For the Year Ended December 31, 2014 Weighted Average Number of Stock Exercise Price Options $15.21 126,821 12.69 (42,214) 12.94 (26,047) 18.04 58,560 18.04 58,560 144 The intrinsic value of stock options outstanding and exercisable at December 31, 2014 was $0. The intrinsic values of options exercised during the twelve months ended December 31, 2014 and 2013 were $132,000 and $106,000, respectively. There were no stock options exercised during the twelve months ended December 31, 2012. NOTE 14: 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. • 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. 145 The following tables present assets and liabilities that were measured at fair value on a recurring basis as of December 31, 2014 and 2013, and that were included in the Company’s Consolidated Statements of Condition at those dates: Fair Value Measurements at December 31, 2014 Using 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 $ $ -- -- -- -- $ -- -- 95,051 16,984 $112,035 $112,035 $ -- -- -- 2,655 $ $ $ $ $ $ $ 19,700 -- -- $ 19,700 $ 942 11,482 27,960 1,664 $ 42,048 $ 61,748 $379,399 -- -- 8,429 -- -- -- -- -- -- -- -- -- -- -- 227,297 4,397 -- $ $ $ $ $ $ -- -- -- -- -- -- -- -- -- -- -- -- -- (7,198) $ 19,700 -- -- $ 19,700 $ 942 11,482 123,011 18,648 $154,083 $173,783 $379,399 227,297 4,397 3,886 $ (346) $ (7,862) $ -- $ 7,696 $ (512) (in thousands) Assets: Mortgage-Related Securities Available for Sale: GSE certificates GSE CMOs Private label CMOs Total mortgage-related securities Other Securities Available for Sale: Municipal bonds Capital trust notes Preferred stock Common stock Total other securities Total securities available for sale Other Assets: Loans held for sale Mortgage servicing rights Interest rate lock commitments Derivative assets-other(2) Liabilities: Derivative liabilities (1) Includes cash collateral received from, and paid to, counterparties. (2) Includes $2.6 million to purchase Treasury options. 146 Fair Value Measurements at December 31, 2013 Using 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 $ $ -- -- -- -- $ -- -- 89,942 52,740 $142,682 $142,682 $ -- -- -- 1,267 $ $ $ $ $ $ $ 25,200 60,819 10,202 $ 96,221 $ 1,026 11,798 26,297 2,714 $ 41,835 $138,056 $306,915 -- -- 5,155 -- -- -- -- -- -- -- -- -- -- -- 241,018 258 -- $ $ $ $ $ $ -- -- -- -- -- -- -- -- -- -- -- -- -- (4,848) $ 25,200 60,819 10,202 $ 96,221 $ 1,026 11,798 116,239 55,454 $184,517 $280,738 $306,915 241,018 258 1,574 $ (590) $ (7,422) $ -- $ 7,624 $ (388) (in thousands) Assets: Mortgage-Related Securities Available for Sale: GSE certificates GSE CMOs Private label CMOs Total mortgage-related securities Other Securities Available for Sale: Municipal bonds Capital trust notes Preferred stock Common stock Total other securities Total securities available for sale Other Assets: Loans held for sale Mortgage servicing rights Interest rate lock commitments Derivative assets-other(2) Liabilities: Derivative liabilities (1) Includes cash collateral received from, and paid to, counterparties. (2) Includes $1.3 million to purchase Treasury options. The Company reviews and updates the fair value hierarchy classifications for its assets on a quarterly basis. Changes from one quarter to the next that are related to the observability of inputs for a fair value measurement may result in a reclassification from one hierarchy level to another. A description of the methods and significant assumptions utilized in estimating the fair values of available-for- sale securities follows. Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid government securities, exchange-traded securities, and derivatives. If quoted market prices are not available for the specific security, then fair values are estimated by using pricing models. These pricing models primarily use market-based or independently sourced market parameters as inputs, including, but not limited to, yield curves, interest rates, equity or debt prices, and credit spreads. In addition to observable market information, models incorporate transaction details such as maturity and cash flow assumptions. Securities valued in this manner would generally be classified within Level 2 of the valuation hierarchy, and primarily include such instruments as mortgage-related and corporate debt securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. In valuing capital trust notes, which may include pooled trust preferred securities, collateralized debt obligations (“CDOs”), and certain single-issue capital trust notes, the determination of fair value may require benchmarking to similar instruments or analyzing default and recovery rates. Therefore, capital trust notes are valued using a model based on the specific collateral composition and cash flow structure of the securities. Key inputs to the model consist of market spread data for each credit rating, collateral type, and other relevant contractual features. In instances where quoted price information is available, the price is considered when arriving at a security’s fair value. Where there is limited activity or less transparency around the inputs to the valuation of preferred stock, the valuation is based on a discounted cash flow model. 147 Periodically, the Company uses fair values supplied by independent pricing services to corroborate the fair values derived from the pricing models. In addition, the Company reviews the fair values supplied by independent pricing services, as well as their underlying pricing methodologies, for reasonableness. The Company challenges pricing services’ valuations that appear to be unusual or unexpected. The Company carries loans held for sale originated by the Residential Mortgage Banking segment at fair value, in accordance with ASC Topic 825, “Financial Instruments.” The fair value of 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. MSRs do not trade in an active open market with readily observable prices. The Company bases the fair value of its MSRs on the present value of estimated future net servicing income cash flows, utilizing an internal valuation model. The Company estimates future net servicing income cash flows with assumptions that market participants would use to estimate fair value, including estimates of prepayment speeds, discount rates, default rates, refinance rates, servicing costs, escrow account earnings, contractual servicing fee income, and ancillary income. The Company reassesses and periodically adjusts the underlying inputs and assumptions to reflect market conditions and assumptions that a market participant would consider in valuing the MSR asset. MSR fair value measurements use significant unobservable inputs and, accordingly, are classified within Level 3. Exchange-traded derivatives that are valued using quoted prices are classified within Level 1 of the valuation hierarchy. The majority of the Company’s derivative positions are valued using internally developed models that use readily observable market parameters as their basis. These are parameters that are actively quoted and can be validated by external sources, including industry pricing services. Where the types of derivative products have been in existence for some time, the Company uses models that are widely accepted in the financial services industry. These models reflect the contractual terms of the derivatives, including the period to maturity, and market-based parameters such as interest rates, volatility, and the credit quality of the counterparty. Furthermore, many of these models do not contain a high level of subjectivity, as the methodologies used in the models do not require significant judgment, and inputs to the models are readily observable from actively quoted markets, as is the case for “plain vanilla” interest rate swaps and option contracts. Such instruments are generally classified within Level 2 of the valuation hierarchy. Derivatives that are valued based on models with significant unobservable market parameters, and that are normally traded less actively, have trade activity that is one-way, and/or are traded in less-developed markets, are classified within Level 3 of the valuation hierarchy. The fair values of 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 December 31, 2014. 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. 148 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: 2014 2013 December 31, Fair Value Carrying Amount $201,012 Aggregate Unpaid Principal $194,692 Fair Value Carrying Amount Less Aggregate Unpaid Principal $6,320 Fair Value Carrying Amount $306,915 Aggregate Unpaid Principal $303,805 Fair Value Carrying Amount Less Aggregate Unpaid Principal $3,110 (in thousands) Loans held for sale 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. 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 Twelve Months Ended December 31, 2013 $(10,260) 15,699 2012 $102,642 (88,303) $ 14,339 2014 $ 11,681 (48,542) $(36,861) $ 5,439 (in thousands) Loans held for sale Mortgage servicing rights Total (loss) gain (1) Does not include the effect of hedging activities. The Company has determined that there is no instrument-specific credit risk related to its loans held for sale, due to the short duration of such assets. 149 n i s e g n a h c g n i d u l c n i ( s t n u o m a t e e h s e c n a l a b e h t f o d r a w r o f - l l o r a , 3 1 0 2 d n a 4 1 0 2 , 1 3 r e b m e c e D d e d n e s h t n o m e v l e w t e h t r o f , t n e s e r p s e l b a t g n i w o l l o f e h T : y h c r a r e i h n o i t a u l a v e h t f o 3 l e v e L n i d e i f i s s a l c s t n e m u r t s n i l a i c n a n i f r o f ) e u l a v r i a f s t n e m e r u s a e M e u l a V r i a F 3 l e v e L n i s e g n a h C n i e g n a h C / s n i a G d e z i l a e r n U o t d e t a l e R ) s e s s o L ( t a d l e H s t n e m u r t s n I 4 1 0 2 , 1 3 r e b m e c e D 7 9 3 , 4 7 7 3 , 7 $ n i e g n a h C / s n i a G d e z i l a e r n U o t d e t a l e R ) s e s s o L ( t a d l e H s t n e m u r t s n I 3 1 0 2 , 1 3 r e b m e c e D 8 5 2 8 1 2 , 0 7 - - $ e u l a V r i a F , 1 3 . c e D t a 4 1 0 2 7 9 3 , 4 7 9 2 , 7 2 2 $ s r e f s n a r T ) m o r f ( / o t 3 l e v e L - - - - $ s t n e m e l t t e S - - - - $ - - s e c n a u s s I 1 2 8 , 4 3 $ d e z i l a e r n U / d e z i l a e R l a t o T n i d e d r o c e R ) s e s s o L ( / s n i a G d e z i l a e r n U / d e z i l a e R l a t o T n i d e d r o c e R ) s e s s o L ( / s n i a G e m o c n I ) s s o L ( s s o L e v i s n e h e r p m o C / e m o c n I e u l a V r i a F , 1 y r a u n a J 4 1 0 2 - - - - $ 9 3 1 , 4 8 5 2 ) 2 4 5 , 8 4 ( $ 8 1 0 , 1 4 2 $ s t n e m t i m m o c k c o l e t a r t s e r e t n I s t h g i r g n i c i v r e s e g a g t r o M ) s d n a s u o h t n i ( e u l a V r i a F , 1 3 . c e D t a 3 1 0 2 8 5 2 8 1 0 , 1 4 2 - - $ s r e f s n a r T ) m o r f ( / o t 3 l e v e L - - - - - - $ s t n e m e l t t e S s e c n a u s s I e m o c n I ) s s o L ( s s o L e v i s n e h e r p m o C / e m o c n I e u l a V r i a F , 1 y r a u n a J 3 1 0 2 ) s d n a s u o h t n i ( ) 9 6 5 , 8 1 ( $ - - $ - - - - - - 9 9 7 , 0 8 - - - - - - $ - - $ 9 6 5 , 8 1 $ s e i t i r u c e s l a t i p a c e l a s - r o f - e l b a l i a v A 9 9 6 , 5 1 ) 8 8 1 , 1 2 ( 6 4 4 , 1 2 0 2 5 , 4 4 1 s t n e m t i m m o c k c o l e t a r t s e r e t n I s t h g i r g n i c i v r e s e g a g t r o M f o t u o r o n i s r e f s n a r t o n e r e w e r e h T . d o i r e p g n i t r o p e r e h t f o d n e e h t f o s a 3 d n a , 2 , 1 s l e v e L f o t u o d n a n i s r e f s n a r t e z i n g o c e r o t s i y c i l o p s ’ y n a p m o C e h T n i a t r e c d e r r e f s n a r t y n a p m o C e h t , 3 1 0 2 , 1 3 r e b m e c e D d e d n e s h t n o m e v l e w t e h t g n i r u D . 3 1 0 2 r o 4 1 0 2 , 1 3 r e b m e c e D d e d n e s h t n o m e v l e w t e h t g n i r u d 3 l e v e L a s a d e z i n g o c e r s e s s o l r o s n i a g o n e r e w e r e h T . s e i t i r u c e s e s e h t r o f y t i v i t c a t e k r a m e l b a v r e s b o d e s a e r c e d f o t l u s e r a s a 1 l e v e L m o r f 2 l e v e L o t k c o t s d e r r e f e r p . 3 1 0 2 , 1 3 r e b m e c e D d e d n e s h t n o m e v l e w t e h t g n i r u d s e i t i r u c e s f o r e f s n a r t e h t f o t l u s e r 0 5 1 For Level 3 assets and liabilities measured at fair value on a recurring basis as of December 31, 2014, the significant unobservable inputs used in the fair value measurements were as follows: (dollars in thousands) Mortgage Servicing Rights Fair Value at Dec. 31, 2014 Valuation Technique Significant Unobservable Inputs $227,297 Discounted Cash Flow Weighted Average Constant Significant Unobservable Input Value Prepayment Rate (1) Weighted Average Discount Rate 9.30% 10.00 Interest Rate Lock Commitments 4,397 Discounted Cash Flow Weighted Average Closing Ratio 76.81 (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 December 31, 2014 and 2013, and that were included in the Company’s Consolidated Statements of Condition at those dates: Fair Value Measurements at December 31, 2014 Using Quoted Prices in Active Markets for Identical Assets (Level 1) $-- -- $-- Significant Other Observable Inputs (Level 2) $ -- 15,916 $15,916 Significant Unobservable Inputs (Level 3) $23,366 -- $23,366 Total Fair Value $23,366 15,916 $39,282 (in thousands) Certain impaired loans Other assets (1) Total (1) Represents the fair value of OREO, based on the appraised value of the collateral subsequent to its initial classification as OREO. Fair Value Measurements at December 31, 2013 Using Quoted Prices in Active Markets for Identical Assets (Level 1) $-- -- $-- Significant Other Observable Inputs (Level 2) -- $ 19,810 $19,810 Significant Unobservable Inputs (Level 3) $47,535 -- $47,535 Total Fair Value $47,535 19,810 $67,345 (in thousands) Certain impaired loans Other assets (1) Total (1) Represents the fair value of OREO, based on the appraised value of the collateral subsequent to its initial classification as OREO. 151 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. Other Fair Value Disclosures FASB guidance requires the disclosure of fair value information about the Company’s on- and off-balance sheet financial instruments. When available, quoted market prices are used as the measure of fair value. In cases where quoted market prices are not available, fair values are based on present-value estimates or other valuation techniques. Such fair values are significantly affected by the assumptions used, the timing of future cash flows, and the discount rate. Because assumptions are inherently subjective in nature, estimated fair values cannot be substantiated by comparison to independent market quotes. Furthermore, in many cases, the estimated fair values provided would not necessarily be realized in an immediate sale or settlement of such instruments. The following tables summarize the carrying values, estimated fair values, and fair value measurement levels of financial instruments that were not carried at fair value on the Company’s Consolidated Statements of Condition at December 31, 2014 and 2013: (in thousands) Financial Assets: Carrying Value Estimated Fair Value December 31, 2014 Fair Value Measurement Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Cash and cash equivalents Securities held to maturity FHLB stock(1) Loans, net $ 564,150 $ 564,150 7,085,971 515,327 36,167,980 6,922,667 515,327 35,647,639 $ 564,150 -- -- -- $ -- 7,084,959 515,327 -- $ -- 1,012 -- 36,167,980 Financial Liabilities: Deposits Borrowed funds $28,328,734 $28,377,897 15,140,171 14,226,487 $21,908,136(2) -- $ 6,469,761(3) 15,140,171 $ -- -- (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. (in thousands) Financial Assets: Carrying Value Estimated Fair Value December 31, 2013 Fair Value Measurement Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Cash and cash equivalents Securities held to maturity FHLB stock(1) Loans, net $ 644,550 $ 644,550 7,445,244 561,390 32,628,361 7,670,282 561,390 32,727,507 $ 644,550 -- -- -- $ -- 7,438,091 561,390 -- $ -- 7,153 -- 32,628,361 Financial Liabilities: Deposits Borrowed funds $25,660,992 $25,712,388 16,058,931 15,105,002 $18,728,896(2) -- $ 6,983,492 (3) 16,058,931 $ -- -- (1) Carrying value and estimated fair value are at cost. (2) NOW and money market accounts, savings accounts, and non-interest-bearing accounts. (3) Certificates of deposit. 152 The methods and significant assumptions used to estimate fair values for the Company’s financial instruments follow: Cash and Cash Equivalents Cash and cash equivalents include cash and due from banks and federal funds sold. The estimated fair values of cash and cash equivalents are assumed to equal their carrying values, as these financial instruments are either due on demand or have short-term maturities. Securities If quoted market prices are not available for a specific security, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. These pricing models primarily use market-based or independently sourced market parameters as inputs, including, but not limited to, yield curves, interest rates, equity or debt prices, and credit spreads. In addition to observable market information, pricing models also incorporate transaction details such as maturity and cash flow assumptions. Federal Home Loan Bank Stock Ownership in equity securities of the FHLB is restricted and there is no established market for their resale. The carrying amount approximates the fair value. Loans The loan portfolio is segregated into various components for valuation purposes in order to group loans based on their significant financial characteristics, such as loan type (mortgage or other) and payment status (performing or non-performing). The estimated fair values of mortgage and other loans are computed by discounting the anticipated cash flows from the respective portfolios. The discount rates reflect current market rates for loans with similar terms to borrowers of similar credit quality. The estimated fair values of non-performing mortgage and other loans are based on recent collateral appraisals. The methods used to estimate the fair 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 any other company. Mortgage Servicing Rights MSRs do not trade in an active market with readily observable prices. Accordingly, the Company utilizes a valuation model that calculates the present value of estimated future cash flows. The model incorporates various assumptions, including estimates of prepayment speeds, discount rates, refinance rates, servicing costs, and ancillary income. The Company reassesses and periodically adjusts the underlying inputs and assumptions to reflect current market conditions and assumptions that a market participant would consider in valuing the MSR asset. Derivative Financial Instruments For exchange-traded futures and exchange-traded options, fair value is based on observable quoted market prices in an active market. For forward commitments to buy and sell loans and mortgage-backed securities, fair value is based on observable market prices for similar loans and securities in an active market. The fair value of IRLCs for one-to-four family mortgage loans that the Company intends to sell is based on internally developed models. The key model inputs primarily include the sum of the value of the forward commitment based on the loans’ expected settlement dates, the value of MSRs arrived at by an independent MSR broker, government agency price adjustment factors, and historical IRLC fall-out factors. Deposits The fair values of deposit liabilities with no stated maturity (i.e., NOW and money market accounts, savings accounts, and non-interest-bearing accounts) are equal to the carrying amounts payable on demand. The fair values of 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. 153 Borrowed Funds The estimated fair value of borrowed funds is based either on bid quotations received from securities dealers or the discounted value of contractual cash flows with interest rates currently in effect for borrowed funds with similar maturities and structures. Off-Balance Sheet Financial Instruments The fair values of commitments to extend credit and unadvanced lines of credit are estimated based on an analysis of the interest rates and fees currently charged to enter into similar transactions, considering the remaining terms of the commitments and the creditworthiness of the potential borrowers. The estimated fair values of such off- balance sheet financial instruments were insignificant at December 31, 2014 and 2013. NOTE 15: DERIVATIVE FINANCIAL INSTRUMENTS The Company’s derivative financial instruments consist of financial forward and futures contracts, IRLCs, and options. These derivatives relate to mortgage banking operations, MSRs, and other risk management activities, and seek to mitigate or reduce the Company’s exposure to losses from adverse changes in interest rates. These activities will vary in scope based on the level and volatility of interest rates, the type of assets held, and other changing market conditions. In accordance with the applicable accounting guidance, the Company takes into account the impact of collateral and master netting agreements that allow it to settle all derivative contracts held with a single counterparty on a net basis, and to offset the net derivative position with the related collateral when recognizing derivative assets and liabilities. As a result, the Company’s Statements of Financial Condition could reflect derivative contracts with negative fair values 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 $3.4 billion at December 31, 2014. Changes in the fair value of these derivatives are reflected in current-period earnings. None of these derivatives are designated as hedges for accounting purposes. The 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 also purchases put and call options to manage the risk associated with variations in the amount of IRLCs that ultimately close. 154 The following table sets forth information regarding the Company’s derivative financial instruments at December 31, 2014: December 31, 2014 Notional Amount (in thousands) $ 610,000 Treasury options 25,000 Treasury futures 75,000 Eurodollar futures Forward commitments to sell loans/mortgage-backed securities 1,050,470 Forward commitments to buy loans/mortgage-backed securities 1,104,469 Interest rate lock commitments 495,794 $ 3,360,733 Total derivatives Unrealized (1) Gain $ 12 57 11 8 8,421 4,397 $12,906 Loss $ 337 -- 9 7,862 -- -- $8,208 (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 MSRs. The general strategy for mitigating this risk is to purchase derivative instruments, the value of which changes in the opposite direction of interest rates, thus partially offsetting changes in the value of our servicing assets, which tends to move in the same direction as interest rates. Accordingly, the Company purchases Eurodollar futures and call options on Treasury securities, and enters into forward contracts to purchase mortgage-backed securities. The following table sets forth the effect of derivative instruments on the Consolidated Statements of Income and Comprehensive Income for the periods indicated: (in thousands) Treasury options Treasury and Eurodollar futures Forward commitments to buy/sell loans/mortgage- backed securities Total gain Gain (Loss) Included in Mortgage Banking Income For the Twelve Months Ended December 31, 2012 2013 2014 $ (120) $(10,224) $ 1,968 (1,468) (38) 333 12,009 $14,310 17,727 $ 7,465 3,026 $ 1,438 The Company has in place an enforceable master netting arrangement with every counterparty. All master netting arrangements include rights to offset associated with the Company’s recognized derivative assets, derivative liabilities, and cash collateral received and pledged. Accordingly, the Company, where appropriate, offsets all derivative asset and liability positions with the cash collateral received and pledged. 155 The following tables present the effect the master netting arrangements had on the presentation of the derivative assets in the Consolidated Statements of Condition as of the dates indicated: December 31, 2014 Gross Amount of Recognized Assets (1) $15,481 Gross Amount Offset in the Statement of Condition $7,198 Net Amount of Assets Presented in the Statement of Condition $8,283 (in thousands) Derivatives (1) Includes $2.6 million to purchase Treasury options. Gross Amounts Not Offset in the Consolidated Statement of Condition Financial Instruments $-- Cash Collateral Received $-- Net Amount $8,283 December 31, 2013 Gross Amount of Recognized Assets (1) $6,680 Gross Amount Offset in the Statement of Condition $4,848 Net Amount of Assets Presented in the Statement of Condition $1,832 (in thousands) Derivatives (1) Includes $1.3 million to purchase Treasury options. Gross Amounts Not Offset in the Consolidated Statement of Condition Financial Instruments $-- Cash Collateral Received $-- Net Amount $1,832 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: December 31, 2014 Gross Amount of Recognized Liabilities $8,208 Gross Amount Offset in the Statement of Condition $7,696 Net Amount of Liabilities Presented in the Statement of Condition $512 Gross Amounts Not Offset in the Consolidated Statement of Condition Financial Instruments $-- Cash Collateral Pledged $-- Net Amount $512 December 31, 2013 Gross Amount of Recognized Liabilities $8,012 Gross Amount Offset in the Statement of Condition $7,624 Net Amount of Liabilities Presented in the Statement of Condition $388 Gross Amounts Not Offset in the Consolidated Statement of Condition Financial Instruments $-- Cash Collateral Pledged $-- Net Amount $388 (in thousands) Derivatives (in thousands) Derivatives NOTE 16: DIVIDEND RESTRICTIONS ON SUBSIDIARY BANKS Various legal restrictions limit the extent to which the Company’s subsidiary banks can supply funds to the Parent Company and its non-bank subsidiaries. The Company’s subsidiary banks would require the approval of the Superintendent of the New York State Department of Financial Services (the “NYDFS”) if the dividends they declared in any calendar year were to exceed the total of their respective net profits for that year combined with their respective retained net profits for the preceding two calendar years, less any required transfer to paid-in capital. The term “net profits” is defined as the remainder of all earnings from current operations plus actual recoveries on loans, investments, and other assets, after deducting from the total thereof all current operating expenses, actual losses if any, and all federal, state, and local taxes. In 2014, dividends of $410.0 million were paid by the Banks to the Parent Company; at December 31, 2014, the Banks could have paid additional dividends of $195.9 million to the Parent Company without regulatory approval. 156 NOTE 17: PARENT COMPANY-ONLY FINANCIAL INFORMATION The following tables present the condensed financial statements for New York Community Bancorp, Inc. December 31, 2014 2013 $ 89,518 2,002 6,039,718 7,859 32,165 $6,171,262 $ 126,165 2,545 5,961,367 5,152 32,458 $6,127,687 $ 358,355 31,092 389,447 5,781,815 $6,171,262 $ 358,126 33,899 392,025 5,735,662 $6,127,687 Years Ended December 31, 2013 $ 702 450,000 -- -- 525 451,227 38,268 2012 $ 1,121 485,000 -- (2,313) 1,174 484,982 44,651 2014 $ 715 410,000 261 -- 520 411,496 42,370 369,126 17,570 386,696 98,701 $485,397 412,959 16,547 429,506 46,041 $475,547 440,331 20,029 460,360 40,746 $501,106 (parent company only): Condensed Statements of Condition (in thousands) ASSETS: Cash and cash equivalents Securities available for sale Investments in subsidiaries Receivables from subsidiaries Other assets Total assets LIABILITIES AND STOCKHOLDERS’ EQUITY: Junior subordinated debentures Other liabilities Total liabilities Stockholders’ equity Total liabilities and stockholders’ equity Condensed Statements of Income (in thousands) Interest income Dividends received from subsidiaries Gain on sale of securities Loss on debt redemption Other income Gross income Operating expenses Income before income tax benefit and equity in undistributed earnings of subsidiaries Income tax benefit Income before equity in undistributed earnings of subsidiaries Equity in undistributed earnings of subsidiaries Net income 157 Condensed Statements of Cash Flows (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income Change in other assets Change in other liabilities Other, net Equity in undistributed earnings of subsidiaries Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales and repayments of securities Change in receivable from subsidiaries, net Net cash (used in) provided by investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Treasury stock purchases Cash dividends paid on common stock Net cash received from exercise of stock options Payments for debt redemptions Net cash used in financing activities Net (decrease) increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year NOTE 18: REGULATORY MATTERS Years Ended December 31, 2013 2014 2012 $ 485,397 293 (2,807) 30,739 (98,701) $ 414,921 $ 475,547 (3,841) 6,342 24,135 (46,041) $ 456,142 $ 501,106 (154) (8,799) 21,474 (40,746) $ 472,881 $ 566 (2,707) $ (2,141) $ 151 1,428 $ 1,579 $ 1,276 (409) $ 867 $ (7,283) (442,204) 60 -- $(449,427) (36,647) 126,165 $ 89,518 $ (5,319) (440,308) 326 -- $(445,301) 12,420 113,745 $ 126,165 $ (3,522) (438,539) -- (159,210) $(601,271) (127,523) 241,268 $ 113,745 The Company is subject to examination, regulation, and periodic reporting under the Bank Holding Company Act of 1956, as amended, which is administered by the FRB. The FRB has adopted capital adequacy guidelines for bank holding companies (on a consolidated basis) that are substantially similar to those of the FDIC for the Banks. The following tables present the regulatory capital ratios for the Company at December 31, 2014 and 2013, in comparison with the minimum amounts and ratios required by the FRB for capital adequacy purposes: At December 31, 2014 (dollars in thousands) Total regulatory capital Minimum for capital adequacy purposes Excess Leverage Capital Amount $3,731,430 1,856,755 $1,874,675 Ratio 8.04% 4.00 4.04% Tier 1 Amount Ratio $3,731,430 12.30 % 1,213,802 $2,517,628 4.00 8.30 % Total Amount Ratio $3,919,248 12.92% 2,427,605 $1,491,643 8.00 4.92% Risk-Based Capital At December 31, 2013 (dollars in thousands) Total regulatory capital Minimum for capital adequacy purposes Excess Leverage Capital Amount $3,664,082 1,745,857 $1,918,225 Ratio 8.39% 4.00 4.39% Tier 1 Amount Ratio $3,664,082 12.84% 1,141,644 $2,522,438 4.00 8.84% Total Amount Ratio $3,870,921 13.56% 2,283,287 $1,587,634 8.00 5.56% Risk-Based Capital The Banks are subject to regulation, examination, and supervision by the NYDFS and the FDIC (the “Regulators”). The Banks are also governed by numerous federal and state laws and regulations, including the FDIC Improvement Act of 1991, which established five categories of capital adequacy ranging from well capitalized to critically undercapitalized. Such classifications are used by the FDIC to determine various matters, including prompt corrective action and each institution’s FDIC deposit insurance premium assessments. Capital amounts and classifications are also subject to the Regulators’ qualitative judgments about the components of capital and risk weightings, among other factors. The quantitative measures established to ensure capital adequacy require that banks maintain minimum amounts and ratios of leverage capital to average assets, and of Tier 1 and total risk-based capital to risk-weighted 158 assets (as such measures are defined in the regulations). At December 31, 2014, the Banks exceeded all the capital adequacy requirements to which they were subject. As of December 31, 2014, the most recent notifications from the FDIC categorized the Community Bank and the Commercial Bank as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as well capitalized, a bank must maintain a minimum leverage capital ratio of 5.00%; a minimum Tier 1 risk-based capital ratio of 6.00%; and a minimum total risk-based capital ratio of 10.00%. In the opinion of management, no conditions or events have transpired since said notification to change these capital adequacy classifications. The following tables present the actual capital amounts and ratios for the Community Bank at December 31, 2014 and 2013 in comparison to the minimum amounts and ratios required for capital adequacy purposes: At December 31, 2014 (dollars in thousands) Total regulatory capital Minimum for capital adequacy purposes Excess Leverage Capital Amount $3,285,870 1,701,174 $1,584,696 Ratio 7.73% 4.00 3.73% Tier 1 Amount Ratio $3,285,870 12.02% Total Amount Ratio $3,461,741 12.66% 1,093,835 $2,192,035 4.00 8.02% 2,187,669 $1,274,072 8.00 4.66% Risk-Based Capital At December 31, 2013 (dollars in thousands) Total regulatory capital Minimum for capital adequacy purposes Excess Leverage Capital Amount $3,196,870 1,627,696 $1,569,174 Ratio 7.86% 4.00 3.86% Tier 1 Amount Ratio $3,196,870 12.22% Total Amount Ratio $3,391,944 12.96% 1,046,793 $2,150,077 4.00 8.22% 2,093,586 $1,298,358 8.00 4.96% Risk-Based Capital The following tables present the actual capital amounts and ratios for the Commercial Bank at December 31, 2014 and 2013 in comparison to the minimum amounts and ratios required for capital adequacy purposes: At December 31, 2014 (dollars in thousands) Total regulatory capital Minimum for capital adequacy purposes Excess Leverage Capital Ratio Amount 9.25% $364,591 4.00 157,599 5.25% $206,992 Tier 1 Amount Ratio 12.08% $364,591 4.00 120,755 8.08% $243,836 Total Amount Ratio $376,538 12.47% 241,509 $135,029 8.00 4.47% Risk-Based Capital At December 31, 2013 (dollars in thousands) Total regulatory capital Minimum for capital adequacy purposes Excess Leverage Capital Amount Ratio $354,423 11.49% 123,393 $231,030 4.00 7.49% Tier 1 Amount Ratio $354,423 14.84% 95,517 4.00 $258,906 10.84% Total Amount Ratio $366,076 15.33% 191,033 $175,043 8.00 7.33% Risk-Based Capital NOTE 19: 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 159 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 amount 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 hybrid 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. The following tables provide a summary of the Company’s segment results for the years ended December 31, 2014 and 2013, on an internally managed accounting basis: (in thousands) Net interest income Recoveries of loan losses Non-Interest Income: Third party(1) Inter-segment Total non-interest income Non-interest expense(2) Income before income tax expense Income tax expense Net income Identifiable segment assets (period-end) (1) Includes ancillary fee income. (2) Includes both direct and indirect expenses. For the Twelve Months Ended December 31, 2014 Residential Mortgage Banking $ 14,191 -- Banking Operations $ 1,126,162 (18,587) Total Company $ 1,140,353 (18,587) 135,834 (13,521) 122,313 528,436 738,626 274,179 $ 464,447 $47,897,672 65,759 13,521 79,280 59,031 34,440 13,490 $ 20,950 $ 661,545 201,593 -- 201,593 587,467 773,066 287,669 $ 485,397 $48,559,217 160 (in thousands) Net interest income Provisions for loan losses Non-Interest Income: Third party(1) Inter-segment Total non-interest income Non-interest expense(2) Income before income tax expense Income tax expense Net income Identifiable segment assets (period-end) (1) Includes ancillary fee income. (2) Includes both direct and indirect expenses. For the Twelve Months Ended December 31, 2013 Residential Banking Mortgage Banking Operations $ 21,796 $ 1,144,820 -- 30,758 Total Company $ 1,166,616 30,758 137,534 (16,607) 120,927 533,951 701,038 254,738 446,300 $ $46,015,332 81,296 16,607 97,903 73,611 46,088 16,841 $ 29,247 $ 672,955 218,830 -- 218,830 607,562 747,126 271,579 475,547 $ $ 46,688,287 161 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders New York Community Bancorp, Inc.: We have audited New York Community Bancorp, Inc.’s (the “Company”) internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of condition of the Company as of December 31, 2014 and 2013, and the related consolidated statements of income and comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2014, and our report dated March 2, 2015 expressed an unqualified opinion on those consolidated financial statements. New York, New York March 2, 2015 162 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders New York Community Bancorp, Inc.: We have audited the accompanying consolidated statements of condition of New York Community Bancorp, Inc. and subsidiaries (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of income and comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2014. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 2, 2015 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. New York, New York March 2, 2015 163 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures Under the supervision, and with the participation, of our Chief Executive Officer and Chief Financial Officer, our management evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15(b), as adopted by the Securities and Exchange Commission (the “SEC”) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this annual report. Disclosure controls and procedures are the controls and other procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. (b) Management’s Report on Internal Control over Financial Reporting Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Our system of internal control is designed under the supervision of management, including our Chief Executive Officer and Chief Financial Officer, to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles (“GAAP”). Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are made only in accordance with the authorization of management and the Boards of Directors of the Company and the Banks; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on our financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that the controls may become inadequate because of changes in conditions or that the degree of compliance with policies and procedures may deteriorate. As of December 31, 2014, management assessed the effectiveness of the Company’s internal control over financial reporting based upon the framework established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based upon its assessment, management concluded that the Company’s internal control over financial reporting as of December 31, 2014 was effective using this criteria. The effectiveness of the Company’s internal control over financial reporting as of December 31, 2014 has been audited by KPMG LLP, an independent registered public accounting firm that audited the Company’s consolidated financial statements as of and for the year ended December 31, 2014, as stated in their report, included in Item 8 on the preceding page, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2014. (c) Changes in Internal Control over Financial Reporting There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. 164 ITEM 9B. OTHER INFORMATION None. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE Information regarding our directors, executive officers, and corporate governance appears in our Proxy Statement for the Annual Meeting of Shareholders to be held on June 3, 2015 (hereafter referred to as our “2015 Proxy Statement”) under the captions “Information with Respect to Nominees, Continuing Directors, and Executive Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Meetings and Committees of the Board of Directors,” and “Corporate Governance,” and is incorporated herein by this reference. A copy of our Code of Business Conduct and Ethics, which applies to our Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, and Chief Accounting Officer as officers of the Company, and all other senior financial officers of the Company designated by the Chief Executive Officer from time to time, is available at the Investor Relations portion of our websites, www.myNYCB.com, www.NewYorkCommercialBank.com, and www.NYCBfamily.com, and will be provided, without charge, upon written request to the Corporate Secretary at 615 Merrick Avenue, Westbury, NY 11590. ITEM 11. EXECUTIVE COMPENSATION Information regarding executive compensation appears in our 2015 Proxy Statement under the captions “Compensation Committee Report,” “Compensation Committee Interlocks and Insider Participation,” “Compensation Discussion and Analysis,” “Executive Compensation and Related Information,” and “Director Compensation,” and is incorporated herein by this reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The following table provides information regarding the Company’s equity compensation plans at December 31, 2014: Number of securities to be issued upon exercise of outstanding options, warrants, and rights Weighted-average exercise price of outstanding options, warrants, and rights Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (a) (b) (c) 58,560 -- 58,560 $18.04 -- $18.04 14,480,253 -- 14,480,253 Plan category Equity compensation plans approved by security holders Equity compensation plans not approved by security holders Total Information relating to the security ownership of certain beneficial owners and management appears in our 2015 Proxy Statement under the captions “Security Ownership of Certain Beneficial Owners” and “Information with Respect to Nominees, Continuing Directors, and Executive Officers.” ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Information regarding certain relationships and related transactions appears in our 2015 Proxy Statement under the captions “Transactions with Certain Related Persons” and “Corporate Governance,” and is incorporated herein by this reference. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information regarding principal accountant fees and services appears in our 2015 Proxy Statement under the caption “Audit and Non-Audit Fees,” and is incorporated herein by this reference. 165 PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Documents Filed As Part of This Report 1. Financial Statements The following are incorporated by reference from Item 8 hereof: • • • • • • Reports of Independent Registered Public Accounting Firm; Consolidated Statements of Condition at December 31, 2014 and 2013; Consolidated Statements of Income and Comprehensive Income for each of the years in the three-year period ended December 31, 2014; Consolidated Statements of Changes in Stockholders’ Equity for each of the years in the three-year period ended December 31, 2014; Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2014; and Notes to the Consolidated Financial Statements. The following are incorporated by reference from Item 9A hereof: • Management’s Report on Internal Control over Financial Reporting; and • Changes in Internal Control over Financial Reporting. 2. Financial Statement Schedules Financial statement schedules have been omitted because they are not applicable or because the required information is provided in the Consolidated Financial Statements or Notes thereto. 3. Exhibits Required by Securities and Exchange Commission Regulation S-K The following exhibits are filed as part of this Form 10-K and this list includes the Exhibit Index. Exhibit No. 3.1 Amended and Restated Certificate of Incorporation (1) 3.2 3.3 4.1 4.2 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 10.10 10.11 10.12 Certificates of Amendment of Amended and Restated Certificate of Incorporation (2) Amended and Restated Bylaws (3) Specimen Stock Certificate (4) Registrant will furnish, upon request, copies of all instruments defining the rights of holders of long-term debt instruments of the registrant and its consolidated subsidiaries. Form of Employment Agreement between New York Community Bancorp, Inc. and Joseph R. Ficalora, Robert Wann, Thomas R. Cangemi, James J. Carpenter, and John J. Pinto (5) Retirement Agreement between New York Community Bancorp, Inc. and Michael F. Manzulli (6) Retirement Agreement between New York Community Bancorp, Inc. and James J. O’Donovan (6) Synergy Financial Group, Inc. 2004 Stock Option Plan (as assumed by New York Community Bancorp, Inc. effective October 1, 2007) (7) Form of Change in Control Agreements among the Company, the Bank, and Certain Officers (8) Form of Queens County Savings Bank Employee Severance Compensation Plan (8) Form of Queens County Savings Bank Outside Directors’ Consultation and Retirement Plan (8) Form of Queens County Bancorp, Inc. Employee Stock Ownership Plan and Trust (8) Incentive Savings Plan of Queens County Savings Bank (9) Retirement Plan of Queens County Savings Bank (8) Supplemental Benefit Plan of Queens County Savings Bank (10) Excess Retirement Benefits Plan of Queens County Savings Bank (8) 166  10.13 Queens County Savings Bank Directors’ Deferred Fee Stock Unit Plan (8) 10.14 Richmond County Financial Corp. 1998 Stock Compensation Plan (11) 10.15 Long Island Financial Corp. 1998 Stock Option Plan, as amended (12) 10.16 New York Community Bancorp, Inc. Management Incentive Compensation Plan (13) 10.17 New York Community Bancorp, Inc. 2006 Stock Incentive Plan (13) 10.18 New York Community Bancorp, Inc. 2012 Stock Incentive Plan (14) 11.0 12.0 21.0 23.0 31.1 Statement Re: Ratio of Earnings to Fixed Charges (attached hereto) Subsidiaries information incorporated herein by reference to Part I, “Subsidiaries” Consent of KPMG LLP, dated March 2, 2015 (attached hereto) Statement Re: Computation of Per Share Earnings (See Note 2 to the Consolidated Financial Statements.) 31.2 32.0 101 (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) Rule 13a-14(a) Certification of Chief Executive Officer of the Company in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (attached hereto) Rule 13a-14(a) Certification of Chief Financial Officer of the Company in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (attached hereto) Section 1350 Certifications of the Chief Executive Officer and Chief Financial Officer of the Company in accordance with Section 906 of the Sarbanes-Oxley Act of 2002 (attached hereto) The following materials from the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Condition, (ii) the Consolidated Statements of Income and Comprehensive Income, (iii) the Consolidated Statements of Changes in Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows, and (v) the Notes to the Consolidated Financial Statements. Incorporated by reference to Exhibits filed with the Company’s Form 10-Q for the quarterly period ended March 31, 2001 (File No. 0-22278) Incorporated by reference to Exhibits filed with the Company’s Form 10-K for the year ended December 31, 2003 (File No. 1-31565) Incorporated by reference to Exhibits to the Company’s Form 8-K filed with the Securities and Exchange Commission on May 6, 2014 Incorporated by reference to Exhibits filed with the Company’s Registration Statement on Form S-1, Registration No. 33-66852 Incorporated by reference to Exhibits filed with the Company’s Form 8-K filed with the Securities and Exchange Commission on March 9, 2006 Incorporated by reference to Exhibits filed with the Company’s Form 10-Q for the quarterly period ended March 31, 2007 (File No. 001-31565) Incorporated by reference to Exhibits to Form S-8, Registration Statement filed on October 4, 2007, Registration No. 333-146512 Incorporated by reference to Exhibits filed with the Company’s Registration Statement on Form S-1, Registration No. 33-66852 Incorporated by reference to Exhibits to Form S-8, Registration Statement filed on October 27, 1994, Registration No. 33-85682 Incorporated by reference to Exhibits filed with the 1995 Proxy Statement for the Annual Meeting of Shareholders held on April 19, 1995 Incorporated by reference to Exhibits to Form S-8, Registration Statement filed on July 31, 2001, Registration No. 333-66366 Incorporated by reference to Exhibits to Form S-8, Registration Statement filed on January 9, 2006, Registration No. 333-130908 Incorporated by reference to Exhibits filed with the 2006 Proxy Statement for the Annual Meeting of Shareholders held on June 7, 2006 Incorporated by reference to Exhibits filed with the 2012 Proxy Statement for the Annual Meeting of Shareholders held on June 7, 2012 167 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SIGNATURES March 2, 2015 New York Community Bancorp, Inc. (Registrant) /s/ Joseph R. Ficalora Joseph R. Ficalora President and Chief Executive Officer (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Thomas R. Cangemi Thomas R. Cangemi Senior Executive Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Maureen E. Clancy Maureen E. Clancy Director /s/ Max L. Kupferberg Max L. Kupferberg Director /s/ James J. O’Donovan James J. O’Donovan Director /s/ Ronald A Rosenfeld Ronald A. Rosenfeld Director /s/ John M. Tsimbinos John M. Tsimbinos Director 3/2/15 3/2/15 3/2/15 3/2/15 3/2/15 3/2/15 /s/ Joseph R. Ficalora Joseph R. Ficalora President, Chief Executive Officer, and Director (Principal Executive Officer) /s/ John J. Pinto John J. Pinto Executive Vice President and Chief Accounting Officer (Principal Accounting Officer) /s/ Dominick Ciampa Dominick Ciampa Chairman of the Board of Directors /s/ Hanif W. Dahya Hanif W. Dahya Director /s/ Michael J. Levine Michael J. Levine Director /s/ Lawrence Rosano, Jr. Lawrence Rosano, Jr. Director /s/ Lawrence J. Savarese Lawrence J. Savarese Director /s/ Robert Wann Robert Wann Senior Executive Vice President, Chief Operating Officer, and Director 3/2/15 3/2/15 3/2/15 3/2/15 3/2/15 3/2/15 3/2/15 3/2/15 168 STATEMENT RE: RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12.0 (dollars in thousands) Including Interest Paid on Deposits: Earnings before income taxes Combined fixed charges: Interest expense on deposits Interest expense on borrowed funds Appropriate portion (1/3) of rent expenses Total fixed charges Earnings before income taxes and fixed charges Ratio of earnings to fixed charges Excluding Interest Paid on Deposits: Earnings before income taxes Combined fixed charges: Interest expense on borrowed funds Appropriate portion (1/3) of rent expenses Total fixed charges Earnings before income taxes and fixed charges Ratio of earnings to fixed charges Years Ended December 31, 2013 2014 2012 $ 773,066 $ 747,126 $ 780,909 149,746 392,968 12,000 $ 554,714 $1,327,780 2.39x 141,639 399,843 11,676 $ 553,158 $1,300,284 2.35x 144,166 486,914 11,282 $ 642,362 $1,423,271 2.22x $ 773,066 $ 747,126 $ 780,909 392,968 12,000 $ 404,968 $1,178,034 2.91x 399,843 11,676 $ 411,519 $1,158,645 2.82x 486,914 11,282 $ 498,196 $1,279,105 2.57x CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM EXHIBIT 23.0 The Board of Directors New York Community Bancorp, Inc.: We consent to the incorporation by reference in the registration statements (Nos. 333-182334, 333-146512, 333- 135279, 333-130908, 333-110361, 333-105901, 333-89826, 333-66366, 333-51988, and 333-32881) on Form S-8 and the registration statements (Nos. 333-188181, 333-188178, 333-129338, 333-105350, 333-100767, 333-86682, 333-150442, 333-152147, and 333-166080) on Form S-3 of New York Community Bancorp, Inc. of our reports dated March 2, 2015, with respect to the consolidated statements of condition of New York Community Bancorp, Inc. as of December 31, 2014 and 2013, and the related consolidated statements of income and comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2014, and the effectiveness of internal control over financial reporting as of December 31, 2014, which reports appear in the December 31, 2014 annual report on Form 10-K of New York Community Bancorp, Inc. New York, New York March 2, 2015 NEW YORK COMMUNITY BANCORP, INC. CERTIFICATIONS EXHIBIT 31.1 I, Joseph R. Ficalora, certify that: 1. I have reviewed this annual report on Form 10-K of New York Community Bancorp, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. DATE: March 2, 2015 BY: /s/ Joseph R. Ficalora Joseph R. Ficalora President and Chief Executive Officer (Duly Authorized Officer) NEW YORK COMMUNITY BANCORP, INC. CERTIFICATIONS EXHIBIT 31.2 I, Thomas R. Cangemi, certify that: 1. I have reviewed this annual report on Form 10-K of New York Community Bancorp, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. DATE: March 2, 2015 BY: /s/ Thomas R. Cangemi Thomas R. Cangemi Senior Executive Vice President and Chief Financial Officer (Principal Financial Officer) EXHIBIT 32.0 NEW YORK COMMUNITY BANCORP, INC. CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADDED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of New York Community Bancorp, Inc. (the “Company”) on Form 10-K for the fiscal year ended December 31, 2014 as filed with the Securities and Exchange Commission (the “Report”), the undersigned certify, pursuant to 18 U.S.C. Section 1350, as added by Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. 2. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report. DATE: March 2, 2015 DATE: March 2, 2015 BY: /s/ Joseph R. Ficalora Joseph R. Ficalora President and Chief Executive Officer (Duly Authorized Officer) BY: /s/ Thomas R. Cangemi Thomas R. Cangemi Senior Executive Vice President and Chief Financial Officer (Principal Financial Officer) NEW YORK COMMUNITY BANCORP, INC. 615 MERRICK AVENUE, WESTBURY, NEW YORK 11590 www.myNYCB.com ir@myNYCB.com (516) 683 - 4420 2014 ANNUAL REPORT 

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