Edgar Filing: NEW YORK COMMUNITY BANCORP INC

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2012

Commission File Number 1-31565

NEW YORK COMMUNITY BANCORP, INC.

(Exact name of registrant as specified in its charter)

Delaware

06-1377322

(State or other jurisdiction of

incorporation or organization)

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

615 Merrick Avenue, Westbury, New York 11590

(Address of principal executive offices)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large Accelerated Filer X Accelerated Filer Non-accelerated Filer Smaller Reporting Company

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

Yes No X

439,114,402

Number of shares of common stock outstanding at

October 31, 2012

NEW YORK COMMUNITY BANCORP, INC.

FORM 10-Q

Quarter Ended September 30, 2012


INDEX		Page No.

Part I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Statements of Condition as of September 30, 2012 (unaudited) and December 31, 2011	1

	Consolidated Statements of Income and Comprehensive Income for the Three and Nine Months Ended September 30, 2012 and 2011 (unaudited)	2

	Consolidated Statement of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2012 (unaudited)	3

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011 (unaudited)	4

	Notes to the Unaudited Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	42

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	93

Item 4.	Controls and Procedures	94

Part II.	OTHER INFORMATION

Item 1.	Legal Proceedings	94

Item 1A.	Risk Factors	94

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	95

Item 3.	Defaults Upon Senior Securities	95

Item 4.	Mine Safety Disclosures	95

Item 5.	Other Information	95

Item 6.	Exhibits	96

Signatures		97

Exhibits

NEW YORK COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CONDITION

(in thousands, except share data)


	September 30, 2012 (unaudited)			December 31, 2011
Assets:
Cash and cash equivalents		$	2,538,290		$	2,001,737
Securities:
Available-for-sale ($165,835 and $590,488 pledged, respectively)			378,514			724,662
Held to maturity ($4,377,046 and $3,610,172 pledged, respectively) (fair value of $5,004,397 and $3,966,185, respectively)			4,765,694			3,815,854

Total securities			5,144,208			4,540,516

Non-covered loans held for sale			1,211,767			1,036,918
Non-covered loans held for investment, net of deferred loan fees and costs			26,822,850			25,532,818
Less: Allowance for losses on non-covered loans			(139,015)			(137,290)

Non-covered loans held for investment, net			26,683,835			25,395,528
Covered loans			3,400,624			3,753,031
Less: Allowance for losses on covered loans			(54,591)			(33,323)

Covered loans, net			3,346,033			3,719,708

Total loans, net			31,241,635			30,152,154
Federal Home Loan Bank stock, at cost			473,629			490,228
Premises and equipment, net			253,504			250,859
FDIC loss share receivable			594,994			695,179
Goodwill			2,436,131			2,436,131
Core deposit intangibles, net			36,734			51,668
Mortgage servicing rights			122,530			117,012
Bank-owned life insurance			781,630			768,996
Other real estate owned (includes $50,404 and $71,400, respectively, covered by loss sharing agreements)			94,336			155,967
Other assets			376,174			363,855

Total assets		$	44,093,795		$	42,024,302

Liabilities and Stockholders’ Equity:
Deposits:
NOW and money market accounts		$	8,814,151		$	8,757,198
Savings accounts			4,122,015			3,953,859
Certificates of deposit			9,091,022			7,373,263
Non-interest-bearing accounts			2,494,435			2,189,810

Total deposits			24,521,623			22,274,130
Borrowed funds:
Wholesale borrowings:
Federal Home Loan Bank advances			8,945,008			9,314,193
Repurchase agreements			4,125,000			4,125,000
Fed funds purchased			100,000			--

Total wholesale borrowings			13,170,008			13,439,193
Junior subordinated debentures			427,077			426,936
Other borrowings			4,300			94,284

Total borrowed funds			13,601,385			13,960,413
Other liabilities			328,322			224,055

Total liabilities			38,451,330			36,458,598

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; 439,133,951 and 437,426,665 shares issued, and 439,114,402 and 437,344,796 shares outstanding, respectively)			4,391			4,374
Paid-in capital in excess of par			5,321,655			5,309,269
Retained earnings			374,351			324,967
Treasury stock, at cost (19,549 and 81,869 shares, respectively)			(258)			(996)
Accumulated other comprehensive loss, net of tax:
Net unrealized gain on securities available for sale, net of tax			10,871			1,321
Net unrealized loss on the non-credit portion of other-than-temporary impairment (“OTTI”) losses on securities, net of tax			(13,552)			(13,627)
Net unrealized loss on pension and post-retirement obligations, net of tax			(54,993)			(59,604)

Total accumulated other comprehensive loss, net of tax			(57,674)			(71,910)

Total stockholders’ equity			5,642,465			5,565,704

Total liabilities and stockholders’ equity		$	44,093,795		$	42,024,302

See accompanying notes to the consolidated financial statements.

NEW YORK COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(in thousands, except per share data)

(unaudited)


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2012		2011		2012		2011
Interest Income:
Mortgage and other loans	$	394,935	$	400,114	$	1,199,600	$	1,224,348
Securities and money market investments		47,776		61,777		144,729		177,474

Total interest income		442,711		461,891		1,344,329		1,401,822


Interest Expense:
NOW and money market accounts		9,106		9,095		27,196		30,647
Savings accounts		3,288		3,696		10,349		12,029
Certificates of deposit		23,516		25,173		70,725		77,099
Borrowed funds		121,851		128,960		366,039		381,884

Total interest expense		157,761		166,924		474,309		501,659

Net interest income		284,950		294,967		870,020		900,163
Provision for losses on non-covered loans		10,000		18,000		40,000		59,000
Provision for losses on covered loans		2,820		--		21,268		8,708

Net interest income after provisions for loan losses		272,130		276,967		808,752		832,455


Non-Interest Income:
Total loss on OTTI of securities		--		--		--		(18,124)
Less: Non-credit portion of OTTI recorded in other comprehensive income (before taxes)		--		--		--		--

Net loss on OTTI recognized in earnings		--		--		--		(18,124)
Mortgage banking income		52,581		24,274		146,069		55,986
Fee income		9,427		11,544		28,618		35,586
Bank-owned life insurance		6,781		6,890		23,168		21,343
Net gain on sales of securities		510		6,734		1,369		35,469
FDIC indemnification income		2,256		--		17,015		7,624
Gain on business disposition		--		--		--		9,823
Other		10,102		8,627		25,619		27,860

Total non-interest income		81,657		58,069		241,858		175,567


Non-Interest Expense:
Operating expenses:
Compensation and benefits		74,416		76,898		221,624		222,184
Occupancy and equipment		22,956		21,711		68,089		65,421
General and administrative		51,094		47,918		154,280		146,139

Total operating expenses		148,466		146,527		443,993		433,744
Amortization of core deposit intangibles		4,855		6,089		14,934		20,618

Total non-interest expense		153,321		152,616		458,927		454,362

Income before income taxes		200,466		182,420		591,683		553,660
Income tax expense		71,668		62,670		213,420		191,275

Net Income	$	128,798	$	119,750	$	378,263	$	362,385

Other comprehensive income (loss), net of tax:
Change in net unrealized gain/loss on securities available for sale, net of tax of $3,498; $3,961; $6,971; and $3,502, respectively		5,198		6,109		10,383		(5,167)
Change in the non-credit portion of OTTI losses recognized in other comprehensive income, net of tax of $17; $17; $48; and $4,842, respectively		26		22		75		7,229
Change in pension and post-retirement obligations, net of tax of $1,042; $503; $3,128; and $1,509, respectively		1,537		741		4,611		2,225
Less: Reclassification adjustment for sales of available for sale securities and loss on OTTI of securities, net of tax of $204; $5,550; $536; and $6,978, respectively		(306)		(8,245)		(833)		(10,367)

Total other comprehensive income (loss), net of tax		6,455		(1,373)		14,236		(6,080)

Total comprehensive income, net of tax	$	135,253	$	118,377	$	392,499	$	356,305


Basic earnings per share		$0.29		$0.27		$0.86		$0.82

Diluted earnings per share		$0.29		$0.27		$0.86		$0.82

See accompanying notes to the unaudited consolidated financial statements.

NEW YORK COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands, except share data)

(unaudited)


	For the Nine Months Ended September 30, 2012
Common Stock (Par Value: $0.01):
Balance at beginning of year		$	4,374
Shares issued for restricted stock awards (1,707,286 shares)			17

Balance at end of period			4,391


Paid-in Capital in Excess of Par:
Balance at beginning of year			5,309,269
Shares issued for restricted stock awards, net of forfeitures			(3,430)
Compensation expense related to restricted stock awards			15,476
Tax effect of stock plans			340

Balance at end of period			5,321,655


Retained Earnings:
Balance at beginning of year			324,967
Net income			378,263
Dividends paid on common stock ($0.75 per share)			(328,879)

Balance at end of period			374,351


Treasury Stock:
Balance at beginning of year			(996)
Purchase of common stock (209,555 shares)			(2,713)
Shares issued for restricted stock awards (271,875 shares)			3,451

Balance at end of period			(258)


Accumulated Other Comprehensive Loss, net of tax:
Balance at beginning of year			(71,910)
Other comprehensive income, net of tax			14,236

Balance at end of period			(57,674)

Total stockholders’ equity		$	5,642,465

See accompanying notes to the consolidated financial statements.

NEW YORK COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	For the Nine Months Ended September 30,
	2012		2011
Cash Flows from Operating Activities:
Net income	$	378,263	$	362,385
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		61,268		67,708
Depreciation and amortization		18,699		17,642
Accretion of premiums and discounts, net		(2,263)		(987)
Amortization of core deposit intangibles		14,934		20,618
Net gain on sale of securities		(1,369)		(35,469)
Net gain on sale of loans		(159,511)		(56,131)
Gain on business disposition		--		(9,823)
Stock plan-related compensation		15,514		12,096
Loss on OTTI of securities recognized in earnings		--		18,124
Changes in assets and liabilities:
Decrease in deferred tax asset, net		28,344		51,799
Decrease (increase) in other assets		93,341		(2,985)
Increase (decrease) in other liabilities		112,006		(82,526)
Origination of loans held for sale		(7,971,638)		(4,426,713)
Proceeds from sale of loans originated for sale		7,950,220		4,705,787

Net cash provided by operating activities		537,808		641,525

Cash Flows from Investing Activities:
Proceeds from repayment of securities held to maturity		1,838,793		1,821,919
Proceeds from repayment of securities available for sale		457,808		158,479
Proceeds from sale of securities held to maturity		--		284,406
Proceeds from sale of securities available for sale		561,369		740,738
Purchase of securities held to maturity		(2,785,758)		(2,609,676)
Purchase of securities available for sale		(656,115)		(748,721)
Net redemption of Federal Home Loan Bank stock		16,599		3,424
Net increase in loans		(969,820)		(1,191,660)
Purchase of premises and equipment, net		(21,344)		(29,491)
Net cash acquired in business transactions		--		100,027

Net cash used in investing activities		(1,558,468)		(1,470,555)

Cash Flows from Financing Activities:
Net increase in deposits		2,247,493		943,596
Net decrease in short-term borrowed funds		(262,000)		--
Net decrease in long-term borrowed funds		(97,028)		(121,039)
Tax effect of stock plans		340		2,518
Cash dividends paid on common stock		(328,879)		(327,657)
Treasury stock purchases		(2,713)		(2,769)
Net cash received from stock option exercises		--		3,519

Net cash provided by financing activities		1,557,213		498,168

Net increase (decrease) in cash and cash equivalents		536,553		(330,862)
Cash and cash equivalents at beginning of period		2,001,737		1,927,542

Cash and cash equivalents at end of period	$	2,538,290	$	1,596,680

Supplemental information:
Cash paid for interest		$469,664		$513,189
Cash paid for income taxes		196,761		106,480
Non-cash investing and financing activities:
Transfers to other real estate owned from loans		77,080		197,114

See accompanying notes to the consolidated financial statements.

NEW YORK COMMUNITY BANCORP, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Organization and Basis of Presentation

Organization

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

The Community Bank is the primary banking subsidiary of the Company. Founded on April 14, 1859 and formerly known as Queens County Savings Bank, the Community Bank converted from a state-chartered mutual savings bank to the capital stock form of ownership on November 23, 1993, on which date the Company completed 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, the Company’s initial offering price adjusts to $0.93 per share. All share and per share data presented in this report have been adjusted to reflect the impact of the stock splits.

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

Reflecting this strategy of growth through acquisitions, the Community Bank currently operates 240 branches, four of which operate directly under the Community Bank name. The remaining 236 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 34 branches in Manhattan, Queens, Brooklyn, Westchester County, and Long Island (all in New York), including 17 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 loans held for sale; 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 current economic environment has increased the degree of uncertainty inherent in these material estimates.

The unaudited consolidated financial statements include the accounts of the Company and other entities in which the Company has a controlling financial interest. All inter-company accounts and transactions are eliminated in consolidation. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s 2011 Annual Report on Form 10-K. The Company currently has unconsolidated subsidiaries in the form of nine wholly-owned statutory business trusts, which were formed to issue guaranteed capital debentures (“capital securities”). Please see Note 6, “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.

Note 2. Computation of Earnings per Share

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

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

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


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands, except share and per share data)	2012		2011		2012		2011
Net income		$128,798		$119,750		$378,263		$362,385
Less: Dividends paid on and earnings allocated to participating securities		(1,213)		(914)		(3,552)		(2,732)

Earnings applicable to common stock		$127,585		$118,836		$374,711		$359,653


Weighted average common shares outstanding		437,787,688		436,243,926		437,692,411		435,980,390

Basic earnings per common share		$0.29		$0.27		$0.86		$0.82


Earnings applicable to common stock		$127,585		$118,836		$374,711		$359,653


Weighted average common shares outstanding		437,787,688		436,243,926		437,692,411		435,980,390
Potential dilutive common shares⁽¹⁾		5,664		33,640		5,026		371,359

Total shares for diluted earnings per share computation		437,793,352		436,277,566		437,697,437		436,351,749


Diluted earnings per common share and common share equivalents		$0.29		$0.27		$0.86		$0.82

(1)

Options to purchase 2,579,585 shares of the Company’s common stock that were outstanding in the three and nine months ended September 30, 2012, at a weighted average exercise price of $16.86, were excluded from the respective computations of diluted EPS because their inclusion would have had an antidilutive effect. Options to purchase 8,918,493 and 3,122,124 shares, respectively, of the Company’s common stock that were outstanding in the three and nine months ended September 30, 2011, at respective weighted average exercise prices of $15.64 and $17.32, were excluded from the respective computations of diluted EPS because their inclusion would have had an antidilutive effect.

Note 3. Securities

The following table summarizes the Company’s portfolio of securities available for sale at September 30, 2012:


	September 30, 2012
(in thousands)	Amortized Cost			Gross Unrealized Gain			Gross Unrealized Loss			Fair Value
Mortgage-Related Securities:
GSE ⁽¹⁾ certificates		$	93,764		$	8,270		$	6		$	102,028
GSE CMOs ⁽²⁾			80,472			5,945			--			86,417
Private label CMOs			18,426			--			325			18,101

Total mortgage-related securities		$	192,662		$	14,215		$	331		$	206,546

Other Securities:
GSE debentures		$	11,000		$	68		$	--		$	11,068
State, county, and municipal			1,195			131			--			1,326
Capital trust notes			35,228			2,352			4,009			33,571
Preferred stock			77,913			5,093			--			83,006
Common stock			42,917			1,273			1,193			42,997

Total other securities		$	168,253		$	8,917		$	5,202		$	171,968

Total securities available for sale ⁽³⁾		$	360,915		$	23,132		$	5,533		$	378,514

(1)	Government-sponsored enterprises

(2)	Collateralized mortgage obligations

(3)	The non-credit portion of OTTI recorded in accumulated other comprehensive loss (“AOCL”) was $570,000 (before taxes).

As of September 30, 2012, the fair value of marketable equity securities included common stock of $43.0 million, corporate preferred stock of $82.9 million, and Freddie Mac preferred stock of $105,000. Common stock primarily consisted of an investment in a large cap equity fund and certain other funds that are Community Reinvestment Act (“CRA”) eligible. The Freddie Mac preferred stock was recognized by the Company as other-than-temporarily impaired in the fourth quarter of 2008.

The following table summarizes the Company’s portfolio of securities available for sale at December 31, 2011:


	December 31, 2011
(in thousands)	Amortized Cost			Gross Unrealized Gain			Gross Unrealized Loss			Fair Value
Mortgage-Related Securities:
GSE certificates		$	97,642		$	5,013		$	10		$	102,645
GSE CMOs			62,373			2,903			--			65,276
Private label CMOs			25,306			--			1,265			24,041

Total mortgage-related securities		$	185,321		$	7,916		$	1,275		$	191,962

Other Securities:
GSE debentures		$	456,969		$	1,797		$	--		$	458,766
State, county, and municipal			1,188			97			--			1,285
Capital trust notes			36,754			141			4,692			32,203
Preferred stock			--			195			--			195
Common stock			42,863			1,604			4,216			40,251

Total other securities		$	537,774		$	3,834		$	8,908		$	532,700

Total securities available for sale ⁽¹⁾		$	723,095		$	11,750		$	10,183		$	724,662

(1)	The non-credit portion of OTTI recorded in AOCL was $570,000 (before taxes).

The following tables summarize the Company’s portfolio of securities held to maturity at September 30, 2012 and December 31, 2011:


	September 30, 2012
(in thousands)	Amortized Cost			Carrying Amount			Gross Unrealized Gain			Gross Unrealized Loss			Fair Value
Mortgage-Related Securities:
GSE certificates		$	1,266,523		$	1,266,523		$	102,160		$	--		$	1,368,683
GSE CMOs			2,087,968			2,087,968			110,349			--			2,198,317
Other mortgage-related securities			3,263			3,263			--			--			3,263

Total mortgage-related securities		$	3,357,754		$	3,357,754		$	212,509		$	--		$	3,570,263

Other Securities:
GSE debentures		$	1,203,313		$	1,203,313		$	17,121		$	26		$	1,220,408
Corporate bonds			77,407			77,407			9,715			--			87,122
Municipal bonds			17,326			17,326			347			--			17,673
Capital trust notes			131,507			109,894			14,804			15,767			108,931

Total other securities		$	1,429,553		$	1,407,940		$	41,987		$	15,793		$	1,434,134

Total securities held to maturity⁽¹⁾		$	4,787,307		$	4,765,694		$	254,496		$	15,793		$	5,004,397

(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. The non-credit portion of OTTI recorded in AOCL was $21.6 million (before taxes).


	December 31, 2011
(in thousands)	Amortized Cost			Carrying Amount			Gross Unrealized Gain			Gross Unrealized Loss			Fair Value
Mortgage-Related Securities:
GSE certificates		$	660,945		$	660,945		$	47,064		$	--		$	708,009
GSE CMOs			2,331,916			2,331,916			93,216			--			2,425,132
Other mortgage-related securities			3,379			3,379			--			--			3,379

Total mortgage-related securities		$	2,996,240		$	2,996,240		$	140,280		$	--		$	3,136,520

Other Securities:
GSE debentures		$	633,258		$	633,258		$	14,878		$	146		$	647,990
Corporate bonds			54,759			54,759			2,826			12			57,573
Capital trust notes			153,334			131,597			12,362			19,857			124,102

Total other securities		$	841,351		$	819,614		$	30,066		$	20,015		$	829,665

Total securities held to maturity ⁽¹⁾		$	3,837,591		$	3,815,854		$	170,346		$	20,015		$	3,966,185

(1)	The non-credit portion of OTTI recorded in AOCL was $21.7 million (before taxes).

The Company had $473.6 million and $490.2 million of Federal Home Loan Bank (“FHLB”) stock, at cost, at September 30, 2012 and December 31, 2011, respectively. The Company is required to maintain this investment in order to have access to funding resources provided by the FHLB.

The following table summarizes the gross proceeds, gross realized gains, and gross realized losses from the sale of available-for-sale securities during the nine months ended September 30, 2012 and 2011:


	For the Nine Months Ended September 30,
(in thousands)	2012			2011
Gross proceeds		$	561,369		$	740,738
Gross realized gains			1,369			26,977
Gross realized losses			--			11

In addition, during the nine months ended September 30, 2011, the Company sold held-to-maturity securities with gross proceeds of $284.4 million and gross realized gains of $8.5 million. These sales occurred because the Company had either collected a substantial portion (at least 85%) of the initial principal balance or because there was evidence of significant deterioration in the issuers’ creditworthiness.

The $142.5 million market value of the capital trust note portfolio at September 30, 2012 included three pooled trust preferred securities. The following table details the pooled trust preferred securities that had at least one credit rating below investment grade as of September 30, 2012:


	INCAPS Funding I			Alesco Preferred Funding VII Ltd.			Preferred Term Securities II
(dollars in thousands)	Class B-2 Notes			Class C-1 Notes			Mezzanine Notes
Book value		$14,964			$553			$491
Fair value		17,095			281			728
Unrealized gain (loss)		2,131			(272	)		237
Lowest credit rating assigned to security		CCC			C			C
Number of banks/insurance companies currently performing		24			58			24
Actual deferrals and defaults as a percentage of original collateral		8	%		18	%		34	%
Expected deferrals and defaults as a percentage of remaining performing collateral		22			25			19
Expected recoveries as a percentage of remaining performing collateral		--			--			2
Excess subordination as a percentage of remaining performing collateral		17			--			--

As of September 30, 2012, after taking into account the Company’s best estimates of future deferrals, defaults, and recoveries, two of its pooled trust preferred securities had no excess subordination in the classes it owns and one had excess subordination of 17%. Excess subordination is calculated after taking into account the deferrals, defaults, and recoveries noted in the table above, and indicates whether there is sufficient additional collateral to cover the outstanding principal balance of the class owned, after taking into account these projected deferrals, defaults, and recoveries.

As the following table indicates, there was no activity from December 31, 2011 through September 30, 2012 in the credit loss component of OTTI on debt securities for which a non-credit component of OTTI was recognized in AOCL. The beginning balance represents the credit loss component for debt securities for which OTTI occurred prior to January 1, 2012. For credit-impaired debt securities, OTTI recognized in earnings after that date is presented as an addition in two components, based upon whether the current period is the first time a debt security was credit-impaired (initial credit impairment) or is not the first time a debt security was credit-impaired (subsequent credit impairment).


(in thousands)	For the Nine Months Ended September 30, 2012
Beginning credit loss amount as of December 31, 2011		$	219,978
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 September 30, 2012		$	219,978

The following table summarizes the carrying amounts and estimated fair values of held-to-maturity debt securities, and the amortized costs and estimated fair values of available-for-sale debt securities, at September 30, 2012, by contractual maturity. Mortgage-related securities held to maturity and available for sale, all of which have prepayment provisions, are distributed to a maturity category based on the ends of the estimated average lives of such securities. Principal and amortization prepayments are not shown in maturity categories as they occur, but are considered in the determination of estimated average life.


	Carrying Amount at September 30, 2012
(dollars in thousands)	Mortgage- Related Securities			Average Yield		U.S. Treasury and GSE Obligations			Average Yield		State, County, and Municipal			Average Yield ⁽¹⁾		Other Debt Securities ⁽²⁾			Average Yield		Fair Value
Held-to-Maturity Securities:
Due within one year		$	--		--%		$	--		--%		$	--		--%		$	--		--%		$	--
Due from one to five years			--		--			--		--			1,791		2.96			46,588		4.04			49,836
Due from five to ten years			1,715,778		3.20			60,682		4.17			--		--			--		--			1,925,888
Due after ten years			1,641,976		3.73			1,142,631		2.60			15,535		3.90			140,713		6.55			3,028,673

Total debt securities held to maturity		$	3,357,754		3.46%		$	1,203,313		2.68%		$	17,326		3.80%		$	187,301		5.93%		$	5,004,397


Available-for-Sale Securities: ⁽³⁾
Due within one year		$	--		--%		$	--		--%		$	125		5.63%		$	--		--%		$	126
Due from one to five years			7,936		7.22			--		--			512		6.21			--		--			9,011
Due from five to ten years			78,396		3.48			11,000		3.25			558		6.56			--		--			98,119
Due after ten years			106,330		3.71			--		--			--		--			35,228		6.06			145,255

Total debt securities available for sale		$	192,662		3.76%		$	11,000		3.25%		$	1,195		6.31%		$	35,228		6.06%		$	252,511

(1)	Not presented on a tax-equivalent basis.

(2)

Includes corporate bonds and capital trust notes. Included in capital trust notes are $15.5 million and $491,000 of pooled trust preferred securities available for sale and held to maturity, respectively, all of which are due after ten years. The remaining capital trust notes consist of single-issue trust preferred securities.

(3)	As equity securities have no contractual maturity, they have been excluded from this table.

At September 30, 2012, the Company had commitments to purchase $310.3 million of securities, all of which were GSE securities.

The following tables present held-to-maturity and available-for-sale securities having a continuous unrealized loss position for less than twelve months and for twelve months or longer as of September 30, 2012:


At September 30, 2012	Less than Twelve Months				Twelve Months or Longer				Total
(in thousands)	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Temporarily Impaired Held-to-Maturity Debt Securities:
GSE debentures		$ 14,956		$ 26		$ --		$ --		$ 14,956		$ 26
Corporate bonds		--		--		--		--		--		--
Municipal bonds		--		--		--		--		--		--
Capital trust notes		--		--		55,373		15,767		55,373		15,767

Total temporarily impaired held-to-maturity debt securities		$ 14,956		$ 26		$55,373		$ 15,767		$ 70,329		$ 15,793


Temporarily Impaired Available-for-Sale Securities:
Debt Securities:
GSE certificates		$ 371		$ 6		$ --		$ --		$ 371		$ 6
Private label CMOs		18,101		325		--		--		18,101		325
Capital trust notes		--		--		6,518		4,009		6,518		4,009

Total temporarily impaired available-for-sale debt securities		$ 18,472		$331		$ 6,518		$ 4,009		$ 24,990		$ 4,340
Equity securities		--		--		29,667		1,193⁽¹⁾		29,667		1,193

Total temporarily impaired available-for-sale securities		$ 18,472		$331		$36,185		$ 5,202		$ 54,657		$ 5,533

(1)

The twelve months or longer unrealized losses on equity securities of $1.2 million at September 30, 2012 relate to available-for-sale equity securities that consisted of a large cap equity fund and investments in certain financial institutions at that date. The principal balance of the large cap equity fund was $29.1 million and the twelve months or longer unrealized loss was $556,000. The principal balance of investments in financial institutions totaled $1.7 million and the twelve months or longer unrealized loss was $623,000.


At December 31, 2011	Less than Twelve Months						Twelve Months or Longer						Total
(in thousands)	Fair Value			Unrealized Loss			Fair Value			Unrealized Loss			Fair Value			Unrealized Loss
Temporarily Impaired Held-to-Maturity Debt Securities:
GSE debentures		$	62,601		$	146		$	--		$	--		$	62,601		$	146
GSE certificates			--			--			--			--			--			--
GSE CMOs			--			--			--			--			--			--
Corporate bonds			4,987			12			--			--			4,987			12
Capital trust notes			971			43			68,570			19,814			69,541			19,857

Total temporarily impaired held-to-maturity debt securities		$	68,559		$	201		$	68,570		$	19,814		$	137,129		$	20,015


Temporarily Impaired Available-for-Sale Securities:
Debt Securities:
GSE certificates		$	181		$	9		$	13		$	1		$	194		$	10
Private label CMOs			24,041			1,265			--			--			24,041			1,265
Corporate bonds			--			--			--			--			--			--
State, county, and municipal			--			--			--			--			--			--
Capital trust notes			15,154			363			9,810			4,329			24,964			4,692

Total temporarily impaired available-for-sale debt securities		$	39,376		$	1,637		$	9,823		$	4,330		$	49,199		$	5,967
Equity securities			784			40			26,651			4,176			27,435			4,216

Total temporarily impaired available-for-sale securities		$	40,160		$	1,677		$	36,474		$	8,506		$	76,634		$	10,183

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. Financial Accounting Standards Board (“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.

Available-for-sale securities in unrealized loss positions are analyzed as part of the Company’s ongoing assessment of OTTI. When the Company intends to sell such available-for-sale 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 available-for-sale 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 September 30, 2012, the Company did not intend to sell the securities with an unrealized loss position in AOCL, 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 in AOCL were not other-than-temporarily impaired as of September 30, 2012.

Other factors considered in determining whether a loss is temporary include the length of time and the extent to which fair value has been below cost; the severity of the impairment; the cause of the impairment; the financial condition and near-term prospects of the issuer; activity in the market of the issuer that may indicate adverse credit conditions; and the forecasted recovery period using current estimates of volatility in market interest rates (including liquidity and risk premiums).

Management’s assertion regarding its intent not to sell, or that it is not more likely than not that the Company will be required to sell the 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 Company reviews quarterly financial information related to its investments in capital trust notes as well as other information that is released by each financial institution to determine the continued creditworthiness of the issuer of the securities. 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 September 30, 2012. 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. Events that may occur in the future at the financial institutions that issued these securities could trigger material unrecoverable declines in the fair values of the Company’s investments and therefore could result in future potential OTTI losses. Such events include, but are not limited to, government intervention, deteriorating asset quality and credit metrics, significantly higher levels of default and loan loss provisions, losses in value on the underlying collateral, deteriorating credit enhancement, net operating losses, and further illiquidity in the financial markets.

At September 30, 2012, the Company’s equity securities portfolio consisted of perpetual preferred and 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 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 the Company’s ability and intent to hold these investments for a period of time reasonably sufficient to realize a near-term forecasted recovery of fair value, the Company did not consider these investments to be other-than-temporarily impaired at September 30, 2012. 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, causing the Company to potentially 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 September 30, 2012 consisted of eight capital trust notes and four equity securities. At December 31, 2011, the investment securities designated as having a continuous loss position for twelve months or more consisted of one mortgage-related security, eleven capital trust notes, and six equity securities. At September 30, 2012 and December 31, 2011, the combined market value of the respective securities represented unrealized losses of $21.0 million and $28.3 million. At September 30, 2012, the fair value of securities having a continuous loss position for twelve months or more was 18.7% below the collective amortized cost of $112.0 million. At December 31, 2011, the fair value of such securities was 21.2% below the collective amortized cost of $133.4 million.

Note 4. Loans

The following table sets forth the composition of the loan portfolio at September 30, 2012 and December 31, 2011:


	September 30, 2012				December 31, 2011
(dollars in thousands)	Amount		Percent of Non-Covered Loans Held for Investment		Amount		Percent of Non-Covered Loans Held for Investment
Non-Covered Loans Held for Investment:
Mortgage Loans:
Multi-family		$18,468,229		68.88%		$17,430,628		68.28%
Commercial real estate		7,193,194		26.83		6,855,244		26.85
Acquisition, development, and construction		383,695		1.43		445,671		1.75
One-to-four family		131,115		0.49		127,361		0.50

Total mortgage loans held for investment		26,176,233		97.63		$24,858,904		97.38

Other Loans:
Commercial and industrial		582,572		2.17		599,986		2.35
Other		54,256		0.20		69,907		0.27

Total other loans held for investment		636,828		2.37		669,893		2.62

Total non-covered loans held for investment		26,813,061		100.00%		$25,528,797		100.00%

Net deferred loan origination costs		9,789				4,021
Allowance for losses on non-covered loans		(139,015)				(137,290)

Non-covered loans held for investment, net		26,683,835				$25,395,528
Covered loans		3,400,624				3,753,031
Allowance for losses on covered loans		(54,591)				(33,323)

Total covered loans, net		3,346,033				$ 3,719,708
Loans held for sale		1,211,767				1,036,918

Total loans, net		$31,241,635				$30,152,154

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 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, to a lesser extent, on Long Island and in New Jersey.

To a lesser extent, the Company also originates acquisition, development, and construction (“ADC”) loans and commercial and industrial (“C&I”) loans. ADC loans are primarily originated for multi-family and residential tract projects in New York City and on Long Island, while C&I loans are made on both a secured and unsecured basis, to small and mid-size businesses in New York City, Long Island, New Jersey, and, to a lesser extent, Arizona, 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.

ADC loans typically involve a higher degree of credit risk than loans secured by improved or owner-occupied real estate. The risk of loss on an ADC loan is largely dependent upon the accuracy of the initial appraisal of the property’s value upon completion of construction or development; the estimated cost of construction, including interest; and the estimated time to complete and/or sell or lease such property. The Company seeks to minimize these risks by maintaining consistent lending policies and rigorous underwriting standards. However, if the estimate

of value proves to be inaccurate, the cost of completion is greater than expected, the length of time to complete and/or sell or lease the collateral property is greater than anticipated, or if there is a downturn in the local economy or real estate market, the property could have a value upon completion that is insufficient to assure full repayment of the loan. This could have a material adverse effect on the quality of the ADC loan portfolio, and could result in significant losses or delinquencies.

The Company seeks to minimize the risks involved in 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 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.

The ability of the Company’s borrowers to repay their loans, and the value of the collateral securing such loans, could be adversely impacted by continued or more significant economic weakness in its local markets as a result of increased unemployment, declining real estate values, or increased residential and office vacancies. This not only could result in the Company experiencing an increase in charge-offs and/or non-performing assets, but also could necessitate an increase in the provision for loan losses. These events, if they were to occur, would have an adverse impact on the Company’s results of operations and its capital.

Loans Held for Sale

The Community Bank’s mortgage banking operation is one of the largest aggregators of one-to-four family loans for sale to GSEs in the nation. Community banks, credit unions, mortgage companies, and mortgage brokers use the subsidiary’s proprietary web-accessible mortgage banking platform to originate and close one-to-four family loans in all 50 states. The Company sells these loans, primarily servicing retained.

Prior to December 2010, the Company would originate one-to-four family loans for its customers in its branches and on its website on a pass-through, or conduit, basis, and would sell the loans to the third-party conduit shortly after they closed. Since then, the Company had been originating one-to-four family loans through its mortgage banking operation, directly and indirectly, rather than through the single third-party conduit with which it previously worked. The vast majority of the one-to-four family loans produced for the Company’s customers are aggregated with loans produced by its mortgage banking clients throughout the nation, and then sold.

The Company also services mortgage loans for various third parties. At September 30, 2012, the unpaid principal balance of serviced loans amounted to $16.6 billion. At December 31, 2011, the unpaid principal balance of loans serviced for others amounted to $13.1 billion.

Asset Quality

The following table presents information regarding the quality of the Company’s non-covered loans held for investment at September 30, 2012:


(in thousands)	30-89 Days Past Due			Non- Accrual			90 Days or More Delinquent and Still Accruing Interest			Total Past Due			Current			Total Loans Receivable
Multi-family		$	33,644		$	139,293		$	--		$	172,937		$	18,295,292		$	18,468,229
Commercial real estate			4,631			54,641			--			59,272			7,133,922			7,193,194
Acquisition, development, and construction			--			24,813			--			24,813			358,882			383,695
One-to-four family			3,563			9,487			--			13,050			118,065			131,115
Commercial and industrial			5,831			17,342			--			23,173			559,399			582,572
Other			1,233			992			--			2,225			52,031			54,256

Total		$	48,902		$	246,568		$	--		$	295,470		$	26,517,591		$	26,813,061

The following table presents information regarding the quality of the Company’s non-covered loans held for investment at December 31, 2011:


(in thousands)	30-89 Days Past Due			Non- Accrual			90 Days or More Delinquent and Still Accruing Interest			Total Past Due			Current			Total Loans Receivable
Multi-family		$	46,702		$	205,064		$	--		$	251,766		$	17,178,862		$	17,430,628
Commercial real estate			53,798			68,032			--			121,830			6,733,414			6,855,244
Acquisition, development, and construction			6,520			29,886			--			36,406			409,265			445,671
One-to-four family			2,712			11,907			--			14,619			112,742			127,361
Commercial and industrial			1,223			8,827			--			10,050			589,936			599,986
Other			702			2,099			--			2,801			67,106			69,907

Total		$	111,657		$	325,815		$	--		$	437,472		$	25,091,325		$	25,528,797

The following table summarizes the Company’s non-covered loan portfolio by credit quality indicator at September 30, 2012:


(in thousands)	Multi-Family		Commercial Real Estate			Acquisition, Development, and Construction			One-to-Four Family			Total Mortgage Segment			Commercial and Industrial			Other			Total Other Loan Segment
Credit Quality Indicator:
Pass		$18,170,382		$	7,089,632		$	350,651		$	124,100		$	25,734,765		$	540,616		$	53,263		$	593,879
Special mention		54,093			31,223			5,900			301			91,517			19,772			--			19,772
Substandard		242,263			72,339			24,061			6,714			345,377			22,184			993			23,177
Doubtful		1,491			--			3,083			--			4,574			--			--			--

Total		$18,468,229		$	7,193,194		$	383,695		$	131,115		$	26,176,233		$	582,572		$	54,256		$	636,828

The following table summarizes the Company’s non-covered loan portfolio by credit quality indicator at December 31, 2011:


(in thousands)	Multi-Family		Commercial Real Estate			Acquisition, Development, and Construction			One-to-Four Family			Total Mortgage Segment			Commercial and Industrial			Other			Total Other Loan Segment
Credit Quality Indicator:
Pass		$17,135,461		$	6,704,824		$	399,811		$	118,293		$	24,358,389		$	570,442		$	67,808		$	638,250
Special mention		58,134			64,802			6,489			--			129,425			13,234			--			13,234
Substandard		237,033			85,618			39,371			9,068			371,090			15,928			2,099			18,027
Doubtful		--			--			--			--			--			382			--			382

Total		$17,430,628		$	6,855,244		$	445,671		$	127,361		$	24,858,904		$	599,986		$	69,907		$	669,893

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

Troubled Debt Restructurings

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

The following table presents information regarding the Company’s TDRs as of September 30, 2012 and December 31, 2011:


	September 30, 2012						December 31, 2011
(in thousands)	Accruing		Non-Accrual		Total		Accruing		Non-Accrual		Total
Loan Category:
Multi-family		$74,825		$117,683		$192,508		$60,454		$166,248		$226,702
Commercial real estate		37,473		39,881		77,354		3,389		39,054		42,443
Acquisition, development, and construction		--		11,734		11,734		--		15,886		15,886
Commercial and industrial		1,523		--		1,523		--		667		667
One-to-four family		--		1,101		1,101		--		1,411		1,411

Total		$113,821		$170,399		$284,220		$63,843		$223,266		$287,109

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 September 30, 2012, loans on which concessions were made with respect to rate reductions and/or extension of maturity dates amounted to $252.9 million and loans on which forbearance agreements were reached amounted to $31.3 million.

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 judgment by Company personnel regarding the likelihood that the concession will result in the maximum recovery for the Company.

The financial effects of TDRs granted in the three and nine months ended September 30, 2012 were as follows:


	Financial Effect of Modifications
	For the Three Months Ended September 30, 2012											For the Nine Months Ended September 30, 2012
	Weighted Average Interest Rate											Weighted Average Interest Rate
(dollars in thousands)	Number of Loans		Pre- Modification			Post- Modification			Charge-off Amount			Number of Loans		Pre- Modification			Post- Modification			Charge-off Amount
Loan Category:
Multi-family		--		--	%		--	%		$	--		4		6.19	%		5.34	%		$	188
Commercial real estate		--		--			--				--		3		6.30			4.50				--
Acquisition, development, and construction		--		--			--				--		--		--			--				--
Other		--		--			--				--		--		--			--				--

Total/average		--		--	%		--	%		$	--		7		6.28	%		4.71	%		$	188

As of September 30, 2012, there were no payment defaults on any loans that had been modified as TDRs during the preceding twelve months. 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. In addition, the Company does consider a loan with multiple modifications of forbearance periods to be in default.

Covered Loans

The following table presents the balance of covered loans acquired in the AmTrust and Desert Hills acquisitions as of September 30, 2012:


(dollars in thousands)	Amount			Percent of Covered Loans
Loan Category:
One-to-four family		$	3,069,827		90.3%
All other loans			330,797		9.7

Total covered loans		$	3,400,624		100.0%

The Company refers to the loans acquired in the AmTrust and Desert Hills acquisitions as “covered loans” because the Company is being reimbursed for a substantial portion of losses on these loans under the terms of the FDIC loss sharing agreements. Covered loans are accounted for under Accounting Standards Codification (“ASC”) Topic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310-30”), and 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 September 30, 2012 and December 31, 2011, the outstanding balances of covered loans (representing amounts owed to the Company) were $4.1 billion and $4.5 billion, respectively. The carrying values of such loans were $3.4 billion and $3.8 billion, respectively, at September 30, 2012 and December 31, 2011.

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 value, 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 difference between the undiscounted contractual cash flows and 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 acquisition date.

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 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.

Changes in the accretable yield for covered loans were as follows for the nine months ended September 30, 2012:


(in thousands)	Accretable Yield
Balance at beginning of period		$1,365,978
Reclassification to non-accretable difference		(172,775)
Accretion		(135,531)

Balance at end of period		$1,057,672

The line item in the preceding table titled “reclassification to non-accretable difference” includes changes in cash flows the Company expects to collect due to changes in prepayment assumptions and changes in interest rates on variable rate loans. As of the Company’s last periodic evaluation, prepayment assumptions increased and, accordingly, future expected interest cash flows decreased. This resulted in a decrease in the accretable yield. In addition, these decreases were coupled with additional reductions in the expected cash flows from interest payments, as interest rates continued to be very low. As a result, a large percentage of the Company’s covered variable rate loans continue to reset at lower interest rates. Partially offsetting these decreases were increases in the expected principal and interest payments driven by better expectations relating to credit.

In connection with the AmTrust and Desert Hills transactions, the Company has acquired other real estate owned (“OREO”), all of which is covered under FDIC loss sharing agreements. Covered OREO is 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 are charged to non-interest expense, and partially offset by loss reimbursements under the FDIC loss sharing agreements. Any recoveries of previous write-downs are credited to non-interest expense and partially offset by the portion of the recovery that is due to the FDIC.

The FDIC loss share receivable represents the present value of the estimated losses on covered loans 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 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.

The following table presents information regarding the Company’s covered loans 90 days or more past due at September 30, 2012 and December 31, 2011:


(in thousands)	September 30, 2012		December 31, 2011
Covered Loans 90 Days or More Past Due:
One-to-four family		$297,293		$314,821
Other loans		19,844		32,621

Total covered loans 90 days or more past due		$317,137		$347,442

The following table presents information regarding the Company’s covered loans that were 30 to 89 days past due at September 30, 2012 and December 31, 2011:


(in thousands)	September 30, 2012		December 31, 2011
Covered Loans 30-89 Days Past Due:
One-to-four family		$84,471		$103,495
Other loans		7,449		8,494

Total covered loans 30-89 days past due		$91,920		$111,989

At September 30, 2012, the Company had $91.9 million of covered loans that were 30 to 89 days past due, and covered loans of $317.1 million that were 90 days or more past due but considered to be performing due to the application of the yield accretion method under ASC 310-30. The remaining portion of the Company’s covered loan portfolio totaled $3.0 billion at September 30, 2012 and was considered current as of 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. Accordingly, loans that may have been classified as non-performing loans by AmTrust or Desert Hills are no longer classified as non-performing 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 (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 its 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 provisions for losses on covered loans of $2.8 million and $21.3 million, respectively, during the three and nine months ended September 30, 2012. These provisions were largely due to credit deterioration in the acquired portfolios of one-to-four family and home equity loans. The provisions for losses on covered loans were largely offset by FDIC indemnification income of $2.3 million and $17.0 million, respectively, recorded in non-interest income for the three and nine months ended September 30, 2012.

Note 5. Allowance for Loan Losses

The following tables provide additional information regarding the Company’s allowance for loan losses, based upon the method of evaluating loan impairment:


(in thousands)	Mortgage		Other		Total
Allowance for Loan Losses at September 30, 2012:
Individually evaluated for impairment		$ 1,677		$ --		$ 1,677
Collectively evaluated for impairment		124,017		13,321		137,338
Acquired loans with deteriorated credit quality		35,085		19,506		54,591

Total		$160,779		$32,827		$193,606


(in thousands)	Mortgage		Other		Total
Allowance for Loan Losses at December 31, 2011:
Individually evaluated for impairment		$ 490		$ --		$ 490
Collectively evaluated for impairment		121,505		15,295		136,800
Acquired loans with deteriorated credit quality		14,227		19,096		33,323

Total		$136,222		$34,391		$170,613

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


(in thousands)	Mortgage		Other		Total
Loans Receivable at September 30, 2012:
Individually evaluated for impairment		$ 302,571		$ 17,770		$ 320,341
Collectively evaluated for impairment		25,873,662		619,058		26,492,720
Acquired loans with deteriorated credit quality		3,069,827		330,797		3,400,624

Total		$29,246,060		$ 967,625		$30,213,685


(in thousands)	Mortgage		Other		Total
Loans Receivable at December 31, 2011:
Individually evaluated for impairment		$ 324,427		$ 5,995		$ 330,422
Collectively evaluated for impairment		24,534,477		663,898		25,198,375
Acquired loans with deteriorated credit quality		3,366,456		386,575		3,753,031

Total		$28,225,360		$1,056,468		$29,281,828

Non-Covered Loans

The following table summarizes activity in the allowance for losses on non-covered loans for the nine months ended September 30, 2012 and 2011:


	September 30,
	2012						2011
(in thousands)	Mortgage		Other		Total		Mortgage		Other		Total
Balance, beginning of period	$	121,995	$	15,295	$	137,290	$	140,834	$	18,108	$	158,942
Charge-offs		(35,542)		(6,217)		(41,759)		(73,994)		(9,485)		(83,479)
Recoveries		735		2,749		3,484		2,189		2,727		4,916
Provision for loan losses		38,506		1,494		40,000		53,287		5,713		59,000

Balance, end of period	$	125,694	$	13,321	$	139,015	$	122,316	$	17,063	$	139,379

Non-accrual loans amounted to $246.6 million and $325.8 million, respectively, at September 30, 2012 and December 31, 2011. There were no loans over 90 days past due and still accruing interest at either of these dates.

The following table presents additional information regarding the Company’s impaired loans at or for the nine months ended September 30, 2012:


(in thousands)	Recorded Investment			Unpaid Principal Balance			Related Allowance			Average Recorded Investment			Interest Income Recognized
Impaired loans with no related allowance:
Multi-family		$	158,750		$	176,801		$	--		$	188,180		$	2,642
Commercial real estate			79,744			81,237			--			69,544			1,030
Acquisition, development, and construction			22,643			27,015			--			24,538			636
One-to-four family			1,102			1,147			--			1,118			--
Commercial and industrial			17,769			24,999			--			9,840			1,749

Total impaired loans with no related allowance		$	280,008		$	311,199		$	--		$	293,220		$	6,057


Impaired loans with an allowance recorded:
Multi-family		$	38,488		$	39,368		$	1,628		$	30,423		$	655
Commercial real estate			1,845			1,845			49			3,953			79
Acquisition, development, and construction			--			--			--			2,098			--
One-to-four family			--			--			--			--			--
Commercial and industrial			--			--			--			--			--

Total impaired loans with an allowance recorded		$	40,333		$	41,213		$	1,677		$	36,474		$	734


Total impaired loans:
Multi-family		$	197,238		$	216,169		$	1,628		$	218,603		$	3,297
Commercial real estate			81,589			83,082			49			73,497			1,109
Acquisition, development, and construction			22,643			27,015			--			26,636			636
One-to-four family			1,102			1,147			--			1,118			--
Commercial and industrial			17,769			24,999			--			9,840			1,749

Total impaired loans		$	320,341		$	352,412		$	1,677		$	329,694		$	6,791

The following table presents additional information regarding the Company’s impaired loans at or for the year ended December 31, 2011:


(in thousands)	Recorded Investment			Unpaid Principal Balance			Related Allowance			Average Recorded Investment			Interest Income Recognized
Impaired loans with no related allowance:
Multi-family		$	235,100		$	244,684		$	--		$	321,994		$	3,435
Commercial real estate			49,258			52,152			--			63,032			1,397
Acquisition, development, and construction			26,680			27,143			--			42,600			1,141
One-to-four family			1,127			1,520			--			2,649			10
Commercial and industrial			5,995			10,240			--			6,442			60

Total impaired loans with no related allowance		$	318,160		$	335,739		$	--		$	436,717		$	6,043


Impaired loans with an allowance recorded:
Multi-family		$	6,329		$	6,899		$	408		$	10,893		$	187
Commercial real estate			5,648			5,857			53			10,297			--
Acquisition, development, and construction			--			--			--			14,495			--
One-to-four family			285			373			29			71			--
Commercial and industrial			--			--			--			1,837			--

Total impaired loans with an allowance recorded		$	12,262		$	13,129		$	490		$	37,593		$	187


Total impaired loans:
Multi-family		$	241,429		$	251,583		$	408		$	332,887		$	3,622
Commercial real estate			54,906			58,009			53			73,329			1,397
Acquisition, development, and construction			26,680			27,143			--			57,095			1,141
One-to-four family			1,412			1,893			29			2,720			10
Commercial and industrial			5,995			10,240			--			8,279			60

Total impaired loans		$	330,422		$	348,868		$	490		$

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