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 MARCH 31, 2014

Commission File Number 1-31565

NEW YORK COMMUNITY BANCORP, INC.

(Exact name of registrant as specified in its charter)

Delaware

06-1377322

(State or other jurisdiction of

incorporation or organization)

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

615 Merrick Avenue, Westbury, New York 11590

(Address of principal executive offices)

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

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

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

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

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

Yes No X


		442,656,612
		Number of shares of common stock outstanding at May 2, 2014

NEW YORK COMMUNITY BANCORP, INC.

FORM 10-Q

Quarter Ended March 31, 2014


INDEX		Page No.

Part I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Statements of Condition as of March 31, 2014 (unaudited) and December 31, 2013	1

	Consolidated Statements of Income and Comprehensive Income for the Three Months Ended March 31, 2014 and 2013 (unaudited)	2

	Consolidated Statement of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2014 (unaudited)	3

	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2014 and 2013 (unaudited)	4

	Notes to the Unaudited Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	41

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	86

Item 4.	Controls and Procedures	86

Part II.	OTHER INFORMATION

Item 1.	Legal Proceedings	87

Item 1A.	Risk Factors	87

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	87

Item 3.	Defaults Upon Senior Securities	87

Item 4.	Mine Safety Disclosures	87

Item 5.	Other Information	87

Item 6.	Exhibits	88

Signatures		89

Exhibits

NEW YORK COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CONDITION

(in thousands, except share data)


	March 31, 2014 (unaudited)			December 31, 2013
Assets:
Cash and cash equivalents		$	672,872		$	644,550
Securities:
Available-for-sale ($63,421 and $79,905 pledged, respectively)			245,321			280,738
Held-to-maturity ($4,916,515 and $4,945,905 pledged, respectively) (fair value of $7,629,929 and $7,445,244, respectively)			7,707,092			7,670,282

Total securities			7,952,413			7,951,020

Non-covered loans held for sale			266,240			306,915
Non-covered loans held for investment, net of deferred loan fees and costs			30,867,631			29,837,989
Less: Allowance for losses on non-covered loans			(139,361)			(141,946)

Non-covered loans held for investment, net			30,728,270			29,696,043
Covered loans			2,695,158			2,788,618
Less: Allowance for losses on covered loans			(49,439)			(64,069)

Covered loans, net			2,645,719			2,724,549

Total loans, net			33,640,229			32,727,507
Federal Home Loan Bank stock, at cost			545,113			561,390
Premises and equipment, net			278,216			273,299
FDIC loss share receivable			460,426			492,674
Goodwill			2,436,131			2,436,131
Core deposit intangibles, net			13,918			16,240
Mortgage servicing rights			238,004			241,018
Bank-owned life insurance			899,649			893,522
Other real estate owned (includes $36,134 and $37,477, respectively, covered by loss sharing agreements)			106,789			108,869
Other assets			323,710			342,067

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

Liabilities and Stockholders’ Equity:
Deposits:
NOW and money market accounts		$	11,180,217		$	10,536,947
Savings accounts			6,193,669			5,921,437
Certificates of deposit			6,934,692			6,932,096
Non-interest-bearing accounts			2,444,988			2,270,512

Total deposits			26,753,566			25,660,992
Borrowed funds:
Wholesale borrowings:
Federal Home Loan Bank advances			10,514,899			10,872,576
Repurchase agreements			3,425,000			3,425,000
Fed funds purchased			525,000			445,000

Total wholesale borrowings			14,464,899			14,742,576
Other borrowings			362,481			362,426

Total borrowed funds			14,827,380			15,105,002
Other liabilities			243,872			186,631

Total liabilities			41,824,818			40,952,625

Stockholders’ equity:
Preferred stock at par $0.01 (5,000,000 shares authorized; none issued)			--			--
Common stock at par $0.01 (600,000,000 shares authorized; 442,659,460 and 440,873,285 shares issued, and 442,654,213 and 440,809,365 shares outstanding, respectively)			4,427			4,409
Paid-in capital in excess of par			5,347,183			5,346,017
Retained earnings			426,251			422,761
Treasury stock, at cost (5,247 and 63,920 shares, respectively)			(84)			(1,032)
Accumulated other comprehensive loss, net of tax:
Net unrealized gain on securities available for sale, net of tax of $732 and $171, respectively			1,102			277
Net unrealized loss on the non-credit portion of other-than-temporary impairment (“OTTI”) losses on securities, net of tax of $3,575 and $3,586, respectively			(5,587)			(5,604)
Net unrealized loss on pension and post-retirement obligations, net of tax of $20,769 and $21,126, respectively			(30,640)			(31,166)

Total accumulated other comprehensive loss, net of tax			(35,125)			(36,493)

Total stockholders’ equity			5,742,652			5,735,662

Total liabilities and stockholders’ equity		$	47,567,470		$	46,688,287

See accompanying notes to the consolidated financial statements.

NEW YORK COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(in thousands, except per share data)

(unaudited)


	For the Three Months Ended March 31,
	2014		2013
Interest Income:
Mortgage and other loans		$345,530		$366,999
Securities and money market investments		69,781		45,808

Total interest income		415,311		412,807


Interest Expense:
NOW and money market accounts		8,396		9,175
Savings accounts		6,473		4,021
Certificates of deposit		19,060		22,235
Borrowed funds		97,232		102,200

Total interest expense		131,161		137,631

Net interest income		284,150		275,176
Provision for losses on non-covered loans		--		5,000
(Recovery of) provision for losses on covered loans		(14,630)		4,502

Net interest income after (recovery of) provision for loan losses		298,780		265,674


Non-Interest Income:
Mortgage banking income		14,610		26,109
Fee income		8,894		8,772
Bank-owned life insurance		6,829		7,253
Net gain on sales of securities		4,873		16,622
FDIC indemnification (expense) income		(11,704)		3,602
Gain on Visa shares sold		3,856		--
Other income		9,877		13,193

Total non-interest income		37,235		75,551


Non-Interest Expense:
Operating expenses:
Compensation and benefits		75,740		83,506
Occupancy and equipment		25,998		23,600
General and administrative		42,264		44,569

Total operating expenses		144,002		151,675
Amortization of core deposit intangibles		2,323		4,421

Total non-interest expense		146,325		156,096

Income before income taxes		189,690		185,129
Income tax expense		74,436		66,454

Net income		$115,254		$118,675

Other comprehensive income (loss), net of tax:
Change in net unrealized gain on securities available for sale, net of tax of $2,529 and $463, respectively		3,729		685
Change in the non-credit portion of OTTI losses recognized in other comprehensive income, net of tax of $11 and $17, respectively		17		28
Change in pension and post-retirement obligations, net of tax of $357 and $1,008, respectively		526		1,486
Less: Reclassification adjustment for sales of available-for-sale securities, net of tax of $1,969 and $2,048, respectively		(2,904)		(3,022)

Total other comprehensive income (loss), net of tax		1,368		(823)

Total comprehensive income, net of tax		$116,622		$117,852


Basic earnings per share		$0.26		$0.27

Diluted earnings per share		$0.26		$0.27

See accompanying notes to the consolidated financial statements.

NEW YORK COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands, except share data)

(unaudited)


	For the Three Months Ended March 31, 2014
Common Stock (Par Value: $0.01):
Balance at beginning of year		$	4,409
Shares issued for restricted stock awards (1,782,601 shares)			18
Shares issued for exercise of stock options (3,574 shares)			--

Balance at end of period			4,427


Paid-in Capital in Excess of Par:
Balance at beginning of year			5,346,017
Shares issued for restricted stock awards, net of forfeitures			(6,994)
Compensation expense related to restricted stock awards			6,664
Tax effect of stock plans			1,496

Balance at end of period			5,347,183


Retained Earnings:
Balance at beginning of year			422,761
Net income			115,254
Dividends paid on common stock ($0.25 per share)			(110,461)
Effect of adoption of Accounting Standards Update 2014-01			(1,303)

Balance at end of period			426,251


Treasury Stock:
Balance at beginning of year			(1,032)
Purchase of common stock (358,461 shares)			(6,029)
Exercise of stock options (37 shares)			1
Shares issued for restricted stock awards (417,097 shares)			6,976

Balance at end of period			(84)


Accumulated Other Comprehensive Loss, net of tax:
Balance at beginning of year			(36,493)
Other comprehensive income, net of tax			1,368

Balance at end of period			(35,125)

Total stockholders’ equity		$	5,742,652

See accompanying notes to the consolidated financial statements.

NEW YORK COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	For the Three Months Ended March 31,
	2014		2013
Cash Flows from Operating Activities:
Net income	$	115,254	$	118,675
Adjustments to reconcile net income to net cash provided by operating activities:
(Recovery of) provision for loan losses		(14,630)		9,502
Depreciation and amortization		6,765		6,880
Amortization of discounts and premiums, net		(2,007)		(199)
Amortization of core deposit intangibles		2,323		4,421
Net gain on sales of securities		(4,873)		(16,622)
Gain on sale of loans		(3,778)		(25,883)
Gain on Visa shares sold		(3,856)		--
Stock plan-related compensation		6,664		5,537
Deferred tax expense		10,587		7,259
Changes in assets and liabilities:
Decrease in other assets		49,571		11,170
Increase in other liabilities		45,305		11,234
Origination of loans held for sale		(636,855)		(2,361,315)
Proceeds from sale of loans originated for sale		617,633		2,861,356

Net cash provided by operating activities		188,103		632,015

Cash Flows from Investing Activities:
Proceeds from repayment of securities held to maturity		103,577		313,394
Proceeds from repayment of securities available for sale		3,918		48,852
Proceeds from sale of securities held to maturity		--		191,142
Proceeds from sale of securities available for sale		136,747		335,064
Purchase of securities held to maturity		(138,342)		(1,148,160)
Purchase of securities available for sale		(99,000)		(278,000)
Proceeds from sale of Visa shares		3,856		--
Net redemption of Federal Home Loan Bank stock		16,277		12,588
Net increase in loans		(875,092)		(706,193)
Purchase of premises and equipment, net		(11,682)		(7,391)

Net cash used in investing activities		(859,741)		(1,238,704)

Cash Flows from Financing Activities:
Net increase in deposits		1,092,574		600,151
Net decrease in short-term borrowed funds		(276,100)		(225,000)
Net decrease in long-term borrowed funds		(1,522)		(26,623)
Tax effect of stock plans		1,496		(64)
Cash dividends paid on common stock		(110,461)		(109,955)
Treasury stock purchases		(6,029)		(4,079)
Net cash received from stock option exercises		2		59

Net cash provided by financing activities		699,960		234,489

Net increase(decrease) in cash and cash equivalents		28,322		(372,200)
Cash and cash equivalents at beginning of period		644,550		2,427,258

Cash and cash equivalents at end of period	$	672,872	$	2,055,058

Supplemental information:
Cash paid for interest		$135,424		$130,989
Cash paid for income taxes		17,418		10,270
Non-cash investing and financing activities:
Transfers to other real estate owned from loans		45,917		49,587

See accompanying notes to the consolidated financial statements.

NEW YORK COMMUNITY BANCORP, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Organization and Basis of Presentation

Organization

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

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

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

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

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

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

Basis of Presentation

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

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

Effects of New Accounting Pronouncements

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

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

Note 2. Computation of Earnings per Share

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

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

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


	Three Months Ended March 31,
(in thousands, except share and per share amounts)	2014		2013
Net income		$115,254		$118,675
Less: Dividends paid on and earnings allocated to participating securities		(796)		(1,212)

Earnings applicable to common stock		$114,458		$117,463


Weighted average common shares outstanding		440,570,598		438,703,468

Basic earnings per common share		$0.26		$0.27


Earnings applicable to common stock		$114,458		$117,463


Weighted average common shares outstanding		440,570,598		438,703,468
Potential dilutive common shares ⁽¹⁾		--		5,052

Total shares for diluted earnings per share computation		440,570,598		438,708,520


Diluted earnings per common share and common share equivalents		$0.26		$0.27

(1)

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

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


(in thousands)	For the Three Months Ended March 31, 2014
Details about Accumulated Other Comprehensive Loss	Amount Reclassified from Accumulated Other Comprehensive Loss ⁽¹⁾			Affected Line Item in the Consolidated Statement of Income and Comprehensive Income
Unrealized gains on available-for-sale securities		$	4,873	Net gain on sales of securities
			(1,969)	Tax expense

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

Amortization of defined benefit pension items:
Prior-service costs		$	62	Included in the computation of net periodic (credit) expense ⁽²⁾
Actuarial losses			(940)	Included in the computation of net periodic (credit) expense ⁽²⁾

			(878)	Total before tax
			355	Tax benefit

		$	(523)	Amortization of defined benefit pension items, net of tax

Total reclassifications for the period		$	2,381

(1)	Amounts in parentheses indicate expense items.

(2)	Please see Note 9, Pension and Other Post-Retirement Benefits, for additional information.

Note 4. Securities

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


	March 31, 2014
(in thousands)	Amortized Cost			Gross Unrealized Gain			Gross Unrealized Loss			Fair Value
Mortgage-Related Securities:
GSE⁽¹⁾ certificates		$	22,659		$	1,445		$	---		$	24,104
GSE CMOs⁽²⁾			59,561			672			1,684			58,549
Private label CMOs			10,178			--			90			10,088

Total mortgage-related securities		$	92,398		$	2,117		$	1,774		$	92,741

Other Securities:
Municipal bonds		$	959		$	99		$	--		$	1,058
Capital trust notes			13,422			63			1,591			11,894
Preferred stock			118,205			3,295			792			120,708
Common stock			18,504			644			228			18,920

Total other securities		$	151,090		$	4,101		$	2,611		$	152,580

Total securities available for sale		$	243,488		$	6,218		$	4,385		$	245,321

(1)	Government-sponsored enterprise

(2)	Collateralized mortgage obligations

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

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


	December 31, 2013
(in thousands)	Amortized Cost			Gross Unrealized Gain			Gross Unrealized Loss			Fair Value
Mortgage-Related Securities:
GSE certificates		$	23,759		$	1,442		$	1		$	25,200
GSE CMOs			62,082			598			1,861			60,819
Private label CMOs			10,214			--			12			10,202

Total mortgage-related securities		$	96,055		$	2,040		$	1,874		$	96,221

Other Securities:
Municipal bonds		$	957		$	69		$	--		$	1,026
Capital trust notes			13,419			60			1,681			11,798
Preferred stock			118,205			1,936			3,902			116,239
Common stock			51,654			4,093			293			55,454

Total other securities		$	184,235		$	6,158		$	5,876		$	184,517

Total securities available for sale		$	280,290		$	8,198		$	7,750		$	280,738

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


	March 31, 2014
(in thousands)	Amortized Cost			Carrying Amount			Gross Unrealized Gain			Gross Unrealized Loss			Fair Value
Mortgage-Related Securities:
GSE certificates		$	2,527,673		$	2,527,673		$	48,962		$	35,013		$	2,541,622
GSE CMOs			1,846,549			1,846,549			41,725			11,344			1,876,930

Total mortgage-related securities		$	4,374,222		$	4,374,222		$	90,687		$	46,357		$	4,418,552

Other Securities:
GSE debentures		$	3,124,191		$	3,124,191		$	10,512		$	137,118		$	2,997,585
Corporate bonds			73,003			73,003			12,301			--			85,304
Municipal bonds			60,168			60,168			1			3,295			56,874
Capital trust notes			84,670			75,508			4,079			7,973			71,614

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

Total securities held to maturity ⁽¹⁾		$	7,716,254		$	7,707,092		$	117,580		$	194,743		$	7,629,929

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


	December 31, 2013
(in thousands)	Amortized Cost			Carrying Amount			Gross Unrealized Gain			Gross Unrealized Loss			Fair Value
Mortgage-Related Securities:
GSE certificates		$	2,529,102		$	2,529,102		$	30,145		$	61,280		$	2,497,967
GSE CMOs			1,878,885			1,878,885			29,330			22,520			1,885,695

Total mortgage-related securities		$	4,407,987		$	4,407,987		$	59,475		$	83,800		$	4,383,662

Other Securities:
GSE debentures		$	3,053,253		$	3,053,253		$	6,512		$	208,506		$	2,851,259
Corporate bonds			72,899			72,899			11,063			--			83,962
Municipal bonds			60,462			60,462			19			3,849			56,632
Capital trust notes			84,871			75,681			3,134			9,086			69,729

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

Total securities held to maturity ⁽¹⁾		$	7,679,472		$	7,670,282		$	80,203		$	305,241		$	7,445,244

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

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

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


	For the Three Months Ended March 31,
(in thousands)	2014		2013
Gross proceeds		$136,747		$335,064
Gross realized gains		4,873		5,070
Gross realized losses		--		--

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

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


(in thousands)	For the Three Months Ended March 31, 2014
Beginning credit loss amount as of December 31, 2013		$216,334
Add: Initial other-than-temporary credit losses		--
Subsequent other-than-temporary credit losses		--
Amount previously recognized in AOCL		--
Less: Realized losses for securities sold		--
Securities intended or required to be sold		--
Increases in expected cash flows on debt securities		--

Ending credit loss amount as of March 31, 2014		$216,334

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


	At March 31, 2014
(dollars in thousands)	Mortgage- Related Securities			Average Yield		U.S. Treasury and GSE Obligations			Average Yield		Municipal Bonds			Average Yield ⁽¹⁾		Other Debt Securities ⁽²⁾			Average Yield		Fair Value
Held-to-Maturity Securities:
Due within one year		$	--		--%		$	--		--%		$	--		--%		$	--		--%		$	--
Due from one to five years			--		--			60,317		4.17			1,177		2.96			--		--			67,447
Due from five to ten years			3,241,420		3.24			2,864,014		2.77			--		--			47,080		3.14			6,048,216
Due after ten years			1,132,802		3.36			199,860		3.61			58,991		2.86			101,431		5.81			1,514,266

Total debt securities held to maturity		$	4,374,222		3.27%		$	3,124,191		2.85%		$	60,168		2.86%		$	148,511		4.96%		$	7,629,929

Available-for-Sale Securities: ⁽³⁾
Due within one year		$	--		--%		$	--		--%		$	124		6.09%		$	--		--%		$	129
Due from one to five years			5,926		6.87			--		--			555		6.45			--		--			6,867
Due from five to ten years			16,361		3.78			--		--			280		6.63			--		--			17,532
Due after ten years			70,111		3.94			--		--			--		--			13,422		5.68			81,165

Total debt securities available for sale		$	92,398		4.10%		$	--		--%		$	959		6.46%		$	13,422		5.68%		$	105,693

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

(2)	Consists of corporate bonds and capital trust notes. Included in capital trust notes are $206,000 of pooled trust preferred securities held to maturity, all of which are due after ten years. The remaining capital trust notes consist of single-issue trust preferred securities.

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

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


At March 31, 2014 (in thousands)	Less than Twelve Months				Twelve Months or Longer				Total
At March 31, 2014 (in thousands)	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Temporarily Impaired Held-to-Maturity Debt Securities:
GSE debentures		$2,433,954		$137,118		$ --		$ --		$2,433,954		$137,118
GSE certificates		951,596		35,013		--		--		951,596		35,013
GSE CMOs		677,733		11,344		--		--		677,733		11,344
Municipal bonds		55,696		3,295		--		--		55,696		3,295
Capital trust notes		--		--		38,198		7,973		38,198		7,973

Total temporarily impaired held-to-maturity debt securities		$4,118,979		$186,770		$38,198		$7,973		$4,157,177		$194,743

Temporarily Impaired Available-for-Sale Securities:
Debt Securities:
Private label CMOs		$ 10,087		$ 90		$ --		$ --		$ 10,087		$ 90
GSE CMOs		44,915		1,684		--		--		44,915		1,684
Capital trust notes		--		--		5,831		1,591		5,831		1,591

Total temporarily impaired available-for-sale debt securities		$ 55,002		$ 1,774		$ 5,831		$1,591		$ 60,833		$ 3,365
Equity securities		79,102		1,020		--		--		79,102		1,020

Total temporarily impaired available-for-sale securities		$ 134,104		$ 2,794		$ 5,831		$1,591		$ 139,935		$ 4,385


At December 31, 2013	Less than Twelve Months						Twelve Months or Longer						Total
(in thousands)	Fair Value			Unrealized Loss			Fair Value			Unrealized Loss			Fair Value			Unrealized Loss
Temporarily Impaired Held-to-Maturity Debt Securities:
GSE debentures		$	2,777,417		$	208,506		$	--		$	--		$	2,777,417		$	208,506
GSE certificates			1,684,793			61,280			--			--			1,684,793			61,280
GSE CMOs			936,691			22,520			--			--			936,691			22,520
Municipal bonds			55,333			3,849			--			--			55,333			3,849
Capital trust notes			24,900			100			37,181			8,986			62,081			9,086

Total temporarily impaired held-to-maturity debt securities		$	5,479,134		$	296,255		$	37,181		$	8,986		$	5,516,315		$	305,241

Temporarily Impaired Available-for-Sale Securities:
Debt Securities:
GSE certificates		$	--		$	--		$	110		$	1		$	110		$	1
Private label CMOs			10,202			12			--			--			10,202			12
GSE CMOs			44,725			1,861			--			--			44,725			1,861
Capital trust notes			1,992			8			5,746			1,673			7,738			1,681

Total temporarily impaired available-for-sale debt securities		$	56,919		$	1,881		$	5,856		$	1,674		$	62,775		$	3,555
Equity securities			75,886			4,195			--			--			75,886			4,195

Total temporarily impaired available-for-sale securities		$	132,805		$	6,076		$	5,856		$	1,674		$	138,661		$	7,750

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

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

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

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

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

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

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

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

Note 5. Loans

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


	March 31, 2014					December 31, 2013
(dollars in thousands)	Amount			Percent of Non-Covered Loans Held for Investment		Amount			Percent of Non-Covered Loans Held for Investment
Non-Covered Loans Held for Investment:
Mortgage Loans:
Multi-family		$	21,454,697		69.55%		$	20,699,927		69.41%
Commercial real estate			7,488,692		24.27			7,364,231		24.70
One-to-four family			626,975		2.03			560,730		1.88
Acquisition, development, and construction			373,849		1.21			344,100		1.15

Total mortgage loans held for investment			29,944,213		97.06			28,968,988		97.14

Other Loans:
Commercial and industrial			763,418		2.48			712,260		2.39
Lease financing, net of unearned income of $5,690 and $5,723			104,925		0.34			101,431		0.34

Total commercial and industrial loans			868,343		2.82			813,691		2.73

Other			37,351		0.12			39,036		0.13

Total other loans held for investment			905,694		2.94			852,727		2.86

Total non-covered loans held for investment		$	30,849,907		100.00%		$	29,821,715		100.00%

Net deferred loan origination costs			17,724					16,274
Allowance for losses on non-covered loans			(139,361)					(141,946)

Non-covered loans held for investment, net		$	30,728,270				$	29,696,043

Covered loans			2,695,158					2,788,618
Allowance for losses on covered loans			(49,439)					(64,069)

Total covered loans, net		$	2,645,719				$	2,724,549
Loans held for sale			266,240					306,915

Total loans, net		$	33,640,229				$	32,727,507

Non-Covered Loans

Non-Covered Loans Held for Investment

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

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

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

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

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

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

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

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

Loans Held for Sale

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

Asset Quality

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


(in thousands)	Loans 30-89 Days Past Due			Non- Accrual Loans			Loans 90 Days or More Delinquent and Still Accruing Interest			Total Past Due Loans			Current Loans			Total Loans Receivable
Multi-family		$	3,644		$	68,012		$	--		$	71,656		$	21,383,041		$	21,454,697
Commercial real estate			11,843			27,014			--			38,857			7,449,835			7,488,692
One-to-four family			1,430			9,640			--			11,070			615,905			626,975
Acquisition, development, and construction			--			2,328			--			2,328			371,521			373,849
Commercial and industrial⁽¹⁾			1,067			5,051			--			6,118			862,225			868,343
Other			615			1,334			--			1,949			35,402			37,351

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

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

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


(in thousands)	Loans 30-89 Days Past Due			Non- Accrual Loans			Loans 90 Days or More Delinquent and Still Accruing Interest			Total Past Due Loans			Current Loans			Total Loans Receivable
Multi-family		$	33,678		$	58,395		$	--		$	92,073		$	20,607,854		$	20,699,927
Commercial real estate			1,854			24,550			--			26,404			7,337,827			7,364,231
One-to-four family			1,076			10,937			--			12,013			548,717			560,730
Acquisition, development, and construction			--			2,571			--			2,571			341,529			344,100
Commercial and industrial⁽¹⁾			1			5,735			--			5,736			807,955			813,691
Other			480			1,349			--			1,829			37,207			39,036

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

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

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


(in thousands)	Multi-Family		Commercial Real Estate		One-to-Four Family		Acquisition, Development, and Construction		Total Mortgage Loans		Commercial and Industrial⁽¹⁾		Other		Total Other Loan Segment
Credit Quality Indicator:
Pass		$21,340,444		$7,427,159		$621,789		$371,191		$29,760,583		$849,359		$36,159		$885,518
Special mention		36,643		21,050		--		--		57,693		7,412		--		7,412
Substandard		77,610		40,123		5,186		2,658		125,577		11,506		1,192		12,698
Doubtful		--		360		--		--		360		66		--		66

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

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

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


(in thousands)	Multi-Family		Commercial Real Estate			One-to-Four Family			Acquisition, Development, and Construction			Total Mortgage Loans			Commercial and Industrial⁽¹⁾			Other			Total Other Loan Segment
Credit Quality Indicator:
Pass		$20,527,460		$	7,304,502		$	554,132		$	333,805		$	28,719,899		$	793,693		$	37,688		$	831,381
Special mention		73,549			25,407			--			7,400			106,356			13,036			--			13,036
Substandard		98,918			33,822			6,598			2,895			142,233			6,808			1,348			8,156
Doubtful		--			500			--			--			500			154			--			154

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

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

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

Troubled Debt Restructurings

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

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

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


	March 31, 2014						December 31, 2013
(in thousands)	Accruing		Non-Accrual		Total		Accruing		Non-Accrual		Total
Loan Category:
Multi-family		$10,042		$50,391		$60,433		$10,083		$50,548		$60,631
Commercial real estate		2,180		15,524		17,704		2,198		15,626		17,824
One-to-four family		--		--		--		--		--		--
Acquisition, development, and construction		--		935		935		--		--		--
Commercial and industrial		1,043		1,376		2,419		1,129		758		1,887

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

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

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

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

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

Covered Loans

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


(dollars in thousands)	Amount			Percent of Covered Loans
Loan Category:
One-to-four family		$	2,453,548		91.0%
All other loans			241,610		9.0

Total covered loans		$	2,695,158		100.0%

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

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

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

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

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

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


(in thousands)	Accretable Yield
Balance at beginning of period		$796,993
Reclassification from non-accretable difference		151,499
Accretion		(34,742)

Balance at end of period		$913,750

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

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

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

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


(in thousands)	March 31, 2014		December 31, 2013
Covered Loans 90 Days or More Past Due:
One-to-four family		$182,585		$201,425
Other loans		9,410		10,060

Total covered loans 90 days or more past due		$191,995		$211,485

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


(in thousands)	March 31, 2014		December 31, 2013
Covered Loans 30-89 Days Past Due:
One-to-four family		$39,632		$52,250
Other loans		5,012		5,679

Total covered loans 30-89 days past due		$44,644		$57,929

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

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

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

Note 6. Allowances for Loan Losses

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


(in thousands)	Mortgage			Other			Total
Allowances for Loan Losses at March 31, 2014:
Loans individually evaluated for impairment		$	428		$	--		$	428
Loans collectively evaluated for impairment			126,798			12,135			138,933
Acquired loans with deteriorated credit quality			43,871			5,568			49,439

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


(in thousands)	Mortgage			Other			Total
Allowances for Loan Losses at December 31, 2013:
Loans individually evaluated for impairment		$	--		$	--		$	--
Loans collectively evaluated for impairment			127,840			14,106			141,946
Acquired loans with deteriorated credit quality			56,705			7,364			64,069

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

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


(in thousands)	Mortgage			Other			Total
Loans Receivable at March 31, 2014:
Loans individually evaluated for impairment		$	106,669		$	12,119		$	118,788
Loans collectively evaluated for impairment			29,837,544			893,575			30,731,119
Acquired loans with deteriorated credit quality			2,453,548			241,610			2,695,158

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


(in thousands)	Mortgage			Other			Total
Loans Receivable at December 31, 2013:
Loans individually evaluated for impairment		$	109,389		$	6,996		$	116,385
Loans collectively evaluated for impairment			28,859,599			845,731			29,705,330
Acquired loans with deteriorated credit quality			2,529,200			259,418			2,788,618

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

Allowance for Losses on Non-Covered Loans

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


	March 31,
	2014						2013
(in thousands)	Mortgage		Other		Total		Mortgage		Other		Total
Balance, beginning of period		$127,840		$14,106		$141,946		$127,934		$13,014		$140,948
Charge-offs		(950)		(2,032)		(2,982)		(1,431)		(6,173)		(7,604)
Recoveries		336		61		397		1,675		368		2,043
Provision for loan losses		--		--		--		(277)		5,277		5,000

Balance, end of period		$127,226		$12,135		$139,361		$127,901		$12,486		$140,387

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

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


(in thousands)	Recorded Investment			Unpaid Principal Balance			Related Allowance			Average Recorded Investment			Interest Income Recognized
Impaired loans with no related allowance:
Multi-family		$	71,263		$	87,555		$	--		$	75,018		$	336
Commercial real estate			31,299			33,334			--			30,958			352
One-to-four family			1,348			1,348			--			674			--
Acquisition, development, and construction			--			--			--			--			--
Commercial and industrial			12,119			27,732			--			9,557			136

Total impaired loans with no related allowance		$	116,029		$	149,969		$	--		$	116,207		$	824


Impaired loans with an allowance recorded:
Multi-family		$	--		$	--		$	--		$	--		$	--
Commercial real estate			2,453			2,453			392			1,226			12
One-to-four family			306			306			36			153			--
Acquisition, development, and construction			--			--			--			--			--
Commercial and industrial			--			--			--			--			--

Total impaired loans with an allowance recorded		$	2,759		$	2,759		$	428		$	1,379		$	12


Total impaired loans:
Multi-family		$	71,263		$	87,555		$	--		$	75,018		$	336
Commercial real estate			33,752			35,787			392			32,184			364
One-to-four family			1,654			1,654			36			827			--
Acquisition, development, and construction			--			--			--			--			--
Commercial and industrial			12,119			27,732			--			9,557			136

Total impaired loans		$	118,788		$	152,728		$	428		$	117,586		$	836

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


(in thousands)	Recorded Investment			Unpaid Principal Balance			Related Allowance			Average Recorded Investment			Interest Income Recognized
Impaired loans with no related allowance:
Multi-family		$	78,771		$	94,265		$	--		$	117,208		$	1,991
Commercial real estate			30,619			32,474			--			43,566			1,604
One-to-four family			--			--			--			3,611			89
Acquisition, development, and construction			--			--			--			275			--
Commercial and industrial			6,995			34,199			--			6,890			366

Total impaired loans with no related allowance		$	116,385		$	160,938		$	--		$	171,550		$	4,050


Impaired loans with an allowance recorded:
Multi-family		$	--		$	--		$	--		$	2,442		$	--
Commercial real estate			--			--			--			900			--
One-to-four family			--			--			--			--			--
Acquisition, development, and construction			--			--			--			--			--
Commercial and industrial			--			--			--			--			--

Total impaired loans with an allowance recorded		$	--		$	--		$	--		$	3,342		$	--


Total impaired loans:
Multi-family		$	78,771		$	94,265		$	--		$	119,650		$	1,991
Commercial real estate			30,619			32,474			--			44,466			1,604
One-to-four family			--			--			--			3,611			89
Acquisition, development, and construction			--			--			--			275			--
Commercial and industrial			6,995			34,199			--			6,890			366

Total impaired loans		$	116,385		$	160,938		$	--		$	174,892		$	4,050

Allowance for Losses on Covered Loans

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

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


	March 31,
(in thousands)	2014				2013
Balance, beginning of period		$	64,069			$	51,311
(Recovery of) provision for losses on covered loans			(14,630	)			4,502

Balance, end of period		$	49,439			$	55,813

Note 7. Borrowed Funds

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


(in thousands)	March 31, 2014			December 31, 2013
Wholesale borrowings:
FHLB advances		$	10,514,899		$	10,872,576
Repurchase agreements			3,425,000			3,425,000
Fed funds purchased			525,000			445,000

Total wholesale borrowings		$	14,464,899		$	14,742,576

Other borrowings:
Junior subordinated debentures		$	358,181		$	358,126
Preferred stock of subsidiaries			4,300			4,300

Total other borrowings		$	362,481		$	362,426

Total borrowed funds		$	14,827,380		$	15,105,002

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

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

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

Issuer

Interest Rate of
Capital Securities
and Debentures

Junior

Subordinated

Debenture

Carrying

Amount

Capital

Securities

Amount

Outstanding

Date of

Original Issue

Stated Maturity

First Optional
Redemption Date

(dollars in thousands)

New York Community Capital Trust V (BONUSES^SMUnits)

6.000

$144,255

$137,904

Nov. 4, 2002

Nov. 1, 2051

Nov. 4, 2007 ⁽¹⁾

New York Community Capital Trust X

1.833

123,712

120,000

Dec. 14, 2006

Dec. 15, 2036

Dec. 15, 2011 ⁽²⁾

PennFed Capital Trust III

3.483

30,928

30,000

June 2, 2003

June 15, 2033

June 15, 2008 ⁽²⁾

New York Community Capital Trust XI

1.884

59,286

57,500

April 16, 2007

June 30, 2037

June 30, 2012 ⁽²⁾

Total junior subordinated debentures

$358,181

$345,404

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

(2)	Callable from this date forward.

Note 8. Mortgage Servicing Rights

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

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

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

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

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


	For the Three Months Ended March 31, 2014				For the Year Ended December 31, 2013
(in thousands)	Residential		Securitized		Residential		Securitized
Carrying value, beginning of year		$241,018		$ --		$144,520		$ 193
Additions		6,808		--		80,799		--
Increase (decrease) in fair value:
Due to changes in interest rates and valuation assumptions		43		--		70,218		--
Due to other changes⁽¹⁾		(9,865)		--		(54,519)		--
Amortization		--		--		--		(193)

Carrying value, end of period		$238,004		$ --		$241,018		$ --

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

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


	March 31, 2014			December 31, 2013
Expected Weighted Average Life		91 months			93 months
Assumed Prepayment Speed		8.7	%		8.3	%
Discount Rate		10.5			10.5
Primary Mortgage Rate to Refinance		4.4			4.5
Cost to Service (per loan per year):
Current		$ 53			$ 53
30-59 days or less delinquent		103			103
60-89 days delinquent		203			203
90-119 days delinquent		303			303
Over 120 days delinquent		553			553

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

Note 9. Pension and Other Post-Retirement Benefits

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


	For the Three Months Ended March 31,
	2014						2013
(in thousands)	Pension Benefits			Post-Retirement Benefits			Pension Benefits			Post-Retirement Benefits
Components of net periodic (credit) expense:
Interest cost		$ 1,474			$190			$ 1,364			$171
Service cost		--			1			--			1
Expected return on plan assets		(4,859	)		--			(4,147	)		--
Amortization of prior-service costs		--			(62	)		--			(62	)
Amortization of net actuarial loss		822			118			2,351			164

Net periodic (credit) expense		$(2,563	)		$247			$ (432	)		$274

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

Note 10. Stock-Based Compensation

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

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


	For the Three Months Ended March 31, 2014
	Number of Shares			Weighted Average Grant Date Fair Value
Unvested at beginning of year		5,043,642			$	14.27
Granted		2,314,498				16.82
Vested		(1,173,471	)			14.71
Cancelled		(10,200	)			16.02

Unvested at end of period		6,174,469				15.14

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

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

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

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

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


	For the Three Months Ended March 31, 2014
	Number of Stock Options		Weighted Average Exercise Price
Stock options outstanding, beginning of year		126,821		$	15.21
Granted		--			--
Exercised		(16,462)			12.69
Expired/forfeited		(1,740)			16.38

Stock options outstanding, end of period		108,619			15.58
Options exercisable, end of period		108,619			15.58

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

Note 11. Fair Value Measurements

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

—

Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

—

Level 2 – Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

—

Level 3 – Inputs to the valuation methodology are significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants use in pricing an asset or liability.

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

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


	Fair Value Measurements at March 31, 2014 Using
(in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Netting Adjustments⁽¹⁾			Total Fair Value
Assets:
Mortgage-Related Securities Available for Sale:
GSE certificates		$	--		$	24,104		$	--		$	--		$	24,104
GSE CMOs			--			58,549			--			--			58,549
Private label CMOs			--			10,088			--			--			10,088

Total mortgage-related securities		$	--		$	92,741		$	--		$	--		$	92,741

Other Securities Available for Sale:
Municipal bonds		$	--		$	1,058		$	--		$	--		$	1,058
Capital trust notes			--			11,894			--			--			11,894
Preferred stock			93,245			27,463			--			--			120,708
Common stock			16,761			2,159			--			--			18,920

Total other securities		$	110,006		$	42,574		$	--		$	--		$	152,580

Total securities available for sale		$	110,006		$	135,315		$	--		$	--		$	245,321

Other Assets:
Loans held for sale		$	--		$	266,240		$	--		$	--		$	266,240
Mortgage servicing rights			--			--			238,004			--			238,004
Interest rate lock commitments			--			--			1,611			--			1,611
Derivative assets-other⁽²⁾			1,678			1,398			--			(1,564)			1,512
Liabilities:
Derivative liabilities		$	(699)		$	(1,007)		$	--		$	1,418		$	(288)

(1)	Includes cash collateral received and pledged.

(2)	Includes $1.5 million to purchase Treasury options.


	Fair Value Measurements at December 31, 2013 Using
(in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Netting Adjustments⁽¹⁾			Total Fair Value
Assets:
Mortgage-Related Securities Available for Sale:
GSE certificates		$	--		$	25,200		$	--		$	--		$	25,200
GSE CMOs			--			60,819			--			--			60,819
Private label CMOs			--			10,202			--			--			10,202

Total mortgage-related securities		$	--		$	96,221		$	--		$	--		$	96,221

Other Securities Available for Sale:
Municipal bonds		$	--		$	1,026		$	--		$	--		$	1,026
Capital trust notes			--			11,798			--			--			11,798
Preferred stock			89,942			26,297			--			--			116,239
Common stock			52,740			2,714			--			--			55,454

Total other securities		$	142,682		$	41,835		$	--		$	--		$	184,517

Total securities available for sale		$	142,682		$	138,056		$	--		$	--		$	280,738

Other Assets:
Loans held for sale		$	--		$	306,915		$	--		$	--		$	306,915
Mortgage servicing rights			--			--			241,018			--			241,018
Interest rate lock commitments			--			--			258			--			258
Derivative assets-other⁽¹⁾			1,267			5,155			--			(4,848)			1,574
Liabilities:
Derivative liabilities		$	(590)		$	(7,422)		$	--		$	7,624		$	(388)

(1)	Includes cash collateral received and pledged.

(2)	Includes $1.3 million to purchase Treasury options.

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

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

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

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

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

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

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

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

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

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

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

Fair Value Option

Loans Held for Sale

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

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

March 31, 2014

December 31, 2013

(in thousands)

Fair Value
Carrying
Amount

Aggregate
Unpaid
Principal

Fair Value
Carrying Amount
Less Aggregate
Unpaid Principal

Fair Value
Carrying
Amount

Aggregate
Unpaid Principal

Fair Value
Carrying Amount
Less Aggregate
Unpaid Principal

Loans held for sale

$266,240

$260,548

$5,692

$306,915

$303,805

$3,110

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

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


	Gain (Loss) Included in Mortgage Banking Income from Changes in Fair Value⁽¹⁾
	For the Three Months Ended March 31,
(in thousands)	2014	2013
Loans held for sale	$ 1,667	$ 9,672
Mortgage servicing rights	(9,822)	(3,272)

Total (loss) gain	$(8,155)	$ 6,400

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

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

Changes in Level 3 Fair Value Measurements

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


	Fair Value			Total Realized/Unrealized Gains/(Losses) Recorded in													Transfers			Fair Value			Change in Unrealized Gains/ (Losses) Related to
(in thousands)	January 1, 2014			Income/ (Loss)				Comprehensive (Loss) Income			Issuances			Settlements			to/(from) Level 3			at Mar. 31, 2014			Instruments Held at March 31, 2014
Mortgage servicing rights		$	241,018		$	(9,822	)		$	--		$	6,808		$	--		$	--		$	238,004		$	43
Interest rate lock commitments			258			1,353				--			--			--			--			1,611			1,606

	Fair Value			Total Realized/Unrealized Gains/(Losses) Recorded in													Transfers			Fair Value			Change in Unrealized Gains/ (Losses) Related to
(in thousands)	January 1, 2013			Income/ (Loss)				Comprehensive (Loss) Income			Issuances			Settlements			to/(from) Level 3			at Mar. 31, 2013			Instruments Held at March 31, 2013
Available-for-sale capital securities		$	18,569		$	--			$	931		$	--		$	--		$	--		$	19,500		$	931
Mortgage servicing rights			144,520			(3,272	)			--			31,601			--			--			172,849			13,094
Interest rate lock commitments			21,446			(9,026	)			--			--			--			--			12,420			12,224

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

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

(dollars in thousands)

Fair Value at
March 31, 2014

Valuation Technique

Significant Unobservable Inputs

Significant
Unobservable
Input Value

Mortgage Servicing Rights

238,004

Discounted Cash Flow

Weighted Average Constant Prepayment Rate ⁽¹⁾

8.70%

Weighted Average Discount Rate

10.50

Interest Rate Lock Commitments

1,611

Pricing Model

Weighted Average Closing Ratio

73.06

(1)	Represents annualized loan repayment rate assumptions.

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

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

Assets Measured at Fair Value on a Non-Recurring Basis

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


	Fair Value Measurements at March 31, 2014 Using
(in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total Fair Value
Certain impaired loans		$	--		$	--		$	15,314		$	15,314
Other assets ⁽¹⁾			--			13,863			--			13,863

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

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


	Fair Value Measurements at December 31, 2013 Using
(in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total Fair Value
Certain impaired loans		$	--		$	--		$	47,535		$	47,535
Other assets ⁽¹⁾			--			19,810			--			19,810

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

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

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

Other Fair Value Disclosures

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

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

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


	March 31, 2014
							Fair Value Measurement Using
(in thousands)	Carrying Value			Estimated Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Financial Assets:
Cash and cash equivalents		$	672,872		$	672,872		$	672,872			$	--			$	--
Securities held to maturity			7,707,092			7,629,929			--				7,622,111				7,818
FHLB stock⁽¹⁾			545,113			545,113			--				545,113				--
Loans, net			33,640,229			33,612,172			--				--				33,612,172
Financial Liabilities:
Deposits		$	26,753,566		$	26,789,591		$	19,818,874	⁽²⁾		$	6,970,717	⁽³⁾		$	--
Borrowed funds			14,827,380			15,813,816			--				15,813,816				--

(1)	Carrying value and estimated fair value are at cost.

(2)	NOW and money market accounts, savings accounts, and non-interest-bearing accounts.

(3)	Certificates of deposit.


	December 31, 2013
							Fair Value Measurement Using
(in thousands)	Carrying Value			Estimated Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Financial Assets:
Cash and cash equivalents		$	644,550		$	644,550		$	644,550			$	--			$	--
Securities held to maturity			7,670,282			7,445,244			--				7,438,091				7,153
FHLB stock⁽¹⁾			561,390			561,390			--				561,390				--
Loans, net			32,727,507			32,628,361			--				--				32,628,361
Financial Liabilities:
Deposits		$	25,660,992		$	25,712,388		$	18,728,896	⁽²⁾		$	6,983,492	⁽³⁾		$	--
Borrowed funds			15,105,002			16,058,931			--				16,058,931				--

(1)	Carrying value and estimated fair value are at cost.

(2)	NOW and money market accounts, savings accounts, and non-interest-bearing accounts.

(3)	Certificates of deposit.

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

Cash and Cash Equivalents

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

Securities

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

Federal Home Loan Bank Stock

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

Loans

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

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

Mortgage Servicing Rights

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

Derivative Financial Instruments

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

Deposits

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

Borrowed Funds

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

Off-Balance-Sheet Financial Instruments

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

Note 12. Derivative Financial Instruments

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

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

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

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


	March 31, 2014
(in thousands)	Notional		Unrealized ⁽¹⁾
(in thousands)	Amount		Gain		Loss
Treasury options	$	410,000	$	125	$	584
Eurodollar futures		95,000		18		115
Forward commitments to sell loans/mortgage-backed securities		484,033		1,005		254
Forward commitments to buy loans/mortgage-backed securities		470,000		393		753
Interest rate lock commitments		312,197		1,611		--

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

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

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

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

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

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

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

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


	Gain (Loss) Included in Mortgage Banking Income
	For the Three Months Ended March 31,
(in thousands)	2014		2013
Treasury options		$ (399)		$ (3,588	)
Eurodollar futures		(55)		15
Forward commitments to buy/sell loans/mortgage-backed securities		3,495		8,979

Total gain		$ 3,041		$ 5,406

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

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


	March 31, 2014
										Gross Amounts Not Offset in the Consolidated Statement of Condition
(in thousands)	Gross Amounts of Recognized Assets			Gross Amounts Offset in the Statement of Condition			Net Amounts of Assets Presented in the Statement of Condition			Financial Instruments			Cash Collateral Received			Net Amount
Derivatives		$	4,687		$	1,564		$	3,123		$	--		$	--		$	3,123


	December 31, 2013
										Gross Amounts Not Offset in the Consolidated Statement of Condition
(in thousands)	Gross Amounts of Recognized Assets			Gross Amounts Offset in the Statement of Condition			Net Amounts of Assets Presented in the Statement of Condition			Financial Instruments			Cash Collateral Received			Net Amount
Derivatives		$	6,680		$	4,848		$	1,832		$	--		$	--		$	1,832

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

March 31, 2014

(in thousands)

Gross
Amounts of
Recognized
Liabilities

Gross Amounts
Offset in the
Statemen

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