NOTE 4: LOANS

The following table sets forth the composition of the loan portfolio at December 31, 2011 and 2010:


	December 31, 2011						December 31, 2010
(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	$	17,430,628			68.28	%	$	16,807,913			70.88	%
Commercial real estate		6,855,244			26.85			5,439,611			22.94
Acquisition, development, and construction		445,671			1.75			569,537			2.40
One-to-four family		127,361			0.50			170,392			0.72

Total mortgage loans held for investment	$	24,858,904			97.38		$	22,987,453			96.94

Other Loans:
Commercial and industrial		599,986			2.35			641,663			2.70
Other		69,907			0.27			85,559			0.36

Total other loans held for investment		669,893			2.62			727,222			3.06

Total non-covered loans held for investment	$	25,528,797			100.00	%	$	23,714,675			100.00	%

Net deferred loan origination costs/(fees)		4,021						(7,181	)
Allowance for losses on non-covered loans		(137,290	)					(158,942	)

Non-covered loans held for investment, net	$	25,395,528					$	23,548,552
Covered loans		3,753,031						4,297,869
Allowance for losses on covered loans		(33,323	)					(11,903	)

Total covered loans, net	$	3,719,708					$	4,285,966
Loans held for sale		1,036,918						1,207,077

Total loans, net	$	30,152,154					$	29,041,595

Non-Covered Loans

Loans Held for Investment

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

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

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

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

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

In the second quarter of 2011, the Company sold $92.1 million of C&I loans in connection with the disposition of the assets and liabilities of its insurance premium financing subsidiary, Standard Funding Corp. As a result, the Company recognized a gain on business disposition of $9.8 million ($5.9 million after-tax) during the three-month period.

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

Loans Held for Sale

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

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

The Company also services mortgage loans for various third parties. At December 31, 2011, the unpaid principal balance of serviced loans amounted to $13.1 billion. At December 31, 2010, the unpaid principal balance of serviced loans amounted to $9.5 billion. In accordance with the Purchase and Assumption Agreement between the Community Bank and the FDIC, effective December 4, 2009, the Community Bank serviced the loans that were acquired by the FDIC in the AmTrust acquisition for a period of one year, which ended prior to December 31, 2010.

Asset Quality

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


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

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

The following table presents information regarding the quality of the Company’s non-covered loans at December 31, 2010:


(in thousands)	30-89 Days Past Due		Non- Accrual		90 Days or More Delinquent and Still Accruing Interest		Total Past Due		Current		Total Loans Receivable
Multi-family	$	121,188	$	327,892	$	—	$	449,080	$	16,358,833	$	16,807,913
Commercial real estate		8,207		162,400		—		170,607		5,269,004		5,439,611
Acquisition, development, and construction		5,194		91,850		—		97,044		472,493		569,537
One-to-four family		5,723		17,813		—		23,536		146,856		170,392
Commercial and industrial		9,324		22,804		—		32,128		609,535		641,663
Other		1,404		1,672		—		3,076		82,483		85,559

Total	$	151,040	$	624,431	$	—	$	775,471	$	22,939,204	$	23,714,675

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


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

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

The following table summarizes the Company’s non-covered loan portfolio by credit quality indicator at December 31, 2010:


(in thousands)	Multi-Family		Commercial Real Estate		Acquisition, Development, and Construction		One-to-Four Family		Total Mortgage Segment		Commercial and Industrial		Other		Total Other Loan Segment
Credit Quality Indicator:
Pass	$	16,097,834	$	5,239,936	$	454,570	$	158,240	$	21,950,580	$	594,373	$	83,887	$	678,260
Special mention		172,713		22,650		6,650		—		202,013		21,224		—		21,224
Substandard		535,366		176,797		108,317		12,152		832,632		23,564		1,672		25,236
Doubtful		2,000		228		—		—		2,228		2,502		—		2,502

Total	$	16,807,913	$	5,439,611	$	569,537	$	170,392	$	22,987,453	$	641,663	$	85,559	$	727,222

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

The interest income that would have been recorded under the original terms of non-accrual loans at the respective year-ends, and the interest income actually recorded on these loans in the respective years, is summarized below:


	December 31,
(in thousands)	2011			2010			2009
Interest income that would have been recorded	$	14,072		$	32,943		$	35,805
Interest income actually recorded		(6,484	)		(7,055	)		(13,929	)

Interest income foregone	$	7,588		$	25,888		$	21,876

Troubled Debt Restructurings

In accordance with GAAP, the Company is required to account for certain loan modifications or restructurings as 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 in TDRs are placed on non-accrual status until the Company determines that future collection of principal and interest is reasonably assured, which generally requires that the borrower demonstrate performance according to the restructured terms for a period of at least six months.

In April 2011, the FASB issued guidance regarding the determination of whether or not a restructuring is a TDR. In anticipation of such guidance, the Company began applying these more conservative metrics at the beginning of 2011 and, accordingly, the Company did not record any additional TDRs as a result of adopting the FASB’s new guidance later in the year.

The following table presents information regarding the Company’s TDRs as of December 31, 2011 and December 31, 2010:


	December 31, 2011						December 31, 2010
(in thousands)	Accruing		Non-Accrual		Total		Accruing		Non-Accrual		Total
Loan Category:
Multi-family	$	60,454	$	166,248	$	226,702	$	148,738	$	123,435	$	272,173
Commercial real estate		3,389		39,054		42,443		3,917		56,814		60,731
Acquisition, development, and construction		—		15,886		15,886		—		17,666		17,666
Commercial and industrial		—		667		667		—		5,381		5,381
One-to-four family		—		1,411		1,411		—		1,520		1,520

Total	$	63,843	$	223,266	$	287,109	$	152,655	$	204,816	$	357,471

In an effort to proactively manage delinquent loans, the Company has selectively extended to certain borrowers concessions such as rate reductions, extension of maturity dates, and forbearance agreements. As of December 31, 2011, loans on which concessions were made with respect to rate reductions and/or extension of maturity dates amounted to $246.7 million, and loans on which forbearance agreements were reached amounted to $40.4 million.

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

The financial effects of the Company’s TDRs for the twelve months ended December 31, 2011 are summarized as follows:


	For the Twelve Months Ended December 31, 2011
	Weighted Average Interest Rate
(dollars in thousands)	Number of Loans		Pre- Modification			Post- Modification			Charge-off Amount
Loan Category:
Multi-family		22		4.33	%		3.62	%	$	9,853
Commercial real estate		7		6.88			4.00			—
Acquisition, development, and construction		2		7.50			5.00			—
Other		1		6.75			4.00			326

Total		32		4.85			4.07		$	10,179

During the twelve months ended December 31, 2011, there were no payment defaults on any loans that had been modified as TDRs during the preceding twelve months. A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms.

Covered Loans

The following table presents the carrying balance of covered loans acquired in the AmTrust and Desert Hills acquisitions as of December 31, 2011:


(dollars in thousands)	Amount		Percent of Covered Loans
Loan Category:
One-to-four family	$	3,366,456		89.7	%
All other loans		386,575		10.3

Total covered loans	$	3,753,031		100.0	%

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

At December 31, 2011 and 2010, the outstanding balance of covered loans (i.e. amounts owed to the Company) totaled $4.5 billion and $5.2 billion, respectively. The carrying values of such loans were $3.8 billion and $4.3 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 value, the Company (a) calculated the contractual amount and timing of undiscounted principal and interest payments (the “undiscounted contractual cash flows”); and (b) estimated the expected amount and timing of undiscounted principal and interest payments (the “undiscounted expected cash flows”). The amount by which the undiscounted expected cash flows exceed the estimated fair value (the “accretable yield”) is accreted into interest income over the lives of the loans. The difference between the undiscounted contractual cash flows and the undiscounted expected cash flows is referred to as the “non-accretable difference.” The non-accretable difference represents an estimate of the credit risk in the loan portfolios at the acquisition date.

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

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

Changes in the accretable yield for covered loans were as follows for the twelve months ended December 31, 2011:


(in thousands)	Accretable Yield
Balance at beginning of period	$	1,356,844
Reclassification from non-accretable difference		206,580
Accretion		(197,446	)

Balance at end of period	$	1,365,978

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

In connection with the AmTrust and Desert Hills transactions, the Company has acquired OREO, all of which is covered under FDIC loss sharing agreements. Covered OREO is initially recorded at its estimated fair value on the acquisition date, based on independent appraisals less the estimated selling costs. Any subsequent write-downs due to declines in fair value are charged to non-interest expense, and partially offset by loss reimbursements under the FDIC loss sharing agreements. Any recoveries of previous write-downs are credited to non-interest expense and partially offset by the portion of the recovery that is due to the FDIC.

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

The following table presents information regarding the Company’s covered loans 90 days or more past due at December 31, 2011 and 2010:


	December 31,
(in thousands)	2011		2010
Covered Loans 90 Days or More Past Due:
One-to-four family	$	314,821	$	310,929
Other loans		32,621		49,898

Total covered loans 90 days or more past due	$	347,442	$	360,827

The following table presents information regarding the Company’s covered loans that were 30 to 89 days past due at December 31, 2011 and 2010:


	December 31,
(in thousands)	2011		2010
Loans 30-89 Days Past Due:
One-to-four family	$	103,495	$	108,691
Other loans		8,494		21,851

Total loans 30-89 days past due	$	111,989	$	130,542

At December 31, 2011, the Company had $112.0 million of covered loans that were 30 to 89 days past due, and covered loans of $347.4 million that were 90 days or more past due but considered to be performing due to the application of the yield accretion method under ASC 310-30. The remaining portion of the Company’s covered loan portfolio totaled $3.3 billion at December 31, 2011 and is considered current as of that date. ASC 310-30 allows the Company to aggregate credit-impaired loans acquired in the same fiscal quarter into one or more pools, provided that the loans have common risk characteristics. A pool is then accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. Accordingly, loans that may have been classified as non-performing loans by AmTrust or Desert Hills are no longer classified as non-performing because, at the respective dates of acquisition, the Company believed that it would fully collect the new carrying value of these loans. The new carrying value represents the contractual balance, reduced by the portion that is expected to be uncollectible (referred to as the “non-accretable difference”) and by an accretable yield (discount) that is recognized as interest income. It is important to note that management’s judgment is required in reclassifying loans subject to ASC 310-30 as performing loans, and its judgment is dependent on having a reasonable expectation about the timing and amount of the cash flows to be collected, even if the loan is contractually past due.

The primary credit quality indicator for covered loans is the expectation of underlying cash flows. At December 31, 2011, the balance of pools with an adverse change in expected cash flows was $497.4 million. These pools consisted of one-to-four family loans of $184.9 million and other loans of $312.5 million. At December 31, 2010, the balance of pools with an adverse change in expected cash flows was $3.3 billion. These pools consisted of one-to-four family loans of $3.1 billion and other loans of $281.4 million.

The Company recorded a $21.4 million provision for losses on covered loans during the twelve months ended December 31, 2011. This provision was largely due to credit deterioration in the portfolio of C&I loans acquired in the Desert Hills acquisition and in the portfolios of home equity lines of credit (“HELOCs”) acquired in the acquisitions of both AmTrust and Desert Hills. The provision for covered loans was largely offset by FDIC indemnification income of $17.6 million that was recorded in non-interest income for the twelve months ended December 31, 2011.