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

Executive Summary

New York Community Bancorp, Inc. is the holding company for New York Community Bank, with 225 branches in Metro New York, New Jersey, Ohio, Florida, and Arizona, and New York Commercial Bank, with 30 branches in Metro New York. At December 31, 2016, we had total assets of $48.9 billion, including total loans of $39.5 billion, and total deposits of $28.9 billion.

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

As a publicly traded company, our mission is to provide our shareholders with a solid return on their investment by producing a strong financial performance, maintaining a solid capital position, and engaging in corporate strategies that enhance the value of their shares. In 2016, we generated earnings of $495.4 million, or $1.01 per diluted share, and maintained our status as a well-capitalized institution with regulatory capital ratios that rose year-over-year. We also engaged in strategies that were consistent with our business model, as further described below:

We Continued to Manage our Assets below the SIFI Threshold

In 2016, we continued to manage our assets below the threshold for a Systemically Important Financial Institution (“SIFI”), a strategy we launched in the fourth quarter of 2014. In the current year, we achieved this goal by selling $1.7 billion of multi-family, commercial real estate (“CRE”), and acquisition, development, and construction (“ADC”) loans, largely through participations. In addition, our securities portfolio declined $2.4 billion from the year-earlier balance as the low level of market interest rates triggered a high volume of calls. As a result, our consolidated assets totaled $48.9 billion at December 31, 2016 and averaged $49.0 billion for the four quarters ended at that date.                

We Maintained a Strong Presence in our Multi-Family Lending Niche    

In 2016, we produced $9.2 billion of non-covered loans held for investment, including $5.7 billion of multi-family loans. While loan growth was tempered by a combination of sales and prepayments, the portfolio of non-covered held-for-investment loans rose $1.6 billion year-over-year to $37.4 billion, including a $973.4 million increase in multi-family loans to $26.9 billion.

Multi-family loans accounted for $1.3 billion of the loans we sold in 2016, with CRE and ADC loans accounting for $338.7 million and $3.4 million, respectively. In addition to enabling us to manage our assets below the current SIFI threshold, the loan sales generated net gains of $15.8 million, which were recorded as non-interest income, in 2016.

We Maintained our Record of Exceptional Asset Quality

Non-performing non-covered assets represented $68.1 million, or 0.14%, of total non-covered assets at the end of this December, and non-performing non-covered loans represented $56.5 million, or 0.15%, of total non-covered loans. While our level of non-performing assets was modestly higher than the year-earlier level, the increase stemmed from the transition to non-accrual status of a single ADC credit and certain New York City taxi medallion loans. The performance of our multi-family and CRE loans, which are our principal assets, continued to be exceptional over the course of the year.    

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Also reflecting the quality of our assets was the nominal level of net charge-offs we recorded in the twelve months ended December 31, 2016. Net charge-offs represented $708,000, or 0.0%, of average loans in 2016 and consisted entirely of New York City taxi medallion loans.

Notwithstanding the overall quality of our assets, we recorded an $11.9 million provision for non-covered loan losses, bringing our allowance for non-covered loan losses to $158.3 million at December 31, 2016.

The Benefit of our Strategic Debt Repositioning Was Validated by the Growth of our Net Interest Income     

In the fourth quarter of 2015, we prepaid $10.4 billion of wholesale borrowings with an average cost of 3.16% and replaced them with a like amount of wholesale borrowings with an average cost of 1.58%. In addition, the majority of the wholesale borrowings we prepaid had callable features; the borrowings with which they were replaced featured fixed maturities.

While the related debt repositioning charge reduced our 2015 net interest income to $408.1 million, the level of net interest income we recorded in 2016, as well as our net interest rate spread and net interest margin, partly reflect the benefit of having repositioned our debt in the prior year.

While the aforementioned strategies, for the most part, contributed to our 2016 earnings, the benefits were tempered by the following events:

Our Merger Agreement with Astoria Financial Corporation Was Terminated

On October 29, 2015, we announced the signing of a definitive merger agreement with Astoria Financial Corporation (“Astoria Financial”) which, pending receipt of the necessary approvals, was expected to close prior to the expiration of the agreement on December 31, 2016.

On December 20, 2016, the Boards of Directors of both companies mutually agreed to terminate the merger agreement, effective January 1, 2017.

In connection with our preparations for the merger, and its subsequent termination, merger-related expenses totaled $11.1 million in the twelve months ended December 31, 2016.

Mortgage Banking Income Declined

Mortgage banking income fell $26.8 million from the year-earlier level to $27.3 million in the twelve months ended December 31, 2016. The reduction was primarily due to a change in the assumptions used to calculate the value of our mortgage servicing rights (“MSRs”) in the first quarter, together with an increase in prepayments and curtailments.

Operating Expenses Rose

Operating expenses rose $22.5 million from the year-earlier level to $638.1 million in 2016. The increase was primarily due to general and administrative (“G&A”) expense, which rose $17.6 million year-over-year. The rise in G&A expense was largely due to an increase in FDIC deposit insurance premiums, as well as higher legal and professional fees.

In addition, compensation and benefits expense rose $8.8 million year-over-year, primarily reflecting an increase in the cost of medical benefits, as well as the expansion of our back-office staff.                

External Factors

The following is a discussion of certain external factors that tend to influence our financial performance and the strategic actions we take.

Interest Rates

Among the external factors that tend to influence our performance, the interest rate environment is key. Just as short-term interest rates affect the cost of our deposits and that of the funds we borrow, market interest rates affect the yields on the loans we produce for investment and the securities in which we invest.

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As further discussed under “Loans Held for Investment” later on in this discussion, the interest rates on our multi-family loans and CRE credits generally are based on the five-year Constant Maturity Treasury Rate (the “CMT”). The following table summarizes the high, low, and average five- and ten-year Constant Maturity Treasury rates in 2016 and 2015:

In addition, residential market interest rates impact the volume of one-to-four family mortgage loans we originate in any given quarter, directly affecting new home purchases and refinancing activity. Accordingly, when residential mortgage interest rates are low, refinancing activity typically increases; as residential mortgage interest rates begin to rise, the refinancing of one-to-four family mortgage loans typically declines. In 2016, we originated $4.6 billion of one-to-four family mortgage loans for sale through our mortgage banking operation.

Changes in market interest rates generally have a lesser impact on our multi-family and CRE loan production than they do on our production of one-to-four family mortgage loans. Because the multi-family and CRE loans we produce generate income when they prepay (which is recorded as interest income), the impact of repayment activity can be especially meaningful. In 2016, prepayment income from loans contributed $60.9 million to interest income; in the prior year, the contribution was $97.3 million.

Economic Indicators

While we attribute our asset quality to the nature of the loans we produce and our conservative underwriting standards, the quality of our assets can also be impacted by economic conditions in our local markets and throughout the United States. The information that follows consists of recent economic data that we consider to be germane to our performance and the markets we serve.

The following table presents the generally downward trend in unemployment rates, as reported by the U.S. Department of Labor, both nationally and in the various markets that comprise our footprint, for the months indicated:

The Consumer Price Index (the “CPI”) measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. The following table indicates the change in the CPI for the twelve months ended at each of the indicated dates:

Economic activity also is indicated by the Consumer Confidence Index ^® , which moved up to 113.7 in December 2016 from 96.3 in December 2015. An index level of 90 or more is considered indicative of a strong economy.

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The level of our mortgage lending activity is also impacted by new home sales. According to estimates set forth in a U.S. Department of Commerce report issued on January 26, 2017, the volume of new home sales nationwide was at a seasonally adjusted annual rate of 536,000 in December 2016, 0.4% below the rate reported for December 2015.

Given the impact that home prices have on residential mortgage lending, we consider the S&P Corelogic Case-Shiller U.S. National NSA Index to be an important economic indicator for the Company. According to this index, home prices rose 5.8% across the U.S. in the twelve months ended December 31, 2016 as compared to 5.4% in the twelve months ended December 31, 2015.

The residential rental vacancy rate in New York, as reported by the U.S. Department of Commerce, and the office vacancy rate in Manhattan, as reported by a leading commercial real estate broker (Jones Lang LaSalle), are important in view of the fact that 65.3% of our multi-family loans and 72.1% of our CRE loans are secured by properties in New York City, with Manhattan accounting for 27.8% and 53.1% of our multi-family and CRE loans, respectively.

As reflected in the following table, the residential rental vacancy rate in New York and the office vacancy rate in Manhattan were both higher in the three months ended December 31, 2016 than they were in the three months ended December 31, 2015:

Dividend Declaration

On January 24, 2017, the Board of Directors declared a quarterly cash dividend of $0.17 per share, payable on February 22, 2017 to shareholders of record at the close of business on February 7, 2017.

Critical Accounting Policies

We consider certain accounting policies to be critically important to the portrayal of our financial condition and results of operations, since they require management to make complex or subjective judgments, some of which may relate to matters that are inherently uncertain. The inherent sensitivity of our consolidated financial statements to these critical accounting policies, and the judgments, estimates, and assumptions used therein, could have a material impact on our financial condition or results of operations.

We have identified the following to be critical accounting policies: the determination of the allowances for loan losses; the valuation of MSRs; the determination of whether an impairment of securities is other than temporary; the determination of the amount, if any, of goodwill impairment; and the determination of the valuation allowance, if any, for deferred tax assets.

The judgments used by management in applying these critical accounting policies may be influenced by adverse changes in the economic environment, which may result in changes to future financial results.

Allowance for Losses on Non-Covered Loans

The allowance for losses on non-covered loans represents our estimate of probable and estimable losses inherent in the non-covered loan portfolio as of the date of the balance sheet. Losses on non-covered loans are charged against, and recoveries of losses on non-covered loans are credited back to, the allowance for losses on non-covered loans.

Although non-covered loans are held by either the Community Bank or the Commercial Bank, and a separate loan loss allowance is established for each, the total of the two allowances is available to cover all losses incurred. In addition, except as otherwise noted in the following discussion, the process for establishing the allowance for losses on non-covered loans is largely the same for each of the Community Bank and the Commercial Bank.

The methodology used for the allocation of the allowance for non-covered loan losses at December 31, 2016 and December 31, 2015 was generally comparable, whereby the Community Bank and the Commercial Bank

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segregated their loss factors (used for both criticized and non-criticized loans) into a component that was primarily based on historical loss rates and a component that was primarily based on other qualitative factors that are probable to affect loan collectability. In determining the respective allowances for non-covered loan losses, management considers the Community Bank’s and the Commercial Bank’s current business strategies and credit processes, including compliance with applicable regulatory guidelines and with guidelines approved by the respective Boards of Directors with regard to credit limitations, loan approvals, underwriting criteria, and loan workout procedures.

The allowance for losses on non-covered loans is established based on management’s evaluation of incurred losses in the portfolio in accordance with U.S. generally accepted accounting principles (“GAAP”), and is comprised of both specific valuation allowances and general valuation allowances.

Specific valuation allowances are established based on management’s analyses of individual loans that are considered impaired. If a non-covered loan is deemed to be impaired, management measures the extent of the impairment and establishes a specific valuation allowance for that amount. A non-covered loan is classified as “impaired” when, based on current information and/or events, it is probable that we will be unable to collect all amounts due under the contractual terms of the loan agreement. We apply this classification as necessary to non-covered loans individually evaluated for impairment in our portfolios. Smaller-balance homogenous loans and loans carried at the lower of cost or fair value are evaluated for impairment on a collective, rather than individual, basis. Loans to certain borrowers who have experienced financial difficulty and for which the terms have been modified, resulting in a concession, are considered troubled debt restructurings (“TDRs”) and are classified as impaired.

We generally measure impairment on an individual loan and determine the extent to which a specific valuation allowance is necessary by comparing the loan’s outstanding balance to either the fair value of the collateral, less the estimated cost to sell, or the present value of expected cash flows, discounted at the loan’s effective interest rate. Generally, when the fair value of the collateral, net of the estimated costs to sell, or the present value of the expected cash flows is less than the recorded investment in the loan, any shortfall is promptly charged off.

We also follow a process to assign general valuation allowances to non-covered loan categories. General valuation allowances are established by applying our loan loss provisioning methodology, and reflect the inherent risk in outstanding held-for-investment loans. This loan loss provisioning methodology considers various factors in determining the appropriate quantified risk factors to use to determine the general valuation allowances. The factors assessed begin with the historical loan loss experience for each major loan category. We also take into account an estimated historical loss emergence period (which is the period of time between the event that triggers a loss and the confirmation and/or charge-off of that loss) for each loan portfolio segment.

The allocation methodology consists of the following components: First, we determine an allowance for loan losses based on a quantitative loss factor for loans evaluated collectively for impairment. This quantitative loss factor is based primarily on historical loss rates, after considering loan type, historical loss and delinquency experience, and loss emergence periods. The quantitative loss factors applied in the methodology are periodically re-evaluated and adjusted to reflect changes in historical loss levels, loss emergence periods, or other risks. Lastly, we allocate an allowance for loan losses based on qualitative loss factors. These qualitative loss factors are designed to account for losses that may not be provided for by the quantitative loss component due to other factors evaluated by management, which include, but are not limited to:

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By considering the factors discussed above, we determine an allowance for non-covered loan losses that is applied to each significant loan portfolio segment to determine the total allowance for losses on non-covered loans.

The historical loss period we use to determine the allowance for loan losses on non-covered loans is a rolling 24-quarter look-back period, as we believe this produces an appropriate reflection of our historical loss experience.

The process of establishing the allowance for losses on non-covered loans also involves:

In order to determine their overall adequacy, each of the respective non-covered loan loss allowances is reviewed quarterly by management and the Board of Directors of the Community Bank or the Commercial Bank, as applicable.

We charge off loans, or portions of loans, in the period that such loans, or portions thereof, are deemed uncollectible. The collectability of individual loans is determined through an assessment of the financial condition and repayment capacity of the borrower and/or through an estimate of the fair value of any underlying collateral. For non-real-estate-related consumer credits, the following past-due time periods determine when charge-offs are typically recorded: (1) Closed-end credits are charged off in the quarter that the loan becomes 120 days past due; (2) Open-end credits are charged off in the quarter that the loan becomes 180 days past due; and (3) Both closed-end and open-end credits are typically charged off in the quarter that the credit is 60 days past the date we received notification that the borrower has filed for bankruptcy.

The level of future additions to the respective non-covered loan loss allowances is based on many factors, including certain factors that are beyond management’s control, such as changes in economic and local market conditions, including declines in real estate values, and increases in vacancy rates and unemployment. Management uses the best available information to recognize losses on loans or to make additions to the loan loss allowances; however, the Community Bank and/or the Commercial Bank may be required to take certain charge-offs and/or recognize further additions to their loan loss allowances, based on the judgment of regulatory agencies with regard to information provided to them during their examinations of the Banks.

An allowance for unfunded commitments is maintained separate from the allowances for non-covered loan losses and is included in “Other liabilities” in the Consolidated Statements of Condition.

Allowance for Losses on Covered Loans

We have elected to account for the loans acquired in our FDIC-assisted acquisitions of AmTrust Bank (“AmTrust”) and Desert Hills Bank (“Desert Hills”) (our “covered loans”) based on expected cash flows. This election is in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310-30”). In accordance with ASC 310-30, we maintain the integrity of a pool of loans accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows.

Covered loans are reported exclusive of the FDIC loss share receivable. The covered loans acquired in the AmTrust and Desert Hills acquisitions are reviewed for collectability based on the expectations of cash flows from these loans. Covered loans have been aggregated into pools of loans with common characteristics. In determining the allowance for losses on covered loans, we periodically perform an analysis to estimate the expected cash flows for each of the loan pools. A provision for losses on covered loans is recorded to the extent that the expected cash flows from a loan pool have decreased for credit-related items since the acquisition date. Accordingly, during the

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loss share recovery period, 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 will be recorded as a provision for covered loan losses charged to earnings, and the allowance for covered loan losses will be increased. During the loss share recovery period, a related credit to non-interest income and an increase in the FDIC loss share receivable will be recognized at the same time, and will be measured based on the applicable loss sharing agreement percentage.

See Note 6, “Allowances for Loan Losses” for a further discussion of our allowance for losses on covered loans, as well as additional information about our allowance for losses on non-covered loans.

Mortgage Servicing Rights

We recognize the rights to service mortgage loans for others as a separate asset referred to as “mortgage servicing rights,” or “MSRs.” MSRs are generally recognized when loans are sold whole or in part (i.e., as a “participation”), and the servicing is retained by us. Both of the Company’s two classes of MSRs, residential and participation, are initially recorded at fair value. While residential MSRs continue to be carried at fair value, participation MSRs are subsequently amortized and carried at the lower of their fair value or amortized amount on a quarterly basis. The amortization is recorded in proportion to, and over the period of, estimated net servicing income.

We base the fair value of our MSRs on a valuation performed by a third-party valuation specialist. This specialist determines fair value based on the present value of estimated future net servicing income cash flows, and incorporates assumptions that market participants would use to estimate fair value, including estimates of prepayment speeds, discount rates, default rates, refinance rates, servicing costs, escrow account earnings, contractual servicing fee income, and ancillary income. The specialist and the Company evaluate, and periodically adjust, as necessary, these underlying inputs and assumptions to reflect market conditions and changes in the assumptions that a market participant would consider in valuing MSRs.

Changes in the fair value of MSRs occur primarily in connection with the collection/realization of expected cash flows, as well as changes in the valuation inputs and assumptions. Changes in the fair value of residential MSRs are reported in “Mortgage banking income” and changes in the value of participation MSRs are reported in “Other income” in the period during which such changes occur.

Investment Securities

The securities portfolio primarily consists of mortgage-related securities and, to a lesser extent, debt and equity (together, “other”) securities. Securities that are classified as “available for sale” are carried at their estimated fair value, with any unrealized gains or losses, net of taxes, reported as accumulated other comprehensive income or loss in stockholders’ equity. Securities that we have the intent and ability to hold to maturity are classified as “held to maturity” and carried at amortized cost, less the non-credit portion of other-than-temporary impairment (“OTTI”) recorded in accumulated other comprehensive loss, net of tax (“AOCL”).

The fair values of our securities, and particularly our fixed-rate securities, are affected by changes in market interest rates and credit spreads. In general, as interest rates rise and/or credit spreads widen, the fair value of fixed-rate securities will decline; as interest rates fall and/or credit spreads tighten, the fair value of fixed-rate securities will rise. We regularly conduct a review and evaluation of our securities portfolio to determine if the decline in the fair value of any security below its carrying amount is other than temporary. If we deem any decline in value to be other than temporary, the security is written down to its current fair value, creating a new cost basis, and the resultant loss (other than the OTTI of debt securities attributable to non-credit factors) is charged against earnings and recorded in “Non-interest income.” Our assessment of a decline in fair value includes judgment as to the financial position and future prospects of the entity that issued the investment security, as well as a review of the security’s underlying collateral. Broad changes in the overall market or interest rate environment generally will not lead to a write-down.

In accordance with OTTI accounting guidance, unless we have the intent to sell, or it is more likely than not that we may be required to sell a security before recovery, OTTI is recognized as a realized loss in earnings to the extent that the decline in fair value is credit-related. If there is a decline in fair value of a security below its carrying amount and we have the intent to sell it, or it is more likely than not that we may be required to sell the security before recovery, the entire amount of the decline in fair value is charged to earnings.

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Goodwill Impairment

We have significant intangible assets related to goodwill. In connection with our acquisitions, assets that are acquired and liabilities that are assumed are recorded at their estimated fair values. Goodwill represents the excess of the purchase price of our acquisitions over the fair value of the identifiable net assets acquired, including other identified intangible assets. Our determination of whether or not goodwill is impaired requires us to make significant judgments and requires us to use significant estimates and assumptions regarding estimated future cash flows. If we change our strategy or if market conditions shift, our judgments may change, which may result in adjustments to the recorded goodwill balance.

We test our goodwill for impairment at the reporting unit level. These impairment evaluations are performed by comparing the carrying value of the goodwill of a reporting unit to its estimated fair value. We allocate goodwill to reporting units based on the reporting unit expected to benefit from the business combination. We had previously identified two reporting units: our Banking Operations reporting unit and our Residential Mortgage Banking reporting unit. Our reporting units are the same as our operating segments and reportable segments.

For annual goodwill impairment testing, we have the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill and other intangible assets. If we conclude that this is the case, we must perform the two-step test described below. If we conclude based on the qualitative assessment that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, we have completed our goodwill impairment test and do not need to perform the two-step test.

Under step one of the two-step test, we are required to determine the fair value of each reporting unit and compare it to the carrying value, including goodwill and other intangible assets, of such reporting unit. If the fair value exceeds the carrying value, no impairment loss is recognized and the second step, which is a calculation of the impairment, is not performed. However, if the carrying value of the reporting unit exceeds its fair value, an impairment charge is recorded equal to the extent that the carrying amount of goodwill exceeds its implied fair value.

Application of the impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and the determination of the fair value of each reporting unit. In assessing whether goodwill is impaired, we must make estimates and assumptions regarding future cash flows, long-term growth rates of our business, operating margins, discount rates, weighted average cost of capital and other factors to determine the fair value of our assets. These estimates and assumptions require management’s judgment, and changes to these estimates and assumptions, as a result of changing economic and competitive conditions, could materially affect the determination of fair value and/or impairment. Future events could cause us to conclude that indicators of impairment exist for goodwill, and may result from, among other things, deterioration in the performance of our business, adverse market conditions, adverse changes in applicable laws and regulations, competition, or the sale or disposition of a reporting unit. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations.

As of December 31, 2016, we had goodwill of $2.4 billion. Our goodwill is evaluated for impairment annually as of year-end, or more frequently if conditions exist that indicate that the value may be impaired. During the year ended December 31, 2016, no triggering events were identified that indicated that the value of goodwill might be impaired. We performed our annual goodwill impairment test as of December 31, 2016 and, based on the results of our qualitative assessments, found no indication of goodwill impairment at that date.

Income Taxes

In estimating income taxes, management assesses the relative merits and risks of the tax treatment of transactions, taking into account statutory, judicial, and regulatory guidance in the context of our tax position. In this process, management also relies on tax opinions, recent audits, and historical experience. Although we use the best available information to record income taxes, underlying estimates and assumptions can change over time as a result of unanticipated events or circumstances such as changes in tax laws and judicial guidance influencing our overall or transaction-specific tax position.

We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and the carryforward of certain tax attributes such as net operating losses. A valuation allowance is maintained for deferred tax assets that we estimate are more likely than not to be unrealizable, based on available evidence at the

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time the estimate is made. In assessing the need for a valuation allowance, we estimate future taxable income, considering the prudence and feasibility of tax planning strategies and the realizability of tax loss carryforwards. Valuation allowances related to deferred tax assets can be affected by changes to tax laws, statutory tax rates, and future taxable income levels. In the event we were to determine that we would not be able to realize all or a portion of our net deferred tax assets in the future, we would reduce such amounts through a charge to income tax expense in the period in which that determination was made. Conversely, if we were to determine that we would be able to realize our deferred tax assets in the future in excess of the net carrying amounts, we would decrease the recorded valuation allowance through a decrease in income tax expense in the period in which that determination was made. Subsequently recognized tax benefits associated with valuation allowances recorded in a business combination would be recorded as an adjustment to goodwill.

FINANCIAL CONDITION

Balance Sheet Summary

In 2016, we continued to manage our assets below the current SIFI threshold, as such term is defined by the Dodd-Frank Act. To be designated as a SIFI, we would have to have average total consolidated assets in excess of $50.0 billion over four consecutive quarters; the four-quarter average of our total consolidated assets was $49.0 billion at both December 31, 2016 and 2015. At December 31, 2016, we recorded total assets of $48.9 billion, as compared to $50.3 billion at December 31, 2015.

Our ability to remain below the $50.0 billion threshold reflects certain strategic actions we took over the last four quarters, in addition to the impact of market interest rates on our portfolio of securities. While total loans rose $1.3 billion year-over-year to $39.5 billion, the increase was exceeded by a $2.4 billion decline in total securities to $3.8 billion, primarily reflecting repayments and calls. In addition to repayments, the growth of our loans was tempered by sales of multi-family, CRE, and ADC loans, largely through participations. In 2016, such loan sales totaled $1.7 billion; in the prior year, we sold $1.9 billion of multi-family and CRE loans.

In addition to the cash flows from loan and securities sales and repayments, we fund the loans we produce and the securities we invest in with the deposits we gather and with wholesale borrowings. At December 31, 2016, our deposits totaled $28.9 billion, reflecting a year-over-year increase of $461.1 million. Borrowed funds totaled $13.7 billion at the end of this December, reflecting a $2.1 billion reduction year-over-year.

Stockholders’ equity rose $189.3 million to $6.1 billion at the end of this year, representing 12.52% of total assets and a book value per share of $12.57. Tangible stockholders’ equity rose $191.7 million year-over-year to $3.7 million, after the distribution of cash dividends totaling $330.8 million, and represented 7.93% of tangible assets and a tangible book value per share of $7.57. (See the discussion and reconciliations of stockholders’ equity and tangible stockholders’ equity, total assets and tangible assets, and the related financial measures that appear on the last page of this discussion and analysis of financial condition and results of operations.)

Loans

Total loans grew $1.3 billion year-over-year to $39.5 billion, representing 80.7% of total assets at December 31, 2016. Included in the year-end amount were covered loans of $1.7 billion, non-covered loans held for investment of $37.4 billion, and non-covered loans held for sale of $409.2 million.

Covered Loans

In December 2009 and March 2010, we acquired certain assets and assumed certain liabilities of AmTrust and Desert Hills, respectively, in FDIC-assisted acquisitions. “Covered loans” refers to the loans we acquired in those transactions, and are referred to as such because they are covered by loss sharing agreements with the FDIC. At the time of each acquisition, the loss sharing agreements required the FDIC to reimburse us for 80% of losses up to a specific threshold and for 95% of losses beyond that threshold with respect to covered loans and covered other real estate owned (“OREO”).

The length of the agreements depended on the types of loans that were covered, with the agreements covering one-to-four family loans and home equity loans extending for ten years from the date of acquisition, and all other covered loans and OREO extending for five years from the acquisition dates.

Primarily reflecting repayments, covered loans declined $362.0 million year-over-year to $1.7 billion, representing 4.3% of total loans at December 31, 2016. At the prior year-end, covered loans totaled $2.1 billion and represented 5.4% of total loans.

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In addition, $1.2 billion, or 66.7%, of the loans in our covered loan portfolio at the end of this December were variable-rate loans, with a contractual weighted average interest rate of 3.89%. The remainder of the portfolio consisted of fixed-rate loans. The interest rates on 84.0% of our covered variable-rate loans were scheduled to reprice within twelve months and annually thereafter. The interest rates on our variable-rate covered loans are indexed to either the one-year LIBOR or the one-year Treasury rate, plus a spread in the range of 2% to 5%, subject to certain caps.

The following table presents a geographical analysis of our covered loan portfolio at December 31, 2016:

Loan Maturity and Repricing Analysis: Covered Loans

The following table sets forth the maturity or period to repricing of our covered loan portfolio at December 31, 2016. Loans that have adjustable rates are shown as being due or repricing in the period during which their interest rates are next subject to change.

The following table sets forth, as of December 31, 2016, the dollar amount of all covered loans due or repricing after December 31, 2017, and indicates whether such loans have fixed or adjustable interest rates.

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Non-Covered Loans Held for Investment

The majority of the loans we produce are loans held for investment and most of the held-for-investment loans we produce are multi-family loans. Our production of multi-family loans began several decades ago in the five boroughs of New York City, where 61.1% of the rental units currently consist of rent-regulated apartments featuring below-market rents.

In addition to multi-family loans, our portfolio of loans held for investment contains a large number of CRE credits, most of which are secured by income-producing properties located in New York City and on Long Island.

In addition to multi-family loans and CRE loans, our portfolio includes substantially smaller balances of one-to-four family loans, ADC loans, and other loans held for investment, with commercial and industrial (“C&I”) loans comprising the bulk of the “other loan” portfolio. Specialty finance loans and leases account for most of our C&I credits, with the remainder consisting primarily of loans to small and mid-size businesses, referred to as “other” C&I loans.

Non-covered loans held for investment represented $37.4 billion, or 94.7%, of total loans at the end of this December, reflecting a year-over-year increase of $1.6 billion, or 4.5%. Loans secured by multi-family, CRE, and ADC properties represented 821.0% of the consolidated Banks’ total risk-based capital, within our limit of 850%.

In 2016, we originated $9.2 billion of held-for-investment loans, a $3.5 billion decrease from the record volume produced in the prior year. Consistent with our short-term objective of containing the growth of our assets, we sold $1.7 billion of held-for-investment loans, largely through participations, as compared to $1.9 billion in 2015. In 2016, sales of such loans produced net gains of $15.8 million, as further discussed under “Non-Interest Income” later in this report.

Multi-Family Loans

Multi-family loans are our principal asset. The loans we produce are primarily secured by non-luxury residential apartment buildings in New York City that feature rent-regulated units and below-market rents—a market we refer to as our “primary lending niche.” Consistent with our emphasis on multi-family lending, multi-family loan originations represented $5.7 billion, or 61.9%, of the loans we produced for investment in 2016. The latter amount was $3.5 billion, or 38.3%, lower than the prior year’s volume, reflecting a sharp decline in the gross dollar volume of sales transactions in our market, coupled with a decline in refinancing activity.

At December 31, 2016, multi-family loans represented $26.9 billion, or 72.1%, of total non-covered loans held for investment, reflecting a year-over-year increase of $973.4 million, or 3.7%. In addition to prepayments, the growth of the portfolio was tempered by the sale of multi-family loans totaling $1.3 billion, primarily through participations.

At December 31, 2016 and 2015, respectively, the average multi-family loan had a principal balance of $5.5 million and $5.3 million; the expected weighted average life of the portfolio was 2.9 years and 2.8 years at the respective dates.

The majority of our multi-family loans are made to long-term owners of buildings with apartments that are subject to rent regulation and feature below-market rents. Our borrowers typically use the funds we provide to make building-wide improvements and renovations to certain apartments, as a result of which they are able to increase the rents their tenants pay. In doing so, the borrower creates more cash flows to borrow against in future years.

In addition to underwriting multi-family loans on the basis of the buildings’ income and condition, we consider the borrowers’ credit history, profitability, and building management expertise. Borrowers are required to present evidence of their ability to repay the loan from the buildings’ current rent rolls, their financial statements, and related documents.

While a small percentage of our multi-family loans are ten-year fixed rate credits, the vast majority of our multi-family loans feature a term of ten or twelve years, with a fixed rate of interest for the first five or seven years of the loan, and an alternative rate of interest in years six through ten or eight through twelve. The rate charged in the first five or seven years is generally based on intermediate-term interest rates plus a spread. During the remaining years, the loan resets to an annually adjustable rate that is tied to the prime rate of interest, plus a spread. Alternately, the borrower may opt for a fixed rate that is tied to the five-year fixed advance rate of the Federal Home Loan Bank of New York (the “FHLB-NY”), plus a spread. The fixed-rate option also requires the payment of one

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percentage point of the then-outstanding loan balance. In either case, the minimum rate at repricing is equivalent to the rate in the initial five-or seven-year term. As the rent roll increases, the typical property owner seeks to refinance the mortgage, and generally does so before the loan reprices in year six or eight.

Multi-family loans that refinance within the first five or seven years are typically subject to an established prepayment penalty schedule. Depending on the remaining term of the loan at the time of prepayment, the penalties normally range from five percentage points to one percentage point of the then-current loan balance. If a loan extends past the fifth or seventh year and the borrower selects the fixed-rate option, the prepayment penalties typically reset to a range of five points to one point over years six through ten or eight through twelve. For example, a ten-year multi-family loan that prepays in year three would generally be expected to pay a prepayment penalty equal to three percentage points of the remaining principal balance. A twelve-year multi-family loan that prepays in year one or two would generally be expected to pay a penalty equal to five percentage points.

Because prepayment penalties are recorded as interest income, they are reflected in the average yields on our loans and interest-earning assets, our net interest rate spread and net interest margin, and the level of net interest income we record. No assumptions are involved in the recognition of prepayment income, as such income is only recorded when cash is received.

Our success as a multi-family lender partly reflects the solid relationships we have developed with the market’s leading mortgage brokers, who are familiar with our lending practices, our underwriting standards, and our long-standing practice of basing our loans on the cash flows produced by the properties. The process of producing such loans is generally four to six weeks in duration and, because the multi-family market is largely broker-driven, the expense incurred in sourcing such loans is substantially reduced.

At December 31, 2016, the majority of our multi-family loans were secured by rental apartment buildings. In addition, 65.3% of our multi-family loans were secured by buildings in New York City and 5.5% were secured by buildings elsewhere in New York State. The remaining multi-family loans were secured by buildings outside these markets, including in the four other states served by our retail branch offices.

Our emphasis on multi-family loans is driven by several factors, including their structure, which reduces our exposure to interest rate volatility to some degree. Another factor driving our focus on multi-family lending has been the comparative quality of the loans we produce. Reflecting the nature of the buildings securing our loans, our underwriting standards, and the generally conservative loan-to-value ratios (“LTVs”) our multi-family loans feature at origination, a relatively small percentage of the multi-family loans that have transitioned to non-performing status have actually resulted in losses, even when the credit cycle has taken a downward turn.

We primarily underwrite our multi-family loans based on the current cash flows produced by the collateral property, with a reliance on the “income” approach to appraising the properties, rather than the “sales” approach. The sales approach is subject to fluctuations in the real estate market, as well as general economic conditions, and is therefore likely to be more risky in the event of a downward credit cycle turn. We also consider a variety of other factors, including the physical condition of the underlying property; the net operating income of the mortgaged premises prior to debt service; the debt service coverage ratio (“DSCR”), which is the ratio of the property’s net operating income to its debt service; and the ratio of the loan amount to the appraised value (i.e., the LTV) of the property.

In addition to requiring a minimum DSCR of 120% on multi-family buildings, we obtain a security interest in the personal property located on the premises, and an assignment of rents and leases. Our multi-family loans generally represent no more than 75% of the lower of the appraised value or the sales price of the underlying property, and typically feature an amortization period of 30 years. In addition, our multi-family loans may contain an initial interest-only period which typically does not exceed two years; however, these loans are underwritten on a fully amortizing basis.

Accordingly, while our multi-family lending niche has not been immune to downturns in the credit cycle, the limited number of losses we have recorded, even in adverse credit cycles, suggests that the multi-family loans we produce involve less credit risk than certain other types of loans. In general, buildings that are subject to rent regulation have tended to be stable, with occupancy levels remaining more or less constant over time. Because the rents are typically below market and the buildings securing our loans are generally maintained in good condition, they have been more likely to retain their tenants in adverse economic times. In addition, we exclude any short-term property tax exemptions and abatement benefits the property owners receive when we underwrite our multi-family loans.

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Commercial Real Estate Loans

At December 31, 2016, CRE loans represented $7.7 billion, or 20.7%, of total loans held for investment, as compared to $7.9 billion, or 22.0%, at December 31, 2015. In addition to prepayments, the growth of the portfolio was tempered by sales of CRE loans, largely through participations, in the amount of $338.7 million during the year. The average CRE loan had a principal balance of $5.6 million at the end of this December, as compared to $5.4 million at the prior year-end. In addition, the portfolio had an expected weighted average life of 3.4 years and 3.2 years at the corresponding dates.

CRE loans represented $1.2 billion, or 12.9%, of the loans we produced in 2016 for investment, as compared to $1.8 billion, or 14.5%, in the prior year.

The CRE loans we produce are secured by income-producing properties such as office buildings, retail centers, mixed-use buildings, and multi-tenanted light industrial properties. At December 31, 2016, 72.1% of our CRE loans were secured by properties in New York City, while properties on Long Island accounted for 11.6%. Other parts of New York State accounted for 2.4% of the properties securing our CRE credits, while all other states accounted for 14.0%, combined.

The terms of our CRE loans are similar to the terms of our multi-family credits. While a small percentage of our CRE loans feature ten-year fixed-rate terms, they primarily feature a fixed rate of interest for the first five or seven years of the loan that is generally based on intermediate-term interest rates plus a spread. During years six through ten or eight through twelve, the loan resets to an annually adjustable rate that is tied to the prime rate of interest, plus a spread . Alternately, the borrower may opt for a fixed rate that is tied to the five-year fixed advance rate of the FHLB-NY plus a spread. The fixed-rate option also requires the payment of an amount equal to one percentage point of the then-outstanding loan balance. In either case, the minimum rate at repricing is equivalent to the rate in the initial five- or seven-year term.

Prepayment penalties apply to our CRE loans, as they do our multi-family credits. Depending on the remaining term of the loan at the time of prepayment, the penalties normally range from five percentage points to one percentage point of the then-current loan balance. If a loan extends past the fifth or seventh year and the borrower selects the fixed rate option, the prepayment penalties typically reset to a range of five points to one point over years six through ten or eight through twelve. Our CRE loans tend to refinance within three to four years of origination, as reflected in the expected weighted average life of the CRE portfolio noted above.

The repayment of loans secured by commercial real estate is often dependent on the successful operation and management of the underlying properties. To minimize our credit risk, we originate CRE loans in adherence with conservative underwriting standards, and require that such loans qualify on the basis of the property’s current income stream and DSCR. The approval of a loan also depends on the borrower’s credit history, profitability, and expertise in property management, and generally requires a minimum DSCR of 130% and a maximum LTV of 65%. In addition, the origination of CRE loans typically requires a security interest in the fixtures, equipment, and other personal property of the borrower and/or an assignment of the rents and/or leases. In addition, our CRE loans may contain an interest-only period which typically does not exceed three years; however, these loans are underwritten on a fully amortizing basis.

One-to-Four Family Loans

At December 31, 2016, one-to-four family loans represented $381.1 million, or 1.0%, of total loans held for investment, as compared to $116.8 million, or 0.33%, at the prior year-end.

The majority of the one-to-four family loans we produce for investment are prime jumbo adjustable-rate mortgage loans made at conservative LTVs to borrowers with high credit ratings. While originations of one-to-four family loans rose $282.6 million year-over-year to $303.9 million, such loans continued to represent a small portion (3.3%) of the held-for-investment loans we produced in 2016.

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Acquisition, Development, and Construction Loans

At December 31, 2016, ADC loans represented $381.2 million, or 1.0%, of total loans held for investment, as compared to $311.7 million, or 0.87%, at the prior year-end. Originations of ADC loans totaled $150.2 million in 2016, down $5.1 million from the year-earlier amount.

At December 31, 2016, 79.0% of the loans in our ADC portfolio were for land acquisition and development; the remaining 21.0% consisted of loans that were provided for the construction of commercial properties and owner-occupied homes. Loan terms vary based upon the scope of the construction, and generally range from 18 months to two years. They also feature a floating rate of interest tied to prime, with a floor. At December 31, 2016, 74.1% of our ADC loans were for properties in New York City, with Manhattan accounting for more than half of New York City’s share.

Because ADC loans are generally considered to have a higher degree of credit risk, especially during a downturn in the credit cycle, borrowers are required to provide a guarantee of repayment and completion. In the twelve months ended December 31, 2016 and 2015, we recovered losses against guarantees of $337,000 and $336,000, respectively. The risk of loss on an ADC loan is largely dependent upon the accuracy of the initial appraisal of the property’s value upon completion of construction; the developer’s experience; the estimated cost of construction, including interest; and the estimated time to complete and/or sell or lease such property.

When applicable, as a condition to closing an ADC loan, it is our practice to require that properties meet pre-sale or pre-lease requirements prior to funding.

Other Loans

At December 31, 2016, other loans represented $1.9 billion, or 5.2%, of total loans held for investment, an increase from $1.5 billion, or 4.2%, at December 31, 2015. C&I loans represented all but $24.1 million of the year-end 2016 balance and all but $32.6 million of the prior year-end amount.

Our C&I loans are divided into two categories: specialty finance loans and leases, and “other” C&I loans, as further described below.

Specialty Finance Loans and Leases

C&I loans rose $449.9 million year-over-year to $1.9 billion, largely reflecting a $386.9 million increase in the specialty finance loan and lease portfolio. At December 31, 2016 and 2015, specialty finance loans and leases represented $1.3 billion and $880.7 million, respectively, of total loans held for investment, and $1.3 billion and $1.1 billion, respectively, of the C&I loans produced over the course of those years.

We produce our specialty finance loans and leases through a subsidiary that is staffed by a group of industry veterans with expertise in originating and underwriting senior securitized debt and equipment loans and leases. The subsidiary participates in syndicated loans that are brought to them, and equipment loans and leases that are assigned to them, by a select group of nationally recognized sources, and are generally made to large corporate obligors, many of which are publicly traded, carry investment grade or near-investment grade ratings, and participate in stable industries nationwide.

The specialty finance loans and leases we fund fall into three categories: asset-based lending, dealer floor-plan lending, and equipment loan and lease financing. Each of these credits is secured with a perfected first security interest in, or outright ownership of, the underlying collateral, and structured as senior debt or as a non-cancelable lease. Asset-based and dealer floor-plan loans are priced at floating rates predominately tied to LIBOR, while our equipment financing credits are priced at fixed rates at a spread over Treasuries.

Since launching our specialty finance business in the third quarter of 2013, no losses have been recorded on any of the loans or leases in this portfolio.

Other C&I Loans

In the twelve months ended December 31, 2016, other C&I loans rose $63.0 million to $632.9 million, and represented $592.3 million of the held-for-investment loans we produced. Included in the balance at year-end 2016 were taxi medallion loans of $150.7 million, all of which were collateralized by New York City taxi medallions. The portfolio of taxi medallion loans represented 0.40% of total held-for-investment loans at December 31, 2016.

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In contrast to the loans produced by our specialty finance subsidiary, the other C&I loans we produce are primarily made to small and mid-size businesses in the five boroughs of New York City and on Long Island. Such loans are tailored to meet the specific needs of our borrowers, and include term loans, demand loans, revolving lines of credit, and, to a much lesser extent, loans that are partly guaranteed by the Small Business Administration.

A broad range of other C&I loans, both collateralized and unsecured, are made available to businesses for working capital (including inventory and accounts receivable), business expansion, the purchase of machinery and equipment, and other general corporate needs. In determining the term and structure of other C&I loans, several factors are considered, including the purpose, the collateral, and the anticipated sources of repayment. Other C&I loans are typically secured by business assets and personal guarantees of the borrower, and include financial covenants to monitor the borrower’s financial stability.

The interest rates on our other C&I loans can be fixed or floating, with floating-rate loans being tied to prime or some other market index, plus an applicable spread. Our floating-rate loans may or may not feature a floor rate of interest. The decision to require a floor on other C&I loans depends on the level of competition we face for such loans from other institutions, the direction of market interest rates, and the profitability of our relationship with the borrower.

The remainder of the “other” loan portfolio consists primarily of home equity loans and lines of credit, as well as a variety of consumer loans, most of which were originated by our pre-2009 merger partners prior to their joining the Company. We currently do not offer home equity loans or lines of credit.

Lending Authority

The loans we originate for investment are subject to federal and state laws and regulations, and are underwritten in accordance with loan underwriting policies and procedures approved by the Mortgage and Real Estate Committee of the Community Bank (the “Mortgage Committee”), the Credit Committee of the Commercial Bank (the “Credit Committee”), and the respective Boards of Directors of the Banks.

Prior to 2017, all loans originated by the Banks were presented to the Mortgage Committee or the Credit Committee, as applicable. Furthermore, all loans of $20.0 million or more originated by the Community Bank, and all loans of $10.0 million or more originated by the Commercial Bank, were reported to the applicable Board of Directors. One-to-four family mortgage loans were approved by line-of-business personnel having underwriting authority pursuant to a separate policy applicable to our mortgage banking segment.

Effective January 27, 2017, and in accordance with the Banks’ credit policies, all loans other than one-to-four family mortgage loans and C&I loans less than or equal to $3.0 million are required to be presented to the Management Credit Committee for approval. All multi-family, CRE, and “other” C&I loans in excess of $5.0 million, and specialty finance loans in excess of $15.0 million, are also required to be presented to the Mortgage Committee or the Credit Committee, as applicable, so that the Committees can review the loans’ associated risks. The Committees have authority to direct changes in lending practices as they deem necessary or appropriate in order to address individual or aggregate risks and credit exposures in accordance with the Bank’s strategic objectives and risk appetites.

All mortgage loans in excess of $50.0 million and all “other” C&I loans in excess of $5.0 million require approval by the Mortgage Committee or the Credit Committee. Credit Committee approval also is required for specialty finance loans in excess of $15.0 million.

In addition, all loans of $20.0 million or more originated by the Community Bank, and all loans of $10.0 million or more originated by the Commercial Bank, continue to be reported to the applicable Board of Directors, and all one-to-four family mortgage loans and C&I loans less than or equal to $3.0 million continue to be approved by line-of-business personnel.

In 2016, 176 loans of $10.0 million or more were originated by the Banks, with an aggregate loan balance of $5.1 billion at origination. In 2015, by comparison, 285 loans of $10.0 million or more were originated, with an aggregate loan balance at origination of $7.3 billion.

At December 31, 2016 and 2015, the largest loan in our portfolio was a loan originated by the Community Bank on June 28, 2013 to the owner of a commercial office building located in Manhattan. As of the date of this report, the loan has been current since origination. The balance of the loan was $287.5 million at both year-ends.

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At December 31, 2016, the largest concentration of one-to-four family loans held for investment was in California, with a total of $182.0 million; the largest concentration of ADC loans held for investment was in New York City, with a total of $282.3 million at that date. The majority of our “other” C&I loans held for investment were secured by properties and/or businesses located in Metro New York.

Loan Maturity and Repricing Analysis: Non-Covered Loans Held for Investment

The following table sets forth the maturity or period to repricing of our portfolio of non-covered loans held for investment at December 31, 2016. Loans that have adjustable rates are shown as being due in the period during which their interest rates are next subject to change.

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The following table sets forth, as of December 31, 2016, the dollar amount of all non-covered loans held for investment that are due after December 31, 2017, and indicates whether such loans have fixed or adjustable rates of interest:

Non-Covered Loans Held for Sale

Our portfolio of non-covered loans held for sale consists of one-to-four family loans originated through our mortgage banking operation, utilizing our proprietary web-based technology. This platform is not only used by the Community Bank to serve our retail customers in New York, New Jersey, Ohio, Florida, and Arizona, but also by approximately 900 clients—community banks, credit unions, mortgage companies, and mortgage brokers—to originate full-documentation, prime credit one-to-four family loans nationwide.

While the vast majority of the one-to-four family loans held for sale we produce are agency-conforming loans sold to government-sponsored enterprises (“GSEs”), we also utilize our mortgage banking platform to originate prime jumbo loans for sale to other private mortgage investors, as well as for our own portfolio.

In the twelve months ended December 31, 2016, we originated loans held for sale of $4.6 billion, representing a $33.5 million decrease from the year-earlier volume and 33.6% of total loans produced over the course of the year. Of the one-to-four family loans we produced for sale, $4.4 billion, or 96.6%, were agency-conforming and $154.6 million, or 3.4%, were non-conforming (i.e., jumbo) loans. Loans held for sale totaled $409.2 million at the end of this December, up $41.9 million from the balance at year-end 2015.

Both the agency-conforming and non-conforming one-to-four family loans we originate for sale require that we make certain representations and warranties with regard to the underwriting, documentation, and legal/regulatory compliance, and we may be required to repurchase a loan or loans if it is found that a breach of the representations and warranties has occurred. If this were the case, we would be exposed to any subsequent credit loss on the mortgage loans that might or might not be realized in the future.

As governed by our agreements with the GSEs and other third parties to whom we sell loans, the representations and warranties we make relate to several factors, including, but not limited to, the ownership of the loan; the validity of the lien securing the loan; the absence of delinquent taxes or liens against the property securing the loan as of its closing date; the process used to select the loan for inclusion in a transaction; and the loan’s compliance with any applicable criteria, including underwriting standards, loan program guidelines, and compliance with applicable federal, state, and local laws.

We record a liability for estimated losses relating to these representations and warranties, which is included in “Other liabilities” in the accompanying Consolidated Statements of Condition. The related expense is recorded in “Mortgage banking income” in the accompanying Consolidated Statements of Operations and Comprehensive Income (Loss). At December 31, 2016 and 2015, the respective liabilities for estimated possible future losses relating to these representations and warranties were $2.1 million and $8.0 million.

The methodology used to estimate the liability for representations and warranties is a function of the representations and warranties given and considers a variety of factors, including, but not limited to, actual default experience, estimated future defaults, historical loan repurchase rates, the frequency and potential severity of defaults, the probability that a repurchase request will be received, and the probability that a loan will be required to be repurchased.

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In January 2013, the GSEs changed the rules related to their ability to put back claims for representation and warranty issues. These rule changes moderated the potential exposure to issuers, and provided for a phase-in that became fully impactful in 2016. Reflecting this change, as well as the minimal volume of repurchase requests and related losses incurred since our mortgage banking business was established, our representation and warranty reserve was reduced by $5.9 million in the first quarter of 2016.

Because the level of mortgage loan repurchase losses is dependent on economic factors, investor demand strategies, and other external conditions that may change over the lives of the underlying loans, the level of the liability for mortgage loan repurchase losses is difficult to estimate and requires considerable judgment on the part of management. However, we believe the amount and range of reasonably possible losses in excess of our reserve would not be material to our operation, or to our financial condition or results of operations.

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See Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” for a discussion of the strategies we employ to mitigate the interest rate risk associated with our production of one-to-four family loans for sale.

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