NOTE 10: COMMITMENTS AND CONTINGENCIES

Pledged Assets

The Company pledges securities to serve as collateral for its repurchase agreements, among other purposes. At December 31, 2015 and 2014, the Company had pledged mortgage-related securities held to maturity with a carrying value of $967.4 million and $2.9 billion, respectively. The Company also had pledged other securities held to maturity with a carrying value of $1.2 billion at December 31, 2015 and a carrying value of $1.7 billion at the prior year-end. There were no pledged available-for-sale securities at December 31, 2015; at December 31, 2014, the Company had pledged available-for-sale mortgage-related securities with a carrying value of $11.4 million. In addition, the Company had $21.5 billion of loans pledged to the FHLB to serve as collateral for its wholesale borrowings.

Loan Commitments and Letters of Credit

At December 31, 2015 and 2014, the Company had commitments to originate loans, including unused lines of credit, of $2.8 billion and $2.6 billion, respectively. The majority of the outstanding loan commitments at December 31, 2015 and 2014 had adjustable interest rates and were expected to close within 90 days.

The following table sets forth the Company’s off-balance sheet commitments relating to outstanding loan commitments and letters of credit at December 31, 2015:


(in thousands)
Mortgage Loan Commitments:
Multi-family and commercial real estate	$	1,122,634
One-to-four family		394,912
Acquisition, development, and construction		311,062

Total mortgage loan commitments	$	1,828,608
Other loan commitments		1,003,216

Total loan commitments	$	2,831,824
Commercial, performance stand-by, and financial stand-by letters of credit		296,505

Total commitments	$	3,128,329

Lease Commitments

At December 31, 2015, the Company was obligated under various non-cancelable operating lease and license agreements with renewal options on properties used primarily for branch operations. The Company currently expects to renew such agreements upon their expiration in the normal course of business. The agreements contain periodic escalation clauses that provide for increases in the annual rents, commencing at various times during the lives of the agreements, which are primarily based on increases in real estate taxes and cost-of-living indices.

The projected minimum annual rental commitments under these agreements, exclusive of taxes and other charges, are summarized as follows:


(in thousands)
2016	$	28,833
2017		26,222
2018		22,212
2019		19,319
2020 and thereafter		61,877

Total minimum future rentals	$	158,463

The rental expense under these leases is included in “Occupancy and equipment expense” in the Consolidated Statements of Operations and Comprehensive (Loss) Income, and amounted to $32.8 million, $35.2 million, and $33.7 million, respectively, in the years ended December 31, 2015, 2014, and 2013. Rental income on Company-owned properties, netted in occupancy and equipment expense, was approximately $3.7 million, $3.6 million, and $3.9 million in the corresponding periods. There was no minimum future rental income under non-cancelable sub-lease agreements at December 31, 2015.

Financial Guarantees

The Company provides guarantees and indemnifications to its customers to enable them to complete a variety of business transactions and to enhance their credit standings. These guarantees are recorded at their respective fair values in “Other liabilities” in the Consolidated Statements of Condition. The Company deems the fair value of the guarantees to equal the consideration received.

The following table summarizes the Company’s guarantees and indemnifications at December 31, 2015:


(in thousands)	Expires Within One Year		Expires After One Year		Total Outstanding Amount		Maximum Potential Amount of Future Payments
Financial stand-by letters of credit	$	25,024	$	39,791	$	64,815	$	202,807
Performance stand-by letters of credit		9,537		—		9,537		9,526
Commercial letters of credit		5,917		209		6,126		84,172

Total letters of credit	$	40,478	$	40,000	$	80,478	$	296,505

The maximum potential amount of future payments represents the notional amounts that could be funded under the guarantees and indemnifications if there were a total default by the guaranteed parties or if indemnification provisions were triggered, as applicable, without consideration of possible recoveries under recourse provisions or from collateral held or pledged.

The Company collects a fee upon the issuance of letters of credit. These fees are initially recorded by the Company as a liability, and are recognized as income at the expiration date of the respective guarantees. In addition, the Company requires adequate collateral, typically in the form of real property or personal guarantees, upon its issuance of financial stand-by, performance stand-by, and commercial letters of credit. In the event that a borrower defaults, loans with recourse or indemnification obligate the Company to purchase loans that it has sold or otherwise transferred to a third party. Also outstanding at December 31, 2015 were $151,000 of bankers’ acceptances.

Visa Inc.

In October 2007, Visa U.S.A., a subsidiary of Visa Inc. (“Visa”) completed a reorganization in contemplation of its initial public offering, which was subsequently completed in March 2008. As part of that reorganization, the Community Bank and the former Synergy Bank, along with many other banks across the nation, received shares of common stock of Visa. In accordance with GAAP, the Company did not recognize any value for this common stock ownership interest.

Visa claims that all Visa U.S.A. member banks are obligated to share in its losses stemming from certain litigation against it and certain other named member banks (the “Covered Litigation”). Visa continues to set aside amounts in an escrow account to fund any judgments or settlements that may arise from the Covered Litigation, and has reduced the amount of shares allocated to the Visa U.S.A. member banks by the amounts necessary to cover such liability. Nevertheless, Visa U.S.A. member banks were required to record a liability for the fair value of their related contingent obligation to Visa U.S.A., based on the percentage of their membership interest. The Company has a $433,000 liability based on its best estimate of the combined membership interest of the Community Bank and the former Synergy Bank with regard to both the settled and pending litigation in which Visa is involved.

Derivative Financial Instruments

The Company uses various financial instruments, including derivatives, in connection with its strategies to mitigate or reduce price risk resulting from changes in interest rates. The Company’s derivative financial instruments consist of financial forward and futures contracts, interest rate lock commitments (“IRLCs”), swaps, and options, and relate to mortgage banking operations, MSRs, and other risk management activities. These instruments vary in scope based on the level and volatility of interest rates, the types of assets held, and other changing market conditions. Please see Note 15, “Derivative Financial Instruments” for further information about our use of derivative financial instruments.

Legal Proceedings

Following the announcement on October 29, 2015 of the execution of the Company’s merger agreement with Astoria Financial, six lawsuits challenging the proposed transaction were filed in the Supreme Court of the State of New York, County of Nassau. These actions are captioned: (1) Sandra E. Weiss IRA v. Chrin, et al., Index No. 607132/2015 (filed November 4, 2015); (2) Raul v. Palleschi, et al., Index No. 607238/2015 (filed November 6, 2015); (3) Lowinger v. Redman, et al., Index No. 607268/2015 (filed November 9, 2015); (4) Minzer v. Astoria Fin. Corp., et al., Index No. 607358/2015 (filed November 12, 2015); (5) MSS 12-09 Trust v. Palleschi, et al., Index No. 607472/2015 (filed November 13, 2015); and (6) Firemen’s Ret. Sys. of St. Louis v. Keegan, et al., Index No. 607612/2015 (filed November 23, 2015 (collectively, the “New York Actions”). On January 15, 2016, the court consolidated the New York Actions under the caption In re Astoria Financial Corporation Shareholders Litigation, Index No. 607132/2015. In addition, a seventh lawsuit was filed challenging the proposed transaction in the Delaware Court of Chancery, captioned O’Connell v. Astoria Financial Corp., et al., Case No. 11928 (filed January 22, 2016) (the “Delaware Action”).

Each of the lawsuits challenging the proposed transaction is a putative class action filed on behalf of the stockholders of Astoria Financial and names as defendants Astoria Financial, its directors, and the Company. The various complaints allege that the directors of Astoria Financial breached their fiduciary duties in connection with their approval of the merger agreement by, among other things: agreeing to an allegedly unfair price for Astoria Financial; approving the transaction notwithstanding alleged conflicts of interest; agreeing to deal protection devices that plaintiffs allege are unreasonable; and by failing to disclose certain facts about the process that led to the merger and financial analyses performed by Astoria Financial’s financial advisors. The complaints also allege that the Company aided and abetted those alleged fiduciary breaches. The actions seek, among other things, an order enjoining completion of the proposed merger. Other potential plaintiffs may also file additional lawsuits challenging the proposed transaction.

The outcome of the pending and any additional future litigation is uncertain. If the cases are not resolved, these lawsuits could prevent or delay completion of the merger and result in substantial costs to the Company and Astoria Financial, including any costs associated with the indemnification of directors and officers. One of the conditions to the closing of the merger is that no order, injunction, or decree issued by any court or agency of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the merger shall be in effect. As such, if plaintiffs are successful in obtaining an injunction prohibiting the completion of the merger on the agreed-upon terms, then such injunction may prevent the merger from being completed, or from being completed within the expected timeframe. The defense or settlement of any lawsuit or claim that remains unresolved at the time the merger is completed may adversely affect the Company’s business, financial condition, results of operations, and cash flows.

The Company believes that the factual allegations in the lawsuits are without merit and intends to defend vigorously against these allegations.

In addition to the lawsuits noted above, the Company is involved in various other legal actions arising in the ordinary course of its business. All such actions in the aggregate involve amounts that are believed by management to be immaterial to the financial condition and results of operations of the Company.