Form 10-Q for the Period Ended September 30, 2006
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
[x]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
OF 1934
For
the quarterly period ended September 30, 2006
OR
[
]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
OF 1934
For
the
transition period from to
Commission
file number 0-27782
Dime
Community Bancshares, Inc.
(Exact
name of registrant as specified in its charter)
Delaware
(State
or other jurisdiction of incorporation or organization)
|
|
11-3297463
(I.R.S.
employer identification number)
|
209
Havemeyer Street, Brooklyn, NY
(Address
of principal executive offices)
|
|
11211
(Zip
Code)
|
(718)
782-6200
(Registrant's
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all the reports required
to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES
X
NO
___
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
LARGE
ACCELERATED FILER
ACCELERATED FILER X NON-ACCELERATED
FILER ___
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
YES
NO
X
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
Classes
of Common Stock
|
|
Number
of Shares Outstanding at November 8, 2006
|
$.01
Par Value
|
|
36,596,686
|
|
PART
I - FINANCIAL INFORMATION
|
|
|
|
Page
|
Item
1.
|
|
|
|
|
3
|
|
|
4
|
|
|
5
|
|
|
6
|
|
|
7-15
|
Item
2.
|
|
15-33
|
Item
3.
|
|
34-35
|
Item
4.
|
|
35
|
|
|
|
|
PART
II - OTHER INFORMATION
|
|
Item
1.
|
|
35
|
Item
1A.
|
|
35
|
Item
2.
|
|
35-36
|
Item
3.
|
|
36
|
Item
4.
|
|
36
|
Item
5.
|
|
36
|
Item
6.
|
|
36-37
|
|
|
38
|
This
Quarterly Report on Form 10-Q contains a number of forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended
and
Section 21E of the Securities Exchange Act of 1934, as amended. These statements
may be identified by use of words such as "anticipate," "believe," "could,"
"estimate," "expect," "intend," "may," "outlook," "plan," "potential,"
"predict," "project," "should," "will," "would" and similar terms and phrases,
including references to assumptions.
Forward-looking
statements are based upon various assumptions and analyses made by Dime
Community Bancshares, Inc. (the "Holding Company," and together with its direct
and indirect subsidiaries, the "Company") in light of management's experience
and its perception of historical trends, current conditions and expected future
developments, as well as other factors it believes are appropriate under the
circumstances. These statements are not guarantees of future performance and
are
subject to risks, uncertainties and other factors (many of which are beyond
the
Company's control) that could cause actual results to differ materially from
future results expressed or implied by such forward-looking statements. These
factors include, without limitation, the following:
· |
the
timing and occurrence or non-occurrence of events may be subject
to
circumstances beyond the Company’s control;
|
· |
there
may be increases in competitive pressure among financial institutions
or
from non-financial institutions;
|
· |
changes
in the interest rate environment may reduce interest
margins;
|
· |
changes
in deposit flows, loan demand or real estate values may adversely
affect
the business of The Dime Savings Bank of Williamsburgh (the
"Bank");
|
· |
changes
in accounting principles, policies or guidelines may cause the Company’s
financial condition to be perceived
differently;
|
· |
changes
in corporate and/or individual income tax laws may adversely affect
the
Company's financial condition or results of
operations;
|
· |
general
economic conditions, either nationally or locally in some or all
areas in
which the Company conducts business, or conditions in the securities
markets or banking industry may be less favorable than the Company
currently anticipates;
|
· |
legislation
or regulatory changes may adversely affect the Company’s
business;
|
· |
technological
changes may be more difficult or expensive than the Company
anticipates;
|
· |
success
or consummation of new business initiatives may be more difficult
or
expensive than the Company anticipates;
or
|
· |
litigation
or other matters before regulatory agencies, whether currently existing
or
commencing in the future, may delay the occurrence or non-occurrence
of
events longer than the Company
anticipates.
|
The
Company has no obligation to update forward-looking statements to reflect events
or circumstances after the date of this document.
UNAUDITED
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars
in thousands except share amounts)
|
September
30, 2006
|
December
31, 2005
|
ASSETS:
|
|
|
Cash
and due from banks
|
$22,539
|
$40,199
|
Federal
funds sold and short-term investments
|
94,082
|
60,014
|
Encumbered
investment securities held-to-maturity (estimated fair value of
$380
and $456 at September 30, 2006 and December
31, 2005, respectively)
|
380
|
455
|
Investment
securities available-for-sale, at fair value
|
|
|
Encumbered
|
-
|
13,062
|
Unencumbered
|
29,170
|
31,770
|
|
29,170
|
44,832
|
Mortgage-backed
securities available-for-sale, at fair value:
|
|
|
Encumbered
|
148,987
|
191,093
|
Unencumbered
|
13,951
|
2,360
|
|
162,938
|
193,453
|
Loans:
|
|
|
Real estate, net
|
2,641,290
|
2,608,854
|
Other loans
|
2,234
|
2,341
|
Less allowance for loan losses
|
(15,956)
|
(15,785)
|
Total
loans, net
|
2,627,568
|
2,595,410
|
Loans
held for sale
|
-
|
900
|
Premises
and fixed assets, net
|
22,610
|
16,527
|
Federal
Home Loan Bank of New York capital stock
|
31,745
|
29,917
|
Goodwill
|
55,638
|
55,638
|
Other
assets
|
90,930
|
88,881
|
Total
Assets
|
$3,137,600
|
$3,126,226
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
Liabilities:
|
|
|
Due
to depositors:
|
|
|
Interest bearing deposits
|
$1,837,983
|
$1,817,771
|
Non-interest bearing deposits
|
92,712
|
97,001
|
Total
deposits
|
1,930,695
|
1,914,772
|
Escrow
and other deposits
|
68,035
|
47,518
|
Securities
sold under agreements to repurchase
|
120,380
|
205,455
|
Federal
Home Loan Bank of New York advances
|
581,500
|
531,500
|
Subordinated
notes payable
|
25,000
|
25,000
|
Trust
Preferred securities payable
|
72,165
|
72,165
|
Other
liabilities
|
44,078
|
38,102
|
Total
Liabilities
|
2,841,853
|
2,834,512
|
Commitments
and Contingencies
|
|
|
Stockholders'
Equity:
|
|
|
Preferred
stock ($0.01 par, 9,000,000 shares authorized, none issued or outstanding
at September
30, 2006 and December 31, 2005)
|
-
|
-
|
Common
stock ($0.01 par, 125,000,000 shares authorized, 50,862,445 shares
and
50,633,881 shares
issued
at September 30, 2006 and
December 31, 2005, respectively, and 36,665,264 shares and 36,956,907
shares outstanding at September 30, 2006 and December 31, 2005,
respectively)
|
509
|
506
|
Additional
paid-in capital
|
206,351
|
204,083
|
Retained
earnings
|
284,367
|
274,579
|
Accumulated
other comprehensive loss, net of deferred taxes
|
(3,534)
|
(3,328)
|
Unallocated
common stock of Employee Stock Ownership Plan ("ESOP")
|
(4,453)
|
(4,627)
|
Unearned
and unallocated common stock of Recognition and Retention Plan
("RRP")
|
(3,518)
|
(2,979)
|
Common
stock held by Benefit Maintenance Plan ("BMP")
|
(7,941)
|
(7,941)
|
Treasury
stock, at cost (14,197,181 shares and 13,676,974 shares at September
30, 2006 and December 31, 2005, respectively)
|
(176,034)
|
(168,579)
|
Total
Stockholders' Equity
|
295,747
|
291,714
|
Total
Liabilities And Stockholders' Equity
|
$3,137,600
|
$3,126,226
|
UNAUDITED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars
in thousands except per share amounts)
|
Three
Months Ended September
30,
|
|
Nine
Months Ended September
30,
|
|
2006
|
2005
|
|
2006
|
2005
|
Interest
income:
|
|
|
|
|
|
Loans
secured by real estate
|
$39,122
|
$37,472
|
|
$116,805
|
$110,753
|
Other
loans
|
47
|
29
|
|
141
|
96
|
Mortgage-backed
securities
|
1,666
|
2,010
|
|
5,264
|
9,770
|
Investment
securities
|
454
|
601
|
|
1,405
|
1,963
|
Other
|
1,384
|
2,230
|
|
4,062
|
5,071
|
Total
interest income
|
42,673
|
42,342
|
|
127,677
|
127,653
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
Deposits
and escrow
|
15,019
|
10,690
|
|
40,069
|
30,256
|
Borrowed
funds
|
8,948
|
9,306
|
|
27,610
|
26,956
|
Total
interest expense
|
23,967
|
19,996
|
|
67,679
|
57,212
|
Net
interest income
|
18,706
|
22,346
|
|
59,998
|
70,441
|
Provision
for loan losses
|
60
|
60
|
|
180
|
180
|
Net
interest income after provision for loan losses
|
18,646
|
22,286
|
|
59,818
|
70,261
|
|
|
|
|
|
|
Non-interest
income:
|
|
|
|
|
|
Service
charges and other fees
|
1,507
|
1,561
|
|
4,461
|
4,483
|
Net
gain on sales of loans
|
779
|
284
|
|
1,432
|
571
|
Net
gain (loss) on sales and redemptions of securities and other
assets
|
-
|
-
|
|
1,541
|
(5,176)
|
Income
from Bank owned life insurance
|
466
|
466
|
|
1,396
|
1,415
|
Other
|
383
|
330
|
|
1,158
|
1,251
|
Total
non-interest income
|
3,135
|
2,641
|
|
9,988
|
2,544
|
|
|
|
|
|
|
Non-interest
expense:
|
|
|
|
|
|
Salaries
and employee benefits
|
5,445
|
5,470
|
|
15,955
|
15,547
|
ESOP
and RRP compensation expense
|
561
|
589
|
|
1,723
|
1,743
|
Occupancy
and equipment
|
1,504
|
1,389
|
|
4,295
|
4,002
|
Federal
deposit insurance premiums
|
64
|
76
|
|
196
|
242
|
Data
processing costs
|
807
|
966
|
|
2,382
|
1,995
|
Other
|
2,239
|
2,246
|
|
7,045
|
6,898
|
Total
non-interest expense
|
10,620
|
10,736
|
|
31,596
|
30,427
|
|
|
|
|
|
|
Income
before income taxes
|
11,161
|
14,191
|
|
38,210
|
42,378
|
Income
tax expense
|
4,002
|
5,089
|
|
13,583
|
15,147
|
Net
income
|
$7,159
|
$9,102
|
|
$24,627
|
$27,231
|
|
|
|
|
|
|
Earnings
per Share:
|
|
|
|
|
|
Basic
|
$0.21
|
$0.26
|
|
$0.70
|
$0.77
|
Diluted
|
$0.20
|
$0.26
|
|
$0.70
|
$0.76
|
UNAUDITED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND
COMPREHENSIVE INCOME
(Dollars
in thousands)
|
Nine
Months Ended September 30,
|
|
2006
|
2005
|
Common
Stock (Par Value $0.01):
|
|
|
Balance
at beginning of period
|
$506
|
$501
|
Shares
issued in exercise of options
|
3
|
4
|
Balance
at end of period
|
509
|
505
|
Additional
Paid-in Capital:
|
|
|
Balance
at beginning of period
|
204,083
|
198,183
|
Cash
paid for fractional shares of stock dividend
|
-
|
-
|
Stock
options exercised
|
878
|
1,747
|
Tax
benefit of benefit plans
|
620
|
1,935
|
Excess
market over cost basis of treasury shares released
|
107
|
222
|
Amortization
of excess fair value over cost - ESOP stock
|
663
|
836
|
Balance
at end of period
|
206,351
|
202,923
|
Retained
Earnings:
|
|
|
Balance
at beginning of period
|
274,579
|
258,237
|
Net
income for the period
|
24,627
|
27,231
|
Cash
dividends declared and paid
|
(14,839)
|
(14,921)
|
Balance
at end of period
|
284,367
|
270,547
|
Accumulated
Other Comprehensive Income:
|
|
|
Balance
at beginning of period
|
(3,328)
|
(3,228)
|
Change
in other comprehensive loss during the period, net of deferred
taxes
|
(206)
|
400
|
Balance
at end of period
|
(3,534)
|
(2,828)
|
Employee
Stock Ownership Plan:
|
|
|
Balance
at beginning of period
|
(4,627)
|
(4,749)
|
Amortization
of earned portion of ESOP stock
|
174
|
70
|
Balance
at end of period
|
(4,453)
|
(4,679)
|
Recognition
and Retention Plan:
|
|
|
Balance
at beginning of period
|
(2,979)
|
(2,612)
|
Common
stock acquired by RRP
|
(770)
|
(571)
|
Amortization
of earned portion of RRP stock
|
231
|
147
|
Balance
at end of period
|
(3,518)
|
(3,036)
|
Treasury
Stock:
|
|
|
Balance
at beginning of period
|
(168,579)
|
(157,263)
|
Shares
released for obligation of BMP and RRP
|
592
|
862
|
Purchase
of treasury shares, at cost
|
(8,047)
|
(9,617)
|
Balance
at end of period
|
(176,034)
|
(166,018)
|
Common
Stock Held by BMP:
|
|
|
Balance
at beginning of period
|
(7,941)
|
(7,348)
|
Common
stock acquired
|
-
|
(593)
|
Balance
at end of period
|
(7,941)
|
(7,941)
|
|
Ended
September 30,
|
|
For
the Nine Months
Ended
September 30,
|
Statements
of Comprehensive Income
|
2006
|
2005
|
|
2006
|
2005
|
Net
Income
|
$7,159
|
$9,102
|
|
$24,627
|
$27,231
|
Reclassification
adjustment for securities sold, net of (tax) benefit of $(489)
and
$2,143, respectively, during the nine months ended September 30,
2006 and
2005
|
-
|
-
|
|
(575)
|
3,033
|
Net
unrealized securities gains (losses) arising during the period, net
of
benefit
(taxes) of $1,266 and $(1,117)
during the three months ended September
30, 2006 and 2005, respectively, and $314 and $(2,243)
during the nine months ended September 30, 2006 and 2005,
respectively
|
1,486
|
(1,311)
|
|
369
|
(2,633)
|
Comprehensive
Income
|
$8,645
|
$7,791
|
|
$24,421
|
$27,631
|
UNAUDITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars
In thousands)
|
Nine
Months Ended September
30,
|
|
2006
|
2005
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
Net
Income
|
$24,627
|
$27,231
|
Adjustments
to reconcile net income to net cash (used in) provided by operating
activities:
|
|
|
Net
(gain) loss on the sale of investment securities and other
assets
|
(1,541)
|
5,176
|
Net
gain on sale of loans held for sale
|
(1,432)
|
(571)
|
Net
depreciation and amortization
|
1,280
|
1,977
|
ESOP
compensation expense
|
836
|
906
|
Stock
plan compensation (excluding ESOP)
|
232
|
147
|
Provision
for loan losses
|
180
|
180
|
Increase
in cash surrender value of Bank Owned Life Insurance
|
(1,396)
|
(1,415)
|
(Increase)
Decrease in net deferred income tax asset
|
(298)
|
608
|
Changes
in assets and liabilities:
|
|
|
Origination
of loans held for sale
|
(69,345)
|
(85,169)
|
Proceeds
from sale of loans held for sale
|
71,677
|
86,023
|
Decrease
(Increase) in other assets
|
296
|
(265)
|
Increase
in other liabilities
|
5,977
|
12,656
|
Net
cash provided by operating activities
|
31,093
|
47,484
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
Net
increase in other short term investments
|
(34,064)
|
(93,423)
|
Proceeds
from maturities of investment securities held-to-maturity
|
75
|
65
|
Proceeds
from maturities of investment securities
available-for-sale
|
17,075
|
15,000
|
Proceeds
from sales of investment securities available-for-sale
|
3,032
|
36,421
|
Proceeds
from sales of mortgage backed securities held-to-maturity
|
-
|
377
|
Proceeds
from sales of mortgage backed securities
available-for-sale
|
-
|
232,230
|
Purchases
of investment securities available-for-sale
|
(4,029)
|
(51,980)
|
Purchases
of mortgage backed securities available-for-sale
|
-
|
(1,493)
|
Principal
collected on mortgage backed securities held-to-maturity
|
-
|
94
|
Principal
collected on mortgage backed securities available-for-sale
|
30,560
|
75,384
|
Net
increase in loans
|
(32,338)
|
(67,908)
|
Purchases
of premises and equipment
|
(7,145)
|
(864)
|
Purchase
of Federal Home Loan Bank of New York stock
|
(1,828)
|
-
|
Net
cash (used in) provided by investing activities
|
(28,662)
|
143,903
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
Net
increase (decrease) in due to depositors
|
15,923
|
(195,128)
|
Net
increase in escrow and other deposits
|
20,517
|
28,095
|
Decrease
in securities sold under agreements to repurchase
|
(85,075)
|
(64)
|
Increase
in Federal Home Loan Bank of New York Advances
|
50,000
|
-
|
Cash
dividends paid
|
(14,839)
|
(14,921)
|
Stock
options exercised and tax benefits of stock plans
|
1,501
|
3,686
|
Acquisition
of common stock by RRP and BMP
|
(71)
|
(80)
|
Purchase
of treasury stock
|
(8,047)
|
(9,617)
|
Net
cash used in financing activities
|
(20,091)
|
(188,029)
|
(DECREASE)
INCREASE IN CASH AND DUE FROM BANKS
|
(17,660)
|
3,358
|
CASH
AND DUE FROM BANKS, BEGINNING OF PERIOD
|
40,199
|
26,581
|
CASH
AND DUE FROM BANKS, END OF PERIOD
|
$22,539
|
$29,939
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
Cash
paid for income taxes
|
$8,907
|
$2,491
|
Cash
paid for interest
|
66,551
|
56,008
|
(Decrease)
Increase in accumulated other comprehensive loss
|
(206)
|
400
|
1.
NATURE OF OPERATIONS
The
Holding Company is a Delaware corporation and parent company of the Bank, a
federally-chartered stock savings bank. The
Holding Company's direct subsidiaries are the Bank, Dime Community Capital
Trust
1 and 842 Manhattan Avenue Corp. The Bank's direct subsidiaries are Havemeyer
Equities Corp. (''HEC''), Boulevard Funding Corp., Havemeyer Investments, Inc.,
DSBW Residential Preferred Funding Corp. and Dime Reinvestment Corp. HEC has
one
direct subsidiary, DSBW Preferred Funding Corporation.
The
Bank
maintains its headquarters in the Williamsburg section of Brooklyn, New York
and
operates twenty-one full service retail banking offices located in the New
York
City boroughs of Brooklyn, Queens, and the Bronx, and in Nassau County, New
York. The Bank’s principal business has been, and continues to be, gathering
deposits from customers within its market area, and investing them primarily
in
multifamily residential, commercial real estate, one- to four-family
residential, construction and consumer loans, as well as mortgage-backed
securities (“MBS”), obligations of the U.S. Government and Government Sponsored
Entities, and corporate debt and equity securities.
2.
SUMMARY OF ACCOUNTING POLICIES
In
the
opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the Company's
financial condition as of September 30, 2006, the results of operations and
statements of comprehensive income for the three-month and nine-month periods
ended September 30, 2006 and 2005, and changes in stockholders' equity and
cash
flows for the nine months ended September 30, 2006 and 2005. The results of
operations for the three-month and nine-month periods ended September 30, 2006
are not necessarily indicative of the results of operations for the remainder
of
the year ending December 31, 2006. Certain information and note disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America ("GAAP") have
been
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC").
Preparation
of the consolidated financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
of
assets and liabilities and disclosure of contingent assets and liabilities
at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Areas in the accompanying financial statements where estimates are
made include the allowance for loan losses, the valuation of mortgage servicing
rights ("MSR"), asset impairment adjustments, the valuation of debt and equity
securities, loan income recognition, and the realization of deferred tax
assets.
These
unaudited condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements as of and for
the
year ended December 31, 2005 and notes thereto.
3.
TREASURY STOCK
During
the nine months ended September 30, 2006, the Holding Company repurchased
568,207 shares of its common stock into treasury. All shares repurchased were
recorded at the acquisition cost, which totaled $8.0 million during the
period.
On
January 3, 2006, 30,000 shares of the Company's common stock were released
from
treasury in order to fulfill benefit obligations under the 2004 Stock Incentive
Plan for Outside Directors, Officers and Employees of Dime Community Bancshares,
Inc. (the "2004 Stock Incentive Plan"). The closing price of the Company's
common stock on that date was $14.97. The shares were released utilizing the
average historical cost method.
On
March
16, 2006, 18,000 shares of the Company's common stock were released from
treasury in order to fulfill benefit obligations under the 2004 Stock Incentive
Plan. The closing price of the Company's common stock on that date was $14.48.
The shares were released utilizing the average historical cost
method.
4.
ACCOUNTING FOR GOODWILL
The
Company has designated the last day of its fiscal year as its date for annual
impairment testing. The Company performed an impairment test as of December
31,
2005 and concluded that no impairment of goodwill existed. No events have
occurred nor circumstances changed subsequent to December 31, 2005 that would
reduce the fair value of the Company's reporting unit below its carrying value.
Such events or changes in circumstances would require the immediate performance
of an impairment test in accordance with
Statement
of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other
Intangible Assets."
Aggregate
amortization expense related to the core deposit intangible was $48,000 for
the
nine months ended September 30, 2005. The core deposit intangible was fully
amortized as of March 31, 2005, and there has been no subsequent amortization
expense.
5.
EARNINGS PER SHARE ("EPS")
EPS
is
calculated and reported in accordance with SFAS No. 128, "Earnings Per Share.''
SFAS No. 128 requires disclosure of basic EPS and diluted EPS for entities
with
complex capital structures on the face of the income statement, along with
a
reconciliation of the numerators and denominators of basic and diluted EPS.
Basic
EPS
is computed by dividing net income by the weighted-average number of common
shares outstanding during the period (weighted-average common shares are
adjusted to exclude unvested RRP shares and unallocated ESOP shares). Diluted
EPS is computed using the same method as basic EPS, however, the computation
reflects the potential dilution that would occur if unvested RRP shares became
vested and stock options were exercised and converted into common stock.
The
following is a reconciliation of the numerator and denominator of basic EPS
and
diluted EPS for the periods presented:
|
Three
Months Ended September
30,
|
|
Nine
Months Ended September
30,
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
(Dollars
in Thousands except share amounts)
|
Numerator:
|
|
|
|
|
|
|
|
Net
Income per the Consolidated Statements of Operations
|
$7,159
|
|
$9,102
|
|
$24,627
|
|
$27,231
|
Denominator:
|
|
|
|
|
|
|
|
Weighted-average
number of shares outstanding utilized
in the calculation of basic EPS
|
34,806,171
|
|
35,123,231
|
|
34,944,681
|
|
35,168,741
|
|
|
|
|
|
|
|
|
Unvested
shares of RRP or Restricted Stock Awards
|
71,855
|
|
45,304
|
|
76,091
|
|
42,253
|
Common
stock equivalents resulting from the dilutive
effect of "in-the-money" stock options
|
217,097
|
|
572,967
|
|
266,135
|
|
661,403
|
Anti-dilutive
effect of tax benefits associated with "in-the-money"
stock options
|
(66,220)
|
|
(188,370)
|
|
(86,540)
|
|
(219,281)
|
Weighted
average number of shares outstanding utilized
in the calculation of diluted EPS
|
35,028,903
|
|
35,553,132
|
|
35,200,367
|
|
35,653,116
|
Common
stock equivalents resulting from the dilutive effect of "in-the-money" stock
options are calculated based upon the excess of the average market value of
the
Company's common stock over the exercise price of outstanding options.
There
were 1,078,238 weighted-average unexercised stock options for both the
three-month and nine-month periods ended September 30, 2006, and 2005,
respectively, and 769,354 weighted-average unexercised stock options for both
the three-month and nine-month periods ended September 30, 2005, respectively,
that were not considered in the calculation of diluted EPS since their exercise
prices exceeded the average market price during the period.
6.
ACCOUNTING FOR STOCK BASED COMPENSATION
The
Holding Company and Bank maintain the Dime
Community Bancshares, Inc. 1996 Stock Option Plan for Outside Directors,
Officers and Employees, the Dime Community Bancshares, Inc. 2001 Stock Option
Plan for Outside Directors, Officers and Employees and the 2004
Stock Incentive Plan, (collectively the "Stock Plans"), as well as the RRP,
which are discussed more fully in Note 15 to the Company's consolidated audited
financial statements for the year ended December 31, 2005, and which
are
subject to the accounting requirements of SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), as amended by SFAS No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosures, an Amendment of
FASB
Statement No. 123."
In
December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No.
123 (revised 2004), "Share-Based Payment", ("SFAS 123R"), addressing the
accounting for share-based payment transactions (e.g.,
stock
options and awards of restricted stock) in which an employer receives employee
services in exchange for equity securities of the company or liabilities that
are based on the fair value of the company’s equity securities. The Company
adopted SFAS 123R on January 1, 2006 using a modified prospective application.
Accordingly, prior year amounts have not been restated. Prior to January 1,
2006, the Company accounted for stock options granted under the Stock Plans
using the
intrinsic
value recognition and measurement principles of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and
related interpretations. Accordingly, no stock-based compensation was reflected
in net income for stock options during the three-month and nine-month periods
ended September 30, 2005, since, for all options granted under the Stock Plans,
the exercise price equaled the market value of the underlying common stock
on
the date of the grant.
Compensation
expense related to the RRP prior to January 1, 2006 was recorded for all shares
earned by participants during the applicable period at the average historical
acquisition cost of all allocated RRP shares in accordance with APB
25.
SFAS
123R
supersedes APB 25, generally requiring that share based payments be accounted
for using a fair value based method and the recording of compensation expense
in
lieu of optional pro forma disclosure.
Since
all
stock options outstanding were fully vested on December 30, 2005 and there
have
been no grants of stock options since that date, there was no recorded expense
related to stock options during the three-month and nine-month periods ended
September 30, 2006. Grants of restricted stock awards during the three-month
and
nine-month periods ended September 30, 2006 were accounted for in accordance
with SFAS 123R.
The
following table illustrates the effect on net income and EPS had the Company
applied the fair value recognition provisions of SFAS 123R to stock-based
employee compensation for the Stock Plans and RRP during the three-month and
nine-month periods ended September 30, 2005:
|
|
Three
Months Ended
September
30, 2005
|
|
Nine
Months Ended
September
30, 2005
|
|
|
(Dollars
in Thousands, except
per share amounts)
|
Net
income, as reported
|
|
$9,102
|
|
$27,231
|
Less:
Excess stock-based compensation expense determined under the fair
value
method over the stock-based compensation recorded for all plans,
net of
applicable taxes
|
|
(395)
|
|
(1,148)
|
Pro
forma net income
|
|
$8,707
|
|
$26,083
|
|
|
|
|
|
Earnings
per share
|
|
|
|
|
Basic,
as reported
|
|
$0.26
|
|
$0.77
|
Basic,
pro forma
|
|
0.25
|
|
0.74
|
|
|
|
|
|
Diluted,
as reported
|
|
$0.26
|
|
$0.76
|
Diluted,
pro forma
|
|
0.24
|
|
0.73
|
On
March
29, 2005, the SEC released Staff Accounting Bulletin No. 107 ("SAB No. 107"),
providing guidance on several technical issues regarding the required adoption
of SFAS 123R. The Company adopted SAB No. 107 on January 1, 2006 in conjunction
with the adoption of SFAS 123R. Compliance with SAB No. 107 did not have a
material impact upon the Company's financial condition or results of
operations.
Combined
activity related to stock options granted under the Stock Plans for the
three-month and nine-month periods ended Sptember 30, 2006 and 2005 was as
follows:
|
At
or for the Three Months
Ended
September 30,
|
|
At
or for the Nine Months
Ended
September 30,
|
|
2006
|
2005
|
|
2006
|
2005
|
|
(Dollars
in Thousands, Except Share Amounts)
|
Options
outstanding - beginning of period
|
2,305,708
|
2,750,672
|
|
2,503,103
|
2,679,435
|
Options
granted
|
-
|
-
|
|
-
|
394,812
|
Weighted
average exercise price of grants
|
-
|
-
|
|
-
|
$15.36
|
Options
exercised
|
53,977
|
123,306
|
|
245,747
|
424,906
|
Weighted
average exercise price of exercised options
|
$5.21
|
$4.37
|
|
$4.74
|
$4.63
|
Options
forfeited
|
-
|
12,705
|
|
5,625
|
34,680
|
Weighted
average exercise price of forfeited options
|
$-
|
$16.91
|
|
$19.90
|
$17.26
|
Options
outstanding - end of period
|
2,251,731
|
2,614,661
|
|
2,251,731
|
2,614,661
|
Weighted
average exercise price of outstanding options - end of
period
|
$14.85
|
$13.50
|
|
$14.85
|
$13.50
|
Remaining
options available for grant
|
1,127,278
|
1,166,842
|
|
1,127,278
|
1,166,842
|
Exercisable
options at end of period
|
2,251,731
|
1,343,058
|
|
2,251,731
|
1,343,058
|
Weighted
average exercise price of exercisable options - end of
period
|
$14.85
|
$11.11
|
|
$14.85
|
$11.11
|
Cash
received for option exercise cost
|
$281
|
$539
|
|
$1,082
|
$1,889
|
Income
tax benefit recognized
|
839
|
1,900
|
|
565
|
1,900
|
The
range
of exercise prices and weighted-average remaining contractual lives of both
options outstanding and options exercisable as of September 30, 2006 was as
follows:
Range
of Exercise Prices
|
Outstanding
as of
September
30, 2006
|
Exercisable
as of
September
30, 2006
|
Weighted
Average
Exercise
Price
|
Weighted
Average Contractual Years Remaining
|
$2.51
- $3.00
|
39,403
|
39,403
|
2.76
|
0.7
|
$4.51
- $5.00
|
14,087
|
14,087
|
4.56
|
3.3
|
$10.50
- $11.00
|
507,818
|
507,818
|
10.91
|
5.1
|
$13.00-$13.50
|
612,185
|
612,185
|
13.16
|
6.3
|
$15.00-$15.50
|
318,492
|
318,492
|
15.10
|
8.7
|
$16.00-$16.50
|
76,320
|
76,320
|
16.45
|
8.3
|
$19.50-$20.00
|
683,426
|
683,426
|
19.90
|
7.3
|
Total
|
2,251,731
|
2,251,731
|
$14.85
|
6.7
|
There
were no grants of stock options under the Stock Plans during the three-month
and
nine-month periods ended September 30, 2006, or the three-month period ended
September 30, 2005. The weighted average fair value per option at the date
of
grant for stock options granted during the nine-month period ended September
30,
2005 was estimated as follows:
|
Nine Months Ended September 30, 2005
|
Total
options granted
|
394,812
|
Estimated
fair value on date of grant
|
$3.91
|
Pricing
methodology utilized
|
Black-
Scholes
|
Expected
life (in years)
|
7.0
|
Interest
rate
|
3.94%
|
Volatility
|
31.67
|
Dividend
yield
|
3.67
|
Other
Stock Awards
RRP
- In
December 1996, the Holding Company's shareholders approved the RRP. On February
1, 1997, the Holding Company allocated 1,963,913 shares of its common stock
to
employees and outside directors. These shares vested in equal installments
on
February 1, 1998, 1999, 2000, 2001, and 2002. On
each
vesting date, the RRP re-acquired shares that were sold by RRP participants
in
order to fund income tax obligations associated with their individual vesting
of
shares. In addition, during the period February 1, 1998 through February 1,
2002, the RRP re-acquired shares that were forfeited by participants. The shares
re-acquired by the RRP during the period February 1, 1998 through February
1,
2002, either through the repurchase or forfeiture of previously allocated
shares, totaled 343,797. On May 17, 2002, 67,500 RRP shares were granted to
certain officers of the Bank. These shares vested as follows: 20% on November
25, 2002, and 20% each on April 25, 2003, 2004, 2005 and 2006. The fair value
of
the Company's common stock on May 17, 2002 was $16.19. The RRP has re-acquired
26,840 shares of common stock that were sold by RRP participants in order to
fund income tax obligations associated with their individual vesting of shares
under the May 17, 2002 grant. At September 30, 2006, a total of 303,137 shares
held by the RRP remained eligible for future allocation. Prior to adoption
of
SFAS 123R on January 1, 2006, the Company accounted for compensation expense
under the RRP pursuant to APB 25, measuring compensation cost based upon the
average acquisition value of the RRP shares. Effective January 1, 2006, the
Company began accounting for compensation expense under the RRP pursuant to
SFAS
123R. The effect of adoption upon the compensation expense recorded was not
material.
The
following is a summary of activity related to the RRP awards during the
three-month and nine-month periods ended September 30, 2006 and
2005:
|
At
or for the Three Months
Ended
September 30,
|
|
At
or for the Nine Months
Ended
September 30,
|
|
2006
|
2005
|
|
2006
|
2005
|
|
(Dollars
in Thousands Except Share Amounts)
|
Shares
acquired (a)
|
-
|
-
|
|
5,023
|
5,636
|
Shares
vested
|
-
|
-
|
|
13,500
|
13,500
|
Shares
allocated
|
-
|
-
|
|
-
|
-
|
Unallocated
shares - end of period
|
303,137
|
298,114
|
|
303,137
|
298,114
|
Unvested
allocated shares - end of period
|
-
|
13,500
|
|
-
|
13,500
|
Compensation
recorded to expense
|
-
|
$27
|
|
$45
|
$81
|
Income
tax benefit recognized
|
29
|
-
|
|
58
|
35
|
(a)
Represents shares re-acquired from either participant sales of vested shares
in
order to satisfy income tax obligations or participant forfeitures.
Restricted
Stock Awards - On
March
17, 2005, a grant of 31,804 restricted stock awards was made to officers of
the
Bank under the 2004 Stock Incentive Plan. One-fourth of these awards vested
to
the respective recipients on May 1, 2006. The remaining three-fourths of these
awards vest in equal annual installments on May 1, 2007, 2008 and 2009,
respectively. The fair value of the Company's common stock on March 17, 2005
was
$15.44. On January 3, 2006, a grant of 30,000 restricted stock awards was made
to officers of the Bank under the 2004 Stock Incentive Plan. One-fifth of these
awards vest to the respective recipients on February 1, 2007, 2008, 2009, 2010
and 2011, respectively. The fair value of the Company's common stock on January
3, 2006 was $14.61 (the opening price on the grant date). On March 16, 2006,
a
grant of 18,000 restricted stock awards was made to officers of the Bank under
the 2004 Stock Incentive Plan. One-fifth of these awards vest to the respective
recipients on May 1, 2007, 2008, 2009, 2010 and 2011, respectively. The fair
value of the Company's common stock on March 16, 2006 was $14.48.
In
accordance with either SFAS 123 or SFAS 123R, during the three-month and
nine-month periods ended September 30, 2006 and 2005, compensation expense
was
recorded on these restricted stock awards based upon the fair value of the
shares on the respective dates of grant.
The
following is a summary of activity related to the restricted stock awards
granted under the 2004 Stock Incentive Plan during the three-month and
nine-month periods ended September 30, 2006 and 2005:
|
At
or for the Three Months
Ended
September 30,
|
|
At
or for the Nine Months
Ended
September 30,
|
|
2006
|
2005
|
|
2006
|
2005
|
|
(Dollars
in Thousands Except Share Amounts)
|
Unvested
allocated shares - beginning of period
|
71,855
|
31,804
|
|
31,804
|
-
|
Shares
granted
|
-
|
-
|
|
48,000
|
31,804
|
Shares
vested
|
-
|
-
|
|
7,949
|
-
|
Unvested
allocated shares - end of period
|
71,855
|
31,804
|
|
71,855
|
31,804
|
Unallocated
shares - end of period
|
-
|
-
|
|
-
|
-
|
Compensation
recorded to expense
|
$66
|
$31
|
|
$186
|
$66
|
Income
tax benefit recognized
|
(3)
|
-
|
|
(3)
|
-
|
7.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
The
following table summarizes the gross unrealized losses and fair value of
investment securities and MBS available-for-sale as of September 30, 2006,
aggregated by investment category and the length of time the securities were
in
a continuous unrealized loss position:
|
Less
than 12 Months
Consecutive
Unrealized
Losses
|
12
Months or More Consecutive
Unrealized
Losses
|
Total
|
|
|
(Dollars
in thousands)
|
|
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
Corporate
securities
|
$5,000
|
$6
|
$993
|
$7
|
$5,993
|
$13
|
Equity
securities
|
1,217
|
6
|
2,953
|
118
|
4,170
|
124
|
FNMA
pass-through certificates
|
-
|
-
|
9,943
|
417
|
9,943
|
417
|
Collateralized
Mortgage Obligations
|
-
|
-
|
151,075
|
5,697
|
151,075
|
5,697
|
|
$6,217
|
$12
|
$164,964
|
$6,239
|
$171,181
|
$6,251
|
Management
believes that all unrealized losses were temporary at September 30, 2006. In
making this determination, management considered the severity and duration
of
the loss as well as its intent with regard to these securities.
The
aggregate amount of held-to-maturity investment securities and MBS carried
at
historical cost was $380,000 as of September 30, 2006. No individual
held-to-maturity security that was carried at historical cost possessed an
unrealized loss as of September 30, 2006.
8.
RETIREMENT AND POSTRETIREMENT PLANS
The
Company or the Bank maintain the Retirement Plan of The Dime Savings Bank of
Williamsburgh (the "Employee Retirement Plan"), the Retirement Plan for Board
Members of Dime Community Bancshares, Inc. (the "Outside Director Retirement
Plan"), the BMP and the Postretirement Welfare Plan of The Dime Savings Bank
of
Williamsburgh ("Postretirement Plan"). Net expenses associated with the Employee
and Outside Director Retirement Plans, the BMP and the Postretirement Plan
were
comprised of the following components:
|
Three
Months Ended September
30, 2006
|
|
Three
Months Ended September
30, 2005
|
|
BMP,
Employee
and
Outside
Director
Retirement
Plans
|
Postretirement
Plan
|
|
BMP,
Employee
and Outside Director
Retirement
Plans
|
Postretirement
Plan
|
|
(Dollars
in thousands)
|
Service
cost
|
$-
|
$16
|
|
$-
|
$18
|
Interest
cost
|
327
|
57
|
|
336
|
64
|
Expected
return on assets
|
(438)
|
-
|
|
(413)
|
-
|
Unrecognized
past service liability
|
-
|
(7)
|
|
-
|
(7)
|
Amortization
of unrealized loss
|
155
|
10
|
|
142
|
14
|
Net
expense
|
$44
|
$76
|
|
$65
|
$89
|
|
Nine
Months Ended September
30, 2006
|
|
Nine
Months Ended September
30, 2005
|
|
BMP,
Employee
and
Outside
Director
Retirement
Plans
|
Postretirement
Plan
|
|
BMP,
Employee
and
Outside
Director
Retirement
Plans
|
Postretirement
Plan
|
|
(Dollars
in thousands)
|
Service
cost
|
$-
|
$62
|
|
$-
|
$54
|
Interest
cost
|
981
|
171
|
|
1,018
|
192
|
Expected
return on assets
|
(1,314)
|
-
|
|
(1,239)
|
-
|
Unrecognized
past service (liability) benefit
|
-
|
(21)
|
|
52
|
(22)
|
Amortization
of unrealized loss
|
465
|
30
|
|
426
|
42
|
Curtailment
credit
|
-
|
-
|
|
(179)
|
-
|
Net
expense
|
$132
|
$242
|
|
$78
|
$266
|
The
Company previously disclosed in its consolidated financial statements for the
year ended December 31, 2005 that it expects to make contributions or benefit
payments totaling $177,000 to the BMP, $156,000 to its Outside Director
Retirement Plan, and $155,000 to its Postretirement Plan, and make no
contributions to the Employee Retirement Plan during the year ending December
31, 2006. During the three-month and nine-month periods ended September 30,
2006, the Company made benefit payments of $32,000 and $56,000, respectively,
to
the Outside Director Retirement Plan and expects to make an additional $32,000
of contributions or benefit payments during the remainder of 2006. During the
three-month and nine-month periods ended September 30, 2006, the Company made
contributions totaling $45,000 and $113,000, respectively, to the Postretirement
Plan and expects to make an additional estimated $45,000 of contributions or
benefit payments during the remainder of 2006. During the nine months ended
September 30, 2006, the Company made no contributions or benefit payments to
the
BMP, and does not expect to make any benefit payments or contributions to the
BMP during the remainder of 2006, since anticipated retirements that formed
the
basis for the expected benefit payments in 2006 are no longer expected to
occur.
9.
RECENT ACCOUNTING PRONOUNCEMENTS
In
September 2006, the FASB issued SFAS No. 158, "Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements
No. 87, 88, 106, and 132(R)" (SFAS 158"). SFAS 158 requires an employer
sponsoring a single employer defined benefit plan to do the following: (1)
recognize the funded status of a benefit plan, measured as the difference
between plan assets at fair value (with limited exceptions) and the benefit
obligation, in its statement of financial position. For a pension plan, the
benefit obligation is the projected benefit obligation; for any other
postretirement benefit plan, such as a retiree health care plan, the benefit
obligation is the accumulated postretirement benefit obligation; (2) recognize
as a component of other comprehensive income, net of tax, the gains or losses
and prior service costs or credits that arise during the period but are not
recognized as components of net periodic benefit cost pursuant to SFAS No.
87,
"Employers’ Accounting for Pensions," or SFAS No. 106, "Employers’ Accounting
for Postretirement
Benefits
Other Than Pensions." Amounts recognized in accumulated other comprehensive
income, including the gains or losses, prior service costs or credits, and
the
transition asset or obligation remaining from the initial application of
Statements 87 and 106, are adjusted as they are subsequently recognized as
components of net periodic benefit cost pursuant to the recognition and
amortization provisions of those Statements; (3) measure defined benefit plan
assets and obligations as of the date of the employer’s fiscal year-end
statement of financial position (with limited exceptions); and (4) disclose
in
the notes to financial statements additional information about certain effects
on net periodic benefit cost for the next fiscal year that arise from delayed
recognition of the gains or losses, prior service costs or credits, and
transition asset or obligation. Adoption of SFAS 158 is required for fiscal
years ending after December 15, 2006. Management is evaluating the impact of
adopting SFAS 158.
In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS
157"), which defines fair value, establishes a framework for measuring fair
value under GAAP, and expands disclosures about fair value measurements. Other
current accounting pronouncements that require or permit fair value measurements
will require application of SFAS 157. SFAS 157 does not require any new fair
value measurements, however, does change the definition of, and methods used
to
measure, fair value and expands disclosures about fair value measurements.
SFAS
157 emphasizes fair value as a market-based measurement, not an entity-specific
measurement. Under SFAS 157, a fair value measurement should be determined
based
on the assumptions that market participants would use in pricing the asset
or
liability. SFAS 157 further establishes a fair value hierarchy that
distinguishes between (1) market participant assumptions developed based on
market data obtained from sources independent of the reporting entity
(observable inputs) and (2) the reporting entity’s own assumptions about market
participant assumptions developed based on the best information available in
the
circumstances. SFAS 157 also expands disclosures about the use of fair value
to
measure assets and liabilities in interim and annual periods subsequent to
initial recognition. SFAS 157 is effective for financial statements issued
for
fiscal years beginning after November 15, 2007, and interim periods within
those
fiscal years. Adoption of SFAS 157 is not expected to have a material impact
upon the Company's financial condition or results of operations.
In
March
2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial
Assets" ("SFAS 156"). The Statement amends SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
with respect to accounting for separately recognized MSR. SFAS 156 requires
all
separately recognized MSR to be initially measured at fair value, if
practicable. SFAS 156 permits an entity to choose either of the following
subsequent measurement methods for each class of separately recognized servicing
assets and liabilities: (1) amortizing servicing assets or liabilities in
proportion to and over the period of estimated net servicing income or net
servicing loss; or (2) reporting servicing assets or liabilities at fair value
at each reporting date and reporting changes in fair value in earnings in the
period in which the changes occur. In the event that the first method is
selected, SFAS 156 requires an assessment of servicing assets or liabilities
for
impairment or increased obligation based on fair value at each reporting date.
SFAS 156 further requires additional disclosures for all separately recognized
MSR. SFAS 156 is effective as of commencement of the first fiscal year that
begins after September 15, 2006. Adoption of SFAS 156 is not expected to have
a
material impact on the Company’s consolidated financial condition or results of
operations.
In
February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments" ("SFAS 155"). SFAS 155 amends both SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," and SFAS No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." Among other matters, SFAS 155 resolves issues
addressed in SFAS 133 Implementation Issue No. D1, "Application of Statement
133
to Beneficial Interests in Securitized Financial Assets." SFAS 155 permits
fair
value re-measurement for any hybrid financial instrument that contains an
embedded derivative that otherwise would require bifurcation, clarifies which
interest-only strips and principal-only strips are not subject to the
requirements of SFAS No. 133, establishes a requirement to evaluate interests
in
securitized financial assets to identify interests that are freestanding
derivatives or that are hybrid financial instruments that contain an embedded
derivative requiring bifurcation, clarifies that concentrations of credit risk
in the form of subordination are not embedded derivatives, and amends SFAS
140
to eliminate the prohibition on a qualifying special purpose entity against
holding a derivative financial instrument that pertains to a beneficial interest
other than another derivative financial instrument. SFAS 155 is effective for
all financial instruments acquired, issued, or subject to a re-measurement
event
occurring during fiscal years commencing after September 15, 2006. Adoption
of
SFAS 155 is not expected to have a material impact on the Company’s consolidated
financial condition or results of operations.
In
June 2006, the FASB
issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes"
("FIN
48"). FIN 48 clarifies the accounting for uncertainty in income taxes recognized
in financial statements prepared in accordance with SFAS No. 109, "Accounting
for Income Taxes." FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on de-recognition, classification, interest and penalties, accounting
in interim periods, disclosure, and transition. Under FIN 48, a tax position
adopted is subjected to two levels of evaluation. Initially, a determination
is
made as to whether it is more likely than not that a tax position will be
sustained upon examination, including resolution of any related appeals or
litigation processes, based on the technical merits of the position. In
conducting this evaluation, management should presume that the position will
be
examined by the appropriate taxing authority possessing full knowledge of all
relevant information. The second level of evaluation is the measurement of
a tax
position that satisfies the more-likely-than-not recognition threshold. This
measurement
is performed in order to determine the amount of benefit to recognize in the
financial statements. The tax position is measured at the largest amount of
benefit that is greater than 50 percent likely of being realized upon ultimate
settlement. FIN 48 is effective for fiscal years beginning after December 15,
2006. Management is still evaluating the impact of adopting FIN 48.
In
September 2006, the
Emerging Issues Task Force reached a consensus on Issue 06-5, "Accounting
for
Purchases of Life Insurance-Determining the Amount That Could Be Realized
in
Accordance with FASB Technical Bulletin No. 85-4" ("EITF No. 06-5"). EITF
No.
06-5 requires that a life insurance policyholder consider any additional
amounts
included in the contractual terms of the purchased life insurance policy
in
determining the amount that could be realized under the insurance contract
on a
policy by policy basis. EITF No. 06-5 is effective for fiscal years beginning
after December 15, 2006 and requires that recognition of the effects of adoption
should be by a change in accounting principle through either (i) a
cumulative-effect adjustment to retained earnings as of the beginning of
the
year of adoption or (ii) retrospective application to all prior periods.
The
Company is currently evaluating the effect, if any, adoption of EITF No.
06-5
will have on its consolidated results of operations and financial position.
In
September 2006, the SEC Staff issued Staff Accounting Bulletin No. 108,
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in the Current Year Financial Statements" ("SAB No. 108").
SAB No.
108 requires the use of two alternative approaches in quantitatively evaluating
materiality of misstatements. If the misstatement as quantified under either
approach is material to the current year financial statements, the misstatement
must be corrected. If the effect of correcting the prior year misstatements,
if
any, in the current year income statement is material, the prior year financial
statements should be corrected. This guidance is effective for the calendar
year
ending 2006. In the year of adoption, the misstatements may be corrected
as an
accounting change by adjusting opening retained earnings rather than being
included in the current year income statement. The Company is currently
evaluating the impact that SAB No. 108 will have on its financial position
or
results of operations.
10.
RECLASSIFICATION
Effective
January 1, 2006, the Company reclassified prepayment and late charge fees on
loans in all periods presented from non-interest income into interest income
as
a result of a classification change made by the Office of Thrift Supervision.
In
preference of conformed presentation, the Company now recognizes all prepayment
and late charge fees on loans as net interest income instead of non-interest
income on both its financial and regulatory reports.
Certain
other amounts as of December 31, 2005 and for the three-month and nine-month
periods ended September 30, 2005 have been reclassified to conform to their
presentation as of and for the three-month and nine-month periods ended
September 30, 2006.
General
Dime
Community Bancshares, Inc. (the "Holding Company" and together with its direct
and indirect subsidiaries the "Company") is a Delaware corporation and parent
company of The Dime Savings Bank of Williamsburgh (the "Bank"), a
federally-chartered stock savings bank. The Bank maintains its headquarters
in
the Williamsburg section of Brooklyn, New York and operates twenty-one full
service retail banking offices located in the New York City boroughs of
Brooklyn, Queens, and the Bronx, and in Nassau County, New York. The Bank’s
principal business has been, and continues to be, gathering deposits from
customers within its market area, and investing them primarily in multifamily
residential, commercial real estate, one- to four-family residential,
construction and consumer loans, mortgage-backed securities ("MBS"), obligations
of the U.S. government and government sponsored entities, and corporate debt
and
equity securities.
Executive
Summary
The
Holding Company’s primary business is the operation of the Bank. The Company’s
consolidated results of operations are dependent primarily on net interest
income, which is the difference between the interest income earned on
interest-earning assets, such as loans and securities, and the interest expense
paid on interest-bearing liabilities, such as deposits and borrowings. The
Bank
additionally generates non-interest income such as service charges and other
fees, as well as income associated with Bank Owned Life Insurance. Non-interest
expense consists primarily of employee compensation and benefits, federal
deposit insurance premiums, data processing costs, occupancy and equipment
expenses, marketing costs and other operating expenses. The Company’s
consolidated results of operations are also significantly affected by general
economic and competitive conditions (particularly fluctuations in market
interest rates), government policies, changes in accounting standards and
actions of regulatory agencies.
The
Bank’s primary strategy is generally to increase its household and deposit
market shares in the communities that it serves. During the previous several
operating quarters, however, growth has been restricted as a result of the
interest rate environment, which management has deemed unfavorable for
significant balance sheet growth. The Bank also seeks
to
increase its product and service utilization for each individual depositor.
In
addition, the Bank’s primary strategy includes the origination of, and
investment in, mortgage loans, with an emphasis on multifamily residential
and
commercial real estate loans. Recently, the Bank has increased its portfolios
of
loans secured by commercial real estate and mixed-use properties (typically
comprised of ground level commercial units and residential apartments on the
upper floors).
The
Company believes that multifamily residential and commercial real estate loans
provide advantages as investment assets. Initially, they offer a higher yield
than investment securities of comparable maturities or terms to repricing.
In
addition, origination and processing costs for the Bank’s multifamily
residential and commercial real estate loans are lower per thousand dollars
of
originations than comparable one-to four-family loan costs. Further, the Bank’s
market area has generally provided a stable flow of new and refinanced
multifamily residential and commercial real estate loan originations. In order
to address the credit risk associated with multifamily residential and
commercial real estate lending, the Bank has developed underwriting standards
that it believes are reliable in order to maintain consistent credit quality
for
its loans.
The
Bank
also strives to provide a stable source of liquidity and earnings through the
purchase of investment grade securities; seeks to maintain the asset quality
of
its loans and other investments; and uses appropriate portfolio and
asset/liability management techniques in an effort to manage the effects of
interest rate volatility on its profitability and capital.
During
the quarter ended September 30, 2006, the Company recorded non-recurring pre-tax
income of $764,000 related to a restructuring of $170.0 million of
borrowings. Excluding
this transaction, net income would have declined by $2.5 million during the
three months ended September 30, 2006 compared to the quarter ended September
30, 2005. This decline resulted primarily from a decline in net interest income
during the period.
Net
interest income, and the related net interest spread and net interest margin,
declined during the three months ended September 30, 2006 versus the comparable
period of 2005. These declines were attributable to the continuation of the
flattened market yield curve as interest rates on short-term investments and
borrowings continued to increase at a faster rate than those on medium- and
long-term investments and borrowings. This environment resulted in a greater
increase in the average cost of interest bearing liabilities than the increase
in yield on interest earning assets during the comparative period.
Selected
Financial Highlights and Other Data
(Dollars
in Thousands Except Per Share Amounts)
|
For
the Three Months
|
For
the Nine Months
|
|
Ended
September 30,
|
Ended
September 30,
|
|
2006
|
|
2005
|
2006
|
|
2005
|
Performance
and Other Selected Ratios:
|
|
|
|
|
|
|
Return
on Average Assets
|
0.92%
|
|
1.12%
|
1.05%
|
|
1.10%
|
Return
on Average Stockholders' Equity
|
9.73
|
|
12.62
|
11.21
|
|
12.75
|
Stockholders'
Equity to Total Assets
|
9.43
|
|
8.96
|
9.43
|
|
8.96
|
Tangible
Equity to Total Tangible Assets
|
7.88
|
|
7.44
|
7.88
|
|
7.44
|
Loans
to Deposits at End of Period
|
136.92
|
|
127.51
|
136.92
|
|
127.51
|
Loans
to Earning Assets at End of Period
|
89.25
|
|
84.10
|
89.25
|
|
84.10
|
Net
Interest Spread
|
2.16
|
|
2.61
|
2.29
|
|
2.68
|
Net
Interest Margin
|
2.53
|
|
2.89
|
2.69
|
|
2.97
|
Average
Interest Earning Assets to Average Interest Bearing
Liabilities
|
112.38
|
|
111.49
|
113.00
|
|
111.50
|
Non-Interest
Expense to Average Assets
|
1.37
|
|
1.32
|
1.35
|
|
1.22
|
Efficiency
Ratio
|
50.42
|
|
43.46
|
47.15
|
|
39.22
|
Effective
Tax Rate
|
35.86
|
|
35.86
|
35.55
|
|
35.74
|
Dividend
Payout Ratio
|
70.00
|
|
53.85
|
60.00
|
|
55.26
|
Average
Tangible Equity
|
$242,658
|
|
$234,560
|
$240,967
|
|
$232,098
|
Per
Share Data:
|
|
|
|
|
|
|
Reported
EPS (Diluted)
|
$0.20
|
|
$0.26
|
$0.70
|
|
$0.76
|
Cash
Dividends Paid Per Share
|
0.14
|
|
0.14
|
0.42
|
|
0.42
|
Stated
Book Value
|
8.07
|
|
7.82
|
8.07
|
|
7.82
|
Tangible
Book Value
|
6.64
|
|
6.39
|
6.64
|
|
6.39
|
Asset
Quality Summary:
|
|
|
|
|
|
|
Net
Charge-offs (Recoveries)
|
$-
|
|
$(2)
|
$19
|
|
$(17)
|
Non-performing
Loans
|
2,889
|
|
4,608
|
2,889
|
|
4,608
|
Non-performing
Loans/Total Loans
|
0.11%
|
|
0.18%
|
0.11%
|
|
0.18%
|
Non-performing
Assets/Total Assets
|
0.09
|
|
0.14
|
0.09
|
|
0.14
|
Allowance
for Loan Loss/Total Loans
|
0.60
|
|
0.60
|
0.60
|
|
0.60
|
Allowance
for Loan Loss/Non-performing Loans
|
552.30
|
|
335.55
|
552.30
|
|
335.55
|
Regulatory
Capital Ratios (Bank Only):
|
|
|
|
|
|
|
Tangible
Capital
|
9.64%
|
|
9.20%
|
9.64%
|
|
9.20%
|
Leverage
Capital
|
9.64
|
|
9.20
|
9.64
|
|
9.20
|
Total
Risk-based Capital
|
13.61
|
|
13.84
|
13.61
|
|
13.84
|
Earnings
to Fixed Charges Ratios
|
|
|
|
|
|
|
Including
Interest on Deposits
|
1.47x
|
|
1.71x
|
1.56x
|
|
1.74x
|
Excluding
Interest on Deposits
|
2.25
|
|
2.52
|
2.38
|
|
2.57
|
|
For
the Three Months
|
For
the Nine Months
|
|
Ended
September 30,
|
Ended
September 30,
|
|
2006
|
|
2005
|
2006
|
|
2005
|
|
(Dollars
in thousands, except per share amounts)
|
Non-GAAP
Disclosures - Core Earnings Reconciliation and Ratios
(1)
|
|
|
|
|
|
|
Net
income
|
$7,159
|
|
$9,102
|
$24,627
|
|
$27,231
|
Net
pre-tax (gain) loss on sale of securities and other assets
|
-
|
|
-
|
(1,541)
|
|
5,176
|
Pre-tax
income from borrowings restructuring
|
(764)
|
|
-
|
(807)
|
|
-
|
Tax
effect of adjustments
|
271
|
|
-
|
838
|
|
(2,143)
|
After
tax effect of adjustments to core earnings
|
(493)
|
|
-
|
(1,510)
|
|
3,033
|
Core
Earnings
|
$6,666
|
|
$9,102
|
$23,117
|
|
$30,264
|
|
|
|
|
|
|
|
Core
Return on Average Assets
|
0.86%
|
|
1.12%
|
0.99%
|
|
1.22%
|
Core
Return on Average Stockholders' Equity
|
9.06
|
|
12.62
|
10.53
|
|
14.17
|
Core
EPS (Diluted)
|
$0.19
|
|
$0.26
|
$0.66
|
|
$0.85
|
Dividend
payout ratio (based upon core earnings)
|
73.68%
|
|
53.85%
|
63.95%
|
|
49.41%
|
(1)
Core
earnings and related data are "Non-GAAP Disclosures." These disclosures present
information which management considers useful to the readers of this report
since they present a measure of the results of the Company's ongoing operations
(exclusive of significant non-recurring items such as gains or losses on sales
of investment or mortgage backed securities) during the period.
Critical
Accounting Policies
Various
elements of the Company’s accounting policies are inherently subject to
estimation techniques, valuation assumptions and other subjective assessments.
The Company’s policies with respect to the methodologies it uses to determine
the allowance for loan losses, the valuation of mortgage servicing rights
("MSR"), asset impairments (including the valuation of goodwill and other
intangible assets, realization of deferred tax assets and other than temporary
declines in the valuation of securities), and loan income recognition are the
Company’s most critical accounting policies because they are important to the
presentation of the Company’s financial condition and results of operations,
involve a significant degree of complexity and require management to make
difficult and subjective judgments which often necessitate assumptions or
estimates about highly uncertain matters. The use of different judgments,
assumptions and estimates could result in material variations in the Company's
results of operations or financial condition.
The
following are descriptions of the Company's critical accounting policies and
explanations of the methods and assumptions underlying their application. These
policies and their application are reviewed periodically and at least annually
with the Audit Committees of the Holding Company and Bank.
Allowance
for Loan Losses. Accounting
principles generally accepted in the United States
("GAAP')
require the Bank to maintain an appropriate allowance for loan losses.
Management uses available information to estimate losses on loans and believes
that the Bank maintains its allowance for loan losses at appropriate levels.
Adjustments may be necessary, however, if future economic, market or other
conditions differ from the current operating environment. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to recognize additions to, or reductions in, the allowance
based on judgments different from those of management.
Although
the Bank believes it utilizes the most reliable information available, the
level
of the allowance for loan losses remains an estimate subject to significant
judgment. These evaluations are inherently subjective because, although based
upon objective data, it is management's interpretation of the data that
determines the amount of the appropriate allowance. The Company, therefore,
periodically reviews the actual performance and charge-off of its portfolio
and
compares them to the previously determined allowance coverage percentages.
In so
doing, the Company evaluates the impact that the variables discussed below
may
have on the portfolio to determine whether or not changes should be made to
the
assumptions and analyses.
The Bank's loan loss reserve methodology consists of several key components,
including a review of the two elements of the Bank's loan portfolio: problem
loans [i.e.,
classified loans, non-performing loans, troubled-debt restructuring and impaired
loans under SFAS No. 114, "Accounting By Creditors for Impairment of a Loan,"
as
amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan
-
Income Recognition and Disclosure an Amendment of FASB Statement No. 114"
("Amended SFAS 114")] and performing loans.
At
September 30, 2006, the majority of the allowance for loan losses was allocated
to performing loans, which represented the overwhelming majority of the Bank's
loan portfolio. Performing loans are reviewed at least quarterly based upon
the
premise that there are losses inherent within the loan portfolio that have
not
been identified as of the review date. The Bank thus calculates an allowance
for
loan losses related to its performing loans by deriving an expected loan loss
percentage and applying it to its performing loans. In deriving the expected
loan loss percentage, the Bank generally considers, among others, the following
criteria: the Bank's historical loss experience; the age and payment history
of
the loans (commonly referred to as their "seasoned quality"); the type of loan
(i.e.,
one- to
four-family, multifamily residential, commercial real estate, cooperative
apartment, construction or consumer); the underwriting history of the loan
(i.e.,
whether it was underwritten by the Bank or a predecessor institution acquired
by
the Bank and, therefore, originally subjected to different underwriting
criteria); both the current condition and recent history of the overall local
real estate market (in order to determine the accuracy of utilizing recent
historical charge-off data to derive the expected loan loss percentages); the
level of, and trend in, non-performing loans; the level and composition of
new
loan activity; and the existence of geographic loan concentrations (as the
overwhelming majority of the Bank's loans are secured by real estate located
in
the New York City metropolitan area) or specific industry conditions within
the
portfolio segments. Since these criteria affect the expected loan loss
percentages that are applied to performing loans, changes in any of them may
affect the amount of the allowance and the provision for loan losses. The Bank
applied the process of determining the allowance for loan losses consistently
throughout the three-month and nine-month periods ended September 30, 2006
and
2005.
Federal
regulations and Bank policy require that loans possessing certain weaknesses
be
classified as Substandard, Doubtful or Loss assets. Assets that do not expose
the Bank to risk sufficient to justify classification in one of these
categories, however, which possess potential weaknesses that deserve
management's attention, are designated Special Mention. Loans classified as
Special Mention, Substandard or Doubtful are reviewed individually on a
quarterly basis by the Bank's Loan Loss Reserve Committee to determine the
level
of possible loss, if any, that should be provided for within the Bank's
allowance for loan losses.
The
Bank's policy is to charge-off immediately all balances classified as ''Loss''
and record a reduction of the allowance for loan losses for the full amount
of
the outstanding loan balance. The Bank applied this process consistently
throughout the three-month and nine-month periods ended September 30, 2006
and
2005.
Under
the
guidance established by Amended SFAS 114, loans determined to be impaired
(generally, non-performing one- to four-family loans in excess of $417,000
and
non-performing and troubled-debt restructured multifamily residential and
commercial real estate loans) are evaluated at least quarterly in order to
establish whether the estimated value of the underlying collateral determined
based upon an independent appraisal is sufficient to satisfy the existing debt.
For each loan that the Bank determines to be impaired, impairment is measured
by
the amount that the carrying balance of the loan, including all accrued
interest, exceeds the estimated fair value of the collateral. A specific reserve
is established on all impaired loans to the extent of impairment and comprises
a
portion of the allowance for loan losses. The Loan Loss Reserve Committee's
determination of the estimated fair value of the underlying collateral is
subject to assumptions and judgments made by the committee. A specific valuation
allowance could differ materially as a result of changes in these assumptions
and judgments.
Valuation
of MSR. The
estimated origination and servicing costs of mortgage loans sold with servicing
rights retained by the Bank are allocated between the loans and the servicing
rights based on their estimated fair values at the time of the loan sale. MSR
are carried at the lower of cost or fair value and are amortized in proportion
to, and over the period of, net servicing income. The estimated fair value
of
MSR is determined by calculating the present value of estimated future net
servicing cash flows, using prepayment, default, servicing cost and discount
rate assumptions that the Company believes market participants would use for
similar assets. All estimates and assumptions utilized in the valuation of
MSR
are derived based upon actual historical results for either the Bank or its
industry peers.
The
fair
value of MSR is sensitive to changes in assumptions. Fluctuations in prepayment
speed assumptions have the most significant impact on the estimated fair value
of MSR. In the event that loan prepayment activities exceed the assumed amount
due to increased loan refinancing, the fair value of MSR would likely decline.
In the event that loan prepayment activities fall below the assumed amount
due
to a decline in loan refinancing, the fair value of MSR would likely increase.
Any measurement of the value of MSR is limited by the existing conditions and
assumptions utilized at a particular point in time, and would not necessarily
be
appropriate if applied at a different point in time.
In
measuring the fair value of capitalized MSR, assumptions utilized additionally
include the stratification based on predominant risk characteristics of the
underlying loans for the purpose of evaluating impairment. Increases in the
risk
characteristics of the underlying loans from the assumed amounts would result
in
a decline in the fair value of the MSR. A
valuation
allowance is then established in the event the recorded value of an individual
stratum exceeds its fair value.
Asset
Impairment Adjustments. Certain
assets are carried in the Company's consolidated statements of financial
condition at fair value or at the lower of cost or fair value. Management
periodically performs analyses to test for impairment of these assets. Two
significant impairment analyses relate to the value of goodwill and other than
temporary declines in the value of the Company's securities. In the event that
an impairment of goodwill or an other than temporary decline in securities
is
determined to exist, it is recognized as a charge to earnings.
Goodwill
is accounted for in accordance with SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"), which was adopted on July 1, 2001. SFAS 142 eliminated
amortization of goodwill and instead requires performance of an annual
impairment test at the reporting unit level. As of September 30, 2006, the
Company had goodwill totaling $55.6 million.
The
Company identified a single reporting unit for purposes of its goodwill
impairment testing. The impairment test is therefore performed on a consolidated
basis and compares the Holding Company's market capitalization (reporting unit
fair value) to its outstanding equity (reporting unit carrying value). The
Holding Company utilizes its closing stock price as reported on the Nasdaq
National Market on the date of the impairment test in order to compute market
capitalization. The Company has designated the last day of its fiscal year
as
the annual date for impairment testing. The Company performed its annual
impairment test as of December 31, 2005 and concluded that no potential
impairment of goodwill existed since the fair value of the Company's reporting
unit exceeded its carrying value. No events occurred, nor circumstances changed,
subsequent to December 31, 2005 that would reduce the fair value of the
Company's reporting unit below its carrying value. Such events or changes in
circumstances would require an immediate impairment test to be performed in
accordance with SFAS 142. Differences in the identification of reporting units
or the use of valuation techniques can result in materially different
evaluations of impairment.
Available-for-sale
debt and equity securities that have readily determinable fair values are
carried at fair value. Estimated fair values for securities are based on
published or securities dealers' market values.
Debt
securities are classified as held-to-maturity, and carried at amortized cost,
only if the Company has a positive intent and ability to hold them to maturity.
Debt
securities that are not classified as held-to-maturity, along with all equity
securities, are classified as either securities available-for-sale or trading
securities. Unrealized holding gains or losses on debt and equity securities
available-for-sale are excluded from net income and reported net of income
taxes
as other comprehensive income or loss.
The
Company conducts a periodic review and evaluation of its securities portfolio,
taking into account the severity and duration of each unrealized loss as well
as
management's intent with regard to the securities, in order to determine if
a
decline in market value of any security below its carrying value is other than
temporary. If such decline is deemed other than temporary, the carrying amount
of the security is adjusted through a charge recorded in the Company's statement
of operations. For the three-month and nine-month periods ended September 30,
2006 and 2005, there were no other than temporary impairments in the securities
portfolio.
Loan
Income Recognition.
Interest income on loans is recorded using the level yield method. Loan
origination fees and certain direct loan origination costs are deferred and
amortized as a yield adjustment over the contractual loan terms. Accrual of
interest is discontinued when its receipt is in doubt, which typically occurs
when a loan becomes 90 days past due as to principal or interest. Any interest
accrued to income in the year when interest accruals are discontinued is
reversed. Payments on nonaccrual loans are generally applied to principal.
Management may elect to continue the accrual of interest when a loan is in
the
process of collection and the estimated fair value of the collateral is
sufficient to satisfy the principal balance and accrued interest. Loans are
returned to accrual status once the doubt concerning collectibility has been
removed and the borrower has demonstrated performance in accordance with the
loan terms and conditions for a minimum of twelve months.
The
Bank's primary sources of funding for its lending and investment activities
include deposits, loan and MBS payments, investment security maturities and
redemptions, advances from the Federal Home Loan Bank of New York ("FHLBNY"),
and borrowings in the form of securities sold under agreement to repurchase
("REPOs") entered into with various financial institutions, including the
FHLBNY. The Bank also sells selected multifamily residential and mixed use
loans
to the Federal National Mortgage Association ("FNMA'), and long-term, one-
to
four-family residential real estate loans to either FNMA or the State of New
York Mortgage Agency. The Company may additionally issue debt under appropriate
circumstances. Although maturities and scheduled amortization of loans and
investments are predictable sources of funds, deposits flows and prepayments
on
mortgage loans and MBS are influenced by interest rates, economic conditions
and
competition.
The
Bank
gathers deposits in direct competition with commercial banks, savings banks
and
brokerage firms, many among the largest in the nation. It must additionally
compete for deposit monies against the stock and bond markets, especially during
periods of strong performance in those arenas. The Bank's deposit flows are
affected primarily by the pricing and marketing of its deposit products compared
to its competitors, as well as the market performance of depositor investment
alternatives such as the U.S. bond or equity markets. To the extent that the
Bank is responsive to general market increases or declines in interest rates,
its deposit flows should not be materially impacted. However, favorable
performance of the equity or bond markets could adversely impact the Bank’s
deposit flows.
Deposits increased
$15.9 million during the nine months ended September 30, 2006, compared to
a
decrease of $195.1 million during the nine months ended September 30, 2005.
During the nine months ended September 30, 2006, the Company experienced an
increase of $48.3 million in certificates of deposit ("CDs"), due primarily
to
successful promotional campaigns, that was partially offset by a decline of
$29.8 million in savings accounts during the period, as customers continued
to
migrate towards CDs as market rates offered on time deposit accounts gained
greater acceptance.
During
the nine months ended September 30, 2005, while short-term interest rates were
steadily increasing, the Bank, primarily in order to control its overall cost
of
deposits, elected to maintain the non-promotional interest rates offered on
its
various deposit accounts at or near their existing levels. As a result, the
attrition level on deposits increased during that time period (particularly
in
promotional money market accounts with expiring promotional offering rates)
and
exceeded the level of new deposits gathered through ongoing promotional
programs. As a result, money market deposits declined $235.8 million during
the
nine months ended September 30, 2005.
During
2005, the Bank’s rates on repricing core deposits lagged those of the price
leaders in its markets. This strategy served to protect margin, not deposits.
Commencing in the first quarter of 2006, there was a slight shift in the Bank’s
deposit pricing posture for competitive reasons. With the average rate on new
loans currently consistently trending above 6 percent, attracting and retaining
new deposits at today’s rates appears more palatable to managing the Bank’s
interest rate risk than it did throughout 2005. Although this strategy was
not
reflected in the results of the September 2006 quarter, it continues to be
management's overall anticipated strategy for the remainder of 2006.
Average
deposits per branch approximated $92 million at September 30, 2006, lower than
the $101 million average at September 30, 2005. The loan-to-deposit ratio was
137% at September 30, 2006, compared to 128% at September 30, 2005. The decline
in the average deposits per branch and the increase in the loan-to-deposit
ratio
resulted primarily from a reduction of $84.2 million in deposits from their
September 30, 2005 level. The addition of a new branch in February 2006 also
contributed to the decline in the average deposits per branch. Core deposits
comprised 47% of total deposits at September 30, 2006, slightly below the 49%
level at September 30, 2005, reflecting a decline of $42.7 million in money
markets from September 2005 to September 2006.
During
the nine months ended September 30, 2006, principal repayments totaled $268.1
million on real estate loans and $30.6 million on MBS. During the nine months
ended September 30, 2005, principal repayments totaled $277.6 million on real
estate loans and $75.5 million on MBS. The decrease in principal repayments
on
loans and MBS resulted from a reduction in borrower refinance activities
associated with mortgage-related assets as a result of increases in interest
rates during the period July 2005 through September 2006. The decrease in
principal repayments on MBS additionally reflected a reduction in their balance
due to the sale of securities in May 2005.
Since
December 2002, the Bank has originated and sold multifamily residential mortgage
loans in the secondary market to FNMA while retaining servicing and generating
fee income while it services the loan. The Bank underwrites these loans using
its customary underwriting standards, funds the loans, and sells them to FNMA
at
agreed upon pricing. Typically, the Bank seeks to sell loans with terms to
maturity or repricing in excess of seven years from the origination date since
it does not desire to retain such loans in portfolio as a result of the
heightened interest rate risk they possess. Under the terms of the sales
program, the Bank retains a portion of the associated credit risk. Once
established, such amount continues to increase as long as the Bank continues
to
sell loans to FNMA under the program. The Bank retains this exposure until
the
portfolio of loans sold to FNMA is satisfied in its entirety or the Bank funds
claims by FNMA for the maximum loss exposure. During the nine months ended
September 30, 2006 and 2005, the Bank sold FNMA $140.4 million and $65.7 million
of loans, respectively, pursuant to this program.
In
order
to both replace liquidity lost by the attrition of deposits during 2005 and
reduce the overall level of interest rate risk associated with its assets,
the
Company sold $274.2 million of investment securities and MBS during the nine
months ended September 30, 2005. The cash proceeds of the sale were initially
reinvested in overnight funds and other short-term (90 day or less) investments
with an average yield approximating 3.5%. The securities sold had an average
yield of 3.62% and an average estimated duration of 2.4 years upon their
disposition.
Due
in
part to the growth in deposit funding during the nine months ended September
30,
2006, the Company was able to reduce its overall level of borrowings, which,
because the interest rates associated with borrowings generally exceeds those
paid on deposits, helped minimize the increase in the average cost of its
interest bearing liabilities while short-term interest rates continued to rise.
During the nine months ended September 30, 2006, borrowings declined by $35.1
million on a net basis, as the Company utilized deposit inflows and liquidity
from its investment and MBS portfolios to fund loan growth. During the nine
months ended September 30, 2005, the Bank limited asset growth, and, as a
result, undertook no new REPO borrowings or FHLBNY advances during the period.
During
the quarter ended September 30, 2006, the Company restructured $170.0 million
of
wholesale borrowings. Under this restructuring, $120.0 million of REPOs and
$50.0 million in FHLBNY advances were prepaid and replaced. The prepaid
borrowings had a weighted average interest rate of 4.53%, and were replaced
with
a combination of REPOs and FHLBNY advances having an initial weighted average
interest rate of 3.79%. The replacement FHLBNY advances have a fixed rate of
interest, a final maturity of ten years and are callable by the FHLBNY after
an
initial period (the “lockout period”) of one, two or three years. The
replacement REPOs have a ten-year maturity and a lockout period of either one
or
two years. During the lockout period, the REPOs are variable rate (indexed
to
3-month LIBOR), and have embedded interest rate caps and floors that ensure
their reset interest rate will not exceed their initial interest rate. After
the
lockout period, if not called by the lender, the REPOs convert to an average
fixed rate of 4.90%. The Company recorded a non-recurring reduction of $764,000
in interest expense related to the prepayment.
During
the three months ended March 31, 2006, the Bank restructured $145.0 million
of
its borrowings in order to lower their average cost. Borrowings with a weighted
average cost of 4.61% and a weighted average term to maturity of one year were
replaced with borrowings having a weighted average cost of 4.17% and a final
maturity of ten years, callable after year one. Since portions of the original
borrowings were satisfied at a discount, the Company recorded a non-recurring
reduction of $43,200 in interest expense related to the prepayment.
In
the
event that the Bank should require funds beyond its ability to generate them
internally, an additional source of funds is available through use of its
borrowing line at the FHLBNY. At September 30, 2006, the Bank had an additional
potential borrowing capacity of $367.8 million available should it purchase
the
minimum required level of FHLBNY common stock (i.e.,
1/20th
of its
outstanding FHLBNY borrowings).
The
Bank
is subject to minimum regulatory capital requirements imposed by the Office
of
Thrift Supervision ("OTS"), which, as a general matter, are based on the amount
and composition of an institution's assets. At September 30, 2006, the Bank
was
in compliance with all applicable regulatory capital requirements and was
considered "well-capitalized" for all regulatory purposes.
The
Bank
uses its liquidity and capital resources primarily for the origination of real
estate loans and the purchase of mortgage-backed and other securities. During
the nine months ended September 30, 2006 and 2005, real estate loan originations
totaled $439.4 million and $430.3 million, respectively. Purchases of investment
securities (excluding short-term investments and federal funds sold) and MBS
totaled $4.0 million during the nine months ended September 30, 2006 compared
to
$53.5 million during the nine months ended September 30, 2005. The decline
resulted from reduced levels of liquidity experienced during the period July
2005 through September 2006 that provided limited funds available for investment
purchase.
During
the nine months ended September 30, 2006, the Holding Company repurchased
568,207 shares of its common stock into treasury. All shares repurchased were
recorded at the acquisition cost, which totaled $8.0 million during the period.
As of September 30, 2006, up to 1,895,942 shares remained available for purchase
under authorized share purchase programs. Based upon the $14.73 per share
closing price of its common stock as of September 30, 2006, the Holding Company
would utilize $27.9 million in order to purchase all of the remaining authorized
shares. For the Holding Company to complete these share purchases, it would
likely require dividend distributions from the Bank.
Contractual
Obligations
The
Bank
has outstanding at any time significant borrowings in the form of FHLBNY
advances and/or REPOs. The Holding Company has an outstanding $25.0 million
non-callable subordinated note payable due to mature in 2010, and $72.2 million
of trust preferred borrowings from third parties due to mature in April 2034,
which are callable at any time after April 2009. The Bank is also obligated
for
rental payments under leases on certain of its branches and equipment and for
minimum monthly payments under its current data systems contract.
Off-Balance
Sheet Arrangements
The
Bank
implemented a program in December 2002 to originate and sell multifamily
residential mortgage loans in the secondary market to FNMA while retaining
servicing. The Bank retains a recourse obligation on all loans sold under this
program, which will remain in effect until either the entire portfolio of loans
sold to FNMA is satisfied or the Bank funds
claims
by
FNMA for the full balance of the recourse obligation.
In
addition, as part of its loan origination business, the Bank has outstanding
commitments to extend credit to third parties, which are subject to strict
credit control assessments. Since many of these loan commitments expire prior
to
funding, in whole or in part, the contract amounts are not estimates of future
cash flows. The following chart represents off balance sheet commitments for
which the Company is obligated as of September 30, 2006:
|
Less
than One Year
|
One
Year to Three Years
|
Over
Three Years
to
Five Years
|
Over
Five Years
|
|
Total
at
September
30, 2006
|
|
(Dollars
in thousands)
|
Credit
Commitments:
|
|
|
|
|
|
|
Available
lines of credit
|
$57,485
|
$-
|
$-
|
$-
|
|
$57,485
|
Other
loan commitments
|
50,591
|
-
|
-
|
-
|
|
50,591
|
Other
Commitments:
|
|
|
|
|
|
|
Recourse
obligation on loans sold to FNMA
|
18,076
|
-
|
-
|
-
|
|
18,076
|
Total
Commitments
|
$126,152
|
$-
|
$-
|
$-
|
|
$126,152
|
The
recourse obligation on loans sold to FNMA increased $3.8 million during the
nine
months ended September 30, 2006, primarily as a result of $3.6 million of
recourse obligation that was added in connection with a $71.6 single-borrower
loan package sale that was completed during the period. Due to the underwriting
characteristics of the loans included in this sale, the recourse obligation
related to these loans exceeds that of loans sold previously to FNMA.
Non-performing
loans (i.e.,
delinquent loans for which interest accruals have ceased in accordance with
the
Bank's policy discussed below) totaled $2.9 million and $958,000 at September
30, 2006 and December 31, 2005, respectively. The increase resulted primarily
from the addition of 4 loans totaling $2.9 million to nonaccrual status, that
was partially offset by the removal of loans totaling $958,000 from nonaccrual
status during the period.
Pursuant
to Bank policy, accrual of interest is discontinued when its receipt is in
doubt, which typically occurs when a loan becomes 90 days past due as to
principal or interest. Any interest previously accrued to income in the year
that interest accruals are discontinued is reversed. Payments on non-performing
loans are generally applied to principal. Management may elect to continue
the
accrual of interest when a loan is in the process of collection and the
estimated fair value of the collateral is sufficient to satisfy the principal
balance and accrued interest. Loans are returned to accrual status once the
doubt concerning collectibility has been removed and the borrower has
demonstrated performance in accordance with the loan terms and conditions for
a
minimum of twelve months. The Bank had no loans that were 90 days past due
and
accruing interest at September 30, 2006 or December 31, 2005.
The
Bank
had real estate and consumer loans totaling $425,000 delinquent 60-89 days
at
September 30, 2006, compared to a total of $1.4 million at December 31, 2005.
The decline resulted primarily from a decrease during the period of $958,000
in
delinquent real estate and home equity loans. The 60-89 day delinquency levels
fluctuate monthly, and are generally considered a less accurate indicator of
credit quality trends than non-performing loans.
GAAP
requires the Bank to account for certain loan modifications or restructurings
as
''troubled-debt restructurings.'' In general, the modification or restructuring
of a loan constitutes a troubled-debt restructuring if the Bank, for economic
or
legal reasons related to the borrower's financial difficulties, grants a
concession to the borrower that it would not otherwise consider. Current OTS
regulations require that troubled-debt restructurings remain classified as
such
until the loan is either repaid or returns to its original terms. The Bank
had
no loans classified as troubled-debt restructurings at September 30, 2006 or
December 31, 2005.
The
recorded investment in loans deemed impaired pursuant to Amended SFAS 114 was
$2.9 million, consisting of four loans, at September 30, 2006, compared to
$384,000, consisting of one loan, at December 31, 2005. The increase resulted
from the addition of four loans totaling $2.9 million to impaired status during
the nine months ended September 30, 2006, partially offset by the removal of
loans totaling $384,000 from impaired status. The average total balance of
impaired loans was approximately $1.5 million and $2.8
million during the nine months ended September 30, 2006 and 2005, respectively.
The decrease in the average balance of impaired loans during the comparative
period resulted primarily from the removal of seven impaired loans totaling
$4.2
million during the period July 2005 through September 2006, that was partially
offset by the addition of four impaired loans totaling $2.9 million during
the
same period. There were $285,000 of reserves allocated within the allowance
for
loan losses for impaired loans at September 30, 2006. At December 31, 2005,
reserves totaling $38,000 were allocated within the allowance for loan losses
for impaired loans. At September 30, 2006, non-performing loans exceeded
impaired loans by $38,000, due to $38,000
of
one-
to four-family and consumer loans, which, while on non-performing status, were
not deemed impaired since they each had individual outstanding balances less
than $417,000.
Other
Real Estate Owned (“OREO”).
Property acquired by the Bank as a result of foreclosure on a mortgage loan
or a
deed in lieu of foreclosure is classified as OREO and is recorded at the lower
of the recorded investment in the related loan or the fair value of the property
on the date of acquisition, with any resulting write down charged to the
allowance for loan losses. The Bank obtains a current appraisal on OREO property
as soon as practicable after it takes possession of the realty and generally
reassesses its value at least annually thereafter. There were no OREO properties
as of September 30, 2006 and December 31, 2005.
The
following table sets forth information regarding non-performing loans,
non-performing assets, impaired loans and troubled-debt restructurings at the
dates indicated:
|
At
September 30, 2006
|
At
December 31, 2005
|
|
(Dollars
in thousands)
|
Non-Performing
Loans
|
|
|
One-
to four-family
|
$1
|
$317
|
Multifamily
residential
|
2,851
|
384
|
Cooperative
apartment
|
26
|
229
|
Other
|
11
|
28
|
Total
non-performing loans
|
2,889
|
958
|
OREO
|
-
|
-
|
Total
non-performing assets
|
2,889
|
958
|
Troubled-debt
restructurings
|
-
|
-
|
Total
non-performing assets and
troubled-debt
restructurings
|
$2,889
|
$958
|
|
|
|
Impaired
loans
|
$2,851
|
$384
|
Ratios:
|
|
|
Total
non-performing loans to total loans
|
0.11%
|
0.04%
|
Total
non-performing loans and troubled-debt restructurings to total
loans
|
0.11
|
0.04
|
Total
non-performing assets to total assets
|
0.09
|
0.03
|
Total
non-performing assets and troubled-debt restructurings to total
assets
|
0.09
|
0.03
|
Allowance
for Loan Losses
Comparison
of Financial Condition at September 30, 2006 and December 31,
2005
Assets.
Assets
totaled $3.14 billion at September 30, 2006, a slight increase from total assets
of $3.13 billion at December 31, 2005.
Federal
funds sold and other short-term assets increased $34.1 million during the period
as cash flows from maturing investment securities and principal repayments
on
MBS were reinvested in short-term securities and federal funds sold, since
the
flattened yield curve provided benefits to retaining the funds in short-term
investments. Real estate loans increased $32.4 million during the nine months
ended September 30, 2006 due primarily to originations of $439.4 million during
the period (as interest rates offered on new loans continued to stimulate
origination activity), that were partially offset by amortization of $268.1
million and sales to FNMA of $140.4 million. During the nine months ended
September 30, 2006 and 2005, real estate loan originations totaled $439.4
million and $430.3 million, respectively. The average rate on total loan
originations during the nine months ended September 30, 2006 was 6.40%, compared
to 5.70% in the nine months ended September 30, 2005. Real
estate loan prepayment and amortization during the nine months ended September
30, 2006 approximated 13% of the loan portfolio on an annualized basis, compared
to 15% during
the nine months ended September 2005. The decline in prepayment and amortization
levels
resulted
from increases in interest rates from October 2005 to September
2006.
Partially
offsetting the increases in real estate loans and federal funds sold and other
short term assets were declines in MBS available-for-sale and investment
securities available-for-sale of $30.5 million and $15.7 million, respectively,
during the nine months ended September 30, 2006. The decline in MBS
available-for-sale resulted primarily from principal repayments of $30.6
million. The decrease in investment securities available for sale resulted
primarily from maturities of $17.1 million. In addition, cash and due from
banks
declined $17.7 million during the nine months ended September 30, 2006 as excess
liquidity that was maintained in cash and due from banks at December 31, 2005
was utilized for operations during the nine months ended September 30,
2006.
Stockholders'
Equity.
Stockholders' equity increased $4.0 million during the nine months ended
September 30, 2006, due to net income of $24.6 million, common stock issued
in
fulfillment of stock option exercises totaling $881,000, and an increase to
equity of $1.1 million related to amortization of the Employee Stock Ownership
Plan of Dime Community Bancshares, Inc. and Certain Affiliates ("ESOP") and
The
Recognition and Retention Plan for Outside Directors, Officers and Employees
of
Dime Community Bancshares, Inc. ("RRP") stock benefit plans. The ESOP and RRP
possess investments in the Holding Company's common stock that are recorded
as
reductions in stockholders' equity ("Contra Equity Balances"). As compensation
expense is recognized on the ESOP and RRP, the Contra Equity Balances are
reduced in a corresponding amount, resulting in an increase to their respective
equity balances. This increase to equity offsets the decline in the Company's
retained earnings related to the periodic recorded ESOP and RRP expenses.
Partially
offsetting the increases to stockholders' equity during the nine months ended
September 30, 2006 were cash dividends of $14.8 million and treasury stock
repurchases of $8.0 million during the period. Additionally, other comprehensive
loss (which is recorded as a negative balance within stockholders' equity)
increased by $206,000 during the nine months ended September 30, 2006. This
growth in the level of the loss resulted from increases in short-term interest
rates during the period, which reduced the market value of existing fixed rate
securities available for sale owned by the Company. The increase of $206,000
in
other comprehensive loss caused a corresponding decrease in stockholders' equity
during the period.
Comparison
of Operating Results for the Three Months Ended September 30, 2006 and
2005
General.
Net
income was $7.2 million during the three months ended September 30, 2006, a
decrease of $1.9 million from net income of $9.1 million during the three months
ended September 30, 2005. During the comparative period, net interest income
declined $3.6 million, non-interest income, including gains or losses on the
disposal of assets, increased $494,000, and non-interest expense decreased
$116,000, resulting in a reduction in pre-tax net income of $3.0 million. Income
tax expense decreased $1.1 million during the comparative period primarily
as a
result of the decrease in pre-tax net income.
Net
Interest Income. The
discussion of net interest income for the three months ended September 30,
2006
and 2005 presented below should be read in conjunction with the following
tables, which set forth certain information related to the consolidated
statements of operations for those periods, and which also present the average
yield on assets and average cost of liabilities for the periods indicated.
The
yields and costs were derived by dividing income or expense by the average
balance of their related assets or liabilities during the periods represented.
Average balances were derived from average daily balances. The yields include
fees that are considered adjustments to yields.
Analysis
of Net Interest Income (Unaudited)
|
Three
Months Ended September 30,
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Average
|
|
|
Average
|
|
Average
|
|
Yield/
|
Average
|
|
Yield/
|
|
Balance
|
Interest
|
Cost
|
Balance
|
Interest
|
Cost
|
(Dollars In
Thousands)
|
Assets:
|
|
|
|
|
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
Real
estate loans
|
$2,654,055
|
$39,122
|
5.90%
|
$2,558,690
|
$37,472
|
5.86%
|
Other
loans
|
1,959
|
47
|
9.60
|
2,273
|
29
|
5.10
|
Mortgage-backed
securities
|
172,116
|
1,666
|
3.87
|
218,204
|
2,010
|
3.68
|
Investment
securities
|
31,406
|
454
|
5.78
|
65,259
|
601
|
3.68
|
Other
short-term investments
|
100,932
|
1,384
|
5.48
|
246,397
|
2,230
|
3.62
|
Total
interest-earning assets
|
2,960,468
|
$42,673
|
5.77%
|
3,090,823
|
$42,342
|
5.48%
|
Non-interest
earning assets
|
147,014
|
|
|
156,393
|
|
|
Total
assets
|
$3,107,482
|
|
|
$3,247,216
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity:
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
NOW
and Super Now accounts
|
$33,814
|
$85
|
1.00%
|
$39,728
|
$100
|
1.00%
|
Money
Market accounts
|
455,629
|
3,228
|
2.81
|
570,067
|
2,284
|
1.59
|
Savings
accounts
|
312,891
|
493
|
0.63
|
349,384
|
486
|
0.55
|
Certificates
of deposit
|
1,023,738
|
11,213
|
4.35
|
1,003,995
|
7,820
|
3.10
|
Borrowed
Funds
|
808,278
|
8,948
|
4.39
|
809,185
|
9,306
|
4.58
|
Total
interest-bearing liabilities
|
2,634,350
|
$23,967
|
3.61%
|
2,772,359
|
$19,996
|
2.87%
|
Checking
accounts
|
93,989
|
|
|
93,690
|
|
|
Other
non-interest-bearing liabilities
|
84,838
|
|
|
92,736
|
|
|
Total
liabilities
|
2,813,177
|
|
|
2,958,785
|
|
|
Stockholders'
equity
|
294,305
|
|
|
288,431
|
|
|
Total
liabilities and stockholders' equity
|
$3,107,482
|
|
|
$3,247,216
|
|
|
Net
interest income
|
|
$18,706
|
|
|
$22,346
|
|
Net
interest spread
|
|
|
2.16%
|
|
|
2.61%
|
Net
interest-earning assets
|
$326,118
|
|
|
$318,464
|
|
|
Net
interest margin
|
|
|
2.53%
|
|
|
2.89%
|
Ratio
of interest-earning assets to interest-bearing liabilities
|
|
|
112.38%
|
|
|
111.49%
|
Rate/Volume
Analysis (Unaudited)
|
Three
Months Ended September 30, 2006
|
|
Compared
to Three Months Ended September 30, 2005
|
|
Increase/
(Decrease) Due to:
|
|
Volume |
Rate
|
Total
|
Interest-earning
assets:
|
(Dollars
In thousands)
|
Real
Estate Loans
|
$1,395
|
$255
|
$1,650
|
Other
loans
|
(5)
|
23
|
18
|
Mortgage-backed
securities
|
(437)
|
93
|
(344)
|
Investment
securities
|
(401)
|
254
|
(147)
|
Other
short-term investments
|
(1,655)
|
809
|
(846)
|
Total
|
(1,103)
|
1,434
|
331
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
NOW
and Super Now accounts
|
$(15)
|
$-
|
$(15)
|
Money
market accounts
|
(635)
|
1,579
|
944
|
Savings
accounts
|
(57)
|
64
|
7
|
Certificates
of deposit
|
192
|
3,201
|
3,393
|
Borrowed
funds
|
10
|
(368)
|
(358)
|
Total
|
(505)
|
4,476
|
3,971
|
Net
change in net interest income
|
$(598)
|
$(3,042)
|
$(3,640)
|
Net
interest income for the three months ended September 30, 2006 decreased $3.6
million to $18.7 million, from $22.3 million during the three months ended
September 30, 2005. The decrease was attributable to an increase of $4.0 million
in interest expense that was partially offset by an increase of $331,000 in
interest income. The net interest spread decreased 45 basis points, from 2.61%
for the three months ended September 30, 2005 to 2.16% for the three months
ended September 30, 2006, and the net interest margin decreased 36 basis points,
from 2.89% to 2.53% during the same period.
The
tightening of monetary policy by the Federal Open Market Committee ("FOMC")
from
the second half of 2004 through June 30, 2006, in combination with various
market factors suppressing increases in both general long-term interest rates
and interest rates offered on real estate loans within the Bank's lending
market, resulted in a narrowing spread between short and long-term interest
rates, which negatively impacted net interest income during the three-month
period ended September 30, 2006.
The
decrease in both the net interest spread and net interest margin reflected
an
increase of 74 basis points in the average cost of interest bearing liabilities.
The increase resulted primarily from the following: (i) borrowings, which
possess a higher average cost than deposits, became a larger percentage of
the
Bank's total interest bearing liabilities as a result of runoff in average
deposit balances from October 2005 to September 2006, and (ii) the average
cost
of money market deposits and CDs increased by 122 basis points and 125 basis
points, respectively, during the comparative period, reflecting increases in
short-term interest rates during the period October 2005 through June 2006.
(See
"Interest Expense" below).
Partially
offsetting the increase in the average cost of interest bearing liabilities
was
an increase of 29 basis points in the average yield on interest earning assets
during the three months ended September 30, 2006 compared to the three months
ended September 30, 2005. This increase resulted primarily from an increase
in
the average balance of real estate loans (the Bank's highest yielding interest
earning asset) as a percentage of total interest earning assets, which was
coupled with an increase in the average yields on real estate loans and MBS
of 4
basis points and 19 basis points, respectively. The increase in the composition
of real estate loans as a percentage of interest earning assets resulted from
both loan origination activity during the period October 2005 through June
2006
coupled with a reduction in the level of investment securities and MBS during
the same period, as cash flows from maturing investment securities and MBS
were
utilized to fund both loan originations and ongoing operations of the Company.
The increase in average yield on real estate loans reflected ongoing increases
in medium- and long-term interest rates from October 2005 through June 2006.
The
increase in average yield on MBS reflected ongoing increases in short- and
medium-term interest rates from October 2005 through June 2006.
Interest
Income.
Interest
income was $42.7 million during the three months ended September 30, 2006,
an
increase of $331,000 from $42.3 million during the three months ended September
30, 2005. This resulted from an increase of $1.7 million in interest income
on
real estate loans that was partially offset by decreases in interest income
on
MBS, investment securities and other short-term investments of $344,000,
$147,000 and $846,000, respectively, during the period.
The
increase in interest income on real estate loans resulted primarily from growth
in their average balance of $95.4 million during the three months ended
September 30, 2006 compared to the three months ended September 30, 2005. The
growth reflected real estate loan originations of $583.3 between October 2005
and September 2006, which were partially offset by principal repayments and
loan
sales during the period.
The
average yield on real estate loans increased by 4 basis points during the three
months ended September 30, 2006 compared to the three months ended September
30,
2005. This increase resulted from ongoing increases in medium term interest
rates from October 2005 through June 2006, which resulted in an increase in
the
average origination rate on real estate loans from 5.84% during the three months
ended September 30, 2005 to 6.58% during the three months ended September 30,
2006.
The
decline in interest income on MBS during the three months ended September 30,
2006 compared to the three months ended September 30, 2005 resulted from a
decreased average balance of $46.1 million (resulting
primarily from principal repayments on MBS of $44.2 million during the period
October 2005 through June 2006), that
was
partially offset by an increase of 19 basis points in average yield during
the
three months ended September 30, 2006 compared to the three months ended
September 30, 2005 (resulting from increases in short and medium-term interest
rates during the period October 2005 through June 2006). The decline in interest
income on investment securities and other short-term investments reflected
declines in their average balances of $33.9 million and $145.5 million,
respectively, during the three months ended September 30, 2006 compared to
the
three months ended September 30, 2005, as cash flows from maturing investment
securities and other short-term investments were utilized to fund both loan
originations and ongoing operations of the Company.
Interest
Expense.
Interest
expense increased $4.0 million, to $24.0 million, during the three months ended
September 30, 2006, from $20.0 million during the three months ended September
30, 2005. The growth resulted primarily from increased interest expense of
$3.4
million related to CDs and $944,000 related to money markets, that was partially
offset by a decline of $358,000 in interest expense on borrowings.
The
increase in interest expense on CDs resulted from an increase in their average
cost of 125 basis points during the quarter ended September 30, 2006 compared
to
the quarter ended September 30, 2005. The increase in average cost resulted
from
increases in short-term interest rates during the period October 2005 through
June 2006, as a significant majority of the Bank's CDs outstanding at September
2005 matured during this timeframe. In addition, the average balance of CDs
increased $19.7 million during the period, reflecting both a movement of
deposits from money market accounts into CDs as interest rates on CDs became
preferable to money markets, as well as some successful gathering of new CDs
from promotional activities. (See "Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources").
Interest
expense on money markets increased $944,000 during the three months ended
September 30, 2006 compared to the three months ended September 30, 2005 due
to
an increase of 122 basis points in their average cost during the period, which
was partially offset by a decline of $114.4 million in their average balance
during the same period. During the three months ended September 30, 2006, the
Bank increased the rates offered on both promotional and non-promotional money
market accounts, which led to the increase in average cost during the period.
In
2005 and early 2006, management of the Bank elected to maintain the
non-promotional interest rates offered on money markets constant during a period
of rising short-term interest rates. The Bank thus experienced an above average
level of attrition in non-promotional money market accounts, the majority of
which flowed into other financial institutions and resulted in a decrease of
$114.4 million in their average balance during the quarter ended September
30,
2006 compared to the quarter ended September 30, 2005
During
the three months ended September 30, 2006 compared to the three months ended
September 30, 2005, the average cost of borrowed funds decreased 19 basis points
due to a reduction of borrowing expense of $764,000 during the quarter ended
September 30, 2006 related to proceeds received on the prepayment of below
market interest rate borrowings (See "Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources"). Excluding this item, the average
borrowing cost would have increased 19 basis points during the three months
ended September 30, 2006 compared to the three months ended September 30, 2005
due to the replacement of maturing low cost short-term borrowings at higher
rates while short-term interest rates rose during the period July 2005 through
June 2006.
Provision
for Loan Losses.
The
provision for loan losses was $60,000 during the three months ended September
30, 2006 and the three months ended September 30, 2005, as the Bank provided
for
additional inherent losses in the portfolio.
Non-Interest
Income. Non-interest
income, excluding gains or losses on the sale of assets, totaled $2.4 million
during both the three months ended September 30, 2006 and 2005.
The
Company sold loans to FNMA totaling $92.3 million and $25.5 million during
the
quarters ended September 30, 2006 and 2005, respectively. The gains recorded
on
these sales were $779,000 and $284,000, respectively, during the quarters ended
September 30, 2006 and 2005. All of the loans sold during both of these periods
were designated for sale upon
origination.
The loans sold during the quarter ended September 30, 2006 included a $71.6
million package of loans made to one borrower that were originated for sale
during the June 2006 and September 2006 quarters. A pre-tax gain of $609,000
was
recognized on this package of loans. All loans sold during the quarter ended
September 30, 2006 had a weighted average term to the earlier of maturity or
next repricing of 10.2 years.
Non-Interest
Expense.
Non-interest expense was $10.6 million during the quarter ended September 30,
2006, a decrease of $116,000 from the three months ended September 30, 2005.
Data
systems expense decreased $159,000 during the three months ended September
30,
2006 compared to the three months ended September 30, 2005, as the Company
paid
$100,000 to its previous data systems provider during the September 2005 quarter
in final settlement related to its late 2004 data systems conversion.
Occupancy
and equipment expense increased $115,000 during the three months ended September
30, 2006 compared to the September 30, 2005 quarter due to both general
increases in utility costs and real estate taxes as well as the addition of
the
Valley Stream branch in March 2006.
Non-interest
expense to average assets was 1.37% in the September 2006 quarter, compared
to
1.32% for the quarter ended September 30, 2005. Average assets decreased by
$139.7 million from September 30, 2005 to September 30, 2006, as a result of
the
previously discussed declines in investment securities, MBS and other short-term
investments from October 2005 through June 2006.
Income
Tax Expense.
Income
tax expense decreased $1.1 million during the quarter ended September 30, 2006
compared to the quarter ended September 30, 2005, due primarily to a decline
of
$3.0 million in pre-tax net income during the period.
Comparison
of the Operating Results for the Nine Months Ended September 30, 2006 and
2005
General.
Net
income was $24.6 million during the nine months ended September 30, 2006, a
decrease of $2.6 million from net income of $27.2 million during the nine months
ended September 30, 2005. During the comparative period, net interest income
decreased $10.4 million, non-interest income increased $7.4 million and
non-interest expense increased $1.2 million, resulting in a decline in pre-tax
net income of $4.2 million. Income tax expense decreased $1.6 million as a
result of the decline in pre-tax net income.
Net
Interest Income. The
discussion of net interest income for the nine months ended September 30, 2006
and 2005 presented below should be read in conjunction with the following
tables, which set forth certain information related to the consolidated
statements of operations for those periods, and which also present the average
yield on assets and average cost of liabilities for the periods indicated.
The
yields and costs were derived by dividing income or expense by the average
balance of their related assets or liabilities during the periods represented.
Average balances were derived from average daily balances. The yields include
fees that are considered adjustments to yields.
Analysis
of Net Interest Income (Unaudited)
|
Nine
Months Ended September 30,
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Average
|
|
|
Average
|
|
Average
|
|
Yield/
|
Average
|
|
Yield/
|
|
Balance
|
Interest
|
Cost
|
Balance
|
Interest
|
Cost
|
|
(Dollars
In
thousands)
|
Assets:
|
|
|
|
|
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
Real
estate loans
|
$2,645,992
|
$116,805
|
5.89%
|
$2,512,274
|
$110,753
|
5.88%
|
Other
loans
|
1,977
|
141
|
9.51
|
2,424
|
96
|
5.28
|
Mortgage-backed
securities
|
182,296
|
5,264
|
3.85
|
363,917
|
9,770
|
3.58
|
Investment
securities
|
33,586
|
1,405
|
5.58
|
74,632
|
1,963
|
3.51
|
Other
short-term investments
|
109,421
|
4,062
|
4.95
|
210,564
|
5,071
|
3.21
|
Total
interest-earning assets
|
2,973,272
|
$127,677
|
5.73%
|
3,163,811
|
$127,653
|
5.38%
|
Non-interest
earning assets
|
147,099
|
|
|
149,343
|
|
|
Total
assets
|
$3,120,371
|
|
|
$3,313,154
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity:
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
NOW,
Super Now accounts
|
$35,944
|
$268
|
1.00%
|
$41,200
|
$310
|
1.01%
|
Money
market accounts
|
454,531
|
7,885
|
2.32
|
655,102
|
7,871
|
1.61
|
Savings
accounts
|
322,980
|
1,424
|
0.59
|
356,203
|
1,469
|
0.55
|
Certificates
of deposit
|
1,011,812
|
30,492
|
4.03
|
977,442
|
20,606
|
2.82
|
Borrowed
funds
|
806,040
|
27,610
|
4.58
|
807,591
|
26,956
|
4.46
|
Total
interest-bearing liabilities
|
2,631,307
|
$67,679
|
3.44%
|
2,837,538
|
$57,212
|
2.70%
|
Checking
accounts
|
95,691
|
|
|
94,500
|
|
|
Other
non-interest-bearing liabilities
|
100,568
|
|
|
96,258
|
|
|
Total
liabilities
|
2,827,566
|
|
|
3,028,296
|
|
|
Stockholders'
equity
|
292,805
|
|
|
284,858
|
|
|
Total
liabilities and stockholders' equity
|
$3,120,371
|
|
|
$3,313,154
|
|
|
Net
interest income
|
|
$59,998
|
|
|
$70,441
|
|
Net
interest spread
|
|
|
2.29%
|
|
|
2.68%
|
Net
interest-earning assets
|
$341,965
|
|
|
$326,273
|
|
|
Net
interest margin
|
|
|
2.69%
|
|
|
2.97%
|
Ratio
of interest-earning assets to
interest-bearing liabilities
|
|
|
113.00%
|
|
|
111.50%
|
Rate/Volume
Analysis (Unaudited)
|
Nine
Months Ended September 30, 2006 Compared to
|
|
Nine
Months Ended September 30, 2005
|
|
Increase/
(Decrease) Due to:
|
|
Volume
|
Rate
|
Total
|
|
(Dollars
In thousands)
|
Interest-earning
assets:
|
|
|
|
Real
Estate Loans
|
$5,879
|
$173
|
$6,052
|
Other
loans
|
(25)
|
70
|
45
|
Mortgage-backed
securities
|
(5,060)
|
554
|
(4,506)
|
Investment
securities
|
(1,399)
|
841
|
(558)
|
Other
short-term investments
|
(3,097)
|
2,088
|
(1,009)
|
Total
|
(3,702)
|
3,726
|
24
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
NOW
and Super Now accounts
|
$(40)
|
$(3)
|
$(43)
|
Money
market accounts
|
(2,937)
|
2,952
|
15
|
Savings
accounts
|
(145)
|
99
|
(46)
|
Certificates
of deposit
|
883
|
9,004
|
9,887
|
Borrowed
funds
|
(62)
|
716
|
654
|
Total
|
(2,301)
|
12,768
|
10,467
|
Net
change in net interest income
|
$(1,401)
|
$(9,042)
|
$(10,443)
|
Net
interest income for the nine months ended September 30, 2006 decreased $10.4
million to $60.0 million, from $70.4 million during the nine months ended
September 30, 2005. The decrease was attributable to an increase of $10.5
million in interest expense that was slightly offset by an increase of $24,000
in interest income. The net interest spread decreased 39 basis points, from
2.68% for the nine months ended September 30, 2005 to 2.29% for the nine months
ended September 30, 2006, and the net interest margin decreased 28 basis points,
from 2.97% to 2.69% during the same period.
The
tightening of monetary policy by the FOMC from the second half of 2004 through
June 30, 2006, in combination with various market factors suppressing increases
in both general long-term interest rates and interest rates offered on real
estate loans within the Bank's lending market, resulted in a narrowing spread
between short and long-term interest rates, which negatively impacted net
interest income during the nine-month period ended September 30, 2006.
The
decrease in both the net interest spread and net interest margin reflected
an
increase of 74 basis points in the average cost of interest bearing liabilities.
The increase resulted primarily from the following: (i) borrowings, which
possess a higher average cost than deposits, became a larger percentage of
the
Bank's total interest bearing liabilities as a result of runoff in average
deposit balances from October 2005 to September 2006, and (ii) the average
cost
of money market deposits and CDs increased by 71 basis points and 121 basis
points, respectively, during the comparative period, reflecting increases in
short-term interest rates during the period October 2005 through June 2006.
(See
"Interest Expense" below).
Partially
offsetting the increase in the average cost of interest bearing liabilities
was
an increase of 35 basis points in the average yield on interest earning assets
during the nine months ended September 30, 2006 compared to the nine months
ended September 30, 2005. This increase resulted primarily from an increase
in
the average balance of real estate loans (the Bank's highest yielding interest
earning asset) as a percentage of total interest earning assets, which was
coupled with an increase in the average yields on real estate loans and MBS
of 1
basis point and 27 basis points, respectively, during the comparative period.
The increase in the composition of real estate loans as a percentage of interest
earning assets resulted from both loan origination activity during the period
October 2005 through June 2006 coupled with a reduction in the level of
investment securities and MBS during the same period, as cash flows from
maturing investment securities and MBS were utilized to fund both loan
originations and ongoing operations of the Company. The increase in average
yield on real estate loans reflected ongoing increases in medium- and long-term
interest rates from October 2005 through June 2006. The increase in average
yield on MBS reflected ongoing increases in short- and medium-term interest
rates from October 2005 through June 2006.
Interest
Income.
Interest
income was $127.7 million during both the nine months ended September 30, 2006
and 2005. Interest income on real estate loans increased $6.1 million and was
offset by decreases in interest income on MBS, investment securities and other
short-term investments of $4.5 million, $558,000 and $1.0 million, respectively,
during the period.
The
increase in interest income on real estate loans resulted primarily from growth
in their average balance of $133.7 million during the nine months ended
September 30, 2006 compared to the nine months ended September 30, 2005. The
growth reflected real estate loan originations of $583.3 between October 2005
and September 2006, which were partially offset by principal repayments and
loan
sales during the period.
The
average yield on real estate loans increased by 1 basis point during the nine
months ended September 30, 2006 compared to the nine months ended September
30,
2005. This increase resulted from ongoing increases in medium term interest
rates from October 2005 through June 2006, which resulted in an increase in
the
average origination rate on real estate loans from 5.84% during the nine months
ended September 30, 2005 to 6.58% during the nine months ended September 30,
2006.
The
decline in interest income on MBS during the nine months ended September 30,
2006 compared to the nine months ended September 30, 2005 resulted from a
decreased average balance of $181.6 million (resulting primarily from the sale
of $236.9 million of MBS in May 2005 and principal repayments on MBS of $44.2
million during the period October 2005 through June 2006), that was partially
offset by an increase of 27 basis points in average yield during the nine months
ended September 30, 2006 compared to the nine months ended September 30, 2005
(resulting from increases in short and medium-term interest rates during the
period October 2005 through June 2006). The decline in interest income on
investment securities and other short-term investments reflected declines in
their average balances of $41.1 million and $101.1 million, respectively, during
the nine months ended September 30, 2006 compared to the nine months ended
September 30, 2005, as cash flows from maturing investment securities and other
short-term investments were utilized to fund both loan originations and ongoing
operations of the Company.
Interest
Expense.
Interest
expense increased $10.5 million, to $67.7 million, during the nine months ended
September 30, 2006, from $57.2 million during the nine months ended September
30, 2005. The growth resulted primarily from increased interest expense of
$9.9
million related to CDs and $654,000 related to borrowings.
The increase in interest expense on CDs resulted from an increase in their
average cost of 121 basis points during the nine months ended September 30,
2006
compared to the nine months ended September 30, 2005. The increase in average
cost resulted from increases in short-term interest rates during the period
October 2005 through June 2006, as a significant majority of the Bank's CDs
outstanding at September 2005 matured during this timeframe. In addition, the
average balance of CDs increased $34.4 million during the period, reflecting
both a movement of deposits from money market accounts into CDs as interest
rates on CDs became preferable to money markets, as well as some successful
gathering of new CDs from promotional activities. (See "Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital
Resources").
The
increase in interest expense on borrowed funds during the nine months ended
September 30, 2006 compared to the nine months ended September 30, 2005 resulted
from an increase of 12 basis points in their average cost during the period
as
maturing low cost short-term borrowings were replaced at higher rates while
short-term interest rates rose during the period October 2005 through June
2006.
Provision
for Loan Losses.
The
provision for loan losses was $180,000 during the nine months ended both
September 30, 2006 and 2005, as the Bank provided for additional inherent losses
in the portfolio.
Non-Interest
Income.
Non-interest income, excluding gains or losses on the sale of assets, totaled
$7.0 million during the nine months ended September 30, 2006, compared to $7.1
million during the nine months ended September 30, 2005. There were no material
changes in any individual item during the comparable period.
The
Company sold loans to FNMA totaling $140.4 million and $65.7 million during
the
nine months ended September 30, 2006 and 2005, respectively. The gains recorded
on these sales were $1.4 million and $571,000, respectively, during the nine
months ended September 30, 2006 and 2005. The majority of the loans sold during
both of these periods were designated for sale upon origination.
During
the nine months ended September 30, 2006, the Company recorded a pre-tax gain
of
$1.1 million on the sale of mutual fund investments associated with its Benefit
Maintenance Plan. During the nine months ended September 30, 2005, the Company
incurred a pre-tax loss of $5.2 million related to the sale of $276 million
of
investment and mortgage-backed securities under a restructuring of its
securities portfolio. During the nine months ended September 30, 2006, the
Company sold a parcel of real estate obtained in its acquisition of Financial
Bancorp, Inc. in 1999, recognizing a pre-tax gain of $478,000.
Non-Interest
Expense.
Non-interest expense was $31.6 million during the nine months ended September
30, 2006, an increase of $1.2 million from the nine months ended September
30,
2005.
Salaries
and employee benefits increased $408,000 during the comparative period,
reflecting normal salary increases as well as the filling of open and new
staffing and management positions. Additions to staff occurred primarily in
the
retail division of the Bank where initiatives included product and sales
development for business and professional banking.
Occupancy
and equipment expense increased $293,000 during the nine months ended September
30, 2006 compared to the nine months ended September 30, 2005 due to both
general increases in utility costs and real estate taxes as well as the addition
of the Valley Stream branch in March 2006.
Data
systems expense increased $387,000 during the nine months ended September 30,
2006 compared to the nine months ended September 30, 2005, resulting from the
expiration of promotional pricing the Company received throughout the first
six
months of 2005 from its new data systems vendor.
Non-interest
expense to average assets was 1.35% during the nine months ended the September
2006, compared to 1.22% for the nine months ended September 30, 2005. Average
assets decreased by $192.8 million from September 30, 2005 to September 30,
2006
as a result of the previously discussed declines in investment securities,
MBS
and other short-term investments from October 2005 through June
2006.
Income
Tax Expense.
Income
tax expense decreased $1.6 million during the nine months ended September 30,
2006 compared to the nine months ended September 30, 2005, due primarily to
a
decline of $4.2 million in pre-tax net income during the period.
Other
Information
Loan
Portfolio Composition
The
following table presents a breakdown of the Company's loan portfolio at
September 30, 2006 and December 31, 2005 by loan type:
|
At
September 30, 2006
|
|
At
December 31, 2005
|
|
Balance
|
|
%
of Total
|
|
Balance
|
|
%
of Total
|
|
(Dollars
in thousands)
|
One-to
Four family and cooperative apartment
|
$
158,861
|
|
6.0%
|
|
145,755
|
|
5.6%
|
Multifamily
residential
|
1,174,562
|
|
44.5
|
|
1,229,195
|
|
47.1
|
Commercial
real estate
|
392,705
|
|
14.9
|
|
358,830
|
|
13.8
|
Mixed
use (classified as multifamily residential)
|
637,399
|
|
24.1
|
|
648,788
|
|
24.9
|
Mixed
use (classified as commercial real estate)
|
261,101
|
|
9.9
|
|
213,687
|
|
8.2
|
Construction
and land acquisition
|
15,738
|
|
0.6
|
|
12,098
|
|
0.4
|
Unearned
Discounts and net deferred loan fees
|
924
|
|
-
|
|
501
|
|
-
|
Total
real estate loans
|
2,641,290
|
|
100.0%
|
|
2,608,854
|
|
100.0%
|
Consumer
loans
|
2,234
|
|
|
|
2,341
|
|
|
Allowance
for loan losses
|
(15,956)
|
|
|
|
(15,785)
|
|
|
Total
loans, net
|
2,627,568
|
|
|
|
$
2,595,410
|
|
|
Investment
Portfolio Summary Information
The
following table presents summary information related to the Company's
consolidated investment securities and MBS portfolios at September 30, 2006
and
December 31, 2005:
|
At
September 30, 2006
|
|
At
December 31, 2005
|
|
(Dollars
in thousands)
|
Balance
at end of period
|
$
192,488
|
|
$
238,740
|
Average
interest rate
|
4.32%
|
|
4.03%
|
Average
duration (in years)
|
2.3
|
|
2.4
|
Outlook
for the Remainder of 2006
At
present, the overall yield on the Company's interest-earning assets is rising
(excluding the effects of prepayment fee income), despite the lagging movement
of yields on real estate loans compared to general market rates. The average
yield on interest earning assets, excluding the effects of prepayment fee
income, rose on a linked quarter basis, from 5.54% to 5.59%.
The
cost
of deposits rose from 2.80% during the June 30, 2006 quarter to 3.10% during
the
September 2006 quarter. This trend is likely to continue, whether or not the
Bank grows deposits. The rising cost of deposits is due to a combination of
repricing lower rate deposits already on the books, plus the cost of attracting
new deposits.
At
13.6%
annualized during the first nine months of 2006, prepayment and amortization
rates were slightly in excess of the range anticipated by management, and are
expected to remain in the 10% to 12% range during the final quarter of 2006.
At
September 30, 2006, the multifamily and mixed use loan commitment pipeline
approximated $89.8 million, including $6.5 million of loan commitments intended
for sale to FNMA. The average rate on the commitment pipeline was
6.63%.
Operating
expenses are expected to be approximately $10.7 million in the fourth quarter
of
2006. Share repurchases are expected to be in line with recent practices. The
Company is positioned, however, to be opportunistic in the purchase of its
own
shares should conditions warrant.
Quantitative
and qualitative disclosures about market risk were presented at December 31,
2005 in Item 7A of the Company's Annual Report on Form 10-K, filed with the
Securities and Exchange Commission on March 17, 2006. The following is an update
of the discussion provided therein.
General.
Virtually all of the Company's market risk continues to reside at the Bank
level. The Bank's largest component of market risk remains interest rate risk.
The Company is not subject to foreign currency exchange or commodity price
risk.
At September 30, 2006, the Company owned no trading assets, nor did it conduct
transactions involving derivative instruments requiring bifurcation in order
to
hedge interest rate or market risk.
Assets,
Deposit Liabilities and Wholesale Funds.
There
was no material change in the composition of assets, deposit liabilities or
wholesale funds from December 31, 2005 to September 30, 2006.
Interest
Sensitivity Gap.
There
was no material change in the computed one-year interest sensitivity gap from
December 31, 2005 to September 30, 2006.
Interest
Rate Risk Exposure (Net Portfolio Value) Compliance.
At
September 30, 2006, the Bank continued to monitor the impact of interest rate
volatility upon net interest income and net portfolio value ("NPV") in the
same
manner as at December 31, 2005. There were no changes in the Board-approved
limits of acceptable variance in the effect of interest rate fluctuations upon
net interest income and NPV at September 30, 2006 compared to December 31,
2005.
The
analysis that follows presents the estimated NPV resulting from market interest
rates prevailing at a given quarter-end ("Pre-Shock Scenario"), and under four
other interest rate scenarios (each a "Rate Shock Scenario") represented by
immediate, permanent, parallel shifts in the term structure of interest rates
from the actual term structure observed at September 30, 2006 and December
31,
2005. The analysis additionally presents a measurement of the percentage by
which each of the Rate Shock Scenario NPVs change from the Pre-Shock Scenario
NPV at September 30, 2006 and December 31, 2005. Interest rate sensitivity
is
measured by the changes in the various NPV ratios ("NPV Ratios") from the
Pre-Shock Scenario to the Rate Shock Scenarios. An increase in the NPV is
considered favorable, while a decline is considered unfavorable.
|
At
September 30, 2006
|
|
|
|
Net
Portfolio Value
|
|
Portfolio
Value of Assets
|
Portfolio
Value ofAssets
At
December 31, 2005
|
|
Dollar
Amount
|
Dollar
Change
|
Percentage
Change
|
|
NPV
Ratio
|
Sensitivity
Change
|
NPV
Ratio
|
Sensitivity
Change
|
Change
in Interest Rate
|
(Dollars
in Thousands)
|
+
200 Basis Points
|
$332,374
|
$(73,388)
|
-18.09%
|
|
10.94%
|
(200)
|
10.69%
|
(235)
|
+
100 Basis Points
|
373,462
|
(32,300)
|
-7.96
|
|
12.09
|
(85)
|
12.01
|
(103)
|
Pre-Shock
|
405,762
|
-
|
-
|
|
12.94
|
-
|
13.04
|
-
|
-
100 Basis Points
|
418,009
|
12,247
|
3.02
|
|
13.18
|
24
|
13.66
|
62
|
-
200 Basis Points
|
401,514
|
4,248
|
-1.05
|
|
12.59
|
(35)
|
13.25
|
21
|
The
NPVs
presented above incorporate asset and liability values, some of which
(e.g.,
mortgage loans and time deposits) were derived from the Bank’s valuation model,
and others of which (e.g.,
MBS and
structured borrowings) were provided by reputable independent sources. The
Bank's valuation model for assets and liabilities incorporates, at each level
of
interest rate change, estimates of cash flows from non-contractual sources
such
as unscheduled principal payments on loans and passbook deposit balance decay.
The Bank's estimates for loan prepayment levels are influenced by the recent
history of prepayment activity in its loan portfolio as well as the
interest-rate composition of the existing portfolio, especially vis-à-vis the
current interest rate environment. In addition, the Bank considers the amount
of
prepayment fee protection inherent in the loan portfolio when estimating future
prepayment cash flows. Regarding passbook deposit flows, the Bank tracks and
analyzes the decay rate of its passbook deposits over time and over various
interest rate scenarios and then estimates its passbook decay rate for use
in
the valuation model. Regardless of the care and precision with which the
estimates are derived, however, actual cash flows for loans, as well as
passbooks, could differ significantly from the Bank's estimates resulting in
significantly different NPV calculations.
The
Bank
also generates a series of spot discount rates that are integral to the
valuation of the projected monthly cash flows of its assets and liabilities.
The
Bank's valuation model employs discount rates that are representative of
prevailing market rates of interest, with appropriate adjustments suited to
the
heterogeneous characteristics of the Bank’s various asset and liability
portfolios.
The
Pre-Shock Scenario NPV declined from $408.9 million at December 31, 2005 to
$405.8 million at September 30, 2006. The NPV Ratio at September 30, 2006 was
12.94% in the Pre-Shock Scenario, a decrease from the NPV Ratio of 13.04% in
that Scenario at December 31, 2005. The decrease in the Pre-Shock NPV was due
primarily to a decline in the Bank's equity resulting from a capital
distribution of $35.0 million during the period. In addition, REPOs and FHLBNY
advances became more interest rate sensitive, as the restructuring of a portion
of their balance during the September 2006 quarter extended their potential
duration term and thus led to a decline in the Pre-Shock NPV. The decrease
in
the Pre-Shock Scenario NPV Ratio reflected the decline in the Pre-Shock Scenario
NPV at September 30, 2006 compared to December 31, 2005.
The
Bank’s +200 basis point Rate Shock Scenario NPV increased from $323.4 million at
December 31, 2005 to $332.4 million at September 30, 2006. This increase
resulted primarily from an increase in the value of multifamily loans reflecting
lower expected runoff in the portfolio.
The
NPV
Ratio was 10.94% in the +200 basis point Rate Shock Scenario at September 30,
2006, an increase from the NPV Ratio of 10.69% in the +200 basis point Rate
Shock Scenario at December 31, 2005. The increase in the Bank’s +200 basis point
Rate Shock Scenario NPV Ratio at September 30, 2006 compared to December 31,
2005 reflected the aforementioned increase in the +200 basis point Rate Shock
Scenario NPV during the period.
At
September 30, 2006, the sensitivity change in the +200 basis point Rate Shock
Scenario was 200 basis points, compared to a sensitivity change of 235 basis
points in the +200 basis point Rate Shock Scenario at December 31, 2005. The
reduction in sensitivity was primarily due to the aforementioned increase in
the
value of multifamily loans.
Management
of the Company, with the participation of its Chief Executive Officer and Chief
Financial Officer, conducted an evaluation, as of September 30, 2006, of the
effectiveness of the Company's disclosure controls and procedures, as defined
in
Rules 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934,
as
amended (the "Exchange Act"). Based upon this evaluation, the Chief Executive
Officer and Chief Financial Officer each found that the Company's disclosure
controls and procedures were effective to ensure that information required
to be
disclosed by the Company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Security and Exchange Commission’s rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by
the
Company in the reports that it files or submits under the Exchange Act, is
accumulated and communicated to the Company's management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.
Changes
in Internal Control Over Financial Reporting
There
was
no change in the Company's internal control over financial reporting that
occurred during the Company's last quarter that has materially affected, or
is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
In
the
ordinary course of business, the Company is routinely named as a defendant
in or
party to various pending or threatened legal actions or proceedings. Certain
of
these matters may seek substantial monetary damages. In the opinion of
management, the Company is involved in no actions or proceedings that will
have
a material adverse impact on its financial condition and results of
operations.
There
have been no material changes in the Company’s risk factors from those
previously disclosed in Part I, Item 1A of the Company’s Form 10-K for the year
ended December 31, 2005.
(c)
During the three months ended September 30, 2006, the Holding Company purchased
179,448 shares of its common stock into treasury. These repurchases were made
under the Company's Tenth Stock Repurchase Program, which was publicly announced
on May 20, 2004.
A
summary
of the shares repurchased by month is as follows:
Period
|
Total
Number
of
Shares Purchased
|
|
Average
Price
Paid
Per Share
|
|
Total
Number of Shares Purchased as
Part
of a Publicly Announced Programs
|
|
Maximum
Number of Shares that May Yet be Purchased Under the
Programs
|
July
2006
|
80,000
|
|
$13.73
|
|
80,000
|
|
1,995,390
|
August
2006
|
48,448
|
|
14.16
|
|
48,448
|
|
1,946,942
|
September
2006
|
51,000
|
|
14.52
|
|
51,000
|
|
1,895,942
|
None.
None.
None.
Exhibit
Number
3(i)
|
|
Amended
and Restated Certificate of Incorporation of Dime Community Bancshares,
Inc. (1)
|
3(ii)
|
|
Amended
and Restated Bylaws of Dime Community Bancshares, Inc.
(12)
|
4.1
|
|
Amended
and Restated Certificate of Incorporation of Dime Community Bancshares,
Inc. [See Exhibit 3(i) hereto]
|
4.2
|
|
Amended
and Restated Bylaws of Dime Community Bancshares, Inc. [See Exhibit
3(ii)
hereto]
|
4.3
|
|
Draft
Stock Certificate of Dime Community Bancshares, Inc.
(2)
|
4.4
|
|
Certificate
of Designations, Preferences and Rights of Series A Junior Participating
Preferred Stock (3)
|
4.5
|
|
Rights
Agreement, dated as of April 9, 1998, between Dime Community Bancorp,
Inc.
and ChaseMellon Shareholder Services,
L.L.C., as Rights Agent (3)
|
4.6
|
|
Form
of Rights Certificate (3)
|
4.7
|
|
Second
Amended and Restated Declaration of Trust, dated as of July 29, 2004,
by
and among Wilmington Trust Company,
as Delaware Trustee, Wilmington Trust
Company as Institutional Trustee, Dime Community Bancshares, Inc.,
as Sponsor, the Administrators of Dime Community Capital Trust I
and the
holders from time
to time of undivided beneficial
interests in the assets of Dime Community Capital Trust I
(8)
|
4.8
|
|
Indenture,
dated as of March 19, 2004, between Dime Community Bancshares, Inc.
and
Wilmington Trust Company, as trustee
(8)
|
4.9
|
|
Series
B Guarantee Agreement, dated as of July 29, 2004, executed and delivered
by Dime Community Bancshares, Inc.,
as Guarantor and Wilmington Trust Company,
as Guarantee Trustee, for the benefit of the holders from time to
time
of the Series B Capital Securities of Dime Community Capital Trust
I
(8)
|
10.1
|
|
Amended
and Restated Employment Agreement between The Dime Savings Bank of
Williamsburgh and Vincent F. Palagiano
(4)
|
10.2
|
|
Amended
and Restated Employment Agreement between The Dime Savings Bank of
Williamsburgh and Michael P. Devine
(4)
|
10.3
|
|
Amended
and Restated Employment Agreement between The Dime Savings Bank of
Williamsburgh and Kenneth
J. Mahon (4)
|
10.4
|
|
Employment
Agreement between Dime Community Bancorp, Inc. and Vincent F. Palagiano
(9)
|
10.5
|
|
Employment
Agreement between Dime Community Bancorp, Inc. and Michael P. Devine
(9)
|
10.6
|
|
Employment
Agreement between Dime Community Bancorp, Inc. and Kenneth J. Mahon
(9)
|
10.7
|
|
Form
of Employee Retention Agreement by and among The Dime Savings Bank
of
Williamsburgh, Dime Community Bancorp,
Inc. and certain officers (4)
|
10.8
|
|
The
Benefit Maintenance Plan of Dime Community Bancorp, Inc.
(5)
|
10.9
|
|
Severance
Pay Plan of The Dime Savings Bank of Williamsburgh (4)
|
10.10
|
|
Retirement
Plan for Board Members of Dime Community Bancorp, Inc.
(5)
|
|
|
Table
continued on next page
|
10.11
|
|
Dime
Community Bancorp, Inc. 1996 Stock Option Plan for Outside Directors,
Officers and Employees, as amended by
amendments number 1 and 2 (5)
|
10.12
|
|
Recognition
and Retention Plan for Outside Directors, Officers and Employees
of Dime
Community Bancorp, Inc., as amended
by amendments number 1 and 2 (5)
|
10.13
|
|
Form
of stock option agreement for Outside Directors under Dime Community
Bancshares, Inc. 1996 and 2001 Stock
Option Plans for Outside Directors, Officers and
Employees and the 2004 Stock Incentive Plan. (5)
|
10.14
|
|
Form
of stock option agreement for officers and employees under Dime Community
Bancshares, Inc. 1996 and 2001 Stock
Option Plans for Outside Directors, Officers and
Employees and the 2004 Stock Incentive Plan (5)
|
10.15
|
|
Form
of award notice for outside directors under the Recognition and Retention
Plan for Outside Directors, Officers and
Employees of Dime Community Bancorp, Inc. (5)
|
10.16
|
|
Form
of award notice for officers and employees under the Recognition
and
Retention Plan for Outside Directors, Officers
and Employees of Dime Community
Bancorp, Inc. (5)
|
10.17
|
|
Financial
Federal Savings Bank Incentive Savings Plan in RSI Retirement Trust
(6)
|
10.18
|
|
Financial
Federal Savings Bank Employee Stock Ownership Plan (6)
|
10.19
|
|
Option
Conversion Certificates between Dime Community Bancshares, Inc. and
each
of Messrs. Russo, Segrete, Calamari,
Latawiec, O'Gorman, and Ms. Swaya pursuant
to Section 1.6(b) of the Agreement and Plan of Merger, dated
as of July 18, 1998 by and between Dime Community Bancshares, Inc.
and
Financial Bancorp, Inc. (6)
|
10.20
|
|
Dime
Community Bancshares, Inc. 2001 Stock Option Plan for Outside Directors,
Officers and Employees (7)
|
10.21
|
|
Dime
Community Bancshares, Inc. 2004 Stock Incentive Plan for Outside
Directors, Officers and Employees (11)
|
10.22
|
|
Waiver
executed by Vincent F. Palagiano (12)
|
10.23
|
|
Waiver
executed by Michael P. Devine (12)
|
10.24
|
|
Waiver
executed by Kenneth J. Mahon (12)
|
10.25
|
|
Form
of restricted stock award notice for officers and employees under
the 2004
Stock Incentive Plan (11)
|
10.26
|
|
Employee
Retention Agreement between The Dime Savings Bank of Williamsburgh
and Christopher D. Maher
|
31(i).1
|
|
Certification
of Chief Executive Officer Pursuant to 17 CFR
240.13a-14(a)
|
31(i).2
|
|
Certification
of Chief Financial Officer Pursuant to 17 CFR
240.13a-14(a)
|
32.1
|
|
Certification
of Chief Executive Officer Pursuant to 18 U.S.C. Section
1350
|
32.2
|
|
Certification
of Chief Financial Officer Pursuant to 18 U.S.C. Section
1350
|
(1) Incorporated
by reference to the registrant's Transition Report on Form 10-K for the
transition period ended December 31, 2002 filed on March 28, 2003.
(2) Incorporated
by reference to the registrant's Annual Report on Form 10-K for the fiscal
year
ended June 30, 1998 filed on September 28, 1998.
(3) Incorporated
by reference to the registrant's Current Report on Form 8-K dated April 9,
1998
and filed on April 16, 1998.
(4) Incorporated
by reference to Exhibits to the registrant's Annual Report on Form 10-K for
the
fiscal year ended June 30, 1997 filed on September 26, 1997.
(5) Incorporated
by reference to the registrant's Annual Report on Form 10-K for the fiscal
year
ended June 30, 1997 filed on September 26, 1997, and the Current Reports on
Form 8-K filed on March 22, 2004 and March 29, 2005.
(6) Incorporated
by reference to the registrant's Annual Report on Form 10-K for the fiscal
year
ended June 30, 2000 filed on September 28, 2000.
(7) Incorporated
by reference to the registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2003 filed on November 14, 2003.
(8) Incorporated
by reference to Exhibits to the registrant’s Registration Statement No.
333-117743 on Form S-4 filed on July 29, 2004.
(9) Incorporated
by reference to the registrant's Annual Report on Form 10-K for the fiscal
year
ended December 31, 2003 filed on March 15, 2004.
(10) Incorporated
by reference to the registrant's Annual Report on Form 10-K for the fiscal
year
ended December 31, 2004 filed on March 15, 2005.
(11) Incorporated
by reference to the registrant's Current Report on Form 8-K filed on March
22,
2005.
(12) Incorporated
by reference to the registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2005 filed on May 10, 2005.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Dime
Community Bancshares, Inc.
|
Dated:
November 9, 2006
|
|
By:
/s/ VINCENT F. PALAGIANO
|
|
|
Vincent
F. Palagiano
|
|
|
Chairman
of the Board and Chief Executive
Officer
|
Dated:
November 9, 2006
|
|
By:
/s/ KENNETH J. MAHON
|
|
|
Kenneth
J. Mahon
|
|
|
Executive
Vice President and Chief Financial Officer (Principal Accounting
Officer)
|