form10q.htm
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, 2007
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 7, 2007
|
$.01
Par Value
|
|
34,106,002
|
|
PART
I - FINANCIAL INFORMATION
|
|
|
|
Page
|
Item
1.
|
|
|
|
|
3
|
|
|
4
|
|
|
5
|
|
|
6
|
|
|
7-14
|
Item
2.
|
|
14-32
|
Item
3.
|
|
32-33
|
Item
4.
|
|
34
|
|
|
|
|
|
|
Item
1.
|
|
34
|
Item
1A.
|
|
34
|
Item
2.
|
|
34
|
Item
3.
|
|
34
|
Item
4.
|
|
34
|
Item
5.
|
|
35
|
Item
6.
|
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35-36
|
|
|
37
|
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 (the "Exchange
Act"). 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 Bank 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, 2007
|
December
31,
2006
|
ASSETS:
|
|
|
Cash
and due from banks
|
$35,739
|
$26,264
|
Federal
funds sold and short-term investments ($16,200 encumbered at September
30,
2007)
|
35,224
|
78,752
|
Encumbered
investment securities held-to-maturity (estimated fair value of $160
and
$235 at September 30, 2007 and December 31, 2006,
respectively)
|
160
|
235
|
Unencumbered
Investment securities available-for-sale, at fair value
|
34,591
|
29,548
|
Mortgage-backed
securities available-for-sale, at fair value:
|
|
|
Encumbered
|
168,263
|
147,765
|
Unencumbered
|
1,645
|
6,672
|
Total
mortgage-backed securities available-for-sale
|
169,908
|
154,437
|
Loans:
|
|
|
Real
estate, net
|
2,835,823
|
2,700,268
|
Other
loans
|
2,096
|
2,205
|
Less
allowance for loan losses
|
(15,374)
|
(15,514)
|
Total
loans, net
|
2,822,545
|
2,686,959
|
Loans
held for sale
|
-
|
1,200
|
Premises
and fixed assets, net
|
23,625
|
22,886
|
Federal
Home Loan Bank of New York capital stock
|
33,629
|
31,295
|
Goodwill
|
55,638
|
55,638
|
Other
assets
|
90,413
|
86,163
|
Total
Assets
|
$3,301,472
|
$3,173,377
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
Liabilities:
|
|
|
Due
to depositors:
|
|
|
Interest
bearing deposits
|
$1,983,300
|
$1,913,317
|
Non-interest
bearing deposits
|
90,720
|
95,215
|
Total
deposits
|
2,074,020
|
2,008,532
|
Escrow
and other deposits
|
72,572
|
46,373
|
Securities
sold under agreements to repurchase
|
155,160
|
120,235
|
Federal
Home Loan Bank of New York advances
|
586,500
|
571,500
|
Subordinated
notes payable
|
25,000
|
25,000
|
Trust
Preferred securities payable
|
72,165
|
72,165
|
Other
liabilities
|
46,007
|
38,941
|
Total
Liabilities
|
3,031,424
|
2,882,746
|
Commitments
and Contingencies
|
|
|
Stockholders'
Equity:
|
|
|
Preferred
stock ($0.01 par, 9,000,000 shares authorized, none issued or outstanding
at September 30, 2007 and December 31, 2006)
|
-
|
-
|
Common
stock ($0.01 par, 125,000,000 shares authorized, 50,904,028 shares
and
50,862,867 shares issued at September 30, 2007 and
December 31, 2006, respectively, and 34,218,754 shares and 36,456,354
shares outstanding at September 30, 2007 and December 31, 2006,
respectively)
|
509
|
509
|
Additional
paid-in capital
|
207,896
|
206,601
|
Retained
earnings
|
287,253
|
285,420
|
Accumulated
other comprehensive loss, net of deferred taxes
|
(5,701)
|
(7,100)
|
Unallocated
common stock of Employee Stock Ownership Plan ("ESOP")
|
(4,222)
|
(4,395)
|
Unearned
and unallocated common stock of Recognition and Retention Plan ("RRP")
and
Restricted Stock Awards
|
(741)
|
(3,452)
|
Common
stock held by Benefit Maintenance Plan ("BMP")
|
(7,941)
|
(7,941)
|
Treasury
stock, at cost (16,685,274 shares and 14,406,513 shares at September
30,
2007 and December 31, 2006, respectively)
|
(207,005)
|
(179,011)
|
Total
Stockholders' Equity
|
270,048
|
290,631
|
Total
Liabilities And Stockholders' Equity
|
$3,301,472
|
$3,173,377
|
UNAUDITED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars
in thousands except per share amounts)
|
Three
Months Ended September
30,
|
|
Nine
Months Ended September
30,
|
|
2007
|
2006
|
|
2007
|
2006
|
Interest
income:
|
|
|
|
|
|
Loans
secured by real estate
|
$41,420
|
$39,122
|
|
$122,367
|
$116,805
|
Other
loans
|
45
|
47
|
|
132
|
141
|
Mortgage-backed
securities
|
1,588
|
1,666
|
|
4,535
|
5,264
|
Investment
securities
|
374
|
454
|
|
1,194
|
1,405
|
Federal
funds sold and short-term investments
|
1,474
|
1,384
|
|
6,736
|
4,062
|
Total
interest income
|
44,901
|
42,673
|
|
134,964
|
127,677
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
Deposits
and escrow
|
18,919
|
15,019
|
|
56,657
|
40,069
|
Borrowed
funds
|
8,604
|
8,948
|
|
25,375
|
27,610
|
Total
interest expense
|
27,523
|
23,967
|
|
82,032
|
67,679
|
Net
interest income
|
17,378
|
18,706
|
|
52,932
|
59,998
|
Provision
for loan losses
|
60
|
60
|
|
180
|
180
|
Net
interest income after provision for loan losses
|
17,318
|
18,646
|
|
52,752
|
59,818
|
|
|
|
|
|
|
Non-interest
income:
|
|
|
|
|
|
Service
charges and other fees
|
1,609
|
1,507
|
|
4,247
|
4,461
|
Net
gain on sales of loans
|
79
|
779
|
|
546
|
1,432
|
Net
gain on sales and redemptions of securities
|
-
|
-
|
|
-
|
1,541
|
Income
from bank owned life insurance
|
1,042
|
466
|
|
2,018
|
1,396
|
Other
|
401
|
383
|
|
1,198
|
1,158
|
Total
non-interest income
|
3,131
|
3,135
|
|
8,009
|
9,988
|
|
|
|
|
|
|
Non-interest
expense:
|
|
|
|
|
|
Salaries
and employee benefits
|
5,865
|
5,445
|
|
17,255
|
15,955
|
Stock
benefit plan amortization expense
|
802
|
561
|
|
2,061
|
1,723
|
Occupancy
and equipment
|
1,566
|
1,504
|
|
4,572
|
4,295
|
Federal
deposit insurance premiums
|
67
|
64
|
|
191
|
196
|
Data
processing costs
|
842
|
807
|
|
2,520
|
2,382
|
Other
|
2,575
|
2,239
|
|
7,565
|
7,045
|
Total
non-interest expense
|
11,717
|
10,620
|
|
34,164
|
31,596
|
|
|
|
|
|
|
Income
before income taxes
|
8,732
|
11,161
|
|
26,597
|
38,210
|
Income
tax expense
|
3,188
|
4,002
|
|
9,591
|
13,583
|
Net
income
|
$5,544
|
$7,159
|
|
$17,006
|
$24,627
|
|
|
|
|
|
|
Earnings
per Share:
|
|
|
|
|
|
Basic
|
$0.17
|
$0.21
|
|
$0.50
|
$0.70
|
Diluted
|
$0.17
|
$0.20
|
|
$0.50
|
$0.70
|
UNAUDITED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND
COMPREHENSIVE INCOME
(Dollars
in thousands)
|
Nine
Months Ended September 30,
|
|
2007
|
2006
|
STATEMENTS
OF CHANGES IN STOCKHOLDERS' EQUITY
|
|
|
Common
Stock (Par Value $0.01):
|
|
|
Balance
at beginning of period
|
$509
|
$506
|
Shares
issued in exercise of options
|
-
|
3
|
Balance
at end of period
|
509
|
509
|
Additional
Paid-in Capital:
|
|
|
Balance
at beginning of period
|
206,601
|
204,083
|
Stock
options exercised
|
107
|
878
|
Tax
benefit of stock benefit plans
|
174
|
620
|
Release
from treasury stock for restricted stock award shares
|
15
|
107
|
Stock
Options expense
|
394
|
-
|
Amortization
of excess fair value over cost – ESOP
|
605
|
663
|
Balance
at end of period
|
207,896
|
206,351
|
Retained
Earnings:
|
|
|
Balance
at beginning of period
|
285,420
|
274,579
|
Net
income for the period
|
17,006
|
24,627
|
Cash
dividends re-assumed through liquidation of RRP
|
958
|
-
|
Cash
dividends declared and paid
|
(14,427)
|
(14,839)
|
Cumulative
effect adjustment for the adoption of FASB Interpretation
No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN
48")
|
(1,704)
|
-
|
Balance
at end of period
|
287,253
|
284,367
|
Accumulated
Other Comprehensive Loss, Net of Deferred Income
Taxes:
|
|
|
Balance
at beginning of period
|
(7,100)
|
(3,328)
|
Change
in other comprehensive loss during the period, net of deferred
taxes
|
1,399
|
(206)
|
Balance
at end of period
|
(5,701)
|
(3,534)
|
ESOP:
|
|
|
Balance
at beginning of period
|
(4,395)
|
(4,627)
|
Amortization
of earned portion of ESOP stock
|
173
|
174
|
Balance
at end of period
|
(4,222)
|
(4,453)
|
RRP
and Restricted Stock Awards:
|
|
|
Balance
at beginning of period
|
(3,452)
|
(2,979)
|
Release
from treasury stock for restricted stock award shares and RRP shares
acquired
|
(165)
|
(770)
|
Transfer
of common stock to treasury upon liquidation of RRP
|
2,611
|
-
|
Amortization
of earned portion of RRP and restricted stock awards
|
265
|
231
|
Balance
at end of period
|
(741)
|
(3,518)
|
Treasury
Stock:
|
|
|
Balance
at beginning of period
|
(179,011)
|
(168,579)
|
Release
from treasury stock for restricted stock award shares
|
150
|
592
|
Transfer
of common stock to treasury upon liquidation of RRP
|
(2,611)
|
-
|
Purchase
of treasury shares, at cost
|
(25,533)
|
(8,047)
|
Balance
at end of period
|
(207,005)
|
(176,034)
|
Common
Stock Held by BMP
|
|
|
Balance
at beginning and end of period
|
(7,941)
|
(7,941)
|
Total
Stockholders Equity
|
$270,048
|
$295,747
|
|
For
the Three Months
Ended
September 30,
|
|
For
the Nine Months
Ended
September 30,
|
|
2007
|
2006
|
|
2007
|
2006
|
Net
Income
|
$5,544
|
$7,159
|
|
$17,006
|
$24,627
|
Reclassification
adjustment for securities sold, net of expense of $489 during the
nine
months ended
September 30, 2006
|
-
|
-
|
|
-
|
(575)
|
Net
unrealized securities gains arising during the period, net of taxes
of
$1,153 and $1,266 during the three months ended September 30, 2007
and
2006, respectively, and $1,192 and $314 during the nine months ended
September 30, 2007 and 2006, respectively
|
1,353
|
1,486
|
|
1,399
|
369
|
Comprehensive
Income
|
$6,897
|
$8,645
|
|
$18,405
|
$24,421
|
UNAUDITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars
In thousands)
|
Nine
Months Ended September
30,
|
|
|
2007
|
2006
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
Net
Income
|
$17,006
|
$24,627
|
Adjustments
to reconcile net income to net cash provided by (used in)
operating activities:
|
|
|
Net
gain on the sale of investment securities and other assets
|
-
|
(1,541)
|
Net
gain on sale of loans held for sale
|
(546)
|
(1,432)
|
Net
depreciation and amortization
|
1,220
|
1,280
|
ESOP
compensation expense
|
779
|
836
|
Stock
plan compensation (excluding ESOP)
|
659
|
232
|
Provision
for loan losses
|
180
|
180
|
Increase
in cash surrender value of Bank Owned Life Insurance
|
(840)
|
(1,396)
|
Deferred
income tax credit
|
(539)
|
(298)
|
Excess
tax benefits of stock plans
|
(174)
|
(620)
|
Changes
in assets and liabilities:
|
|
|
Origination
of loans held for sale
|
(45,332)
|
(69,345)
|
Proceeds
from sale of loans held for sale
|
47,078
|
71,677
|
(Decrease)
Increase in other assets
|
(3,873)
|
8
|
Increase
in other liabilities
|
5,362
|
5,977
|
Net
cash provided by operating activities
|
20,980
|
30,185
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
Net
decrease (increase) in federal funds sold and other short term
investments
|
43,528
|
(34,064)
|
Proceeds
from maturities of investment securities held to maturity
|
75
|
75
|
Proceeds
from maturities of investment securities
available-for-sale
|
1,000
|
17,075
|
Proceeds
from sales and calls of investment securities
available-for-sale
|
6,507
|
3,032
|
Purchases
of investment securities available-for-sale
|
(12,181)
|
(4,029)
|
Purchases
of mortgage backed securities available-for-sale
|
(37,992)
|
-
|
Principal
collected on mortgage backed securities available-for-sale
|
24,669
|
30,560
|
Net
increase in loans
|
(135,765)
|
(32,338)
|
Proceeds
from the sale of investment property
|
-
|
908
|
Purchases
of fixed assets, net
|
(1,903)
|
(7,145)
|
Purchase
of Federal Home Loan Bank of New York capital stock
|
(2,334)
|
(1,828)
|
Net
cash used in investing activities
|
(114,396)
|
(27,754)
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
Net
increase in due to depositors
|
65,488
|
15,923
|
Net
increase in escrow and other deposits
|
26,199
|
20,517
|
Increase
(Decrease) in securities sold under agreements to
repurchase
|
34,925
|
(85,075)
|
Increase
in FHLBNY advances
|
15,000
|
50,000
|
Cash
dividends paid
|
(14,427)
|
(14,839)
|
Cash
dividends re-assumed through liquidation of RRP
|
958
|
-
|
Exercise
of stock options
|
107
|
881
|
Excess
tax benefit on stock plans
|
174
|
620
|
Purchase
of common stock by the RRP
|
-
|
(71)
|
Purchase
of treasury stock
|
(25,533)
|
(8,047)
|
Net
cash provided by (used in) financing activities
|
102,891
|
(20,091)
|
INCREASE
(DECREASE) IN CASH AND DUE FROM BANKS
|
9,475
|
(17,660)
|
CASH
AND DUE FROM BANKS, BEGINNING OF PERIOD
|
26,264
|
40,199
|
CASH
AND DUE FROM BANKS, END OF PERIOD
|
$35,739
|
$22,539
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
Cash
paid for income taxes
|
$9,471
|
$8,907
|
Cash
paid for interest
|
80,597
|
66,551
|
Increase
(Decrease) in accumulated other comprehensive loss
|
1,399
|
(206)
|
1. NATURE
OF OPERATIONS
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 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 Inc. (“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,
2007,
the results of operations and statements of comprehensive income for the
three-month and nine-month periods ended September 30, 2007 and 2006, and
changes in stockholders' equity and cash flows for the nine month periods ended
September 30, 2007 and 2006. The results of operations for the
three-month and nine-month periods ended September 30, 2007 are not necessarily
indicative of the results of operations for the remainder of the year ending
December 31, 2007. 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.
Preparation
of the condensed
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, 2006 and notes
thereto.
3. TREASURY
STOCK
During
the nine months ended September
30, 2007, the Holding Company repurchased 1,987,624 shares of its common stock
into treasury. All shares repurchased were recorded at the
acquisition cost, which totaled $25.5 million during the period.
On
May 1,
2007, 12,000 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 $13.74. The shares were released utilizing the average historical
cost method.
On
June
21, 2007, the Holding Company announced its Twelfth Stock Repurchase Program,
which authorizes the purchase, at the discretion of management, of up to
1,787,665 shares of its common stock.
On
September 14, 2007, the assets of the Company's RRP were liquidated and the
Company retired into treasury the 303,137 shares of common stock that had been
previously acquired and held in an unallocated account by the RRP.
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, 2006 and concluded that no impairment of goodwill
existed. No events have occurred nor circumstances changed subsequent
to December 31, 2006 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."
5. EARNINGS
PER SHARE ("EPS")
EPS
is calculated and reported in
accordance with SFAS No. 128, "Earnings Per Share.'' For entities
like the Company with complex capital structures, SFAS No. 128 requires
disclosure of basic EPS and diluted EPS 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 or restricted stock awards
became vested and outstanding in-the-money stock options were exercised and
converted into common stock.
The
following is a reconciliation of
the numerators and denominators of basic EPS and diluted EPS for the periods
presented:
|
Three
Months Ended September
30,
|
|
Nine
Months Ended September
30,
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
(Dollars
in Thousands)
|
Numerator:
|
|
|
|
|
|
|
|
Net
Income per the Consolidated Statements of Operations
|
$5,544
|
|
$7,159
|
|
$17,006
|
|
$24,627
|
Denominator:
|
|
|
|
|
|
|
|
Weighted-average
number of shares outstanding utilized in the calculation of
basic EPS
|
32,964,985
|
|
34,806,171
|
|
33,798,814
|
|
34,944,681
|
|
|
|
|
|
|
|
|
Unvested
RRP and Restricted Stock Award shares
|
66,304
|
|
71,855
|
|
66,788
|
|
76,091
|
Common
stock equivalents resulting from the dilutive effect of "in-the-money"
outstanding stock options
|
97,345
|
|
217,097
|
|
106,464
|
|
266,135
|
Anti-dilutive
effect of tax benefits associated with "in-the-money" outstanding
stock
options
|
(22,410)
|
|
(66,220)
|
|
(25,747)
|
|
(86,540)
|
Weighted
average number of shares outstanding utilized in the calculation
of
diluted EPS
|
33,106,224
|
|
35,028,903
|
|
33,946,319
|
|
35,200,367
|
Common
stock equivalents resulting from the dilutive effect of "in-the-money"
outstanding 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 in the money stock options during the
period.
There
were 2,053,104 weighted-average stock options outstanding for both the
three-month and nine-month periods ended September 30, 2007 that were not
considered in the calculation of diluted EPS since their exercise prices
exceeded the average market price during the period. There were
1,078,238 weighted-average stock options for both the three-month and nine-month
periods ended September 30, 2006 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
During
both the three-month and
nine-month periods ended September 30, 2007, the Holding Company and Bank
maintained 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"), which are discussed
more fully in Note 15 to the Company's consolidated audited financial statements
for the year ended December 31, 2006, and which are subject to the accounting
requirements of SFAS No. 123 (revised 2004), "Share-Based Payment," ("SFAS
123R"). In addition, the Bank maintained the RRP prior to its
liquidation on September 14, 2007, which was
also
subject to the accounting requirements of SFAS 123R. SFAS 123R
requires 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. The Company adopted SFAS 123R on January 1,
2006.
During
the three-month and nine-month
periods ended September 30, 2007, the 1996 Stock Option Plan for Outside
Directors, Officers and Employees was deemed inactive.
Stock
Option Awards
Combined
activity related to stock
options granted under the Stock Plans during the periods presented was as
follows:
|
At
or for the Three Months
Ended
September 30,
|
|
At
or for the Nine Months
Ended
September 30,
|
|
2007
|
2006
|
|
2007
|
2006
|
|
(Dollars
in Thousands, Except Per Share Amounts)
|
Options
outstanding – beginning of period
|
3,181,408
|
2,305,708
|
|
2,250,747
|
2,503,103
|
Options
granted
|
-
|
-
|
|
996,500
|
-
|
Weighted
average exercise price of grants
|
-
|
-
|
|
$13.74
|
-
|
Options
exercised
|
7,012
|
53,977
|
|
54,290
|
245,747
|
Weighted
average exercise price of exercised options
|
$13.16
|
$5.21
|
|
$5.33
|
$4.74
|
Options
forfeited
|
6,149
|
-
|
|
24,710
|
5,625
|
Weighted
average exercise price of forfeited options
|
$17.04
|
$-
|
|
$18.88
|
$19.90
|
Options
outstanding – end of period
|
3,168,247
|
2,251,731
|
|
3,168,247
|
2,251,731
|
Weighted
average exercise price of outstanding options – end of
period
|
$14.63
|
$14.85
|
|
$14.63
|
$14.85
|
Remaining
options available for grant
|
118,975
|
1,127,278
|
|
118,975
|
1,127,278
|
Exercisable
options at end of period
|
2,171,747
|
2,251,731
|
|
2,171,747
|
2,251,731
|
Weighted
average exercise price of exercisable options – end of
period
|
$15.04
|
$14.85
|
|
$15.04
|
$14.85
|
Cash
received for option exercise cost
|
92
|
$281
|
|
$215
|
$1,082
|
Income
tax benefit recognized
|
21
|
839
|
|
175
|
565
|
Compensation
expense recognized
|
236
|
-
|
|
393
|
-
|
Remaining
unrecognized compensation expense
|
2,613
|
-
|
|
2,613
|
-
|
Weighted
average remaining years for which compensation expense is to be
recognized
|
3.4
|
-
|
|
3.4
|
-
|
The
range
of exercise prices and weighted-average remaining contractual lives of both
options outstanding and options exercisable as of September 30, 2007 was as
follows:
|
Outstanding
Options as of September 30, 2007
|
|
Range
of Exercise Prices
|
Amount
|
Weighted
Average
Exercise
Price
|
Weighted
Average Contractual Years Remaining
|
Exercisable
Options
as of
September
30, 2007
|
$4.51
- $5.00
|
14,087
|
4.56
|
2.3
|
14,087
|
$10.50
- $11.00
|
500,364
|
10.91
|
4.1
|
500,364
|
$13.00-$13.50
|
600,692
|
13.16
|
5.3
|
600,692
|
$13.50-$14.00
|
996,500
|
13.74
|
9.6
|
-
|
$15.00-$15.50
|
318,492
|
15.10
|
7.7
|
318,492
|
$16.00-$16.50
|
76,320
|
16.45
|
7.3
|
76,320
|
$19.50-$20.00
|
661,792
|
19.90
|
6.3
|
661,792
|
Total
|
3,168,247
|
$14.63
|
6.9
|
2,171,747
|
The
weighted average exercise price and contractual years remaining for exercisable
options was $15.04 and 5.8 years, respectively, at September 30,
2007. There were no grants of stock options under the Stock Plans
during the three months ended September 30, 2007, or the three-month and
nine-month periods ended September 30, 2006. The weighted average
fair value per option at the date of grant for stock options granted during
the
nine-months ended September 30, 2007 was estimated as follows:
|
Nine
Months Ended September 30, 2007
|
Total
options granted
|
996,500
|
Estimated
fair value on date of grant
|
$3.06
|
Pricing
methodology utilized
|
Black-
Scholes
|
Expected
life (in years)
|
6.2
|
Interest
rate
|
4.56%
|
Volatility
|
28.39
|
Dividend
yield
|
4.08
|
Other
Stock Awards
RRP
- 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 Holding Company's common stock on May 17, 2002 was
$16.19. The Company accounts for compensation expense under the RRP
in accordance with SFAS 123R. During the nine months ended September
30, 2007, the Company determined that the shares held by the RRP were no longer
eligible for grant. On September 14, 2007, all of the assets of the
RRP were liquidated, and the 303,137 unallocated shares of common stock
previously held by the RRP were retired into treasury.
The
following is a summary of activity related to the RRP awards during the
three-month and nine-month periods ended September 30, 2007 and
2006:
|
At
or for the Three Months Ended September 30,
|
|
At
or for the Nine Months Ended September 30,
|
|
2007
|
2006
|
|
2007
|
2006
|
|
(Dollars
in Thousands)
|
Shares
acquired
|
-
|
5,023
|
|
-
|
5,023
|
Shares
vested
|
-
|
13,500
|
|
-
|
13,500
|
Shares
allocated
|
-
|
-
|
|
-
|
-
|
Shares
transferred to Dime Community Bancshares, Inc.
|
303,137
|
-
|
|
303,137
|
-
|
Unallocated
shares - end of period
|
-
|
303,137
|
|
-
|
303,137
|
Unvested
allocated shares – end of period
|
-
|
-
|
|
-
|
-
|
Compensation
recorded to expense
|
-
|
-
|
|
-
|
$45
|
Income
recognized upon transfer of assets
|
$109
|
-
|
|
$109
|
-
|
Income
tax benefit recognized
|
-
|
$29
|
|
-
|
58
|
Restricted
Stock Awards – On March 17, 2005, a grant of 31,804 restricted stock awards
was made to certain officers of the Bank under the 2004 Stock Incentive
Plan. One-half of these awards vested to the respective recipients in
equal annual installments on May 1, 2006 and 2007, respectively. The
remaining one-half of these awards vest in equal annual installments on May
1,
2008 and 2009, respectively. The fair value of the Holding 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 certain officers of the
Bank
under the 2004 Stock Incentive Plan. One-fifth of the awards vested
to the respective recipients on February 1, 2007. The remaining
four-fifths of the awards vest to the respective recipients in equal
installments (as adjusted for rounding) on February 1, 2008, 2009, 2010 and
2011, respectively. The fair value of the Holding 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 certain officers of the Bank under the 2004 Stock Incentive
Plan. One-fifth of the awards vested to the respective recipients on
May 1, 2007. The remaining four-fifths of the awards vest to the
respective recipients in equal installments (as adjusted for rounding) on May
1,
2008, 2009, 2010 and 2011, respectively. The fair value of the
Holding Company's common stock on March 16, 2006 was $14.48. On May
1, 2007, a grant of 12,000 restricted stock awards was made to outside directors
of the Bank under the 2004 Stock Incentive Plan. The awards fully
vest to the respective recipients on May 1, 2008. The fair value of
the Holding Company's common stock on May 1, 2007 was $13.74.
Compensation
expense related to restricted stock awards was accounted for in accordance
with
SFAS 123R during the three-month and nine-month periods ended September 30,
2007
and 2006. 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, 2007 and
2006:
|
At
or for the Three Months Ended
September
30,
|
|
At
or for the Nine Months Ended
September
30,
|
|
2007
|
2006
|
|
2007
|
2006
|
|
(Dollars
in Thousands)
|
Unvested
allocated shares – beginning of period
|
66,304
|
71,855
|
|
71,855
|
31,804
|
Shares
granted
|
-
|
-
|
|
12,000
|
48,000
|
Shares
vested
|
-
|
-
|
|
17,551
|
7,949
|
Unvested
allocated shares – end of period
|
66,304
|
71,855
|
|
66,304
|
71,855
|
Unallocated
shares - end of period
|
-
|
-
|
|
-
|
-
|
Compensation
recorded to expense
|
$107
|
$66
|
|
$266
|
$186
|
Income
tax benefit recognized
|
-
|
(3)
|
|
(1)
|
(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, 2007, 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 of
Consecutive
Unrealized
Losses
|
Total
|
|
|
(Dollars
in thousands)
|
|
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
Municipal
securities
|
$3,027
|
$34
|
$-
|
$-
|
$3,027
|
$34
|
Corporate
obligations
|
7,171
|
28
|
-
|
-
|
7,171
|
28
|
Equity
securities
|
4,518
|
147
|
4
|
1
|
4,522
|
148
|
FNMA
pass-through certificates
|
-
|
-
|
8,111
|
276
|
8,111
|
276
|
Collateralized
Mortgage Obligations
|
-
|
-
|
122,270
|
3,267
|
122,270
|
3,267
|
Total
|
$14,716
|
$209
|
$130,385
|
$3,544
|
$145,101
|
$3,753
|
Management
believes that all unrealized
losses were temporary at September 30, 2007. In making this
determination, management considered the underlying nature, severity and
duration of the loss as well as its intent with regard to these securities.
Management has no current intention to dispose of these
investments. At September 30, 2007, all of the Federal National
Mortgage Association pass-through certificates and collateralized mortgage
obligations that possessed unrealized losses for 12 or more consecutive months
had the highest possible credit quality rating. Since inception, all
unrealized losses on the municipal, corporate, FNMA
pass-through and collateralized mortgage obligation securities shown in the
above table have resulted solely from interest rate
fluctuations.
The
aggregate amount of held-to-maturity investment securities and MBS carried
at
historical cost was $160,000 as of September 30, 2007. No individual
held-to-maturity security that was carried at historical cost possessed an
unrealized loss as of September 30, 2007.
8. RETIREMENT
AND POSTRETIREMENT PLANS
The
Holding 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 these plans were comprised of the following
components:
|
Three
Months Ended September
30, 2007
|
|
Three
Months Ended September
30, 2006
|
|
BMP,
Employee
and Outside Director
Retirement
Plans
|
Postretirement
Plan
|
|
BMP,
Employee
and Outside Director
Retirement
Plans
|
Postretirement
Plan
|
|
(Dollars
in thousands)
|
Service
cost
|
$-
|
$21
|
|
$-
|
$16
|
Interest
cost
|
339
|
61
|
|
327
|
57
|
Expected
return on assets
|
(450)
|
-
|
|
(438)
|
-
|
Unrecognized
past service liability
|
-
|
(7)
|
|
-
|
(7)
|
Amortization
of unrealized loss
|
118
|
7
|
|
155
|
10
|
Net
expense
|
$7
|
$82
|
|
$44
|
$76
|
|
Nine
Months Ended September
30, 2007
|
|
Nine
Months Ended September
30, 2006
|
|
BMP,
Employee
and Outside Director
Retirement
Plans
|
Postretirement
Plan
|
|
BMP,
Employee
and Outside Director
Retirement
Plans
|
Postretirement
Plan
|
|
(Dollars
in thousands)
|
Service
cost
|
$-
|
$63
|
|
$-
|
$62
|
Interest
cost
|
1,017
|
183
|
|
981
|
171
|
Expected
return on assets
|
(1,350)
|
-
|
|
(1,314)
|
-
|
Unrecognized
past service liability
|
-
|
(21)
|
|
-
|
(21)
|
Amortization
of unrealized loss
|
354
|
21
|
|
465
|
30
|
Net
expense
|
$21
|
$246
|
|
$132
|
$242
|
The
Company previously disclosed in its
consolidated financial statements for the year ended December 31, 2006 that
it
expected to make contributions or benefit payments totaling $186,000 to the
BMP,
$131,000 to the Outside Director Retirement Plan, and $159,000 to the
Postretirement Plan, and no contributions to the Employee Retirement Plan,
during the year ending December 31, 2007. The Company made benefit
payments of $96,300 to the Outside Director Retirement Plan during the
nine-months ended September 30, 2007, and expects to make an additional $32,100
of contributions or benefit payments during the remainder of
2007. The Company made contributions totaling $124,000 to the
Postretirement Plan during the nine months ended September 30, 2007, and expects
to make the additional estimated $35,000 of contributions or benefit payments
during the remainder of 2007. The Company made no contributions or
benefit payments to the BMP during the nine months ended September 30, 2007,
and
does not expect to make any benefit payments or contributions to the BMP during
the remainder of 2007, since anticipated retirements that formed the basis
for
the expected benefit payments in 2007 are presently not expected to
occur.
As
disclosed
in Note 15 of the audited consolidated financial statements included in the
Holding Company's Annual Report on Form 10-K for the year ended December 31,
2006, the Company adopted 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") effective December 31,
2006. Effective for fiscal years ending after December 15, 2008, SFAS
158 requires an employer sponsoring a single employer defined benefit plan
to
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). In compliance with this requirement, effective December
31, 2008, the Company will change the measurement date for its defined benefit
plans from October 1st to December
31st. Adoption
of this requirement of SFAS 158 is not expected to have a material impact on
the
Company’s consolidated financial condition or results of
operations.
9. INCOME
TAXES
The
Company adopted FIN 48 on January
1, 2007. FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in financial statements prepared in accordance with SFAS 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. Pursuant
to 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 is required to 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 further requires tabular
disclosure of material activity related to unrecognized tax benefits that do
not
satisfy the recognition provisions established under FIN 48. The
adoption of FIN 48 on January 1, 2007 resulted in an increase of $1.7 million
in
the liability for unrecognized tax benefits, which was accounted for as a
reduction of the Company's consolidated January 1, 2007 balance of retained
earnings.
The
Company's gross unrecognized tax
benefits totaled $2.7 million at September 30, 2007 and $3.2 million at January
1, 2007. If realized, the net unrecognized tax benefits as of
September 30, 2007 would have reduced the Company's consolidated income tax
expense by $1.8 million, all of which would have favorably impacted the
Company's consolidated effective tax rate.
Interest
and penalties associated with unrecognized tax benefits approximated $779,000
and $597,000 at January 1, 2007 and September 30, 2007,
respectively. The Company, consistent with its existing policy,
recognizes both interest and penalties on unrecognized tax benefits as part
of
income tax expense.
All
entities for which unrecognized tax
benefits existed as of September 30, 2007 possess a June 30th tax
year-end. As a result, as of September 30, 2007, the tax years ended
June 30, 2004 through June 30, 2007 remained subject to examination by all
tax
jurisdictions. The Company is currently under audit by taxing
jurisdictions. As a result, it is reasonably possible that
significant changes in the gross balance of unrecognized tax benefits may occur
within the next twelve months. As of September 30, 2007, an estimate
of the range of such changes could not be made.
10. RECENT
ACCOUNTING PRONOUNCEMENTS
In
February 2007, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 159, "The Fair
Value Option for Financial Assets and Financial Liabilities" ("SFAS
159"). SFAS 159 permits companies to choose to measure many financial
instruments and certain other items at fair value. SFAS 159 seeks to
improve the overall quality of financial reporting by providing companies the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without requiring the application
of
complex hedge accounting provisions. SFAS 159 is effective for fiscal
years beginning after November 15, 2007. Management is
evaluating the impact that SFAS 159 will have upon the Company's financial
condition and results of operations.
In
September 2006, the FASB issued SFAS
No. 157, "Fair Value Measurements" ("SFAS 157"), which defined fair value,
established a framework for measuring fair value under GAAP, and expanded
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, changes the definition of, and methods used to measure,
fair value. SFAS 157 emphasizes fair value as a market-based, not
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 (i) market participant assumptions
developed based on market data obtained from sources independent of the
reporting entity (observable inputs), and (ii) 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. Management is
evaluating the impact that SFAS 157 will have upon the Company's financial
condition and results of operations.
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 should consider contractual limitations in the
policy when determining the realizable amount of the insurance contract. In
addition, EITF No. 06-5 requires that amounts recoverable by the policyholder
at
the discretion of the insurance company should be excluded from the amount
that
could be realized under the insurance contract. EITF No. 06-5
further requires that amounts recoverable by the policyholder in periods beyond
one year from the surrender of the policy should be recognized at a value
discounted under a present value of cash flows method. 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. Adoption of EITF No. 06-5 did not have a
material impact on the Company’s consolidated 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: (i) amortizing servicing assets or
liabilities in proportion to and over the period of estimated net servicing
income or net servicing loss; or (ii) 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 and 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. The Company adopted
SFAS 156 effective January 1, 2007, and elected to amortize servicing assets
or
liabilities in proportion to and over the period of estimated net servicing
income or loss. Adoption of SFAS 156 did not 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 did not have a material impact
on the Company’s consolidated financial condition or results of
operations.
11. RECLASSIFICATION
Certain
amounts for the three-month and nine-month periods months ended September 30,
2006 have been reclassified to conform to their presentation for the three-month
and nine-month months periods ended September 30, 2007.
General
The
Holding Company is a Delaware corporation and parent company of 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, securities and other short-term
investments, 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. The Bank also seeks
to increase its product and service utilization for each individual
depositor. The Bank’s primary strategy
additionally
includes the origination of, and investment in, mortgage loans, with an emphasis
on multifamily residential and commercial real estate loans.
The
Company believes that multifamily residential and commercial real estate loans
provide advantages as investment assets. Initially, they offer a
higher yield than the majority of 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.
Net
interest income, and the related net interest spread and net interest margin,
declined during the three-month and nine-month periods ended September 30,
2007
versus the comparable periods of 2006. 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 periods.
Selected
Financial Highlights and Other Data
(Dollars
in Thousands Except Per Share Amounts)
|
For
the Three Months Ended September 30,
|
For
the Nine Months Ended September 30,
|
|
2007
|
|
2006
|
2007
|
|
2006
|
Performance
and Other Selected Ratios:
|
|
|
|
|
|
|
Return
on Average Assets
|
0.69%
|
|
0.92%
|
0.70%
|
|
1.05%
|
Return
on Average Stockholders' Equity
|
8.20
|
|
9.73
|
8.13
|
|
11.21
|
Stockholders'
Equity to Total Assets
|
8.18
|
|
9.43
|
8.18
|
|
9.43
|
Tangible
Equity to Total Tangible Assets
|
6.75
|
|
7.88
|
6.75
|
|
7.88
|
Loans
to Deposits at End of Period
|
136.83
|
|
136.92
|
136.83
|
|
136.92
|
Loans
to Earning Assets at End of Period
|
91.21
|
|
89.25
|
91.21
|
|
89.25
|
Net
Interest Spread
|
1.92
|
|
2.16
|
1.86
|
|
2.29
|
Net
Interest Margin
|
2.28
|
|
2.53
|
2.29
|
|
2.69
|
Average
Interest Earning Assets to Average Interest Bearing
Liabilities
|
110.83
|
|
112.38
|
111.79
|
|
113.00
|
Non-Interest
Expense to Average Assets
|
1.45
|
|
1.37
|
1.41
|
|
1.35
|
Efficiency
Ratio
|
57.35
|
|
50.42
|
56.57
|
|
47.15
|
Effective
Tax Rate
|
36.51
|
|
35.86
|
36.06
|
|
35.55
|
Dividend
Payout Ratio
|
82.35
|
|
70.00
|
84.00
|
|
60.00
|
|
|
|
|
|
|
|
Average
Tangible Equity
|
$220,915
|
|
$242,658
|
$230,057
|
|
$240,967
|
Per
Share Data:
|
|
|
|
|
|
|
Reported
EPS (Diluted)
|
$0.17
|
|
$0.20
|
$0.50
|
|
$0.70
|
Cash
Dividends Paid Per Share
|
0.14
|
|
0.14
|
0.42
|
|
0.42
|
Stated
Book Value
|
7.89
|
|
8.07
|
7.89
|
|
8.07
|
Tangible
Book Value
|
6.43
|
|
6.64
|
6.43
|
|
6.64
|
Asset
Quality Summary:
|
|
|
|
|
|
|
Net
Charge-offs
|
$7
|
|
$-
|
4
|
|
$19
|
Non-performing
Loans
|
1,792
|
|
2,889
|
1,792
|
|
2,889
|
Non-performing
Loans/Total Loans
|
0.06%
|
|
0.11%
|
0.06%
|
|
0.11%
|
Non-performing
Assets/Total Assets
|
0.05
|
|
0.09
|
0.05
|
|
0.09
|
Allowance
for Loan Loss/Total Loans
|
0.54
|
|
0.60
|
0.54
|
|
0.60
|
Allowance
for Loan Loss/Non-performing Loans
|
857.92
|
|
552.30
|
857.92
|
|
552.30
|
Regulatory
Capital Ratios (Bank Only):
|
|
|
|
|
|
|
Tangible
Capital
|
8.75%
|
|
9.64%
|
8.75%
|
|
9.64%
|
Leverage
Capital
|
8.75
|
|
9.64
|
8.75
|
|
9.64
|
Total
Risk-based Capital
|
12.65
|
|
13.61
|
12.65
|
|
13.61
|
Earnings
to Fixed Charges Ratios (1)
|
|
|
|
|
|
|
Including
Interest on Deposits
|
1.31x
|
|
1.46x
|
1.32x
|
|
1.56x
|
Excluding
Interest on Deposits
|
1.98
|
|
2.22
|
2.03
|
|
2.37
|
|
For
the Three Months Ended
September
30,
|
For
the Nine Months
Ended
September 30,
|
|
2007
|
|
2006
|
2007
|
|
2006
|
|
(Dollars
in thousands, except per share amounts)
|
Non-GAAP
Disclosures - Core Earnings Reconciliation and Ratios
(2)
|
|
|
|
|
|
Net
income
|
$5,544
|
|
$7,159
|
$17,006
|
|
$24,627
|
Pre-tax
income from life insurance contract settlement
|
(546)
|
|
-
|
(546)
|
|
-
|
Net
pre-tax gain on sale of securities
|
-
|
|
-
|
-
|
|
(1,541)
|
Pre-tax
income from borrowings restructuring
|
-
|
|
(764)
|
-
|
|
(807)
|
Tax
effect of adjustments
|
|
|
271
|
|
|
838
|
After
tax effect of adjustments to core earnings
|
-
|
|
(493)
|
-
|
|
(1,510)
|
Core
Earnings
|
$4,998
|
|
$6,666
|
$16,460
|
|
$23,117
|
|
|
|
|
|
|
|
Core
Return on Average Assets
|
0.62%
|
|
0.86%
|
0.68%
|
|
0.99%
|
Core
Return on Average Stockholders' Equity
|
7.39
|
|
9.06
|
7.87
|
|
10.53
|
Core
EPS (Diluted)
|
$0.15
|
|
$0.19
|
$0.48
|
|
$0.66
|
Dividend
payout ratio (based upon core earnings)
|
93.33%
|
|
73.68%
|
87.50%
|
|
63.95%
|
(1)
Interest on unrecognized tax benefits totaling $597,000 for both the three-month
and nine-month periods ended September 30, 2007 and $184,000 for both the
three-month and nine-month periods ended September 30, 2006, respectively,
is
included in the calculation of fixed charges for the three-month and nine-month
periods ended September 30, 2007 and 2006, respectively.
(2)
Core
earnings and related data are "Non-GAAP Disclosures." These
disclosures provide 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 investments, MBS or investment properties and income
or
expense associated with borrowing restructurings and insurance settlements)
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 and other than temporary declines in the valuation of
securities), the realization of deferred tax assets and the recognition of
loan
income are its 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 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.
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-offs
of its portfolio and compares them to the previously determined allowance
coverage percentages. In doing so, 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 components, including
a
review of the two elements of its loan portfolio: problem loans [i.e.,
classified loans, non-performing loans and impaired loans under Statement of
Financial Accounting
Standards
No. 114, "Accounting By Creditors for Impairment of a Loan," as amended by
SFAS
118, "Accounting by Creditors for Impairment of a Loan - Income Recognition
and
Disclosures an amendment of FASB Statement No. 114" ("Amended SFAS 114")] and
performing loans. The Bank applied the process of determining the
allowance for loan losses consistently throughout the three-month and nine-month
periods ended September 30, 2007 and 2006.
Performing
Loans
At
September 30, 2007, 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.
Office
of
Thrift Supervision ("OTS") 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, 2007 and 2006.
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 impairment, i.e., whether the estimated fair 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.
Non-performing
one- to four-family loans of $417,000 or less are not deemed impaired, and
are
classified as Substandard, Doubtful or Loss, and reviewed and reserved for
in
the manner discussed above for loans of such classification.
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, anticipated net servicing income
calculated in accordance with GAAP. The
estimated fair value of MSR is determined by calculating the present value
of
estimated future net servicing cash flows, using estimated prepayment, default,
servicing cost and discount rate assumptions. All estimates and
assumptions utilized in the valuation of MSR are derived based upon actual
historical results for the Bank, or, in the absence of such historical data,
from historical results for the Bank's 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 (generally 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 (generally 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.
Assumptions
utilized in measuring the fair value of MSR for the purpose of evaluating
impairment additionally include the stratification based on predominant risk
characteristics of the underlying loans. 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 established in
the event the recorded value of an individual stratum exceeds its fair value
for
the full amount of the difference.
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 the value of
the
Company's 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"). SFAS 142 eliminates amortization of goodwill
and instead requires performance of an annual impairment test at the reporting
unit level. As of September 30, 2007, 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 Company utilizes the closing price of the Holding
Company's common stock 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, 2006 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, 2006 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. All of the Company's available for sale
securities have readily determinable fair values, and such fair values 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. Unrealized holding gains or losses on debt securities
classified as held-to-maturity are disclosed, but are not recognized in the
Company's consolidated statements of financial condition or results of
operations.
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. The Company owned no securities classified as trading
securities during the three-month and nine-month periods ended September
30, 2007, nor does it presently anticipate establishing a trading
portfolio.
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 and ability to hold the security until the unrealized
loss is substantially eliminated, in order to determine if a decline in market
value of any security below its carrying value is either temporary or other
than
temporary. All unrealized losses on debt and equity securities
available-for-sale that are deemed temporary are excluded from net income and
reported net of income taxes as other comprehensive income or
loss. All unrealized losses that are deemed other than temporary are
recognized immediately as a reduction of the carrying amount of the security,
with a charge recorded in the Company's consolidated statements of
operations. For the three-month and nine-month periods ended
September 30, 2007 and 2006, there were no other than temporary impairments
in
the securities portfolio. All unrealized holding gains 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. Unrealized holding gains on securities totaled $713,000 and
$323,000 at September 30, 2007 and December 31, 2006, respectively.
Recognition
of Deferred Tax
Assets. Management reviews
all deferred tax assets periodically. Upon such review, in the event
that it is more likely than not that the deferred tax asset will not be fully
realized, a valuation allowance is recognized against the deferred tax asset
in
the full amount that is deemed more likely than not to be realized.
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. 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. Payments on nonaccrual
loans are generally applied to principal.
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 MBS are predictable sources of funds,
deposits flows and prepayments of 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,
Internet 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
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
$65.5 million during the nine months ended September 30, 2007, compared to
an
increase of $15.9 million during the nine months ended September 30,
2006. During the nine months ended September 30, 2007, the Company
experienced an increase of $116.9 million in money markets due to successful
promotional campaigns. 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, 2007, principal repayments totaled $218.3
million on real estate loans and $24.7 million on MBS. During the
nine months ended September 30, 2006, principal repayments totaled $268.1
million on real estate loans and $30.6 million on MBS. The decrease
in principal repayments on real estate loans resulted from a reduction in
borrower refinance activities due to (i) an absence of significant changes
in
medium and long-term interest rates from September 30, 2006 to September 30,
2007, and (ii) the historically high refinancing activity from January 1, 2002
through December 31, 2005 (making refinancing of the majority of the Bank's
loan
portfolio unlikely in the interest rate environment present from January 1,
2007
through September 30, 2007). The decline in principal repayments of MBS during
the comparative period reflected a decrease of $7.0 million in their balance
from September 30, 2006 to September 30, 2007, reflecting principal repayments
during the period. The Company does not believe that its future
levels of principal repayments will be materially impacted by problems currently
experienced in the residential mortgage market. See "Item 2. - Management's Discussion and Analysis of
Financial
Condition and Results of Operations - Asset Quality" for a further
discussion of the Bank's asset quality.
Since
December 2002, the Bank has originated and sold multifamily residential and
mixed use mortgage loans in the secondary market to FNMA, while retaining
servicing and generating fee income while it services the loans. 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 their heightened interest rate risk. Under
the terms of the sales program, the Bank retains a portion of the associated
credit risk. The aggregate amount of the retained risk 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, 2007 and 2006,
the Bank sold FNMA $47.1 million and $140.4 million of loans,
respectively, pursuant to this program.
During
the nine months ended September 30, 2007, in order to provide additional
liquidity to fund ongoing operations and potential future balance growth, the
Company increased its REPOs and FHLBNY advances by $34.9 million and $15.0
million, respectively. During the nine months ended September 30,
2006, the Company was able to reduce its overall level of borrowings by $35.1
million, instead using primarily deposit inflows and liquidity from its
investment and MBS portfolios to fund loan growth.
During
the three months 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 in the quarter ended September 30, 2006.
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
during the quarter ended March 31, 2006.
An
additional source of funds is available to the Bank through use of its borrowing
line at the FHLBNY. At September 30, 2007, the Bank had an additional
potential borrowing capacity of $430.0 million available, provided it owned
the
minimum required level of FHLBNY common stock (i.e., 4.5% of its
outstanding FHLBNY borrowings). The Holding Company additionally has
a $15.0 million line of credit agreement with a reputable financial institution
in the event that it requires further liquidity.
The
Bank
is subject to minimum regulatory capital requirements imposed by the OTS, which,
as a general matter, are based on the amount and composition of an institution's
assets. At September 30, 2007, the Bank was in compliance with all applicable
regulatory capital requirements and was considered "well-capitalized" for all
regulatory purposes.
The
Bank
generally uses its liquidity and capital resources primarily to fund the
origination of real estate loans and/or the purchase of mortgage-backed and
other securities. During the nine months ended September 30, 2007 and
2006, real estate loan originations totaled $399.3 million and $439.4 million,
respectively. Purchases of investment securities totaled $50.2
million during the nine months ended September 30, 2007 and $4.0 million during
the nine months ended September 30, 2006.
During
the nine months ended September 30, 2007, the Holding Company repurchased
1,987,624 shares of its common stock into treasury. All shares
repurchased were recorded at the acquisition cost, which totaled $25.5 million
during the period. As of September 30, 2007, up to 1,486,651 shares
of Holding Company common stock remained available for purchase under authorized
share purchase programs. Based upon the $14.97 per share closing
price of its common stock as of September 28, 2007, the Holding Company would
utilize $22.3 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
is obligated for rental payments under leases on certain of its branches and
equipment and for minimum monthly payments under its current data systems
contract. The Bank generally has outstanding at any time
significant borrowings in the form of FHLBNY advances and/or REPOs, and 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. None of these contractual obligations have changed
materially since December 31, 2006.
Off-Balance
Sheet Arrangements
Since
December 2002, the Bank has originated and sold multifamily residential and
mixed use mortgage loans in the secondary market to FNMA, while retaining
servicing and generating fee income while it services the loans. The Bank
underwrites these loans using its customary underwriting standards, funds the
loans, and sells them to FNMA at agreed upon pricing. Under the terms
of the sales program, the Bank retains a portion of the associated credit
risk. The aggregate amount of the retained risk 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.
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 was obligated as of September
30, 2007:
|
Less
than One Year
|
One
Year to Three Years
|
Over
Three Years to Five Years
|
Over
Five Years
|
|
Total
|
|
(Dollars
in thousands)
|
Credit
Commitments:
|
|
|
|
|
|
|
Available
lines of credit
|
$72,179
|
$-
|
$-
|
$-
|
|
$72,179
|
Other
loan commitments (1)
|
99,621
|
-
|
-
|
-
|
|
99,621
|
Other
Commitments:
|
|
|
|
|
|
|
Recourse
obligation on loans sold to FNMA (1)
|
19,633
|
-
|
-
|
-
|
|
19,633
|
Total
Commitments
|
$191,433
|
$-
|
$-
|
$-
|
|
$191,433
|
(1)
In
accordance with SFAS 5, "Accounting for Contingencies," as of September 30,
2007, reserves related to other loan commitments and the recourse obligation
on
loans sold to FNMA were $1.2 million and $2.2 million, respectively, and were
recorded in other liabilities in the Company's condensed consolidated statements
of financial condition.
At
both
September 30, 2007 and December 31, 2006, the Company had no real estate loans
or collateral underlying MBS that would be considered subprime loans, which
are
defined as mortgage loans advanced to borrowers who do not qualify for market
interest rates because of problems with their credit history. The
Company does not originate subprime loans. The Company's lending
standards are discussed in Item 1 of its Form 10-K for the year ended December
31, 2006. All MBS owned by the Company as of September 30, 2007
possessed the highest possible investment credit rating.
Non-performing
loans totaled $1.8 million and $3.6 million at September 30, 2007 and December
31, 2006, respectively. The decrease resulted primarily from the
removal of four loans totaling $2.0 million from nonaccrual status during the
comparative period, that was partially offset by the addition of two loans
totaling $198,000 to nonaccrual status.
The
Bank
had real estate and consumer loans totaling $372,000 delinquent 60-89 days
at
September 30, 2007, compared to a total of $258,000 at December 31,
2006. The increase resulted primarily from growth of $319,000 in
delinquent home equity loans, which was offset by a reduction of $202,000 in
60-89 day delinquent one-to four-family and multifamily residential loans during
the period. 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, 2007 or December 31,
2006.
The
recorded investment in loans deemed impaired pursuant to Amended SFAS 114 was
$1.5 million, consisting of three loans, at September 30, 2007, compared to
$3.5
million, consisting of six loans, at December 31, 2006. The decline
resulted from the removal of three loans totaling $2.0 million from impaired
status during the nine months ended September 30, 2007. The average
balance of impaired loans was approximately $2.7 million and $1.5 million during
the nine months ended September 30, 2007 and 2006, respectively. The
increase in the average balance of impaired loans during the comparative period
resulted primarily from the addition of nine impaired loans totaling $3.5
million during the period April 1, 2006 through December 31, 2006, which had
greater impact upon the tabulation of average impaired loans during the nine
months ended September 30, 2007 than the nine months ended September 30,
2006. There were $156,000 and $351,000 of reserves allocated within
the allowance for loan losses for impaired loans at September 30, 2007 and
December 31, 2006, respectively. At September 30, 2007,
non-performing loans exceeded impaired loans by $228,000, due to $91,000 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 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 reappraises its value at least annually
thereafter. There were no OREO properties as of September 30, 2007
and December 31, 2006.
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, 2007
|
At
December 31, 2006
|
|
(Dollars
in thousands)
|
Non-Performing
Loans
|
|
|
One-
to four-family
|
$199
|
$60
|
Multifamily
residential
|
987
|
1,655
|
Commercial
|
577
|
1,859
|
Cooperative
apartment
|
26
|
26
|
Other
|
3
|
6
|
Total
non-performing loans
|
1,792
|
3,606
|
OREO
|
-
|
-
|
Total
non-performing assets
|
1,792
|
3,606
|
Troubled-debt
restructurings
|
-
|
-
|
Total
non-performing assets and troubled-debt restructurings
|
$1,792
|
$3,606
|
|
|
|
Impaired
loans
|
$1,792
|
$3,514
|
Troubled-debt
restructurings included in Impaired loans
|
-
|
-
|
Ratios:
|
|
|
Total
non-performing loans to total loans
|
0.06%
|
0.13%
|
Total
non-performing loans and troubled-debt restructurings to total
loans
|
0.06
|
0.13
|
Total
non-performing assets to total assets
|
0.05
|
0.11
|
Total
non-performing assets and troubled-debt restructurings to total
assets
|
0.05
|
0.11
|
Allowance
for Loan Losses
The
allowance for loan losses was $15.4 million at September 30, 2007 compared
to
$15.5 million at December 31, 2006. During the nine months ended
September 30, 2007, the Bank recorded a provision of $180,000 to the allowance
for loan losses to provide for additional inherent losses in the
portfolio. During the same period, the Bank also recorded net
charge-offs of approximately $4,000, all of which related to consumer loans,
and
reclassified $316,000 of its existing allowance for loan losses to other
liabilities in order to separately account for reserves related to loan
origination commitments. (See "Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations – Critical Accounting
Policies – Allowance for Loan Losses" for a further
discussion).
Comparison
of Financial Condition at September 30, 2007 and December 31,
2006
Assets. Assets
totaled $3.30 billion at September 30, 2007, an increase of $128.1 million
from
total assets of $3.17 billion at December 31, 2006.
Real
estate loans increased $135.6 million during the nine months ended September
30,
2007, due primarily to originations of $399.3 million during the period (as
interest rates offered on new loans continued to stimulate origination
activity), that were partially offset by amortization of $218.3 million and
sales to FNMA of $47.1 million.
MBS
available-for-sale increased $15.5 million during the nine months ended
September 30, 2007, as purchases of $38.0 million and an increase in fair value
of $2.3 million were partially offset by paydowns of $24.8
million. Investment securities increased $5.0 million during the nine
months ended September 30, 2007, as purchases of $12.2 million were partially
offset by maturities and calls totaling $7.5 million.
Partially
offsetting these asset increases was a decline of $43.5 million in federal
funds
sold and other short-term investments as these funds were utilized to fund
real
estate loan originations and investment security and MBS purchases.
Liabilities. During
the nine months ended September 30, 2007, total liabilities increased $148.7
million, reflecting increases of $65.5 million in deposits, $26.2 million in
escrow and other deposits, $34.9 million in REPOs and $15.0 million in FHLBNY
advances during the period. The increase in escrow and
other deposits during the nine months ended September 30, 2007 resulted from
the
Bank's accumulation of escrow balances during the period that it did
not hold at December 31, 2006, to be used for real estate tax payments to be
made on behalf of borrowers during 2007. (See "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources" for
a
discussion of the deposit, FHLBNY advances and REPO increases during the
period).
Stockholders'
Equity. Stockholders' equity decreased $20.6 million during the
nine months ended September 30, 2007, due to treasury stock repurchases of
$25.5
million, cash dividends on the Holding Company's common stock of $14.4 million
and a reduction to equity of $1.7 million related to an additional reserve
recorded by the Company upon adoption of FASB Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes."
Partially
offsetting these items were increases to equity during the period resulting
from
the following: (i) net income of $17.0 million; (ii) $1.4 million related to
amortization of the Employee Stock Ownership Plan of Dime Community Bancshares,
Inc. and Certain Affiliates (the "ESOP") and restricted stock awards issued
under other stock benefit plans; and (iii) $958,000 of cash dividends re-assumed
through the liquidation of the Company's Recognition and Retention
Plan. The ESOP and restricted stock awards are initially recorded as
reductions in stockholders' equity ("Contra Equity Balances"). As
compensation expense is recognized on the ESOP and restricted stock awards,
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 restricted stock award expenses.
Comparison
of Operating Results for the Three Months Ended September 30, 2007 and
2006
General. Net
income was $5.5 million during the three months ended September 30, 2007, a
decrease of $1.6 million from net income of $7.2 million during the three months
ended September 30, 2006. During the comparative period, net interest
income declined $1.3 million and non-interest expense increased $1.1 million,
resulting in a reduction in pre-tax net income of $2.4
million. Income tax expense decreased $814,000 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, 2007 and 2006 presented below should be read
in
conjunction with the following tables, which set forth certain information
related to the condensed 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,
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
Yield/
|
Average
|
|
Yield/
|
|
|
Balance
|
Interest
|
Cost
|
Balance
|
Interest
|
Cost
|
|
Assets:
|
(Dollars
In Thousands)
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
Real
estate loans
|
$2,785,057
|
$41,420
|
5.95%
|
$2,654,055
|
$39,122
|
5.90%
|
|
Other
loans
|
1,805
|
45
|
9.97
|
1,959
|
47
|
9.60
|
|
Mortgage-backed
securities
|
153,738
|
1,588
|
4.13
|
172,116
|
1,666
|
3.87
|
|
Investment
securities
|
22,921
|
374
|
6.53
|
31,406
|
454
|
5.78
|
|
Federal
funds sold and short-term investments
|
90,978
|
1,474
|
6.48
|
100,932
|
1,384
|
5.48
|
|
Total
interest-earning assets
|
3,054,499
|
$44,901
|
5.88%
|
2,960,468
|
$42,673
|
5.77%
|
|
Non-interest
earning assets
|
170,079
|
|
|
147,014
|
|
|
|
Total
assets
|
$3,224,578
|
|
|
$3,107,482
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity:
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
NOW
and Super Now accounts
|
$45,609
|
$220
|
1.91%
|
$33,814
|
$85
|
1.00%
|
|
Money
Market accounts
|
654,192
|
6,348
|
3.85
|
455,629
|
3,228
|
2.81
|
|
Savings
accounts
|
284,366
|
388
|
0.54
|
312,891
|
493
|
0.63
|
|
Certificates
of deposit
|
1,053,972
|
11,963
|
4.50
|
1,023,738
|
11,213
|
4.35
|
|
Borrowed
Funds
|
717,926
|
8,604
|
4.75
|
808,278
|
8,948
|
4.39
|
|
Total
interest-bearing liabilities
|
2,756,065
|
27,523
|
3.96%
|
2,634,350
|
23,967
|
3.61%
|
|
Checking
accounts
|
92,333
|
|
|
93,989
|
|
|
|
Other
non-interest-bearing liabilities
|
105,830
|
|
|
84,838
|
|
|
|
Total
liabilities
|
2,954,228
|
|
|
2,813,177
|
|
|
|
Stockholders'
equity
|
270,350
|
|
|
294,305
|
|
|
|
Total
liabilities and stockholders' equity
|
$3,224,578
|
|
|
$3,107,482
|
|
|
|
Net
interest income
|
|
$17,378
|
|
|
$18,706
|
|
|
Net
interest spread
|
|
|
1.92%
|
|
|
2.16%
|
|
Net
interest-earning assets
|
$298,434
|
|
|
$326,118
|
|
|
|
Net
interest margin
|
|
|
2.28%
|
|
|
2.53%
|
|
Ratio
of interest-earning assets to interest-bearing liabilities
|
|
|
110.83%
|
|
|
112.38%
|
|
Rate/Volume
Analysis (Unaudited)
|
Three
Months Ended September 30, 2007
|
|
Compared
to Three Months Ended September 30, 2006
|
|
Increase/
(Decrease) Due to:
|
|
Volume
|
Rate
|
Total
|
|
(Dollars
In thousands)
|
Interest-earning
assets:
|
|
|
|
Real
Estate Loans
|
$2,297
|
$1
|
$2,298
|
Other
loans
|
(3)
|
1
|
(2)
|
Mortgage-backed
securities
|
(188)
|
110
|
(78)
|
Investment
securities
|
(123)
|
43
|
(80)
|
Federal
funds sold and short-term investments
|
(201)
|
291
|
90
|
Total
|
$1,782
|
$446
|
$2,228
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
NOW
and Super Now accounts
|
$44
|
$91
|
$135
|
Money
market accounts
|
1,667
|
1,453
|
3,120
|
Savings
accounts
|
(40)
|
(65)
|
(105)
|
Certificates
of deposit
|
348
|
403
|
751
|
Borrowed
funds
|
(1,039)
|
695
|
(344)
|
Total
|
980
|
2,577
|
3,557
|
Net
change in net interest income
|
$802
|
$(2,131)
|
$(1,329)
|
Net
interest income for the three months ended September 30, 2007 decreased $1.3
million to $17.4 million, from $18.7 million during the three months ended
September 30, 2006. The decrease was attributable to an increase of
$3.6 million in interest expense that was partially offset by an increase of
$2.2 million in interest income. The net interest spread decreased 24
basis points, from 2.16% for the three months ended September 30, 2006 to 1.92%
for the three months ended September 30, 2007, and the net interest margin
decreased 25 basis points, from 2.53% to 2.28% during the same
period.
The
increase in funding costs resulting from the tightening of monetary policy
by
the Federal Open Market Committee during the nine months ended September 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 during the great majority of the period January
1,
2007 through September 30, 2007, which negatively impacted net interest income
during the three-month period ended September 30, 2007.
The
decreases in both the net interest spread and net interest margin reflected
an
increase of 35 basis points in the average cost of interest bearing
liabilities. The increase resulted primarily from increases in the
average cost of money market deposits and CDs of 104 basis points and 15 basis
points, respectively, during the comparative period, reflecting both ongoing
competition in the deposit marketplace and the tightening of monetary policy
by
the Federal Open Market Committee during the nine months ended September 30,
2006 (See "Interest Expense" below).
Interest
Income. Interest income was $44.9
million during the three months ended September 30, 2007, an increase of $2.2
million from $42.7 million during the three months ended September 30,
2006. This resulted primarily from increases of $2.3 million and
$90,000 in interest income on real estate loans and other short-term
investments, respectively, that were partially offset by decreases in interest
income on MBS and investment securities of $78,000 and $80,000, respectively,
during the period.
The
increase in interest income on real estate loans resulted from growth in their
average balance of $131.0 million during the three months ended September 30,
2007 compared to the three months ended September 30, 2006, which reflected
originations of $523.1 million between October 2006 and September 2007, which
were partially offset by principal repayments of $277.0 million and loan sales
of $52.3 million during the period. Partially offsetting the increase
in interest income on real estate loans was a decline of 5 basis points in
their
average yield during the three months ended September 30, 2007 compared to
the
three months ended September 30, 2006. This decline resulted from a
reduction of $518,000 in prepayment fee income during the comparative period
as
increases in short and medium term interest rates during the first nine months
of 2006 led to a decline in prepayment activity during the three months ended
September 30, 2007.
The
increase in interest income on other short-term investments resulted from an
increase in their average yield that reflected increases in short-term interest
rates during the first nine months of 2006 that fully benefited yields during
the three months ended September 30, 2007, however, only partially benefited
yields during the three months ended September 30, 2006. The actions
of the Federal Open Market Committee in September 2007 that served to lower
short-term interest rates had little effect upon the yields on short-term
investments during the three months ended September 30, 2007 since they occurred
so late in the period.
The
decline in interest income on MBS during the three months ended September 30,
2007 compared to the three months ended September 30, 2006 resulted from a
decreased average balance of $18.4 million (resulting primarily from principal
repayments on MBS of $33.5 million during the period October 2006 through
September 2007), that was partially offset by an increase of 28 basis points
in
average yield during the three months ended September 30, 2007 compared to
the
three months ended September 30, 2006 (resulting from increases in short and
medium-term interest rates during the first nine months of 2006 which fully
benefited yields earned during the three months ended September 30, 2007, while
only partially benefiting yields during the three months ended September 30,
2006). The decline in interest income on investment securities
reflected a decrease in their average balance of $8.5 million during the three
months ended September 30, 2007 compared to the three months ended September
30,
2006, as cash flows from maturing investment securities were utilized to fund
real estate loan originations or Bank operations.
Interest
Expense. Interest expense increased
$3.6 million, to $27.5 million, during the three months ended September 30,
2007, from $24.0 million during the three months ended September 30,
2006. The growth resulted primarily from increased interest expense
of $3.1 million related to money markets and $751,000 related to CDs, that
was
partially offset by a decline of $344,000 in interest expense on
borrowings.
The
increase in interest expense on money markets was due to increases of 104 basis
points in their average cost and $198.6 million in their average balance during
the comparative period. During the three months ended September 30,
2007, 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 addition, the Bank grew its balance of
money markets during the period October 2006 through September 2007 through
successful promotional activities.
The
increase in interest expense on CDs resulted, in part, from an increase in
their
average cost of 15 basis points during the three months ended September 30,
2007
compared to the three months ended September 30, 2006. The increase
in average cost resulted from increases in short-term interest rates during
the
first nine months of 2006, as a significant majority of the Bank's CDs have
re-priced since September 30, 2006. In addition, the average balance
of CDs increased $30.2 million during the comparative period,
reflecting 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
decrease in interest expense on borrowed funds during the three months ended
September 30, 2007 compared to the three months ended September 30, 2006 was
due
to a decline of $90.4 million in average balance during the period as the
Company did not replace a portion of matured borrowings during the first six
months of 2007 while deposit balances were increasing. The average
cost of borrowed funds increased 36 basis points during the three months ended
September 30, 2007 compared to the three months ended September 30, 2006, due
to
a reduction of $764,000 in borrowing expense recorded during the September
2006
quarter related to a borrowing restructuring (See "Item
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources").
Provision
for Loan Losses. The provision for loan losses was $60,000
during the three months ended both September 30, 2007 and September 30, 2006,
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, inceased $696,000, from $2.4 million during the
three months ended September 30, 2006 to $3.1 million during the three months
ended September 30, 2007. This increase resulted primarily from
a non-recurring $546,000 Bank Owned Life Insurance ("BOLI") settlement during
the September 2007 quarter and an increase of $164,000 in a loan administration
fee that is collected in the third quarter of each year.
The
Company sold loans to the Federal National Mortgage Association ("FNMA")
totaling $10.1 million and $92.3 million during the three months ended September
30, 2007 and 2006, respectively. The gains recorded on these sales
were $79,000 and $779,000 during the three months ended September 30, 2007
and
2006, respectively. All of the loans sold during both of these
periods were designated for sale upon
origination. The loans sold during the three months ended
September 30, 2007 and 2006 had weighted average terms to the earlier of
maturity or next repricing of 9.0 years and 10.2 years,
respectively.
Non-Interest
Expense. Non-interest expense was $11.7 million during the three
months ended September 30, 2007, an increase of $1.1 million from the three
months ended September 30, 2006.
Salaries
and employee benefits increased $420,000 during the comparative period as a
result of regular increases to existing employee compensation
levels. Stock benefit plan amortization expense increased $241,000,
primarily as a result of stock option and restricted stock awards granted on
May
1, 2007 to outside directors and certain officers of the Company.
Occupancy
and equipment expense increased $62,000 during the three months ended September
30, 2007 compared to the September 30, 2006 quarter due to general increases
in
utility costs and real estate taxes, as well as the expansion of administrative
office space during 2007.
Data
processing expense increased $35,000 during the comparative period as a result
of increased loan and deposit account activity during the three months ended
September 30, 2007 compared to the three months ended September 30,
2006. Other expenses increased $336,000 due primarily to increased
promotional activities and increased expenses associated with accounting and
tax
compliance.
Non-interest
expense to average assets was 1.45% in the September 2007 quarter, compared
to
1.37% for the quarter ended September 30, 2006. The increase
reflected the growth in non-interest expense during the comparative
period.
Income
Tax Expense. Income tax expense decreased $814,000 during the
quarter ended September 30, 2007 compared to the quarter ended September 30,
2006, due primarily to a decline of $2.4 million in pre-tax net income during
the period.
Comparison
of Operating Results for the Nine Months Ended September 30, 2007 and
2006
General. Net
income
was $17.0 million during the nine months ended September 30, 2007, a decrease
of
$7.6 million from net income of $24.6 million during the nine months ended
September 30, 2006. During the comparative period, net interest
income declined $7.1 million, non-interest income decreased $2.0 million due
primarily to a change in the net gains or losses on the disposal of assets,
and
non-interest expense increased $2.6 million, resulting in a reduction in pre-tax
net income of $11.6 million. Income tax expense decreased $4.0
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 nine
months ended September 30, 2007 and 2006 presented below should be read in
conjunction with the following tables, which set forth certain information
related to the condensed 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,
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
Average
|
|
Yield/
|
Average
|
|
Yield/
|
|
|
|
Balance
|
Interest
|
Cost
|
Balance
|
Interest
|
Cost
|
|
|
(Dollars
In Thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
Real
estate loans
|
$2,747,450
|
$122,367
|
5.94%
|
$2,645,992
|
$116,805
|
5.89%
|
|
|
Other
loans
|
1,824
|
132
|
9.65
|
1,977
|
141
|
9.51
|
|
|
Mortgage-backed
securities
|
151,525
|
4,535
|
3.99
|
182,296
|
5,264
|
3.85
|
|
|
Investment
securities
|
26,172
|
1,194
|
6.08
|
33,586
|
1,405
|
5.58
|
|
|
Federal
funds sold and short-term investments
|
153,441
|
6,736
|
5.85
|
109,421
|
4,062
|
4.95
|
|
|
Total
interest-earning assets
|
3,080,412
|
$134,964
|
5.84%
|
2,973,272
|
$127,677
|
5.73%
|
|
|
Non-interest
earning assets
|
155,134
|
|
|
147,099
|
|
|
|
|
Total
assets
|
$3,235,546
|
|
|
$3,120,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity:
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
NOW
and Super Now accounts
|
$41,465
|
$526
|
1.70%
|
$35,944
|
$268
|
1.00%
|
|
|
Money
Market accounts
|
619,368
|
17,575
|
3.79
|
454,531
|
7,885
|
2.32
|
|
|
Savings
accounts
|
291,358
|
1,261
|
0.58
|
322,980
|
1,424
|
0.59
|
|
|
Certificates
of deposit
|
1,080,290
|
37,295
|
4.62
|
1,011,812
|
30,492
|
4.03
|
|
|
Borrowed
Funds
|
723,105
|
25,375
|
4.69
|
806,040
|
27,610
|
4.58
|
|
|
Total
interest-bearing liabilities
|
2,755,586
|
$82,032
|
3.98%
|
2,631,307
|
$67,679
|
3.44%
|
|
|
Checking
accounts
|
94,475
|
|
|
95,691
|
|
|
|
|
Other
non-interest-bearing liabilities
|
106,471
|
|
|
100,568
|
|
|
|
|
Total
liabilities
|
2,956,532
|
|
|
2,827,566
|
|
|
|
|
Stockholders'
equity
|
279,014
|
|
|
292,805
|
|
|
|
|
Total
liabilities and stockholders' equity
|
$3,235,546
|
|
|
$3,120,371
|
|
|
|
|
Net
interest income
|
|
$52,932
|
|
|
$59,998
|
|
|
|
Net
interest spread
|
|
|
1.86%
|
|
|
2.29%
|
|
|
Net
interest-earning assets
|
$324,826
|
|
|
$341,965
|
|
|
|
|
Net
interest margin
|
|
|
2.29%
|
|
|
2.69%
|
|
|
Ratio
of interest-earning assets to interest-bearing liabilities
|
|
|
111.79%
|
|
|
113.00%
|
|
|
Rate/Volume
Analysis (Unaudited)
|
Nine
Months Ended September 30, 2007 Compared to
|
|
Nine
Months Ended September 30, 2006
|
|
Increase/
(Decrease) Due to:
|
|
Volume
|
Rate
|
Total
|
Interest-earning
assets:
|
(Dollars
In thousands)
|
Real
Estate Loans
|
$4,524
|
$1,038
|
$5,562
|
Other
loans
|
(10)
|
1
|
(9)
|
Mortgage-backed
securities
|
(905)
|
176
|
(729)
|
Investment
securities
|
(324)
|
112
|
(212)
|
Federal
funds sold and short-term investments
|
1,784
|
890
|
2,674
|
Total
|
$5,069
|
$2,217
|
$7,286
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
NOW
and Super Now accounts
|
$56
|
$202
|
$258
|
Money
market accounts
|
3,777
|
5,913
|
9,690
|
Savings
accounts
|
(139)
|
(24)
|
(163)
|
Certificates
of deposit
|
2,201
|
4,602
|
6,803
|
Borrowed
funds
|
(2,870)
|
634
|
(2,236)
|
Total
|
3,025
|
11,327
|
14,352
|
Net
change in net interest income
|
$2,044
|
$(9,110)
|
$(7,066)
|
Net
interest income for the nine months ended September 30, 2007 decreased $7.1
million to $52.9 million, from $60.0 million during the nine months ended
September 30, 2006. The decrease was attributable to an increase of
$14.4 million in interest expense that was partially offset by an increase
of
$7.3 million in interest income. The net interest spread decreased 43
basis points, from 2.29% for the nine months ended September 30, 2006 to 1.86%
for the nine months ended September 30, 2007, and the net interest margin
decreased 40 basis points, from 2.69% to 2.29% during the same
period.
The
increase in funding costs resulting from the tightening of monetary policy
by
the Federal Open Market Committee during the nine months ended September 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 during the great majority of the period January
1,
2007 through September 30, 2007, which negatively impacted net interest income
during the nine-month period ended September 30, 2007.
The
decreases in both the net interest spread and net interest margin reflected
an
increase of 54 basis points in the average cost of interest bearing
liabilities. The increase resulted primarily from increases in the
average cost of money market deposits and CDs of 147 basis points and 59 basis
points, respectively, during the comparative period, reflecting increases in
short-term interest rates during the first nine months of 2006. (See
"Interest Expense" below).
Interest
Income. Interest income was $135.0
million during the nine months ended September 30, 2007, an increase of $7.3
million from $127.7 million during the nine months ended September 30,
2006. This resulted primarily from increases of $5.6 million and $2.7
million in interest income on real estate loans and other short-term
investments, respectively, that were partially offset by decreases in interest
income on MBS and investment securities of $729,000 and $212,000, respectively,
during the period.
The
increase in interest income on real estate loans resulted, in part, from growth
in their average balance of $101.5 million during the nine months ended
September 30, 2007 compared to the nine months ended September 30, 2006, which
reflected originations of $523.1 million between October 2006 and September
2007, which were partially offset by principal repayments of $277.0 million
and
loan sales of $52.3 million during the period. The increase in
interest income on real estate loans additionally resulted from an increase
in
the average yield from 5.89% during the nine months ended September 30, 2006
to
5.94% during the nine months ended September 30, 2007, that was attributable
to
increases in medium- and long-term interest rates during the first six months
of
2006, which positively impacted the average loan origination rate during the
period October 2006 through September 2007.
The
increase in interest income on other short-term investments resulted from growth
in their average balance of $44.0 million during the nine months ended September
30, 2007 compared to the nine months ended September 30, 2006 coupled with
an
increase of 90 basis points in their average yield during the same
period. The increase in average balance reflected the reinvestment of
cash flows from deposit growth and principal repayments on MBS experienced
during the first six months of 2007 in short-term securities and federal funds
sold, since the flattened yield curve provided benefits to retaining the funds
in short-term investments. The increase in average yield reflected
increases in short-term interest rates during the first six months of 2006
that
fully benefited yields
during
the nine months ended September 30, 2007, however, only partially benefited
yields during the nine months ended September 30, 2006. The actions
of the Federal Open Market Committee in September 2007 that served to lower
short-term interest rates had little effect upon the yields on short-term
investments during the nine months ended September 30, 2007 since they occurred
so late in the period.
The
decline in interest income on MBS during the nine months ended September 30,
2007 compared to the nine months ended September 30, 2006 resulted from a
decreased average balance of $30.8 million (resulting primarily from principal
repayments on MBS of $33.5 million during the period October 2006 through
September 2007), that was partially offset by an increase of 14 basis points
in
average yield during the nine months ended September 30, 2007 compared to the
nine months ended September 30, 2006 (resulting from increases in short and
medium-term interest rates during the first nine months of 2006 which fully
benefited yields earned during the nine months ended September 30, 2007, while
only partially benefiting yields during the nine months ended September 30,
2006). The decline in interest income on investment securities
reflected a decrease in their average balance of $7.4 million during the nine
months ended September 30, 2007 compared to the nine months ended September
30,
2006, as cash flows from maturing investment securities were utilized to fund
real estate loan originations or Bank operations.
Interest
Expense. Interest expense increased
$14.4 million, to $82.0 million, during the nine months ended September 30,
2007, from $67.7 million during the nine months ended September 30,
2006. The growth resulted primarily from increased interest expense
of $9.7 million related to money markets and $6.8 million related to CDs, that
was partially offset by a decline of $2.2 million in interest expense on
borrowings.
The
increase in interest expense on money markets was due to increases of 147 basis
points in their average cost and $164.8 million in their average balance during
the comparative period. During the nine months ended September 30,
2007, 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 addition, the Bank grew its balance of
money markets during the period October 2006 through June 2007 through
successful promotional activities.
The
increase in interest expense on CDs resulted, in part, from an increase in
their
average cost of 59 basis points during the nine months ended September 30,
2007
compared to the nine months ended September 30, 2006. The increase in
average cost resulted from increases in short-term interest rates during the
first nine months of 2006, as a significant majority of the Bank's CDs have
re-priced since September 30, 2006. In addition, the average balance
of CDs increased $68.5 million during the comparative period, reflecting
successful gathering of new CDs from promotional activities from October 1,
2006
through June 30, 2007. (See "Item
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources").
The
decrease in interest expense on borrowed funds during the nine months ended
September 30, 2007 compared to the nine months ended September 30, 2006 was
due
to a decline of $82.9 million in average balance during the period as the
Company allowed borrowings to mature without being replaced during the first
six
months of 2007 while deposit balances were increasing. The average
cost of borrowed funds increased 11 basis points during the nine months ended
September 30, 2007 compared to the nine months ended September 30, 2006, due
to
a reduction of $807,000 in borrowing expense recorded during the nine months
ended September 2006 related to a borrowing restructuring. See "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources" for a discussion of the change in borrowing balances during the
nine months ended September 30, 2007.
Provision
for Loan Losses. The provision for loan losses was $180,000
during the nine months ended both September 30, 2007 and September 30, 2006,
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, increased from $7.0 million during the nine months ended
September 30, 2006 to $7.5 million during the nine months ended September 30,
2007. This increase resulted primarily from the previously referenced
non-recurring $546,000 BOLI settlement.
Net
gains
on the sale of loans and other assets (which were recorded as non-interest
income) declined from $3.0 million during the nine months ended September 30,
2006 to $546,000 during the nine months ended September 30, 2007. The
Company sold loans to FNMA totaling $47.1 million and $140.4 million during
the
nine months ended September 30, 2007 and 2006, respectively. The
gains recorded on these sales were $546,000 and $1.4 million during the nine
months ended September 30, 2007 and 2006, respectively. The majority
of the loans sold during both of these periods were designated for sale upon
origination. The loans sold had weighted average terms to the earlier
of maturity or next repricing of 10.6 years and 11.9 years, respectively, during
the nine months ended September 30, 2007 and 2006. During the nine months ended
September 30, 2006, the Company additionally recorded non-recurring pre-tax
gains of $478,000 on the sale of a property obtained in its 1999 acquisition
of
Financial Bancorp, Inc. and $1.1 million on the sale of mutual fund investments
associated with its Benefit Maintenance Plan.
Non-Interest
Expense. Non-interest expense was $34.2 million during the nine
months ended September 30, 2007, an increase of $2.6 million from the nine
months ended September 30, 2006.
Salaries
and employee benefits increased $1.3 million during the comparative period
as a
result of regular increases to existing employee compensation
levels. Stock benefit plan amortization expense increased $338,000 as
a result of stock option awards granted on May 1, 2007 to outside directors
and
certain officers of the Company.
Occupancy
and equipment expense increased $277,000 during the nine months ended September
30, 2007 compared to the comparable period of 2006 due to general increases
in
rental costs and real estate taxes, as well as the expansion of administrative
office space during 2007.
Data
processing expense increased $138,000 during the comparative period as a result
of increased loan and deposit account activity during the nine months ended
September 30, 2007 compared to the nine months ended September 30,
2006. Other expenses increased $520,000 due primarily to increased
advertising costs of $290,000 resulting from increased promotional activities
and increased expenses associated with accounting and tax
compliance.
Non-interest
expense to average assets was 1.41% for the nine months ended September 30
2007,
compared to 1.35% for the nine months ended September 30, 2006. The
increase reflected the growth in non-interest expense during the comparative
period.
Income
Tax Expense. Income tax expense decreased $4.0 million during
the nine months ended September 30, 2007 compared to the nine months ended
September 30, 2006, due primarily to a decline of $11.6 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, 2007 and December 31, 2006 by loan type:
|
At
September 30, 2007
|
|
At
December 31, 2006
|
|
Balance
|
|
%
of Total
|
|
Balance
|
|
%
of Total
|
|
(Dollars
in thousands)
|
One-to
Four family and cooperative apartment
|
$148,145
|
|
5.2%
|
|
$153,847
|
|
5.7%
|
Multifamily
residential
|
1,252,609
|
|
44.1
|
|
1,201,760
|
|
44.5
|
Commercial
real estate
|
430,972
|
|
15.2
|
|
400,097
|
|
14.8
|
Mixed
use (classified as multifamily residential)
|
674,698
|
|
23.8
|
|
653,346
|
|
24.2
|
Mixed
use (classified as commercial real estate)
|
280,602
|
|
9.9
|
|
266,830
|
|
9.9
|
Construction
and land acquisition
|
47,261
|
|
1.7
|
|
23,340
|
|
0.9
|
Unearned
Discounts and net deferred loan fees
|
1,536
|
|
0.1
|
|
1,048
|
|
-
|
Total
real estate loans
|
2,835,823
|
|
100.0%
|
|
2,700,268
|
|
100.0%
|
Consumer
loans
|
2,096
|
|
|
|
2,205
|
|
|
Allowance
for loan losses
|
(15,374)
|
|
|
|
(15,514)
|
|
|
Total
loans, net
|
2,822,545
|
|
|
|
$2,686,959
|
|
|
Investment
Portfolio Summary Information
The
following table presents summary information related to the Company's
consolidated investment securities and MBS portfolios at September 30, 2007
and
December 31, 2006:
|
At
September 30, 2007
|
|
At
December 31, 2006
|
|
(Dollars
in thousands)
|
Balance
at end of period
|
$204,659
|
|
$
184,220
|
Average
interest rate
|
4.67%
|
|
4.49%
|
Average
duration (in years)
|
2.6
|
|
2.3
|
Outlook
for the Remainder of 2007
At
present, the overall yield on the Company's interest-earning assets is
rising. The average yield on interest-earning assets, excluding the
effects of prepayment and late fee income, rose on a linked quarter basis,
from
5.69% to 5.78%. This trend appears likely to continue, as $390
million in portfolio mortgage loans with a below current market weighted average
coupon of 5.37% contractually reprice or mature between October 1, 2007 and
December 31, 2008. During the year ending December 31, 2009, an
additional $366 million in mortgage loans with a weighted average coupon of
5.38% are scheduled to reprice. These loan repricings and maturities
provide a potentially significant boost to overall portfolio
yields.
The
average cost of deposits was 3.52% during the September 2007
quarter. During the remainder of 2007, average deposit costs are
expected to remain relatively stable, as maturing accounts that are anticipated
to re-price at lower rates are expected to be offset by new promotional
accounts.
Prepayment
and amortization rates, which approximated 10.5% during the first nine months
of
2007, are expected to remain in the 10% to 12% range during the remainder of
2007. At September 30, 2007, the real estate loan commitment pipeline
approximated $148.6 million, including $15.1 million of loan commitments
intended for sale to FNMA. The real estate loan pipeline had a
weighted average interest rate approximating 6.2% at September 30,
2007.
Greater
steepness in the yield curve, primarily represented by a reduction in short-term
rates, would need to persist before a significant increase in the net interest
margin would occur, and there remains a great deal of uncertainty about Federal
Open Market Committee moves in the near term. Since the Bank's
interest bearing liabilities traditionally reprice faster than its interest
earning assets, reductions in short-term interest rates would be expected to
have a positive impact on earnings.
Operating
expenses are expected to approximate $11.5 million in the fourth quarter of
2007. The Company is positioned 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,
2006 in Item 7A of the Company's Annual Report on Form 10-K, filed with the
Securities and Exchange Commission on March 16, 2007. 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, 2007, 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, 2006 to September 30, 2007.
Interest
Sensitivity Gap. There was no material change in the computed
one-year interest sensitivity gap from December 31, 2006 to September 30,
2007.
Interest Rate Risk Exposure (Net Portfolio Value) Compliance. At
September 30, 2007, 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, 2006. 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, 2007 compared
to
December 31, 2006.
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 interest rates from
those observed at September 30, 2007 and December 31, 2006. 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, 2007 and December 31, 2006. 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 Ratio is
considered favorable, while a decline is considered
unfavorable.
|
Net
Portfolio Value
|
|
Portfolio
Value of Assets
|
|
At
September 30, 2007
|
|
At
December 31, 2006
|
|
At
September 30, 2007
|
At
December 31, 2006
|
|
Dollar
Amount
|
Dollar
Change
|
Percentage
Change
|
|
Dollar
Amount
|
|
NPV
Ratio
|
Sensitivity
Change
|
NPV
Ratio
|
Sensitivity
Change
|
|
(Dollars
in Thousands)
|
|
|
|
|
|
Change
in Interest Rate
|
|
|
|
|
|
|
|
|
|
|
+
200 Basis Points
|
$255,148
|
$(97,299)
|
-27.61%
|
|
$306,488
|
|
8.04%
|
(267)
|
10.01%
|
(220)
|
+
100 Basis Points
|
306,333
|
(46,114)
|
-13.08
|
|
349,577
|
|
9.48
|
(123)
|
11.22
|
(99)
|
Pre-Shock
Scenario
|
352,447
|
-
|
-
|
|
386,202
|
|
10.71
|
-
|
12.21
|
-
|
-
100 Basis Points
|
380,873
|
28,426
|
8.07
|
|
405,945
|
|
11.40
|
69
|
12.67
|
46
|
-
200 Basis Points
|
391,393
|
38,946
|
11.05
|
|
402,937
|
|
11.59
|
88
|
12.47
|
26
|
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 both 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 interest rates prevailing at the time of the estimate. 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 utilizes that information to estimate 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 it believes are suited to the heterogeneous characteristics of
the
Bank’s various asset and liability portfolios.
The
Pre-Shock Scenario NPV declined from $386.2 million at December 31, 2006
to
$352.4 million at September 30, 2007. The NPV Ratio at September 30,
2007 was 10.71% in the Pre-Shock Scenario, a decrease from the NPV Ratio
of
12.21% in that Scenario at December 31, 2006. The decrease in the
Pre-Shock NPV was due primarily to increases in the valuation of core deposits
and borrowings (which negatively impact NPV) that resulted from declines
in
short and medium-term term interest rates at September 30, 2007 compared
to
December 31, 2006.
The
Bank’s +200 basis point Rate Shock Scenario NPV decreased from $306.5 million
at
December 31, 2006 to $255.1 million at September 30, 2007. The
decline resulted primarily from the aforementioned increases in the valuation
of
core deposits and borrowings.
The
NPV
Ratio was 8.04% in the +200 basis point Rate Shock Scenario at September
30,
2007, a decrease from the NPV Ratio of 10.01% in the +200 basis point Rate
Shock
Scenario at December 31, 2006. The decrease reflected the
aforementioned decline in the +200 basis point Rate Shock Scenario NPV during
the period.
At September 30, 2007, the sensitivity change in the +200 basis point Rate
Shock
Scenario was 267 basis points, compared to a sensitivity change of 220 basis
points in the +200 basis point Rate Shock Scenario at December 31,
2006. The increase in sensitivity was due primarily to a greater
reduction in the valuation of multifamily loans and MBS in the +200 basis
point
Rate Shock Scenario NPV than the Pre-Shock Scenario NPV.
Management
of the Company, with the participation of its Chief Executive Officer and Chief
Financial Officer, conducted an evaluation of the effectiveness as of September
30, 2007, of the Company's disclosure controls and procedures, as defined in
Rules 13a-15(e) and 15(d)-15(e) under the Exchange Act. Based upon
this evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures were effective
as of September 30, 2007 in ensuring 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.
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 fiscal 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, 2006.
(c) During
the three months ended September 30, 2007, the Holding Company purchased 742,640
shares of its common stock into treasury. 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 Publicly Announced
Programs
|
|
Maximum
Number of Shares that May Yet be Purchased Under the
Programs
|
July
2007
|
279,029
|
|
$12.15
|
|
279,029
|
|
1,950,262
|
August
2007
|
400,500
|
|
11.87
|
|
400,500
|
|
1,549,762
|
September
2007
|
63,111
|
|
13.59
|
|
63,111
|
|
1,486,651
|
All
repurchases in the above table were made under either the Company's Eleventh
Stock Repurchase Program, which was approved by the Holding Company's Board
of
Directors and publicly announced on December 15, 2005, or the Company's Twelfth
Stock Repurchase Program, which was approved by the Holding Company's Board
of
Directors and publicly announced on June 21, 2007. All shares
eligible for repurchase under the Eleventh Stock Repurchase Program were
repurchased as of August 31, 2007. No existing repurchase programs expired
during the three months ended September 30, 2007, nor did the Company terminate
any repurchase programs prior to expiration during the quarter, as the Eleventh
Repurchase Program had no expiration date.
None.
None.
None.
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.
(2)
|
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. (3)
|
4.4
|
|
Certificate
of Designations, Preferences and Rights of Series A Junior Participating
Preferred Stock (4)
|
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 (4)
|
4.6
|
|
Form
of Rights Certificate (4)
|
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
(9)
|
4.8
|
|
Indenture,
dated as of March 19, 2004, between Dime Community Bancshares, Inc.
and
Wilmington Trust Company, as
trustee
(9)
|
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
(9)
|
10.1
|
|
Amended
and Restated Employment Agreement between The Dime Savings Bank of
Williamsburgh and Vincent F.
Palagiano
(5)
|
10.2
|
|
Amended
and Restated Employment Agreement between The Dime Savings Bank of
Williamsburgh and Michael P.
Devine
(5)
|
10.3
|
|
Amended
and Restated Employment Agreement between The Dime Savings Bank of
Williamsburgh and
Kenneth
J. Mahon (5)
|
10.4
|
|
Employment
Agreement between Dime Community Bancorp, Inc. and Vincent F. Palagiano
(10)
|
10.5
|
|
Employment
Agreement between Dime Community Bancorp, Inc. and Michael P.
Devine (10)
|
10.6
|
|
Employment
Agreement between Dime Community Bancorp, Inc. and Kenneth J. Mahon
(10)
|
10.7
|
|
Form
of Employee Retention Agreement by and among The Dime Savings Bank
of
Williamsburgh, Dime Community
Bancorp,
Inc. and certain officers (5)
|
10.8
|
|
The
Benefit Maintenance Plan of Dime Community Bancorp, Inc.
(6)
|
10.9
|
|
Severance
Pay Plan of The Dime Savings Bank of Williamsburgh (5)
|
10.10
|
|
Retirement
Plan for Board Members of Dime Community Bancorp, Inc.
(6)
|
10.11
|
|
Dime
Community Bancorp, Inc. 1996 Stock Option Plan for Outside Directors,
Officers and Employees, as amended
by
amendments number 1 and 2 (6)
|
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 (6)
|
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. (6)
|
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 (6)
|
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. (6)
|
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. (6)
|
10.17
|
|
Financial
Federal Savings Bank Incentive Savings Plan in RSI Retirement Trust
(7)
|
10.18
|
|
Financial
Federal Savings Bank Employee Stock Ownership Plan (7)
|
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. (7)
|
10.20
|
|
Dime
Community Bancshares, Inc. 2001 Stock Option Plan for Outside Directors,
Officers and Employees (8)
|
10.21
|
|
Dime
Community Bancshares, Inc. 2004 Stock Incentive Plan for Outside
Directors, Officers and Employees (11)
|
|
|
Table
continued on next page
|
10.22
|
|
Waiver
executed by Vincent F. Palagiano (13)
|
10.23
|
|
Waiver
executed by Michael P. Devine (13)
|
10.24
|
|
Waiver
executed by Kenneth J. Mahon (13)
|
10.25
|
|
Form
of restricted stock award notice for officers and employees under
the 2004
Stock Incentive Plan (12)
|
10.26
|
|
Employee
Retention Agreement between The Dime Savings Bank of Williamsburgh
and
Christopher D. Maher (14)
|
10.27
|
|
Form
of restricted stock award notice for outside directors under the
2004
Stock Incentive Plan
|
31(i).1
|
|
Certification
of Chief Executive Officer Pursuant to Rule
.13a-14(a)/15d-14(a)
|
31(i).2
|
|
Certification
of Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a)
|
32.1
|
|
Certification
of Chief Executive Officer Pursuant to 18 U.S.C. 1350
|
32.2
|
|
Certification
of Chief Financial Officer Pursuant to 18 U.S.C.
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 Quarterly Report on Form 10-Q for
the
quarter ended June 30, 2007 filed on August 9, 2007.
|
(3)
|
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.
|
(4)
|
Incorporated
by reference to the registrant's Current Report on Form 8-K dated
April 9,
1998 and filed on April 16, 1998.
|
(5)
|
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.
|
(6)
|
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.
|
(7)
|
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.
|
(8)
|
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.
|
(9)
|
Incorporated
by reference to Exhibits to the registrant’s Registration Statement No.
333-117743 on Form S-4 filed on July 29, 2004.
|
(10)
|
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.
|
(11)
|
Incorporated
by reference to the registrant's Annual Report on Form 10-K for the
fiscal
year ended December 31, 2004 filed on March 16, 2005.
|
(12)
|
Incorporated
by reference to the registrant's Current Report on Form 8-K filed
on March
22, 2005.
|
(13)
|
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.
|
(14)
|
Incorporated
by reference to the registrant's Quarterly Report on Form 10-Q for
the
quarter ended September 30, 2006 filed on November 9,
2006.
|
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, 2007
|
|
By:
/s/ VINCENT F. PALAGIANO
|
|
|
Vincent
F. Palagiano
|
|
|
Chairman
of the Board and Chief Executive
Officer
|
Dated:
November 9, 2007
|
|
By:
/s/ KENNETH J. MAHON
|
|
|
Kenneth
J. Mahon
|
|
|
Executive
Vice President and Chief Financial Officer (Principal Accounting
Officer)
|