form10q9302008.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, 2008
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, a non-accelerated filer, or a smaller reporting
company. See definitions of "large accelerated filer," "accelerated
filer" and "smaller reporting company" in Rule 12b-2 of the Exchange
Act.
LARGE
ACCELERATED FILER ___
|
ACCELERATED
FILER X
|
NON
-ACCELERATED FILER ___
|
SMALLER
REPORTING COMPANY ___
|
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 4,
2008
|
$.01
Par Value
|
|
34,179,900
|
|
PART
I - FINANCIAL INFORMATION
|
|
|
|
Page
|
Item
1.
|
Condensed
Financial Statements
|
|
|
Consolidated
Statements of Financial Condition at September 30, 2008 and December 31,
2007
|
3
|
|
Consolidated
Statements of Operations for the Three-Month and Nine-Month Period
Ended
September 30, 2008 and 2007
|
4
|
|
Consolidated Statements of Changes in Stockholders' Equity for the Nine
Months Ended September 30, 2008 and 2007 and Consolidated
Statements of Comprehensive Income for the Three-Months and
Nine-Month Periods Ended September 30, 2008 and
2007
|
5
|
|
Consolidated
Statements of Cash Flows for the Nine Months Ended September 30, 2008 and
2007
|
6
|
|
Notes
to Consolidated Financial Statements
|
7-19
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
19-37
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
37-38
|
Item
4.
|
Controls
and Procedures
|
38
|
|
|
|
|
PART
II - OTHER INFORMATION
|
|
Item
1.
|
Legal
Proceedings
|
39
|
Item
1A.
|
Risk
Factors
|
39
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
39
|
Item
3.
|
Defaults
Upon Senior Securities
|
39
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
39
|
Item
5.
|
Other
Information
|
39
|
Item
6.
|
Exhibits
|
40-41
|
|
Signatures
|
42
|
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.
Item
1. Condensed Financial Statements
DIME
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION
(Dollars
in thousands except share amounts)
|
September
30, 2008
(Unaudited)
|
December
31, 2007
|
ASSETS:
|
|
|
Cash
and due from banks
|
$78,159
|
$101,708
|
Federal
funds sold and other short-term investments
|
-
|
128,014
|
Investment
securities held-to-maturity (market value of $8,446 at September 30, 2008
and $80 at December
31, 2007) (None encumbered
at September 30, 2008, and $80 encumbered at December 31,
2007)
|
11,513
|
80
|
Investment
securities available-for-sale, at fair value (fully
unencumbered)
|
16,059
|
34,095
|
Mortgage-backed
securities available-for-sale, at fair value:
|
|
|
Encumbered
|
244,447
|
160,821
|
Unencumbered
|
64,647
|
1,943
|
Total
mortgage-backed securities available-for-sale
|
309,094
|
162,764
|
Loans:
|
|
|
Real
estate, net
|
3,191,341
|
2,873,966
|
Other
loans
|
2,133
|
2,169
|
Less
allowance for loan losses
|
(16,549)
|
(15,387)
|
Total
loans, net
|
3,176,925
|
2,860,748
|
Loans
held for sale
|
736
|
890
|
Premises
and fixed assets, net
|
25,883
|
23,878
|
Federal
Home Loan Bank of New York ("FHLBNY") capital stock
|
52,985
|
39,029
|
Goodwill
|
55,638
|
55,638
|
Other
assets
|
101,644
|
94,331
|
Total
Assets
|
$3,828,636
|
$3,501,175
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
Liabilities:
|
|
|
Due
to depositors:
|
|
|
Interest
bearing deposits
|
$2,010,684
|
$2,091,600
|
Non-interest
bearing deposits
|
87,093
|
88,398
|
Total
deposits
|
2,097,777
|
2,179,998
|
Escrow
and other deposits
|
80,110
|
52,209
|
Securities
sold under agreements to repurchase
|
230,000
|
155,080
|
FHLBNY
advances
|
1,009,675
|
706,500
|
Subordinated
notes payable
|
25,000
|
25,000
|
Trust
Preferred securities payable
|
72,165
|
72,165
|
Other
liabilities
|
37,807
|
41,371
|
Total
Liabilities
|
3,552,534
|
3,232,323
|
Commitments
and Contingencies
|
|
|
Stockholders'
Equity:
|
|
|
Preferred
stock ($0.01 par, 9,000,000 shares authorized, none issued or outstanding
at September
30, 2008 and December 31, 2007)
|
-
|
-
|
Common
stock ($0.01 par, 125,000,000 shares authorized, 51,121,694 shares and
50,906,278 shares
issued at September 30, 2008 and
December 31, 2007, respectively, and 34,179,275 shares and 33,909,902
shares outstanding at September 30, 2008 and
December 31, 2007, respectively)
|
511
|
509
|
Additional
paid-in capital
|
213,335
|
208,369
|
Retained
earnings
|
297,146
|
288,112
|
Accumulated
other comprehensive loss, net of deferred taxes
|
(10,408)
|
(4,278)
|
Unallocated
common stock of Employee Stock Ownership Plan ("ESOP")
|
(3,990)
|
(4,164)
|
Unearned
restricted stock awards
|
(2,014)
|
(634)
|
Common
stock held by Benefit Maintenance Plan ("BMP")
|
(8,007)
|
(7,941)
|
Treasury
stock, at cost (16,942,419 shares and 16,996,376 shares at September
30, 2008 and December 31, 2007, respectively)
|
(210,471)
|
(211,121)
|
Total
Stockholders' Equity
|
276,102
|
268,852
|
Total
Liabilities And Stockholders' Equity
|
$3,828,636
|
$3,501,175
|
See notes
to condensed consolidated financial statements.
DIME
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
UNAUDITED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars
in thousands except per share amounts)
|
Three
Months Ended September
30,
|
|
Nine
Months Ended September
30,
|
|
2008
|
2007
|
|
2008
|
2007
|
Interest
income:
|
|
|
|
|
|
Loans
secured by real estate
|
$47,734
|
$41,420
|
|
$134,947
|
$122,367
|
Other
loans
|
41
|
45
|
|
126
|
132
|
Mortgage-backed
securities
|
3,610
|
1,588
|
|
9,196
|
4,535
|
Investment
securities
|
340
|
374
|
|
1,412
|
1,194
|
Federal
funds sold and other short-term investments
|
783
|
1,474
|
|
4,325
|
6,736
|
Total
interest income
|
52,508
|
44,901
|
|
150,006
|
134,964
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
Deposits
and escrow
|
12,927
|
18,919
|
|
45,347
|
56,657
|
Borrowed
funds
|
14,399
|
8,604
|
|
37,136
|
25,375
|
Total
interest expense
|
27,326
|
27,523
|
|
82,483
|
82,032
|
Net
interest income
|
25,182
|
17,378
|
|
67,523
|
52,932
|
Provision
for credit losses
|
596
|
60
|
|
966
|
180
|
Net
interest income after provision for credit losses
|
24,586
|
17,318
|
|
66,557
|
52,752
|
|
|
|
|
|
|
Non-interest
income:
|
|
|
|
|
|
Service
charges and other fees
|
1,500
|
1,419
|
|
3,690
|
3,677
|
Net
mortgage banking (loss) income
|
(724)
|
269
|
|
(408)
|
1,116
|
Net
loss on sales of other real estate owned and other assets
|
-
|
-
|
|
(129)
|
-
|
Income
from bank owned life insurance
|
504
|
1,042
|
|
1,492
|
2,018
|
Other
|
397
|
401
|
|
1,059
|
1,198
|
Total
non-interest income
|
1,677
|
3,131
|
|
5,704
|
8,009
|
|
|
|
|
|
|
Non-interest
expense:
|
|
|
|
|
|
Salaries
and employee benefits
|
6,486
|
5,865
|
|
18,897
|
17,255
|
Stock
benefit plan amortization expense
|
1,005
|
802
|
|
2,716
|
2,061
|
Occupancy
and equipment
|
1,815
|
1,566
|
|
5,150
|
4,572
|
Federal
deposit insurance premiums
|
361
|
67
|
|
598
|
191
|
Data
processing costs
|
827
|
842
|
|
2,384
|
2,520
|
Other
|
2,419
|
2,575
|
|
7,706
|
7,565
|
Total
non-interest expense
|
12,913
|
11,717
|
|
37,451
|
34,164
|
|
|
|
|
|
|
Income
before income taxes
|
13,350
|
8,732
|
|
34,810
|
26,597
|
Income
tax expense
|
4,997
|
3,188
|
|
12,075
|
9,591
|
Net
income
|
$8,353
|
$5,544
|
|
$22,735
|
$17,006
|
|
|
|
|
|
|
Earnings
per Share:
|
|
|
|
|
|
Basic
|
$0.26
|
$0.17
|
|
$0.70
|
$0.50
|
Diluted
|
$0.25
|
$0.17
|
|
$0.69
|
$0.50
|
See notes
to condensed consolidated financial statements.
DIME
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
UNAUDITED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND
COMPREHENSIVE INCOME
(Dollars
in thousands)
|
Nine
Months Ended September 30,
|
|
2008
|
2007
|
STATEMENTS
OF CHANGES IN STOCKHOLDERS' EQUITY
|
|
|
Common
Stock (Par Value $0.01):
|
|
|
Balance
at beginning of period
|
$509
|
$509
|
Shares
issued in exercise of options
|
2
|
-
|
Balance
at end of period
|
511
|
509
|
Additional
Paid-in Capital:
|
|
|
Balance
at beginning of period
|
208,369
|
206,601
|
Stock
options exercised
|
2,463
|
107
|
Tax
benefit of stock plans
|
476
|
174
|
Amortization
of excess fair value over cost – ESOP
|
787
|
605
|
Stock
option expense
|
771
|
394
|
Release
from treasury stock for restricted stock award shares
|
469
|
15
|
Balance
at end of period
|
213,335
|
207,896
|
Retained
Earnings:
|
|
|
Balance
at beginning of period
|
288,112
|
285,420
|
Net
income for the period
|
22,735
|
17,006
|
Cash
dividends re-assumed through liquidation of Recognition and Retention Plan
("RRP")
|
-
|
958
|
Cash
dividends declared and paid
|
(13,678)
|
(14,427)
|
Cumulative
effect adjustment for the adoption of the transition requirements of
Statement of Financial Accounting Standards ("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")
|
(23)
|
-
|
Cumulative
effect adjustment for the adoption of Financial Accounting Standards Board
("FASB") Interpretation
No. 48,
"Accounting for Uncertainty in Income Taxes"
|
-
|
(1,704)
|
Balance
at end of period
|
297,146
|
287,253
|
Accumulated
Other Comprehensive Income:
|
|
|
Balance
at beginning of period
|
(4,278)
|
(7,100)
|
Cumulative
effect adjustment for the adoption of the transition requirements of SFAS
158
|
(64)
|
-
|
Change
in other comprehensive (loss) income during the period, net of deferred
taxes
|
(6,066)
|
1,399
|
Balance
at end of period
|
(10,408)
|
(5,701)
|
ESOP:
|
|
|
Balance
at beginning of period
|
(4,164)
|
(4,395)
|
Amortization
of earned portion of ESOP stock
|
174
|
173
|
Balance
at end of period
|
(3,990)
|
(4,222)
|
Unearned
restricted stock awards and unallocated common stock
of RRP:
|
|
|
Balance
at beginning of period
|
(634)
|
(3,452)
|
Amortization
of earned portion of restricted stock awards
|
393
|
(165)
|
Release
from treasury stock for restricted stock award shares
|
(1,773)
|
265
|
Transfer
of common stock to treasury upon liquidation of RRP
|
-
|
2,611
|
Balance
at end of period
|
(2,014)
|
(741)
|
Common
Stock Held by BMP
|
|
|
Balance
at beginning of period
|
(7,941)
|
(7,941)
|
Common
stock acquired
|
(66)
|
-
|
Balance
at end of period
|
(8,007)
|
(7,941)
|
Treasury
Stock:
|
|
|
Balance
at beginning of period
|
(211,121)
|
(179,011)
|
Purchase
of treasury shares, at cost
|
(654)
|
(25,533)
|
Release
from treasury stock for restricted stock award shares
|
1,304
|
150
|
Transfer
of common stock to treasury upon liquidation of RRP
|
-
|
(2,611)
|
Balance
at end of period
|
(210,471)
|
(207,005)
|
Total
Stockholders' Equity
|
276,102
|
$270,048
|
|
For
the Three Months Ended
September 30,
|
|
For
the Nine Months Ended
September 30,
|
Statements
of Comprehensive Income
|
2008
|
2007
|
|
2008
|
2007
|
Net
Income
|
$8,353
|
$5,544
|
|
$22,735
|
$17,006
|
Net
unrealized securities (losses) gains arising during the period, net of
(taxes) benefit of $2,360 and $(1,153) during the three months ended
September 30, 2008 and 2007, respectively, and $5,187 and $(1,192) during
the nine months ended September 30, 2008 and 2007,
respectively
|
(2,771)
|
1,353
|
|
(6,089)
|
1,399
|
Amortization
of net unrealized loss on securities transferred from available-for- sale
to held-to-maturity, net of tax of $(19) during the three months and nine
months ended September 30, 2008
|
23
|
-
|
|
23
|
-
|
Comprehensive
income
|
$5,605
|
$6,897
|
|
$16,669
|
$18,405
|
See notes
to condensed consolidated financial statements.
DIME
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
UNAUDITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars
In thousands)
|
Nine Months Ended September 30,
|
|
2008
|
2007
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
Net
Income
|
$22,735
|
$17,006
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
Net
loss on sale of other real estate owned and other assets
|
129
|
-
|
Net
gain on sale of loans held for sale
|
(1,021)
|
(546)
|
Net
depreciation and amortization
|
1,348
|
1,220
|
ESOP
compensation expense
|
960
|
779
|
Stock
plan compensation (excluding ESOP)
|
1,165
|
659
|
Provision
for credit losses
|
966
|
180
|
Charge
to net mortgage banking income - provision to increase the liability for
loans sold with recourse
|
2,027
|
-
|
Increase
in cash surrender value of Bank Owned Life Insurance
|
(1,492)
|
(840)
|
Deferred
income tax credit
|
(1,050)
|
(539)
|
Excess
tax benefits of stock plans
|
(476)
|
(174)
|
Changes
in assets and liabilities:
|
|
|
Origination
of loans held for sale
|
(146,963)
|
(45,332)
|
Proceeds
from sale of loans held for sale
|
148,138
|
47,078
|
Decrease
(Increase) in other assets
|
537
|
(3,873)
|
(Decrease)
Increase in other liabilities
|
(5,751)
|
5,362
|
Net
cash provided by operating activities
|
21,252
|
20,980
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
Net
decrease in federal funds sold and other short term
investments
|
128,014
|
43,528
|
Proceeds
from maturities of investment securities held-to-maturity
|
80
|
75
|
Proceeds
from maturities of investment securities
available-for-sale
|
1,000
|
1,000
|
Proceeds
from calls and redemptions of investment securities
available-for-sale
|
729
|
6,507
|
Purchases
of investment securities available-for-sale
|
(4,428)
|
(12,181)
|
Principal
collected on mortgage-backed securities available-for-sale
|
35,889
|
24,669
|
Purchases
of mortgage-backed securities available-for-sale
|
(183,849)
|
(37,992)
|
Net
increase in loans
|
(318,038)
|
(135,765)
|
Purchases
of fixed assets, net
|
(3,327)
|
(1,903)
|
Proceeds
from the sale of other real estate owned
|
767
|
-
|
Purchase
of FHLBNY capital stock
|
(13,956)
|
(2,334)
|
Net
cash used in investing activities
|
(357,119)
|
(114,396)
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
Net
(decrease) increase in due to depositors
|
(82,221)
|
65,488
|
Net
increase in escrow and other deposits
|
27,901
|
26,199
|
Increase
in securities sold under agreements to repurchase
|
74,920
|
34,925
|
Increase
in FHLBNY advances
|
303,175
|
15,000
|
Cash
dividends paid
|
(13,678)
|
(14,427)
|
Cash
dividends re-assumed through liquidation of RRP
|
-
|
958
|
Exercise
of stock options
|
2,465
|
107
|
Excess
tax benefits of stock plans
|
476
|
174
|
Acquisition
of common stock by BMP
|
(66)
|
-
|
Purchase
of treasury stock
|
(654)
|
(25,533)
|
Net
cash provided by financing activities
|
312,318
|
102,891
|
(DECREASE)
INCREASE IN CASH AND DUE FROM BANKS
|
(23,549)
|
9,475
|
CASH
AND DUE FROM BANKS, BEGINNING OF PERIOD
|
101,708
|
26,264
|
CASH
AND DUE FROM BANKS, END OF PERIOD
|
$78,159
|
$35,739
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
Cash
paid for income taxes
|
$16,528
|
$9,471
|
Cash
paid for interest
|
80,475
|
80,597
|
Loans
transferred to other real estate owned
|
895
|
-
|
Other
comprehensive (loss)
|
(6,066)
|
1,399
|
Cumulative
effect adjustment for the adoption of the transition requirements of SFAS
158
|
(64)
|
-
|
Transfer
of securities from available-for-sale to held-to-maturity (at fair
value)
|
11,501
|
-
|
See notes
to condensed consolidated financial statements.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 Boulevard Funding Corp., Havemeyer Investments, Inc.,
DSBW Preferred Funding Corporation, DSBW Residential Preferred Funding Corp. and
Dime Reinvestment Corp.
The Bank
maintains its headquarters in the Williamsburg section of Brooklyn, New York and
operates twenty-two 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 land acquisition, and consumer loans,
as well as mortgage-backed securities (“MBS”), obligations of the U.S.
Government and Government Sponsored Entities ("GSEs"), 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, 2008,
and the results of operations and statements of comprehensive income, changes in
stockholders' equity and cash flows for the three-month and nine-month periods
ended September 30, 2008 and 2007. The results of operations for the
three-month and nine-month periods ended September 30, 2008 are not necessarily
indicative of the results of operations for the remainder of the year ending
December 31, 2008. 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 U. S. Securities and
Exchange Commission ("SEC").
The
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 the disclosure of contingent
assets and liabilities at the date of the consolidated 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
consolidated financial statements where estimates are significant include the
allowance for loans losses, valuation of mortgage servicing rights, asset
impairment adjustments related to the valuation of goodwill and other than
temporary impairments of securities, loan income recognition, the valuation of
financial instruments, recognition of deferred tax assets and unrecognized tax
benefits and the accounting for defined benefit plans sponsored by the
Company.
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, 2007 and notes
thereto.
3. RECENT
ACCOUNTING PRONOUNCEMENTS
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 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 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. The Company adopted SFAS 157 on January 1,
2008. Disclosures required as a result of the adoption of SFAS 157
are included in Note 10.
In
February 2008, the FASB issued Staff Position FAS 157-2, "Effective Date of FASB
Statement No. 157, Fair Value Measurements" ("FSP 157-2"). FSP 157-2
delays the effective date of SFAS 157 for all nonrecurring fair value
measurements of non-financial assets and non-financial liabilities until fiscal
years beginning after November 15, 2008.
On
October 10, 2008, the FASB issued Staff Position FAS 157-3, "Determining the
Fair Value of a Financial Asset When the Market for That Asset Is Not Active."
("FSP 157-3"). FSP 157-3 clarified the application of SFAS 157 in a
market that is not active. FSP 157-3 reiterated several key
principles of SFAS 157, such as the requirement that a fair value measurement
represent the price at which a transaction would occur between market
participants as of the measurement date. FSP 157-3 further clarified
that where there is little, if any, market activity for an asset at the
measurement date, the fair value measurement objectives outlined in SFAS 157 do
not vary (i.e., the
price that would be received by the holder of the financial asset in an orderly
transaction that is not a forced liquidation or distressed sale as of the
measurement date). FSP 157-3 stated that even in times of market dislocation, it
is not appropriate to conclude that all market activity represents forced
liquidations or distressed sales. However, it is also not appropriate to
automatically conclude that any transaction price is determinative of fair
value. Under FSP 157-3, determining fair value in a dislocated market depends on
the facts and circumstances and may require the use of significant judgment
about whether individual transactions are forced liquidations or distressed
sales. FSP 157-3 further states that in determining fair value of a financial
asset, the use of a reporting entity’s own assumptions about future cash flows
and appropriately risk-adjusted discount rates is acceptable when relevant
observable inputs are not available. Under FSP 157-3, regardless of
the valuation technique used, an entity must include appropriate risk
adjustments that market participants would make for nonperformance and liquidity
risks. FSP 157-3 noted that although broker or pricing service quotes may be an
appropriate input when measuring fair value, they are not necessarily
determinative if an active market does not exist for the financial asset, since,
when markets are not active, brokers may rely more on models with inputs based
on information available only to the broker. FSP 157-3 stated that when weighing
a broker quote as an input to a fair value measurement, an entity should place
less reliance on quotes that do not reflect the result of market transactions;
and the nature of the quote should be considered when weighing the available
evidence. FSP 157-3 reaffirmed the importance of adhering to all SFAS
157 disclosure requirements in the event that an entity obtains a fair value
measurement using significant unobservable inputs, while not requiring any new
disclosures. FSP 157-3 was deemed effective upon issuance, including
prior periods for which financial statements have not been
issued. Revisions resulting from a change in the valuation technique
or its application shall be accounted for as a change in accounting
estimate. Adoption of FSP 157-3 did not have a material impact upon
the Company's consolidated financial condition or results of
operations.
In June
2008, the FASB finalized Staff Position EITF 03-6-1, "Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities" ("FSP EITF 03-6-1"). FSP EITF 03-6-1 affects entities
that accrue cash dividends on share-based payment awards during the service
period when the dividends need not be returned if the employees forfeit the
awards. Under FSP EITF 03-6-1, all share-based payment awards that
accrue cash dividends (whether paid or unpaid) any time the common shareholders
receive dividends are considered participating securities if the dividends need
not be returned to the entity if the employee forfeits the award. Because the
awards are considered participating securities, the issuing entity is required
to apply the two-class method of computing basic and diluted earnings per share
under SFAS 128, "Earnings Per Share." FSP EITF 03-6-1 is effective
for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. FSP EITF 03-6-1 requires an entity to
retroactively adjust all prior-period earnings per share computations to reflect
its provisions. Early adoption of the FSP EITF 03-6-1 is not
permitted. Adoption of FSP EITF 03-6-1 is not expected to have a
material impact upon the Company's consolidated financial condition or results
of operations.
In May
2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles" ("SFAS 162"). SFAS 162 categorizes the
hierarchy of GAAP sources applicable to non-governmental entities as follows:
(a) FASB Statements of Financial Accounting Standards, FASB Interpretations,
SFAS No. 133 Implementation Issues, FASB Staff Positions, and American Institute
of Certified Public Accountants ("AICPA") Accounting Research Bulletins and
Accounting Principles Board Opinions not superseded by the FASB; (b) FASB
Technical Bulletins, AICPA Industry Audit and Accounting Guides and AICPA
Statements of Position that have been cleared for issuance by the FASB; (c)
Accounting Standards Executive Committee Practice Bulletins that have been
cleared for issuance by the FASB, consensus positions of the Emerging Issues
Task Force ("EITF"), and Appendix D Topics discussed by the EITF; and (d)
Implementation Guides (Questions and Answers) published by the FASB Staff, AICPA
Accounting Interpretations, AICPA Industry Accounting and Auditing Guides and
AICPA Statements of Position not cleared by the FASB, and practices that are
widely recognized and prevalent either generally or in the applicable
industry. Under SFAS 162, an entity may not represent that its
financial statements are presented in accordance with GAAP if the principles
used depart from the GAAP hierarchy and such departure had a material effect on
the financial statements. SFAS 162 will become effective 60 days
following approval by the SEC of amendments made by the Public Company
Accounting Oversight Board to AU Section 411, "The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles," which remove the
detailed description of GAAP and replace it with an instruction to refer to SEC
requirements to identify the accounting principles applicable to the particular
company under audit. Adoption of SFAS 162 is not expected to have a
material impact upon the Company's consolidated financial condition or results
of operations.
In March
2008, the FASB issued SFAS 161, "Disclosures about Derivative Instruments and
Hedging Activities—an amendment of FASB Statement No. 133" ("SFAS
161"). SFAS 161 changes the disclosure requirements for
derivative instruments and hedging activities by requiring enhanced disclosures
about (i) the manner in which and reason
that an
entity uses derivative instruments, with particular emphasis upon underlying
risk, (ii) the manner in which derivative instruments and related hedged items
are accounted for under SFAS 133 and its related interpretations, and (iii) (in
tabular form) the manner in which derivative instruments and related hedged
items affect an entity’s financial position, financial performance, and cash
flows. SFAS 161 further requires enhanced disclosures of
credit-risk-related contingent features of derivative
instruments. This Statement is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008,
with early application encouraged. This Statement encourages, but does not
require, comparative disclosures for earlier periods at initial
adoption. Adoption of SFAS 161 is not expected to have a material
impact upon the Company's consolidated financial condition or results of
operations.
In
February 2008, the FASB issued Staff Position FAS 140-3, "Accounting for
Transfers of Financial Assets and Repurchase Financing Transactions" ("FSP
140-3"). FSP 140-3 provides guidance on accounting for a transfer of
a financial asset and repurchase financing. FSP 140-3 presumes that an initial
transfer of a financial asset and a repurchase financing are considered part of
the same arrangement (linked transaction) under SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
("SFAS 140"), however, if certain criteria are satisfied, the initial transfer
and repurchase financing shall not be evaluated as a linked transaction and
shall be evaluated separately under SFAS 140. Under FSP 140-3, a transferor and
transferee shall not separately account for a transfer of a financial asset and
a related repurchase financing unless: (i) the two transactions have a valid and
distinct business or economic purpose for being entered into separately, and
(ii) the repurchase financing does not result in the initial transferor
regaining control over the financial asset. FSP 140-3 is effective
for financial statements issued for fiscal years beginning after November 15,
2008, and interim periods within those fiscal years. The Company is currently
evaluating the potential impact, if any, of the adoption of FSP 140-3 on its
consolidated financial statements.
In December 2007, the FASB issued
SFAS No. 141 (revised 2007), "Business Combinations" ("SFAS 141R"), which
replaces FASB Statement No. 141. SFAS 141R establishes principles and
requirements governing the manner in which an acquirer of a business
recognizes and measures in its financial statements the identifiable assets
acquired, liabilities assumed, any non-controlling interest in the acquiree, and
goodwill acquired. SFAS 141R also establishes disclosure requirements intended
to enable users to evaluate the nature and financial effects of the business
combination. SFAS 141R is effective for business combinations occurring during a
fiscal year beginning after December 15, 2008.
In December 2007, the FASB issued
SFAS No. 160, "Noncontrolling Interests in Consolidated Financial
Statement—amendments of ARB No. 51" ("SFAS 160"). SFAS 160 requires
that, for purposes of accounting and reporting, minority interests be
re-characterized as non-controlling interests and classified as a component of
equity. SFAS 160 also requires financial reporting disclosures that
clearly identify and distinguish between the interests of the parent and the
non-controlling owners. SFAS 160 applies to all entities that prepare
consolidated financial statements other than not-for-profit organizations,
however, will affect only those entities that have an outstanding
non-controlling interest in one or more subsidiaries or that deconsolidate a
subsidiary. SFAS 160 is effective for fiscal years beginning after
December 15, 2008. Adoption of SFAS 160 is not expected to have a
material impact upon the Company's consolidated financial condition or results
of operations.
In
November 2007, the SEC issued Staff Accounting Bulletin No. 109, "Written Loan
Commitments Recorded at Fair Value Through Earnings" ("SAB 109"). SAB
109 provides guidance on accounting for loan commitments recorded at fair value
under GAAP. SAB 109 supersedes SAB No. 105, "Application of Accounting
Principles to Loan Commitments." SAB 109 requires that the expected
net future cash flows related to the associated servicing of a loan be included
in the measurement of all written loan commitments that are accounted for at
fair value. The provisions of SAB 109 are applicable on a prospective basis to
written loan commitments recorded at fair value that are issued or modified in
fiscal quarters beginning after December 15, 2007. The Company
adopted SAB 109 on January 1, 2008. Adoption of SAB 109 did not have
a material impact on the Company's consolidated financial condition or results
of operations.
In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS
159"). SFAS 159 permits companies 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. The Company adopted SFAS 159 on
January 1, 2008. The adoption of SFAS 159 did not have a material
impact on the Company’s consolidated financial condition or results of
operations, as the Company did not elect to apply the fair value method of
accounting to any of its assets or liabilities.
4. TREASURY
STOCK
During the nine months ended September
30, 2008, the Holding Company repurchased 51,000 shares of its common stock into
treasury. All shares repurchased were recorded at the acquisition
cost, which totaled $654,000 during the period.
On May 30, 2008, 12,000 shares of the
Company's common stock were released from treasury in order to fulfill benefit
obligations under the Company's 2004 Stock Incentive Plan (the "2004 Stock
Incentive Plan"). The closing price of the Company's common stock on
that date was $18.18. The shares were released utilizing the average
historical cost method.
Effective August 1, 2008, 92,957 shares
of the Company's common stock were released from treasury in order to fulfill a
grant of restricted stock awards under the 2004 Stock Incentive Plan that was
deemed effective as of the close of business on July 31, 2008. The
closing price of the Company's common stock on July 31, 2008 was
$16.73. The shares were released utilizing the average historical
cost method.
5. 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, 2007 and concluded that no impairment of goodwill
existed. No events have occurred nor circumstances changed subsequent
to December 31, 2007 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 SFAS No. 142, "Goodwill and Other Intangible
Assets."
6. 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
restricted stock award 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,
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
(Dollars
in Thousands)
|
Numerator:
|
|
|
|
|
|
|
|
Net
Income per the Consolidated Statements of Operations
|
$8,353
|
|
$5,544
|
|
$22,735
|
|
$17,006
|
Denominator:
|
|
|
|
|
|
|
|
Weighted-average
number of shares outstanding utilized in the calculation of basic
EPS
|
32,740,620
|
|
32,964,985
|
|
32,601,077
|
|
33,798,814
|
|
|
|
|
|
|
|
|
Unvested
shares of RRP or Restricted Stock Awards
|
110,388
|
|
66,304
|
|
73,914
|
|
66,788
|
Common
stock equivalents resulting from the dilutive effect of outstanding
"in-the-money" stock options
|
314,019
|
|
97,345
|
|
317,891
|
|
106,464
|
Anti-dilutive
effect of tax benefits associated with outstanding "in-the-money" stock
options
|
(128,090)
|
|
(22,410)
|
|
(131,691)
|
|
(25,747)
|
Weighted
average number of shares outstanding utilized in the calculation of
diluted EPS
|
33,036,937
|
|
33,106,224
|
|
32,861,191
|
|
33,946,319
|
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 790,695 and 2,053,104 weighted-average stock options outstanding for the
three-month periods ended September 30, 2008 and 2007, respectively, that were
not considered in the calculation of diluted EPS since their exercise prices
exceeded the average market price during the period. There were
790,410 and 2,053,104 weighted-average stock
options
outstanding for the nine-month periods ended September 30, 2008 and 2007,
respectively, that were not considered in the calculation of diluted EPS since
their exercise prices exceeded the average market price during the
period.
7. ACCOUNTING
FOR STOCK BASED COMPENSATION
During the three-month and nine-month
periods ended September 30, 2008 and 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, 2007, 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.
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,
|
|
2008
|
2007
|
|
2008
|
2007
|
|
(Dollars
in Thousands, Except per Share Amounts)
|
Options
outstanding – beginning of period
|
3,059,498
|
3,181,408
|
|
3,165,997
|
2,250,747
|
Options
granted
|
61,066
|
-
|
|
185,491
|
996,500
|
Weighted
average exercise price of grants
|
$16.73
|
-
|
|
$17.10
|
$13.74
|
Options
exercised
|
1,125
|
7,012
|
|
229,799
|
54,290
|
Weighted
average exercise price of exercised options
|
$10.91
|
$13.16
|
|
$11.91
|
$5.33
|
Options
forfeited
|
2,250
|
6,149
|
|
4,500
|
24,710
|
Weighted
average exercise price of forfeited options
|
$19.90
|
$17.04
|
|
$19.90
|
$18.88
|
Options
outstanding – end of period
|
3,117,189
|
3,168,247
|
|
3,117,189
|
3,168,247
|
Weighted
average exercise price of outstanding options at the
end of period
|
$14.97
|
$14.63
|
|
$14.97
|
$14.63
|
Remaining
options available for grant
|
1,133,027
|
118,975
|
|
1,133,027
|
118,975
|
Exercisable
options at end of period
|
2,251,823
|
2,171,747
|
|
2,251,823
|
2,171,747
|
Weighted
average exercise price of exercisable options at the
end of period
|
$15.17
|
$15.04
|
|
$15.17
|
$15.04
|
Cash
received for option exercise cost
|
12
|
92
|
|
2,465
|
$215
|
Income
tax benefit recognized
|
3
|
21
|
|
463
|
175
|
Compensation
expense recognized
|
297
|
236
|
|
771
|
393
|
Remaining
unrecognized compensation expense
|
2,374
|
2,613
|
|
2,374
|
2,613
|
Weighted
average remaining years for which compensation expense
is to be recognized
|
2.5
|
3.4
|
|
2.5
|
3.4
|
The range
of exercise prices and weighted-average remaining contractual lives of both
options outstanding and options exercisable as of September 30, 2008 were as
follows:
|
Outstanding
Options as of September 30, 2008
|
|
Range
of Exercise Prices
|
Amount
|
Weighted
Average
Exercise
Price
|
Weighted
Average Contractual Years Remaining
|
ExercisableOptions
as of
September
30, 2008
|
$4.50
- $5.00
|
9,465
|
$4.56
|
1.3
|
9,465
|
$10.50
- $11.00
|
380,351
|
10.91
|
3.1
|
380,351
|
$13.00-$13.50
|
530,903
|
13.16
|
4.3
|
530,903
|
$13.51-$14.00
|
958,875
|
13.74
|
8.6
|
279,000
|
$14.50-$15.00
|
34,425
|
14.92
|
9.6
|
-
|
$15.00-$15.50
|
318,492
|
15.10
|
6.7
|
318,492
|
$16.00-$16.50
|
76,320
|
16.45
|
6.3
|
76,320
|
$16.51-$17.00
|
61,066
|
16.73
|
9.8
|
-
|
$18.00-$18.50
|
90,000
|
18.18
|
9.7
|
-
|
$19.50-$20.00
|
657,292
|
19.90
|
5.3
|
657,292
|
Total
|
3,117,189
|
$14.97
|
6.3
|
2,251,823
|
The
weighted average exercise price and contractual years remaining for exercisable
options were $15.17 and 5.3 years, respectively, at September 30,
2008. The estimated weighted average fair value per option at the
date of grant for stock options granted during the three-month and nine-month
periods ended both September 30, 2008 and 2007 was as follows:
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2008
|
2007
|
|
2008
|
2007
|
Total
options granted
|
61,066
|
-
|
|
185,491
|
996,500
|
Estimated
fair value on date of grant
|
$3.73
|
-
|
|
$4.16
|
$3.06
|
Pricing
methodology utilized
|
Black-
Scholes
|
-
|
|
Black-
Scholes
|
Black-
Scholes
|
Expected
life (in years)
|
5.91
|
-
|
|
6.36
|
6.2
|
Interest
rate
|
3.36%
|
-
|
|
3.37%
|
4.56%
|
Volatility
|
28.54
|
-
|
|
30.09
|
28.39
|
Dividend
yield
|
3.35
|
-
|
|
3.29
|
4.08
|
Other
Stock Awards
RRP – 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.
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. Three-fourths of these awards vested to the respective
recipients in equal annual installments on May 1, 2006, 2007 and 2008,
respectively. The remaining one-fourth of these awards vests on May
1, 2009. 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. Two-fifths of the awards vested to the
respective recipients in equal installments on February 1, 2007 and 2008,
respectively. The remaining three-fifths of the awards vest to the
respective recipients in equal installments on February 1, 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. Two-fifths
of the awards vested to the respective recipients in equal installments on May
1, 2007 and 2008, respectively. The remaining three-fifths of the
awards vest to the respective recipients in equal installments on May 1, 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 vested 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. On May 30, 2008, a
grant of 12,000 restricted stock awards was made to outside Directors of the
Bank under the 2004 Stock Incentive Plan. The awards will fully vest
to the respective recipients on May 30, 2009. The fair value of the
Holding Company's common stock on May 30, 2008 was $18.18. On July
31, 2008, a grant of 92,957 restricted stock awards was made to outside
Directors of the Bank under
the 2004
Stock Incentive Plan. The awards will fully vest to the respective
recipients in equal installments on May 1, 2009, 2010, 2011, and 2012
respectively. The fair value of the Holding Company's common stock on
July 31, 2008 was $16.73.
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-months periods ended September 30, 2008 and 2007:
|
At or for the Three Months Ended September 30,
|
At or for the Nine Months Ended September 30,
|
|
2008
|
2007
|
2008
|
2007
|
|
(Dollars
in Thousands)
|
Unvested
allocated shares – beginning of period
|
48,753
|
66,304
|
66,304
|
71,855
|
Shares
granted
|
92,957
|
-
|
104,957
|
12,000
|
Shares
vested
|
-
|
-
|
29,551
|
17,551
|
Unvested
allocated shares – end of period
|
141,710
|
66,304
|
141,710
|
66,304
|
Unallocated
shares - end of period
|
-
|
-
|
-
|
-
|
Compensation
recorded to expense
|
$189
|
$107
|
$394
|
$266
|
Income
tax expense (benefit) recognized
|
-
|
-
|
13
|
(1)
|
8. ALLOWANCE
FOR LOAN LOSSES
Changes
in the allowance for loan losses were as follows:
|
Three
Months Ended September 30,
|
|
Nine
Months Ended September 30,
|
|
2008
|
2007
|
|
2008
|
2007
|
Balance
at beginning of period
|
$15,386
|
$15,405
|
|
$15,387
|
$15,514
|
Provision
for credit losses
|
596
|
60
|
|
966
|
180
|
Loans
charged off
|
(3)
|
(7)
|
|
(263)
|
(23)
|
Recoveries
|
29
|
-
|
|
29
|
19
|
Transfer
from (to) reserves on loan commitments
|
541
|
(84)
|
|
430
|
(316)
|
Balance
at end of period
|
$16,549
|
$15,374
|
|
$16,549
|
$15,374
|
Management's
quarterly evaluation of the loan loss reserves takes into account not only
performance of the current loan portfolio, but also general credit conditions
and volume of new business, in determining the timing and amount of any future
credit loss provisions. The increase in the provision for credit
losses during the three- and nine- month periods ended September 30, 2008
compared to the three- and nine-month periods ended September 30, 2007 reflected
estimated losses related to the significant growth in the Bank's real estate
loan portfolio during the nine months ended September 30, 2008.
9. INVESTMENT
AND MORTGAGE-BACKED SECURITIES
The following table summarizes the
gross unrealized losses and fair value of investment securities and MBS as of
September 30, 2008, aggregated by investment category and the length of time the
securities were in a continuous unrealized loss position:
|
Total
|
12
or MoreConsecutive
Months
of
Unrealized Losses
|
Less
than 12Consecutive
Months
of
Unrealized Losses
|
|
(Dollars
in thousands) |
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
Held-to-Maturity
Securities:
|
|
|
|
|
|
|
Trust
preferred securities (a)
|
$8,446
|
$11,444
|
$2,360
|
$4,801
|
$6,086
|
$6,643
|
Available-for-Sale
Securities:
|
|
|
|
|
|
|
Municipal
securities
|
8,985
|
305
|
282
|
21
|
8,703
|
284
|
Equity
securities
|
6,382
|
1,491
|
2,816
|
923
|
3,566
|
568
|
FHLMC
pass-through certificates
|
114,421
|
1,472
|
-
|
-
|
114,421
|
1,472
|
FNMA
pass-through certificates
|
52,751
|
809
|
-
|
-
|
52,751
|
809
|
GSE
sponsored Collateralized Mortgage
Obligations ("CMOs")
|
89,524
|
902
|
61,141
|
719
|
28,383
|
183
|
Private
label MBS and CMOs
|
12,991
|
626
|
8,665
|
362
|
4,326
|
264
|
Total
|
$293,500
|
$17,049
|
$75,264
|
$6,826
|
$218,236
|
$10,223
|
(a) At
September 30, 2008, the recorded balance of these securities was $11.5
million. This balance reflected an unrealized loss of $8.4 million
that was recognized in accumulated other comprehensive income on September 1,
2008 (the day on which these securities were transferred from available-for-sale
to held-to-maturity). In accordance with SFAS No. 115, "Accounting
for Investments in Debt and Equity Securities" ("SFAS 115"), this unrealized
loss is currently being amortized over the remaining estimated life of these
securities.
Management
does not believe that any of the unrealized losses on the securities in the
above table were other than temporary as of September 30, 2008. The
following is a summary of management's determination for each security
classification:
Trust
Preferred Securities
At
September 30, 2008, the Bank owned eight investment securities with an amortized
cost of $19.9 million that were primarily secured by the preferred debt
obligations of a pool of U.S. banks (with a small portion secured by debt
obligations of insurance companies). The market value of these
securities approximated their amortized cost as recently as December 2007. As of
September 30, 2008, each of these securities had made all principal and interest
payments in accordance with their contractual terms. However, the
market value of these securities declined significantly during the nine months
ended September 30, 2008, reflecting illiquidity in their marketplace fueled by
concerns of future bank failures. Management, therefore, reviewed all
such securities for impairment regardless of the duration of their unrealized
losses. Despite the significant decline in market value, management
believes that the unrealized losses on these securities at September 30, 2008
were temporary, and that the full value of these investments will be
realized, once the market dislocations
have been removed, or as the securities continue to make their
contractual payments of principal and interest. In making this
determination, management considered the following:
In
addition to satisfying all contractual payments since inception, each of the
eight securities demonstrated the following beneficial credit
characteristics:
·
|
All
securities have maintained an investment grade rating since
inception
|
·
|
Each
security has a diverse pool of underlying
issuers
|
·
|
None
of the securities have exposure to real estate investment trust issued
debt (which has experienced high default
rates)
|
·
|
Each
security features either a mandatory auction or a de-leveraging mechanism
that could result in principal repayments to the Bank prior to the stated
maturity of the security
|
·
|
Each
security is characterized by some level of
over-collateralization
|
·
|
Based
upon an internal review of the collateral backing the Trust Preferred
Securities portfolio, which accounted for current and prospective
deferrals, each of the securities can reasonably be expected to continue
making contractual payments.
|
On September
1, 2008, the Bank elected to transfer these securities from its
available-for-sale portfolio to its held-to-maturity portfolio. Based
upon the lack of an orderly market for these securities, management determined
that a formal election to hold these securities to maturity was consistent with
its initial investment decision. At the point of transfer, a pre-tax
loss of $8.4 million, or 42% of their amortized cost basis, had previously been
recognized in connection with these securities, as a component of accumulated
other comprehensive loss within the Company's consolidated stockholders' equity
(net of income tax benefit). The Company has the intent and ability
to hold these securities to maturity.
Temporary
Impairment of the Municipal Security That Has Maintained an Unrealized Holding
Loss for 12 or More Consecutive Months
At
September 30, 2008, the Bank owned one municipal security that possessed
unrealized losses for 12 or more consecutive months. This security
was not deemed to be other than temporarily impaired at September 30, 2008 based
upon the following: (1) its fair value on that date approximated 93%
of its amortized cost and has only fallen below 99% of its amortized cost since
June 2008, (2) its credit rating deemed it a low credit risk, and (3) the
Company has the intent and ability to hold the security until
recovery.
Temporary
Impairment of the Equity Security That Has Maintained an Unrealized Holding Loss
for 12 or More Consecutive Months
The
equity security that possessed unrealized losses for 12 or more consecutive
months was a managed mutual fund investment that declined significantly in 2008
as a result of problems encountered by the U.S. equity
markets. Management performed an historical analysis of the average
period for which a declining (or "bear") market has continued for the Standard
and Poors 500 Equity Index. Based upon this analysis, management
believes that this security was not other than temporarily impaired at September
30, 2008. In making this determination, management considered the
following: (1) the security is a managed mutual fund comprised primarily of
large capitalization (in excess of $5.0 billion) U.S. common stocks with a high
correlation to the Standard and Poors 500 Equity Index; (2) this investment has
possessed unrealized holding losses of less than 15% of its historical cost
basis for much of the past twelve months and was only two percent below its
historical cost basis as recently as October 2007; and (3) the Company has owned
this investment for approximately 20 years, and it has regularly demonstrated
the ability to recover to its cost basis during periods in which the major U.S.
equity market indexes rose significantly.
Temporary
Impairment of FHLMC and FNMA Pass-Through Certificates, GSE Sponsored CMOs, and
Private Label MBS and CMOs That Have Maintained an Unrealized Holding Loss for
12 or More Consecutive Months
At
September 30, 2008, all of the FHLMC and FNMA pass-through certificates, GSE
sponsored CMOs, and private label MBS and CMOs that possessed unrealized losses
for 12 or more consecutive months had the highest possible credit quality
rating. Since inception, virtually all unrealized losses on these
securities have resulted from interest rate fluctuations. These
securities were not deemed to be other than temporarily impaired at September
30, 2008 due to the following: (1) their credit quality rating remained
superior; (2) the Company's investment was within the highest available tranche
(or repayment pool); and (3) the Company had the intent and ability to hold the
securities until recovery.
10. FAIR
VALUE OF FINANCIAL INSTRUMENTS
The fair
value hierarchy established under SFAS 157 is summarized as
follows:
Level 1 Inputs – Quoted
prices (unadjusted) for identical assets or liabilities in active markets that
the reporting entity has the ability to access at the measurement
date.
Level 2 Inputs – Significant
other observable inputs such as any of the following; (1) quoted prices for
similar assets or liabilities in active markets, (2) quoted prices for identical
or similar assets or liabilities in markets that are not active, (3) inputs
other than quoted prices that are observable for the asset or liability (e.g., interest rates and
yield curves observable at commonly quoted intervals, volatilities, prepayment
speeds, loss severities, credit risks, and default rates), or (4) inputs that
are derived principally from or corroborated by observable market data by
correlation or other means (market-corroborated inputs).
Level 3 Inputs – Unobservable
inputs for the asset or liability. Unobservable inputs reflect the reporting
entity's own assumptions about the assumptions that market participants would
use in pricing the asset or liability (including assumptions about
risk). Unobservable inputs shall be used to measure fair value to the
extent that observable inputs are not available, thereby allowing for situations
in which there is little, if any, market activity for the asset or liability at
the measurement date.
The
following tables present the assets that are reported on the condensed
consolidated statements of financial condition at fair value as of September 30,
2008 by level within the fair value hierarchy. As required by SFAS
157, financial assets are classified in their entirety based on the lowest level
of input that is significant to the fair value measurement.
Assets
Measured at Fair Value on a Recurring Basis
|
|
|
|
|
Fair
Value Measurements Using
|
Description
|
|
Total
at September 30, 2008
|
|
Level
1
|
|
Level
2
|
Level
3
|
|
|
(Dollars
in Thousands)
|
Investment
securities available-for-sale (1)
|
|
$16,059
|
|
$6,425
|
|
$9,634
|
$-
|
MBS
available-for-sale (1)
|
|
309,094
|
|
-
|
|
309,094
|
-
|
(1)
|
The
Company’s available-for-sale investment securities and MBS are
reported at fair value, which is determined utilizing prices obtained from
independent parties. The valuations obtained are based upon market data,
and often utilize evaluated pricing models that vary by asset and
incorporate available trade, bid and other market information. For
securities that do not trade on a daily basis, pricing applications apply
available information such as benchmarking and matrix pricing. The market
inputs normally sought in the evaluation of securities include benchmark
yields, reported trades, broker/dealer quotes (only obtained from market
makers or broker/dealers recognized as market participants), issuer
spreads, two-sided markets, benchmark securities, bid, offers and
reference data. For certain securities, additional inputs may be used or
some market inputs may not be applicable. Prioritization of
inputs may vary on any given day based on market
conditions.
|
The
Company's available-for-sale investment securities and MBS at September 30, 2008
were categorized as follows:
Investment
Category
|
|
Percentage
of Total
|
|
Valuation
Level Under
SFAS 157
|
Pass
Through MBS or CMOs issued by GSEs
|
|
91.1%
|
|
Two
|
Pass
Through MBS or CMOs issued by entities other than GSEs
|
|
4.0
|
|
Two
|
Mutual
Funds and Corporate Equities
|
|
2.0
|
|
One
|
Municipal
securities
|
|
2.9
|
|
Two
|
The pass
through MBS and CMOs (issued either by GSEs or entities other than GSEs), which
comprised approximately 95.1% of the Company's total available-for-sale
investment securities and MBS at September 30, 2008, all possessed the highest
possible credit rating published by multiple established credit rating agencies
as of September 30, 2008. Obtaining a market value as of September
30, 2008 for these securities utilizing significant observable inputs as defined
under SFAS 157 was not difficult due to their demand even in a financial
marketplace challenged with reduced liquidity levels such as existed at
September 30, 2008. For the municipal securities, which in aggregate
were less than 1% of the Company's consolidated assets at September 30, 2008,
obtaining a market value utilizing significant observable inputs as defined
under SFAS 157 was slightly more difficult due to the lack of regular trading
activity as of September 30, 2008. For these securities, the Company
obtained market values from at least two credible market sources, and verified
that these values were prepared utilizing significant observable inputs as
defined under SFAS 157. In accordance with established policies and
procedures, the Company never utilized the highest value obtained as its
recorded fair value for securities that were valued with significant observable
inputs.
Assets
Measured at Fair Value on a Non-Recurring Basis
|
|
|
|
|
Fair
Value Measurements Using
|
Total
Loss Recognized During The
|
Description
|
|
Total
at
September
30, 2008
|
|
Level
1
|
Level
2
|
Level
3
|
Three
Months Ended
September
30, 2008
|
Nine
Months Ended
September
30, 2008
|
|
|
|
|
(Dollars
in Thousands)
|
|
|
Loans
held for sale (1)
|
|
$236
|
|
$-
|
$236
|
$-
|
$5
|
$16
|
(1)
|
Loans
held for sale were recorded at the lower of cost or market, and the market
value was based on the contractual price to be
received.
|
Loans
with certain characteristics are evaluated individually for impairment. A loan
is considered impaired when, based upon current information and events, it is
probable that the Bank will be unable to collect all amounts due, including
principal and interest, according to the contractual terms of the loan
agreement. The Bank's impaired loans at September 30, 2008 were collateralized
by real estate and were thus carried at the lower of the outstanding principal
balance or the estimated fair value of the real estate collateral less estimated
selling costs. Fair value is estimated through current appraisals, where
practical, or a drive-by inspection and a comparison of the real estate
collateral with similar properties in the area by either a licensed appraiser or
real estate broker and adjusted as deemed necessary by management to reflect
current market conditions. At September 30, 2008, no impaired loans
were carried at fair value. Recoveries of $29,000 were recognized on
impaired loans during the three months ended September 30,
2008. Losses recognized on impaired loans were $248,000 during the
nine months ended September 30, 2008. The recoveries and losses were
charged against the allowance for loans losses. All of these loans
for which losses or recoveries were recognized were satisfied during the nine
months ended September 30, 2008.
The
provisions of SFAS 157 related to disclosures surrounding non-financial assets
and non-financial liabilities such as goodwill and other real estate owned have
not been applied since the Company elected the deferral rules of FSP 157-2
(discussed in Note 3 to the condensed consolidated financial
statements).
11. 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, 2008
|
|
Three
Months Ended September
30, 2007
|
|
BMP,
Employee
and Outside Director Retirement
Plans
|
Postretirement
Plan
|
|
BMP,
Employee
and Outside Director Retirement
Plans
|
Postretirement
Plan
|
|
(Dollars
in thousands)
|
Service
cost
|
$-
|
$21
|
|
$-
|
$21
|
Interest
cost
|
358
|
65
|
|
339
|
61
|
Expected
return on assets
|
(485)
|
-
|
|
(450)
|
-
|
Unrecognized
past service liability
|
-
|
(7)
|
|
-
|
(7)
|
Amortization
of unrealized loss
|
67
|
4
|
|
118
|
7
|
Net
periodic (credit) cost
|
$(60)
|
$83
|
|
$7
|
$82
|
|
Nine
Months Ended September
30, 2008
|
|
Nine
Months Ended September
30, 2007
|
|
BMP,
Employee
and Outside Director Retirement
Plans
|
Postretirement
Plan
|
|
BMP,
Employee
and Outside Director Retirement
Plans
|
Postretirement
Plan
|
|
(Dollars
in thousands)
|
Service
cost
|
$-
|
$
63
|
|
$-
|
$63
|
Interest
cost
|
1,074
|
195
|
|
1,017
|
183
|
Expected
return on assets
|
(1,456)
|
-
|
|
(1,350)
|
-
|
Unrecognized
past service liability
|
-
|
(20)
|
|
-
|
(21)
|
Amortization
of unrealized loss
|
201
|
12
|
|
354
|
21
|
Net
periodic (credit) cost
|
$(181)
|
$250
|
|
$21
|
$246
|
The
Company disclosed in its consolidated financial statements for the year ended
December 31, 2007 that it expected to make contributions or benefit payments
totaling $191,000 to the BMP, $131,000 to the Outside Director Retirement Plan,
and $168,000 to the Postretirement Plan, and no contributions to the Employee
Retirement Plan, during the year ending December 31, 2008. The
Company made benefit payments of $96,300 to the Outside Director Retirement Plan
during the nine months ended September 30, 2008, and expects to make an
additional $32,100 of contributions or benefit payments during the remainder of
2008. The Company made contributions totaling $138,200 to the
Postretirement Plan during the nine months ended September 30, 2008, and expects
to make an additional estimated $46,000 of contributions or benefit payments
during the remainder of 2008. The Company made an unexpected and
non-recurring contribution of $80,000 in April 2008 related to two participants
in the BMP, and no other contributions to the BMP during the nine months ended
September 30, 2008. The Company does not expect to make any other
benefit payments or contributions to the BMP during the remainder of 2008, since
anticipated retirements that formed the basis for the expected benefit payments
in 2008 are presently not expected to occur.
As
disclosed in Note 1 of the audited consolidated financial statements included in
the Holding Company's Annual Report on Form 10-K for the year ended December 31,
2007, the Company adopted 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 statements of financial condition (with limited
exceptions). In compliance with this requirement, effective December
31, 2008, the Company will change the financial statement disclosure measurement
date for its defined benefit plans from October 1st to
December 31st. On
January 1, 2008, the Company recorded reductions of $23,000 to retained earnings
and $64,000 to accumulated other comprehensive income related to this
transition.
12. INCOME
TAXES
During
the nine months ended September 30, 2008, the Company recorded a decline of
$662,000 in income tax expense related to a reduction in its reserve for
unrecognized tax benefits, as events occurring during the period resulted in the
probable recognition of these benefits. The Company does not expect
that any of its unrecognized tax benefits at September 30, 2008 will be
recognized in the upcoming twelve months. During the nine months
ended September 30, 2008, the Company's income tax expense was further reduced
by adjustments of $275,000 associated with the completion of the June 30, 2007
and December 31, 2007 tax returns. Excluding these items, the
Company's effective tax rate approximated 37.0% during the three-month and
nine-month periods ended September 30, 2008.
13. NET
MORTGAGE BANKING INCOME
Net
mortgage banking income presented in the consolidated statements of operations
was comprised of the following items:
|
Three
Months Ended September
30,
|
|
Nine
Months Ended September
30,
|
|
2008
|
2007
|
|
2008
|
2007
|
|
(Dollars
in thousands)
|
Gain
on the sale of loans originated for sale (1)
|
$802
|
$79
|
|
$1,021
|
$546
|
Provision
to increase the liability for loans sold with recourse
|
(1,727)
|
-
|
|
(2,027)
|
-
|
Mortgage
banking fees (1)
|
201
|
190
|
|
598
|
570
|
Net
mortgage banking (loss) income
|
$(724)
|
$269
|
|
$(408)
|
$1,116
|
(1)
|
These
amounts for
the three-month and nine-month periods ended September 30, 2007 have been
reclassified to conform to their presentation for the three-month and
nine-month periods ended September 30, 2008. These amounts were
included in non-interest income during the three-month and nine-month
periods ended September 30, 2007. The reclassification thus
does not result in a materially different
presentation.
|
During
the nine months ended September 30, 2008, four loans totaling $8.7 million
serviced by the Bank for FNMA entered non-performing status. These
loans are subject to a recourse exposure. Under the terms of the
servicing agreement with FNMA, the Bank is obligated to fund FNMA all monthly
principal and interest payments under the original terms of the loans until the
earlier of the following events: (1) the loans have been fully satisfied; or (2)
the recourse exposure has been fully exhausted. During the nine
months ended September 30, 2008, the Bank estimated aggregate future probable
losses of $2.0 million related to these four loans.
A reserve liability of $4.0 million
existed at September 30, 2008 related to the estimated probable recourse
exposure on all loans sold with recourse, including the above-mentioned
non-performing loans. During the nine months ended September 30,
2008, the Bank reduced this reserve liability by $527,000 for items that it
expected to charge-off, and provided an additional $2.0 million (included as a
charge to net mortgage banking income in non-interest income) to this reserve
liability in order to ensure that, at September 30, 2008, the reserve liability
adequately reflected the estimated recourse exposure likely to be recognized on
all loans sold with recourse. Of the $2.0 million provision
recognized during the nine months ended September 30, 2008, $1.7 million was
recognized during the three months ended September 30, 2008. The
remainder was recognized during the three months ended June 30,
2008.
Item
2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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-two full service retail banking offices located in the New York City
("NYC") 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 land acquisition loans, 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.
During
the years ended December 31, 2005, 2006 and 2007, the Company operated in an
environment challenging to earnings growth, marked by a flattened market yield
curve, as interest rates on short-term investments and borrowings increased at a
faster rate than those on medium- and long-term investments and
borrowings. This environment resulted in an increase in the average
cost of interest bearing liabilities greater than the increase in yield on
interest earning assets during the period. Late in 2007 and during
the three months and nine months ended September 30, 2008, pricing discipline
that developed on new mortgage loans as a result of deterioration in the
national real estate market, coupled with monetary policy actions of the Federal
Open Market Committee resulting in lower short-term rates, led to a steepening
in the market yield curve beyond levels experienced in 2005, 2006 and
2007. This steepening positively impacted the Company's net interest
margin and earnings during the three months and nine months ended September 30,
2008.
The
Company has historically maintained conservative lending standards and avoided
the speculative forms of lending, such as sub-prime mortgages, that have
experienced the severe difficulties over the past fifteen months. As
a result, the problems in the national real estate market did not cause a
significant adverse impact to the Company's earnings during the three months and
nine months ended September 30, 2008. A continued decline in the
value of real estate or further decline in overall economic conditions in the
Bank's primary market will likely adversely impact the Company's future
financial performance.
Recent
Market Developments
The U.S.
and global economies are experiencing significantly reduced activity as a result
of, among other factors, disruptions in the financial system during the past
year. Reflecting concern about the stability of the financial markets, many
lenders and institutional investors have reduced, and in some cases ceased to
provide, funding to borrowers, including other financial institutions. The
availability of credit, confidence in the financial sector, and level of
volatility in the financial markets have been significantly adversely affected
as a result.
In
response to the financial crises affecting the banking system and financial
markets the Emergency Economic Stabilization Act of 2008 (the “EESA”) was
enacted on October 3, 2008. Pursuant to the EESA, the U.S. Department of
Treasury ("Treasury") was granted the authority to, among others, purchase up to
$700 billion of mortgages, MBS and certain other financial instruments from
financial institutions for the purpose of stabilizing and providing liquidity to
the U.S. financial markets.
On
October 14, 2008, Treasury announced the Troubled Asset Relief Program Capital
Purchase Program (the “TARP Capital Purchase Program”), under which it will
purchase equity stakes in a wide variety of banks and
thrifts. Pursuant to the TARP Capital Purchase Program, from the $700
billion authorized by the EESA, Treasury will make $250 billion of capital
available to U.S. financial institutions in the form of preferred stock. In
conjunction with the purchase of preferred stock, Treasury will receive warrants
to purchase common stock with an aggregate market price equal to 15% of the
preferred investment. Participating financial institutions will be required to
adopt Treasury’s standards for executive compensation and corporate governance
for the period during which Treasury holds equity issued under the TARP Capital
Purchase Program. Several financial institutions have already agreed to
participate in the TARP Capital Purchase Program.
Additionally
on October 14, 2008, Treasury triggered the systemic risk exception to the FDIC
Act, enabling the FDIC to temporarily provide a 100% guarantee of the senior
debt of all FDIC-insured institutions and their holding companies, as well as
deposits in non-interest bearing transaction deposit accounts under a Temporary
Liquidity Guarantee Program ("TLGP"). Coverage under the TLGP is available for
30 days without charge and thereafter at a cost of 75 basis points per annum for
senior unsecured debt and 10 basis points per annum surcharge for non-interest
bearing transaction deposits in excess of $250,000 per account. The Company is
currently evaluating its participation in both the TARP Capital Purchase Program
and the TLGP.
It is
presently unclear what impact the EESA, the TARP Capital Purchase Program, the
TLGP, other previously announced liquidity and funding initiatives of the
Federal Reserve and other agencies, and any additional programs that may be
initiated in the future will have on the financial markets and the other
difficulties described above, including the current extreme levels of volatility
and limited credit availability, or on the U.S. banking and financial industries
and the broader U.S. and global economies. Further adverse effects could have an
adverse impact on the Company and its business.
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,
|
|
2008
|
|
2007
|
2008
|
|
2007
|
Performance
and Other Selected Ratios:
|
|
|
|
|
|
|
Return
on Average Assets
|
0.88%
|
|
0.69%
|
0.83%
|
|
0.70%
|
Return
on Average Stockholders' Equity
|
12.20
|
|
8.20
|
11.18
|
|
8.13
|
Stockholders'
Equity to Total Assets
|
7.21
|
|
8.18
|
7.21
|
|
8.18
|
Tangible
Equity to Total Tangible Assets
|
6.08
|
|
6.75
|
6.08
|
|
6.75
|
Loans
to Deposits at End of Period
|
152.27
|
|
136.83
|
152.27
|
|
136.83
|
Loans
to Earning Assets at End of Period
|
89.13
|
|
91.21
|
89.13
|
|
91.21
|
Net
Interest Spread
|
2.52
|
|
1.92
|
2.31
|
|
1.86
|
Net
Interest Margin
|
2.77
|
|
2.28
|
2.59
|
|
2.29
|
Average
Interest Earning Assets to Average Interest Bearing
Liabilities
|
108.80
|
|
110.83
|
108.78
|
|
111.79
|
Non-Interest
Expense to Average Assets
|
1.36
|
|
1.45
|
1.37
|
|
1.41
|
Efficiency
Ratio
|
48.08
|
|
57.35
|
51.05
|
|
56.57
|
Effective
Tax Rate
|
37.43
|
|
36.51
|
34.69
|
|
36.06
|
Dividend
Payout Ratio
|
56.00
|
|
82.35
|
60.87
|
|
84.00
|
Average
Tangible Equity
|
$227,454
|
|
$220,915
|
$221,614
|
|
$230,057
|
Per
Share Data:
|
|
|
|
|
|
|
Reported
EPS (Diluted)
|
$0.25
|
|
$0.17
|
$0.69
|
|
$0.50
|
Cash
Dividends Paid Per Share
|
0.14
|
|
0.14
|
0.42
|
|
0.42
|
Stated
Book Value
|
8.08
|
|
7.89
|
8.08
|
|
7.89
|
Tangible
Book Value
|
6.75
|
|
6.43
|
6.75
|
|
6.43
|
Asset
Quality Summary:
|
|
|
|
|
|
|
Net
(Recoveries) Charge-offs
|
$(26)
|
|
$7
|
234
|
|
4
|
Non-performing
Loans
|
6,440
|
|
1,792
|
6,440
|
|
1,792
|
Non-performing
Loans/Total Loans
|
0.20%
|
|
0.06%
|
0.20%
|
|
0.06%
|
Non-performing
Assets/Total Assets
|
0.17
|
|
0.05
|
0.17
|
|
0.05
|
Allowance
for Loan Loss/Total Loans
|
0.52
|
|
0.54
|
0.52
|
|
0.54
|
Allowance
for Loan Loss/Non-performing Loans
|
256.97
|
|
857.92
|
256.97
|
|
857.92
|
Regulatory
Capital Ratios (Bank Only):
|
|
|
|
|
|
|
Tangible
Capital
|
7.87%
|
|
8.75%
|
7.87%
|
|
8.75%
|
Leverage
Capital
|
7.87
|
|
8.75
|
7.87
|
|
8.75
|
Tier
1 Risk-based Capital
|
10.94
|
|
11.95
|
10.94
|
|
11.95
|
Total
Risk-based Capital
|
11.43
|
|
12.65
|
11.43
|
|
12.65
|
Earnings
to Fixed Charges Ratios (1)
|
|
|
|
|
|
|
Including
Interest on Deposits
|
1.48x
|
|
1.31x
|
1.42x
|
|
1.32x
|
Excluding
Interest on Deposits
|
1.90
|
|
1.98
|
1.93
|
|
2.03
|
(1)
Interest on unrecognized tax benefits totaling $425,000 for both the three-month
and nine-month periods ended September 30, 2008 and $597,000 for both the
three-month and nine-month periods ended September 30, 2007, respectively, is
included in the calculation of fixed charges for each of the three-month and
nine-month periods ended September 30, 2008 and 2007.
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 than
temporary declines in the valuation of securities), the recognition of deferred
tax assets and unrecognized tax positions, the recognition of loan income, the
fair value of financial instruments, and accounting for defined benefit plans
are its most critical accounting policies because they are important to the
presentation of the Company’s consolidated 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 or estimates could result in material variations in the Company's
consolidated 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. GAAP requires 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 SFAS 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, 2008 and 2007.
Performing
Loans
At
September 30, 2008, 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 and land acquisition 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 NYC 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 amounts of the allowance
for loan losses or the provision for credit losses.
Problem
Loans
Regulations
of the Bank's primary regulator, the Office of Thrift Supervision ("OTS"), 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, 2008 and 2007.
Under the
guidance established by Amended SFAS 114, loans determined to be impaired (i.e., loans where it is
probable that all contractual amounts due will not be collected in accordance
with the terms of the loan; 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. They 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 full
value of mortgage loans sold with servicing rights retained by the Bank is
allocated between the loans and the servicing rights based on their estimated
fair values at the time of the loan sale. MSR are amortized in proportion to,
and over the period of, anticipated net servicing income determined in
accordance with GAAP, and are carried at the lower of their unamortized balance
or fair value. SFAS No. 156, "Accounting for Servicing of Financial
Assets," requires all separately recognized MSR to be initially measured at fair
value, if practicable. 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 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 142. SFAS 142 eliminates
amortization of goodwill and instead requires performance of an annual
impairment test at the reporting unit level. At September 30, 2008,
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, 2007 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, 2007 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.
Fair Value of Financial
Instruments. 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 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 available-for-sale. Available-for-sale debt and equity
securities that have readily determinable fair values are carried at fair
value. 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.
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. For the three-month and nine-month periods ended September
30, 2008 and 2007, there were no other than temporary impairments in the
securities portfolio. Pre-tax unrealized holding losses on securities
totaled $13.2 million at September 30, 2008, compared to $3.0 million at
September 30, 2007. See Note 9 to the Company's condensed
consolidated financial statements for a discussion of the factors underlying the
determination that none of these unrealized losses were other than temporary at
September 30, 2008.
See Note
10 to the Company's condensed consolidated financial statements for a discussion
of the fair value of financial instruments.
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 will not be realized.
Unrecognized Tax Benefits.
The Company performs two levels of evaluation for unrecognized tax
benefits. Initially, a determination is made as to whether it is more likely
than not that a tax benefit 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 benefit 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 condensed consolidated financial statements. The tax benefit
position is measured at the largest amount of benefit that is greater than 50
percent likely to be realized upon ultimate settlement. In making its
evaluation, management reviews applicable tax rulings and other advice provided
by reputable tax professionals.
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 yield adjustments over the
contractual loan terms.
Accrual
of interest is discontinued on loans identified as impaired (See Item 2. –
Management's Discussion and Analysis of Financial Condition and Results of
Operations – Critical Accounting Policies – Allowance for Loan Losses – Problem
Loans for a definition of impaired) and past due 90 days. 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 consecutive months. Payments on nonaccrual loans are generally
applied to principal.
Accounting for Defined Benefit
Plans. The Company maintains various defined benefit plans,
including the Postretirement Plan, providing additional postretirement benefits
to employees that are recorded in accordance with SFAS No. 106, ''Employers'
Accounting for Postretirement Benefits Other Than Pensions'' ("SFAS
106"). SFAS 106 requires accrual of postretirement benefits (such as
health care benefits) during the years an employee provides
services. As a result of amendments to the respective plans in
previous years, none of the remaining defined benefit plans maintained by the
Company provided benefits for services performed during the three- month and
nine-month periods ended September 30, 2008 and 2007.
In
accordance with SFAS 158, the Company recognizes the funded status of all of its
defined benefit plans in its condensed consolidated statements of financial
condition, measured as the difference between plan assets at fair value (with
limited exceptions) and the benefit obligation. The Company utilizes
the services of certified actuaries employed at an independent benefits plan
administration entity in order to measure the funded status of its defined
benefit plans in accordance with various applicable accounting
standards.
Liquidity
and Capital Resources
The Board
of Directors of the Bank has established a liquidity policy that it reviews and
updates at least annually. Senior management is responsible for implementing the
policy. The Bank's Asset/Liability Committee ("ALCO") is responsible
for general oversight and strategic implementation of the policy, and management
of the appropriate departments are designated responsibility for implementing
any strategies established by ALCO. On a daily basis, senior
management receives a current cash position report and one-week forecast to
ensure that all short-term obligations are satisfied on a timely basis and that
adequate liquidity exists to fund future activities. On a monthly
basis, reports detailing the Bank's liquidity reserves and forecasted cash flows
are presented to both senior management and the Board of
Directors. In addition on a monthly basis, a six-month liquidity
forecast is presented to ALCO in order to assess potential future liquidity
concerns. A summary of the financial plan, including cash flow data
for the upcoming 12 months, is prepared and presented to the Board of Directors
on an annual basis.
The
Bank's primary sources of funding for its lending and investment activities
include deposits, loan and MBS payments, advances from the FHLBNY, and
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, and long-term one-
to four-family residential real estate loans, to either Fannie Mae ("FNMA") or
other private sector secondary market purchasers. The Company may
additionally issue debt under appropriate circumstances. Although
maturities and scheduled amortization of loans and investments are predictable
sources of funds, deposits flows and prepayments on mortgage loans and MBS are
influenced by interest rates, economic conditions and competition.
The Bank
gathers deposits in direct competition with commercial banks, savings banks and
brokerage firms, many among the largest in the nation. It must
additionally compete for deposit monies against the stock and bond markets,
especially during periods of strong performance in those arenas. The
Bank's deposit flows are affected primarily by the pricing and marketing of its
deposit products compared to its competitors, as well as the market performance
of depositor investment alternatives such as the U.S. bond or equity
markets. To the extent that the Bank is responsive to general market
increases or declines in interest rates, its deposit flows should not be
materially impacted, however, favorable performance of the equity or bond
markets could adversely impact the Bank’s deposit flows.
Retail
branch and Internet banking deposits decreased $82.2 million during the nine
months ended September 30, 2008, compared to an increase of $65.5 million during
the nine months ended September 30, 2007. During the nine months
ended September 30, 2008, money market deposits declined $83.2 million and
certificates of deposit ("CDs"), declined $37.0 million, as beneficial rates on
FHLBNY advances prompted management to utilize them as the primary funding
source for balance sheet growth, and limit aggressive efforts to retain both
money markets and maturing CDs. Partially offsetting the
decline in money markets and CDs was an increase of $39.7 million in total
interest bearing checking accounts during the period, resulting primarily from
the continued success of the interest bearing "Prime Dime" checking account
launched during the second half of 2007. 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, 2008, principal repayments totaled $392.6
million on real estate loans and $35.9 million on MBS. During the
nine months ended September 30, 2007, principal repayments totaled $218.3
million on real estate loans and $30.6 million on MBS. The increase in principal
repayments on loans related to an increase in borrower refinance activities as
loans originated in 2003 and 2004 approached their contractual interest rate
reset dates, coupled with growth in the portfolio during the nine months ended
September 30, 2008. The increase in principal paydowns on MBS
resulted from the purchase of $183.8 million of MBS during the nine months ended
September 30, 2008 that increased their average balance by $120.0 million
compared to the nine months ended September 30, 2007. The Company
does not presently 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 mortgage
and mixed use 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 the heightened interest rate risk they possess. Under
the terms of the sales program, the Bank retains a portion of the associated
credit risk. Once established, such amount continues to increase as
long as the Bank sells 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, 2008 and 2007,
the Bank sold FNMA $27.0 million and $47.1
million
of loans, respectively, pursuant to this program. The reduction in
sales activity during the nine months ended September 30, 2008 reflected less
favorable offering rates by FNMA on new loans during the period.
In
addition, during the nine months ended September 30, 2008, the Bank sold $113.3
million of multifamily loans to a reputable and financially stable community
savings bank operating within the Bank's marketplace. All of these
loans will remain fully serviced by the Bank, and were sold at par and without
recourse, with a gain recognized for the value of the net servicing rights
associated with the loans. These sales were made in order to permit
the Bank to retain its desired volume of lending without growing its assets too
rapidly, thus leveraging its capital to an uncomfortable level. Loan
sales to third party financial institutions may be utilized in the future by the
Bank as a supplement its FNMA loan sale program, which it fully intends to
continue as long as the terms of sale remain mutually beneficial. The
Bank did not sell any loans to third party financial institutions during the
months ended September 30, 2007.
During
the nine months ended September 30, 2008, the Company increased its REPO
borrowings by $74.9 million and FHLBNY advances by $303.2 million,
respectively. These borrowings were added in order to fund real
estate loan originations and purchases of MBS during the period, which both
significantly exceeded their respective levels during the nine months ended
September 30, 2007. These borrowings enabled management to extend the
average duration of the Company’s liabilities, as the average cost of the new
REPO borrowings and FHLBNY advances was significantly lower than the cost of
raising new, or retaining existing, retail deposit funding of similar
durations. In addition, embedded within a portion of the added REPO
borrowings and FHLBNY advances were interest rate caps that provide a
significant benefit to their average cost in the event of an increase in
short-term interest rates. During the nine months ended September 30,
2007, in order to provide additional liquidity to fund ongoing operations and
potential future balance sheet growth, the Company increased its REPOs and
FHLBNY advances by $34.9 million and $15.0 million, respectively.
In the
event that the Bank should require funds beyond its ability to generate them
internally, an additional source of funds is available through use of its
borrowing line at the FHLBNY. At September 30, 2008, the Bank had an
additional potential borrowing capacity of $325.6 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 possesses a
$15.0 million committed line of credit agreement with a reputable financial
institution in the event of further required liquidity, and the Bank maintains
an uncommitted line of credit with a reputable financial institution for up to
$50.0 million.
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, 2008, the Bank was in compliance with all applicable
regulatory capital requirements and was considered "well-capitalized" for all
regulatory purposes.
The
Company generally utilizes its liquidity and capital resources primarily to fund
the origination of real estate loans, the purchase of mortgage-backed and other
securities, the repurchase of Holding Company common stock into treasury and the
payment of dividends on its common stock. During the nine months
ended September 30, 2008 and 2007, real estate loan originations totaled $856.7
million and $399.3 million, respectively. Purchases of investment
securities (excluding short-term investments and federal funds sold) and MBS
totaled $188.3 million during the nine months ended September 30, 2008, compared
to $50.2 million during the nine months ended September 30, 2007. The
increase in real estate loan originations resulted from increased borrower
refinance activity, as real estate loans originated during 2003 and 2004
approached their contractual interest rate repricing dates. The
increase in investment security and MBS purchases resulted from a decision to
add these assets in order to achieve additional net interest income from the
positive spread between the average yield on the securities and the average cost
of the REPOs and FHLBNY advances utilized to fund the
purchases. Purchases of investment securities and MBS were lower
during the nine months ended September 30, 2007 as the Company elected to retain
excess funds in federal funds sold and other short-term investments while
short-term rates equaled or exceeded medium and long-term rates.
During
the nine months ended September 30, 2008, the Holding Company repurchased 51,000
shares of its common stock into treasury. All shares repurchased were
recorded at the acquisition cost, which totaled $654,000 during the period.
Share repurchase levels were significantly lower during the nine months ended
September 30, 2008 than the nine months ended September 30, 2007 as management
elected to retain additional capital at the Bank while it was resuming loan
growth during the nine months ended September 30, 2008. As of
September 30, 2008, up to 1,124,549 shares remained available for purchase under
authorized share purchase programs. Based upon the $15.22 per share
closing price of its common stock as of September 30, 2008, the Holding Company
would utilize $17.1 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.
During
the nine months ended September 30, 2008, the Company paid $13.7 million in cash
dividends on its common stock, compared to $14.4 million during the nine months
ended September 30, 2007. The reduction reflected a decline of 1.2
million in the average basic shares of common stock outstanding during the nine
months ended September 30, 2008
compared
to the nine months ended September 30, 2007, that resulted primarily from 2.3
million shares of treasury stock repurchased during 2007.
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, 2007. The Company additionally had a
reserve recorded related to unrecognized income tax benefits totaling $1.1
million at September 30, 2008. This reserve was reduced by $662,000
during the nine months ended September 30, 2008, as a portion of these benefits
became likely to be recognized. Otherwise, the facts and
circumstances surrounding this obligation have not changed materially since
December 31, 2007. Please refer to Note 14 to the Company's
consolidated audited financial statements for the year ended December 31, 2007
for a further discussion of the unrecognized income tax benefits.
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 partial recourse. The
aggregate amount of the retained risk continues to increase as long as the Bank
sells loans to FNMA under the program. The Bank retains this recourse exposure
until either the portfolio of loans sold to FNMA is satisfied in its entirety,
or the Bank funds claims by FNMA for the full amount of the recourse
exposure. During the nine months ended September 30, 2008, this
recourse exposure increased by $1.4 million for new loans sold.
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, 2008:
|
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
|
$58,079
|
$-
|
$-
|
$-
|
|
$58,079
|
Other
loan commitments (1)
|
85,400
|
-
|
-
|
-
|
|
85,400
|
Other
Commitments:
|
|
|
|
|
|
|
Recourse
obligation on loans sold to FNMA (1)
|
21,769
|
-
|
-
|
-
|
|
21,769
|
Total
Commitments
|
$165,248
|
$-
|
$-
|
$-
|
|
$165,248
|
(1) In
accordance with FASB Interpretation No. 45 ""Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," as well as SFAS 5, "Accounting for Contingencies," as
of September 30, 2008, reserves related to other loan commitments and the
recourse obligation on loans sold to FNMA were $787,000 and $3.9 million,
respectively, and were recorded in other liabilities in the Company's condensed
consolidated statements of financial condition.
Asset
Quality
At both
September 30, 2008 and December 31, 2007, the Company had neither real estate
loans nor collateral underlying MBS that would be considered subprime loans,
i.e., mortgage loans
advanced to borrowers who do not qualify for market interest rates because of
problems with their income or credit history. The Company's lending
standards are discussed in Item 1 of its Form 10-K for the year ended December
31, 2007. All MBS owned by the Company as of September 30, 2008
possessed the highest possible investment credit rating.
Within
the Bank's portfolio, non-performing loans totaled $6.4 million and $2.9 million
at September 30, 2008 and December 31, 2007, respectively. During the
nine months ended September 30, 2008, thirteen loans totaling $5.4 million were
added to non-performing status. Partially offsetting this increase
were two loans totaling $987,000 that were transferred to other real estate
owned ("OREO") and two loans totaling $876,000 that were satisfied during the
period. The increase in non-performing loans during the nine months
ended
September 30, 2008 reflected isolated problem loans, and did not appear
indicative of any systemic problem within the Bank's loan
portfolio. Through September 2008, the metropolitan NYC area
multifamily and commercial real estate markets remained relatively stable
despite the difficulties experienced nationally in the real estate
market.
The Bank
had real estate and consumer loans totaling $1.2 million delinquent 60-89 days
at September 30, 2008, compared to a total of $1.9 million at December 31,
2007. The decrease resulted primarily from the reduction of $545,000
in delinquent real estate 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, 2008 or December 31,
2007.
The recorded investment in loans deemed
impaired pursuant to Amended SFAS 114 was $5.4 million, consisting of nine
loans, at September 30, 2008, compared to $2.8 million, consisting of six loans,
at December 31, 2007. The increase resulted from the addition
of six loans totaling $4.5 million during the nine months ended September
30, 2008, that was partially offset by the transfer of two impaired loans
totaling $1.0 million from loans to OREO, and the satisfaction of two impaired
loans totaling $876,000 during the same period. The average balances
of impaired loans were approximately $4.2 million and $2.7 million during the
nine months ended September 30, 2008 and 2007, respectively. The
increase resulted from the $3.5 million of loans that were added to impaired
status during the nine months ended September 30, 2008, which exceeded all loans
removed from impaired status from October 2007 through September
2008. There were $641,000 and $348,000 of reserves allocated within
the allowance for loan losses for impaired loans at September 30, 2008 and
December 31, 2007, respectively. At September 30, 2008,
non-performing loans exceeded impaired loans by $757,000, due to $757,000 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. See "Item 2 – Management's Discussion and
Analysis of Financial Condition and Results of Operations – Critical Accounting
Policies – Allowance for Loan Losses - Problem Loans" for a discussion of
impairment and reserves.
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 an 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
owned by the Bank as of September 30, 2008 or December 31,
2007. During the first quarter of 2008, the Bank transferred two
loans with an aggregate outstanding principal balance of $987,000 to OREO,
recognizing a charge-off of $92,000 in principal balance. In
addition, a charge-off of $52,000 was recognized upon transfer related to
outstanding advances and accrued interest in connection with these
loans. These loans were sold subsequently during the nine months
ended September 30, 2008. A loss of $128,000 was recognized on the
sale.
The
following table provides information regarding non-performing loans,
non-performing assets, impaired loans and troubled-debt restructurings at the
dates indicated:
|
At
September 30, 2008
|
At
December 31, 2007
|
|
(Dollars
in thousands)
|
Non-Performing
Loans
|
|
|
One-
to four-family
|
$703
|
$11
|
Mixed
Use
|
1,563
|
-
|
Multifamily
residential
|
776
|
2,236
|
Commercial
real estate
|
3,344
|
577
|
Cooperative
apartment unit
|
43
|
27
|
Other
|
11
|
5
|
Total
non-performing loans
|
6,440
|
2,856
|
OREO
|
-
|
-
|
Total
non-performing assets
|
6,440
|
2,856
|
Troubled-debt
restructurings
|
-
|
-
|
Total
non-performing assets and troubled-debt restructurings
|
$6,440
|
$2,856
|
|
|
|
Impaired
loans
|
$5,448
|
$2,814
|
Troubled-debt
restructurings included in Impaired loans
|
-
|
-
|
Ratios:
|
|
|
Total
non-performing loans to total loans
|
0.20%
|
0.10%
|
Total
non-performing loans and troubled-debt restructurings to total
loans
|
0.20
|
0.10
|
Total
non-performing assets to total assets
|
0.17
|
0.08
|
Total
non-performing assets and troubled-debt restructurings to total
assets
|
0.17
|
0.08
|
At September 30, 2008, the Bank was
servicing four non-performing loans totaling $8.7 million for FNMA, all of which
entered non-performing status during the nine months ended September 30, 2008,
and three of which share one common borrower. These loans are subject
to a recourse exposure. Under the terms of the servicing agreement
with FNMA, the Bank is obligated to fund FNMA all monthly principal and interest
payments under the original terms of the loans until the earlier of the
following events: (1) the loans have been fully satisfied; or (2) the recourse
exposure has been fully exhausted. During the nine months ended
September 30, 2008, the Bank had estimated aggregate future probable losses of
$2.0 million related to these loans. Upon ultimate settlement of the
loans, the Bank will request approval by FNMA to fully recognize all losses
incurred as a reduction of the $21.5 million total recourse exposure at
September 30, 2008, and expects such approval to be granted. No other
loans sold by the Bank with recourse were non-performing at September 30,
2008.
A reserve liability of $4.0 million
existed at September 30, 2008 related to the estimated probable recourse
exposure on all loans sold with recourse, including the above-mentioned
non-performing loans. During the nine months ended September 30,
2008, the Bank reduced this reserve liability by $527,000 for items that it
expected to charge-off, and provided an additional $2.0 million (included as a
charge to net mortgage banking income in non-interest income) to this reserve
liability in order to ensure that, at September 30, 2008, the reserve liability
adequately reflected the estimated recourse exposure likely to be recognized on
all loans sold with recourse. Of the $2.0 million provision, $1.7
million was recognized during the three months ended September 30,
2008. The remainder was recognized during the three months ended June
30, 2008.
Please refer to Note 9 to the Company's
condensed consolidated financial statements for a discussion of investment and
mortgage-backed securities that possessed unrealized losses as of September 30,
2008.
Allowance
for Loan Losses and Reserve Liability on Loan Origination
Commitments
The
allowance for loan losses was $16.5 million at September 30, 2008, up from $15.4
million at December 31, 2007. In addition, the Bank had a reserve
liability related to loan origination commitments (recorded in other
liabilities) that totaled $787,000 at September 30, 2008 and $1.2 million at
December 31, 2007. During the nine months ended September 30, 2008,
the Bank recorded a provision of $966,000 to provide for additional inherent
losses in the portfolio and loans committed for funding at period
end. During the same period, the Bank also recorded net charge-offs
of approximately $234,000, and reclassified $430,000 of its reserves related to
loan origination commitments to its allowance for loan losses to due to a
decrease in loan commitments outstanding at September 30,
2008. (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).
Management's
quarterly evaluation of the loan loss reserves takes into account not only
performance of the current loan portfolio, but also general credit conditions
and volume of new business, in determining the timing and amount of any future
loan loss provisions.
Comparison
of Financial Condition at September 30, 2008 and December 31, 2007
Assets. Assets
totaled $3.83 billion at September 30, 2008, an increase of $327.5 million from
total assets of $3.50 billion at December 31, 2007.
Real
estate loans increased $317.4 million during the nine months ended September 30,
2008, due primarily to originations of $856.7 million during the period (as
loans originated in 2003 and 2004 approached their contractual maturities
resulting in increased financing activity during the nine months ended September
30, 2008), that were partially offset by amortization of $392.6 million and
sales of $148.1 million.
MBS
available-for-sale increased $146.3 million during the nine months ended
September 30, 2008, as purchases of $183.8 million were partially offset by
paydowns of $35.9 million and a decline in fair value of $1.3
million.
Federal
funds sold and other short-term investments declined $128.0 million and cash and
due from banks decreased by $23.5 million during the nine months ended September
30, 2008, as these funds were utilized to fund real estate loan originations and
MBS purchases during the period.
The
Company acquired an additional $14.0 million of FHLBNY common stock during the
nine months ended September 30, 2008 in order to satisfy the requisite ownership
levels necessary to obtain additional FHLBNY advances during the
period. (See "Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources" for a discussion of requisite ownership of FHLBNY common
stock).
Liabilities. Total
liabilities grew $320.2 million during the nine months ended September 30, 2008,
reflecting increases of $74.9 million in REPOs, $303.2 million in FHLBNY
advances, and $27.9 million in escrow and other deposits, that were partially
offset by a decline of $82.2 million in retail branch and Internet banking
deposits during the period. The increase in escrow and other deposits
resulted from the accumulation of 2008 tax and insurance escrow balances during
the period not held by the Bank at December 31, 2007. (See "Item
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources" for a discussion of
increases in REPOs, FHLBNY advances and retail branch and Internet banking
deposits during the period).
Stockholders'
Equity. Stockholders' equity increased $7.3 million during the
nine months ended September 30, 2008, due primarily to net income of $22.7
million, amortization of stock benefit plans of $2.1 million, and $2.5 million
of proceeds received in consideration for shares issued in connection with the
exercise of stock options, all of which were partially offset by dividend
payments of $13.7 million, treasury stock repurchases of $654,000, and an
increase of $6.1 million in the accumulated other comprehensive loss component
of stockholders' equity. The majority of the increase in other
comprehensive loss related to a decline in the market value of
available-for-sale investment securities and MBS.
Comparison
of Operating Results for the Three Months Ended September 30, 2008 and
2007
General. Net
income was $8.4 million during the three months ended September 30, 2008, an
increase of $2.8 million from net income of $5.5 million during the three months
ended September 30, 2007. During the comparative period, net interest
income increased $7.8 million, the provision for credit losses increased
$536,000, non-interest income declined $1.5 million and non-interest expense
increased $1.2 million, resulting in a net increase in pre-tax net income of
$4.6 million. Income tax expense increased $1.8 million during the
comparative period due to the increased pre-tax earnings.
Net Interest
Income. The discussion of net interest income for the three
months ended September 30, 2008 and 2007 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 average 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
|
Three
Months Ended September 30,
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
Yield/
|
Average
|
|
Yield/
|
|
|
Balance
|
Interest
|
Cost
|
Balance
|
Interest
|
Cost
|
|
Assets:
|
(Dollars
In Thousands)
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
Real
estate loans
|
$3,218,192
|
$47,734
|
5.93%
|
$2,785,057
|
$41,420
|
5.95%
|
|
Other
loans
|
1,722
|
41
|
9.52
|
1,805
|
45
|
9.97
|
|
Mortgage-backed
securities
|
318,224
|
3,610
|
4.54
|
153,738
|
1,588
|
4.13
|
|
Investment
securities
|
31,271
|
340
|
4.35
|
22,921
|
374
|
6.53
|
|
Federal
funds sold and other short-term investments
|
70,555
|
783
|
4.44
|
90,978
|
1,474
|
6.48
|
|
Total
interest-earning assets
|
3,639,964
|
$52,508
|
5.77%
|
3,054,499
|
$44,901
|
5.88%
|
|
Non-interest
earning assets
|
154,531
|
|
|
170,079
|
|
|
|
Total
assets
|
$3,794,495
|
|
|
$3,224,578
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity:
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
Interest
bearing checking accounts
|
$103,718
|
$607
|
2.33%
|
$45,609
|
$220
|
1.91%
|
|
Money
Market accounts
|
633,946
|
4,075
|
2.56
|
654,192
|
6,348
|
3.85
|
|
Savings
accounts
|
275,104
|
387
|
0.56
|
284,366
|
388
|
0.54
|
|
Certificates
of deposit
|
944,367
|
7,858
|
3.31
|
1,053,972
|
11,963
|
4.50
|
|
Borrowed
Funds
|
1,388,337
|
14,399
|
4.13
|
717,926
|
8,604
|
4.75
|
|
Total
interest-bearing liabilities
|
3,345,472
|
27,326
|
3.25%
|
2,756,065
|
27,523
|
3.96%
|
|
Non-interest
bearing checking accounts
|
92,648
|
|
|
92,333
|
|
|
|
Other
non-interest-bearing liabilities
|
82,559
|
|
|
105,830
|
|
|
|
Total
liabilities
|
3,520,679
|
|
|
2,954,228
|
|
|
|
Stockholders'
equity
|
273,816
|
|
|
270,350
|
|
|
|
Total
liabilities and stockholders' equity
|
$3,794,495
|
|
|
$3,224,578
|
|
|
|
Net
interest income
|
|
$25,182
|
|
|
$17,378
|
|
|
Net
interest spread
|
|
|
2.52%
|
|
|
1.92%
|
|
Net
interest-earning assets
|
$294,492
|
|
|
$298,434
|
|
|
|
Net
interest margin
|
|
|
2.77%
|
|
|
2.28%
|
|
Ratio
of interest-earning assets to interest-bearing liabilities
|
|
|
108.80%
|
|
|
110.83%
|
|
Rate/Volume
Analysis
|
Three Months Ended September 30, 2008 Compared to Three Months
Ended September 30, 2007 Increase/ (Decrease) Due
to:
|
|
Volume
|
Rate
|
Total
|
|
(Dollars
In thousands)
|
Interest-earning
assets:
|
|
|
|
Real
Estate Loans
|
$6,448
|
$(134)
|
$6,314
|
Other
loans
|
(1)
|
(3)
|
(4)
|
Mortgage-backed
securities
|
1,781
|
241
|
2,022
|
Investment
securities
|
114
|
(148)
|
(34)
|
Federal
funds sold and other short-term investments
|
(279)
|
(412)
|
(691)
|
Total
|
8,063
|
(456)
|
7,607
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
Interest
bearing checking accounts
|
$308
|
$79
|
$387
|
Money
market accounts
|
(182)
|
(2,091)
|
(2,273)
|
Savings
accounts
|
(14)
|
13
|
(1)
|
Certificates
of deposit
|
(1,105)
|
(3,000)
|
(4,105)
|
Borrowed
funds
|
7,426
|
(1,631)
|
5,795
|
Total
|
6,433
|
(6,630)
|
(197)
|
Net
change in net interest income
|
$1,630
|
$6,174
|
$7,804
|
During the nine months ended September
30, 2008, FOMC monetary policies resulted in a 225 basis point reduction of the
overnight federal funds rate from 4.25% to 2.00%. This reduction far
exceeded the decline in medium- and long-term interest rates offered throughout
the financial markets, thus creating a steeper market interest rate yield curve
during the period. This trend favorably impacted the Company's net
interest income and net interest margin during the three months ended September
30, 2008 compared to the three months ended September 30, 2007.
Interest
Income. Interest income was $52.5 million during the three
months ended September 30, 2008, an increase of $7.6 million from $44.9 million
during the three months ended September 30, 2007. This resulted
primarily from increases in interest income of $6.3 million and $2.0 million on
real estate loans and MBS, respectively, that were partially offset by a decline
of $691,000 in interest income on federal funds sold and other short-term
investments.
The
increase in interest income on real estate loans resulted from growth in their
average balance of $433.1 million during the three months ended September 30,
2008 compared to the three months ended September 30, 2007, reflecting
originations of $1.03 billion between October 2007 and September 2008, which
were partially offset by principal repayments of $498.8 million and loan sales
of $178.5 million during the same period.
The
increase in interest income on MBS resulted from an increase of $164.5 million
in their average balance coupled with an increase of 41 basis points in their
average yield during the three months ended September 30, 2008 compared to the
three months ended September 30, 2007. The increase in average
balance resulted from $183.8 million of MBS purchases during the period October
2007 through September 2008, that were partially offset by $44.5 million in
principal repayments during the same period. The increase in average
yield on MBS reflected the steeper yield curve during the three months ended
September 30, 2008, as increases in yields on these securities that resulted
from tightening of monetary policy by the FOMC during 2006 and 2007 were not
adversely impacted by the reduction in short-term interest rates that resulted
from FOMC monetary policy during the first six months of 2008.
The
decrease in interest income on federal funds sold and other short-term
investments resulted from a decline of $20.4 million in their average balance
(as these liquid investments were utilized to fund real estate loans and MBS
purchases during the nine months ended September 30, 2008), along with a
reduction of 204 basis points in their average yield (reflecting lower federal
funds and benchmark short-term interest rates during the nine months ended
September 30, 2008 as a result of FOMC monetary policy actions).
Interest
Expense. Interest expense decreased $197,000, to $27.3
million, during the three months ended September 30, 2008, from $27.5 million
during the three months ended September 30, 2007. The decline
resulted primarily from reductions in interest expense of $4.1 million and $2.3
million on CDs and money market accounts, respectively, which were partially
offset by increased interest expense of $5.8 million on borrowed
funds.
The
decline in interest expense on CDs resulted from both decreases of $109.6
million in their average balance and 119 basis points in their average cost
during the three months ended September 30, 2008 compared to the three months
ended September 30, 2007. The decline in average cost reflected lower
offering rates during the three months ended September 30, 2008, as short-term
market interest rates, which influence the pricing of CDs, declined by 225 basis
points during the nine months ended September 30, 2008. The decline
in average balance of CDs reflected deposit pricing strategies implemented by
the Bank during the majority of the nine months ended September 30, 2008 which
de-emphasized the use of CDs as a funding source.
The
decrease in interest expense on money market accounts was due to a decline of
129 basis points in their average rate, as the Bank lowered offering rates on
money market accounts from March through September 2008 in response to the
significant reduction in benchmark short-term interest rates that occurred
during the first three months of 2008. The average balance of money
markets also decreased $20.2 million during the three months ended September 30,
2008 compared to the three months ended September 30,
2007. During the nine months ended September 30, 2008, the Bank
lowered its offering rates on money market accounts in response to the reduction
in benchmark short-term interest rates during the period (reflecting FOMC
monetary policy actions during the period). The reduction in offering
rates resulted in a decline in money market accounts during the nine months
ended September 30, 2008.
The
increase in interest expense on borrowed funds resulted from $670.4 million of
growth in their average balance during the three months ended September 30, 2008
compared to the three months ended September 30, 2007, as the Company added
$658.0 million of REPOs and FHLBNY advances from July 1, 2007 to September 30,
2008 in order to fund operational requirements and help maintain pricing
discipline on deposits. Partially offsetting the increased interest
expense resulting from the higher average balance of borrowed funds was a
reduction of 62 basis points in their average cost during the comparative period
attributable to favorable borrowings undertaken in late 2007 and the first six
months of 2008.
Provision for Credit
Losses. The provision for credit losses was $596,000 during
the three months ended September 30, 2008, an increase of $536,000 over the
provision of $60,000 recorded during the three months ended September 30,
2007. The increase reflected estimated losses related to the
significant growth in the real estate loan portfolio (including commitments to
fund loans in the December 2008 quarter) that occurred during the quarter ended
September 30, 2008.
Non-Interest Income. Non-interest income
decreased $1.5 million, from $3.1 million during the three months ended
September 30, 2007, to $1.7 million during the three months ended September 30,
2008. The decline was attributable primarily to a reduction in net
mortgage banking income of $993,000, resulting from a charge to net mortgage
banking income of $1.7 million that was recognized during the three months ended
September 30, 2008 for a provision to the reserve liability for losses on loans
sold with recourse. (See "Item 2 – Management's Discussion and
Analysis of Financial Condition and Results of Operations - Asset Quality" for a
further discussion of the $1.7 million provision to the book reserve for losses
on loans sold with recourse). Within net mortgage banking income,
this charge was partially offset by a gain of $662,000 (reflecting the net
present value of the servicing asset) recorded on the sale at par of an 80%
participation in $124.0 million of loans to a third party financial
institution. The remainder of the decline in non-interest
income resulted primarily from a non-recurring $546,000 BOLI settlement the Bank
received in the September 2007 quarter.
Non-Interest
Expense. Non-interest expense was $12.9 million during the
three months ended September 30, 2008, an increase of $1.2 million from $11.7
million during the three months ended September 30, 2007.
Salaries
and employee benefits increased $621,000 during the comparative period as a
result of regular increases to existing employee compensation levels, along with
increases related to the additions of a management position in the Bank's
lending department and new management positions required for one completed and
one scheduled retail branch opening in 2008. Stock benefit plan
amortization expense increased $203,000, reflecting equity awards granted to
officers in July 2008 along with higher ESOP expense resulting from an increase
in the Holding Company's common stock price during the quarter ended September
30, 2008 compared to the three months ended September 30, 2007.
Occupancy
and equipment expense increased by $249,000 during the comparative period, due
primarily to the opening of the Borough Park branch in March 2008, along with a
substantial increase in the monthly rental cost of the Bank's Bronx branch
commencing in late 2007. Federal deposit insurance costs increased
$294,000 as a result of an insurance fund re-capitalization plan implemented by
the FDIC in late 2006.
Non-interest
expense was 1.36% of average assets during the three months ended September 30,
2008, compared to 1.45% during the three months ended September 30,
2007. This ratio declined despite the increase in non-interest
expense during the comparative period due to growth of $569.9 million in average
assets.
Income Tax
Expense. Income tax expense increased $1.8 million during the
quarter ended September 30, 2008 compared to the quarter ended September 30,
2007, due to an increase of $4.6 million in pre-tax income during the
period.
Comparison
of Operating Results for the Nine Months Ended September 30, 2008 and
2007
General. Net
income was $22.7 million during the nine months ended September 30, 2008, an
increase of $5.7 million from net income of $17.0 million during the nine months
ended September 30, 2007. During the comparative period, net interest
income increased $14.6 million, the provision for credit losses increased
$786,000, non-interest income declined $2.3 million and non-interest expense
increased $3.3 million, resulting in a net increase in pre-tax net income of
$8.2 million. Income tax expense increased $2.5 million during the
comparative period due to the increased pre-tax earnings.
Net Interest
Income. The discussion of net interest income for the nine
months ended September 30, 2008 and 2007 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 average 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
|
Nine
Months Ended September 30,
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
Yield/
|
Average
|
|
Yield/
|
|
|
Balance
|
Interest
|
Cost
|
Balance
|
Interest
|
Cost
|
|
Assets:
|
(Dollars
In Thousands)
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
Real
estate loans
|
$3,039,071
|
$134,947
|
5.92%
|
$2,747,450
|
$122,367
|
5.94%
|
|
Other
loans
|
1,785
|
126
|
9.41
|
1,824
|
132
|
9.65
|
|
Mortgage-backed
securities
|
271,525
|
9,196
|
4.52
|
151,525
|
4,535
|
3.99
|
|
Investment
securities
|
33,822
|
1,412
|
5.57
|
26,172
|
1,194
|
6.08
|
|
Federal
funds sold and other short-term investments
|
127,650
|
4,325
|
4.52
|
153,441
|
6,736
|
5.85
|
|
Total
interest-earning assets
|
3,473,853
|
$150,006
|
5.76%
|
3,080,412
|
$134,964
|
5.84%
|
|
Non-interest
earning assets
|
181,581
|
|
|
155,134
|
|
|
|
Total
assets
|
$3,655,434
|
|
|
$3,235,546
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity:
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
Interest
bearing checking accounts
|
$87,909
|
$1,596
|
2.43%
|
$41,465
|
$526
|
1.70%
|
|
Money
Market accounts
|
672,256
|
14,476
|
2.88
|
619,368
|
17,575
|
3.79
|
|
Savings
accounts
|
275,242
|
1,153
|
0.56
|
291,358
|
1,261
|
0.58
|
|
Certificates
of deposit
|
993,715
|
28,122
|
3.78
|
1,080,290
|
37,295
|
4.62
|
|
Borrowed
Funds
|
1,164,385
|
37,136
|
4.26
|
723,105
|
25,375
|
4.69
|
|
Total
interest-bearing liabilities
|
3,193,507
|
$82,483
|
3.45%
|
2,755,586
|
$82,032
|
3.98%
|
|
Non-interest
bearing checking accounts
|
91,309
|
|
|
94,475
|
|
|
|
Other
non-interest-bearing liabilities
|
99,518
|
|
|
106,471
|
|
|
|
Total
liabilities
|
3,384,334
|
|
|
2,956,532
|
|
|
|
Stockholders'
equity
|
271,100
|
|
|
279,014
|
|
|
|
Total
liabilities and stockholders' equity
|
$3,655,434
|
|
|
$3,235,546
|
|
|
|
Net
interest income
|
|
$67,523
|
|
|
$52,932
|
|
|
Net
interest spread
|
|
|
2.31%
|
|
|
1.86%
|
|
Net
interest-earning assets
|
$280,346
|
|
|
$324,826
|
|
|
|
Net
interest margin
|
|
|
2.59%
|
|
|
2.29%
|
|
Ratio
of interest-earning assets to interest-bearing liabilities
|
|
|
108.78%
|
|
|
111.79%
|
|
Rate/Volume
Analysis (Unaudited)
|
Nine
Months Ended September 30, 2008 Compared to Nine Months Ended
September 30, 2007 Increase/ (Decrease) Due
to |
|
Volume
|
Rate
|
Total
|
Interest-earning
assets:
|
(Dollars
In thousands) |
Real
Estate Loans
|
$12,990
|
$(410)
|
$12,580
|
Other
loans
|
(3)
|
(3)
|
(6)
|
Mortgage-backed
securities
|
3,825
|
836
|
4,661
|
Investment
securities
|
334
|
(116)
|
218
|
Federal
funds sold and other short-term investments
|
(1,006)
|
(1,405)
|
(2,411)
|
Total
|
16,140
|
(1,098)
|
15,042
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
Interest
bearing checking accounts
|
$716
|
$354
|
$1,070
|
Money
market accounts
|
1,309
|
($4,408)
|
(3,099)
|
Savings
accounts
|
(67)
|
(41)
|
(108)
|
Certificates
of deposit
|
(2,687)
|
(6,486)
|
(9,173)
|
Borrowed
funds
|
14,787
|
(3,026)
|
11,761
|
Total
|
14,058
|
(13,607)
|
451
|
Net
change in net interest income
|
$2,082
|
$12,509
|
$14,591
|
During the nine months ended September
30, 2008, FOMC monetary policies resulted in a 225 basis point reduction of the
overnight federal funds rate from 4.25% to 2.00%. This reduction far
exceeded the decline in medium- and long-term interest rates offered throughout
the financial markets, thus creating a steeper market interest rate yield curve
during the period. This trend favorably impacted the Company's net
interest income and net interest margin during the nine months ended September
30, 2008 compared to the nine months ended September 30, 2007.
Interest
Income. Interest income was $150.0 million during the nine
months ended September 30, 2008, an increase of $15.0 million, from $135.0
million, during the nine months ended September 30, 2007. This
resulted primarily from increases in interest income of $12.6 million and $4.7
million on real estate loans and MBS, respectively, that were partially offset
by a decline of $2.4 million in interest income on federal funds sold and other
short-term investments.
The
increase in interest income on real estate loans resulted from growth in their
average balance of $291.6 million during the nine months ended September 30,
2008 compared to the nine months ended September 30, 2007, reflecting
originations of $1.03 billion between October 2007 and September 2008, which
were partially offset by principal repayments of $498.8 million and loan sales
of $178.5 million during the same period.
The
increase in interest income on MBS resulted from an increase of $120.0 million
in their average balance coupled with an increase of 53 basis points in their
average yield during the nine months ended September 30, 2008 compared to the
nine months ended September 30, 2007. The increase in average balance
resulted from $183.8 million of MBS purchases during the period October 2007
through September 2008, that were partially offset by $44.5 million in principal
repayments during the same period. The increase in average yield on
MBS reflected the steeper yield curve during the nine months ended September 30,
2008, as increases in yields on these securities that resulted from tightening
of monetary policy by the FOMC during 2006 and 2007 were not adversely impacted
by the reduction in short-term interest rates that resulted from FOMC monetary
policy during the first six months of 2008.
The
decrease in interest income on federal funds sold and other short-term
investments resulted from a decline of $25.8 million in their average balance
(as these liquid investments were utilized to fund real estate loans and MBS
purchases during the nine months ended September 30, 2008), along with a
reduction of 133 basis points in their average yield (reflecting lower federal
funds and benchmark short-term interest rates during the nine months ended
September 30, 2008 as a result of FOMC monetary policy actions).
Interest
Expense. Interest expense increased $451,000 to $82.5 million,
during the nine months ended September 30, 2008, from $82.0 million during the
nine months ended September 30, 2007. The additional expense resulted
primarily from increased interest expense of $11.8 million on borrowed funds and
$1.1 million on interest bearing checking accounts, that was partially offset by
a decline in interest expense of $9.2 million and $3.1 million on CDs and money
market accounts, respectively.
The
increase in interest expense on borrowed funds resulted from $441.3 million of
growth in their average balance during the nine months ended September 30, 2008
compared to the nine months ended September 30, 2007, as the Company added
$658.0 million of REPOs and FHLBNY advances from October 1, 2007 to September
30, 2008 in order to fund operational requirements and help maintain pricing
discipline on deposits.
The
increase of $1.1 million in interest expense on interest bearing checking
accounts during the nine months ended September 30, 2008 compared to the nine
months ended September 30, 2007 resulted from an increase of $46.4 million in
their average balance, coupled with an increase of 73 basis points in their
average cost during the period, both of which reflected growth in Prime Dime
interest bearing checking accounts that began in the second half of 2007 and
continued during the nine months ended September 30, 2008.
The
decline in interest expense on CDs resulted from decreases of both $86.6 million
in their average balance and 84 basis points in their average cost during the
nine months ended September 30, 2008 compared to the nine months ended September
30, 2007. The decline in average cost reflected lower offering rates
during the nine months ended September 30, 2008, as short-term market interest
rates, which influence the pricing of CDs, declined by 225 basis points during
the nine months ended September 30, 2008. The decline in average
balance of CDs reflected deposit pricing strategies implemented by the Bank
during the majority of the nine months ended September 30, 2008 which
de-emphasized the use of CDs as a funding source.
The
decrease in interest expense on money market accounts was due to a decline of 91
basis points in their average rate, as the Bank lowered offering rates on money
market accounts from March through September 2008 in response to the reduction
in benchmark short-term interest rates during the first six months of
2008. The decrease in average rate was partially offset by a $52.9
million increase in the average balance of money markets during the nine months
ended September 30, 2008 compared to the nine months ended September 30, 2007
which was attributable to a combination of two factors. The balance
of money markets increased during 2007 through successful promotional
activities. In addition, the Bank's
offering
rates on money market accounts lagged the decline in short-term interest rates
in the financial markets during most of the first six months of
2008. As a result, the Bank retained a large portion of its money
market balances during this period, contributing to their increased average
balance during the nine months ended September 30, 2008 compared to the nine
months ended September 30, 2007.
Provision for Credit
Losses. The provision for credit losses was $966,000 during
the nine months ended September 30, 2008, an increase of $786,000 over the
provision of $180,000 recorded during the nine months ended September 30,
2007. The increase reflected estimated losses related to the
significant growth in the real estate loan portfolio (including commitments to
fund loans in the December 2008 quarter) that occurred during the nine months
ended September 30, 2008.
Non-Interest Income. Non-interest income
decreased $2.3 million, from $8.0 million during the nine months ended September
30, 2007 to $5.7 million during the nine months ended September 30,
2008. The decline resulted primarily from a reduction in net mortgage
banking income of $1.5 million attributable to provisions to net mortgage
banking income of $2.0 million recognized during the nine months ended September
30, 2008 for an increase to the reserve liability for losses on loans sold with
recourse. (See "Item 2 – Management's Discussion and Analysis of
Financial Condition and Results of Operations - Asset Quality" for a further
discussion of the provisions to the book reserve for losses on loans sold with
recourse). Partially offsetting these additional provisions was an
increase of $475,000 in the gain on sale of real estate loans component of
mortgage banking income during the comparative period, reflecting a gain of
$705,000 recognized on the sale of $113.3 million of multifamily loans to a
third party financial institution during the nine months ended September 30,
2008 that was partially offset by a decline of $259,000 in gains on sales of
multifamily loans to FNMA during the same period. (See "Item
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources" for a discussion of
loan sale activities during the nine months ended September 30, 2008 and
2007).
The Bank
additionally incurred a loss of $129,000 on a non-recurring sale of OREO
properties during the nine months ended September 30, 2008. There
were no sales of assets during the nine months ended September 30,
2007.
The
remainder of the decline in non-interest income resulted primarily from a
non-recurring $546,000 BOLI settlement the Bank received during the nine months
ended September 30, 2007, as well as lower loan inspection fee
income.
Non-Interest
Expense. Non-interest expense was $37.5 million during the
nine months ended September 30, 2008, an increase of $3.3 million from $34.2
million during the nine months ended September 30, 2007.
Salaries
and employee benefits increased $1.6 million during the comparative period as a
result of regular increases to existing employee compensation levels, along with
increases related to the additions of a management position in the Bank's
lending department and new management positions required for one completed and
one scheduled retail branch opening in 2008. Stock benefit plan
amortization expense increased $655,000, reflecting reflecting equity awards
granted to officers in July 2008 along with higher ESOP expense resulting from
an increase in the Holding Company's common stock price during the nine months
ended September 30, 2008 compared to the nine months ended September 30,
2007.
Occupancy
and equipment expense increased by $578,000 during the comparative period, due
primarily to the opening of the Borough Park branch in March 2008, along with a
substantial increase in the monthly rental cost of the Bank's Bronx branch
commencing in late 2007. Federal deposit insurance costs increased
$407,000 as a result of an insurance fund re-capitalization plan implemented by
the FDIC in late 2006.
Other
non-interest expenses increased $141,000, primarily as a result of additional
professional fees related to various consultation matters.
Non-interest
expense was 1.37% of average assets during the nine months ended September 30,
2008, compared to 1.41% during the nine months ended September 30,
2007. This ratio declined despite the increase in non-interest
expense during the comparative period due to growth of $419.9 million in average
assets.
Income Tax
Expense. Income tax expense increased $2.5 million during the
nine months ended September 30, 2008 compared to the nine months ended September
30, 2007, due to an increase of $8.2 million in pre-tax income during the
period. Partially offsetting this increase were non-recurring
reductions to income tax expense during the nine months ended September 30, 2008
of $662,000 from the reduction in the reserve for unrecognized tax benefits, and
$275,000 from adjustments related to completion of the June 2007 and December
2007 tax returns.
Outlook
for the Remainder of 2008
Please
refer to the section entitled "Outlook" in Exhibit 99 to the Current Report on
Form 8-K furnished to the SEC on October 27, 2008 for a discussion of the
Company's outlook for financial reporting periods subsequent to September 30,
2008.
Proposed
FDIC Recapitalization Plan and Its Impact Upon the Bank's Future Deposit
Insurance Costs
In
October 2008, the FDIC released a five-year re-capitalization plan that included
a proposal to raise deposit insurance premiums charged to financial institutions
such as the Bank by seven basis points commencing in the first quarter of
2009. Subsequent to this initial increase, the FDIC further proposes
a modification to its current risk-based premium assessment model that should
apply to all future premium payments made by the Bank. Under the
re-capitalization plan, financial institutions with the lowest risk assessment
under the risk-based premium assessment model will pay, commencing in the second
quarter of 2009, quarterly FDIC premiums ranging from 10 to 14 basis points in
accordance with the modified premium assessment model. In addition
under the re-capitalization plan, the FDIC proposes a separate quarterly
assessment premium for a financial institution whose ratio of secured
liabilities, including FHLBNY advances and REPOS, exceeds 15% of its domestic
deposits. This charge is calculated by multiplying the institution's
base assessment rate by one plus the ratio of its secured liabilities to
domestic deposits minus 0.15. Based upon the level of FHLBNY advances
and REPOS held by the Bank at September 30, 2008, it would be required to pay an
additional assessment premium under this formula. Should these
proposed increases in the Bank's future quarterly FDIC premium assessments
become effective as planned commencing in 2009, the Bank expects, based upon its
level of deposits and secured liabilities as of September 30, 2008, that its
annual FDIC insurance expense will increase in excess of 300% of its current
level.
Item
3.
Quantitative and Qualitative Disclosures About Market Risk
Quantitative
and qualitative disclosures about market risk were presented at December 31,
2007 in Item 7A of the Company's Annual Report on Form 10-K, filed with the SEC
on March 18, 2008. 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, 2008, 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,
2007 to September 30, 2008.
Interest Sensitivity
Gap. There was no material change in the computed one-year
interest sensitivity gap from December 31, 2007 to September 30,
2008.
Interest Rate Risk Exposure (Net
Portfolio Value) Compliance. At September 30, 2008, 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,
2007. 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, 2008 compared to December 31,
2007.
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, 2008 and December 31, 2007. The analysis additionally
presents a measurement of the interest rate sensitivity at September 30, 2008
and December 31, 2007. Interest rate sensitivity is measured by the
basis point changes in the various NPV ratios ("NPV Ratios") from the Pre-Shock
Scenario to the Rate Shock Scenarios. NPV Ratios represent the NPV as
a percentage of the total value of assets determined under each respective Pre-
and Rate Shock Scenario. An increase in the NPV Ratio is considered
favorable, while a decline is considered unfavorable.
|
At
September 30, 2008
|
|
|
|
|
Net
Portfolio Value
|
|
|
|
|
At
December 31, 2007
|
|
|
Dollar
Amount
|
Dollar
Change
|
Percentage
Change
|
|
NPV
Ratio
|
Basis
Point Change in NPV Ratio
|
|
NPV
Dollar
Amount
|
NPV
Ratio
|
Basis
Point Change in NPV Ratio
|
Board
Approved NPV Ratio Limit
|
|
(Dollars
in thousands)
|
|
Rate
Shock Scenario
|
|
|
|
|
|
|
|
|
|
|
|
+
200 Basis Points
|
250,651
|
$(64,495)
|
-20.47%
|
|
6.82%
|
(148)
|
|
$263,704
|
7.79%
|
(211)
|
6.0%
|
+
100 Basis Points
|
287,203
|
(27,943)
|
-8.87
|
|
7.69
|
(61)
|
|
310,161
|
9.00
|
(90)
|
7.0
|
Pre-Shock
Scenario
|
315,146
|
-
|
-
|
|
8.30
|
-
|
|
346,924
|
9.90
|
-
|
8.0
|
-
100 Basis Points
|
331,838
|
16,692
|
5.30
|
|
8.62
|
32
|
|
364,169
|
10.25
|
35
|
8.0
|
-
200 Basis Points
|
N/A
|
N/A
|
N/A
|
|
N/A
|
N/A
|
|
363,913
|
10.14
|
24
|
8.0
|
The NPVs
presented above incorporate some asset and liability values derived from the
Bank’s valuation model, such as those for mortgage loans and time deposits, and
some asset and liability values that are provided by reputable independent
sources, such as values for the Bank's MBS and CMO portfolios, as well as its
putable borrowings. The Bank's valuation model makes various
estimates regarding cash flows from principal repayments on loans and passbook
deposit balance decay rates at each level of interest rate
change. The Bank's estimates for loan repayment levels are influenced
by the recent history of prepayment activity in its loan portfolio as well as
the interest rate composition of the existing portfolio, especially vis-à-vis
the current interest rate environment. In addition, the Bank
considers the amount of fee protection inherent in the loan portfolio when
estimating future repayment cash flows. Regarding passbook deposit
decay rates, the Bank tracks and analyzes the decay rate of its passbook
deposits over time and over various interest rate scenarios and then makes
estimates of its passbook deposit decay rate for use in the valuation
model. No matter the care and precision with which the estimates are
derived, actual cash flows for passbooks, as well as loans, 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 $346.9 million at December 31, 2007 to
$315.1 million at September 30, 2008. The NPV Ratio at September 30,
2008 was 8.30% in the Pre-Shock Scenario, a decrease from the NPV Ratio of 9.90%
in that Scenario at December 31, 2007. The decrease in the Pre-Shock
Scenario NPV was due primarily to an increase in the valuation of borrowings
(which negatively impact NPV) that resulted from both increased volume and from
declines in short and medium-term term interest rates at September 30, 2008
compared to December 31, 2007. This was partially offset by an
increase in the valuation of real estate loans during the same period, resulting
primarily from the advance of the loans to their contractual interest rate
repricing dates (thus favorably impacting their valuation).
The
Bank’s +200 basis point Rate Shock Scenario NPV decreased from $263.7 million at
December 31, 2007 to $250.6 million at September 30, 2008. The
decrease resulted primarily from the growth in the loan portfolio during the
nine months ended September 30, 2008, including the loan commitment pipeline at
September 30, 2008. The combination of growth in the loan portfolio
that resulted from the new loans originated during the nine months ended
September 30, 2008, and the loan commitment pipeline at September 30, 2008
created a longer term to next interest rate repricing for assets at September
30, 2008 compared to December 31, 2007. Assets with a longer term to
next interest rate repricing generate a less favorable NPV in a rising rate
interest rate environment. As a result, the decline in the NPV of
total assets from the Pre- Shock Scenario to the +200 basis point Rate Shock
Scenario was greater at September 30, 2008 than December 31,
2007.
The NPV
Ratio was 6.82% in the +200 basis point Rate Shock Scenario at September 30,
2008, a decrease from the NPV Ratio of 7.79% in the +200 basis point Rate Shock
Scenario at December 31, 2007. The decrease reflected the
aforementioned decrease in the +200 basis point Rate Shock Scenario NPV during
the comparative period.
At
September 30, 2008, the interest rate sensitivity (i.e., the basis point change
in the NPV Ratio calculated under the various Rate Shock Scenarios compared to
the Pre-Shock Scenario) in the +200 basis point Rate Shock Scenario was negative
148 basis points, compared to interest rate sensitivity of negative 211 basis
points in the +200 basis point Rate Shock Scenario at December 31,
2007. The reduction in sensitivity was due primarily to the favorable
valuation of borrowings in the +200 basis point Rate Shock Scenario NPV compared
to the Pre-Shock Scenario NPV at September 30, 2008 compared to December 31,
2007. This favorable valuation resulted from an increase in the
average contractual term to next interest rate repricing on the Bank's
borrowings as a result of borrowings added during the nine months ended
September 30, 2008, as well as interest rate caps purchased with a portion of
the borrowings added during the period that provide protection in the event that
interest rates rise.
Item
4. Controls and Procedures
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, 2008, 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, 2008 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.
PART
II – OTHER INFORMATION
Item
1. Legal
Proceedings
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.
Item
1A. Risk Factors
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, 2007.
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds
(c)
|
The
Holding Company did not repurchase any shares of its common stock into
treasury during the three months ended September 30, 2008. No
existing repurchase programs expired during the three months ended
September 30, 2008, nor did the Company terminate any repurchase programs
prior to expiration during the quarter. As of September
30, 2008, the Company had an additional 1,124,549 shares remaining
eligible for repurchase under its twelfth stock repurchase program, which
was publicly announced in June
2007.
|
Item
3. Defaults
Upon Senior Securities
None.
Item
4. Submission
of Matters to a Vote of Security Holders
None.
Item
5. Other
Information
None.
Exhibit
Number
3(i)
|
|
Amended
and Restated Certificate of Incorporation of Dime Community Bancshares,
Inc. (1)
|
3(ii)
|
|
Amended
and Restated Bylaws of Dime Community Bancshares, Inc.
(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 (15)
|
10.22
|
|
Waiver
executed by Vincent F. Palagiano (12)
|
10.23
|
|
Waiver
executed by Michael P. Devine (12)
|
10.24
|
|
Waiver
executed by Kenneth J. Mahon (12)
|
10.25
|
|
Form
of restricted stock award notice for officers and employees under the 2004
Stock Incentive Plan (11)
|
10.26
|
|
Employee
Retention Agreement between The Dime Savings Bank of Williamsburgh , Dime
Community Bancshares, Inc. and Christopher D. Maher
(13)
|
10.27
|
|
Form
of restricted stock award notice for outside directors under the 2004
Stock Incentive Plan (11)
|
10.28
|
|
Employee
Retention Agreement between The Dime Savings Bank of Williamsburgh, Dime
Community Bancshares, Inc. and Daniel Harris
(14)
|
10.29
|
|
Dime
Community Bancshares, Inc. Annual 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 Current Report on Form 8-K filed on March
22, 2005.
|
(12)
|
Incorporated
by reference to the registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2005 filed on May 10, 2005.
|
(13)
|
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.
|
(14)
|
Incorporated
by reference to the registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2008 filed on May 12, 2008.
|
(15)
|
Incorporated
by reference to the registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2008 filed on August 8,
2008.
|
SIGNATURES
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 5, 2008
|
|
By: /s/ VINCENT F.
PALAGIANO
|
|
|
Vincent
F. Palagiano
|
|
|
Chairman
of the Board and Chief Executive
Officer
|
Dated:
November 5, 2008
|
|
By: /s/ KENNETH J. MAHON
|
|
|
Kenneth
J. Mahon
|
|
|
First
Executive Vice President and Chief Financial Officer (Principal Accounting
Officer)
|