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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

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FORM 10-Q

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☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2017

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

 

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N/A

(Former name or former address, if changed since last report)

Delaware (State or other jurisdiction of incorporation or organization)		11-3297463 (I.R.S. employer identification number)
300 Cadman Plaza West, 8th Floor, Brooklyn, NY  (Address of principal executive offices)		11201 (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   ☒

NO  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES  ☒

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, or an emerging growth company.  See definitions of "large accelerated filer," "accelerated filer" "smaller reporting company" and “emerging growth company” in Rule 12b-2 of the Exchange Act.

LARGE ACCELERATED FILER  ☐	ACCELERATED FILER  ☒
NON -ACCELERATED FILER  ☐	(Do not check if a smaller reporting company)
	SMALLER REPORTING COMPANY  ☐
	EMERGING GROWTH COMPANY  ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES  ☐

NO  ☒

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 August 7, 2017
$.01 Par Value	37,446,742

 

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		Page
	PART I – FINANCIAL INFORMATION
Item 1.	Unaudited Condensed Consolidated Financial Statements
	Consolidated Statements of Financial Condition at June 30, 2017 and December 31, 2016	3
	Consolidated Statements of Income for the Three-Month and Six-Month Periods Ended June 30, 2017 and 2016	4
	Consolidated Statements of Comprehensive Income for the Three-Month and Six-Month Periods Ended June 30, 2017 and 2016	4
	Consolidated Statements of Changes in Stockholders' Equity for the Three-Month and Six-Month Periods Ended  June 30, 2017 and 2016	5
	Consolidated Statements of Cash Flows for the Six-Month Periods Ended June 30, 2017 and 2016	6
	Notes to Unaudited Condensed Consolidated Financial Statements	7-29
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	30-43
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	43-44
Item 4.	Controls and Procedures	44
	PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	45
Item 1A.	Risk Factors	45
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45
Item 3.	Defaults Upon Senior Securities	45
Item 5.	Other Information	45
Item 6.	Exhibits	45-48
	Signatures	49

 

Cautionary Note Regarding Forward-Looking Statements

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," “continue,” "could," "estimate," "expect," “impact,” "intend," "seek," "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 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 conditions or results to differ materially from those expressed or implied by such forward-looking statements. Accordingly, you should not place undue reliance on such 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;

·

the net interest margin is subject to material short-term fluctuation based upon market rates;

·

changes in deposit flows, loan demand or real estate values may adversely affect the business of Dime Community Bank  (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 business or financial condition;

·

general economic conditions, either nationally or locally in some or all areas in which the Company conducts business, or conditions in the securities markets or the banking industry may be less favorable than the Company currently anticipates;

·

legislative or regulatory changes may adversely affect the Company’s business;

·

technological changes may be more difficult or expensive than the Company  anticipates;

·

our ability to successfully integrate acquired entities, if any;

·

breaches, failures and interruptions in IT systems and IT security;

·

ability to retain key employees/executive management team;

·

success or consummation of new business initiatives may be more difficult or expensive than the Company anticipates;

·

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; and

·

the risks referred to in the section entitled "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2016 as updated by our Quarterly Reports on Form 10-Q.

The Company has no obligation to update any forward-looking statements to reflect events or circumstances after the date of this document.

 

Item 1.

Condensed Consolidated Financial Statements

DIME COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)

(Dollars in thousands except share amounts)

		June 30, 2017				December 31, 2016
ASSETS:
Cash and due from banks		$	110,044			$	113,503
Investment securities held-to-maturity (estimated fair value of $8,385 and $7,296 at June 30, 2017 and December 31, 2016, respectively) (Fully unencumbered)			5,315				5,378
Investment securities available-for-sale, at fair value (Fully unencumbered)			4,049				3,895
Mortgage-backed securities (“MBS”) available-for-sale, at fair value (Fully unencumbered)			3,496				3,558
Trading securities			2,687				6,953
Loans:
Real estate, net			5,806,933				5,633,007
Commercial and industrial (“C&I”) loans			68,199				2,058
Other loans			1,749				1,357
Less allowance for loan losses			(21,985	)			(20,536	)
Total loans, net			5,854,896				5,615,886
Premises and fixed assets, net			22,315				18,405
Premises held for sale			1,379				1,379
Federal Home Loan Bank of New York ("FHLBNY") capital stock			50,961				44,444
Bank Owned Life Insurance (“BOLI”)			87,424				86,328
Goodwill			55,638				55,638
Other assets			59,980				50,063
Total Assets		$	6,258,184			$	6,005,430
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Due to depositors:
Interest bearing deposits		$	4,105,129			$	4,097,992
Non-interest bearing deposits			313,351				297,434
Total deposits			4,418,480				4,395,426
Escrow and other deposits			91,196				103,001
FHLBNY advances			944,575				831,125
Subordinated notes payable			113,545				-
Trust Preferred securities payable			70,680				70,680
Other liabilities			39,260				39,330
Total Liabilities			5,677,736				5,439,562
Stockholders' Equity:
Preferred stock ($0.01 par, 9,000,000 shares authorized, none issued or outstanding at June 30, 2017 and December 31, 2016)			-				-
Common stock ($0.01 par, 125,000,000 shares authorized, 53,614,924 shares and 53,572,745 shares issued at June 30, 2017 and December 31, 2016, respectively, and 37,675,379 shares and 37,455,853 shares outstanding at June 30, 2017 and December 31, 2016, respectively)			536				536
Additional paid-in capital			280,453				278,356
Retained earnings			516,165				503,539
Accumulated other comprehensive loss, net of deferred taxes			(5,647	)			(5,939	)
Unearned stock award common stock			(4,433	)			(1,932	)
Holding Company common stock held by Benefit Maintenance Plan ("BMP")			(7,029	)			(6,859	)
Treasury stock, at cost (15,939,545 shares and 16,116,892 shares at June 30, 2017 and December 31, 2016, respectively)			(199,597	)			(201,833	)
Total Stockholders' Equity			580,448				565,868
Total Liabilities And Stockholders' Equity		$	6,258,184			$	6,005,430

See notes to unaudited condensed consolidated financial statements.

 

DIME COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(Dollars in thousands except per share amounts)

		Three Months Ended June 30,								Six Months Ended June 30,
		2017				2016				2017				2016
Interest income:
Loans secured by real estate		$	51,137			$	47,358			$	101,612			$	93,009
C&I loans			474				6				515				11
Other loans			18				18				36				37
MBS			14				2				28				4
Investment securities			164				265				354				438
Other short-term investments			611				721				1,328				1,382
Total interest  income			52,418				48,370				103,873				94,881
Interest expense:
Deposits and escrow			9,509				7,597				19,016				14,391
Borrowed funds			4,856				5,163				9,317				10,249
Total interest expense			14,365				12,760				28,333				24,640
Net interest income			38,053				35,610				75,540				70,241
Provision for loan losses			1,047				442				1,497				421
Net interest income after provision for loan losses			37,006				35,168				74,043				69,820
Non-interest income:
Service charges and other fees			919				758				1,713				1,443
Net mortgage banking income			65				27				81				55
Net gain on securities and other assets			59				33				134				79
Net (loss) gain on the sale of premises held for sale			-				(4	)			-				68,183
Income from BOLI			551				1,043				1,096				1,603
Other			153				448				501				683
Total non-interest income			1,747				2,305				3,525				72,046
Non-interest expense:
Salaries and employee benefits			9,341				9,532				19,661				19,240
Occupancy and equipment			3,500				3,115				7,128				5,742
Data processing costs			1,503				1,256				3,110				2,451
Marketing			1,466				1,178				2,932				2,355
Federal deposit insurance premiums			712				581				1,367				1,320
Other			2,947				2,430				6,040				4,853
Total non-interest expense			19,469				18,092				40,238				35,961
Income before income taxes			19,284				19,381				37,330				105,905
Income tax expense			7,295				8,173				14,184				44,660
Net income		$	11,989			$	11,208			$	23,146			$	61,245
Earnings per Share:
Basic		$	0.32			$	0.30			$	0.62			$	1.67
Diluted		$	0.32			$	0.30			$	0.61			$	1.67

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(Dollars in thousands except per share amounts)

		Three Months Ended June 30,								Six Months Ended June 30,
		2017				2016				2017				2016
Net Income		$	11,989			$	11,208			$	23,146			$	61,245
Other comprehensive income:
Change in unrealized holding loss on securities held-to-maturity and transferred securities			30				22				64				41
Change in unrealized holding loss on securities available-for-sale			104				47				224				62
Change in pension and other postretirement obligations			355				425				657				850
Change in unrealized gain on derivatives			(733	)			(957	)			(418	)			(957	)
Other comprehensive gain before income taxes			(244	)			(463	)			527				(4	)
Deferred tax expense (benefit)			(111	)			(209	)			235				(2	)
Other comprehensive income (loss), net of tax			(133	)			(254	)			292				(2	)
Total comprehensive income			11,856				10,954				23,438				61,243

 

See notes to unaudited condensed consolidated financial statements.

 

DIME COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

 (Dollars in thousands)

 

	Six Months ended June 30, 2017
	Number of Shares				Common Stock				Additional Paid-in Capital				Retained Earnings				Accumulated Other Comprehensive Loss, Net of Deferred Taxes				Unallocated Common Stock of ESOP				Unearned Stock Award Common Stock				Common Stock Held by BMP				Treasury Stock, at cost				Total Stockholders’ Equity
Beginning balance as of January 1, 2017			37,455,853			$	536			$	278,356			$	503,539			$	(5,939	)		$	-			$	(1,932	)		$	(6,859	)		$	(201,833	)		$	565,868
Net Income			-				-				-				23,146				-				-				-				-				-				23,146
Other comprehensive income, net of tax			-				-				-				-				292				-				-				-				-				292
Exercise of stock options			42,179				-				626				-				-				-				-				-				-				626
Release of shares, net of forfeitures			177,347				-				1,471				-				-				-				(3,339	)			(170	)			2,236				198
Stock-based compensation			-				-				-				-				-				-				838				-				-				838
Cash dividends declared and paid			-				-				-				(10,520	)			-				-				-				-				-				(10,520	)
Ending balance as of June 30, 2017			37,675,379			$	536			$	280,453			$	516,165			$	(5,647	)		$	-			$	(4,433	)		$	(7,029	)		$	(199,597	)		$	580,448
	Six Months ended June 30, 2016
	Number of Shares				Common Stock				Additional Paid-in Capital				Retained Earnings				Accumulated Other Comprehensive Loss, Net of Deferred Taxes				Unallocated Common Stock of ESOP				Unearned Stock Award Common Stock				Common Stock Held by BMP				Treasury Stock, at cost				Total Stockholders’ Equity
Beginning balance as of January 1, 2016			37,371,992			$	533			$	262,798			$	451,606			$	(8,801	)		$	(2,313	)		$	(2,271	)		$	(9,354	)		$	(198,251	)		$	493,947
Net Income			-				-				-				61,245				-				-				-				-				-				61,245
Other comprehensive loss, net of tax			-				-				-				-				(2	)			-				-				-				-				(2	)
Exercise of stock options			193,828				2				2,898				-				-				-				-				-				-				2,900
Release of shares, net of forfeitures			88,951				-				727				-				-				-				(1,311	)			(222	)			1,105				299
Stock-based compensation			-				-				561				-				-				115				828				-				-				1,504
Cash dividends declared and paid			-				-				-				(10,282	)			-				-				-				-				-				(10,282	)
Ending balance as of June 30, 2016			37,654,771			$	535			$	266,984			$	502,569			$	(8,803	)		$	(2,198	)		$	(2,754	)		$	(9,576	)		$	(197,146	)		$	549,611

See notes to unaudited condensed consolidated financial statements.

 

DIME COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands)

 

		Six Months Ended June 30,
		2017				2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income		$	23,146			$	61,245
Adjustments to reconcile net income to net cash provided by operating activities:
Net gain recognized on trading securities			(134	)			(39	)
Net gain on the sale of other real estate owned (“OREO”)			-				(40	)
Net gain on sale of premises held for sale			-				(68,183	)
Net depreciation, amortization and accretion			1,836				1,086
Stock plan compensation [excluding Employee Stock Ownership Plan (“ESOP”)]			838				943
ESOP compensation expense			-				561
Provision for loan losses			1,497				421
Increase in cash surrender value of BOLI			(1,096	)			(1,119	)
Income recognized from mortality benefit on BOLI			-				(484	)
Deferred income tax  provision			6				615
Reduction in credit related other than temporary impairment (“OTTI”) amortized through interest income			(52	)			(52	)
Excess tax benefit from stock benefit plans			-				(142	)
Changes in assets and liabilities:
Increase in other assets			(10,488	)			(4,094	)
Increase in other liabilities			499				6,038
Net cash provided by (used in) Operating activities			16,052				(3,244	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investment securities available-for-sale			101				-
Purchases of investment securities available-for-sale			(37	)			(19	)
Proceeds from the sales of trading securities			4,544				3,648
Purchases of trading securities			(144	)			(222	)
Proceeds from calls and principal repayments of MBS available-for-sale			28				25
Proceeds from the sale of loans			393				-
Purchases of loans			-				(152,637	)
Loans originated, net of repayments			(240,900	)			(359,730	)
Proceeds from sale of OREO			-				170
Proceeds from surrender of cash surrender value of BOLI			-				1,425
Net proceeds from the sale of premises held for sale			-				75,899
Net purchases of fixed assets			(5,527	)			(16	)
Redemption of FHLBNY capital stock, net			(6,517	)			5,899
Net cash used in Investing Activities			(248,059	)			(425,558	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in due to depositors			23,054				595,956
Increase (decrease) in escrow and other deposits			(11,805	)			15,160
Repayments of FHLBNY advances			(1,359,500	)			(2,402,500	)
Proceeds from FHLBNY advances			1,472,950				2,252,900
Proceeds from exercise of stock options			626				2,900
Excess tax benefit from stock benefit plans			-				142
Release of stock for benefit plan awards			198				299
Cash dividends paid to stockholders			(10,520	)			(10,282	)
Proceeds from Subordinated debt issuance, net			113,545				-
Net cash provided by Financing Activities			228,548				454,575
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			(3,459	)			25,773
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			113,503				64,154
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	110,044			$	89,927
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes		$	20,912			$	29,100
Cash paid for interest			28,124				11,770
Transfer of premises to held for sale			-				1,379
Amortization of unrealized loss on securities transferred from available-for-sale to held-to-maturity			47				25
Net decrease in non-credit component of OTTI			17				16

See notes to unaudited condensed consolidated financial statements.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in Thousands Except Per Share Amounts)

1.   NATURE OF OPERATIONS

Dime Community Bancshares (the “Company”), is a Delaware corporation headquartered in the Brooklyn Heights neighborhood of Brooklyn, New York. The Company was organized in 1996 and is registered as a savings and loan holding company with the Board of Governors of the Federal Reserve System pursuant to section 10(l) of the Home Owners’ Loan Act, as amended. As of June 30, 2017, the Holding Company's direct subsidiaries were Dime Community Bank, 842 Manhattan Avenue Corp., and Dime Community Capital Trust 1. The Company engages in commercial banking and financial services through its wholly-owned banking subsidiary, Dime Community Bank. In 2004, the Company formed Dime Community Capital Trust I as a subsidiary, which issued $72.2 million of 7.0% trust preferred securities, $70.7 million of which remained outstanding at June 30, 2017. The Company’s common stock is traded on the Nasdaq Global Market under the symbol “DCOM.”

 

Dime Community Bank, a New York-chartered stock savings bank formerly known as The Dime Savings Bank of Williamsburgh, was founded in 1864 and operates 27 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 is gathering deposits from customers within its market area and via the internet, and investing them primarily in multifamily residential, commercial real estate, mixed use, and, to a lesser extent, commercial and industrial (“C&I”) loans, mortgage-backed securities, obligations of the U.S. government and government sponsored enterprises, and corporate debt and equity securities. The substantial majority of the Bank’s lending occurs in the greater New York City metropolitan area. The Bank has four active subsidiaries, including two real estate investment trusts that hold one- to four-family and multifamily residential and commercial real estate loans; Dime Insurance Agency, which engages in general insurance agency activities; and Boulevard Funding Corporation, which holds and manages real estate.

2.   SUMMARY OF ACCOUNTING POLICIES

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary for a fair presentation of the Company's financial condition as of June 30, 2017 and December 31, 2016, the results of operations and statements of comprehensive income for the three-month and six-month periods ended June 30, 2017 and 2016, and the changes in stockholders' equity and cash flows for the six-month periods ended June 30, 2017 and 2016.  The results of operations for the three-month and six-month period ended June 30, 2017 are not necessarily indicative of the results of operations for the remainder of the year ending December 31, 2017.  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 condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Please see "Part I - Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies" for a discussion of areas in the accompanying unaudited condensed consolidated financial statements utilizing significant estimates.

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, 2016 and notes thereto.

 

3.   RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606).  ASU 2014-09 impacts any entity that either enters into contracts with customers to transfer goods or services, or that enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance or lease contracts).  Under ASU 2014-09, an entity is required to recognize revenue for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  ASU 2014-09 also requires disclosure of sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, as well as qualitative and quantitative disclosure related to contracts with certain customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract.  In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal Versus Agent Consideration - Reporting Revenue Gross Versus Net. The objective of the ASU is to align the recognition of revenue with the transfer of promised goods or services provided to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments in this ASU affect the guidance in ASU 2014-09, which is not yet effective.  Both ASU 2014-09 and the amendment are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The Company is evaluating the potential impact of ASU 2014-09 and the amendment on its consolidated financial statements, however, it is not presently expected to have a material impact.

In January 2016, the FASB issued ASU 2016-01, an amendment to Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10). The objectives of the ASU are to: (1) require equity investments to be measured at fair value, with changes in fair value recognized in net income, (2) simplify the impairment assessment of equity investments without readily determinable fair values, (3) eliminate the requirement to disclose methods and significant assumptions used to estimate fair value for financial instruments measured at amortized cost on the balance sheet, (4) require the use of the exit price notion when measuring the fair value of financial instruments, and (5) clarify the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The amendments in this ASU are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The Company is evaluating the potential impact of ASU 2016-01 on its consolidated financial statements, however, it is not presently expected to have a material impact.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires companies that lease valuable assets to recognize on their balance sheets the assets and liabilities generated by contracts longer than a year. The amendments in this update are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018, however, early adoption is permitted. The Company is evaluating the potential impact of ASU 2016-02 on its consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326), which requires that the measurement of all expected credit losses for financial assets held at the reporting date be based on historical experience, current condition, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. This guidance also amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For the Company, this guidance is effective for fiscal years and interim periods beginning after December 31, 2019. The Company has established a committee that is assessing system requirements, gathering data, and evaluating the impact of the ASU on its consolidated financial statements. The Company expects to recognize a one-time cumulative effect increase to the allowance for loan losses as of the beginning of the reporting period in which the ASU takes effect, however, cannot yet determine the magnitude of the impact on the consolidated financial statements.

In March 2017, the FASB issued ASU 2017-07, Compensation – Retirement Benefits (Topic 715). ASU 2017-07 requires companies that offer employee defined pension plans, other postretirement benefit plans, or other types of benefit plans accounted for under Topic 715 to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented.  The amendments in this update are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, however, early adoption is permitted. The adoption of ASU 2017-07 will not have a material impact on the Company’s consolidated financial statements.

 

In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. ASU 2017-08 shortens the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments in this update are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018, however, early adoption is permitted. The adoption of ASU 2017-08 will not have a material impact on the Company’s consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting. The amendments in ASU 2017-09 provide guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting. The amendments in this update are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, however, early adoption is permitted. The adoption of ASU 2017-09 is currently not expected to have a material impact on the Company’s consolidated financial statements.

4.   OTHER COMPREHENSIVE INCOME (LOSS)

Activity in accumulated other comprehensive income (loss), net of tax, was as follows:

		Securities Held- to-Maturity and Transferred Securities				Securities Available-for- Sale				Defined Benefit Plans				Derivative Asset				Total Accumulated Other Comprehensive Gain (Loss)
Balance as of January 1, 2017		$	(713	)		$	(92	)		$	(6,910	)		$	1,776			$	(5,939	)
Other comprehensive income before reclassifications			36				125				(7	)			(331	)			(177	)
Amounts reclassified from accumulated other comprehensive loss			-				-				372				97				469
Net other comprehensive income during the period			36				125				365				(234	)			292
Balance as of June 30, 2017		$	(677	)		$	33			$	(6,545	)		$	1,542			$	(5,647	)
Balance as of January 1, 2016		$	(760	)		$	(122	)		$	(7,919	)		$	-			$	(8,801	)
Other comprehensive income before reclassifications			22				34				-				(526	)			(470	)
Amounts reclassified from accumulated other comprehensive loss			-				-				468				-				468
Net other comprehensive income during the period			22				34				468				(526	)			(2	)
Balance as of June 30, 2016		$	(738	)		$	(88	)		$	(7,451	)		$	(526	)		$	(8,803	)

 

The before and after tax amounts allocated to each component of other comprehensive income (loss) are presented in the table below.  Reclassification adjustments related to securities available-for-sale are included in the line entitled net gain (loss) on securities and other assets in the accompanying condensed consolidated statements of income. Reclassification adjustments related to the defined benefit plan are included in the line entitled salaries and employee benefits.

		Three Months Ended June 30,								Six Months Ended June 30,
		2017				2016				2017				2016
Change in unrealized holding loss on securities held-to-maturity and transferred securities:
Accretion of previously recognized non-credit component of OTTI		$	8			$	8			$	17			$	16
Change in unrealized loss on securities transferred to held-to-maturity			22				14				47				25
Net change			30				22				64				41
Tax expense			12				10				28				19
Net change in unrealized holding loss on securities held-to-maturity and transferred securities			18				12				36				22
Change in unrealized holding gain on securities available-for-sale:
Change in net unrealized gain during the period			104				47				224				62
Tax expense			44				21				99				28
Net change in unrealized holding gain on securities available-for-sale			60				26				125				34
Change in pension and other postretirement obligations:
Reclassification adjustment for expense included in salaries and employee benefits expense			355				425				657				850
Tax expense			161				191				292				382
Net change in pension and other postretirement obligations			194				234				365				468
Change in unrealized loss on derivative liability:
Change in net unrealized loss during the period			(825	)			(998	)			(597	)			(998	)
Reclassification adjustment for expense included in interest expense			92				41				179				41
Net change			(733	)			(957	)			(418	)			(957	)
Tax benefit			(328	)			(431	)			(184	)			(431	)
Net change in unrealized loss on derivative liability			(405	)			(526	)			(234	)			(526	)
Other comprehensive income (loss)		$	(133	)		$	(254	)		$	292			$	(2	)

5.   EARNINGS PER SHARE ("EPS")

Basic EPS is computed by dividing net income by the weighted-average common shares outstanding during the reporting period.  Diluted EPS is computed using the same method as basic EPS, but reflects the potential dilution that would occur if "in the money" stock options were exercised and converted into common stock, and likely aggregate Long-term Incentive Plan (“LTIP”) share payout.  In determining the weighted average shares outstanding for basic and diluted EPS, treasury shares, and (until the period ended September 30, 2016) unallocated ESOP shares, are excluded.  Vested restricted stock award (“RSA”) shares are included in the calculation of the weighted average shares outstanding for basic and diluted EPS.  Unvested RSA shares and LTIP shares not yet awarded are recognized as a special class of participating securities under ASC 260.

The following is a reconciliation of the numerators and denominators of basic and diluted EPS for the periods presented:

		Three Months Ended June 30,								Six Months Ended June 30,
		2017				2016				2017				2016
Net income per the Consolidated Statements of Income		$	11,989			$	11,208			$	23,146			$	61,245
Less: Dividends paid and earnings allocated to participating securities			(38	)			(24	)			(63	)			(55	)
Income attributable to common stock		$	11,951			$	11,184			$	23,083			$	61,190
Weighted average common shares outstanding, including participating securities			37,733,956				36,946,082				37,670,585				36,874,535
Less: weighted average participating securities			(179,346	)			(192,525	)			(166,398	)			(202,885	)
Weighted average common shares outstanding			37,554,610				36,753,557				37,504,187				36,671,650
Basic EPS		$	0.32			$	0.30			$	0.62			$	1.67
Income attributable to common stock		$	11,951			$	11,184			$	23,083			$	61,190
Weighted average common shares outstanding			37,554,610				36,753,557				37,504,187				36,671,650
Weighted average common equivalent shares outstanding			81,188				65,028				86,011				69,420
Weighted average common and equivalent shares outstanding			37,635,798				36,818,585				37,590,198				36,741,070
Diluted EPS		$	0.32			$	0.30			$	0.61			$	1.67

 

Common and equivalent shares 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 common stock over the exercise price of outstanding in-the-money stock options during the period.

There were no “out-of-the-money” stock options during the three-month or six-month periods ended June 30, 2017. There were 80,000 weighted-average stock options outstanding for the three-month and six-month periods ended June 30, 2016 which were not considered in the calculation of diluted EPS since their exercise prices exceeded the average market price during the period.

For information about the calculation of likely aggregate LTIP share payout, see Note 6.

6.   ACCOUNTING FOR STOCK BASED COMPENSATION

The Company maintains the Dime Community Bancshares, Inc. 2001 Stock Option Plan for Outside Directors, Officers and Employees, the 2004 Stock Incentive Plan and the 2013 Equity and Incentive Plan (“2013 Equity Plan”) (collectively, the "Stock Plans"), which are discussed more fully in Note 15 to the Company's audited consolidated financial statements for the year ended December 31, 2016, and which are subject to the accounting requirements of ASC 505-50 and ASC 718.

Stock Option Awards

The following table presents a summary of activity related to stock options granted under the Stock Plans, and changes during the six-month period then ended:

		Number of Options				Weighted-Average Exercise Price				Weighted-Average Remaining Contractual Years				Aggregate Intrinsic Value
Options outstanding at January 1, 2017			209,254			$	15.48
Options granted			-				-
Options exercised			(42,179	)			14.87
Options outstanding at June 30, 2017			167,075			$	15.64				2.1			$	662
Options vested and exercisable at June 30, 2017			167,075			$	15.64				2.1			$	662

Information related to stock options during each period is as follows:

		At or for the Three Months Ended June 30,								At or for the Six Months Ended June 30,
		2017				2016				2017				2016
Cash received for option exercise cost		$	2			$	2,900			$	626			$	2,900
Income tax benefit recognized on stock option exercises(1)			-				64				69				64
Intrinsic value of options exercised			1				732				276				732

(1)	Effective January 1, 2017, income tax benefits were recognized as discrete items in income tax expense in accordance to ASU 2016-09. Prior to January, 1, 2017, income tax benefits were recognized through additional paid in capital.

There were no grants of stock options during the three-month or six-month periods ended June 30, 2017 or 2016. All stock options are fully vested at both June 30, 2017 and 2016.

Restricted Stock Awards

The Company has made RSA grants to outside Directors and certain officers under the 2004 Stock Incentive Plan or 2013 Equity and Incentive Plan. Typically, awards to outside Directors fully vest on the first anniversary of the grant date, while awards to officers may vest in equal annual installments over a four-year period or at the end of the four-year requisite period.

 

The following table presents a summary of activity related to the RSAs granted, and changes during the three-month period then ended:

		Number of Shares				Weighted-Average Grant-Date Fair Value
Unvested allocated shares outstanding at January 1, 2017			152,409			$	16.56
Shares granted			121,857				19.60
Shares vested			(82,520	)			16.34
Shares forfeited			(16,448	)			17.24
Unvested allocated shares at June 30, 2017			175,298			$	18.71

All awards were made at the fair value of the Holding Company’s common stock (i.e., the closing price on the NASDAQ market as of the close of business) on the award date. Compensation expense is based upon the fair value of the shares on the respective dates of the grant.

Information related to RSAs during each period is as follows:

		At or for the Three Months Ended June 30,								At or for the Six Months Ended June 30,
		2017				2016				2017				2016
Compensation expense recognized		$	370			$	390			$	666			$	828
Income tax benefit recognized on vesting of RSA(1)			114				77				116				78

(1)	Effective January 1, 2017, income tax benefits were recognized as discrete items in income tax expense in accordance to ASU 2016-09. Prior to January, 1, 2017, income tax benefits were recognized through additional paid in capital.

As of June 30, 2017, unrecognized compensation cost relating to unvested restricted shares totaled $2,998. This amount will be recognized over a remaining weighted average period of 2.89 years.

Performance Based Equity Awards

The Company established the LTIP, a long term incentive award program for certain officers, that meets the criteria for equity-based accounting.  For each award, threshold (50% of target), target (100% of target) and maximum (150% of target) opportunities are eligible to be earned over a three-year performance period based on the Company's relative performance on certain goals that were established at the onset of the performance period and cannot be altered subsequently.  Shares of the Holding Company’s common stock are issued on the grant date and held as unvested stock awards until the end of the performance period. They are issued at the maximum opportunity in order to ensure that an adequate number of shares are allocated for shares expected to vest at the end of the performance period.

The following table presents a summary of activity related to performance based equity awards, and changes during the three-month period then ended:

		Number of Shares				Weighted-Average Grant-Date Fair Value
Maximum aggregate share payout at January 1, 2017			24,730			$	17.35
Shares granted			71,976				19.75
Shares forfeited			(10,010	)			18.73
Maximum aggregate share payout at June 30, 2017			86,696			$	19.18
Minimum aggregate share payout			-				-
Likely aggregate share payout			49,974			$	19.47

Compensation expense recorded for performance based equity awards was $76 and $21 for the three-month periods ended June 30, 2017 and 2016, respectively.  Compensation expense recorded for performance based equity awards was $172 and $48 for the six-month periods ended June 30, 2017 and 2016, respectively.

 

7.   LOANS RECEIVABLE AND CREDIT QUALITY

Loans are reported at the principal amount outstanding, net of unearned fees or costs and the allowance for loan losses.  Interest income on loans is recorded using the level yield method.  Under this method, discount accretion and premium amortization are included in interest income.  Loan origination fees and certain direct loan origination costs are deferred and amortized as yield adjustments over the contractual loan terms.

Credit Quality Indicators:

On a quarterly basis, the Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying them as to credit risk.  This analysis includes all loans, such as multifamily residential, mixed use residential (i.e., loans in which the aggregate rental income of the underlying collateral property is generated from both residential and commercial units, but the majority of such income is generated from the residential units), mixed use commercial real estate (i.e., loans in which the aggregate rental income of the underlying collateral property is generated from both residential and commercial units, but the majority of such income is generated from the commercial units), commercial real estate loans, acquisition, development, and construction (“ADC”) loans (which includes land loans), C&I loans, as well as one-to-four family residential and cooperative and condominium apartment loans. Prior to April 1, 2016, the analysis of one-to-four family residential and cooperative and condominium apartment loans included only loans with balances in excess of the Fannie Mae (“FNMA”) conforming loan limits for high-cost areas such as the Bank’s primary lending area (“FNMA Limits”) that were deemed to meet the definition of impaired.  Prior to December 31, 2016, the analysis of C&I loans was included in the consumer loan credit quality analysis, which is based on payment activity due to the nature and volume of the C&I loan balance.

The Company uses the following definitions for risk ratings:

Special Mention.  Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Bank's credit position at some future date.

Substandard.  Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Doubtful.  Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of then existing facts, conditions, and values, highly questionable and improbable.

The Bank had no loans classified as doubtful as of June 30, 2017 or December 31, 2016. All real estate and C&I loans not classified as Special Mention or Substandard were deemed pass loans at both June 30, 2017 and December 31, 2016.

The following is a summary of the credit risk profile of real estate and C&I loans (including deferred costs) by internally assigned grade as of the dates indicated:

		Balance at June 30, 2017
		Pass				Special Mention				Substandard				Doubtful				Total
Real Estate:
One-to-four family residential, including condominium and cooperative apartment		$	69,688			$	182			$	1,112			$	-			$	70,982
Multifamily residential and residential mixed use			4,747,233				3,432				5,515				-				4,756,180
Commercial mixed use real estate			399,960				-				4,966				-				404,926
Commercial real estate			563,513				864				6,468				-				570,845
ADC			4,000				-				-				-				4,000
Total real estate			5,784,394				4,478				18,061				-				5,806,933
C&I			68,199				-				-				-				68,199
Total		$	5,852,593			$	4,478			$	18,061			$	-			$	5,875,132

 

		Balance at December 31, 2016
		Pass				Special Mention				Substandard				Doubtful				Total
Real Estate:
One-to-four family residential, including condominium and cooperative apartment		$	72,325			$	212			$	1,485			$	-			$	74,022
Multifamily residential and residential mixed use			4,589,838				3,488				7,200				-				4,600,526
Commercial mixed use real estate			398,139				535				5,465				-				404,139
Commercial real estate			546,568				525				7,227				-				554,320
Total Real Estate		$	5,606,870			$	4,760			$	21,377			$	-			$	5,633,007

For consumer loans, the Company evaluates credit quality based on payment activity.  Consumer loans that are 90 days or more past due are placed on non-accrual status, while all remaining consumer loans are classified and evaluated as performing.

The following is a summary of the credit risk profile of consumer loans by internally assigned grade:

Grade		Balance at June 30, 2017				Balance at December 31, 2016(1)
Performing		$	1,748			$	3,414
Non-accrual			1				1
Total		$	1,749			$	3,415

(1)	Included in the balance of consumer loans at December 31, 2016 are $2,058 of C&I loans. Subsequent to December 31, 2016, C&I loans were evaluated based on risk ratings and included in the preceding credit risk profile table.

The following is a breakdown of the past due status of the Company's investment in loans (excluding accrued interest) as of the dates indicated:

		At June 30, 2017
		30 to 59 Days Past Due				60 to 89 Days Past Due				Loans 90 Days or More Past Due and Still Accruing Interest				Non-accrual (1)				Total Past Due				Current				Total Loans
Real Estate:
One-to-four family residential, including condominium and cooperative apartment		$	84			$	74			$	373			$	654			$	1,185			$	69,797			$	70,982
Multifamily residential and residential mixed use			-				-				98				2,618				2,716				4,753,464				4,756,180
Commercial mixed use real estate			-				-				793				101				894				404,032				404,926
Commercial real estate			1,713				-				-				-				1,713				569,132				570,845
ADC			-				-				-				-				-				4,000				4,000
Total real estate		$	1,797			$	74			$	1,264			$	3,373			$	6,508			$	5,800,425			$	5,806,933
C&I		$	-			$	-			$	-			$	-			$	-			$	68,199			$	68,199
Consumer		$	2			$	-			$	-			$	1			$	3			$	1,746			$	1,749

⁽¹⁾ Includes all loans on non-accrual status regardless of the number of days such loans were delinquent as of June 30, 2017.

		At December 31, 2016
		30 to 59 Days Past Due				60 to 89 Days Past Due				Loans 90 Days or More Past Due and Still Accruing Interest				Non-accrual (1)				Total Past Due				Current				Total Loans
Real Estate:
One-to-four family residential, including condominium and cooperative apartment		$	188			$	-			$	1,513			$	1,012			$	2,712			$	71,309			$	74,022
Multifamily residential and residential mixed use			-				-				1,557				2,675				4,232				4,596,294				4,600,526
Commercial mixed use real estate			-				-				-				549				549				403,590				404,139
Commercial real estate			1,732				-				-				-				1,732				552,588				554,320
Total real estate		$	1,920			$	-			$	3,070			$	4,236			$	9,226			$	5,623,781			$	5,633,007
C&I		$	-			$	-			$	-			$	-			$	-			$	2,058			$	2,058
Consumer		$	-			$	-			$	-			$	1			$	1			$	1,356			$	1,357

⁽¹⁾ Includes all loans on non-accrual status regardless of the number of days such loans were delinquent as of December 31, 2016.

 

The Bank continued accruing interest on five real estate loans with an aggregate outstanding balance of $1,265 at June 30, 2017, and four real estate loans with an aggregate outstanding balance of $3,070 at December 31, 2016, all of which were 90 days or more past due on their respective contractual maturity dates. These loans continued to make monthly payments consistent with their initial contractual amortization schedule exclusive of the balloon payments due at maturity.  These loans were well secured and were expected to be refinanced, and, therefore, remained on accrual status and were deemed performing assets at the dates indicated above.

The following table summarizes outstanding TDRs by underlying collateral types as of the dates indicated:

		As of June 30, 2017								As of December 31, 2016
		No. of Loans				Balance				No. of Loans				Balance
One-to-four family residential, including condominium and cooperative apartment			2			$	399				2			$	407
Multifamily residential and residential mixed use			3				639				3				658
Commercial mixed use real estate			1				4,218				1				4,261
Commercial real estate			1				3,330				1				3,363
Total real estate			7			$	8,586				7			$	8,689

Accrual status for TDRs is determined separately for each TDR in accordance with the Bank’s policies for determining accrual or non-accrual status.  At the time an agreement is entered into between the Bank and the borrower that results in the Bank's determination that a TDR has been created, the loan can be on either accrual or non-accrual status.  If a loan is on non-accrual status at the time it is restructured, it continues to be classified as non-accrual until the borrower has demonstrated compliance with the modified loan terms for a period of at least six months.  Conversely, if at the time of restructuring the loan is performing (and accruing), it will remain accruing throughout its restructured period, unless the loan subsequently meets any of the criteria for non-accrual status under the Bank’s policy and agency regulations.  There were no TDRs on non-accrual status at June 30, 2017 or December 31, 2016.

The Company has not restructured troubled consumer loans, as its consumer loan portfolio has not experienced any problem issues warranting restructuring.  Therefore, all TDRs were collateralized by real estate at both June 30, 2017 and December 31, 2016.

There were no loans modified in a manner that met the criteria of a TDR during the three-month or six-month periods ended June 30, 2017.  The Company modified one one-to-four family residential loan in a manner that met the criteria of a TDR during the three-month and six-month periods ended June 30, 2016.

The Bank's allowance for loan losses at June 30, 2017 and December 31, 2016 did not reflect any allocated reserve associated with TDRs.

As of June 30, 2017 and December 31, 2016, the Bank had no loan commitments to borrowers with outstanding TDRs.

A TDR is considered to be in payment default once it is 90 days contractually past due under the modified terms. All TDRs are considered impaired loans and are evaluated individually for measurable impairment, if any.

There were no TDRs which defaulted within twelve months following the modification during the three-month or six-month periods ended June 30, 2017 or 2016 (thus no impact to the allowance for loan losses during those periods).

A loan is considered impaired when, based on then current information and events, it is probable that all contractual amounts due will not be collected in accordance with the terms of the loan.  Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant payment delays or shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

 

The Bank considers TDRs and non-accrual multifamily residential, commercial real estate, and C&I loans, along with non-accrual one-to-four family loans in excess of the FNMA Limits, to be impaired.  Non-accrual one-to-four family loans equal to or less than the FNMA Limits, as well as all consumer loans, are considered homogeneous loan pools and are not required to be evaluated individually for impairment unless considered a TDR.

Impairment is typically measured using the difference between the outstanding loan principal balance and either: 1) the likely realizable value of a note sale; 2) the fair value of the underlying collateral, net of likely disposal costs, if repayment is expected to come from liquidation of the collateral; or 3) the present value of estimated future cash flows (using the loan’s pre-modification rate for some of the performing TDRs).  If a TDR is substantially performing in accordance with its restructured terms, management will look to either the potential net liquidation proceeds of the underlying collateral or the present value of the expected cash flows from the debt service in measuring impairment (whichever is deemed most appropriate under the circumstances).  If a TDR has re-defaulted, generally the likely realizable net proceeds from either a note sale or the liquidation of the collateral is considered when measuring impairment.  Measured impairment is either charged off immediately or, in limited instances, recognized as an allocated reserve within the allowance for loan losses.

Please refer to Note 8 for tabular information related to impaired loans.

8.   ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses may consist of specific and general components.  At June 30, 2017, the Bank’s periodic evaluation of its allowance for loan losses (specific or general) was comprised of two primary components: (1) impaired loans and (2) pass graded loans. Within these components, the Company has identified the following portfolio segments for purposes of assessing its allowance for loan losses: (1) real estate loans; (2) C&I loans; and (3) consumer loans.  Within these segments, the Bank analyzes the allowance for loan losses based upon the underlying collateral type (classes). Due to their small homogeneous balances, consumer loans were not individually evaluated for impairment as of either June 30, 2017 or December 31, 2016.

Impaired Loan Component

All multifamily residential, mixed use, commercial real estate, ADC and C&I loans that are deemed to meet the definition of impaired are individually evaluated for impairment.  In addition, all condominium or cooperative apartment and one-to-four family residential real estate loans in excess of the FNMA Limits are individually evaluated for impairment.  Impairment is typically measured using the difference between the outstanding loan principal balance and either: (1) the likely realizable value of a note sale; (2) the fair value of the underlying collateral, net of likely disposal costs, if repayment is expected to come from liquidation of the collateral; or (3) the present value of estimated future cash flows (using the loan's pre-modification rate in the case of some performing TDRs).  For impaired loans on non-accrual status, either of the initial two measurements is utilized.

All TDRs are considered impaired loans and are evaluated individually for measurable impairment, if any.  If a TDR is substantially performing in accordance with its restructured terms, management will look to either the present value of the expected cash flows from the debt service or the potential net liquidation proceeds of the underlying collateral in measuring impairment (whichever is deemed most appropriate under the circumstances). If a TDR has re-defaulted, the likely realizable net proceeds from either a note sale or the liquidation of the collateral are generally considered when measuring impairment.  While measured impairment is generally charged off immediately, impairment attributed to a reduction in the present value of expected cash flows of a performing TDR is generally reflected as an allocated reserve within the allowance for loan losses. At June 30, 2017 and December 31, 2016, there were no allocated reserves related to TDRs within the allowance for loan losses.

Smaller balance homogeneous real estate loans, such as condominium or cooperative apartment and one-to four-family residential real estate loans with balances equal to or less than the FNMA Limits, are collectively evaluated for impairment, and accordingly, are not separately identified for impairment disclosures.

Non-Impaired Loan Component

During the three month period ended June 30, 2016, the Bank refined the calculation of the allowance for loan losses associated with non-impaired loans using third party software purchased by the Bank. The software model is substantially similar to the previous model used by the Bank whereby the primary drivers of the calculation are historical charge-offs by loan type and certain qualitative elements. The historical loss look-back period for Substandard and Special Mention non-impaired loans was expanded from the previous twelve month period to a forty-eight month period, which is aligned with the same historical loss look-back period used for all Pass-graded loans.  Management has evaluated the impact of these changes and concluded that they are not material to the overall allowance for non-impaired loans.

 

The Bank initially looks to the underlying collateral type when determining the allowance for loan losses associated with non-impaired real estate loans.  The following underlying collateral types are analyzed separately: 1) one-to-four family residential and condominium or cooperative apartment; 2) multifamily residential and residential mixed use; 3) commercial mixed use real estate, 4) commercial real estate; 5) ADC; and 6) C&I.  Within the analysis of each underlying collateral type, the following elements are additionally considered and provided weighting in determining the allowance for loan losses for non-impaired real estate loans:

(i)

Charge-off experience (including peer charge-off experience)

(ii)

Economic conditions

(iii)

Underwriting standards or experience

(iv)

Loan concentrations

(v)

Regulatory climate

(vi)

Nature and volume of the portfolio

(vii)

Changes in the quality and scope of the loan review function

The following is a brief synopsis of the manner in which each element is considered:

(i)  Charge-off experience - Loans within the non-impaired loan portfolio are segmented by significant common characteristics, against which historical loss rates are applied to reflect probable incurred loss percentages.  The Bank also reviews and considers the charge-off experience of peer banks in its lending marketplace in order to determine whether probable incurred losses that could take a longer period to flow through its allowance for loan losses possibly exist.

(ii) Economic conditions - The Bank assigned a loss allocation to its entire non-impaired real estate loan portfolio based, in part, upon a review of economic conditions affecting the local real estate market. Specifically, the Bank considered both the level of, and recent trends in: 1) the local and national unemployment rate, 2) residential and commercial vacancy rates, 3) real estate sales and pricing, and 4) delinquencies in the Bank’s loan portfolio.

(iii) Underwriting standards or experience - Underwriting standards are reviewed to ensure that changes in the Bank's lending policies and practices are adequately evaluated for risk and reflected in its analysis of potential credit losses.  Loss expectations associated with changes in the Bank’s lending policies and practices, if any, are then incorporated into the methodology.

(iv) Loan concentrations - The Bank regularly reviews its loan concentrations (borrower, collateral type and location) in order to ensure that heightened risk has not evolved that has not been captured through other factors.  The risk component of loan concentrations is regularly evaluated for reserve adequacy.

(v) Regulatory climate – Consideration is given to public statements made by the banking regulatory agencies that have a potential impact on the Bank’s loan portfolio and allowance for loan losses.

(vi) Nature and volume of the portfolio – The Bank considers any significant changes in the overall nature and volume of its loan portfolio.

(vii) Changes in the quality and scope of the loan review function – The Bank considers the potential impact upon its allowance for loan losses of any adverse change in the quality and scope of the loan review function.

All non-impaired Substandard loans were deemed sufficiently well secured and performing to have remained on accrual status both prior and subsequent to their downgrade to the Substandard internal loan grade at June 30, 2017.

Due to their small individual balances, the Bank does not evaluate individual consumer loans for impairment.  Loss percentages are applied to aggregate consumer loans based upon both their delinquency status and loan type.  These loss percentages are derived from a combination of the Company’s historical loss experience and/or nationally published loss data on such loans.  Consumer loans in excess of 120 days delinquent are typically fully charged off against the allowance for loan losses.

 

The following tables present data regarding the allowance for loan losses activity for the periods indicated:

		At or for the Three Months Ended June 30, 2017
						Real Estate Loans																								Consumer Loans
		One-to-Four Family Residential, Including Condominium and Cooperative Apartment				Multifamily Residential and Residential Mixed Use				Commercial Mixed Use Real Estate				Commercial Real Estate				ADC				Total Real Estate					C&I
Beginning balance		$	129			$	16,665			$	1,589			$	2,099			$	-			$	20,482			$	453			$	19
Provision (credit) for loan losses			(19	)			730				(178	)			(65	)			6				474				570				3
Charge-offs			-				(23	)			-				-				-				(23	)			-				(5	)
Recoveries			12				-				-				-				-				12				-				-
Ending balance		$	122			$	17,372			$	1,411			$	2,034			$	6			$	20,945			$	1,023			$	17