UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
|
[ X ]
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the Year Ended December 31, 2007
|
[ ]
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
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)
|
Registrant’s
telephone number, including area code: (718) 782-6200
Securities
Registered Pursuant to Section 12(b) of the Act:
None
Securities
Registered Pursuant to Section 12(g) of the Act:
Common
Stock, par value $.01 per share
(Title of
Class)
Preferred
Stock Purchase Rights
(Title of
Class)
Indicate by check mark if the
registrant is a well-known seasonal issuer, as defined in Rule 405 of the
Securities Act.YES
NO X
Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Act.YES
NO X
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding twelve months (or
for such shorter period that the registrant was required to file reports) and
(2) has been subject to such requirements for the past 90 days.YES X NO
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of
this chapter) is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company (as defined 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
Act): ___
Yes X No
The aggregate market value of the
voting stock held by non-affiliates of the registrant as of June 30, 2007 was
approximately $362.4
million based upon the $13.19 closing price on the NASDAQ National Market for a
share of the registrant’s common stock on June 30, 2007.
As
of March 12, 2008, there were 33,869,390 shares of the registrant’s common
stock, $0.01 par value, outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the definitive Proxy Statement to be distributed on behalf of the Board of
Directors of Registrant in connection with the Annual Meeting of Shareholders to
be held on May 15, 2008 and any adjournment thereof, and are incorporated by
reference in Part III.
F-3
|
TABLE
OF CONTENTS
|
|
|
Page
|
|
|
PART
I
|
|
|
Item
1. Business
|
|
|
General
|
F-3
|
|
Market Area and
Competition
|
F-4
|
|
Lending
Activities
|
F-5
|
|
Asset Quality
|
F-11
|
|
Allowance for Loan
Losses
|
F-15
|
|
Investment
Activities
|
F-16
|
|
Sources of
Funds
|
F-19
|
|
Subsidiary
Activities
|
F-22
|
|
Personnel
|
F-22
|
|
Federal, State and Local
Taxation
|
F-23
|
|
Federal Taxation
|
F-23
|
|
State and Local
Taxation
|
F-23
|
|
Regulation
|
F-24
|
|
General
|
F-24
|
|
Regulation of Federal Savings
Associations
|
F-24
|
|
Regulation of Holding
Company
|
F-32
|
|
Federal Securities
Laws
|
F-33
|
|
Item
1A. Risk Factors
|
F-33
|
|
Item
1B. Unresolved Staff Comments
|
F-35
|
|
Item
2. Properties
|
F-35
|
|
Item
3. Legal Proceedings
|
F-35
|
|
Item
4. Submission of Matters to a Vote of Security Holders
|
F-35
|
|
PART
II
|
|
|
Item
5. Market for the Registrant's Common Equity, Related Stockholder Matters
and
Issuer Purchases of Equity
Securities
|
F-35
|
|
Item
6. Selected Financial Data
|
F-38
|
|
Item
7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
|
F-40
|
|
Item
7A. Quantitative and Qualitative Disclosures About Market
Risk
|
F-57
|
|
Item
8. Financial Statements and Supplementary Data
|
F-62
|
|
Item
9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
|
F-62
|
|
Item
9A. Controls and Procedures
|
F-62
|
|
Item
9B. Other Information
|
F-62
|
|
PART
III
|
|
|
Item
10. Directors, Executive Officers and Corporate Governance
|
F-64
|
|
Item
11. Executive Compensation
|
F-64
|
|
Item
12. Security Ownership of Certain Beneficial Owners and
Management
|
|
|
and Related Stockholder
Matters
|
F-64
|
|
Item
13. Certain Relationships and Related Transactions, and Director
Independence
|
F-65
|
|
Item
14. Principal Accounting Fees and Services
|
F-65
|
|
PART
IV
|
|
|
Item
15. Exhibits, Financial Statement Schedules
|
F-65
|
|
Signatures
|
F-66
|
F-3
This Annual Report on Form 10-K
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," "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 the Company (as defined
subsequently herein) 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. 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;
|
|
·
|
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;
|
|
·
|
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 any forward-looking statements to reflect events or circumstances after
the date of this document.
PART
I
Item
1. Business
General
Dime Community Bancshares, Inc. (the
“Holding Company,” and together with its direct and indirect subsidiaries, the
“Company”) is a Delaware corporation and parent company of the Bank, a
federally-chartered stock savings bank. The Bank maintains its
headquarters in the Williamsburg section of the borough of Brooklyn, New York
and operates twenty-one 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 mortgage loans,
commercial real estate loans, one- to four-family residential mortgage loans,
construction and land acquisition loans, consumer loans, mortgage-backed
securities (“MBS”), obligations of the U.S. Government and Government Sponsored
Entities ("GSEs"), and corporate debt and equity securities. The Bank’s revenues
are derived principally from interest on its loan and securities portfolios and
other short-term investments. The Bank’s primary sources of funds are deposits;
loan amortization, prepayments and maturities; MBS amortization, prepayments and
maturities; investment securities maturities and sales; advances from the
Federal Home Loan Bank of New York (“FHLBNY”); securities sold under agreement
to repurchase (“REPOS”); and the sale of real estate loans to the secondary
market.
The primary business of the Holding
Company is the operation of its wholly-owned subsidiary, the Bank. The Holding
Company is a unitary savings and loan holding company, which, under existing
law, is generally not restricted as to the types of business activities in which
it may engage, provided that the Bank remains a qualified thrift lender
(“QTL”). Pursuant to regulations of the Office of Thrift Supervision
(“OTS”), the Bank qualifies as a QTL if its ratio of qualified thrift
investments to portfolio assets (“QTL Ratio”) was 65% or more, on a monthly
average basis, in nine of the previous twelve months. At December 31,
2007, the Bank’s QTL Ratio was 69.1%, and the
Bank maintained more than 65% of its portfolio assets in qualified thrift
investments throughout the year ended December 31, 2007.
The Holding Company neither owns nor
leases any property but instead uses the premises and equipment of the
Bank. The Holding Company does not employ any persons other than
certain officers of the Bank, who receive no additional compensation as officers
of the Holding Company. The Holding Company utilizes the support
staff of the Bank from time to time, as required. Additional
employees may be hired as deemed appropriate by Holding Company
management.
The Company’s website address is
www.dimewill.com. The
Company makes available free of charge through its website, by clicking the
Investor Relations tab and selecting "SEC Filings," its Annual and Transition
Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form
8-K, and amendments to these reports as soon as reasonably practicable after
such material is electronically filed with or furnished to the Securities and
Exchange Commission (“SEC”).
Market
Area and Competition
The Bank has historically operated as
a community-oriented financial institution providing financial services and
loans primarily for multifamily housing within its market areas. The
Bank maintains its headquarters in the Williamsburg section of the borough of
Brooklyn, New York, and operates twenty-one full-service retail banking offices
located in the NYC boroughs of Brooklyn, Queens, and the Bronx, and in Nassau
County, New York. The Bank gathers deposits primarily from the
communities and neighborhoods in close proximity to its branches. The
Bank’s primary lending area is the NYC metropolitan area, although its overall
lending area is much larger, extending approximately 150 miles in each direction
from its corporate headquarters in Brooklyn. The majority of the
Bank’s mortgage loans are secured by properties located in its primary lending
area, and approximately 75% of these loans were secured by real estate located
in the NYC boroughs of Brooklyn, Queens and Manhattan on December 31,
2007.
The NYC
banking environment is extremely competitive. The Bank’s competition
for loans exists principally from other savings banks, commercial banks,
mortgage banks and insurance companies. The Bank has faced sustained competition
for the origination of multifamily residential and commercial real estate loans,
which together comprised 93% of the Bank’s loan portfolio at December 31,
2007. Management anticipates that the current level of competition
for multifamily residential and commercial real estate loans will continue for
the foreseeable future, which may inhibit the Bank’s ability to maintain its
current level of such loans.
The Bank
gathers deposits in direct competition with other savings banks, commercial
banks and brokerage firms, many among the largest in the nation. It
must additionally compete for deposit monies with the stock market and mutual
funds, especially during periods of strong performance in the equity
markets. Over the previous decade, consolidation in the financial
services industry, coupled with the emergence of Internet banking, has
dramatically altered the deposit gathering landscape. Facing
increasingly larger and more efficient competitors, the Bank’s strategy to
attract depositors has increasingly utilized targeted marketing and delivery of
technology-enhanced, customer-friendly banking services while controlling
operating expenses.
Banking
competition occurs within an economic and financial marketplace that is largely
beyond the control of any individual financial institution. The
interest rates paid to depositors and charged to borrowers, while affected by
marketplace competition, are generally a function of broader-based macroeconomic
and financial factors, including the level of U.S. Gross Domestic Product, the
supply of, and demand for, loanable funds, and the impact of global trade and
international financial markets. Within this environment, the Federal
Open Market Committee ("FOMC") monetary policy and governance of short-term
rates also significantly influence the interest rates paid and charged by
financial institutions.
The
Bank’s success is additionally impacted by the overall condition of the economy,
particularly in the NYC metropolitan area. As home to several
national companies in the financial and business services industries, and as a
popular destination for domestic travelers, the NYC economy is particularly
sensitive to the health of the national economy. Success in banking
is more easily achieved when local income levels increase due to economic
strength. The Bank has demonstrated that even in periods of intense
competition, such as those that existed during 2003 through 2006, it can succeed
by effectively implementing its business strategies. However, if the
local market for multifamily residential and commercial real estate declines,
thereby potentially increasing competitive pressures, the Bank may be unable to
originate the volume of loans that it otherwise anticipates.
Lending
Activities
Loan Portfolio
Composition. At December 31, 2007, the Bank’s loan portfolio
totaled $2.88 billion, consisting primarily of mortgage loans
secured by multifamily residential apartment buildings, including buildings
organized under a cooperative form of ownership (“Underlying Cooperatives”);
commercial properties; real estate construction and land acquisition; and one-
to four-family residences and cooperative apartments. Within the loan
portfolio, $1.95 billion, or 67.8%, were classified as multifamily residential
loans; $728.1 million, or 25.3%, were classified as commercial real estate
loans; $145.7 million, or 5.1%, were classified as one- to four-family
residential, including condominium or cooperative apartments; $1.0 million, or
0.04%, were loans to finance multifamily residential and one- to four-family
residential properties with full or partial credit guarantees provided by either
the Federal Housing Administration (‘’FHA’’) or the Veterans Administration
(‘’VA’’); and $49.4 million, or 1.7%, were loans to finance real estate
construction and land acquisition loans within the NYC metropolitan
area. Of the total mortgage loan portfolio outstanding at that date,
$2.41 billion, or 83.9%, were adjustable-rate loans (‘’ARMs’’) and $461.5
million, or 16.1%, were fixed-rate loans. Of the Bank’s multifamily
residential and commercial real estate loans, over 80% were
ARMs at December 31, 2007, the majority of which were contracted to reprice no
later than 7 years from their origination date and carried a total amortization
period of no longer than 30 years. At December 31, 2007, the Bank’s
loan portfolio additionally included $2.2 million in consumer loans, composed of
passbook loans, consumer installment loans, overdraft loans and mortgagor
advances. As of
December 31, 2007, $2.23 billion, or 77.6% of the loan portfolio, was scheduled
to mature or reprice within five years.
The Bank
does not originate or purchase loans, either whole loans or 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 types
of loans the Bank may originate are subject to federal laws and
regulations (See "Item 1. Business - Regulation –
Regulation of Federal Savings Associations").
At December 31, 2007, the Bank had
$102.4 million of loan commitments that were accepted by the
borrowers. All of these commitments are expected to close during the
year ending December 31, 2008. At December 31, 2006, the Bank had
$53.8 million of loan commitments that were accepted by the
borrower. All of these commitments closed during 2007.
F-3
The following table sets forth the
composition of the Bank’s real estate and other loan portfolios (including loans
held for sale) in dollar amounts and percentages at the dates
indicated:
|
At
December 31,
|
||||||||||
|
2007
|
Percent
of Total
|
2006
|
Percent
of Total
|
2005
|
Percent
of Total
|
2004
|
Percent
of Total
|
2003
|
Percent
of Total
|
|
|
Dollars
in Thousands
|
||||||||||
|
Real
Estate loans:
|
||||||||||
|
Multifamily
residential
|
$1,948,765
|
67.78%
|
$1,855,080
|
68.64%
|
$1,872,163
|
71.69%
|
$1,917,447
|
76.63%
|
$1,734,904
|
79.07%
|
|
Commercial
real estate
|
728,129
|
25.32
|
666,927
|
24.68
|
576,561
|
22.08
|
424,060
|
16.95
|
309,810
|
14.12
|
|
One-
to four-family
|
139,541
|
4.85
|
146,613
|
5.42
|
135,622
|
5.19
|
126,225
|
5.04
|
124,047
|
5.65
|
|
Cooperative
apartment units
|
6,172
|
0.21
|
7,224
|
0.27
|
10,115
|
0.39
|
11,853
|
0.47
|
13,798
|
0.63
|
|
FHA/VA
insured
|
1,029
|
0.04
|
1,236
|
0.05
|
2,694
|
0.10
|
4,209
|
0.17
|
4,646
|
0.21
|
|
Construction
and land acquisition
|
49,387
|
1.72
|
23,340
|
0.86
|
12,098
|
0.46
|
15,558
|
0.62
|
2,880
|
0.13
|
|
Total
mortgage loans
|
2,873,023
|
99.92
|
2,700,420
|
99.92
|
2,609,253
|
99.91
|
2,499,352
|
99.88
|
2,190,085
|
99.81
|
|
Other
loans:
|
||||||||||
|
Student
loans
|
-
|
-
|
-
|
0.00
|
-
|
0.00
|
61
|
0.00
|
295
|
0.01
|
|
Depositor
loans
|
$1,122
|
0.04
|
1,172
|
0.04
|
1,160
|
0.04
|
1,318
|
0.06
|
2,371
|
0.11
|
|
Consumer
installment and other
|
1,047
|
0.04
|
1,033
|
0.04
|
1,181
|
0.05
|
1,537
|
0.06
|
1,406
|
0.07
|
|
Total
other loans
|
2,169
|
0.08
|
2,205
|
0.08
|
2,341
|
0.09
|
2,916
|
0.12
|
4,072
|
0.19
|
|
Gross
loans
|
2,875,192
|
100.00%
|
2,702,625
|
100.00%
|
2,611,594
|
100.00%
|
2,502,268
|
100.00%
|
2,194,157
|
100.00%
|
|
Net
unearned costs (fees)
|
1,833
|
1,048
|
501
|
(463)
|
(1,517)
|
|||||
|
Allowance
for loan losses
|
(15,387)
|
(15,514)
|
(15,785)
|
(15,543)
|
(15,018)
|
|||||
|
Loans,
net
|
$2,861,638
|
$2,688,159
|
$2,596,310
|
$2,486,262
|
$2,177,622
|
|||||
|
Loans
serviced for others:
|
||||||||||
|
One-
to four-family and
cooperative
apartment
|
$21,515
|
$24,395
|
$26,881
|
$29,524
|
$33,671
|
|||||
|
Multifamily
residential
|
541,868
|
494,770
|
386,781
|
295,800
|
157,774
|
|||||
|
Total
loans serviced for others
|
$563,383
|
$519,165
|
$413,662
|
$325,324
|
$191,445
|
|||||
F-3
Loan Originations, Purchases, Sales
and Servicing. For the year ended December 31, 2007, total
loan originations were $576.3 million. The Bank originates both ARMs
and fixed-rate loans, depending upon customer demand and market rates of
interest. ARM originations were approximately 96% of total loan
originations during the period. The majority of both ARM and
fixed-rate originations were multifamily residential and commercial real estate
loans. Multifamily residential real estate loans are either retained
in the Bank's portfolio or sold in the secondary market to the Federal National
Mortgage Association ("FNMA"), and occasionally to other third-party financial
institutions. One- to four-family adjustable rate and fixed-rate
mortgage loans with maturities up to 15 years are generally retained for the
Bank’s portfolio. Generally, the Bank sells its newly originated one-
to four-family fixed-rate mortgage loans with maturities greater than fifteen
years in the secondary market to FNMA.
The Bank sells multifamily
residential loans to FNMA pursuant to a multifamily seller/servicing agreement
entered into in December 2002. The majority of the loans sold under
the agreement since its inception possessed a minimum term to maturity or
repricing of seven years. The Bank sold $71.4 million, $144.7 million
and $106.6 million of such loans to FNMA during the years ended December 31,
2007, 2006 and 2005, respectively. The Bank additionally sold one
multifamily loan with a principal balance of $6.1 million to a third party
financial institution during the year ended December 31, 2007.
The Bank currently has no arrangement
pursuant to which it sells commercial real estate loans to the secondary
market. During the year ended December 31, 2007, sales of fixed-rate
one- to four-family mortgage loans totaled $150,000, all of which were sold to
FNMA.
The Bank generally retains the
servicing rights in connection with loans it sells in the secondary
market. As of December 31, 2007, the Bank was servicing $563.4
million of loans for non-related institutions. The Bank generally
receives a loan servicing fee equal to 0.25% of the outstanding principal
balance on all loans sold to FNMA, other than multifamily residential
loans. The loan servicing fees on multifamily residential loans sold
to FNMA vary as they are derived based upon the difference between the actual
origination rate and contractual pass-through rate of the loans sold at the time
of sale. At December 31, 2007, the Bank had recorded mortgage
servicing rights ("MSR") of $2.5 million associated with the sale of one- to
four-family and multifamily residential loans to FNMA.
The following table sets forth the
Bank's loan originations (including loans held for sale), sales, purchases and
principal repayments for the periods indicated:
|
For
the Year Ended December 31,
|
|||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
|
|
Dollars
in Thousands
|
|||||
|
Gross
loans:
|
|||||
|
At
beginning of period
|
$2,702,625
|
$2,611,594
|
$2,502,268
|
$2,194,157
|
$2,169,745
|
|
Real
estate loans originated:
|
|||||
|
Multifamily
residential
|
391,882
|
388,102
|
312,026
|
774,832
|
917,904
|
|
Commercial
real estate
|
124,262
|
133,099
|
203,841
|
187,655
|
126,185
|
|
One-
to four-family (1)
|
27,425
|
19,070
|
41,143
|
36,363
|
28,259
|
|
Cooperative
apartment units
|
-
|
210
|
465
|
1,048
|
1,839
|
|
Equity
lines of credit
|
5,777
|
7,977
|
6,405
|
6,488
|
21,469
|
|
Construction
and land acquisition
|
25,180
|
14,768
|
10,331
|
6,844
|
4,549
|
|
Total
mortgage loans originated
|
574,526
|
563,226
|
574,211
|
1,013,230
|
1,100,205
|
|
Other
loans originated
|
1,772
|
1,688
|
1,859
|
3,166
|
3,866
|
|
Total
loans originated
|
576,298
|
564,914
|
576,070
|
1,016,396
|
1,104,071
|
|
Less:
|
|||||
|
Principal
repayments
|
326,103
|
328,453
|
358,255
|
557,134
|
976,779
|
|
Loans
sold (2)
|
77,628
|
145,430
|
108,489
|
151,151
|
102,880
|
|
Gross
loans at end of period
|
2,875,192
|
$2,702,625
|
$2,611,594
|
$2,502,268
|
$2,194,157
|
(1) Includes
Home Equity and Home Improvement Loans.
(2) Includes
multifamily residential loans sold to FNMA, fixed-rate one- to four-family
mortgage loans and student loans.
Loan Maturity and
Repricing. The following table shows the earlier of the
maturity or repricing period of the Bank's loan portfolio (including loans held
for sale) at December 31, 2007. ARMs are shown as being due in the
period during which the interest rates are next scheduled to adjust. The table
does not include prepayments or scheduled principal
amortization. Scheduled loan repricing and estimated prepayment and
amortization information is presented on an aggregate basis in "Item
7A. Quantitative and Qualitative Disclosure About Market Risk –
Interest Sensitivity Gap."
F-59
|
At
December 31, 2007
|
|||||||||
|
Real
Estate Loans
|
|||||||||
|
Multifamily
Residential
|
Commercial
Real
Estate
|
One-
to Four-
Family
|
Cooperative
Apartment
|
FHA/VA
Insured
|
Construction
and Land Acquisition
|
Other
Loans
|
Total
Loans
|
||
|
(Dollars
In Thousands)
|
|||||||||
|
Amount
due to Mature or Reprice During the Year Ending:
|
|||||||||
|
December
31, 2008
|
$261,871
|
$53,593
|
$27,321
|
$4,003
|
-
|
$49,387
|
$2,169
|
$398,344
|
|
|
December
31, 2009
|
281,082
|
60,786
|
18,184
|
416
|
-
|
-
|
-
|
360,468
|
|
|
December
31, 2010
|
295,553
|
102,703
|
14,140
|
54
|
-
|
-
|
-
|
412,450
|
|
|
December
31, 2011
|
383,612
|
183,776
|
12,311
|
100
|
-
|
-
|
-
|
579,799
|
|
|
December
31, 2012
|
307,978
|
150,426
|
21,326
|
54
|
$220
|
-
|
-
|
480,004
|
|
|
Sub-total
|
1,530,096
|
551,284
|
93,282
|
4,627
|
220
|
49,387
|
2,169
|
2,231,065
|
|
|
December
31, 2013 through
December
31, 2017
|
352,897
|
131,528
|
22,650
|
973
|
805
|
-
|
-
|
508,853
|
|
|
December
31, 2018 and beyond
|
65,772
|
45,317
|
23,609
|
572
|
4
|
-
|
-
|
135,274
|
|
|
Total
|
$1,948,765
|
$728,129
|
$139,541
|
$6,172
|
$1,029
|
$49,387
|
$2,169
|
$2,875,192
|
|
The following table sets forth the
outstanding principal balance in each loan category (including loans held for
sale) at December 31, 2007 that is due to mature or reprice after December 31,
2008, and whether such loans have fixed or adjustable interest
rates:
|
Due
after December 31, 2008
|
|||
|
Fixed
|
Adjustable
|
Total
|
|
|
(Dollars in
Thousands)
|
|||
|
Mortgage
loans:
|
|||
|
Multifamily
residential
|
$273,937
|
$1,412,957
|
$1,686,894
|
|
Commercial
real estate
|
115,841
|
558,695
|
674,536
|
|
One-
to four-family
|
47,394
|
64,826
|
112,220
|
|
Cooperative
apartment
|
1,699
|
470
|
2,169
|
|
FHA/VA
insured
|
1,029
|
-
|
1,029
|
|
Construction
and land acquisition
|
-
|
-
|
-
|
|
Other
loans
|
-
|
-
|
-
|
|
Total
loans
|
$439,900
|
$2,036,948
|
$2,476,848
|
Multifamily Residential Lending and
Commercial Real Estate Lending. The majority of the Bank's lending
activities consist of originating adjustable-rate and fixed-rate multifamily
residential (i.e.,
buildings possessing a minimum of five residential units) and commercial real
estate loans. The properties securing these loans are generally located in the
Bank's primary lending area. At December 31, 2007, the Bank had multifamily
residential loans totaling $1.95 billion in its portfolio, comprising 67.8% of
the gross loan portfolio. Of the multifamily residential loans, $1.86 billion,
or 95.7%, were secured by apartment buildings and $84.5 million, or 4.3%, were
secured by Underlying Cooperatives. The Bank also had $728.1 million of
commercial real estate loans in its portfolio at December 31, 2007, representing
25.3% of its total loan portfolio.
The Bank originated multifamily
residential and commercial real estate loans totaling $516.1 million during the
year ended December 31, 2007 and $521.2 million during the year ended December
31, 2006. At December 31, 2007, the Bank had commitments accepted by borrowers
to originate $96.3 million of multifamily residential and commercial real estate
loans, compared to $53.8 million outstanding at December 31, 2006.
At December 31, 2007, multifamily
residential and commercial real estate loans originated by the Bank were secured
by three distinct property types: (1) fully residential apartment buildings; (2)
"mixed-use" properties featuring a combination of residential and commercial
units within the same building; and (3) fully commercial buildings. The
underwriting procedures for each of these property types were substantially
similar. Loans secured by fully residential apartment buildings were classified
by the Bank as multifamily residential loans in all instances. Loans secured by
fully commercial real estate were classified as commercial real estate loans in
all instances. Loans secured by mixed-use properties were classified as either
multifamily residential or commercial real estate loans based upon the
percentage of the property's rental income received from its residential
compared to its commercial tenants. If 50% or more of the rental income is
received from residential tenants, the full balance of the loan is classified as
multifamily residential. If less than 50% of the rental income is received from
residential tenants, the full balance of the loan is classified as commercial
real estate. At December 31, 2007, mixed use properties classified as
multifamily residential or commercial real estate loans totaled $982.1
million.
Multifamily residential and
commercial real estate loans in the Bank's portfolio generally range in amount
from $250,000 to $4.0 million, and, at December 31, 2007, had an average loan
size of approximately $1.3 million. Multifamily residential loans in this range
are generally secured by buildings that possess between 5 and 100 apartments. As
of December 31, 2007, the Bank had a total of $1.76 billion of multifamily
residential loans in its portfolio secured by buildings with under 100 units,
representing approximately 61% of its real estate loan portfolio. Principally as
a result of NYC rent control and rent stabilization laws, which limit the amount
of rent that may be charged to tenants, a portion of the associated rent rolls
for buildings of this type indicate a rent range that would be considered
affordable for low- to moderate-income households, regardless of the household
income profiles of the associated census tracks.
Multifamily residential loans are
generally viewed as exposing the Bank to a greater risk of loss than one- to
four-family residential loans and typically involve higher loan principal
amounts. Repayment of multifamily residential loans is dependent, in
significant part, on cash flow from the collateral property sufficient to
satisfy operating expenses and debt service. Economic events and government
regulations, such as rent control and rent stabilization laws, which are outside
the control of the borrower or the Bank, could impair the future cash flow of
such properties. As a result, rental income might not rise sufficiently over
time to satisfy increases in the loan rate at repricing or in overhead expenses
(e.g., utilities,
taxes, and insurance).
The
underwriting standards for new multifamily residential and commercial real
estate loans generally require (1) a maximum loan-to-value ratio of 80% based
upon an appraisal performed by an independent, state licensed appraiser, and (2)
sufficient cash flow from the underlying property to adequately service the
debt, represented by a minimum debt service ratio of 115%. The average
loan-to-value and debt service ratios were 65% and 155%, respectively, on all
multifamily and commercial real estate loans that were originated during the
year ended December 31, 2007. The Bank additionally requires all multifamily and
commercial real estate borrowers to represent that they are unaware of any
environmental concerns related to the collateral. The Bank further considers the
borrower's experience in owning or managing similar properties, the value of the
collateral based upon the income approach, and the Bank's lending experience
with the borrower. The Bank utilizes rent or lease income and the borrower's
credit history and business experience when underwriting multifamily real estate
applications. When originating commercial real estate loans, the Bank
utilizes rent or lease income and the borrower's credit history and business
experience. (See "Item 1. Business - Lending Activities - Loan Approval
Authority and Underwriting" for a discussion of the Bank's underwriting
procedures utilized in originating multifamily residential and commercial real
estate loans).
It is the
Bank's policy to require appropriate insurance protection, including title and
hazard insurance, on all real estate mortgage loans at closing. Borrowers
generally are required to advance funds for certain expenses such as real estate
taxes, hazard insurance and flood insurance.
At
December 31, 2007, the Bank had 375 multifamily residential and commercial real
estate loans in portfolio with principal balances greater than $2.0 million,
totaling $1.43 billion. These loans, while underwritten to the same standards as
all other multifamily residential and commercial real estate loans, tend to
expose the Bank to a higher degree of risk due to the potential impact of losses
from any one loan relative to the size of the Bank's capital
position.
The
typical multifamily residential and commercial real estate ARM carries a final
maturity of 10 or 12 years, and an amortization period not exceeding 30 years.
These loans generally have an interest rate that adjusts once after the fifth or
seventh year, indexed to the 5-year FHLBNY advance rate plus a spread typically
approximating 225 basis points, but may not adjust below the initial interest
rate of the loan. Prepayment fees are assessed throughout the majority of the
life of the loans. The Bank also offers fixed-rate, self-amortizing, multifamily
residential and commercial real estate loans with maturities of up to fifteen
years.
Commercial
real estate loans are generally viewed as exposing the Bank to a greater risk of
loss than both one- to four-family and multifamily residential mortgage loans.
Because payments on loans secured by commercial real estate are often dependent
upon successful operation or management of the collateral properties, repayment
of such loans are generally subject to a greater extent to prevailing conditions
in the real estate market or the economy. Further, the collateral securing such
loans may depreciate over time, be difficult to appraise, or fluctuate in
value based upon the success of the business. In order to partially
compensate for this increased risk, the Bank requires, in addition to the
security interest in the commercial real estate, a security interest in the
personal property associated with the collateral and standby assignments of
rents and leases from the borrower.
The Bank's three largest multifamily
residential loans at December 31, 2007 were a $23.8 million loan originated in
March 2004 secured by an eight-story, mixed-use building located in Flushing,
New York, containing 137 residential apartments and 4 commercial units; a $15.0
million loan originated in December 2003 secured by a nine story building in
Manhattan, New York containing 159 loft cooperative apartments; and
a $13.6 million loan originated in May 2007 secured by four fully
residential buildings located in Brooklyn, New York containing a total of 242
apartments.
The Bank's three largest commercial
real estate loans at December 31, 2007 were a $15.4 million loan originated in
May 2005 secured by a three-story building located in Manhattan, New York
containing 10 retail stores; a $13.5 million loan originated in February 2007
secured by a professional office building located in White Plains, New York; and
an $11.8 million loan originated in July 2004 secured by a five-story mixed-use
building located in Manhattan, New York containing 30 residential apartments and
10 commercial units.
Small Mixed-Use Lending (Small
Investment Property Loans). Beginning in 2003, the Bank began
originating small investment property loans. Small investment property
loans are typically sourced through brokers. Generally, small investment
properties include: owner and non-owner occupied one- to four-family
residential, multifamily, or mixed-use properties under $1.0 million. One
important underwriting distinction between small investment property loans and
other loans in the Bank’s commercial real estate portfolio is that the appraised
value, in the majority of cases, is based upon a ‘comparable sales’ methodology
rather than an income approach methodology. Another important distinction
is that the loans are required to be personally guaranteed by the
borrowers. The appraisal methodology chosen can vary depending upon the
attributes of the underlying collateral and/or the availability of comparable
sales data. In cases where the comparable sales method of appraisal is
used, loans can have debt service coverage ratios below 1%. In such cases,
the Bank looks to the borrower’s financial capacity to carry the loan.
Small investment property loans typically carry higher rates of interest in
order to compensate the Bank for the assumed higher risk of default. Borrowers
may be owner/occupants of the subject properties; borrowers are always required
to provide the Bank with personal guarantees. Because these loans are
required to be personally guaranteed, the Bank relies heavily on both the
financial and credit information of borrowers in its’ underwriting. Small
commercial real estate loans can be underwritten to a maximum loan-to-value
ratio of 80%. In the minority of cases where the income approach to
appraised value is used, loans can be underwritten to a minimum debt service
ratio of 110%. At December 31, 2007, the Bank held in portfolio $72.6
million of loans classified as small investment property loans, or about 2% of
the gross loan portfolio, with a weighted average FICO score of 709 and a
weighted average loan-to-value ratio of 64%.
One- to Four-Family Residential and
Cooperative Apartment Lending. The Bank offers
residential first and second mortgage loans secured primarily by owner-occupied,
one- to four-family residences, including condominium and cooperative
apartments. The majority of one- to four-family residential loans in
the Bank's loan portfolio were obtained through the Bank's acquisitions of
Financial Federal Savings Bank in 1999 and Pioneer Savings Bank, F.S.B. in
1996. The Bank originated $16.6 million of one- to four-family
mortgages during the year ended December 31, 2007, including home equity and
home improvement loans. At December 31, 2007, $145.7 million, or
5.1%, of the Bank's loans consisted of one- to four-family residential and
cooperative apartment loans. The Bank is a participating
seller/servicer with FNMA and generally underwrites its one- to four-family
residential mortgage loans to conform with its standards.
Although the collateral securing
cooperative apartment loans is composed of shares in a cooperative corporation
(i.e., a corporation
whose primary asset is the underlying building) and a proprietary lease in the
borrower's apartment, cooperative apartment loans are treated as one- to
four-family loans. The Bank's portfolio of cooperative apartment
loans was $6.2 million, or 0.2% of total loans, as of December 31,
2007. The Bank did not originate any cooperative apartment loans
during the year ended December 31, 2007.
For all one- to four-family loans
originated by the Bank, upon receipt of a completed loan application from a
prospective borrower: (1) a credit report is reviewed; (2) income, assets,
indebtedness and certain other information are verified by an independent credit
agency; (3) if necessary, additional financial information is required of the
borrower; and (4) an appraisal of the real estate intended to secure the
proposed loan is obtained from an independent appraiser approved by the Board of
Directors.
The Bank generally sells its newly
originated conforming fixed-rate one- to four-family mortgage loans with
maturities in excess of 15 years in the secondary market to FNMA, and its
non-conforming fixed-rate one- to four-family mortgage loans with maturities in
excess of 15 years to various private sector secondary market
purchasers. With few exceptions, the Bank retains the servicing
rights on all such loans sold. During the year ended December 31,
2007, the Bank sold one- to four-family mortgage loans totaling $150,000 to
non-affiliates. As of December 31, 2007, the Bank's portfolio of one-
to four-family fixed-rate mortgage loans serviced for others totaled $21.5
million.
Home Equity and Home Improvement
Loans. Home equity loans and home improvement loans, the
majority of which are included in one- to four-family loans, are originated to a
maximum of $250,000. At the time of origination, the combined balance
of the first mortgage and home equity or home improvement loan may not exceed
the following limitations: (1) 89% of the appraised value of the collateral
property at origination of the home equity or home improvement loan in the event
that the Bank holds the first mortgage on the collateral property; or (2) 85% of
the appraised value of the collateral property at origination of the home equity
or home improvement loan in the event that the Bank does not hold the first
mortgage on the collateral property. On home equity and home
improvement loans, the borrower pays an initial interest rate that may be as low
as 200 basis points below the prime rate of interest in effect at
origination. After six months, the interest rate adjusts and ranges
from the prime interest rate in effect at the time to 100 basis points above the
prime interest rate in effect at the time. The combined outstanding
balance of the Bank's home equity and home improvement loans was $29.0 million
at December 31, 2007.
Equity credit lines are available on
multifamily residential and commercial real estate loans. These loans
are underwritten in the same manner as first mortgage loans on these properties,
except that the combined loan-to-value ratio of the first mortgage and the
equity line may not exceed 80%. On multifamily residential and
commercial real estate equity lines of credit, the borrower pays an interest
rate generally ranging from 100 to 200 basis points above the prime rate, based
upon the loan-to-value ratio of the combined first mortgage and equity credit at
the time of origination of the equity line of credit. The outstanding
balance of these equity loans (which are included in the $29.0 million of total
outstanding home equity and home improvement loans) was $11.9 million at
December 31, 2007, on outstanding total lines of $38.4 million.
Construction
Lending. The Bank participates in various real estate
construction loans underwritten by either qualified local financial institutions
or a prominant national construction lender. All of these
construction projects are located in Brooklyn or Queens, New York, and in most
instances, involve the conversion of desirable real estate from commercial to
residential use. Although it has assumed up to 90% participation on
some construction loan commitments, the Bank generally does not act as primary
underwriting agent for any of these loans. The Bank does, however,
carefully review the underwriting of these construction loans, and regularly
inspects the construction progress and engineering reports prior to advancing
funds. During the year ended December 31, 2007, the Bank funded $25.2
million of new construction loans. At December 31, 2007, the Bank had
$31.0 million in unfunded construction loan commitments.
Loan Approval Authority and
Underwriting. The Board of Directors of the Bank
establishes lending authorities for individual officers related to the various
types of loan products offered by the Bank. In addition, the Bank
maintains a Loan Operating Committee entrusted with loan approval
authority. The Loan Operating Committee is comprised of the Chief
Executive Officer, President, Chief Financial Officer, Chief Investment Officer,
Chief Lending Officer and a credit officer overseeing the underwriting function
for the type of loan under consideration. The Loan Operating
Committee has authority to approve loan originations in amounts up to $3.0
million. Both the Loan Operating Committee and the Bank's Board of
Directors must approve all loan originations exceeding $3.0
million. All loans approved by the Loan Operating Committee are
presented to the Bank's Board of Directors for its review.
Regulatory restrictions imposed on
the Bank's lending activities limit the amount of credit that may be extended to
any one borrower to 15% of unimpaired capital and unimpaired surplus. A single
borrower may exceed the initial 15% limit, up to a final limit of 25%, if he or
she secures the full amount of the outstanding loan balance in excess of the
initial 15% limit with collateral in the form of readily marketable securities
that have a reliable and continuously available price quotation. (See
"Item 1. Business - Regulation - Regulation of Federal Savings
Associations - Loans to One Borrower'').
Asset
Quality
At both December 31, 2007 and December
31, 2006, the Company had neither whole 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. (See "Item I – Business –
Lending Activities" for a further discussion of the Bank's underwriting
standards).
Non-performing loans (i.e., delinquent loans for
which interest accruals have ceased in accordance with the Bank's policy
discussed below - typically loans 90 days or more past due) totaled $2.9 million
and $3.6 million at December 31, 2007 and 2006, respectively. The
decrease in non-performing loans during the year resulted primarily from the
removal of four loans from non-performing status, totaling $2.0 million, that
was partially offset by the addition of four loans totaling $1.3 million during
the period.
Accrual of interest is discontinued on
loans identified as impaired (as defined below) and past due ninety days. Any
interest accrued to income in the year that interest accruals are discontinued
is reversed. Payments on nonaccrual loans are generally applied to
principal. 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 period of at
least twelve consecutive months.
The Bank had a total of 7 real estate
and consumer loans, totaling $1.9 million, delinquent 60-89 days at December 31,
2007, compared to a total of 16 such delinquent loans, totaling $258,000, at
December 31, 2006. The majority of the dollar amount of both
non-performing loans and loans delinquent 60-89 days was comprised of real
estate loans. The majority of the count of both non-performing loans
and loans delinquent 60-89 days was composed of consumer loans (primarily
depositor loans). The growth in the dollar amount delinquent 60-89
days from December 31, 2006 to December 31, 2007 resulted primarily from a net
increase of $1.4 million of 60 to 89 day 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.
Under accounting principles generally
accepted in the United States of America ("GAAP"), the Bank is required 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 either the loan is repaid or returns to its original terms. The
Bank had no loans classified as troubled-debt restructurings at December 31,
2007 or 2006.
Statement of Financial Accounting
Standards ("SFAS") 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"), provides guidelines for determining and measuring impairment in
loans. For each loan that the Bank determines to be impaired, (i.e., possessing underlying
collateral of an estimated fair value insufficient to satisfy the existing
debt), impairment is measured by the amount that the carrying balance of the
loan, including all accrued interest, exceeds the estimate of the 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. A loan is considered impaired when it is probable that
all contractual amounts due will not be collected in accordance with the terms
of the loan. A loan is not deemed to be impaired, even during a period of
delayed payment by the borrower, if the Bank ultimately expects to collect all
amounts due, including interest accrued at the contractual rate. Generally, the
Bank considers non-performing and troubled-debt restructured multifamily
residential and commercial real estate loans, along with non-performing one- to
four-family loans exceeding $417,000, to be impaired. Non-performing one-to
four-family loans of $417,000 or less, as well as all consumer loans, are
considered homogeneous loan pools and are not required to be evaluated
individually for impairment. The recorded investment in loans deemed
impaired was approximately $2.8 million, consisting of six loans, at December
31, 2007, compared to $3.5 million, consisting of six loans, at December 31,
2006, and $84,000, consisting of one loan, at December 31, 2005. The
average total balance of impaired loans was approximately $2.7 million during
the year ended December 31, 2007, $1.9 million during the year ended December
31, 2006, and $2.3 million during the year ended December 31,
2005. During the year ended December 31, 2007, three impaired loans
totaling $2.0 million were removed from impaired status while three loans
totaling $1.2 million were added to impaired status. Since much of
the activity occurred during the final six months of 2007, while the period-end
balance of impaired loans declined from December 31, 2006 to December 31, 2007,
the average balance was higher during the year ended December 31, 2007, as $3.5
million of impaired loans added during the year ended December 31, 2006 had a
greater impact on the average balance of impaired loans during 2007 than
2006.
Since the
six impaired loans totaling $3.5 million added to impaired status during the
year ended December 31, 2006 were added throughout the year, their impact upon
the average balance of impaired loans was significantly lower than the change in
the aggregate balance of impaired loans from December 31, 2005 to December 31,
2006. Similarly, during the year ended December 31, 2005, the majority of
impaired loans entered impaired status early in the year but were repaid prior
to December 31st. As
a result, although there was an increase in the balance of impaired loans from
December 31, 2005 to December 31, 2006, the average balance of impaired loans
was higher during the year ended December 31, 2005 compared to the year ended
December 31, 2006.
At
December 31, 2007 and 2006, reserves totaling $348,000 and $351,000,
respectively, were allocated within the allowance for loan losses for impaired
loans. At December 31, 2007, non-performing loans exceeded impaired
loans by $42,000, due to $42,000 of one- to four-family and consumer loans,
which, while on non-performing status, were not deemed impaired since they had
individual outstanding balances of $417,000 or less.
Other Real Estate Owned
(“OREO”). Property acquired by the Bank as a result of a
foreclosure on a mortgage loan or 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 and any disposition expenses
charged to the valuation allowance for possible losses on OREO. The Bank obtains
a current appraisal on OREO property as soon as practicable after it takes
possession and will generally reassess the value of OREO at least annually
thereafter. There were no OREO properties as of December 31, 2007,
2006 and 2005.
The
following table sets forth information regarding non-performing loans, OREO, and
troubled-debt restructurings at the dates indicated:
|
At
December 31,
|
|||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
|
|
Non-performing
loans
|
(Dollars
in Thousands)
|
||||
|
One-
to four-family
|
$11
|
$60
|
$317
|
$475
|
$346
|
|
Multifamily
residential
|
2,236
|
1,655
|
384
|
830
|
-
|
|
Commercial
real estate
|
577
|
1,859
|
|||
|
Cooperative
apartment
|
27
|
26
|
229
|
-
|
-
|
|
Other
|
5
|
6
|
28
|
154
|
179
|
|
Total
non-performing loans
|
2,856
|
3,606
|
958
|
1,459
|
525
|
|
OREO
|
-
|
-
|
-
|
-
|
-
|
|
Total
non-performing assets
|
2,856
|
3,606
|
958
|
1,459
|
525
|
|
Troubled-debt
restructurings
|
-
|
-
|
-
|
-
|
-
|
|
Total
non-performing assets and
troubled-debt
restructurings
|
$2,856
|
$3,606
|
$958
|
$1,459
|
$525
|
|
Impaired
loans
|
$2,814
|
$3,514
|
$384
|
$830
|
$-
|
|
Ratios:
|
|||||
|
Total
non-performing loans to total loans
|
0.10%
|
0.13%
|
0.04%
|
0.06%
|
0.02%
|
|
Total
non-performing loans and troubled-debt
restructurings
to total loans
|
0.10
|
0.13
|
0.04
|
0.06
|
0.02
|
|
Total
non-performing assets to total assets
|
0.08
|
0.11
|
0.03
|
0.04
|
0.02
|
|
Total
non-performing assets and troubled-
debt
restructurings to total assets
|
0.08
|
0.11
|
0.03
|
0.04
|
0.02
|
Monitoring and Collection of
Delinquent Loans. Management of the Bank reviews delinquent
loans on a monthly basis and reports to its Board of Directors regarding the
status of all non-performing and otherwise delinquent loans in the Bank's
portfolio.
The
Bank's loan servicing policies and procedures require that an automated late
notice be sent to a delinquent borrower as soon as possible after a payment is
ten days late in the case of a multifamily residential or commercial real estate
loan, or fifteen days late in connection with a one- to four-family or consumer
loan. A second letter is sent to the borrower if payment has not been
received within 30 days of the due date. Thereafter, periodic letters
are mailed and phone calls are placed to the borrower until payment is
received. When contact is made with the borrower at any time prior to
foreclosure, the Bank will attempt to obtain the full payment due or negotiate a
repayment schedule with the borrower to avoid foreclosure.
Generally,
the Bank initiates foreclosure proceedings when a loan is 90 days past
due. As soon as practicable after initiating foreclosure proceedings,
the Bank procures current appraisal information in order to prepare an estimate
of the fair value of the underlying collateral. If a foreclosure
action is instituted and the loan is not brought current, paid in full, or
refinanced before the foreclosure action is completed, the property securing the
loan is generally sold. It is the Bank's general policy to dispose of
OREO properties as quickly and prudently as possible in consideration of market
conditions, the physical condition of the property and any other mitigating
circumstances.
Classified
Assets. OTS regulations and Bank policy require that loans and
other assets possessing certain negative characteristics be classified as
''Substandard,'' ''Doubtful'' or ''Loss'' assets. An asset is considered
''Substandard'' if it is inadequately protected by the current net worth and
paying capacity of the obligor or the collateral pledged, if any.
''Substandard'' assets have a well-defined weakness or weaknesses and are
characterized by the distinct possibility that the Bank will sustain ''some
loss'' if deficiencies are not corrected. Assets classified as ''Doubtful'' have
all of the weaknesses inherent in those classified ''Substandard'' with the
added characteristic that the weaknesses present make ''collection or
liquidation in full,'' on the basis of current existing facts, conditions, and
values, ''highly questionable and improbable.'' Assets classified as ''Loss''
are those considered ''uncollectible'' and of such little value that their
continuance as assets without the establishment of a specific loss reserve is
not warranted. Assets which do not expose the Bank to risk sufficient
to warrant classification in one of the aforementioned categories, but possess
potential weaknesses that deserve management's attention, are designated
''Special Mention.''
The Bank's Loan Loss Reserve
Committee, subject to approval of the Bank's Board of Directors, establishes
policies relating to the internal classification of loans. The Bank
believes that its classification policies are consistent with regulatory
requirements. All non-performing and impaired loans, troubled-debt
restructurings and OREO are considered classified assets. In addition, the Bank
maintains a "watch list," comprised of loans that, while performing, are
characterized by weaknesses requiring special attention from management and are
considered to be potential problem loans. This list includes loans
that have either been classified as Substandard or Special Mention in previous
years but have remained current for at least 12 months or loans that have
experienced irregular payment histories.
The Loan Loss Reserve Committee
reviews all loans in the Bank's portfolio quarterly, with particular emphasis on
problem loans, in order to determine whether any loans require reclassification
in accordance with applicable regulatory guidelines. The Loan Loss
Reserve Committee reports its conclusions to the Bank's Board of Directors on a
quarterly basis.
During the year ended December 31,
2007 the Bank's classified assets continued at historically low levels, despite
a slowdown in what had been a prolonged period of favorable real estate market
conditions in the NYC metropolitan area. The watch list
contained 7 loans totaling $1.8 million at December 31, 2007, compared to 5
loans totaling $773,000 at December 31, 2006. The increase resulted
from the addition of a $1.0 million loan to the watch list during
2007. At both December 31, 2007 and 2006, the Bank had no assets
classified as either Doubtful or Loss. At December 31, 2007, the Bank
had 31 loans totaling $1.2 million designated Special Mention, compared to 47
loans totaling $783,000 at December 31, 2006, reflecting the increase in watch
list loan balance during the year ended December 31, 2007. At both
December 31, 2007 and 2006, the Bank had $3.7 million of assets classified as
Substandard.
The following table sets forth the
Bank's aggregate carrying value of the assets classified as either Substandard
or Special Mention at December 31, 2007:
|
Special
Mention
|
Substandard
|
||||
|
Number
|
Amount
|
Number
|
Amount
|
||
|
(Dollars
in Thousands)
|
|||||
|
Mortgage
Loans:
|
|||||
|
Multifamily
residential
|
2
|
$1,044
|
4
|
$1,916
|
|
|
One-
to four-family
|
1
|
58
|
-
|
-
|
|
|
Cooperative
apartment
|
3
|
102
|
1
|
38
|
|
|
Commercial
real estate
|
-
|
-
|
2
|
1,715
|
|
|
Total
Mortgage Loans
|
6
|
1,204
|
7
|
$3,669
|
|
|
Other
loans
|
25
|
36
|
6
|
5
|
|
|
OREO
|
-
|
-
|
-
|
-
|
|
|
Total
|
31
|
$1,240
|
13
|
$3,674
|
|
F-59
Allowance
for Loan Losses
GAAP requires the Bank to maintain an
appropriate allowance for loan losses. The Bank believes that its
allowance for loan losses was determined in accordance with such
requirements. The Loan Loss Reserve Committee is charged with, among
other functions, responsibility for monitoring the appropriateness of the loan
loss reserve. The Loan Loss Reserve Committee's findings, along with
recommendations for changes to loan loss reserve provisions, if any, are
reported directly to the Bank's senior management and Board of
Directors. The following table sets forth activity in the Bank's
allowance for loan losses at or for the dates indicated:
|
At
or for the Year Ended December 31,
|
|||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
|
|
(Dollars
in Thousands)
|
|||||
|
Total
loans outstanding at end of period (1)
|
$2,877,025
|
$2,703,673
|
$2,612,095
|
$2,501,805
|
$2,192,640
|
|
Average
total loans outstanding (1)
|
$2,777,220
|
$2,651,601
|
$2,535,574
|
$2,397,187
|
$2,206,003
|
|
Allowance
for loan losses:
|
|||||
|
Balance
at beginning of period
|
$15,514
|
$15,785
|
$15,543
|
$15,018
|
$15,458
|
|
Provision
for loan losses
|
240
|
240
|
340
|
280
|
288
|
|
Charge-offs
|
|||||
|
Multifamily
residential
|
-
|
-
|
-
|
-
|
-
|
|
Commercial
real estate
|
-
|
-
|
-
|
-
|
-
|
|
One-
to four-family
|
-
|
(2)
|
-
|
(3)
|
(2)
|
|
FHA/VA
insured
|
-
|
-
|
-
|
-
|
-
|
|
Cooperative
apartment
|
-
|
-
|
-
|
-
|
(1)
|
|
Other
|
(28)
|
(48)
|
(76)
|
(155)
|
(60)
|
|
Total
charge-offs
|
(28)
|
(50)
|
(76)
|
(158)
|
(63)
|
|
Recoveries
|
19
|
23
|
31
|
25
|
34
|
|
Reserve
for loan commitments
transferred
(to) from other liabilities
|
(358)
|
(484)
|
(53)
|
378
|
(699)
|
|
Balance
at end of period
|
$15,387
|
$15,514
|
$15,785
|
$15,543
|
$15,018
|
|
Allowance
for loan losses to
total
loans at end of period
|
0.53%
|
0.57%
|
0.60%
|
0.62%
|
0.68%
|
|
Allowance
for loan losses to total
non-performing
loans at end of period
|
538.76
|
430.23
|
1,647.70
|
1,065.32
|
2,860.57
|
|
Allowance
for loan losses to total non-performing
loans
and troubled-debt restructurings at end of period
|
538.76
|
430.23
|
1,647.70
|
1,065.32
|
2,860.57
|
|
Ratio
of net charge-offs to average loans outstanding
during
the period
|
-
|
-
|
-
|
-
|
-
|
|
(1)
|
Total
loans represent gross loans, net of deferred loan fees and
discounts.
|
Based upon its evaluation of the
loan portfolio, management believes that the Bank maintained its allowance for
loan losses at a level appropriate to absorb losses inherent within the Bank's
loan portfolio as of the balance sheet dates. Factors considered in
determining the appropriateness of the allowance for loan losses include the
Bank's past loan loss experience, known and inherent risks in the portfolio,
existing adverse situations which may affect a borrower's ability to repay,
estimated value of underlying collateral and current economic conditions in the
Bank's lending area. Although management uses available information to estimate
losses on loans, future additions to, or reductions in, the allowance may be
necessary based on changes in economic conditions beyond management's control.
In addition, various regulatory agencies, as an integral part of their
examination processes, periodically review the Bank's allowance for loan losses.
Such agencies may require the Bank to recognize additions to, or reductions in,
the allowance based upon judgments different from those of
management.
The allowance for loan losses was
$15.4 million at December 31, 2007 compared to $15.5 million at December 31,
2006. During the year ended December 31, 2007, the Bank recorded a provision of
$240,000 to the allowance for loan losses to provide for growth in its loan
portfolio balances. In addition during the year ended December
31, 2007, the Bank re-designated $358,000 of its allowance for loan losses into
other liabilities related to reserves on loan origination
commitments. The Bank also recorded net charge-offs of $9,000 during
the year ended December 31, 2007, all of which related to consumer
loans.
The
following table sets forth the Bank's allowance for loan losses allocated by
loan category and the percent of loans in each category to total loans at the
dates indicated:
F-59
|
At
December 31,
|
||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||
|
Allocated
Amount
|
Percent
of
Loans
in
Each Category to Total Loans(1)
|
Allocated
Amount
|
Percent
of
Loans
in
Each Category to Total Loans(1)
|
Allocated
Amount
|
Percent
of
Loans
in
Each Category to Total Loans(1)
|
Allocated
Amount
|
Percent
of
Loans
in
Each Category to Total Loans(1)
|
Allocated
Amount
|
Percent
of
Loans
in
Each Category to Total Loans(1)
|
|
|
(Dollars
in Thousands)
|
||||||||||
|
Impaired
loans
|
$348
|
0.10%
|
$351
|
0.13%
|
$38
|
0.01%
|
$83
|
0.04%
|
$-
|
-
|
|
Multifamily
residential
|
9,381
|
67.72
|
8,948
|
68.62
|
10,137
|
71.75
|
11,753
|
76.72
|
11,391
|
79.24%
|
|
Commercial
real estate
|
4,449
|
25.31
|
5,208
|
24.61
|
4,759
|
22.10
|
3,161
|
16.98
|
2,742
|
14.15
|
|
One-to
four- family
|
347
|
4.86
|
496
|
5.43
|
496
|
5.20
|
436
|
5.05
|
686
|
5.67
|
|
Cooperative
apartment
|
33
|
0.21
|
45
|
0.27
|
59
|
0.39
|
65
|
0.47
|
124
|
0.63
|
|
Construction
and
land
acquisition
|
764
|
1.72
|
392
|
0.86
|
196
|
0.46
|
-
|
0.62
|
-
|
0.13
|
|
Other
|
65
|
0.08
|
74
|
0.08
|
100
|
0.09
|
45
|
0.12
|
75
|
0.18
|
|
Total
|
$15,387
|
100.00%
|
$15,514
|
100.00%
|
$15,785
|
100.00%
|
$15,543
|
100.00%
|
$15,018
|
100.00%
|
|
(1)
|
Total
loans represent gross loans less FHA and VA guaranteed
loans.
|
Investment
Activities
Investment Strategies of the Holding
Company. At December 31, 2007, the Holding Company's principal
asset was its $321.1 million investment in the Bank's common
stock. Other Holding Company investments are intended primarily to
provide future liquidity which may be utilized for general business
activities. These may include, but are not limited to: (1) purchases
of the Holding Company's common stock into treasury; (2) repayment of principal
and interest on the Holding Company's $25.0 million subordinated note obligation
and $72.2 million trust preferred securities borrowing; (3) subject to
applicable dividend restriction limitations, the payment of dividends on the
Holding Company's common stock; and/or (4) investments in the equity securities
of other financial institutions and other investments not permitted to the
Bank. The Holding Company's investment policy calls for investments
in relatively short-term, liquid securities similar to those permitted by the
securities investment policy of the Bank. The Holding Company cannot
assure that it will engage in any of these activities in the
future.
Investment Policy of the
Bank. The investment policy of the Bank, which is
adopted by its Board of Directors, is designed to help achieve the Bank's
overall asset/liability management objectives and to comply with applicable OTS
regulations. Generally, when selecting new investments for the Bank's
portfolio, the policy calls for management to emphasize principal preservation,
liquidity, diversification, short maturities and/or repricing terms, and a
favorable return on investment. The policy permits investments in various types
of liquid assets, including obligations of the U.S. Treasury and federal
agencies, investment grade corporate debt, various types of MBS, commercial
paper, certificates of deposit ("CDs") and overnight federal funds sold to
financial institutions. The Bank's Board of Directors periodically
approves all financial institutions that buy federal funds from the
Bank.
Investment strategies are implemented
by the Asset and Liability Management Committee ("ALCO"), which is comprised of
the Chief Financial Officer, Chief Investment Officer, Treasurer and other
financial officers. The strategies take into account the overall
composition of the Bank's balance sheet, including loans and deposits, and are
intended to protect and enhance the Bank's earnings and market
value. The strategies are reviewed monthly by the ALCO and reported
regularly to the Board of Directors.
The Holding Company or the Bank may,
with respective Board approval, engage in hedging transactions utilizing
derivative instruments. During the years ended December 31, 2007 and
2006, neither the Holding Company nor the Bank held any derivative instruments
or embedded derivative instruments that required bifurcation.
MBS. MBS provide
the portfolio with investments offering desirable repricing, cash flow and
credit quality characteristics. MBS yield less than the loans that underlie the
securities as a result of the cost of payment guarantees and credit enhancements
which reduce credit risk to the investor. Although MBS guaranteed by
federally sponsored agencies carry a reduced credit risk compared to whole
loans, such securities remain subject to the risk that fluctuating interest
rates, along with other factors such as the geographic distribution of the
underlying mortgage loans, may alter the prepayment rate of such loans and thus
affect both the prepayment speed and value of such securities. MBS,
however, are more liquid than individual mortgage loans and may readily be used
to collateralize borrowings. The MBS portfolio also provides the
Holding Company and the Bank with important interest rate risk management
features, as the entire portfolio provides monthly cash flow for re-investment
at current market interest rates. At December 31, 2007 and 2006,
respectively, all MBS owned by the Company possessed the highest possible
investment credit rating.
The Company's consolidated investment
in MBS totaled $162.8 million, or 4.6% of total assets, at
December 31, 2007, the majority of which was owned by the
Bank. At December 31, 2007, the largest component of the portfolio
was $117.2 million in Collateralized Mortgage Obligations ("CMOs") and Real
Estate Mortgage Investment Conduits ("REMICs") owned by the Bank. All
of the CMOs and REMICs were either U.S agency guaranteed obligations or issued
by highly rated private financial institutions. All of the non-agency
guaranteed obligations were rated in the highest ratings category by at least
one nationally recognized rating agency at the time of purchase. None
of the CMOs and REMICs had stripped principal and interest components and all
occupied priority tranches within their respective issues. As of
December 31, 2007, the fair value of CMOs and REMICs was approximately $2.2
million below their cost basis.
The remaining MBS portfolio was
comprised of pass-through securities guaranteed by the Federal Home Loan
Mortgage Corporation ("FHLMC"), Government National Mortgage Agency ("GNMA") or
FNMA. These securities approximated 23.1% of the total MBS portfolio
at December 31, 2007. This portion of the portfolio was comprised of
$36.4 million of FHLMC or FNMA securities that are fixed for a period of five or
seven years and then reset annually thereafter, $6.4 million of
seasoned fixed-rate FNMA pass-through securities with an average estimated
duration of less than 3.0 years, $1.3 million of GNMA ARM pass-through
securities with a weighted average term to next rate adjustment of less than one
year, and a $1.4 million FNMA 18-year balloon MBS.
GAAP requires that investments in
equity securities have readily determinable fair values and investments in debt
securities be classified in one of the following three categories and accounted
for accordingly: trading securities, securities available for sale or
securities held to maturity. Neither the Holding Company nor the Bank
owned any securities classified as trading securities during the twelve months
ended December 31, 2007, nor do they presently anticipate establishing
a trading portfolio. Unrealized gains and losses on available for
sale securities are reported as a separate component of stockholders' equity
referred to as accumulated other comprehensive income, net of deferred
taxes. At December 31, 2007, the Holding Company and the Bank owned,
on a combined basis, $196.9 million of securities classified as available for
sale, which represented 5.6% of total assets. Based upon the size of the
available for sale portfolio, future variations in the market value of the
available for sale portfolio could result in fluctuations in the Company's
consolidated stockholders' equity.
The Company typically classifies MBS
as available for sale, in recognition of the greater prepayment uncertainty
associated with these securities, and carries them at fair market
value. The amortized cost of MBS available for sale (excluding CMOs
and REMICs) was $420,000 above their fair value at December 31,
2007.
The following table sets forth
activity in the MBS portfolio for the periods indicated:
|
For
the Year Ended December 31,
|
|||
|
2007
|
2006
|
2005
|
|
|
Dollars
in Thousands
|
|||
|
Amortized
cost at beginning of period
|
$160,096
|
$199,931
|
$526,074
|
|
(Sales)
Purchases, net
|
37,992
|
-
|
(235,791)
|
|
Principal
repayments
|
(33,329)
|
(39,420)
|
(89,072)
|
|
Premium
amortization, net
|
(256)
|
(415)
|
(1,280)
|
|
Amortized
cost at end of period
|
$164,503
|
$160,096
|
$199,931
|
Corporate Debt
Obligations. Both the Holding Company and the Bank invest in
short-term investment-grade debt obligations of various corporations. Corporate
debt obligations generally carry both a higher rate of return and a higher
degree of credit risk than U.S. Treasury and agency securities with comparable
maturities. In addition, corporate securities are generally less liquid than
comparable U.S. Treasury and agency securities. In recognition of the additional
risks associated with these securities, the Bank's investment policy limits new
investments in corporate debt obligations to companies rated single ''A'' or
better by one of the nationally recognized rating agencies, and limits
investments in any one corporate entity to the lesser of 1% of total assets or
15% of the Bank's equity. At December 31, 2007, the Company's consolidated
portfolio of corporate debt obligations totaled $17.0 million. All of
these investments were held by the Bank.
Municipal Agencies. At
December 31, 2007, the Bank had an investment in municipal agency obligations
totaling $10.1 million, all of which were acquired during
2007. At December 31, 2007, the market value of these securities
exceeded their amortized cost basis, and they possessed a weighted average
tax-adjusted yield approximating 4.1% and a weighted average duration
approximating 7.0 years.
Equity
Investments. The Company's consolidated investment in equity
securities totaled $7.1 million at December 31, 2007, and was comprised
primarily of various equity mutual fund investments.
The following table sets forth the
amortized cost and fair value of the total portfolio of investment securities
and MBS at the dates indicated:
|
At
December 31,
|
||||||
|
2007
|
2006
|
2005
|
||||
|
Amortized
Cost
|
Fair
Value
|
Amortized
Cost
|
Fair
Value
|
Amortized
Cost
|
Fair
Value
|
|
|
MBS:
|
Dollars
in Thousands
|
|||||
|
CMOs
and REMICs
|
$119,386
|
$117,228
|
$148,461
|
$143,157
|
$185,510
|
$179,495
|
|
FHLMC
|
31,174
|
31,611
|
-
|
-
|
-
|
-
|
|
FNMA
|
12,677
|
12,646
|
9,862
|
9,488
|
12,077
|
11,599
|
|
GNMA
|
1,266
|
1,279
|
1,773
|
1,792
|
2,344
|
2,359
|
|
Total
MBS
|
164,503
|
162,764
|
160,096
|
154,437
|
199,931
|
193,453
|
|
Investment
securities:
|
||||||
|
U.S.
Treasury and agency
|
-
|
-
|
-
|
-
|
17,067
|
17,060
|
|
Municipal
agencies
|
9,951
|
10,028
|
-
|
-
|
-
|
-
|
|
Other
|
24,830
|
24,147
|
29,738
|
29,783
|
27,322
|
28,228
|
|
Total
investment securities
|
34,781
|
34,175
|
29,738
|
29,783
|
44,389
|
45,288
|
|
Net
unrealized loss (1)
|
(2,345)
|
-
|
(5,614)
|
-
|
(5,581)
|
-
|
|
Total
securities, net
|
$196,939
|
$196,939
|
$184,220
|
$184,220
|
$238,739
|
$238,741
|
|
(1)
|
The
net unrealized loss relates to available for sale securities in accordance
with SFAS 115, "Accounting for Investments in Debt and Equity Securities."
("SFAS 115"). The net unrealized loss is presented in order to
reconcile the amortized cost of the available for sale securities
portfolio to the recorded value reflected in the Company's Consolidated
Statements of Financial Condition.
|
The following table sets forth the
amortized cost and fair value of the total portfolio of investment securities
and MBS, by accounting classification and type of security, at the dates
indicated:
|
At
December 31,
|
||||||
|
2007
|
2006
|
2005
|
||||
|
Amortized
Cost
|
Fair
Value
|
Amortized
Cost
|
Fair
Value
|
Amortized
Cost
|
Fair
Value
|
|
|
Held-to-Maturity:
|
Dollars
in Thousands
|
|||||
|
MBS
(1)
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
|
Investment
securities (2)
|
80
|
80
|
235
|
235
|
455
|
456
|
|
Total
Held-to-Maturity
|
$80
|
$80
|
$235
|
$235
|
$455
|
$456
|
|
Available-for-Sale:
|
||||||
|
MBS:
|
||||||
|
Pass-through
securities
|
$45,117
|
$45,536
|
$11,635
|
$11,280
|
$14,421
|
$13,958
|
|
CMOs
and REMICs
|
119,386
|
117,228
|
148,461
|
143,157
|
185,510
|
179,495
|
|
Total
MBS available-for-sale
|
164,503
|
162,764
|
160,096
|
154,437
|
199,931
|
193,453
|
|
Investment
securities (2)
|
34,701
|
34,095
|
29,503
|
29,548
|
43,934
|
44,832
|
|
Net
unrealized loss (3)
|
(2,345)
|
-
|
(5,614)
|
-
|
(5,581)
|
-
|
|
Total
Available-for-Sale
|
$196,859
|
$196,859
|
$183,985
|
$183,985
|
$238,284
|
$238,285
|
|
Total
securities, net
|
$196,939
|
$196,939
|
$184,220
|
$184,220
|
$238,739
|
$238,741
|
(1) Includes
both pass-through securities and investments in CMOs and REMICs.
(2) Includes
corporate debt obligations.
|
(3)
|
The
net unrealized loss relates to available for sale securities in accordance
with SFAS 115. The net unrealized loss is presented in order to reconcile
the amortized cost of the available for sale securities portfolio to the
recorded value reflected in the Company's Consolidated Statements of
Condition.
|
The held to maturity security at
December 31, 2007 is scheduled to mature during the year ending December 31,
2008 and has a weighted average yield of 7.50%.
The following table sets forth
certain information regarding the amortized cost, fair value and weighted
average yield of available for sale investment securities and MBS (exclusive of
equity investments) at December 31, 2007, by remaining period to contractual
maturity. With respect to MBS, the entire carrying amount of each security at
December 31, 2007 is reflected in the maturity period that includes the final
security payment date and, accordingly, no effect has been given to periodic
repayments or possible prepayments. The investment policies of both
the Holding Company and the Bank call for the purchase of only priority tranches
when investing in MBS. As a result, the weighted average duration of
the Company's MBS approximated 2.5 years as of December 31, 2007 when giving
consideration to anticipated repayments or possible prepayments, which is far
less than their calculated average maturity in the table below. Other
than obligations of federal agencies and GSEs, neither the Holding Company nor
the Bank had a combined investment in securities issued by any one entity in
excess of the lesser of 1% of total assets or 15% of the Bank's equity at
December 31, 2007.
|
Amortized
Cost
|
Fair
Value
|
Weighted
Average
Yield
|
|
|
(Dollars
in Thousands)
|
|||
|
MBS:
|
|||
|
Due
within 1 year
|
-
|
-
|
-
|
|
Due
after 1 year but within 5 years
|
-
|
-
|
-
|
|
Due
after 5 years but within 10 years
|
$71,959
|
$70,666
|
3.92%
|
|
Due
after ten years
|
92,544
|
92,098
|
4.74
|
|
Total
|
164,503
|
162,764
|
4.38
|
|
Municipal
agency:
|
|||
|
Due
within 1 year
|
-
|
-
|
-
|
|
Due
after 1 year but within 5 years
|
348
|
351
|
3.79
|
|
Due
after 5 years but within 10 years
|
9,603
|
9,677
|
3.73
|
|
Due
after ten years
|
-
|
-
|
-
|
|
Total
|
9,951
|
10,028
|
3.73
|
|
Corporate
and other:
|
|||
|
Due
within 1 year
|
5,218
|
5,190
|
5.81
|
|
Due
after 1 year but within 5 years
|
-
|
-
|
-
|
|
Due
after 5 years but within 10 years
|
-
|
-
|
-
|
|
Due
after ten years
|
11,959
|
11,765
|
6.80
|
|
Total
|
17,177
|
16,955
|
6.50
|
|
Total:
|
|||
|
Due
within 1 year
|
5,218
|
5,190
|
5.81
|
|
Due
after 1 year but within 5 years
|
348
|
351
|
3.79
|
|
Due
after 5 years but within 10 years
|
81,562
|
80,343
|
3.90
|
|
Due
after ten years
|
104,503
|
103,863
|
4.98
|
|
Total
|
$191,631
|
$189,747
|
4.54%
|
Sources
of Funds
General. The
Bank's primary sources of funding for its lending and investment activities
include deposits, repayments of loans and MBS, investment security
maturities and redemptions, FHLBNY advances and borrowing in the form of REPOS
entered into with various financial institutions, including the
FHLBNY. The Bank also sells selected multifamily residential and
mixed use loans to FNMA, and all long-term, one- to four-family residential real
estate loans to either FNMA or other financial institutions. The
Company may additionally issue debt under appropriate
circumstances.
Deposits. The
Bank offers a variety of deposit accounts possessing a range of interest rates
and terms. At December 31, 2007, the Bank offered, and presently
offers, savings, money market, checking, NOW and Super NOW accounts, and CDs.
The flow of deposits is influenced significantly by general economic conditions,
changes in prevailing interest rates, and competition from other financial
institutions and investment products. Traditionally, the Bank has relied upon
direct marketing, customer service, convenience and long-standing relationships
with customers to generate deposits. The communities in which the
Bank maintains branch offices have historically provided nearly all of its
deposits. At December 31, 2007, the Bank had deposit liabilities of $2.18
billion, up $171.5 million from December 31, 2006 (See "Part II - Item 7 –
Management's Discussion and Analysis of Financial Condition and Results of
Operations – Liquidity and Capital Resources"). Within total deposits
at December 31, 2007, $364.6 million, or 16.7%, consisted of CDs with a minimum
denomination of one-hundred thousand dollars. Individual Retirement
Accounts totaled $120.6 million, or 5.5% of total deposits on that
date.
The Bank is authorized to accept
brokered CDs up to an aggregate limit of $120.0 million. At December
31, 2007 and 2006, the Bank had no brokered CDs.
The following table presents the
deposit activity of the Bank for the periods indicated:
|
Year
Ended December 31,
|
|||
|
2007
|
2006
|
2005
|
|
|
(Dollars
in Thousands)
|
|||
|
Deposits
|
$3,098,739
|
$1,826,641
|
$2,942,773
|
|
Withdrawals
|
3,003,034
|
1,789,552
|
3,279,191
|
|
Deposits
(less) greater than Withdrawals
|
$95,705
|
$37,089
|
(336,418)
|
|
Interest
credited
|
75,761
|
56,671
|
41,141
|
|
Total
(decrease) increase in deposits
|
$171,466
|
$93,760
|
$(295,277)
|
At December 31, 2007, the Bank had
$364.6 million in CDs with a minimum denomination of one-hundred thousand
dollars as follows:
|
Maturity
Period
|
Amount
|
Weighted
Average Rate
|
|
(Dollars
in Thousands)
|
||
|
Within
three months
|
$121,329
|
4.61%
|
|
After
three but within six months
|
181,170
|
4.88
|
|
After
six but within twelve months
|
36,636
|
4.46
|
|
After
12 months
|
25,456
|
4.55
|
|
Total
|
$364,591
|
4.72%
|
The following table sets forth the
distribution of the Bank's deposit accounts and the related weighted average
interest rates at the dates indicated:
|
At
December 31, 2007
|
At
December 31, 2006
|
At
December 31, 2005
|
|||||||||
|
Amount
|
Percent
of
Total Deposits
|
Weighted
Average Rate
|
Amount
|
Percent
of Total Deposits
|
Weighted
Average Rate
|
Amount
|
Percent
of Total Deposits
|
Weighted
Average Rate
|
|||
|
(Dollars
in Thousands)
|
|||||||||||
|
Savings
accounts
|
$274,067
|
12.57%
|
0.55%
|
$298,522
|
14.86%
|
0.59%
|
$335,527
|
17.52%
|
0.56%
|
||
|
CDs
|
1,077,087
|
49.41
|
4.61
|
1,064,669
|
53.01
|
4.76
|
978,585
|
51.11
|
3.50
|
||
|
Money
market accounts
|
678,759
|
31.14
|
4.04
|
514,607
|
25.62
|
3.56
|
464,962
|
24.28
|
1.69
|
||
|
NOW
and
Super
NOW accounts
|
58,414
|
2.68
|
2.28
|
35,519
|
1.77
|
1.08
|
38,697
|
2.02
|
1.01
|
||
|
Checking
accounts
|
91,671
|
4.20
|
0.15
|
95,215
|
4.74
|
-
|
97,001
|
5.07
|
-
|
||
|
Totals
|
$2,179,998
|
100.00%
|
3.67%
|
$2,008,532
|
100.00%
|
3.54%
|
$1,914,772
|
100.00%
|
2.32%
|
||
F-59
The following table presents, by
interest rate ranges, the dollar amount of CDs outstanding at the dates
indicated and the period to maturity of the CDs outstanding at December 31,
2007:
|
Period
to Maturity at December 31, 2007
|
||||||||
|
Interest
Rate Range
|
One
Year or Less
|
Over
One Year to Three Years
|
Over
Three Years to Five Years
|
Over
Five Years
|
Total
at
December
31,
2007
|
Total
at
December
31,
2006
|
Total
at
December
31,
2005
|
|
|
(Dollars
in Thousands)
|
||||||||
|
2.00%
and below
|
$21,802
|
$22
|
-
|
-
|
$21,824
|
$69,396
|
$134,953
|
|
|
2.01%
to 3.00%
|
17,578
|
4,237
|
$112
|
-
|
21,927
|
77,401
|
187,456
|
|
|
3.01%
to 4.00%
|
198,624
|
24,729
|
7,230
|
$10
|
230,593
|
63,645
|
423,177
|
|
|
4.01%
to 5.00%
|
452,445
|
55,312
|
1,603
|
-
|
509,360
|
142,657
|
220,750
|
|
|
5.01%
and above
|
277,679
|
15,628
|
76
|
-
|
293,383
|
711,570
|
12,249
|
|
|
Total
|
$968,128
|
$99,928
|
$9,021
|
$10
|
$1,077,087
|
$1,064,669
|
$978,585
|
|
Borrowings. The
Bank has been a member and shareholder of the FHLBNY since 1980. One of the
privileges offered to FHLBNY shareholders is the ability to secure advances from
the FHLBNY under various lending programs at competitive interest
rates. The Bank's borrowing line equaled $1.04 billion at December
31, 2007.
The Bank had FHLBNY advances totaling
$706.5 million and $571.5 million at December 31, 2007 and 2006,
respectively. At December 31, 2007, the Bank maintained sufficient collateral,
as defined by the FHLBNY (principally in the form of real estate loans), to
secure such advances.
REPOS totaled $155.1 million and $120.2
million, respectively, at December 31, 2007 and 2006. REPOS involve
the delivery of securities to broker-dealers as collateral for borrowing
transactions. The securities remain registered in the name of the Bank, and are
returned upon the maturities of the agreements. Funds to repay the Bank's REPOS
at maturity are provided primarily by cash received from the maturing
securities.
Presented below is information
concerning REPOS and FHLBNY advances for the periods presented:
REPOS:
|
At
or for the Year Ended December 31,
|
|||
|
2007
|
2006
|
2005
|
|
|
(Dollars
in Thousands)
|
|||
|
Balance
outstanding at end of period
|
$155,080
|
$120,235
|
$205,455
|
|
Average
interest cost at end of period
|
4.53%
|
3.54%
|
2.99%
|
|
Average
balance outstanding during the period
|
$132,685
|
$134,541
|
$205,530
|
|
Average
interest cost during the period (a)
|
4.11%
|
1.95%(a)
|
2.90%
|
|
Carrying
value of underlying collateral at end of period
|
$163,116
|
$126,830
|
$213,925
|
|
Estimated
fair value of underlying collateral
|
$163,116
|
$126,830
|
$213,925
|
|
Maximum
balance outstanding at month end during period
|
$155,160
|
$205,455
|
$205,584
|
(a)
During the year ended December 31, 2006, the Company recorded a reduction of
$2,176 in interest expense on REPOs that resulted from such borrowings that were
prepaid. Excluding this reduction, the average cost of REPOs would
have been 3.56% during the year ended December 31, 2006.
FHLBNY
Advances:
|
At
or for the Year Ended December 31,
|
|||
|
2007
|
2006
|
2005
|
|
|
(Dollars
in Thousands)
|
|||
|
Balance
outstanding at end of period
|
$706,500
|
$571,500
|
$531,500
|
|
Average
interest cost at end of period
|
4.07%
|
4.37%
|
4.62%
|
|
Weighted
average balance outstanding during the period
|
$520,972
|
$565,612
|
$508,583
|
|
Average
interest cost during the period (1)
|
4.30%
|
4.69%
|
4.49%
|
|
Maximum
balance outstanding at month end during period
|
$706,500
|
$596,500
|
$531,500
|
(1)
Amounts in the above table exclude the effects of prepayment expenses paid on
FHLBNY advances. Including prepayment expenses of $1.4 million paid
on FHLBNY advances during the year ended December 31, 2006, the average interest
cost on FHLBNY advances was 4.45% during the year ended December 31,
2006. The Bank did not prepay any FHLBNY advances during the years
ended December 31, 2007 or 2005.
During the year ended December 31,
2006, the Company engaged in two separate borrowing restructuring
transactions. In the initial transaction, the Company restructured
$145.0 million of its borrowings in order to lower their average
cost. Borrowings with a weighted average cost of 4.46% and a weighted
average term to maturity of one year were replaced with borrowings having a
weighted average cost of 4.17% and a final maturity of ten years, callable after
year one. Since portions of the original borrowings were satisfied at
a discount, the Company recorded a non-recurring reduction of $43,200 in
interest expense related to the prepayment.
In
the second transaction, the Company restructured $170.0 million of wholesale
borrowings. Under this restructuring, $120.0 million of REPOs and
$50.0 million in FHLBNY advances were prepaid and replaced. The
prepaid borrowings had a weighted average interest rate of 4.53%, and were
replaced with a combination of REPOs and FHLBNY advances having an initial
weighted average interest rate of 3.79%. The replacement FHLBNY advances have a
4.4% fixed rate of interest, a final maturity of ten years and are callable by
the FHLBNY after an initial period (the "Lockout Period") of one, two or three
years. The replacement REPOs have a ten-year maturity and a Lockout
Period of either one or two years. During the Lockout Period, the
REPOs are variable rate (indexed to 3-month LIBOR), and have embedded interest
rate caps and floors that ensure their reset interest rate will not exceed their
initial interest rate. After the Lockout Period, if not called by the
lender, the REPOs convert to an average fixed rate of 4.90%. The
Company recorded a non-recurring reduction of $764,000 in interest expense
related to the prepayment.
Subsidiary
Activities
In addition to the Bank, the Holding
Company's direct and indirect subsidiaries consist of seven wholly-owned
corporations, two of which are directly owned by the Holding Company and five of
which are directly owned by the Bank. Havemeyer Equities Inc., a corporation
formerly owned by the Bank, was dissolved in 2007. The following
table presents an overview of the Holding Company's subsidiaries, other than the
Bank, as of December 31, 2007:
|
Subsidiary
|
Year/
State of Incorporation
|
Primary
Business Activities
|
|
Direct
Subsidiaries of the Holding Company:
|
||
|
842
Manhattan Avenue Corp.
|
1995/
New York
|
Management
and ownership of real estate. Currently
Inactive
|
|
Dime
Community Capital Trust I
|
2004/
Delaware
|
Statutory
Trust (1)
|
|
Direct
Subsidiaries of the Bank:
|
||
|
Boulevard
Funding Corp.
|
1981
/ New York
|
Currently
inactive
|
|
Havemeyer
Investments, Inc.
|
1997
/ New York
|
Sale
of non-FDIC insured investment products
|
|
DSBW
Preferred Funding Corp.
|
1998
/ Delaware
|
Real
Estate Investment Trust investing in multifamily
residential
and commercial real estate loans
|
|
DSBW
Residential Preferred Funding Corp.
|
1998
/ Delaware
|
Real
Estate Investment Trust investing in one- to
four-family
real estate loans
|
|
Dime
Reinvestment Corporation
|
2004
/ Delaware
|
Community
Development Entity. Currently
inactive.
|
|
|
(1) Dime
Community Capital Trust I was established for the exclusive purpose of
issuing and selling $72.2 million of capital securities and using the
proceeds to acquire $72.2 million of junior subordinated debt securities
issued by the Holding Company. The junior subordinated debt (referred to
later in this Annual Report as "trust preferred securities payable " bear
an interest rate of 7.0%, mature on April 14, 2034 and are the sole assets
of Dime Community Capital Trust I. In accordance with revised
interpretation No. 46, "Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51," Dime Community Capital Trust I is not
consolidated with the Holding Company for financial reporting
purposes.
|
Personnel
As of December 31, 2007, the Company
had 334 full-time employees and 80 part-time employees. The employees
are not represented by a collective bargaining unit, and the Holding Company and
all of its subsidiaries consider their relationships with their employees to be
good.
Federal,
State and Local Taxation
Federal
Taxation
The following is a discussion of
material tax matters and does not purport to be a comprehensive description of
the tax rules applicable to the Company.
General. The Bank
was last audited by the Internal Revenue Service ("IRS") for its taxable year
ended December 31, 1988. For federal income tax purposes, the Company
files a consolidated income tax return on a June 30th fiscal year basis using
the accrual method of accounting and is subject to federal income taxation in
the same manner as other corporations with some exceptions, including
particularly the Bank's tax reserve for bad debts, discussed below.
Tax Bad Debt
Reserves. The Bank, as a "large bank" under IRS
classifications (i.e.,
one with assets having an adjusted basis in excess of $500 million), is: (i)
unable to make additions to its tax bad debt reserve, (ii) permitted to deduct
bad debts only as they occur, and (iii) required to recapture (i.e., take into income) over
a multi-year period a portion of the balance of its tax bad debt reserves as of
June 30, 1997. Since the Bank had already provided a deferred income
tax liability for the bad debt reserve for financial reporting purposes, there
was no adverse impact to the Bank's financial condition or results of operations
from the enactment of the federal legislation that imposed the recapture
requirement.
Distributions. Non-dividend
distributions to shareholders of the Bank are considered distributions from the
Bank's "base year tax bad debt reserve" (i.e., its reserve as of
December 31, 1987, to the extent thereof), and then from its supplemental
reserve for losses on loans. Non-dividend distributions include
distributions: (i) in excess of the Bank's current and accumulated earnings and
profits, as calculated for federal income tax purposes; (ii) for redemption of
stock; and (iii) for partial or complete liquidation.
An amount based on the total
non-dividend distributions paid will be included in the Bank's taxable income in
the year of distribution. Dividends paid out of current or
accumulated earnings and profits will not be included in the Bank's
income. The amount of additional taxable income created from a
non-dividend distribution is the amount that, when reduced by the amount of the
tax attributable to this income, is equal to the amount of the distribution.
Thus, assuming a 35% federal corporate income tax rate, approximately one and
one-half times the amount of such distribution (but not in excess of the amount
of the above-mentioned reserves) would be includable in income for federal
income tax purposes. (See "Item 1 – Business - Regulation - Regulation of
Federal Savings Associations - Limitation on Capital Distributions," for a
discussion of limits on the payment of dividends by the Bank). The Bank does not
intend to pay dividends that would result in a recapture of any portion of its
base year tax bad debt reserves.
Corporate Alternative Minimum
Tax. The Bank's current federal rate is 35% of taxable
income. The Internal Revenue Code of 1986, as amended (the "Code")
imposes a tax on alternative minimum taxable income ("AMTI") at a rate of 20%.
AMTI is adjusted by determining the tax treatment of certain items in a manner
that negates the deferral or deduction of income resulting from the customary
tax treatment of those items. Thus, the Bank's AMTI is increased by 75% of the
amount by which the Bank's adjusted current earnings exceed its AMTI (determined
without regard to this adjustment and prior to reduction for net operating
losses).
State
and Local Taxation
State of New York. The
Company is subject to New York State ("NYS") franchise tax on one of several
alternative bases, whichever results in the greatest tax, and files combined
returns for this purpose. The basic tax is measured by "entire net income,"
which is federal taxable income with adjustments. In instances where
entire net income is less than zero, the Bank is taxed at rate equal to 1% of
assets.
For NYS tax purposes, as long as the
Bank continues to satisfy certain definitional tests relating to its assets and
the nature of its business, it will be permitted deductions, within specified
formula limits, for additions to its tax bad debt reserves for purposes of
computing its entire net income.
The Bank's deduction with respect to
"qualifying loans," which are generally loans secured by certain interests in
real property, may be computed using an amount based on the Bank's actual loss
experience (the "Experience Method") or 32% of the Bank's entire net income,
computed without regard to this deduction and reduced by the amount of any
permitted addition to the Bank's reserve for non-qualifying
loans. The Bank's deduction with respect to non-qualifying loans must
be computed pursuant to the Experience Method. The Bank reviews the
most appropriate method of calculating the deduction attributable to an addition
to the tax bad debt reserves each year.
The portion of the NYS tax bad debt
reserve in excess of a reserve amount computed pursuant to the Experience Method
is subject to recapture upon a non-dividend distribution in a manner similar to
the recapture of the federal tax bad debt reserves for such distributions. The
tax bad debt reserve is additionally subject to recapture in the event that the
Bank fails either to satisfy a thrift definitional test relating to the
composition of its assets or to maintain a thrift charter.
In general, the Holding Company is not
required to pay NYS tax on dividends and interest received from the
Bank.
The statutory NYS tax rate for the year
ended December 31, 2007 approximated 8.63% of taxable income. This
rate included a metropolitan commuter transportation district
surcharge.
City of New
York. The Holding Company and the Bank are both subject to a
NYC banking corporation tax of 9% on taxable income allocated to
NYC. In instances where entire net income is less than zero,
the Bank is taxed at rate equal to 1% of assets deemed to be headquartered in
New York City.
NYC generally conforms its tax law to
NYS tax law in the determination of taxable income (including the laws relating
to tax bad debt reserves). NYC tax law, however, does not allow a
deduction for the carryover of a net operating loss of a banking
company.
State of Delaware. As a
Delaware holding company not earning income in Delaware, the Holding Company is
exempt from Delaware corporate income tax, however, is required to file an
annual report and pay an annual franchise tax to the State of
Delaware.
Regulation
General
The Bank is subject to extensive
regulation, examination, and supervision by the OTS, as its chartering agency,
and the Federal Deposit Insurance Corporation ("FDIC"), as its deposit
insurer. The Bank's deposit accounts are insured up to applicable
limits by the FDIC under the Deposit Insurance Fund ("DIF") [formerly the Bank
Insurance Fund ("BIF") and the Savings Association Insurance Fund ("SAIF"),
which merged into the DIF as of March 31, 2006]. The Bank must file
reports with the OTS concerning its activities and financial condition, and must
obtain regulatory approval prior to entering into certain transactions, such as
mergers with, or acquisitions of, other depository institutions. The OTS
conducts periodic examinations to assess the Bank's safety and soundness and
compliance with various regulatory requirements. This regulation and supervision
establishes a comprehensive framework of activities in which a savings
association may engage and is intended primarily for the protection of the DIF
and depositors. As a publicly-held unitary savings and loan holding
company, the Holding Company is required to file certain reports with, and
otherwise comply with the rules and regulations of, both the SEC, under the
federal securities laws, and the OTS.
The OTS and the FDIC have significant
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in such policies, whether by the OTS, the FDIC or the
United States Congress, could have a material adverse impact on the operations
of the Company.
The following discussion is intended
to be a summary of the material statutes and regulations applicable to savings
associations and savings and loan holding companies, and does not purport to be
a comprehensive description of all such statutes and regulations.
Regulation
of Federal Savings Associations
Business
Activities. The Bank derives its lending and investment
powers from the Home Owners' Loan Act, as amended (''HOLA''), and the
regulations of the OTS enacted thereunder. Pursuant thereto, the Bank may invest
in mortgage loans secured by residential and commercial real estate, commercial
and consumer loans, certain types of debt securities, and certain other assets.
The Bank may also establish service corporations that may engage in activities
not otherwise permissible for the Bank, including certain real estate equity
investments and securities and insurance brokerage activities. The investment
powers are subject to various limitations, including a: (i) prohibition against
the acquisition of any corporate debt security not rated in one of the four
highest rating categories; (ii) limit of 400% of capital on the aggregate amount
of loans secured by non-residential real property; (iii) limit of 20% of assets
on commercial loans, with the amount of commercial loans in excess of 10% of
assets being limited to small business loans; (iv) limit of 35% of assets on the
aggregate amount of consumer loans and commercial paper and corporate debt
securities; (v) limit of 5% of assets on non-conforming loans (i.e., loans in excess of
specified amounts); and (vi) limit of the greater of 5% of assets or capital on
certain construction loans made for the purpose of financing property which is,
or is expected to become, residential.
Interagency Guidance on
Nontraditional Mortgage Product Risks. On October 4, 2006, the
OTS and other federal bank regulatory authorities published the Interagency
Guidance on Nontraditional Mortgage Product Risks (the “Nontraditional Mortgage
Product Guidance”). The Nontraditional Mortgage Product Guidance describes sound
practices for managing risk, as well as marketing, originating and servicing
nontraditional mortgage products, which include, among other things, interest
only loans. The Nontraditional Mortgage Product Guidance sets forth supervisory
expectations with respect to loan terms and underwriting standards, portfolio
and risk management practices and consumer protection. For example, the
Nontraditional Mortgage Product Guidance indicates that originating interest
only loans with reduced documentation is considered a layering of risk and that
institutions are expected to demonstrate mitigating factors to support their
underwriting decision and the borrower’s repayment capacity. Specifically, the
Nontraditional Mortgage Product Guidance indicates that a lender may accept a
borrower’s statement as to the borrower’s income without obtaining verification
only if there are mitigating factors that clearly minimize the need for direct
verification of repayment capacity and that, for many borrowers, institutions
should be able to readily document income.
Statement on Subprime Lending.
On June 29, 2007, the OTS and other federal bank regulatory agencies
issued a final Statement on Subprime Mortgage Lending (the “Subprime Mortgage
Statement”) to address the growing concerns facing the subprime mortgage market,
particularly with respect to rapidly rising subprime default rates that may
indicate borrowers do not have the ability to repay adjustable-rate subprime
loans originated by financial institutions. In particular, the
agencies express concern in the Subprime Mortgage Statement that current
underwriting practices do not take into account that many subprime borrowers are
not prepared for "payment shock" and that current subprime lending practices
compound the risk for financial institutions. The Subprime Mortgage
Statement describes the prudent safety and soundness and consumer protection
standards that financial institutions should follow to ensure borrowers obtain
loans that they can afford to repay. These standards include a fully
indexed, fully amortized qualification for borrowers and cautions on
risk-layering features, including expectation that stated income and reduced
documentation should be accepted only if there are documented mitigating factors
that clearly minimize the need for verification of a borrower's repayment
capacity. Consumer protection standards include clear and balanced
product disclosures to customers and limits on prepayment penalties that allow
for a reasonable period of time, typically at least 60 days, for borrowers to
refinance prior to the expiration of the initial fixed interest rate period
without penalty. The Subprime Mortgage Statement also reinforces the
April 17, 2007 Interagency Statement on Working with Mortgage Borrowers, in
which the federal bank regulatory agencies encouraged institutions to work
constructively with residential borrowers who are financially unable or
reasonably expected to be unable to meet their contractual payment obligations
on their home loans.
The Company has evaluated the
Nontraditional Mortgage Product Guidance and the Subprime Mortgage Statement to
determine our compliance and, as necessary, modified our risk management
practices, underwriting guidelines and consumer protection
standards.
Loans to One
Borrower. Under HOLA, savings associations are generally
subject to limits on loans to one borrower identical to those imposed on
national banks. Generally, pursuant to these limits, a savings association may
not advance a loan or extend credit to a single or related group of borrowers in
excess of 15% of the association's unimpaired capital and unimpaired surplus.
Additional amounts may be advanced, not in excess of 10% of unimpaired capital
and unimpaired surplus, if such loans or extensions of credit are fully secured
by readily-marketable collateral. Such collateral is defined to include certain
debt and equity securities and bullion, but generally does not include real
estate. At December 31, 2007, the Bank's limit on loans to one
borrower was $71.2 million. The Bank's largest aggregate amount of
loans to one borrower on that date was $36.1 million and the second largest
borrower had an aggregate loan balance of $33.9 million.
QTL Test. HOLA
requires savings associations to satisfy a QTL test. A savings
association may satisfy the QTL test by maintaining at least 65% of its
''portfolio assets'' in certain ''qualified thrift investments'' during at least
nine months of the most recent twelve-month period. ''Portfolio assets'' means,
in general, an association's total assets less the sum of: (i) specified liquid
assets up to 20% of total assets, (ii) certain intangibles, including goodwill,
credit card relationships and purchased MSR, and (iii) the value of property
used to conduct the association's business. ''Qualified thrift investments''
include various types of loans made for residential and housing purposes;
investments related to such purposes, including certain mortgage-backed and
related securities; and small business, education, and credit card
loans. A savings association may additionally satisfy the QTL test by
qualifying as a "domestic building and loan association" as defined in the
Code. At December 31, 2007, the Bank maintained 69.1% of its
portfolio assets in qualified thrift investments. The Bank also satisfied the
QTL test in each of the prior 12 months and, therefore, was a QTL.
A savings association that fails the
QTL test must either operate under certain restrictions on its activities or
convert to a bank charter. The initial restrictions include prohibitions against
(i) engaging in any new activity not permissible for a national bank, (ii)
paying dividends not permissible under national bank regulations, and (iii)
establishing any new branch office in a location not permissible for a national
bank in the association's home state. In addition, within one year of the date a
savings association ceases to satisfy the QTL test, any company controlling the
association must register under, and become subject to the requirements of, the
Bank Holding Company Act of 1956, as amended ("BHCA"). A savings
association that has failed the QTL test may requalify under the QTL test and be
relieved of the limitations; however, it may do so only once. If the
savings association does not requalify under the QTL test within three years
after failing the QTL test, it will be required to terminate any activity, and
dispose of any investment, not permissible for a national bank.
Capital
Requirements. OTS regulations require savings associations to
satisfy three minimum capital standards: (i) a tangible capital ratio of 1.5%;
(ii) a risk-based capital ratio of 8%; and (iii) a leverage capital
ratio. For depository institutions that have been assigned the
highest composite rating of 1 under the Uniform Financial Institutions Rating
System, the minimum required leverage capital ratio is 3%. For any
other depository institution, the minimum required leverage capital ratio is 4%,
unless a higher leverage capital ratio is warranted by the particular
circumstances or risk profile of the depository institution. In
assessing an institution's capital adequacy, the OTS takes into consideration
not only these numeric factors but qualitative factors as well, and possesses
the authority to establish increased capital requirements for individual
institutions when necessary.
The Federal Deposit Insurance
Corporation Improvement Act ("FDICIA") requires that the OTS and other federal
banking agencies revise their risk-based capital standards, with appropriate
transition rules, to ensure that they take into account interest rate risk
("IRR"), concentration of risk and the risks of non-traditional
activities. Current OTS regulations do not include a specific IRR
component of the risk-based capital requirement; however, the OTS monitors the
IRR of individual institutions through a variety of methods, including an
analysis of the change in net portfolio value ("NPV"). NPV is the
difference between the present value of the expected future cash flows of the
Bank’s assets and liabilities, plus the value of net expected cash flows from
either loan origination commitments or purchases of securities and, therefore,
hypothetically represents the value of an institution's net
worth. The OTS has also used the NPV analysis as part of its
evaluation of certain applications or notices submitted by thrift
institutions. In addition, OTS Thrift Bulletin 13a provides guidance
on the management of IRR and the responsibility of boards of directors in that
area. The OTS, through its general oversight of the safety and
soundness of savings associations, retains the right to impose minimum capital
requirements on individual institutions to the extent they are not in compliance
with certain written OTS guidelines regarding NPV analysis. The OTS
has not imposed any such requirements on the Bank.
The table below presents the Bank's
regulatory capital as compared to the OTS regulatory capital
requirements:
|
As
of December 31, 2007
|
||||
|
Actual
|
Minimum
Capital Requirement
|
|||
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|
|
(Dollars
in Thousands)
|
||||
|
Tangible
|
$269,231
|
7.88%
|
$51,228
|
1.5%
|
|
Leverage
Capital
|
269,231
|
7.88
|
136,609
|
4.0
|
|
Total
Risk-based capital
|
266,645
|
11.92
|
178,954
|
8.0
|
F-59
The following is a reconciliation of
GAAP capital to regulatory capital for the Bank:
|
At
December 31, 2007
|
|||
|
Tangible
Capital
|
Leverage
Capital
|
Total
Risk-Based Capital
|
|
|
(Dollars
in Thousands)
|
|||
|
GAAP
capital
|
$321,091
|
$321,091
|
$321,091
|
|
Non-allowable
assets:
|
|||
|
MSR
|
(254)
|
(254)
|
(254)
|
|
Accumulated
other comprehensive loss
|
4,032
|
4,032
|
4,032
|
|
Goodwill
|
(55,638)
|
(55,638)
|
(55,638)
|
|
Tier
1 risk-based capital
|
269,231
|
269,231
|
269,231
|
|
Adjustment
for recourse provision on loans sold
|
-
|
-
|
(17,973)
|
|
General
valuation allowance
|
-
|
-
|
15,387
|
|
Total
Tier 2 risk based capital
|
269,231
|
269,231
|
266,645
|
|
Minimum
capital requirement
|
51,228
|
136,609
|
178,954
|
|
Regulatory
capital excess
|
$218,003
|
$132,622
|
$87,691
|
Limitation on Capital
Distributions. OTS regulations impose limitations upon
capital distributions by savings associations, such as cash dividends, payments
to purchase or otherwise acquire its shares, payments to shareholders of another
institution in a cash-out merger, and other distributions charged against
capital.
As the subsidiary of a savings and
loan holding company, the Bank is required to file a notice with the OTS at
least 30 days prior to each capital distribution. However, if the
total amount of all capital distributions (including each proposed capital
distribution) for the applicable calendar year exceeds net income for that year
plus the retained net income for the preceding two years, the Bank must file an
application for OTS approval of a proposed capital distribution. In
addition, the OTS can prohibit a proposed capital distribution otherwise
permissible under the regulation if it determines that the association is in
need of greater than customary supervision or that a proposed distribution would
constitute an unsafe or unsound practice. Further, under OTS prompt corrective
action regulations, the Bank would be prohibited from making a capital
distribution if, after the distribution, the Bank would fail to satisfy its
minimum capital requirements, as described above (See ''Item 1 –
Business - Regulation - Regulation of Federal Savings Associations - Prompt
Corrective Regulatory Action''). In addition, pursuant to the Federal
Deposit Insurance Act ("FDIA"), an insured depository institution such as the
Bank is prohibited from making capital distributions, including the payment of
dividends, if, after making such distribution, the institution would become
"undercapitalized" as defined in the FDIA.
Liquidity. Pursuant
to OTS regulations, the
Bank is required to maintain sufficient liquidity to ensure its safe and sound
operation (See "Part II - Item 7 – Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
for further discussion). At December 31, 2007, the Bank's liquid
assets approximated 11.48% of total assets.
Assessments. Savings
associations are required by OTS regulation to pay semi-annual assessments to
the OTS to fund its operations. The regulations base the assessment
for individual savings associations, other than those with total assets never
exceeding $100.0 million, on three components: the size of the association (on
which the basic assessment is based); the association's supervisory condition,
which results in percentage increases for any savings institution with a
composite rating of 3, 4 or 5 in its most recent safety and soundness
examination; and the complexity of the association's operations, which results
in percentage increases for a savings association that managed over $1 billion
in trust assets, serviced loans for other institutions aggregating more than $1
billion, or had certain off-balance sheet assets aggregating more than $1
billion. Savings and loan holding companies are also required to pay
semi-annual assessments to the OTS. For the year ended December 31,
2007, assessments paid for the Bank and Holding Company totaled
$13,000.
Branching. Subject
to certain limitations, HOLA and OTS regulations permit federally chartered
savings associations to establish branches in any state of the United States.
The authority to establish such a branch is available: (i) in states that
expressly authorize branches of savings associations located in another state,
and (ii) to an association that either satisfies the QTL test or qualifies as a
''domestic building and loan association'' under the Code, which imposes
qualification requirements similar to those for a QTL under HOLA (See "Item 1 –
Business - Regulation - Regulation of Federal Savings Associations - QTL
Test''). HOLA and OTS regulations preempt any state law purporting to
regulate branching by federal savings associations.
Community
Reinvestment. Under the Community Reinvestment Act
("CRA"), as implemented by OTS regulations, a savings association possesses a
continuing and affirmative obligation, consistent with its safe and sound
operation, to help satisfy the credit needs of its entire community, including
low and moderate income neighborhoods. The CRA does not establish specific
lending requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services it
believes are most appropriate to its particular community. The CRA requires the
OTS, in connection with its examination of a savings association, to assess the
association's record of satisfying the credit needs of its community and
consider such record in its evaluation of certain applications by the
association. The assessment is composed of three tests: (i) a lending
test, to evaluate the institution's record of making loans in its service areas;
(ii) an investment test, to evaluate the institution's record of investing in
community development projects, affordable housing, and programs benefiting low
or moderate income individuals and businesses; and (iii) a service test, to
evaluate the institution's delivery of services through its branches, automated
teller machines and other offices. The CRA also requires all
institutions to make public disclosure of their CRA ratings. The Bank received
an "Outstanding" CRA rating in its most recent
examination. Regulations additionally require that the Bank
publicly disclose certain agreements that are in fulfillment of the
CRA. The Bank has no such agreements.
Transactions with Related
Parties. The Bank's authority to engage in transactions
with its ''affiliates'' is limited by OTS regulations, Sections 23A, 23B, 22(g)
and 22(h) of the Federal Reserve Act (''FRA''), Regulation W issued by the
Federal Reserve Board ("FRB"), as well as additional limitations adopted by the
Director of the OTS. OTS regulations regarding transactions with
affiliates conform to Regulation W. These provisions, among other
matters, prohibit, limit or place restrictions upon a savings institution
extending credit to, or entering into certain transactions with, its affiliates,
which, for the Bank, would include the Holding Company, principal shareholders,
directors and executive officers.
OTS
regulations include additional restrictions on savings associations under
Section 11 of HOLA, including provisions prohibiting a savings association from:
(i) advancing a loan to an affiliate engaged in non-bank holding company
activities; and (ii) purchasing or investing in securities issued by an
affiliate that is not a subsidiary. OTS regulations also include
certain exemptions from these prohibitions. The FRB and the OTS
require each depository institution that is subject to Sections 23A and 23B to
implement policies and procedures to ensure compliance with Regulation W and the
OTS regulations regarding transactions with affiliates.
Section 402 of the Sarbanes-Oxley Act
of 2002 ("Sarbanes-Oxley") prohibits the extension of personal loans to
directors and executive officers of issuers (as defined in
Sarbanes-Oxley). The prohibition, however, does not apply to any loan
by an insured depository institution, such as the Bank, if the loan is subject
to the insider lending restrictions of Section 22(h) of the FRA, as implemented
by Regulation O (12 CFR 215).
The Bank's authority to extend credit
to its directors, executive officers, and shareholders owning 10% or more of the
Holding Company's outstanding common stock, as well as to entities controlled by
such persons, is additionally governed by the requirements of Sections 22(g) and
22(h) of the FRA and Regulation O of the FRB enacted thereunder. Among other
matters, these provisions require that extensions of credit to insiders: (i) be
made on terms substantially the same as, and follow credit underwriting
procedures not less stringent than, those prevailing for comparable transactions
with unaffiliated persons and that do not involve more than the normal risk of
repayment or present other unfavorable features; and (ii) not exceed certain
amount limitations individually and in the aggregate, which limits are based, in
part, on the amount of the association's capital. Regulation O additionally
requires that extensions of credit in excess of certain limits be approved in
advance by the association's board of directors. The Holding
Company and Bank both presently prohibit loans to Directors and executive
management.
Enforcement. Under
FDICIA, the OTS possesses primary enforcement responsibility over
federally-chartered savings associations and has the authority to bring
enforcement action against all ''institution-affiliated parties,'' including any
controlling stockholder or any shareholder, attorney, appraiser or accountant
who knowingly or recklessly participates in any violation of applicable law or
regulation, breach of fiduciary duty or certain other wrongful actions that
cause, or are likely to cause, more than minimal loss or other significant
adverse effect on an insured savings association. Civil penalties cover a wide
series of violations and actions and range from $5,000 for each day during which
violations of law, regulations, orders, and certain written agreements and
conditions continue, up to $1 million per day if the person obtained a
substantial pecuniary gain as a result of such violation or knowingly or
recklessly caused a substantial loss to the institution. Criminal penalties for
certain financial institution crimes include fines of up to $1 million and
imprisonment for up to 30 years. In addition, regulators possess substantial
discretion to take enforcement action against an institution that fails to
comply with regulatory structure, particularly with respect to capital
requirements. Possible enforcement actions range from the imposition of a
capital plan and capital directive to receivership, conservatorship, or the
termination of deposit insurance. Under FDICIA, the FDIC has the authority to
recommend to the Director of the OTS that enforcement action be taken with
respect to a particular savings association. If action is not taken by the
Director, the FDIC possesses authority to take such action under certain
circumstances.
Standards for Safety and
Soundness. Pursuant to FDICIA, as amended by the Riegle
Community Development and Regulatory Improvement Act of 1994, the OTS, together
with the other federal bank regulatory agencies, has adopted guidelines
prescribing safety and soundness standards relating to internal controls and
information systems, internal audit systems, loan documentation, credit
underwriting, interest rate risk exposure, asset growth, asset quality, earnings
and compensation, fees and benefits. In general, the guidelines require, among
other features, appropriate systems and practices to identify and manage the
risks and exposures specified in the guidelines. The guidelines prohibit
excessive compensation as an unsafe and unsound practice and describe
compensation as excessive when the amounts paid are unreasonable or
disproportionate to the services performed by an executive officer, employee,
director or principal shareholder. In addition, the OTS has adopted
regulations pursuant to FDICIA that authorize, but do not require, the OTS to
order an institution that has been given notice by the OTS that it is not
satisfying any of such safety and soundness standards to submit a compliance
plan. If, after being so notified, an institution fails to submit an acceptable
compliance plan or fails in any material respect to implement an accepted
compliance plan, the OTS must issue an order directing action to correct the
deficiency and may issue an order directing other actions of the types to which
an undercapitalized association is subject under the ''prompt corrective
action'' provisions of FDICIA (See "Item 1 – Business - Regulation - Regulation
of Savings Associations – Prompt Corrective Regulatory Action"). If
an institution fails to comply with such an order, the OTS may seek enforcement
in judicial proceedings and the imposition of civil money
penalties.
Real Estate Lending
Standards. The OTS and the other federal banking
agencies have adopted regulations prescribing standards for extensions of credit
that are (i) secured by real estate, or (ii) made for the purpose of financing
the construction of improvements on real estate. The regulations
require each savings association to establish and maintain written internal real
estate lending standards that are consistent with safe and sound banking
practices and appropriate to the size of the association and the nature and
scope of its real estate lending activities. The standards must additionally
conform to accompanying OTS guidelines, which include loan-to-value ratios for
the different types of real estate loans. Associations are permitted to make a
limited amount of loans that do not conform to the loan-to-value limitations
provided such exceptions are reviewed and justified appropriately. The
guidelines additionally contain a number of lending situations in which
exceptions to the loan-to-value standards are permitted.
In 2006, the OTS adopted guidance
entitled "Concentrations in Commercial Real Estate (CRE) Lending, Sound Risk
Management Practices" (the "CRE Guidance"), to address concentrations of
commercial real estate loans in savings associations. The CRE
Guidance reinforces and enhances the OTS existing regulations and guidelines for
real estate lending and loan portfolio management, but does not establish
specific commercial real estate lending limits. Rather, the CRE
Guidance seeks to promote sound risk management practices that will enable
savings associations to continue to pursue commercial real estate lending in a
safe and sound manner. The CRE Guidance applies to savings
associations with an accumulation of credit concentration exposures and asks
that the associations quantify the additional risk such exposures may
pose. Such quantification should include the stratification of the
commercial real estate portfolio by, among other qualities, property type,
geographic market, tenant concentrations, tenant industries, developer
concentrations and risk rating. In addition, an institution should
perform periodic market analyses for the various property types and geographic
markets represented in its portfolio. Further, an institution with
commercial real estate concentration risk should also perform portfolio level
stress tests or sensitivity analysis to quantify the impact of changing economic
conditions on asset quality, earnings and capital. The Bank commenced
implementation of the requirements and suggestions set forth in the CRE Guidance
during 2007, and will expand this process in 2008.
Prompt Corrective Regulatory
Action. Under the OTS prompt corrective action
regulations, the OTS is required to take certain, and authorized to take other,
supervisory actions against undercapitalized savings associations. For this
purpose, a savings association is placed in one of five categories based on its
capital: "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized." Generally,
a capital restoration plan must be filed with the OTS within 45 days of the date
an association receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized," and the plan must be
guaranteed by any parent holding company. In addition, the
institution becomes subject to various mandatory supervisory actions, including
restrictions on growth of assets and other forms of
expansion. Generally, under the OTS regulations, a federally
chartered savings association is treated as well capitalized if its total
risk-based capital ratio is 10% or greater, its Tier 1 risk-based capital ratio
is 6% or greater, its leverage ratio is 5% or greater, and it is not subject to
any order or directive by the OTS to meet a specific capital
level. As of December 31, 2007, the Bank satisfied all criteria
necessary to be categorized "well capitalized" under the prompt
corrective action regulatory framework.
When appropriate, the OTS can require
corrective action by a savings association holding company under the ''prompt
corrective action'' provisions of FDICIA.
Insurance of Deposit
Accounts. Savings associations are required to pay a deposit
insurance premium. The amount of the premium is determined based upon
a risk-based assessment system, which was amended effective January 1,
2007. During the years ended December 31, 2006 and 2005, the Bank was
not required to pay any assessments on its deposits under the previously
existing FDIC policies. Under the amended system, the FDIC
assigns an institution to one of four risk categories entitled Risk
Category I, II, III and IV, with Risk Category I considered most favorable and
Risk Category IV considered least favorable. Risk Category I contains
all well capitalized institutions with capital adequacy, asset quality,
management, earnings, and liquidity component ratings ("CAMEL Component
Ratings") of either 1 or 2. Risk Category II contains all
institutions that are adequately capitalized and possess CAMEL Component Ratings
of either 1, 2 or 3. Risk Category III contains either
undercapitalized institutions that have CAMEL Composite Ratings of 1, 2 or 3 or
adequately capitalized institutions that have CAMEL Composite Ratings of 4 or
5. Risk Category IV contains all institutions that are
undercapitalized and have a CAMEL Composite Ratings of 4 or 5. The
Bank currently falls within Risk Category I. Base assessment rates
for institutions within Risk Category I range from 2 to 4 basis points,
depending upon a combination of the institution's CAMEL Component Ratings and
financial ratios. The base assessment rates are fixed at 7 basis
points, 25 basis points and 40 basis points for institutions within the Risk
Categories II, III and IV, respectively. The FDIC has the flexibility
to adjust rates, without further notice-and-comment rulemaking, provided that no
such adjustment can be greater than 3 basis points from one quarter to the next,
adjustments cannot result in rates more than 3 basis points above or below the
base rates and rates cannot be negative. Effective January 1, 2007, the FDIC set
the assessment rates at 3 basis points above the base rates. Assessment rates,
therefore, currently range from 5 to 43 basis points of deposits. The
assessment rate for the Bank's deposits is currently 5 basis
points. The FDIC also established 1.25% of estimated insured deposits
as the designated reserve ratio of the DIF. The FDIC is authorized to change the
assessment rates as necessary, subject to the previously discussed limitations,
to maintain the required reserve ratio of 1.25%. The DIF currently
satisfies the reserve ratio requirement. If the FDIC determines that
assessment rates should be increased, institutions in all risk categories could
be affected. The FDIC has exercised this authority several times in
the past and could raise insurance assessment rates in the future.
In November 2006, the FDIC notified
the Bank that it was granted a credit of $1.6 million to apply against its
insurance premiums commencing in 2007. This credit resulted from
final implementation of a provision of the Federal Deposit Insurance Reform Act
of 2005 that compensated financial institutions such as the Bank that were
required to pay insurance premiums prior to 1996 while other financial
institutions that had units that operated under industrial loan company and
thrift charters were not. This credit was used to offset 100% of the 2007
deposit insurance assessment. The $466,000 remaining credit may be
used to offset up to 90% of deposit insurance assessments in 2008.
The Deposit Insurance Funds Act of
1996 amended the FDIA to recapitalize the SAIF (which was merged with the BIF
into the newly-formed DIF on March 31, 2006) and expand the assessment base for
the payments of Financing Corporation ("FICO") bonds. FICO bonds were
sold by the federal government in order to finance the recapitalization of the
SAIF and BIF insurance funds that was necessitated following payments from the
funds to compensate depositors of federally-insured depository institutions that
experienced bankruptcy and dissolution during the 1980's and
1990's. The assessment rate is adjusted quarterly and was 0.0114% of
total deposits of the Bank for the fourth quarter of 2007 and the first quarter
of 2008. The Bank's total expense in 2007 for the FICO bonds
assessment was $258,000.
Privacy and Security
Protection. The OTS has adopted regulations implementing the
privacy protection provisions of The Gramm- Leach-Bliley Act of 1999
("Gramm-Leach"). The regulations require financial institutions to
adopt procedures to protect customers and their "non-public personal
information." The regulations require the Bank to disclose its
privacy policy, including identifying with whom it shares "non-public personal
information," to customers at the time of establishing the customer relationship
and annually thereafter. In addition, the Bank is required to provide
its customers the ability to "opt-out" of the sharing of their personal
information with unaffiliated third parties, if the sharing of such information
does not satisfy any of the permitted exceptions. The Bank's existing
privacy protection policy complies with the regulations.
The Bank is additionally subject to
regulatory guidelines establishing standards for safeguarding customer
information. The guidelines describe the federal banking agencies'
expectations for the creation, implementation and maintenance of an information
security program, including administrative, technical and physical safeguards
appropriate to the size and complexity of the institution and the nature and
scope of its activities. The standards set forth in the guidelines
are intended to insure the security and confidentiality of customer records and
information, and protect against anticipated threats or hazards to the security
or integrity of such records and unauthorized access to or use of such records
or information that could result in substantial customer harm or
inconvenience.
Gramm-Leach additionally permits each
state to enact legislation that is more protective of consumers' personal
information. Currently, there are a number of privacy bills pending
in the New York legislature. Management of the Company cannot predict
the impact, if any, of these bills if enacted.
Internet
Banking. Technological developments are dramatically altering
the methods by which most companies, including financial institutions, conduct
their business. The growth of the Internet is prompting banks to
reconsider business strategies and adopt alternative distribution and marketing
systems. The federal banking regulatory agencies have conducted
seminars and published materials targeted at various aspects of Internet banking
and have indicated their intention to re-evaluate their regulations to ensure
they encourage bank efficiency and competitiveness consistent with safe and
sound banking practices. The Company cannot assure that federal bank
regulatory agencies will not adopt new regulations that will materially affect
or restrict the Bank's Internet operations.
Insurance
Activities. As a federal savings association, the Bank is
generally permitted to engage in certain insurance activities through
subsidiaries. OTS regulations prohibit depository institutions from
conditioning the extension of credit to individuals upon either the purchase of
an insurance product or annuity or an agreement by the consumer not to purchase
an insurance product or annuity from an entity not affiliated with the
depository institution. The regulations additionally require prior
disclosure of this prohibition if such products are offered to credit
applicants.
Federal Home Loan Bank ("FHLB")
System. The Bank is a member of the FHLBNY, which is one
of the twelve regional FHLB's composing the FHLB System. Each FHLB provides a
central credit facility primarily for its member institutions. Any advances from
the FHLBNY must be secured by specified types of collateral, and long-term
advances may be obtained only for the purpose of providing funds for residential
housing finance. The Bank, as a member of the FHLBNY, is currently
required to acquire and hold shares of FHLBNY Class B stock. The
Class B stock has a par value of $100 per share and is redeemable upon five
years notice, subject to certain conditions. The Class B stock has
two subclasses, one for membership stock purchase requirements and the other for
activity-based stock purchase requirements. The minimum stock
investment requirement in the FHLBNY Class B stock is the sum of the membership
stock purchase requirement, determined on an annual basis at the end of each
calendar year, and the activity-based stock purchase requirement, determined on
a daily basis. For the Bank, the membership stock purchase
requirement is 0.2% of "mortgage-related assets," as defined by the FHLBNY,
which consist primarily of residential mortgage loans and MBS held by the
Bank. The activity-based stock purchase requirement for the Bank is
equal to the sum of: (i) 4.5% of outstanding borrowings from the FHLBNY; (ii)
4.5% of the outstanding principal balance of the "acquired member assets," as
defined by the FHLBNY, and delivery commitments for acquired member assets;
(iii) a specified dollar amount related to certain off-balance sheet items,
which for the Bank is zero; and (iv) a specific percentage range from 0% to 5%
of the carrying value on the FHLBNY's balance sheet of derivative contracts
between the FHLBNY and its members, which is also zero for the
Bank. The Bank was in compliance with these requirements with an
investment in FHLBNY Class B stock of $39.0 million at December 31,
2007. The FHLBNY can adjust the specific percentages and dollar
amount periodically within the ranges established by the FHLBNY capital
plan.
Federal Reserve
System. The Bank is subject to provisions of the FRA and
FRB regulations pursuant to which savings associations are required to maintain
non-interest-earning cash reserves against their transaction accounts (primarily
NOW and regular checking accounts). FRB regulations generally require
that reserves be maintained in the amount of 3% of the aggregate of transaction
accounts in excess of $9.3 million through $43.9 million (subject to adjustment
by the FRB) plus a reserve of 10% (subject to adjustment by the FRB between 8%
and 14% against the portion of total transaction accounts in excess of $43.9
million). The initial $9.3 million of otherwise reservable balances
are currently exempt from the reserve requirements, however, the exemption is
adjusted by the FRB at the end of each year. The Bank is in
compliance with the foregoing reserve requirements.
Because required reserves must be
maintained in the form of either vault cash, a non-interest-bearing account at a
Federal Reserve Bank, or a pass-through account as defined by the FRB, the
effect of this reserve requirement is to reduce the Bank's interest-earning
assets. The balances maintained to satisfy the FRB reserve requirements may be
used to satisfy liquidity requirements imposed by the OTS.
Depository institutions are
additionally authorized to borrow from the Federal Reserve ''discount window,''
however, FRB regulations require such institutions to hold reserves in the form
of vault cash or deposits with Federal Reserve Banks in order to
borrow.
Anti-Money Laundering and Customer
Identification. The Company is subject to OTS
regulations implementing the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001
("PATRIOT Act"). The PATRIOT Act provides the federal government with
powers to address terrorist threats through enhanced domestic security measures,
expanded surveillance powers, increased information sharing and broadened
anti-money laundering requirements. By way of amendments to the Bank
Secrecy Act, Title III of the PATRIOT Act enacted measures intended to encourage
information sharing among bank regulatory and law enforcement
agencies. In addition, certain provisions of Title III and the
related OTS regulations impose affirmative obligations on a broad range of
financial institutions, including banks and thrifts. Title III
imposes the following requirements, among others, with respect to financial
institutions: (i) establishment of anti-money laundering programs; (ii)
establishment of procedures for obtaining identifying information from customers
opening new accounts, including verifying their identity within a reasonable
period of time; (iii) establishment of enhanced due diligence policies,
procedures and controls designed to detect and report money laundering; and (iv)
prohibition on correspondent accounts for foreign shell banks and compliance
with recordkeeping obligations with respect to correspondent accounts of foreign
banks.
In addition, bank regulators are
directed to consider a holding company's effectiveness in preventing money
laundering when ruling on FRA and Bank Merger Act applications.
Regulation
of Holding Company
The Holding Company is a
non-diversified unitary savings and loan holding company within the meaning of
HOLA. As such, it is required to register with the OTS and is subject to OTS
regulations, examinations, supervision and reporting requirements. In addition,
the OTS has enforcement authority over the Holding Company's non-savings
association subsidiaries. Among other effects, this authority permits
the OTS to restrict or prohibit activities that are determined to be a serious
risk to the financial safety, soundness, or stability of a subsidiary savings
association.
HOLA prohibits a savings association
holding company, directly or indirectly, or through one or more subsidiaries,
from acquiring another savings association or holding company thereof, without
prior written approval of the OTS; acquiring or retaining, with certain
exceptions, more than 5% of a non-subsidiary savings association, non-subsidiary
holding company, or non-subsidiary company engaged in activities other than
those permitted by HOLA; or acquiring or retaining control of a depository
institution that is not insured by the FDIC. In evaluating an application by a
holding company to acquire a savings association, the OTS must consider the
financial and managerial resources and future prospects of the company and
savings association involved, the effect of the acquisition on the risk to the
insurance funds, the convenience and needs of the community, and competitive
factors.
Gramm-Leach additionally restricts
the powers of new unitary savings and loan association holding
companies. A unitary savings and loan holding company that is
"grandfathered," i.e.,
became a unitary savings and loan holding company pursuant to an application
filed with the OTS prior to May 4, 1999, such as the Holding Company, retains
the authority it possessed under the law in existence as of May 4,
1999. All other savings and loan holding companies are limited to
financially related activities permissible for bank holding companies, as
defined under Gramm-Leach. Gramm-Leach also prohibits non-financial
companies from acquiring grandfathered savings and loan association holding
companies.
Upon any non-supervisory acquisition
by the Holding Company of another savings association or a savings bank that
satisfies the QTL test and is deemed to be a savings association by the OTS and
that will be held as a separate subsidiary, the Holding Company will become a
multiple savings association holding company and will be subject to limitations
on the types of business activities in which it may engage. HOLA
currently limits the activities of a multiple savings association holding
company and its non-insured association subsidiaries primarily to activities
permissible under Section 4(c)(8) of the BHCA, subject to prior approval of the
OTS, and to other activities authorized by OTS regulation. Effective
in April 2008, however, all savings and loan association holding companies will
be permitted, with the prior approval of the OTS, to engage in all activities in
which bank holding companies may engage under any regulation the FRB has
promulgated under Section 4(c) of the BHCA.
The OTS is prohibited from approving
any acquisition that would result in a multiple savings association holding
company controlling savings associations in more than one state, subject to two
exceptions: an acquisition of a savings association in another state (i) in a
supervisory transaction, or (ii) pursuant to authority under the laws of the
state of the association to be acquired that specifically permit such
acquisitions. The conditions imposed upon interstate acquisitions by
those states that have enacted authorizing legislation vary.
The Bank must file a notice with the
OTS prior to the payment of any dividends or other capital distributions to the
Holding Company (See "Item 1 – Business - Regulation - Regulation of
Federal Savings Associations - Limitation on Capital
Distributions'').
Federal
Securities Laws
The Holding Company's common stock is
registered with the SEC under Section 12(g) of the Exchange Act. It
is subject to the periodic reporting, proxy solicitation, insider trading
restrictions and other requirements under the Exchange Act.
Item
1A. Risk Factors
The
Bank’s focus on multifamily and commercial real estate lending may subject it to
greater risk of an adverse impact on operations from a decline in the
economy.
The majority of loans in the Bank’s
portfolio are secured by multifamily residential property. Multifamily loans are
generally viewed as exposing lenders to a greater risk of loss than one- to
four-family residential loans and typically involve higher loan principal
amounts. Although multifamily loans are generally non-recourse, are underwritten
based upon the cash flow generated by the collateral property and have loan to
value ratios of less than 80%, in a decline in the economy, a borrower
experiencing financial difficulties in connection with one income producing
property may default on all of its outstanding loans, even if the properties
securing the other loans are generating positive cash flow. In
addition, large loans tend to expose the Bank to a greater degree of risk due to
the potential impact of losses from any one loan or concentration of loans to
one borrower relative to the size of the Bank’s capital position.
As part of the Company’s strategic
plan, it has increased its emphasis on commercial real estate loans over the
past six years. Loans secured by commercial real estate are generally larger and
involve a greater degree of risk than one- to four-family and multifamily
residential mortgage loans. Because payments on loans secured by commercial real
estate are often dependent upon successful operation or management of the
collateral properties, repayment of such loans is generally subject to a greater
extent to prevailing conditions in the real estate market or the economy.
Further, the collateral securing such loans may depreciate over time, may be
difficult to appraise and may fluctuate in value based upon the success of the
business.
Multifamily and commercial real
estate loans additionally involve a greater risk than one- to four- family
residential mortgage loans because economic and real estate conditions, and
government regulations such as rent control and rent stabilization laws, which
are outside the control of the borrower or the Bank, could impair the value of
the security for the loan or the future cash flow of such properties. As a
result, rental income might not rise sufficiently over time to satisfy increases
in the loan rate at repricing or increases in overhead expenses (i.e., utilities, taxes,
etc.). Impaired loans are thus difficult to identify before they become
problematic. In addition, if the cash flow from a collateral property is reduced
(e.g., if leases are
not obtained or renewed), the borrower’s ability to repay the loan and the value
of the security for the loan may be impaired.
Dependence
on economic and real estate conditions and geographic concentration in market
area.
The Bank gathers deposits primarily
from the communities and neighborhoods in close proximity to its branches. The
Bank lends primarily in the NYC metropolitan area, although its overall lending
area is much larger, and extends approximately 150 miles in each direction from
its corporate headquarters in Brooklyn. The majority of the Bank’s mortgage
loans are secured by properties located in its primary lending area,
approximately 75% of which are located in the NYC boroughs of Brooklyn, Queens
and Manhattan. As a result of this geographic concentration, the
Bank’s results of operations depend largely upon economic conditions in this
area. A deterioration in economic conditions in the NYC metropolitan area could
have a material adverse impact upon the quality of the Bank’s loan portfolio and
the demand for its products and services, and, accordingly, on the Company’s
results of operations, cash flows, business, financial condition and
prospects.
Conditions in the real estate markets
in which the collateral for the Bank’s mortgage loans are located strongly
influence the level of the Bank’s non-performing loans and the value of its
collateral. Real estate values are affected by, among other items, fluctuations
in general or local economic conditions, supply and demand, changes in
governmental rules or policies, the availability of loans to potential
purchasers and acts of nature. Declines in real estate markets have in the past,
and may in the future, negatively impact the Company’s results of operations,
cash flows, business, financial condition and prospects.
The Bank’s allowance for loan losses
is maintained at a level considered adequate by management to absorb losses
inherent in its loan portfolio. The amount of inherent loan losses which could
be ultimately realized is susceptible to changes in economic, operating and
other conditions, including changes in interest rates, that could be beyond the
Bank’s control. Such losses could exceed current estimates. Although management
believes that the Bank’s allowance for loan losses is adequate, there can be no
assurance that the allowance will be sufficient to satisfy actual loan losses
should such losses be realized.
Increases
in interest rates may reduce the Company’s profitability.
The Bank’s primary source of income
is its net interest income, which is the difference between the interest income
earned on its interest earning assets and the interest expense incurred on its
interest bearing liabilities. The one-year interest rate sensitivity gap is the
difference between interest rate sensitive assets maturing or repricing within
one year and interest rate sensitive liabilities maturing or repricing within
one year, expressed as a percentage of total assets. In a rising interest rate
environment, an institution with a negative gap would generally be expected,
absent the effects of other factors, to experience a greater increase in its
cost of liabilities relative to its yield on assets, and thus decrease its net
interest income.
Based upon historical experience, if
interest rates were to rise, the Bank would expect the demand for multifamily
loans to decline. Decreased loan origination volume would likely negatively
impact the Bank's interest income. In addition, if interest rates were to rise
rapidly and result in an economic decline, the Bank would expect its level of
non-performing loans to increase. Such an increase in non-performing loans may
result in an increase to the allowance for loan losses and possible increased
charge-offs, which would negatively impact the Company's net
income.
Further
the actual amount of time before mortgage loans and MBS are repaid can be
significantly impacted by changes in mortgage redemption rates and market
interest rates. Mortgage prepayment, satisfaction and refinancing rates will
vary due to several factors, including the regional economy in the area where
the underlying mortgages were originated, seasonal factors, and other
demographic variables. However, the most significant factors affecting
prepayment, satisfaction and refinancing rates are prevailing interest rates,
related mortgage refinancing opportunities and competition. The level
of mortgage and MBS prepayment, satisfaction and refinancing activity impacts
the Company's earnings due to its effect on fee income earned on prepayment and
refinancing activities, along with liquidity levels the Company will experience
to fund new investments or ongoing operations.
As a federally-chartered savings
bank, the Bank is required to monitor changes in its NPV, which is the
difference between the estimated market value of its assets and liabilities. In
addition, the Bank monitors its NPV ratio, which is the NPV divided by the
estimated market value of total assets. The NPV ratio can be viewed as a
corollary to the Bank’s capital ratios. To monitor its overall sensitivity to
changes in interest rates, the Bank simulates the effect of instantaneous
changes in interest rates of up to 200 basis points on its assets and
liabilities. Interest rates do and will continue to fluctuate, and the Bank
cannot predict future FOMC actions or other factors that will cause interest
rates to vary.
Risks
related to changes in laws, government regulation and monetary
policy.
The Holding Company and the Bank are
subject to extensive supervision, regulation and examination by the OTS, as the
Bank's chartering agency, and the FDIC, as its deposit insurer. Such regulation
limits the manner in which the Holding Company and the Bank conduct business,
undertake new investments and activities and obtain financing. This regulation
is designed primarily for the protection of the deposit insurance funds and the
Bank’s depositors, and not to benefit the Bank or its creditors. The regulatory
structure also provides the regulatory authorities extensive discretion in
connection with their supervisory and enforcement activities and examination
policies, including policies with respect to capital levels, the classification
of assets and the establishment of adequate loan loss reserves for regulatory
purposes. For further information regarding the laws and regulations
that affect the Holding Company and the Bank, see "Item 1. Business - Regulation
- Regulation of Federal Savings Associations," and "Item 1. Business -
Regulation - Regulation of Holding Company."
Financial institution regulation has
been the subject of significant legislation in recent years, and may be the
subject of further significant legislation in the future, none of which is
within the control of the Holding Company or the Bank. Significant new laws or
changes in, or repeals of, existing laws may cause the Company's results of
operations to differ materially. Further, federal monetary policy, particularly
as implemented through the OTS, significantly affects credit conditions for the
Company, primarily through open market operations in United States government
securities, the discount rate for bank borrowings and reserve requirements for
liquid assets. A material change in any of these conditions would have a
material impact on the Bank, and therefore, on the Company’s results of
operations.
Competition
from other financial institutions in originating loans and attracting deposits
may adversely affect profitability.
The Bank's retail banking and a
significant portion of its lending business are concentrated in the NYC
metropolitan area. The NYC banking environment is extremely competitive. The
Bank’s competition for loans exists principally from savings banks, commercial
banks, mortgage banks and insurance companies. The Bank has faced sustained
competition for the origination of multifamily residential and commercial real
estate loans. Management anticipates that the current level of competition for
multifamily residential and commercial real estate loans will continue for the
foreseeable future, and this competition may inhibit the Bank’s ability to
maintain its current level and pricing of such loans.
The Bank gathers deposits in direct
competition with commercial banks, savings banks and brokerage firms, many among
the largest in the nation. In addition, it must also compete for deposit monies
against the stock markets and mutual funds, especially during periods of strong
performance in the equity markets. Over the previous decade, consolidation in
the financial services industry, coupled with the emergence of Internet banking,
has altered the deposit gathering landscape and may increase competitive
pressures on the Bank.
Item
1B. Unresolved Staff Comments
Not applicable.
Item
2. Properties
The headquarters of both the Holding
Company and the Bank are located at 209 Havemeyer Street, Brooklyn, New
York 11211. The headquarters building is fully owned by
the Bank. The Bank conducts its business through twenty-one
full-service retail banking offices located throughout Brooklyn, Queens, the
Bronx and Nassau County, New York.
Item 3. 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
4. Submission of Matters to a Vote of Security
Holders
None.
PART
II
Item 5. Market
for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
The Holding Company's common stock is
traded on the Nasdaq National Market and quoted under the symbol
"DCOM." Prior to June 15, 1998, the Holding Company's common stock
was quoted under the symbol "DIME."
The following table indicates the high
and low sales price for the Holding Company's common stock, and dividends
declared, during the periods indicated. The Holding Company's common
stock began trading on June 26, 1996, the date of the initial public
offering.
|
Twelve
Months Ended
December
31, 2007
|
Twelve
Months Ended
December
31, 2006
|
||||||
|
Quarter
Ended
|
Dividends
Declared
|
High
Sales
Price
|
Low
Sales
Price
|
Dividends
Declared
|
High
Sales
Price
|
Low
Sales
Price
|
|
|
March
31st
|
$0.14
|
$14.29
|
$12.21
|
$0.14
|
$15.55
|
$13.46
|
|
|
June
30th
|
0.14
|
14.00
|
12.52
|
0.14
|
14.58
|
13.49
|
|
|
September
30th
|
0.14
|
15.99
|
10.70
|
0.14
|
14.89
|
13.39
|
|
|
December
31st
|
0.14
|
15.56
|
11.99
|
0.14
|
14.80
|
13.66
|
|
On December 31, 2007, the final trading
date in the fiscal year, the Holding Company's common stock closed at
$12.77.
Management estimates that the Holding
Company had approximately 4,600 shareholders of record as of March 1, 2008,
including persons or entities holding stock in nominee or street name through
various brokers and banks. There were 33,909,902 shares of Holding Company
common stock outstanding at December 31, 2007.
On August 21, 2001, the Holding Company
paid a 50% common stock dividend to all shareholders of record as of July 31,
2001. On April 24, 2002, the Holding Company paid a 50% common stock
dividend to all shareholders of record as of April 1, 2002. On March
16, 2004, the Holding Company paid a 50% common stock dividend to all
shareholders of record as of March 1, 2004. Each of these dividends
had the effect of a three-for-two stock split.
During
the year ended December 31, 2007, the Holding Company paid cash dividends
totaling $19.0 million, representing $0.56 per outstanding common
share. During the year ended December 31, 2006, the Holding Company
paid cash dividends totaling $19.7 million, representing $0.56 per outstanding
common share.
On
January 17, 2008, the Board of Directors declared a cash dividend of $0.14 per
common share to all shareholders of record as of January 31,
2008. This dividend was paid on February 15, 2008.
The Holding Company is subject to the
requirements of Delaware law, which generally limits dividends to an amount
equal to the excess of net assets (i.e., the amount by which
total assets exceed total liabilities) over statutory capital, or if no such
excess exists, to net profits for the current and/or immediately preceding
fiscal year.
As the principal asset of the Holding
Company, the Bank could be called upon to provide funds for the Holding
Company's payment of dividends (See "Item 1 – Business - Regulation –
Regulation of Federal Savings Associations – Limitation on Capital
Distributions"). (See also Notes to the Company's Audited
Consolidated Financial Statements for a discussion of limitations on
distributions from the Bank to the Holding Company).
In April 2000, the Holding Company
issued $25.0 million in subordinated notes payable, with a stated annual coupon
rate of 9.25%. Pursuant to the provisions of the notes, the Holding Company is
required to first satisfy the interest obligation on the notes, which
approximates $2.4 million annually, prior to the authorization and payment of
common stock cash dividends. Management of the Holding Company does
not believe that this requirement will materially affect its ability to pay
dividends to its common shareholders.
In March 2004, the Holding Company
issued $72.2 million in trust preferred debt, with a stated annual coupon rate
of 7.0%. Pursuant to the provisions of the debt, the Holding Company
is required to first satisfy the interest obligation on the debt, which
approximates $5.1 million annually, prior to the authorization and payment of
common stock cash dividends. Management of the Holding Company does
not believe that this requirement will materially affect its ability to pay
dividends to its common shareholders.
During
the three months ended December 31, 2007, the Holding Company purchased 311,102
shares of its common stock into treasury. These repurchases were made
under the Company's Twelfth Stock Repurchase Program, which was publicly
announced on June 21, 2007.
F-59
A summary
of the shares repurchased by month is as follows:
|
Period
|
Total
Number
Shares
Purchased
|
Average
Price
Paid Per Share
|
Total
Number of Shares Purchased as Part of Publicly Announced
Programs
|
Maximum
Number of Shares that May Yet be Purchased Under the
Programs
|
|||
|
October
2007
|
55,002
|
$13.73
|
55,002
|
1,431,649
|
|||
|
November
2007
|
215,100
|
13.09
|
215,100
|
1,216,549
|
|||
|
December
2007
|
41,000
|
13.32
|
41,000
|
1,175,549
|
Performance
Graph
Pursuant
to regulations of the SEC, the graph below compares the Company's stock
performance with that of the total return for the U.S. Nasdaq Stock Market and
an index of all thrift stocks as reported by SNL Securities L.C. from January 1,
2003 through December 31, 2007. The graph assumes the reinvestment of
dividends in additional shares of the same class of equity securities as those
listed below.
|
Period
Ending December 31,
|
||||||
|
Index
|
2002
|
2003
|
2004
|
2005
|
2006
|
2007
|
|
Dime
Community Bancshares, Inc.
|
100.00
|
164.91
|
148.67
|
125.75
|
125.36
|
119.27
|
|
NASDAQ
Composite
|
100.00
|
150.01
|
162.89
|
165.13
|
180.85
|
198.60
|
|
SNL
Thrift Index
|
100.00
|
141.57
|
157.73
|
163.29
|
190.35
|
114.19
|
F-59
Item 6. Selected
Financial Data
Financial
Highlights
(Dollars
in Thousands, except per share data)
The consolidated financial and other
data of the Company as of and for the years ended December 31, 2007, 2006, 2005,
2004 and 2003 set forth below is derived in part from, and should be read in
conjunction with, the Company's audited Consolidated Financial Statements and
Notes thereto. Amounts as of and for the years ended December 31,
2006, 2005, 2004 and 2003 have been reclassified to conform to the December 31,
2007 presentation.
|
At
or for the Year Ended December 31,
|
|||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
|
|
Selected
Financial Condition Data:
|
|||||
|
Total
assets
|
$3,501,175
|
$3,173,377
|
$3,126,226
|
$3,377,266
|
$2,971,661
|
|
Loans
and loans held for sale (net of deferred costs or fees
and
the allowance for loans losses)
|
2,861,638
|
2,688,159
|
2,596,310
|
2,486,262
|
2,177,622
|
|
MBS
|
162,764
|
154,437
|
193,453
|
519,885
|
462,737
|
|
Investment
securities (including FHLBNY capital stock)
|
73,204
|
61,078
|
74,750
|
80,750
|
64,517
|
|
Federal
funds sold and other short-term investments
|
128,014
|
78,752
|
60,014
|
103,291
|
95,286
|
|
Goodwill
|
55,638
|
55,638
|
55,638
|
55,638
|
55,638
|
|
Deposits
|
2,179,998
|
2,008,532
|
1,914,772
|
2,210,049
|
2,041,678
|
|
Borrowings
|
958,745
|
788,900
|
834,120
|
809,249
|
571,675
|
|
Stockholders'
equity
|
268,852
|
290,631
|
291,713
|
281,721
|
283,919
|
|
Tangible
Stockholders' equity
|
217,238
|
241,829
|
239,169
|
229,013
|
228,026
|
|
Selected
Operating Data:
|
|||||
|
Interest
income
|
$182,160
|
$170,810
|
$169,712
|
$173,758
|
$184,849
|
|
Interest
expense
|
111,147
|
93,340
|
77,341
|
67,776
|
71,063
|
|
Net
interest income
|
71,013
|
77,470
|
92,371
|
105,982
|
113,786
|
|
Provision
for loan losses
|
240
|
240
|
340
|
280
|
288
|
|
Net
interest income after provision for loan losses
|
70,773
|
77,230
|
92,031
|
105,702
|
113,498
|
|
Non-interest
income
|
10,420
|
12,390
|
5,151
|
10,376
|
9,388
|
|
Non-interest
expense
|
45,502
|
41,976
|
40,742
|
42,407
|
40,809
|
|
Income
before income tax
|
35,691
|
47,644
|
56,440
|
73,671
|
82,077
|
|
Income
tax expense
|
13,248
|
17,052
|
20,230
|
27,449
|
30,801
|
|
Net
income
|
$22,443
|
$30,592
|
$36,210
|
$46,222
|
$51,276
|
F-59
|
At
or for the Year Ended December 31,
|
|||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
|
|
SELECTED
FINANCIAL RATIOS AND OTHER DATA (1):
|
|||||
|
Return
on average assets
|
0.69%
|
0.98%
|
1.11%
|
1.38%
|
1.67%
|
|
Return
on average stockholders' equity
|
8.11
|
10.43
|
12.65
|
16.76
|
18.76
|
|
Stockholders'
equity to total assets at end of period
|
7.68
|
9.16
|
9.33
|
8.34
|
9.55
|
|
Tangible
equity to tangible assets at end of period
|
6.29
|
7.74
|
7.78
|
6.88
|
7.82
|
|
Loans
to deposits at end of period
|
131.97
|
134.61
|
136.42
|
113.20
|
107.39
|
|
Loans
to interest-earning assets at end of period
|
88.77
|
90.18
|
88.82
|
78.04
|
77.89
|
|
Net
interest spread (2)
|
1.88
|
2.19
|
2.66
|
3.09
|
3.62
|
|
Net
interest margin (3)
|
2.29
|
2.60
|
2.96
|
3.32
|
3.90
|
|
Average
interest-earning assets to average interest-bearing
liabilities
|
111.48
|
113.07
|
111.88
|
110.79
|
111.60
|
|
Non-interest
expense to average assets
|
1.39
|
1.34
|
1.24
|
1.27
|
1.33
|
|
Core
non-interest expense to average assets (4)
|
1.39
|
1.34
|
1.24
|
1.24
|
1.30
|
|
Efficiency
ratio (5)
|
56.40
|
48.36
|
40.03
|
36.67
|
33.05
|
|
Core
efficiency ratio (4) (5)
|
56.40
|
48.36
|
39.98
|
35.96
|
32.38
|
|
Effective
tax rate
|
37.12
|
35.79
|
35.84
|
37.26
|
37.53
|
|
Dividend
payout ratio
|
83.58
|
64.37
|
54.90
|
42.97
|
30.10
|
|
Per
Share Data:
|
|||||
|
Diluted
earnings per share
|
$0.67
|
$0.87
|
$1.02
|
$1.28
|
$1.37
|
|
Cash
dividends paid per share
|
0.56
|
0.56
|
0.56
|
0.55
|
0.41
|
|
Book
value per share
|
7.93
|
7.97
|
7.89
|
7.58
|
7.45
|
|
Tangible
book value per share
|
6.41
|
6.63
|
6.47
|
6.16
|
5.98
|
|
Asset
Quality Ratios and Other Data(1):
|
|||||
|
Net
charge-offs
|
$9
|
$27
|
$45
|
$133
|
$29
|
|
Total
non-performing loans
|
2,856
|
3,606
|
958
|
1,459
|
525
|
|
OREO,
net
|
-
|
-
|
-
|
-
|
-
|
|
Non-performing
loans to total loans
|
0.10%
|
0.13%
|
0.04%
|
0.06%
|
0.02%
|
|
Non-performing
loans and OREO to total assets
|
0.08
|
0.11
|
0.03
|
0.04
|
0.02
|
|
Allowance
for Loan Losses to:
|
|||||
|
Non-performing
loans
|
538.76%
|
430.23%
|
1,647.70%
|
1,065.32%
|
2,860.57%
|
|
Total
loans (6)
|
0.53
|
0.57
|
0.60
|
0.62
|
0.68
|
|
Regulatory Capital
Ratios: (Bank only) (1)
|
|||||
|
Tangible
capital
|
7.88%
|
9.05%
|
9.84%
|
7.88%
|
7.97%
|
|
Leverage
capital
|
7.88
|
9.05
|
9.84
|
7.88
|
7.97
|
|
Total
risk-based capital
|
11.92
|
12.61
|
14.30
|
12.83
|
15.03
|
|
Earnings
to Fixed Charges Ratios (7) (8):
|
|||||
|
Including
interest on deposits
|
1.32x
|
1.51x
|
1.73x
|
2.09x
|
2.15x
|
|
Excluding
interest on deposits
|
1.99
|
2.30
|
2.56
|
3.46
|
3.50
|
|
Full
Service Branches
|
21
|
21
|
20
|
20
|
20
|
|
(1)
|
With
the exception of end of period ratios, all ratios are based on average
daily balances during the indicated periods. Asset Quality Ratios and
Regulatory Capital Ratios are end of period
ratios.
|
|
(2)
|
The
net interest spread represents the difference between the weighted-average
yield on interest-earning assets and the weighted-average cost of
interest-bearing liabilities.
|
(3) The
net interest margin represents net interest income as a percentage of average
interest-earning assets.
|
(4)
|
In
calculating the core non-interest expense to average assets and core
efficiency ratios, amortization expense related to the core deposit
intangible is excluded from non-interest
expense.
|
|
(5)
|
The
efficiency ratio represents non-interest expense as a percentage of the
sum of net interest income and non-interest income, excluding any gains or
losses on sales of assets.
|
(6) Total
loans represents loans, net, plus the allowance for loan losses.
|
(7)
|
For
purposes of computing the ratios of earnings to fixed charges, earnings
represent income before taxes, extraordinary items and the cumulative
effect of accounting changes plus fixed charges. Fixed charges
represent total interest expense, including and excluding interest on
deposits.
|
|
|
(8) Interest on
unrecognized tax benefits totaling $509,000 is included in the calculation
of fixed charges for the year ended December 31,
2007.
|
F-59
Item
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Executive
Summary
The
Holding Company’s primary business is the operation of the Bank. The
Company’s consolidated results of operations are dependent primarily on net
interest income, which is the difference between the interest income earned on
interest-earning assets, such as loans and securities, and the interest expense
paid on interest-bearing liabilities, such as deposits and
borrowings. The Bank additionally generates non-interest income such
as service charges and other fees, as well as income associated with Bank Owned
Life Insurance. Non-interest expense primarily consists of employee
compensation and benefits, federal deposit insurance premiums, data processing
costs, occupancy and equipment expenses, marketing expenses and other operating
expenses. The Company’s consolidated results of operations are also
significantly affected by general economic and competitive conditions
(particularly fluctuations in market interest rates), government policies,
changes in accounting standards and actions of regulatory agencies.
The
Bank’s primary strategy is generally to increase its household and deposit
market shares in the communities that it serves. During much of 2005,
2006 and 2007, however, growth was restricted as a result of the interest rate
environment, which management has deemed unfavorable for significant balance
sheet growth. The Bank also generally seeks to increase its product
and service utilization for each individual depositor. In addition,
the Bank’s primary strategy includes the origination of, and investment in,
mortgage loans, with an emphasis on multifamily residential and commercial real
estate loans.
The
Company believes that multifamily residential and commercial real estate loans
provide advantages as investment assets. Initially, they offer a
higher yield than investment securities of comparable maturities or terms to
repricing. In addition, origination and processing costs for the
Bank’s multifamily residential and commercial real estate loans are lower per
thousand dollars of originations than comparable one-to four-family loan
costs. Further, the Bank’s market area has generally provided a
stable flow of new and refinanced multifamily residential and commercial real
estate loan originations. In order to address the credit risk
associated with multifamily residential and commercial real estate lending, the
Bank has developed underwriting standards that it believes are reliable in order
to maintain consistent credit quality for its loans.
The Bank
also strives to provide a stable source of liquidity and earnings through the
purchase of investment grade securities; seeks to maintain the asset quality of
its loans and other investments; and uses appropriate portfolio and
asset/liability management techniques in an effort to manage the effects of
interest rate volatility on its profitability and capital.
The net
interest spread and net interest margin declined during the year ended December
31, 2007. These declines were attributable to increases in short-term
interest rates during the first six months of December 31,
2007. This condition resulted in a greater increase in the average
cost of interest bearing liabilities than the yield on interest earning assets
during the year.
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 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 and accounting for
defined benefit plans are its most critical accounting policies because they are
important to the presentation of the Company’s financial condition and results
of operations, involve a significant degree of complexity and require management
to make difficult and subjective judgments which often necessitate assumptions
or estimates about highly uncertain matters. The use of different judgments,
assumptions and estimates could result in material variations in the Company's
results of operations or financial condition.
The
following are descriptions of the Company's critical accounting policies and
explanations of the methods and assumptions underlying their application. These
policies and their application are reviewed periodically with the Audit
Committees of the Holding Company and Bank.
Allowance for Loan
Losses. 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 Amended SFAS 114") and performing
loans. The Bank applied the process of determining the allowance for
loan losses consistently throughout the years ended December 31, 2007 and
2006.
Performing
Loans
At
December 31, 2007, the majority of the allowance for loan losses was allocated
to performing loans, which represented the overwhelming majority of the Bank's
loan portfolio. Performing loans are reviewed at least quarterly
based upon the premise that there are losses inherent within the loan portfolio
that have not been identified as of the review date. The Bank thus
calculates an allowance for loan losses related to its performing loans by
deriving an expected loan loss percentage and applying it to its performing
loans. In deriving the expected loan loss percentage, the Bank
generally considers, among others, the following criteria: the Bank's historical
loss experience; the age and payment history of the loans (commonly referred to
as their "seasoned quality"); the type of loan (i.e., one- to four-family,
multifamily residential, commercial real estate, cooperative apartment,
construction 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
and the provision for loan losses.
Problem
Loans
OTS
regulations and Bank policy require that loans possessing certain weaknesses be
classified as Substandard, Doubtful or Loss assets. Assets that do
not expose the Bank to risk sufficient to justify classification in one of these
categories, however, which possess potential weaknesses that deserve
management's attention, are designated Special Mention. Loans
classified as Special Mention, Substandard or Doubtful are reviewed individually
on a quarterly basis by the Bank's Loan Loss Reserve Committee to determine the
level of possible loss, if any, that should be provided for within the Bank's
allowance for loan losses.
The
Bank's policy is to charge-off immediately all balances classified as ''Loss''
and record a reduction of the allowance for loan losses for the full amount of
the outstanding loan balance. The Bank applied this process
consistently throughout the years ended December 31, 2007 and 2006.
Under the
guidance established by Amended SFAS 114, loans determined to be impaired (i.e., loans where its 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, and are
classified as Substandard, Doubtful or Loss, and reviewed and reserved for in
the manner discussed above for loans of such classification.
See also
"Item 1 – Business – Asset Quality."
Valuation of MSR. The cost 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. In accordance with GAAP, MSR are carried at the
lower of cost or fair value and are amortized in proportion to, and over the
period of, anticipated net servicing income. The Company
adopted SFAS No. 156, "Accounting for Servicing of Financial Assets" ("SFAS
156") effective January 1, 2007. SFAS 156 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 No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). SFAS 142 eliminates amortization of goodwill
and instead requires performance of an annual impairment test at the reporting
unit level. As of December 31, 2007, the Company had goodwill
totaling $55.6 million.
The
Company identified a single reporting unit for purposes of its goodwill
impairment testing. The impairment test is therefore performed on a
consolidated basis and compares the Holding Company's market capitalization
(reporting unit fair value) to its outstanding equity (reporting unit carrying
value). The Company utilizes the closing price of the Holding
Company's common stock as reported on the Nasdaq National Market on the date of
the impairment test in order to compute market capitalization. The
Company has designated the last day of its fiscal year as the annual date for
impairment testing. The Company performed its annual impairment test as of
December 31, 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.
Available-for-sale
debt and equity securities that have readily determinable fair values are
carried at fair value. All of the Company's available for sale
securities at December 31, 2007 had readily determinable fair values, and such
fair values were based on published or securities dealers' market
values.
Debt
securities are classified as held-to-maturity, and carried at amortized cost,
only if the Company has a positive intent and ability to hold them to
maturity. Unrealized holding gains or losses on debt securities
classified as held-to-maturity are disclosed, but are not recognized in the
Company's consolidated statements of financial condition or results of
operations.
Debt
securities that are not classified as held-to-maturity, along with all equity
securities, are classified as either securities available-for-sale or trading
securities. The Company owned no securities classified as trading
securities during the year ended December 31, 2007.
The
Company conducts a periodic review and evaluation of its securities portfolio,
taking into account the severity and duration of each unrealized loss, as well
as management's intent and ability to hold the security until the unrealized
loss is substantially eliminated, in order to determine if a decline in market
value of any security below its carrying value is either temporary or other than
temporary. All unrealized losses on debt and equity securities
available-for-sale that are deemed temporary are excluded from net income and
reported net of income taxes as other comprehensive income or
loss. All unrealized losses that are deemed other than temporary are
recognized immediately as a reduction of the carrying amount of the security,
with a charge recorded in the Company's consolidated statements of
operations. For the years ended December 31, 2007 and 2006, there
were no other than temporary impairments in the securities
portfolio. Unrealized holding gains on securities totaled $733,000
and $323,000 at December 31, 2007 and December 31, 2006,
respectively.
Recognition of Deferred Tax
Assets. Management reviews all deferred tax assets
periodically. Upon such review, in the event that it is more likely
than not that the deferred tax asset will not be fully realized, a valuation
allowance is recognized against the deferred tax asset in the full amount that
is deemed more likely than not will not be realized.
Uncertain Tax Positions – The
Company performs two levels of evaluation for all uncertain tax positions.
Initially, a determination is made as to whether it is more likely than not that
a tax position will be sustained upon examination, including resolution of any
related appeals or litigation processes, based on the technical merits of the
position. In conducting this evaluation, management is required to presume that
the position will be examined by the appropriate taxing authority possessing
full knowledge of all relevant information. The second level of evaluation is
the measurement of a tax position that satisfies the more-likely-than-not
recognition threshold. This measurement is performed in order to
determine the amount of benefit to recognize in the financial statements. The
tax position is measured at the largest amount of benefit that is greater than
50 percent likely of being realized upon ultimate settlement. 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 1. –
Business – Asset Quality 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 – Defined benefit plans are accounted for in accordance with SFAS
No. 158 "Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and
132(R)" ("SFAS 158"). SFAS 158 requires an employer sponsoring a
single employer defined benefit plan to do the following: (1) recognize the
funded status of a benefit plan in its 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 trained actuaries employed at an independent benefits plan
administration company in order to measure the funded status of its defined
benefit plans.
Liquidity
and Capital Resources
The Bank's primary sources of funding
for its lending and investment activities include deposits, loan and MBS
payments, investment security maturities and redemptions, advances from the
FHLBNY, and REPOs entered into with various financial institutions, including
the FHLBNY. The Bank also sells selected multifamily residential and
mixed use loans to the FNMA, and long-term, one- to four-family residential real
estate loans to either 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.
Deposits increased $171.5 million
during the year ended December 31, 2007, and $93.8 million during the year ended
December 31, 2006, as for the majority of 2007, management elected to seek
deposit growth as its primary source of funding. During the year
ended December 31, 2007, the Company experienced an increase of $12.4 million in
CDs and $164.2 in money market accounts, due primarily to successful promotional
campaigns. During the year ended December 31, 2006, the Company
experienced an increase of $86.1 million in CDs and $49.6 in money market
accounts, due primarily to successful promotional campaigns.
During the year ended December 31,
2007, principal repayments totaled $324.4 million on real estate loans and $33.3
million on MBS. During the year ended December 31, 2006, principal
repayments totaled $326.8 million on real estate loans and $39.4 million on
MBS. The decrease in principal repayments on loans and MBS resulted
from a reduction in borrower refinance activities associated with
mortgage-related assets as a result of increases in interest rates during the
period July 2005 through September 2006. The Company does not presently believe
that its future levels of principal repayments will be materially impacted by
problems currently being experienced in the residential mortgage market. See
"Item 1 – Business - Asset Quality" for a further discussion of the Bank's asset
quality.
Since December 2002, the Bank has
originated and sold multifamily residential mortgage loans in the secondary
market to FNMA while retaining servicing and generating fee income while it
services the 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 continues to sell loans to FNMA under the program. The Bank retains
this exposure until the portfolio of loans sold to FNMA is satisfied in its
entirety or the Bank funds claims by FNMA for the maximum loss
exposure. During the year ended December 31, 2007 and 2006, the Bank
sold FNMA $71.4 million and $145.4 million of loans, respectively, pursuant to
this program. In addition, the Bank sold a participation in one
multifamily loan totaling $6.1 million to a third party financial institution
during the year ended December 31, 2007.
During the year ended December 31,
2007, the Company increased its REPO borrowings by $34.8 million and FHLBNY
advances by $135.0 million, respectively. The REPO borrowings were
added in order to fund real estate loan originations and ongoing Bank
operations. The majority of the additional FHLBNY advances were undertaken late
in 2007 when favorable funding pricing available through wholesale borrowings
from highly reputable financial institutions made that form of funding more
desirable than promotional deposits. These borrowings are expected to
contribute to anticipated balance sheet growth during the year ending December
31, 2008.
During the year ended December 31,
2006, borrowings declined by $45.2 million on a net basis, as the Company
utilized deposit inflows and liquidity from its investment and MBS portfolios to
fund loan growth. Due in part to the growth in deposit funding during
the year ended December 31, 2006, the Company was able to reduce its overall
level of borrowings in that year, which, because the interest rates associated
with borrowings exceeded those paid on deposits at that time, helped minimize
the increase in the average cost of its interest bearing liabilities while
short-term interest rates continued to rise.
During the year ended December 31,
2006, the Company engaged in two separate borrowing restructuring
transactions. In the initial transaction, the Company restructured
$145.0 million of its borrowings in order to lower their average
cost. Borrowings with a weighted average cost of 4.46% and a weighted
average term to maturity of one year were replaced with borrowings having a
weighted average cost of 4.17% and a final maturity of ten years, callable after
year one. Since portions of the original borrowings were satisfied at
a discount, the Company recorded a non-recurring reduction of $43,200 in
interest expense related to the prepayment.
In the second transaction, the
Company restructured $170.0 million of wholesale borrowings. Under
this restructuring, $120.0 million of REPOs and $50.0 million in FHLBNY advances
were prepaid and replaced. The prepaid borrowings had a
weighted average interest rate of 4.53%, and were replaced with a combination of
REPOs and FHLBNY advances having an initial weighted average interest rate of
3.79%. The replacement FHLBNY advances have a 4.4% fixed rate of interest, a
final maturity of ten years and are callable by the FHLBNY after a Lockout
Period of one, two or three years. The replacement REPOs have a
ten-year maturity and a Lockout Period of either one or two
years. During the Lockout Period, the REPOs are variable rate
(indexed to 3-month LIBOR), and have embedded interest rate caps and floors that
ensure their reset interest rate will not exceed their initial interest
rate. After the Lockout Period, if not called by the lender, the
REPOs convert to an average fixed rate of 4.90%. The Company recorded
a non-recurring reduction of $764,000 in interest expense related to the
prepayment.
In the 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 December 31, 2007, the Bank had an additional potential
borrowing capacity of $332.8 million available provided it owned the minimum
required level of FHLBNY common stock (i.e., 4.5% of its outstanding
FHLBNY borrowings).
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 December
31, 2007, the Bank was in compliance with all applicable regulatory capital
requirements and was considered "well-capitalized" for all regulatory
purposes.
The Bank utilizes its liquidity and
capital resources primarily to fund the origination of real estate loans and the
purchase of mortgage-backed and other securities. During the years
ended December 31, 2007 and 2006, real estate loan originations totaled $574.5
million and $563.2 million, respectively. Purchases of investment
securities (excluding short-term investments and federal funds sold) and MBS
totaled $52.2 million during the year ended December 31, 2007 compared to $4.0
million during the year ended December 31, 2006. The increase
resulted from reduced levels of securities purchases during 2006 reflecting
lower levels of liquidity experienced during the period July 2005 through
September 2006 (as a result of deposit outflows), that limited the funds
available for investment purchases.
During the year ended December 31,
2007, the Holding Company repurchased 2,298,726 shares of its common stock into
treasury. All shares repurchased were recorded at the acquisition
cost, which totaled $29.6 million during the period. As of December 31, 2007, up
to 1,686,610 shares remained available for purchase under authorized share
purchase programs. Based upon the $12.77 per share closing price of
its common stock as of December 31, 2007, the Holding Company would utilize
$15.0 million in order to purchase all of the remaining authorized
shares. For the Holding Company to complete these share purchases, it
would likely require dividend distributions from the Bank.
Contractual
Obligations
The Bank has outstanding at any time, a
significant number of borrowings in the form of FHLBNY advances or
REPOS. The Holding Company also 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 is callable at any time after April 2009.
The Bank is obligated under leases for
certain rental payments due on its branches and equipment. A summary
of borrowings and lease obligations at December 31, 2007 is as
follows:
|
Payments
Due By Period
|
||||||
|
Contractual
Obligations
|
Less
than One Year
|
One
Year to Three Years
|
Over
Three Years to Five Years
|
Over
Five Years
|
Total
|
|
|
(Dollars
in thousands)
|
||||||
|
CDs
|
$968,128
|
$99,928
|
$9,021
|
$10
|
$1,077,087
|
|
|
Weighted
average interest rate of CD's (1)
|
4.52%
|
4.45%
|
3.43%
|
3.10%
|
4.50%
|
|
|
Borrowings
|
$90,080
|
$281,000
|
$257,500
|
$330,165
|
$958,745
|
|
|
Weighted
average interest rate of borrowings
|
4.62%
|
4.92%
|
3.68%
|
4.74%
|
4.50%
|
|
|
Operating
lease obligations
|
$1,858
|
$4,155
|
$3,810
|
$19,130
|
$28,953
|
|
|
Minimum
data processing system obligation
|
$752
|
$1,505
|
$251
|
-
|
$2,508
|
|
(1) The
weighted average cost of CD's, inclusive of their contractual compounding of
interest, was 4.61% at December 31, 2007.
The Company had a reserve recorded
related to unrecognized income tax benefits totaling $1.8 million at December
31, 2007. Due to the uncertainty of the amounts to be
ultimately paid as well as the timing of such payments, all liabilities pursuant
to FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes"
("FIN 48") that have not been paid have been excluded from the tabular
disclosure of contractual obligations. The Company is currently under
audit by taxing jurisdictions. As a result, it is reasonably possible
that an amount ranging from 30% to 50% of the unrecognized tax benefits could be
recognized within the next twelve months.
Off-Balance
Sheet Arrangements
The Bank implemented a program in
December 2002 to originate and sell multifamily residential mortgage loans in
the secondary market to FNMA while retaining servicing. The Bank is
required to retain a recourse obligation on all loans sold under this program,
which will remain in effect until either the entire portfolio of loans sold to
FNMA is satisfied or the Bank funds claims by FNMA for the full balance of the
recourse obligation.
In addition, as part of its loan
origination business, the Bank has outstanding commitments to extend credit to
third parties, which are subject to strict credit control
assessments. Since many of these loan commitments expire prior to
funding, in whole or in part, the contract amounts are not estimates of future
cash flows. The following table presents off-balance sheet
arrangements as of December 31, 2007:
|
Less
than One Year
|
One
Year to Three Years
|
Over
Three Years to Five Years
|
Over
Five Years
|
Total
|
||
|
(Dollars
in thousands)
|
||||||
|
Credit
Commitments:
|
||||||
|
Available
lines of credit
|
$67,704
|
$-
|
$-
|
$-
|
$67,704
|
|
|
Other
loan commitments
|
102,397
|
-
|
-
|
-
|
102,397
|
|
|
Recourse
obligation on loans sold to FNMA
|
20,409
|
-
|
-
|
-
|
20,409
|
|
|
Total
Credit Commitments
|
$190,510
|
$-
|
$-
|
$-
|
$190,510
|
|
Analysis
of Net Interest Income
The
Company's profitability, like that of most banking institutions, is dependent
primarily upon net interest income, which is the difference between interest
income on interest-earnings assets, such as loans and securities, and interest
expense on interest-bearing liabilities, such as deposits or
borrowings. Net interest income depends on the relative amounts of
interest-earning assets and interest-bearing liabilities, and the interest rate
earned or paid on them. The following tables set forth certain
information relating to the Company's consolidated statements of operations for
the years ended December 31, 2007, 2006 and 2005, and reflect the average yield
on interest-earning assets and average cost of interest-bearing liabilities for
the periods indicated. Such yields and costs are derived by dividing interest
income or expense by the average balance of interest-earning assets or
interest-bearing liabilities, respectively, for the periods indicated. Average
balances are derived from daily balances. The yields and costs include fees that
are considered adjustments to yields. All material changes in average
balances and interest income or expense are discussed in the sections entitled
"Interest Income" and "Interest Expense" in the comparison of operating results
commencing on page F-50.
F-59
|
For the Year Ended December
31,
|
|||||||||||
|
2007
|
2006
|
2005
|
|||||||||
|
(Dollars
in Thousands)
|
|||||||||||
|
Average
|
Average
|
Average
|
|||||||||
|
Average
|
Yield/
|
Average
|
Yield/
|
Average
|
Yield/
|
||||||
|
Balance
|
Interest
|
Cost
|
Balance
|
Interest
|
Cost
|
Balance
|
Interest
|
Cost
|
|||
|
Assets:
|
|||||||||||
|
Interest-earning
assets:
|
|||||||||||
|
Real
estate loans (1)
|
$2,775,397
|
$165,221
|
5.95%
|
$2,649,623
|
$155,510
|
5.87%
|
$2,533,205
|
$148,442
|
5.86%
|
||
|
Other
loans
|
1,823
|
178
|
9.77
|
1,978
|
190
|
9.61
|
2,369
|
214
|
9.03
|
||
|
Investment
securities
|
26,683
|
2,011
|
7.54
|
32,609
|
2,276
|
6.98
|
68,315
|
2,602
|
3.81
|
||
|
MBS
|
155,462
|
6,344
|
4.08
|
177,490
|
6,850
|
3.86
|
324,002
|
11,699
|
3.61
|
||
|
Other
|
146,094
|
8,406
|
5.75
|
116,447
|
5,984
|
5.14
|
197,891
|
6,755
|
3.41
|
||
|
Total
interest-earning assets
|
3,105,459
|
$182,160
|
5.87
|
2,978,147
|
170,810
|
5.74%
|
3,125,782
|
169,712
|
5.43%
|
||
|
Non-interest
earning assets
|
157,559
|
148,493
|
150,765
|
||||||||
|
Total
assets
|
3,263,018
|
$3,126,640
|
$3,276,547
|
||||||||
|
Liabilities
and Stockholders' Equity:
|
|||||||||||
|
Interest-bearing
liabilities:
|
|||||||||||
|
NOW,
Super Now accounts
|
$44,406
|
$833
|
1.88%
|
$35,475
|
$361
|
1.02%
|
$40,625
|
$408
|
1.00%
|
||
|
Money
Market accounts
|
630,375
|
24,238
|
3.85
|
463,885
|
12,038
|
2.60
|
611,673
|
9,773
|
1.60
|
||
|
Savings
accounts
|
287,420
|
1,631
|
0.57
|
317,572
|
1,866
|
0.59
|
351,827
|
1,943
|
0.55
|
||
|
CDs
|
1,072,678
|
49,059
|
4.57
|
1,019,562
|
42,394
|
4.16
|
982,030
|
28,934
|
2.95
|
||
|
Borrowed
Funds
|
750,822
|
35,386
|
4.71
|
797,318
|
36,681
|
4.60
|
807,800
|
36,283
|
4.49
|
||
|
Total
interest-bearing liabilities
|
2,785,701
|
$111,147
|
3.99
|
2,633,812
|
93,340
|
3.54%
|
2,793,955
|
$77,341
|
2.77%
|
||
|
Checking
accounts
|
93,470
|
95,067
|
94,541
|
||||||||
|
Other
non-interest-bearing liabilities
|
107,260
|
104,562
|
101,889
|
||||||||
|
Total
liabilities
|
2,986,431
|
2,833,441
|
2,990,385
|
||||||||
|
Stockholders'
equity
|
276,587
|
293,199
|
286,162
|
||||||||
|
Total
liabilities and stockholders' equity
|
3,263,018
|
$3,126,640
|
$3,276,547
|
||||||||
|
Net
interest spread (2)
|
1.88%
|
2.19%
|
2.66%
|
||||||||
|
Net
interest income/ interest margin (3)
|
$71,013
|
2.29%
|
$77,470
|
2.60%
|
$92,371
|
2.96%
|
|||||
|
Net
interest-earning assets
|
319,758
|
$344,335
|
$331,827
|
||||||||
|
Ratio
of interest-earning assets
to
interest-bearing liabilities
|
111.48%
|
113.07%
|
111.88%
|
||||||||
(1) In
computing the average balance of real estate loans, non-performing loans have
been included. Interest income includes loan fees as defined under
SFAS 91, "Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases—an amendment
of FASB Statements No. 13, 60, and 65 and a rescission of FASB Statement No.
17." Interest income also includes applicable prepayment fees and
late charges under SFAS 91.
(2) Net
interest spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(3) The
interest margin represents net interest income as a percentage of average
interest-earning assets.
F-59
Rate/Volume
Analysis. The following table represents the extent to which
variations in interest rates and the volume of interest-earning assets and
interest-bearing liabilities have affected interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to: (i) variances attributable to fluctuations in volume (change in
volume multiplied by prior rate), (ii) variances attributable to rate (changes
in rate multiplied by prior volume), and (iii) the net change. Variances
attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to
rate.
|
Year
Ended December 31, 2007
Compared
to
Year
Ended December 31, 2006
Increase/
(Decrease) Due to
|
Year
Ended December 31, 2006
Compared
to
Year
Ended December 31, 2005
Increase/
(Decrease) Due to
|
Year
Ended December 31, 2005
Compared
to
Year
Ended December 31, 2004
Increase/
(Decrease) Due to
|
|||||||||
|
Volume
|
Rate
|
Total
|
Volume
|
Rate
|
Total
|
Volume
|
Rate
|
Total
|
|||
|
Interest-earning
assets:
|
(Dollars
in Thousands)
|
||||||||||
|
Real
Estate Loans
|
$6,828
|
$2,883
|
$9,711
|
$6,818
|
$250
|
$7,068
|
$8,440
|
$(8,842)
|
$(402)
|
||
|
Other
loans
|
(12)
|
-
|
(12)
|
(37)
|
13
|
(24)
|
(79)
|
45
|
(34)
|
||
|
Investment
securities
|
(357)
|
92
|
(265)
|
(1,927)
|
1,601
|
(326)
|
783
|
74
|
857
|
||
|
MBS
|
(719)
|
213
|
(506)
|
(5,475)
|
626
|
(4,849)
|
(10,336)
|
944
|
(9,392)
|
||
|
Other
|
1,516
|
906
|
2,422
|
(3,487)
|
2,716
|
(771)
|
1,650
|
3,275
|
4,925
|
||
|
Total
|
$7,256
|
$4,094
|
$11,350
|
$(4,108)
|
$5,206
|
$1,098
|
$458
|
$(4,504)
|
$(4,046)
|
||
|
Interest-bearing
liabilities:
|
|||||||||||
|
NOW
and Super Now accounts
|
$156
|
$316
|
$472
|
$(54)
|
$7
|
($47)
|
$(8)
|
$6
|
$(2)
|
||
|
Money
market accounts
|
5,547
|
6,653
|
12,200
|
(3,107)
|
5,372
|
2,265
|
(2,970)
|
998
|
(1,972)
|
||
|
Savings
accounts
|
(160)
|
(75)
|
(235)
|
(204)
|
127
|
(77)
|
(77)
|
82
|
5
|
||
|
CDs
|
2,595
|
4,070
|
6,665
|
1,342
|
12,118
|
13,460
|
1,140
|
4,014
|
5,154
|
||
|
Borrowed
funds
|
(1,776)
|
481
|
(1,295)
|
(481)
|
879
|
398
|
3,529
|
2,851
|
6,380
|
||
|
Total
|
6,362
|
11,445
|
17,807
|
(2,504)
|
18,503
|
15,999
|
1,614
|
7,951
|
9,565
|
||
|
Net
change in net interest income
|
$894
|
$(7,351)
|
$(6,457)
|
$(1,604)
|
$(13,297)
|
$(14,901)
|
$(1,156)
|
$(12,455)
|
$(13,611)
|
||
Comparison
of Financial Condition at December 31, 2007 and December 31, 2006
Assets. Assets
totaled $3.50 billion at December 31, 2007, an increase of $327.8 million from
total assets of $3.17 billion at December 31, 2006.
Real
estate loans increased $173.7 million during the year ended December 31, 2007,
due primarily to originations of $574.5 million during the period (as interest
rates offered on new loans continued to stimulate origination activity), that
were partially offset by amortization of $324.4 million and sales to third
parties of $77.6 million.
Cash and
due from banks and federal funds sold and other short-term securities increased
by $75.4 million and $49.3 million, respectively, during the year ended December
31, 2007, as the Company added FHLBNY advances late in the year ended December
31, 2007, and held the funds in cash and due from banks and federal funds sold
and other short-term investments at year-end. In future periods,
these funds are anticipated to be invested in higher-yielding investment
securities, MBS and real estate loans to the extent permissible under the Bank's
regulations.
Liabilities. During
the year ended December 31, 2007, total liabilities increased $349.6 million,
reflecting increases of $171.5 million in deposits, $34.8 million in REPOS and
$135.0 million in FHLBNY advances during the period. (See "Item 7. –
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" for a discussion of the deposit,
FHLBNY advances and REPO increases during the period).
Stockholders'
Equity. Stockholders' equity decreased $21.8 million during
the year ended December 31, 2007, due to treasury stock repurchases of $29.6
million, cash dividends on the Holding Company's common stock of $19.0 million
and a reduction to equity of $1.7 million related to an additional reserve
recorded by the Company upon adoption of FASB Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes."
Partially
offsetting these items were increases to equity during the period resulting from
the following: (i) net income of $22.4 million; (ii) $2.0 million related to
amortization of the Employee Stock Ownership Plan of Dime Community Bancshares,
Inc. and Certain Affiliates (the "ESOP") and restricted stock awards issued
under other stock benefit plans; and (iii) $958,000 of cash dividends re-assumed
through the liquidation of the Recognition and Retention Plan for Outside
Directors, Officers and Employees of Dime Community Bancshares, Inc.
("RRP"). The ESOP and restricted stock awards are initially recorded
as reductions in stockholders' equity ("Contra Equity Balances"). As
compensation expense is recognized on the ESOP and restricted stock awards, the
Contra Equity Balances are reduced in a corresponding amount, resulting in an
increase to their respective equity balances. This increase to equity
offsets the decline in the Company's retained earnings related to the periodic
recorded ESOP and restricted stock award expenses.
Comparison
of Financial Condition at December 31, 2006 and December 31, 2005
Assets. Assets
totaled $3.17 billion at December 31, 2006, a slight increase from total assets
of $3.13 billion at December 31, 2005.
Real estate loans increased $91.7
million during the year ended December 31, 2006, due primarily to originations
of $563.2 million during the period (as interest rates offered on new loans
continued to stimulate origination activity), that were partially offset by
amortization of $326.8 million and sales to FNMA of $145.4
million. During the years ended December 31, 2006 and 2005, real
estate loan originations totaled $563.2 million and $574.2 million,
respectively. The average rate on total loan originations during the
year ended December 31, 2006 was 6.43%, compared to 5.77% in the year ended
December 31, 2005. Real estate loan
prepayment and amortization during the year ended December 31, 2006 approximated
12% of the loan portfolio on an annualized basis, compared to 14% during the year ended
December 2005. The decline in prepayment and amortization levels
resulted from increases in interest rates from January 2006 to December
2006. Federal funds sold and other short-term assets increased $18.7
million during the comparative period as cash flows from maturing investment
securities and principal repayments on MBS were reinvested in short-term
securities and federal funds sold, since the flattened yield curve provided
benefits to retaining the funds in short-term investments.
Partially offsetting the increases in
real estate loans and federal funds sold and other short-term assets were
declines in MBS available-for-sale and investment securities available-for-sale
of $39.0 million and $15.3 million, respectively, during the year ended December
31, 2006. The decline in MBS available-for-sale resulted primarily
from principal repayments of $39.4 million. The decrease in investment
securities available for sale resulted primarily from maturities of $17.1
million. In addition, cash and due from banks declined $13.9 million
during the year ended December 31, 2006 as excess liquidity that was maintained
in cash and due from banks at December 31, 2005 was utilized for operations
during the year ended December 31, 2006.
Liabilities. Total
liabilities increased $48.2 million during the year ended December 31, 2006.
Deposits increased $93.8 million during the period (See "Item
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources" for a discussion of
deposit activity). Partially offsetting this increase was a net
decline in borrowings (REPOS and FHLBNY advances) of $45.2
million. (See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" for a discussion of borrowing
activity).
Stockholders'
Equity. Stockholders' equity declined $1.1 million during the
year ended December 31, 2006, due to cash dividends of $19.7 million and
treasury stock repurchases of $11.0 million during the
period. Additionally, accumulated other comprehensive loss (which is
recorded as a negative balance within stockholders' equity) increased by $3.8
million during the year ended December 31, 2006. The change in
accumulated other comprehensive loss resulted primarily from a charge of $3.8
million caused by the adoption of SFAS 158. The increase of $3.8
million in accumulated other comprehensive loss caused a corresponding decrease
in stockholders' equity during the period.
Partially offsetting the decrease to
stockholders' equity during the year ended December 31, 2006 were net income of
$30.6 million, common stock issued in fulfillment of stock option exercises
totaling $910,000, and an increase to equity of $1.4 million related to
amortization of the ESOP and RRP stock benefit plans. The ESOP and
RRP possess investments in the Holding Company's common stock that are recorded
as Contra Equity Balances. As compensation expense is recognized on
the ESOP and RRP, the Contra Equity Balances are reduced in a corresponding
amount, resulting in an increase to their respective equity
balances. This increase to equity offsets the decline in the
Company's retained earnings related to the periodic recorded ESOP and RRP
expenses.
Comparison
of Operating Results for the Year Ended December 31, 2007 and 2006
General. Net
income was $22.4 million during the year ended December 31, 2007, a decrease of
$8.1 million from net income of $30.6 million during the year ended December 31,
2006. During the comparative period, net interest income declined
$6.5 million, non-interest income decreased $2.0 million due primarily to a
change in the net gains or losses on the disposal of assets, and non-interest
expense increased $3.5 million, resulting in a reduction in pre-tax net income
of $12.0 million. Income tax expense decreased $3.8 million during
the comparative period, primarily as a result of the decrease in pre-tax net
income.
Net Interest
Income. The discussion of net interest income for the years
ended December 31, 2007 and 2006 presented below should be read in conjunction
with the tables on pages F-47 and F-48, which set forth certain information
related to the condensed consolidated statements of operations for those
periods, and which also present the average yield on assets and average cost of
liabilities for the periods indicated. The yields and costs were
derived by dividing income or expense by the average balance of their related
assets or liabilities during the periods represented. Average balances were
derived from average daily balances. The yields include fees that are considered
adjustments to yields.
Net
interest income for the year ended December 31, 2007 decreased $6.5 million to
$71.0 million, from $77.5 million during the year ended December 31,
2006. The decrease was attributable to an increase of $17.8 million
in interest expense that was partially offset by an increase of $11.4 million in
interest income. The net interest spread decreased 31 basis points,
from 2.19% for the year ended December 31, 2006 to 1.88% for the year ended
December 31, 2007, and the net interest margin decreased 31 basis points, from
2.60% to 2.29% during the same period.
The
increase in funding costs resulting from the tightening of monetary policy by
the FOMC during the first six months of 2006 that remained in effect for the
majority of 2007, in combination with various market factors suppressing
increases in both general long-term interest rates and interest rates offered on
real estate loans within the Bank's lending market, resulted in a narrowing
spread between short and long-term interest rates during the great majority of
the year ended December 31, 2007, which negatively impacted net interest income
during the year ended December 31, 2007. While these conditions
improved late in 2007, the benefit occurred too late in the year to provide any
significant favorable impact during the year ended December 31,
2007.
The
decreases in both the net interest spread and net interest margin reflected an
increase of 45 basis points in the average cost of interest bearing
liabilities. The increase resulted primarily from increases in the
average cost of money market deposits and CDs of 125 basis points and 41 basis
points, respectively, during the comparative period, reflecting increases in
short-term interest rates during the first six months of 2006 that remained in
effect throughout the great majority of 2007. (See "Interest Expense"
below).
Interest
Income. Interest income was $182.2 million during the year
ended December 31, 2007, an increase of $11.4 million from $170.8 million during
the year ended December 31, 2006. This resulted primarily from
increases of $9.7 million and $2.4 million in interest income on real estate
loans and other short-term investments, respectively, that were partially offset
by decreases in interest income on MBS and investment securities of $506,000 and
$266,000, respectively, during the period.
The
increase in interest income on real estate loans resulted, in part, from growth
in their average balance of $125.8 million during the year ended December 31,
2007 compared to the year ended December 31, 2006. The increase
reflected originations of $574.5 million in 2007, which were partially offset by
principal repayments of $324.4 million and loan sales of $77.6 million during
the period. The increase in interest income on real estate
loans additionally resulted from an increase in the average yield from 5.87%
during the year ended December 31, 2006 to 5.95% during the year ended December
31, 2007, that was attributable to higher medium- and long-term interest rates
throughout much of the year ended December 31, 2007 compared to the year ended
December 31, 2006.
The
increase in interest income on other short-term investments resulted from growth
in their average balance of $29.6 million during the year ended December 31,
2007 compared to the year ended December 31, 2006 coupled with an increase of 61
basis points in their average yield during the same period. The
increase in average balance reflected cash flows from deposit growth during 2007
that were retained in short-term securities and federal funds sold, since the
flattened yield curve provided benefits to retaining the funds in short-term
investments. The increase in average yield reflected increases in
short-term interest rates throughout 2006 that remained in effect throughout the
great majority of 2007. The actions of the FOMC during the last few
months of 2007 resulting in lower short-term interest rates had only a minor
effect upon short-term investment yields during the year ended December 31, 2007
since they occurred so late in the period.
The
decline in interest income on MBS during the year ended December 31, 2007
compared to the year ended December 31, 2006 resulted from a decreased average
balance of $22.0 million (resulting from $33.3 million and $39.4 million in
principal repayments during the years ended December 31, 2007 and 2006,
respectively, that were partially offset by purchases of $38.0 million during
2007), that was partially offset by an increase of 22 basis points in average
yield during the year ended December 31, 2007 compared to the year ended
December 31, 2006 (resulting from increases in short and medium-term interest
rates throughout 2006 which remained in effect throughout the great majority of
2007). The decline in interest income on investment securities
reflected a decrease in their average balance of $5.9 million during the year
ended December 31, 2007 compared to the year ended December 31, 2006, as cash
flows from maturing investment securities were utilized to fund real estate loan
originations or Bank operations.
Interest
Expense. Interest expense increased $17.8 million, to $111.1
million, during the year ended December 31, 2007, from $93.3 million during the
year ended December 31, 2006. The growth resulted primarily from
increased interest expense of $12.2 million related to money markets and $6.7
million related to CDs, that was partially offset by a decline of $1.3 million
in interest expense on borrowings.
The
increase in interest expense on money markets was due to increases of 125 basis
points in their average cost and $166.5 million in their average balance during
the comparative period. During the year ended December 31, 2007, the
Bank increased the rates offered on both promotional and non-promotional money
market accounts, which led to the increase in average cost during the
period. In addition, the Bank grew its balance of money markets
during 2007 through successful promotional activities.
The
increase in interest expense on CDs resulted, in part, from an increase in their
average cost of 41 basis points during the year ended December 31, 2007 compared
to the year ended December 31, 2006. The increase in average cost
resulted from increases in short-term interest rates throughout 2006 that
remained in effect throughout the great majority of 2007, as a significant
majority of the Bank's CDs re-priced during 2007. In addition, the
average balance of CDs increased $53.1 million during the comparative period,
reflecting successful gathering of new CDs from promotional activities during
2007. (See "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources").
The
decrease in interest expense on borrowed funds during the year ended December
31, 2007 compared to the year ended December 31, 2006 was due to a decline of
$46.5 million in average balance during the period as the Company elected not to
replace maturing borrowings throughout much of 2007 while deposit balances were
increasing. The average cost of borrowed funds increased 11 basis
points during the year ended December 31, 2007 compared to the year ended
December 31, 2006, due primarily to a reduction of $807,000 in borrowing expense
recorded during 2006 related to borrowing restructurings. (See
"Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources" for a discussion of
the change in borrowing balances during the years ended December 31, 2007 and
2006).
Provision for Loan
Losses. The provision for loan losses was $240,000 during the
years ended both December 31, 2007 and December 31, 2006, as the Bank provided
for additional inherent losses in the portfolio.
Non-Interest
Income. Non-interest income, excluding gains or losses on the
sale of assets, increased $337,000 from $9.3 million during the year ended
December 31, 2006 to $9.7 million during the year ended December 31,
2007. This increase resulted primarily from a $546,000 Bank Owned
Life Insurance benefit payment received by the Bank during 2007.
Net gains
on the sale of loans and other assets (which were recorded as non-interest
income) declined from $3.1 million during the year ended December 31, 2006 to
$750,000 during the year ended December 31, 2007. The Company sold
loans to FNMA totaling $71.6 million and $145.4 million during the years ended
December 31, 2007 and 2006, respectively. The gains recorded on these
sales were $750,000 and $1.5 million during the years ended December 31, 2007
and 2006, respectively. During the year ended December 31, 2006, the
Company additionally recorded non-recurring pre-tax gains of $478,000 on the
sale of a property obtained in its 1999 acquisition of Financial Bancorp, Inc.
and $1.1 million on the sale of mutual fund investments associated with its
Benefit Maintenance Plan.
Non-Interest
Expense. Non-interest expense was $45.5 million during the
year ended December 31, 2007, an increase of $3.5 million from the year ended
December 31, 2006.
Salaries
and employee benefits increased $1.3 million during the comparative period as a
result of regular increases to existing employee compensation
levels. Stock benefit plan amortization expense increased $671,000 as
a result of stock option awards granted on May 1, 2007 to outside directors and
certain officers of the Company.
Occupancy
and equipment expense increased $669,000 during the year ended December 31, 2007
compared to the comparable period of 2006 due to general increases in rental
costs and real estate taxes, the expansion of administrative office space during
2007, and a $239,000 charge related to the early termination of
leased equipment .
Data
processing expense increased $37,000 during the comparative period as a result
of increased loan and deposit account activity during the year ended December
31, 2007 compared to the year ended December 31, 2006. Other expenses
increased $835,000 due primarily to increased advertising costs of $452,000
resulting from increased promotional activities and an aggregate increase of
$499,000 in accounting and legal fees related primarily to a change in tax
year-end along with added legal costs associated with new proxy compensation
disclosures implemented in 2007.
Non-interest
expense to average assets was 1.39% for the year ended December 31 2007,
compared to 1.34% for the year ended December 31, 2006. The increase
reflected the growth in non-interest expense during the comparative
period.
Income Tax
Expense. Income tax expense decreased $3.8 million during the
year ended December 31, 2007 compared to the year ended December 31, 2006, due
primarily to a decline of $12.0 million in pre-tax net income during the
period. The effective tax rate increased from 35.8% during the year
ended December 31, 2006 to 37.1% during the year ended December 31, 2007 due
primarily to the dissolution of a subsidiary in 2007.
Comparison
of Operating Results for the Years Ended December 31, 2006 and 2005
General. Net income was $30.6
million during the year ended December 31, 2006, a decrease of $5.6 million from
net income of $36.2 million during the year ended December 31,
2005. Net interest income decreased $14.9 million, non-interest
income increased $7.2 million and non-interest expense increased $1.2 million,
resulting in a decline in pre-tax net income of $8.8 million. Income
tax expense decreased $3.2 million as a result of the decline in pre-tax net
income.
Net Interest
Income. The discussion of net interest income for the years
ended December 31, 2007 and 2006 presented below should be read in conjunction
with the tables on pages F-42 and F-43 , which set forth certain information
related to the condensed consolidated statements of operations for those
periods, and which also present the average yield on assets and average cost of
liabilities for the periods indicated. The yields and costs were
derived by dividing income or expense by the average balance of their related
assets or liabilities during the periods represented. Average balances were
derived from average daily balances. The yields include fees that are considered
adjustments to yields.
Net interest income for the year ended
December 31, 2006 decreased $14.9 million to $77.5 million, from $92.4 million
during the year ended December 31, 2005. The decrease was
attributable to an increase of $16.0 million in interest expense that was
slightly offset by an increase of $1.1 million in interest
income. The net interest spread decreased 47 basis points, from 2.66%
for the year ended December 31, 2005 to 2.19% for the year ended December 31,
2006, and the net interest margin decreased 36 basis points, from 2.96% to 2.60%
during the same period.
The tightening of monetary policy by
the FOMC from the second half of 2004 through June 30, 2006, in combination with
various market factors suppressing increases in both general long-term interest
rates and interest rates offered on real estate loans within the Bank's lending
market, resulted in a narrowing spread between short and long-term interest
rates, which negatively impacted net interest income during the year ended
December 31, 2006.
The decrease in both the net interest
spread and net interest margin reflected an increase of 77 basis points in the
average cost of interest bearing liabilities. The increase resulted
primarily from the following: (i) borrowings, which generally possess a higher
average cost than deposits, became a larger percentage of the Bank's total
interest bearing liabilities as a result of runoff in average deposit balances
during 2006, and (ii) the average cost of money market deposits and CDs
increased by 100 basis points and 121 basis points, respectively, during the
comparative period, reflecting increases in short-term interest rates during
2006. (See "Interest Expense" below).
Partially offsetting the increase in
the average cost of interest bearing liabilities was an increase of 31 basis
points in the average yield on interest earning assets during the year ended
December 31, 2006 compared to the year ended December 31, 2005. This
increase resulted primarily from an increase in the average balance of real
estate loans (the Bank's highest yielding interest earning asset) as a
percentage of total interest earning assets, which was coupled with an increase
in the average yields on real estate loans and MBS of 1 basis point and 25 basis
points, respectively, during the comparative period. The increase in
the composition of real estate loans as a percentage of interest earning assets
resulted from both loan origination activity during 2006 coupled with a
reduction in the level of investment securities and MBS during the same period,
as cash flows from maturing investment securities and MBS were utilized to fund
both loan originations and ongoing operations of the Company. The increase in
average yield on real estate loans reflected ongoing increases in medium- and
long-term interest rates during 2006. The increase in average yield
on MBS reflected ongoing increases in short- and medium-term interest rates
during 2006.
Interest
Income. Interest income was $170.8 million during the year
ended December 31, 2006, an increase of $1.1 million from the year ended
December 31, 2005. Interest income on real estate loans increased $7.1 million
and was partially offset by decreases in interest income on MBS, investment
securities and other short-term investments of $4.8 million, $326,000 and
$771,000, respectively, during the period.
The increase in interest income on real
estate loans resulted primarily from growth in their average balance of $116.4
million during the year ended December 31, 2006 compared to the year ended
December 31, 2005. The growth reflected real estate loan originations
of $563.2 during 2006, which were partially offset by principal repayments and
loan sales during the period.
The one basis point increase in average
yield on real estate loans during the year ended December 31, 2006 compared to
the year ended December 31, 2005 resulted from ongoing increases in medium and
long-term interest rates from October 2005 through June 2006, which resulted in
an increase in the average origination rate on real estate loans from 5.77%
during the year ended December 31, 2005 to 6.43% during the year ended December
31, 2006.
The decline in interest income on MBS
during the year ended December 31, 2006 compared to the year ended December 31,
2005 resulted from a decreased average balance of $146.5 million (resulting
primarily from the sale of $236.9 million of MBS in May 2005 and principal
repayments on MBS of $39.4 million during 2006), that was partially offset by an
increase of 25 basis points in average yield during the year ended December 31,
2006 compared to the year ended December 31, 2005 (resulting from increases in
short and medium-term interest rates during 2006). The decline in
interest income on investment securities and other short-term investments
reflected declines in their average balances of $35.7 million and $81.4 million,
respectively, during the year ended December 31, 2006 compared to the year ended
December 31, 2005, as cash flows from maturing investment securities and other
short-term investments were utilized to fund both loan originations and ongoing
operations of the Company.
Interest
Expense. Interest expense increased $16.0 million, to $93.3
million, during the year ended December 31, 2006, from $77.3 million during the
year ended December 31, 2005. The growth resulted primarily from
increased interest expense of $13.5 million related to CDs and $2.3 million
related to money market accounts.
The increase in interest expense on CDs
resulted from an increase in their average cost of 121 basis points during the
year ended December 31, 2006 compared to the year ended December 31,
2005. The increase in average cost resulted from increases in
short-term interest rates during 2006, as most of the Bank's CDs outstanding at
December 2005 matured during this timeframe. In addition, the average
balance of CDs increased $37.5 million during the period, reflecting successful
gathering of new CDs from promotional activities during 2006. (See
"Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources"). The
increase of $2.3 million in interest expense on money market accounts resulted
from an increase of 100 basis points in average cost during 2006 that
was attributable to increases in short-term interest rates during 2006.
Partially offsetting the increased cost was a $147.8 million decline in the
average balance of money market accounts during 2006 that resulted primarily
from a $173.2 million decrease in money market accounts from June 30, 2005
through June 30, 2006, as management elected not to compete aggressively for
money market balances during this time period.
Provision for Loan
Losses. The provision for loan losses was $240,000 during the
year ended December 31, 2006, down from $340,000 during the year ended December
31, 2005. The decline reflected an additional provision of $100,000
taken during 2005 related to consumer loans. Otherwise the provisions
taken in 2006 and 2005 reflected inherent losses in the Bank's real estate loan
portfolio that resulted from ongoing originations.
Non-Interest
Income. Non-interest income, excluding gains or losses on the
sale of assets, totaled $9.3 million during the year ended December 31, 2006,
compared to $9.4 million during the year ended December 31,
2005. There were no material changes in any individual item during
the comparable period.
The Company sold loans to FNMA
totaling $145.4 million and $108.5 million during the years ended December 31,
2006 and 2005, respectively. The gains recorded on these sales were
$1.5 million and $924,000, respectively, during the years ended December 31,
2006 and 2005. The majority of the loans sold during both of these
periods were designated for sale upon origination.
During the year ended December 31,
2006, the Company recorded a pre-tax gain of $1.1 million on the sale of mutual
fund investments associated with the Benefit Maintenance Plan of Dime Community
Bancshares, Inc. ("BMP"). During the year ended December 31, 2005,
the Company incurred a pre-tax loss of $5.2 million related to the sale of
$274.2 million of investment and mortgage-backed securities under a
restructuring of its securities portfolio. During the year ended
December 31, 2006, the Company sold a parcel of real estate obtained in its
acquisition of Financial Bancorp, Inc. in 1999, recognizing a pre-tax gain of
$478,000.
Non-Interest
Expense. Non-interest expense was $42.0 million during the
year ended December 31, 2006, an increase of $1.2 million from the year ended
December 31, 2005.
Salaries and employee benefits
increased $591,000 during the comparative period, reflecting normal salary
increases as well as the filling of open and new staffing and management
positions. Additions to staff occurred primarily in the retail
division of the Bank, where initiatives included product and sales development
for business and professional banking.
Occupancy and equipment expense
increased $369,000 during the year ended December 31, 2006 compared to the year
ended December 31, 2005 due to both general increases in utility costs and real
estate taxes as well as the addition of the Valley Stream branch in March
2006.
Data systems expense increased $339,000
during the year ended December 31, 2006 compared to the year ended December 31,
2005, resulting from the expiration of promotional pricing the Company received
throughout the first six months of 2005 from its new data systems
vendor.
Non-interest expense to average assets
was 1.34% during the year ended the December 31, 2006, compared to 1.24% for the
year ended December 31, 2005. Average assets decreased by $149.9
million during 2006 as a result of the previously discussed declines in the
average balance of investment securities, MBS and other short-term investments
during 2006.
Income Tax
Expense. Income tax expense decreased $3.2 million during the
year ended December 31, 2006 compared to the year ended December 31, 2005, due
primarily to a decline of $8.8 million in pre-tax net income during the
period.
Comparison
of the Operating Results for the Year Ended December 31, 2005 and
2004
General. Net
income was $36.2 million during the year ended December 31, 2005, a decrease of
$10.0 million from net income of $46.2 million during the year ended December
31, 2004. During the comparative period, net interest income
decreased $13.6 million, non-interest income decreased $5.2 million and
non-interest expense decreased $1.7 million, resulting in a decline in income
before income tax of $17.2 million. Income tax expense decreased $7.2
million as a result of the decline in income before income tax.
Net Interest
Income. Net interest income for the year ended December 31,
2005 decreased $13.6 million, to $92.4 million, from $106.0 million during the
year ended December 31, 2004. The decrease was attributable to an
increase of $9.6 million in interest expense coupled with a decrease of $4.0
million in interest income. The net interest spread decreased 43
basis points, from 3.09% for the year ended December 31, 2004 to 2.66% for the
year ended December 31, 2005, and the net interest margin decreased 36 basis
points, from 3.32% to 2.96% during the same period.
The decrease in both the net interest
spread and net interest margin reflected an increase of 42 basis points in the
average cost of interest bearing liabilities, due primarily to: (i) borrowings,
which generally possess a higher average cost than deposits, becoming a higher
percentage of the overall composition of the Bank's funding as a result of a
runoff in deposit balances during the period (see "Interest Expense" below), and
(ii) increases in the average cost of money market deposits, CDs and borrowings
of 14 basis points, 42 basis points and 37 basis points, respectively, during
the comparative period, reflecting increases in short-term interest rates during
2005.
In addition, the average yield on
interest earning assets declined one basis point during the year ended December
31, 2005 compared to the year ended December 31, 2004. This decline
resulted from a reduction of 36 basis points in the average yield on real estate
loans due to a decline of $4.8 million in prepayment fee income during the year
ended December 31, 2005 compared to the year ended December 31,
2004.
Interest
Income. Interest income was $169.7 million during the year
ended December 31, 2005, a decrease of $4.0 million from $173.7 million during
the year ended December 31, 2004. Interest income on real estate
loans and MBS declined $402,000 and $9.4 million, respectively, during the
period. Partially offsetting these decreases were increases in interest income
on investment securities and other short-term investments of $857,000 and $4.9
million, respectively, during the year ended December 31, 2005 compared to the
year ended December 31, 2004.
The decrease in interest income on real
estate loans resulted from a decline of $4.8 million in prepayment fee income
during the year ended December 31, 2005 compared to the year ended December 31,
2004, as increases in medium- and long-term interest rates resulted in a
reduction in loan refinancing activity during 2005. In
addition, since the average interest rate on the loans that satisfied, prepaid
and/or refinanced during this period was higher than the average yield on the
remaining loan portfolio, the average yield on real estate loans declined
throughout the period. These factors combined to result in a
reduction of 36 basis points in the yield on real estate loans during the year
ended December 31, 2005 compared to the year ended December 31,
2004.
Partially offsetting the decrease in
interest income on real estate loans that resulted from a decline in their yield
was an increase in their average balance of $139.3 million during the year ended
December 31, 2005 compared to the year ended December 31,
2004. The growth in the average balance of real estate loans
reflected real estate loan originations of $574.2 million during the year ended
December 31, 2005, which were partially offset by principal repayments and loan
sales during the period.
The decline in interest income on MBS
during the year ended December 31, 2005 compared to the year ended December 31,
2004 resulted from a decreased average balance of $294.5 million (resulting from
both the sale of $237.3 million of MBS and principal repayments of $89.1 million
during the year ended December 31, 2005) that was partially offset by an
increase of 20 basis points in average yield during the year ended December 31,
2005 compared to the year ended December 31, 2004 (resulting from increases in
short-term interest rates during 2005).
The growth in interest income on
investment securities during the year ended December 31, 2005 compared to the
year ended December 31, 2004 reflected increases in both their average yield and
average balance during the period. The increase in the average
balance of investment securities reflected the purchase of investment securities
available-for-sale totaling $52.0 million during the year ended December 31,
2005. The average yield on investment securities increased 13 basis
points during the year ended December 31, 2005 compared to the year ended
December 31, 2004 due to increases in short-term interest rates during
2005. Since the Company's investment securities portfolio is
predominantly short and medium-term in nature, its overall yield was favorably
impacted by the increases in interest rates.
The increase in interest income on
federal funds sold and other short-term investments resulted from an increase of
200 basis points in their average yield, reflecting an increase of 200 basis
points in short-term interest rates during 2005, and an increase of $68.3
million in their average balance due to management's decision to maintain a
higher level of federal funds sold and other short-term investments during a
period of rising short-term interest rates and flat or minimally rising
long-term interest rates.
Interest
Expense. Interest expense increased $9.6 million, to $77.3
million, during the year ended December 31, 2005, from $67.7 million during the
year ended December 31, 2004. The growth in interest expense resulted
primarily from increases of $6.4 million and $5.2 million in interest expense on
borrowings and CDs, respectively.
During the year ended December 31, 2005
compared to the year ended December 31, 2004, the average balance of borrowings
increased $81.7 million as a result of the effects upon the computation of
average balance of $192.9 million of REPOS and a $72.2 million trust
preferred borrowing that were added during 2004 and remained outstanding
throughout the entire year ended December 31, 2005. The average cost
of borrowed funds increased 37 basis points during the year ended December 31,
2005 compared to the year ended December 31, 2004 due to the replacement of
maturing low cost short-term borrowings while short-term interest rates rose
during the year ended December 31, 2005.
The increase in interest expense on CDs
resulted from both an increase in their average cost of 42 basis points and an
increase in their average balance of $42.3 million during the comparative
period. The increase in average cost resulted from increases in
short-term interest rates during the year ended December 31, 2005, as a great
majority of the Bank's CDs outstanding at December 2004 matured during this
period. The increase in average balance of CDs reflected $18.6
million of CDs added during the year ended December 31, 2005, as a portion of
the Bank's non-promotional interest rate money market depositors elected to move
their balances into CDs as interest rates offered on CDs became more attractive
compared to money markets.
Partially offsetting the increase in
interest expense on CDs and borrowings was a decline of $2.0 million in interest
expense on money market accounts. This resulted from a decrease of
$194.9 million in their average balance during the year ended December 31, 2005
compared to the year ended December 31, 2004, that was partially offset by an
increase of 14 basis points in their average cost during the
period. Since management of the Bank elected to maintain the
non-promotional interest rates offered on money markets constant during a period
of rising short-term interest rates, the Bank experienced an above average level
of attrition in non-promotional money market accounts, the majority of which
flowed out of the Bank and into other financial institutions or Bank
CDs. This resulted in a decline in the overall average balance of
money market accounts during the year ended December 31, 2005 compared to the
year ended December 31, 2004.
Provision for Loan
Losses. The
provision for loan losses was $340,000 during the year ended December 31, 2005,
compared to $280,000 for the year ended December 31, 2004 (See "Part I - Item 1
– Business - Allowance for Loan Losses").
Non-Interest
Income. Non-interest income decreased $5.2 million, to $5.2
million, during the year ended December 31, 2005, from $10.4 million during the
year ended December 31, 2004.
During the year ended December 31,
2005, the Company recorded a net loss of $5.2 million on the sale of investment
securities and MBS (See "Part II - Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations – Liquidity and
Capital Resources"). During the year ended December 31, 2004, the
Company recorded net gains of $377,000 on the sale of investment and
mortgage-backed securities.
Service charges and other fees declined
$329,000 during the year ended December 31, 2005 compared to the year ended
December 31, 2004, due primarily to a reduction of $651,000 in retail deposit
fees, reflecting both reduced customer fee-based activities and competitive fee
policies implemented in the local market.
Non-Interest
Expense. Non-interest expense was $40.7 million during the
year ended December 31, 2005, a decrease of $1.7 million from the year ended
December 31, 2004.
The benefit costs associated with the
ESOP and RRP declined $1.3 million during the comparative period due to both a
reduction in the level of allocated shares during the year ended December 31,
2005, (attributable to a decrease in the anticipated loan principal repayment to
be made on the underlying ESOP borrowing that became effective January 1, 2005),
along with a reduction in the average price of the Company's common stock (from
which the recorded ESOP expense is derived).
Salaries and employee benefits
increased $836,000 during the year ended December 31, 2005 compared to the year
ended December 31, 2004, reflecting both additional staffing and general salary
increases during the year ended December 31, 2005, offset by a reduction to
expense related to the BMP, reflecting management's decision to forego the
defined contribution portion of BMP benefits earned in 2005.
Data processing costs decreased
$631,000 during the comparative period due to cost savings associated with the
new data systems implemented in November 2004.
Other expenses declined $682,000 during
the year ended December 31, 2005 compared to the year ended December 31, 2004,
due primarily to the reduction of $777,000 in the core deposit intangible
expense associated with the Company's 1999 acquisition of Financial Bancorp,
Inc., which fully amortized in January 2005.
Income Tax
Expense. Income tax expense decreased $7.2 million during the
year ended December 31, 2005 compared to the year ended December 31, 2004, due
primarily to a decline of $17.2 million in income before income
tax. A decline in the effective tax rate to 36% during the year ended
December 31, 2005 compared to 37% during the year ended December 31, 2004
resulted from the tax impact of the loss recorded from the sale of investment
and mortgage backed securities during the quarter ended June 30,
2005.
Impact
of Inflation and Changing Prices
The consolidated financial statements
and notes thereto presented herein have been prepared in accordance with GAAP,
which requires the measurement of financial position and operating results in
terms of historical dollars without considering the changes in the relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected in the increased costs of operations. Unlike industrial companies,
nearly all of the Company's consolidated assets and liabilities are monetary in
nature. As a result, interest rates have a greater impact on the Company's
consolidated performance than do the effects of general levels of inflation.
Interest rates do not necessarily fluctuate in the same direction or to the same
extent as the price of goods and services.
Recently
Issued Accounting Standards
For a discussion of the impact of
recently issued accounting standards, please see Note 1 to the Company's
consolidated financial statements that commence on page F-67.
Item
7A. Quantitative and Qualitative Disclosures About Market
Risk
As a depository financial
institution, the Bank's primary source of market risk is interest rate
volatility. Fluctuations in interest rates will ultimately impact the
level of interest income recorded on, and the market value of, a significant
portion of the Bank's assets. Fluctuations in interest rates will
also ultimately impact the level of interest expense recorded on, and the market
value of, a significant portion of the Bank's liabilities. In
addition, the Bank's real estate loan portfolio, concentrated primarily within
the NYC metropolitan area, is subject to risks associated with the local
economy.
Real estate loans, the largest
component of the Bank's interest earning assets, derive their current interest
rates primarily from either the five- or seven-year constant maturity Treasury
index. As a result, the Bank's interest earning assets are most
sensitivity to these benchmark interest rates. Since the majority of
the Bank's interest bearing liabilities mature within one year, its interest
bearing liabilities are most sensitive to fluctuations in short-term interest
rates.
Neither
the Holding Company nor the Bank is subject to foreign currency exchange or
commodity price risk. In addition, the Company owned no trading
assets, nor did it engage in any hedging transactions utilizing derivative
instruments (such as interest rate swaps and caps) or embedded derivative
instruments that required bifurcation during the years ended December 31, 2007
or 2006. In the future, the Company may, with appropriate Board
approval, engage in hedging transactions utilizing derivative
instruments.
Since a
majority of the Company's consolidated interest-earning assets and
interest-bearing liabilities are located at the Bank, virtually all of the
interest rate risk exposure exists at the Bank level. As a result,
all of the significant interest rate risk management procedures are performed at
the Bank level. The Bank's interest rate risk management strategy is
designed to limit the volatility of net interest income and preserve capital
over a broad range of interest rate movements and has the following three
primary components.
Assets. The Bank's
largest single asset type is the adjustable-rate multifamily residential loan.
Multifamily residential loans typically carry shorter average terms to maturity
than one- to four-family residential loans, thus significantly reducing the
overall level of interest rate risk. Approximately 80% of multifamily
residential loans originated during the years ended both December 31, 2007 and
2006 were adjustable rate, with repricing typically occurring after five or
seven years. In
addition, the Bank has sought to include in its portfolio various types of
adjustable-rate one- to four-family loans and adjustable and floating-rate
investment securities, which generally have repricing terms of three years or
less. At December 31, 2007, adjustable-rate real estate and consumer
loans totaled $2.41 billion, or 76.1% of total assets, and adjustable-rate
investment securities (CMOs, REMICs, MBS issued by GSEs and other securities)
totaled $53.6 million, or 1.5% of total assets. At December 31,
2006, adjustable-rate real estate and consumer loans totaled $2.26 billion, or
71.1% of total assets, and adjustable-rate investment securities (CMOs, REMICs,
MBS issued by GSEs and other securities) totaled $23.8 million, or 0.8% of total
assets.
Deposit
Liabilities. As a traditional community-based savings bank,
the Bank is largely dependent upon its base of competitively priced core
deposits to provide stability on the liability side of the balance
sheet. The Bank has retained many loyal customers over the years
through a combination of quality service, convenience, and a stable and
experienced staff. Core deposits, at December 31, 2007, were $1.10 billion, or
50.5% of total deposits. The balance of CDs as of December 31, 2007 was $1.08
billion, or 49.5% of total deposits, of which $968.1 million, or 89.9%, were to
mature within one year. The weighted average maturity of the Bank's
CDs at December 31, 2007 was 5.8 months
compared to 6.2 months at December 31, 2006. While the Bank generally
prices its CDs in an effort to encourage the extension of the average maturities
of deposit liabilities beyond one year, the decline in the average maturity of
CDs during the year ended December 31, 2007 reflected customer recognition that
rising deposit offering interest rates during the great majority of 2007 made
long-term CDs less desirable.
Wholesale
Funds. The Bank is a member of the FHLBNY, which provided the
Bank with a borrowing line of up to $1.04 billion at December 31, 2007. The Bank borrows from
the FHLBNY for various purposes. At December 31, 2007, the Bank had outstanding
advances of $706.5 million from the FHLBNY, all of which were
unsecured.
The Bank
has authority to accept brokered deposits as a source of funds. The
Bank had no outstanding brokered deposits at either December 31, 2007 or
December 31, 2006.
Interest
Sensitivity Gap
The Bank
regularly monitors its interest rate sensitivity through the calculation of an
interest sensitivity gap. The interest sensitivity gap is the
difference between the amount of interest-earning assets and interest-bearing
liabilities anticipated to mature or reprice within a specific
period. The interest sensitivity gap is considered positive when the
amount of interest-earning assets anticipated to mature or reprice within a
specified time frame exceeds the amount of interest-bearing liabilities
anticipated to mature or reprice within the same period. Conversely,
the interest sensitivity gap is considered negative when the amount of
interest-bearing liabilities anticipated to mature or reprice within a specific
time frame exceeds the amount of interest-earning assets anticipated to mature
or reprice within the same period. In a rising interest rate
environment, an institution with a positive interest sensitivity gap would
generally be expected, absent the effects of other factors, to experience a
greater increase in the yields of its assets relative to the costs of its
liabilities and thus an increase in its net interest income, whereas an
institution with a negative interest sensitivity gap would generally be expected
to experience a decline in net interest income. Conversely, in a
declining interest rate environment, an institution with a positive interest
sensitivity gap would generally be expected, absent the effects of other
factors, to experience a greater decline in the yields of its assets relative to
the costs of its liabilities and thus a decrease in its net interest income,
whereas an institution with a negative interest sensitivity gap would generally
be expected to experience an increase in net interest income.
The
following table sets forth the amounts of the Company's consolidated
interest-earning assets and interest-bearing liabilities outstanding at December
31, 2007 which are anticipated, based upon certain assumptions, to reprice,
prepay or mature in each of the time periods shown. Except as stated below, the
amounts of assets and liabilities shown repricing or maturing during a
particular period reflect the earlier of term to repricing or maturity of the
asset or liability. The table is intended to provide an approximation of the
projected repricing of assets and liabilities which existed at December 31, 2007
on the basis of contractual maturities, anticipated prepayments, and scheduled
rate adjustments within a three-month period and selected subsequent time
intervals. For purposes of presentation in the table, the Bank utilized its own
historical deposit attrition experience ("Deposit Decay Rate") for savings
accounts, which it believes to be the most accurate measure. For NOW, Super NOW
and money market accounts, it utilized the Deposit Decay Rates published by the
OTS. All amounts calculated in the table for both loans and MBS
reflect principal balances expected to reprice as a result of contractual
interest rate adjustments or from reinvestment of cash flows generated from
anticipated principal repayments (inclusive of early prepayments).
There are certain limitations inherent
in the method of analysis presented in the table. For example,
although certain assets and liabilities may possess similar maturities or
periods to repricing, they are impacted by different market forces, and may
therefore react differently to changes in interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate with changes in
market interest rates, while interest rates on other types of assets may lag
behind changes in market rates. Additionally, certain assets, such as
adjustable-rate loans, have features, like annual and lifetime rate caps, which
restrict changes in the interest rates charged, both on a short-term basis and
over the life of the asset. Further, in the event of a change in interest rates,
prepayment and early withdrawal levels would likely deviate from those assumed
in the table. Finally, the ability of certain borrowers to make scheduled
payments on their adjustable-rate loans may decrease in the event of an interest
rate increase.
F-59
|
At
December 31, 2007
|
3
Months
or
Less
|
More
than
3
Months to
6
Months
|
More
than 6 Months
to
1 Year
|
More
than
1
Year
to
3 Years
|
More
than
3
Years
to
5 Years
|
More
than
5
Years
|
Non-interest
bearing
|
Total
|
|
(Dollars
in Thousands)
|
||||||||
|
Interest-Earning
Assets (1):
|
||||||||
|
Mortgages
and other loans
|
$165,866
|
$120,735
|
$262,523
|
$1,117,832
|
$895,110
|
$314,959
|
-
|
$2,877,025
|
|
Investment
securities
|
17,035
|
-
|
-
|
-
|
351
|
16,789
|
-
|
34,175
|
|
MBS
(2)
|
9,107
|
7,828
|
15,657
|
45,428
|
38,818
|
45,926
|
-
|
162,764
|
|
Other
short-term Investments
|
128,014
|
-
|
-
|
-
|
-
|
-
|
-
|
128,014
|
|
FHLBNY
capital stock
|
39,029
|
-
|
-
|
-
|
-
|
-
|
-
|
39,029
|
|
Total
interest-earning assets
|
359,051
|
128,563
|
278,180
|
1,163,260
|
934,279
|
377,674
|
-
|
3,241,007
|
|
Less:
|
||||||||
|
Allowance
for loan losses
|
-
|
-
|
-
|
-
|
-
|
-
|
$(15,387)
|
(15,387)
|
|
Net
interest-earning assets
|
359,051
|
128,563
|
278,180
|
1,163,260
|
934,279
|
377,674
|
(15,387)
|
3,225,620
|
|
Non-interest-earning
assets
|
-
|
-
|
-
|
-
|
-
|
-
|
275,555
|
275,555
|
|
Total
assets
|
$359,051
|
$128,563
|
$278,180
|
$1,163,260
|
$934,279
|
$377,674
|
$260,168
|
$3,501,175
|
|
Interest-Bearing
Liabilities
|
||||||||
|
Savings
accounts
|
$9,531
|
$9,208
|
$17,492
|
$58,017
|
$43,865
|
$135,955
|
-
|
$274,068
|
|
NOW
and Super NOW accounts
|
5,403
|
4,903
|
8,488
|
19,286
|
5,968
|
14,364
|
-
|
58,412
|
|
Money
market accounts
|
134,055
|
107,579
|
155,614
|
133,864
|
70,208
|
77,439
|
-
|
678,759
|
|
CDs
|
429,841
|
414,397
|
123,890
|
99,928
|
9,021
|
10
|
-
|
1,077,087
|
|
Borrowed
funds
|
50,000
|
8,080
|
40,000
|
256,000
|
257,500
|
250,000
|
-
|
861,580
|
|
Subordinated
notes
|
-
|
-
|
-
|
25,000
|
-
|
-
|
25,000
|
|
|
Trust
preferred securities
|
-
|
-
|
-
|
-
|
-
|
72,165
|
72,165
|
|
|
Interest-bearing
escrow
|
-
|
-
|
-
|
-
|
-
|
1,424
|
-
|
1,424
|
|
Total
interest-bearing liabilities
|
628,830
|
544,167
|
345,484
|
592,095
|
386,562
|
551,357
|
-
|
3,048,495
|
|
Checking
accounts
|
-
|
-
|
-
|
-
|
-
|
-
|
$91,671
|
91,671
|
|
Other
non-interest-bearing liabilities
|
-
|
-
|
-
|
-
|
-
|
-
|
92,157
|
92,157
|
|
Stockholders'
equity
|
-
|
-
|
-
|
-
|
-
|
-
|
268,852
|
268,852
|
|
Total
liabilities and stockholders' equity
|
$628,830
|
$544,167
|
$345,484
|
$592,095
|
$386,562
|
$551,357
|
$452,680
|
$3,501,175
|
|
Positive
(Negative) interest sensitivity gap per period
|
$(269,779)
|
$(415,604)
|
$(67,304)
|
$571,165
|
$547,717
|
$(173,683)
|
-
|
|
|
Positive
(Negative) cumulative interest sensitivity gap
|
$(269,779)
|
$(685,383)
|
$(752,687)
|
$(181,522)
|
$366,195
|
$192,512
|
-
|
|
|
Positive
(Negative) cumulative interest sensitivity gap
as
a percent of total assets
|
(7.71)%
|
(19.58)%
|
(21.50)%
|
(5.18)%
|
10.46%
|
5.50%
|
-
|
|
|
Cumulative
total interest-earning assets as a percent
of
cumulative total interest-bearing liabilities
|
57.10%
|
41.57%
|
50.43%
|
91.40%
|
114.66%
|
106.31%
|
-
|
|
|
(1)
|
Interest-earning
assets are included in the period in which the balances are expected to be
redeployed and/or repriced as a result of anticipated prepayments,
scheduled rate adjustments, or contractual maturities or
calls.
|
|
(2)
|
Based
upon historical repayment experience, and, where applicable, balloon
payment dates.
|
F-59
At December 31, 2007, the Company's
consolidated balance sheet was comprised primarily of assets that were estimated
to mature or reprice within five years, with a significant portion maturing or
repricing within one year. In addition, the Bank's deposit base was comprised
primarily of savings accounts, money market accounts and CDs with maturities of
two years or less. At December 31, 2007, interest-bearing liabilities
estimated to mature or reprice within one year totaled $1.52 billion, while
interest-earning assets estimated to mature or reprice within one year totaled
$765.8 million, resulting in a negative one-year interest sensitivity gap of
$752.7 million, or negative 21.5% of total assets. In comparison, at
December 31, 2006, interest-bearing liabilities estimated to mature or reprice
within one year totaled $1.70 billion, while interest-earning assets estimated
to mature or reprice within one year totaled $571.5 million, resulting in a
negative one-year interest sensitivity gap of $1.12 billion, or negative 35.4%
of total assets. The decrease in the magnitude of the one-year
negative interest sensitivity gap resulted from an increase in the level of real
estate loans scheduled to mature or reprice within one year (as loans originated
during the refinance boom period of 2002 through 2004 approached their
contractual repricing date) coupled with a decline in borrowings maturing or
repricing within one year, as the Company took advantage of favorable pricing
late in 2007 in order to extend the average term to maturity of its
borrowings.
Under interest rate scenarios other
than that which existed on December 31, 2007, the interest sensitivity gap for
assets and liabilities could differ substantially based upon different
assumptions about the manner in which core Deposit Decay Rates and loan
prepayments would change. For example, the interest rate risk management model
assumes that in a rising rate scenario, by paying competitive rates on non-core
deposits, a portion of core deposits will transfer to CDs and be retained,
although at higher cost. Also, in a rising interest rate environment,
loan and MBS prepayment rates would be expected to slow, as borrowers postpone
loan refinancings until rates again decline.
Interest
Rate Risk Exposure (NPV) Compliance
Under
guidelines established by OTS Thrift Bulletin 13a, the Bank also measures its
interest rate risk through an analysis of the change in its NPV under several
interest rate scenarios. NPV is the difference between the present
value of the expected future cash flows of the Bank’s assets and liabilities,
plus the value of net expected cash flows from either loan origination
commitments or purchases of securities.
Generally, the fair value of fixed-rate
instruments fluctuates inversely with changes in interest
rates. Increases in interest rates could thus result in decreases in
the fair value of interest-earning assets, which could adversely affect the
Company's consolidated results of operations if they were to be sold, or, in the
case of interest-earning assets classified as available for sale, reduce the
Company's consolidated stockholders' equity, if retained. The changes in the
value of assets and liabilities due to fluctuations in interest rates reflect
the interest rate sensitivity of those assets and liabilities. Under
GAAP, changes in the unrealized gains and losses, net of taxes, on securities
classified as available for sale are reflected in stockholders' equity through
other comprehensive income. As of December 31, 2007, the Company's
consolidated securities portfolio included $196.9 million in securities
classified as available for sale, which possessed a gross unrealized loss of
$2.3 million. Neither the Holding Company nor the Bank owned
any trading assets as of December 31, 2007 or 2006.
In order
to measure the Bank’s sensitivity to changes in interest rates, NPV is
calculated under market interest rates prevailing at a given quarter-end
("Pre-Shock Scenario"), and under various other interest rate scenarios ("Rate
Shock Scenarios") representing immediate, permanent, parallel shifts in the term
structure of interest rates from the actual term structure observed at
quarter-end. The changes in NPV between the Pre-Shock Scenario and
various Rate Shock Scenarios due to fluctuations in interest rates reflect the
interest rate sensitivity of the Bank’s assets, liabilities, and commitments to
either originate or sell loans and/or purchase or sell securities that are
included in the NPV. The NPV ratio under any interest rate scenario
is defined as the NPV in that scenario divided by the present value of the
assets in the same scenario (the "NPV Ratio").
An interest rate risk exposure
compliance report is presented to the Bank's Board of Directors on a quarterly
basis. The report, prepared in accordance with Thrift Bulletin 13a, compares the
Bank's estimated Pre-Shock Scenario NPV to the estimated NPVs calculated under
the various Rate Shock Scenarios. The calculated estimates of the
resulting NPV Ratios are compared to current limits established by management
and approved by the Board of Directors.
F-67
The
analysis that follows presents the estimated NPV in the Pre-Shock Scenario and
four Rate Shock Scenarios and measures the dollar amount and percentage by which
each of the Rate Shock Scenario NPVs changes from the Pre-Shock Scenario
NPV. Interest rate sensitivity is measured by the changes in the
various Rate Shock Scenario NPV Ratios from the Pre-Shock Scenario NPV
Ratio.
|
At
December 31, 2007
|
||||||||||
|
Net
Portfolio Value
|
At
December 31, 2006
|
|||||||||
|
Dollar
Amount
|
Dollar
Change
|
Percentage
Change
|
NPV
Ratio
|
Basis
Point Change in NPV Ratio
|
NPV
Ratio
|
Basis
Point Change in NPV Ratio
|
Board
Approved NPV Ratio Limit
|
|||
|
(Dollars
in Thousands)
|
||||||||||
|
Rate
Shock Scenario
|
||||||||||
|
+
200 Basis Points
|
$263,704
|
(83,220)
|
-23.99%
|
7.79%
|
(211)
|
10.01%
|
(220)
|
6.0%
|
||
|
+
100 Basis Points
|
310,161
|
(36,763)
|
-10.60
|
9.00
|
(90)
|
11.22
|
(99)
|
7.0
|
||
|
Pre-Shock
Scenario
|
346,924
|
-
|
-
|
9.90
|
-
|
12.21
|
-
|
8.0
|
||
|
-
100 Basis Points
|
364,169
|
17,245
|
4.97
|
10.25
|
35
|
12.67
|
46
|
8.0
|
||
|
-
200 Basis Points
|
363,913
|
16,989
|
4.90
|
10.14
|
24
|
12.47
|
26
|
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 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. Nevertheless, 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 suited to the heterogeneous characteristics of the Bank’s various
asset and liability portfolios.
The
Pre-Shock Scenario NPV declined from $386.2 million at December 31, 2006 to
$346.9 million at December 31, 2007. The NPV Ratio at December 31,
2007 was 9.90% in the Pre-Shock Scenario, a decrease from the NPV Ratio of
12.21% in that Scenario at December 31, 2006. The decrease in the
Pre-Shock Scenario NPV was due primarily to a decline in the Bank's equity
resulting from $35.0 million of capital distributions to the Holding Company
during 2007 that exceeded the Bank's earnings during the same period, coupled
with an increase in the valuation of borrowings (which negatively impact NPV)
that resulted from declines in short and medium-term interest rates at December
31, 2007 compared to December 31, 2006.
The
Bank’s +200 basis point Rate Shock Scenario NPV decreased from $306.5 million at
December 31, 2006 to $263.7 million at December 31, 2007. This
decline also resulted primarily from the aforementioned $35.0 million of capital
distributions during 2007 and increase in the
valuation of borrowings.
The NPV
Ratio was 7.79% in the +200 basis point Rate Shock Scenario at December 31,
2007, a decrease from the 10.01% NPV Ratio in the +200 basis point Rate Shock
Scenario at December 31, 2006. The decrease reflected the
aforementioned decline in the +200 basis point Rate Shock Scenario NPV during
the period.
At
December 31, 2007, the "sensitivity change" (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 211 basis
points, compared to a sensitivity change of 220 basis points in the +200 basis
point Rate Shock Scenario at December 31, 2006. The decrease in
sensitivity was due primarily to growth in the Company's balance sheet that
occurred late in 2007 in which medium- and long-term borrowings were obtained
and were temporarily invested in short-term assets (cash and federal funds sold
and other short-term investments). This resulted in a reduction of
sensitivity in a rising interest rate environment since the average repricing
period on the Bank's liabilities increased as a result of the medium- and
long-term borrowings and the average repricing period of the Bank's assets
declined from the additional short-term assets held at December 31,
2007.
Item 8. Financial
Statements and Supplementary Data
For the Company's consolidated
financial statements, see index on page F-67.
Item 9. Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure
None.
Item 9A. Controls
and Procedures
Disclosure
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 December 31, 2007, of the
Company's disclosure controls and procedures, as defined in Rules 13a-15(e) and
15(d)-15(e) under the Exchange Act. Based upon this evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective as of December 31, 2007 in
ensuring that information required to be disclosed by the Company in the reports
that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC’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.
Management’s
Report On Internal Control Over Financial Reporting
Management of the Company is
responsible for establishing and maintaining adequate internal control over
financial reporting for the Company. The Company’s internal control
over financial reporting is defined as a process designed to provide reasonable
assurance to the Company's management and Board of Directors regarding the
preparation and fair presentation of financial statements.
Because of inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. In addition, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
The Company’s management assessed the
effectiveness of the Company's internal control over financial reporting as of
December 31, 2007, utilizing the criteria established by the Committee of
Sponsoring Organizations of the Treadway Commission in "Internal Controls –
Integrated Framework." Based upon its assessment, management believes
that, as of December 31, 2007, the Company's internal control over financial
reporting is effective.
Deloitte & Touche LLP, the
independent registered public accounting firm that audited the consolidated
financial statements included in the Annual Report, has issued an audit report
on the effectiveness of the Company’s internal control over financial reporting
as of December 31, 2007, which is included below.
Item
9B. Other
Information
None.
F-67
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
Dime
Community Bancshares, Inc. & Subsidiaries
Brooklyn,
New York
We have
audited the internal control over financial reporting of Dime Community
Bancshares, Inc. and Subsidiaries (the "Company") as of December 31, 2007, based
on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. The Company's management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting
included in the accompanying Management’s Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on
the Company's internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
A
company's internal control over financial reporting is a process designed by, or
under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2007, based on the criteria
established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements as of and
for the year ended December 31, 2007 of the Company and our report dated March
14, 2008 expressed an unqualified opinion on those consolidated financial
statements, and included an explanatory paragraph relating to the adoption of
FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” on
January 1, 2007.
/s/
DELOITTE & TOUCHE LLP
New York,
New York
March 14,
2008
PART
III
Item
10. Directors, Executive Officers and Corporate
Governance
Information regarding directors and
executive officers of the Company is presented under the headings "Proposal 1 -
Election of Directors," "Section 16(a) Beneficial Ownership Reporting
Compliance" and "Executive Officers" in the Holding Company's definitive Proxy
Statement for its Annual Meeting of Shareholders to be held on May 15, 2008 (the
"Proxy Statement") which will be filed with the SEC within 120 days of December
31, 2007, and is incorporated herein by reference.
Information regarding the audit
committee of the Holding Company's Board of Directors, including information
regarding audit committee financial experts serving on the audit committee, is
presented under the headings, "Meetings and Committees of the Company's Board of
Directors," and "Report of the Audit Committee" in the Proxy Statement and is
incorporated herein by reference.
The Holding Company has adopted a
written Code of Business Ethics that applies to its principal executive officer,
principal financial officer, principal accounting officer or controller, or
persons performing similar functions. The Code of Business Ethics is
published on the Company's website, www.dimewill.com. The
Company will provide to any person, without charge, upon request, a copy of such
Code of Business Ethics. Such request should be made in writing
to: Dime Community Bancshares, Inc., 209 Havemeyer Street, Brooklyn,
New York 11211, attention Investor Relations.
Item
11. Executive Compensation
Information regarding executive and
director compensation and the Compensation Committee of the Holding Company's
Board of Directors is presented under the headings, "Directors' Compensation,"
"Compensation - Executive Compensation, "Compensation Discussion and Analysis,"
"Compensation Committee Interlocks and Insider Participation," and "Compensation
Committee Report" in the Proxy Statement and is incorporated herein by
reference.
Item 12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Information regarding security
ownership of certain beneficial owners and management is included under the
heading "Security Ownership of Certain Beneficial Owners and Management" in the
Proxy Statement and is incorporated herein by reference.
The
following table presents information as of December 31, 2007 with respect to
compensation plans under which equity securities of the Holding Company are
authorized for issuance:
|
EQUITY
COMPENSATION PLAN INFORMATION
|
||||||
|
Plan
Category
|
Number
of Securities to be Issued Upon Exercise of Outstanding
Options
(a)
|
Weighted
Average Exercise Price of Outstanding Options
(b)
|
Number
of Securities Remaining Available for Future Issuance Under Equity
Compensation Plans [Excluding Securities Reflected in Column
(a)]
(c)
|
|||
|
Equity
compensation plans approved
by
the Holding Company's shareholders
|
3,165,997
|
$14.63
|
118,975(1)
|
|||
|
Equity
compensation plans not
approved
by the Holding Company's
shareholders
|
-
|
-
|
-
|
|||
|
|
(1)
|
Amount
comprised of 105,791 stock options that remain available for future
issuance under the 2001 Stock Option Plan for Outside Directors, Officers
and Employees of Dime Community Bancshares, Inc., and 13,184 equity awards
that remain available for future issuance under the 2004 Stock Incentive
Plan for Outside Directors, Officers and Employees of Dime Community
Bancshares, Inc.
|
Item 13. Certain
Relationships and Related Transactions, and Director
Independence
Information regarding certain
relationships and related transactions is included under the heading
"Transactions with Certain Related Persons" in the Proxy Statement and is
incorporated herein by reference. Information regarding director
independence is included under the heading "Information as to Nominees and
Continuing Directors" in the Proxy Statement and is incorporated herein by
reference.
Item
14. Principal Accounting Fees
and Services
Information regarding principal
accounting fees and services, as well as the Audit Committee's pre-approval
policies and procedures, is included under the heading "Proposal 2 –
Ratification of Appointment of Independent Auditors," in the Proxy Statement and
is incorporated herein by reference.
PART
IV
Item
15. Exhibits, Financial Statement Schedules
(a) (1) Financial
Statements
See index to Consolidated Financial
Statements on page F-67.
(2) Financial
Statement Schedules
Financial statement schedules have
been omitted because they are not applicable or not required or the required
information is shown in the Consolidated Financial Statements or Notes thereto
under "Item 8. Financial Statements and Supplementary
Data."
(3) Exhibits
Required by Item 601 of SEC Regulation S-K
See Index
of Exhibits on pages F-111 and F-112.
F-67
SIGNATURES
Pursuant to the requirements of Section
13 or 15(d) 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 on March 14, 2008.
DIME COMMUNITY BANCSHARES,
INC.
By: /s/ VINCENT F.
PALAGIANO
Vincent F. Palagiano
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below on March 14,
2008 by the following persons on behalf of the registrant and in the capacities
indicated.
|
Name
|
Title
|
|
/s/ VINCENT F. PALAGIANO
Vincent
F. Palagiano
|
Chairman
of the Board and Chief Executive Officer
(Principal
Executive Officer)
|
|
/s/ MICHAEL P. DEVINE
Michael
P. Devine
|
President
and Chief Operating Officer and Director
|
|
/s/ KENNETH J. MAHON
Kenneth
J. Mahon
|
First
Executive Vice President and Chief Financial Officer and Director
(Principal Financial Officer and
Principal Accounting Officer)
|
|
/s/ ANTHONY BERGAMO
Anthony
Bergamo
|
Director
|
|
/s/ GEORGE L. CLARK, JR.
George
L. Clark, Jr.
|
Director
|
|
/s/ STEVEN D. COHN
Steven
D. Cohn
|
Director
|
|
/s/ PATRICK E. CURTIN
Patrick
E. Curtin
|
Director
|
|
/s/ FRED P. FEHRENBACH
Fred
P. Fehrenbach
|
Director
|
|
/s/ JOHN J. FLYNN
John
J. Flynn
|
Director
|
|
/s/ JOSEPH J. PERRY
Joseph
J. Perry
|
Director
|
|
/s/ DONALD E. WALSH
Donald
E. Walsh
|
Director
|
|
/s/ OMER S.J. WILLIAMS
Omer
S.J. Williams
|
Director
|
F-67
CONSOLIDATED
FINANCIAL STATEMENTS OF
DIME
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
INDEX
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-63
|
|
Consolidated
Statements of Financial Condition at December 31, 2007 and
2006
|
F-64
|
|
Consolidated
Statements of Operations for the years ended December 31, 2007, 2006 and
2005
|
F-65
|
|
Consolidated
Statements of Changes in Stockholders' Equity and Comprehensive Income for
the years ended
December
31, 2007, 2006 and 2005
|
F-66
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2007, 2006 and
2005
|
F-67
|
|
Notes
to Consolidated Financial Statements
|
F68-F103
|
F-67
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
Dime
Community Bancshares, Inc. & Subsidiaries
Brooklyn,
NY
We have
audited the accompanying consolidated statements of financial condition of Dime
Community Bancshares, Inc. and Subsidiaries (the "Company") as of December 31,
2007 and 2006, and the related consolidated statements of operations, changes in
stockholders' equity and comprehensive income, and cash flows for each of the
three years in the period ended December 31, 2007. These consolidated
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of Dime Community Bancshares, Inc. and
Subsidiaries as of December 31, 2007 and 2006, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2007, in conformity with accounting principles generally accepted in the United
States of America.
As
discussed in Notes 1 and 14, the Company adopted the FASB Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes" on January 1, 2007. In
addition, as discussed in Note 1, the Company adopted the Statement of Financial
Accounting Standards No. 158, "Employers' Accounting for Defined Benefit Pension
and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106
and 132(R)" as of December 31, 2006.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company's internal control over financial
reporting as of December 31, 2007, based on the criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated March 14, 2008 expressed an unqualified
opinion on the effectiveness of the Company’s internal control over financial
reporting.
/s/
DELOITTE & TOUCHE LLP
New York,
New York
March 14,
2008
F-
DIME
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION
(Dollars
in thousands except share amounts)
|
December
31, 2007
|
December
31, 2006
|
|
|
ASSETS:
|
||
|
Cash
and due from banks
|
$101,708
|
$26,264
|
|
Federal
funds sold and other short-term investments
|
128,014
|
78,752
|
|
Encumbered
investment securities held-to-maturity (estimated fair value
of
$80
and $235 at December 31, 2007 and 2006, respectively) (Note
3)
|
80
|
235
|
|
Investment
securities available-for-sale, at fair value (fully unencumbered) (Note
3)
|
34,095
|
29,548
|
|
Mortgage-backed
securities available-for-sale, at fair value (Note 4):
|
||
|
Encumbered
|
160,821
|
147,765
|
|
Unencumbered
|
1,943
|
6,672
|
|
162,764
|
154,437
|
|
|
Loans
(Note 5):
|
||
|
Real
estate, net
|
2,873,966
|
2,700,268
|
|
Other
loans
|
2,169
|
2,205
|
|
Less
allowance for loan losses (Note 6)
|
(15,387)
|
(15,514)
|
|
Total
loans, net
|
2,860,748
|
2,686,959
|
|
Loans
held for sale
|
890
|
1,200
|
|
Premises
and fixed assets, net (Note 8)
|
23,878
|
22,886
|
|
Federal
Home Loan Bank of New York capital stock (Note 9)
|
39,029
|
31,295
|
|
Goodwill
(Note 1)
|
55,638
|
55,638
|
|
Other
assets (Notes 7, 14 and 15)
|
94,331
|
86,163
|
|
Total
Assets
|
$3,501,175
|
$3,173,377
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||
|
Liabilities:
|
||
|
Due
to depositors (Note 10):
|
||
|
Interest
bearing deposits
|
$2,091,600
|
$1,913,317
|
|
Non-interest
bearing deposits
|
88,398
|
95,215
|
|
Total
deposits
|
2,179,998
|
2,008,532
|
|
Escrow
and other deposits (Note 7)
|
52,209
|
46,373
|
|
Securities
sold under agreements to repurchase (Note 11)
|
155,080
|
120,235
|
|
Federal
Home Loan Bank of New York advances (Note 12)
|
706,500
|
571,500
|
|
Subordinated
notes payable (Note 13)
|
25,000
|
25,000
|
|
Trust
Preferred securities payable (Note 13)
|
72,165
|
72,165
|
|
Other
liabilities (Note 14 and 15)
|
41,371
|
38,941
|
|
Total
Liabilities
|
3,232,323
|
2,882,746
|
|
Commitments and Contingencies
(Note 16)
|
||
|
Stockholders'
Equity:
|
||
|
Preferred
stock ($0.01 par, 9,000,000 shares authorized, none issued or outstanding
at
December
31, 2007 and 2006)
|
-
|
-
|
|
Common
stock ($0.01 par, 125,000,000 shares authorized,
50,906,278 shares and 50,862,867
shares
issued at December 31, 2007 and 2006, respectively, and 33,909,902 shares
and
36,456,354
shares outstanding at December 31, 2007 and 2006,
respectively)
|
509
|
509
|
|
Additional
paid-in capital
|
208,369
|
206,601
|
|
Retained
earnings (Note 2)
|
288,112
|
285,420
|
|
Accumulated
other comprehensive loss, net of deferred taxes
|
(4,278)
|
(7,100)
|
|
Unallocated
common stock of Employee Stock Ownership Plan ("ESOP") (Note
15)
|
(4,164)
|
(4,395)
|
|
Unearned
and unallocated common stock of Recognition and Retention Plan ("RRP")
and
Restricted
Stock Awards (Note
15)
|
(634)
|
(3,452)
|
|
Common
stock held by Benefit Maintenance Plan ("BMP") (Note 15)
|
(7,941)
|
(7,941)
|
|
Treasury
stock, at cost (16,996,376 shares and 14,406,513 shares at
December
31, 2007 and 2006, respectively) (Note 18)
|
(211,121)
|
(179,011)
|
|
Total
Stockholders' Equity
|
268,852
|
290,631
|
|
Total
Liabilities And Stockholders' Equity
|
$3,501,175
|
$3,173,377
|
See notes
to consolidated financial statements.
F-
DIME
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Dollars
in thousands except per share amounts)
|
Fiscal
Year Ended December 31,
|
|||
|
2007
|
2006
|
2005
|
|
|
Interest
income:
|
|||
|
Loans
secured by real estate
|
165,221
|
$155,510
|
$148,442
|
|
Other
loans
|
178
|
190
|
214
|
|
Mortgage-backed
securities
|
6,344
|
6,850
|
11,699
|
|
Investment
securities
|
2,011
|
2,276
|
2,602
|
|
Federal
funds sold and other short-term investments
|
8,406
|
5,984
|
6,755
|
|
Total
interest income
|
182,160
|
170,810
|
169,712
|
|
Interest
expense:
|
|||
|
Deposits
and escrow
|
75,761
|
56,659
|
41,058
|
|
Borrowed
funds
|
35,386
|
36,681
|
36,283
|
|
Total
interest expense
|
111,147
|
93,340
|
77,341
|
|
Net
interest income
|
71,013
|
77,470
|
92,371
|
|
Provision
for loan losses
|
240
|
240
|
340
|
|
Net
interest income after provision for loan losses
|
70,773
|
77,230
|
92,031
|
|
Non-interest
income:
|
|||
|
Service
charges and other fees
|
5,542
|
5,985
|
5,967
|
|
Net
gain on sales of loans
|
750
|
1,516
|
924
|
|
Net
gain (loss) on sales and redemptions of securities
and
other assets
|
-
|
1,541
|
(5,176)
|
|
Income
from Bank Owned Life Insurance ("BOLI")
|
2,513
|
1,868
|
1,885
|
|
Other
|
1,615
|
1,480
|
1,551
|
|
Total
non-interest income
|
10,420
|
12,390
|
5,151
|
|
Non-interest
expense:
|
|||
|
Salaries
and employee benefits
|
22,620
|
21,307
|
20,716
|
|
Stock
benefit plan compensation expense
|
2,796
|
2,125
|
2,233
|
|
Occupancy
and equipment
|
6,431
|
5,762
|
5,393
|
|
Data
processing costs
|
3,204
|
3,167
|
2,828
|
|
Advertising
and marketing
|
2,638
|
2,186
|
1,800
|
|
Federal
deposit insurance premiums
|
258
|
257
|
315
|
|
Other
|
7,555
|
7,172
|
7,457
|
|
Total
non-interest expense
|
45,502
|
41,976
|
40,742
|
|
Income
before income taxes
|
35,691
|
47,644
|
56,440
|
|
Income
tax expense
|
13,248
|
17,052
|
20,230
|
|
Net
income
|
$22,443
|
$30,592
|
$36,210
|
|
Earnings
per Share:
|
|||
|
Basic
|
$0.67
|
$0.88
|
$1.03
|
|
Diluted
|
$0.67
|
$0.87
|
$1.02
|
See notes
to consolidated financial statements.
F-
DIME
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE
INCOME
(Dollars
in thousands)
|
Year
Ended December 31,
|
|||
|
2007
|
2006
|
2005
|
|
|
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
|
|||
|
Common
Stock (Par Value $0.01):
|
|||
|
Balance
at beginning of period
|
$509
|
$506
|
$501
|
|
Shares
issued in exercise of options
|
-
|
3
|
5
|
|
Balance
at end of period
|
509
|
509
|
506
|
|
Additional
Paid-in Capital:
|
|||
|
Balance
at beginning of period
|
206,601
|
204,083
|
198,183
|
|
Stock
options exercised
|
136
|
907
|
2,302
|
|
Release
of treasury stock for shares acquired by BMP and RRP
|
15
|
108
|
222
|
|
Excess
tax benefit of stock benefit plans
|
174
|
621
|
2,307
|
|
Amortization
of excess fair value over cost – ESOP stock
|
1,443
|
882
|
1,069
|
|
Balance
at end of period
|
208,369
|
206,601
|
204,083
|
|
Retained
earnings:
|
|||
|
Balance
at beginning of period
|
285,420
|
274,579
|
258,237
|
|
Cumulative
effect adjustment for the adoption of FASB Interpretation
No. 48, "Accounting for
Uncertainty
in Income Taxes" ("FIN 48")
|
(1,703)
|
-
|
-
|
|
Net
income for the period
|
22,443
|
30,592
|
36,210
|
|
Cash
dividends re-assumed through liquidation of RRP
|
958
|
-
|
-
|
|
Cash
dividends declared and paid
|
(19,006)
|
(19,751)
|
(19,868)
|
|
Balance
at end of period
|
288,112
|
285,420
|
274,579
|
|
Accumulated
other comprehensive loss:
|
|||
|
Balance
at beginning of period
|
(7,100)
|
(3,328)
|
(3,228)
|
|
(Increase)
Decrease in unrealized loss on available for sale securities
during
the period, net of deferred taxes
|
1,800
|
(14)
|
176
|
|
Minimum
pension liability, net of deferred taxes
|
-
|
148
|
(276)
|
|
Increase
in defined benefit plan liability from the adoption of 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"), net of deferred
benefit of $3,246
|
-
|
(3,906)
|
-
|
|
Unrecognized
gain of pension and other postretirement obligations, net of deferred tax
of $874
|
1,022
|
-
|
-
|
|
Balance
at end of period
|
(4,278)
|
(7,100)
|
(3,328)
|
|
ESOP:
|
|||
|
Balance
at beginning of period
|
(4,395)
|
(4,627)
|
(4,749)
|
|
Amortization
of earned portion of ESOP stock
|
231
|
232
|
122
|
|
Balance
at end of period
|
(4,164)
|
(4,395)
|
(4,627)
|
|
RRP
and Restricted Stock Awards:
|
|||
|
Balance
at beginning of period
|
(3,452)
|
(2,979)
|
(2,612)
|
|
Release
from treasury stock for restricted stock award shares and RRP and
restricted stock award
shares
acquired
|
(165)
|
(770)
|
(571)
|
|
Transfer
of common stock to treasury upon liquidation of RRP
|
2,611
|
-
|
-
|
|
Amortization
of earned portion of RRP stock
|
372
|
297
|
204
|
|
Balance
at end of period
|
(634)
|
(3,452)
|
(2,979)
|
|
Common
Stock Held by BMP:
|
|||
|
Balance
at beginning of period
|
(7,941)
|
(7,941)
|
(7,348)
|
|
Common
stock acquired
|
-
|
-
|
(593)
|
|
Balance
at end of period
|
(7,941)
|
(7,941)
|
(7,941)
|
|
Treasury
Stock:
|
|||
|
Balance
at beginning of period
|
(179,011)
|
(168,579)
|
(157,263)
|
|
Release
of treasury stock for allocated restricted stock awards and shares
acquired by BMP
|
151
|
592
|
862
|
|
Transfer
of common stock to treasury upon liquidation of RRP
|
(2,611)
|
-
|
-
|
|
Purchase
of treasury shares, at cost
|
(29,650)
|
(11,024)
|
(12,178)
|
|
Balance
at end of period
|
(211,121)
|
(179,011)
|
(168,579)
|
|
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
|
|||
|
Net
Income
|
$22,443
|
$30,592
|
$36,210
|
|
Increase
(Decrease) in Actuarial Gain or Reduction (Increase) in Actuarial Loss on
defined benefit plans,
net
of (taxes) benefit of $(123) and $229 during the years ended December 31,
2006 and
2005,
respectively
|
-
|
148
|
(276)
|
|
Change
in pension and other postretirement obligations, net of deferred taxes of
$(874) during the year ended
December
31, 2007
|
1,022
|
-
|
-
|
|
Reclassification
adjustment for securities sold, net of (taxes) benefit of
$(489)
and $2,143 during the years ended December 31, 2006 and 2005,
respectively
|
-
|
(575)
|
3,033
|
|
Net
unrealized securities gain (loss) arising during the period, net of
(taxes) benefit of $(1,469),
$(478)
and $2,434 during the years ended December 31, 2007, 2006 and 2005,
respectively
|
1,800
|
561
|
(2,857)
|
|
Comprehensive
Income
|
$25,265
|
$30,726
|
$36,110
|
See notes
to consolidated financial statements.
F-
DIME
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH
FLOWS
(Dollars
in thousands)
|
Year
Ended December 31,
|
|||
|
2007
|
2006
|
2005
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|||
|
Net
Income
|
$22,443
|
$30,592
|
$36,210
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities
|
|||
|
Net (gain)
loss on investment and mortgage backed securities sold
|
-
|
(1,063)
|
5,176
|
|
Net
gain on sale of loans held for sale
|
(750)
|
(1,516)
|
(924)
|
|
Net
gain on sales and disposals of other assets
|
-
|
(478)
|
-
|
|
Net
depreciation, amortization and accretion
|
1,252
|
1,265
|
2,334
|
|
Stock
plan compensation expense (excluding ESOP)
|
372
|
296
|
206
|
|
ESOP
compensation expense
|
1,674
|
1,115
|
1,190
|
|
Provision
for loan losses
|
240
|
240
|
340
|
|
Increase
in cash surrender value of BOLI
|
(1,965)
|
(1,868)
|
(1,885)
|
|
Deferred
income tax provision (credit)
|
(834)
|
103
|
(649)
|
|
Excess
tax benefits of stock plans
|
(174)
|
(621)
|
-
|
|
Changes
in assets and liabilities:
|
|||
|
Originations
of loans sold during the period
|
(76,568)
|
(145,430)
|
(102,974)
|
|
Proceeds
from sales of loans held for sale
|
77,628
|
146,646
|
108,489
|
|
Decrease
(Increase) in other assets
|
(6,368)
|
929
|
4,247
|
|
Increase
in other liabilities
|
823
|
840
|
9,633
|
|
Net
cash provided by Operating Activities
|
17,773
|
31,050
|
61,393
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|||
|
Net
(increase) decrease in federal funds sold and other short-term
investments
|
(49,262)
|
(18,734)
|
43,277
|
|
Proceeds
from maturities of investment securities held-to-maturity
|
155
|
220
|
130
|
|
Proceeds
from maturities of investment securities
available-for-sale
|
1,000
|
17,075
|
26,000
|
|
Proceeds
from sales of investment securities available-for-sale
|
-
|
3,032
|
36,421
|
|
Proceeds
from sales and calls of mortgage backed securities
held-to-maturity
|
-
|
-
|
377
|
|
Proceeds
from sales and calls of mortgage backed securities
available-for-sale
|
8,542
|
-
|
232,230
|
|
Purchases
of investment securities available-for-sale
|
(14,162)
|
(4,002)
|
(51,980)
|
|
Purchases
of mortgage backed securities available-for-sale
|
(37,992)
|
-
|
(1,493)
|
|
Principal
collected on mortgage backed securities held-to-maturity
|
-
|
-
|
94
|
|
Principal
collected on mortgage backed securities available-for-sale
|
33,329
|
39,420
|
88,978
|
|
Net
increase in loans
|
(174,029)
|
(91,789)
|
(114,979)
|
|
Proceeds
from the sale of investment property
|
-
|
908
|
-
|
|
Proceeds
from BOLI benefit payment
|
631
|
-
|
-
|
|
Purchases
of fixed assets, net
|
(2,566)
|
(7,818)
|
(1,246)
|
|
Purchase
of Federal Home Loan Bank of New York capital stock
|
(7,734)
|
(1,378)
|
(4,592)
|
|
Net
cash (used in) provided by Investing Activities
|
(242,088)
|
(63,066)
|
253,217
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|||
|
Net
increase (decrease) in due to depositors
|
171,466
|
93,760
|
(295,277)
|
|
Net
increase (decrease) in escrow and other deposits
|
5,836
|
(1,145)
|
(766)
|
|
Increase
(Decrease) in securities sold under agreements to
repurchase
|
34,845
|
(85,220)
|
(129)
|
|
Proceeds
from Federal Home Loan Bank of New York advances
|
135,000
|
40,000
|
25,000
|
|
Proceeds
from exercise of stock options
|
136
|
910
|
2,307
|
|
Excess
tax benefits of stock plans
|
174
|
621
|
-
|
|
Cash
dividends re-assumed through liquidation of RRP
|
958
|
-
|
-
|
|
Purchase
of common stock by the RRP and BMP
|
-
|
(70)
|
(81)
|
|
Cash
dividends paid to stockholders and cash disbursed in payment of stock
dividends
|
(19,006)
|
(19,751)
|
(19,868)
|
|
Purchase
of treasury stock
|
(29,650)
|
(11,024)
|
(12,178)
|
|
Net
cash provided by (used in) Financing Activities
|
299,759
|
18,081
|
(300,992)
|
|
INCREASE(DECREASE)
IN CASH AND DUE FROM BANKS
|
75,444
|
(13,935)
|
13,618
|
|
CASH
AND DUE FROM BANKS, BEGINNING OF PERIOD
|
26,264
|
40,199
|
26,581
|
|
CASH
AND DUE FROM BANKS, END OF PERIOD
|
$101,708
|
$26,264
|
$40,199
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|||
|
Cash
paid for income taxes
|
$20,622
|
$15,531
|
$8,654
|
|
Cash
paid for interest
|
$110,508
|
$93,530
|
$76,975
|
|
Decrease
(Increase) in unrealized loss on available-for-sale securities, net of
taxes
|
$1,800
|
$(14)
|
$176
|
|
Change
in minimum pension liability, net of taxes
|
1,022
|
148
|
$(276)
|
|
Increase
in defined benefit plan liability from adoption of SFAS 158, net of
taxes
|
$-
|
$(3,906)
|
$-
|
See notes
to consolidated financial statements.
F-
DIME
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
In Thousands except for share amounts)
1. NATURE
OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - Dime
Community Bancshares, Inc. (the "Holding Company" and together with its direct
and indirect subsidiaries, the "Company") is a Delaware corporation organized by
The Dime Savings Bank of Williamsburgh (the "Bank") for the purpose of acquiring
all of the capital stock of the Bank issued in the Bank's conversion to stock
ownership on June 26, 1996. At December 31, 2007, the significant
assets of the Holding Company were the capital stock of the Bank, the Holding
Company's loan to the ESOP and investments retained by the Holding
Company. The liabilities of the Holding Company were comprised
primarily of a $25,000 subordinated note payable maturing in May 2010 and
$72,165 of trust preferred securities payable maturing in 2034. The
Company is subject to the financial reporting requirements of the Securities
Exchange Act of 1934, as amended.
The Bank
was originally founded in 1864 as a New York State-chartered mutual savings
bank. In November 1995, the Bank converted to a federally chartered
stock savings bank. The Bank has been a community-oriented financial
institution providing financial services and loans for housing within its market
areas. The Bank maintains its headquarters in the Williamsburg
section of the borough of Brooklyn, New York. The Bank has twenty one
retail banking offices located throughout the boroughs of Brooklyn, Queens, and
the Bronx, and in Nassau County, New York.
Summary of Significant Accounting
Policies - The accounting and reporting policies of the Company conform
to accounting principles generally accepted in the United States of America
("GAAP"). The following is a description of the significant
policies.
Principles of Consolidation -
The accompanying 2007, 2006 and 2005 consolidated financial statements include
the accounts of the Holding Company, and its wholly-owned subsidiaries, the Bank
and 842 Manhattan Avenue Corporation. At December 31,
2005, 842 Manhattan Avenue Corporation owned and managed a real
estate property which housed a former branch office of Financial Federal Savings
Bank, F.S.B. ("FFSB"), a subsidiary of Financial Bancorp, Inc. ("FIBC"), which
the Holding Company acquired on January 21, 1999. The property was
sold in 2006, and as a result, 842 Manhattan Corporation Avenue held no real
estate at December 31, 2007. All financial statements presented also
include the accounts of the Bank's five wholly-owned subsidiaries, Boulevard
Funding Corp. (''BFC''), Havemeyer Investments, Inc., DSBW Preferred Funding
Corporation ("DPFC"), DSBW Residential Preferred Funding Corporation ("DRPFC")
and Dime Reinvestment Company ("DRC"). DRPFC, established in March
1998, invests in real estate loans and is intended to qualify as a real estate
investment trust for federal tax purposes. BFC was established in
order to invest in real estate joint ventures and other real estate assets, and
had some minor financial investments as of December 31, 2007. DPFC
was established in March 1998, invests in multifamily and commercial real estate
loans and is intended to qualify as a real estate investment trust for federal
tax purposes. DRC was established in 2004 in order to function as a
Qualified Community Development Entity as defined in the Internal Revenue Code
of 1986, as amended (the "Code"). DRC is currently
inactive. All significant intercompany accounts and transactions have
been eliminated in consolidation. The financial statements presented
for the years ended December 31, 2005 and 2006 and for the period January 1,
2007 through June 30, 2007, include the accounts of Havemeyer Equities Corp.
(''HEC''). HEC was originally established in order to invest in real
estate joint ventures and other real estate assets. In June 1998, HEC
assumed direct ownership of DPFC. HEC ceased operations effective the
close of business on June 30, 2007, and was legally dissolved prior to December
31, 2007. All of the assets and liabilities of HEC, including the
direct ownership of DPFC, were assumed by the Bank.
Federal funds sold and short-term
investments - Purchases and sales of federal funds sold and other
short-term investments are recorded on trade date. Federal funds sold
and other short-term investments are carried at cost, which approximates market
value due to the short-term nature of the investment.
Investment Securities and
Mortgage-Backed Securities - Purchases and sales of investment and
mortgage-backed securities are recorded on trade date. Gains and
losses on sales of investment and mortgage-backed securities are recorded on the
specific identification basis.
Debt and
equity securities that have readily determinable fair values are carried at fair
value unless they are held-to-maturity. 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. If not
classified as held-to-maturity, such securities are classified as securities
available-for-sale or as trading securities. Unrealized holding gains or losses
on securities available-for-sale are excluded from net income and reported net
of income taxes as other comprehensive income. At December 31, 2007
and 2006, all equity securities were classified as
available-for-sale.
Neither
the Holding Company nor the Bank has acquired securities for the purpose of
engaging in trading activities.
The
Company conducts a quarterly review and evaluation of its securities portfolio
taking into account the severity and duration of a decline in market value, as
well as its intent with regard to the securities in order to determine if a
decline in market value of any security below its amortized cost basis is other
than temporary. If such decline is deemed other than temporary, the carrying
amount of the security is adjusted through a charge to net income in the amount
of the decline in value.
Loans Held for Sale -
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of aggregate cost or estimated fair value. Loans
sold are generally sold with servicing rights retained.
Allowance for Loan Losses -
The Company provides a valuation allowance for estimated losses inherent in the
loan portfolio. The valuation allowance for estimated losses on loans
is based on the Bank's past loan loss experience, known and inherent risks in
the portfolio, existing adverse situations which may affect a borrower's ability
to repay, estimated value of underlying collateral and current economic
conditions in the Bank's lending area. The allowance is increased by provisions
for loan losses charged to operations and is reduced by charge-offs, net of
recoveries. Although management uses available information to
estimate losses on loans, future additions to, or reductions in, the allowance
may be necessary based on changes in economic conditions beyond management's
control. Management believes, based upon all relevant and available information,
that the allowance for loan losses is appropriate to absorb losses inherent in
the portfolio.
Statement
of Financial Accounting Standards ("SFAS") 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"), requires all creditors to account for
impaired loans, except those loans that are accounted for at fair value or at
the lower of cost or fair value, at the present value of expected future cash
flows discounted at the loan's effective interest rate. As an
expedient, creditors may account for impaired loans at the fair value of the
collateral or at the observable market price of the loan if one
exists. If the estimated fair value of an impaired loan is less than
the recorded amount, a specific valuation allowance is
established. If the impairment is considered to be permanent, a
write-down is charged against the allowance for loan losses. In
accordance with Amended SFAS 114, homogeneous loans are not individually
considered for impairment. The Company considers individual one- to
four-family residential mortgage and cooperative apartment loans having a
balance of $417 or less and all consumer loans to be small balance homogenous
loan pools and, accordingly, not covered by Amended SFAS 114.
A reserve
is also recorded related to certain multifamily residential real estate loans
sold with partial recourse under an agreement with the Federal National Mortgage
Association ("FNMA"). This reserve, which is included in other
liabilities, is determined in a manner similar to the Company's allowance for
loan losses related to loans held in portfolio.
Loans - 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 a yield adjustment over the contractual loan terms.
Accrual
of interest is discontinued on loans considered impaired and ninety days past
due. A loan is considered impaired when it is probable that all
contractual amounts due will not be collected in accordance with the terms of
the loan. Any interest accrued to income in the year that interest
accruals are discontinued is reversed. Payments on nonaccrual loans
are generally applied initially to principal. Management may elect to
continue the accrual of interest when a loan is in the process of collection and
the estimated fair value of the collateral is sufficient to satisfy the
outstanding principal balance (including any outstanding advances made related
to the loan) and accrued interest. Loans are returned to accrual
status once the doubt concerning collectibility has been removed and the
borrower has demonstrated performance in accordance with the loan terms and
conditions for a period of at least twelve consecutive months.
Mortgage Servicing Rights -
The cost 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. Servicing assets are carried
at the lower of cost or fair value and are amortized in proportion to, and over
the period of, anticipated net servicing income. The Company
adopted SFAS No. 156, "Accounting for Servicing of Financial Assets" ("SFAS
156") effective January 1, 2007. SFAS 156 requires all separately
recognized mortgage servicing rights ("MSR") to be initially measured at fair
value, if practicable. The estimated fair value of loan servicing
assets is determined by calculating the present value of estimated future net
servicing cash flows, using assumptions of prepayments, defaults, servicing
costs and discount rates derived based upon actual historical results for the
Bank, or, in the absence of such data, from historical results for the Bank's
peers. Capitalized loan servicing assets are stratified based on predominant
risk characteristics of the underlying loans (i.e. collateral, interest
rate, servicing spread and maturity) for the purpose of evaluating impairment. A
valuation allowance is then established in the event the recorded value of an
individual stratum exceeds its fair value. Third party valuations of
the loan servicing asset are performed on a quarterly basis, and were performed
as of both December 31, 2007 and 2006. In accordance with the
provisions of SFAS 156, the Bank elected to continue its practice of amortizing
its MSR in proportion to and over the period of estimated net servicing income
or net servicing loss.
Other Real Estate Owned, Net
- Properties acquired as a result of foreclosure on a mortgage loan or a deed in
lieu of foreclosure are classified as other real estate owned ("OREO") and are
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 and any disposition expenses charged to
the valuation allowance for possible losses on OREO. Subsequent write
downs are charged directly to operating expenses. The Company did not
possess any OREO during the years ended December 31, 2007 and 2006.
Premises and Fixed Assets,
Net - Land is stated at original cost. Buildings and furniture, fixtures
and equipment are stated at cost less accumulated depreciation. Depreciation is
computed by the straight-line method over the estimated useful lives of the
properties as follows:
|
Buildings
|
2.22%
to 2.50% per year
|
|
|
Furniture,
fixtures and equipment
|
10%
per year
|
|
|
Computer
equipment
|
33.33%
per year
|
Leasehold
improvements are amortized over the remaining non-cancelable terms of the
related leases.
Earnings Per Share ("EPS") - EPS are
calculated and reported in accordance with SFAS 128, "Earnings Per
Share.'' SFAS 128 requires disclosure of basic EPS and diluted EPS
for entities with complex capital structures on the face of the income
statement, along with a reconciliation of the numerator and denominator of basic
and diluted EPS.
Basic EPS
is computed by dividing net income by the weighted-average common shares
outstanding during the year (weighted average common shares are adjusted to
include vested RRP and restricted stock award shares and allocated ESOP
shares). Diluted EPS is computed using the same method as basic EPS,
but reflects the potential dilution that would occur if unvested RRP and
restricted stock award shares became vested, unallocated ESOP shares became
committed for allocation, or "in the money" stock options were exercised and
converted into common stock.
F-
The
following is a reconciliation of the numerator and denominator of basic EPS and
diluted EPS for the years ended December 31, 2007, 2006 and 2005:
|
Year
Ended December 31,
|
|||
|
2007
|
2006
|
2005
|
|
|
Numerator:
|
|||
|
Net
Income per the Consolidated Statements
of
Operations
|
$22,443
|
$30,592
|
$36,210
|
|
Denominator:
|
|||
|
Weighted
average shares outstanding utilized in the
calculation
of basic EPS
|
33,490,420
|
34,872,421
|
35,121,413
|
|
Unvested
shares of RRP and restricted stock awards
|
66,666
|
75,023
|
43,022
|
|
Common
stock equivalents resulting from the
dilutive
effect of "in-the-money" stock options
|
112,170
|
250,602
|
600,468
|
|
Anti-dilutive
effect of tax benefits associated with
"in-the-money"
non-qualified stock options
|
(27,381)
|
(79,918)
|
(204,457)
|
|
Weighted
average shares outstanding utilized in the
calculation
of diluted EPS
|
33,641,875
|
35,118,128
|
35,560,446
|
Common
stock equivalents resulting from the dilutive effect of "in-the-money" stock
options are calculated based upon the excess of the average market value of the
Company's common stock over the exercise price of outstanding
options.
There
were approximately 2,053,104 weighted average options, 1,077,676 weighted
average options, and 759,100 weighted average options for the years ended
December 31, 2007, 2006, and 2005, respectively, that were not considered in the
calculation of diluted EPS since their exercise prices exceeded the average
market price during the relevant period.
Accounting for Goodwill and Other
Intangible Assets – SFAS 142 "Goodwill and Other Intangible Assets,"
established standards for goodwill acquired in a business
combination. SFAS 142 eliminated amortization of goodwill and instead
required the performance of a transitional goodwill impairment test six months
from the date of adoption and at least annually thereafter. As of the
July 1, 2001 date of adoption of SFAS 142, the Company had goodwill totaling
$55.6 million.
The
Company performed impairment tests of goodwill as of December 31, 2007, 2006 and
2005. In each instance, the Company concluded that no potential impairment of
goodwill existed. No events have occurred or 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. In conjunction with the
adoption of SFAS 142, the Company also re-assessed the useful lives and
classifications of its identifiable intangible assets and determined that they
remained appropriate.
Changes
in the carrying amount of goodwill for the periods presented are as
follows:
|
Year
Ended December 31,
|
|||
|
2007
|
2006
|
2005
|
|
|
Original
Amount
|
$73,107
|
$73,107
|
$73,107
|
|
Accumulated
Amortization
|
(17,469)
|
(17,469)
|
(17,469)
|
|
Net
Carrying Value
|
$55,638
|
$55,638
|
$55,638
|
Income Taxes - Income taxes
are accounted for in accordance with SFAS 109, "Accounting for Income Taxes,"
which requires that deferred taxes be provided for temporary differences between
the book and tax bases of assets and liabilities. A valuation
allowance is recognized against deferred tax assets in the event that it is more
likely than not that the deferred tax asset will not be fully
realized.
The
Company adopted FIN 48 on January 1, 2007. Provisions of FIN 48 were
clarified by FASB Staff Position FIN 48-1 "Definition of Settlement in FASB
Interpretation No. 48." Please refer to Note 14 for a discussion of
FIN 48.
Cash and Cash Equivalents -
For purposes of the Consolidated Statements of Cash Flows, the Company considers
cash and due from banks to be cash equivalents.
Employee Benefits – The Bank
maintains the Retirement Plan of The Dime Savings Bank of Williamsburgh (the
"Employee Retirement Plan") and The Dime Savings Bank of Williamsburgh 401(k)
Plan [the "401(k) Plan"] for substantially all of its employees, both of which
are tax qualified under the Code.
The Bank
also maintains the Postretirement Welfare Plan of The Dime Savings Bank of
Williamsburgh (the "Postretirement Benefit Plan."), providing additional
postretirement benefits to employees that are recorded in accordance with SFAS
106, ''Employers' Accounting for Postretirement Benefits Other Than
Pensions.'' SFAS 106 requires accrual of postretirement benefits
(such as health care benefits) during the years an employee provides
services.
The
Company adopted SFAS 158 effective December 31, 2006. SFAS 158
requires an employer sponsoring a single employer defined benefit plan to do the
following: (1) recognize the funded status of a benefit plan in its statements
of financial condition, measured as the difference between plan assets at fair
value (with limited exceptions) and the benefit obligation. For a pension plan,
the benefit obligation is the projected benefit obligation; for any other
postretirement benefit plan, such as a retiree health care plan, the benefit
obligation is the accumulated postretirement benefit obligation; (2) recognize
as a component of other comprehensive income, net of tax, the gains or losses
and prior service costs or credits that arise during the period but are not
recognized as components of net periodic benefit cost pursuant to SFAS 87,
"Employers’ Accounting for Pensions," or SFAS 106, "Employers’ Accounting for
Postretirement Benefits Other Than Pensions." Amounts recognized in
accumulated other comprehensive income, including the gains or losses, prior
service costs or credits, and the transition asset or obligation remaining from
the initial application of SFAS 87 and SFAS 106, are adjusted as they are
subsequently recognized as components of net periodic benefit cost pursuant to
the recognition and amortization provisions of those Statements; (3) measure
defined benefit plan assets and obligations as of the date of the employer’s
fiscal year-end statements of financial condition (with limited exceptions); and
(4) disclose in the notes to financial statements additional information about
certain effects on net periodic benefit cost for the next fiscal year that arise
from delayed recognition of the gains or losses, prior service costs or credits,
and transition asset or obligation. The effect of adoption of SFAS
158 upon the Company's consolidated financial condition is summarized as
follows.
|
Statement
of Condition Line Item
|
Balance
Prior to Adoption of SFAS 158
|
Increase
(Decrease) from Adoption of SFAS
158
|
Balance
After Adoption of SFAS 158
|
|||
|
Prepaid
pension asset (other assets)
|
$8,338
|
(6,582)
|
$1,756
|
|||
|
Deferred
income tax asset (other assets)
|
12,955
|
3,246
|
16,444
|
|||
|
Defined
benefit plan liabilities (other liabilities)
|
8,584
|
570
|
9,154
|
|||
|
Accumulated
Other Comprehensive Income
|
(3,194)
|
(3,906)
|
(7,100)
|
Effective
January 1, 2008, in compliance with applicable provisions of SFAS 158, the
Company changed the measurement date for its defined benefit plans from October
1st
to December 31st. As
a result of this change, the Company recorded a transition adjustment on January
1, 2008 that reduced its consolidated stockholders equity by $23.
The
Holding Company and Bank maintain the ESOP. Compensation expense
related to the ESOP is recorded in accordance with Statement of Position No.
93-6, which requires the compensation expense to be recorded during the period
in which the shares become committed to be released to
participants. The compensation expense is measured based upon the
fair market value of the stock during the period, and, to the extent that the
fair value of the shares committed to be released differs from the original cost
of such shares, the difference is recorded as an adjustment to additional
paid-in capital.
The
Holding Company and Bank maintain the Dime Community Bancshares, Inc. 1996 Stock
Option Plan for Outside Directors, Officers and Employees (the "1996 Stock
Option Plan"), the Dime Community Bancshares, Inc. 2001 Stock Option Plan for
Outside Directors, Officers and Employees (the "2001 Stock Option Plan") and the
Dime Community Bancshares, Inc. 2004 Stock Incentive Plan for Outside Directors,
Officers and Employees (the "2004 Stock Incentive Plan," and collectively the
"Stock Plans"); which are discussed more fully in Note 15 and which prior to
January 1, 2006, were subject to the accounting requirements of SFAS 123,
"Accounting for Stock-Based Compensation," as amended by SFAS 148 "Accounting
for Stock-Based Compensation – Transition and Disclosures, an Amendment of FASB
Statement No. 123" (collectively "SFAS 123"). SFAS 123 encouraged,
but did not require, companies to record compensation cost for stock-based
employee compensation plans at fair value. Until January 1, 2006, the
Company accounted for stock-based compensation under the Stock Plans using the
intrinsic value recognition and measurement principles of Accounting Principles
Board Opinion 25, "Accounting for Stock Issued to Employees" ("APB 25"), and
related interpretations. Accordingly, no stock-based compensation
cost was reflected in net income for stock options, since, for all options
granted under the Stock Plans, the market value of the underlying common stock
on the date of grant equaled the exercise price of the common
stock.
In
December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No.
123 (revised 2004), "Share-Based Payment", ("SFAS 123R"), addressing the
accounting for share-based payment transactions (e.g., stock options and
awards of restricted stock) in which an employer receives employee services in
exchange for equity securities of the company or liabilities that are based on
the fair value of the company’s equity securities. SFAS 123R
supersedes APB 25, generally requiring that share based payments be accounted
for using a fair value based method and the recording of compensation expense in
lieu of optional pro forma disclosure.
On March
29, 2005, the Securities and Exchange Commission ("SEC") released Staff
Accounting Bulletin No. 107 ("SAB No. 107"), providing guidance on several
technical issues regarding the required adoption of SFAS 123R. The
Company adopted SFAS 123R in conjunction with SAB No. 107 on January 1,
2006.
On
December 30, 2005, vesting was accelerated for 1,141,813 outstanding unvested
stock options awarded to outside directors, officers and employees of the
Company or Bank under the Stock Plans. As a result of the accelerated
vesting, all of the 1,141,813 stock options became immediately
exercisable. The acceleration of vesting was undertaken in order to
eliminate the compensation expense that the Company would otherwise be required
to recognize with respect to these unvested stock options upon adopting SFAS
123R. Of the 1,141,813 stock options for which vesting was
accelerated, 290,934, or 25%, were "in-the money" and possessed an exercise
price of $13.16 per share. The remaining accelerated options had
exercise prices ranging from $15.10 to $19.90 per share, and vesting periods
ranging from January 2006 to May 2009. The Company incurred a pre-tax
charge of approximately $5 related to the acceleration of vesting.
Since all
stock options outstanding were fully vested on December 30, 2005 and there were
no grants of stock options during the year ended December 31, 2006, there was no
recorded expense related to stock options during the years ended December 31,
2006 and 2005. Grants of stock options during the year
ended December 31, 2007 were accounted for at fair value in accordance with SFAS
123R.
Grants of
restricted stock awards during the years ended December 31, 2007, 2006 and 2005
were accounted for at fair value in accordance with SFAS 123R.
The
following table illustrates the effect on net income and EPS had the Company
applied the fair value recognition provisions of SFAS 123R to stock-based
employee compensation for the Stock Plans and RRP during the year ended December
31, 2005 and reflects $1,945 of additional pro-forma expense during the year
ended December 31, 2005 related to the acceleration of vesting.
|
Year
Ended December 31, 2005
|
|
|
Net
income, as reported
|
$36,210
|
|
Less: Excess
stock-based compensation expense determined under the fair value
method
over
the stock-based compensation recorded for all Stock Plans, net of
applicable taxes
|
(3,439)
|
|
Pro
forma net income
|
$32,771
|
|
Earnings
per share
|
|
|
Basic,
as reported
|
$1.03
|
|
Basic,
pro forma
|
0.93
|
|
Diluted,
as reported
|
1.02
|
|
Diluted,
pro forma
|
0.92
|
Derivative Instruments - All
derivatives are recognized at fair value as either assets or liabilities in the
consolidated statements of financial condition. A derivative may be
designated as a hedge against exposure to changes in either: (i) the fair value
of a recognized asset, liability or firm commitment, (ii) cash flows of a
recognized or forecasted transaction, or (iii) foreign currencies of a net
investment in foreign operations, firm commitments, available-for-sale
securities or a forecasted transaction. Depending upon the
effectiveness of the hedge and/or the transaction being hedged, any fluctuations
in the fair value of the derivative instrument are required to be either
recognized in earnings in the current year, deferred to future periods, or
recognized in other comprehensive income. Changes in the fair value
of all derivative instruments not receiving hedge accounting recognition are
recorded in current year earnings.
During
the years ended December 31, 2007, 2006 and 2005, neither the Holding Company
nor the Bank held any derivative instruments or any embedded derivative
instruments that required bifurcation.
BOLI – BOLI is carried at its
contract value. Increases in the contract value are recorded as
non-interest income in the consolidated statements of operations and insurance
proceeds received are recorded as a reduction of the contract
value.
Comprehensive Income -
Comprehensive income for the years ended December 31, 2007, 2006 and 2005 was
determined in accordance with SFAS 130, "Reporting Comprehensive
Income.'' Comprehensive income includes changes in the unrealized
gain or loss on available for sale securities and minimum pension liability,
which, under GAAP, bypass net income and are typically reported as components of
stockholders' equity. All comprehensive income adjustment items are
presented net of applicable tax effect.
Disclosures
About Segments of an Enterprise and Related Information - The Company's consolidated
financial statements reflect the adoption of SFAS 131, "Disclosures About
Segments of an Enterprise and Related Information." SFAS 131
establishes standards for the manner in which public business enterprises report
information about operating segments in annual financial statements, requires
that the enterprises report selected information about operating segments and
establishes standards for related disclosure about products and services,
geographic areas, and major customers.
The
Company has one reportable segment, "Community Banking." All of the
Company's activities are interrelated, and each activity is dependent and
assessed based on the manner in which it supports the other activities of the
Company. For example, lending is dependent upon the ability of the
Bank to fund itself with retail deposits and other borrowings and to manage
interest rate and credit risk. Accordingly, all significant operating
decisions are based upon analysis of the Company as one operating segment or
unit. The Chief Executive Officer is considered the chief decision
maker for this reportable segment.
For the
years ended December 31, 2007, 2006 and 2005, there was no customer that
accounted for more than 10% of the Company's consolidated revenue.
Recently Issued Accounting
Standards
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 which will enable users to evaluate the
nature and financial effects of the business combination. SFAS 141R is effective
for fiscal years beginning after December 15, 2008. The Company is
currently evaluating the potential impact, if any, of the adoption of FAS 141R
on its financial statements.
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, except
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. SAB 109
is not expected to 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 choose to measure many financial
instruments and certain other items at fair value. SFAS 159 seeks to
improve the overall quality of financial reporting by providing companies the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without requiring the application of
complex hedge accounting provisions. The Company adopted SFAS 159 on
January 1, 2008. Adoption of SFAS 159 did not have a material impact
on the Company’s consolidated financial condition or results of
operations.
In
September 2006, the Emerging Issues Task Force reached a consensus on Issue
06-4, "Accounting for Deferred Compensation and Postretirement Benefit Aspects
of Endorsement Split-Dollar Life Insurance Arrangements" ("EITF-06-4"). Under
EITF 06-4, an employer should recognize a liability for future benefits
associated with an endorsement split-dollar life insurance arrangement based on
the substantive agreement with the employee. If the substance of
these benefits is deemed comparable to benefits of a postretirement benefit
plan, the liability associated with the endorsement split-dollar life insurance
arrangement should be measured in accordance with SFAS 106. If the endorsement
split-dollar life insurance arrangement is, in substance, an individual deferred
compensation contract, then the liability should be measured in accordance with
Accounting Principles Board Opinion No. 12, "Omnibus Opinion-1967." ("APB
12").
Under
EITF 06-4, if the employer has agreed to maintain a life insurance policy during
the employee's retirement, the cost of the insurance policy during
postretirement periods should be accrued in accordance with either SFAS 106 or
APB 12. Similarly, if the employer has agreed to provide the employee with a
death benefit, the employer should accrue, over the service period, a liability
for the actuarial present value of the future death benefit as of the employee's
expected retirement date, in accordance with either SFAS 106 or APB
12. The Company adopted EITF 06-4 on January 1, 2008. As a
result of the adoption of EITF 06-4, the Company recorded a reduction of $528 to
the Company's consolidated stockholders' equity on January 1, 2008.
In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS
157"), which defined fair value, established a framework for measuring fair
value under GAAP, and expanded disclosures about fair value
measurements. Other current accounting pronouncements that require or
permit fair value measurements will require application of SFAS
157. SFAS 157 does not require any new fair value measurements,
however, changes the definition of, and methods used to measure, fair
value. SFAS 157 emphasizes fair value as a market-based, not
entity-specific, measurement. Under SFAS 157, a fair value measurement should be
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. Adoption of SFAS 157 did not have a material impact on the
Company’s consolidated financial condition or results of
operations.
In
September 2006, the Emerging Issues Task Force reached a consensus on Issue
06-5, "Accounting for Purchases of Life Insurance-Determining the Amount That
Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4" ("EITF
No. 06-5"). EITF No. 06-5 requires that a life insurance policyholder consider
contractual limitations in the policy when determining the realizable amount of
the insurance contract. In addition, EITF No. 06-5 requires that amounts
recoverable by the policyholder at the discretion of the insurance company be
excluded from the amount that could be realized under the insurance
contract. EITF No. 06-5 further requires that amounts
recoverable by the policyholder in periods beyond one year from the surrender of
the policy be recognized at a value discounted under a present value of cash
flows method. EITF No. 06-5 is effective for fiscal years beginning
after December 15, 2006 and requires that the effects of adoption be recognized
by a change in accounting principle through either (i) a cumulative-effect
adjustment to retained earnings as of the beginning of the year of adoption, or
(ii) retrospective application to all prior periods. Adoption of EITF
No. 06-5 did not have a material impact on the Company’s consolidated financial
condition or results of operations.
In
February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments" ("SFAS 155"). SFAS 155 amends both SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," and SFAS
No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." Among other matters, SFAS 155 resolves issues
addressed in SFAS 133 Implementation Issue No. D1, "Application of Statement 133
to Beneficial Interests in Securitized Financial Assets." SFAS 155 permits fair
value re-measurement for any hybrid financial instrument that contains an
embedded derivative that otherwise would require bifurcation, clarifies which
interest-only strips and principal-only strips are not subject to the
requirements of SFAS No. 133, establishes a requirement to evaluate interests in
securitized financial assets to identify interests that are freestanding
derivatives or that are hybrid financial instruments that contain an embedded
derivative requiring bifurcation, clarifies that concentrations of credit risk
in the form of subordination are not embedded derivatives, and amends SFAS 140
to eliminate the prohibition on a qualifying special purpose entity against
holding a derivative financial instrument that pertains to a beneficial interest
other than another derivative financial instrument. SFAS 155 is
effective for all financial instruments acquired, issued, or subject to a
re-measurement event occurring during fiscal years commencing after September
15, 2006. Adoption of SFAS 155 did not have a material impact
on the Company’s consolidated financial condition or results of
operations.
Use of Estimates in the Preparation
of the Consolidated Financial Statements - The preparation of the
consolidated financial statements in conformity with GAAP requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and 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
MSR, asset impairment adjustments related to the valuation of goodwill, and
other than temporary impairments of securities, loan income recognition, the
fair value of financial instruments, recognition of deferred tax asset and
unrecognized tax benefits and the accounting for defined benefit plans sponsored
by the Company.
Reclassification
– Certain amounts as of December 31, 2006 and 2005 have been
reclassified to conform to their presentation as of and for the year ended
December 31, 2007. In particular, effective January 1, 2006, the
Company reclassified prepayment and late charge fees on loans in all periods
presented from non-interest income into interest income as a result of a
classification change made by the Office of Thrift Supervision
("OTS"). The Company now recognizes all prepayment and late charge
fees on loans as net interest income instead of non-interest income in both its
financial and regulatory reports. Prepayment fee and late charge
income reclassified from non-interest income to interest income totaled $5,517
during the year ended December 31, 2005.
2. CONVERSION
TO STOCK FORM OF OWNERSHIP
On
November 2, 1995, the Board of Directors of the Bank adopted a Plan of
Conversion to convert from mutual to stock form of ownership. At the
time of conversion, the Bank established a liquidation account in an amount
equal to the retained earnings of the Bank as of the date of the most recent
financial statements contained in the final conversion prospectus. The
liquidation account is reduced annually to the extent that eligible account
holders have reduced their qualifying deposits as of each anniversary date.
Subsequent increases in deposits do not restore an eligible account holder's
interest in the liquidation account. In the event of a complete liquidation,
each eligible account holder will be entitled to receive a distribution from the
liquidation account in an amount proportionate to the adjusted qualifying
balances on the date of liquidation for accounts held
at conversion.
The
Holding Company acquired Conestoga Bancorp, Inc. ("Conestoga") on June 26,
1996. The liquidation account previously established by Conestoga's
subsidiary, Pioneer Savings Bank, F.S.B., during its initial public offering in
March 1993, was assumed by the Company in the acquisition.
The
Holding Company acquired FIBC on January 21, 1999. The liquidation
account previously established by FIBC's subsidiary, FFSB, during its initial
public offering, was assumed by the Company in the acquisition.
The
Holding Company may not declare or pay cash dividends on, or repurchase any of,
its shares of common stock if the effect thereof would cause stockholders'
equity to be reduced below either applicable regulatory capital maintenance
requirements, or the amount of the liquidation account, or if such declaration
or payment or repurchase would otherwise violate regulatory
requirements.
3. INVESTMENT
SECURITIES HELD-TO-MATURITY AND AVAILABLE-FOR-SALE
The
amortized cost, gross unrealized gains and losses and estimated fair value of
investment securities held-to-maturity at December 31, 2007 were as
follows:
|
Investment
Securities Held-to-Maturity
|
|||||||
|
Amortized
Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized
(Losses)
|
Estimated
Fair
Value
|
||||
|
Debt
Securities:
|
|||||||
|
Obligations
of state and political
subdivisions,
maturities of one-to-five years
|
$80
|
$-
|
$-
|
$80
|
|||
The
amortized/historical cost, gross unrealized gains and losses and estimated fair
value of investment securities available-for-sale at December 31, 2007 were as
follows:
|
Investment
Securities Available-for-Sale
|
|||||||
|
Amortized/
Historical
Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized
(Losses)
|
Estimated
Fair
Value
|
||||
|
Debt
securities:
|
|||||||
|
Municipal
agencies
|
$9,951
|
$94
|
$(17)
|
$10,028
|
|||
|
Corporate
and other
|
17,177
|
1
|
(223)
|
16,955
|
|||
|
Total
debt securities
|
27,128
|
95
|
(240)
|
26,983
|
|||
|
Equity
securities
|
7,573
|
111
|
(572)
|
7,112
|
|||
|
$34,701
|
$206
|
$(812)
|
$34,095
|
||||
The
amortized cost and estimated fair value of the debt securities component of
investment securities available-for-sale at December 31, 2007, by contractual
maturity, are shown below. Actual maturities may differ from contractual
maturities because issuers may have the right to call or prepay obligations with
or without call or prepayment fees.
|
Amortized
Cost
|
Estimated
Fair
Value
|
|
|
Due
in one year or less
|
$5,218
|
$5,190
|
|
Due
after one year through five years
|
348
|
351
|
|
Due
after five year through ten years
|
9,603
|
9,677
|
|
Due
after ten years
|
11,959
|
11,765
|
|
$27,128
|
$26,983
|
The
following summarizes the gross unrealized losses and fair value of investment
securities available-for-sale as of December 31, 2007, aggregated by investment
category and the length of time that the securities were in a continuous
unrealized loss position:
|
Less
than 12
Months
Consecutive
Unrealized
Losses
|
12
Months or More
Consecutive
Unrealized
Losses
|
Total
|
||||
|
Fair
Value
|
Gross
Unrealized Losses
|
Fair
Value
|
Gross
Unrealized Loss
|
Fair
Value
|
Gross
Unrealized Losses
|
|
|
Municipal
agencies
|
$2,679
|
$17
|
-
|
-
|
$2,679
|
$17
|
|
Corporate
securities
|
15,512
|
223
|
-
|
-
|
15,512
|
223
|
|
Equity
securities
|
1,245
|
58
|
$3,213
|
$514
|
4,458
|
572
|
|
$19,436
|
$298
|
$3,213
|
$514
|
$22,649
|
$812
|
|
At
December 31, 2007, the Company had two investment security positions that
possessed 12 months or more of consecutive unrealized losses, one of which was a
diversified mutual fund investment. The other security was a minor
equity investment in a financial institution that possessed an unrealized loss
of less than $2 as of December 31, 2007. Management does not believe
that any of the unrealized losses in the above table qualified as other-than
temporary impairments at December 31, 2007. In making this
determination, management considered the severity and duration of the loss, as
well as management's intent and ability to hold the security until substantial
recovery of the loss. Management also has no current intention to
dispose of these investments.
During
the year ended December 31, 2007, there were no sales of investment securities
available-for-sale.
The
amortized cost, gross unrealized gains and losses and estimated fair value of
investment securities held-to-maturity at December 31, 2006 were as
follows:
|
Investment
Securities Held-to-Maturity
|
|||||||
|
Amortized
Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized
(Losses)
|
Estimated
Fair
Value
|
||||
|
Debt
Securities:
|
|||||||
|
Obligations
of state and political
subdivisions,
maturities of one-to-five years
|
$235
|
$-
|
$-
|
$235
|
|||
The
amortized/historical cost, gross unrealized gains and losses and estimated fair
value of investment securities available-for-sale at December 31, 2006 were as
follows:
|
Investment
Securities Available-for-Sale
|
|||||||
|
Amortized/
Historical
Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized
(Losses)
|
Estimated
Fair
Value
|
||||
|
Debt
securities:
|
|||||||
|
Corporate
and other
|
$22,478
|
$123
|
$(1)
|
$22,600
|
|||
|
Total
debt securities
|
22,478
|
123
|
(1)
|
22,600
|
|||
|
Equity
securities
|
7,025
|
181
|
(258)
|
6,948
|
|||
|
$29,503
|
$304
|
$(259)
|
$29,548
|
||||
The
amortized cost and estimated fair value of the debt securities component of
investment securities available-for-sale at December 31, 2006, by contractual
maturity, are shown below. Actual maturities may differ from contractual
maturities because issuers may have the right to call or prepay obligations with
or without call or prepayment fees.
|
Amortized
Cost
|
Estimated
Fair
Value
|
|
|
Due
in one year or less
|
$1,000
|
$999
|
|
Due
after one year through five years
|
982
|
984
|
|
Due
after ten years
|
20,496
|
20,617
|
|
$22,478
|
$22,600
|
F-
The
following summarizes the gross unrealized losses and fair value of investment
securities available-for-sale as of December 31, 2006, aggregated by investment
category and the length of time that the securities were in a continuous
unrealized loss position:
|
Less
than 12
Months
Consecutive
Unrealized
Losses
|
12
Months or More
Consecutive
Unrealized
Losses
|
Total
|
||||
|
Fair
Value
|
Gross
Unrealized Losses
|
Fair
Value
|
Gross
Unrealized Loss
|
Fair
Value
|
Gross
Unrealized Losses
|
|
|
Debt
securities:
|
||||||
|
Corporate
securities
|
-
|
-
|
999
|
1
|
999
|
1
|
|
Equity
securities
|
4,354
|
257
|
4
|
1
|
4,358
|
258
|
|
$4,354
|
$257
|
$1,003
|
$2
|
$5,357
|
$259
|
|
At
December 31, 2006, the Company had four investment security positions that
possessed 12 months or more of consecutive unrealized losses. One of
the four securities matured and was paid in full on January 15,
2007. Two of the three remaining securities were comprised of
diversified mutual fund investments. The final security was a minor
equity investment in a financial institution that possessed an unrealized loss
of less than $1 as of December 31, 2006. Management does not believe
that any of the unrealized losses in the above table qualified as other-than
temporary impairments at December 31, 2006. In making this
determination, management considered the severity and duration of the loss, as
well as management's intent and ability to hold the security until substantial
recovery of the loss. Management also has no current intention to
dispose of these investments.
During
the year ended December 31, 2006, proceeds from the sale of investment
securities available-for-sale totaled $3,032. A net gain of $1,063
was recorded on these sales.
4. MORTGAGE-BACKED
SECURITIES AVAILABLE-FOR-SALE
The
amortized cost, gross unrealized gains and losses and estimated fair value of
MBS available-for-sale at December 31, 2007 were as follows:
|
Mortgage-Backed
Securities Available-for-Sale
|
||||
|
Amortized
Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized
(Losses)
|
Estimated
Fair
Value
|
|
|
Collateralized
mortgage obligations ("CMOs")
|
$119,386
|
$-
|
$(2,158)
|
$117,228
|
|
Federal
Home Loan Mortgage Corporation
pass-through
certificates
|
31,174
|
437
|
-
|
31,611
|
|
FNMA
pass-through certificates
|
12,677
|
77
|
(108)
|
12,646
|
|
Governmental
National Mortgage Association
("GNMA")
pass-through certificates
|
1,266
|
13
|
-
|
1,279
|
|
$164,503
|
$527
|
$(2,266)
|
$162,764
|
|
At
December 31, 2007, MBS available-for-sale possessed a weighted average
contractual maturity of 15.8 years and a weighted average estimated duration of
2.5 years.
F-
The
following summarizes the gross unrealized losses and fair value of MBS available
for sale at December 31, 2007, aggregated by investment category and the length
of time that the securities were in a continuous unrealized loss
position:
|
Less
than 12
Months
Consecutive
Unrealized
Losses
|
12
Months or More
Consecutive
Unrealized
Losses
|
Total
|
||||
|
Fair
Value
|
Gross
Unrealized Losses
|
Fair
Value
|
Unrealized
Loss
|
Fair
Value
|
Gross
Unrealized Losses
|
|
|
CMOs
|
$-
|
$-
|
$7,860
|
$108
|
$7,860
|
$108
|
|
FNMA
pass-through certificates
|
-
|
-
|
117,227
|
2,158
|
117,227
|
2,158
|
|
$-
|
$-
|
$125,087
|
$2,266
|
$125,087
|
$2,266
|
|
At
December 31, 2007, there were twenty-three MBS positions that possessed 12
months or more of consecutive unrealized losses. The unrealized loss
for all twenty-three securities resulted solely from changes in interest rates
subsequent to acquisition of the security. Management does not
believe that any of the unrealized losses in the above table qualified as
other-than temporary impairments at December 31, 2007. In making this
determination, management considered the severity and duration of the loss, as
well as management's intent and ability to hold the security until substantial
recovery of the loss. Management also has no current intention to
dispose of these investments. At December 31, 2007, all of the FNMA
pass-through certificates and CMOs that possessed unrealized losses for 12 or
more consecutive months had the highest possible credit quality
rating.
The
amortized cost, gross unrealized gains and losses and estimated fair value of
MBS available-for-sale at December 31, 2006 were as follows:
|
Mortgage-Backed
Securities Available-for-Sale
|
||||
|
Amortized
Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized
(Losses)
|
Estimated
Fair
Value
|
|
|
CMOs
|
$148,461
|
$-
|
$(5,304)
|
$143,157
|
|
GNMA
pass-through certificates
|
1,773
|
19
|
-
|
1,792
|
|
FNMA
pass-through certificates
|
9,862
|
-
|
(374)
|
9,488
|
|
$160,096
|
$19
|
$(5,678)
|
$154,437
|
|
At
December 31, 2006, MBS available-for-sale possessed a weighted average
contractual maturity of 13.4 years and a weighted average estimated duration of
2.6 years.
The
following summarizes the gross unrealized losses and fair value of MBS available
for sale at December 31, 2006, aggregated by investment category and the length
of time that the securities were in a continuous unrealized loss
position:
|
Less
than 12
Months
Consecutive
Unrealized
Losses
|
12
Months or More
Consecutive
Unrealized
Losses
|
Total
|
||||
|
Fair
Value
|
Gross
Unrealized Losses
|
Fair
Value
|
Gross
Unrealized Loss
|
Fair
Value
|
Goss
Unrealized Losses
|
|
|
Debt
securities:
|
||||||
|
CMOs
|
$-
|
$-
|
$143,157
|
$5,304
|
$143,157
|
5,304
|
|
FNMA
pass-through certificates
|
-
|
-
|
9,488
|
374
|
9,488
|
374
|
|
$-
|
$-
|
$152,645
|
$5,678
|
$152,645
|
$5,678
|
|
At
December 31, 2006, there were twenty-four MBS positions that possessed 12 months
or more of consecutive unrealized losses. The unrealized loss for all
twenty-four securities resulted solely from changes in interest rates subsequent
to acquisition of the security. Management does not believe that any
of the unrealized losses in the above table qualified as other-than temporary
impairments at December 31, 2006. In making this determination,
management considered the severity and duration of the loss, as well as
management's intent and ability to hold the security until substantial recovery
of the loss. Management also has no current intention to dispose of
these investments.
5. LOANS
The
Bank's real estate loans were composed of the following:
|
December
31,
2007
|
December
31,
2006
|
|
|
One-
to four-family
|
$139,416
|
$146,613
|
|
Multifamily
residential
|
1,948,000
|
1,853,880
|
|
Commercial
real estate
|
728,129
|
666,927
|
|
Construction
and land acquisition
|
49,387
|
23,340
|
|
Federal
Housing Authority and Veterans Administration
Insured
mortgage loans
|
1,029
|
1,236
|
|
Cooperative
apartment unit loans
|
6,172
|
7,224
|
|
2,872,133
|
2,699,220
|
|
|
Net
unearned costs
|
1,833
|
1,048
|
|
$2,873,966
|
$2,700,268
|
The Bank
originates both adjustable and fixed interest rate real estate
loans. At December 31, 2007, the approximate composition of these
loans was as follows:
|
Fixed
Rate
|
Adjustable
Rate
|
|||
|
Period
to Maturity
|
Book
Value
|
Earlier
of Period to Maturity
or
Next Repricing
|
Book
Value
|
|
|
1
year or less
|
$21,461
|
1
year or less
|
$373,824
|
|
|
>
1 year-3 years
|
37,066
|
>
1 year-3 years
|
735,852
|
|
|
>
3 years-5 years
|
58,803
|
>
3 years-5 years
|
1,001,000
|
|
|
>
5 years-10 years
|
209,450
|
>
5 years-10 years
|
299,403
|
|
|
>
10 years
|
134,580
|
>
10 years
|
694
|
|
|
$461,360
|
$2,410,773
|
|||
The
adjustable-rate loans are generally indexed to the Federal Home Loan Bank of New
York ("FHLBNY") five-year borrowing rate, or the one- or three-year constant
maturity Treasury index. The contractual terms of adjustable rate
multifamily residential and commercial real estate loans provide that their
interest rate, upon repricing, cannot fall below their rate at the time of
origination. The Bank's one- to four-family residential
adjustable-rate loans are subject to periodic and lifetime caps and floors on
interest rate changes that typically range between 200 and 650 basis
points.
A
concentration of credit risk existed within the Bank's loan portfolio at
December 31, 2007, as the majority of real estate loans on that date were
collateralized by properties located in the New York City metropolitan
area.
At
December 31, 2007, the Bank had $420,808 of loans in its portfolio that featured
interest only payments. These loans subject the Bank to additional
risk since their principal balance will not be reduced significantly prior to
contractual maturity. In addition at December 31, 2007, the Bank
possessed a loss exposure of up to $20,409 in connection with $70,677 of
interest only loans sold to FNMA.
F-
The
Bank's other loans were composed of the following:
|
December
31,
2007
|
December
31,
2006
|
|
|
Passbook
loans (secured by savings
and
time deposits)
|
$1,122
|
$1,172
|
|
Consumer
installment and other loans
|
1,047
|
1,033
|
|
$2,169
|
$2,205
|
Loans on
which the accrual of interest was discontinued were $2,856 and $3,606 at
December 31, 2007 and 2006, respectively. Interest income foregone on
nonaccrual loans was $108 during the year ended December 31, 2007, $131 during
the year ended December 31, 2006, and was immaterial during the year ended
December 31, 2005.
The Bank
had no loans considered troubled-debt restructurings at December 31, 2007 and
2006.
At
December 31, 2007, there were six loans totaling $2,814 deemed impaired under
Amended SFAS 114, compared to six loans totaling $3,514 as of December 31,
2006. The average balance of impaired loans was approximately $2,717
during the year ended December 31, 2007, $1,920 during the year ended December
31, 2006, and $2,309 during the year ended December 31, 2005. There
were no write-downs on impaired loans during the years ended December 31, 2007,
2006 and 2005. At December 31, 2007 and 2006, reserves allocated
within the allowance for loan losses for impaired loans totaled $348 and $351,
respectively. Net principal received on impaired loans totaled $1,950
and net interest received on impaired loans totaled $326 during the year ended
December 31, 2007. Net principal received on impaired loans totaled
$628 and net interest received on impaired loans totaled $132 during the year
ended December 31, 2006. Net principal received on impaired loans
totaled $10,755 and net interest received on impaired loans totaled $1,189
during the year ended December 31, 2005.
The
following assumptions were utilized in evaluating the loan portfolio pursuant to
the provisions of Amended SFAS 114:
Homogenous Loans - Individual
one- to four-family residential mortgage loans and cooperative apartment loans
having a balance of $417 or less and all consumer loans were considered to be
small balance homogenous loan pools and, accordingly, not subject to Amended
SFAS 114.
Loans Evaluated for
Impairment - All non-homogeneous loans greater than $1,000 were
individually evaluated for potential impairment. Additionally, individual one-
to four-family residential and cooperative apartment unit mortgage loans
exceeding $417 and delinquent in excess of 60 days were evaluated for
impairment. A loan is considered impaired when it is probable that
all contractual amounts due will not be collected in accordance with the terms
of the loan. A loan is not deemed to be impaired, even during a period of
delayed payment by the borrower, if the Bank ultimately expects to collect all
amounts due, including interest accrued at the contractual
rate. At December 31, 2007 and 2006, all impaired loans were on
nonaccrual status. In addition at December 31, 2007 and 2006, approximately $42
and $92, respectively, of one- to four-family residential and cooperative
apartment loans with a balance of $417 or less and consumer loans were on
nonaccrual status. These loans are considered as a homogeneous loan pool not
subject to Amended SFAS 114.
Reserves and Charge-Offs -
The Bank allocates a portion of its total allowance for loan losses to loans
deemed impaired under Amended SFAS 114. All charge-offs on impaired loans are
recorded as a reduction in both loan principal and the allowance for loan
losses. Management evaluates the adequacy of its allowance for loan losses on a
regular basis. Management believes that its allowance for impaired
loans was adequate at December 31, 2007 and 2006.
Measurement of Impairment -
Since all impaired loans are secured by real estate properties, the fair
value of the collateral is utilized to measure impairment. The fair
value of the collateral is measured as soon as practicable after the loan
becomes impaired and periodically thereafter.
Income Recognition - Accrual
of interest is discontinued on loans identified as impaired and past due ninety
days. Cash payments received on impaired loans subsequent to discontinuation of
interest accruals are generally applied initially to principal.
F-
6. ALLOWANCE
FOR LOAN LOSSES
Changes
in the allowance for loan losses were as follows:
|
Year
Ended December 31,
|
|||
|
2007
|
2006
|
2005
|
|
|
Balance
at beginning of period
|
$15,514
|
$15,785
|
$15,543
|
|
Provision
charged to operations
|
240
|
240
|
340
|
|
Loans
charged off
|
(28)
|
(50)
|
(76)
|
|
Recoveries
|
19
|
23
|
31
|
|
Transfer
(to) from reserves on loan commitments
|
(358)
|
(484)
|
(53)
|
|
Balance
at end of period
|
$15,387
|
$15,514
|
$15,785
|
7. MORTGAGE
SERVICING ACTIVITIES
At
December 31, 2007, 2006 and 2005, the Bank was servicing loans for others having
principal balances outstanding of approximately $563,383, $519,165, and
$413,662, respectively. Servicing loans for others generally consists
of collecting mortgage payments, maintaining escrow accounts, disbursing
payments to investors, paying taxes and insurance, and foreclosure
processing. The deferred servicing rights related to these loans
totaled $2,496 and $2,592 at December 31, 2007 and 2006, respectively, including
the servicing rights associated with the multifamily loans sold to FNMA
discussed below totaling $2,268 and $2,339 at December 31, 2007 and 2006,
respectively. MSR recognized from loan sales were $493, $815 and $424
during the years ended December 31, 2007, 2006 and 2005,
respectively. Amortization of servicing rights was $589, $569 and
$578 during the years ended December 31, 2007, 2006 and 2005,
respectively. MSR are accounted for in accordance with SFAS 156,
which was adopted by the Bank on January 1, 2007, and did not create a material
change in the Bank's existing accounting practices. In connection
with loans serviced for others, the Bank held borrowers' escrow balances of
approximately $7,121 and $6,518 at December 31, 2007 and 2006,
respectively.
Multifamily Loans Sold To
FNMA - The Bank
implemented a program in December 2002 to originate and sell multifamily
residential mortgage loans in the secondary market to FNMA while retaining
servicing. The Bank underwrites these loans using its customary underwriting
standards, funds the loans, and sells them to FNMA at agreed upon pricing. At
December 31, 2007 and 2006, the Bank serviced $541,868 and $494,770,
respectively, of loans sold pursuant to this program with corresponding loan
servicing assets of $2,268 and $2,339, respectively. Amortization of
these servicing rights was $562, $543 and $559 during the years ended December
31, 2007, 2006 and 2005, respectively. Under the terms of the sales
program, the Bank retains a portion of the associated credit risk. At December
31, 2007 and 2006, the Bank's maximum potential exposure related to secondary
market sales to FNMA with respect to this specific program was $20,409 and
$18,495, respectively. The Bank retains this level of 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. As of December
31, 2007 and 2006, the Bank had not realized any losses related to these
loans. Reserves of
$2,436 and $2,223 were established as of December 31, 2007 and 2006,
respectively, related to this exposure. The reserve recorded relating
to this exposure was included in the calculation of the gain on the sale of the
loans. No additional provisions relating to this exposure were
recorded during the years ended December 31, 2007, 2006 and
2005.
F-
Key
economic assumptions and the sensitivity of the current fair value of residual
cash flows to immediate 10 and 20 percent adverse changes in those assumptions
are as follows:
|
At
December
31,
2007
|
At
December
31,
2006
|
At
December
31,
2005
|
|
|
Net
carrying value of the servicing asset
|
$2,268
|
$2,339
|
$2,074
|
|
Fair
value of the servicing asset
|
3,914
|
3,556
|
2,890
|
|
Weighted
average life (in years)
|
8.25
|
8.25
|
8.25
|
|
Prepayment
speed assumptions (annual rate)
|
151
PSA
|
151
PSA
|
151
PSA
|
|
Impact
on fair value of 10% adverse change
|
$(89)
|
$(76)
|
$(60)
|
|
Impact
on fair value of 20% adverse change
|
$(174)
|
$(150)
|
$(118)
|
|
Expected
credit losses (annual rate)
|
$13
|
$65
|
$13
|
|
Impact
on fair value of 10% adverse change
|
$(1)
|
$(1)
|
$(4)
|
|
Impact
on fair value of 20% adverse change
|
$(3)
|
$(3)
|
$(9)
|
|
Residual
cash flows discount rate (annual rate)
|
12.75%
|
13.75%
|
12.75%
|
|
Impact
on fair value of 10% adverse change
|
$(107)
|
$(101)
|
$(70)
|
|
Impact
on fair value of 20% adverse change
|
$(207)
|
$(195)
|
$(137)
|
|
Average
Interest rate on adjustable rate loans
|
5.66%
|
5.62%
|
5.41%
|
|
Impact
on fair value of 10% adverse change
|
-
|
-
|
-
|
|
Impact
on fair value of 20% adverse change
|
-
|
-
|
-
|
8. PREMISES
AND FIXED ASSETS
The
following is a summary of premises and fixed assets:
|
December
31,
2007
|
December
31,
2006
|
|
|
Land
|
$7,237
|
$7,237
|
|
Buildings
|
21,532
|
20,293
|
|
Leasehold
improvements
|
5,209
|
4,856
|
|
Furniture,
fixtures and equipment
|
14,558
|
13,586
|
|
48,536
|
45,972
|
|
|
Less: accumulated
depreciation and amortization
|
(24,658)
|
(23,086)
|
|
$23,878
|
$22,886
|
Depreciation
and amortization expense amounted to approximately $1,574, $1,459 and $1,371
during the years ended December 31, 2007, 2006 and 2005,
respectively.
9. FEDERAL
HOME LOAN BANK OF NEW YORK CAPITAL STOCK
The Bank
is a Savings Bank Member of the FHLBNY. Membership requires the
purchase of shares of FHLBNY capital stock at $100 per share. The Bank owned
390,294 shares and 312,948 shares at December 31, 2007 and 2006, respectively.
The Bank recorded dividends on the FHLBNY capital stock of $2,169, $1,688 and
$1,139 during the years ended December 31, 2007, 2006 and 2005,
respectively.
F-
10. DUE
TO DEPOSITORS
Deposits
are summarized as follows:
|
At
December 31, 2007
|
At
December 31, 2006
|
|||
|
Effective
Cost
|
Liability
|
Effective
Cost
|
Liability
|
|
|
Savings
accounts
|
0.55%
|
$274,067
|
0.59%
|
$298,522
|
|
Certificates
of deposit
|
4.61
|
1,077,087
|
4.76
|
1,064,669
|
|
Money
market accounts
|
4.04
|
678,759
|
3.56
|
514,607
|
|
NOW
and Super NOW accounts
|
2.28
|
58,414
|
1.08
|
35,519
|
|
Checking
accounts
|
0.15
|
91,671
|
-
|
95,215
|
|
3.67%
|
$2,179,998
|
3.54%
|
$2,008,532
|
|
The
distribution of certificates of deposit by remaining maturity was as
follows:
|
At
December 31,
|
At
December 31,
|
|
|
2007
|
2006
|
|
|
Maturity
in one year or less
|
$968,128
|
$961,009
|
|
Over
one year through three years
|
99,928
|
85,435
|
|
Over
three years to five years
|
9,021
|
18,225
|
|
Over
five years
|
10
|
-
|
|
Total
certificates of deposit
|
$1,077,087
|
$1,064,669
|
The
aggregate amount of certificates of deposit with a minimum denomination of
one-hundred thousand dollars was approximately $364,591 and $356,584 at December
31, 2007 and 2006, respectively.
11. SECURITIES
SOLD UNDER AGREEMENTS TO REPURCHASE
Presented
below is information concerning securities sold under agreements to
repurchase:
|
At
or for the
Fiscal
Year
Ended
December 31,
|
||
|
2007
|
2006
|
|
|
Balance
outstanding at end of period
|
$155,080
|
$120,235
|
|
Average
interest cost at end of period
|
4.53%
|
3.54%
|
|
Average
balance outstanding during the period
|
$132,685
|
$134,541
|
|
Average
interest cost during the period
|
4.11%
|
1.95%(a)
|
|
Carrying
amount of underlying collateral
|
$163,116
|
$126,830
|
|
Estimated
fair value of underlying collateral
|
$163,116
|
$126,830
|
|
Maximum
balance outstanding at month end during the year
|
$155,160
|
$205,455
|
(a)
During the year ended December 31, 2006, the Company recorded a reduction of
$2,176 in interest expense on securities sold under agreements to repurchase
that were prepaid. Excluding this reduction, the average cost of
securities sold under agreements to repurchase would have been 3.56% during the
year ended December 31, 2006.
12. FEDERAL
HOME LOAN BANK OF NEW YORK ADVANCES
The Bank
had borrowings (''Advances'') from the FHLBNY totaling $706,500 and $571,500 at
December 31, 2007 and 2006, respectively. The average interest cost
of FHLBNY Advances was 4.30%, 4.69%, and 4.48% during the years ended December
31, 2007, 2006 and 2005, respectively. During the year ended December
31, 2006, the Company incurred $1,369 in additional interest expense related to
the prepayment of FHLBNY Advances. Excluding this increase, the
average cost of FHLBNY Advances would have been 4.45% during the year ended
December 31, 2006. The average interest rate on outstanding FHLBNY Advances was
4.07% and 4.37% at December 31, 2007 and 2006, respectively. At
December 31, 2007, in accordance with its Advances, Collateral Pledge and
Security Agreement with the FHLBNY, the Bank maintained the requisite qualifying
collateral with the FHLBNY (principally real estate loans), as defined by the
FHLBNY, to secure such Advances. At December 31, 2007, the FHLBNY
Advances had contractual maturities ranging from September 2008 through December
2017. Certain of the FHLBNY Advances outstanding at December 31, 2007
contained call features that may be exercised by the FHLBNY.
13. SUBORDINATED
NOTES PAYABLE AND TRUST PREFERRED SECURITIES PAYABLE
On April
12, 2000, the Holding Company issued subordinated notes in the aggregate amount
of $25,000. The notes have a 9.25% fixed rate of interest and mature on May 1,
2010. Interest expense recorded on the notes, inclusive of
amortization of related issuance costs, was $2,396 during each of the years
ended December 31, 2007, 2006 and 2005.
On March
19, 2004, the Holding Company completed an offering of an aggregate amount of
$72,165 of trust preferred securities through Dime Community Capital Trust I, an
unconsolidated special purpose entity formed for the purpose of the
offering. Of the total amount offered, the Holding Company retained
ownership of $2,165 of the securities. The trust preferred securities
bear a fixed interest rate of 7.0%, mature on April 14, 2034, and are callable
without penalty at any time on or after April 15, 2009.
Interest
expense recorded on the trust preferred securities totaled $5,129 during each of
the years ended December 31, 2007, 2006 and 2005. Of the total
interest payments, $152 was paid to the Holding Company in each of 2007, 2006
and 2005 related to its $2,165 investment in the securities, and was recorded in
other non-interest income.
14. INCOME
TAXES
The
Company's consolidated Federal, State and City income tax provisions were
comprised of the following:
|
Year
Ended December 31,
|
Year
Ended December 31,
|
Year
Ended December 31,
|
|||||||||
|
2007
|
2006
|
2005
|
|||||||||
|
Federal
|
State
and
City
|
Total
|
Federal
|
State
and
City
|
Total
|
Federal
|
State
and
City
|
Total
|
|||
|
Current
|
$11,976
|
$2,106
|
$14,082
|
$15,385
|
$1,564
|
$16,949
|
$18,919
|
$1,960
|
$20,879
|
||
|
Deferred
|
(204)
|
(630)
|
(834)
|
(176)
|
279
|
103
|
(691)
|
42
|
(649)
|
||
|
$11,772
|
$1,476
|
$13,248
|
$15,209
|
$1,843
|
$17,052
|
$18,228
|
$2,002
|
$20,230
|
|||
The
preceding table excludes tax effects recorded directly to stockholders’ equity
in connection with unrealized gains and losses on securities available-for-sale,
stock-based compensation plans, and adjustments to other comprehensive income
relating to the minimum pension liability, unrecognized gains of pension and
other postretirement obligations and the adoption of SFAS 158. These
tax effects are disclosed as part of the presentation of the consolidated
Statements of Changes in Stockholders’ Equity and Comprehensive
Income.
The
provision for income taxes differed from that computed at the Federal statutory
rate as follows:
|
Year
Ended December 31,
|
|||
|
2007
|
2006
|
2005
|
|
|
Tax
at Federal statutory rate
|
$12,492
|
$16,675
|
$19,754
|
|
State
and local taxes, net of
Federal
income tax benefit
|
959
|
1,198
|
1,156
|
|
Benefit
plan differences
|
(37)
|
(159)
|
(3)
|
|
Adjustments
for prior period tax returns
|
641
|
(42)
|
(50)
|
|
Investment
in BOLI
|
(880)
|
(654)
|
(660)
|
|
Other,
net
|
73
|
34
|
33
|
|
$13,248
|
$17,052
|
$20,230
|
|
|
Effective
tax rate
|
37.12%
|
35.79%
|
35.84%
|
In
accordance with SFAS 109, "Accounting for Income Taxes," deferred tax assets and
liabilities are recorded for temporary differences between the book and tax
bases of assets and liabilities.
The
components of Federal and State and City deferred income tax assets and
liabilities were as follows:
|
At
December 31,
|
||
|
Deferred
tax assets:
|
2007
|
2006
|
|
Excess
book bad debt over tax bad debt reserve
|
$7,156
|
$6,625
|
|
Employee
benefit plans
|
7,063
|
7,671
|
|
Tax
effect of other comprehensive income on securities
available-for-sale
|
1,079
|
2,548
|
|
State
net operating loss carryforwards expiring in 2027 and 2026
|
873
|
136
|
|
Other
|
504
|
452
|
|
Total
deferred tax assets
|
16,675
|
17,432
|
|
Deferred
tax liabilities:
|
||
|
Difference
in book and tax carrying value of fixed assets
|
600
|
498
|
|
Tax
effect of purchase accounting fair value adjustments
|
179
|
194
|
|
Other
|
103
|
296
|
|
Total
deferred tax liabilities
|
882
|
$988
|
|
Valuation
Allowance for State net operating loss carryforwards
|
873
|
136
|
|
Net
deferred tax asset (recorded in other assets)
|
$14,920
|
$16,308
|
At
December 31, 2007 and 2006, respectively, a valuation allowance of $873 and $136
was established against the deferred tax asset associated with State net
operating loss carryforwards. No other valuation allowances were
recognized during the years ended December 31, 2007 and 2006, since, at each
period end, it was more likely than not that the deferred tax assets would be
fully realized.
At
December 31, 2007, the Bank had approximately $60,000 of bad debt reserves for
New York State and New York City income tax purposes for which no provision for
income tax was required to be recorded. However, these bad debt
reserves could be subject to recapture into taxable income under certain
circumstances. Approximately $15,000 of the Bank’s previously
accumulated bad debt deductions were similarly subject to potential recapture
for federal income tax purposes at December 31, 2007. New York State
and federal recapture liabilities could be triggered by certain actions,
including a distribution of these bad debt benefits to the Holding Company or
the failure of the Bank to qualify as a bank for federal or New York State and
New York City tax purposes.
In order
for the Bank to permissibly maintain a New York State and New York City tax bad
debt reserve for thrifts, certain thrift definitional tests must be satisfied on
an ongoing basis. These include maintaining at least 60% of assets in
thrift qualifying assets, as defined for tax purposes, and maintaining a thrift
charter. If the Bank fails to satisfy these definitional tests, it would be
required to transition to the reserve method permitted to commercial banks under
New York State and New York City income tax law, which would result in an
increase in the New York State and New York City income tax provision, and a
deferred tax liability would be established to reflect the eventual recapture of
some or all of the New York State and New York City bad debt
reserve.
The
Company expects to take no action in the foreseeable future that would require
the establishment of a tax liability associated with these bad debt
reserves.
The
Company is subject to regular examination by various tax authorities in
jurisdictions in which the Company conducts significant business
operations. The Company regularly assesses the likelihood of
additional assessments in each of the tax jurisdictions resulting from ongoing
assessments.
The
Company adopted FIN 48 on January 1, 2007. FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in financial statements
prepared in accordance with SFAS 109, "Accounting for Income Taxes." FIN 48
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. FIN 48 also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. Pursuant to FIN 48, a tax position
adopted is subjected to two levels of evaluation. Initially, a
determination is made as to whether it is more likely than not that a tax
position will be sustained upon examination, including resolution of any related
appeals or litigation processes, based on the technical merits of the position.
In conducting this evaluation, management is required to presume that the
position will be examined by the appropriate taxing authority possessing full
knowledge of all relevant information. The second level of evaluation is the
measurement of a tax position that satisfies the more-likely-than-not
recognition threshold. This measurement is performed in order to
determine the amount of benefit to recognize in the financial statements. The
tax position is measured at the largest amount of benefit that is greater than
50 percent likely of being realized upon ultimate settlement. FIN 48
further requires tabular disclosure of material activity related to unrecognized
tax benefits that do not satisfy the recognition provisions established under
FIN 48. The adoption of FIN 48 on January 1, 2007 resulted in an
increase of $1.7 million in the liability for unrecognized tax benefits, which
was accounted for as a reduction of the Company's consolidated January 1, 2007
balance of retained earnings.
The
following table reconciles the Company's gross unrecognized tax
benefits:
|
Gross
unrecognized tax benefits at January 1, 2007
|
$2,716
|
|
|
Lapse
of statue of limitations
|
(183)
|
|
|
Gross
increases – current period tax positions
|
73
|
|
|
Gross
decreases – prior period tax positions
|
(332)
|
|
|
Gross
unrecognized tax benefits at December 31, 2007
|
$2,274
|
If
recognized, the net unrecognized tax benefits as of December 31, 2007 would have
reduced the Company's consolidated income tax expense by $1.4 million (excluding
interest of $331), all of which would have favorably impacted the Company's
consolidated effective tax rate.
Interest
and penalties associated with unrecognized tax benefits approximated $648 and
$509 at January 1, 2007 and December 31, 2007, respectively. The
Company recognizes interest accrued related to unrecognized tax benefits and
penalties as income tax expense. Related to the unrecognized tax
benefits noted above, the Company reversed interest of $139 during 2007 and in
total, as of December 31, 2007, has an unrecognized tax liability for interest
of $331, and no unrecognized tax liability for penalties.
All
entities for which unrecognized tax benefits existed as of December 31, 2007
possess a June 30th tax
year-end. As a result, as of December 31, 2007, the tax years ended
June 30, 2004 through June 30, 2007 remained subject to examination by all tax
jurisdictions. The Company is currently under audit by taxing
jurisdictions. As a result, it is reasonably possible that an amount
ranging from 30% to 50% of the unrecognized tax benefits (including interest)
could be recognized within the next twelve months.
15. EMPLOYEE
BENEFIT PLANS
Employee Retirement Plan -
The Bank sponsors the Employee Retirement Plan, a tax-qualified,
noncontributory, defined-benefit retirement plan. Prior to April 1,
2000, substantially all full-time employees of at least 21 years of age were
eligible for participation after one year of service. Effective April
1, 2000, the Bank froze all participant benefits under the Employee Retirement
Plan.
The net
periodic (credit)cost for the Employee Retirement Plan included the following
components:
|
Year
Ended December 31,
|
|||
|
2007
|
2006
|
2005
|
|
|
Interest
cost
|
1,071
|
1,041
|
1,068
|
|
Expected
return on plan assets
|
(1,799)
|
(1,753)
|
(1,650)
|
|
Net
amortization and deferral
|
470
|
580
|
545
|
|
Net
periodic (credit) cost
|
$(258)
|
$(132)
|
$(37)
|
Major
assumptions utilized to determine the net periodic cost (credit) were as
follows:
|
Year
Ended December 31,
|
|||
|
2007
|
2006
|
2005
|
|
|
Discount
rate
|
5.875%
|
5.50%
|
6.125%
|
The
funded status of the Employee Retirement Plan was as follows:
|
At
December 31,
|
||
|
2007
|
2006
|
|
|
Accumulated
benefit obligation at end of period
|
$18,357
|
$18,753
|
|
Reconciliation
of Projected benefit obligation:
|
||
|
Projected
benefit obligation at beginning of period
|
$18,753
|
$19,450
|
|
Interest
cost
|
1,070
|
1,041
|
|
Actuarial
gain
|
(430)
|
(652)
|
|
Benefit
payments
|
(1,036)
|
(1,049)
|
|
Settlements
|
-
|
(37)
|
|
Projected
benefit obligation at end of period
|
18,357
|
18,753
|
|
Plan
assets at fair value (investments in trust funds managed by
trustee)
|
||
|
Balance
at beginning of period
|
20,509
|
20,000
|
|
Return
on plan assets
|
2,699
|
1,595
|
|
Contributions
|
-
|
-
|
|
Benefit
payments
|
(1,036)
|
(1,049)
|
|
Settlements
|
-
|
(37)
|
|
Balance
at end of period
|
22,172
|
20,509
|
|
Funded
status:
|
||
|
Excess
of plan assets over projected benefit obligation
|
3,815
|
1,756
|
|
Unrecognized
loss from experience different from that assumed
|
N/A
|
N/A
|
|
Prepaid
retirement expense included in other assets
|
$3,815
|
$1,756
|
For the
years ended December 31, 2007 and 2006, the Bank used October 1st as its
measurement date for the Employee Retirement Plan. The Bank does not
anticipate making any contributions to the Employee Retirement Plan in
2008. During the year ending December 31, 2008, $268 in actuarial
losses are anticipated to be recognized as a component of net periodic
cost.
Major
assumptions utilized to determine the benefit obligations at December 31, 2007
and 2006 were as follows:
|
At
December 31,
|
||
|
2007
|
2006
|
|
|
Discount
rate
|
6.29%
|
5.875%
|
|
Expected
long-term return on plan assets
|
9.00
|
9.00
|
Employee
Retirement Plan assets are invested in six diversified investment funds of RSI
Retirement Trust (the "Trust"), a no-load series open-ended mutual
fund. The investment funds include four equity mutual funds and two
bond mutual funds, each with its own investment objectives, strategies and
risks, as detailed in the Trust's prospectus. All of the investment
funds have quoted market prices. The Trust has been given discretion
by the plan sponsor to determine the appropriate strategic asset allocation
versus plan liabilities, as governed by the Trust's Statement of Investment
Objectives and Guidelines (the "Guidelines").
The
long-term investment objective is to be invested 65% in equity mutual funds and
35% in bond mutual funds. If the plan is underfunded under the
Guidelines, the bond fund portion will be temporarily increased to 50% in order
to lessen asset value volatility. When the Employee Retirement Plan
is no longer underfunded, the bond fund portion will be returned to
35%. Asset rebalancing is performed at least annually, with interim
adjustments performed when the investment mix varies in excess of 10% from the
target.
The
investment goal is to achieve investment results that will contribute to the
proper funding of the Employee Retirement Plan by exceeding the rate of
inflation over the long-term. In addition, investment managers for
the Trust are expected to provide above average performance when compared to
their peer managers. Performance volatility is also
monitored. Risk/volatility is further managed by the distinct
investment objectives of each of the Trust funds and the diversification within
each fund.
The
weighted average allocation by asset category of the assets of the Employee
Retirement Plan were summarized as follows:
|
At
December 31,
|
||
|
2007
|
2006
|
|
|
Asset
Category
|
||
|
Equity
securities
|
70%
|
73%
|
|
Debt
securities (bond mutual funds)
|
30
|
27
|
|
Total
|
100%
|
100%
|
The
allocation percentages in the above table are consistent with future planned
allocation percentages as of December 31, 2007.
The
expected long-term rate of return assumptions on Employee Retirement Plan assets
were established based upon historical returns earned by equities and fixed
income securities, adjusted to reflect expectations of future returns as applied
to the Employee Retirement Plan's target allocation of asset
classes. Equities and fixed income securities were assumed to earn
real rates of return in the ranges of 5% to 9% and 2% to 6%,
respectively. The long-term inflation rate was estimated to be
3%. When these overall return expectations are applied to the plan's
target allocation, the expected rate of return is determined to be 9.0%, which
approximates the midpoint of the range of the expected return.
Benefit
payments, which reflect expected future service (as appropriate), are
anticipated to be made as follows:
|
Year
Ending December 31,
|
||
|
2008
|
$1,197
|
|
|
2009
|
1,218
|
|
|
2010
|
1,215
|
|
|
2011
|
1,216
|
|
|
2012
|
1,266
|
|
|
2013
to 2017
|
6,472
|
Retirement Plan for Board Members of
Dime Community Bancshares, Inc. ("Directors' Retirement Plan") and BMP -
The Holding Company and Bank maintain the BMP, which exists in order to
compensate executive officers for any curtailments in benefits due to statutory
limitations on benefit plans. As of December 31, 2007 and 2006, the
BMP had investments in the Holding Company's common stock of $9,352 and $10,260,
respectively. Benefit accruals under the defined benefit portion of
the BMP were suspended on April 1, 2000, when they were suspended under the
Employee Retirement Plan.
Effective
July 1, 1996, the Bank established the Directors' Retirement Plan, which
provides benefits to each eligible outside director commencing upon termination
of their Board service or at age 65. Each outside director
automatically becomes a participant in the Directors' Retirement
Plan.
In March
2005, the Board of Directors of the Company approved an amendment to the
Directors' Retirement Plan that froze all participant benefits effective March
31, 2005. Upon receipt of an updated actuarial valuation report
reflecting this amendment, the Company recorded a curtailment credit of $179
related to the Directors' Retirement Plan during the year ended December 31,
2005.
F-
The
combined net periodic cost for the defined benefit portions of the BMP and the
Directors' Retirement Plan includes the following components:
|
Year
Ended December 31,
|
|||
|
2007
|
2006
|
2005
|
|
|
Service
cost
|
$-
|
$-
|
$-
|
|
Interest
cost
|
281
|
269
|
286
|
|
Net
amortization and deferral
|
-
|
38
|
73
|
|
Curtailment
credit
|
-
|
-
|
(179)
|
|
Net
periodic cost
|
$281
|
$307
|
$180
|
Major
assumptions utilized to determine the net periodic cost for the BMP were as
follows:
|
Year
Ended December 31,
|
|||
|
2007
|
2006
|
2005
|
|
|
Discount
rate
|
5.875%
|
5.50%
|
6.125%
|
Major
assumptions utilized to determine the net periodic cost for the Directors'
Retirement Plan were as follows:
|
Year
Ended December 31,
|
|||
|
2007
|
2006
|
2005
|
|
|
Discount
rate
|
5.875%
|
5.50%
|
6.00%
|
|
Rate
of increase in fee compensation levels
|
-
|
4.0
|
4.0
|
The
defined contribution costs incurred by the Company related to the BMP were $75
and $135 for the years ended December 31, 2007 and 2005,
respectively. There was no defined contribution expense incurred by
the Company related to the BMP during the year ended December 31,
2006. There is no defined contribution cost incurred by the Holding
Company or Bank under the Directors' Retirement Plan.
The
combined funded status of the defined benefit portions of the BMP and Directors'
Retirement Plan was as follows:
|
At
December 31,
|
||
|
2007
|
2006
|
|
|
Accumulated
benefit obligation at end of period
|
$5,166
|
$4,942
|
|
Reconciliation
of projected benefit obligation:
|
||
|
Projected
benefit obligation at beginning of period
|
$4,910
|
$5,067
|
|
Service
cost
|
-
|
-
|
|
Interest
cost
|
281
|
270
|
|
Benefit
payments
|
(128)
|
(96)
|
|
Actuarial
loss (gain)
|
71
|
(331)
|
|
Projected
benefit obligation at end of period
|
5,134
|
4,910
|
|
Plan
assets at fair value:
|
||
|
Balance
at beginning of period
|
-
|
-
|
|
Contributions
|
128
|
96
|
|
Benefit
payments
|
(128)
|
(96)
|
|
Balance
at end of period
|
-
|
-
|
|
Funded
status:
|
||
|
Deficiency
of plan assets over projected benefit obligation
|
(5,134)
|
(4,910)
|
|
Contributions
by employer
|
N/A
|
N/A
|
|
Unrecognized
(gain) loss from experience different from that assumed
|
N/A
|
N/A
|
|
Unrecognized
net past service liability
|
N/A
|
N/A
|
|
Accrued
expense included in other liabilities
|
$(5,134)
|
$(4,910)
|
Major
assumptions utilized to determine the benefit obligations at December 31, 2007
and 2006 were as follows:
|
At
December 31, 2007
|
At
December 31, 2006
|
||||
|
BMP
|
Directors'
Retirement Plan
|
BMP
|
Directors'
Retirement Plan
|
||
|
Discount
rate
|
6.29%
|
6.29%
|
5.875%
|
5.50%
|
|
|
Rate
of increase in compensation levels
|
-
|
-
|
-
|
-
|
|
As of
December 31, 2007 and 2006, the Bank used October 1st as its
measurement date for both the BMP and Directors' Retirement
Plan. Both the BMP and Directors' Retirement Plan are unfunded
non-qualified benefit plans that are not anticipated to ever hold assets for
investment. Any contributions made to either the BMP or Directors'
Retirement Plan are expected to be used immediately to pay benefits that come
due.
The Bank
expects to contribute $191 to the BMP and $131 to the Directors' Retirement Plan
during the year ending December 31, 2008 in order to pay benefits due under the
respective plans. During the year ending December 31, 2008, $268 in
actuarial losses are anticipated to be recognized as components of net periodic
cost.
Combined
benefit payments under the BMP and Directors' Retirement Plan, which reflect
expected future service (as appropriate), are anticipated to be made as
follows:
|
Year
Ending December 31,
|
||
|
2008
|
$322
|
|
|
2009
|
340
|
|
|
2010
|
358
|
|
|
2011
|
380
|
|
|
2012
|
464
|
|
|
2013
to 2017
|
$2,293
|
Postretirement Benefit Plan -
The Bank offers the Postretirement Benefit Plan to its retired employees who
provided at least five consecutive years of credited service and were active
employees prior to April 1, 1991, as follows:
|
|
(1) Qualified
employees who retired prior to April 1, 1991 receive the full medical
coverage in effect at the time of retirement until their death at no cost
to such retirees;
|
|
|
(2) Qualified
employees retiring on or after after April 1, 1991 are eligible for
continuation of the medical coverage in effect at the time of retirement
until their death. Throughout retirement, the Bank will continue to pay
the premiums for the coverage not to exceed the premium amount paid for
the first year of retirement coverage. Should the premiums increase, the
employee is required to pay the differential to maintain full medical
coverage.
|
Postretirement
Benefit Plan benefits are available only to full-time employees who commenced
collecting retirement benefits immediately upon termination of service from the
Bank. The Bank reserves the right at any time, to the extent permitted by law,
to change, terminate or discontinue any of the group benefits, and can exercise
the maximum discretion permitted by law in administering, interpreting,
modifying or taking any other action with respect to the plan or
benefits.
The
Postretirement Benefit Plan net periodic cost included the following
components:
|
Year
Ended December 31,
|
|||
|
2007
|
2006
|
2005
|
|
|
Service
cost
|
$83
|
$82
|
$72
|
|
Interest
cost
|
245
|
227
|
256
|
|
Unrecognized
past service liability
|
(29)
|
(29)
|
(28)
|
|
Amortization
of unrealized loss
|
29
|
40
|
56
|
|
$328
|
$320
|
$356
|
|
F-
Major
assumptions utilized to determine the net periodic cost were as
follows:
|
Year
Ended December 31,
|
|||
|
2007
|
2006
|
2005
|
|
|
Discount
rate
|
5.875%
|
5.50%
|
6.125%
|
|
Rate
of increase in compensation levels
|
3.50
|
3.00
|
3.25
|
As of
December 31, 2007, an escalation in the assumed medical care cost trend rates by
1% in each year would increase the net periodic cost by approximately
$20. A decline in the assumed medical care cost trend rates by 1% in
each year would decrease the net periodic cost by approximately
$19.
The
funded status of the Postretirement Benefit Plan was as follows:
|
At
December 31,
|
At
December 31,
|
|
|
2007
|
2006
|
|
|
Accumulated
benefit obligation at end of period
|
$4,234
|
$4,244
|
|
Reconciliation
of projected benefit obligation:
|
||
|
Projected
benefit obligation at beginning of period
|
$4,244
|
$4,183
|
|
Service
cost
|
83
|
82
|
|
Interest
cost
|
244
|
227
|
|
Actuarial
gain
|
(166)
|
(109)
|
|
Benefit
payments
|
(171)
|
(139)
|
|
Projected
benefit obligation at end of period
|
4,234
|
4,244
|
|
Plan
assets at fair value:
|
||
|
Balance
at beginning of period
|
-
|
-
|
|
Contributions
|
171
|
139
|
|
Benefit
payments
|
(171)
|
(139)
|
|
Balance
at end of period
|
-
|
-
|
|
Funded
status:
|
||
|
(Deficiency)
of plan assets over projected benefit obligation
|
(4,234)
|
(4,244)
|
|
Unrecognized
loss from experience different from that assumed
|
N/A
|
N/A
|
|
Unrecognized
net past service liability
|
N/A
|
N/A
|
|
Accrued
expense included in other liabilities
|
$(4,234)
|
$(4,244)
|
As
of December 31, 2007 and 2006, the Bank used October 1st as its
measurement date for the Postretirement Benefit Plan. The assumed
medical care cost trend rate used in computing the accumulated Postretirement
Benefit Plan obligation was 9.0% in 2007 and was assumed to decrease gradually
to 3.75% in 2013 and remain at that level thereafter. An escalation
in the assumed medical care cost trend rates by 1% in each year would increase
the accumulated Postretirement Benefit Plan obligation by approximately
$191. A decline in the assumed medical care cost trend rates by 1% in
each year would decrease the accumulated Postretirement Benefit Plan obligation
by approximately $176. The assumed discount rate and rate of
compensation increase used to measure the accumulated Postretirement Benefit
Plan obligation were 6.29% and 4.0%, respectively, at December 31,
2007. The assumed discount rate and rate of compensation increase
used to measure the accumulated Postretirement Benefit Plan obligation were
5.875% and 3.50%, respectively, at December 31, 2006. The assumed
discount rate and rate of compensation increase used to measure the accumulated
Postretirement Benefit Plan obligation at December 31, 2005 were 5.50% and
3.00%, respectively.
In May
2004, the FASB issued FSP 106-2 ("FSP 106-2"), "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug Improvement and
Modernization Act of 2003 (the "Act")," to provide guidance on accounting for
the effects of the Act to employers that sponsor postretirement health care
plans which provide prescription drug benefits. FSP 106-2 supersedes
FSP 106-1, "Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug Improvement and Modernization Act of 2003." FSP
106-2 applies only to sponsors of single-employer defined benefit postretirement
health care plans for which (i) the employer has concluded that prescription
drug benefits available under the plan to some or all participants, for some or
all future years, are "actuarially equivalent" to Medicare Part D and thus
qualify for the subsidy provided by the Act, and (ii) the expected subsidy will
offset or reduce the employer's share of the cost of the underlying
postretirement prescription drug coverage on which the subsidy is
based. FSP 106-2 provides guidance on measuring the accumulated
postretirement benefit obligation ("APBO") and net periodic postretirement
benefit cost, and the effects of the Act on the APBO. The Company
determined that the benefits provided by the Postretirement Benefit Plan are
actuarially equivalent to Medicare Part D under the Act. The effects
of the subsidy resulted in a decrease in the APBO of $450 at December 31,
2005. The effects of the subsidy were treated as an actuarial gain
for purposes of calculating the APBO as of December 31, 2005. The Company is
still in the process of claiming this subsidy from the government, and, as a
result, the Bank cannot determine the amount of subsidy it will ultimately
receive.
The
Postretirement Benefit Plan is an unfunded non-qualified benefit plan that is
not anticipated to ever hold assets for investment. Any contributions
made to the Postretirement Benefit Plan are expected to be used immediately to
pay benefits that come due.
The Bank
expects to contribute $168 to the Postretirement Benefit Plan during the year
ending December 31, 2008 in order to pay benefits due under the
plan. During the year ending December 31, 2008, $16 of actuarial loss
and a credit of $26 of prior service costs are anticipated to be recognized as
components of net periodic cost.
Benefit
payments under the Postretirement Benefit Plan, which reflect expected future
service (as appropriate), are expected to be made as follows:
|
Year
Ending December 31,
|
||
|
2008
|
$168
|
|
|
2009
|
164
|
|
|
2010
|
166
|
|
|
2011
|
172
|
|
|
2012
|
180
|
|
|
2013
to 2017
|
1,003
|
401(k) Plan - The Bank also
maintains the 401(k) Plan which covers substantially all
employees. During the year ended December 31, 2007, a direct employer
contribution equal to 3% of "covered compensation" [defined as total W-2
compensation including amounts deducted from W-2 compensation for pre-tax
benefits such as health insurance premiums and contributions to the 401(k) Plan]
up to applicable Internal Revenue Service limits, was awarded to all employees
who were eligible to participate in the 401(k) Plan regardless of whether or not
they participated in the 401(k) Plan during 2007. During the years
ended December 31, 2006 and 2005, the 401(k) Plan received the proceeds from a
100% vested cash contribution to all participants in the ESOP in the amount of
3% of "covered compensation" up to applicable Internal Revenue
Service limits. 401(k) Plan participants possess the ability to
invest this contribution in any of the investment options offered under the
401(k) Plan. The Bank makes no other contributions to the 401(k)
Plan. Expenses associated with this contribution totaled $383, $397
and $425 during the years ended December 31, 2007, 2006 and 2005,
respectively.
The
401(k) Plan owned participant investments in the Holding Company's common stock
for the accounts of participants totaling $7,498 and $7,499 at December 31, 2007
and 2006, respectively.
ESOP - The Holding Company
adopted the ESOP in connection with the Bank's June 26, 1996 conversion to stock
ownership. The ESOP borrowed $11,638 from the Holding Company and
used the funds to purchase 3,927,825 shares of the Holding Company's common
stock. The loan was originally to be repaid principally from the
Bank's discretionary contributions to the ESOP over a period of time not to
exceed 10 years from the date of the conversion. Effective July 1,
2000, the loan agreement was amended to extend the repayment period to thirty
years from the date of the conversion, with the right of optional
prepayment. In exchange for the extension of the loan agreement,
various benefits were offered to participants, including the addition of pre-tax
employee contributions to the 401(k) Plan, a 3% annual employer contribution to
the ESOP [which is automatically transferred to the 401(k) Plan], and the
pass-through of cash dividends received by the ESOP to the individual
participants. The loan had an outstanding balance of $4,444 and
$4,554 at December 31, 2007 and December 31, 2006, respectively, and a fixed
rate of 8.0%.
Shares
purchased with the loan proceeds are held in a suspense account for allocation
among participants as the loan is repaid. Shares released from the
ESOP suspense account are allocated among participants on the basis of
compensation, as defined in the plan, in the year of allocation. ESOP
distributions vest at a rate of 25% per year of service, beginning after two
years, with full vesting after five years, or upon attainment of age 65, death,
disability, retirement or in the event of a "change of control" of the Holding
Company as defined in the ESOP. Common stock allocated to
participating employees totaled 78,155 shares during each of the years ended
December 31, 2007, 2006 and 2005. The ESOP benefit expense
recorded in accordance with Statement of Position 93-6 for allocated shares
totaled $1,794, $1,829 and $2,023, respectively, for the years ended December
31, 2007, 2006 and 2005.
As
indicated previously, effective July 1, 2000, the Holding Company or Bank became
required to make a 100% vested cash contribution annually to all ESOP
participants in the amount of 3% of "covered compensation" as defined in the
ESOP. This contribution was guaranteed until December 31, 2006
(unless the ESOP was terminated prior thereto) and is discretionary after that
date. This annual contribution was made in January of each year based
upon the total covered compensation through December 31st of the
previous year. The participant possesses the ability to invest this
contribution in any of the investment options offered under the 401(k)
Plan.
Stock
Option Activity
1996 Stock Option Plan - In
November 1996, the Holding Company adopted the 1996 Stock Option Plan, which
permitted the Company to grant up to 4,909,781 incentive or non-qualified stock
options to outside directors, certain officers and other employees of the
Holding Company or the Bank. The Compensation Committee of the Board
of Directors administers the 1996 Stock Option Plan and authorized all option
grants.
On
December 26, 1996, 4,702,796 stock options were granted to outside directors,
certain officers and certain employees under the 1996 Stock Option Plan, all of
which were fully exercisable at December 31, 2006. On January 20,
2000, 224,435 stock options remaining under the 1996 Stock Option Plan were
granted to certain officers and certain employees. All of these stock
options expire on January 20, 2010. One-fifth of the shares granted
to participants under this grant vested on January 20, 2001, 2002, 2003, 2004
and 2005, respectively. No stock options may be granted under the
1996 Stock Option Plan after December 26, 2006.
On
January 21, 1999, holders of stock options which had been granted by FIBC to
purchase 327,290 shares of FIBC common stock were converted into options to
purchase 598,331 shares of the Holding Company's common stock (the "Converted
Options"). The expiration dates on all Converted Options remained
unchanged from the initial grant by FIBC, and all Converted Options were fully
exercisable at December 31, 2005.
During
the year ended December 31, 2007, 25,075 unissued options under the 1996 Stock
Option Plan were deemed ineligible for future grant.
2001 Stock Option Plan - In
September 2001, the Holding Company adopted the 2001 Stock Option Plan, which
permitted the Company to grant up to 1,771,875 incentive or non-qualified stock
options to officers and other employees of the Holding Company or the Bank and
253,125 non-qualified stock options to outside directors of the Holding Company
or Bank. The Compensation Committee of the Board of Directors
administered the 2001 Stock Option Plan and authorized all option
grants.
On
November 21, 2001, 540,447 stock options were granted to certain officers and
employees under the 2001 Stock Option Plan. All of these stock
options expire on November 21, 2011. One-fourth of the options under
this grant vested on November 21, 2002, 2003, 2004 and 2005,
respectively. On November 21, 2001, 67,500 stock options were granted
to outside directors under the 2001 Stock Option Plan. All of these
stock options will expire on November 21, 2011 and vested on November 21,
2002.
On
February 1, 2003, a grant of 604,041 stock options was made to certain officers
and employees under the 2001 Stock Option Plan. All of these stock
options expire on February 1, 2013. When originally granted,
one-fourth of the options under this grant were to vest on February 1, 2004,
2005, 2006 and 2007, respectively. On December 30, 2005, vesting was
accelerated for all unvested options issued under this grant. On
February 1, 2003, 75,000 stock options were granted to outside directors under
the 2001 Stock Option Plan. All of these stock options will expire on
February 1, 2013 and vested on February 1, 2004.
On
January 27, 2004, a grant of 632,874 stock options was made to certain officers
and employees under the 2001 Stock Option Plan. All of these stock
options expire on January 27, 2014. When originally granted,
one-fourth of the options under this grant were to vest on January 27, 2005,
2006, 2007 and 2008, respectively. On December 30, 2005, vesting was
accelerated for all unvested options issued under this grant. On
January 27, 2004, 81,000 stock options were granted to outside directors under
the 2001 Stock Option Plan. All of these stock options will expire on
January 27, 2014 and vested on January 27, 2005.
2004 Stock Incentive Plan -
In November 2004, the Company adopted the 2004 Stock Incentive Plan,
which permits the Company to grant up to a total of 1,496,300 restricted stock
awards, incentive or non-qualified stock options or stock appreciation rights to
outside directors, officers and other employees of the Holding Company or the
Bank. Of the total shares eligible for grant under the 2004 Stock
Incentive Plan, only up to 374,075 may be granted as restricted stock
awards. The full amount of 1,496,300 shares may be issued either
fully as stock options or stock appreciation rights, or a combination
thereof. The Compensation Committee of the Board of Directors
administers the 2004 Stock Incentive Plan and authorizes all equity
grants.
On
January 31, 2005, a grant of 76,320 options was made to outside directors of the
Company under the 2004 Stock Incentive Plan. These options expire on
January 31, 2015, and, upon grant, were to vest on January 31,
2006. On May 31, 2005, a grant of 318,492 stock options was made to
certain officers of the Company under the 2004 Stock Incentive
Plan. All of the options issued under this grant expire on May 31,
2015. When originally granted, one-fourth of the options under this
grant were to vest on May 31, 2006, 2007, 2008 and 2009,
respectively. On December 30, 2005, vesting was accelerated for all
unvested options issued under both of these grants. On May 1, 2007, a
grant of 90,000 options was made to outside directors of the Company under the
2004 Stock Incentive Plan. These options expire on May 1, 2017, and
vest on May 1, 2008. On May 1, 2007, a grant of 906,500 stock options
was made to certain officers of the Company under the 2004 Stock Incentive
Plan. All of the options issued under this grant expire on May 1,
2017. One-fourth of the options under this grant vest on May 1, 2008,
2009, 2010 and 2011, respectively.
Combined
stock option activity related to the Stock Plans was as follows:
|
At
or for the Year Ended December 31,
|
|||
|
2007
|
2006
|
2005
|
|
|
Options
outstanding – beginning of period
|
2,250,747
|
2,503,103
|
2,679,435
|
|
Options
granted
|
996,500
|
-
|
394,812
|
|
Weighted
average exercise price of grants
|
$13.74
|
-
|
$15.36
|
|
Options
exercised
|
56,540
|
246,169
|
534,637
|
|
Weighted
average exercise price of exercised options
|
$5.64
|
$4.75
|
$4.72
|
|
Options
forfeited
|
24,710
|
6,187
|
36,507
|
|
Weighted
average exercise price of forfeited options
|
$18.88
|
$19.90
|
$17.40
|
|
Options
outstanding - end of period
|
3,165,997
|
2,250,747
|
2,503,103
|
|
Weighted
average exercise price of outstanding
options
- end of period
|
$14.63
|
$14.85
|
$13.87
|
|
Remaining
options available for grant
|
118,975
|
1,127,840
|
1,169,653
|
|
Vested
options at end of period
|
2,169,497
|
2,250,747
|
2,503,103
|
|
Weighted
average exercise price of vested
options
– end of period
|
$15.04
|
$14.85
|
$13.87
|
|
Cash
received for option exercise cost
|
$244
|
$1,086
|
$2,445
|
|
Income
tax benefit recognized
|
177
|
839
|
1,995
|
|
Compensation
expense recognized
|
629
|
-
|
-
|
|
Remaining
unrecognized compensation expense
|
2,377
|
-
|
-
|
|
Weighted
average remaining years for which
compensation
expense is to be recognized
|
3.2
|
-
|
-
|
The range
of exercise prices and weighted-average remaining contractual lives of both
options outstanding and vested options as of December 31, 2007 were as
follows:
F-
|
Outstanding
Options as of December 31, 2007
|
||||
|
Range
of Exercise Prices
|
Amount
|
Weighted
Average
Exercise
Price
|
Weighted
Average Contractual Years Remaining
|
Vested
Options
as of
December
31, 2007
|
|
$4.51
- $5.00
|
14,087
|
4.56
|
2.3
|
14,087
|
|
$10.50
- $11.00
|
500,364
|
10.91
|
4.1
|
500,364
|
|
$13.00-$13.50
|
598,442
|
13.16
|
5.3
|
598,442
|
|
$13.50-$14.00
|
996,500
|
13.74
|
9.6
|
-
|
|
$15.00-$15.50
|
318,492
|
15.10
|
7.7
|
318,492
|
|
$16.00-$16.50
|
76,320
|
16.45
|
7.3
|
76,320
|
|
$19.50-$20.00
|
661,792
|
19.90
|
6.3
|
661,792
|
|
Total
|
3,165,997
|
$14.63
|
6.9
|
2,169,497
|
There
were no stock options granted during the year ended December 31,
2006. The weighted average fair value per option on the date of grant
for stock options granted during the years ended December 31, 2007 and 2005 were
estimated as follows:
|
Year
Ended December 31,
|
||
|
2007
|
2005
|
|
|
Total
options granted
|
996,500
|
394,812
|
|
Estimated
fair value on date of grant
|
$3.06
|
$3.91
|
|
Pricing
methodology utilized
|
Black-
Scholes
|
Black-
Scholes
|
|
Expected
life (in years)
|
6.2
|
7.0
|
|
Interest
rate
|
4.56%
|
3.94%
|
|
Volatility
|
28.39
|
31.67
|
|
Dividend
yield
|
4.08
|
3.67
|
Other
Stock Awards
RRP - On May 17, 2002, 67,500
RRP shares were granted to certain officers of the Bank. These shares
vested as follows: 20% on November 25, 2002, and 20% each on April
25, 2003, 2004, 2005 and 2006. The fair value of the Holding
Company's common stock on May 17, 2002 was $16.19. The Company
accounts for compensation expense under the RRP in accordance with SFAS
123R. During the year ended December 31, 2007, the Company determined
that the shares held by the RRP were no longer eligible for grant. On
September 14, 2007, all of the assets of the RRP were liquidated, and the
303,137 unallocated shares of common stock previously held by the RRP were
retired into treasury.
The
following is a summary of activity related to the RRP for the years ended
December 31, 2007, 2006 and 2005:
|
At
or for the Year Ended December 31,
|
|||
|
2007
|
2006
|
2005
|
|
|
Shares
acquired (a)
|
-
|
5,023
|
5,636
|
|
Shares
vested
|
-
|
13,500
|
13,500
|
|
Shares
allocated
|
-
|
-
|
-
|
|
Shares
transferred to the Holding Company
|
303,137
|
||
|
Unallocated
shares - end of period
|
-
|
303,137
|
298,114
|
|
Unvested
allocated shares – end of period
|
-
|
-
|
13,500
|
|
Compensation
recorded to expense
|
-
|
$45
|
$108
|
|
Income
recognized upon transfer of assets
|
109
|
-
|
-
|
|
Income
tax benefit recognized
|
-
|
134
|
-
|
(a)
Represents shares re-acquired from either participant sales of vested shares in
order to satisfy income tax obligations or participant forfeitures.
Restricted Stock Awards – On
March 17, 2005, a grant of 31,804 restricted stock awards was made to certain
officers of the Bank under the 2004 Stock Incentive Plan. One-fourth
of these awards vest to the respective recipients on May 31, 2006, 2007, 2008
and 2009, respectively. The fair value of the Company's common stock
on March 17, 2005 was $15.44. On January 3, 2006, a grant of 30,000
restricted stock awards was made to certain officers of the Bank under the 2004
Stock Incentive Plan. One-fifth of these awards vest to the
respective recipients on February 1, 2007, 2008, 2009, 2010 and 2011,
respectively. The fair value of the Company's common stock on January
3, 2006 was $14.61 (the opening price on the grant date). On March
16, 2006, a grant of 18,000 restricted stock awards was made to certain officers
of the Bank under the 2004 Stock Incentive Plan. One-fifth of these
awards vest to the respective recipients on May 1, 2007, 2008, 2009, 2010 and
2011, respectively. The fair value of the Company's common stock on
March 16, 2006 was $14.48. 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. All of these awards vest to the respective recipients on
May 1, 2008. The fair value of the Company's common stock on May 1,
2007 was $13.74.
In
accordance with SFAS 123R, compensation expense was recorded on these restricted
stock awards based upon the fair value of the shares on the respective dates of
grant for all periods presented.
The
following is a summary of activity related to the restricted stock awards
granted under the 2004 Stock Incentive Plan:
|
At
or for the Year Ended December 31,
|
|||
|
2007
|
2006
|
2005
|
|
|
Unvested
allocated shares – beginning of period
|
71,855
|
31,804
|
-
|
|
Shares
granted
|
12,000
|
48,000
|
31,804
|
|
Shares
vested
|
17,551
|
7,949
|
-
|
|
Unvested
allocated shares – end of period
|
66,304
|
71,855
|
31,804
|
|
Unallocated
shares - end of period
|
-
|
-
|
-
|
|
Compensation
recorded to expense
|
$372
|
$252
|
$96
|
|
Income
tax (benefit) recognized
|
(1)
|
16
|
-
|
16. COMMITMENTS
AND CONTINGENCIES
Mortgage Loan Commitments and Lines
of Credit - At December 31, 2007 and 2006, the Bank had outstanding
commitments to make real estate loans aggregating approximately $102,397 and
$55,321, respectively.
At
December 31, 2007, commitments to originate fixed-rate and adjustable-rate real
estate loans were $6,145 and $96,252 respectively. Interest rates on
fixed-rate commitments ranged between 5.70% and 7.13%. Substantially all of the
Bank's commitments expire within three months of their acceptance by the
prospective borrower. A concentration risk exists with these
commitments as virtually all of them involve multifamily and underlying
cooperative properties located within the New York City metropolitan
area.
At
December 31, 2007, unused lines of credit available on one- to four-family
residential, multifamily residential and commercial real estate loans totaled
$37,731. At December 31, 2007, unused commitments to fund
construction loans and overdraft checking accounts totaled $30,973 and $3,191,
respectively.
At
December 31, 2007, the Bank had available unused lines of credit with the FHLBNY
totaling $100,000 expiring on July 31, 2008, and the Holding Company has a $15.0
million line of credit agreement with a reputable financial institution expiring
in June 2009.
Lease Commitments - At
December 31, 2007, aggregate minimum annual rental commitments on operating
leases were as follows:
|
Year
Ending December 31,
|
Amount
|
|
2008
|
$1,858
|
|
2009
|
2,062
|
|
2010
|
2,093
|
|
2011
|
1,963
|
|
2012
|
1,848
|
|
Thereafter
|
19,130
|
|
Total
|
$28,954
|
Rental
expense for the years ended December 31, 2007, 2006 and 2005 totaled $1,794,
$1,417, and $1,283, respectively.
Litigation - The Company is
subject to certain pending and threatened legal actions which arise out of the
normal course of business. Litigation is inherently unpredictable,
particularly in proceedings where claimants seek substantial or indeterminate
damages, or which are in their early stages. The Company cannot
predict with certainty the actual loss or range of loss related to such legal
proceedings, the manner in which they will be resolved, the timing of final
resolution or the ultimate settlement. Consequently, the Company
cannot estimate losses or ranges of losses related to such legal matters, even
in instances where it is reasonably possible that a future loss will be
incurred. In the opinion of management, after consultation with
counsel, the resolution of all ongoing legal proceedings will not have a
material adverse effect on the consolidated financial condition or results of
operations of the Company. The Company accounts for potential losses
related to litigation in accordance with SFAS 5 "Accounting for
Contingencies." As of December 31, 2007 and 2006, reserves provided
for potential losses related to litigation matters were not
material.
17. FAIR
VALUE OF FINANCIAL INSTRUMENTS
Considerable
judgment is required in interpreting market data when determining the fair value
of financial instruments. The estimated fair value amounts below have been
determined by the Company using available market information and appropriate
valuation methodologies outlined in SFAS 107, "Disclosures About Fair Value of
Financial Instruments." As discussed in Note 1, the Company adopted
SFAS 157 effective January 1, 2008. Management does not believe that
the valuations presented below would differ materially if prepared in accordance
with SFAS 157.
Cash and Due From Banks - The
fair value is assumed to be equal to their carrying value as these amounts are
due upon demand.
Investment Securities and MBS
- The fair value of these securities is based on quoted market prices obtained
from an independent pricing service.
Federal Funds Sold and Other Short
Term Investments - The fair value of these assets, principally overnight
deposits, is assumed to be equal to their carrying value due to their short
maturity.
FHLBNY Capital Stock - The
fair value of FHLBNY stock is assumed to be equal to the carrying value as the
stock is carried at par value and redeemable at par value by the
FHLBNY.
Loans and Loans Held for Sale
- The fair value of loans receivable is determined by utilizing either secondary
market prices, or, to a greater extent, by discounting the future cash flows,
net of anticipated prepayments of the loans, using an interest rate for which
loans with similar terms would be originated to new borrowers. This
methodology is applied to all loans, inclusive of impaired and non-accrual
loans.
MSR –The fair value of the
MSR is measured by the discounted anticipated cash flows through contractual
maturity.
Deposits - The fair value of
savings, money market, NOW, Super NOW and checking accounts is assumed to be
their carrying amount. The fair value of certificates of deposit is based upon
the present value of contractual cash flows using current interest rates for
instruments of the same remaining maturity.
Escrow and Other Deposits -
The estimated fair value of escrow and other deposits is assumed to be
their carrying amount payable.
Securities sold under agreements to
repurchase and Federal Home Loan Bank of New York advances - The fair
value is measured by the discounted anticipated cash flows through contractual
maturity or next interest repricing date, or an earlier call date if, as of the
valuation date, the borrowing is expected to be called. The carrying
amount of accrued interest payable is their fair value.
Subordinated notes payable and Trust
Preferred securities payable - The fair value is measured by an
independent price quote obtained based upon comparable transactions that are
occurring in the market as of the respective disclosure date. The
carrying amount of accrued interest payable is their fair value.
Commitments to Extend Credit
- The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed-rate loan commitments, fair value also considers the
difference between current interest rates and the committed rates.
The
estimated carrying amount and fair values of the Company's financial instruments
at December 31, 2007 and December 31, 2006 were as follows:
|
At
December 31, 2007
|
Carrying
Amount
|
Fair
Value
|
|
Assets:
|
||
|
Cash
and due from banks
|
$101,708
|
$101,708
|
|
Investment
securities held-to-maturity
|
80
|
80
|
|
Investment
securities available-for-sale
|
34,095
|
34,095
|
|
MBS
available-for-sale
|
162,764
|
162,764
|
|
Loans,
net
|
2,860,748
|
2,848,863
|
|
Loans
held for sale
|
890
|
890
|
|
MSR
|
2,496
|
3,914
|
|
Federal
funds sold and other short-term investments
|
128,014
|
128,014
|
|
FHLBNY
capital stock
|
39,029
|
39,029
|
|
Liabilities:
|
||
|
Savings,
money market, NOW, Super NOW and
checking
accounts
|
1,102,911
|
1,102,911
|
|
Certificates
of deposit
|
1,077,087
|
1,076,362
|
|
Escrow
and other deposits
|
52,209
|
52,209
|
|
Securities
sold under agreements to repurchase
|
155,080
|
166,745
|
|
FHLBNY
advances
|
706,500
|
719,452
|
|
Subordinated
notes payable
|
25,000
|
25,750
|
|
Trust
Preferred securities payable
|
72,165
|
57,732
|
|
Commitments
to extend credit
|
590
|
590
|
F-
|
At
December 31, 2006
|
Carrying
Amount
|
Fair
Value
|
|
Assets:
|
||
|
Cash
and due from banks
|
$26,264
|
$26,264
|
|
Investment
securities held-to-maturity
|
235
|
235
|
|
Investment
securities available-for-sale
|
29,548
|
29,548
|
|
MBS
available-for-sale
|
154,437
|
154,437
|
|
Loans,
net
|
2,686,959
|
2,670,036
|
|
Loans
held for sale
|
1,200
|
1,200
|
|
MSR
|
2,592
|
3,497
|
|
Federal
funds sold and other short-term investments
|
78,752
|
78,752
|
|
FHLBNY
capital stock
|
31,295
|
31,295
|
|
Liabilities:
|
||
|
Savings,
money market, NOW, Super NOW and
checking
accounts
|
943,863
|
943,863
|
|
Certificates
of deposit
|
1,064,669
|
1,062,073
|
|
Escrow
and other deposits
|
46,373
|
46,373
|
|
Securities
sold under agreements to repurchase
|
120,235
|
118,668
|
|
FHLBNY
advances
|
571,500
|
569,377
|
|
Subordinated
notes payable
|
25,000
|
26,875
|
|
Trust
Preferred securities payable
|
72,165
|
72,165
|
|
Commitments
to extend credit
|
163
|
163
|
18. TREASURY
STOCK
The
Holding Company purchased 2,298,726 shares, 777,539 shares and 801,384 shares of
its common stock into treasury during the years ended December 31, 2007, 2006
and 2005, respectively. All shares were purchased in accordance with
applicable regulations of the OTS and the SEC.
19. REGULATORY
MATTERS
The
Bank is subject to various regulatory capital requirements established by the
federal banking agencies. Failure to satisfy minimum capital
requirements may result in certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Company's consolidated financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must satisfy specific capital
guidelines that involve quantitative measures of its assets, liabilities, and
certain off-balance-sheet items as calculated pursuant to regulatory accounting
practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative
measures that have been established by regulation to ensure capital adequacy
require the Bank to maintain minimum capital amounts and ratios (set forth in
the table below). The Bank's primary regulatory agency, the OTS,
requires that the Bank maintain minimum ratios of tangible capital (as defined
in the regulations) of 1.5%, and total risk-based capital (as defined in the
regulations) of 8%. In addition, insured institutions in the
strongest financial and managerial condition, with a rating of one (the highest
rating of the OTS under the Uniform Financial Institutions Rating System) are
required to maintain a Leverage Capital Ratio (the "Leverage Capital
Ratio") of not less than 3.0% of total assets. For all other banks,
the minimum Leverage Capital Ratio requirement is 4.0%, unless a higher leverage
capital ratio is warranted by the particular circumstances or risk profile of
the institution. The Bank is also subject to prompt corrective action
requirement regulations promulgated by the Federal Deposit Insurance
Corporation. These regulations require the Bank to maintain a minimum
of Total and Tier I capital (as defined in the regulations) to risk-weighted
assets (as defined in the regulations), and of Tier I capital to average assets
(as defined in the regulations). As of December 31, 2007, the Bank
satisfied all capital adequacy requirements to which it was
subject.
As of
December 31, 2007 and 2006, the Bank satisfied all criteria necessary to be
categorized as "well capitalized" under the regulatory framework for prompt
corrective action. To be categorized as "well capitalized," the Bank
was required to maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the following tables:
|
Actual
|
For
Capital
Adequacy
Purposes
|
To
Be Categorized as "Well Capitalized"
|
||||||
|
As
of December 31, 2007
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||
|
Tangible
capital
|
$269,231
|
7.88%
|
$51,228
|
1.5%
|
$170,761
|
5.00%
|
||
|
Leverage
capital
|
$269,231
|
7.88
|
136,609
|
4.0%
|
170,761
|
5.00
|
||
|
Total
risk-based capital (to risk
weighted
assets)
|
266,645
|
11.92
|
178,954
|
8.0%
|
$223,693
|
10.00
|
||
|
Tier
I risk-based capital (to risk
weighted
assets)
|
251,258
|
11.23
|
89,477
|
4.0%
|
134,216
|
6.00
|
||
|
Tier
I leverage capital (to average assets)
|
269,231
|
8.28
|
N/A
|
N/A
|
162,660
|
5.00
|
||
|
Actual
|
For
Capital
Adequacy
Purposes
|
To
Be Categorized as "Well Capitalized"
|
||||||
|
As
of December 31, 2006
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||
|
Tangible
capital
|
$277,622
|
9.05%
|
$46,037
|
1.5%
|
$153,458
|
5.00%
|
||
|
Leverage
capital
|
277,622
|
9.05
|
122,766
|
4.0%
|
153,458
|
5.00
|
||
|
Total
risk-based capital (to risk
weighted
assets)
|
276,864
|
12.61
|
175,653
|
8.0%
|
219,566
|
10.00
|
||
|
Tier
I risk-based capital (to risk
weighted
assets)
|
261,350
|
11.90
|
87,826
|
4.0%
|
131,739
|
6.00
|
||
|
Tier
I leverage capital (to average assets)
|
277,622
|
8.97
|
N/A
|
N/A
|
154,801
|
5.00
|
||
The
following is a reconciliation of GAAP capital to regulatory capital for the
Bank:
|
At
December 31, 2007
|
At
December 31, 2006
|
||||||
|
Tangible
Capital
|
Leverage
Capital
|
Total
Risk-Based Capital
|
Tangible
Capital
|
Leverage
Capital
|
Total
Risk-Based
Capital
|
||
|
GAAP
capital
|
$321,091
|
$321,091
|
$321,091
|
$326,456
|
$326,456
|
$326,456
|
|
|
Non-allowable
assets:
|
|||||||
|
MSR
|
(254)
|
(254)
|
(254)
|
(265)
|
(265)
|
(265)
|
|
|
Accumulated
other comprehensive loss
|
4,032
|
4,032
|
4,032
|
7,069
|
7,069
|
7,069
|
|
|
Goodwill
|
(55,638)
|
(55,638)
|
(55,638)
|
(55,638)
|
(55,638)
|
(55,638)
|
|
|
Tier
1 risk-based capital
|
269,231
|
269,231
|
269,231
|
277,622
|
277,622
|
277,622
|
|
|
Adjustment
for recourse provision on loans sold
|
-
|
-
|
(17,973)
|
-
|
-
|
(16,272)
|
|
|
General
valuation allowance
|
-
|
-
|
15,387
|
-
|
-
|
15,514
|
|
|
Total
(Tier 2) risk based capital
|
269,231
|
269,231
|
266,645
|
277,622
|
277,622
|
276,864
|
|
|
Minimum
capital requirement
|
51,228
|
136,609
|
178,954
|
46,037
|
122,766
|
175,653
|
|
|
Regulatory
capital excess
|
$218,003
|
$132,622
|
$87,691
|
$231,585
|
$154,856
|
$101,211
|
|
F-
20. UNAUDITED
QUARTERLY FINANCIAL INFORMATION
The
following represents the unaudited consolidated results of operations for each
of the quarters during the fiscal years ended December 31, 2007 and
2006.
|
For
the three months ended
|
||||
|
March
31,
2007
|
June
30,
2007
|
September
30, 2007
|
December
31, 2007
|
|
|
Net
interest income
|
$17,886
|
$17,669
|
$17,378
|
$18,080
|
|
Provision
for loan losses
|
60
|
60
|
60
|
60
|
|
Net
interest income after
provision
for loan losses
|
17,826
|
17,609
|
17,318
|
18,020
|
|
Non-interest
income
|
2,490
|
2,387
|
3,131
|
2,411
|
|
Non-interest
expense
|
11,248
|
11,199
|
11,717
|
11,337
|
|
Income
before income taxes
|
9,068
|
8,797
|
8,732
|
9,094
|
|
Income
tax expense
|
3,251
|
3,152
|
3,188
|
3,657
|
|
Net
income
|
$5,817
|
$5,645
|
$5,544
|
$5,437
|
|
Earnings
per share (1):
|
||||
|
Basic
|
$0.17
|
$0.17
|
$0.17
|
$0.17
|
|
Diluted
|
$0.17
|
$0.17
|
$0.17
|
$0.17
|
|
For
the three months ended
|
||||
|
March
31,
2006
|
June
30,
2006
|
September
30, 2006
|
December
31, 2006
|
|
|
Net
interest income
|
$20,441
|
$20,851
|
$18,706
|
$17,472
|
|
Provision
for loan losses
|
60
|
60
|
60
|
60
|
|
Net
interest income after
provision
for loan losses
|
20,381
|
20,791
|
18,646
|
17,412
|
|
Non-interest
income
|
3,160
|
3,693
|
3,135
|
2,402
|
|
Non-interest
expense
|
10,448
|
10,528
|
10,620
|
10,380
|
|
Income
before income taxes
|
13,093
|
13,956
|
11,161
|
9,434
|
|
Income
tax expense
|
4,685
|
4,896
|
4,002
|
3,469
|
|
Net
income
|
$8,408
|
$9,060
|
$7,159
|
$5,965
|
|
Earnings
per share (1):
|
||||
|
Basic
|
$0.24
|
$0.26
|
$0.21
|
$0.17
|
|
Diluted
|
$0.24
|
$0.26
|
$0.20
|
$0.17
|
(1) The
quarterly earnings per share amounts, when added, may not coincide with the full
fiscal year earnings per share reported on the Consolidated Statements of
Operations due to differences in the computed weighted average shares
outstanding as well as rounding differences.
F-
21. CONDENSED
PARENT COMPANY ONLY FINANCIAL STATEMENTS
The
following statements of condition as of December 31, 2007 and 2006, and the
related statements of operations and cash flows for the years ended December 31,
2007, 2006 and 2005, reflect the Holding Company's investment in its
wholly-owned subsidiaries, the Bank and 842 Manhattan Avenue Corp., using the
equity method of accounting:
DIME
COMMUNITY BANCSHARES, INC.
CONDENSED
STATEMENTS OF FINANCIAL CONDITION
|
At
December 31,
|
At
December 31,
|
|
|
2007
|
2006
|
|
|
ASSETS:
|
||
|
Cash
and due from banks
|
$5,103
|
$4,427
|
|
Investment
securities available-for-sale
|
7,112
|
6,947
|
|
MBS
available-for-sale
|
1,279
|
1,792
|
|
Federal
funds sold and other short term investments
|
22,733
|
39,678
|
|
ESOP
loan to subsidiary
|
4,444
|
4,554
|
|
Investment
in subsidiaries
|
321,737
|
327,089
|
|
Other
assets
|
5,690
|
5,654
|
|
Total
assets
|
$368,098
|
$390,141
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY:
|
||
|
Subordinated
notes payable
|
$25,000
|
$25,000
|
|
Trust
Preferred securities payable
|
72,165
|
72,165
|
|
Other
liabilities
|
2,081
|
2,345
|
|
Stockholders'
equity
|
268,852
|
290,631
|
|
Total
liabilities and stockholders' equity
|
$368,098
|
$390,141
|
DIME
COMMUNITY BANCSHARES, INC.
CONDENSED
STATEMENTS OF OPERATIONS
|
Fiscal
Year Ended December 31,
|
|||
|
2007
|
2006
|
2005
|
|
|
Net
interest loss
|
$(5,902)
|
$(5,178)
|
$(5,911)
|
|
Dividends
received from Bank
|
35,000
|
58,012
|
11
|
|
Non-interest
income
|
516
|
1,215
|
152
|
|
Non-interest
expense
|
(424)
|
(484)
|
(512)
|
|
Income
(Loss) before income taxes and equity in
undistributed
earnings of direct subsidiaries
|
29,190
|
53,565
|
(6,260)
|
|
Income
tax credit
|
2,143
|
698
|
2,721
|
|
Income
(Loss) before equity in undistributed earnings
of
direct subsidiaries
|
31,333
|
54,263
|
(3,539)
|
|
Equity
in (overdistributed) undistributed earnings of
subsidiaries
|
(8,890)
|
(23,671)
|
39,749
|
|
Net
income
|
$22,443
|
$30,592
|
$36,210
|
F-
DIME
COMMUNITY BANCSHARES, INC.
CONDENSED
STATEMENTS OF CASH FLOWS
|
Fiscal
Year Ended December 31,
|
|||
|
2007
|
2006
|
2005
|
|
|
Cash
flows from Operating Activities:
|
|||
|
Net
income
|
$22,443
|
$30,592
|
$36,210
|
|
Adjustments
to reconcile net income to net cash provided
by
operating activities:
|
|||
|
Equity
in overdistributed (undistributed) earnings of direct
subsidiaries
|
8,890
|
23,671
|
(39,749)
|
|
Gain
on sale of assets
|
-
|
(1,063)
|
-
|
|
Net
(amortization) and accretion
|
(547)
|
(594)
|
(299)
|
|
(Increase)
Decrease in other assets
|
(36)
|
703
|
461
|
|
(Decrease)
Increase in other liabilities
|
(89)
|
596
|
(144)
|
|
Net
cash provided by (used in) Operating Activities
|
30,661
|
53,905
|
(3,521)
|
|
Cash
flows from Investing Activities:
|
|||
|
Net
Decrease (Increase) in federal funds sold and other short-term
Investments
|
16,945
|
(25,962)
|
23,235
|
|
Proceeds
from maturities of investment securities
available-for-sale
|
-
|
3,000
|
25,000
|
|
Proceeds
from sale of investment securities available-for-sale
|
-
|
3,032
|
-
|
|
Purchases
of investment securities available-for-sale
|
-
|
(3,029)
|
(15,000)
|
|
Principal
collected on MBS available-for-sale
|
507
|
571
|
945
|
|
Principal
repayments on ESOP loan
|
110
|
102
|
94
|
|
Net
cash provided by (used in) Investing Activities
|
17,562
|
(22,286)
|
34,274
|
|
Cash
flows from Financing Activities:
|
|||
|
Cash
dividends re-assumed through liquidation of RRP
|
958
|
-
|
-
|
|
Common
stock issued for exercise of stock options
|
136
|
910
|
2,307
|
|
Purchase
of common stock by the RRP
|
-
|
-
|
(80)
|
|
Cash
dividends paid to stockholders
|
(18,991)
|
(19,751)
|
(19,868)
|
|
Purchase
of treasury stock
|
(29,650)
|
(11,024)
|
(12,178)
|
|
Benefit
plan payments reimbursed by subsidiary
|
-
|
-
|
777
|
|
Net
cash used in financing activities
|
(47,547)
|
(29,865)
|
(29,042)
|
|
Net
increase in cash and due from banks
|
676
|
1,754
|
1,711
|
|
Cash
and due from banks, beginning of period
|
4,427
|
2,673
|
962
|
|
Cash
and due from banks, end of period
|
$5,103
|
$4,427
|
$2,673
|
* * * * *
F-
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 (11)
|
|
|
10.22
|
Waiver
executed by Vincent F. Palagiano (13)
|
|
|
Table
continued on next page
|
F-
|
10.23
|
Waiver
executed by Michael P. Devine (13)
|
|
|
10.24
|
Waiver
executed by Kenneth J. Mahon (13)
|
|
|
10.25
|
Form
of restricted stock award notice for officers and employees under the 2004
Stock Incentive Plan (12)
|
|
|
10.26
|
Employee
Retention Agreement between The Dime Savings Bank of Williamsburgh and
Christopher D. Maher (14)
|
|
|
10.27
|
Form
of restricted stock award notice for outside directors under the 2004
Stock Incentive Plan
|
|
|
21
|
Subsidiaries
of the Registrant
|
|
|
31(i).1
|
Certification
of Chief Executive Officer Pursuant to Rule
.13a-14(a)/15d-14(a)
|
|
|
31(i).2
|
Certification
of Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a)
|
|
|
32.1
|
Certification
of Chief Executive Officer Pursuant to 18 U.S.C. 1350
|
|
|
32.2
|
Certification
of Chief Financial Officer Pursuant to 18 U.S.C.
1350
|
|
(1)
|
Incorporated
by reference to the registrant's Transition Report on Form 10-K for the
transition period ended December 31, 2002 filed on March 28,
2003.
|
|
(2)
|
Incorporated
by reference to the registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2007 filed on August 9, 2007.
|
|
(3)
|
Incorporated
by reference to the registrant's Annual Report on Form 10-K for the fiscal
year ended June 30, 1998 filed on September 28, 1998.
|
|
(4)
|
Incorporated
by reference to the registrant's Current Report on Form 8-K dated April 9,
1998 and filed on April 16, 1998.
|
|
(5)
|
Incorporated
by reference to Exhibits to the registrant's Annual Report on Form 10-K
for the fiscal year ended June 30, 1997 filed on September 26,
1997.
|
|
(6)
|
Incorporated
by reference to the registrant's Annual Report on Form 10-K for the fiscal
year ended June 30, 1997 filed on September 26, 1997, and the Current
Reports on Form 8-K filed on March 22, 2004 and March 29,
2005.
|
|
(7)
|
Incorporated
by reference to the registrant's Annual Report on Form 10-K for the fiscal
year ended June 30, 2000 filed on September 28, 2000.
|
|
(8)
|
Incorporated
by reference to the registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2003 filed on November 14,
2003.
|
|
(9)
|
Incorporated
by reference to Exhibits to the registrant’s Registration Statement No.
333-117743 on Form S-4 filed on July 29, 2004.
|
|
(10)
|
Incorporated
by reference to the registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 2003 filed on March 15, 2004.
|
|
(11)
|
Incorporated
by reference to the registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 2004 filed on March 16, 2005.
|
|
(12)
|
Incorporated
by reference to the registrant's Current Report on Form 8-K filed on March
22, 2005.
|
|
(13)
|
Incorporated
by reference to the registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2005 filed on May 10, 2005.
|
|
(14)
|
Incorporated
by reference to the registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2006 filed on November 9,
2006.
|
F-