UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K/A
(Amendment
No. 2)
[ X ]
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the Year Ended December 31, 2006
[ ] 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 or a non-accelerated filer (as defined in Rule 12b-2 of the
Act). LARGE ACCELERATED FILER
ACCELERATED FILER X NON-ACCELERATED
FILER ___
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act): ___ Yes X
No
EXPLANATORY
NOTE
This
Form 10-K/A (Amendment No. 2) is being filed to include both the full
Annual Report on Form 10-K (filed on March 16, 2007), and Exhibits 31.1, 32.1,
32.1 and 32.2 (which were erroneously not included in the 10-K filing made
on
March 16, 2007) and filed subsequently in Amendment No. 1 on March 21,
2007.
SIGNATURE
Pursuant
to the requirements of the 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.
DIME
COMMUNITY BANCSHARES, INC.
|
By:
|
/s/
VINCENT F. PALAGIANO
|
|
Vincent
F. Palagiano
|
|
|
Chairman
of the Board and Chief Executive Officer
|
|
|
Date:
|
March
22, 2007
|
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, 2006
[ ] 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 or a non-accelerated filer (as defined in Rule 12b-2
of the
Act). LARGE ACCELERATED FILER
ACCELERATED FILER X NON-ACCELERATED
FILER ___
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule
12b-2 of the Act): ___ Yes X
No
The
aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 30, 2006 was approximately $399.9
million based upon the $13.57 closing price on the NASDAQ National Market
for a
share of the registrant’s common stock on June 30, 2006.
As
of
March 13, 2007, there were 36,140,920 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 17, 2007 and any adjournment thereof, and are incorporated
by
reference in Part III.
F-1
|
TABLE
OF CONTENTS
|
|
|
Page
|
|
|
PART
I
|
|
|
F-3
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F-4
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F-5
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F-11
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F-14
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F-15
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|
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F-18
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|
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F-21
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F-21
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|
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F-21
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|
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F-21
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|
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F-22
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|
|
F-22
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|
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F-22
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|
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F-23
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|
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F-29
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|
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F-30
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|
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F-30
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|
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F-32
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|
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F-32
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|
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F-32
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|
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F-32
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PART
II
|
|
|
F-32
|
|
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F-34
|
|
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F-36
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|
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F-51
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|
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F-57
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|
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F-57
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|
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F-57
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|
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PART
III
|
|
|
F-59
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|
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F-59
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|
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F-50
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|
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F-60
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|
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F-60
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PART
IV
|
|
|
F-60
|
|
|
F-61
|
|
F-2
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
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 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.
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.
F-3
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”). The Holding Company’s primary business is the operation of its
wholly-owned subsidiary, the Bank. Pursuant to regulations of the Office
of
Thrift Supervision (“OTS”), the Bank is 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, 2006,
the
Bank’s QTL Ratio was 68.5%,
and the
Bank maintained more than 65% of its portfolio assets in qualified thrift
investments throughout the year ended December 31, 2006.
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.dimedirect.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”).
On
July
18, 2002, the Boards of Directors of the Holding Company and each of its
direct
and indirect subsidiaries other than DSBW Preferred Funding Corporation
and DSBW
Residential Preferred Funding Corporation, approved changes in the fiscal
year
end of each company from June 30th
to
December 31st.
In
order
to further assist in the interpretive reading of the statistical data presented
in Parts I and II of this Annual Report, management has elected to add
information related to the unaudited 12-month period ended December 31,
2002.
The
Bank
has historically operated as, and intends to remain, 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 81% of these loans
were
secured by real estate located in the NYC boroughs of Brooklyn, Queens
and
Manhattan on December 31, 2006.
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, 2006.
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.
This
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
F-4
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 New York City 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.
Loan
Portfolio Composition.
At
December 31, 2006, the Bank’s loan portfolio totaled $2.70 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 one- to four-family residences, including condominiums and cooperative
apartments. Within the loan portfolio, $1.86 billion, or 68.6%, were classified
as multifamily residential loans; $666.9 million, or 24.7%, were classified
as
commercial real estate loans; $146.6 million, or 5.4%, were classified
as one-
to four-family residential, including condominium or cooperative apartments;
$1.2 million, or 0.1%, 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 $23.3 million, or 0.9%, were loans to finance real
estate construction within the NYC boroughs of Brooklyn or Queens. Of the
total
mortgage loan portfolio outstanding at that date, $2.26 billion, or 83.5%,
were
adjustable-rate loans (‘’ARMs’’) and $446.0 million, or 16.5%, were fixed-rate
loans. Of the Bank’s multifamily residential and commercial real estate loans,
over 80% were
ARMs
at December 31, 2006, 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, 2006, 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, 2006, $2.02 billion, or 75% of the loan portfolio, was scheduled
to
mature or reprice within five years.
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, 2006, the Bank had $53.8 million of loan commitments that
were
accepted by the borrower. All of these commitments are expected to close
during
the year ending December 31, 2007. At December 31, 2005, the bank had $55.4
million of loan commitments that were accepted by the borrower. All of
these
commitments closed during 2006.
F-5
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,
|
||||||||||
|
2006
|
Percent
of Total
|
2005
|
Percent
of Total
|
2004
|
Percent
of Total
|
2003
|
Percent
of Total
|
2002
|
Percent
of Total
|
|
|
Dollars
in Thousands
|
||||||||||
|
Real
Estate loans:
|
||||||||||
|
Multifamily
residential
|
$1,855,080
|
68.64%
|
$1,872,163
|
71.69%
|
$1,917,447
|
76.63%
|
$1,734,904
|
79.07%
|
$1,730,102
|
79.74%
|
|
Commercial
real estate
|
666,927
|
24.68
|
576,561
|
22.08
|
424,060
|
16.95
|
309,810
|
14.12
|
265,485
|
12.23
|
|
One-
to four-family
|
146,613
|
5.42
|
135,622
|
5.19
|
126,225
|
5.04
|
124,047
|
5.65
|
145,808
|
6.72
|
|
Cooperative
apartment units
|
7,224
|
0.27
|
10,115
|
0.39
|
11,853
|
0.47
|
13,798
|
0.63
|
16,451
|
0.76
|
|
FHA/VA
insured
|
1,236
|
0.05
|
2,694
|
0.10
|
4,209
|
0.17
|
4,646
|
0.21
|
5,215
|
0.24
|
|
Construction
|
23,340
|
0.85
|
12,098
|
0.46
|
15,558
|
0.62
|
2,880
|
0.13
|
1,931
|
0.09
|
|
Total
mortgage loans
|
2,700,420
|
99.92
|
2,609,253
|
99.91
|
2,499,352
|
99.88
|
2,190,085
|
99.81
|
2,164,992
|
99.78
|
|
Other
loans:
|
||||||||||
|
Student
loans
|
-
|
0.00
|
-
|
0.00
|
61
|
0.00
|
295
|
0.01
|
420
|
0.02
|
|
Depositor
loans
|
1,172
|
0.04
|
1,160
|
0.04
|
1,318
|
0.06
|
2,371
|
0.11
|
1,552
|
0.07
|
|
Consumer
installment and other
|
1,033
|
0.04
|
1,181
|
0.05
|
1,537
|
0.06
|
1,406
|
0.07
|
2,781
|
0.13
|
|
Total
other loans
|
2,205
|
0.08
|
2,341
|
0.09
|
2,916
|
0.12
|
4,072
|
0.19
|
4,753
|
0.22
|
|
Gross
loans
|
2,702,625
|
100.00%
|
2,611,594
|
100.00%
|
2,502,268
|
100.00%
|
2,194,157
|
100.00%
|
2,169,745
|
100.00%
|
|
Net
unearned costs (fees)
|
1,048
|
501
|
(463)
|
(1,517)
|
332
|
|||||
|
Allowance
for loan losses
|
(15,514)
|
(15,785)
|
(15,543)
|
(15,018)
|
(15,458)
|
|||||
|
Loans,
net
|
$2,688,159
|
$2,596,310
|
$2,486,262
|
$2,177,622
|
$2,154,619
|
|||||
|
Loans
serviced for others:
|
||||||||||
|
One-
to four-family and
cooperative
apartment
|
$24,395
|
$26,881
|
$29,524
|
$33,671
|
$34,683
|
|||||
|
Multifamily
residential
|
494,770
|
386,781
|
295,800
|
157,774
|
73,384
|
|||||
|
Total
loans serviced for others
|
$519,165
|
$413,662
|
$325,324
|
$191,445
|
$108,067
|
|||||
F-6
Loan
Originations, Purchases, Sales and Servicing. For
the
year ended December 31, 2006, total loan originations were $564.9 million.
The
Bank originates both ARMs and fixed-rate loans, depending upon customer
demand
and market rates of interest. ARM originations were approximately 80% 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"). One- to four-family adjustable rate and fixed-rate
mortgage loans with maturities up to 15 years are 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 or the State of New York Mortgage Agency
("SONYMA").
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. During the years ended December 31,
2006,
2005 and 2004, the Bank sold $144.7 million, $106.6 million and $148.2
million,
respectively, of such loans to FNMA.
The
Bank
currently has no arrangement in which it sells commercial real estate loans
to
the secondary market. During the year ended December 31, 2006, sales of
fixed-rate one- to four-family mortgage loans totaled $720,000.
The
Bank
generally retains the servicing rights in connection with loans it sells
in the
secondary market. As of December 31, 2006, the Bank was servicing $519.2
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
other than multifamily residential loans sold to FNMA. 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,
2006,
the Bank had recorded mortgage servicing rights ("MSR") of $2.6 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,
|
|||||
|
2006
|
2005
|
2004
|
2003
|
2002
|
|
|
Dollars
in Thousands
|
|||||
|
Gross
loans:
|
|||||
|
At
beginning of period
|
$2,611,594
|
$2,502,268
|
$2,194,157
|
$2,169,745
|
$2,055,825
|
|
Real
estate loans originated:
|
|||||
|
Multifamily
residential
|
388,102
|
312,026
|
774,832
|
917,904
|
616,276
|
|
Commercial
real estate
|
133,099
|
203,841
|
187,655
|
126,185
|
56,063
|
|
One-
to four-family (1)
|
19,070
|
41,143
|
36,363
|
28,259
|
18,846
|
|
Cooperative
apartment units
|
210
|
465
|
1,048
|
1,839
|
1,469
|
|
Equity
lines of credit
|
7,977
|
6,405
|
6,488
|
21,469
|
19,535
|
|
Construction
|
14,768
|
10,331
|
6,844
|
4,549
|
805
|
|
Total
mortgage loans originated
|
563,226
|
574,211
|
1,013,230
|
1,100,205
|
712,994
|
|
Loans
purchased
|
-
|
-
|
-
|
-
|
-
|
|
Other
loans originated
|
1,688
|
1,859
|
3,166
|
3,866
|
3,997
|
|
Total
loans originated
|
564,914
|
576,070
|
1,016,396
|
1,104,071
|
716,991
|
|
Less:
|
|||||
|
Principal
repayments
|
328,453
|
358,255
|
557,134
|
976,779
|
521,880
|
|
Loans
sold (2)
|
145,430
|
108,489
|
151,151
|
102,880
|
81,191
|
|
Gross
loans at end of period
|
$2,702,625
|
$2,611,594
|
$2,502,268
|
$2,194,157
|
$2,169,745
|
(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, 2006.
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-7
|
At
December 31, 2006
|
|||||||||
|
Real
Estate Loans
|
|||||||||
|
Multifamily
Residential
|
Commercial
Real
Estate
|
One-
to Four-
Family
|
Cooperative
Apartment
|
FHA/VA
Insured
|
Construction
|
Other
Loans
|
Total
Loans
|
||
|
(Dollars
In Thousands)
|
|||||||||
|
Amount
due to Mature or Reprice During the Year Ending:
|
|||||||||
|
December
31, 2007
|
$64,099
|
$20,259
|
$26,838
|
$3,936
|
$10
|
$23,340
|
$2,205
|
$140,597
|
|
|
December
31, 2008
|
336,627
|
64,126
|
10,612
|
723
|
-
|
-
|
-
|
412,088
|
|
|
December
31, 2009
|
304,327
|
63,179
|
20,905
|
459
|
-
|
-
|
-
|
388,870
|
|
|
December
31, 2010
|
322,407
|
108,706
|
17,485
|
-
|
-
|
-
|
-
|
448,598
|
|
|
December
31, 2011
|
421,729
|
192,900
|
12,491
|
124
|
-
|
-
|
-
|
627,244
|
|
|
Sub-total
|
1,449,099
|
449,170
|
88,331
|
5,242
|
10
|
23,340
|
2,205
|
2,017,397
|
|
|
December
31, 2012 through
December
31, 2016
|
331,649
|
167,604
|
27,993
|
903
|
1,226
|
-
|
-
|
529,375
|
|
|
December
31, 2017 and beyond
|
74,332
|
50,153
|
30,289
|
1,079
|
-
|
-
|
-
|
155,853
|
|
|
Total
|
$1,855,080
|
$666,927
|
$146,613
|
$7,224
|
$
1,236
|
$23,340
|
$
2,205
|
$2,702,625
|
|
The
following table sets forth the outstanding principal balance in each loan
category (including loans held for sale) at December 31, 2006 that is due
to
mature or reprice after December 31, 2007, and whether such loans have
fixed or
adjustable interest rates:
|
Due
after December 31, 2007
|
|||
|
Fixed
|
Adjustable
|
Total
|
|
|
(Dollars
in Thousands)
|
|||
|
Mortgage
loans:
|
|||
|
Multifamily
residential
|
$259,640
|
$1,531,431
|
$1,791,071
|
|
Commercial
real estate
|
95,486
|
551,182
|
646,668
|
|
One-
to four-family
|
51,868
|
67,906
|
119,774
|
|
Cooperative
apartment
|
2,106
|
1,182
|
3,288
|
|
FHA/VA
insured
|
1,226
|
-
|
1,226
|
|
Construction
|
5,064
|
-
|
5,064
|
|
Other
loans
|
-
|
-
|
-
|
|
Total
loans
|
$410,326
|
$2,151,701
|
$2,562,027
|
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), Underlying
Cooperative and commercial real estate loans. The properties securing these
loans are generally located in the Bank's primary lending area. At December
31,
2006, the Bank had multifamily residential loans totaling $1.86 billion
in its
portfolio, comprising 68.6% of the gross loan portfolio. Of the multifamily
residential loans, $1.67 billion, or 89.5%, were secured by apartment buildings
and $194.2 million, or 10.5%, were secured by Underlying Cooperatives.
The Bank
also had $666.9 million of commercial real estate loans in its portfolio
at
December 31, 2006, representing 24.7% of its total loan portfolio.
The
Bank
originated multifamily residential, Underlying Cooperative, and commercial
real
estate loans totaling $521.2 million during the year ended December 31,
2006 and
$515.9 million during the year ended December 31, 2005. At December 31,
2006,
the Bank had commitments accepted by borrowers to originate $53.8 million
of
multifamily residential and commercial real estate loans, compared to $51.0
million outstanding at December 31, 2005.
At
December 31, 2006, multifamily residential, Underlying Cooperative 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
tenants
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, 2006, mixed use properties classified as
multifamily residential or commercial real estate loans totaled $920.2
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, 2006,
had an
average loan size of approximately $1.2 million. Multifamily residential
loans
in this range are generally secured by buildings that possess between 5
and 100
apartments. As of December 31,
F-8
2006,
the
Bank had a total of $1.78 billion of multifamily residential loans in its
portfolio secured by buildings with under 100 units, representing approximately
65% 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, 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 and commercial residential 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, 2006. The Bank additionally requires all multifamily
and
commercial 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. Where appropriate, 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, where
appropriate, rent or lease income, the borrower's credit history and business
experience, and valuation determined under the income approach, and additionally
requires a security interest in the personal property associated with the
collateral, and standby assignments of rents and leases in addition to
the
security interest in the underlying property. (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, 2006, the Bank had 342 multifamily residential and commercial
real
estate loans in portfolio with principal balances greater than $2.0 million,
totaling $1.26 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, may be difficult to appraise, or may
fluctuate in value based upon the success of the business.
The
Bank's three largest multifamily residential loans at December 31, 2006
were a
$24.2 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 $13.0 million loan originated in December 2004 secured
by ten
adjacent, mixed-use buildings ranging between one and five stories located
in
Manhattan, New York.
The
Bank's three largest commercial real estate loans at December 31, 2006
were a
$15.7 million loan originated in May 2005 secured by a three-story building
located in Manhattan, New York containing 10 retail stores; a $11.9 million
loan
originated in July 2004 secured by a five-story mixed-use building located
in
Manhattan, New York containing 30
F-9
residential
apartments and 10 commercial units; and a $9.3 million loan originated
in March
2005 secured by an office building containing 63 offices and 2 retail stores
located in Manhattan, New York.
Small
Mixed-Use Lending. Over
the
past few years the Bank has increased its origination of loans secured
by
buildings containing between two and five units, of which at least one
unit is
residential and one unit is commercial, and for which the collateral generally
serves as the borrower's primary residence or business. These loans are
referred
to as "small mixed-use" loans. These loans are classified as either one-
to
four-family residential, multifamily residential or commercial real estate
utilizing the same general criteria as the "mixed use" loans discussed
previously. Depending upon both the attributes of the underlying collateral
building and/or the availability of comparable sales data, small mixed-use
loans
may be underwritten utilizing either an income capitalization method (similar
to
multifamily residential, commercial real estate and mixed use loans) or
based
upon comparable sales information (similar to one-to four-family and cooperative
unit loans). In all instances, the Bank also relies heavily upon both the
financial and credit information of the borrower when underwriting these
loans.
Small mixed-use loans may be underwritten to a maximum loan-to-value ratio
of
80% and, in the event the income method is utilized, a minimum debt service
ratio of 110%. During the year ended December 31, 2006, the Bank originated
$30.5 million of small mixed-use loans, of which $8.5 million were classified
as
one- to four-family residential and $22.0 million were classified as either
multifamily residential or commercial real estate loans.
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 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 $10.6 million of one- to four-family mortgages during the year
ended
December 31, 2006, including home equity and home improvement loans. At
December
31, 2006, $153.8 million, or 5.7%, of the Bank's loans consisted of one-
to
four-family residential and cooperative apartment loans. The Bank is a
participating seller/servicer with two government-sponsored mortgage agencies:
FNMA and SONYMA, and generally underwrites its one- to four-family residential
mortgage loans to conform with standards required by those agencies.
Although
the collateral for 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 $7.2 million, or 0.3% of total loans, as of December 31, 2006.
Adjustable-rate cooperative apartment loans continue to be originated for
portfolio.
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 SONYMA, 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, such as SONYMA, the Bank retains
the
servicing rights on all such loans sold. During the year ended December
31,
2006, the Bank sold one- to four-family mortgage loans totaling $720,000
to
non-affiliates. As of December 31, 2006, the Bank's portfolio of one- to
four-family fixed-rate mortgage loans serviced for others totaled $24.4
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 $20.9 million at
December
31, 2006.
Equity
credit is also 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 equity loans, 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 equity loans was $12.0 million at December 31, 2006,
on
outstanding total lines of $37.6 million.
F-10
Construction
Lending. The
Bank
has accepted participation 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
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, 2006, the Bank funded
$14.8 million of new construction loans. At December 31, 2006, the Bank
had
$33.4 million in unfunded construction loan commitments.
Loan
Approval Authority and Underwriting.
The
Board
of Directors of the Bank establishes lending authorities for individual
officers
as to the various types of loan products. 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 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 can be extended to any one borrower to 15% of unimpaired capital and
unimpaired surplus. An individual 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 equity securities that have a reliable and continuously
available price quotation. (See "Item 1. Business
- Regulation - Regulation of Federal Savings Associations - Loans to One
Borrower'').
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 $3.6 million and $958,000 at December 31, 2006 and 2005, respectively.
The increase in non-performing loans during the year resulted primarily
from the
addition of seven loans totaling $3.6 million that was partially offset
by the
removal of four loans totaling $898,000 from non-performing status 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 months.
The
Bank
had a total of 16 real estate and consumer loans, totaling $258,000, delinquent
60-89 days at December 31, 2006, compared to a total of 19 such delinquent
loans, totaling $1.4 million, at December 31, 2005. The majority of the
dollar
amount of both non-performing loans and loans delinquent 60-89 days was
composed
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 decline in the dollar amount delinquent 60-89 days from December
31,
2005 to December 31, 2006 resulted primarily from a net decrease of $929,000
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, 2006 or 2005.
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, 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,
F-11
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
$3.5 million, consisting of six loans, at December 31, 2006, compared to
$384,000, consisting of one loan, at December 31, 2005. The
average total balance of impaired loans was approximately $1.9 million
during
the year ended December 31, 2006, $2.3 million during the year ended December
31, 2005, and $608,000 during the year ended December 31, 2004. During
the year
ended December 31, 2006, six impaired loans totaling $3.5 million were
added to
impaired status, however, since they 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, and a decline in the balance of
impaired
loans from December 31, 2004 to December 31, 2005, the average balance
of
impaired loans was higher during the year ended December 31, 2005 compared
to
both years ended December 31, 2006 and 2004. At December 31, 2006 and 2005,
reserves totaling $351,000 and $38,000, respectively, were allocated within
the
allowance for loan losses for impaired loans. At
December 31, 2006, non-performing loans exceeded impaired loans by $92,000,
due
to $92,000 of one- to four-family and consumer loans, which, while on
non-performing status, were not deemed impaired since they had individual
outstanding balances less than $417,000.
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, 2006, 2005 and 2004.
The
following table sets forth information regarding non-performing loans,
OREO, and
troubled-debt restructurings at the dates indicated:
|
At
December 31,
|
|||||
|
2006
|
2005
|
2004
|
2003
|
2002
|
|
|
Non-performing
loans
|
(Dollars
in Thousands)
|
||||
|
One-
to four-family
|
$60
|
$317
|
$475
|
$346
|
$1,232
|
|
Multifamily
residential
|
1,655
|
384
|
830
|
-
|
690
|
|
Commercial
real estate
|
1,859
|
||||
|
Cooperative
apartment
|
26
|
229
|
-
|
-
|
70
|
|
Other
|
6
|
28
|
154
|
179
|
124
|
|
Total
non-performing loans
|
3,606
|
958
|
1,459
|
525
|
2,116
|
|
OREO
|
-
|
-
|
-
|
-
|
134
|
|
Total
non-performing assets
|
3,606
|
958
|
1,459
|
525
|
2,250
|
|
Troubled-debt
restructurings
|
-
|
-
|
-
|
-
|
-
|
|
Total
non-performing assets and
troubled-debt
restructurings
|
$3,606
|
$958
|
$1,459
|
$525
|
$2,250
|
|
Impaired
loans
|
$3,514
|
$384
|
$830
|
$-
|
$690
|
|
Ratios:
|
|||||
|
Total
non-performing loans to total loans
|
0.13%
|
0.04%
|
0.06%
|
0.02%
|
0.10%
|
|
Total
non-performing loans and troubled-debt restructurings
to total loans
|
0.13
|
0.04
|
0.06
|
0.02
|
0.10
|
|
Total
non-performing assets to total assets
|
0.11
|
0.03
|
0.04
|
0.02
|
0.08
|
|
Total
non-performing assets and troubled-debt
restructurings to total assets
|
0.11
|
0.03
|
0.04
|
0.02
|
0.08
|
Monitoring
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
F-12
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
hires an
independent appraiser 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 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 policies. All non-performing loans, troubled-debt restructurings
and
OREO are considered to be 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 recommendations to the Bank's
Board
of Directors on a quarterly basis.
The
year
ended December 31, 2006 saw the continuation of a strong real estate market
throughout the NYC metropolitan area. As a result, the Bank's classified
assets
continued at historically low levels. The
watch
list contained 5 loans totaling $773,000 at December 31, 2006, compared
to 15
loans totaling $2.8 million at December 31, 2005. The decline resulted
from the
removal of eleven loans totaling $2.0 million from the watch list as these
loans
were either satisfied or remained current for a period of at least twelve
months
as of December 31, 2006. At both December 31, 2006 and 2005, the Bank had
no
assets classified as either Doubtful or Loss. At December 31, 2006, the
Bank had
47 loans totaling $783,000 designated Special Mention, compared to 58 loans
totaling $2.8 million at December 31, 2005, reflecting the decline in watch
list
loans during the year ended December 31, 2006. At December 31, 2006, the
Bank
had $3.7 million of assets classified as Substandard, compared to $807,000
at
December 31, 2005 reflecting the increase in non-performing loans during
the
year ended December 31, 2006.
F-13
The
following table sets forth the Bank's aggregate carrying value of the assets
classified as either Substandard or Special Mention at December 31,
2006:
|
Special
Mention
|
Substandard
|
||||
|
Number
|
Amount
|
Number
|
Amount
|
||
|
(Dollars
in Thousands)
|
|||||
|
Mortgage
Loans:
|
|||||
|
Multifamily
residential
|
1
|
$653
|
2
|
$1,020
|
|
|
One-
to four-family
|
-
|
-
|
2
|
72
|
|
|
Cooperative
apartment
|
3
|
110
|
1
|
38
|
|
|
Commercial
real estate
|
-
|
-
|
4
|
2,589
|
|
|
Total
Mortgage Loans
|
4
|
763
|
9
|
3,719
|
|
|
Other
loans
|
43
|
20
|
4
|
5
|
|
|
OREO
|
-
|
-
|
-
|
-
|
|
|
Total
|
47
|
$783
|
13
|
$3,724
|
|
The
allowance for loan losses was determined in accordance with GAAP, which
requires
the Bank to maintain an appropriate allowance for loan losses. 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,
|
|||||
|
2006
|
2005
|
2004
|
2003
|
2002
|
|
|
(Dollars
in Thousands)
|
|||||
|
Total
loans outstanding at end of period (1)
|
$2,703,673
|
$2,612,095
|
$2,501,805
|
$2,192,640
|
$2,170,077
|
|
Average
total loans outstanding (1)
|
$2,662,497
|
$2,598,204
|
$2,397,187
|
$2,206,003
|
$2,128,297
|
|
Allowance
for loan losses:
|
|||||
|
Balance
at beginning of period
|
$15,785
|
$15,543
|
$15,018
|
$15,458
|
$15,492
|
|
Provision
for loan losses
|
240
|
340
|
280
|
288
|
240
|
|
Charge-offs
|
|||||
|
Multifamily
residential
|
-
|
-
|
-
|
-
|
(42)
|
|
Commercial
real estate
|
-
|
-
|
-
|
-
|
-
|
|
One-
to four-family
|
(2)
|
-
|
(3)
|
(2)
|
(169)
|
|
FHA/VA
insured
|
-
|
-
|
-
|
-
|
-
|
|
Cooperative
apartment
|
-
|
-
|
-
|
(1)
|
-
|
|
Other
|
(48)
|
(76)
|
(155)
|
(60)
|
(79)
|
|
Total
charge-offs
|
(50)
|
(76)
|
(158)
|
(63)
|
(290)
|
|
Recoveries
|
23
|
31
|
25
|
34
|
16
|
|
Reserve
for loan commitments
transferred
(to) from other liabilities
|
(484)
|
(53)
|
378
|
(699)
|
-
|
|
Balance
at end of period
|
$15,514
|
$15,785
|
$15,543
|
$15,018
|
$15,458
|
|
Allowance
for loan losses to
total
loans at end of period
|
0.57%
|
0.60%
|
0.62%
|
0.68%
|
0.71%
|
|
Allowance
for loan losses to total non-performing
loans at end of period
|
430.23
|
1,647.70
|
1,065.32
|
2,860.57
|
730.53
|
|
Allowance
for loan losses to total non-performing loans and
troubled-debt restructurings at end of period
|
430.23
|
1,647.70
|
1,065.32
|
2,860.57
|
730.53
|
|
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.
The
allowance for loan losses was $15.5 million at December 31, 2006 compared
to
$15.8 million at December 31, 2005. During the year ended December 31,
2006, 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, 2006, the Bank re-designated $484,000 of its allowance
for
loan losses into other liabilities related to reserves on loan origination
commitments. The Bank also recorded net charge-offs of $27,000 during the
year
ended December 31, 2006, all of which related to consumer loans.
F-14
Management
believes, based upon all relevant and available information, that the allowance
for loan losses is appropriate to absorb losses inherent in the portfolio.
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 the 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
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:
|
At
December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
2003
|
2002
|
||||||
|
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
|
$351
|
0.13%
|
$38
|
0.01%
|
$83
|
0.04%
|
$-
|
-
|
$-
|
0.03%
|
|
Multifamily
residential
|
8,948
|
68.62
|
10,137
|
71.75
|
11,753
|
76.72
|
11,391
|
79.24%
|
11,831
|
79.90
|
|
Commercial
real estate
|
5,208
|
24.61
|
4,759
|
22.10
|
3,161
|
16.98
|
2,742
|
14.15
|
2,416
|
12.26
|
|
One-to
four- family
|
496
|
5.43
|
496
|
5.20
|
436
|
5.05
|
686
|
5.67
|
1,051
|
6.74
|
|
Cooperative
apartment
|
45
|
0.27
|
59
|
0.39
|
65
|
0.47
|
124
|
0.63
|
151
|
0.76
|
|
Construction
|
392
|
0.86
|
196
|
0.46
|
-
|
0.62
|
-
|
0.13
|
-
|
0.09
|
|
Other
|
74
|
0.08
|
100
|
0.09
|
45
|
0.12
|
75
|
0.18
|
9
|
0.22
|
|
Total
|
$15,514
|
100.00%
|
$15,785
|
100.00%
|
$15,543
|
100.00%
|
$15,018
|
100.00%
|
$15,458
|
100.00%
|
| (1) |
Total
loans represent gross loans less FHA and VA guaranteed
loans.
|
Investment
Strategies of the Holding Company.
At
December 31, 2006, the Holding Company's principal asset was its $327.0
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 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, 2006 and 2005, neither the Holding Company nor the Bank held
any
derivative instruments or embedded derivative instruments that required
bifurcation.
F-15
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. None of the Company's MBS as of December 31, 2006 possessed
call
features.
The
Company's consolidated investment in MBS totaled $154.4 million, or 4.9%
of
total assets, at December 31, 2006, the majority of which was owned by
the Bank. At December 31, 2006, the largest component of the portfolio
was
$143.2 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, 2006, the fair value of CMOs
and
REMICs was approximately $5.3 million below their cost basis.
The
remaining MBS portfolio was composed of pass-through securities guaranteed
by
the Government National Mortgage Agency ("GNMA") or FNMA. These securities
approximated 7.3% of the total MBS portfolio at December 31, 2006. This
portion
of the portfolio was composed of $1.8 million of GNMA ARM pass-through
securities with a weighted average term to next rate adjustment of less
than one
year, and $9.5 million of seasoned fixed-rate FNMA pass-through securities
with
an average estimated duration of less than 3.2 years.
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, 2006, 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, 2006, the Holding Company
and the
Bank owned, on a combined basis, $184.0 million of securities classified
as
available for sale, which represented 5.8% 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 $355,000 below their fair value at December
31,
2006.
The
following table sets forth activity in the MBS portfolio for the periods
indicated:
|
For
the Year Ended December 31,
|
|||
|
2006
|
2005
|
2004
|
|
|
Dollars
in Thousands
|
|||
|
Amortized
cost at beginning of period
|
$199,931
|
$526,074
|
$464,671
|
|
(Sales)
Purchases, net
|
-
|
(235,791)
|
271,221
|
|
Principal
repayments
|
(39,420)
|
(89,072)
|
(206,455)
|
|
Premium
amortization, net
|
(415)
|
(1,279)
|
(3,363)
|
|
Amortized
cost at end of period
|
$160,096
|
$199,931
|
$526,074
|
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, 2006, the Company's consolidated portfolio of corporate debt
obligations totaled $22.8 million. The majority of these investments were
held
by the Bank.
Equity
Investments.
The
Company's consolidated investment in equity securities totaled $6.9 million
at
December 31, 2006, and was comprised primarily of various equity mutual
fund
investments.
F-16
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,
|
||||||
|
2006
|
2005
|
2004
|
||||
|
Amortized
Cost
|
Fair
Value
|
Amortized
Cost
|
Fair
Value
|
Amortized
Cost
|
Fair
Value
|
|
|
MBS:
|
Dollars
in Thousands
|
|||||
|
CMOs
and REMICs
|
$148,461
|
$143,157
|
$185,510
|
$179,495
|
$480,865
|
$474,459
|
|
FHLMC
|
-
|
-
|
-
|
-
|
1,454
|
1,493
|
|
FNMA
|
9,862
|
9,488
|
12,077
|
11,599
|
29,250
|
29,125
|
|
GNMA
|
1,773
|
1,792
|
2,344
|
2,359
|
14,505
|
14,828
|
|
Total
MBS
|
160,096
|
154,437
|
199,931
|
193,453
|
526,074
|
519,905
|
|
Investment
securities:
|
||||||
|
U.S.
Treasury and agency
|
-
|
-
|
17,067
|
17,060
|
12,999
|
12,956
|
|
Other
|
29,738
|
29,783
|
27,322
|
28,228
|
42,143
|
42,473
|
|
Total
investment securities
|
29,738
|
29,783
|
44,389
|
45,288
|
55,142
|
55,429
|
|
Net
unrealized loss (1)
|
(5,614)
|
-
|
(5,581)
|
-
|
(5,906)
|
-
|
|
Total
securities, net
|
$184,220
|
$184,220
|
$238,739
|
$238,741
|
$575,310
|
$575,334
|
| (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
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,
|
||||||
|
2006
|
2005
|
2004
|
||||
|
Amortized
Cost
|
Fair
Value
|
Amortized
Cost
|
Fair
Value
|
Amortized
Cost
|
Fair
Value
|
|
|
Held-to-Maturity:
|
Dollars
in Thousands
|
|||||
|
MBS
(1)
|
$-
|
$-
|
$-
|
$-
|
$465
|
$485
|
|
Investment
securities (2)
|
235
|
235
|
455
|
456
|
585
|
589
|
|
Total
Held-to-Maturity
|
$235
|
$235
|
$455
|
$456
|
$1,050
|
$1,074
|
|
Available-for-Sale:
|
||||||
|
MBS:
|
||||||
|
Pass-through
securities
|
$11,635
|
$11,280
|
$14,421
|
$13,958
|
$44,744
|
$44,961
|
|
CMOs
and REMICs
|
148,461
|
143,157
|
185,510
|
179,495
|
480,865
|
474,459
|
|
Total
MBS available-for-sale
|
160,096
|
154,437
|
199,931
|
193,453
|
525,609
|
519,420
|
|
Investment
securities (2)
|
29,503
|
29,548
|
43,934
|
44,832
|
54,557
|
54,840
|
|
Net
unrealized loss (3)
|
(5,614)
|
-
|
(5,581)
|
-
|
(5,906)
|
-
|
|
Total
Available-for-Sale
|
$183,985
|
$183,985
|
$238,284
|
$238,285
|
$574,260
|
$574,260
|
|
Total
securities, net
|
$184,220
|
$184,220
|
$238,739
|
$238,741
|
$575,310
|
$575,334
|
(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 securities portfolio to the recorded
value
reflected in the Company's Consolidated Statements of
Condition.
|
The
following table sets forth certain information regarding the amortized
cost,
fair value and weighted average yield of investment securities and MBS
(exclusive of equity investments) at December 31, 2006, by remaining period
to
contractual maturity. With respect to MBS, the entire carrying amount of
each
security at December 31, 2006 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 2.6 years as of December 31, 2006 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,
2006.
F-17
|
At
December 31, 2006
|
||||||
|
Held
to Maturity
|
Available
for Sale
|
|||||
|
Amortized
Cost
|
Fair
Value
|
Weighted
Average
Yield
|
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
|
-
|
-
|
-
|
$21,536
|
$20,812
|
3.82%
|
|
Due
after ten years
|
-
|
-
|
-
|
138,560
|
133,625
|
3.98
|
|
Total
|
-
|
-
|
-
|
160,096
|
154,437
|
3.96
|
|
U.S.
Treasury and agency:
|
||||||
|
Due
within 1 year
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Due
after 1 year but within 5 years
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Due
after 5 years but within 10 years
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Due
after ten years
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Total
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Corporate
and other:
|
||||||
|
Due
within 1 year
|
-
|
-
|
-
|
1,000
|
999
|
2.88
|
|
Due
after 1 year but within 5 years
|
$235
|
$235
|
7.50%
|
982
|
984
|
5.55
|
|
Due
after 5 years but within 10 years
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Due
after ten years
|
-
|
-
|
-
|
20,496
|
20,617
|
7.29
|
|
Total
|
235
|
235
|
7.50
|
22,478
|
22,600
|
7.02
|
|
Total:
|
||||||
|
Due
within 1 year
|
$-
|
$-
|
-
|
$1,000
|
$999
|
2.88%
|
|
Due
after 1 year but within 5 years
|
235
|
235
|
7.50
|
982
|
984
|
5.55
|
|
Due
after 5 years but within 10 years
|
-
|
-
|
-
|
21,536
|
20,812
|
3.82
|
|
Due
after ten years
|
-
|
-
|
-
|
159,056
|
154,242
|
4.41
|
|
Total
|
$235
|
$235
|
7.50%
|
$182,574
|
$177,037
|
4.34%
|
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 long-term,
one- to four-family residential real estate loans to either FNMA or SONYMA.
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. The Bank, at December 31, 2006 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, 2006,
the Bank
had deposit liabilities of $2.01 billion, up $93.8 million from December
31,
2005 (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, 2006, $356.6
million, or 17.8%, consisted of CDs with a minimum denomination of one-hundred
thousand dollars. Individual Retirement Accounts totaled $106.5 million,
or 5.3%
of total deposits.
The
Bank
is authorized to accept brokered CDs up to an aggregate limit of $120.0
million.
At December 31, 2006 and 2005, the Bank had no brokered CDs.
F-18
The
following table presents the deposit activity of the Bank for the periods
indicated:
|
Year
Ended December 31,
|
|||
|
2006
|
2005
|
2004
|
|
|
(Dollars
in Thousands)
|
|||
|
Deposits
|
$1,826,641
|
$2,942,773
|
$3,445,897
|
|
Withdrawals
|
1,789,552
|
3,279,191
|
3,315,462
|
|
Deposits
(less) greater than Withdrawals
|
$37,089
|
(336,418)
|
130,435
|
|
Interest
credited
|
56,671
|
41,141
|
37,936
|
|
Total
(decrease) increase in deposits
|
$93,760
|
$(295,277)
|
$168,371
|
At December 31, 2006, the Bank had $356.6 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
|
$108,357
|
4.96%
|
|
After
three but within six months
|
139,984
|
5.05
|
|
After
six but within twelve months
|
86,649
|
5.02
|
|
After
12 months
|
21,594
|
4.09
|
|
Total
|
$356,584
|
4.96%
|
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, 2006
|
At
December 31, 2005
|
At
December 31, 2004
|
|||||||||
|
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
|
$298,522
|
14.86%
|
0.59%
|
$335,527
|
17.52%
|
0.56%
|
$362,656
|
16.41%
|
0.56%
|
||
|
CDs
|
1,064,669
|
53.01
|
4.76
|
978,585
|
51.11
|
3.50
|
959,951
|
43.44
|
2.52
|
||
|
Money
market accounts
|
514,607
|
25.62
|
3.56
|
464,962
|
24.28
|
1.69
|
749,040
|
33.89
|
1.40
|
||
|
NOW
and Super NOW
accounts
|
35,519
|
1.77
|
1.08
|
38,697
|
2.02
|
1.01
|
45,178
|
2.04
|
1.08
|
||
|
Checking
accounts
|
95,215
|
4.74
|
-
|
97,001
|
5.07
|
-
|
93,224
|
4.22
|
-
|
||
|
Totals
|
$2,008,532
|
100.00%
|
3.54%
|
$1,914,772
|
100.00%
|
2.32%
|
$2,210,049
|
100.00%
|
1.68%
|
||
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, 2006:
|
Period
to Maturity at December 31, 2006
|
||||||||
|
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,
2006
|
Total
at
December
31,
2005
|
Total
at
December
31,
2004
|
|
|
(Dollars
in Thousands)
|
||||||||
|
2.00%
and below
|
$66,764
|
$2,632
|
$-
|
$-
|
$69,396
|
$134,953
|
$364,871
|
|
|
2.01%
to 3.00%
|
65,319
|
11,908
|
174
|
-
|
77,401
|
187,456
|
456,019
|
|
|
3.01%
to 4.00%
|
11,449
|
42,955
|
9,241
|
-
|
63,645
|
423,177
|
69,836
|
|
|
4.01%
to 5.00%
|
128,957
|
4,890
|
8,810
|
-
|
142,657
|
220,750
|
44,231
|
|
|
5.01%
and above
|
688,520
|
23,050
|
-
|
-
|
711,570
|
12,249
|
24,994
|
|
|
Total
|
$961,009
|
$85,435
|
$18,225
|
$-
|
$1,064,669
|
$978,585
|
$959,951
|
|
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 $935.9 million at December 31, 2006.
F-19
The
Bank
had FHLBNY advances totaling $571.5 million and $531.5 million at
December 31, 2006 and 2005, respectively. At
December 31, 2006, the Bank maintained sufficient collateral, as defined
by the
FHLBNY (principally in the form of real estate loans), to secure such Advances.
REPOS
totaled $120.2 million and $205.5 million, respectively, at December 31,
2006
and 2005. 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,
|
|||
|
2006
|
2005
|
2004
|
|
|
(Dollars
in Thousands)
|
|||
|
Balance
outstanding at end of period
|
$120,235
|
$205,455
|
$205,584
|
|
Average
interest cost at end of period
|
3.54%
|
2.99%
|
2.48%
|
|
Average
balance outstanding during the period
|
$134,541
|
$205,530
|
$129,426
|
|
Average
interest cost during the period (a)
|
1.95%(a)
|
2.90%
|
2.34%
|
|
Carrying
value of underlying collateral at end of period
|
$126,830
|
$213,925
|
$216,754
|
|
Estimated
fair value of underlying collateral
|
$126,830
|
$213,925
|
$216,754
|
|
Maximum
balance outstanding at month end during period
|
$205,455
|
$205,584
|
$220,649
|
(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,
|
|||
|
2006
|
2005
|
2004
|
|
|
(Dollars
in Thousands)
|
|||
|
Balance
outstanding at end of period
|
$571,500
|
$531,500
|
$506,500
|
|
Average
interest cost at end of period
|
4.37%
|
4.62%
|
4.21%
|
|
Weighted
average balance outstanding during the period
|
$565,612
|
$508,583
|
$515,626
|
|
Average
interest cost during the period (1)
|
4.69%
|
4.49%
|
4.00%
|
|
Maximum
balance outstanding at month end during period
|
$596,500
|
$531,500
|
$534,000
|
(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, 2005
or
2004.
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.
F-20
In
addition to the Bank, the Holding Company's direct and indirect subsidiaries
consist of seven wholly-owned corporations, one of which is directly owned
by
the Holding Company and six of which are directly or indirectly owned by
the
Bank. DSBW Preferred Funding Corp. is a direct subsidiary of Havemeyer
Equities,
Inc., which is a direct subsidiary of the Bank. The following table presents
an
overview of the Holding Company's subsidiaries as of December 31,
2006:
|
Subsidiary
|
Year/
State of Incorporation
|
Primary
Business Activities
|
|
Havemeyer
Equities, Inc.
|
1977
/ New York
|
Ownership
of DSBW Preferred Funding Corp.
|
|
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
|
|
842
Manhattan Avenue Corp.
|
1995/
New York
|
Management
and ownership of real estate. Currently inactive
|
|
Dime
Reinvestment Corporation
|
2004
/ Delaware
|
Community
Development Entity. Currently
inactive.
|
As
of
December 31, 2006, the Company had 327 full-time employees and 82 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.
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
consolidated income tax returns on a June 30 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 has 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 so 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
F-21
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
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
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.
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
NYS
tax rate for the year ended December 31, 2006 was 9.03% of taxable income.
This
rate included a commuter transportation 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.
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.
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 were 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.
F-22
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.
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.
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, 2006, the
Bank's limit on loans to one borrower was $73.3 million. The Bank's largest
aggregate amount of loans to one borrower on that date was $36.8 million
and the
second largest borrower had an aggregate loan balance of $35.5 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, 2006, the Bank maintained
68.5% 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
F-23
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.
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.
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 at December 31, 2006:
|
As
of December 31, 2006
|
||||
|
Actual
|
Minimum
Capital Requirement
|
|||
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|
|
(Dollars
in Thousands)
|
||||
|
Tangible
|
$277,622
|
9.05%
|
$46,037
|
1.5%
|
|
Leverage
Capital
|
277,622
|
9.05
|
122,766
|
4.0
|
|
Total
Risk-based capital
|
276,864
|
12.61
|
175,653
|
8.0
|
The
following is a reconciliation of GAAP capital to regulatory capital for
the
Bank:
|
At
December 31, 2006
|
|||
|
Tangible
Capital
|
Leverage
Capital
|
Total
Risk-Based
Capital
|
|
|
(Dollars
in Thousands)
|
|||
|
GAAP
capital
|
$326,456
|
$326,456
|
$326,456
|
|
Non-allowable
assets:
|
|||
|
Core
deposit intangible
|
-
|
-
|
-
|
|
MSR
|
(265)
|
(265)
|
(265)
|
|
Accumulated
other comprehensive loss
|
7,069
|
7,069
|
7,069
|
|
Goodwill
|
(55,638)
|
(55,638)
|
(55,638)
|
|
Tier
1 risk-based capital
|
277,622
|
277,622
|
277,622
|
|
Contingent
liability for loans sold to FNMA
|
-
|
-
|
(16,272)
|
|
General
valuation allowance
|
-
|
-
|
15,514
|
|
Total
capital
|
277,622
|
277,622
|
276,864
|
|
Minimum
capital requirement
|
46,037
|
122,766
|
175,653
|
|
Regulatory
capital excess
|
$231,585
|
$154,856
|
$101,211
|
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.
F-24
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 failed 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, 2006, the Bank's
liquid assets approximated 5.75% 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, 2006, a total of $13,000 in assessments
were paid for the Bank and Holding Company.
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. The OTS regulations also
F-25
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.
F-26
In
late
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
believes that the CRE Guidance will not have a material impact on the conduct
of
its business and that it will be able to effectively implement requirements
and
suggestions set forth in the CRE Guidance during 2007.
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." 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, 2006, 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 will, therefore, range from 5 to 43 basis points of deposits.
Under the amended system, the assessment rate for the Bank's deposits is
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 has been granted a credit of $1.6 million that will 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.
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
F-27
and
dissolution during the 1980's and 1990's. For the fourth quarter of 2006,
the
quarterly adjusted rate of assessment for FICO bonds is 0.0124%. The Bank's
total expense in 2006 for the FICO bonds assessment was $257,000.
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 to implement certain provisions of
Gramm-Leach. 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 stock of $31.3 million at December 31, 2006.
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 $8.5
million
through $45.8 million (subject to adjustment by the FRB) plus a reserve
of 10%
(subject to adjustment by the FRB
F-28
between
8% and 14% against the portion of total transaction accounts in excess
of $45.8
million). The initial $8.5 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.
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.
As
a
unitary savings and loan holding company, the Holding Company generally
is not
restricted under existing laws as to the types of business activities in
which
it may engage, provided that the Bank continues to satisfy the QTL test
(See "Item 1 - Business - Regulation - Regulation of Federal
Savings
Associations - QTL Test'' for a discussion of the QTL requirements). 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 limits the activities of a multiple savings association
holding company and its non-insured association subsidiaries primarily
to
activities permissible for bank holding companies under Section 4(c)(8)
of the
Bank Holding Company Act, subject to prior approval of the OTS, and to
other
activities authorized by OTS regulation.
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.
F-29
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.
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'').
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.
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 five 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
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, 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’s primary lending area is 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, most of which are secured by real
estate
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
F-30
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. In addition,
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.
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.
As
a
federally-chartered savings bank, the Bank is required to monitor changes
in its
NPV. 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 change.
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. 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
F-31
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.
Not
applicable.
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.
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.
None.
PART
II
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, 2006
|
Twelve
Months Ended December
31, 2005
|
||||||
|
Quarter
Ended
|
Dividends
Declared
|
High
Sales
Price
|
Low
Sales
Price
|
|
Dividends
Declared
|
High
Sales
Price
|
Low
Sales
Price
|
|
March
31st
|
$0.14
|
$15.55
|
$13.46
|
$0.14
|
$17.41
|
$15.05
|
|
|
June
30th
|
0.14
|
14.58
|
13.49
|
0.14
|
15.62
|
13.96
|
|
|
September
30th
|
0.14
|
14.89
|
13.39
|
0.14
|
16.52
|
14.13
|
|
|
December
31st
|
0.14
|
14.80
|
13.66
|
0.14
|
15.24
|
13.78
|
|
On
December 29, 2006, the final trading date in the fiscal year, the Holding
Company's common stock closed at $14.01.
Management
estimates that the Holding Company had approximately 4,300 shareholders
of
record as of March 11, 2007, including persons or entities holding stock
in
nominee or street name through various brokers and banks. There were 36,456,354
shares of Holding Company common stock outstanding at December 31,
2006.
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
F-32
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, 2006, the Holding Company paid cash dividends
totaling $19.7 million, representing $0.56 per outstanding common share.
During
the year ended December 31, 2005, the Holding Company paid cash dividends
totaling $19.9 million, representing $0.56 per outstanding common share.
On
January 18, 2007, the Board of Directors declared a cash dividend of $0.14
per
common share to all shareholders of record as of January 31, 2007. This
dividend
was paid on February 15, 2007.
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 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, 2006, the Holding Company purchased
209,332
shares of its common stock into treasury. These repurchases were made under
the
Company's Eleventh Stock Repurchase Program, which was publicly announced
on
December 15, 2005.
A
summary
of the shares repurchased by month is as follows:
|
Period
|
Total
Number
Shares
Purchased
|
AveragePrice
Paid
Per Share
|
Total
Number of Shares Purchased as Part of a Publicly Announced
Programs
|
Maximum
Number of Shares that May Yet be Purchased Under the
Programs
|
|||
|
October
2006
|
57,500
|
$14.40
|
57,500
|
1,838,442
|
|||
|
November
2006
|
76,332
|
14.12
|
76,332
|
1,762,110
|
|||
|
December
2006
|
75,500
|
14.19
|
75,500
|
1,686,610
|
Performance
Graph
Pursuant
to the 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,
2002 through December 31, 2006. The graph assumes the reinvestment of dividends
in additional shares of the same class of equity securities as those listed
below.
F-33
|
|
Period
Ending
|
|||||
|
Index
|
12/31/01
|
12/31/02
|
12/31/03
|
12/31/04
|
12/31/05
|
12/31/06
|
|
Dime
Community Bancshares, Inc.
|
100.00
|
104.46
|
172.26
|
155.30
|
131.35
|
130.95
|
|
NASDAQ
Composite
|
100.00
|
68.76
|
103.67
|
113.16
|
115.57
|
127.58
|
|
SNL
Thrift Index
|
100.00
|
119.29
|
168.88
|
188.16
|
194.80
|
227.07
|
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, 2006, 2005, 2004, 2003 and 2002, 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. The consolidated financial
and other data for the year ended December 31, 2002 is unaudited. Amounts
as of
and for the twelve months ended December 31, 2005, 2004, 2003 and 2002
have been
reclassified to conform to the December 31, 2006 presentation.
|
At
or for the Year Ended December 31,
|
|||||
|
2006
|
2005
|
2004
|
2003
|
2002
|
|
|
Selected
Financial Condition Data:
|
|||||
|
Total
assets
|
$3,173,377
|
$3,126,226
|
$3,377,266
|
$2,971,661
|
$2,946,374
|
|
Loans
and loans held for sale (net of deferred costs or fees and
the
allowance for loans losses)
|
2,688,159
|
2,596,310
|
2,486,262
|
2,177,622
|
2,154,619
|
|
MBS
|
154,437
|
193,453
|
519,885
|
462,737
|
362,952
|
|
Investment
securities (including FHLBNY capital stock)
|
61,078
|
74,750
|
80,750
|
64,517
|
140,279
|
|
Federal
funds sold and other short-term investments
|
78,752
|
60,014
|
103,291
|
95,286
|
114,291
|
|
Goodwill
|
55,638
|
55,638
|
55,638
|
55,638
|
55,638
|
|
Deposits
|
2,008,532
|
1,914,772
|
2,210,049
|
2,041,678
|
1,927,175
|
|
Borrowings
|
788,900
|
834,120
|
809,249
|
571,675
|
675,541
|
|
Stockholders'
equity
|
290,631
|
291,713
|
281,721
|
283,919
|
265,737
|
|
Tangible
Stockholders' equity
|
241,829
|
239,169
|
229,013
|
228,026
|
206,325
|
|
Selected
Operating Data:
|
|||||
|
Interest
income
|
$170,810
|
$169,712
|
$173,758
|
$184,849
|
$189,621
|
|
Interest
expense on deposits and borrowings
|
93,340
|
77,341
|
67,776
|
71,063
|
91,790
|
|
Net
interest income
|
77,470
|
92,371
|
105,982
|
113,786
|
97,831
|
|
Provision
for losses
|
240
|
340
|
280
|
288
|
240
|
|
Net
interest income after provision for loan losses
|
77,230
|
92,031
|
105,702
|
113,498
|
97,591
|
|
Non-interest
income
|
12,390
|
5,151
|
10,376
|
9,388
|
12,292
|
|
Non-interest
expense
|
41,976
|
40,742
|
42,407
|
40,809
|
38,696
|
|
Income
before income tax
|
47,644
|
56,440
|
73,671
|
82,077
|
71,187
|
|
Income
tax expense
|
17,052
|
20,230
|
27,449
|
30,801
|
26,565
|
|
Net
income
|
$30,592
|
$36,210
|
$46,222
|
$51,276
|
$44,622
|
F-34
|
At
or for the Year Ended December 31,
|
|||||
|
2006
|
2005
|
2004
|
2003
|
2002
|
|
|
SELECTED
FINANCIAL RATIOS AND OTHER DATA (1):
|
|||||
|
Return
on average assets
|
0.98%
|
1.11%
|
1.38%
|
1.67%
|
1.57%
|
|
Return
on average stockholders' equity
|
10.43
|
12.65
|
16.76
|
18.76
|
17.65
|
|
Stockholders'
equity to total assets at end of period
|
9.16
|
9.33
|
8.34
|
9.55
|
9.02
|
|
Tangible
equity to tangible assets at end of period
|
7.74
|
7.78
|
6.88
|
7.82
|
7.15
|
|
Loans
to deposits at end of period
|
134.61
|
136.42
|
113.20
|
107.39
|
112.60
|
|
Loans
to interest-earning assets at end of period
|
90.18
|
88.82
|
78.04
|
77.89
|
77.85
|
|
Net
interest spread (2)
|
2.19
|
2.66
|
3.09
|
3.62
|
3.22
|
|
Net
interest margin (3)
|
2.60
|
2.96
|
3.32
|
3.90
|
3.61
|
|
Average
interest-earning assets to average interest-bearing
liabilities
|
113.07
|
111.88
|
110.79
|
111.60
|
111.64
|
|
Non-interest
expense to average assets
|
1.34
|
1.24
|
1.27
|
1.33
|
1.36
|
|
Core
non-interest expense to average assets (4)
|
1.34
|
1.24
|
1.24
|
1.30
|
1.28
|
|
Efficiency
ratio (4)
|
48.36
|
40.03
|
36.67
|
33.05
|
36.49
|
|
Core
efficiency ratio (4) (5)
|
48.36
|
39.98
|
35.96
|
32.38
|
34.44
|
|
Effective
tax rate
|
35.79
|
35.84
|
37.26
|
37.53
|
37.32
|
|
Dividend
payout ratio
|
64.37
|
54.90
|
42.97
|
30.10
|
25.00
|
|
Per
Share Data:
|
|||||
|
Diluted
earnings per share
|
$0.87
|
$1.02
|
$1.28
|
$1.37
|
$1.17
|
|
Cash
dividends paid per share
|
0.56
|
0.56
|
0.55
|
0.41
|
0.29
|
|
Book
value per share
|
7.97
|
7.89
|
7.58
|
7.45
|
6.91
|
|
Tangible
book value per share
|
6.63
|
6.47
|
6.16
|
5.98
|
5.36
|
|
Asset
Quality Ratios and Other Data:
|
|||||
|
Net
charge-offs
|
$27
|
$45
|
$133
|
$29
|
$274
|
|
Total
non-performing loans
|
3,606
|
958
|
1,459
|
525
|
2,116
|
|
OREO,
net
|
-
|
-
|
-
|
-
|
134
|
|
Non-performing
loans to total loans
|
0.13%
|
0.04%
|
0.06%
|
0.02%
|
0.10%
|
|
Non-performing
loans and OREO
to
total assets
|
0.11
|
0.03
|
0.04
|
0.02
|
0.08
|
|
Allowance
for Loan Losses to:
|
|||||
|
Non-performing
loans
|
430.23%
|
1,647.70%
|
1,065.32%
|
2,860.57%
|
730.53%
|
|
Total
loans (6)
|
0.57
|
0.60
|
0.62
|
0.68
|
0.71
|
|
Regulatory
Capital Ratios:
(Bank only)
|
|||||
|
Tangible
capital
|
9.05%
|
9.84%
|
7.88%
|
7.97%
|
7.19%
|
|
Leverage
capital
|
9.05
|
9.84
|
7.88
|
7.97
|
7.19
|
|
Total
risk-based capital
|
12.61
|
14.30
|
12.83
|
15.03
|
13.17
|
|
Earnings
to Fixed Charges Ratios (7):
|
|||||
|
Including
interest on deposits
|
1.51x
|
1.73x
|
2.09x
|
2.15x
|
1.78x
|
|
Excluding
interest on deposits
|
2.30
|
2.56
|
3.46
|
3.50
|
2.49
|
|
Full
Service Branches
|
21
|
20
|
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 these 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.
F-35
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 which it serves. During the last nine
operating
quarters, however, growth has been restricted as a result of the interest
rate
environment, which management has deemed unfavorable for significant balance
sheet growth. The Bank also 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, 2006. These declines were attributable to the continued low interest
rate
environment on loans coupled with increases in short-term interest rates
during
the year ended December 31, 2006. These conditions 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 intangible assets, realization
of
deferred tax assets and other than temporary declines in the valuation
of
securities), and loan income recognition 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
F-36
percentages.
In so doing, the Company evaluates the impact that the variables discussed
below
may have on the portfolio to determine whether or not changes should be
made to
the assumptions and analyses.
The
Bank's loan loss reserve methodology consists of several key components,
including a review of the two elements of its loan portfolio: problem loans
(i.e.,
classified loans, non-performing loans, troubled-debt restructuring and
impaired
loans under Amended SFAS 114) and performing loans.
Performing
Loans
At
December 31, 2006, the majority of the allowance for loan losses was allocated
to performing loans, which represented the overwhelming majority of the
Bank's
loan portfolio. Performing loans are reviewed at least quarterly based
upon the
premise that there are losses inherent within the loan portfolio that have
not
been identified as of the review date. The Bank thus calculates an allowance
for
loan losses related to its performing loans by deriving an expected loan
loss
percentage and applying it to its performing loans. In deriving the expected
loan loss percentage, the Bank generally considers, among others, the following
criteria: the Bank's historical loss experience; the age and payment history
of
the loans (commonly referred to as their "seasoned quality"); the type
of loan
(i.e.,
one- to
four-family, multifamily residential, commercial real estate, cooperative
apartment, construction or consumer); the underwriting history of the loan
(i.e.,
whether it was underwritten by the Bank or a predecessor institution acquired
by
the Bank and, therefore, originally subjected to different underwriting
criteria); both the current condition and recent history of the overall
local
real estate market (in order to determine the accuracy of utilizing recent
historical charge-off data to derive the expected loan loss percentages);
the
level of, and trend in, non-performing loans; the level and composition
of new
loan activity; and the existence of geographic loan concentrations (as
the
overwhelming majority of the Bank's loans are secured by real estate located
in
the 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
amount of
the allowance and the provision for loan losses. The Bank applied the process
of
determining the allowance for loan losses consistently throughout the years
ended December 31, 2006 and 2005.
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, 2006 and 2005.
Under
the
guidance established by Amended SFAS 114, loans determined to be impaired
(generally, non-performing one- to four-family loans in excess of $417,000
and
non-performing and troubled-debt restructured multifamily residential and
commercial real estate loans) are evaluated at least quarterly in order
to
establish whether the estimated value of the underlying collateral determined
based upon an independent appraisal is sufficient to satisfy the existing
debt.
For each loan that the Bank determines to be impaired, impairment is measured
by
the amount that the carrying balance of the loan, including all accrued
interest, exceeds the estimated fair value of the collateral. A specific
reserve
is established on all impaired loans to the extent of impairment and comprises
a
portion of the allowance for loan losses. The Loan Loss Reserve Committee's
determination of the estimated fair value of the underlying collateral
is
subject to assumptions and judgments made by the committee. A specific
valuation
allowance could differ materially as a result of changes in these assumptions
and judgments.
Valuation
of MSR. The
estimated origination and servicing costs of mortgage loans sold with servicing
rights retained by the Bank are allocated between the loans and the servicing
rights based on their estimated fair values at the time of the loan sale.
MSR
are carried at the lower of cost or fair value and are amortized in proportion
to, and over the period of, net servicing income. The estimated fair value
of
MSR is determined by calculating the present value of estimated future
net
servicing cash flows, using prepayment, default, servicing cost and discount
rate assumptions that the Company believes market participants would use
for
similar assets. All estimates and assumptions utilized in the valuation
of MSR
are derived based upon actual historical results for either the Bank or
its
industry peers.
The
fair
value of MSR is sensitive to changes in assumptions. Fluctuations in prepayment
speed assumptions have the most significant impact on the estimated fair
value
of MSR. In the event that loan prepayment activities exceed the assumed
amount
due to increased loan refinancing, the fair value of MSR would likely decline.
In the event that loan prepayment
F-37
activities
fall below the assumed amount due to a decline in loan refinancing, the
fair
value of MSR would likely increase. Any measurement of the value of MSR
is
limited by the existing conditions and assumptions utilized at a particular
point in time, and would not necessarily be appropriate if applied at a
different point in time.
In
measuring the fair value of capitalized MSR, assumptions utilized additionally
include the stratification based on predominant risk characteristics of
the
underlying loans for the purpose of evaluating impairment. Increases in
the risk
characteristics of the underlying loans from the assumed amounts would
result in
a decline in the fair value of the MSR. A valuation allowance is established
in
the event the recorded value of an individual stratum exceeds its fair
value,
for the full amount of the shortfall in the fair value.
Asset
Impairment Adjustments. Certain
assets are carried in the Company's consolidated statements of financial
condition at fair value or at the lower of cost or fair value. Management
periodically performs analyses to test for impairment of these assets.
Two
significant impairment analyses relate to the value of goodwill and other
than
temporary declines in the value of the Company's securities. In the event
that
an impairment of goodwill or an other than temporary decline in securities
is
determined to exist, it is recognized as a charge to earnings.
Goodwill
is accounted for in accordance with SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"), which was adopted on July 1, 2001. SFAS 142 eliminated
amortization of goodwill and instead requires performance of an annual
impairment test at the reporting unit level. As of December 31, 2006, the
Company had goodwill totaling $55.6 million.
The
Company identified a single reporting unit for purposes of its goodwill
impairment testing. The impairment test is therefore performed on a consolidated
basis and compares the Holding Company's market capitalization (reporting
unit
fair value) to its outstanding equity (reporting unit carrying value).
The
Holding Company utilizes its closing stock price as reported on the Nasdaq
National Market on the date of the impairment test in order to compute
market
capitalization. The Company has designated the last day of its fiscal year
as
the annual date for impairment testing. The Company performed its annual
impairment test as of December 31, 2006 and concluded that no potential
impairment of goodwill existed since the fair value of the Company's reporting
unit exceeded its carrying value. No events occurred, nor circumstances
changed,
subsequent to December 31, 2006 that would reduce the fair value of the
Company's reporting unit below its carrying value. Such events or changes
in
circumstances would require an immediate impairment test to be performed
in
accordance with SFAS 142. Differences in the identification of reporting
units
or the use of valuation techniques can result in materially different
evaluations of impairment.
Available-for-sale
debt and equity securities that have readily determinable fair values are
carried at fair value. Estimated fair values for securities are based on
published or securities dealers' market values.
Debt
securities are classified as held-to-maturity, and carried at amortized
cost,
only if the Company has a positive intent and ability to hold them to maturity.
Debt
securities that are not classified as held-to-maturity, along with all
equity
securities, are classified as either securities available-for-sale or trading
securities. Unrealized holding gains or losses on debt and equity securities
available-for-sale are excluded from net income and reported net of income
taxes
as other comprehensive income or loss. Neither the Holding Company nor
the Bank
owned any securities classified as trading securities during the twelve
months
ended December 31, 2006, nor do they presently anticipate establishing
a trading portfolio.
The
Company conducts a periodic review and evaluation of its securities portfolio,
taking into account the severity and duration of each unrealized loss as
well as
management's intent with regard to the securities, in order to determine
if a
decline in market value of any security below its carrying value is other
than
temporary. If such decline is deemed other than temporary, the carrying
amount
of the security is adjusted through a charge recorded in the Company's
statement
of operations. For the years ended December 31, 2006 and 2005, there were
no
other than temporary impairments in the securities portfolio.
Loan
Income Recognition.
Interest income on loans is recorded using the level yield method. Loan
origination fees and certain direct loan origination costs are deferred and
amortized as a yield adjustment over the contractual loan terms. Accrual
of
interest is discontinued when its receipt is in doubt, which typically
occurs
when a loan becomes 90 days past due as to principal or interest. Any interest
accrued to income in the year when interest accruals are discontinued is
reversed. Payments on nonaccrual loans are generally applied to principal.
Loans
are returned to accrual status once the doubt concerning collectibility
has been
removed and the borrower has demonstrated performance in accordance with
the
loan terms and conditions for a minimum of twelve months.
F-38
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 SONYMA. 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 $93.8 million during the year ended December 31, 2006, compared
to a
decrease of $295.3 million during the year ended December 31, 2005. 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, 2005, while short-term interest rates were
steadily
increasing, the Bank, primarily in order to control its overall cost of
deposits, elected to maintain the non-promotional interest rates offered
on its
various deposit accounts at or near their existing levels. As a result,
the
attrition level on deposits increased during that time period (particularly
in
promotional money market accounts with expiring promotional offering rates)
and
exceeded the level of new deposits gathered through ongoing promotional
programs. As a result, money market deposits declined $284.1 million during
the
year ended December 31, 2005.
During
2005, the Bank’s rates on repricing core deposits lagged those of the price
leaders in its markets. This strategy served to protect margin, not deposits.
Commencing in the first quarter of 2006, there was a slight shift in the
Bank’s
deposit pricing posture for competitive reasons. With the average rate
on new
loans currently generally trending above six percent, attracting and retaining
new deposits became more palatable to managing the Bank’s interest rate risk
during 2006 than it was throughout 2005.
During
the year ended December 31, 2006, principal repayments totaled $326.8 million
on
real estate loans and $39.4 million on MBS. During the year ended December
31,
2005, principal repayments totaled $358.5 million on real estate loans
and $89.1
million on MBS. The decrease in principal repayments on loans and MBS resulted
from a reduction in borrower refinance activities associated with
mortgage-related assets as a result of increases in interest rates during
the
period July 2005 through September 2006. The decrease in principal repayments
on
MBS additionally reflected a reduction in their balance due to the sale
of
securities in May 2005.
Since
December 2002, the Bank has originated and sold multifamily residential
mortgage
loans in the secondary market to FNMA while retaining servicing and generating
fee income while it services the 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,
2006 and 2005, the Bank sold FNMA $145.4 million and $106.7 million of
loans,
respectively, pursuant to this program.
In
order
to both replace liquidity lost by the attrition of deposits during 2005
and
reduce the overall level of interest rate risk associated with its assets,
the
Company sold $274.2 million of investment securities and MBS during the
year
ended December 31, 2005, recognizing a net pre-tax loss of $5.2 million
on the
sale. The cash proceeds of the sale were initially reinvested in overnight
funds
and other short-term (90 day or less) investments with an average yield
approximating 3.5%. The securities sold had an average yield of 3.62% and
an
average estimated duration of 2.4 years upon their disposition.
Due
in
part to the growth in deposit funding during the year ended December 31,
2006,
the Company was able to reduce its overall level of borrowings, which,
because
the interest rates associated with borrowings generally exceed those paid
on
deposits, helped minimize the increase in the average cost of its interest
bearing liabilities while short-term interest rates continued to rise.
During
the year ended December 31, 2006, borrowings declined by $45.2 million
on a net
basis, as the Company utilized deposit inflows and liquidity
F-39
from
its
investment and MBS portfolios to fund loan growth. During the year ended
December 31, 2005, the Bank limited asset growth, and, as a result, undertook
no
new REPO borrowings or FHLBNY advances during the period.
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, 2006, the Bank had an additional
potential borrowing capacity of $389.4 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, 2006, the Bank was in compliance with all applicable
regulatory capital requirements and was considered "well-capitalized" for
all
regulatory purposes.
The
Bank
uses its liquidity and capital resources primarily for the origination
of real
estate loans and the purchase of mortgage-backed and other securities.
During
the years ended December 31, 2006 and 2005, real estate loan originations
totaled $563.2 million and $574.2 million, respectively. Purchases of investment
securities (excluding short-term investments and federal funds sold) and
MBS
totaled $4.0 million during the year ended December 31, 2006 compared to
$53.5
million during the year ended December 31, 2005. The decline resulted from
reduced 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, 2006, the Holding Company repurchased 777,539
shares
of its common stock into treasury. All shares repurchased were recorded
at the
acquisition cost, which totaled $11.0 million during the period. As of
December
31, 2006, up to 1,686,610
shares
remained available for purchase under authorized share purchase programs.
Based
upon the $14.01 per share closing price of its common stock as of December
31,
2006, the Holding Company would utilize $23.6 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.
F-40
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,
2006 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
at
December
31, 2006
|
|
|
(Dollars
in thousands)
|
||||||
|
CDs
|
$961,009
|
$85,435
|
$18,225
|
$-
|
$1,064,669
|
|
|
Weighted
average interest rate of CD's (1)
|
4.73%
|
3.77%
|
3.96%
|
-%
|
4.64%
|
|
|
Borrowings
|
$210,000
|
$90,235
|
$66,000
|
$422,665
|
$788,900
|
|
|
Weighted
average interest rate of borrowings
|
4.40%
|
5.34%
|
4.24%
|
4.66%
|
4.63%
|
|
|
Operating
lease obligations
|
$1,141
|
$1,945
|
$1,650
|
$3,895
|
$8,631
|
|
|
Minimum
data processing system obligation
|
$752
|
$1,505
|
$1,003
|
--
|
$3,260
|
|
(1)
The
weighted average cost of CD's, inclusive of their contractual compounding
of
interest, was 4.76% at December 31, 2006.
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.
|
Less
than
One
Year
|
One
Year to
Three
Years
|
Over
Three Years to Five Years
|
Over
Five Years
|
|
Total
at
December
31, 2006
|
|
|
(Dollars
in thousands)
|
||||||
|
Credit
Commitments:
|
||||||
|
Available
lines of credit
|
$71,595
|
$-
|
$-
|
$-
|
$71,595
|
|
|
Other
loan commitments
|
55,321
|
-
|
-
|
-
|
55,321
|
|
|
Recourse
obligation on loans sold to FNMA
|
18,495
|
-
|
-
|
-
|
18,495
|
|
|
Total
Credit Commitments
|
$145,411
|
$-
|
$-
|
$-
|
$145,411
|
|
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,
2006,
2005 and 2004, 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 comparison of operating results commencing on page
F-44.
F-41
|
For
the Year Ended December 31,
|
|||||||||||
|
2006
|
2005
|
2004
|
|||||||||
|
(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)
|
$2,649,623
|
$155,510
|
5.87%
|
$2,533,205
|
$148,442
|
5.86%
|
$2,393,862
|
$148,844
|
6.22%
|
||
|
Other
loans
|
1,978
|
190
|
9.61
|
2,369
|
214
|
9.03
|
3,325
|
248
|
7.46
|
||
|
Investment
securities (2)
|
32,609
|
2,276
|
6.98
|
68,315
|
2,602
|
3.81
|
47,384
|
1,745
|
3.68
|
||
|
MBS
|
177,490
|
6,850
|
3.86
|
324,002
|
11,699
|
3.61
|
618,471
|
21,091
|
3.41
|
||
|
Other
|
116,447
|
5,984
|
5.14
|
197,891
|
6,755
|
3.41
|
129,570
|
1,830
|
1.41
|
||
|
Total
interest-earning assets
|
2,978,147
|
170,810
|
5.74%
|
3,125,782
|
169,712
|
5.43%
|
3,192,612
|
$173,758
|
5.44%
|
||
|
Non-interest
earning assets
|
148,493
|
150,765
|
159,580
|
||||||||
|
Total
assets
|
$3,126,640
|
$3,276,547
|
$3,352,192
|
||||||||
|
Liabilities
and Stockholders' Equity:
|
|||||||||||
|
Interest-bearing
liabilities:
|
|||||||||||
|
NOW,
Super Now accounts
|
$35,475
|
$361
|
1.02%
|
$40,625
|
$408
|
1.00%
|
$41,535
|
$410
|
0.99%
|
||
|
Money
Market accounts
|
463,885
|
12,038
|
2.60
|
611,673
|
9,773
|
1.60
|
806,582
|
11,745
|
1.46
|
||
|
Savings
accounts
|
317,572
|
1,866
|
0.59
|
351,827
|
1,943
|
0.55
|
367,746
|
1,938
|
0.53
|
||
|
CDs
|
1,019,562
|
42,394
|
4.16
|
982,030
|
28,934
|
2.95
|
939,682
|
23,780
|
2.53
|
||
|
Borrowed
Funds
|
797,318
|
36,681
|
4.60
|
807,800
|
36,283
|
4.49
|
726,083
|
29,903
|
4.12
|
||
|
Total
interest-bearing liabilities
|
2,633,812
|
93,340
|
3.54%
|
2,793,955
|
$77,341
|
2.77%
|
2,881,628
|
$67,776
|
2.35%
|
||
|
Checking
accounts
|
95,067
|
94,541
|
93,845
|
||||||||
|
Other
non-interest-bearing liabilities
|
104,562
|
101,889
|
100,926
|
||||||||
|
Total
liabilities
|
2,833,441
|
2,990,385
|
3,076,399
|
||||||||
|
Stockholders'
equity
|
293,199
|
286,162
|
275,793
|
||||||||
|
Total
liabilities and stockholders' equity
|
$3,126,640
|
$3,276,547
|
$3,352,192
|
||||||||
|
Net
interest spread (3)
|
2.19%
|
2.66%
|
3.09%
|
||||||||
|
Net
interest income/ interest margin (4)
|
$77,470
|
2.60%
|
$92,371
|
2.96%
|
$105,982
|
3.22%
|
|||||
|
Net
interest-earning assets
|
$344,335
|
$331,827
|
$310,984
|
||||||||
|
Ratio
of interest-earning assets
to interest-bearing liabilities
|
113.07%
|
111.88%
|
110.79%
|
||||||||
(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) Includes
interest-bearing deposits in other banks.
(3) Net
interest spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) The
interest margin represents net interest income as a percentage of average
interest-earning assets.
F-42
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, 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
|
Year
Ended December 31, 2004
Compared
to
Year
Ended December 31, 2003
Increase/
(Decrease) Due to
|
|||||||||
|
Volume
|
Rate
|
Total
|
|
Volume
|
Rate
|
Total
|
|
Volume
|
Rate
|
Total
|
|
|
Interest-earning
assets:
|
(Dollars
in Thousands)
|
||||||||||
|
Real
Estate Loans
|
$6,818
|
$250
|
$7,068
|
$8,440
|
$(8,842)
|
$(402)
|
$13,830
|
$(26,399)
|
$(12,569)
|
||
|
Other
loans
|
(37)
|
13
|
(24)
|
(79)
|
45
|
(34)
|
(22)
|
(28)
|
(50)
|
||
|
Investment
securities
|
(1,927)
|
1,601
|
(326)
|
783
|
74
|
857
|
(525)
|
(91)
|
(616)
|
||
|
MBS
|
(5,475)
|
626
|
(4,849)
|
(10,336)
|
944
|
(9,392)
|
3,683
|
(576)
|
3,107
|
||
|
Other
|
(3,487)
|
2,716
|
(771)
|
1,650
|
3,275
|
4,925
|
(313)
|
(650)
|
(963)
|
||
|
Total
|
$(4,108)
|
$5,206
|
$1,098
|
$458
|
$(4,504)
|
$(4,046)
|
$16,653
|
$(27,744)
|
$(11,091)
|
||
|
Interest-bearing
liabilities:
|
|||||||||||
|
NOW
and Super Now accounts
|
$(54)
|
$7
|
($47)
|
$(8)
|
$6
|
$(2)
|
$86
|
$(20)
|
$66
|
||
|
Money
market accounts
|
(3,107)
|
5,372
|
2,265
|
(2,970)
|
998
|
(1,972)
|
1,857
|
(852)
|
1,005
|
||
|
Savings
accounts
|
(204)
|
127
|
(77)
|
(77)
|
82
|
5
|
(15)
|
(452)
|
(467)
|
||
|
CDs
|
1,342
|
12,118
|
13,460
|
1,140
|
4,014
|
5,154
|
1,784
|
(2,736)
|
(952)
|
||
|
Borrowed
funds
|
(481)
|
879
|
398
|
3,529
|
2,851
|
6,380
|
3,167
|
(6,106)
|
(2,939)
|
||
|
Total
|
(2,504)
|
18,503
|
15,999
|
1,614
|
7,951
|
9,565
|
6,879
|
(10,166)
|
(3,287)
|
||
|
Net
change in net interest income
|
$(1,604)
|
$(13,297)
|
$(14,901)
|
$(1,156)
|
$(12,455)
|
$(13,611)
|
$9,774
|
$(17,578)
|
$(7,804)
|
||
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 comprehensive loss resulted primarily from a charge of $3.8
million
caused by 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"). The increase of $3.8 million
in
accumulated other comprehensive loss caused a corresponding decrease in
stockholders' equity during the period.
F-43
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 Employee Stock Ownership Plan of
Dime
Community Bancshares, Inc. and Certain Affiliates ("ESOP") and The Recognition
and Retention Plan for Outside Directors, Officers and Employees of Dime
Community Bancshares, Inc. ("RRP") stock benefit plans. The ESOP and RRP
possess
investments in the Holding Company's common stock that are recorded as
reductions in stockholders' equity ("Contra Equity Balances"). As compensation
expense is recognized on the ESOP and RRP, the Contra Equity Balances are
reduced in a corresponding amount, resulting in an increase to their respective
equity balances. This increase to equity offsets the decline in the Company's
retained earnings related to the periodic recorded ESOP and RRP expenses.
Comparison
of Financial Condition at December 31, 2005 and December 31,
2004
Assets.
Assets
totaled $3.13 billion at December 31, 2005, a decrease of $251.0 million
from
total assets of $3.38 billion at December 31, 2004. The decline in assets
was
experienced primarily in MBS available-for-sale, which decreased $326.0
million
during the period, principally as a result of the sale of $236.9 million
of MBS
available-for-sale (see "Part II. Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations
-
Liquidity and Capital Resources") and MBS principal payments received
totaling $89.0 million. In addition, federal funds sold and other short-term
investments declined $43.3 million, as the Bank utilized a portion of these
short-term assets in order to provide operational liquidity while deposit
funding was declining.
Partially
offsetting the decline in MBS and federal funds sold and other short-term
investments during the year ended December 31, 2005, was an increase of
$115.0
million in real estate loans. The increase was attributable to originations
of
$574.2 million during the period, as interest rates offered on new loans
continued to stimulate origination activity, that were partially offset
by
amortization of $358.3 million and sales to FNMA of $108.2 million.
Liabilities.
Total
liabilities decreased $261.0 million during the year ended December 31,
2005.
Deposits declined $295.3 million during the period, which was partially
offset
by an increase of $25.0 million in FHLBNY Advances. (See "Part II - Item 7. Management's Discussion and Analysis
of
Financial Condition and Results of Operations - Liquidity and Capital
Resources" for a discussion of deposit activity).
Stockholders'
Equity.
Stockholders' equity increased $10.0 million during the year ended December
31,
2005, due to net income of $36.2 million, common stock issued in fulfillment
of
stock option exercises totaling $2.3 million, tax benefits on stock option
exercises totaling $2.3 million, and an increase to equity of $1.4 million
related to amortization of the ESOP and the RRP stock benefit plans. As
compensation expense is recognized on the ESOP and RRP, the Contra Equity
Balances are reduced, 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.
Offsetting
the increase to stockholders' equity during the year ended December 31,
2005
were cash dividends of $19.9 million and treasury stock repurchases of
$12.2
million during the period, along with an increase in other comprehensive
loss of
$100,000 resulting primarily from the addition of a minimum pension liability
of
$276,000 during the period.
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, 2006
and 2005
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 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.
F-44
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
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
F-45
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.
F-46
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 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
F-47
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 (See
"Part II - Item 7. Management's Discussion and Analysis
of
Financial Condition and Results of Operations - Liquidity and Capital
Resources"). 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.
F-48
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.
Comparison
of the Operating Results for the Years Ended December 31, 2004 and
2003
General.
Net
income was $46.2 million during the year ended December 31, 2004, a decrease
of
$5.1 million from net income of $51.3 million during the year ended December
31,
2003. During this comparative period, net interest income decreased $2.2
million, non-interest income decreased $4.6 million and non-interest expense
increased $1.6 million, resulting in a decline in income before income
taxes of
$8.4 million. Income tax expense decreased $3.4 million as a result of
the
reduced income before income taxes.
Net
Interest Income.
Net
interest income for the year ended December 31, 2004 decreased $7.8 million
to
$106.0 million from $113.8 million during the year ended December 31, 2003.
This
decrease was attributable to a decline of $11.1 million in interest income
that
was partially offset by a decline of $3.3 million in interest expense during
the
year ended December 31, 2004 compared to the year ended December 31, 2003.
The
net interest spread decreased 53 basis points from 3.62% for the year ended
December 31, 2003 to 3.09% for the year ended December 31, 2004, and the
net
interest margin decreased 58 basis points from 3.90% to 3.32% during the
same
period.
The
decrease in both the net interest spread and net interest margin reflected
a 90
basis point decline in the average yield on interest earning assets as
a result
of the continued repricing of assets during the historically low interest
rate
environment that persisted from January 2002 through December 2004. In
addition,
prior to January 2004, the overall low interest rate environment resulted
in a
greater decline in the average cost of interest bearing liabilities than
the
decline in average yield on interest earning assets. During the year ended
December 31, 2004, the continued low interest rate environment created
the
opposite effect, resulting in a greater decline in the average yield on
interest
earning assets than in the average cost of interest bearing liabilities.
(See
section entitled "Interest Income" below for a further
discussion of these declines). As a result, both the net interest spread
and the
net interest margin, which had increased during most of 2003 and 2002,
declined
during the year ended December 31, 2004.
During
the year ended December 31, 2004 compared to the year ended December 31,
2003,
the average yield on real estate loans and MBS, which collectively comprised
the
great majority of the Company's interest earning assets, declined by 115
basis
points and 10 basis points, respectively (See the discussion entitled "Interest Income" below for a further examination of these
declines).
Partially
offsetting the decline in the average yield on interest earning assets
was a
reduction of 37 basis points in the average cost of interest bearing
liabilities. This resulted primarily from declines in the average cost
of
borrowings of 88 basis points and a decline in the average cost of CDs
of 30
basis points, coupled with the movement of the overall composition of funding
from higher-cost borrowings into deposits with a lower average cost (See
the
discussion entitled "Interest Expense" below for a
further examination of these declines).
Interest
Income.
Interest income was $173.7 million during the year ended December 31, 2004,
a
decrease of $11.1 million from $184.8 million during the year ended December
31,
2003. Interest income on real estate loans, investment securities and other
short term investments declined by $12.6 million, $616,000 and $963,000,
respectively, during the year ended December 31, 2004 compared to the year
ended
December 31, 2003. Partially offsetting these declines was an increase
of $3.1
million in interest income on MBS during the year ended December 31, 2004
compared to the year ended December 31, 2003.
The
decline in interest income resulted from the historically low interest
rate
environment that existed during the period January 1, 2002 through December
31,
2004. That environment stimulated the refinancing and prepayment of higher
rate
loans in the Bank's portfolio, while also resulting in reduced rates on
existing
portfolio loans that repriced during the period January 1, 2003 to December
31,
2004 (although the levels of refinancing and prepayment did experience
a decline
during the year ended December 31, 2004 as a result of an increase in interest
rates). Prepayment fee income declined $5.6 million, due to a decrease
in
refinancing driven by the significant levels of refinancing that occurred
during
2003, as well as increases in interest rates during the second half of
2004. The
combination of these two factors resulted in a decline of 115 basis points
in
the average yield on real estate loans (the Bank's largest interest-earning
asset) during the year ended December 31, 2004 compared to the year ended
December 31, 2003.
The
average yield on MBS declined 10 basis points during the same period as
a result
of the high level of prepayments on portfolio securities during 2003 and
2002 as
well as the purchase of new securities during the period January 1, 2002
through
December 31, 2004 while rates were historically low. Finally, as a result
of the
low interest rate environment, the average yields on investment securities
and
other short-term investments also declined by 17 basis points and 47 basis
points, respectively, during the year ended December 31, 2004 compared
to the
year ended December 31, 2003.
F-49
The
Bank's general policy has been to emphasize growth in real estate loans
as its
primary interest-earning asset, and de-emphasize its investment and MBS
portfolios, while loan origination demand is strong. However, as part of
a
specific investment strategy to achieve a desirable balance of yield and
liquidity on short-term investments, the Bank purchased $398.2 million
of MBS
during the year ended December 31, 2004. This purchase level exceeded the
level
of MBS principal repayments of $206.5 million during the same period, and
contributed to an overall increase of $106.6 million in the average balance
of
MBS during the year ended December 31, 2004 compared to the year ended
December
31, 2003. As a result, the dollar amount of interest income on MBS increased
by
$3.1 million during the year ended December 31, 2004 compared to the year
ended
December 31, 2003, despite the decline in average yield of 10 basis points
during the same period.
Interest
Expense.
Interest
expense declined $3.3 million, to $67.8 million during the year ended December
31, 2004, from $71.1 million during the year ended December 31, 2003. The
decrease resulted primarily from a reduction of $2.9 million in interest
expense
on borrowed funds, due to a decline of 88 basis points in the average cost
of
borrowed funds during the year ended December 31, 2004 compared to the
year
ended December 31, 2003.
During
the twelve months ended December 31, 2003, the Company reduced its total
borrowings by $103.9 million by either not replacing borrowings that matured
or
prepaying outstanding debt. During the year ended December 31, 2003, the
Company
incurred $4.1 million of expense on prepaid borrowings, which increased
the
average cost of borrowed funds by 63 basis points during the period. During
the
year ended December 31, 2004, the Company added $192.9 million of REPOS,
and a
$72.2 million trust preferred borrowing. The REPOS were added during the
period
of historically low interest rates; and, therefore, possessed a lower average
cost than the existing average cost within the Company's total portfolio
of
borrowings, which was not materially impacted by the increases in short-term
interest rates that occurred during the period June through December 2004.
The
trust preferred borrowing added 26 basis points to the average cost of
borrowings during the year ended December 31, 2004. The combination of
activity
in these two periods resulted in an overall increase of $69.9 million in
the
average balance of borrowings during the year ended December 31, 2004 compared
to the year ended December 31, 2003, but a decline of 88 basis points in
their
average cost.
During
the year ended December 31, 2004 compared to the year ended December 31,
2003,
the average cost of CDs, the next largest component of interest expense
during
the 2004 period, declined by 30 basis points, while their average balance
increased by $67.1 million. The combination of these two events resulted
in a
reduction in interest expense of $952,000 during the year ended December
31,
2004 compared to the year ended December 31, 2003. The decline in interest
rates
offered on CDs reflected the continued low level of interest rates paid
during
the period January 1, 2002 through December 31, 2004, which was not materially
impacted by the increase in short-term interest rates that occurred during
the
period June through December 2004. The increase in the average balance
of CDs
during the year ended December 31, 2004 compared to the year ended December
31,
2003 resulted from new promotional CDs added during the year ended December
31,
2004.
The
average cost of savings accounts declined by 12 basis points during the
comparative period, resulting in a $467,000 reduction in interest expense.
The
decline in average cost reflected reductions in interest rates paid by
the Bank
as a result of the overall interest rate environment in effect during 2004,
which was not materially impacted by the increase in short-term interest
rates
that occurred during the period June through December 2004.
Interest
expense on money market accounts increased $1.0 million during the year
ended
December 31, 2004 compared to the year ended December 31, 2003, due to
an
increase in average balance of $124.3 million during the period. The increase
in
average balance reflected successful deposit gathering promotions during
the
period July 1, 2003 to September 30, 2004. Partially offsetting the increase
was
a decline in the average cost of money market accounts of 11 basis points,
reflecting reductions in interest rates paid by the Bank as a result of
the
overall low interest rate environment in effect during 2004, which was
not
materially impacted by the increase in short-term interest rates from June
2004
through December 2004.
Provision
for Loan Losses.
The
provision for loan losses was approximately $280,000 during both of the
years
ended December 31, 2004 and 2003 (See "Item 1. Business -
Allowance for Loan Losses").
Non-Interest
Income.
Non-interest income increased $988,000, to $10.4 million, during the year
ended
December 31, 2004, from $9.4 million during the year ended December 31,
2003.
This change resulted primarily from a net increase of $1.0 million in net
gains
recorded on the sale of loans, investment securities and MBS.
During
the year ended December 31, 2004, the net gain on the sale of loans was
$336,000. During the year ended December 31, 2003, the Company recorded
a net
gain of $1.6 million on the sale of loans (primarily multifamily residential)
to
FNMA. Increases in interest rates during 2004 reduced the level of gain
recorded
on loans sold from the Bank's portfolio to FNMA. The gain on portfolio
loan
sales to FNMA was significantly higher during 2003, when rates were at
historic
lows. During the year ended December 31, 2004, the Company recorded a net
gain
of $377,000 on the sale of investment and mortgage-backed securities. During
the
year ended December 31, 2003, the Company recorded a net loss of $1.9 million
on
F-50
the
sale
of investment and mortgage-backed securities. The sale of securities and
associated loss during the year ended December 31, 2003 were incurred in
connection with a balance sheet restructuring performed in October
2003.
Non-Interest
Expense.
Non-interest expense was $42.4 million during the year ended December 31,
2004,
an increase of $1.6 million over the year ended December 31, 2003.
Salaries
and benefits decreased $491,000, primarily as a result of a reduction of
$1.6
million in benefits accrued under the BMP, which was partially offset by
increased salaries resulting from both general salary increases and added
staff.
The
benefit costs associated with the ESOP and RRP increased $1.0 million during
the
year ended December 31, 2004 compared to the year ended December 31, 2003,
due
primarily to the recording of expense related to dividends paid on unallocated
ESOP shares that commenced in 2004.
Data
processing costs increased $765,000 during the comparative period, primarily
due
to non-recurring charges approximating $640,000 associated with a loan
servicing, retail deposit branch operations and accounting transaction
processing data system conversion completed by the Company in November
2004.
Occupancy
and equipment expenses increased $159,000 due to increased maintenance
and
utility costs and increased depreciation expense associated with acquired
furniture and fixtures.
Income
Tax Expense.
Income
tax expense decreased $3.4 million during the year ended December 31, 2004
compared to the year ended December 31, 2003, due primarily to a decline
of $8.4
million in income before income tax. The effective tax rate approximated
37.5%
during both of the years ended December 31, 2004 and 2003.
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-62.
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.
The
largest component of the Bank's interest earning assets, real estate loans,
derives its current interest rate 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, 2006 or 2005. In the future,
the
Company may, with appropriate Board approval, engage in hedging transactions
utilizing derivative instruments.
F-51
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 twelve months ended December 31,
2006
were adjustable rate, with repricing typically occurring after five or
seven
years, compared to approximately 80% during the twelve months ended December
31,
2005. 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, 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. At December
31, 2005, adjustable-rate real estate and consumer loans totaled $2.14
billion,
or 68.6% of total assets, and adjustable-rate investment securities (CMOs,
REMICs, MBS issued by GSEs and other securities) totaled $23.0 million,
or 0.7%
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, 2006, were $943.9 million,
or
47.0% of total deposits. The balance of CDs as of December 31, 2006 was
$1.06
billion, or 53.0% of total deposits, of which $961.0 million, or 90.3%,
were to
mature within one year. The weighted average maturity of the Bank's CDs
at
December 31, 2006 was 6.2 months
compared to 6.9 months at December 31, 2005. 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, 2006 reflected customer recognition that rising
short-term interest rates during 2006 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 $935.9 million at December 31, 2006.
The Bank
borrows from the FHLBNY for various purposes. At December 31, 2006, the
Bank had
outstanding advances of $571.5 million from the FHLBNY, of which $546.5
million
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, 2006 or December 31,
2005.
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, 2006 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, 2006
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
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).
F-52
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-53
|
At
December 31, 2006
|
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
|
$136,588
|
$88,689
|
$180,232
|
$1,199,700
|
$847,129
|
$251,335
|
-
|
$2,703,673
|
|
Investment
securities
|
21,617
|
-
|
-
|
1,219
|
-
|
6,947
|
-
|
29,783
|
|
MBS
(2)
|
9,862
|
8,145
|
16,292
|
45,650
|
28,131
|
46,357
|
-
|
154,437
|
|
Other
short-term Investments
|
78,752
|
-
|
-
|
-
|
-
|
-
|
-
|
78,752
|
|
FHLBNY
capital stock
|
31,295
|
-
|
-
|
-
|
-
|
-
|
-
|
31,295
|
|
Total
interest-earning assets
|
278,114
|
96,834
|
196,524
|
1,246,569
|
875,260
|
304,639
|
-
|
2,997,940
|
|
Less:
|
||||||||
|
Allowance
for loan losses
|
-
|
-
|
-
|
-
|
-
|
-
|
$(15,514)
|
(15,514)
|
|
Net
interest-earning assets
|
278,114
|
96,834
|
196,524
|
1,246,569
|
875,260
|
304,639
|
(15,514)
|
2,982,426
|
|
Non-interest-earning
assets
|
-
|
-
|
-
|
-
|
-
|
-
|
190,951
|
190,951
|
|
Total
assets
|
$278,114
|
$96,834
|
$196,524
|
$1,246,569
|
$875,260
|
$304,639
|
$175,437
|
$3,173,377
|
|
Interest-Bearing
Liabilities
|
||||||||
|
Savings
accounts
|
$10,367
|
$10,016
|
$19,024
|
$63,208
|
$47,789
|
$148,118
|
-
|
$298,522
|
|
NOW
and Super NOW accounts
|
3,286
|
2,982
|
5,161
|
11,727
|
3,629
|
8,734
|
-
|
35,519
|
|
Money
market accounts
|
101,635
|
81,562
|
117,980
|
101,490
|
53,229
|
58,711
|
-
|
514,607
|
|
CDs
|
306,219
|
395,120
|
259,670
|
85,435
|
18,225
|
-
|
-
|
1,064,669
|
|
Borrowed
funds
|
185,000
|
25,000
|
172,500
|
98,235
|
16,000
|
195,000
|
-
|
691,735
|
|
Subordinated
notes
|
-
|
-
|
-
|
-
|
25,000
|
-
|
25,000
|
|
|
Trust
preferred securities
|
-
|
-
|
-
|
-
|
-
|
72,165
|
72,165
|
|
|
Interest-bearing
escrow
|
-
|
-
|
-
|
-
|
-
|
1,412
|
-
|
1,412
|
|
Total
interest-bearing liabilities
|
606,507
|
514,680
|
574,335
|
360,095
|
163,872
|
484,140
|
-
|
2,703,629
|
|
Checking
accounts
|
-
|
-
|
-
|
-
|
-
|
-
|
$95,215
|
95,215
|
|
Other
non-interest-bearing liabilities
|
-
|
-
|
-
|
-
|
-
|
-
|
83,902
|
83,902
|
|
Stockholders'
equity
|
-
|
-
|
-
|
-
|
-
|
-
|
290,631
|
290,631
|
|
Total
liabilities and stockholders' equity
|
$606,507
|
$514,680
|
$574,335
|
$360,095
|
$163,872
|
$484,140
|
$469,748
|
$3,173,377
|
|
Positive
(Negative) interest sensitivity gap per period
|
$(328,393)
|
$(417,846)
|
$(377,811)
|
$886,474
|
$711,388
|
$(179,501)
|
-
|
|
|
Positive
(Negative) cumulative interest sensitivity gap
|
$(328,393)
|
$(746,239)
|
$(1,124,050)
|
$(237,576)
|
$473,812
|
$294,311
|
-
|
|
|
Positive
(Negative) cumulative interest sensitivity gap
as a percent of total assets
|
(10.35)%
|
(23.52)%
|
(35.42)%
|
(7.49)%
|
14.93%
|
9.27%
|
-
|
|
|
Cumulative
total interest-earning assets as a percent
of cumulative total interest-bearing liabilities
|
45.86%
|
33.44%
|
33.70%
|
88.44%
|
121.35%
|
110.89%
|
-
|
|
| (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-54
At
December 31, 2006, the Company's consolidated balance sheet was composed
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 composed primarily of savings accounts, money
market
accounts and CDs with maturities of two years or less. 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.
In
comparison, at December 31, 2005, interest-bearing liabilities estimated
to
mature or reprice within one year totaled $1.48 billion, while interest-earning
assets estimated to mature or reprice within one year totaled $569.0 million,
resulting in a negative one-year interest sensitivity Gap of $909.1 million,
or
negative 29.1% of total assets. The increase in the magnitude of the one-year
negative interest sensitivity Gap resulted from an increase in the level
of CDs
and money market accounts maturing or repricing in one year or less, reflecting
growth in their balance from December 31, 2005 to December 31, 2006.
Under
interest rate scenarios other than that which existed on December 31, 2006,
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, 2006, the Company's consolidated
securities portfolio included $184.0 million in securities classified as
available for sale, which possessed a gross unrealized loss of $5.6 million.
Neither the Holding Company nor the Bank owned any trading assets as of
December
31, 2006 or 2005.
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-55
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, 2006
|
||||||||||
|
Net
Portfolio Value
|
At
December 31, 2005
|
|||||||||
|
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 Limit
|
|||
|
(Dollars
in Thousands)
|
||||||||||
|
Rate
Shock Scenario
|
||||||||||
|
+
200 Basis Points
|
$306,488
|
($79,714)
|
-20.64%
|
10.01%
|
(220)
|
10.69%
|
(235)
|
6.0%
|
||
|
+
100 Basis Points
|
349,577
|
-36,625
|
-9.48
|
11.22
|
(99)
|
12.01
|
(103)
|
7.0
|
||
|
Pre-Shock
|
386,202
|
-
|
-
|
12.21
|
-
|
13.04
|
-
|
8.0
|
||
|
-
100 Basis Points
|
405,945
|
19,743
|
5.11
|
12.67
|
46
|
13.66
|
62
|
8.0
|
||
|
-
200 Basis Points
|
402,937
|
16,735
|
4.33
|
12.47
|
26
|
13.25
|
21
|
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 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 prepayment
levels are influenced by the recent history of prepayment activity in its
loan
portfolio as well as the interest-rate composition of the existing portfolio,
especially vis-à-vis the current interest rate environment. In addition, the
Bank considers the amount of prepayment fee protection inherent in the
loan
portfolio when estimating future prepayment cash flows.
Regarding
passbook Deposit 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 $408.9 million at December 31, 2005
to
$386.2 million at December 31, 2006. The Pre-Shock Scenario NPV Ratio was
12.21%
at December 31, 2006, down from 13.04% at December 31, 2005. The decrease
was
due primarily to a decline in the Bank's equity resulting from $58.0 million
of
capital distributions during the year ended December 31, 2006 that exceeded
the
Bank's earnings during the same period, which was partially offset by an
increased valuation of multifamily loans at December 31, 2006 compared
to
December 31, 2005, that resulted from a reduction in their term to next
repricing. The decrease in the Pre-Shock Scenario NPV Ratio reflected the
decline in the Pre-Shock Scenario NPV at December 31, 2006 compared to
December
31, 2005.
The
Bank’s +200 basis point Rate Shock Scenario NPV decreased from $323.4 million
at
December 31, 2005 to $306.5 million at December 31, 2006. This decline
also
resulted from the reduction of the Bank's equity from the $58.0 million
capital
distribution during the year ended December 31, 2006 which was partially
offset
by earnings during the period and an increased valuation of multifamily
loans at
December 31, 2006 compared to December 31, 2005. The increased valuation
of
multifamily loans in the +200 basis point Rate Shock Scenario NPV at December
31, 2006 compared to December 31, 2005 resulted primarily from their shorter
term to next repricing at December 31, 2006, which reduced the decrease in
their valuation from lower expected prepayment and amortization levels
in the
+200 basis point Rate Shock Scenario versus the Pre-Shock Scenario.
The
NPV
Ratio was 10.01% in the +200 basis point Rate Shock Scenario at December
31,
2006, down from 10.69% at December 31, 2005. The decrease reflected the
aforementioned decline in the +200 basis point Rate Shock Scenario NPV
during
the period.
At
December 31, 2006, the sensitivity change in the +200 basis point Rate
Shock
Scenario was 220 basis points, compared to a sensitivity change of 235
basis
points in the +200
F-56
basis
point Rate Shock Scenario at December 31, 2005. The reduction in sensitivity
was
primarily due to the aforementioned increase in the value of multifamily
loans
in the +200 basis point Rate Shock Scenario at December 31, 2006 compared
to
December 31, 2005.
For
the
Company's consolidated financial statements, see index on page F-62.
None.
Disclosure
Controls and Procedures
Management
of the Company, with the participation of its Chief Executive Officer and
Chief
Financial Officer, conducted an evaluation, as of December 31, 2006, of
the
effectiveness of the Company's disclosure controls and procedures, as defined
in
Rules 13a-15(e) and 15(d)-15(e) under the Exchange Act. Based upon this
evaluation, the Chief Executive Officer and Chief Financial Officer each
found
that the Company's disclosure controls and procedures were effective to
ensure
that information required to be disclosed by the Company in the reports
that it
files or submits under the Exchange Act is recorded, processed, summarized
and
reported within the time periods specified in the SEC’s rules and forms.
Disclosure controls and procedures include, without limitation, controls
and
procedures designed to ensure that information required to be disclosed
by the
Company in the reports that it files or submits under the Exchange Act
is
accumulated and communicated to the Company's management, including its
Chief
Executive Officer and Chief Financial Officer, as appropriate to allow
timely
decisions regarding required disclosure.
Changes
in Internal Control Over Financial Reporting
There
was
no change in the Company's internal control over financial reporting during
the
Company's last quarter that has materially affected, or is reasonable 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. A company’s internal control
over financial reporting is defined as a process designed by, or under
the
supervision of, a company’s principal executive and principal financial
officers, and effected by its 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 GAAP. The 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 GAAP, 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 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, 2006, 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, 2006, the Company's
internal control over financial reporting is effective.
Deloitte
& Touche LLP, the independent registered public accounting firm that audited
the financial statements included in this Annual Report, has audited
management's assessment of the effectiveness of the Company's internal
control
over financial reporting as of December 31, 2006, as stated in its report,
which
is included below and which expresses
F-57
unqualified
opinions on management's assessment and on the effectiveness of the Company's
internal control over financial reporting as of December 31, 2006.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Stockholders of
Dime
Community Bancshares, Inc. & Subsidiaries
Brooklyn,
NY 11211
We
have
audited management's assessment, included in the accompanying Management's
Report of Internal Control Over Financial Reporting, that Dime Community
Bancshares, Inc. and Subsidiaries (the "Company") maintained effective
internal
control over financial reporting as of December 31, 2006, 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. Our responsibility is to express an
opinion on
management's assessment and an opinion on the effectiveness of 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, evaluating management's assessment, testing and
evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We
believe
that our audit provides a reasonable basis for our opinions.
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, management's assessment that the Company maintained effective
internal
control over financial reporting as of December 31, 2006, is fairly stated,
in
all material respects, based on the criteria established in Internal
Control—Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway Commission.
Also in
our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2006, based
on the
criteria established in Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
F-58
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, 2006 of the Company and our report
dated March
15, 2007 expressed an unqualified opinion on those consolidated financial
statements, and
included an explanatory paragraph relating to the adoption of 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)”.
/s/
DELOITTE & TOUCHE LLP
New
York,
New York
March
15,
2007
PART
III
Information
regarding directors and executive officers of the Holding 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 17, 2007 (the "Proxy Statement") which will
be
filed with the SEC within 120 days of December 31, 2006, 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 heading 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.dimedirect.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.
Information
regarding executive and director compensation is presented under the headings
"Directors' Compensation" and "Executive Compensation" in the Proxy Statement
and is incorporated herein by reference.
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.
F-59
The
following table presents equity compensation plan information as of December
31,
2006:
|
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 Company's shareholders
|
2,250,747
|
$14.85
|
1,430,977(1)
|
|||
|
Equity
compensation plans not approved
by the Company's shareholders
|
-
|
-
|
-
|
(1)
Amount
comprised of 303,137 shares held by the RRP that remained available for
issuance
to individual employees, officers or outside directors of the Company as
of
December 31, 2006, and 106,156 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 1,021,684 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.
(the "2004 Stock Incentive Plan"). Substantially all of the equity compensation
remaining available for future issuance is available under the 2004 Stock
Incentive Plan.
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.
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
(a)
(1) Financial
Statements
(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-104 and F-105.
F-60
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of
1934, the registrant certifies that it has duly caused this report to be
signed
on its behalf by the undersigned, thereunto duly authorized on
March 16, 2007.
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 16, 2007 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
|
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-61
INDEX
|
Page
|
|
|
F-63
|
|
|
F-64
|
|
|
F-65
|
|
|
Consolidated
Statements of Stockholders' Equity
and Comprehensive Income for the years ended
December
31, 2006, 2005 and 2004
|
F-66
|
|
F-67
|
|
|
F68-F103
|
F-62
To
the
Board of Directors and Stockholders of
Dime
Community Bancshares, Inc. and 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,
2006 and 2005, 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, 2006. 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
consolidated financial statements are free of material misstatement.
An audit
includes examining, on a test basis, evidence supporting the amounts
and
disclosures in the consolidated 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, 2006 and 2005, and the results of its
operations
and its cash flows for each of the three years in the period ended December
31,
2006, in conformity with accounting principles generally accepted in
the United
States of America.
As
discussed in Notes 1 and 15, 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 effectiveness of the Company's internal
control over financial reporting as of December 31, 2006, 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 15, 2007 expressed an unqualified opinion on management’s
assessment of the effectiveness of the Company’s internal control over financial
reporting and an unqualified opinion on the effectiveness of the Company's
internal control over financial reporting.
/s/
DELOITTE & TOUCHE LLP
New
York,
New York
March
15,
2007
F-63
CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION
(Dollars
in thousands except share amounts)
|
December
31, 2006
|
December
31, 2005
|
|
|
ASSETS:
|
||
|
Cash
and due from banks
|
$26,264
|
$40,199
|
|
Federal
funds sold and short-term investments
|
78,752
|
60,014
|
|
Encumbered
investment securities held-to-maturity (estimated fair value
of
$235
and $456 at December 31, 2006 and 2005, respectively) (Note
3)
|
235
|
455
|
|
Investment
securities available-for-sale, at fair value (Note 3)
|
||
|
Encumbered
|
-
|
13,062
|
|
Unencumbered
|
29,548
|
31,770
|
|
29,548
|
44,832
|
|
|
Mortgage-backed
securities available-for-sale, at fair value (Note 4):
|
||
|
Encumbered
|
147,765
|
191,093
|
|
Unencumbered
|
6,672
|
2,360
|
|
154,437
|
193,453
|
|
|
Loans
(Note 5):
|
||
|
Real
estate, net
|
2,700,268
|
2,608,854
|
|
Other
loans
|
2,205
|
2,341
|
|
Less
allowance for loan losses (Note 6)
|
(15,514)
|
(15,785)
|
|
Total
loans, net
|
2,686,959
|
2,595,410
|
|
Loans
held for sale
|
1,200
|
900
|
|
Premises
and fixed assets, net (Note 8)
|
22,886
|
16,527
|
|
Federal
Home Loan Bank of New York capital stock (Note 9)
|
31,295
|
29,917
|
|
Goodwill
(Note 1)
|
55,638
|
55,638
|
|
Other
assets (Notes 7, 14 and 15)
|
86,163
|
88,881
|
|
Total
Assets
|
$3,173,377
|
$3,126,226
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||
|
Liabilities:
|
||
|
Due
to depositors (Note 10):
|
||
|
Interest
bearing deposits
|
$1,913,317
|
$1,817,771
|
|
Non-interest
bearing deposits
|
95,215
|
97,001
|
|
Total
deposits
|
2,008,532
|
1,914,772
|
|
Escrow
and other deposits (Note 7)
|
46,373
|
47,518
|
|
Securities
sold under agreements to repurchase (Note 11)
|
120,235
|
205,455
|
|
Federal
Home Loan Bank of New York advances (Note 12)
|
571,500
|
531,500
|
|
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)
|
38,941
|
38,102
|
|
Total
Liabilities
|
2,882,746
|
2,834,512
|
|
Commitments
and Contingencies (Note
16)
|
||
|
Stockholders'
Equity:
|
||
|
Preferred
stock ($0.01 par, 9,000,000 shares authorized, none issued or
outstanding
at
December
31, 2006 and 2005)
|
-
|
-
|
|
Common
stock ($0.01 par, 125,000,000 shares authorized, 50,862,867 shares
and
50,633,881 shares
issued
at December 31, 2006 and 2005,
respectively, and 36,456,354 shares and 36,956,907
shares outstanding at December 31, 2006 and 2005,
respectively)
|
509
|
506
|
|
Additional
paid-in capital
|
206,601
|
204,083
|
|
Retained
earnings (Note 2)
|
285,420
|
274,579
|
|
Accumulated
other comprehensive loss, net of deferred taxes
|
(7,100)
|
(3,328)
|
|
Unallocated
common stock of Employee Stock Ownership Plan ("ESOP") (Note
15)
|
(4,395)
|
(4,627)
|
|
Unearned
and unallocated common stock of Recognition and Retention Plan
("RRP")
(Note
15)
|
(3,452)
|
(2,979)
|
|
Common
stock held by Benefit Maintenance Plan ("BMP") (Note 15)
|
(7,941)
|
(7,941)
|
|
Treasury
stock, at cost (14,406,513 shares and 13,676,974 shares at December
31, 2006 and 2005, respectively) (Note 18)
|
(179,011)
|
(168,579)
|
|
Total
Stockholders' Equity
|
290,631
|
291,714
|
|
Total
Liabilities And Stockholders' Equity
|
$3,173,377
|
$3,126,226
|
F-64
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Dollars
in thousands except per share amounts)
|
Fiscal
Year Ended December 31,
|
|||
|
2006
|
2005
|
2004
|
|
|
Interest
income:
|
|||
|
Loans
secured by real estate
|
$155,510
|
$148,442
|
$148,844
|
|
Other
loans
|
190
|
214
|
248
|
|
Mortgage-backed
securities
|
6,850
|
11,699
|
21,091
|
|
Investment
securities
|
2,276
|
2,602
|
1,745
|
|
Federal
funds sold and short-term investments
|
5,984
|
6,755
|
1,830
|
|
Total
interest income
|
170,810
|
169,712
|
173,758
|
|
Interest
expense:
|
|||
|
Deposits
and escrow
|
56,659
|
41,058
|
37,873
|
|
Borrowed
funds
|
36,681
|
36,283
|
29,903
|
|
Total
interest expense
|
93,340
|
77,341
|
67,776
|
|
Net
interest income
|
77,470
|
92,371
|
105,982
|
|
Provision
for loan losses
|
240
|
340
|
280
|
|
Net
interest income after provision for loan losses
|
77,230
|
92,031
|
105,702
|
|
Non-interest
income:
|
|||
|
Service
charges and other fees
|
5,985
|
5,967
|
6,296
|
|
Net
gain on sales of loans
|
1,516
|
924
|
336
|
|
Net
gain (loss) on sales and redemptions of securities and
other assets
|
1,541
|
(5,176)
|
377
|
|
Income
from Bank owned life insurance
|
1,868
|
1,885
|
1,957
|
|
Other
|
1,480
|
1,551
|
1,410
|
|
Total
non-interest income
|
12,390
|
5,151
|
10,376
|
|
Non-interest
expense:
|
|||
|
Salaries
and employee benefits
|
21,307
|
20,716
|
19,880
|
|
ESOP
and RRP compensation expense
|
2,125
|
2,233
|
3,573
|
|
Occupancy
and equipment
|
5,762
|
5,393
|
5,213
|
|
Data
processing costs
|
3,167
|
2,828
|
3,459
|
|
Federal
deposit insurance premiums
|
257
|
315
|
343
|
|
Advertising
and marketing
|
2,186
|
1,800
|
1,723
|
|
Other
|
7,172
|
7,457
|
8,216
|
|
Total
non-interest expense
|
41,976
|
40,742
|
42,407
|
|
Income
before income taxes
|
47,644
|
56,440
|
73,671
|
|
Income
tax expense
|
17,052
|
20,230
|
27,449
|
|
Net
income
|
$30,592
|
$36,210
|
$46,222
|
|
Earnings
per Share:
|
|||
|
Basic
|
$0.88
|
$1.03
|
$1.31
|
|
Diluted
|
$0.87
|
$1.02
|
$1.28
|
F-65
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE
INCOME
(Dollars
in thousands)
|
Year
Ended December 31,
|
|||
|
2006
|
2005
|
2004
|
|
|
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
|
|||
|
Common
Stock (Par Value $0.01):
|
|||
|
Balance
at beginning of period
|
$506
|
$501
|
$492
|
|
Shares
issued in exercise of options
|
3
|
5
|
9
|
|
Balance
at end of period
|
509
|
506
|
501
|
|
Additional
Paid-in Capital:
|
|||
|
Balance
at beginning of period
|
204,083
|
198,183
|
185,991
|
|
Cash
paid for fractional shares and adjustment from cash
dividend
|
-
|
-
|
(12)
|
|
Stock
options exercised
|
907
|
2,302
|
4,007
|
|
Release
of treasury stock for shares acquired by BMP and RRP
|
108
|
222
|
742
|
|
Tax
benefit of RRP shares and stock options exercised
|
621
|
2,307
|
5,212
|
|
Amortization
of excess fair value over cost - ESOP stock
|
882
|
1,069
|
2,243
|
|
Balance
at end of period
|
206,601
|
204,083
|
198,183
|
|
Retained
earnings:
|
|||
|
Balance
at beginning of period
|
274,579
|
258,237
|
231,771
|
|
Net
income for the period
|
30,592
|
36,210
|
46,222
|
|
Cash
dividends declared and paid
|
(19,751)
|
(19,868)
|
(19,756)
|
|
Balance
at end of period
|
285,420
|
274,579
|
258,237
|
|
Accumulated
other comprehensive loss:
|
|||
|
Balance
at beginning of period
|
(3,328)
|
(3,228)
|
(846)
|
|
(Increase)
Decrease in unrealized loss on available for sale securities
during
the period, net of deferred taxes
|
(14)
|
176
|
(2,382)
|
|
Minimum
pension liability
|
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 tax benefit
|
(3,906)
|
-
|
-
|
|
Balance
at end of period
|
(7,100)
|
(3,328)
|
(3,228)
|
|
ESOP:
|
|||
|
Balance
at beginning of period
|
(4,627)
|
(4,749)
|
(5,202)
|
|
Amortization
of earned portion of ESOP stock
|
232
|
122
|
453
|
|
Balance
at end of period
|
(4,395)
|
(4,627)
|
(4,749)
|
|
RRP:
|
|||
|
Balance
at beginning of period
|
(2,979)
|
(2,612)
|
(2,617)
|
|
Common
stock acquired by RRP
|
(770)
|
(571)
|
(103)
|
|
Amortization
of earned portion of RRP stock
|
297
|
204
|
108
|
|
Balance
at end of period
|
(3,452)
|
(2,979)
|
(2,612)
|
|
Common
Stock Held by BMP:
|
|||
|
Balance
at beginning of period
|
(7,941)
|
(7,348)
|
(5,584)
|
|
Common
stock acquired
|
-
|
(593)
|
(1,764)
|
|
Balance
at end of period
|
(7,941)
|
(7,941)
|
(7,348)
|
|
Treasury
Stock:
|
|||
|
Balance
at beginning of period
|
(168,579)
|
(157,263)
|
(120,086)
|
|
Release
of treasury stock for allocated restricted stock awards and shares
acquired by BMP
|
592
|
862
|
1,021
|
|
Purchase
of treasury shares, at cost
|
(11,024)
|
(12,178)
|
(38,198)
|
|
Balance
at end of period
|
(179,011)
|
(168,579)
|
(157,263)
|
|
Net
Income
|
$30,592
|
$36,210
|
$46,222
|
|
Change
in minimum pension liability, net of (taxes) benefit of $(123)
and
$229 during
the years ended
December 31, 2006 and 2005, respectively
|
148
|
(276)
|
-
|
|
Reclassification
adjustment for securities sold, net of (taxes) benefit of $(489),
$2,143
and $(173) during
the years ended December 31, 2006, 2005 and 2004, respectively
|
(575)
|
3,033
|
(203)
|
|
Net
unrealized securities gain (loss) arising during the period,
net of
(taxes) benefit of $(478),
$2,434 and $1,856 during the years ended December 31, 2006, 2005
and 2004,
respectively
|
561
|
(2,857)
|
(2,179)
|
|
Comprehensive
Income
|
$30,726
|
$36,110
|
$43,480
|
F-66
DIME
COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Dollars
in thousands)
|
Year Ended December 31,
|
|||
|
2006
|
2005
|
2004
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|||
|
Net
Income
|
$30,592
|
$36,210
|
$46,222
|
|
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
|
(377)
|
|
Net
gain on sale of loans held for sale
|
(1,516)
|
(924)
|
(336)
|
|
Net
gain on sales and disposals of other assets
|
(478)
|
-
|
-
|
|
Net
depreciation and amortization and accretion
|
1,265
|
2,334
|
4,411
|
|
Stock
plan compensation expense (excluding ESOP)
|
296
|
206
|
108
|
|
ESOP
compensation expense
|
1,115
|
1,190
|
2,537
|
|
Provision
for loan losses
|
240
|
340
|
280
|
|
(Increase)
Decrease in cash surrender value of Bank Owned Life
Insurance
|
(1,868)
|
(1,885)
|
2,043
|
|
Deferred
income tax provision (credit)
|
103
|
(649)
|
(533)
|
|
Changes
in assets and liabilities:
|
|||
|
Originations
of loans sold during the period
|
(145,430)
|
(102,974)
|
(170,564)
|
|
Proceeds
from sales of loans held for sale
|
146,646
|
108,489
|
167,458
|
|
Decrease
(Increase) in other assets
|
308
|
4,247
|
(7,000)
|
|
Increase
(Decrease) in other liabilities
|
840
|
9,633
|
(6,485)
|
|
Net
cash provided by Operating Activities
|
31,050
|
61,393
|
37,764
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|||
|
Net
(increase) decrease in federal funds sold and short-term
investments
|
(18,734)
|
43,277
|
(8,005)
|
|
Proceeds
from maturities of investment securities held-to-maturity
|
220
|
130
|
125
|
|
Proceeds
from maturities of investment securities
available-for-sale
|
17,075
|
26,000
|
5,000
|
|
Proceeds
from sales of investment securities available-for-sale
|
3,032
|
36,421
|
7,959
|
|
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
|
-
|
232,230
|
127,107
|
|
Purchases
of investment securities available-for-sale
|
(4,002)
|
(51,980)
|
(30,074)
|
|
Purchases
of mortgage backed securities available-for-sale
|
-
|
(1,493)
|
(398,210)
|
|
Principal
collected on mortgage backed securities held-to-maturity
|
-
|
94
|
305
|
|
Principal
collected on mortgage backed securities available-for-sale
|
39,420
|
88,978
|
206,150
|
|
Net
increase in loans
|
(91,789)
|
(114,979)
|
(305,479)
|
|
Proceeds
from the sale of investment property
|
908
|
-
|
-
|
|
Purchases
of fixed assets, net
|
(7,818)
|
(1,246)
|
(1,742)
|
|
(Purchase)
redemption of Federal Home Loan Bank of New York capital
stock
|
(1,378)
|
(4,592)
|
1,375
|
|
Net
cash (used in) provided by Investing Activities
|
(63,066)
|
253,217
|
(395,489)
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|||
|
Net
increase (decrease) in due to depositors
|
93,760
|
(295,277)
|
168,371
|
|
Net
(decrease) increase in escrow and other deposits
|
(1,145)
|
(766)
|
8,342
|
|
(Decrease)
Increase in securities sold under agreements to repurchase
|
(85,220)
|
(129)
|
192,909
|
|
Proceeds
from (Repayments of) Federal Home Loan Bank of New York
advances
|
40,000
|
25,000
|
(27,500)
|
|
Proceeds
from Trust Preferred borrowings
|
-
|
-
|
72,165
|
|
Proceeds
from exercise of stock options
|
910
|
2,307
|
4,016
|
|
Excess
tax benefits of stock plans
|
621
|
-
|
-
|
|
Purchase
of common stock by the RRP and BMP
|
(70)
|
(81)
|
(103)
|
|
Cash
dividends paid to stockholders and cash disbursed in payment
of stock
dividends
|
(19,751)
|
(19,868)
|
(19,769)
|
|
Purchase
of treasury stock
|
(11,024)
|
(12,178)
|
(38,198)
|
|
Net
cash provided by (used in) Financing Activities
|
18,081
|
(300,992)
|
360,233
|
|
(DECREASE)
INCREASE IN CASH AND DUE FROM BANKS
|
(13,935)
|
13,618
|
2,508
|
|
CASH
AND DUE FROM BANKS, BEGINNING OF PERIOD
|
40,199
|
26,581
|
24,073
|
|
CASH
AND DUE FROM BANKS, END OF PERIOD
|
$26,264
|
$40,199
|
$26,581
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|||
|
Cash
paid for income taxes
|
$15,531
|
$8,654
|
$32,239
|
|
Cash
paid for interest
|
$93,530
|
$76,975
|
$66,629
|
|
(Increase)
Decrease in unrealized loss on available-for-sale securities,
net of
taxes
|
$(14)
|
$176
|
$(2,382)
|
|
Change
in minimum pension liability, net of taxes
|
148
|
$(276)
|
-
|
|
Increase
in defined benefit plan liability from adoption of SFAS 158,
net of
taxes
|
$(3,906)
|
$-
|
$-
|
F-67
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, 2006, 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 are 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, and intends to remain, 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.
Stock
Dividends
- All
capital accounts, share and per share data included in the consolidated
financial statements and notes thereto have been retroactively adjusted
to
reflect the 50% common stock dividends paid on August 21, 2001, April 24,
2002
and March 16, 2004.
Principles
of Consolidation
- The
accompanying 2006, 2005 and 2004 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 and 2004, 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 Avenue Corporation held no real estate properties at December
31,
2006. All financial statements presented also include the accounts of the
Bank's
five wholly-owned subsidiaries, Havemeyer Equities Corp. (''HEC''), Boulevard
Funding Corp. (''BFC''), Havemeyer Investments, Inc., 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. BFC had no investments in real estate at December 31, 2006
and
2005, and is currently inactive. HEC was also originally established in
order to
invest in real estate joint ventures and other real estate assets. In June
1998,
HEC assumed direct ownership of DSBW Preferred Funding Corporation ("DPFC").
DPFC, established as a direct subsidiary of the Bank in March 1998, invests
in
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.
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, 2006 and
2005,
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.
F-68
The
Company conducts a quarterly review and evaluation of its securities portfolio
taking into account the severity, duration and 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.
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 the 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 loans and cooperative apartment loans having a balance of less
than
$417 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 loans sold with 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 when its receipt is in doubt, which typically
occurs
when a loan becomes 90 days past due as to principal or interest. Any interest
accrued to income in the year 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 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 months.
Mortgage
Servicing Rights - The
cost
of mortgage loans sold with servicing rights retained is allocated between
the
loans and the servicing rights based on their estimated fair values at
the time
of 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, net servicing
income. 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
that the Company believes market participants would use for similar assets.
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, 2006 and 2005.
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
F-69
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 had no OREO properties
as of
December 31, 2006 and 2005.
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.
The
following is a reconciliation of the numerator and denominator of basic
EPS and
diluted EPS for the years ended December 31, 2006, 2005 and 2004:
|
Year
Ended December 31,
|
|||
|
2006
|
2005
|
2004
|
|
|
Numerator:
|
|||
|
Net
Income per the Consolidated Statement of
Operations
|
$30,592
|
$36,210
|
$46,222
|
|
Denominator:
|
|||
|
Average
shares outstanding utilized in the calculation
of basic EPS
|
34,872,421
|
35,121,413
|
35,318,858
|
|
Unvested
shares of RRP and restricted stock awards
|
75,023
|
43,022
|
29,766
|
|
Common
stock equivalents resulting from the dilutive
effect of "in-the-money" stock options
|
250,602
|
600,468
|
1,306,286
|
|
Anti-dilutive
effect of tax benefits associated with "in-the-money"
non-qualified stock options
|
(79,918)
|
(204,457)
|
(442,910)
|
|
Average
shares outstanding utilized in the calculation
of diluted EPS
|
35,118,128
|
35,560,446
|
36,212,000
|
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 1,077,676 weighted average options, 759,100 weighted
average
options, and 662,600 weighted average options for the years ended December
31,
2006, 2005, and 2004, respectively, that were not considered in the calculation
of diluted EPS since their exercise prices exceeded the average market
price
during the period.
Accounting
for Goodwill and Core Deposit Intangible -
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
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, 2006,
2005 and
2004. In each instance, the Company concluded that no potential impairment
of
goodwill existed. No events have occurred or circumstances changed subsequent
to
December 31, 2006 that would reduce the fair value of the Company's reporting
unit below its carrying value.
F-70
Such
events or changes in circumstances would require an immediate impairment
test to
be performed in accordance with SFAS 142.
Changes
in the carrying amount of goodwill and other intangible assets for the
periods
presented are as follows:
|
Goodwill
|
Core
Deposit Intangible
|
||||||
|
Year
Ended December 31,
|
Year
Ended December 31,
|
||||||
|
2006
|
2005
|
2004
|
2006
|
2005
|
2004
|
||
|
Original
Amount
|
$73,107
|
$73,107
|
$73,107
|
$4,950
|
$4,950
|
$4,950
|
|
|
Accumulated
Amortization
|
(17,469)
|
(17,469)
|
(17,469)
|
(4,950)
|
(4,950)
|
(4,902)
|
|
|
Net
Carrying Value
|
$55,638
|
$55,638
|
$55,638
|
$-
|
$-
|
$48
|
|
In
conjunction with the adoption of SFAS 142, the Company also re-assessed
the
useful lives and classification of its identifiable intangible assets and
determined that they remained appropriate. The core deposit intangible
was fully
amortized in January 2005, as a result there was no amortization expense
during
the year ended December 31, 2006. Aggregate amortization expense related
to the
core deposit intangible was $48 and $825, respectively, for the years ended
December 31, 2005 and 2004.
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.
Cash
and Cash Equivalents
- For
purposes of the Consolidated Statement 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, measured as the difference
between plan assets at fair value (with limited exceptions) and the benefit
obligation, in its statement of financial position. For a pension plan,
the
benefit obligation is the projected benefit obligation; for any other
postretirement benefit plan, such as a retiree health care plan, the benefit
obligation is the accumulated postretirement benefit obligation; (2) recognize
as a component of other comprehensive income, net of tax, the gains or
losses
and prior service costs or credits that arise during the period but are
not
recognized as components of net periodic benefit cost pursuant to SFAS
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 statement of financial position (with limited exceptions); and
(4)
disclose in the notes to financial statements additional information about
certain effects on net periodic benefit cost for the next fiscal year that
arise
from delayed recognition of the gains or losses, prior service costs or
credits,
and transition asset or obligation. The effect of adoption of SFAS 158
upon the
Company's consolidated financial condition is summarized in Note 15. Effective January 1, 2008, in
compliance with applicable provisions SFAS 158, the Company will change
the
measurement date for its defined benefit plans from October 1st
to
December 31st.
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.
F-71
The
Holding Company and Bank maintain the RRP, 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. Prior to
January
1, 2006, Compensation expense related to the RRP was recorded for all shares
earned by participants during the applicable period at the average historical
acquisition cost of all allocated RRP shares in accordance with APB
25.
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
have
been no grants of stock options since that date, there was no recorded
expense
related to stock options during the years ended December 31, 2006, 2005
and
2004.
Grants
of
restricted stock awards during the years ended December 31, 2006 and 2005
were
accounted for at fair value in accordance with SFAS 123R during the year
ended
December 31, 2006.
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 2004, and reflects $1,945 of additional pro-forma expense
during
the year ended December 31, 2005 related to the acceleration of
vesting.
F-72
|
Year
Ended December
31,
|
||
|
2005
|
2004
|
|
|
Net
income, as reported
|
$36,210
|
$46,222
|
|
Less:
Excess stock-based compensation expense determined under the
fair value
method over the stock-based compensation recorded for all plans,
net of
applicable taxes
|
(3,439)
|
(1,603)
|
|
Pro
forma net income
|
$32,771
|
$44,619
|
|
|
||
|
Earnings
per share
|
||
|
Basic,
as reported
|
$1.03
|
$1.31
|
|
Basic,
pro forma
|
0.93
|
1.26
|
|
Diluted,
as reported
|
1.02
|
1.28
|
|
Diluted,
pro forma
|
0.92
|
1.23
|
Derivative
Instruments
- In
June 1998, the FASB issued SFAS 133 "Accounting for Derivative Instruments
and
Hedging Activities" as amended in June 1999 by SFAS 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective
Date
of FASB Statement No. 133," and in June 2000 by SFAS 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities," and in
April
2003 by SFAS 149 "Amendment of Statement 133 on Derivative Instruments
and
Hedging Activities" (collectively "SFAS 133"). SFAS 133 requires that entities
recognize all derivatives as either assets or liabilities in the statement
of
financial condition and measure those instruments at fair value. Under
SFAS 133,
an entity may designate a derivative as a hedge of 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, 2006, 2005 and 2004, neither the Holding Company
nor the Bank held any derivative instruments or any embedded derivative
instruments that required bifurcation.
Comprehensive
Income
-
Comprehensive income for the years ended December 31, 2006, 2005 and 2004
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, 2006, 2005 and 2004, there was no customer that
accounted for more than 10% of the Company's consolidated revenue.
F-73
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 and expands disclosures about fair value measurements.
SFAS
157 emphasizes fair value as a market-based measurement, not an entity-specific
measurement. Under SFAS 157, a fair value measurement should be determined
based
on the assumptions that market participants would use in pricing the asset
or
liability. SFAS 157 further establishes a fair value hierarchy that
distinguishes between (1) market participant assumptions developed based
on
market data obtained from sources independent of the reporting entity
(observable inputs), and (2) the reporting entity’s own assumptions about market
participant assumptions developed based on the best information available
in the
circumstances. SFAS 157 also expands disclosures about the use of fair
value to
measure assets and liabilities in interim and annual periods subsequent
to
initial recognition. SFAS 157 is effective for financial statements issued
for
fiscal years beginning after November 15, 2007, and interim periods within
those
fiscal years. Adoption of SFAS 157 is not expected to have a material impact
upon the Company's consolidated financial condition or results of operations.
In
March
2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial
Assets" ("SFAS 156"). The Statement amends SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
with respect to accounting for separately recognized mortgage servicing
rights
("MSR"). SFAS 156 requires all separately recognized MSR to be initially
measured at fair value, if practicable. SFAS 156 permits an entity to choose
either of the following subsequent measurement methods for each class of
separately recognized servicing assets and liabilities: (1) amortizing
servicing
assets or liabilities in proportion to and over the period of estimated
net
servicing income or net servicing loss; or (2) reporting servicing assets
or
liabilities at fair value at each reporting date and reporting changes
in fair
value in earnings in the period in which the changes occur. In the event
that
the first method is selected, SFAS 156 requires an assessment of servicing
assets or liabilities for impairment or increased obligation based on fair
value
at each reporting date. SFAS 156 further requires additional disclosures
for all
separately recognized MSR. SFAS 156 is effective as of commencement of
the first
fiscal year that begins after September 15, 2006. Adoption of SFAS 156
is not
expected to have a material impact on the Company’s consolidated financial
condition or results of operations.
In
February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments" ("SFAS 155"). SFAS 155 amends both SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," and SFAS
No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." Among other matters, SFAS 155 resolves
issues
addressed in SFAS 133 Implementation Issue No. D1, "Application of Statement
133
to Beneficial Interests in Securitized Financial Assets." SFAS 155 permits
fair
value re-measurement for any hybrid financial instrument that contains
an
embedded derivative that otherwise would require bifurcation, clarifies
which
interest-only strips and principal-only strips are not subject to the
requirements of SFAS No. 133, establishes a requirement to evaluate interests
in
securitized financial assets to identify interests that are freestanding
derivatives or that are hybrid financial instruments that contain an embedded
derivative requiring bifurcation, clarifies that concentrations of credit
risk
in the form of subordination are not embedded derivatives, and amends SFAS
140
to eliminate the prohibition on a qualifying special purpose entity against
holding a derivative financial instrument that pertains to a beneficial
interest
other than another derivative financial instrument. SFAS 155 is effective
for
all financial instruments acquired, issued, or subject to a re-measurement
event
occurring during fiscal years commencing after September 15, 2006. Adoption
of
SFAS 155 did not have a material impact on the Company’s consolidated financial
condition or results of operations.
In
June
2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in
Income Taxes" ("FIN 48"). FIN 48 clarifies the accounting for uncertainty
in
income taxes recognized in financial statements prepared in accordance
with SFAS
109, "Accounting for Income Taxes." FIN 48 prescribes a recognition threshold
and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return.
FIN
48 also provides guidance on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosure, and transition. Under
FIN
48, a tax position adopted is subjected to two levels of evaluation. Initially,
a determination is made as to whether it is more likely than not that a
tax
position will be sustained upon examination, including resolution of any
related
appeals or litigation processes, based on the technical merits of the position.
In conducting this evaluation, management should presume that the position
will
be examined by the appropriate taxing authority possessing full knowledge
of all
relevant information. The second level of evaluation is the measurement
of a tax
position that satisfies the more-likely-than-not recognition threshold.
This
measurement is performed in order to determine the amount of benefit to
recognize in the financial statements. The tax position is measured at
the
largest amount of benefit that is greater than 50 percent likely of
F-74
being
realized upon ultimate settlement. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The adoption of FIN 48 on January 1,
2007 did
not have a material impact upon the Company's beginning retained earnings.
In
September 2006, the Emerging Issues Task Force reached a consensus on Issue
06-5, "Accounting for Purchases of Life Insurance-Determining the Amount
That
Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4"
("EITF
No. 06-5"). EITF No. 06-5 requires that a life insurance policyholder consider
any additional amounts included in the contractual terms of the purchased
life
insurance policy in determining the amount that could be realized under
the
insurance contract on a policy by policy basis. EITF No. 06-5 is effective
for
fiscal years beginning after December 15, 2006 and requires that recognition
of
the effects of adoption should be by a change in accounting principle through
either (i) a cumulative-effect adjustment to retained earnings as of the
beginning of the year of adoption, or (ii) retrospective application to
all
prior periods. Adoption of EITF No. 06-5 did not have a material impact
on the
Company’s consolidated financial condition or results of
operations.
In
September 2006, the SEC Staff issued Staff Accounting Bulletin No. 108,
"Considering the Effects of Prior Year Misstatements When Quantifying
Misstatements in the Current Year Financial Statements" ("SAB No. 108").
SAB No.
108 requires the use of two alternative approaches in quantitatively evaluating
materiality of misstatements. If the misstatement as quantified under either
approach is material to the current year financial statements, the misstatement
must be corrected. If the effect of correcting prior year misstatements,
if any,
in the current year income statement is material, the prior year financial
statements should be corrected. This guidance is effective for annual financial
statements covering the first fiscal year ending after November 15, 2006.
In the
year of adoption, the misstatements may be corrected as an accounting change
by
adjusting opening retained earnings rather than being included in the current
year income statement. Adoption of SAB No. 108 is not expected to have
a
material effect upon 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 No. 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 having to apply complex
hedge
accounting provisions. SFAS 159 is effective for fiscal years beginning
after
November 15, 2007. Management is evaluating the impact of SFAS 159 upon the
Company's financial condition and 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 intangible assets, other
than
temporary impairments of securities and loan income recognition. Other
less
significant estimates include the fair value of financial instruments,
realization of deferred tax asset and the determination of actuarial benefit
obligations associated with defined benefit plans sponsored by the
Company.
Reclassification
-
Certain other amounts as of December 31, 2005 and 2004 have been reclassified
to
conform to their presentation as of and for the year ended December 31,
2006. 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 OTS.
The
Company now recognizes all prepayment and late charge fees on loans as
net
interest income instead of non-interest income on both its financial and
regulatory reports. Prepayment fee and late charge income reclassified
from
non-interest income to interest income totaled $5,517 and $10,137 during
the
years ended December 31, 2005 and 2004, respectively.
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 upon conversion.
F-75
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 applicable regulatory capital maintenance
requirements, or the amount required for the liquidation account, or if
such
declaration and 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, 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. Expected 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-76
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
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Loss
|
Fair
Value
|
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 are comprised of diversified mutual fund investments.
The
final security is 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 as shown 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 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.
The
amortized cost, gross unrealized gains and losses and estimated fair value
of
investment securities held-to-maturity at December 31, 2005 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
|
$455
|
$1
|
-
|
$456
|
|||
The
amortized/historical cost, gross unrealized gains and losses and estimated
fair
value of investment securities available-for-sale at December 31, 2005
were as
follows:
|
Investment
Securities Available-for-Sale
|
|||||||
|
Amortized/
Historical Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized (Losses)
|
Estimated
Fair
Value
|
||||
|
Debt
securities:
|
|||||||
|
U.S.
Treasury securities and obligations
of U.S. Government
corporations
and agencies
|
$17,067
|
$-
|
$(7)
|
$17,060
|
|||
|
Corporate
and other
|
22,191
|
212
|
(20)
|
22,383
|
|||
|
Total
debt securities
|
39,258
|
212
|
(27)
|
39,443
|
|||
|
Equity
securities
|
4,676
|
1,081
|
(368)
|
5,389
|
|||
|
$43,934
|
$1,293
|
$(395)
|
$44,832
|
||||
The
amortized cost and estimated fair value of the debt securities component
of
investment securities available-for-sale at December 31, 2005, by contractual
maturity, are shown below. Expected maturities may differ from contractual
maturities because issuers may have the right to call or prepay obligations
with
or without call or prepayment fees.
F-77
|
Amortized
Cost
|
Estimated
Fair
Value
|
|
|
Due
in one year or less
|
$17,762
|
$17,780
|
|
Due
after one year through five years
|
999
|
980
|
|
Due
after ten years
|
20,497
|
20,683
|
|
$39,258
|
$39,443
|
The
following summarizes the gross unrealized losses and fair value of investment
securities available-for-sale as of December 31, 2005, 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
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Loss
|
Fair
Value
|
Unrealized
Losses
|
|
|
Debt
securities:
|
||||||
|
U.S.
Treasury securities and obligations
of
U.S. Government corporations
and agencies
|
$6,513
|
$6
|
$2,998
|
$1
|
$9,511
|
$7
|
|
Corporate
securities
|
-
|
-
|
980
|
20
|
980
|
20
|
|
Equity
securities
|
-
|
-
|
3,201
|
368
|
3,201
|
368
|
|
$6,513
|
$6
|
$7,179
|
$389
|
$13,692
|
$395
|
|
At
December 31, 2005, the Company had five investment security positions that
possessed 12 months or more of consecutive unrealized losses, two of which
were
debt securities and three of which were equity securities. The unrealized
loss
on the two debt securities resulted solely from changes in interest rates
that
occurred subsequent to the purchase of the respective security. The three
equity
securities were comprised of diversified mutual fund investments. Management
does not believe that any of the unrealized losses as shown in the above
table
qualified as other-than temporary impairments at December 31, 2005. 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 recovery
of the loss.
During
the fiscal year ended December 31, 2005, proceeds from the sale of investment
securities available-for-sale totaled $36,421. A net loss of $499 was recorded
on these sales.
4.
MORTGAGE-BACKED SECURITIES HELD-TO-MATURITY AND
AVAILABLE-FOR-SALE
There
were no mortgage-backed securities ("MBS") held-to-maturity owned by the
Company
as of December 31, 2006 and 2005.
During
the year ended December 31, 2005, proceeds from the sale of MBS held-to-maturity
totaled $377. A gain of $6 was recognized on this sale. The unpaid principal
balance of the securities sold was less than 15% of their acquired par
value,
and thus permissible for disposal under SFAS 115, "Accounting for Investments
in
Debt and Equity Securities."
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
|
|
|
Collateralized
mortgage obligations
|
$148,461
|
$-
|
$(5,304)
|
$143,157
|
|
Governmental
National Mortgage Association
("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
|
|
F-78
At
December 31, 2006, MBS available-for-sale (including collateralized mortgage
obligations) 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
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Loss
|
Fair
Value
|
Unrealized
Losses
|
|
|
Debt
securities:
|
||||||
|
Collateralized
mortgage obligations
|
$-
|
$-
|
$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 security positions that possessed
12 months or more of consecutive unrealized losses. For all twenty-four
securities, the unrealized loss resulted solely from changes in interest
rates
subsequent to acquisition of the security. Management does not believe
that any
of the unrealized losses as shown 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 recovery of
the loss.
Management also has no current intention to dispose of these
investments.
The
amortized cost, gross unrealized gains and losses and estimated fair value
of
MBS available-for-sale at December 31, 2005 were as follows:
|
Mortgage-Backed
Securities Available-for-Sale
|
||||
|
Amortized
Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized (Losses)
|
Estimated
Fair
Value
|
|
|
Collateralized
mortgage obligations
|
$185,510
|
$-
|
$(6,015)
|
$179,495
|
|
GNMA
pass-through certificates
|
2,344
|
15
|
-
|
2,359
|
|
FNMA
pass-through certificates
|
12,077
|
-
|
(478)
|
11,599
|
|
$199,931
|
$15
|
$(6,493)
|
$193,453
|
|
At
December 31, 2005, MBS available-for-sale (including collateralized mortgage
obligations) possessed a weighted average contractual maturity of 14.7
years and
a weighted average estimated duration of 2.8 years.
Proceeds
from the sale of MBS available-for-sale totaled $232,230 during the fiscal
year
ended December 31, 2005. A loss of $4,683 was recorded on these
sales.
The
following summarizes the gross unrealized losses and fair value of MBS
available
for sale at December 31, 2005, 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
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Loss
|
Fair
Value
|
Unrealized
Losses
|
|
|
Debt
securities:
|
||||||
|
Collateralized
mortgage obligations
|
$-
|
$-
|
$179,495
|
$6,015
|
$179,495
|
6,015
|
|
FNMA
pass-through certificates
|
1,426
|
61
|
10,173
|
417
|
11,599
|
478
|
|
$1,426
|
$61
|
$189,668
|
$6,432
|
$191,094
|
$6,493
|
|
At
December 31, 2005, there were twenty-two MBS security positions that possessed
12 months or more of consecutive unrealized losses. For all twenty-two
securities, the unrealized
F-79
loss
resulted solely from changes in interest rates subsequent to acquisition
of the
security. Management does not believe that any of the unrealized losses
as shown
in the above table qualified as other-than temporary impairments at December
31,
2005. 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 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, 2006
|
December
31, 2005
|
|
|
One-
to four-family
|
$146,613
|
$135,622
|
|
Multifamily
residential
|
1,853,880
|
1,871,263
|
|
Commercial
real estate
|
666,927
|
576,561
|
|
Construction
|
23,340
|
12,098
|
|
Federal
Housing Authority and Veterans Administration Insured
mortgage loans
|
1,236
|
2,694
|
|
Cooperative
apartment unit loans
|
7,224
|
10,115
|
|
2,699,220
|
2,608,353
|
|
|
Net
unearned costs
|
1,048
|
501
|
|
$2,700,268
|
$2,608,854
|
The
Bank
originates both adjustable and fixed interest rate real estate loans. At
December 31, 2006, the approximate composition of these loans was as follows:
|
Fixed
Rate
|
Adjustable
Rate
|
||||||
|
Period
to Maturity
|
Book
Value
|
Earlier
Period to Maturity or
Next Repricing
|
Book
Value
|
||||
|
1
year or less
|
$26,526
|
1
year or less
|
$29,692
|
||||
|
>
1 year-3 years
|
18,370
|
>
1 year-3 years
|
474,779
|
||||
|
>
3 years-5 years
|
30,857
|
>
3 years-5 years
|
806,356
|
||||
|
>
5 years-10 years
|
193,179
|
>
5 years-10 years
|
933,121
|
||||
|
>
10 years
|
175,916
|
>
10 years
|
10,424
|
||||
|
$444,848
|
$2,254,372
|
||||||
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,
as the
majority of real estate loans at December 31, 2006 were collateralized
by
properties located in the New York City metropolitan area.
At
December 31, 2006, the Bank had $275,185 of loans outstanding in its portfolio
that featured interest only payments. In addition at December 31, 2006,
the Bank
had $54,878
of interest only loans sold to FNMA that are subject to a loss exposure
of up to
$18,495. As a result, these loans subject the Bank to additional risk since
their principal balance will not be reduced significantly prior to contractual
maturity.
F-80
The
Bank's other loans were composed of the following:
|
December
31, 2006
|
December
31, 2005
|
|
|
Passbook
loans (secured by savings and
time deposits)
|
$1,172
|
$1,160
|
|
Consumer
installment and other loans
|
1,033
|
1,181
|
|
$2,205
|
$2,341
|
Loans
on
which the accrual of interest was discontinued were $3,606 and $958 at
December
31, 2006 and 2005, respectively. Interest income foregone on nonaccrual
loans
was $131 during the year ended December 31, 2006 and was immaterial during
both
of the years ended December 31, 2005 and 2004.
The
Bank
had no loans considered troubled-debt restructurings at December 31, 2006
and
2005.
At
December 31, 2006, there were six loans totaling $3,514 deemed impaired
under
Amended SFAS 114, compared to one loan totaling $384 as of December 31,
2005.
The average balance of impaired loans was approximately $1,920 during the
year
ended December 31, 2006, $2,309 during the year ended December 31, 2005,
and
$608 during the year ended December 31, 2004. There were no write-downs
on
impaired loans during the years ended December 31, 2006, 2005 and 2004.
At
December 31, 2006 and 2005, reserves allocated within the allowance for
loan
losses for impaired loans totaled $351 and $38, respectively. Net principal
received on impaired loans totaled $628,000 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.
Net
principal and interest received on impaired loans were immaterial during
the
year ended December 31, 2004.
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, 2006 and 2005, all impaired loans were
on
nonaccrual status. In addition at December 31, 2006 and 2005, approximately
$92
and $574, 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, 2006 and 2005.
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 to principal.
Additional cash payments received beyond this level are recorded as regular
principal and interest payments.
F-81
6.
ALLOWANCE FOR LOAN LOSSES
Changes
in the allowance for loan losses were as follows:
|
Year
Ended December 31,
|
|||
|
2006
|
2005
|
2004
|
|
|
Balance
at beginning of period
|
$15,785
|
$15,543
|
$15,018
|
|
Provision
charged to operations
|
240
|
340
|
280
|
|
Loans
charged off
|
(50)
|
(76)
|
(158)
|
|
Recoveries
|
23
|
31
|
25
|
|
Transfer
(to) from reserves on loan commitments
|
(484)
|
(53)
|
378
|
|
Balance
at end of period
|
$15,514
|
$15,785
|
$15,543
|
7.
MORTGAGE SERVICING ACTIVITIES
At
December 31, 2006, 2005 and 2004, the Bank was servicing loans for others
having
principal balances outstanding of approximately $519,165, $413,662, and
$325,324, 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 $2,592 and $2,346
at
December 31, 2006 and 2005, respectively, including the servicing rights
associated with the multifamily loans sold to FNMA discussed below totaling
$2,339 and $2,074 at December 31, 2006 and 2005, respectively. MSR recognized
from loan sales were $815, $424 and $731 during the years ended December
31,
2006, 2005 and 2004, respectively. Amortization of servicing rights was
$569,
$578 and $508 during the years ended December 31, 2006, 2005 and 2004,
respectively. Servicing assets are carried at the lower of cost or fair
value
and are amortized in proportion to, and over the period of, net servicing
income. The estimated fair value of 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
that the Company believes market participants would use for similar assets.
In
connection with loans serviced for others, the Bank held borrowers' escrow
balances of approximately $6,518 and $5,730 at December 31, 2006 and 2005,
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, 2006 and 2005, the Bank serviced $494,770 and $386,781,
respectively, of loans sold pursuant to this program with respective
corresponding loan servicing assets of $2,339 and $2,074. Amortization
of these
servicing rights was $543, $559 and $441 during the years ended December
31,
2006, 2005 and 2004, respectively. Under the terms of the sales program,
the
Bank retains a portion of the associated credit risk. At December 31, 2006
and
2005, the Bank's maximum potential exposure related to secondary market
sales to
FNMA with respect to this specific program was $18,495 and $14,274,
respectively. The Bank retains this level of exposure until the portfolio
of
loans is satisfied in its entirety or the Bank funds claims by FNMA for
the
maximum loss exposure. As of December 31, 2006 and 2005, the Bank had not
realized any losses related to these loans.
Reserves
of $2,223 and $1,771 were established as of December 31, 2006 and 2005,
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, 2006, 2005 and 2004.
F-82
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, 2006
|
At
December
31, 2005
|
At
December
31, 2004
|
|
|
Carrying
value of the servicing asset
|
$2,339
|
$2,074
|
$2,226
|
|
Fair
value of the servicing asset
|
3,556
|
2,890
|
2,460
|
|
Weighted
average life (in years)
|
8.25
|
8.25
|
7.25
|
|
Prepayment
speed assumptions (annual rate)
|
151
PSA
|
151
PSA
|
152
PSA
|
|
Impact
on fair value of 10% adverse change
|
$(76)
|
$(60)
|
$(55)
|
|
Impact
on fair value of 20% adverse change
|
$(150)
|
$(118)
|
$(108)
|
|
Expected
credit losses (annual rate)
|
$65
|
$13
|
$341
|
|
Impact
on fair value of 10% adverse change
|
$(1)
|
$(4)
|
$(306)
|
|
Impact
on fair value of 20% adverse change
|
$(3)
|
$(9)
|
$(609)
|
|
Residual
cash flows discount rate (annual rate)
|
13.75%
|
12.75%
|
10.50%
|
|
Impact
on fair value of 10% adverse change
|
$(101)
|
$(70)
|
$(52)
|
|
Impact
on fair value of 20% adverse change
|
$(195)
|
$(137)
|
$(101)
|
|
Average
Interest rate on adjustable rate loans
|
5.62%
|
5.41%
|
5.40%
|
|
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, 2006
|
December
31, 2005
|
|
|
Land
|
$7,237
|
2,308
|
|
Buildings
|
20,293
|
18,948
|
|
Leasehold
improvements
|
4,856
|
4,520
|
|
Furniture,
fixtures and equipment
|
13,586
|
12,387
|
|
45,972
|
38,163
|
|
|
Less:
accumulated depreciation and amortization
|
(23,086)
|
(21,636)
|
|
$22,886
|
$16,527
|
Depreciation
and amortization expense amounted to approximately $1,459, $1,371 and $1,490
during the years ended December 31, 2006, 2005 and 2004,
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 312,948
shares
and 299,173 shares at December 31, 2006 and 2005, respectively. The Bank
recorded dividends on the FHLBNY capital stock of $1,688, $1,139 and $488
during
the years ended December 31, 2006, 2005 and 2004, respectively. During
the
fourth quarter of 2003, the FHLBNY significantly reduced its quarterly
dividend
payment on the capital stock, which resulted in a decline in income received
by
the Company during 2004.
F-83
10.
DUE TO DEPOSITORS
Deposits
are summarized as follows:
|
At December 31, 2006
|
At December 31, 2005
|
|||
|
Effective
Cost
|
Liability
|
Effective
Cost
|
Liability
|
|
|
Savings
accounts
|
0.59%
|
$298,522
|
0.56%
|
$335,527
|
|
Certificates
of deposit
|
4.76
|
1,064,669
|
3.50
|
978,585
|
|
Money
market accounts
|
3.56
|
514,607
|
1.69
|
464,962
|
|
NOW
and Super NOW accounts
|
1.08
|
35,519
|
1.01
|
38,697
|
|
Non-interest
bearing checking accounts
|
-
|
95,215
|
-
|
97,001
|
|
3.54%
|
$2,008,532
|
2.32%
|
$1,914,772
|
|
The
distribution of certificates of deposit by remaining maturity was as
follows:
|
At
December 31, 2006
|
At
December 31, 2005
|
|
|
Maturity
in one year or less
|
$961,009
|
$794,263
|
|
Over
one year through three years
|
85,435
|
157,986
|
|
Over
three years to five years
|
18,225
|
26,336
|
|
Over
five years
|
-
|
-
|
|
Total
certificates of deposit
|
$1,064,669
|
$978,585
|
The
aggregate amount of certificates of deposit with a minimum denomination
of
one-hundred thousand dollars was approximately $356,584 and $292,936 at
December
31, 2006 and 2005, respectively.
11.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Presented
below is information concerning securities sold under agreement to
repurchase:
|
At
or for the Fiscal
Year Ended
December 31,
|
||
|
2006
|
2005
|
|
|
Balance
outstanding at end of period
|
$120,235
|
$205,455
|
|
Average
interest cost at end of period
|
3.54%
|
2.99%
|
|
Average
balance outstanding during the period
|
$134,541
|
$205,530
|
|
Average
interest cost during the period
|
1.95%(a)
|
2.90%
|
|
Estimated
fair value of underlying collateral
|
$126,830
|
$213,925
|
|
Maximum
balance outstanding at month end during the year
|
$205,455
|
$205,584
|
(a)
During the year ended December 31, 2006, the Company recorded a reduction
of
$2,176 in interest expense on securities sold under agreement to repurchase
that
were prepaid. Excluding this reduction, the average cost of securities
sold
under agreement 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 $571,500 and $531,500
at
December 31, 2006 and 2005, respectively. The average interest cost of
FHLBNY
Advances was 4.69%, 4.48%, and 4.00% during the years ended December 31,
2006,
2005 and 2004, 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 4.37% and 4.62% at December
31,
2006 and 2005, respectively. At December 31, 2006, 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, 2006, the FHLBNY Advances had contractual maturities ranging from January
2007 through August 2016. Certain of the FHLBNY Advances outstanding at
December
31, 2006 contain call features that may be exercised by the FHLBNY.
F-84
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,
2006, 2005 and 2004.
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.
During
the years ended December 31, 2006, 2005 and 2004, interest expense recorded
on
the trust preferred securities totaled $5,129, $5,129 and $4,016, respectively.
Of the total interest payments, $152, $152 and $118 were paid to the Holding
Company during the years ended December 31, 2006, 2005 and 2004, respectively,
related to its $2,165 investment in the securities, and were 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, 2006
|
Year
Ended December 31, 2005
|
Year
Ended December 31, 2004
|
|||||||||
|
Federal
|
State
and
City
|
Total
|
|
Federal
|
State
and
City
|
Total
|
|
Federal
|
State
and
City
|
Total
|
|
|
Current
|
$15,385
|
$1,564
|
$16,949
|
$18,919
|
$1,960
|
$20,879
|
$24,353
|
$3,629
|
$27,982
|
||
|
Deferred
|
(176)
|
279
|
103
|
(691)
|
42
|
(649)
|
(348)
|
(185)
|
(533)
|
||
|
$15,209
|
$1,843
|
$17,052
|
$18,228
|
$2,002
|
$20,230
|
$24,005
|
$3,444
|
$27,449
|
|||
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 adjustment to other comprehensive income
relating to the minimum pension liability or the adoption of SFAS 158.
These tax
effects are disclosed as part of the presentation of the consolidated Statement
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,
|
|||
|
2006
|
2005
|
2004
|
|
|
Tax
at Federal statutory rate
|
$16,675
|
$19,754
|
$25,785
|
|
State
and local taxes, net of Federal
income tax benefit
|
1,198
|
1,156
|
2,227
|
|
Benefit
plan differences
|
(159)
|
(3)
|
288
|
|
Adjustments
for prior period tax returns
|
(42)
|
(50)
|
(115)
|
|
Investment
in Bank Owned Life Insurance
|
(654)
|
(660)
|
(685)
|
|
Other,
net
|
34
|
33
|
(51)
|
|
$17,052
|
$20,230
|
$27,449
|
|
|
Effective
tax rate
|
35.79%
|
35.84%
|
37.26%
|
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.
F-85
The
components of Federal and net State and City deferred income tax assets
and
liabilities were as follows:
|
At
December
31,
|
||
|
Deferred
tax assets:
|
2006
|
2005
|
|
Excess
book bad debt over tax bad debt reserve
|
$6,625
|
$6,762
|
|
Employee
benefit plans
|
7,671
|
4,314
|
|
Tax
effect of other comprehensive income on securities
available-for-sale
|
2,548
|
2,532
|
|
Other
|
588
|
550
|
|
Total
deferred tax assets
|
17,432
|
14,158
|
|
Deferred
tax liabilities:
|
||
|
Difference
in book and tax carrying value of fixed assets
|
498
|
519
|
|
Tax
effect of purchase accounting fair value adjustments
|
194
|
428
|
|
Other
|
296
|
36
|
|
Total
deferred tax liabilities
|
$988
|
$983
|
|
Net
deferred tax asset (recorded in other assets)
|
$16,444
|
$13,175
|
During
the year ended December 31, 2006, a valuation allowance of $136 was established
against a deferred tax asset associated with a net operating loss carryforward.
No other valuation allowances were recognized during the years ended December
31, 2006 and 2005, since, at each period end, it was more likely than not
that the deferred tax assets would be fully realized.
At
December 31, 2006, the Bank had approximately $60,000 of bad debt reserves
for
New York State 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,
2006. 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
tax purposes.
In
order
for the Bank to permissibly maintain a New York State tax bad debt reserve
for
thrifts, certain thrift definitional tests must be satisfied on an ongoing
basis. These definitional tests 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, the transition
to the reserve method permitted to commercial banks under New York State
income
tax law would result in an increase in the New York State income tax provision,
and a deferred tax liability would be established to reflect the eventual
recapture of some or all of the New York bad debt reserve.
The
Company expects that it will 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. Tax reserves
have been
established, which the Company believes to be adequate in relation to the
potential for additional assessments. Once established, reserves are adjusted
as
information becomes available or events requiring change in the reserve
occur.
F-86
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 includes the following
components:
|
Year
Ended December 31,
|
|||
|
2006
|
2005
|
2004
|
|
|
Interest
cost
|
1,041
|
1,068
|
1,067
|
|
Expected
return on plan assets
|
(1,753)
|
(1,650)
|
(1,589)
|
|
Net
amortization and deferral
|
580
|
545
|
584
|
|
Net
periodic (credit) cost
|
$(132)
|
$(37)
|
$62
|
Major
assumptions utilized to determine the net periodic cost (credit) were as
follows:
|
Year
Ended December
31,
|
|||
|
2006
|
2005
|
2004
|
|
|
Discount
rate
|
5.50%
|
6.125%
|
6.25%
|
The
funded status of the Employee Retirement Plan was as follows:
|
At December 31,
|
||
|
2006
|
2005
|
|
|
Accumulated
benefit obligation at end of period
|
$18,753
|
$19,450
|
|
Reconciliation
of Projected benefit obligation:
|
||
|
Projected
benefit obligation at beginning of period
|
$19,450
|
$17,970
|
|
Interest
cost
|
1,041
|
1,068
|
|
Actuarial
(gain) loss
|
(652)
|
1,495
|
|
Benefit
payments
|
(1,049)
|
(1,055)
|
|
Settlements
|
(37)
|
(28)
|
|
Projected
benefit obligation at end of period
|
18,753
|
19,450
|
|
Plan
assets at fair value (investments in trust funds managed by
trustee)
|
||
|
Balance
at beginning of period
|
20,000
|
18,867
|
|
Return
on plan assets
|
1,595
|
2,216
|
|
Contributions
|
-
|
-
|
|
Benefit
payments
|
(1,049)
|
(1,055)
|
|
Settlements
|
(37)
|
(28)
|
|
Balance
at end of period
|
20,509
|
20,000
|
|
Funded
status:
|
||
|
Excess
of plan assets over projected benefit obligation
|
1,756
|
550
|
|
Unrecognized
loss from experience different from that assumed
|
N/A
|
7,656
|
|
Prepaid
retirement expense included in other assets
|
$1,756
|
$8,206
|
The
Bank
uses 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 2007.
F-87
Major
assumptions utilized to determine the benefit obligations at December 31,
2006
and 2005 were as follows:
|
At December 31,
|
||
|
2006
|
2005
|
|
|
Discount
rate
|
5.875%
|
5.50%
|
|
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. 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 5% 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,
|
||
|
2006
|
2005
|
|
|
Asset
Category
|
||
|
Equity
securities
|
73%
|
72%
|
|
Debt
securities (bond mutual funds)
|
27
|
28
|
|
Total
|
100%
|
100%
|
The
allocation percentages in the above table are consistent with future planned
allocation percentages as of December 31, 2006.
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 expected
to be made as follows:
|
Year
Ending December 31,
|
||
|
2007
|
$1,191
|
|
|
2008
|
1,199
|
|
|
2009
|
1,214
|
|
|
2010
|
1,207
|
|
|
2011
|
1,205
|
|
|
2012
to 2016
|
6,309
|
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 the statutory
limitations on benefit plans. As of December 31, 2006 and 2005, the BMP
had an
investment in the Holding Company's common stock of $10,260 and $10,700,
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.
F-88
Effective
July 1, 1996, the Bank established the Directors' Retirement Plan, which
provides benefits to each eligible outside director commencing upon their
termination of 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
Director's 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
Director's Retirement Plan during the year ended December 31, 2005.
The
combined cost for the defined benefit portions of the BMP and the Directors'
Retirement Plan includes the following components:
|
Year Ended December 31,
|
|||
|
2006
|
2005
|
2004
|
|
|
Service
cost
|
$-
|
$-
|
$30
|
|
Interest
cost
|
269
|
286
|
289
|
|
Net
amortization and deferral
|
38
|
73
|
123
|
|
Curtailment
credit
|
-
|
(179)
|
-
|
|
Net
periodic cost
|
$307
|
$180
|
$442
|
Major
assumptions utilized to determine the net periodic cost for the BMP were
as
follows:
|
Year
Ended December 31,
|
|||
|
2006
|
2005
|
2004
|
|
|
Discount
rate
|
5.50%
|
6.125%
|
6.25%
|
Major
assumptions utilized to determine the net periodic cost for the Directors'
Retirement Plan were as follows:
|
Year Ended December 31,
|
|||
|
2006
|
2005
|
2004
|
|
|
Discount
rate
|
5.50%
|
6.00%
|
6.25%
|
|
Rate
of increase in fee compensation levels
|
4.0
|
4.0
|
4.0
|
There
was
no defined contribution expense incurred by the Company related to the
BMP
during the year ended December 31, 2006. The defined contribution costs
incurred
by the Company related to the BMP were $135 and $404 for the years ended
December 31, 2005 and 2004 respectively. There is no defined contribution
cost
incurred by the Holding Company or Bank under the Directors' Retirement
Plan.
F-89
The
combined funded status of the defined benefit portions of the BMP and Directors'
Retirement Plan was as follows:
|
At December 31,
|
||
|
2006
|
2005
|
|
|
Accumulated
benefit obligation at end of period
|
$4,942
|
$5,067
|
|
Reconciliation
of Projected benefit obligation:
|
||
|
Projected
benefit obligation at beginning of period
|
$5,067
|
$4,917
|
|
Service
cost
|
-
|
-
|
|
Interest
cost
|
270
|
286
|
|
Benefit
payments
|
(96)
|
(32)
|
|
Actuarial
loss (gain)
|
(331)
|
295
|
|
Curtailment
credit
|
-
|
(399)
|
|
Projected
benefit obligation at end of period
|
4,910
|
5,067
|
|
Plan
assets at fair value:
|
||
|
Balance
at beginning of period
|
-
|
-
|
|
Contributions
|
96
|
31
|
|
Benefit
payments
|
(96)
|
(31)
|
|
Balance
at end of period
|
-
|
-
|
|
Funded
status:
|
||
|
Deficiency
of plan assets over projected benefit obligation
|
(4,910)
|
(5,067)
|
|
Contributions
by employer
|
N/A
|
7
|
|
Unrecognized
(gain) loss from experience different from that assumed
|
N/A
|
420
|
|
Unrecognized
net past service liability
|
N/A
|
-
|
|
Accrued
expense included in other liabilities
|
$(4,910)
|
$(4,640)
|
|
Amount
recognized in statements of financial condition consists
of:
|
||
|
Pre-tax
component of other comprehensive income
|
N/A
|
$505
|
|
Accrued
liability
|
N/A
|
$(5,145)
|
Major
assumptions utilized to determine the benefit obligations at December 31,
2006
and 2005 were as follows:
|
At
December 31, 2006
|
At
December 31, 2005
|
||||
|
BMP
|
Directors'
Retirement
Plan
|
|
BMP
|
Directors'
Retirement
Plan
|
|
|
Discount
rate
|
5.875%
|
5.50%
|
5.50%
|
5.50%
|
|
|
Rate
of increase in compensation levels
|
-
|
-
|
-
|
-
|
|
The
Bank
uses 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 $186 to the BMP and $131 to the Directors' Retirement
Plan
during the year ending December 31, 2007 in order to pay benefits due under
the
respective plans.
F-90
Combined
benefit payments under the BMP and Directors' Retirement Plan, which reflect
expected future service (as appropriate), are expected to be made as
follows:
|
Year
Ending December 31,
|
||
|
2007
|
$317
|
|
|
2008
|
330
|
|
|
2009
|
343
|
|
|
2010
|
356
|
|
|
2011
|
372
|
|
|
2012
to 2016
|
2,152
|
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 cost included the following components:
|
Year Ended December 31,
|
|||
|
2006
|
2005
|
2004
|
|
|
Service
cost
|
$82
|
$72
|
$57
|
|
Interest
cost
|
227
|
256
|
230
|
|
Unrecognized
past service liability
|
(29)
|
(28)
|
(28)
|
|
Amortization
of unrealized loss
|
40
|
56
|
33
|
|
$320
|
$356
|
$292
|
|
Major
assumptions utilized to determine the net periodic cost were as follows:
|
Year
Ended December 31,
|
|||
|
2006
|
2005
|
2004
|
|
|
Discount
rate
|
5.50%
|
6.125%
|
6.25%
|
|
Rate
of increase in compensation levels
|
3.00
|
3.25
|
3.50
|
An
escalation in the assumed medical care cost trend rates by 1% in each year
would
increase the net periodic cost by approximately $18. A decline in the assumed
medical care cost trend rates by 1% in each year would decrease the net
periodic
cost by approximately $17.
F-91
The
funded status of the Postretirement Benefit Plan was as follows:
|
At
December 31, 2006
|
At
December 31, 2005
|
|
|
Accumulated
benefit obligation at end of period
|
$4,244
|
$4,202
|
|
Reconciliation
of Projected benefit obligation:
|
||
|
Projected
benefit obligation at beginning of period
|
$4,183
|
$4,271
|
|
Service
cost
|
82
|
72
|
|
Interest
cost
|
227
|
256
|
|
Actuarial
gain
|
(109)
|
(243)
|
|
Benefit
payments
|
(139)
|
(173)
|
|
Projected
benefit obligation at end of period
|
4,244
|
4,183
|
|
Plan
assets at fair value:
|
||
|
Balance
at beginning of period
|
-
|
-
|
|
Contributions
|
139
|
173
|
|
Benefit
payments
|
(139)
|
(173)
|
|
Balance
at end of period
|
-
|
-
|
|
Funded
status:
|
||
|
(Deficiency)
of plan assets over projected benefit obligation
|
(4,244)
|
(4,183)
|
|
Unrecognized
loss from experience different from that assumed
|
N/A
|
939
|
|
Unrecognized
net past service liability
|
N/A
|
(83)
|
|
Accrued
expense included in other liabilities
|
$(4,244)
|
$(3,327)
|
The
Bank
uses 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 2006 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 $207. 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 $189.
The
assumed discount rate and rate of compensation increase used to measure
the
accumulated Postretirement Benefit Plan obligation at December 31, 2006
were
5.875% and 3.50%, respectively. 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.
The
assumed discount rate and rate of compensation increase used to measure
the
accumulated Postretirement Benefit Plan obligation at December 31, 2004
were
6.125% and 3.25%, 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 filed a claim
for the
subsidy for coverage provided under the Postretirement Benefit Plan in
2005.
This filing is under review by the government and, as a result, the Bank
cannot
determine the amount of subsidy it will ultimately receive.
F-92
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 $159 to the Postretirement Benefit Plan during the
year
ending December 31, 2007 in order to pay benefits due under the
plan.
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,
|
||
|
2007
|
$159
|
|
|
2008
|
161
|
|
|
2009
|
155
|
|
|
2010
|
156
|
|
|
2011
|
162
|
|
|
2012
to 2016
|
924
|
As
discussed in Note 1, the Company adopted SFAS 158
effective December 31, 2006. The following table details the impact of
adoption
of SFAS 158 on the consolidated statement of financial condition at December
31,
2006:
|
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)
|
401(k)
Plan -
The Bank
also maintains the 401(k) Plan which covers substantially all employees.
The
401(k) Plan annually receives the proceeds from a 100% vested cash contribution
to all participants in the ESOP in the amount of 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. Effective March 1, 2004, any compensation resulting from either
the
granting or vesting of restricted stock or the exercise of stock options
is
excluded from "covered compensation." These amounts were previously included.
401(k) Plan participants have 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 $397, $425 and $457 during the years ended December 31, 2006, 2005
and
2004, respectively.
The
401(k) Plan owns participant investments in the Holding Company's common
stock
for the accounts of participants totaling $7,499 and $8,082 at December
31, 2006
and 2005, respectively.
ESOP
- The
Holding Company adopted the ESOP in connection with the Bank's 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, which included
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 $4,554
and
$4,655 at December 31, 2006 and December 31, 2005, 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. Contributions to the ESOP and
shares
released from the 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, 78,155 shares, and 149,219 shares during
the
years ended December 31,
F-93
2006,
2005 and 2004, respectively. The
ESOP
benefit expense recorded in accordance with Statement of Position 93-6
for
allocated shares totaled $1,829, $2,023 and $2,475, respectively, for the
years
ended December 31, 2006, 2005 and 2004.
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
became
exercisable by participants 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.
2001
Stock Option Plan - In
September 2001, the Holding Company adopted the 2001 Stock Option Plan,
which
permits 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 administers
the
2001 Stock Option Plan and authorizes all option grants.
On
November 21, 2001, 540,447 stock options under the 2001 Stock Option Plan
were
granted to certain officers and employees. All of these stock options expire
on
November 21, 2011. One-fourth of the options under this grant became exercisable
by participants on November 21, 2002, 2003, 2004 and 2005, respectively.
On
November 21, 2001, 67,500 stock options under the 2001 Stock Option Plan
were
granted to outside directors. All of these stock options will expire on
November
21, 2011 and became exercisable by the respective directors on November
21,
2002.
On
February 1, 2003, a grant of 604,041 stock options under the 2001 Stock
Option
Plan was made to certain officers and employees. All of these stock options
expire on February 1, 2013. When originally granted, one-fourth of the
options
under this grant were to become exercisable by participants 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 under the 2001 Stock Option Plan were granted to outside
directors. All of these stock options will expire on February 1, 2013 and
became
exercisable by the respective directors on February 1, 2004.
On
January 27, 2004, a grant of 632,874 stock options was made under the 2001
Stock
Option Plan to certain officers and employees. All of these stock options
expire
on January 27, 2014. When originally granted, one-fourth of the options
under
this grant were to become exercisable by participants 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 under the 2001 Stock Option Plan were granted to outside directors.
All
of these stock options will expire on January 27, 2014 and, when originally
granted, became exercisable by the respective directors 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
F-94
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 become fully exercisable on January 31,
2006. On
May 31, 2005, a grant of 318,492 stock options was made to certain officers
of
the Company. 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
become exercisable by participants 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.
Combined
activity related to the Stock Plans for the years ended December 31, 2006,
2005
and 2004 was as follows:
|
At
or for the Year Ended December
31,
|
|||
|
2006
|
2005
|
2004
|
|
|
Options
outstanding - beginning of period
|
2,503,103
|
2,679,435
|
2,939,286
|
|
Options
granted
|
-
|
394,812
|
713,874
|
|
Weighted
average exercise price of grants
|
-
|
$15.36
|
$19.90
|
|
Options
exercised
|
246,169
|
534,637
|
971,052
|
|
Weighted
average exercise price of exercised options
|
$4.75
|
$4.72
|
$4.52
|
|
Options
forfeited
|
6,187
|
36,507
|
2,673
|
|
Weighted
average exercise price of forfeited options
|
$19.90
|
$17.40
|
$14.10
|
|
Options
outstanding - end of period
|
2,250,747
|
2,503,103
|
2,679,435
|
|
Weighted
average exercise price of outstanding
options
- end of period
|
$14.85
|
$13.87
|
$11.87
|
|
Remaining
options available for grant
|
1,127,840
|
1,169,653
|
62,478
|
|
Exercisable
options at end of period
|
2,250,747
|
2,503,103
|
1,342,518
|
|
Weighted
average exercise price on exercisable options
- end of period
|
$14.85
|
$13.87
|
$7.50
|
|
Cash
received for option exercise cost
|
$1,086
|
$2,445
|
$4,188
|
|
Income
tax benefit recognized
|
839
|
1,995
|
5,311
|
The
range
of exercise prices and weighted-average remaining contractual lives of
both
options outstanding and options exercisable as of December 31, 2006 were
as
follows:
|
Range
of Exercise Prices
|
Outstanding
as of
December
31, 2006
|
Exercisable
as of
December
31, 2006
|
Weighted
Average
Exercise
Price
|
Weighted
Average Contractual Years Remaining
|
|
$2.51
- $3.00
|
39,403
|
39,403
|
2.76
|
0.5
|
|
$4.51
- $5.00
|
14,087
|
14,087
|
4.56
|
3.1
|
|
$10.50
- $11.00
|
507,396
|
507,396
|
10.91
|
4.9
|
|
$13.00-$13.50
|
612,185
|
612,185
|
13.16
|
6.1
|
|
$15.00-$15.50
|
318,492
|
318,492
|
15.10
|
8.4
|
|
$16.00-$16.50
|
76,320
|
76,320
|
16.45
|
8.1
|
|
$19.50-$20.00
|
682,864
|
682,864
|
19.90
|
7.1
|
|
Total
|
2,250,747
|
2,250,747
|
$14.85
|
6.4
|
F-95
There
were no stock options granted during the year ended December 31, 2006.
The
weighted average fair value per option at the date of grant for stock options
granted during the years ended December 31, 2005 and 2004 was estimated
as
follows:
|
Year Ended December 31,
|
||
|
2005
|
2004
|
|
|
Total
options granted
|
394,812
|
713,874
|
|
Estimated
fair value on date of grant
|
$3.91
|
$4.80
|
|
Pricing
methodology utilized
|
Black-
Scholes
|
Black-
Scholes
|
|
Expected
life (in years)
|
7.0
|
7.0
|
|
Interest
rate
|
3.94%
|
3.56%
|
|
Volatility
|
31.67
|
25.91
|
|
Dividend
yield
|
3.67
|
2.68
|
Other
Stock Awards
RRP
- In
December 1996, the Holding Company's shareholders approved the RRP, which
is
designed to retain key officers and directors of the Holding Company and
Bank,
as well as to provide them with a proprietary interest in the Company.
On
February 1, 1997, the Holding Company allocated 1,963,913 shares of stock
to
employees and outside directors. These shares vested in equal installments
on
February 1, 1998, 1999, 2000, 2001, and 2002. On
each
vesting date, the RRP re-acquired shares that were sold by RRP participants
in
order to fund income tax obligations associated with their individual vesting
of
shares. In addition, during the period February 1, 1997 through February
1, 2002
the RRP re-acquired shares that were forfeited by participants. The shares
re-acquired by the RRP during the period February 1, 1997 through February
1,
2002, either through the repurchase or forfeiture of previously allocated
shares, totaled 343,797. On May 17, 2002, a grant of 67,500 RRP shares
was made
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 RRP
re-acquired 21,817 shares of common stock that were sold by RRP participants
in
order to fund income tax obligations associated with the individual vesting
of
their shares under the May 17, 2002 grant. At December 31, 2006, 303,137
shares
held by the RRP remained eligible for future allocation. Prior to January
1,
2006, the Company accounted for compensation expense under the RRP pursuant
to
APB 25, measuring compensation cost based upon the average acquisition
value of
the RRP shares. Effective January 1, 2006, the Company accounts for compensation
expense under the RRP pursuant to SFAS 123R.
The
following is a summary of activity related to the RRP for the years ended
December 31, 2006, 2005 and 2004:
|
At or for the Year Ended December 31,
|
|||
|
2006
|
2005
|
2004
|
|
|
Shares
acquired (a)
|
5,023
|
5,636
|
5,493
|
|
Shares
vested
|
13,500
|
13,500
|
13,500
|
|
Shares
allocated
|
-
|
-
|
-
|
|
Unallocated
shares - end of period
|
303,137
|
298,114
|
292,478
|
|
Unvested
allocated shares - end of period
|
-
|
13,500
|
27,000
|
|
Compensation
recorded to expense
|
$45
|
$108
|
$108
|
|
Income
tax benefit recognized
|
$134
|
$-
|
$108
|
(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.
In
accordance with either SFAS 123 or SFAS 123R, during the years ended December
31, 2006 and 2005, compensation expense was recorded on these restricted
stock
awards based upon the fair value of the shares on the respective dates
of grant.
F-96
The
following is a summary of activity related to the restricted stock awards
granted under the 2004 Stock Incentive Plan during the years ended December
31,
2006 and 2005:
|
At
or for the Year Ended December 31,
|
||
|
2006
|
2005
|
|
|
Unvested
allocated shares - beginning of period
|
31,804
|
-
|
|
Shares
granted
|
48,000
|
31,804
|
|
Shares
vested
|
7,949
|
-
|
|
Unvested
allocated shares - end of period
|
71,855
|
31,804
|
|
Unallocated
shares - end of period
|
-
|
-
|
|
Compensation
recorded to expense
|
$252
|
$96
|
|
Income
tax benefit recognized
|
16
|
-
|
16.
COMMITMENTS AND CONTINGENCIES
Mortgage
Loan Commitments and Lines of Credit
- At
December 31, 2006 and 2005, the Bank had outstanding commitments to make
real
estate loans aggregating approximately $55,321 and $55,353,
respectively.
At
December 31, 2006, commitments to originate fixed-rate and adjustable-rate
real
estate loans were $10,972 and $44,349 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, 2006, unused lines of credit available on one- to four-family
residential, multifamily residential and commercial real estate loans totaled
$38,206. At December 31, 2006, unused commitments to extend credit related
construction loans and overdraft checking accounts totaled $33,389 and
$3,544,
respectively.
At
December 31, 2006, the Bank had available unused lines of credit with the
FHLBNY
totaling $100,000 expiring on September 13, 2007.
Lease
Commitments
- At
December 31, 2006, aggregate minimum annual rental commitments on operating
leases were as follows:
|
Year
Ending December 31,
|
Amount
|
|
2007
|
$1,141
|
|
2008
|
976
|
|
2009
|
970
|
|
2010
|
891
|
|
2011
|
758
|
|
Thereafter
|
3,895
|
|
Total
|
$8,631
|
Rental
expense for the years ended December 31, 2006, 2005 and 2004 totaled 1,417,
$1,283, and $1,190, 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, 2006 and 2005, reserves
provided for potential losses related to litigation matters were not
material.
F-97
17.
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. However,
considerable judgment is required in interpreting market data to develop
the
estimates of fair value. Accordingly, the estimates presented herein are
not
necessarily indicative of the amounts the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value
amounts.
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 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 discounted 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.
Borrowed
Funds - For
borrowed funds with stated maturity or subsequent interest rate repricing
dates
occurring within one year, the carrying value is the best estimate of fair
value. For borrowings with stated maturity or subsequent interest rate
repricing
dates occurring after one year, 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
on
borrowed funds is its 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.
F-98
The
estimated fair values of the Company's financial instruments at December
31,
2006 and December 31, 2005 were as follows:
|
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 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
|
|
Borrowed
funds
|
788,900
|
787,085
|
|
Off
Balance Sheet
|
||
|
Commitments
to extend credit
|
-
|
(163)
|
|
December
31, 2005
|
Carrying
Amount
|
Fair
Value
|
|
Assets:
|
||
|
Cash
and due from banks
|
$40,199
|
$40,199
|
|
Investment
securities held-to-maturity
|
455
|
456
|
|
Investment
securities available-for-sale
|
44,832
|
44,832
|
|
MBS
available-for-sale
|
193,453
|
193,453
|
|
Loans,
net
|
2,595,410
|
2,570,841
|
|
Loans
held for sale
|
900
|
900
|
|
MSR
|
2,344
|
2,890
|
|
Federal
funds sold and short-term investments
|
60,014
|
60,014
|
|
FHLBNY
capital stock
|
29,917
|
29,917
|
|
Liabilities:
|
||
|
Savings,
money market, NOW, Super NOW and
checking
accounts
|
936,187
|
936,187
|
|
Certificates
of deposit
|
978,585
|
973,230
|
|
Escrow
and other deposits
|
47,518
|
47,518
|
|
Borrowed
funds
|
834,120
|
831,041
|
|
Off
Balance Sheet
|
||
|
Commitments
to extend credit
|
-
|
(320)
|
18.
TREASURY STOCK
The
Holding Company purchased 777,539 shares, 801,384 shares and 1,987,529
shares of
its common stock into treasury during the years ended December 31, 2006,
2005
and 2004, 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.
F-99
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, 2006,
the
Bank satisfied all capital adequacy requirements to which it was
subject.
As
of
December 31, 2006 and 2005, 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, 2006
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||
|
Tangible
capital
|
$277,622
|
9.05%
|
$46,037
|
1.5%
|
N/A
|
N/A
|
||
|
Leverage
capital
|
277,622
|
9.05
|
122,766
|
4.0%
|
N/A
|
N/A
|
||
|
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
|
N/A
|
N/A
|
131,739
|
6.00
|
||
|
Tier
I leverage capital (to average assets)
|
277,622
|
8.97
|
N/A
|
N/A
|
154,801
|
5.00
|
||
|
Actual
|
For
Capital
Adequacy
Purposes
|
To
Be Categorized as "Well Capitalized"
|
||||||
|
As
of December 31, 2005
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||
|
Tangible
capital
|
$299,666
|
9.84%
|
$45,673
|
1.5%
|
N/A
|
N/A
|
||
|
Leverage
capital
|
299,666
|
9.84
|
121,794
|
4.0%
|
N/A
|
N/A
|
||
|
Total
risk-based capital (to risk weighted
assets)
|
301,657
|
14.30
|
168,787
|
8.0%
|
$210,983
|
10.00%
|
||
|
Tier
I risk-based capital (to risk weighted
assets)
|
285,872
|
13.55
|
N/A
|
N/A
|
126,590
|
6.00
|
||
|
Tier
I leverage capital (to average assets)
|
299,666
|
9.26
|
N/A
|
N/A
|
161,725
|
5.00
|
||
F-100
The
following is a reconciliation of GAAP capital to regulatory capital for
the
Bank:
|
At
December 31, 2006
|
At
December 31, 2005
|
||||||
|
Tangible
Capital
|
Leverage
Capital
|
Total
Risk-Based Capital
|
Tangible
Capital
|
Leverage
Capital
|
Total
Risk-Based
Capital
|
||
|
GAAP
capital
|
$326,456
|
$326,456
|
$326,456
|
$351,799
|
$351,799
|
$351,799
|
|
|
Non-allowable
assets:
|
|||||||
|
Core
deposit intangible
|
-
|
-
|
-
|
-
|
-
|
-
|
|
|
MSR
|
(265)
|
(265)
|
(265)
|
(234)
|
(234)
|
(234)
|
|
|
Accumulated
other comprehensive loss
|
7,069
|
7,069
|
7,069
|
3,739
|
3,739
|
3,739
|
|
|
Goodwill
|
(55,638)
|
(55,638)
|
(55,638)
|
(55,638)
|
(55,638)
|
(55,638)
|
|
|
Tier
1 risk-based capital
|
277,622
|
277,622
|
277,622
|
299,666
|
299,666
|
299,666
|
|
|
Adjustment
for recourse provision on loans sold
|
-
|
-
|
(16,272)
|
-
|
-
|
(13,794)
|
|
|
General
valuation allowance
|
-
|
-
|
15,514
|
-
|
-
|
15,785
|
|
|
Total
(Tier 2) risk based capital
|
277,622
|
277,622
|
276,864
|
299,666
|
299,666
|
301,657
|
|
|
Minimum
capital requirement
|
46,037
|
122,766
|
175,653
|
45,673
|
121,794
|
168,787
|
|
|
Regulatory
capital excess
|
$231,585
|
$154,856
|
$101,211
|
$253,993
|
$177,872
|
$132,870
|
|
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, 2006 and 2005.
|
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
|
|
For
the three months ended
|
March
31, 2005
|
June
30, 2005
|
September
30, 2005
|
December
31, 2005
|
|
Net
interest income
|
$24,710
|
$23,386
|
$22,346
|
$21,929
|
|
Provision
for loan losses
|
60
|
60
|
60
|
160
|
|
Net
interest income after
provision
for loan losses
|
24,650
|
23,326
|
22,286
|
21,769
|
|
Non-interest
income (loss)
|
2,320
|
(2,418)
|
2,641
|
2,608
|
|
Non-interest
expense
|
9,758
|
9,933
|
10,736
|
10,315
|
|
Income
before income taxes
|
17,212
|
10,975
|
14,191
|
14,062
|
|
Income
tax expense
|
6,341
|
3,717
|
5,089
|
5,083
|
|
Net
income
|
$10,871
|
$7,258
|
$9,102
|
$8,979
|
|
Earnings
per share (1):
|
||||
|
Basic
|
$0.31
|
$0.21
|
$0.26
|
$0.26
|
|
Diluted
|
$0.30
|
$0.20
|
$0.26
|
$0.25
|
F-101
(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.
21.
CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The
following statements of condition as of December 31, 2006 and 2005, and
the
related statements of operations and cash flows for the years ended December
31,
2006, 2005 and 2004, 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, 2006
|
At
December 31, 2005
|
|
|
ASSETS:
|
||
|
Cash
and due from banks
|
$4,427
|
$2,673
|
|
Investment
securities available-for-sale
|
6,947
|
9,107
|
|
MBS
available-for-sale
|
1,792
|
2,360
|
|
Federal
funds sold and short term investments
|
39,678
|
13,716
|
|
ESOP
loan to subsidiary
|
4,554
|
4,655
|
|
Investment
in subsidiaries
|
327,089
|
352,130
|
|
Other
assets
|
5,654
|
6,357
|
|
Total
assets
|
$390,141
|
$390,998
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY:
|
||
|
Subordinated
notes payable
|
$25,000
|
$25,000
|
|
Trust
Preferred securities payable
|
72,165
|
72,165
|
|
Other
liabilities
|
2,345
|
2,119
|
|
Stockholders'
equity
|
290,631
|
291,714
|
|
Total
liabilities and stockholders' equity
|
$390,141
|
$390,998
|
DIME
COMMUNITY BANCSHARES, INC.
CONDENSED
STATEMENTS OF OPERATIONS
|
Fiscal Year Ended December 31,
|
|||
|
2006
|
2005
|
2004
|
|
|
Net
interest loss
|
$(5,178)
|
$(5,911)
|
$(5,054)
|
|
Dividends
received from Bank
|
58,012
|
11
|
30,000
|
|
Non-interest
income
|
1,215
|
152
|
377
|
|
Non-interest
expense
|
(484)
|
(512)
|
(638)
|
|
Income
(Loss) before income taxes and equity in undistributed
earnings of direct subsidiaries
|
53,565
|
(6,260)
|
24,685
|
|
Income
tax credit
|
698
|
2,721
|
2,373
|
|
Income
(Loss) before equity in undistributed earnings of
direct subsidiaries
|
54,263
|
(3,539)
|
27,058
|
|
Equity
in (overdistributed) undistributed earnings of subsidiaries
|
(23,671)
|
39,749
|
19,164
|
|
Net
income
|
$30,592
|
$36,210
|
$46,222
|
F-102
DIME
COMMUNITY BANCSHARES, INC.
CONDENSED
STATEMENTS OF CASH FLOWS
|
Fiscal
Year Ended December 31,
|
|||
|
2006
|
2005
|
2004
|
|
|
Cash
flows from Operating Activities:
|
|||
|
Net
income
|
$30,592
|
$36,210
|
$46,222
|
|
Adjustments
to reconcile net income to net cash provided
by
operating activities:
|
|||
|
Equity
in overdistributed (undistributed) earnings of direct
subsidiaries
|
23,671
|
(39,749)
|
(19,164)
|
|
Gain
on sale of assets
|
(1,063)
|
-
|
(258)
|
|
Net
(amortization) and accretion
|
(594)
|
(299)
|
(432)
|
|
Decrease
(Increase) in other assets
|
703
|
461
|
(6,231)
|
|
Increase
(Decrease) in other liabilities
|
596
|
(144)
|
700
|
|
Net
cash provided by (used in) Operating Activities
|
53,905
|
(3,521)
|
20,837
|
|
Cash
flows from Investing Activities:
|
|||
|
Net
(Increase)Decrease in federal funds sold and short-term
Investments
|
(25,962)
|
23,235
|
(33,198)
|
|
Proceeds
from maturities of investment securities
available-for-sale
|
3,000
|
25,000
|
-
|
|
Proceeds
from sale of investment securities available-for-sale
|
3,032
|
-
|
2,959
|
|
Purchases
of investment securities available-for-sale
|
(3,029)
|
(15,000)
|
(12,999)
|
|
Principal
collected on MBS available-for-sale
|
571
|
945
|
1,790
|
|
Principal
repayments on ESOP loan
|
102
|
94
|
453
|
|
Net
cash (used in) provided by Investing Activities
|
(22,286)
|
34,274
|
(40,995)
|
|
Cash
flows from Financing Activities:
|
|||
|
Cash
disbursed in payment of stock dividends
|
-
|
-
|
(12)
|
|
Proceeds
from Trust Preferred borrowings
|
-
|
-
|
72,165
|
|
Common
stock issued for exercise of stock options
|
910
|
2,307
|
4,016
|
|
Purchase
of common stock by the RRP
|
-
|
(80)
|
-
|
|
Cash
dividends paid to stockholders
|
(19,751)
|
(19,868)
|
(19,743)
|
|
Purchase
of treasury stock
|
(11,024)
|
(12,178)
|
(38,198)
|
|
Benefit
plan payments reimbursed by subsidiary
|
-
|
777
|
1,996
|
|
Net
cash (used in) provided by financing activities
|
(29,865)
|
(29,042)
|
20,224
|
|
Net
increase in cash and due from banks
|
1,754
|
1,711
|
66
|
|
Cash
and due from banks, beginning of period
|
2,673
|
962
|
896
|
|
Cash
and due from banks, end of period
|
$4,427
|
$2,673
|
$962
|
*
* * *
*
F-103
|
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.
(1)
|
|
|
4.1
|
Amended
and Restated Certificate of Incorporation of Dime Community Bancshares,
Inc. [See Exhibit 3(i) hereto]
|
|
|
4.2
|
Amended
and Restated Bylaws of Dime Community Bancshares, Inc. [See Exhibit
3(ii)
hereto]
|
|
|
4.3
|
Draft
Stock Certificate of Dime Community Bancshares, Inc.
(2)
|
|
|
4.4
|
Certificate
of Designations, Preferences and Rights of Series A Junior Participating
Preferred Stock (3)
|
|
|
4.5
|
Rights
Agreement, dated as of April 9, 1998, between Dime Community
Bancorp, Inc.
and ChaseMellon Shareholder
Services,
L.L.C., as Rights Agent (3)
|
|
|
4.6
|
Form
of Rights Certificate (3)
|
|
|
4.7
|
Second
Amended and Restated Declaration of Trust, dated as of July 29,
2004, by
and among Wilmington Trust Company,
as Delaware Trustee, Wilmington Trust
Company as Institutional Trustee, Dime Community Bancshares,
Inc.,
as Sponsor, the Administrators of Dime Community Capital Trust
I and the
holders from time
to time of undivided beneficial
interests in the assets of Dime Community Capital Trust I
(8)
|
|
|
4.8
|
Indenture,
dated as of March 19, 2004, between Dime Community Bancshares,
Inc. and
Wilmington Trust Company, as trustee
(8)
|
|
|
4.9
|
Series
B Guarantee Agreement, dated as of July 29, 2004, executed and
delivered
by Dime Community Bancshares, Inc.,
as Guarantor and Wilmington Trust Company,
as Guarantee Trustee, for the benefit of the holders from time
to
time
of the Series B Capital Securities of Dime Community Capital
Trust I
(8)
|
|
|
10.1
|
Amended
and Restated Employment Agreement between The Dime Savings Bank
of
Williamsburgh and Vincent F. Palagiano
(4)
|
|
|
10.2
|
Amended
and Restated Employment Agreement between The Dime Savings Bank
of
Williamsburgh and Michael P. Devine
(4)
|
|
|
10.3
|
Amended
and Restated Employment Agreement between The Dime Savings Bank
of
Williamsburgh and Kenneth
J. Mahon (4)
|
|
|
10.4
|
Employment
Agreement between Dime Community Bancorp, Inc. and Vincent F.
Palagiano
(9)
|
|
|
10.5
|
Employment
Agreement between Dime Community Bancorp, Inc. and Michael P.
Devine
(9)
|
|
|
10.6
|
Employment
Agreement between Dime Community Bancorp, Inc. and Kenneth J.
Mahon
(9)
|
|
|
10.7
|
Form
of Employee Retention Agreement by and among The Dime Savings
Bank of
Williamsburgh, Dime Community
Bancorp,
Inc. and certain officers (4)
|
|
|
10.8
|
The
Benefit Maintenance Plan of Dime Community Bancorp, Inc.
(5)
|
|
|
10.9
|
Severance
Pay Plan of The Dime Savings Bank of Williamsburgh (4)
|
|
|
10.10
|
Retirement
Plan for Board Members of Dime Community Bancorp, Inc.
(5)
|
|
|
10.11
|
Dime
Community Bancorp, Inc. 1996 Stock Option Plan for Outside Directors,
Officers and Employees, as amended by
amendments number 1 and 2 (5)
|
|
|
10.12
|
Recognition
and Retention Plan for Outside Directors, Officers and Employees
of Dime
Community Bancorp, Inc., as amended
by amendments number 1 and 2 (5)
|
|
|
10.13
|
Form
of stock option agreement for Outside Directors under Dime Community
Bancshares, Inc. 1996 and 2001 Stock
Option Plans for Outside Directors, Officers
and Employees (5)
|
|
|
10.14
|
Form
of stock option agreement for officers and employees under Dime
Community
Bancshares, Inc. 1996 and 2001 Stock
Option Plans for Outside Directors, Officers
and Employees (5)
|
|
|
10.15
|
Form
of award notice for outside directors under the Recognition and
Retention
Plan for Outside Directors, Officers and
Employees of Dime Community
Bancorp, Inc. (5)
|
|
|
10.16
|
Form
of award notice for officers and employees under the Recognition
and
Retention Plan for Outside Directors, Officers
and Employees of Dime Community
Bancorp, Inc. (5)
|
|
|
10.17
|
Financial
Federal Savings Bank Incentive Savings Plan in RSI Retirement
Trust
(6)
|
|
|
10.18
|
Financial
Federal Savings Bank Employee Stock Ownership Plan (6)
|
|
|
10.19
|
Option
Conversion Certificates between Dime Community Bancshares, Inc.
and each
of Messrs: Russo, Segrete, Calamari,
Latawiec, O'Gorman, and Ms. Swaya
pursuant to Section 1.6(b) of the Agreement and Plan of Merger,
dated
as of July 18, 1998 by and between Dime Community Bancshares,
Inc. and
Financial
Bancorp, Inc. (6)
|
|
|
10.20
|
Dime
Community Bancshares, Inc. 2001 Stock Option Plan for Outside
Directors,
Officers and Employees (7)
|
|
|
10.21
|
Dime
Community Bancshares, Inc. 2004 Stock Incentive Plan for Outside
Directors, Officers and Employees (10)
|
|
|
10.22
|
Waiver
executed by Vincent F. Palagiano (12)
|
|
|
10.23
|
Waiver
executed by Michael P. Devine (12)
|
|
|
10.24
|
Waiver
executed by Kenneth J. Mahon (12)
|
|
|
10.25
|
Form
of restricted stock award notice for officers and employees under
the 2004
Stock Incentive Plan (11)
|
|
|
Exhibits
continued on next page
|
F-104
|
10.26
|
Employee
Retention Agreement between The Dime Savings Bank of Williamsburgh
and
Christopher D. Maher (13)
|
|
|
14
|
Code
of Business Ethics (10)
|
|
|
21
|
Subsidiaries
of the Registrant
|
|
|
31(i).1
|
Certification
of Chief Executive Officer Pursuant to 17 CFR
240.13a-14(a)
|
|
|
31(i).2
|
Certification
of Chief Financial Officer Pursuant to 17 CFR
240.13a-14(a)
|
|
|
32.1
|
Certification
of Chief Executive Officer Pursuant to 18 U.S.C. Section
1350.
|
|
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32.2
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Certification
of Chief Financial Officer Pursuant to 18 U.S.C. Section
1350.
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F-105
(1) Incorporated
by reference to the registrant's Transition Report on Form 10-K for the
transition period ended December 31, 2002 filed on March 28, 2003.
(2) Incorporated
by reference to the registrant's Annual Report on Form 10-K for the fiscal
year
ended June 30, 1998 filed on September 28, 1998.
(3) Incorporated
by reference to the registrant's Current Report on Form 8-K dated April
9, 1998
and filed on April 16, 1998.
(4) Incorporated
by reference to Exhibits to the registrant's Annual Report on Form 10-K
for the
fiscal year ended June 30, 1997 filed on September 26, 1997.
(5) Incorporated
by reference to the registrant's Annual Report on Form 10-K for the fiscal
year
ended June 30, 1997 filed on September 26, 1997.
(6) Incorporated
by reference to the registrant's Annual Report on Form 10-K for the fiscal
year
ended June 30, 2000 filed on September 28, 2000.
(7) Incorporated
by reference to the registrant's Quarterly Report on Form 10-Q for the
quarter
ended September 30, 2003 filed on November 14, 2003.
(8) Incorporated
by reference to Exhibits to the registrant’s Registration Statement No.
333-117743 on Form S-4 filed on July 29, 2004.
(9) Incorporated
by reference to the registrant's Annual Report on Form 10-K for the fiscal
year
ended December 31, 2003 filed on March 15, 2004.
(10) Incorporated
by reference to the registrant's Annual Report on Form 10-K for the fiscal
year
ended December 31, 2004 filed on March 16, 2005.
(11) Incorporated
by reference to the registrant's Current Report on Form 8-K filed on March
22,
2005.
(12) Incorporated
by reference to the registrant's Quarterly Report on Form 10-Q for the
quarter
ended March 31, 2005 filed on May 10, 2005.
(13) Incorporated
by reference to the registrant's Quarterly Report on Form 10-Q for the
quarter
ended September 30, 2006 filed on November 9, 2006.