form10q6302011.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q/A

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

For the quarterly period ended                                                      June 30, 2011
OR
 
 
[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                 to

Commission file number 0-27782

Dime Community Bancshares, Inc.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of incorporation or organization)
  
11-3297463
(I.R.S. employer identification number)
 
209 Havemeyer Street, Brooklyn, NY
(Address of principal executive offices)
  
 
11211
(Zip Code)

(718) 782-6200
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all the reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES            X            NO ___

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

YES             X              NO ___

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

LARGE ACCELERATED FILER ___
ACCELERATED FILER         X     
NON -ACCELERATED FILER  ___
SMALLER REPORTING COMPANY ___

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES                                       NO            X  

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Classes of Common Stock
  
Number of Shares Outstanding at August 5, 2011
$.01 Par Value
  
34,997,739
     

 
 
 
 
 

 
The sole purpose of this Amendment to the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2011 (the “10-Q”), is to furnish the Interactive Data File exhibits required by Item 601(b)(101) of Regulation S-K.  No other changes have been made to the 10-Q filed on August 9, 2011.
 
 
Item 6.           Exhibits

Exhibit Number
3(i)
  
Amended and Restated Certificate of Incorporation of Dime Community Bancshares, Inc. (1)
3(ii)
  
Amended and Restated Bylaws of Dime Community Bancshares, Inc. (15)
4.1
  
Amended and Restated Certificate of Incorporation of Dime Community Bancshares, Inc. [See Exhibit 3(i) hereto]
4.2
  
Amended and Restated Bylaws of Dime Community Bancshares, Inc. [See Exhibit 3(ii) hereto]
4.3
  
Draft Stock Certificate of Dime Community Bancshares, Inc.  (3)
4.4
  
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)
4.5
  
Indenture, dated as of March 19, 2004, between Dime Community Bancshares, Inc. and Wilmington Trust Company, as trustee (8)
4.6
  
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 (12)
10.2
  
Amended and Restated Employment Agreement between The Dime Savings Bank of Williamsburgh and Michael P. Devine (12)
10.3
  
Amended and Restated Employment Agreement between The Dime Savings Bank of Williamsburgh and Kenneth J. Mahon (12)
10.4
  
Employment Agreement between Dime Community Bancorp, Inc. and Vincent F. Palagiano(16)
10.5
  
Employment Agreement between Dime Community Bancorp, Inc. and Michael P. Devine (16)
10.6
  
Employment Agreement between Dime Community Bancorp, Inc. and Kenneth J. Mahon(16)
10.7
  
Form of Employee Retention Agreement by and among The Dime Savings Bank of Williamsburgh, Dime Community    Bancorp, Inc. and certain officers (5)
10.7(i)
  
Amendment to Form of Employee Retention Agreement by and among The Dime Savings Bank of Williamsburgh, Dime Community    Bancorp, Inc. and certain officers (12)
10.8
  
The Benefit Maintenance Plan of Dime Community Bancorp, Inc. (16)
10.9
  
Severance Pay Plan of The Dime Savings Bank of Williamsburgh (12)
10.10
  
Retirement Plan for Board Members of Dime Community Bancorp, Inc. (12)
10.12
  
Recognition and Retention Plan for Outside Directors, Officers and Employees of Dime Community Bancorp, Inc., as amended by amendments number 1 and 2 (6)
10.13
  
Form of stock option agreement for Outside Directors under Dime Community Bancshares, Inc. 1996 and 2001 Stock Option Plans for Outside Directors, Officers and Employees and the 2004 Stock Incentive Plan. (6)
10.14
  
Form of stock option agreement for officers and employees under Dime Community Bancshares, Inc. 1996 and 2001 Stock Option Plans for Outside Directors, Officers and Employees and the 2004 Stock Incentive Plan (6)
10.15
  
Form of award notice for outside directors under the Recognition and Retention Plan for Outside Directors, Officers and Employees of Dime Community Bancorp, Inc. (6)
10.16
  
Form of award notice for officers and employees under the Recognition and Retention Plan for Outside Directors, Officers and Employees of Dime Community Bancorp, Inc. (6)
10.17
  
Financial Federal Savings Bank Incentive Savings Plan in RSI Retirement Trust (7)
10.18
  
Financial Federal Savings Bank Employee Stock Ownership Plan (7)
10.19
  
Option Conversion Certificates between Dime Community Bancshares, Inc. and each of Messrs. Russo, Segrete, Calamari, Latawiec, O'Gorman, and Ms. Swaya pursuant to Section 1.6(b) of the Agreement and Plan of
   Merger, dated as of July 18, 1998 by and between Dime Community Bancshares, Inc. and Financial Bancorp, Inc. (7)
10.20*
  
Dime Community Bancshares, Inc. 2001 Stock Option Plan for Outside Directors, Officers and Employees*
10.21
  
Dime Community Bancshares, Inc. 2004 Stock Incentive Plan for Outside Directors, Officers and Employees (11)
10.22
  
Waiver executed by Vincent F. Palagiano (10)
10.23
  
Waiver executed by Michael P. Devine (10)
10.24
  
Waiver executed by Kenneth J. Mahon (10)
10.25
  
Form of restricted stock award notice for officers and employees under the 2004 Stock Incentive Plan (9)
10.27
  
Form of restricted stock award notice for outside directors under the 2004 Stock Incentive Plan (9)
10.28
  
Employee Retention Agreement between The Dime Savings Bank of Williamsburgh, Dime Community Bancshares, Inc.  and Daniel Harris (12)
10.29
  
Dime Community Bancshares, Inc. Annual Incentive Plan (12)
10.30
  
Amendment to the Dime Savings Bank of Williamsburgh 401(K) Plan (14)
10.31
  
Employee Stock Ownership Plan of Dime Community Bancshares, Inc. and Certain Affiliates (12)
12.1*
  
Computation of ratio of earnings to fixed charges*
31(i).1*
  
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)*
31(i).2*
  
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)*
32.1*
  
Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350*
32.2*
  
Certification of Chief Financial Officer Pursuant to 18 U.S.C. 1350*
101**   Pursuant to Rule 405 of Regulation S-T, the following financial information from the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2011, is formatted in XBRL (Extensible Business Reporting Language) interactive data files: (i) the Condensed Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010, (ii) the Condensed Consolidated Statements of Operations and Comprehensive Income for the three-month and six-month periods ended June 30, 2011 and 2010, (iii) the Condensed Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2011 and 2010, (iv) the Condensed Consolidated Statements of Changes in Stockholders' Equity for the six-month periods ended June 30, 2011 and 2010, and (iv) the Notes to Consolidated Financial Statements, tagged as blocks of text.

(1)
Incorporated by reference to the registrant's Transition Report on Form 10-K for the transition period ended December 31, 2002 filed on March 28, 2003.
(2)
Incorporated by reference to the registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2009 filed on May 11, 2009.
(3)
Incorporated by reference to the registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1998 filed on September 28, 1998.
(4)
Incorporated by reference to the registrant's Current Report on Form 8-K dated April 9, 1998 and filed on April 16, 1998.
(5)
Incorporated by reference to Exhibits to the registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1997 filed on September 26, 1997.
(6)
Incorporated by reference to the registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1997 filed on September 26, 1997, and the Current Reports on Form 8-K filed on March 22, 2004 and March 29, 2005.
(7)
Incorporated by reference to the registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2000 filed on September 28, 2000.
(8)
Incorporated by reference to 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 Current Report on Form 8-K filed on March 22, 2005.
(10)
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.
(11)
Incorporated by reference to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2008 filed on August 8, 2008.
(12)
Incorporated by reference to the registrant's Annual Report on Form 10-K for the year ended December 31, 2008 filed on March 16, 2009.
(13)
Incorporated by reference to the registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2009 filed on May 11, 2009
(14)
Incorporated by reference to the registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 filed on May 10, 2010
(15)
Incorporated by reference to the registrant's Current Report on Form 8-K filed on March 17, 2011.
(16)
Incorporated by reference to the registrant's Current Report on Form 8-K filed on April 4, 2011.
(17)
Incorporated by reference to the registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2011 filed on May 10, 2011
 
*      Filed with the 10-Q and attached hereto (exactly as filed with the 10-Q).
**    Furnished, not filed, herewith.
 

 
54 
 



SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Dime Community Bancshares, Inc.



Dated: August 9, 2011
  
By: /s/ VINCENT F. PALAGIANO
   
Vincent F. Palagiano
   
Chairman of the Board and Chief Executive Officer


Dated: August 9, 2011
  
By: /s/ KENNETH J. MAHON
   
Kenneth J. Mahon
   
First Executive Vice President and Chief Financial Officer (Principal Accounting Officer)

 
 
 
 

 
 
 


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended                                                      June 30, 2011
OR
 
 
[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                 to

Commission file number 0-27782

Dime Community Bancshares, Inc.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of incorporation or organization)
  
11-3297463
(I.R.S. employer identification number)
 
209 Havemeyer Street, Brooklyn, NY
(Address of principal executive offices)
  
 
11211
(Zip Code)

(718) 782-6200
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all the reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES            X            NO ___

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

YES             X              NO ___

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

LARGE ACCELERATED FILER ___
ACCELERATED FILER         X     
NON -ACCELERATED FILER  ___
SMALLER REPORTING COMPANY ___

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES                                       NO            X  

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Classes of Common Stock
  
Number of Shares Outstanding at August 5, 2011
$.01 Par Value
  
34,997,739
     


 
 
 


   
Page
 
PART I – FINANCIAL INFORMATION
  
Item 1.
Unaudited Condensed Consolidated Financial Statements
  
 
Condensed Consolidated Statements of Financial Condition at June 30, 2011 and December 31, 2010
3
 
Condensed Consolidated Statements of Operations and Comprehensive Income for the Three-Month and
   Six-Month Periods Ended June 30, 2011 and 2010
4
 
Condensed Consolidated Statements of Changes in Stockholders' Equity for the Six Months Ended
   June 30, 2011 and 2010
5
 
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010
6
 
Notes to Consolidated Financial Statements
7-31
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
31-48
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
48-49
Item 4.
Controls and Procedures
49
 
PART II - OTHER INFORMATION
  
Item 1.
Legal Proceedings
50
Item 1A.
Risk Factors
50-52
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
44
Item 3.
Defaults Upon Senior Securities
44
Item 5.
Other Information
44
Item 6.
Exhibits
44-46
 
Signatures
47

Certain statements contained in this quarterly report on Form 10-Q that are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”), notwithstanding that such statements are not specifically identified as such.  In addition, certain statements may be contained in future filings with the U.S. Securities and Exchange Commission (the "SEC"), press releases, and oral and written statements made by management or with its approval that are not statements of historical fact and constitute forward-looking statements within the meaning of the Act.  Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, expenses, income or loss, earnings or loss per share, the payment or nonpayment of dividends, capital structure and other financial items; (ii) statements of plans, objectives and expectations of Dime Community Bancshares, Inc. and its subsidiaries (the "Company") or those of its management or board of directors, including those relating to products or services; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements.  

Forward-looking statements include information concerning possible or assumed future results of operations and statements preceded by, followed by or that include the words “believes,” “expects,” “feels,” “anticipates,” “intends,” “plans,” “estimates,” “predicts,” “projects,” “potential,” “outlook,” “could,” “will,” “may” or similar expressions.  Forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions.  Actual results may differ materially from those expressed in or implied by these forward-looking statements.  Factors that could cause actual results to differ from these forward-looking statements include, but are not limited to, the following, as well as those discussed elsewhere in this report and the documents incorporated by reference herein:

·
the timing and occurrence or non-occurrence of events may be subject to circumstances beyond the Company's control;
·
there may be increases in competitive pressure among financial institutions or from non-financial institutions;
·
changes in the interest rate environment may reduce interest margins;
·
changes in deposit flows, loan demand or real estate values may adversely affect the business of The Dime Savings Bank of Williamsburgh (the "Bank");
·
changes in accounting principles, policies or guidelines may cause the Company's financial condition to be perceived differently;
·
changes in corporate and/or individual income tax laws may adversely affect the Company's business or financial condition;
·
general economic conditions, either nationally or locally in some or all areas in which the Company conducts business, or conditions in the securities markets or banking industry, may be less favorable than currently anticipated;
·
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;
·
litigation or other matters before regulatory agencies, whether currently existing or commencing in the future, may delay the occurrence or non-occurrence of events longer than the Company anticipates; and
·
the risks referred to in the section entitled "Risk Factors."

Undue reliance should not be placed on any forward-looking statements.  Forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to update them in light of new information or future events except to the extent required by Federal securities laws.

 
2 
 

Item 1.  Condensed Consolidated Financial Statements

DIME COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands except share amounts)

   
June 30, 2011
    
December 31, 2010
  
ASSETS:
            
Cash and due from banks
   $ 131,643     $ 86,193  
Federal funds sold and other short-term investments
     11,575       4,536  
Investment securities held-to-maturity (estimated fair value of $6,484 and $4,408 at June 30, 2011 and December 31, 2010, respectively) (Fully unencumbered)
     7,249       6,641  
Investment securities available-for-sale, at fair value:
                
   Encumbered
     101,484       80,229  
   Unencumbered
     63,628       5,413  
      165,112       85,642  
Mortgage-backed securities available-for-sale, at fair value:
                
   Encumbered
     113,060       139,192  
   Unencumbered
     4,377       5,326  
      117,437       144,518  
Trading securities
     1,829       1,490  
Loans:
                
    Real estate, net
     3,419,510       3,467,644  
    Other loans
     3,630       2,540  
    Less allowance for loan losses
     (19,518 )     (19,166 )
   Total loans, net
     3,403,622       3,451,018  
Loans held for sale
     656       3,308  
Premises and fixed assets, net
     32,608       31,613  
Federal Home Loan Bank of New York ("FHLBNY") capital stock
     49,489       51,718  
Other real estate owned ("OREO")
     -       -  
Goodwill
     55,638       55,638  
Other assets
     115,924       117,980  
Total Assets
   $ 4,092,782     $ 4,040,295  
LIABILITIES AND STOCKHOLDERS' EQUITY
                
Liabilities:
                
Due to depositors:
                
Interest bearing deposits
   $ 2,279,472     $ 2,224,851  
Non-interest bearing deposits
     136,500       125,730  
Total deposits
     2,415,972       2,350,581  
Escrow and other deposits
     89,466       68,542  
Securities sold under agreements to repurchase
     195,000       195,000  
FHLBNY advances
     939,775       990,525  
Trust Preferred securities payable
     70,680       70,680  
Other liabilities
     34,615       36,233  
Total Liabilities
   $ 3,745,508     $ 3,711,561  
Commitments and Contingencies
                
Stockholders' Equity:
                
Preferred stock ($0.01 par, 9,000,000 shares authorized, none issued or outstanding at June 30, 2011 and December 31, 2010)
     -       -  
Common stock ($0.01 par, 125,000,000 shares authorized, 51,413,667 shares and 51,219,609 shares issued at June 30, 2011 and December 31, 2010, respectively, 
   and  34,956,614  shares and 34,593,180 shares outstanding at June 30, 2011 and December 31, 2010, respectively)
     514       512  
Additional paid-in capital
     228,996       225,585  
Retained earnings
     343,669       329,668  
Accumulated other comprehensive loss, net of deferred taxes
     (5,561 )     (6,352 )
Unallocated common stock of Employee Stock Ownership Plan ("ESOP")
     (3,354 )     (3,470 )
Unearned Restricted Stock Award common stock
     (3,915 )     (2,684 )
Common stock held by Benefit Maintenance Plan ("BMP")
     (8,634 )     (7,979 )
Treasury stock, at cost (16,457,053 shares and 16,626,429 shares at June 30, 2011 and December 31, 2010, respectively)
     (204,441 )     (206,546 )
Total Stockholders' Equity
   $ 347,274     $ 328,734  
Total Liabilities And Stockholders' Equity
   $ 4,092,782     $ 4,040,295  
See notes to condensed consolidated financial statements.

 
3 
 

DIME COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Dollars in thousands except per share amounts)
   
Three Months Ended June 30,
    
Six Months Ended June 30,
  
   
2011
    
2010
    
2011
    
2010
  
Interest income:
                        
Loans secured by real estate
   $ 51,857     $ 51,068     $ 102,486     $ 101,191  
Other loans
     24       30       50       68  
Mortgage-backed securities
     1,330       2,082       2,782       4,354  
Investment securities
     382       312       698       719  
Federal funds sold and other short-term investments
     677       681       1,449       1,423  
Total interest  income
     54,270       54,173       107,465       107,755  
Interest expense:
                                
Deposits and escrow
     6,798       8,010       13,583       15,603  
Borrowed funds
     11,312       12,958       22,679       26,181  
Total interest expense
     18,110       20,968       36,262       41,784  
Net interest income
     36,160       33,205       71,203       65,971  
Provision for loan losses
     1,662       3,834       3,088       7,281  
Net interest income after provision for loan losses
     34,498       29,371       68,115       58,690  
Non-interest income:
                                
Total other than temporary impairment ("OTTI") losses
     (574 )       (521 )       (637 )       (736 )  
Less:  Non-credit portion of OTTI recorded in other comprehensive income (before taxes)
     -       13       -       63  
Net OTTI recognized in earnings
     (574 )       (508 )       (637 )       (673 )  
Service charges and other fees
     901       945       1,664       1,881  
Net mortgage banking income
     203       303       296       513  
Net gain on sales of securities and other assets
     21       216       67       785  
Income from bank owned life insurance
     447       488       914       992  
Other
     736       1,013       1,340       1,469  
Total non-interest income
     1,734       2,457       3,644       4,967  
Non-interest expense:
                                
Salaries and employee benefits
     8,061       7,490       16,795       15,469  
Stock benefit plan amortization expense
     955       1,032       1,948       1,940  
Occupancy and equipment
     2,403       2,648       5,092       4,906  
Federal deposit insurance premiums
     347       991       1,571       1,983  
Data processing costs
     784       803       1,476       1,562  
Provision for losses on OREO
     -       157       -       357  
Other
     2,533       2,670       5,061       5,265  
Total non-interest expense
     15,083       15,791       31,943       31,482  
Income before income taxes
     21,149       16,037       39,816       32,175  
Income tax expense
     8,811       6,033       16,398       12,701  
Net income
   $ 12,338     $ 10,004     $ 23,418     $ 19,474  
Earnings per Share:
                                
Basic
   $ 0.37     $ 0.30     $ 0.70     $ 0.59  
Diluted
   $ 0.36     $ 0.30     $ 0.69     $ 0.58  
                                 
STATEMENTS OF COMPREHENSIVE INCOME
                                
Net Income
   $ 12,338     $ 10,004     $ 23,418     $ 19,474  
Amortization and reversal of net unrealized loss on securities transferred from available-for-sale to held-to-
   maturity, net of taxes of $14 and $17 during the three months ended June 30, 2011 and 2010, respectively, and
   $26 and $29 during the six months ended June 30, 2011 and 2010, respectively
     18       21       32       36  
Reduction in non-credit component of OTTI charge, net of taxes of $290 and $178 during the three months ended
   June 30, 2011 and 2010, respectively, and $566 and $303 during the six months ended June 30, 2011 and
   2010, respectively
     352       216       688       370  
Non-credit component of OTTI charge recognized during the period, net of tax benefits of $(5) during
   the three months ended June 30, 2010 and $(27) during the six months ended June 30, 2010
     -       (8 )       -       (36 )  
Reclassification adjustment for securities sold during the period, net of taxes of $127 during the three months
   ended June 30, 2010 and $384 during the six months ended June 30, 2010
     -       (155 )       -       (467 )  
Net unrealized securities gains arising during the period, net of taxes of $304 and $239 during the three months
   ended June 30, 2011 and 2010, respectively, and $37 and $479 during the six months ended June 30, 2011
   and 2010, respectively
     368       291       44       582  
Defined benefit plan adjustments, net of tax (benefits) expense of $(535) during the three months ended
   June 30, 2010, and $23 and $(560) during the six months ended June 30, 2011 and 2010, respectively
     -       (650 )       27       (680 )  
Comprehensive Income
   $ 13,076     $ 9,719     $ 24,209     $ 19,279  
See notes to condensed consolidated financial statements.


 
4 
 

DIME COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
 (Dollars in thousands)

   
Six Months Ended June 30,
  
   
2011
    
2010
  
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
            
Common Stock (Par Value $0.01):
            
Balance at beginning of period
   $ 512     $ 511  
Shares issued in exercise of options
     2       -  
Balance at end of period
     514       511  
Additional Paid-in Capital:
                
Balance at beginning of period
     225,585       214,654  
Stock options exercised
     1,800       165  
Forfeited restricted stock award shares returned to treasury stock
     2       3  
Tax benefit of stock plans
     305       88  
BMP award distribution
     -       (28 )
BMP reclassification
     -       8,007  
Amortization of excess fair value over cost – ESOP stock and stock options expense
     804       866  
Release from treasury stock for restricted stock award and BMP benefit shares
     500       47  
Balance at end of period
     228,996       223,802  
Retained Earnings:
                
Balance at beginning of period
     329,668       306,787  
Net income for the period
     23,418       19,474  
Cash dividends declared and paid
     (9,417 )     (9,306 )
BMP reclassification
     -       133  
Balance at end of period
     343,669       317,088  
Accumulated Other Comprehensive Loss, net of tax:
                
Balance at beginning of period
     (6,352 )     (5,082 )
Amortization and reversal of net unrealized loss on securities transferred from available-for-sale to held-to-maturity, net of tax
     32       36  
Non-credit component of OTTI charge recognized during the period, net of tax
     -       (36 )
Reduction in non-credit component of OTTI during the period, net of tax
     688       370  
Change in unrealized gain or loss on available-for-sale securities during the period
     44       115  
Adjustments to comprehensive income from defined benefit plans, net of tax
     27       (680 )
Balance at end of period
     (5,561 )     (5,277 )
ESOP:
                
Balance at beginning of period
     (3,470 )     (3,701 )
Amortization of earned portion of ESOP stock
     116       115  
Balance at end of period
     (3,354 )     (3,586 )
Unearned Restricted Stock Award Common Stock:
                
Balance at beginning of period
     (2,684 )     (2,505 )
Amortization of earned portion of restricted stock awards
     700       607  
Forfeited restricted stock award shares returned to treasury stock
     22       149  
Release from treasury stock for restricted stock award and BMP benefit shares
     (1,953 )     (1,824 )
Balance at end of period
     (3,915 )     (3,573 )
Treasury Stock, at cost:
                
Balance at beginning of period
     (206,546 )     (207,884 )
Forfeited restricted stock award shares returned to treasury stock
     (24 )     (152 )
Release from treasury stock for restricted stock award and BMP benefit shares
     2,129       1,777  
Balance at end of period
     (204,441 )     (206,259 )
Common Stock Held by BMP:
                
Balance at beginning of period
     (7,979 )     (8,007 )
Release from treasury stock for restricted stock award and BMP benefit shares
     (676 )     -  
BMP award distribution
     21       28  
Balance at end of period
     (8,634 )     (7,979 )
TOTAL STOCKHOLDERS' EQUITY
     347,274       314,727  

See notes to condensed consolidated financial statements.
.

 
5 
 

DIME COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars In thousands)

   
Six Months Ended June 30 ,
  
   
2011
    
2010
  
CASH FLOWS FROM OPERATING ACTIVITIES:
            
Net Income
   $ 23,418     $ 19,474  
Adjustments to reconcile net income to net cash provided by  operating activities:
                
Net loss (gain) on sale of loans originated for sale
     14       (181 )
Net gain on sale of investment securities available-for-sale
     -       (608 )
Net gain recognized on the transfer of securities from available-for-sale into trading
     -       (242 )
Net (gain) loss on trading securities
     (53 )     65  
Net depreciation and amortization
     1,526       1,254  
ESOP compensation expense
     561       489  
Stock plan compensation (excluding ESOP)
     1,059       1,099  
Provision for loan losses
     3,088       7,281  
Provision for losses on OREO
     -       357  
Provision to increase the liability for loans sold with recourse
     -       -  
Recovery of write down of mortgage servicing asset
     -       -  
OTTI charge for investment securities recognized in earnings
     637       673  
Increase in cash surrender value of Bank Owned Life Insurance
     (914 )     (992 )
Deferred income tax credit
     (718 )     (369 )
Excess tax benefit of stock plans
     (305 )     (88 )
Changes in assets and liabilities:
                
Origination of loans held for sale
     (3,050 )     (14,927 )
Proceeds from sale of loans held for sale
     6,448       14,832  
Decrease (increase) in other assets
     3,341       (1,095 )
Decrease in other liabilities
     (1,568 )     (2,559 )
Net cash provided by operating activities
     33,484       24,463  
CASH FLOWS FROM INVESTING ACTIVITIES:
                
Net increase in federal funds sold and other short term investments
     (7,039 )     (41,670 )
Proceeds from principal repayments of investment securities held-to-maturity
     81       90  
Proceeds from maturities of investment securities available-for-sale
     -       -  
Proceeds from calls and principal repayments of investment securities available-for-sale
     94,000       30,000  
Proceeds from sales of investment securities available-for-sale
     -       2,527  
Purchases of investment securities available-for-sale
     (172,910 )     (31,433 )
Principal collected on mortgage backed securities available-for-sale
     26,573       40,646  
Purchases of trading securities
     (286 )     -  
Net decrease (increase) in loans
     43,548       (75,538 )
Proceeds from the sale of OREO
     -       368  
Purchases of fixed assets, net
     (2,506 )     (1,731 )
Redemption of FHLBNY capital stock
     2,229       1,015  
Net cash used in investing activities
     (16,310 )     (75,726 )
CASH FLOWS FROM FINANCING ACTIVITIES:
                
Net increase in due to depositors
     65,391       222,979  
Net  increase in escrow and other deposits
     20,924       11,804  
Increase in securities sold under agreements to repurchase
     -       (35,000 )
Increase(Decrease) in FHLBNY advances
     (50,750 )     10,850  
Repayment of subordinated note
     -       (25,000 )
Cash dividends paid
     (9,417 )     (9,306 )
Exercise of stock options
     1,802       165  
BMP award distribution
     21       -  
Excess tax benefit of stock plans
     305       88  
Net cash provided by financing activities
     28,276       176,580  
INCREASE IN CASH AND DUE FROM BANKS
     45,450       125,317  
CASH AND DUE FROM BANKS, BEGINNING OF PERIOD
     86,193       39,338  
CASH AND DUE FROM BANKS, END OF PERIOD
   $ 131,643     $ 164,655  
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
                
Cash paid for income taxes
   $ 13,718     $ 15,560  
Cash paid for interest
     36,591       42,142  
Loans transferred to OREO
     -       320  
Amortization of unrealized loss on securities transferred from available-for-sale to held-to-maturity
     58       65  
Net decrease non-credit component of OTTI
     (1,254 )     (610 )
Adjustments to other comprehensive income from defined benefit plans, net of tax
   $ 27     $ (680 )
See notes to condensed consolidated financial statements.



 
6 
 


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


1.   NATURE OF OPERATIONS

Dime Community Bancshares, Inc. (the "Holding Company") is a Delaware corporation and parent company of the Bank, a federally chartered stock savings bank.  The Holding Company's direct subsidiaries are the Bank, Dime Community Capital Trust 1 and 842 Manhattan Avenue Corp.  The Bank's direct subsidiaries are Boulevard Funding Corp., Dime Insurance Agency Inc. (f/k/a Havemeyer Investments, Inc.), DSBW Preferred Funding Corporation, DSBW Residential Preferred Funding Corp., Dime Reinvestment Corp. and 195 Havemeyer Corp.

The Bank maintains its headquarters in the Williamsburg section of Brooklyn, New York and operates twenty-six full service retail banking offices located in the New York City boroughs of Brooklyn, Queens, and the Bronx, and in Nassau County, New York.  The Bank’s principal business is gathering deposits from customers within its market area and via the internet, and investing them primarily in multifamily residential, commercial real estate, one- to four-family residential, construction and land acquisition, and consumer loans, as well as mortgage-backed securities (“MBS”), obligations of the U.S. Government and Government Sponsored Entities ("GSEs"), and corporate debt and equity securities.

2.   SUMMARY OF ACCOUNTING POLICIES

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary for a fair presentation of the Company's financial condition as of June 30, 2011, the results of operations and statements of comprehensive income for the three-month and six-month periods ended June 30, 2011 and 2010, and the changes in stockholders' equity and cash flows for the six months ended June 30, 2011 and 2010.  The results of operations for the three-month and six-month periods ended June 30, 2011 are not necessarily indicative of the results of operations for the remainder of the year ending December 31, 2011.  Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been omitted pursuant to the rules and regulations of the SEC.

The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Please see “Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” for a discussion of areas in the accompanying condensed consolidated financial statements where significant estimates are utilized.

These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2010 and notes thereto.

3.   RECENT ACCOUNTING PRONOUNCEMENTS

In April 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2011-2, "A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring" ("ASU 2011-2").  ASU 2011-2 clarifies the guidance for determining whether a loan restructuring constitutes a troubled debt restructuring ("TDR") outlined in Accounting Standards Codification ("ASC") No. 310-40, "Receivables—Troubled Debt Restructurings by Creditors," by providing additional guidance to a creditor in making the following required assessments needed to determine whether a restructuring is a TDR: (i) whether or not a concession has been granted in a debt restructuring; (ii) whether a temporary or permanent increase in the contractual interest rate precludes the restructuring from being a TDR; (iii) whether a restructuring results in an insignificant  delay in payment; (iv) whether a borrower that is not currently in payment default is experiencing financial difficulties; and (v) whether a creditor can use the effective interest rate test outlined in debtor’s guidance on restructuring of payables (ASC Topic No. 470-60-55-10) when evaluating whether or not a restructuring constitutes a TDR.  ASU 2011-2 is effective for interim periods beginning on or after June 15, 2011.  Adoption of ASU 2011-2 is not expected to have a material effect upon the Company's consolidated financial condition or results of operations.

In July 2010. the FASB issued Accounting Standards Update No. 2010-20, "Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses" ("ASU 2010-20").  ASU 2010-20 requires companies to provide a greater level of disaggregated information regarding: (1) the credit quality of their financing receivables; and (2) their allowance for credit losses.  ASU 2010-20 further requires companies to disclose credit quality indicators, past due information, and modifications of their financing receivables. For public companies, ASU 2010-20 is effective for interim and annual reporting periods ending on or after December 15, 2010.  ASU 2010-20 encourages, but does not require, comparative disclosures for earlier reporting periods that ended before initial adoption.  Adoption of ASU 2010-20 did not have a material impact upon the Company's consolidated financial condition or results of operations.

 
7
 
In January 2010, FASB issued Accounting Standards Update No. 2010-06, " Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements" ("ASU 2010-6").  ASU 2010-6 required new disclosures related to transfers into and out of fair value hierarchy Levels 1 and 2, as well as certain activities for assets with fair values measured under the Level 3 hierarchy. ASU 2010-6 also provided amendments clarifying the level of disaggregation and disclosures about inputs and valuation techniques along with conforming amendments to the guidance on employers’ disclosures about postretirement benefit plan assets. ASU 2010-6 was effective for interim and annual reporting periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Adoption of ASU 2010-6 has not had, and is not expected to have, a material impact upon the Company's financial condition or results of operations.

4.   TREASURY STOCK

The Company did not repurchase any shares of treasury stock during the six months ended June 30, 2011 and 2010.  On April 29, 2011, 126,304 shares of the Company's common stock were released from treasury in order to fulfill benefit obligations under the 2004 Stock Incentive Plan.  The closing price of the Company's common stock on that date was $15.46, and the shares were released utilizing the average historical cost method.  On May 3, 2011, 45,056 shares of treasury stock were released in order to fulfill benefit obligations under the BMP.  The closing price of the Company's common stock on that date was $15.16, and the shares were released utilizing the average historical cost method.  On April 30, 2010, 143,083 shares of the Company's common stock were released from treasury in order to fulfill benefit obligations under the 2004 Stock Incentive Plan.  The closing price of the Company's common stock on that date was $12.75.  The shares were released utilizing the average historical cost method.

The Company returned 1,984 and 10,176 forfeited restricted stock awards into treasury stock during the six months ended June 30, 2011 and June 30, 2010, respectively.

5.   ACCOUNTING FOR GOODWILL

The Company has designated the last day of its fiscal year as its date for annual impairment testing.  The Company performed an impairment test as of December 31, 2010 and concluded that no impairment of goodwill existed.  No events or circumstances have occurred subsequent to December 31, 2010 that would, in management's opinion, reduce the fair value of the Company's reporting unit below its carrying value.  Such events or circumstances would require the immediate performance of an impairment test in accordance with ASC 350.

6.   EARNINGS PER SHARE ("EPS")

EPS is calculated and reported in accordance with ASC 260.  For entities like the Company with complex capital structures, ASC 260 requires disclosure of basic EPS and diluted EPS on the face of the income statement, along with a reconciliation of their numerators and denominators.

Basic EPS is computed by dividing net income by the weighted-average number of common shares outstanding during the period (weighted-average common shares are adjusted to exclude unallocated ESOP shares).  Diluted EPS is computed using the same method as basic EPS, however, the computation reflects the potential dilution that would occur if outstanding in-the-money stock options were exercised and converted into common stock.

 
8 
 


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

   
Three Months Ended June 30,
    
Six Months Ended June 30,
  
   
2011
    
2010
    
2011
    
2010
  
   
(Dollars in Thousands)
  
Numerator:
                        
Net Income per the Consolidated Statements of Operations
   $ 12,338     $ 10,004     $ 23,418     $ 19,474  
Denominator:
                                
Weighted-average number of shares outstanding utilized in the calculation of basic EPS
     33,695,418       33,244,218       33,582,080       33,206,948  
Common stock equivalents resulting from the dilutive effect of "in-the-money" outstanding stock options
     188,500       111,402       232,984       101,956  
Anti-dilutive effect of tax benefits associated with "in-the-money" outstanding stock options
     (18,010 )     (13,735 )     (21,348 )     (13,203 )
Weighted average number of shares outstanding utilized in the calculation of diluted EPS
     33,865,908       33,341,885       33,793,716       33,295,701  

Common stock equivalents resulting from the dilutive effect of "in-the-money" outstanding stock options are calculated based upon the excess of the average market value of the Holding Company's common stock over the exercise price of outstanding in-the-money stock options during the period.

There were  1,263,877 and 2,666,827 weighted-average stock options outstanding for the three-month periods ended June 30, 2011 and 2010, respectively, that were not considered in the calculation of diluted EPS since their exercise prices exceeded the average market price during the period.  There were 1,232,350 and 2,699,614 weighted-average stock options outstanding for the six-month periods ended June 30, 2011 and 2010, respectively, that were not considered in the calculation of diluted EPS since their exercise prices exceeded the average market price during the period.

7.    ACCOUNTING FOR STOCK BASED COMPENSATION

During the three-month and six-month periods ended June 30, 2011 and 2010, the Holding Company and Bank maintained the Dime Community Bancshares, Inc. 2001 Stock Option Plan for Outside Directors, Officers and Employees; and the 2004 Stock Incentive Plan (collectively the "Stock Plans"), which are discussed more fully in Note 15 to the Company's audited consolidated financial statements for the year ended December 31, 2010, and which are subject to the accounting requirements of ASC 505-50 and ASC 718.

Stock Option Awards

Combined activity related to stock options granted under the Stock Plans during the periods presented was as follows:

   
At or for the Three Months Ended June 30,
    
At or for the Six Months Ended June 30,
  
   
2011
    
2010
    
2011
    
2010
  
   
(Dollars in Thousands, Except per Share Amounts)
  
Options outstanding – beginning of period
     3,092,127       3,258,771       3,213,007       3,266,920  
Options granted
     91,583       97,294       91,583       97,294  
Weighted average exercise price of grants
   $ 15.46     $ 12.75     $ 15.46     $ 12.75  
Options exercised
     104,670       19,331       220,989       19,331  
Weighted average exercise price of exercised options
     10.67       8.53       10.95       8.53  
Options forfeited
     -       8,750       4,561       16,899  
Weighted average exercise price of forfeited options
     -     $ 13.74       16.73     $ 14.30  
Options outstanding – end of period
     3,079,040       3,327,984       3,079,040       3,327,984  
Weighted average exercise price of outstanding options at the end of period
   $ 14.91     $ 14.54     $ 14.91     $ 14.54  
Remaining options available for grant
     411,962       553,738       411,962       553,738  
Exercisable options at end of period
     2,867,436       2,860,928       2,867,436       2,860,928  
Weighted average exercise price of exercisable options at the end of period
   $ 15.05     $ 14.86     $ 15.05     $ 14.86  
Cash received for option exercise cost
     1,116       165       2,420       165  
Income tax benefit recognized
     134       20       245       20  
Compensation expense recognized
   $ 132       254     $ 359       491  
Remaining unrecognized compensation expense
     1,137       1,174       1,137       1,174  
Weighted average remaining years for which compensation expense is to be recognized
     3.1       2.0       3.1       2.0  


 
9 
 


The range of exercise prices and weighted-average remaining contractual lives of options outstanding, vested and unvested, under the Stock Plans were as follows:

     
Outstanding Options as of June 30, 2011
    
Vested Options as of June 30, 2011
  
Exercise Prices
    
Amount
    
Weighted Average Contractual Years Remaining
    
Amount
    
Weighted Average Contractual Years Remaining
  
$ 8.34       149,909       7.8       92,679       7.8  
$ 10.91       172,081       0.4       172,081       0.4  
$ 12.75       87,541       8.8       46,345       8.8  
$ 13.16       511,078       1.6       511,078       1.6  
$ 13.74       866,375       5.8       866,375       5.8  
$ 14.92       34,425       6.7       25,818       6.7  
$ 15.10       318,492       3.9       318,492       3.9  
$ 15.46       91,583       9.8       -       9.8  
$ 16.45       76,320       3.6       76,320       3.6  
$ 16.73       51,943       7.1       38,955       7.1  
$ 18.18       80,000       6.9       80,000       6.9  
$ 19.90       639,293       2.6       639,293       2.6  
Total
       3,079,040       4.2       2,867,436       3.9  


The weighted average fair value per option at the date of grant for stock options granted was estimated as follows:

   
Three Months Ended June 30,
    
Six Months Ended June 30,
  
   
2011
    
2010
    
2011
    
2010
  
Total options granted
     91,583       97,294       91,583       97,294  
Estimated fair value on date of grant
   $ 4.82     $ 3.70     $ 4.82     $ 3.70  
Pricing methodology utilized
  
Black- Scholes
    
Black- Scholes
    
Black- Scholes
    
Black- Scholes
  
Expected life (in years)
     6.80       5.99       6.80       5.99  
Interest rate
     2.59 %     2.76 %     2.59 %     2.76 %
Volatility
     42.35       43.69       42.35       43.69  
Dividend yield
     3.62       4.39       3.62       4.39  

Restricted Stock Awards

The Company, from time to time, issues restricted stock awards to outside directors and officers under the 2004 Stock Incentive Plan.  Typically, awards to outside directors fully vest on the first anniversary of the grant date, while awards to officers vest in equal annual installments over a four- or five-year period.

The following is a summary of activity related to the restricted stock awards granted under the 2004 Stock Incentive Plan during the periods indicated:

   
At or for the Three Months Ended June 30,
    
At or for the Six Months Ended June 30,
  
   
2011
    
2010
    
2011
    
2010
  
   
(Dollars in Thousands)
  
Unvested allocated shares – beginning of period
     307,783       275,823       309,783       295,066  
Shares granted
     126,304       143,083       126,304       143,083  
Shares vested
     107,649       86,040       109,649       95,107  
Shares forfeited
     1,984       -       1,984       10,176  
Unvested allocated shares – end of period
     324,454       332,866       324,454       332,866  
Unallocated shares - end of period
     -       -       -       -  
Compensation recorded to expense
   $ 392     $ 353     $ 700     $ 608  
Income tax benefit recognized
     60       73       60       68  

8.   LOANS RECEIVABLE AND CREDIT QUALITY

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

 
10
 
Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as:  current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors.  The Company analyzes loans individually by classifying the loans as to credit risk.  This analysis includes all non-homogeneous loans, such as multifamily residential and mixed use residential, mixed use commercial and commercial real estate loans and construction loans, as well as one-to four family residential and cooperative apartment loans with balances greater than $730,000.  This analysis is performed on a quarterly basis.  The Company uses the following definitions for risk ratings:

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

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

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

All loans not classified as Special Mention, Substandard or Doubtful were deemed pass loans at both June 30, 2011 and December 31, 2010.

The Bank had no loans classified as Doubtful at June 30, 2011 or December 31, 2010.

The following is a summary of the credit risk profile of the real estate loans (principal balance only and including loans held for sale) by internally assigned grade as of the date indicated:

   
Balance at June 30, 2011
  
Grade
  
One- to Four-Family
Residential and
Cooperative Unit
    
Multifamily
Residential and Residential
Mixed Use
    
Mixed Use
Commercial
Real Estate
    
Commercial
Real Estate
    
Construction
    
Total
  
   
(Dollars in Thousands)
  
Pass
   $ 66,392     $ 2,499,407     $ 350,738     $ 382,503     $ 4,989     $ 3,304,029  
Special Mention
     979       10,395       2,018       32,734       3,030       49,156  
Substandard
     56       6,105       5,278       17,046       2,865       31,350  
Total real estate loans individually assigned a credit grade
   $ 67,427     $ 2,515,907     $ 358,034     $ 432,283     $ 10,884     $ 3,384,535  
Real estate loans not individually assigned a credit grade (1)
   $ 35,631       -       -       -       -     $ 35,631  
(1) Amount comprised of fully performing one- to four-family residential and cooperative unit loans with balances of $730 or less.  The credit quality of these loans was instead evaluated based upon payment activity.

 
11 
 


   
Balance at December 31, 2010
  
Grade
  
One- to Four-Family
Residential and
Cooperative Unit
    
Multifamily
Residential and Residential
Mixed Use
    
Mixed Use
Commercial
Real Estate
    
Commercial
Real Estate
    
Construction
    
Total
  
   
(Dollars in Thousands)
  
Pass
   $ 70,831     $ 2,483,695     $ 357,463     $ 426,518     $ 9,465     $ 3,347,972  
Special Mention
     127       10,367       5,989       23,150       5,773       45,406  
Substandard
     257       11,216       1,613       18,435       -       31,521  
Total real estate loans individually assigned a credit grade
   $ 71,215     $ 2,505,278     $ 365,065     $ 468,103     $ 15,238     $ 3,424,899  
Real estate loans not individually assigned a credit grade (1)
   $ 46,053       -       -       -       -     $ 46,053  
(1) Amount comprised of fully performing one- to four-family residential and cooperative unit loans with balances of $730 or less.  The credit quality of these loans was instead evaluated based upon payment activity.

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

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

Grade
  
Balance at
June 30, 2011
    
Balance at
December 31, 2010
  
   
(Dollars in Thousands)
  
Performing
   $ 3,620     $ 2,523  
Non-accrual
     10       17  
Total
   $ 3,630     $ 2,540  

The following is an age analysis of past due loans (including loans held for sale) as of the dates indicated:

At June 30, 2011
 
30 to 59 Days Past Due
60 to 89 Days Past Due
90 Days or More Past Due
Total Past Due
Current
Total Loans
Loans 90 Days or More Past Due and Still Accruing Interest
 
(Dollars in Thousands)
Real Estate:
              
   One- to four-family residential and cooperative unit
$910
$73
$67
$1,050
$102,008
$103,058
- 
   Multifamily residential and residential mixed use
2,995
3,115
3,765
9,875
2,506,032(a)
2,515,907
$413
   Mixed use commercial real estate
1,633
434
3,309
5,376
352,658
358,034
- 
   Commercial real estate
1,435
2,987
8,506
12,928
419,355
432,283
1,575
   Construction
- 
 - 
3,297
3,297
7,587
10,884
432
Total real estate (including loans held for sale)
$6,973
$6,609
$18,944
$32,526
$3,387,640
$3,420,166
$2,420
Consumer
$1
$- 
$10
$11
$3,619
$3,630
- 
(a) Includes FHA/VA insured loans totaling $159.

 
12 
 


At December 31, 2010
 
30 to 59 Days Past Due
60 to 89 Days Past Due
90 Days or More Past Due
Total Past Due
Current
Total Loans
Loans 90 Days or More Past Due and Still Accruing Interest
 
(Dollars in Thousands)
Real Estate:
              
   One- to four-family residential and cooperative unit
$130
$141
$223
$494
$116,774
$117,268
- 
   Multifamily residential and residential mixed use
4,435
2,631
11,058
18,124
2,487,054(a)
2,505,178
$3,510
   Mixed use commercial real estate
190
3,051
1,217
4,458
360,607
365,065
- 
   Commercial real estate
3,059
7,592
11,494
22,145
446,058
468,203
331
   Construction
- 
 -  
4,500
4,500
10,738
15,238
4,500
Total real estate (including loans held for sale)
$7,814
$13,415
$28,492
$49,721
$3,421,231
$3,470,952
$8,341
Consumer
$6
$1
$17
$24
$2,516
$2,540
- 
(a) Includes FHA/VA insured loans totaling $285.

Accrual of interest is generally discontinued on loans that have missed three consecutive monthly payments, at which time the Bank generally does not recognize the interest from the third month and reverses all interest associated with the missed payments.  The Bank generally initiates foreclosure proceedings when a loan enters non-accrual status, and does not accept partial payments on loans on which foreclosure proceedings have commenced.  At some point during foreclosure proceedings, the Bank procures current appraisal information in order to prepare an estimate of the fair value of the underlying collateral.  If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure action is completed, the property securing the loan is transferred to OREO.  The Bank generally utilizes all available remedies in an effort to resolve either non-accrual loans or OREO properties as quickly and prudently as possible in consideration of market conditions, the physical condition of the property and any other mitigating circumstances.  In the event that a non-accrual loan is subsequently brought current, it is returned to accrual status once the doubt concerning collectability has been removed and the borrower has demonstrated performance in accordance with the loan terms and conditions for a period of at least six months.

Management may elect to continue the accrual of interest when a loan is in the process of collection and the estimated fair value of the collateral is sufficient to satisfy the outstanding principal balance (including any outstanding advances related to the loan) and accrued interest.  Such elections have not been commonplace.

The following table summarizes loans on non-accrual status for the periods indicated:

   
At June 30, 2011
    
At December 31, 2010
  
   
(Dollars in Thousands)
  
Real Estate Loans:
            
   One- to four-family residential and cooperative unit
   $ 67     $ 223  
   Multifamily residential and residential mixed use
     3,352       7,548  
   Mixed use commercial real estate
     3,309       1,217  
   Commercial real estate
     6,931       11,163  
   Construction
     2,865       -  
Total real estate loans (including loans held for sale)
   $ 16,524       20,151  
Consumer loans
     10       17  
Total non-accrual
   $ 16,534     $ 20,168  

Accruing Loans 90 Days or More Past Due:

At June 30, 2011, the Bank owned two real estate loans totaling $413,000 that were in excess of 90 days past due on their contractual balloon principal payment that continued to make monthly payments consistent with their initial contractual amortization schedule exclusive of the balloon payment.  The weighted average loan-to-value ratio of these loans were below 30% at June 30, 2011, and management expects that they will either be satisfied or formally modified in the future.  As a result, these loans remained on accrual status at June 30, 2011 and were deemed performing assets.  The Bank also had one commercial real estate loan at June 30, 2011 with an outstanding balance
 
 
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of $1.6 million that had not made any payments of principal or interest in over 90 days while the borrower was finalizing negotiations on a significant new tenant lease for the underlying collateral property.  This lease agreement was completed in early July, and the borrower has subsequently made payments of principal and interest.  The Bank expects to receive all principal and interest on this loan, and therefore retained it on accrual status as of June 30, 2011.

In addition, the Bank had one construction loan totaling $432,000 that was in excess of 90 days past its contractual maturity at June 30, 2011, on which the Bank received payments throughout 2010 and the six months ended June 30, 2011, and expects to either receive satisfaction or convert to a permanent real estate loan in future quarters.  As a result, this loan remained on accrual status and was deemed a performing loan at June 30, 2011.   This loan was internally graded Special Mention at June 30, 2011.

TDRs.

At June 30, 2011, the Bank had fourteen loans totaling $18.2 million whose terms were modified in a manner that met the criteria for a TDR.  Two of these loans, with an aggregate outstanding principal balance of $6.0 million, were on non-accrual status as of June 30, 2011, while the remaining twelve loans, with an outstanding principal balance of $12.2 million, were accruing TDRs at June 30, 2011.  Six of these TDRs were commercial real estate loans, five were multifamily residential and mixed-use residential real estate loans and the remaining were mixed-use commercial real estate loans.  At December 31, 2010, the Bank had nineteen loans totaling $22.6 million whose terms were modified in a manner that met the criteria for a TDR.  Seven of these loans, with an aggregate outstanding principal balance of $10.1 million, were on non-accrual status as of December 31, 2010, while the remaining twelve loans, with an outstanding principal balance of $12.4 million, were accruing TDRs at December 31, 2010.  Eight of these TDRs were commercial real estate loans, eight were multifamily residential and residential mixed-use real estate loans and the remaining were mixed-use commercial real estate loans.

The Company does not restructure troubled consumer loans, thus all TDRs have been made on real estate loans.  The following table summarizes TDRs as of and for the periods indicated:

 
At or for the Six Months Ended June 30, 2011
At or for the Year Ended December 31, 2010
 
No. of Loans
Balance
No. of Loans
Balance
 
(Dollars in Thousands)
Loans modified during the period in a manner that met the definition of a TDR
- 
$- 
18
$24,928
Modifications granted:
        
   Reduction of outstanding principal due
- 
- 
- 
- 
   Deferral of principal amounts due
- 
- 
17
16,342
   Temporary reduction in interest rate
- 
- 
6
10,517
   Below market interest rate granted
- 
- 
- 
- 
Outstanding principal balance immediately before and after modification
- 
- 
18
24,928
Aggregate principal charge-off recognized on TDRs outstanding at period end
3
1,311
9
2,204
Outstanding principal balance at period end
14
18,170
19
22,558
TDRs that re-defaulted subsequent to being modified (at period end):
2
6,009
7
10,136
TDRs on accrual status at period end
12
12,161
12
12,422
TDRs on non-accrual status at period end
2
6,009
7
10,136

All TDRs are considered impaired loans and are evaluated individually for measurable impairment, if any.  If a TDR is substantially performing in accordance with its restructured terms, management will look to either the present value of the expected cash flows from the debt service or the potential net liquidation proceeds of the underlying collateral in measuring impairment.  If a TDR has re-defaulted, only the likely realizable net proceeds from the liquidation of collateral is considered when measuring impairment.  While measured impairment on TDRs is typically charged off immediately, if such impairment was measured solely from a reduction in the present value of expected cash flows of a performing TDR, it may be reflected as an allocated reserve within the allowance for loan losses.

Impaired Loans

At June 30, 2011, the Bank had forty-one loans totaling $36.6 million deemed impaired (as defined in Note 9), compared to fifty-seven loans totaling $44.1 million as of December 31, 2010.  The average balance of impaired loans was approximately $40.6 million during the six months ended June 30, 2011 and $29.1 million during the six months ended June 30, 2010.  During the six months ended June 30, 2011, write-downs of principal totaling $2.8 million were recognized on nine impaired loans.  Write-downs of principal on two impaired loans totaled $501,000 during the six months ended June 30, 2010.

 
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At June 30, 2010, an aggregate balance of $6.9 million was allocated within the allowance for loan losses for probable losses on impaired loans, and, with the exception of one loan with an outstanding balance of $2.5 million, all impaired loans had an allocated reserve at June 30, 2010.  Effective July 1, 2010, the Bank commenced a general practice of immediately charging off calculated reserves on impaired loans.  At June 30, 2011, there was one impaired loan with a reserve of $280,000 allocated within the allowance for loan losses, related to the shortfall on the present value of the estimated cash flows associated with a performing TDR.

The Bank disposed of sixteen impaired loans with a recorded balance totaling $9.0 million during the six months ended June 30, 2011, receiving an aggregate amount approximating their recorded balance.  During the six months ended June 30, 2010, the Bank disposed of seven impaired loans totaling $14.9 million, recognizing principal charge-offs of $4.0 million on the disposals.

At June 30, 2011 and December 31, 2010, loans totaling $20.1 million and $24.3 million, respectively, while on accrual status, were deemed impaired.  The great majority of these loans were either accruing TDRs or loans past due 90 days or more but still accruing as of the respective quarter end. Net interest received on these impaired loans totaled $511,000 during the six months ended June 30, 2011.

At both June 30, 2011 and December 31, 2010, approximately $77,000 and $340,000, respectively, of one- to four-family residential and cooperative apartment loans with a balance of $730,000 or less and consumer loans were on non-accrual status, but were not included in the $36.6 million of impaired loans, as these loans are considered homogeneous loan pools not individually analyzed for impairment.

Delinquent Serviced Loans Subject to a First Loss Position

The Bank has a first loss position associated with multifamily loans that it sold to FNMA between December 2002 and February 2009 (the "First Loss Position").  Under the terms of its seller/servicer agreement with FNMA, the Bank is obligated to fund FNMA all monthly principal and interest payments under the original terms of the loans until the earlier of the following events: (1) the loans have been fully satisfied or enter OREO status; or (2) the First Loss Position is fully exhausted.

At June 30, 2011, within the pool of multifamily loans sold to FNMA, there was one $1.4 million loan that was delinquent between 30 and 89 days, and there were no loans 90 days or more delinquent.  At December 31, 2010, within the pool of multifamily loans sold to FNMA, there were three loans totaling $3.7 million 30 to 89 days delinquent, and no loans 90 days or more delinquent.

9.   ALLOWANCE FOR LOAN LOSSES AND RESERVE FOR FIRST LOSS POSITION ON MULTIFAMILY LOANS SOLD TO FNMA

The allowance for loan losses is a valuation allowance for probable incurred credit losses.  Loan losses are charged against the allowance when management believes the uncollectibility of all or part of a loan balance is confirmed.  Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using, among other factors, past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, and economic conditions.  Allocations to the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.

In determining its periodic allowance for loan losses, the Company has identified two portfolio segments: 1) real estate loans, and 2) consumer loans.  Consumer loans represent a nominal portion of the Company’s loan portfolio.  Within the real estate loan segment, the Bank analyzes the allowance based upon: 1) their designation as an impaired, special mention or pass graded loan; and 2) within loans designated as pass, the underlying collateral type.

Real Estate Loans

The Bank’s periodic evaluation of its allowance for loan losses on real estate loans has traditionally been comprised of three primary components.  The first two components relate to problem loans and are divided between loans deemed impaired (primarily loans classified as substandard or doubtful, and TDR loans) and loans designated as special mention.   The final component relates to pass graded or performing loans.

Impaired Loan Component

A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement.  Non-accrual loans and loans for which the terms have been modified in a manner that meets the criteria of a TDR are deemed impaired.

Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays or shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and shortfalls on a case-by-case basis, taking into consideration all of the
 
 
15
 
circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

All multifamily residential, mixed use, commercial real estate and construction loans that are deemed to meet the definition of impaired are individually evaluated for impairment.  In addition, all cooperative unit, one- to four-family residential and consumer loans in excess of $730,000 are individually evaluated for impairment.  Impairment is typically measured using either: 1) the likely realizable value of a note sale; 2) the fair value of the underlying collateral, net of likely disposal costs, if repayment is expected solely from liquidation of the collateral; or 3) the present value of estimated future cash flows using the loan’s existing rate.  TDRs are typically separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception.  If a TDR is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral less estimated disposal costs.  For TDRs that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.

Prior to July 1, 2010, the Company recognized impairment of real estate loans through an allocated reserve balance within the allowance for loan losses.  As a result, increases or decreases in either the amount of impaired loans, the magnitude of impairment of such loans, or the election to recognize the impairment as either an allocated reserve or a principal charge-off could create potential volatility within the allocated portion of the allowance for loan losses associated with such loans.  Effective July 1, 2010, with the exception of performing TDRs, the Bank commenced a general practice of immediately charging off the specific components of the allowance related to loans individually classified as impaired, and not recognizing them through a reserve within the allowance for loan losses.  As previously mentioned, the Bank has maintained the common industry practice of recognizing an allocated reserve within the allowance for loan losses for instances in which impairment is measured solely from a reduction in the present value of expected cash flows of a performing TDR.  The general practice of immediately charging off the specific components of the allowance related to loans individually classified as impaired (other than performing TDRs), although not mandated under GAAP, has significantly reduced the level of volatility of the allowance for loan losses associated with impaired loans.

There were no allocated reserves associated with impaired loans at December 31, 2010.  At June 30, 2011, an allocated reserve of $298,000 was recognized for a reduction in the present value of expected cash flows associated with one performing TDR loan.  Otherwise, there were no allocated reserves on impaired loans at June 30, 2011.  Charge-offs of measured impairment of principal balances (full or partial) on impaired loans totaled $886,000 and $656,000 during the six months ended June 30, 2011 and 2010, respectively.  In addition, charge-offs of $18,000 were recognized during the six months ended June 30, 2010 on impaired loans that were disposed of during the period.  As previously discussed, prior to July 1, 2010, if impairment was measured on these loans, a portion of the allowance was allocated so that the loan was reported, net of its measured impairment, once its allocated reserve within the allowance for loan losses was considered.

Large groups of smaller balance homogeneous real estate loans, such as cooperative unit and one-to four-family residential real estate loans with balances of $730,000 or less, are collectively evaluated for impairment, and accordingly, are not separately identified for impairment disclosures.

Special Mention Component

In order to determine an expected loss percentage on its pool of Special Mention loans, the Bank calculates a rolling 12-month loss history analysis on its pool of such loans.  The loss percentage resulting from this analysis is then applied to the aggregate pool of Special Mention loans at the measurement date.  Based upon this methodology, increases or decreases in either the amount of Special Mention loans, or the magnitude of charge-offs recognized within the 12 months prior to the assessment date, will impact the estimated portion of the allowance for loan losses associated with such loans.  As a result, the allowance for loan losses associated with Special Mention loans is subject to great volatility.

The portion of the allowance for loan losses attributable to Special Mention loans increased from $1.9 million at December 31, 2010 to $2.1 million at June 30, 2011, primarily reflecting an increase of 43 basis points in the 12-month loss history analysis performed on the Special Mention pool at June 30, 2011 compared to December 31, 2010.

Performing Loan Component (Pass Graded Loans)

The Bank initially looks to the underlying collateral type when determining the allowance for loan losses associated with performing real estate loans.  The following underlying collateral types are analyzed separately: 1) one- to four family residential and cooperative unit; 2) multifamily residential and residential mixed use; 3)mixed use commercial real estate, 4) commercial real estate; and 5) construction.  Within each of the analyses of the underlying collateral types, the following elements are additionally considered and provided weighting in determining the allowance for loan losses for performing loans:
 
                           i.  Charge-off experience
                          ii.  Economic conditions
                         iii.  Underwriting standards or experience
 
16
 
                         iv.  Loan concentrations
                          v.  The period of time the loan has been held and performing
 
The following is a brief synopsis of the manner in which each element is considered.

(i)  Charge off experience – Loans within the performing loan portfolio are segmented by significant common characteristics, against which historical loss rates are applied.  In late 2010, the Bank updated the historical period used in this methodology.  Previously, the 1992 to 1996 experience factors were used, since that period represented the most recent complete loss cycle experienced by the Bank for its geography and type of collateral.  During the final quarter of 2010, the Bank updated its experience factors to include only the period 2008 to 2010; for although the current credit cycle may not have completely run its course, the Bank concluded that there was sufficient data to make the experience factors from this period relevant and meaningful.

(ii) Economic conditions - At both June 30, 2011 and December 31, 2010, the Bank assigned an expected loss rate to its entire performing mortgage loan portfolio based, in part, upon a review of economic conditions affecting the local real estate market. Specifically, the Bank considered both the level of and recent trends in: 1) the local unemployment rate, 2) real estate vacancy rates, 3) real estate sales and pricing, and 4) delinquencies in the Bank’s loan portfolio.  At June 30, 2010, the Bank considered the same set of variables in its analysis of expected economic loss from the performing mortgage loan portfolio, however, due to the relatively higher level of uncertainty surrounding the local real estate market at that time, the Bank arrived at a higher expected loss rate for the performing loan group as compared to June 30, 2011.

(iii) Underwriting standards or experience – Underwriting standards are reviewed to ensure that changes in the Bank's lending policies and practices are adequately evaluated for risk and reflected in its analysis of potential credit losses.  Different loss expectations are incorporated into the methodology.  Based upon the Bank’s mitigation of only certain less critical underwriting practices during the year ended December 31, 2010 and the six months ended June 30, 2011, this component did not impact the methodology at either June 30, 2011 or December 31, 2010.

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

(v) The period of time loans have been held and performing (Loan Seasoning) – Generally, it is assumed that loans performing for a period of at least three years are likely to result in diminishing principal losses with the passage of time.  As a result, it is assumed that a lower expected loss percentage should be applied to these loans.  This element was given considerable weight in the evaluation of the allowance for loan losses at June 30, 2010, however, received significantly less consideration in the June 30, 2011 and December 31, 2010 evaluations.  The decrease in consideration resulted from an analysis of the loss experience recognized during the 2008 to 2010 recessionary period (to which the Company migrated late in 2010), which concluded that, contrary to this common assumption, the age or seasoning of the loan did not inversely correlate to the Bank's loss experience.

Consumer Loans

Loss percentages are applied to consumer loans based upon either their delinquency status or loan type.  These loss percentages are derived from a combination of the Company’s historical loss experience and/or nationally published loss data on these loans.  Consumer loans in excess of 120 days delinquent are typically fully charged off against the allowance for loan losses.

Changes in the aggregate allowance for loan losses for loans owned by the Bank were as follows:

   
Three Months Ended June 30,
    
Six Months Ended June 30,
  
   
2011
    
2010
    
2011
    
2010
  
   
(Dollars in Thousands)
  
Balance at beginning of period
   $ 19,663     $ 24,620     $ 19,166     $ 21,505  
Provision for loan losses
     1,662       3,834       3,089       7,281  
Loans charged off
     (1,975 )     (5,024 )     (3,176 )     (5,793 )
Recoveries
     42       -       263       -  
Transfer from (to) reserves on loan commitments
     126       (80 )     176       357  
Balance at end of period
   $ 19,518     $ 23,350       19,518     $ 23,350  


 
17 
 


The following table presents data regarding the allowance for loan losses and loans evaluated for impairment by class of loan within the real estate loan segment as well as for the aggregate consumer loan segment:

At or for the Three Months Ended June 30, 2011
 
Real Estate Loans
Consumer Loans
 
One- to Four Family Residential
and Cooperative
Unit
Multifamily
Residential and Residential Mixed Use
Mixed Use
Commercial
Real Estate
Commercial
Real Estate
Construction
Total Real Estate
  
 
(Dollars in Thousands)
Beginning balance
$280 
$14,425 
$1,074 
$3,532 
$318 
$19,629 
$34 
Charge-offs
(8)
(129)
(61)
(1,039)
(725)
(1,962)
(13)
Recoveries
-  
4 
1 
37 
-  
42 
-  
Transfer from reserve for loan commitments
-  
61 
33 
29 
3 
126 
-  
Provision
127 
35 
61 
848 
583 
1,654 
8 
Ending balance
$399 
$14,396 
$1,108 
$3,407 
$179 
$19,489 
$29 

At or for the Six Months Ended June 30, 2011
 
Real Estate Loans
Consumer Loans
 
One- to Four Family Residential
and
Cooperative
Unit
Multifamily Residential and Residential Mixed Use
Mixed Use
Commercial
Real Estate
Commercial
Real Estate
Construction
Total Real Estate
  
 
(Dollars in Thousands)
Beginning balance
$409 
$14,226 
$1,331 
$2,821 
$345 
$19,132 
$34 
Charge-offs
(83)
(495)
(264)
(1,596)
(725)
(3,163)
(13)
Recoveries
-  
125 
4 
134 
-  
263 
-  
Transfer from (to) reserve for loan commitments
-  
158 
(6)
14 
10 
176 
-  
Provision
73 
382 
43 
2,034 
549 
3,081 
8 
Ending balance
$399 
$14,396 
$1,108 
$3,407 
$179 
$19,489 
$29 

At June 30, 2011
 
Real Estate Loans
Consumer Loans
 
One- to Four Family Residential
and
Cooperative
Unit
Multifamily Residential and Residential Mixed Use
Mixed Use
Commercial
Real Estate
Commercial
Real Estate
Construction
Total Real Estate
  
 
(Dollars in Thousands)
Ending balance – loans individually evaluated for impairment
$-  
$9,716 
$4,468 
$19,121 
$3,297 
$36,602 
$-  
Ending balance – loans collectively evaluated for impairment
103,058 
2,515,907 
358,034 
432,283 
10,884 
3,420,166 
3,630 
Allowance balance associated with loans individually
   evaluated for impairment
-  
-  
-  
280 
-  
280 
-  
Allowance balance associated with loans collectivelly evaluated
   for impairment
399 
14,396 
1,108 
3,127 
179 
19,209 
29 



 
18
 


At December 31, 2010
 
Real Estate Loans
Consumer Loans
 
One- to Four Family Residential
and
Cooperative
Unit
Multifamily Residential and Residential Mixed Use
Mixed Use Commercial
Real Estate
Commercial Real Estate
Construction
Total Real Estate
  
 
(Dollars in Thousands)
Ending balance – loans individually evaluated for impairment
$-  
$16,368 
$2,387 
$20,842 
$4,500 
$44,097 
$-  
Ending balance – loans collectively evaluated for impairment
117,268 
2,483,897 
362,678 
447,261 
10,738 
3,421,842 
2,540 
Allowance balance associated with loans individually evaluated
   for impairment
-  
-  
-  
-  
-  
-  
-  
Allowance balance associated with loans collectivelly evaluated
   for impairment
409 
14,226 
1,331 
2,821 
345 
19,132 
34 

Due to their small individual balances, the Bank does not evaluate individual consumer loans for impairment.  The following table summarizes impaired real estate loans for the periods indicated:

At June 30, 2011
For the Three Months Ended
June 30, 2011
For the Six Months
Ended June 30, 2011
 
Unpaid Principal Balance at Period End
Recorded Investment
at Period End
Reserve Balance Allocated within the Allowance for Loan Losses at Period End
Average Recorded Balance
Interest
Income Recognized
Average Recorded Balance
Interest
Income
Recognized
 
(Dollars in Thousands)
Multifamily Residential and Residential Mixed Use
              
   With no allocated reserve
$11,329
$9,715
- 
$11,423
$140 
$13,071
$263 
   With an allocated reserve
- 
- 
- 
- 
- 
  
- 
Mixed Use Commercial Real Estate
              
   With no allocated reserve
4,469
4,469
- 
4,771
50 
3,977
86 
   With an allocated reserve
- 
- 
- 
- 
- 
  
- 
Commercial Real Estate
              
   With no allocated reserve
16,230
13,305
- 
14,066
97 
14,374
145 
   With an allocated reserve
5,816
5,816
280
5,829
102 
5,836
258 
Construction
              
   With no allocated reserve
3,297
3,297
- 
2,790
122 
3,360
213 
   With an allocated reserve
- 
- 
- 
- 
- 
  
- 
Total
              
   With no allocated reserve
$35,325
$30,786
$- 
$33,050
$409 
$34,782
$707 
   With an allocated reserve
$5,816
$5,816
$280
$5,829
$102 
$5,836
$258 


 
19 
 


At December 31, 2010
 
Unpaid Principal Balance
at Period End
Recorded investment
at Period End
Reserve Balance Allocated within the Allowance for Loan Losses at Period End
 
(Dollars in Thousands)
Multifamily Residential and Residential Mixed Use
      
   With no allocated reserve
$19,460
$16,368
$- 
   With an allocated reserve
  
- 
- 
Mixed Use Commercial Real Estate
      
   With no allocated reserve
2,387
2,387
- 
   With an allocated reserve
- 
- 
- 
Commercial Real Estate
      
   With no allocated reserve
23,771
20,842
- 
   With an allocated reserve
- 
- 
- 
Construction
      
   With no allocated reserve
4,500
4,500
- 
   With an allocated reserve
- 
- 
- 
Total
      
   With no allocated reserve
$50,118
$44,097
- 
   With an allocated reserve
$-  
$-  
$- 

The Bank maintains a reserve liability in relation to the First Loss Position that reflects estimated losses on this loan pool at each period end.  For performing loans within the FNMA serviced pool, the reserve recognized is the present value of the estimated losses calculated based upon the historical loss experience for comparable multifamily loans owned by the Bank.  For problem loans within the pool, the estimated losses are determined in a manner consistent with impaired loans within the Bank's loan portfolio.

The following is a summary of the aggregate balance of multifamily loans serviced for FNMA, the period-end First Loss Position associated with these loans, and activity in the related reserve liability:

   
At or for the Three Months Ended June 30,
    
At or for the Six Months Ended June 30,
  
   
2011
    
2010
    
2011
    
2010
  
   
(Dollars in Thousands)
  
Outstanding balance of multifamily loans serviced for FNMA at period end
   $ 333,826     $ 404,518     $ 333,826     $ 404,518  
Total First Loss Position at end of period
     16,356       18,697       16,356       18,697  
Reserve Liability on the First Loss Position
                                
Balance at beginning of period
   $ 2,993     $ 4,221     $ 2,993     $ 4,373  
Transfer of specific reserve for serviced loans re-acquired by the Bank
     -       (1,123 )     -       (1,123 )
Provision for losses on problem loans(1)
     -       -       -       -  
Charge-offs and other net reductions in balance
     -       (105 )     -       (257 )
Balance at period end
   $ 2,993     $ 2,993     $ 2,993     $ 2,993  
(1) Amount recognized as a component of mortgage banking income during the period.

During the six months ended June 30, 2011, the Bank received approval from FNMA to reduce the total First Loss Position by $434,000 for losses incurred.  During the six months ended June 30, 2010, the Bank received approval from FNMA to reduce the total First Loss Position by $1.5 million for losses incurred.

The Bank has elected to periodically repurchase problematic or non-problematic loans from within the FNMA serviced loan pool.  The repurchase of problematic loans is made in order to expedite their resolution and control losses.  All such elections have been made on an individual loan/borrower basis.  All repurchases from FNMA are made at par, and any reserves recognized on the re-acquired loan within the FNMA reserve analysis reduce the recorded balance of the loan when it is transferred to the Bank’s portfolio.  In most instances, all economic losses realized by the Bank on the re-acquired loans can be applied against the First Loss Position, and any material exceptions for individual loans are disclosed in the Company’s public filings. Since the Bank is fully responsible for all losses on FNMA serviced loans up to the First Loss Position, it has greater incentive to minimize losses. Had the
 
 
20
 
resolution of these loans been left to FNMA to manage, management believes that the ultimate losses recognized would have been greater.  The Bank did not re-acquire any problematic loans within the pool of loans serviced for FNMA during the six months ended June 30, 2011.  During the three months ended June 30, 2010, the Bank re-acquired twelve loans within the pool of loans serviced for FNMA having an aggregate principal balance of $17.2 million.  Upon re-acquisition, aggregate liabilities of $1.1 million that were recorded related to problematic loans within the liability for the First Loss Position served to reduce the outstanding principal balance of the loans (reflecting a write-down of their outstanding principal balance to the lower of the current appraised or estimated disposal value of the underlying collateral).  During the six months ended June 30, 2010, the Bank re-acquired fifteen loans within the pool of loans serviced for FNMA (primarily problematic loans) having an aggregate principal balance of $19.3 million.  Upon re-acquisition, aggregate liabilities of $1.1 million that were recorded related to problematic loans within the liability for the First Loss Position served to reduce the outstanding principal balance of the loans (reflecting a write-down of their outstanding principal balance to the lower of the current appraised or estimated disposal value of the underlying collateral).

10.   INVESTMENT AND MORTGAGE-BACKED SECURITIES

The following is a summary of major categories of securities owned by the Company at June 30, 2011:

               
Unrealized Gains or Losses Recognized in Accumulated
Other Comprehensive Loss
                    
   
Purchase
Amortized / Historical Cost
    
Recorded Amortized/
Historical Cost (1)
    
Non-Credit
OTTI
    
Unrealized
Gains
    
Unrealized Losses
    
Book Value
    
Other Unrealized Losses
    
Fair Value
  
               
(Dollars in Thousands)
                    
Held-to-Maturity:
                                                
Pooled bank trust preferred securities ("TRUPS")
   $ 18,941     $ 10,057     $ (950 )     -     $ (1,858 )(2)   $ 7,249     $ (765 )   $ 6,484  
Available-for-sale:
                                                                
Mutual fund investments
     4,979       3,554       -       1,148       -       4,702       -       4,702  
Agency notes
     160,365       160,365       -       131       (86 )     160,410       -       160,410  
Pass-through MBS issued by GSEs
     84,373       84,373       -       5,292       -       89,665       -       89,665  
Collateralized mortgage obligations
   ("CMOs")  issued by GSEs
     23,587       23,587       -       638       -       24,225       -       24,225  
Private issuer pass through MBS
     1,911       1,911       -       -       (118 )     1,793       -       1,793  
Private issuer CMOs
     1,726       1,726       -       28       -       1,754       -       1,754  
Total
   $ 295,882     $ 285,573     $ (950 )   $ 7,237     $ (2,062 )   $ 289,788     $ (765 )   $ 289,033  
(1) Amount represents the purchase amortized / historical cost less any credit-related OTTI charges recognized through earnings.
(2) Amount represents the unamortized portion of the unrealized loss that was recognized in accumulated other comprehensive loss on September 1, 2008 (the day on which these securities were transferred from available-for-sale to held-to-maturity).

The following is a summary of major categories of securities owned by the Company at December 31, 2010:

               
Unrealized Gains or Losses Recognized in Accumulated
Other Comprehensive Loss
                    
   
Purchase
Amortized / Historical Cost
    
Recorded Amortized/
Historical Cost (1)
    
Non-Credit
OTTI
    
Unrealized
Gains
    
Unrealized Losses
    
Book Value
    
Other Unrealized Losses
    
Fair
Value
  
               
(Dollars in Thousands)
                    
Held-to-Maturity:
                                                
TRUPS
   $ 19,008     $ 10,760     $ (2,203 )     -     $ (1,916 )(2)   $ 6,641     $ (2,233 )   $ 4,408  
Available-for-sale:
                                                                
Mutual fund investments
     4,962       3,537       -       957       (4 )     4,490       -       4,490  
Agency notes
     81,388       81,388       -       5       (241 )     81,152       -       81,152  
Pass-through MBS issued by GSEs
     100,847       100,847       -       5,236       -       106,083       -       106,083  
CMOs issued by GSEs
     32,953       32,953       -       1,012       -       33,965       -       33,965  
Private issuer pass through MBS
     2,363       2,363       -       -       (65 )     2,298       -       2,298  
Private issuer CMOs
     2,122       2,122       -       50       -       2,172       -       2,172  
Total
     243,643       233,970     $ (2,203 )     7,260       (2,226 )     236,801       (2,233 )   $ 234,568  
(1) Amount represents the purchase amortized / historical cost less any credit-related OTTI charges recognized through earnings.
(2) Amount represents the remaining unamortized portion of the unrealized loss that was recognized in accumulated other comprehensive loss on September 1, 2008 (the day on which these securities were transferred from available-for-sale to held-to-maturity).


 
21 
 

At June 30, 2011, the agency note investments in the above table had contractual maturities as follows:

   
Amortized Cost
    
Estimated Fair Value
  
   
(Dollars in Thousands)
  
Due after one year through five years
   $ 159,975     $ 160,018  
Due after five years through ten years
     390       392  
    $ 160,365     $ 160,410  

The held-to-maturity TRUPS had a weighted average term to maturity of 23.5 years at June 30, 2011.  At June 30, 2011, MBS available-for-sale (which include pass-through MBS issued by GSEs, CMOs issued by GSEs, private issuer pass through MBS and private issuer CMOs) possessed a weighted average contractual maturity of 16.9 years and a weighted average estimated duration of 2.1 years.  There were no sales of MBS available-for-sale during the six months ended June 30, 2011 and 2010.

There were no sales of investment securities available-for-sale during the six months ended June 30, 2011.  Proceeds from the sales of investment securities available-for-sale (i.e., mutual funds and agency notes) were $2.5 million during the six months ended June 30, 2010.  Gains of $608,000 was recognized on these sales.  On March 31, 2010, the Company transferred six mutual fund investments totaling $1.4 million from available-for-sale to trading.  Unrealized holding gains totaling $242,000 were recognized on these investments on the date of transfer,.

At June 30, 2011, in management’s judgment, the credit quality of the collateral pool underlying six of the Company's eight TRUPS had deteriorated to the point that full recovery of the Company’s initial investment was considered uncertain, thus resulting in recognition of OTTI charges.  At June 30, 2011, these six securities had credit ratings ranging from  "D" to "Caa3." The Company applied ASC 320-10-65 to determine the credit related component of OTTI for the six TRUPS by discounting the expected future cash flows applicable to the securities at the effective interest rate implicit in the security at the date of acquisition by the Company.

The following table provides a reconciliation of the pre-tax OTTI charges recognized on the Company's TRUPS.

 
At or for the Three Months Ended June 30, 2011
  
At or for the Three Months Ended June 30, 2010
 
Credit Related OTTI Recognized in Earnings
Non-Credit OTTI Recognized in Accumulated Other Comprehensive Loss
Total OTTI
  
Credit Related OTTI Recognized in Earnings
Non-Credit OTTI
Recognized in Accumulated Other Comprehensive Loss
Total OTTI
 
(Dollars in Thousands)
Cumulative balance at the beginning of the period
$8,310 
$1,591 
$9,901 
  
$5,937 
$4,196 
$10,133 
OTTI recognized on securities with previous OTTI
574 
-   
574 
  
508 
13 
521 
Reductions and transfers to credit-related OTTI
-  
(640)
(640)
  
-  
(365)
(365)
Amortization of previously recognized OTTI
-  
(1)
(1)
  
-  
(29)
(29)
Cumulative balance at end of the period
$8,884 
$950 
$9,834 
  
$6,445 
$3,815 
$10,260 

 
At or for the Six Months Ended June 30, 2011
  
At or for the Six Months Ended June 30, 2010
 
Credit Related OTTI Recognized in Earnings
Non-Credit OTTI Recognized in Accumulated Other Comprehensive Loss
Total OTTI
  
Credit Related OTTI Recognized in Earnings
Non-Credit OTTI Recognized in Accumulated Other Comprehensive Loss
Total OTTI
 
(Dollars in Thousands)
Cumulative balance at the beginning of the period
$8,247 
$2,203 
$10,450 
  
$5,772 
$4,425 
$10,197 
OTTI recognized on securities with previous OTTI
637 
-   
637 
  
673 
63 
736 
Reductions and transfers to credit-related OTTI
-  
(1,245)
(1,245)
  
-  
(619)
(619)
Amortization of previously recognized OTTI
-  
(8)
(8)
  
-  
(54)
(54)
Cumulative balance at end of the period
$8,884 
$950 
$9,834 
  
$6,445 
$3,815 
$10,260 

The remaining aggregate amortized cost of TRUPS that could be subject to future OTTI charges through earnings was $10.7 million at June 30, 2011.  Of this total, unrealized losses of $3.5 million have already been recognized as a component of accumulated other comprehensive loss.

 
22 
 


The following table provides a reconciliation of the pre-tax OTTI charges recognized on the Company's equity mutual funds (contained within investment securities available-for-sale):

 
At or For the Three Months Ended June 30,
  
At or For the Six Months Ended June 30,
 
2011
2010
  
2011
2010
PRE-TAX OTTI
(Dollars in Thousands)
Cumulative balance at the beginning of the period
$1,425 
$2,042 
  
$1,425 
$3,063 
OTTI recognized during the period
-  
-   
  
-  
_  
Reduction of OTTI for securities sold during the period
-  
(617)
  
-  
(1,302)
Reduction of OTTI for securities transferred to trading during the period
-  
-  
  
-  
(336)
Cumulative balance at end of the period
$1,425 
$1,425 
  
$1,425 
$1,425 

During the three months and six months ended June 30, 2010, the Company sold portions of mutual fund investments for which it had previously recognized OTTI charges, recovering $617,000 and $1.3 million, respectively, of the apportioned OTTI previously recognized on these fund shares.

In addition, during the six months ended June 30, 2010, the Company transferred mutual fund balances from available-for-sale into trading as part of a re-positioning of a portion of its BMP investments.  The transfer of these mutual funds from available-for-sale into trading during 2010 resulted in the recovery of approximately $336,000 of previously recognized OTTI charges.  Any recovery in value of mutual funds has been recognized as a component of other comprehensive income for mutual funds that have had both OTTI charges and have not been either subsequently sold or transferred into trading.

The following table summarizes the gross unrealized losses and fair value of investment securities and MBS as of June 30, 2011, aggregated by investment category and the length of time the securities were in a continuous unrealized loss position:

   
Total
    
12 or More Consecutive Months
of Unrealized Losses
    
Less than 12 Consecutive Months
of Unrealized Losses
  
   
Fair Value
    
Unrealized Losses
    
Fair Value
    
Unrealized Losses
    
Fair Value
    
Unrealized Losses
  
               
(Dollars in thousands)
              
Held-to-Maturity Securities:
                                    
TRUPS (1)
   $ 6,484     $ 3,573     $ 6,484     $ 3,573     $ -     $ -  
Available-for-Sale Securities:
                                                
Agency notes
     64,914       86       -       -       64,914       86  
Private issuer pass through MBS
     1,793       118       1,793       118       -       -  
Total
   $ 73,191     $ 3,777     $ 8,277     $ 3,691     $ 64,914     $ 86  
(1) At June 30, 2011, the recorded balance of these securities was $7.2 million.  This balance reflected both the remaining unrealized loss of $1.9 million that was recognized in accumulated other comprehensive loss on September 1, 2008 (the day on which these securities were transferred from available-for-sale to held-to-maturity) for two TRUPS that have not been deemed OTTI, and an unrealized loss of $950,000 that has been recognized in accumulated other comprehensive loss that represents the non-credit component of impairment for five TRUPS that have been deemed OTTI.  In accordance with both ASC 320-10-35-17 and ASC 320-10-65, these unrealized losses are currently being amortized over the remaining estimated life of these securities.

TRUPS That Have Maintained an Unrealized Holding Loss for 12 or More Consecutive Months

At June 30, 2011, two of the TRUPS, with an amortized cost of $7.2 million were not deemed to have OTTI.  These securities remained in an unrealized loss for 12 or more consecutive months, and their cumulative unrealized loss was $2.9 million at June 30, 2011, reflecting both illiquidity in the marketplace and concerns over future bank failures.  At June 30, 2011, both of these securities had ratings ranging from "CC" to "Ba1."  Despite both the significant decline in market value and the duration of their impairment, management believes that the unrealized losses on these securities at June 30, 2011 were temporary, and that the full value of the investments will be realized once the market dislocations have been removed, or as the securities continue to make their contractual payments of principal and interest.  In making this determination, management considered the following:

· Based upon an internal review of the collateral backing the TRUPS portfolio, which accounted for current and prospective deferrals, each of the securities could reasonably be expected to continue making all contractual payments
· The Company has the intent and ability to hold these securities until they fully recover their impairment, evidenced by the election to reclassify them as held-to-maturity in 2008
· There were no cash or working capital requirements nor contractual or regulatory obligations that would compel the Company to sell any of these securities prior to their forecasted recovery or maturity
 
23
 
· Each security has a pool of underlying issuers comprised primarily of banks
· None of the securities have exposure to real estate investment trust issued debt (which has experienced high default
rates)
· Each security featured either a mandatory auction or a de-leveraging mechanism that could result in principal repayments to the Bank prior to the stated maturity of the security
· Each security is characterized by some level of over-collateralization

The remaining six trust preferred securities, with an aggregate amortized cost of $3.4 million at June 30, 2011, have previously been determined to meet the OTTI criteria.

Private Issuer Pass Through MBS That Have Maintained an Unrealized Holding Loss for 12 or More Consecutive Months

At June 30, 2011, the Company owned one private label pass-through MBS that possessed unrealized losses for 12 or more consecutive months, with an amortized cost of $1.9 million and an unrealized loss of $118,000. The Company's investment is in the most senior tranche (or repayment pool) of this security.  Despite a challenging real estate marketplace, the private label pass-through MBS made contractual principal and interest payments that reduced its principal balance by approximately 29% during the twelve months ended June 30, 2011.  At June 30, 2011, the Company performed an analysis of likely potential defaults of the real estate loans underlying this security in the current economic environment, and determined that this security could reasonably be expected to continue making all contractual payments.  The Company has no intent to sell this security and it is not likely that the Company will be required to sell this security before the recovery of its remaining amortized cost.

The following summarizes the gross unrealized losses and fair value of investment securities and MBS as of December 31, 2010, aggregated by investment category and the length of time that the securities were in a continuous unrealized loss position:
 
   
Total
    
12 or More Consecutive Months
of Unrealized Losses
    
Less than 12 Consecutive Months
of Unrealized Losses
  
   
Fair Value
    
Unrealized Losses
    
Fair Value
    
Unrealized Losses
    
Fair Value
    
Unrealized Losses
  
               
(Dollars in thousands)
              
Held-to-Maturity Securities:
                                    
TRUPS
   $ 4,408     $ 6,352     $ 4,408     $ 6,352     $ -     $ -  
Available-for-Sale Securities:
                                                
Agency notes
     75,756       241       -       -       75,756       241  
Fixed Income mutual fund
     506       4       -       -       506       4  
Private issuer pass through MBS
     2,298       65       2,298       65                  
Total
   $ 82,968     $ 6,662     $ 6,706     $ 6,417     $ 76,262     $ 245  

11.   FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company adopted ASC 820-10 on January 1, 2008.  The fair value hierarchy established under ASC 820-10 is summarized as follows:

Level 1 Inputs – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the reporting entity has the ability to access at the measurement date.

Level 2 Inputs – Significant other observable inputs such as any of the following: (1) quoted prices for similar assets or liabilities in active markets, (2) quoted prices for identical or similar assets or liabilities in markets that are not active, (3) inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates and yield curves observable at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates), or (4) inputs that are derived principally from or corroborated by observable market data by correlation or other means (market-corroborated inputs).

Level 3 Inputs – Unobservable inputs for the asset or liability. Unobservable inputs reflect the reporting entity's own assumptions about the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk).  Unobservable inputs shall be used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.

The following tables present the assets that are reported on the condensed consolidated statements of financial condition at fair value as of June 30, 2011 by level within the fair value hierarchy.  As required by ASC 820-10, financial assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 
24
 
Assets Measured at Fair Value on a Recurring Basis at June 30, 2011
        
         
Fair Value Measurements Using
        
Description
  
Total
    
Level 1 Inputs
    
Level 2 Inputs
    
Level 3 Inputs
    
Losses for the Three-Month and Six-Month Periods Ended
June 30, 2011
  
   
(Dollars in Thousands)
    
($ in Thousands)
  
Trading securities (Registered Mutual Funds):
                              
   Domestic Equity
   $ 836     $ 836     $ -     $ -     $ -  
   International Equity
     130       130       -       -       -  
   Fixed Income
     863       863       -       -       -  
Investment securities available-for-sale
     165,112       4,702       160,410       -       -  
MBS available-for-sale
     117,437       -       117,437       -       -  

Assets Measured at Fair Value on a Recurring Basis at December 31, 2010
        
         
Fair Value Measurements Using
        
Description
  
Total
    
Level 1 Inputs
    
Level 2 Inputs
    
Level 3 Inputs
    
Losses for the Three-Month and Six-Month Periods Ended
June 30, 2010
  
   
(Dollars in Thousands)
    
($ in Thousands)
  
Trading Securities (Registered Mutual Funds)
                              
   Domestic Equity
   $ 672     $ 672     $ -     $ -     $ -  
   International Equity
     108       108       -       -       -  
   Fixed Income
     710       710       -       -       -  
Investment securities available-for-sale
   $ 85,642     $ 4,883     $ 80,759       -       -  
MBS available-for-sale
     144,518       -       144,518       -       -  

The Company’s trading securities and available-for-sale investment securities and MBS are reported at fair value, which is determined utilizing prices obtained from independent parties. The valuations obtained are based upon market data, and often utilize evaluated pricing models that vary by asset and incorporate available trade, bid and other market information. For securities that do not trade on a daily basis, pricing applications apply available information such as benchmarking and matrix pricing. The market inputs normally sought in the evaluation of securities include benchmark yields, reported trades, broker/dealer quotes (obtained only from market makers or broker/dealers recognized as market participants), issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data.  Prioritization of inputs may vary on any given day based on market conditions.

The Company’s trading securities are registered, actively-traded mutual funds that satisfy the criteria for Level 1 valuation. The Company's available-for-sale investment securities and MBS at June 30, 2011 were categorized as follows:

Investment Category
  
Percentage of Total
  
Valuation Level Under ASC 820-10
Agency Notes
  
56.8%
  
Two
Pass Through MBS or CMOs issued by GSEs
  
40.3   
  
Two
Pass Through MBS or CMOs issued by entities other than GSEs
  
1.2   
  
Two
Mutual fund investments
  
1.7   
  
One

The agency notes owned by the Company possessed the highest possible credit rating published by multiple established credit rating agencies as of June 30, 2011.  Obtaining a market value as of June 30, 2011 for these securities utilizing significant observable inputs as defined under ASC 820-10 was not difficult due to their continued marketplace demand.  The pass-through MBS and CMOs issued by GSEs, which comprised approximately 40.3% of the Company's total available-for-sale investment securities and MBS at June 30, 2011, all possessed the highest possible credit rating published by multiple established credit rating agencies as of June 30, 2011.  Obtaining a market value as of June 30, 2011 for these securities utilizing significant observable inputs as defined under ASC 820-10 was not difficult due to their considerable demand.  In accordance with established policies and procedures, the Company utilized a midpoint value obtained as its recorded fair value for securities that were valued with significant observable inputs.
 
As of June 30, 2011 and 2010, the Company owned one pass through MBS issued by an entity other than a GSE.  This security had an amortized cost basis of $1.9 million at June 30, 2011.  The Company's investment is within the senior tranche of this security, and the weighted average contractual interest rate on the security was 5.0% at both June 30, 2011 and 2010.  The assets underlying this security are a pool of 15-year fixed rate amortizing prime mortgages on residential properties located throughout the United States.  The underlying mortgages were originated in 2005, and, as of June 30, 2011, had a weighted average coupon of 5.25% and a weighted average loan-to-value ratio of 44%.  Approximately 26% of the underlying mortgages are located in California, while the remainder are diversified geographically, and less than 11% of the total underlying mortgage pool was delinquent at June 30, 2011.   The
 
 
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credit ratings on this security ranged from Caa1 to Ba1 at June 30, 2011.  As a result of the overall credit quality of this investment, marketplace demand was deemed sufficient at June 30, 2011 to permit it to be valued utilizing estimated sales determined under benchmarking and matrix pricing.  The Company obtained such values from at least two credible independent market sources, and verified that the values were prepared utilizing significant observable inputs as defined under ASC 820-10.
 
As of June 30, 2011 and 2010, the Company owned one CMO issued by an entity other than a GSE.  This security had an amortized cost basis of $1.7 million at June 30, 2011.  The Company's investment is within the senior tranche of this security, and the weighted average contractual interest rate on the security was 4.5% at both June 30, 2011 and 2010.  The assets underlying this security are a pool of 15-year fixed rate amortizing prime mortgages on residential properties located throughout the United States.  The underlying mortgages were originated in 2003, and, as of June 30, 2011, had a weighted average coupon of 5.38% and a weighted average loan-to-value ratio approximating 30%. Approximately 44% of the underlying mortgages are located in California, while the remainder are diversified geographically.  One percent of the total underlying mortgage pool was delinquent at June 30, 2011.   This security possessed the highest possible credit rating published by multiple established credit rating agencies at June 30, 2011.  As a result of the overall credit quality of this investment, marketplace demand was deemed sufficient  at June 30, 2011 to permit it to be valued utilizing estimated sales determined under benchmarking and matrix pricing.  The Company obtained such values from at least two credible market sources, and verified that these values were prepared utilizing significant observable inputs as defined under ASC 820-10.

Assets Measured at Fair Value on a Non-Recurring Basis at June 30, 2011
              
         
Fair Value Measurements Using
              
Description
  
Total
    
Level 1 Inputs
    
Level 2
Inputs
    
Level 3 Inputs
    
Losses for the Three Months Ended
June 30, 2011
    
Losses for the Six Months Ended
June 30, 2011
  
   
(Dollars in Thousands)
    
(Dollars in Thousands)
  
TRUPS
   $ 1,798 (1)   $ -     $ -     $ 1,798     $ 574 (2)   $ 637 (2)
Impaired loans
                                                
    Multifamily Residential and Residential
        Mixed Use Real Estate
     9,716       -       -       9,716       125 (3)     370 (3)
    Mixed Use Commercial Real Estate
     4,468       -       -       4,468       60 (3)     260 (3)
    Commercial Real Estate
     19,121       -       -       19,121       1,002 (3)     1,462 (3)
    Construction
     3,297       -       -       3,297       725 (3)     725 (3)
(1)      Amount represents the fair value of three held-to-maturity TRUPS that were deemed OTTI at June 30, 2011.
(2)      Amount represents the total OTTI (credit or non-credit related) recognized on TRUPS during the three-month and six-month periods ended June 30, 2011.
(3)      Amount represents total charge-offs on impaired loans during the three-month and six-month periods ended June 30, 2011.

Assets Measured at Fair Value on a Non-Recurring Basis at December 31, 2010
              
         
Fair Value Measurements Using
              
Description
  
Total
    
Level 1 Inputs
    
Level 2 Inputs
    
Level 3 Inputs
    
Losses for the Three Months Ended
June 30, 2010
    
Losses for the Three Months Ended
June 30, 2010
  
   
(Dollars in Thousands)
    
(Dollars in Thousands)
  
TRUPS
   $ 650 (1)   $ -     $ -     $ 650     $ 508 (2)   $ 673 (2)
Impaired loans:
                                                
    Multifamily Residential and Residential
        Mixed Use Real Estate
     16,368       -       -       16,368       4,589 (3)     5,172 (3)
    Mixed Use Commercial Real Estate
     2,387       -       -       2,387       11 (3)     160 (3)
    Commercial Real Estate
     20,842       -       -       20,842       424 (3)     443 (3)
    Construction
     4,500       -       -       4,500       -       -  
(1)      Amount represents the fair value of two held-to-maturity TRUPS that were deemed OTTI at December 31, 2010.
(2)      Amount represents the total OTTI (credit or non-credit related) recognized on TRUPS during the three-month and six-month periods ended June 30, 2010.
(3)      Amount represents total charge-offs on impaired loans during the three-month and six-month periods ended June 30, 2010.

TRUPS Held to Maturity - At June 30, 2011 and December 31, 2010, the Company owned eight TRUPS classified as held-to-maturity.  Late in 2008, the market for these securities became illiquid, and continued to be deemed illiquid as of June 30, 2011.  As a result, at both June 30, 2011 and December 31, 2010, their estimated fair value was obtained utilizing a blended valuation approach (Level 3 pricing).  Under the blended valuation approach, the Bank utilized the following valuation sources: 1) broker quotations, which were deemed to meet the criteria of "distressed sale" pricing under the guidance of ASC 820-10-65-4, were given a minor 10% weighting; 2) An internally created cash flow valuation model that considered the creditworthiness of each individual issuer underlying the collateral pools, and utilized default, cash flow and discount rate assumptions determined by the Company's management (the "Internal Cash Flow Valuation"), was given a 45% weighting; and 3) a minimum of two of three available independent cash flow model valuations were averaged and given a 45% weighting.

 
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The major assumptions utilized (each of which represents a significant unobservable input as defined by ASC 820-10) in the Internal Cash Flow Valuation were as follows:

(i) Discount Rate - Pursuant to ASC 320-10-65, the Company utilized two different discount rates for discounting the cash flows for each of the eight TRUPS, as follows:

(1)  
Purchase discount rate – the rate used to determine the "credit" based valuation of the security.

(2)  Current discount rate - the current discount rate utilized was derived from the Bloomberg fair market value curve for debt offerings of similar credit rating.  In the event that a security had a split investment rating, separate cash flow valuations were made utilizing the appropriate discount rate and were averaged in order to determine the Internal Cash Flow Valuation.  In addition, the discount rate was interpolated from the Bloomberg fair market value curve for securities possessing a credit rating below "B."

(ii) Defaults – The Company utilized the most recently published Fitch bank scores to identify potential defaults in the collateral pool of performing issuers underlying the eight securities.  Using a rating scale of 1 to 5 (best-to-worst), all underlying issuers with a Fitch bank rating of 5.0 were assumed to default.  Underlying issuers with a Fitch bank rating of 3.5 through 4.5 were assumed to default at levels ranging from 5% to 75% based upon both their rating as well as whether they had been granted approval to receive funding under the U.S. Department of Treasury's Troubled Asset Relief Program Capital Purchase Program.   In addition to the defaults derived from the Fitch bank scores, the Company utilized a standard default rate of 1.2% every three years.

(iii) Cash Flows - The expected payments for the tranche of each security owned by the Company, as adjusted to assume that all estimated defaults occur immediately.  The cash flows further assume an estimated recovery rate of 6% per annum to occur one year after initial default.

As discussed above, in addition to the Internal Cash Flow Valuation and broker quotations, the Company utilizes a minimum of two of three additional cash flow model valuations in order to estimate the fair value of TRUPS.  Two of the three independent cash flow model valuations utilized a methodology similar to the Internal Cash Flow Valuation, differing only in the underlying assumptions deriving estimated cash flows, individual bank defaults and discount rate.  The third independent cash flow valuation was derived from a different methodology in which the actual cash flow estimate based upon the underlying collateral of the securities (including default estimates) was not considered.  Instead, this cash flow valuation utilized a discount rate determined from the Bloomberg fair market value curve for similar assets that continued to trade actively, with adjustments made for the illiquidity of TRUPS market.  Because of the significant judgment underlying each of the pricing assumptions, management elected to recognize each of the independent valuations and apply a weighting system to all of the valuations, including the Internal Cash Flow Valuation, as all of these valuations were determined utilizing a valid and objective pricing methodology.

Impaired Loans - Loans with certain characteristics are evaluated individually for impairment. A loan is considered impaired under ASC 310-10-35 when, based upon existing information and events, it is probable that the Bank will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the loan agreement. The Bank's impaired loans at June 30, 2011 were collateralized by real estate and were thus carried at the lower of the outstanding principal balance or the estimated fair value of the collateral.  Fair value is estimated through either a negotiated note sale value, or, more commonly, either a current independent appraisal or a drive-by inspection combined with a comparison of the collateral with similar properties in the area by either a licensed appraiser or real estate broker.  An appraisal is generally ordered for all impaired multifamily residential, mixed use or commercial real estate loans for which the most recent appraisal is more than one year old.  The Bank never adjusts independent appraisal data upward.  Occasionally, management will adjust independent appraisal data downward based upon its own lending expertise and/or experience with the subject property, utilizing such factors as potential note sale values, or a more refined estimate of costs to repair and time to lease the property.  Adjustments for potential disposal costs are also considered when determining the final appraised value.  Of the 39 impaired loans at June 30, 2011, management utilized a likely negotiated note sale value as the valuation for seven of the loans and reduced the independent appraisal value in determining the fair value of nineteen of the loans.  In instances in which foreclosure and sale of the collateral property are deemed to provide the likely ultimate realizable value, estimated disposal costs of 10% of the appraised value are applied against the realizable value.

Financial Instruments Not Actively Traded - Quoted market prices available in active trading marketplaces are generally recognized as the best evidence of fair value of financial instruments, however, several of the Company's financial instruments are not bought or sold in active trading marketplaces.  Accordingly, their fair values are derived or estimated based on a variety of alternative valuation techniques.  All such fair value estimates are based on relevant market information about the financial instrument.  These estimates do not reflect any possible tax ramifications, estimated transaction costs, or potential premium or discount that could result from a one time sale of the entire holdings of a particular financial instrument.  In addition, the estimates are based on assumptions of future loss experience, current economic conditions, risk characteristics, and other such factors.  These assumptions are subjective in nature and involve inherent uncertainty.  Changes in these assumptions could significantly affect the estimates.

Methods and assumptions used to estimate fair values for financial instruments that are not valued utilizing formal marketplace quotations (other than those previously discussed) are summarized as follows:
 
 
27
 

Cash and Due From Banks - The fair value is assumed to be equal to their carrying value as these amounts are due upon demand.

Federal Funds Sold and Other Short Term Investments – As a result of their short duration to maturity, the fair value of these assets, principally overnight deposits, is assumed to be equal to their carrying value due.

FHLBNY Capital Stock – It is not practicable to determine the fair value of FHLBNY capital stock due to restrictions placed on transferability.

Loans, Net - The fair value of loans receivable is determined by discounting anticipated future cash flows of the loans, net of anticipated prepayments, using a discount rate reflecting current market rates for loans with similar terms.  This methodology is applied to all loans, inclusive of non-accrual loans, as well as impaired loans for which a write-down to the current fair market value of the underlying collateral is not deemed warranted (generally loans that are sufficiently collateralized).  In addition, the valuation of loans generally reflects the consideration of sale pricing for loan types that had traditionally been subject to sales to FNMA (over 80% of the outstanding loan portfolio).  Due to significant market dislocation for multifamily loan sales that commenced in 2008, secondary market prices were given little weighting in deriving loan valuation at June 30, 2011.   The valuation of impaired loans for which a write down is warranted was discussed previously within this Note.

Mortgage Servicing Rights ("MSR") - The estimated fair value of MSR is obtained through independent third party valuation, and is derived by calculating the present value of estimated future net servicing cash flows, using estimated prepayment, default, servicing cost and discount rate assumptions.  All estimates and assumptions utilized in the valuation of MSR are derived based upon actual historical results for the Bank, or, in the absence of such data, from historical results for the Bank's peers.

Deposits - The fair value of savings, money market, and checking accounts is assumed to be their carrying amount. The fair value of certificates of deposit ("CDs") is based upon the present value of contractual cash flows using current interest rates for instruments of the same remaining maturity.

Escrow and Other Deposits - The estimated fair value of escrow and other deposits is assumed to be their carrying amount payable.

Securities Sold Under Agreements to Repurchase (“REPOs”) and FHLBNY Advances – REPOs are accounted for as financing transactions.  Their fair value is measured by the discounted anticipated cash flows through contractual maturity or next interest repricing date, or an earlier call date if, as of the valuation date, the borrowing is expected to be called.  The carrying amount of accrued interest payable is 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.

 
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Based upon the aforementioned valuation methodologies, the estimated carrying amounts and estimated fair values of all of the Company's financial instruments and liabilities were as follows:

At June 30, 2011
  
Carrying Amount
    
Fair Value
  
   
(Dollars in Thousands)
  
Assets:
            
Cash and due from banks
   $ 131,643     $ 131,643  
Federal funds sold and other short term investments
     11,575       11,575  
Investment securities held to maturity (TRUPS)
     7,249       6,484  
Available-for-sale securities:
                
   Mutual fund investments
     4,702       4,702  
   Agency notes
     160,410       160,410  
   Pass-through MBS issued by GSEs
     89,665       89,665  
   CMOs  issued by GSEs
     24,225       24,225  
   Private issuer pass-through MBS
     1,793       1,793  
   Private issuer CMOs
     1,754       1,754  
Trading securities
     1,829       1,829  
Loans, net
     3,403,622       3,545,773  
Loans held for sale
     656       656  
MSR
     1,926       2,430  
FHLBNY capital stock
     49,489       N/A  
Liabilities:
                
Savings, money market and checking accounts
     1,339,668       1,339,668  
CDs
     1,076,304       1,091,197  
Escrow and other deposits
     89,466       89,466  
REPOs
     195,000       218,864  
FHLBNY advances
     939,775       984,662  
Trust Preferred securities payable1
     70,680       62,198  
Commitments to extend credit
     918       918  

1 The fair value of these liabilities is measured by independent market quotations obtained based upon transactions occurring in the market as of the disclosure date (Level 1 inputs).

At December 31, 2010
  
Carrying Amount
    
Fair Value
  
   
(Dollars in Thousands)
  
Assets:
            
Cash and due from banks
   $ 86,193     $ 86,193  
Investment securities held to maturity (TRUPS)
     6,641       4,408  
Available-for-sale securities:
                
   Mutual fund investments
     4,490       4,490  
   Agency notes
     81,152       81,152  
   Pass-through MBS issued by GSEs
     106,083       106,083  
   CMOs  issued by GSEs
     33,965       33,965  
   Private issuer pass through MBS
     2,298       2,298  
   Private issuer CMOs
     2,172       2,172  
Loans, net
     3,451,018       3,598,027  
Loans held for sale
     3,308       3,309  
MSR
     2,271       2,840  
Federal funds sold and other short-term investments
     4,536       4,536  
FHLBNY capital stock
     51,718       N/A  
Liabilities:
                
Savings, money market and checking accounts
     1,290,929       1,290,929  
CDs
     1,059,652       1,074,114  
Escrow and other deposits
     68,542       68,542  
REPOs
     195,000       217,735  
FHLBNY advances
     990,525       1,032,555  
Trust Preferred securities payable1
     70,680       63,612  
Commitments to extend credit
     631       631  

1 The fair value of these liabilities is measured by independent market quotations obtained based upon transactions occurring in the market as of the disclosure date (Level 1 inputs).

 
29
 
12.   RETIREMENT AND POSTRETIREMENT PLANS

The Holding Company or the Bank maintains the Retirement Plan of The Dime Savings Bank of Williamsburgh (the "Employee Retirement Plan"), the Retirement Plan for Board Members of Dime Community Bancshares, Inc. (the "Outside Director Retirement Plan"), the BMP, and the Postretirement Welfare Plan of The Dime Savings Bank of Williamsburgh ("Postretirement Plan").  Net expenses associated with these plans were comprised of the following components:

   
Three Months Ended June 30, 2011
    
Three Months Ended June 30, 2010
  
   
BMP,
Employee and Outside Director
Retirement Plans
    
Postretirement Plan
    
BMP,
Employee and Outside Director
Retirement Plans
    
Postretirement
Plan
  
   
(Dollars in thousands)
  
                         
Service cost
   $ -     $ 33     $ -     $ 29  
Interest cost
     339       86       358       79  
Actuarial adjustment to prior period interest cost and amortization
     -       -       353       -  
Expected return on assets
     (361 )       -       (347 )        -  
Unrecognized past service liability
     -       -       -       14  
Amortization of unrealized loss
     312       29       263       -  
Net periodic cost
   $ 290     $ 148     $ 627     $ 122  

   
Six Months Ended June 30, 2011
    
Six Months Ended June 30, 2010
  
   
BMP,
Employee and Outside Director
Retirement Plans
    
Postretirement Plan
    
BMP,
Employee and Outside Director
Retirement Plans
    
Postretirement
Plan
  
   
(Dollars in thousands)
  
                         
Service cost
   $ -     $ 67     $ -     $ 58  
Interest cost
     679       173       715       158  
Actuarial adjustment to prior period interest cost and amortization
     -       -       353       -  
Expected return on assets
     (721 )       -       (694 )        -  
Unrecognized past service liability
     -       -       -       28  
Amortization of unrealized loss
     623       58       526       -  
Net periodic cost
   $ 581     $ 298     $ 900     $ 244  

The Company disclosed in its consolidated financial statements for the year ended December 31, 2010 that it expected to make contributions or benefit payments totaling $48,000 to the Employee Retirement Plan, $389,000 to the BMP, $135,000 to the Outside Director Retirement Plan, and $173,000 to the Postretirement Plan during the year ending December 31, 2011.  The Company made contributions of $24,000 to the Employee Retirement Plan during the six months ended June 30, 2011, and expects to make an additional $24,000 of contributions or benefit payments during the remainder of 2011.  The Company made benefit payments of $64,000 to the Outside Director Retirement Plan during the six months ended June 30, 2011, and expects to make an additional $71,000 of contributions or benefit payments during the remainder of 2011.  The Company made net contributions totaling $124,000 to the Postretirement Plan during the six months ended June 30, 2011, and expects to make the remainder of the estimated $173,000 of net contributions or benefit payments during 2011.  The Company contributed $1.0 million to the BMP during the six months ended June 30, 2011, all of which related to reinstatement benefits that were separate in nature from the $389,000 actuarily determined contributions expected for 2011.  The Company does not expect to make the $389,000 of benefit payments to the BMP during 2011, since anticipated retirements that formed the basis for these expected benefit payments in 2011 are presently not expected to occur.

13.   INCOME TAXES

During the three months ended June 30, 2011, the Company's consolidated effective tax rate was 41.7%, slightly above its expected 41% normalized rate.   During the six months ended June 30, 2011, the Company's consolidated effective tax rate was 41.1%, approximating its expected 41% normalized rate.

During the three months ended June 30, 2010, the Company's consolidated effective tax rate, which was expected to approximate 37%, was 41.3%.  During the three months ended June 30, 2010, the Company recognized gains totaling $569,000 on both the sale of mutual funds and the transfer of mutual funds into trading.  From a tax perspective, since: (i) these events triggered the reversal of deferred tax assets previously recognized when the Company
 
 
30
 
recorded OTTI charges in March 2009; and (ii) the deferred tax assets on the OTTI were established at a statutory rate approximating 45% (significantly in excess of the second quarter 2010 consolidated 37% tax rate), their reversal created an effective tax rate in excess of the 37% customary level during the June 2010 quarter.

14.   NET MORTGAGE BANKING INCOME

Net mortgage banking income presented in the condensed consolidated statements of operations was comprised of the following items:

   
Three Months Ended June 30,
    
Six Months Ended June 30,
  
   
2011
    
2010
    
2011
    
2010
  
   
(Dollars in thousands)
  
Gain (loss) on the sale of loans originated for sale
   $ 53     $ 140     $ (14 )   $ 181  
Credit (Provision) to the liability for First Loss Position
     -       -       -       -  
Recovery of write down of mortgage servicing asset
     -       -       -       -  
Mortgage banking fees
     150       163       311       332  
Net mortgage banking income
   $ 203     $ 303     $ 297     $ 513  

Item 2.                      Management's Discussion and Analysis of Financial Condition and Results of Operations

General

The Holding Company is a Delaware corporation and parent company of the Bank, a federally-chartered stock savings bank.  The Bank maintains its headquarters in the Williamsburg section of Brooklyn, New York and operates twenty-six 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 is gathering deposits from customers within its market area and via the internet, and investing them primarily in multifamily residential, commercial real estate, one- to four-family residential, construction and land acquisition loans, consumer loans, MBS, obligations of the U.S. government and GSEs, and corporate debt and equity securities.

Executive Summary

The Holding Company’s primary business is the ownership 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, and occupancy and equipment, marketing 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 seek to increase its product and service utilization for each individual depositor, and increase its household and deposit market shares in the communities that it serves.  In addition, the Bank’s primary strategy includes the origination of, and investment in, mortgage loans, with an emphasis on multifamily residential and mixed-use real estate loans.  In late 2008, the Company began restricting its plans for future growth based upon the desire to retain capital levels sufficient to accommodate potential credit quality problems resulting from the downturn in the economy and the local real estate market.  This strategy continued throughout 2009, 2010 and the six months ended June 30, 2011.

The Company believes that multifamily residential and mixed-use loans in and around NYC 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 mixed use 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 mixed-use loan originations.  In order to address the credit risk associated with multifamily residential and mixed use 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.

 
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The years ended December 31, 2010 and 2009 were dominated by a global real estate and economic recession fueled by significant weakness and/or failure in many of the world's largest financial institutions, coupled with ongoing economic and political turmoil in various parts of the world.  These events led to historically high dislocations in credit markets, creating favorable origination spreads from the benchmark origination interest rates during the period.  This increase, coupled with the continuation of historically low benchmark short-term interest rates by the Federal Open Market Committee ("FOMC") (which greatly impact the pricing of the Bank's retail deposits), resulted in year-over-year increases in both net interest spread and net interest margin during the years ended December 31, 2010 and 2009, thus favorably impacting the Company's consolidated earnings during the period.  Partially offsetting this benefit were increased credit costs on Bank-owned loans and TRUPS that were recognized during both 2010 and 2009, as well as increased credit costs recognized during 2009 on loans sold to FNMA with recourse.  While both the U.S. and world marketplaces saw greater signs of stability and recovery commencing in late 2010 and continuing during the three-month and six-month periods ended June 30, 2011, the FOMC continued its monetary policy actions aimed at maintaining short-term interest rates at historically low levels.  This continued to benefit the Company's net interest margin, more particularly its funding costs, during the three-month and six-month periods ended June 30, 2011.

During the three months ended June 30, 2011, the Company experienced a high level of prepayment and satisfaction activity, as management elected not to pursue loans that were either: 1) unfavorable from an interest rate repricing standpoint; or 2) required underwriting criteria in excess of management's risk tolerance.  Should such levels of prepayment continue, they will adversely impact the Company's net interest margin during the remainder of 2011.  During the period January 1, 2009 to June 30, 2011, credit costs remained significantly higher than the levels experienced prior to 2009.

Recent Market Developments

On October 19, 2010, the Board of Directors of the Federal Deposit Insurance Corporation (“FDIC”) adopted a new Restoration Plan (the “Restoration Plan”) to ensure that the Deposit Insurance Fund reserve ratio reaches 1.35% by September 30, 2020, as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Reform Act”).  Among other matters, the Restoration Plan provides that the FDIC will forego the uniform three basis point increase in initial assessment rates that was previously scheduled to take effect on January 1, 2011 and will maintain the current assessment rate schedule for all insured depository institutions until the reserve ratio reaches 1.15%.  The FDIC intends to pursue further rulemaking in 2011 regarding the requirement under the Reform Act that the FDIC offset the effect on institutions with less than $10 billion in assets (such as the Bank) of the requirement that the reserve ratio reach 1.35% by September 30, 2020, rather than 1.15% by the end of 2016 (as required under the prior restoration plan), so that more of the cost of raising the reserve ratio to 1.35% will be borne by institutions with more than $10 billion in assets.  Implementation of the Restoration Plan is not expected to have a material effect upon the Company's consolidated operating results.

In accordance with the Reform Act, on February 7, 2011, the FDIC adopted a final rule that redefines the assessment base for deposit insurance assessments as average consolidated total assets minus average tangible equity, rather than on deposit bases, and adopts a new assessment rate schedule, as well as alternative rate schedules that become effective when the reserve ratio reaches certain levels. The final rule also makes conforming changes to the unsecured debt and brokered deposit adjustments to assessment rates, eliminates the secured liability adjustment and creates a new assessment rate adjustment for unsecured debt held that is issued by another insured depository institution.  The depository institution debt adjustment equals fifty basis points of each dollar of long-term, unsecured debt held as an asset by an insured depository institution when that debt was issued by another insured depository institution, to the extent that all such debt exceeds three percent of the institution’s Tier 1 capital.
 
The new rate schedule and other revisions to the assessment rules became effective April 1, 2011 and were used to calculate the Bank’s June 30, 2011 invoices for assessments due September 30, 2011.  As revised by the final rule, for depository institutions with less than $10 billion in assets, such as the Bank, the initial base assessment rates range from five to nine basis points for Risk Category I institutions and are fourteen basis points for Risk Category II institutions, twenty-three basis points for Risk Category III institutions and thirty-five basis points for Risk Category IV institutions.  Total base assessment rates, after applying the unsecured debt and brokered deposit adjustments, range from two and one-half to forty-five basis points.  The Company experienced a reduction of $877,000 in deposit insurance expense during the June 2011 quarter compared to the March 2011 quarter as a result of the implementation of the new assessment rate schedule.

 
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Selected Financial Highlights and Other Data
(Dollars in Thousands Except Per Share Amounts)

   
At or For the Three Months Ended June 30,
    
At or For the Six Months Ended June 30,
  
   
2011
    
2010
    
2011
    
2010
  
Performance and Other Selected Ratios:
                        
Return on Average Assets
     1.18 %     0.95 %     1.13 %     0.95 %
Return on Average Stockholders' Equity
     14.40       12.80       13.86       12.70  
Stockholders' Equity to Total Assets
     8.49       7.59       8.49       7.59  
Loans to Deposits at End of Period
     141.72       142.05       141.72       142.05  
Loans to Earning Assets at End of Period
     90.66       91.24       90.66       91.24  
Net Interest Spread
     3.44       3.16       3.41       3.20  
Net Interest Margin
     3.66       3.35       3.64       3.40  
Average Interest Earning Assets to Average Interest Bearing Liabilities
     112.12       108.78       111.56       108.79  
Non-Interest Expense to Average Assets
     1.44       1.50       1.55       1.53  
Efficiency Ratio
     39.21       43.92       42.34       44.45  
Effective Tax Rate
     41.66       37.62       41.18       39.47  
Dividend Payout Ratio
     38.89       46.67       40.58       48.28  
Per Share Data:
                                
Reported EPS (Diluted)
   $ 0.36     $ 0.30     $ 0.69     $ 0.58  
Cash Dividends Paid Per Share
     0.14       0.14       0.28       0.28  
Stated Book Value
     9.93       9.11       9.93       9.11  
Asset Quality Summary:
                                
Net Charge-offs
   $ 1,933     $ 5,024     $ 2,913     $ 5,793  
Non-performing Loans
     16,534       18,691       16,534       18,691  
Non-performing Loans/Total Loans
     0.48 %     0.54 %     0.48 %     0.54 %
Non-performing Assets
   $ 17,163     $ 19,634     $ 17,163     $ 19,634  
Non-performing Assets/Total Assets
     0.42 %     0.47 %     0.42 %     0.47 %
Allowance for Loan Loss/Total Loans
     0.57       0.67       0.57       0.67  
Allowance for Loan Loss/Non-performing Loans
     118.05       124.93       118.05       124.93  
Earnings to Fixed Charges Ratios (1)
                                
Including Interest on Deposits
     2.11 x     1.73 x     2.06 x     1.75 x
Excluding Interest on Deposits
     2.72       2.15       2.67       2.17  
(1) Please refer to Exhibit 12.1 for further detail on the calculation of these ratios.

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, reserves for loan commitments, the liability for the First Loss Position, the valuation of MSR, asset impairments (including the assessment of impairment of goodwill and other than temporary declines in the valuation of securities), the recognition of deferred tax assets and unrecognized tax positions, the recognition of loan income, the valuation of financial instruments and accounting for defined benefit plans are its most critical accounting policies because they are important to the presentation of the Company’s consolidated financial condition and results of operations, involve a significant degree of complexity and require management to make difficult and subjective judgments which often necessitate assumptions or estimates about highly uncertain matters. The use of different judgments, assumptions or estimates could result in material variations in the Company's consolidated results of operations or financial condition.

The following are descriptions of the Company's critical accounting policies and explanations of the methods and assumptions underlying their application.

Allowance for Loan Losses. The Bank's methods and assumptions utilized to periodically determine its allowance for loan losses are summarized in Note 9 to the condensed consolidated financial statements.

Reserve for Loan Commitments.  The reserve for loan commitments is determined based upon the historical loss experience of similar loans owned by the Bank at each period end.  Any increases in this reserve are achieved via a transfer of reserves from the Bank's allowance for loan losses, with any subsequent resulting shortfall in the allowance for loan losses satisfied through the quarterly provision for loan losses.  Any decreases in the loan commitment
 
 
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reserve are recognized as a transfer of reserve balances back to the allowance for loans losses at each period end.

Reserve Liability for the First Loss Position on Multifamily Loans Sold to FNMA.  The Bank's methods and assumptions utilized to periodically determine its reserve liability for the First Loss Position are summarized in Note 9 to the condensed consolidated financial statements.

Valuation of MSR. The proceeds received on 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. In accordance with GAAP, MSR are carried at the lower of cost or fair value and are amortized in proportion to, and over the period of, anticipated net servicing income.   In accordance with ASC 860-50-35, all separately recognized MSR are required to be initially measured at fair value, if practicable.  The estimated fair value of MSR is determined by calculating the present value of estimated future net servicing cash flows, using estimated prepayment, default, servicing cost and discount rate assumptions.  All estimates and assumptions utilized in the valuation of MSR are derived based upon actual historical results for the Bank, or, in the absence of such data, from historical results for the Bank's peers.

The fair value of MSR is sensitive to changes in assumptions.  Fluctuations in prepayment speed assumptions have the most significant impact on the estimated fair value of MSR.  In the event that actual loan prepayments exceed the assumed amount (generally due to increased loan refinancing), the fair value of MSR would likely decline.  In the event that actual loan prepayments fall below the assumed amount (generally due to a decline in loan refinancing), the fair value of MSR would likely increase.  Any measurement of the value of MSR is limited by the existing conditions and assumptions utilized at a particular point in time, and would not necessarily be appropriate if applied at a different point in time.

Assumptions utilized in measuring the fair value of MSR additionally include the stratification based on predominant risk characteristics of the underlying loans. Increases in the risk characteristics of the underlying loans from the assumptions would result in a decline in the fair value of the MSR.  A valuation allowance is established in the event the recorded value of an individual stratum exceeds its fair value for the full amount of the difference.

Asset Impairment Adjustments.  Certain assets are carried in the Company's consolidated statements of financial condition at fair value or at the lower of cost or fair value:

(i) Goodwill Impairment Analysis.  Goodwill is accounted for in accordance with ASC 805-10.  ASC 805-10 requires performance of an annual impairment test at the reporting unit level.  Management annually performs analyses to test for impairment of goodwill.  In the event an impairment of goodwill is determined to exist, it is recognized as a charge to earnings.

The Company identified a single reporting unit for purposes of its goodwill impairment testing, and thus performs its impairment test on a consolidated basis.  The impairment test has two potential stages.  In the initial stage, the Holding Company's market capitalization (reporting unit fair value) is compared to its outstanding equity (reporting unit carrying value).  The Company utilizes closing price data for the Holding Company's common stock as reported on the Nasdaq National Market 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, 2010 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 or circumstances have occurred subsequent to December 31, 2010 that would reduce the fair value of the Company's reporting unit below its carrying value.  Such events or circumstances would require the immediate performance of an impairment test in accordance with ASC 805-10.

(ii) Valuation of Financial Instruments and Analysis of OTTI Related to Investment Securities and MBS.  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.

At June 30, 2011, the Company owned eight TRUPS classified as held-to-maturity.  Late in 2008, the market for these securities became highly illiquid, and continued to be deemed as such as of June 30, 2011.  As a result, at both June 30, 2011 and 2010, their estimated fair value was obtained utilizing a blended valuation approach (Level 3 pricing as described in Note 11 to the condensed consolidated financial statements).

At June 30, 2011 and 2010, the Company had an investment in nine mutual funds totaling $1.5 million that were classified as trading.  All changes in valuation of these securities are recognized in the Company's results of operations.

Debt securities that are not classified as either held-to-maturity or trading are classified as available-for-sale.

Available-for-sale debt and equity securities that have readily determinable fair values are carried at fair value.  All of the Company's available-for-sale securities at June 30, 2011 and 2010 had readily determinable fair values, which were based on published or securities dealers' market values.

 
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The Company conducts a periodic review and evaluation of its securities portfolio, taking into account the severity and duration of each unrealized loss, as well as management's intent and ability to hold the security until the unrealized loss is substantially eliminated, in order to determine if a decline in fair value of any security below its carrying value is either temporary or other than temporary.  Unrealized losses on held-to-maturity securities that are deemed temporary are disclosed but not recognized.  Unrealized losses on debt or equity securities available-for-sale that are deemed temporary are excluded from net income and reported net of deferred taxes as other comprehensive income or loss.  All unrealized losses that are deemed other than temporary on either available-for-sale or held-to-maturity securities are recognized immediately as a reduction of the carrying amount of the security, with a corresponding decline in either net income or accumulated other comprehensive income or loss in accordance with ASC 320-10-65.  See Note 10 to the condensed consolidated financial statements for a reconciliation of OTTI on securities during the three months ended June 30, 2011 and 2010.

Recognition of Deferred Tax Assets.  Management reviews all deferred tax assets periodically.  Upon such review, in the event that there is a greater than 50% likelihood that the deferred tax asset will not be fully realized, a valuation allowance is recognized against the deferred tax asset in the amount for which realization is determined to be more unlikely than likely to occur.

Unrecognized Tax Positions. The Company performs two levels of evaluation for all uncertain tax positions. Initially, a determination is made, based on the technical merits of the position, 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. In conducting this evaluation, management is required to presume that the position will be examined by the appropriate taxing authority possessing full knowledge of all relevant information. The second level of evaluation is the measurement of a tax position that satisfies the more-likely-than-not recognition threshold.  This measurement is performed in order to determine the amount of benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely to be realized upon ultimate settlement.  In making its evaluation, management reviews applicable tax rulings and other advice provided by reputable tax professionals.

Loan Income Recognition.  Interest income on loans is recorded using the level yield method.  Loan origination fees and certain direct loan origination costs are deferred and amortized as yield adjustments over the contractual loan terms.

Accrual of interest is generally discontinued on loans that have missed three consecutive monthly payments, at which time the Bank generally does not recognize the interest from the third month and reverses all interest associated with the missed payments.  The Bank generally initiates foreclosure proceedings when a loan enters non-accrual status, and does not accept partial payments on loans on which foreclosure proceedings have commenced.  At some point during foreclosure proceedings, the Bank procures current appraisal information in order to prepare an estimate of the fair value of the underlying collateral.  If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure action is completed, the property securing the loan is transferred to OREO.  The Bank generally utilizes all available remedies in an effort to resolve non-accrual loans and OREO properties as quickly and prudently as possible in consideration of market conditions, the physical condition of the property and any other mitigating circumstances.  In the event that a non-accrual loan is subsequently brought current, it is returned to accrual status once the doubt concerning collectability has been removed and the borrower has demonstrated performance in accordance with the loan terms and conditions for a period of at least six months.

Management may elect to continue the accrual of interest when a loan is in the process of collection and the estimated fair value of the collateral is sufficient to satisfy the outstanding principal balance (including any outstanding advances related to the loan) and accrued interest.  Such elections have not been commonplace.

Accounting for Defined Benefit Plans.  Defined benefit plans are accounted for in accordance with ASC 715, which requires an employer sponsoring a single employer defined benefit plan to recognize the funded status of a benefit plan in its statements of financial condition, measured as the difference between plan assets at fair value (with limited exceptions) and the benefit obligation.  The Company utilizes the services of trained actuaries employed at an independent benefits plan administration entity in order to assist in measuring the funded status of its defined benefit plans.

Liquidity and Capital Resources

The Board of Directors of the Bank has approved a liquidity policy that it reviews and updates at least annually. Senior management is responsible for implementing the policy.  The Bank's Asset-Liability Committee ("ALCO") is responsible for general oversight and strategic implementation of the policy, and management of the appropriate departments are assigned responsibility for implementing any strategies established by ALCO.  On a daily basis, senior management receives a current cash position report and one-week forecast to ensure that all short-term obligations are timely satisfied and that adequate liquidity exists to fund future activities.  On a monthly basis, reports detailing the Bank's liquidity reserves and forecasted cash flows are presented to both senior management and the Board of Directors.  In addition, on a monthly basis, a twelve-month liquidity forecast is presented to ALCO in order to assess potential future liquidity concerns.  A forecast of cash flow data for the upcoming 12 months is presented to the Board of Directors on an annual basis.

 
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The Bank's primary sources of funding for its lending and investment activities include deposits, loan and MBS payments, investment security maturities, advances from the FHLBNY, and REPOs entered into with various financial institutions, including the FHLBNY.  The Bank may also sell selected multifamily residential, mixed use and one- to four-family residential real estate loans to private sector secondary market purchasers and has in the past sold such loans to FNMA.  The Company may additionally issue debt under appropriate circumstances.  Although maturities and scheduled amortization of loans and investments are predictable sources of funds, deposit flows and prepayments on mortgage loans and MBS are influenced by interest rates, economic conditions and competition.

The Bank gathers deposits in direct competition with commercial banks, savings banks and brokerage firms, many among the largest in the nation.  It must additionally compete for deposit monies against the stock and bond markets, especially during periods of strong performance in those arenas.  The Bank's deposit flows are affected primarily by the pricing and marketing of its deposit products compared to its competitors, as well as the market performance of depositor investment alternatives such as the U.S. bond or equity markets.  To the extent that the Bank is responsive to general market increases or declines in interest rates, its deposit flows should not be materially impacted.   However, favorable performance of the equity or bond markets could adversely impact the Bank’s deposit flows.

Retail branch and Internet banking deposits increased $65.4 million during the six months ended June 30, 2011, compared to an increase of $223.0 million during the six months ended June 30, 2010.  Within deposits, CDs increased $16.7 million during the six months ended June 30, 2011, primarily as a result of successful individual retirement account ("IRA") and new branch promotional activities, while core deposits (i.e., non-CDs) increased $48.7 million during the period due to both successful gathering efforts tied to promotional offerings as well as increased commercial checking balances.  During the six months ended June 30, 2010, CDs increased $132.4 million, fueled by a promotional 15-month IRA CD campaign, while core deposits increased $90.6 million, led by inflows of $82.8 million of competitively priced money market accounts.

During the six months ended June 30, 2011, principal repayments totaled $368.9 million on real estate loans (including refinanced loans) and $26.6 million on MBS.  During the six months ended June 30, 2010, principal repayments totaled $221.5 million on real estate loans and $40.6 million on MBS.  The increase in principal repayments on real estate loans resulted from increased refinancing activity, as borrowers within the Bank's loan portfolio became more active in refinancing loans that were approaching their contractual interest rate adjustment date.  The decline in principal repayments on MBS resulted from a reduction of $72.3 million in their average balance from the six months ended June 30, 2010 to the six months ended June 30, 2011.

In the event that the Bank should require funds beyond its ability or desire to generate them internally, an additional source of funds is available through its borrowing line at the FHLBNY.  At June 30, 2011, the Bank had an additional potential borrowing capacity of $488.4 million through the FHLBNY, subject to customary minimum FHLBNY common stock ownership requirements imposed by the FHLBNY (i.e., stock valued at 4.5% of the Bank's outstanding FHLBNY borrowings).

The Bank is subject to minimum regulatory capital requirements imposed by its primary regulator, The Office of Thrift Supervision (the "OTS"), which, as a general matter, are based on the amount and composition of an institution's assets. At June 30, 2011, the Bank was in compliance with all applicable regulatory capital requirements and was considered "well-capitalized" for all regulatory purposes.  Subsequent to June 30, 2011, the Bank's primary regulator transitioned from the OTS to the Office of the Comptroller of the Currency ("OCC').  This transition did not result in, and is not currently expected to result in, a material change in regulatory capital requirements for the Bank.

The Company generally utilizes its liquidity and capital resources primarily to fund the origination of real estate loans, the purchase of mortgage-backed and other securities, the repurchase of Holding Company common stock into treasury and the payment of quarterly cash dividends to holders of the Holding Company's common stock.  During the six months ended June 30, 2011 and 2010, real estate loan originations totaled $305.1 million and $259.9 million, respectively.  The increase from the six months ended June 30, 2010 to the six months ended June 30, 2011 reflected higher marketplace loan demand.  Purchases of investment securities (excluding trading securities, short-term investments and federal funds sold) were $172.9 million during the six months ended June 30, 2011, compared to  $31.2 million during the six months ended June 30, 2010.  All of these purchases were limited to medium-term agency notes, as management elected to utilize liquidity generated during the six months ended June 30, 2011 from loan prepayments, as well as both customer deposit and mortgagor escrow inflows to acquire medium term agency notes that provide additional yield over short-term investments or cash balances.

The Holding Company did not repurchase any shares of its common stock during the six months ended June 30, 2011.  As of June 30, 2011, up to 1,124,549 shares remained available for purchase under authorized share purchase programs.  Based upon the $14.54 per share closing price of its common stock as of June 30, 2011, the Holding Company would utilize $16.4 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.

 
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The Company paid $9.4 million in cash dividends on its common stock during the six months ended June 30, 2011, and $9.3 million during the six months ended June 30, 2010.   The increase resulted from a net increase of 409,000 shares outstanding from June 30, 2010 to June 30, 2011.

On May 1, 2010, the Company repaid a $25.0 million subordinated note borrowing at its contractual maturity.

Contractual Obligations

The Bank is obligated for rental payments under leases on certain of its branches and equipment and for minimum monthly payments under its data systems contract.   The Bank generally has outstanding at any time significant borrowings in the form of FHLBNY advances and/or REPOs.  The Holding Company also has $70.7 million of callable trust preferred borrowings from third parties due to mature in April 2034, which are callable at any time after April 2009.  The Holding Company does not currently intend to call this debt.  On May 1, 2010, the Holding Company satisfied at maturity an outstanding $25.0 million non-callable subordinated note.  None of the outstanding contractual obligations have changed materially since December 31, 2010.  The Company additionally had a reserve recorded related to unrecognized income tax benefits totaling $1.4 million at June 30, 2011.  The facts and circumstances surrounding this obligation have not changed materially since December 31, 2010.  Please refer to Note 14 to the Company's consolidated audited financial statements for the year ended December 31, 2010 for a further discussion of the unrecognized income tax benefits.

Off-Balance Sheet Arrangements

From December 2002 through February 2009, the Bank originated and sold multifamily residential mortgage loans in the secondary market to FNMA while retaining servicing.  The Bank is required to retain the First Loss Position related to all loans sold under this program, which will remain in effect until the earlier of the following events: (1) the loans have been fully satisfied or enter OREO status; or (2) the First Loss Position is fully exhausted.

In addition, as part of its loan origination business, the Bank generally has outstanding commitments to extend credit to third parties, which are granted pursuant to its regular underwriting standards.  Since many of these loan commitments expire prior to funding, in whole or in part, the contract amounts are not estimates of future cash flows.

The following table presents off-balance sheet arrangements as of June 30, 2011:

   
Less than One Year
    
One Year to Three Years
    
Over Three Years to Five Years
    
Over Five Years
    
Total
  
   
(Dollars in thousands)
  
Credit Commitments:
                              
Available lines of credit
   $ 34,084     $ -     $ -     $ -     $ 34,084  
Other loan commitments (1)
     43,524       -       -       -       43,524  
Other Commitments:
                                        
First Loss Position on loans sold to FNMA (1)
     16,356       -       -       -       16,356  
Total Commitments
   $ 93,964     $ -     $ -     $ -     $ 93,964  

(1) In accordance with the requirements of both ASC 450-20-25 and ASC 460-10-25, as of June 30, 2011, reserves on loan commitments and the liability for the First Loss Position on loans sold to FNMA were $230,000 and $3.0 million, respectively, and were recorded in other liabilities in the Company's condensed consolidated statements of financial condition.

Asset Quality
 
General
 
At both June 30, 2011 and December 31, 2010, the Company had neither whole loans nor loans underlying MBS that would be considered subprime loans, i.e., mortgage loans advanced to borrowers who did not qualify for market interest rates because of problems with their income or credit history.  See Note 10 to the condensed consolidated financial statements for a discussion of impaired investment securities and MBS.

Monitoring and Collection of Delinquent Loans

Management of the Bank reviews delinquent loans on a monthly basis and reports to its Board of Directors regarding the status of all non-performing and otherwise delinquent loans in the Bank's portfolio.

The Bank's loan servicing policies and procedures require that an automated late notice be sent to a delinquent borrower as soon as possible after a payment is ten days late in the case of multifamily residential or commercial real estate loans, or fifteen days late in connection with one- to four-family or consumer loans.  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
 
 
37
 
and phone calls placed to the borrower until payment is received.  When contact is made with the borrower at any time prior to foreclosure, the Bank will attempt to obtain the full payment due or negotiate a repayment schedule with the borrower to avoid foreclosure.

Accrual of interest is generally discontinued on loans that have missed three consecutive monthly payments, at which time the Bank generally does not recognize the interest from the third month and reverses all interest associated with the missed payments.  The Bank generally initiates foreclosure proceedings when a loan enters non-accrual status, and does not accept partial payments on loans on which foreclosure proceedings have commenced.  At some point during foreclosure proceedings, the Bank procures current appraisal information in order to prepare an estimate of the fair value of the underlying collateral.  If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure action is completed, the property securing the loan is transferred to OREO.  The Bank generally utilizes all available remedies in an effort to resolve non-accrual loans and OREO properties as quickly and prudently as possible taking into account market conditions, the physical condition of the property and any other mitigating circumstances.  In the event that a non-accrual loan is subsequently brought current, it is returned to accrual status once the doubt concerning collectability has been removed and the borrower has demonstrated performance in accordance with the loan terms and conditions for a period of at least six months.

Management may elect to continue the accrual of interest when a loan is in the process of collection and the estimated fair value of the collateral is sufficient to satisfy the outstanding principal balance (including any outstanding advances related to the loan) and accrued interest.  Such elections have not been commonplace.

Non-accrual Loans

Within the Bank's portfolio, non-accrual loans totaled $16.5 million and $20.2 million at June 30, 2011 and December 31, 2010, respectively, representing 0.48% and 0.58% of total loans at June 30, 2011 and December 31, 2010.  During the six months ended June 30, 2011, ten loans totaling $8.2 million were added to non-accrual status.  Offsetting this increase were fifteen loans totaling $8.7 million that were satisfied during the period, $2.8 of principal charge-offs on eleven loans, and two loans totaling $307,000 that were removed from non-accrual status due to their payment status.  The six months ended June 30, 2011 saw a stabilization of the difficulties experienced in both the national real estate and financial services marketplaces that were prevalent throughout 2009 and the great majority of 2010.

Impaired Loans

A loan is considered impaired when it is probable that all amounts due will not be collected in accordance with its contractual terms. A loan is not deemed impaired, even during a period of delayed payment by the borrower, if the Bank ultimately expects to collect all amounts due, including interest accrued at the contractual rate.  Generally, the Bank considers non-accrual and TDR multifamily residential and commercial real estate loans, along with non-accrual one- to four-family loans exceeding $730,000 (the FNMA single family loan limit for high cost areas), to be impaired. Non-accrual one-to four-family loans of $730,000 or less, as well as all consumer loans, are considered homogeneous loan pools and are not required to be evaluated individually for impairment.  Impairment is measured by the amount that the carrying balance of the loan, including all accrued interest, exceeds its likely realizable value (typically obtained from an appraisal of the underlying collateral).  Principal balances of all impaired loans are reduced to their likely realizable value, as determined by the impairment analysis.  The recorded investment in loans deemed impaired was approximately $36.6 million, consisting of forty-one loans, at June 30, 2011, compared to $44.1 million, consisting of fifty-seven loans, at December 31, 2010.  During the six months ended June 30, 2011, twelve loans totaling $11.8 million were added to impaired status, while twenty-nine loans totaling $13.7 million that were impaired at December 31, 2010 were removed from impaired status as they were either satisfied or were loans that were in excess of 90 days past their contractual balloon payment date that were refinanced.  In addition during the six months ended June 30, 2011, principal charge-offs of $2.8 million were recognized on nine impaired loans and principal repayments of $2.9 million were received on impaired loans that  were on accrual status from December 31, 2010 through June 30, 2011.

The following is a reconciliation of non-accrual and impaired loans at June 30, 2011:

   
(D ollars inThousands)
  
Non-accrual loans
   $ 16,534  
Non-accrual one- to four-family and consumer loans with balances of $730,000 or less
     (77 )
TDRs retained on accrual status
     12,161  
Other loans deemed impaired but retained on accrual status
     7,984 (a)
Impaired loans
   $ 36,602  
(a) Amount comprised of $845,000 of loans 90 days or more past due on their contractual maturity and retained on accrual status, and $7.139 million of loans classified as substandard and retained on accrual status.

TDRs

 
38
 
Under ASC 310-40-15, the Bank is required to account for certain loan modifications or restructurings as TDRs.  A loan modification will be considered a TDR if any of the following factors exist:

·  
For economic or legal reasons related to the debtor's financial difficulties, a concession has been granted that would not have otherwise been considered;
·  
A reduction of interest rate has been made for the remaining term of the loan;
·  
The maturity date of the loan has been extended with a stated interest rate lower than the current market rate for new debt with similar risk; or
·  
The outstanding principal amount and/or or accrued interest have been reduced

In instances in which the interest rate has been reduced, both of the following must exist:

·  
The reduction in interest rate reflected either a general decline in market interest rates or an effort to maintain a relationship with a borrower who could readily obtain funds from other sources at the then current market interest rate.
·  
The terms of the restructured loan must have been comparable to the terms offered by the Bank to non-troubled debtors.

In instances where the loan term has been extended, the terms of the restructured loan must have been comparable to the terms offered by the Bank to non-troubled debtors.

The Bank's policy is not to accept receivables or equity interests in satisfaction of TDRs.  Since all TDRs are collateralized by real estate, an appraisal of the underlying collateral is deemed the most appropriate measure to utilize when evaluating impairment.   Any shortfall in valuation on TDRs is accounted for through a charge-off, which can impact the level of periodic loan loss provisions.

Accrual status for TDRs is determined separately for each loan.   At the time the Bank and borrower agree to the TDR, the loan can be either on accrual or non-accrual status.  According to Bank policy, accruals typically cease when a loan misses three consecutive monthly payments.  Therefore, if a loan is on non-accrual status  at the time it is restructured, it continues to be classified as non-accrual until the borrower has demonstrated compliance with the modified loan terms for a period of at least six months.  Conversely, if at the time of restructuring the loan is performing (and accruing), it will remain accruing throughout its restructuring period, unless three consecutive payments are not made under the restructuring agreement, and the loan thus becomes non-accrual in accordance with the Bank’s policy, as disclosed previously.  Accrual of interest would cease for any TDR in which a charge-off of principal has been determined during the reporting period.

The following table summarizes TDRs for the periods indicated:

 
At or for the Six Months Ended June 30, 2011
At or for the Year Ended December 31, 2010
 
No. of Loans
Balance
No. of Loans
Balance
 
(Dollars in Thousands)
Loans modified during the period in a manner that met the definition of a TDR
- 
$- 
18
$24,928
Modifications granted:
        
   Reduction of outstanding principal due
- 
- 
- 
- 
   Deferral of principal amounts due
- 
- 
17
16,342
   Temporary reduction in interest rate
- 
- 
6
10,517
   Below market interest rate granted
- 
- 
- 
- 
Outstanding principal balance immediately before and after modification
- 
- 
18
24,928
Aggregate principal charge-off recognized on TDRs outstanding at period end
3
1,311
9
2,204
Outstanding principal balance at period end
14
18,170
19
22,558
TDRs that re-defaulted subsequent to being modified (at period end):
2
6,009
7
10,136
TDRs on accrual status at period end (1)
12
12,161
12
12,422
TDRs on non-accrual status at period end
2
6,009
7
10,136
(1) Within this group of loans, six loans totaling $7.7 million were internally graded Substandard, three loans totaling $2.6 million were internally graded Special Mention and the remaining $1.9 million were monitored Pass graded loans.

OREO

 Property acquired by the Bank or a subsidiary as a result of foreclosure on a mortgage loan or a deed in lieu of foreclosure is classified as OREO.  Upon entering OREO status, the Bank obtains a current appraisal on the property and reassesses the likely realizable value of the property quarterly thereafter.  Only either contractual or formal marketed values that fall below the appraised value are used when determining the likely realizable value of
 
 
39
 
OREO at each reporting period.  The Bank typically seeks to dispose of OREO properties in a timely manner.  As a result, OREO properties have generally not warranted a subsequent independent appraisal.

The Bank owned no OREO properties with a recorded balance at June 30, 2011 and December 31, 2010.

The following table sets forth information regarding non-performing assets at the dates indicated:

   
At June 30, 2011
    
At December 31, 2010
  
   
(Dollars in Thousands)
  
Real Estate Loans:
            
   One- to four-family residential and cooperative unit
   $ 67     $ 223  
   Multifamily residential and residential mixed use
     3,352       7,548  
   Mixed use commercial real estate
     3,309       1,217  
   Commercial real estate
     6,931       11,163  
   Construction
     2,865       -  
Total real estate loans (including loans held for sale)
     16,524       20,151  
Consumer loans
     10       17  
Total non-accrual loans
   $ 16,534     $ 20,168  
OREO
     -       -  
Non-performing investment securities
     629       564  
Total non-performing assets
   $ 17,163     $ 20,732  
Ratios:
                
   Total non-accrual loans to total loans
     0.48 %     0.58 %
   Total non-performing assets to total assets
     0.42       0.51  

Other Potential Problem Loans

(i)  Accruing Loans In Excess of 90 Days Past Due

At June 30, 2011, there were two real estate loans totaling $413,000 that were in excess of 90 days past due on their contractual balloon principal payment that continued to make monthly payments consistent with their initial contractual amortization schedule exclusive of the balloon payment.  The weighted average loan-to-value ratio of these loans was below 30% at June 30, 2011, and management expects that they will either be satisfied or formally modified in the future.  As a result, these loans remained on accrual status at June 30, 2011 and were deemed performing assets.  The Bank also had one commercial real estate loan with an outstanding balance of $1.6 million that had not made any payments of principal or interest in over 90 days while the borrower was finalizing negotiations on a significant new tenant lease for the underlying collateral property.  This lease agreement was completed in early July, and the borrower has subsequently made payments of principal and interest.  The Bank expects to receive all principal and interest on this loan, and therefore retained it on accrual status as of June 30, 2011.

The Bank also had one construction loan totaling $432,000 that was in excess of 90 days past its contractual maturity at June 30, 2011, on which the Bank received payments throughout 2010 and the six months ended June 30, 2011, and expects to either receive satisfaction or convert to a permanent real estate loan in future quarters.  As a result, this loan remained on accrual status and was deemed a performing loan at June 30, 2011.   This loan was internally graded Special Mention at June 30, 2011.

(ii)  Loans Delinquent 30 to 89 Days

The Bank had 22 real estate loans, totaling $13.6 million, that were delinquent between 30 and 89 days at June 30, 2011, a net reduction of $7.6 million compared to 35 such loans totaling $21.2 million at December 31, 2010.  Within the aggregate $13.6 million balance of 30 to 89 day delinquent loans as of June 30, 2011, were five loans totaling $5.9 million that were included in the previously discussed $36.6 million of loans deemed impaired at June 30, 2011.  The 30 to 89 day delinquent levels fluctuate monthly, and are generally considered a less accurate indicator of credit quality trends than non-accrual loans.  Within this group of loans, four loans totaling $1.9 million were internally graded Substandard, ten loans totaling $9.1 million were internally graded Special Mention and the remaining loans were internally graded Pass.
 
 
(iii)  Loan Modifications

At June 30, 2011, the Bank had 24 loans totaling $48.4 million that were mutually modified with the borrowers in a manner that did not meet the criteria for TDRs, and were either current or less than 30 days delinquent.   At December 31, 2010, there were 22 of such loans totaling $61.2 million.  These modifications, which have a typical term of 12 months, were granted by the Bank to borrowers who requested cash flow relief in order to assist them through
 
 
40
 
periods of sub-optimal occupancy.  The key features of modified loans are: 1) the modifications are typically temporary in nature; 2) they permit only minor reductions in the cash flow requirements of debt service; and 3) they involve no forgiveness of contractual principal due to the Bank.  Specific terms of modification have been in the form of either: (1) temporary suspension of monthly principal amortization, which, given the balloon repayment feature of these loans, typically amounts to a minor modification; or (2) either a temporary reduction of interest rate, or a permanent reduction to an interest rate higher than that offered a prime borrower and generally reflective of the credit condition of the loan at the time of modification.  In consideration of paragraph 12c of ASC 310-40-15, the interest rate offered the borrower in a modification is consistent with one that: 1) the Bank would have offered a different borrower with comparable stabilized loan-to-value and debt service coverage ratios; and 2) the borrower could have received from another financial institution at the time of modification.  To date, no modified loans have had their maturities extended, nor would this be a typical negotiable item for the Bank.  Although all of the modified loans at June 30, 2011 were secured by real estate, none of them were reliant upon the liquidation of the underlying collateral for the repayment of the outstanding loan.  In the rare instance in which the Bank also holds a second lien on a first mortgage that is modified, it would consider the combined debt obligations of both liens in determining potential impairment.  Any impairment determined based upon this combined debt would result in a charge-off of the second lien initially, and the first loan only after the full second lien has been charged off.

Any loan modification that either: 1) reduced the contractual interest rate below market; 2) forgave principal owed; or 3) satisfied any of the other criteria designated in ASC 310-40-15 at the time of its modification was deemed a TDR commencing in the quarter of modification.  Since the Bank is an active multifamily residential and commercial real estate lender, it has continuous access to marketplace offering rates for such properties.  Any adjustments to lending rates for loans experiencing sub-optimal debt service conditions would be authorized under the loan approval and underwriting polices that are summarized in the Company's Annual Report on Form 10-K for the year ended December 31, 2010, and the Bank's lending function performs a formal review process that serves as an effective re-underwriting of all modified loans.

Based upon the criteria established by the Bank to review its potential problem loans for impairment, designation of these modified loans as TDRs would not have had a material impact upon the determination of the adequacy of the Bank’s allowance for loan losses at June 30, 2011 or December 31, 2010.

Within the $48.4 million of modified loans discussed above, eight loans totaling $24.2 million were internally graded Special Mention, while the remaining loans were internally graded Pass loans.

The following table summarizes modifications for the periods indicated:

 
At or for the Six Months Ended
June 30, 2011
  
At or for the Six Months Ended
June 30, 2010
 
# Loans
Balance
  
# Loans
Balance
 
(Dollars in Thousands)
Loans modified in a manner that did not meet the definition of a TDR
6
$5,963
  
7
$23,193
Modification made:
          
   Reduction of outstanding principal due
- 
- 
  
- 
- 
   Deferral of principal amounts due
5
5,599
  
7
23,193
   Temporary reduction in interest rate
1
364
  
- 
- 
   Below market interest rate granted
- 
- 
  
- 
- 
Outstanding principal balance immediately before and after modification
6
$5,963
  
7
$23,193

(iv) Current, Non-Modified  Loans Internally Graded as Special Mention

At June 30, 2011, two loans totaling $12.2 million that were fully performing in accordance with their contractual terms were internally graded as Special Mention due solely to concerns that the underlying collateral would not at that time provide sufficient income to support ongoing service of the debt.  While both of these loans are expected to remedy this concern, they were cautiously graded as Special Mention and actively monitored at June 30, 2011.  In addition, ten loans totaling $5.4 million were internally graded as Special Mention at June 30, 2011 due to temporary delinquencies that were remedied at June 30, 2011.  Should these loans continue to demonstrate a consistent payment history, they will likely be upgraded to an internal Pass grade prior to December 31, 2011.

(v) Problem Loans Serviced for FNMA Subject to the First Loss Position

The Bank services a pool of multifamily loans sold to FNMA that had an outstanding principal balance of $333.8 million at June 30, 2011.  Pursuant to the sale agreement with FNMA, the Bank retained the First Loss Position, which totaled $16.4 million at June 30, 2011.  Against this off balance sheet contingent liability, the Bank has charged through earnings a recorded liability (reserve for First Loss Position) of $3.0 million as of June 30, 2011, leaving approximately $13.4 million of potential charges to earnings for future losses (if any).  Within this pool of loans, one loan with an aggregate balance of $1.4 million was 30 to 89 days delinquent and no loans were 90 days or more past
 
 
41
 
due at June 30, 2011.

Allowance for Loan Losses

The methodology utilized to determine the Company's allowance for loan losses on real estate loans, along with periodic activity associated with it, remained constant during the three-month and six-month periods ended June 30, 2011.  The following is a summary of the components of the allowance for loan losses as of the following dates:

 
At June 30, 2011
At March 31, 2011
At December 31 2010
Real Estate Loans:
      
   Impaired loans1
$280
$298
- 
   Special Mention loans
2,046
2,102
1,880
   Pass graded loans
17,006
17,182
17,178
   Debit escrow balances
157
47
74
Sub-total real estate loans
19,489
19,629
19,132
Consumer loans
29
34
34
TOTAL
$19,518
19,663
19,166
1 All loans internally graded Substandard are included within this amount.

Activity related to the allowance for loan losses during the three-month and six-month periods ended June 30, 2011 is summarized as follows:

 
Three Months Ended June 30, 2011
Six Months Ended June 30, 2011
Net charge-offs
$(1,933)
$(2,913)
Provision
1,662 
3,089 
Transfer from reserve for loan commitments
126 
176 

The allowance for loan losses declined $145,000 during the three months ended June 30, 2011, primarily as a result of a lower calculated allowance on Pass graded real estates loans, whose balance declined by $31.2 million from March 31, 2011 to June 30, 2011.  During the six months ended June 30, 2011, the allowance balance increased $352,000 due to both the transfer of $176,000 from the required reserve for loan commitments (reflecting a smaller loan commitment pipeline at June 30, 2011 compared to December 31, 2010), as well as higher required reserves on impaired loans (reflecting a reserve added on one impaired TDR during the period) and Special Mention loans( primarily reflecting an increase of $3.8 million in their balance from December 31, 2010 to June 30, 2011).

The provision for loan losses recorded during the three months ended June 30, 2011 reflected a replenishment of a portion of the allowance for loan losses that was reduced by net charge-off activity during the period, while the loan loss provision recorded during the six months ended June 30, 2011 reflected both additional reserves determined on Special Mention loans and an impaired TDR, as well as a replenishment of the reduction of the allowance for loan losses resulting from net charge-offs recognized during the period.

For a further discussion of the allowance for loan losses and related activity during the three-month and six-month periods ended June 30, 2011, please see Note 9 to the condensed consolidated financial statements.  Period-end balances of Impaired, Special Mention and Pass graded real estate loans are summarized in Note 8 to the condensed consolidated financial statements.

Reserve Liability on Loan Origination Commitments

The Bank also maintains a reserve liability related to loan origination commitments (recorded in other liabilities) that totaled $230,000 at June 30, 2011 and $408,000 at December 31, 2010.  The expected loss rates applied to these commitments are consistent with those applied to comparable loans held within the Bank's portfolio.  This amount fluctuates based upon the amount and composition of the Bank’s loan commitment pipeline.

Comparison of Financial Condition at June 30, 2011 and December 31, 2010

Assets.  Assets totaled $4.09 billion at June 30, 2011, an increase of $52.5 million from total assets of $4.04 billion at December 31, 2010.

Cash and due from banks and investment securities available-for-sale increased $45.5 million and $79.5 million, respectively, during the period.  During the first six months of 2011, the Company gathered $65.4 million in new deposits and $20.9 million of mortgagor escrow funds and elected to retain a portion of these funds in liquid balances to fund future cash obligations.  The Bank also purchased $172.9 million of medium-term agency notes in order to deploy additional liquidity more profitably.

 
42
 
Liabilities.  Total liabilities increased $33.9 million during the six months ended June 30, 2011, primarily as a result of the addition of $65.4 million in deposits and $20.9 million in mortgagor escrow balances during the period. Mortgagor escrow balances increased as borrowers continued to fund real estate tax obligations in advance of semi-annual payments made by the Bank on their behalf.  Partially offsetting this was a reduction of $50.7 million in FHLBNY advances during the six months ended June 30, 2011, as deposit inflows and principal repayments on real estate loans provided sufficient cash flow during the six months ended June 30, 2011 to permit these borrowings to mature without being replaced.  See "Part I - Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" for a discussion of the increases in retail branch and Internet banking deposits during the period.

Stockholders' Equity.  Stockholders' equity increased $18.5 million during the six months ended June 30, 2011, due primarily to net income of $23.4 million, $1.8 million of common stock issued for the exercise of stock options, $1.6 million of stock benefit plan expense amortization that added to the cumulative balance of stockholders' equity, and a net after-tax reduction of $812,000 in the balance of the accumulated other comprehensive loss.  The reduction in the accumulated other comprehensive loss resulted from a more favorable market valuation on the Company's investment securities at June 30, 2011 compared to December 31, 2010.  Partially offsetting these items were $9.4 million in cash dividends paid during the period.

Comparison of Operating Results for the Three Months Ended June 30, 2011 and 2010

General.  Net income was $12.3 million during the three months ended June 30, 2011, an increase of $2.3 million from net income of $10.0 million during the three months ended June 30, 2010.  During the comparative period, net interest income increased $3.0 million and the provision for loan losses fell $2.2 million, while non-interest income declined $723,000, and non-interest expense was reduced by $708,000, resulting in an increase in pre-tax income of $5.1 million.  Income tax expense increased $2.8 million during the comparative period due to both the increase in pre-tax earnings as well as a higher effective tax rate.

Net Interest Income.  The discussion of net interest income for the three months ended June 30, 2011 and 2010 presented below should be read in conjunction with the following tables, which set forth certain information related to the condensed consolidated statements of operations for those periods, and which also present the average yield on assets and average cost of liabilities for the periods indicated.  The average yields and costs were derived by dividing income or expense by the average balance of their related assets or liabilities during the periods represented. Average balances were derived from average daily balances. The yields include fees that are considered adjustments to yields.


 
43 
 

Analysis of Net Interest Income

 
Three Months Ended June 30,
   
2011
    
2010
    
     
Average
    
Average
  
 
Average
  
Yield/
Average
  
Yield/
  
 
Balance
Interest
Cost
Balance
Interest
Cost
  
Assets:
(Dollars In Thousands)
  
Interest-earning assets:
              
Real estate loans
$3,454,204
$51,857
6.01%
$3,478,236
$51,068
5.87%
  
Other loans
 1,078
 24
8.91   
1,377
30
8.71   
  
MBS
116,786
1,330
4.56   
184,613
2,082
4.51   
  
Investment securities
166,723
 382
0.92   
50,709
312
2.46   
  
Federal funds sold and other short-term investments
 209,601
 677
1.29   
246,815
681
1.10   
  
Total interest-earning assets
3,948,392
$54,270
5.50%
3,961,750
$54,173
5.47%
  
Non-interest earning assets
229,259
    
249,879
      
Total assets
$4,177,651
    
$4,211,629
      
               
Liabilities and Stockholders' Equity:
              
Interest-bearing liabilities:
              
Interest bearing checking accounts
$97,656
$90
0.37%
$102,711
$191
0.75%
  
Money Market accounts
749,299
 1,265
0.68   
785,323
1,647
0.84   
  
Savings accounts
340,968
 179
 0.21   
311,201
200
0.26   
  
CDs
1,089,227
5,264
1.94   
1,106,346
5,972
2.17   
  
Borrowed Funds
 1,244,507
11,312
3.65   
1,336,282
12,958
3.89   
  
Total interest-bearing liabilities
3,521,657
$18,110
2.06%
3,641,863
$20,968
2.31%
  
Non-interest bearing checking accounts
142,326
    
114,177
      
Other non-interest-bearing liabilities
 170,860
    
142,955
      
Total liabilities
3,834,843
    
3,898,995
      
Stockholders' equity
342,808
    
312,634
      
Total liabilities and stockholders' equity
$4,177,651
    
$4,211,629
      
Net interest income
  
$36,160
    
$33,205
    
Net interest spread
    
3.44%
    
3.16%
  
Net interest-earning assets
$426,735
    
$319,887
      
Net interest margin
    
3.66%
    
3.35%
  
Ratio of interest-earning assets to interest-bearing liabilities
    
112.12%
    
108.78%
  

Rate/Volume Analysis

 
Three Months Ended June 30, 2011 Compared to Three Months
Ended June 30, 2010  Increase/ (Decrease) Due to:
 
Volume
Rate
Total
 
(Dollars In thousands)
Interest-earning assets:
      
Real Estate Loans
$(391)
$1,180 
$789 
Other loans
(8)
2 
(6)
MBS
(770)
18 
(752)
Investment securities
490 
(420)
70 
Federal funds sold and other short-term investments
(112)
108 
(4)
Total
$(791)
$888 
$(97)
       
Interest-bearing liabilities:
      
 Interest bearing checking accounts
$(7)
$(94)
$(101)
Money market accounts
(73)
(309)
(382)
Savings accounts
19 
(40)
(21)
CDs
(83)
(625)
(708)
Borrowed funds
(868)
(778)
(1,646)
Total
$(1,012)
$(1,846)
$(2,858)
Net change in net interest income
$221 
$2,734 
$2,955 

 
During the period January 1, 2009 through June 30, 2011, FOMC monetary policies resulted in the maintenance of the overnight federal funds rate in a range of 0.0% to 0.25%.  As a result, beginning in early 2009, the Company was able to commence an orderly reduction of both its deposit and borrowing costs that continued through June 2011, which favorably impacted the Company's net interest margin during the three months ended June 30, 2011 compared to the three months ended June 30, 2010.  In addition, the Company experienced a higher level of prepayment income on its real estate loans during the three months ended June 30, 2011 than the three months ended
 
 
44
 
June 30, 2010.  Since this income is recognized as a component of interest income, it favorably impacted the net interest margin during the comparative period.

Interest Income.  Interest income was $54.3 million during the three months ended June 30, 2011, $97,000 above the level during the three months ended June 30, 2010, primarily reflecting increases of $789,000 in interest income on real estate loans and $70,000 on investment securities, that were partially offset by a reduction of $752,000 in interest income on MBS.  The growth in interest income on real estate loans resulted from $2.6 million in additional prepayment and late charge fees (predominantly prepayment fees) on real estate loans recognized during the three months ended June 30, 2011 compared to the three months ended June 30, 2010.  During the three months ended June 30, 2011, the Company experienced a high level of prepayment activity, as management elected not to pursue refinancing loans that were either: 1) unfavorable from an interest rate repricing standpoint; or 2) required underwriting criteria in excess of management's risk tolerance.  The increase in interest income on investment securities resulted from an increase of $116.0 million in their average balance during the three months ended June 30, 2011 compared to the three months ended June 30, 2010.  During the six months ended June 30, 2011, the Company purchased $172.9 million of medium term callable agency notes in order to utilize liquidity generated from loan repayments and deposit inflows.

The decline in interest income on MBS resulted from a reduction of $67.8 million in their average balance during the three months ended June 30, 2011 compared to the three months ended June 30, 2010.  The Company has not purchased MBS for several quarters, thus their average balance continues to decline as principal payments on the underlying mortgages are passed through monthly.

Interest Expense.  Interest expense decreased $2.9 million, to $18.1 million, during the three months ended June 30, 2011, from $21.0 million during the three months ended June 30, 2010.  The decline resulted from reductions in interest expense of $382,000 on money market accounts, $708,000 on CDs, and $1.6 million on borrowed funds.

The decrease in interest expense on money market accounts and CDs resulted from declines of 16 basis points and 23 basis points, respectively, in their average cost, as a result of the Company's orderly reduction in offering rates on all deposit accounts from July 1, 2010 through June 30, 2011.  In addition, the Company was able to re-finance both maturing and portfolio borrowings at lower average costs during the period July 1, 2010 through June 30, 2011, contributing significantly to a reduction of 24 basis points in its average borrowing costs from the three months ended June 30, 2010 to the three months ended June 30, 2011. The average balance of borrowed funds declined $91.8 million during the three months ended June 30, 2011 compared to the three months ended June 30, 2010, reflecting both a reduction of $80.8 million in the aggregate balance of FHLBNY advances and REPOs from July 1, 2010 to June 30, 2011, as well as the satisfaction of the Holding Company’s $25.0 million subordinated note in May 2010.

Provision for Loan Losses.  The provision for loan losses was $1.7 million during the three months ended June 30, 2011, a reduction of $2.2 million from the provision of $3.8 million recorded during the three months ended June 30, 2010.  This decline reflected the stabilization of the Bank's multifamily residential real estate loan portfolio during the three months ended June 30, 2011, which resulted in less expected future losses on problematic loans at June 30, 2011 than June 30, 2010.

Non-Interest Income.  Total non-interest income declined $723,000 from the three months ended June 30, 2010 to the three months ended June 30, 2011.  During the June 2010 quarter, the Company recognized both a gain of $282,000 on the sale of mutual fund investments, and $400,000 in additional rental income from the modification of the income recognition method on its leased properties.  These non-recurring items were not experienced during the June 2011 quarter.  OTTI recognized on TRUPS (which is recognized as a reduction component of non-interest income) was $66,000 higher during the three months ended June 30, 2011 than  the three months ended June 30, 2010.

Non-Interest Expense.  Non-interest expense was $15.1 million during the three months ended June 30, 2011, an reduction of $708,000 from $15.8 million during the three months ended June 30, 2010.

Salaries and employee benefits (including stock benefit plan) expense increased $571,000 due to both ongoing salary and benefits increases.  Occupancy and equipment expense declined $245,000, primarily as a result of higher rental expense associated with leased branch properties recognized during the three months ended June 30, 2010 from a transition in the expense recognition methodology that occurred during the June 2010 quarter.  FDIC insurance costs decreased $644,000 as a result of the new capitalization plan implemented by the FDIC effective April 1, 2011, which, given the Company's asset size and regulatory risk profile, benefited the Company.  During the three months ended June 30, 2010, the Company recorded a provision for losses on OREO of $157,000 for the write-down of two OREO properties to their likely disposal value.  No such provision was recorded during the three months ended June 30, 2011.  Other expenses declined $137,000 during the comparative period, primarily as a result of lower marketing and legal costs.

Non-interest expense was 1.44% of average assets during the three months ended June 30, 2011, compared to 1.50% during the three months ended June 30, 2010, reflecting the $708,000 reduction in expenses.

 
45
 
Income Tax Expense.   Income tax expense increased $2.8 million during the three months ended June 30, 2011 compared to the three months ended June 30, 2010, due primarily to an increase of $5.1 million in pre-tax earnings.  The Company's consolidated tax rate was 41.7% during the three months ended June 30, 2011, slightly above its normalized 41% rate.  During the three months ended June 30, 2010, the Company's consolidated effective tax rate, which was expected to approximate 37%, was 41.3%.  During the three months ended June 30, 2010, the Company recognized gains totaling $569,000 on both the sale of mutual funds and the transfer of mutual funds into trading.  From a tax perspective, since: (i) these events triggered the reversal of deferred tax assets previously recognized when the Company recorded OTTI charges in March 2009; and (ii) the deferred tax assets on the OTTI were established at a statutory rate approximating 45% (significantly in excess of the second quarter 2010 consolidated 37% tax rate), their reversal created an effective tax rate in excess of the 37% customary level during the June 2010 quarter.

Comparison of Operating Results for the Six Months Ended June 30, 2011 and 2010

General.  Net income was $23.4 million during the six months ended June 30, 2011, an increase of $3.9 million from net income of $19.5 million during the six months ended June 30, 2010.  During the comparative period, net interest income increased $5.2 million, the provision for loan losses declined $4.2 million, non-interest income declined $1.3 million and non-interest expense increased $461,000, resulting in an increase in pre-tax income of $7.6 million.  Income tax expense increased $3.7 million during the comparative period due to both the increase in pre-tax earnings as well as a higher effective tax rate.

Net Interest Income.  The discussion of net interest income for the six months ended June 30, 2011 and 2010 presented below should be read in conjunction with the following tables, which set forth certain information related to the condensed consolidated statements of operations for those periods, and which also present the average yield on assets and average cost of liabilities for the periods indicated.  The average yields and costs were derived by dividing income or expense by the average balance of their related assets or liabilities during the periods represented. Average balances were derived from average daily balances. The yields include fees that are considered adjustments to yields.

Analysis of Net Interest Income

 
Six Months Ended June 30,
   
2011
    
2010
    
     
Average
    
Average
  
 
Average
  
Yield/
Average
  
Yield/
  
 
Balance
Interest
Cost
Balance
Interest
Cost
  
Assets:
(Dollars In Thousands)
  
Interest-earning assets:
              
Real estate loans
$3,461,553
$102,486
5.92%
$3,462,170
$101,191
5.85%
  
Other loans
1,114
50
8.98   
1,402
68
9.70   
  
MBS
123,211
2,782
4.52   
195,540
4,354
4.45   
  
Investment securities
150,511
698
0.93   
53,934
719
2.67   
  
Federal funds sold and other short-term investments
173,943
1,449
1.67   
162,838
1,423
1.75   
  
Total interest-earning assets
3,910,332
$107,465
5.50%
3,875,884
$107,755
5.56%
  
Non-interest earning assets
223,105
    
237,647
      
Total assets
$4,133,437
    
$4,113,531
      
               
Liabilities and Stockholders' Equity:
              
Interest-bearing liabilities:
              
Interest bearing checking accounts
$98,491
$200
0.41%
$103,414
$374
0.73%
  
Money Market accounts
740,786
2,523
0.69   
751,010
3,356
0.90   
  
Savings accounts
337,049
372
0.22   
306,676
400
0.26   
  
CDs
1,078,617
10,488
1.96   
1,061,149
11,473
2.18   
  
Borrowed Funds
1,250,356
22,679
3.66   
1,340,597
26,181
3.94   
  
Total interest-bearing liabilities
3,505,289
$36,262
2.09%
3,562,846
$41,784
2.36%
  
Non-interest bearing checking accounts
138,956
    
111,624
      
Other non-interest-bearing liabilities
151,315
    
132,322
      
Total liabilities
3,795,560
    
3,806,792
      
Stockholders' equity
337,877
    
306,739
      
Total liabilities and stockholders' equity
$4,133,437
    
$4,113,531
      
Net interest income
  
$71,203
    
$65,971
    
Net interest spread
    
3.41%
    
3.20%
  
Net interest-earning assets
$405,043
    
$313,038
      
Net interest margin
    
3.64%
    
3.40%
  
Ratio of interest-earning assets to interest-bearing liabilities
    
111.56%
    
108.79%
  

 
 
 
46
 
 
 
Rate/Volume Analysis

 
Six Months Ended June 30, 2011 Compared to Six Months
Ended June 30, 2010 Increase/ (Decrease) Due to:
 
Volume
Rate
Total
 
(Dollars In thousands)
Interest-earning assets:
      
Real Estate Loans
$33 
$1,262 
$1,295 
Other loans
(13)
(5)
(18)
MBS
(1,626)
54 
(1,572)
Investment securities
868 
(889)
(21)
Federal funds sold and other short-term investments
94 
(68)
26 
Total
$(644)
$354 
$(290)
       
Interest-bearing liabilities:
      
 Interest bearing checking accounts
$(14)
$(160)
$(174)
Money market accounts
(48)
(785)
(833)
Savings accounts
37 
(65)
(28)
CDs
181 
(1,166)
(985)
Borrowed funds
(1,702)
(1,800)
(3,502)
Total
$(1,546)
$(3,976)
$(5,522)
Net change in net interest income
$902 
$4,330 
$5,232 

During the period January 1, 2009 through June 30, 2011, FOMC monetary policies resulted in the maintenance of the overnight federal funds rate in a range of 0.0% to 0.25%.  As a result, beginning in early 2009, the Company was able to commence an orderly reduction of both its deposit and borrowing costs that continued through June 2011, which favorably impacted the Company's net interest margin during the six months ended June 30, 2011 compared to the six months ended June 30, 2010.  In addition, the Company experienced a higher level of prepayment fee income on its real estate loans during the six months ended June 30, 2011 than the six months ended June 30, 2010.  Since this income is recognized as a component of interest income, it favorably impacted the net interest margin during the comparative period.

Interest Income.  Interest income was $107.5 million during the six months ended June 30, 2011, $290,000 below the level recognized during the six months ended June 30, 2010, primarily reflecting a decline of $1.6 million in interest income on MBS.  The reduction in interest income on MBS resulted from a decline of $72.3 million in their average balance during the six months ended June 30, 2011 compared to the six months ended June 30, 2010.  The Company has not purchased MBS for several quarters, thus their average balance continues to decline as principal payments on the underlying mortgages are passed through monthly.  Partially offsetting the decline in interest income on MBS was an increase of $1.3 million in interest income on real estate loans, that resulted primarily from $3.7 million of additional prepayment and late charge fees (that are recognized as a component of interest income).  During the six months ended June 30, 2011, the Company experienced a high level of prepayment activity, as management elected not to pursue refinancing loans that were either: 1) unfavorable from an interest rate repricing standpoint; or 2) required underwriting criteria in excess of management's risk tolerance.

Interest Expense.  Interest expense decreased $5.5 million, to $36.3 million, during the six months ended June 30, 2011, from $41.8 million during the six months ended June 30, 2010.  The decline resulted from reductions in interest expense of $833,000 on money market accounts, $985,000 on CDs and $3.5 million on borrowed funds.

The decrease in interest expense on money market accounts and CDs resulted from declines of 21 basis points and 22 basis points, respectively, in their average cost, as a result of the Company's orderly reduction in offering rates on all deposit accounts from July 2010 through June 2011.  In addition, the Company was able to re-finance both maturing and portfolio borrowings at lower average costs during the period July 2010 through June 2011, creating a reduction of 28 basis points in its average borrowing costs from the six months ended June 30, 2010 to the six months ended June 30, 2011.  The average balance of borrowed funds also declined $90.2 million during the six months ended June 30, 2011 compared to the six months ended June 30, 2010, reflecting both a reduction of $80.8 million in the aggregate balance of FHLBNY advances and REPOs from July 1, 2010 to June 30, 2011, as well as the satisfaction of the Holding Company’s $25.0 million subordinated note in May 2010.

Provision for Loan Losses.  The provision for loan losses was $3.1 million during the six months ended June 30, 2011, a reduction of $4.2 million from the provision of $7.3 million recorded during the six months ended June 30, 2010.  This decline reflected the stabilization of the Bank's multifamily residential real estate loan portfolio during the six months ended June 30, 2011, which resulted in less expected future losses on problematic loans at June 30, 2011 than June 30, 2010.

Non-Interest Income.  Total non-interest income decreased $1.3 million from the six months ended June 30, 2010 to the six months ended June 30, 2011.  During the six months ended June 30, 2010, the Company recognized both aggregate gains of $850,000 on sales and/or transfers from available-for-sale into trading of some equity mutual fund holdings, and additional rental income approximating $400,000 from the modification of the income recognition
 
 
47
 
method on its leased properties.  These non-recurring items were not experienced during the June 2011 quarter.

Non-Interest Expense.  Non-interest expense was $31.9 million during the six months ended June 30, 2011, an increase of $461,000 from $31.5 million during the six months ended June 30, 2010.

Salaries and employee benefits increased $1.3 million during the comparative period due to both ongoing salary and benefits increases and additional charges associated with the restructuring of the Company's BMP benefits.  Occupancy and equipment expense increased $186,000, primarily as a result of the acceleration of depreciation on some leasehold fixed assets that occurred during the first three months of 2011.  FDIC insurance costs decreased $412,000 as a result of the new capitalization plan implemented by the FDIC effective April 1, 2011, which, given the Company's asset size and regulatory risk profile, benefited the Company.  During the six months ended June 30, 2010, the Company recorded a provision for losses on OREO of $357,000 for the write-down of two OREO properties to their likely disposal value.  No such provision was recorded during the six months ended June 30, 2011.  Other expenses declined $205,000 during the comparative period, primarily as a result of lower marketing and legal costs.

Non-interest expense was 1.55% of average assets during the six months ended June 30, 2011, compared to 1.53% during the six months ended June 30, 2010, reflecting the $461,000 increase in non-interest expense.

Income Tax Expense.   Income tax expense increased $3.7 million during the six months ended June 30, 2011 compared to the six months ended June 30, 2010, due primarily to an increase of $7.6 million in pre-tax earnings.  The Company's customary consolidated tax rate approximated 41% during the six months ended June 30, 2011 and 37% during the six months ended June 30, 2010, with the increase in the customary rate resulting from tax law changes enacted by New York State during 2010.  The effective tax rate was 41.1% during the six months ended June 30, 2011, approximating the 41% customary level during that period.  During the six months ended June 30, 2010, the Company recognized gains totaling $608,000 on both the sale of mutual funds and the transfer of mutual funds into trading.  From a tax perspective, since: (i) these events triggered the reversal of deferred tax assets previously recognized when the Company recorded OTTI charges in March 2010; and (ii) the deferred tax assets on the OTTI were established at a statutory rate approximating 45%, their reversal created an effective tax rate of 39.5% during the six months ended June 30, 2010, which exceeded the customary 37% level during that period.

Item 3.            Quantitative and Qualitative Disclosures About Market Risk

Quantitative and qualitative disclosures about market risk were presented at December 31, 2010 in Item 7A of the Company's Annual Report on Form 10-K, filed with the SEC on March 14, 2011.  The following is an update of the discussion provided therein.

General.  Virtually all of the Company's market risk continues to reside at the Bank level.  The Bank's largest component of market risk remains interest rate risk.  The Company is not subject to foreign currency exchange or commodity price risk.  At June 30, 2011, the Company owned six mutual fund investments totaling $1.41 million that were designated as trading.  At June 30, 2011, the Company did not conduct transactions involving derivative instruments requiring bifurcation in order to hedge interest rate or market risk.

Assets, Deposit Liabilities and Wholesale Funds.  There was no material change in the composition of assets, deposit liabilities or wholesale funds from December 31, 2010 to June 30, 2011.

Interest Sensitivity Gap.  There was no material change in the computed one-year interest sensitivity gap from December 31, 2010 to June 30, 2011.

Interest Rate Risk Exposure (Net Portfolio Value) Compliance.  At June 30, 2011, the Bank continued to monitor the impact of interest rate volatility upon net interest income and net portfolio value ("NPV") in the same manner as at December 31, 2010.  There were no changes in the Board-approved limits of acceptable variance in the effect of interest rate fluctuations upon net interest income and NPV at June 30, 2011 compared to December 31, 2010.

The analysis that follows presents the estimated NPV resulting from market interest rates prevailing at a given quarter-end ("Pre-Shock Scenario"), and under four other interest rate scenarios (each a "Rate Shock Scenario") represented by immediate, permanent, parallel shifts in interest rates from those observed at June 30, 2011 and December 31, 2010.  The analysis additionally presents a measurement of the interest rate sensitivity at June 30, 2011 and December 31, 2010.  Interest rate sensitivity is measured by the basis point changes in the various NPV ratios ("NPV Ratios") from the Pre-Shock Scenario to the Rate Shock Scenarios.  NPV Ratios represent the NPV as a percentage of the total value of assets determined under each respective Pre- and Rate Shock Scenario.  An increase in the NPV Ratio is considered favorable, while a decline is considered unfavorable.

 
48 
 


 
At June 30, 2011
      
 
Net Portfolio Value
        
At December 31, 2010
  
 
 
Dollar
Amount
 
Dollar
Change
 
Percentage
Change
  
 
NPV
Ratio
Basis Point Change in NPV Ratio
  
NPV Dollar
Amount
 
NPV
Ratio
Basis Point Change in NPV Ratio
Board Approved
NPV Ratio Limit
 
(Dollars in thousands)
  
Rate Shock Scenario
                      
+ 200 Basis Points
$446,515
$(8,907)
-1.96%
  
10.84%
5
  
$432,333
10.63%
(9)
5.0%
+ 100 Basis Points
458,540
3,118  
0.68    
 
10.98   
19
  
448,038
10.86   
14 
6.0   
Pre-Shock Scenario
455,422
-   
-     
  
10.79   
-  
  
447,222
10.72   
-  
7.0   
- 100 Basis Points
489,375
33,953  
7.46    
 
11.37   
58
 
457,563
10.81   
9 
7.0   
- 200 Basis Points
N/A
N/A  
N/A   
  
N/A   
N/A
  
N/A
N/A   
N/A 
7.0   

The NPVs presented above incorporate some asset and liability values derived from the Bank’s valuation model, such as those for mortgage loans and time deposits, and some asset and liability values that are provided by reputable independent sources, such as values for the Bank's MBS and CMO portfolios, as well as its putable borrowings.  The Bank's valuation model makes various estimates regarding cash flows from principal repayments on loans and deposit decay rates at each level of interest rate change.  The Bank's estimates for loan repayment levels are influenced by the recent history of prepayment activity in its loan portfolio as well as the interest rate composition of the existing portfolio, especially vis-à-vis the existing interest rate environment.  In addition, the Bank considers the amount of fee protection inherent in the loan portfolio when estimating future repayment cash flows.  Regarding passbook deposit decay rates, the Bank tracks and analyzes the decay rate of its passbook deposits over time and over various interest rate scenarios and then makes estimates of its passbook deposit decay rate for use in the valuation model.  No matter the care and precision with which the estimates are derived, however, 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 it considers representative of prevailing market rates of interest, with appropriate adjustments it believes are suited to the heterogeneous characteristics of the Bank’s various asset and liability portfolios.

 The Pre-Shock Scenario NPV increased from $447.2 million at December 31, 2010 to $455.4 million at June 30, 2011.  The NPV Ratio at June 30, 2011 was 10.79% in the Pre-Shock Scenario, compared to 10.72% at December 31, 2010.  The increase in the Pre-Shock Scenario NPV was due primarily to an increase in the valuation of multifamily loans (reflecting lower marketplace offering rates on such loans at June 30, 2011 compared to December 31, 2010). The growth in the Pre-Shock Scenario NPV Ratio reflected the increased Pre-Shock Scenario NPV at June 30, 2011 compared to December 31, 2010.

The Bank’s +200 basis point Rate Shock Scenario NPV increased from $432.3 million at December 31, 2010 to $446.5 million at June 30, 2011.  The increase resulted primarily from a more favorable valuation of multifamily loans at June 30, 2011 compared to December 31, 2010, reflecting a decline in their estimated term to next interest rate repricing at June 30, 2011 compared to December 31, 2010.  Assets with a shorter term to next interest rate repricing generate a more favorable NPV in a rising rate interest rate environment.  As a result, the decline in the NPV of total assets from the Pre-Shock Scenario to the +200 basis point Rate Shock Scenario was lower at June 30, 2011 than December 31, 2010.  In addition, the extension in the average term to maturity or repricing of FHLBNY advances from 1.8 years at December 31, 2010 to 3.0 years at June 30, 2011 favorably impacted the calculation of the +200 basis point Rate Shock Scenario NPV.

The NPV Ratio was 10.84% in the +200 basis point Rate Shock Scenario at June 30, 2011, an increase from the NPV Ratio of 10.63% in the +200 basis point Rate Shock Scenario at December 31, 2010.  The increase reflected the aforementioned increase in the +200 basis point Rate Shock Scenario NPV during the comparative period.

At June 30, 2011, the interest rate sensitivity in the +200 basis point Rate Shock Scenario was positive 5 basis points, compared to interest rate sensitivity of negative 9 basis points in the +200 basis point Rate Shock Scenario at December 31, 2010.  This change was due primarily to a more favorable sensitivity result for multifamily loans and borrowings in the +200 basis point Rate Shock Scenario at June 30, 2011 compared to December 31, 2010, as the great majority of the loans in portfolio moved closer to their contractual repricing, and the extension of the average term to maturity or repricing of the Company's borrowings reduced their sensitivity.

Item 4.  Controls and Procedures

Management of the Company, with the participation of its Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness as of June 30, 2011, of the Company's disclosure controls and procedures, as defined in Rules 13a-15(e) and 15(d)-15(e) under the Exchange Act.  Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of June 30, 2011 in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to management of the Company as appropriate to allow timely decisions regarding required disclosures.

 
49
 
Changes in Internal Control Over Financial Reporting

There was no change in the Company's internal control over financial reporting that occurred during the Company's last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1.                      Legal Proceedings

In the ordinary course of business, the Company is routinely named as a defendant in or party to various pending or threatened legal actions or proceedings.  Certain of these matters may seek substantial monetary damages.  In the opinion of management, the Company is involved in no actions or proceedings that will have a material adverse impact on its financial condition and results of operations.

Item 1A.   Risk Factors

Except as noted below, there were no material changes from the risks disclosed in the Risk Factors section of the Company's Annual Report on Form 10-K for the year ended December 31, 2010.

The FDIC’s restoration plan and the related increased assessment rate schedule may have a further material effect on the Company's results of operations.

In February 2009, the FDIC adopted a final rule which set the initial base assessment rates beginning April 1, 2009 and provided for the following adjustments to an institution's assessment rate: (1) a decrease for long-term unsecured debt, including most senior and subordinated debt; (2) an increase for secured liabilities above a threshold amount; and (3) for non-Risk Category I institutions, an increase for brokered deposits above a threshold amount.  The Bank's deposit insurance assessments totaled $3.7 million for the year ended December 31, 2009, compared to $899,000 for the year ended December 31, 2008.

The FDIC also adopted a final rule in May 2009 imposing a five basis point special assessment on each insured depository institution’s assets minus Tier 1 capital as of June 30, 2009, which was collected on September 30, 2009.  The Bank's FDIC special assessment totaled $1.8 million for the year ended December 31, 2009.

On September 29, 2009, the FDIC adopted an amendment to the restoration plan that increases the deposit insurance assessment rate uniformly across all four risk categories by six basis points (annualized) of insured deposits beginning January 1, 2011.  In addition, on November 17, 2009, the FDIC adopted a final rule that required insured depository institutions to prepay their quarterly deposit insurance assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012 on December 30, 2009, together with their regular deposit insurance assessment for the third quarter of 2009.  The Bank's payment on December 30, 2009 totaled approximately $13.4 million, and was $8.1 million as of June 30, 2011.

On October 19, 2010, the Board of Directors of the FDIC adopted the Restoration Plan  to ensure that the Deposit Insurance Fund reserve ratio reaches 1.35% by September 30, 2020, as required by the Reform Act.  Among other matters, the Restoration Plan provides that the FDIC will forego the uniform six basis point increase in initial assessment rates that was previously scheduled to take effect on January 1, 2011 and will maintain the current assessment rate schedule for all insured depository institutions until the reserve ratio reaches 1.15%.  The FDIC intends to pursue further rulemaking in 2011 regarding the requirement under the Reform Act that the FDIC offset the effect on institutions with less than $10 billion in assets (such as the Bank) of the requirement that the reserve ratio reach 1.35% by September 30, 2020, rather than 1.15% by the end of 2016 (as required under the prior restoration plan), so that more of the cost of raising the reserve ratio to 1.35% will be borne by institutions with more than $10 billion in assets.

On February 7, 2011, the FDIC adopted a final rule that redefines the assessment base for deposit insurance assessments as average consolidated total assets minus average tangible equity, rather than on deposit bases, as required by the Reform Act, and revises the risk-based assessment system for all large insured depository institutions by introducing a scoring system.  This system involves the FDIC establishing a score for each such institution which then translates into an assessment rate.  See "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations – Recent Market Developments – Insurance of Deposit Accounts" for a further discussion of the impact of this final rule.

The final rule allows the FDIC to make limited adjustments to the score used to calculate an institution’s assessment rate and provides that the FDIC will not make any adjustments until new guidelines have been published for comment and approved by the FDIC. On April 12, 2011, the FDIC Board of Directors authorized publication of proposed guidelines describing the process that the FDIC would follow to determine whether to make an adjustment to the score used to calculate the assessment rate for a large or highly complex institution, the size of any such adjustment, and the procedure the FDIC would follow to notify an institution of an adjustment. Pursuant to the proposed guidelines, the FDIC can make a limited adjustment, either upward or downward, to an institution’s total score based upon risks or risk mitigating factors that are not adequately captured in the institution’s scorecard.  In addition, an institution can make written request to the FDIC for such an adjustment.  In either case, the FDIC would consult with an institution’s primary federal regulator and appropriate state banking supervisor before making any decision to
 
 
50
 
adjust an institution’s total score.   Any adjustment to an institution’s score must be approved by the FDIC and there is no assurance that a request for an adjustment will result in an downward adjustment.

The recent adoption of regulatory reform legislation has created uncertainty and may have a material effect on the Company's operations and capital requirements.

There are many provisions of the Reform Act which are to be implemented through regulations to be adopted by the federal bank regulatory agencies within specified time frames following the effective date of the Reform Act, which creates a risk of uncertainty as to the ultimate effect of such provisions. Although it is not possible to currently determine whether the Reform Act will have a material effect on the Company's business, financial condition or results of operations, management believes that the following provisions of the Reform Act will impact the Company:

The elimination of the Company’s primary federal regulator, the OTS, and the assumption by the Office of the Comptroller of the Currency ("OCC") of regulatory authority over all federal savings associations, such as the Bank, and the acquisition by the Board of Governors of the Federal Reserve System ("FRB") of regulatory authority over all savings and loan holding companies, such as the Holding Company, as well as all subsidiaries of savings and loan holding companies other than depository institutions.  Although the laws and regulations currently applicable to the Company generally will not change by virtue of the elimination of the OTS (except to the extent such laws have been modified by the Reform Act), the application of these laws and regulations may vary as administered by the OCC and the FRB.

The Reform Act includes other provisions, subject to further rulemaking by the federal bank regulatory agencies, that may affect the Company’s future operations, including provisions that  restrict proprietary trading by banking entities, restrict the sponsorship of and investment in hedge funds and private equity funds by banking entities and that remove certain obstacles to the conversion of savings associations to national banks.  The Company will not be able to determine the impact of these provisions until final rules are promulgated to implement these provisions and other regulatory guidance is provided interpreting these provisions.

As a result of the Reform Act and other proposed changes, the Bank may become subject to more stringent capital requirements.

The Reform Act requires the federal banking agencies to establish consolidated risk-based and leverage capital requirements for insured depository institutions, depository institution holding companies and systemically important nonbank financial companies. These requirements must be no less than those to which insured depository institutions are currently subject, and the new requirements will effectively eliminate the use of trust preferred securities as a component of Tier 1 capital for depository institution holding companies of $15 billion or greater. As a result, in July 2015, the Company will become subject to consolidated capital requirements to which it has not been previously subject. In addition, in December 2010, the Basel Committee on Banking Supervision announced the new "Basel III" capital rules, which set new standards for common equity, Tier 1 and total capital, determined on a risk-weighted basis.  It is not yet known how these standards, which will be phased in over a period of years, will be implemented by U.S. regulators generally or the manner in which they will be applied to financial institutions of the Company's size.

Pursuant to the Reform Act, the FRB will become responsible for the supervision of savings and loan holding companies on July 21, 2011.  In accordance with this authority, on April 15, 2011, the FRB requested comment on proposed supervisory guidance pursuant to which the FRB is seeking to apply certain elements of its consolidated supervisory program for bank holding companies, including consolidated capital requirements, to savings and loan holding companies. Pursuant to the proposed supervisory guidance, the FRB is considering applying to savings and loan holding companies the same consolidated risk-based and leverage capital requirements currently applicable to bank holding companies.  The FRB, together with the other federal banking agencies, expects to issue a notice of proposed rulemaking in 2011 that will outline how Basel III-based requirements will be implemented for all institutions, including savings and loan holding companies.  The FRB expects that final rules establishing Basel III-based capital requirements would be finalized in 2012 and implementation would start in 2013.

The FRB’s proposed rule to repeal the prohibition against payment of interest on demand deposits may increase competition for such deposits and  ultimately increase interest expense.

On April 6, 2011, the FRB requested comment on a proposed rule to repeal Regulation Q, which prohibits the payment of interest on demand deposits by institutions that are member banks of the Federal Reserve System.  The rule implements Section 627 of the Reform Act, which repeals Section 19(i) of the Federal Reserve Act in its entirety.  As a result, banks and thrifts are now permitted to offer interest-bearing demand deposit accounts to commercial customers, which were previously forbidden under Regulation Q.  The repeal of Regulation Q may gradually cause increased competition from other financial institutions for these deposits.  If the Bank decides to pay interest on demand accounts, it would expect interest expense to increase.


 
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Downgrades of the current "AAA" credit rating assigned to U.S. Government could adversely effect the Bank and/or Holding Company.
 
                On August 5, 2011, Standard & Poor's lowered the long-term sovereign credit rating assigned to the United States from "AAA" to "AA+" with a negative outlook, indicating a further rating downgrade is possible in the future.  On August 2, 2011, Moody's Investors Service confirmed its "Aaa" rating for the United States with a negative outlook.  Fitch Ratings has announced that it expects to complete a review of its "AAA" rating for the United States by the end of August and has not ruled out assigning the rating a negative outlook.

On August 5, 2011, the FDIC, Federal Reserve, OCC and National Credit Union Administration issued a joint press release stating that for risk-based capital purposes, the risk weights assigned to securities issued or guaranteed by the U.S. Government, its agencies and U.S. Government-sponsored entities will not change.  However, a downgrade of the U.S. Government's sovereign credit rating below "AA" could cause a higher risk weight to be assigned to securities issued or guaranteed by the U.S Government or its agencies that the Company holds in its portfolio and increase the Bank's and/or the Holding Company's risk-based capital requirements.  In addition, a ratings downgrade of securities issued or guaranteed by the U.S. Government or its agencies held in the Company's portfolio could adversely affect the carrying value of such securities.  At this time, the Company cannot assess the likelihood or severity of such a downgrade or the potential consequences it may have on either the capital position or investment portfolio of the Bank and/or Holding Company.

Item 2.           Unregistered Sales of Equity Securities and Use of Proceeds

(c) The Holding Company did not repurchase any shares of its common stock into treasury during the six months ended June 30, 2011.  No existing repurchase programs expired during the six months ended June 30, 2011, nor did the Company terminate any repurchase programs prior to expiration during the period.  As of June 30, 2011, the Company had an additional 1,124,549 shares remaining eligible for repurchase under its twelfth stock repurchase program, which was publicly announced in June 2007.

Item 3.                      Defaults Upon Senior Securities

None.

Item 4.           (Removed and Reserved)

Item 5.           Other Information

None.

Item 6.           Exhibits

Exhibit Number
3(i)
  
Amended and Restated Certificate of Incorporation of Dime Community Bancshares, Inc. (1)
3(ii)
  
Amended and Restated Bylaws of Dime Community Bancshares, Inc. (15)
4.1
  
Amended and Restated Certificate of Incorporation of Dime Community Bancshares, Inc. [See Exhibit 3(i) hereto]
4.2
  
Amended and Restated Bylaws of Dime Community Bancshares, Inc. [See Exhibit 3(ii) hereto]
4.3
  
Draft Stock Certificate of Dime Community Bancshares, Inc.  (3)
4.4
  
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)
4.5
  
Indenture, dated as of March 19, 2004, between Dime Community Bancshares, Inc. and Wilmington Trust Company, as trustee (8)
4.6
  
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 (12)
10.2
  
Amended and Restated Employment Agreement between The Dime Savings Bank of Williamsburgh and Michael P. Devine (12)
10.3
  
Amended and Restated Employment Agreement between The Dime Savings Bank of Williamsburgh and Kenneth J. Mahon (12)
10.4
  
Employment Agreement between Dime Community Bancorp, Inc. and Vincent F. Palagiano(16)
10.5
  
Employment Agreement between Dime Community Bancorp, Inc. and Michael P. Devine (16)
10.6
  
Employment Agreement between Dime Community Bancorp, Inc. and Kenneth J. Mahon(16)
10.7
  
Form of Employee Retention Agreement by and among The Dime Savings Bank of Williamsburgh, Dime Community    Bancorp, Inc. and certain officers (5)
 
 
 
52
 
 
10.7(i)
  
Amendment to Form of Employee Retention Agreement by and among The Dime Savings Bank of Williamsburgh, Dime Community    Bancorp, Inc. and certain officers (12)
10.8
  
The Benefit Maintenance Plan of Dime Community Bancorp, Inc. (16)
10.9
  
Severance Pay Plan of The Dime Savings Bank of Williamsburgh (12)
10.10
  
Retirement Plan for Board Members of Dime Community Bancorp, Inc. (12)
10.12
  
Recognition and Retention Plan for Outside Directors, Officers and Employees of Dime Community Bancorp, Inc., as amended by amendments number 1 and 2 (6)
10.13
  
Form of stock option agreement for Outside Directors under Dime Community Bancshares, Inc. 1996 and 2001 Stock Option Plans for Outside Directors, Officers and Employees and the 2004 Stock Incentive Plan. (6)
10.14
  
Form of stock option agreement for officers and employees under Dime Community Bancshares, Inc. 1996 and 2001 Stock Option Plans for Outside Directors, Officers and Employees and the 2004 Stock Incentive Plan (6)
10.15
  
Form of award notice for outside directors under the Recognition and Retention Plan for Outside Directors, Officers and Employees of Dime Community Bancorp, Inc. (6)
10.16
  
Form of award notice for officers and employees under the Recognition and Retention Plan for Outside Directors, Officers and Employees of Dime Community Bancorp, Inc. (6)
10.17
  
Financial Federal Savings Bank Incentive Savings Plan in RSI Retirement Trust (7)
10.18
  
Financial Federal Savings Bank Employee Stock Ownership Plan (7)
10.19
  
Option Conversion Certificates between Dime Community Bancshares, Inc. and each of Messrs. Russo, Segrete, Calamari, Latawiec, O'Gorman, and Ms. Swaya pursuant to Section 1.6(b) of the Agreement and Plan of
   Merger, dated as of July 18, 1998 by and between Dime Community Bancshares, Inc. and Financial Bancorp, Inc. (7)
10.20
  
Dime Community Bancshares, Inc. 2001 Stock Option Plan for Outside Directors, Officers and Employees
10.21
  
Dime Community Bancshares, Inc. 2004 Stock Incentive Plan for Outside Directors, Officers and Employees (11)
10.22
  
Waiver executed by Vincent F. Palagiano (10)
10.23
  
Waiver executed by Michael P. Devine (10)
10.24
  
Waiver executed by Kenneth J. Mahon (10)
10.25
  
Form of restricted stock award notice for officers and employees under the 2004 Stock Incentive Plan (9)
10.27
  
Form of restricted stock award notice for outside directors under the 2004 Stock Incentive Plan (9)
10.28
  
Employee Retention Agreement between The Dime Savings Bank of Williamsburgh, Dime Community Bancshares, Inc.  and Daniel Harris (12)
10.29
  
Dime Community Bancshares, Inc. Annual Incentive Plan (12)
10.30
  
Amendment to the Dime Savings Bank of Williamsburgh 401(K) Plan (14)
10.31
  
Employee Stock Ownership Plan of Dime Community Bancshares, Inc. and Certain Affiliates (12)
12.1
  
Computation of ratio of earnings to fixed charges
31(i).1
  
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)
31(i).2
  
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)
32.1
  
Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350
32.2
  
Certification of Chief Financial Officer Pursuant to 18 U.S.C. 1350

(1)
Incorporated by reference to the registrant's Transition Report on Form 10-K for the transition period ended December 31, 2002 filed on March 28, 2003.
(2)
Incorporated by reference to the registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2009 filed on May 11, 2009.
(3)
Incorporated by reference to the registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1998 filed on September 28, 1998.
(4)
Incorporated by reference to the registrant's Current Report on Form 8-K dated April 9, 1998 and filed on April 16, 1998.
(5)
Incorporated by reference to Exhibits to the registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1997 filed on September 26, 1997.
(6)
Incorporated by reference to the registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1997 filed on September 26, 1997, and the Current Reports on Form 8-K filed on March 22, 2004 and March 29, 2005.
(7)
Incorporated by reference to the registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2000 filed on September 28, 2000.
(8)
Incorporated by reference to 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 Current Report on Form 8-K filed on March 22, 2005.
(10)
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.
(11)
Incorporated by reference to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2008 filed on August 8, 2008.
 
 
 
53
 
 
(12)
Incorporated by reference to the registrant's Annual Report on Form 10-K for the year ended December 31, 2008 filed on March 16, 2009.
(13)
Incorporated by reference to the registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2009 filed on May 11, 2009
(14)
Incorporated by reference to the registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 filed on May 10, 2010
(15)
Incorporated by reference to the registrant's Current Report on Form 8-K filed on March 17, 2011.
(16)
Incorporated by reference to the registrant's Current Report on Form 8-K filed on April 4, 2011.
(17)
Incorporated by reference to the registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2011 filed on May 10, 2011
 

 

 
54 
 



SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Dime Community Bancshares, Inc.



Dated: August 9, 2011
  
By: /s/ VINCENT F. PALAGIANO
   
Vincent F. Palagiano
   
Chairman of the Board and Chief Executive Officer


Dated: August 9, 2011
  
By: /s/ KENNETH J. MAHON
   
Kenneth J. Mahon
   
First Executive Vice President and Chief Financial Officer (Principal Accounting Officer)


 
55