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Section 1: 10-Q (10-Q)


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

FORM 10-Q

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

For the quarterly period ended June 30, 2018
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)

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

Delaware
 
11-3297463
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. employer identification number)

300 Cadman Plaza West, 8th Floor, Brooklyn, NY
 
11201
 (Address of principal executive offices)
 
(Zip Code)

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES   NO

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

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

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

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

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

Classes of Common Stock
 
Number of Shares Outstanding at August 8, 2018
$.01 Par Value
 
37,459,481



   
Page
 
PART I – FINANCIAL INFORMATION
 
Item 1.
 
  4
 
5
 
6
 
7
 
8
 
9-30
Item 2.
31-43
Item 3.
43-44
Item 4.
45
 
PART II - OTHER INFORMATION
 
Item 1.
46
Item 1A.
46
Item 2.
46
Item 3.
46
Item 4.
46
Item 5.
46
Item 6.
47
 
48

2

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  These statements may be identified by use of words such as “annualized,” “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “impact,” “intend,” “seek,” “may,” “outlook,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” and similar terms and phrases, including references to assumptions.

Forward-looking statements are based upon various assumptions and analyses made by Dime Community Bancshares, Inc. (the “Holding Company,” and together with its direct and indirect subsidiaries, the “Company”) in light of management’s experience and its perception of historical trends, current conditions and expected future developments, as well as other factors it believes appropriate under the circumstances. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors (many of which are beyond the Company’s control) that could cause actual conditions or results to differ materially from those expressed or implied by such forward-looking statements. Accordingly, you should not place undue reliance on such statements. These factors include, without limitation, the following:


the timing and occurrence or non-occurrence of events may be subject to circumstances beyond the Company’s control;

there may be increases in competitive pressure among financial institutions or from non-financial institutions;

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

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

changes in accounting principles, policies or guidelines may cause the Company’s financial condition to be perceived differently;

changes in corporate and/or individual income tax laws may adversely affect the Company’s business or financial condition;

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

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

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

our ability to successfully integrate acquired entities, if any;

breaches, failures and interruptions in information tehcnology (“IT”) systems and IT security;

ability to retain key employees/executive management team;

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

litigation or other matters before regulatory agencies, whether currently existing or commencing in the future, may delay the occurrence or non-occurrence of events longer than the Company anticipates; and

the risks referred to in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017 as updated by our Quarterly Reports on Form 10-Q.

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

3

Item 1.
Condensed Consolidated Financial Statements

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

   
June 30, 2018
   
December 31,
2017
 
ASSETS:
           
Cash and due from banks
 
$
150,992
   
$
169,455
 
Total cash and cash equivalents
   
150,992
     
169,455
 
Mortgage-backed securities (“MBS”) available-for-sale, at fair value (See Note 7)
   
414,938
     
351,384
 
Marketable equity securities, at fair value
   
6,368
     
 
Investment securities available-for-sale, at fair value (See Note 7)
   
5,078
     
4,006
 
Trading securities
   
     
2,715
 
Loans:
               
Real estate
   
5,230,361
     
5,464,067
 
Commercial and industrial (“C&I”) loans
   
172,522
     
136,671
 
Other loans
   
1,477
     
1,379
 
Less allowance for loan losses
   
(20,984
)
   
(21,033
)
Total loans, net
   
5,383,376
     
5,581,084
 
Premises and fixed assets, net
   
25,340
     
24,326
 
Loans held for sale
   
430
     
 
Federal Home Loan Bank of New York (“FHLBNY”) capital stock
   
53,874
     
59,696
 
Bank Owned Life Insurance (“BOLI”)
   
109,977
     
108,545
 
Goodwill
   
55,638
     
55,638
 
Other assets
   
47,164
     
46,611
 
Total Assets
 
$
6,253,175
   
$
6,403,460
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Liabilities:
               
Due to depositors:
               
Interest-bearing deposits
 
$
4,002,767
   
$
4,095,701
 
Non-interest-bearing deposits
   
356,626
     
307,746
 
Total deposits
   
4,359,393
     
4,403,447
 
Escrow and other deposits
   
89,302
     
82,168
 
FHLBNY advances
   
1,043,650
     
1,170,000
 
Subordinated debt, net
   
113,686
     
113,612
 
Other liabilities
   
31,612
     
35,666
 
Total Liabilities
   
5,637,643
     
5,804,893
 
                 
Stockholders’ Equity:
               
Preferred stock ($0.01 par, 9,000,000 shares authorized, none issued or outstanding at June 30, 2018 and December 31, 2017)
   
     
 
Common stock ($0.01 par, 125,000,000 shares authorized, 53,690,825 shares and 53,624,453 shares issued at June 30, 2018 and December 31, 2017, respectively, and 37,591,261 shares and 37,419,070 shares outstanding at June 30, 2018 and December 31, 2017, respectively)
   
537
     
536
 
Additional paid-in capital
   
278,194
     
276,730
 
Retained earnings
   
551,818
     
535,130
 
Accumulated other comprehensive loss, net of deferred taxes
   
(4,578
)
   
(3,641
)
Unearned Restricted Stock Award common stock
   
(4,821
)
   
(2,894
)
Common stock held by Benefit Maintenance Plan (“BMP”)
   
(2,148
)
   
(2,736
)
Treasury stock, at cost (16,099,564 shares and 16,205,383 shares at June 30, 2018 and December 31, 2017, respectively)
   
(203,470
)
   
(204,558
)
Total Stockholders’ Equity
   
615,532
     
598,567
 
Total Liabilities and Stockholders’ Equity
 
$
6,253,175
   
$
6,403,460
 

See notes to unaudited consolidated financial statements.

4

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

   
Three Months Ended June
30,
   
Six Months Ended June
30,
 
   
2018
   
2017
   
2018
   
2017
 
Interest income:
                       
Loans secured by real estate
 
$
47,828
   
$
51,137
   
$
97,403
   
$
101,612
 
C&I loans
   
2,156
     
474
     
3,812
     
515
 
Other loans
   
18
     
18
     
37
     
36
 
MBS
   
2,406
     
14
     
4,663
     
28
 
Investment securities
   
49
     
164
     
64
     
354
 
Other short-term investments
   
1,547
     
611
     
3,058
     
1,328
 
Total interest income
   
54,004
     
52,418
     
109,037
     
103,873
 
Interest expense:
                               
Deposits and escrow
   
11,988
     
9,509
     
22,739
     
19,016
 
Borrowed funds
   
5,882
     
4,856
     
12,149
     
9,317
 
Total interest expense
   
17,870
     
14,365
     
34,888
     
28,333
 
Net interest income
   
36,134
     
38,053
     
74,149
     
75,540
 
Provision for loan losses
   
1,113
     
1,047
     
1,306
     
1,497
 
Net interest income after provision for loan losses
   
35,021
     
37,006
     
72,843
     
74,043
 
Non-interest income:
                               
Service charges and other fees
   
1,299
     
919
     
2,210
     
1,713
 
Net mortgage banking income
   
102
     
65
     
213
     
81
 
Net gain on securities and other assets(1)
   
19
     
59
     
1,385
     
134
 
Gain on sale of loans
   
35
     
     
125
     
 
Income from BOLI
   
720
     
551
     
1,432
     
1,096
 
Other
   
62
     
153
     
116
     
501
 
Total non-interest income
   
2,237
     
1,747
     
5,481
     
3,525
 
Non-interest expense:
                               
Salaries and employee benefits
   
10,884
     
8,897
     
22,061
     
18,823
 
Stock benefit plan compensation expense
   
407
      444
     
795
      838
 
Occupancy and equipment
   
3,697
     
3,500
     
7,569
     
7,128
 
Data processing costs
   
1,797
     
1,503
     
3,551
     
3,110
 
Marketing
   
146
     
1,466
     
1,193
     
2,932
 
Federal deposit insurance premiums
   
474
     
712
     
1,139
     
1,367
 
Other
   
3,422
     
2,947
     
6,253
     
6,040
 
Total non-interest expense
   
20,827
     
19,469
     
42,561
     
40,238
 
Income before income taxes
   
16,431
     
19,284
     
35,763
     
37,330
 
Income tax expense
   
4,110
     
7,295
     
8,697
     
14,184
 
Net income
 
$
12,321
   
$
11,989
   
$
27,066
   
$
23,146
 
                                 
Earnings per Share:
                               
Basic
 
$
0.33
   
$
0.32
   
$
0.72
   
$
0.62
 
Diluted
 
$
0.33
   
$
0.32
   
$
0.72
   
$
0.61
 

(1) Amount includes periodic valuation gains or losses on marketable equity and trading securities

5

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

   
Three Months Ended June
30,
   
Six Months Ended June
30,
 
   
2018
   
2017
   
2018
   
2017
 
Net Income
 
$
12,321
   
$
11,989
   
$
27,066
   
$
23,146
 
Other comprehensive income (loss):
                               
Change in unrealized holding loss on securities held-to-maturity and transferred securities
   
     
30
     
     
64
 
Change in unrealized holding loss on securities available-for-sale
   
(1,679
)
   
104
     
(4,237
)
   
224
 
Change in pension and other postretirement obligations
   
286
     
355
     
441
     
657
 
Change in unrealized gain on derivatives
   
560
     
(733
)
   
2,576
     
(418
)
Other comprehensive gain (loss) before income taxes
   
(833
)
   
(244
)
   
(1,220
)
   
527
 
Deferred tax expense (benefit)
   
(292
)
   
(111
)
   
(404
)
   
235
 
Other comprehensive income (loss), net of tax
   
(541
)
   
(133
)
   
(816
)
   
292
 
Total comprehensive income
 
$
11,780
   
$
11,856
   
$
26,250
   
$
23,438
 

See notes to unaudited condensed consolidated financial statements.

6

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

   
Six Months Ended June 30, 2018
 
   
Number
of Shares
   
Common
Stock
   
Additional
Paid-in
Capital
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Loss,
Net of Deferred
Taxes
   
Unearned
Stock Award
Common
Stock
   
Common
Stock
Held by
BMP
   
Treasury
Stock, at
cost
   
Total
Stockholders’
Equity
 
                                                       
Beginning balance as of January 1, 2018
   
37,419,070
   
$
536
   
$
276,730
   
$
535,130
   
$
(3,641
)
 
$
(2,894
)
 
$
(2,736
)
 
$
(204,558
)
 
$
598,567
 
Reclassification of unrealized gains and losses on marketable equity securities
   
     
     
     
153
     
(153
)
   
     
     
     
 
Adjusted beginning balance as of January 1, 2018
   
37,419,070
     
536
     
276,730
     
535,283
     
(3,794
)
   
(2,894
)
   
(2,736
)
   
(204,558
)
   
598,567
 
Net Income
   
     
     
     
27,066
     
     
     
     
     
27,066
 
Other comprehensive loss, net of tax
   
     
     
     
     
(816
)
   
     
     
     
(816
)
Exercise of stock options, net
   
57,327
     
1
     
1,118
     
     
     
     
     
(165
)
   
954
 
Release of shares, net of forfeitures
   
143,499
     
     
934
     
     
     
(2,722
)
   
     
1,797
     
9
 
Stock-based compensation
   
     
     
     
     
     
795
     
     
     
795
 
Shares received to satisfy distribution of retirement benefits
   
(28,635
)
   
     
(588
)
   
     
     
     
588
     
(544
)
   
(544
)
Reclassification of tax effects on other comprehensive income (loss)
   
     
     
     
(32
)
   
32
     
     
     
     
 
Cash dividends declared and paid
   
     
     
     
(10,499
)
   
     
     
     
     
(10,499
)
Ending balance as of June 30, 2018
   
37,591,261
   
$
537
   
$
278,194
   
$
551,818
   
$
(4,578
)
 
$
(4,821
)
 
$
(2,148
)
 
$
(203,470
)
 
$
615,532
 

   
Six Months Ended June 30, 2017
 
   
Number
of Shares
   
Common
Stock
   
Additional
Paid-in
Capital
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Loss,
Net of Deferred
Taxes
   
Unearned
Stock
Award
Common
Stock
   
Common
Stock
Held by
BMP
   
Treasury
Stock, at
cost
   
Total
Stockholders’
Equity
 
                                                       
Beginning balance as of January 1, 2017
   
37,455,853
   
$
536
   
$
278,356
   
$
503,539
   
$
(5,939
)
 
$
(1,932
)
 
$
(6,859
)
 
$
(201,833
)
 
$
565,868
 
Net Income
   
     
     
     
23,146
     
     
     
     
     
23,146
 
Other comprehensive income, net of tax
   
     
     
     
     
292
     
     
     
     
292
 
Exercise of stock options
   
42,179
     
     
626
     
     
     
     
     
     
626
 
Release of shares, net of forfeitures
   
177,347
     
     
1,471
     
     
     
(3,339
)
   
(170
)
   
2,236
     
198
 
Stock-based compensation
   
     
     
     
     
     
838
     
     
     
838
 
Cash dividends declared and paid
   
     
     
     
(10,520
)
   
     
     
     
     
(10,520
)
Ending balance as of June 30, 2017
   
37,675,379
   
$
536
   
$
280,453
   
$
516,165
   
$
(5,647
)
 
$
(4,433
)
 
$
(7,029
)
 
$
(199,597
)
 
$
580,448
 

See notes to unaudited condensed consolidated financial statements.

7

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

   
Six Months Ended June 30,
 
   
2018
   
2017
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net Income
 
$
27,066
   
$
23,146
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Net gain recognized on marketable equity and trading securities
   
(15
)
   
(134
)
Net gain on sale of loans held for sale
   
(125
)
   
 
Net gain on sale of MBS available-for-sale
   
(1,370
)
   
 
Net depreciation, amortization and accretion
   
1,862
     
1,836
 
Stock plan compensation
   
795
     
838
 
Provision for loan losses
   
1,306
     
1,497
 
Proceeds from sale of SBA loans held for sale
    765
     
 
Increase in cash surrender value of BOLI
   
(1,432
)
   
(1,096
)
Deferred income tax provision
   
(1,455
)
   
6
 
Reduction in credit related other than temporary impairment (“OTTI”) amortized through interest income
   
     
(52
)
Changes in assets and liabilities:
               
Decrease (Increase) in other assets
   
4,076
     
(10,488
)
Increase (Decrease) in other liabilities
   
(3,789
)
   
499
 
Net cash provided by Operating activities
   
27,684
     
16,052
 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Proceeds from sales of marketable equity securities
   
529
     
 
Proceeds from sales of investment securities available-for-sale
   
     
101
 
Proceeds from sales of MBS available-for-sale
   
158,484
     
 
Proceeds from sales of trading securities
   
     
4,544
 
Proceeds from calls and principal repayments of MBS available-for-sale
   
28,371
     
28
 
Purchases of investment securities available-for-sale
   
(5,071
)
   
(37
)
Purchases of marketable equity securities
   
(161
)
   
 
Purchases of MBS available-for-sale
   
(253,636
)
   
 
Acquisition of trading securities
   
     
(144
)
Proceeds from sale of portfolio loans held for sale
         
393
 
Net decrease (increase) in loans
   
195,314
     
(240,900
)
Purchases of fixed assets, net
   
(2,449
)
   
(5,527
)
Sale (Purchase) of FHLBNY capital stock, net
   
5,822
     
(6,517
)
Net cash provided by (used in) Investing Activities
   
127,203
     
(248,059
)
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Increase (Decrease) in due to depositors
   
(44,054
)
   
23,054
 
Increase (Decrease) in escrow and other deposits
   
7,134
     
(11,805
)
Repayments of FHLBNY advances
   
(1,637,100
)
   
(1,359,500
)
Proceeds from FHLBNY advances
   
1,510,750
     
1,472,950
 
Proceeds from exercise of stock options
   
954
     
626
 
Release of stock for benefit plan awards
   
9
     
198
 
BMP ESOP shares received to satisfy distribution of retirement benefits
   
(544
)
   
 
Cash dividends paid to stockholders, net
   
(10,499
)
   
(10,520
)
Proceeds from Subordinated debt issuance, net
   
     
113,545
 
Net cash provided by (used in) Financing Activities
   
(173,350
)
   
228,548
 
DECREASE IN CASH AND CASH EQUIVALENTS
   
(18,463
)
   
(3,459
)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
   
169,455
     
113,503
 
CASH AND CASH EQUIVALENTS, END OF PERIOD
 
$
150,992
   
$
110,044
 
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
               
Cash paid for income taxes
 
$
5,928
   
$
20,912
 
Cash paid for interest
   
34,206
     
28,124
 
Loans transferred to held for sale
   
1,061
     
 
Amortization of unrealized loss on securities transferred from available-for-sale to held-to-maturity
   
     
47
 
Net decrease in non-credit component of OTTI
   
     
17
 

See notes to unaudited condensed consolidated financial statements.

8

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands Except Per Share Amounts)

1.
NATURE OF OPERATIONS

Dime Community Bancshares, Inc. (the “Holding Company” and together with its direct and indirect subsidiaries, the “Company”) is a Delaware corporation organized by Dime Community Bank (f/k/a The Dime Savings Bank of Williamsburgh) (the “Bank”) for the purpose of acquiring all of the capital stock of the Bank issued in the Bank’s conversion to stock ownership on June 26, 1996.  At June 30, 2018 the significant assets of the Holding Company were the capital stock of the Bank and investments retained by the Holding Company.  The liabilities of the Holding Company were comprised primarily of $113,686 subordinated notes due in 2027, which become callable commencing in 2022.  The Company is subject to the reporting requirements of the Securities Exchange Act of 1934, as amended.

The Bank was originally founded in 1864 as a New York State-chartered mutual savings bank, and currently operates as a New York State-chartered stock savings bank.  Effective August 1, 2016, the Bank changed its name from The Dime Savings Bank of Williamsburgh to Dime Community Bank.  The new name more accurately reflects the Bank’s evolving business model and emphasizes its broader geographic and business reach while retaining the Bank’s mission to be in and of the communities it serves, including the virtual online community.  The Bank’s principal business is gathering deposits from customers within its market area and via the internet, and investing them primarily in multifamily residential, commercial real estate, mixed use, and, to an increasing extent, commercial and industrial (“C&I”) loans, mortgage-backed securities, obligations of the U.S. government and government sponsored enterprises, and corporate debt and equity securities.

The Holding Company neither owns nor leases any property, but instead uses the administrative offices of the Bank, located in the Brooklyn Heights section of the borough of Brooklyn, New York. The Bank maintains its principal office in the Williamsburg section of the borough of Brooklyn, New York.  As of June 30, 2018, the Bank had twenty-nine retail banking offices located throughout the boroughs of Brooklyn, Queens, and the Bronx, and in Nassau County and Suffolk County, New York.

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, 2018 and December 31, 2017, the results of operations and statements of comprehensive income for the three-month and six-month periods ended June 30, 2018 and 2017, and the changes in stockholders’ equity and cash flows for the six-month periods ended June 30, 2018 and 2017.  The results of operations for the three-month and six-month periods ended June 30, 2018 are not necessarily indicative of the results of operations for the remainder of the year ending December 31, 2018.  Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted pursuant to the rules and regulations of the U. S. Securities and Exchange Commission (“SEC”).

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

These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2017 and notes thereto contained in our Annual Report on Form 10-K.

3.
RECENT ACCOUNTING PRONOUNCEMENTS

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

9

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

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

4.
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

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

   
Securities
Held-to-
Maturity
and Transferred
Securities
   
Securities
Available-for-
Sale
   
Defined
Benefit
Plans
   
Derivative
Asset
   
Total
Accumulated
Other
Comprehensive
Gain (Loss)
 
Balance as of January 1, 2018
 
$
   
$
285
   
$
(6,633
)
 
$
2,707
   
$
(3,641
)
Reclassification of unrealized gains and losses on available-for-sale equity securities (1)
   
     
(153
)
   
     
     
(153
)
Adjusted balance as of January 1, 2018
   
     
132
     
(6,633
)
   
2,707
     
(3,794
)
Other comprehensive income (loss) before reclassifications
   
     
(1,931
)
   
80
     
1,908
     
57
 
Amounts reclassified from accumulated other comprehensive loss
   
     
(922
)
   
217
     
(168
)
   
(873
)
Net other comprehensive income during the period
   
     
(2,853
)
   
297
     
1,740
     
(816
)
Reclassification of tax effects on other comprehensive income (2)
   
     
     
32
     
     
32
 
Balance as of June 30, 2018
 
$
   
$
(2,721
)
 
$
(6,304
)
 
$
4,447
   
$
(4,578
)
                                         
Balance as of January 1, 2017
 
$
(713
)
 
$
(92
)
 
$
(6,910
)
 
$
1,776
   
$
(5,939
)
Other comprehensive income (loss) before reclassifications
   
36
     
125
     
(7
)
   
(331
)
   
(177
)
Amounts reclassified from accumulated other comprehensive loss
   
     
     
372
     
97
     
469
 
Net other comprehensive income during the period
   
36
     
125
     
365
     
(234
)
   
292
 
Balance as of June 30, 2017
 
$
(677
)
 
$
33
   
$
(6,545
)
 
$
1,542
   
$
(5,647
)

(1)
Represents the impact of adopting ASU 2016-01 allowing the reclassification of unrealized gains and losses on available-for-sale equity securities from accumulated other comprehensive income to retained earnings.
(2)
Represents the impact of adopting ASU 2018-02 allowing the reclassification of certain stranded income tax effects in accumulated other comprehensive income resulting from the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) from accumulated other comprehensive income to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act (or portion thereof) is recorded. The amount of the reclassification is an adjustment for the difference between the historical corporate income tax rate (35%) and the newly enacted 21% corporate income tax rate.

10

The before and after tax amounts allocated to each component of other comprehensive income (loss) are presented in the table below for the periods indicated.

   
Three Months Ended June
30,
   
Six Months Ended June
30,
 
   
2018
   
2017
   
2018
   
2017
 
Change in unrealized holding loss on securities held-to-maturity and transferred securities:
                       
Accretion of previously recognized non-credit component of OTTI
 
$
   
$
8
   
$
   
$
17
 
Change in unrealized loss on securities transferred to held-to-maturity
   
     
22
     
     
47
 
Net change
   
     
30
     
     
64
 
Tax expense
   
     
12
     
     
28
 
Net change in unrealized holding loss on securities held-to-maturity and transferred securities
   
     
18
     
     
36
 
Change in unrealized holding gain on securities available-for-sale:
                               
Change in net unrealized gain during the period
   
(1,679
)
   
104
     
(2,867
)
   
224
 
Reclassification adjustment for net gains included in net gain on securities and other assets
   
     
     
(1,370
)
   
 
Net change
   
(1,679
)
   
104
     
(4,237
)
   
224
 
Tax expense (benefit)
   
(534
)
   
44
     
(1,384
)
   
99
 
Net change in unrealized holding gain on securities available-for-sale
   
(1,145
)
   
60
     
(2,853
)
   
125
 
Change in pension and other postretirement obligations:
                               
Reclassification adjustment for expense included in other expense
   
37
     
355
     
323
     
657
 
Change in the net actuarial gain or loss
   
249
     
     
118
     
 
Net change
   
286
     
355
     
441
     
657
 
Tax expense
   
93
     
161
     
144
     
292
 
Net change in pension and other postretirement obligations
   
193
     
194
     
297
     
365
 
Change in unrealized loss on derivatives:
                               
Change in net unrealized loss during the period
   
745
     
(825
)
   
2,826
     
(597
)
Reclassification adjustment for expense included in interest expense
   
(185
)
   
92
     
(250
)
   
179
 
Net change
   
560
     
(733
)
   
2,576
     
(418
)
Tax expense (benefit)
   
149
     
(328
)
   
836
     
(184
)
Net change in unrealized loss on derivatives
   
411
     
(405
)
   
1,740
     
(234
)
Other comprehensive income (loss)
 
$
(541
)
 
$
(133
)
 
$
(816
)
 
$
292
 

5.
EARNINGS PER SHARE (“EPS”)

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

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

   
Three Months Ended June
30,
   
Six Months Ended June
30,
 
   
2018
   
2017
   
2018
   
2017
 
Net income per the Consolidated Statements of Income
 
$
12,321
   
$
11,989
   
$
27,066
   
$
23,146
 
Less: Dividends paid and earnings allocated to participating securities
   
(43
)
   
(38
)
   
(72
)
   
(63
)
Income attributable to common stock
 
$
12,278
   
$
11,951
   
$
26,994
   
$
23,083
 
Weighted average common shares outstanding, including participating securities
   
37,569,085
     
37,733,956
     
37,533,994
     
37,670,585
 
Less: weighted average participating securities
   
(164,867
)
   
(179,346
)
   
(156,938
)
   
(166,398
)
Weighted average common shares outstanding
   
37,404,218
     
37,554,610
     
37,377,056
     
37,504,187
 
Basic EPS
 
$
0.33
   
$
0.32
   
$
0.72
   
$
0.62
 
Income attributable to common stock
 
$
12,278
   
$
11,951
   
$
26,994
   
$
23,083
 
Weighted average common shares outstanding
   
37,404,218
     
37,554,610
     
37,377,056
     
37,504,187
 
Weighted average common equivalent shares outstanding
   
111,155
     
81,188
     
119,926
     
86,011
 
Weighted average common and equivalent shares outstanding
   
37,515,373
     
37,635,798
     
37,496,982
     
37,590,198
 
Diluted EPS
 
$
0.33
   
$
0.32
   
$
0.72
   
$
0.61
 

11

Common and equivalent shares resulting from the dilutive effect of “in-the-money” outstanding stock options are calculated based upon the excess of the average market value of the common stock over the exercise price of outstanding in-the-money stock options during the period.

There were no “out-of-the-money” stock options during the three-month or six-month ended June 30, 2018 or 2017.

For information about the calculation of expected aggregate LTIP and SIP share payouts, see Note 14.

6.
REVENUE FROM CONTRACTS WITH CUSTOMERS

The Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), on January 1, 2018. Under ASC 2014-09, an entity is required to recognize revenue for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  ASU 2014-09 also requires disclosure of sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, as well as qualitative and quantitative disclosure related to contracts with certain customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract.

In accordance with ASU 2014-09, revenue is recognized when a customer obtains control of promised services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these services. The Company applies the following five steps to properly recognize revenue:


1.
Identify the contract with a customer

2.
Identify the performance obligations in the contract

3.
Determine the transaction price

4.
Allocate the transaction price to performance obligations in the contract

5
Recognize revenue when (or as) the Company satisfies a performance obligation

The Company’s only in-scope revenue stream that is subject to the accounting standard is service fees on deposit accounts (including interchange fees), which is disclosed on the Consolidated Statements of Operations as “Service charges and other fees.” For the three-month and six-month period ended June 30, 2018, service charges and other fees totaled $1,299 and $2,210, respectively.

Service Charges on Deposit Accounts. The Company earns fees from its deposits customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payments, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of the month, representing the period over which the Company satisfied the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer’s account balance.

Interchange Income. The Company earns interchange fees from debit cardholder transactions conducted through various payment networks. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provide to the cardholder.

7.
INVESTMENT AND MORTGAGE-BACKED SECURITIES

The Company adopted ASU 2016-01 on January 1, 2018. As a result of adoption all registered mutual funds and trading securities were reclassified as marketable equity securities on the Consolidated Statement of Financial Conditions and are recorded at fair value with changes in fair value recorded through the income statement. Additionally, $153 of unrealized gains, net of taxes, was reclassified from accumulated other comprehensive income to beginning retained earnings on January 1, 2018. Marketable equity securities are excluded from the tables for the period ended June 30, 2018.

12

The following tables summarize the major categories of securities owned by the Company as of the dates indicated:

   
At June 30, 2018
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
Debt securities available-for-sale:
                       
Agency Notes
 
$
5,082
   
$
   
$
(4
)
 
$
5,078
 
Pass-through MBS issued by Government-sponsored Enterprises (“GSEs”)
   
302,348
     
39
     
(3,438
)
   
298,949
 
Agency Collateralized Mortgage Obligation (“CMO”)
   
116,628
     
621
     
(1,260
)
   
115,989
 
Total debt securities available-for-sale
 
$
424,058
   
$
660
   
$
(4,702
)
 
$
420,016
 

   
At December 31, 2017
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
Investment securities available-for-sale:
                       
Registered Mutual Funds
 
$
3,779
   
$
311
   
$
(84
)
 
$
4,006
 
Pass-through MBS issued by GSEs
   
72,938
     
16
     
(325
)
   
72,629
 
CMO
   
278,251
     
669
     
(165
)
   
278,755
 
Total investment securities available-for-sale
 
$
354,968
   
$
996
   
$
(574
)
 
$
355,390
 

The carrying amount of securities pledged as collateral for the Bank’s first loss guarantee was $28,151 and $28,738 at June 30, 2018 and December 31, 2017, respectively (see Note 10).

At June 30, 2018, the available-for-sale agency notes possessed a weighted average contractual maturity of 1.1 years. At June 30, 2018, available-for-sale pass-through MBS issued by GSEs possessed a weighted average contractual maturity of 14.0 years.  As of June 30, 2018, the available-for-sale agency CMO securities had a weighted average term to maturity of 10.6 years. 

During the three-month period ended September 30, 2017, the Company sold its entire portfolio of investment securities held-to-maturity consisting of six pooled trust preferred securities (“TRUP CDO”) securities, of which five were deemed to be OTTI. The TRUP CDO portfolio was sold as part of the Company’s strategy to take advantage of investment opportunities. The Company does not intend to classify any securities as held-to-maturity for the foreseeable future. During the three-month and six-month periods ended June 30, 2017, the Company recognized amortization of $26 and $52, respectively, of the unamortized portion of unrealized losses that were 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), and $9 and $17, respectively, on the unamortized portion of previous credit losses recognized in accumulated other comprehensive loss.

There were no sales of available-for-sale pass-through MBS issued by GSEs during the three-month or six-month periods ended June 30, 2018 or 2017.

There were no sales of available-for-sale CMOs during the three-month period ended June 30, 2018. Proceeds from the sales of available-for-sale CMOs totaled $158,484 during the six-month period ended June 30, 2018. Gross gains of $1,370 were recognized on these sales. There were no sales of available-for-sale CMOs during the three-month or six-month periods ended June 30, 2017. The tax expense related to the gain on sales of available-for-sale CMOs recognized during the six month period ended June 30, 2018 was $440.

The Company holds marketable equity securities (disclosed as both investment securities available-for-sale and trading securities as of December 31, 2017) as the underlying mutual fund investments of the BMP, held in a rabbi trust. The Company may sell these securities on a periodic basis in order to pay retirement benefits to plan retirees. There are no gains or losses recognized from the sales of marketable equity securities.  A summary of the sales of marketable equity securities is listed below for the periods indicated:

   
For the Three Months
Ended June 30,
   
For the Six Months Ended
June 30,
 
   
2018
   
2017
   
2018
   
2017
 
Proceeds:
                       
Marketable equity securities
 
$
136
   
$
   
$
529
   
$
 
Investment securities available-for-sale
   
     
68
     
     
101
 
Trading securities
   
     
4,544
     
     
4,544
 

13

The remaining gain or loss on securities shown in the unaudited condensed consolidated statements of income was due to market valuation changes.  Net gains of $19 and $15 were recognized on marketable equity securities for the three-month and six-month periods ended June 30, 2018, respectively.  Net gains of $59 and $134 were recognized on trading securities during the three-month and six-month periods ended June 30, 2017, respectively.

The following table summarizes the gross unrealized losses and fair value of investment securities aggregated by investment category and the length of time the securities were in a continuous unrealized loss position as of the dates indicated:

   
June 30, 2018
 
   
Less than 12
Consecutive Months
   
12 Consecutive
Months or Longer
   
Total
 
   
Fair
Value
 
Unrealized
Losses
   
Fair
Value
 
Unrealized
Losses
   
Fair
Value
 
Unrealized
Losses
 
Debt securities available-for-sale:
                                   
Agency Notes
 
$
5,078
   
$
4
   
$
   
$
   
$
5,078
   
$
4
 
Pass through MBS issued by GSEs
   
278,633
     
3,438
     
     
     
278,633
     
3,438
 
Agency CMO
   
39,577
     
1,151
     
4,702
     
109
     
44,279
     
1,260
 

   
December 31, 2017
 
   
Less than 12
Consecutive Months
   
12 Consecutive
Months or Longer
   
Total
 
   
Fair
Value
 
Unrealized
Losses
   
Fair
Value
 
Unrealized
Losses
   
Fair
Value
 
Unrealized
Losses
 
Investment securities available-for-sale:
                                   
Registered Mutual Funds
 
$
   
$
   
$
2,591
   
$
84
   
$
2,591
   
$
84
 
Pass through MBS issued by GSEs
   
55,819
     
325
     
     
     
55,819
     
325
 
Agency CMO
   
86,746
     
96
     
3,168
     
69
     
89,914
     
165
 

The issuers of debt securities available-for-sale are U.S. government-sponsored entities or agencies. The decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality. It is likely that the Company will not be required to sell the securities before their anticipated recovery, and as such, the Company does not consider these securities to be other-than-temporarily-impaired at June 30, 2018.

8.
LOANS RECEIVABLE AND CREDIT QUALITY

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

Credit Quality Indicators:

On a quarterly basis, the Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying them as to credit risk.  This analysis includes all loans, such as multifamily residential, mixed-use residential (i.e., loans in which the aggregate rental income of the underlying collateral property is generated from both residential and commercial units, but the majority of such income is generated from the residential units), mixed-use commercial real estate (i.e., loans in which the aggregate rental income of the underlying collateral property is generated from both residential and commercial units, but the majority of such income is generated from the commercial units), commercial real estate loans, acquisition, development, and construction (“ADC”) loans (which includes land loans), C&I loans, as well as one-to-four family residential and cooperative and condominium apartment loans.

The Company uses the following definitions for risk ratings:

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

14

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

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

The Bank had no loans classified as doubtful as of June 30, 2018 or December 31, 2017. All real estate and C&I loans not classified as Special Mention or Substandard were deemed pass loans at both June 30, 2018 and December 31, 2017.

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

   
Balance at June 30, 2018
 
   
Pass
   
Special
Mention
   
Substandard
   
Doubtful
   
Total
 
Real Estate:
                             
One-to-four family residential, including condominium and cooperative apartment
 
$
59,478
   
$
   
$
681
   
$
   
$
60,159
 
Multifamily residential and residential mixed-use
   
4,102,310
     
824
     
2,960
     
     
4,106,094
 
Commercial mixed-use real estate
   
373,219
     
1,336
     
4,218
     
     
378,773
 
Commercial real estate
   
673,150
     
501
     
1,158
     
     
674,809
 
ADC
   
10,526
     
     
     
     
10,526
 
Total real estate
   
5,218,683
     
2,661
     
9,017
     
     
5,230,361
 
C&I
   
172,522
     
     
     
     
172,522
 
Total Real Estate and C&I
 
$
5,391,205
   
$
2,661
   
$
9,017
   
$
   
$
5,402,883
 

   
Balance at December 31, 2017
 
   
Pass
   
Special
Mention
   
Substandard
   
Doubtful
   
Total
 
Real Estate:
                             
One-to-four family residential, including condominium and cooperative apartment
 
$
62,042
   
$
178
   
$
875
   
$
   
$
63,095
 
Multifamily residential and residential mixed-use
   
4,374,388
     
6,326
     
466
     
     
4,381,180
 
Commercial mixed-use real estate
   
396,647
     
     
4,908
     
     
401,555
 
Commercial real estate
   
602,448
     
1,897
     
4,703
     
     
609,048
 
ADC
   
9,189
     
     
     
     
9,189
 
Total real estate
   
5,444,714
     
8,401
     
10,952
     
     
5,464,067
 
C&I
   
136,671
     
     
     
     
136,671
 
Total Real Estate and C&I
 
$
5,581,385
   
$
8,401
   
$
10,952
   
$
   
$
5,600,738
 

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

Grade
 
June 30, 2018
   
December 31, 2017
 
Performing
 
$
1,471
   
$
1,375
 
Non-accrual
   
6
     
4
 
Total
 
$
1,477
   
$
1,379
 

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

   
At June 30, 2018
 
   
30 to 59
Days
Past Due
   
60 to 89
Days
Past Due
   
Loans 90
Days or
More Past
Due and
Still
Accruing
Interest
   
Non-
accrual (1)
   
Total
Past Due
   
Current
   
Total
Loans
 
Real Estate:
                                         
One-to-four family residential, including condominium and cooperative apartment
 
$
291
   
$
449
   
$
150
   
$
306
   
$
1,196
   
$
58,963
   
$
60,159
 
Multifamily residential and residential mixed-use
   
     
     
1,477
     
     
1,477
     
4,104,617
     
4,106,094
 
Commercial mixed-use real estate
   
     
     
491
     
89
     
580
     
378,193
     
378,773
 
Commercial real estate
   
     
     
2,755
     
1,158
     
3,913
     
670,896
     
674,809