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EX-10.44 - EXHIBIT 10.44 - DIME COMMUNITY BANCSHARES INCex10_44.htm
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EX-32.2 - EXHIBIT 32.2 - DIME COMMUNITY BANCSHARES INCex32_2.htm
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EX-31.2 - EXHIBIT 31(I).2 - DIME COMMUNITY BANCSHARES INCex31i_2.htm
EX-31.1 - EXHIBIT 31(I).1 - DIME COMMUNITY BANCSHARES INCex31i_1.htm
EX-12.1 - EXHIBIT 12.1 - DIME COMMUNITY BANCSHARES INCex12_1.htm
EX-10.46 - EXHIBIT 10.46 - DIME COMMUNITY BANCSHARES INCex10_46.htm
EX-10.45 - EXHIBIT 10.45 - DIME COMMUNITY BANCSHARES INCex10_45.htm
EX-10.43 - EXHIBIT 10.43 - DIME COMMUNITY BANCSHARES INCex10_43.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Year Ended December 31, 2016

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-27782
Dime Community Bancshares, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
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)

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

Securities Registered Pursuant to Section 12(b) of the Act:
None

Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.        YES ☐  NO ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.        YES ☐  NO ☒

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

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Website, 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 checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ☒

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).
 
LARGE ACCELERATED FILER ☐
ACCELERATED FILER ☒
NON-ACCELERATED FILER ☐
SMALLER REPORTING COMPANY ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): Yes ☐  No ☒

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2016 was approximately $524.9 million based upon the $17.01 closing price on the NASDAQ National Market for a share of the registrant’s common stock on June 30, 2016.

        As of March 15, 2017, there were 37,498,771 shares of the registrant’s common stock, $0.01 par value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be distributed on behalf of the Board of Directors of Registrant in connection with the Annual Meeting of Shareholders to be held on May 25, 2017 and any adjournment thereof, are incorporated by reference in Part III.
 


TABLE OF CONTENTS
 
   
Page
 
PART I
 
Item 1.
 
 
F-3
 
F-4
 
F-5
 
F-7
 
F-8
 
F-9
 
F-11
 
F-12
 
F-12
 
F-12
 
F-13
Item 1A.
F-24
Item 1B.
F-33
Item 2.
F-33
Item 3.
F-33
Item 4.
F-33
 
PART II
 
Item 5.
F-33
Item 6.
F-36
Item 7.
F-38
Item 7A.
F-57
Item 8.
F-59
Item 9.
F-59
Item 9A.
F-59
Item 9B.
F-60
 
PART III
 
Item 10.
F-60
Item 11.
F-60
Item 12.
F-61
Item 13.
F-61
Item 14.
F-61
 
PART IV
 
Item 15.
F-61
 
F-62
 
This Annual Report on Form 10-K contains a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  These statements may be identified by use of words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “seek,” “may,” “outlook,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” and similar terms and phrases, including references to assumptions.

Forward-looking statements are based upon various assumptions and analyses made by 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. 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 (f/k/a 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 the banking industry, may be less favorable than the Company currently anticipates;
·
legislation or regulatory changes may adversely affect the Company’s business;
·
technological changes may be more difficult or expensive than the Company anticipates;
·
success or consummation of new business initiatives may be more difficult or expensive than the Company anticipates;
·
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
·
Other risks, as enumerated in the section entitled “Risk Factors.”

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

PART I

Item 1.   Business

General

The Holding Company is a Delaware corporation and parent company of the Bank, a New York State chartered savings bank. The Bank maintains its headquarters in the Williamsburg section of Brooklyn, New York, and as of December 31, 2016, operated twenty-five 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 opened two additional branches located in Brooklyn, New York in February 2017. 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 and mixed use loans, mortgage-backed securities (“MBS”), obligations of the U.S. Government and Government Sponsored Entities (“GSEs”), and corporate debt and equity securities.  All of the Bank’s lending occurs in the greater NYC metropolitan area.  The Bank’s revenues are derived principally from interest on its loan and securities portfolios, and other investments. The Bank’s primary sources of funds are, in general, deposits; loan amortization, prepayments and maturities; MBS amortization, prepayments and maturities; investment securities maturities and sales; and advances from the Federal Home Loan Bank of New York (“FHLBNY”).
 
The primary business of the Holding Company is the ownership of its wholly-owned subsidiary, the Bank. The Holding Company is a unitary savings and loan holding company, which, under existing law, is generally not restricted as to the types of business activities in which it may engage.

The Holding Company neither owns nor leases any property, but instead uses the premises and equipment of the Bank.  The Holding Company employs no persons other than certain officers of the Bank, who receive no additional compensation as officers of the Holding Company.  The Holding Company utilizes the support staff of the Bank from time to time, as required.  Additional employees may be hired as deemed appropriate by Holding Company management.

The Company’s website address is www.dime.com. The Company makes available free of charge through its website, by clicking the Investor Relations tab and selecting “SEC Filings” under “Investor Menu,” its Annual and Transition Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (“SEC”).

Market Area and Competition

The Bank has historically operated as a community-oriented financial institution providing financial services and loans primarily for multifamily housing within its market areas.  The Bank maintains its headquarters in the borough of Brooklyn, New York, and as of December 31, 2016 operated twenty-five full-service retail banking offices located in the NYC boroughs of Brooklyn, Queens, and the Bronx, and in Nassau County, New York.  The Bank opened two additional branches located in Brooklyn, New York in February 2017.  The Bank gathers deposits primarily from the communities and neighborhoods in close proximity to its branches, and via the internet.  The Bank’s primary lending area is the NYC metropolitan area, although it’s overall lending area is larger, extending approximately 50 miles in each direction from its corporate headquarters in Brooklyn.  The majority of the Bank’s mortgage loans are secured by properties located in its primary lending area, with approximately 89% secured by real estate located in the NYC boroughs of Brooklyn, Queens and Manhattan on December 31, 2016.

The NYC banking environment is extremely competitive.  The Bank’s competition for loans exists principally from other savings banks, commercial banks, mortgage banks, internet banks and insurance companies. The Bank continues to face sustained competition for the origination of multifamily residential and commercial real estate loans, which together comprised 99% of the Bank’s loan portfolio at December 31, 2016.

The Bank gathers deposits in direct competition with other savings banks, commercial banks and brokerage firms, many among the largest in the nation.  It must additionally compete for deposit monies with the stock and bond markets, especially during periods of strong performance in those arenas.  Over the previous decade, consolidation in the financial services industry, coupled with the emergence of Internet banking, has dramatically altered the deposit gathering landscape.  Facing increasingly larger and more efficient competitors, the Bank’s strategy to attract depositors has utilized various marketing approaches and the delivery of technology-enhanced, customer-friendly banking services while controlling operating expenses.

Banking competition occurs within an economic and financial marketplace that is largely beyond the control of any individual financial institution.  The interest rates paid to depositors and charged to borrowers, while affected by marketplace competition, are generally a function of broader-based macroeconomic and financial factors, including the U.S. Gross Domestic Product, the supply of, and demand for, loanable funds, and the impact of global trade and international financial markets.  Within this environment, Federal Open Market Committee (“FOMC”) monetary policy and governance of short-term rates also significantly influence the interest rates paid and charged by financial institutions.

The Bank’s success is additionally impacted by the overall condition of the economy, particularly in the NYC metropolitan area.  As home to several national companies in the financial and business services industries, and as a popular destination for domestic and international travelers, the NYC economy is particularly sensitive to the health of both the national and global economies.
 
Lending Activities

The Bank originates primarily non-recourse loans on multifamily and commercial real estate properties to limited liability companies. The Bank’s lending is subject to the Bank’s lending policies, which are approved by the Board’s Lending and CRA Committee on an annual basis.  The types of loans the Bank may originate are subject to New York State laws and regulations (See “Item 1.  Business - Regulation – Regulation of New York State Chartered Savings Banks”).

The Board of Directors of the Bank establishes lending authority levels for the various loan products offered by the Bank. The Bank maintains a Loan Operating Committee which, as of December 31, 2016, consisted of the Chief Executive Officer, President and Chief Operating Officer, Chief Investment Officer, Chief Accounting Officer, Chief Lending Officer, Chief Retail Officer, and Director of Credit Administration.  The Loan Operating Committee may approve any portfolio loan origination, however, larger loans, generally in excess of $500,000, require its approval. All loans approved by the Loan Operating Committee are presented to the Bank’s Board of Directors for its review.

The Bank originates both adjustable-rate mortgages (“ARMs”) and fixed-rate loans, depending upon customer demand and market rates of interest.

Multifamily Residential Lending and Commercial Real Estate Lending

The majority of the Bank’s lending activities consist of originating adjustable- and fixed-rate multifamily residential (generally buildings possessing a minimum of five residential units) and commercial real estate loans. The properties securing these loans are generally located in the Bank’s primary lending area.

Multifamily residential and commercial real estate loans originated by the Bank were secured by three distinct property types as of December 31, 2016: (1) fully residential apartment buildings; (2) “mixed-use” properties featuring a combination of residential and commercial units within the same building; and (3) fully commercial buildings. The underwriting procedures for each of these property types were substantially similar.  The Bank classified loans secured 80% to 100% by income from residential apartment buildings as multifamily residential loans in all instances. Loans secured by fully commercial real estate were classified as commercial real estate loans in all instances. Loans secured by mixed-use properties were classified as either residential mixed use (a component of total multifamily residential loans) or commercial mixed use (a component of total commercial real estate loans) based upon the percentage of the property’s rental income received from its residential as compared to its commercial tenants. If 20% to 80% of the rental income was received from residential tenants, the full balance of the loan was classified as multifamily mixed-use residential. If less than 20% of the rental income was received from residential tenants, the full balance of the loan was classified as mixed-use commercial real estate.

Multifamily residential and commercial real estate loans in the Bank’s portfolio generally range in amount from $250,000 to $5.0 million. Multifamily residential loans in this range are generally secured by buildings that contain between 5 and 100 apartments.

The typical multifamily residential and commercial real estate ARM carries a final maturity of 10 or 12 years, and an amortization period not exceeding 30 years. These loans generally have an interest rate that adjusts once after the fifth or seventh year, indexed to the 5-year FHLBNY advance rate plus a spread typically approximating 250 basis points, but generally may not adjust below the initial interest rate of the loan. Prepayment fees are assessed throughout the majority of the life of the loans. The Bank may also offer interest only loans, i.e. loans that do not amortize principal during part of the contractual maturity period. The Bank also offers fixed-rate, self-amortizing, multifamily residential and commercial real estate loans with maturities of up to fifteen years.

Multifamily residential real estate loans are either retained in the Bank’s portfolio or sold in the secondary market to other third-party financial institutions.  The Bank currently has no formal arrangement pursuant to which it sells commercial or multifamily residential real estate loans to the secondary market.
 
Repayment of multifamily residential loans is dependent, in significant part, on cash flow from the collateral property sufficient to satisfy operating expenses and debt service. Future increases in interest rates, increases in vacancy rates on multifamily residential or commercial buildings, and other economic events which are outside the control of the borrower or the Bank could negatively impact the future net operating income of such properties.  Similarly, government regulations, such as the existing NYC Rent Regulation and Rent Stabilization laws, could limit future increases in the revenue from these buildings.  As a result, rental income might not rise sufficiently over time to satisfy increases in either the loan rate at repricing or in overhead expenses (e.g., utilities, taxes, and insurance).

The Bank’s underwriting standards for multifamily residential and commercial real estate loans generally require: (1) a maximum loan-to-value ratio of 75% based upon an appraisal performed by an independent, state licensed appraiser, and (2) sufficient rental income from the underlying property to adequately service the debt, represented by a minimum debt service ratio of 120% for multifamily residential and 125% for commercial real estate loans. The weighted average loan-to-value and debt service ratios approximated 64% and 147%, respectively, on all multifamily residential real estate loans originated during the year ended December 31, 2016, and 53% and 218%, respectively, on commercial real estate loans originated during the year ended December 31, 2016. The Bank additionally requires all multifamily residential and commercial real estate borrowers to represent that they are unaware of any environmental risks directly related to the collateral.  In instances where the Bank’s property inspection procedures indicate a potential environmental risk on a collateral property, the Bank will require a Phase 1 environmental risk analysis to be completed, and will decline loans where any significant residual environmental liability is indicated.  The Bank further considers the borrower’s experience in owning or managing similar properties, the Bank’s lending experience with the borrower, and the borrower’s credit history and business experience.

It is the Bank's policy to require appropriate insurance protection at closing, including title, hazard, and when applicable, flood insurance, on all real estate mortgage loans. Borrowers generally are required to advance funds for certain expenses such as real estate taxes, hazard insurance and flood insurance.
 
Commercial real estate loans are generally viewed as exposing lenders to a greater risk of loss than both one- to four-family and multifamily residential mortgage loans. Because payments on loans secured by commercial real estate are often dependent upon successful operation or management of the collateral properties, as well as the success of the business and retail tenants occupying the properties, repayment of such loans is generally more vulnerable to weak economic conditions. Further, the collateral securing such loans may depreciate over time, be difficult to appraise, or fluctuate in value based upon its rentability, among other commercial factors.  This increased risk is partially mitigated in the following manners: (i) the Bank requires, in addition to the security interest in the commercial real estate, a security interest in the personal property associated with the collateral and standby assignments of rents and leases from the borrower; (ii) the Bank will generally favor investments in mixed-use commercial properties that derive some portion of income from residential units, which provide a more reliable source of cash flow and lower vacancy rates, and (iii) the interest rate on commercial real estate loans generally exceeds that on multifamily residential loans.

As a New York State-chartered savings bank originating loans secured by real estate having a market value at least equal to the loan amount at the time of origination, the Bank is generally not subject to the regulations of its primary regulators, the New York State Department of Financial Services (“NYSDFS”) limiting individual loan or borrower exposures.

One- to Four-Family Residential and Condominium / Cooperative Apartment Lending

Prior to February 2013, the Bank generally sold its newly originated one- to four-family fixed-rate mortgage loans in the secondary market.  During the year ended December 31, 2013, the Bank ceased all one- to four-family fixed-rate mortgage lending in order to focus on its core multifamily residential and commercial real estate lending activities.
 
Home Equity and Home Improvement Loans

The Bank ceased origination of home equity and home improvement loans during the year ended December 31, 2013.  Home equity loans and home improvement loans, the great majority of which are included in one- to four-family loans, were previously originated to a maximum of $500,000.  The combined balance of the first mortgage and home equity or home improvement loan was not permitted to exceed 75% of the appraised value of the collateral property at the time of origination of the home equity or home improvement loan.  Interest on home equity and home improvement loans was initially the “prime lending” rate at the time of origination.  After six months, the interest rate adjusts and ranges from the prime interest rate to 100 basis points above the prime interest rate in effect at the time.  The interest rate on the loan can never fall below the rate at origination.

Equity Lines of Credit on Multifamily Residential and Commercial Real Estate Loans

Equity credit lines are available on multifamily residential and commercial real estate loans.  These loans are underwritten in the same manner as first mortgage loans on these properties, except that the combined first mortgage amount and equity line are used to determine the loan-to-value ratio and minimum debt service coverage ratio.  The interest rate on multifamily residential and commercial real estate equity lines of credit adjusts regularly.

Commercial and Industrial (“C&I”) Loans

As part of its strategic plans for 2017, the Bank is taking steps to grow the C&I loan portfolio. Under this new initiative, the types of products anticipated in the C&I portfolio will include acquisition, land development and construction loans (“ADC”), finance loans and leases, and Small Business Administration (“SBA”) loans in which a portion is guaranteed by the SBA. The Bank did not originate any loans as of December 31, 2016 under this initiative, and had no unfunded construction loan commitments or outstanding ADC loans at December 31, 2016.

Asset Quality

General

The Bank does not originate or purchase loans, either whole loans or loans underlying MBS, which would have been considered subprime loans at origination, 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 3 to the 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 at each regularly scheduled Board meeting 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 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 a loan that meets any of the following three criteria:  (i) full payment of principal or interest is not expected; (ii) principal or interest has been in default for a period of 90 days or more (unless the loan is both deemed to be well secured and in the process of collection); or (iii) an election has otherwise been made to maintain the loan on a cash basis due to deterioration in the financial condition of the borrower.  Such non-accrual determination practices are applied consistently to all loans regardless of their internal classification or designation.  Upon entering non-accrual status, the Bank reverses all outstanding accrued interest receivable.
 
The Bank generally initiates foreclosure proceedings when a loan enters non-accrual status based upon non-payment, and typically does not accept partial payments once 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 Other Real Estate Owned (“OREO”) status.  The Bank generally attempts to utilize all available remedies, such as note sales in lieu of foreclosure, 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.

Troubled Debt Restructured Loans (“TDRs”)

Under ASC 310-40-15, the Bank is required to recognize loans for which certain modifications or concessions have been made as TDRs.  A TDR has been created in the event that, for economic or legal reasons, a concession has been granted that would not have otherwise been considered to a debtor experiencing financial difficulties. The following criteria are considered concessions:

 
·
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
·
The outstanding principal amount and/or accrued interest have been reduced

In instances in which the interest rate has been reduced, management would not deem the modification a TDR in the event that 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 current market interest rate, and the terms of the restructured loan are comparable to the terms offered by the Bank to non-troubled debtors.

Accrual status for TDRs is determined separately for each TDR in accordance with the policies for determining accrual or non-accrual status that are outlined in the previous section titled “Monitoring and Collection of Delinquent Loans.” At the time an agreement is entered into between the Bank and the borrower that results in the Bank’s determination that a TDR has been created, the loan can be either on accrual or non-accrual status.  If a loan is on non-accrual status at the time it is restructured, it continues to be classified as non-accrual until the borrower has demonstrated compliance with the modified loan terms for a period of at least six months.  Conversely, if at the time of restructuring the loan is performing (and accruing); it will remain accruing throughout its restructured period, unless the loan subsequently meets any of the criteria for non-accrual status under the Bank’s policy and agency regulations.

The Bank never accepts receivables or equity interests in satisfaction of TDRs.

For TDRs that demonstrate conditions sufficient to warrant accrual status, the present value of the expected net cash flows of the underlying property is utilized as the primary means of determining impairment.  Any shortfall in the present value of the expected net cash flows calculated at each measurement period (typically quarter-end) compared to the present value of the expected net cash flows at the time of the original loan agreement was recognized as either an allocated reserve (in the event that it related to lower expected interest payments) or a charge-off (if related to lower expected principal payments).  For TDRs on non-accrual status, an appraisal of the underlying real estate collateral is deemed the most appropriate measure to utilize when evaluating impairment, and any shortfall in valuation from the recorded balance is accounted for through a charge-off.  In the event that either an allocated reserve or a charge-off is recognized on TDRs, the periodic loan loss provision is impacted.

Allowance for Loan Losses

Accounting Principles Generally Accepted in the United States (“GAAP”) require the Bank to maintain an appropriate allowance for loan losses.  The Bank maintains a Loan Loss Reserve Committee charged with, among other functions, responsibility for monitoring the appropriateness of the loan loss reserve.
 
To assist the Loan Loss Reserve Committee in carrying out its assigned duties, the Bank engages the services of an experienced third-party loan review firm to perform a review of the loan portfolio.  The 2016 review program covered 100% of construction and land development loans and 50% of the non-one- to four-family and consumer loan portfolio.  Included within the annual 50% target were: (1) 100% of the twenty largest loans in the multifamily and commercial real estate loan portfolio; (2) the ten largest pure commercial real estate loans; (3) the ten largest commercial mixed use real estate loans; (4) 100% of the ten largest multifamily residential real estate loans; (5) 100% of the ten largest residential mixed use real estate loans; (6) 30% of all new loan originations during the year; (7) 100% of the internally criticized and classified loans over $250,000; (8) 100% of the twenty largest borrower relationships; (9) 70% of all commercial real estate loans; (10) all loans over $500,000 that were collateralized by properties located in Long Island, New York; (11) all loans over $500,000 that were scheduled to reprice during the year; (12) all loans over $500,000 that were in the lowest three categories of pass loan grade (including Watch list loans); and (13) 50% of loans over $250,000 originated under the small mixed use lending program.

The Loan Loss Reserve Committee’s findings, along with recommendations for changes to loan loss reserve provisions, if any, are reported directly to the Bank’s executive management and the Lending and CRA Committee of the Board of Directors.

The Loan Loss Reserve Committee evaluates the loan portfolio on a quarterly basis in order to maintain its allowance for loan losses at a level it believes appropriate to absorb probable losses incurred within the Bank’s loan portfolio as of the balance sheet dates.  Factors considered in determining the appropriateness of the allowance for loan losses include the Bank’s past loan loss experience, known and inherent risks in the portfolio, existing adverse situations which may affect a borrower’s ability to repay, estimated value of underlying collateral and current economic conditions in the Bank’s lending area.  Although management uses available information to estimate losses on loans, future additions to, or reductions in, the allowance may be necessary based on changes in economic conditions or other factors beyond management’s control. In addition, the Bank’s regulators, as an integral part of their examination processes, periodically review the Bank’s allowance for loan losses, and may require the Bank to recognize additions to, or reductions in, the allowance based upon judgments different from those of management.

The Bank’s periodic evaluation of its allowance for loan losses has traditionally been comprised of different components, each of which is discussed in Note 5 to the Company’s consolidated audited financial statements.

The Bank also maintains a reserve associated with unfunded loan commitments accepted by the borrower.  This reserve is determined based upon the outstanding volume of loan commitments at each period end.  Any increases or reductions in this reserve are recognized in periodic non-interest expense.

Investment Activities

Investment strategies are implemented by the Asset and Liability Committee (“ALCO”), which, as of December 31, 2016, was comprised of the Chief Operating Officer, Chief Investment Officer, Chief Accounting Officer, Chief Risk Officer, Chief Lending Officer, Chief Retail Officer and other senior officers.  The strategies take into account the overall composition of the Bank’s balance sheet, including loans and deposits, and are intended to protect and enhance the Bank’s earnings and market value, and effectively manage both interest rate risk and liquidity.  The strategies are reviewed periodically by the ALCO and reported to the Board of Directors.

Investment Policy of the Bank

The investment policy of the Bank, which is adopted by its Board of Directors, is designed to help achieve the Bank’s overall asset/liability management objectives while complying with applicable regulations.  Generally, when selecting investments for the Bank’s portfolio, the policy emphasizes principal preservation, liquidity, diversification, short maturities and/or repricing terms, and a favorable return on investment. The policy permits investments in various types of liquid assets, including obligations of the U.S. Treasury and federal agencies, investment grade corporate debt, various types of MBS, commercial paper, certificates of deposit (“CDs”) and overnight federal funds sold to financial institutions.  The Bank’s Board of Directors periodically approves all financial institutions to which the Bank sells federal funds.
 
The Bank’s investment policy limits a combined investment in securities issued by any one entity, with the exception of obligations of the U.S. Government, federal agencies and GSEs, to an amount not exceeding the lesser of either 2% of its total assets or 15% of its total tangible capital (20% of tangible capital in the event all securities of the obligor maintain a “AAA” credit rating).  The Bank was in compliance with this policy limit at both December 31, 2016 and 2015. The Bank may, with Board approval, engage in hedging transactions utilizing derivative instruments.  During the years ended December 31, 2016 and 2015, the Bank did not hold any derivative instruments or embedded derivative instruments that required bifurcation.

Federal Agency Obligations

Federal agency obligations are purchased from time to time in order to provide the Bank a favorable yield in comparison to overnight investments.  These securities possess sound credit ratings, and are readily accepted as collateral for the Bank’s borrowings.  The Bank owned no federal agency obligation investments at December 31, 2016.

MBS

The Bank’s investment policy calls for the purchase of only priority tranches when investing in MBS, and typically possess the highest credit rating from at least one nationally recognized rating agency. MBS provide the portfolio with investments offering desirable repricing, cash flow and credit quality characteristics. MBS yield less than the loans that underlie the securities as a result of the cost of payment guarantees and credit enhancements which reduce credit risk to the investor.  Although MBS guaranteed by federally sponsored agencies carry a reduced credit risk compared to whole loans, such securities remain subject to the risk that fluctuating interest rates, along with other factors such as the geographic distribution of the underlying mortgage loans, may alter the prepayment rate of such loans and thus affect the value of such securities.  MBS, however, are more liquid than individual mortgage loans and may readily be used to collateralize borrowings.  MBS also provide the Company with important interest rate risk management features, as the entire portfolio provides monthly cash flow for re-investment at current market interest rates.

Corporate Debt Obligations

The Bank may invest in investment-grade debt obligations of various corporations.  The Bank’s investment policy limits new investments in corporate debt obligations to companies rated single “A” or better by one of the nationally recognized rating agencies at the time of purchase.  As mentioned previously, with certain exceptions, the Bank’s investment policy also limits a combined investment in corporate securities issued by any one entity to an amount not exceeding the lesser of either 2% of its total assets or 15% of its total tangible capital (20% of core capital in the event all securities of the obligor maintain a “AAA” credit rating).

Investment Strategies of the Holding Company

The Holding Company’s investment policy generally calls for investments in relatively short-term, liquid securities similar to those permitted by the securities investment policy of the Bank.  The investment policy calls for the purchase of only priority tranches when investing in MBS, limits new investments in corporate debt obligations to companies rated single “A” or better by one of the nationally recognized rating agencies at the time of purchase, and limits investments in any one corporate entity to the lesser of 1% of total assets or 5% of the Company’s total consolidated capital. The Holding Company may, with Board approval, engage in hedging transactions utilizing derivative instruments. During the years ended December 31, 2016 and 2015, the Holding Company did not hold any derivative instruments or embedded derivative instruments that required bifurcation.

Holding Company investments are generally intended primarily to provide future liquidity which may be utilized for general business activities, including, but not limited to: (1) purchases of the Holding Company’s common stock (“Common Stock”) into treasury; (2) repayment of principal and interest on the Holding Company’s $70.7 million trust preferred securities debt; (3) subject to applicable restrictions, the payment of dividends on the Common Stock; and/or (4) investments in the equity securities of other financial institutions and other investments not permitted to the Bank.
 
The Holding Company cannot assure that it will engage in these investment activities in the future.  At December 31, 2016, the Holding Company’s principal asset was its $571.2 million investment in the Bank’s common stock.  This investment in its subsidiary is not actively managed and falls outside of the Holding Company investment policy and strategy discussed above.

GAAP requires that investments in debt securities be classified in one of the following three categories and accounted for accordingly:  trading securities, securities available-for-sale or securities held-to-maturity.  GAAP requires investments in equity securities that have readily determinable fair values be classified as either trading securities or securities available-for-sale.  Unrealized gains and losses on available-for-sale securities are reported as a separate component of stockholders’ equity referred to as accumulated other comprehensive loss, net of deferred taxes.

Sources of Funds

General

The Bank’s primary sources of funding for its lending and investment activities include deposits, loan and MBS payments, investment security principal and interest payments, and advances from 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 the Federal National Mortgage Association (“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.

Deposits

The Bank offers a variety of deposit accounts possessing a range of interest rates and terms, including savings, money market, interest bearing and non-interest bearing checking accounts, and CDs. The flow of deposits is influenced significantly by general economic conditions, changes in prevailing interest rates, and competition from other financial institutions and investment products. The Bank relies upon direct and general marketing, customer service, convenience and long-standing relationships with customers or borrowers to generate deposits.  The communities in which the Bank maintains branch offices have historically provided the great majority of its deposits.

The Bank is also eligible to participate in the Certificate of Deposit Account Registry Service (“CDARS”), through which it can either purchase or sell CDs.  Purchases of CDs through this program are limited by Bank policy to an aggregate of 10% of the Bank’s average interest earning assets.

Borrowings

The Bank has been a member and shareholder of the FHLBNY since 1980.  One of the privileges offered to FHLBNY shareholders is the ability to secure advances from the FHLBNY under various lending programs at competitive interest rates.
 
Subsidiary Activities

In addition to the Bank, the Holding Company’s direct and indirect subsidiaries consist of nine corporations, two of which are wholly-owned by the Holding Company and seven of which are wholly-owned by the Bank.  The following table presents an overview of the Holding Company’s subsidiaries, other than the Bank, as of December 31, 2016:
 
Subsidiary
Year/ State of Incorporation
 
Primary Business Activities
Direct Subsidiaries of the Holding Company:
   
842 Manhattan Avenue Corp.
1995/ New York
Currently in the process of dissolution.
Dime Community Capital Trust I
2004/ Delaware
Statutory Trust (1)
Direct Subsidiaries of the Bank:
   
Boulevard Funding Corp.
1981 / New York
Management and ownership of real estate
Dime Insurance Agency Inc. (f/k/a Havemeyer Investments, Inc.)
1997 / New York
Sale of non-FDIC insured investment products
DSBW Preferred Funding Corp.
1998 / Delaware
Real Estate Investment Trust investing in multifamily
   residential and commercial real estate loans
DSBW Residential Preferred Funding Corp.
1998 / Delaware
Real Estate Investment Trust investing in one- to
   four-family real estate loans
Dime Reinvestment Corporation
2004 / Delaware
Community Development Entity.  Currently inactive.
195 Havemeyer Corp.
2008 / New York
Management and ownership of real estate.  Currently inactive.
DSB Holdings NY, LLC
2015 / New York
Management and ownership of real estate.  Currently inactive.

(1)
Dime Community Capital Trust I was established for the exclusive purpose of issuing and selling capital securities and using the proceeds to acquire approximately $70.7 million of junior subordinated debt securities issued by the Holding Company. The junior subordinated debt securities (referred to in this Annual Report as “trust preferred securities payable”) bear an interest rate of 7.0%, mature on April 14, 2034, became callable at any time after April 2009, and are the sole assets of Dime Community Capital Trust I.  In accordance with revised interpretation No. 46, “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51,” Dime Community Capital Trust I is not consolidated with the Holding Company for financial reporting purposes.

Personnel

As of December 31, 2016, the Company had 338 full-time and 45 part-time employees.  The employees are not represented by a collective bargaining unit, and the Holding Company and all of its subsidiaries consider their relationships with their employees to be good.

Federal, State and Local Taxation

The following is a general description of material tax matters and does not purport to be a comprehensive review of the tax rules applicable to the Company.
 
Federal Taxation

For federal income tax purposes, the Company files a consolidated income tax return on a December 31st calendar year basis using the accrual method of accounting and is subject to federal income taxation in the same manner as other corporations with some exceptions, including, particularly, the Bank’s tax reserve for bad debts.

State and Local Taxation

The Company is subject to New York State (“NYS”) franchise tax on a consolidated basis. NYS recently enacted several reforms (the “Tax Reform Package”) to its tax structure, including changes to the franchise, sales, estate and personal income taxes. These changes generally became effective for tax years beginning on or after January 1, 2015.  The Tax Reform Package is intended to simplify the existing corporate tax code for NYS businesses while remaining relatively neutral in relation to corporate tax receipts.

The Company is subject to NYC franchise tax on a consolidated basis. NYC generally conforms its tax law to NYS tax law, and adopted conforming Tax Reform Package provisions similar to those described above for NYS purposes, with only a few minor differences. For tax years beginning on or after January 1, 2015, the NYC income tax rate applied to the Company apportioned NYC taxable income is 8.85%.
 
State of Delaware

As a Delaware holding company not conducting business in Delaware, the Holding Company is exempt from Delaware corporate income tax. However, it is required to file an annual report and pay an annual franchise tax to the State of Delaware based upon its number of authorized shares.

Regulation

General

The Bank is a New York State-chartered stock savings bank.  The Bank’s primary regulator is the NYSDFS, and the Bank’s primary federal regulator is the Federal Deposit Insurance Corporation (“FDIC”), which regulates and examines state-chartered banks that are not members of the Federal Reserve System (“State Nonmember Banks”).  The FDIC also administers laws and regulations applicable to all FDIC-insured depository institutions.  The Holding Company is subject to regulation and examination by the Board of Governors of the Federal Reserve System (“FRB”) and, more specifically, the Federal Reserve Bank of Philadelphia.  The Bank has elected to be treated as a “savings association” under Section 10(l) of the Home Owners’ Loan Act, as amended (“HOLA”), for purposes of the regulation of the Holding Company.  The Holding Company is therefore regulated as a savings and loan holding company by the FRB as long as the Bank continues to satisfy the requirements to remain a “qualified thrift lender”  (“QTL”) under HOLA. If the Bank fails to remain a QTL, the Holding Company must register with the FRB, and be treated as, a bank holding company.  The Holding Company does not expect that regulation as a bank holding company rather than a savings and loan holding company would be a significant change.

The Bank’s deposit accounts are insured up to applicable limits by the FDIC under the Deposit Insurance Fund (“DIF”).  The Bank is required to file reports with both the NYSDFS and the FDIC concerning its activities and financial condition, and to obtain regulatory approval prior to entering into certain transactions, such as mergers with, or acquisitions of, other depository institutions. Both the NYSDFS and the FDIC conduct periodic examinations to assess the Bank’s safety and soundness and compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which a state-chartered savings bank may engage and is intended primarily for the protection of the DIF and depositors and generally is not intended for the protection of shareholders, investors or creditors other than insured depositors.  As a publicly-held unitary savings bank holding company, the Holding Company is also required to file certain reports with, and otherwise comply with the rules and regulations of, both the SEC, under the federal securities laws, and the Federal Reserve Bank of Philadelphia.

The NYSDFS and the FDIC possess significant discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such policies, whether by the NYSDFS, the FDIC or through legislation, could have a material adverse impact on the operations of either the Bank or Holding Company.

The following discussion is intended to be a summary of the material statutes and regulations applicable to NYS chartered savings banks and savings and loan holding companies.  The descriptions are not intended to be complete and are qualified in their entirety by reference to the full text of the statutes and regulations discussed.

Regulation of New York State Chartered Savings Banks

Business Activities.   The Bank derives its lending, investment, and other authority primarily from the New York Banking Law (“NYBL”) and the regulations of the NYSDFS, subject to limitations under applicable FDIC laws and regulations. Pursuant to the NYBL, the Bank may invest in mortgage loans secured by residential and commercial real estate, commercial and consumer loans, certain types of debt securities (including certain corporate debt securities and obligations of federal, state, and local governments and agencies), and certain other assets. The lending powers of New York State-chartered savings banks and commercial banks are not generally subject to percentage-of-assets or capital limitations, although there are limits applicable to loans to individual borrowers.  The Bank may also establish service corporations that may engage in activities not otherwise permissible for the Bank, including certain real estate equity investments and securities and insurance brokerage activities.
 
Recent Financial Regulatory Reforms

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Reform Act”), which became law in 2010, was intended to address perceived weaknesses in the U.S. financial regulatory system and prevent future economic and financial crises.  The Company believes that the following regulatory reforms, may have an impact on the Company:

The Reform Act created the Consumer Financial Protection Bureau (“CFPB”).  With respect to insured depository institutions with less than $10 billion in assets, such as the Bank, the CFPB has rulemaking, but not enforcement, authority for federal consumer protection laws, such as the Truth in Lending Act, the Equal Credit Opportunity Act, the Real Estate Settlement Procedures Act, and the Truth in Savings Act, among others, and may participate in examinations conducted by the federal bank regulatory agencies to determine compliance with consumer protection laws and regulations.

In December 2013, the Office of the Comptroller of the Currency (the “OCC”), FRB, FDIC and SEC (collectively, the “Federal Agencies”) adopted the so-called Volcker Rule to implement the provisions of the Reform Act limiting proprietary trading and investing in and sponsoring certain hedge funds and private equity funds (defined as covered funds in the Volcker Rule).  The covered funds limits are imposed through a conformance period that is expected to end in July 2017.  Management does not currently anticipate that the Volcker Rule will have a material effect on the operations of either the Bank or Holding Company.

In January 2014, the Federal Agencies, including the Commodity Futures Trading Commission (“CFTC”) approved a final rule permitting banking entities to indefinitely retain interests in certain collateralized debt obligations backed primarily by trust preferred securities (“TRUP CDOs”) that otherwise could not be retained under the covered fund investment prohibitions of the Volcker Rule.  Under the final rule, the agencies permit the retention of an interest in, or sponsorship of, covered funds by banking entities if certain qualifications are satisfied. As of December 31, 2016, all TRUP CDO investments owned by the Bank satisfied the retention requirements.

Basel III Capital Rules

On January 1, 2015, the Bank and the Holding Company became subject to a new comprehensive capital framework for U.S. banking organizations that was issued by the FDIC and FRB in July 2013 (the “Basel III Capital Rules”), subject to phase-in periods for certain components and other provisions.

The Basel III Capital Rules provide for the following minimum capital to risk-weighted assets ratios as of January 1, 2015: a) 4.5% based upon common equity tier 1 capital (“CET1”); b) 6.0% based upon tier 1 capital; and c) 8.0% based upon total regulatory capital.  A minimum leverage ratio (tier 1 capital as a percentage of average consolidated assets) of 4.0% is also required under the Basel III Capital Rules.  When fully phased in, the Basel III Capital Rules will additionally require institutions to retain a capital conservation buffer, composed entirely of CET1, of 2.5% above these required minimum capital ratio levels.  Banking organizations that fail to maintain the minimum 2.5% capital conservation buffer could face restrictions on capital distributions or discretionary bonus payments to executive officers.  Restrictions would begin phasing in where the banking organization’s capital conservation buffer was below 2.5% at the beginning of a quarter, and distributions and discretionary bonus payments would be completely prohibited if no capital conservation buffer exists.  When the capital conservation buffer is fully phased in on January 1, 2019, the Holding Company and the Bank will effectively have the following minimum capital to risk-weighted assets ratios: a) 7.0% based upon CET1; b) 8.5% based upon tier 1 capital; and c) 10.5% based upon total regulatory capital.

The Basel III Capital Rules provide for a number of deductions from, and adjustments to, CET1.  These include, for example, the requirement that MSR, deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such items, in the aggregate, exceed 15% of CET1.
 
Implementation of the deductions from, and other adjustments to, CET1 began on January 1, 2015 and are being phased-in over a 4-year period (beginning at 40% on January 1, 2015 and an additional 20% per year thereafter). The implementation of the capital conservation buffer began on January 1, 2016 at 0.625% and will increase by 0.625% each subsequent January 1, until it reaches 2.5% on January 1, 2019.  The Basel III Capital Rules also revised the definitions and components of regulatory capital, and addressed other issues affecting the numerator in banking institutions’ regulatory capital ratios.  The Basel III Capital Rules also address asset risk weights and other matters affecting the denominator in banking institutions’ regulatory capital ratios.

With respect to the Bank, the Basel III Capital Rules revise the “prompt corrective action” (“PCA”) regulations adopted pursuant to the Federal Deposit Insurance Act (“FDIA”) by: (i) introducing a CET1 ratio requirement at each PCA category (other than critically undercapitalized), with the required CET1 ratio being 6.5% for well-capitalized status; (ii) increasing the minimum Tier 1 capital ratio requirement for each category, with the minimum tier 1 capital ratio for well-capitalized status being 8.0% (as compared to the current 6.0%); and (iii) eliminating the provision that a bank with a composite supervisory rating of 1 may have a 3.0% leverage ratio and still be adequately capitalized. The Basel III Capital Rules do not change the total risk-based capital requirement for any PCA category.

The Basel III Capital Rules increased the required capital levels of the Bank and subjected the Holding Company to consolidated capital rules. The Bank and Company made the one-time, permanent election to continue to exclude the effects of accumulated other comprehensive income or loss items included in stockholders’ equity for the purposes of determining the regulatory capital ratios.  See Note 18 to the consolidated financial statements for a discussion of regulatory matters.

FDIC Guidance on Managing Market Risk

In October 2013, the FDIC published guidance entitled “Managing Sensitivity to Market Risk in a Challenging Interest Rate Environment”.  This guidance notes the FDIC’s ongoing supervisory concern that certain institutions may be insufficiently prepared or positioned for sustained increases in, or volatility of, interest rates.  The guidance emphasizes a series of best practices to ensure that state nonmember institutions, such as the Bank, have adopted a comprehensive asset-liability and interest rate risk management process.  These practices include:  (i) effective board governance and oversight; (ii) a sound policy framework and prudent exposure limits; (iii) well-developed risk measurement tools for effective measurement and monitoring of interest rate risk and; (iv) effective risk mitigation strategies.  The Bank has implemented the best practices as of December 31, 2016.

FDIC Real Estate Lending Standards

FDIC regulations prescribe standards for extensions of credit that (i) are secured by liens on or interests in real estate, or (ii) are made for the purpose of financing construction or improvements on real estate.  FDIC regulations require nonmember banks to establish and maintain written real estate lending policies that are consistent with safe and sound banking practices and appropriate to the size of the institution and the nature and scope of its real estate lending activities.  The policies must also be consistent with accompanying interagency guidelines, which include loan-to-value limitations for different types of real estate loans.  Under certain circumstances, institutions are also permitted to make a limited amount of loans that do not conform to the loan-to-value limitations.  In addition, the federal banking agencies consider as part of their ongoing supervisory monitoring processes whether an institution is exposed to significant commercial real estate concentration risk.  Institutions that (i) have experienced rapid growth in their commercial real estate lending, (ii) have notable exposure to a specific type of commercial real estate or (iii) are approaching or have exceeded the following concentration thresholds may become subject to additional regulatory review: (a) total reported loans for construction, land development, and other land represent 100 percent or more of the institution’s total capital; or (b) total commercial real estate loans, excluding owner occupied properties, represent 300 percent or more of the institution’s total capital, and the outstanding balance of the institution’s commercial real estate loan portfolio has increased by 50 percent or more during the prior 36 months.
 
NYSDFS Guidelines for Bank Lending to Multifamily Properties Under the Community Reinvestment Act

Under the NYSDFS’ September 2013 guidelines addressing responsible multifamily lending, the NYSDFS’ Community Reinvestment Act (“CRA”) examinations review whether a bank has satisfied its responsibility to ensure that any loan contributes to, and does not undermine, the availability of affordable housing or neighborhood conditions.  Under the guidelines, a loan on a multifamily property would not be found to have a community development purpose, and would not be CRA eligible if it:  (i) significantly reduces or has the potential to reduce affordable housing; (ii) facilitates substandard living conditions; (iii) is in technical default; or (iv) has been underwritten in an unsound manner.

The guidelines also recommend that banks consider adopting a series of best practices in an effort to help avoid reductions in qualitative or quantitative CRA credit on multifamily loans.

Implementation of these guidelines has not materially impacted the business and operations of the Bank.

Limitations on Individual Loans and Aggregate Loans to One Borrower

As an NYS-chartered savings bank originating loans secured by real estate having a market value at least equal to the loan amount at the time of origination, the Bank is generally not constrained by NYSDFS regulations limiting individual loan or borrower exposures.

QTL Test

In order for the Holding Company to be regulated by the FRB as a savings and loan holding company rather than a bank holding company, the Bank must remain a QTL. To satisfy this requirement, the Bank must maintain at least 65% of its “portfolio assets” in certain “qualified thrift investments” during at least nine of the most recent twelve months. “Portfolio assets” mean, in general, the Bank’s total assets less the sum of: (i) specified liquid assets up to 20% of total assets, (ii) certain intangibles, including goodwill, credit card relationships and purchased MSR, and (iii) the value of property used to conduct the Bank’s business. “Qualified thrift investments” include various types of loans made for residential and housing purposes; investments related to such purposes, including certain mortgage-backed and related securities; and small business, education, and credit card loans.  At December 31, 2016, the Bank maintained 78.2% of its portfolio assets in qualified thrift investments. The Bank also satisfied the QTL test in each month during 2016, and, therefore, was a QTL.  If the Bank fails to remain a QTL, the Holding Company must register with the FRB as a bank holding company. While the Holding Company intends to remain a savings and loan holding company, regulation as a bank holding company rather than a savings and loan holding company would not be expected to have a material impact upon its financial condition or results of operations.

A savings association that fails the QTL test will generally be prohibited from (i) engaging in any new activity not permissible for a national bank, (ii) paying dividends, unless the payment would be permissible for a national bank, is necessary to meet obligations of a company that controls the savings bank, and is specifically approved by the FDIC and the FRB, and (iii) establishing any new branch office in a location not permissible for a national bank in the association’s home state.  A savings association that fails to satisfy the QTL test may be subject to FDIC enforcement action.  In addition, within one year of the date a savings association ceases to satisfy the QTL test, any company controlling the association must register under, and become subject to the requirements of, the Bank Holding Company Act of 1956, as amended (“BHCA”).  A savings association that has failed the QTL test may requalify under the QTL test and be relieved of the limitations; however, it may do so only once.  If the savings association does not requalify under the QTL test within three years after failing the QTL test, it will be required to terminate any activity, and dispose of any investment, not permissible for a national bank.  These provisions remain in effect under the Reform Act.
 
Advisory on Interest Rate Risk Management

In January 2010, the Agencies released an Advisory on Interest Rate Risk Management (the “IRR Advisory”) to remind institutions of the supervisory expectations regarding sound practices for managing IRR.  While some degree of IRR is inherent in the business of banking, the Agencies expect institutions to have sound risk management practices in place to measure, monitor and control IRR exposures, and IRR management should be an integral component of an institution’s risk management infrastructure.  The Agencies expect all institutions to manage their IRR exposures using processes and systems commensurate with their earnings and capital levels, complexity, business model, risk profile and scope of operations.  The IRR Advisory further reiterates the importance of effective corporate governance, policies and procedures, risk measuring and monitoring systems, stress testing, and internal controls related to the IRR exposures of institutions.

The IRR Advisory encourages institutions to use a variety of techniques to measure IRR exposure, which include simple maturity gap analysis, income measurement and valuation measurement for assessing the impact of changes in market rates as well as simulation modeling to measure IRR exposure.  Institutions are encouraged to use the full complement of analytical capabilities of their IRR simulation models.  The IRR Advisory also reminds institutions that stress testing, which includes both scenario and sensitivity analysis, is an integral component of IRR management.  The IRR Advisory indicates that institutions should regularly assess IRR exposures beyond typical industry conventions, including changes in rates of greater magnitude (e.g., up and down 300 and 400 basis points as compared to the generally used up and down 200 basis points) across different tenors to reflect changing slopes and twists of the yield curve.

The IRR Advisory emphasizes that effective IRR management not only involves the identification and measurement of IRR, but also provides for appropriate actions to control the risk.  The adequacy and effectiveness of an institution’s IRR management process and the level of its IRR exposure are critical factors in the Agencies’ evaluation of an institution’s sensitivity to changes in interest rates and capital adequacy.

Limitation on Capital Distributions

The NYBL and the New York banking regulations, as well as FDIC and FRB regulations impose limitations upon capital distributions by state-chartered savings banks, such as cash dividends, payments to purchase or otherwise acquire its shares, payments to shareholders of another institution in a cash-out merger, and other distributions charged against capital.

Under the NYBL and the New York banking regulations, New York State-chartered stock savings banks may declare and pay dividends out of net profits, unless there is an impairment of capital, however, approval of the New York State Superintendent of Financial Services (“Superintendent”) is required if the total of all dividends declared by the bank in a calendar year would exceed the total of its net profits for that year combined with its retained net profits for the preceding two years less prior dividends paid.

As the subsidiary of a savings and loan holding company, the Bank is required to file a notice with the FRB at least 30 days prior to each capital distribution.  The FRB can prohibit a proposed capital distribution if it determines that the bank would be “undercapitalized”, as defined in the FDIA, following the distribution or that a proposed distribution would constitute an unsafe or unsound practice. Further, under FDIC PCA regulations, the Bank would be prohibited from making a capital distribution if, after the distribution, the Bank would fail to satisfy its minimum capital requirements, as described above (See “PCA”).

Liquidity

Pursuant to FDIC regulations, the Bank is required to maintain sufficient liquidity to ensure its safe and sound operation.
 
Assessments

New York State-chartered savings banks are required by the NYBL to pay annual assessments to the NYSDFS in connection with its regulation and supervision (including examination) of the Bank.  This annual assessment is based primarily on the asset size of the Bank, among other factors determined by the NYSDFS.  The Bank is not required to pay additional assessments to the FDIC for its regulation and supervision (including examination) of the Bank as a State Nonmember Bank, however, the Bank is required to pay assessments to the FDIC as an insured depository institution.  (See “Insurance of Deposit Accounts”).

Branching

Subject to certain limitations, NYS and federal law permit NYS-chartered savings banks to establish branches in any state of the United States.  In general, federal law allows the FDIC, and the NYBL allows the Superintendent, to approve an application by a state banking institution to acquire interstate branches by merger.  The NYBL authorizes New York State-chartered savings banks to open and occupy de novo branches outside the State of New York. Pursuant to the Reform Act, the FDIC is authorized to approve the establishment by a state bank of a de novo interstate branch if the intended host state allows de novo branching within that state by banks chartered by that state.

Community Reinvestment

Under the CRA, as implemented by FDIC regulations, an insured depository institution possesses a continuing and affirmative obligation, consistent with its safe and sound operation, to help satisfy the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services it believes are most appropriate to its particular community. The CRA requires the FDIC, in connection with its examination of a State Nonmember Bank, to assess the bank’s record of satisfying the credit needs of its community and consider such record in its evaluation of certain applications by the bank.  The CRA also requires all institutions to make public disclosure of their CRA ratings. The Bank received a “Satisfactory” CRA rating in its most recent examination.   Regulations additionally require that the Bank publicly disclose certain agreements that are in fulfillment of the CRA.  The Bank has no such agreements.

The Bank is also subject to provisions of the NYBL that impose continuing and affirmative obligations upon a New York State-chartered savings bank to serve the credit needs of its local community (the “NYCRA”).  Such obligations are substantially similar to those imposed by the CRA.  The NYCRA requires the NYSDFS to make a periodic written assessment of an institution’s compliance with the NYCRA, utilizing a four-tiered rating system, and to make such assessment available to the public.  The NYCRA also requires the Superintendent to consider the NYCRA rating when reviewing an application to engage in certain transactions, including mergers, asset purchases and the establishment of branch offices or ATMs, and provides that such assessment may serve as a basis for the denial of any such application.  The Bank became subject to the NYCRA at the Charter Conversion, and has not yet received a NYCRA rating.

Transactions with Related Parties

The Bank’s authority to engage in transactions with its “affiliates” is limited by FDIC regulations, Sections 23A and 23B of the Federal Reserve Act (“FRA”), and Regulation W issued by the FRB.  FDIC regulations regarding transactions with affiliates generally conform to Regulation W.  These provisions, among other matters, prohibit, limit or place restrictions upon a depository institution extending credit to, purchasing assets from, or entering into certain transactions (including securities lending, repurchase agreements and derivatives activities) with, its affiliates, which, for the Bank, would include the Holding Company and any other subsidiary of the Holding Company.

As a “savings association” under Section 10(l) of the HOLA, the Bank is additionally subject to the rules governing transactions with affiliates for savings associations under HOLA Section 11.  These rules prohibit, subject to certain exemptions, a savings association from: (i) advancing a loan to an affiliate engaged in non-bank holding company activities; and (ii) purchasing or investing in securities issued by an affiliate that is not a subsidiary.
 
The Bank’s authority to extend credit to its directors, executive officers, and stockholders owning 10% or more of the outstanding Common Stock, as well as to entities controlled by such persons, is additionally governed by the requirements of Sections 22(g) and 22(h) of the FRA and Regulation O of the FRB enacted thereunder. Among other matters, these provisions require that extensions of credit to insiders: (i) be made on terms substantially the same as, and follow credit underwriting procedures not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features; and (ii) not exceed certain amount limitations individually and in the aggregate, which limits are based, in part, on the amount of the bank’s capital. Regulation O additionally requires that extensions of credit in excess of certain limits be approved in advance by the bank’s board of directors.

New York banking regulations impose certain limits and requirements on various transactions with “insiders,” as defined in the New York banking regulations to include certain executive officers, directors and principal stockholders.

The Holding Company and Bank both presently prohibit loans to directors and executive management.

Enforcement

Under the NYBL, the Superintendent possesses enforcement power over New York State-chartered savings banks.  The NYBL gives the Superintendent authority to order a New York State-chartered savings bank to appear and explain an apparent violation of law, to discontinue unauthorized or unsafe practices and to maintain prescribed books and accounts.  Upon a finding by the Superintendent that a director, trustee or officer of a savings bank has violated any law, or has continued unauthorized or unsafe practices in conducting its business after having been notified by the Superintendent to discontinue such practices, such director, trustee, or officer may be removed from office after notice and an opportunity to be heard.  The Superintendent also has authority to appoint a conservator or receiver, such as the FDIC, for a savings bank under certain circumstances.

Under the FDIA, the FDIC possesses enforcement authority for FDIC insured depository institutions and has the authority to bring enforcement action, including civil monetary penalties, against all “institution-affiliated parties,” including any controlling stockholder or any shareholder, attorney, appraiser or accountant who knowingly or recklessly participates in any violation of applicable law or regulation, breach of fiduciary duty or certain other wrongful actions that cause, or are likely to cause, more than minimal loss to or other significant adverse effect on an insured depository institution. Under HOLA and the FDIA, the FRB possesses similar authority to bring enforcement actions and impose civil monetary penalties against savings and loan holding companies for violations of applicable law or regulation.  In addition, regulators possess substantial discretion to take enforcement action against an institution that fails to comply with the law, particularly with respect to capital requirements. Possible enforcement actions range from informal enforcement actions, such as a memorandum of understanding, to formal enforcement actions, such as a written agreement, cease and desist order or civil money penalty, the imposition of a capital plan and capital directive to receivership, conservatorship, or the termination of deposit insurance.

Standards for Safety and Soundness

Pursuant to FDICIA, as amended by the Riegle Community Development and Regulatory Improvement Act of 1994, the FDIC, together with the other federal bank regulatory agencies, has adopted guidelines prescribing safety and soundness standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings and compensation, fees and benefits. In general, the guidelines require, among other features, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal shareholder.  In addition, the FDIC has adopted regulations pursuant to FDICIA that authorize, but do not require, the FDIC to order an institution that has been given notice by the FDIC that it is not satisfying any of such safety and soundness standards to submit a compliance plan. If, after being so ordered, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an accepted compliance plan, the FDIC must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized bank is subject under the PCA provisions of FDICIA (See "Part I - Item 1 – Business - Regulation - Regulation of New York State Chartered Savings Banks –PCA").  If an institution fails to comply with such an order, the FDIC may seek enforcement in judicial proceedings and the imposition of civil money penalties.
 
Insurance of Deposit Accounts

The standard maximum amount of FDIC deposit insurance is $250,000 per depositor.  Insured depository institutions are required to pay quarterly deposit insurance assessments to the DIF.  Assessments are based on average total assets minus average tangible equity.  The assessment rate is determined through a risk-based system.  For depository institutions with less than $10 billion in assets, such as the Bank, the FDIC assigns an institution to one of four risk categories based on its safety and soundness supervisory ratings (its "CAMELS” ratings) and its capital levels.  The initial base assessment rate depends on the institution’s risk category, as well as, if it is in the highest category (indicating the lowest risk), certain financial measures.  The initial base assessment rate currently ranges from 3 to 30 basis points on an annualized basis.  After the effect of potential base-rate adjustments, the total base assessment rate could range from 1.5 to 40 basis points on an annualized basis.

As a result of the recent failures of a number of banks and thrifts, there has been a significant increase in the loss provisions of the DIF.  This resulted in a decline in the DIF reserve ratio during 2008 below the then minimum designated reserve ratio of 1.15%.  In October 2010, the FDIC adopted a new DIF restoration plan to ensure that the fund reserve ratio reaches 1.35% by September 30, 2020, as required by the Reform Act.  In March 2016, the FDIC adopted a final rule increasing the reserve ratio for the DIF to 1.35% of total insured deposits.  The rule imposes a surcharge on the assessments of depository institutions with $10 billion or more in assets beginning the third quarter of 2016 and continuing through the earlier of the quarter that the reserve ratio first reaches or exceeds 1.35% and December 31, 2018.  As a depository institution with less than $10 billion in assets, this rule will not apply to the Bank. The FDIC has established a long-term target for the reserve ratio of 2.0%. At least semi-annually, the FDIC will update its loss and income projections for the fund and, if needed, will increase or decrease assessment rates, following notice-and-comment rulemaking if required.

In addition, the Deposit Insurance Funds Act of 1996 authorized the Financing Corporation (“FICO”) to impose assessments on DIF applicable deposits in order to service the interest on FICO’s bond obligations from deposit insurance fund assessments.  The amount assessed on individual institutions by FICO is in addition to the amount, if any, paid for deposit insurance according to the FDIC’s risk-related assessment rate schedules.  FICO assessment rates may be adjusted quarterly to reflect a change in assessment base.  These payments approximate 10% of the Bank's annual FDIC insurance payments and will continue until the FICO bonds mature in 2017 through 2019.

Acquisitions

Under the federal Bank Merger Act, prior approval of the FDIC is required for the Bank to merge with or purchase the assets or assume the deposits of another insured depository institution. In reviewing applications seeking approval of merger and acquisition transactions, the FDIC will consider, among other factors, the competitive effect and public benefits of the transactions, the capital position of the combined organization, the risks to the stability of the U.S. banking or financial system, the applicant’s performance record under the CRA (see “Community Reinvestment”) and its compliance with fair housing and other consumer protection laws and the effectiveness of the subject organizations in combating money laundering activities.

Privacy and Security Protection

The federal banking agencies have adopted regulations for consumer privacy protection that require financial institutions to adopt procedures to protect customers and their "non-public personal information."  The regulations require the Bank to disclose its privacy policy, including identifying with whom it shares "non-public personal information," to customers at the time of establishing the customer relationship, and annually thereafter if there are changes to its policy.  In addition, the Bank is required to provide its customers the ability to "opt-out" of:  (1) the sharing of their personal information with unaffiliated third parties if the sharing of such information does not satisfy any of the permitted exceptions; and (2) the receipt of marketing solicitations from Bank affiliates.
 
The Bank is additionally subject to regulatory guidelines establishing standards for safeguarding customer information.  The guidelines describe the federal banking agencies' expectations for the creation, implementation and maintenance of an information security program, including administrative, technical and physical safeguards appropriate to the size and complexity of the institution and the nature and scope of its activities.  The standards set forth in the guidelines are intended to ensure the security and confidentiality of customer records and information, and protect against anticipated threats or hazards to the security or integrity of such records and unauthorized access to or use of such records or information that could result in substantial customer harm or inconvenience.

Federal law additionally permits each state to enact legislation that is more protective of consumers' personal information.  Currently, there are a number of privacy bills pending in the New York legislature.  Management of the Company cannot predict the impact, if any, of these bills if enacted.

Cybersecurity more broadly has become a focus of federal and state regulators.  In March 2015, federal regulators issued two statements regarding cybersecurity to reiterate regulatory expectations regarding cyberattacks compromising credentials and business continuity planning to ensure the rapid recovery of an institution’s operations after a cyberattack involving destructive malware.  In October 2016, federal regulators jointly issued an advance notice of proposed rulemaking on enhanced cyber risk management standards that are intended to increase the operational resilience of large and interconnected entities under their supervision. Once established, the enhanced cyber risk management standards would help to reduce the potential impact of a cyber-attack or other cyber-related failure on the financial system.  The advance notice of proposed rulemaking addresses five categories of cyber standards: (1) cyber risk governance; (2) cyber risk management; (3) internal dependency management; (4) external dependency management; and (5) incident response, cyber resilience, and situational awareness.  In December 2016, the NYSDFS re-proposed regulations that would require financial institutions regulated by the NYDFS, including the Bank, to, among other things, (i) establish and maintain a cyber security program designed to ensure the confidentiality, integrity and availability of their information systems; (ii) implement and maintain a written cyber security policy setting forth policies and procedures for the protection of their information systems and nonpublic information; and (iii) designate a Chief Information Security Officer.  The Company will continue to monitor any developments related to these proposed rulemakings as part of its ongoing cyber risk management.  See "Item 1A - Risk Factors" for a further discussion of cybersecurity risks.

Consumer Protection and Compliance Provisions

The Bank is subject to various consumer protection laws and regulations. The Bank may be subject to potential liability for material violations of these laws and regulations, in the form of litigation by governmental and consumer groups, the FDIC and other federal regulatory agencies including the Department of Justice. Moreover, the CFPB has broad rule-making authority for a wide range of consumer protection laws that apply to all depository institutions, as well as the authority to prohibit "unfair, deceptive or abusive" acts and practices.

Insurance Activities

As a New York State chartered savings bank, the Bank is generally permitted to engage in certain insurance activities: (i) directly in places where the population does not exceed 5,000 persons, or (ii) in places with larger populations through subsidiaries if certain conditions are satisfied.  Federal agency regulations prohibit depository institutions from conditioning the extension of credit to individuals upon either the purchase of an insurance product or annuity or an agreement by the consumer not to purchase an insurance product or annuity from an entity not affiliated with the depository institution.  The regulations additionally require prior disclosure of this prohibition if such products are offered to credit applicants. Compliance with these regulations has not had a material impact upon the Bank's financial condition or results of operations.

Federal Home Loan Bank ("FHLB") System

The Bank is a member of the FHLBNY, which is one of the twelve regional FHLBs composing the FHLB System. Each FHLB provides a central credit facility primarily for its member institutions. Any advances from the FHLBNY must be secured by specified types of collateral, and long-term advances may be obtained only for the purpose of providing funds for residential housing finance.  The Bank, as a member of the FHLBNY, is currently required to acquire and hold shares of FHLBNY Class B stock as a membership requirement and must hold additional stock based on its FHLB borrowing and certain other activities.  The Bank was in compliance with these requirements with an investment in FHLBNY Class B stock of $44.4 million at December 31, 2016.  The FHLBNY can adjust the specific percentages and dollar amount periodically within the ranges established by the FHLBNY capital plan.
 
Federal Reserve System

The Bank is subject to FRA and FRB regulations requiring state-chartered depository institutions to maintain cash reserves against their transaction accounts (primarily NOW and regular checking accounts).  Because required reserves must be maintained in the form of vault cash, a low-interest-bearing account at a Federal Reserve Bank, or a pass-through account as defined by the FRB, the effect of this reserve requirement is to reduce the Bank's interest-earning assets. The balances maintained to satisfy the FRB reserve requirements may be used to satisfy liquidity requirements imposed by the FDIC.

The Federal Reserve Banks pay interest on depository institutions’ required and excess reserve balances.  The interest rate paid on required reserve balances and excess balances is currently 0.75 percent.

Depository institutions are additionally authorized to borrow from the Federal Reserve ''discount window,'' however, FRB regulations require such institutions to hold reserves in the form of vault cash or deposits with Federal Reserve Banks in order to borrow.

Anti-Money Laundering and Customer Identification

Financial institutions are subject to Bank Secrecy Act amendments and specific federal agency guidance in relation to implementing the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 ("PATRIOT Act").  The PATRIOT Act provides the federal government with powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money laundering requirements.  By way of amendments to the Bank Secrecy Act, Title III of the PATRIOT Act enacted measures intended to encourage information sharing among bank regulatory and law enforcement agencies. In addition, certain provisions of Title III and the FDIC guidance impose affirmative obligations on a broad range of financial institutions, including banks and thrifts.  Title III imposes the following requirements, among others, with respect to financial institutions: (i) establishment of anti-money laundering programs; (ii) establishment of procedures for obtaining identifying information from customers opening new accounts, including verifying their identity within a reasonable period of time; (iii) establishment of enhanced due diligence policies, procedures and controls designed to detect and report money laundering; and (iv)  prohibition on correspondent accounts for foreign shell banks and compliance with recordkeeping obligations with respect to correspondent accounts of foreign banks. In addition, the NYSDFS issued a final regulation in June 2016 that sets forth, for financial institutions chartered or licensed under the New York Banking Law, the attributes of certain compliance programs such institutions must have to ensure compliance with Bank Secrecy Act/Anti-Money Laundering laws and regulations and sanctions administered by the Office of Foreign Assets Control (“OFAC”).  The regulation requires the board of directors or a senior officer of an institution to make an annual finding as to an institution’s compliance with the requirements of the regulation.

Finally, bank regulators are directed to consider an organization’s effectiveness in preventing money laundering when reviewing and acting on regulatory applications.

OFAC Regulation

OFAC, administers and enforces economic and trade sanctions against targeted foreign countries and regimes, under authority of various laws, including designated foreign countries, nationals, and others.  Failure to comply with these sanctions could have serious legal and reputational consequences.
 
Regulation of the Holding Company

The Bank has made an election under Section 10(l) of the HOLA to be treated as a “savings association” for purposes of regulation of the Holding Company. As a result, the Holding Company continues, after the Charter Conversion, to be registered with the FRB as a non-diversified unitary savings and loan holding company within the meaning of the HOLA.  The Holding Company is currently subject to FRB regulations, examination, enforcement and supervision, as well as reporting requirements applicable to savings and loan holding companies. Among other things, this authority permits the FRB to restrict or prohibit activities that are determined to be a serious risk to the safety, soundness or stability of a subsidiary depository institution.  In addition, the FRB has enforcement authority over the Holding Company’s non-depository institution subsidiaries.  If the Bank does not continue to satisfy the QTL test, the Holding Company must change its status with the FRB as a savings and loan holding company and register as a bank holding company under the BHCA.  (See "Regulation of New York State-Chartered Savings Banks–QTL Test").

HOLA prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from acquiring another savings association or holding company thereof, without prior written approval of the FRB; acquiring or retaining, with certain exceptions, more than 5% of a non-subsidiary savings association, non-subsidiary holding company, or non-subsidiary company engaged in activities other than those permitted by HOLA; or acquiring or retaining control of a depository institution that is not insured by the FDIC. In evaluating an application by a holding company to acquire a savings association, the FRB must consider the financial and managerial resources and future prospects of the company and savings association involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community, and competitive factors.

The Gramm-Leach Bliley Act of 1999 (“Gramm-Leach”) additionally restricts the powers of certain unitary savings and loan holding companies.  A unitary savings and loan holding company that is "grandfathered," i.e., became a unitary savings and loan holding company pursuant to an application filed with the Office of Thrift Supervision (the regulator of savings and loan holding companies prior to the FRB) prior to May 4, 1999, such as the Holding Company, retains the authority it possessed under the law in existence as of May 4, 1999.  All other savings and loan holding companies are limited to financially related activities permissible for bank holding companies, as defined under Gramm-Leach.  Gramm-Leach also prohibits non-financial companies from acquiring grandfathered savings and loan holding companies.

Upon any non-supervisory acquisition by the Holding Company of another savings association or a savings bank that satisfies the QTL test and is deemed to be a savings association and that will be held as a separate subsidiary, the Holding Company will become a multiple savings and loan holding company and will be subject to limitations on the types of business activities in which it may engage.  HOLA limits the activities of a multiple savings and loan holding company and its non-insured subsidiaries primarily to activities permissible under Section 4(c) of the BHCA, subject to prior approval of the FRB, or the activities permissible for financial holding companies under Section 4(k) of the BHCA, if the company meets the requirements to be treated as a financial holding company, and to other activities authorized by federal agency regulations.

Federal agency regulations prohibit regulatory approval of any acquisition that would result in a multiple savings and loan holding company controlling savings associations in more than one state, subject to two exceptions: an acquisition of a savings association in another state (i) in a supervisory transaction, or (ii) pursuant to authority under the laws of the state of the association to be acquired that specifically permit such acquisitions.  The conditions imposed upon interstate acquisitions by those states that have enacted authorizing legislation vary.

The Bank must file a notice with the FRB prior to the payment of any dividends or other capital distributions to the Holding Company (See "Regulation-Regulation of New York State Chartered Savings Banks - Limitation on Capital Distributions'').  The FRB has the authority to deny such payment request.
 
Restrictions on the Acquisition of the Holding Company

Under the Federal Change in Bank Control Act ("CIBCA") and implementing regulations, a notice must be submitted to the FRB if any person (including a company), or group acting in concert, seeks to acquire 10% or more of the shares of outstanding Common Stock, unless the FRB has found that the acquisition will not result in a change in control of the Holding Company. Under CIBCA and implementing regulations, the FRB generally has 60 days within which to act on such notices, taking into consideration certain factors, including the financial and managerial resources of the acquirer; the convenience and needs of the communities served by the Holding Company, the Bank; and the anti-trust effects of the acquisition. Under HOLA, any company would be required to obtain approval from the FRB before it may obtain "control" of the Holding Company within the meaning of HOLA. Control is generally defined to mean the ownership or power to vote 25% or more of any class of voting securities of the Holding Company or the ability to control in any manner the election of a majority of the Holding Company’s directors, although a person or entity may also be determined to “control” the Holding Company without satisfying these requirements if it is determined that he, she or it directly or indirectly exercises a controlling influence over the management or policies of the Holding Company. In addition, an existing bank holding company or savings and loan holding company would, under federal banking laws and regulations, generally be required to obtain FRB approval before acquiring more than 5% of the Holding Company’s voting stock.

In addition to the applicable federal laws and regulations, New York State Banking Law generally requires prior approval of the New York State Superintendent of Financial Services before any action is taken that causes any company to acquire direct or indirect control of a banking institution organized in New York.

Federal Securities Laws

The Common Stock is registered with the SEC under Section 12(g) of the Exchange Act.  It is subject to the periodic reporting, proxy solicitation, insider trading restrictions and other requirements under the Exchange Act.

Delaware Corporation Law

The Holding Company is incorporated under the laws of the State of Delaware, and, therefore, is subject to regulation by the State of Delaware, and the rights of its shareholders are governed by the Delaware General Corporation Law.

Item 1A. Risk Factors

The Company's business may be adversely affected by conditions in the financial markets and economic conditions generally.

The Company's financial performance generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, is highly dependent upon the business environment in the markets where the Company operates, in the New York metropolitan area and in the United States as a whole.  Conditions in the marketplace for the Bank's property collateral types (mainly multifamily and commercial real estate) remained stronger than most other parts of the country throughout the years of the financial crisis, and in fact have recently rebounded to healthy pre-crisis levels.  Nevertheless, given the precarious nature of financial and economic conditions both nationally and globally, this status is always subject to change, which could adversely affect the credit quality of the Bank's loans, results of operations and financial condition.

The Bank’s commercial real estate lending may subject it to greater risk of an adverse impact on operations from a decline in the economy.

The credit quality of the Bank's portfolio can have a significant impact on the Company's earnings, results of operations and financial condition.  As part of the Company’s strategic plan, it originates loans secured by commercial real estate that are generally viewed as exposing lenders to a greater risk of loss than both one- to four-family and multifamily residential mortgage loans. Because payments on loans secured by commercial real estate are often dependent upon successful operation or management of the collateral properties, as well as the success of the business and retail tenants occupying the properties, repayment of such loans are generally more vulnerable to weak economic conditions. Further, the collateral securing such loans may depreciate over time, be difficult to appraise, or fluctuate in value based upon the rentability, among other commercial factors.
 
The performance of Bank's multifamily and mixed-use loans could be adversely impacted by regulation or a weakened economy.

Multifamily and mixed use loans generally involve a greater risk than one- to four- family residential mortgage loans because government regulations such as rent control and rent stabilization laws, which are outside the control of the borrower or the Bank, could impair the value of the security for the loan or the future cash flow of such properties. As a result, rental income might not rise sufficiently over time to satisfy increases in the loan rate at repricing or increases in overhead expenses (e.g., utilities, taxes, etc.). Impaired loans are thus difficult to identify before they become problematic. In addition, if the cash flow from a collateral property is reduced (e.g., if leases are not obtained or renewed), the borrower’s ability to repay the loan and the value of the security for the loan may be impaired.

Extensions of credit on multifamily, mixed-use or commercial real estate loans may result from reliance upon inaccurate or misleading information received from the borrower.

In deciding whether to extend credit on multifamily, mixed-use or commercial real estate loans, the Bank may rely on information furnished by or on behalf of a customer and counterparties, including financial statements, credit reports and other financial information. In the event such information is inaccurate or misleading, reliance on it could have a material adverse impact on the Company's business and, in turn, its financial condition and results of operations.

Geographic and borrower concentrations could adversely impact financial performance.

The Company’s financial performance generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans, as well as the value of collateral securing those loans, is highly dependent upon business and economic conditions in the United States, particularly in the local New York metropolitan area where the Company conducts substantially all of its business. Conditions in these marketplaces have begun to rebound in recent months after several years of deterioration. Should such conditions fail to continue to improve, they may adversely affect the credit quality of the Bank’s loans, its results of operations and its financial condition.

Conditions in the real estate markets in which the collateral for the Bank’s mortgage loans are located strongly influence the level of the Bank’s non-performing loans and the value of its collateral. Real estate values are affected by, among other items, fluctuations in general or local economic conditions, supply and demand, changes in governmental rules or policies, the availability of loans to potential purchasers and acts of nature. Declines in real estate markets have in the past, and may in the future, negatively impact the Company’s results of operations, cash flows, business, financial condition and prospects.  In addition, at December 31, 2016 the Bank had three borrowers for which its total lending exposure equaled or exceeded 10% of its Tier 1 risk-based capital (its lowest capital measure).  Default by these borrowers could adversely impact the Bank's financial condition and results of operations.

If the Bank’s ability to grow its portfolio of multifamily and commercial real estate loans were limited due to regulatory concerns about its concentrated position in such assets, its ability to generate interest income could be adversely affected, as would its financial condition and results of operations, perhaps materially.

The Bank’s portfolios of multifamily and commercial real estate loans represent the largest portion of its asset mix (approximately 98.6% of all loans as of December 31, 2016). The Bank’s position in these markets has been instrumental to its production of solid earnings and its consistent record of exceptional asset quality.  In view of the heightened regulatory focus on commercial real estate concentration, it is possible that the regulators may seek to restrict the Bank’s growth in those asset classes.  Were the Bank to be so limited, its net interest income and its earnings capacity would likely be adversely impacted.

Growth of the C&I Portfolio could result in higher provisions for loan losses, thus reducing earnings and stockholders’ equity

The Bank’s strategic plan to grow the C&I loan portfolio could result in higher provisions for loan losses as the portfolio is seasoned over time. The addition of new loan products will require more qualitative analysis in determining the appropriate level of loan loss provisions.
 
The Bank’s allowance for loan losses may be insufficient.

The Bank’s allowance for loan losses is maintained at a level considered adequate by management to absorb probable incurred losses inherent in its loan portfolio. The amount of inherent loan losses which could be ultimately realized is susceptible to changes in economic, operating and other conditions, including changes in interest rates, that could be beyond the Bank’s control. Such losses could exceed current estimates. Although management believes that the Bank’s allowance for loan losses is adequate, there can be no assurance that the allowance will be sufficient to satisfy actual loan losses should such losses be realized. Any increases in the allowance for loan losses will result in a decrease in net income and capital, and may have a material adverse effect on the Bank’s financial condition and results of operations.

Increases in interest rates may reduce the Company’s profitability.

The Bank’s primary source of income is its net interest income, which is the difference between the interest income earned on its interest earning assets and the interest expense incurred on its interest bearing liabilities. The Bank's one-year interest rate sensitivity gap is the difference between interest rate sensitive assets maturing or repricing within one year and its interest rate sensitive liabilities maturing or repricing within one year, expressed as both a total amount and as a percentage of total assets.  At December 31, 2016, the Bank's one year interest rate gap was negative 22%, indicating that the overall level of its interest rate sensitive liabilities maturing or repricing within one year exceeded that of its interest rate sensitive assets maturing or repricing within one year.  In a rising interest rate environment, an institution with a negative gap would generally be expected, absent the effects of other factors, to experience a greater increase in its cost of liabilities relative to its yield on assets, and thus a decline in net interest income from its existing investments and funding sources.

Based upon historical experience, if interest rates were to rise, the Bank would expect the demand for multifamily loans to decline. Decreased loan origination volume would likely negatively impact the Bank's interest income. In addition, if interest rates were to rise rapidly and result in an economic decline, the Bank would expect its level of non-performing loans to increase. Such an increase in non-performing loans may result in an increase to the provision/allowance for loan losses and possible increased charge-offs, which would negatively impact the Company's net income.

Further, the actual amount of time before mortgage loans and MBS are repaid can be significantly impacted by changes in mortgage redemption rates and market interest rates. Mortgage prepayment, satisfaction and refinancing rates will vary due to several factors, including the regional economy in the area where the underlying mortgages were originated, seasonal factors, and other demographic variables. However, the most significant factors affecting prepayment, satisfaction and refinancing rates are prevailing interest rates, related mortgage refinancing opportunities and competition.  The level of mortgage and MBS prepayment, satisfaction and refinancing activity impacts the Company's earnings due to its effect on fee income earned on prepayment and refinancing activities, along with liquidity levels the Company will experience to fund new investments or ongoing operations.

As a New York State chartered savings bank, the Bank is required to monitor changes in its Economic Value of Equity ("EVE"), which is the difference between the present value of the expected future cash flows of the Bank’s assets and liabilities plus the value of any off-balance sheet items, such as firm commitments to originate loans, or derivatives, if applicable.  To monitor its overall sensitivity to changes in interest rates, the Bank also simulates the effect of instantaneous changes in interest rates of up to 400 basis points on its assets, liabilities and net interest income.  Interest rates do and will continue to fluctuate, and the Bank cannot predict future FOMC actions or other factors that will cause interest rates to vary.
 
The Company operates in a highly regulated industry and is subject to uncertain risks related to changes in laws, government regulation and monetary policy.

The Holding Company and the Bank are subject to extensive supervision, regulation and examination by the NYSDFS (the Bank's primary regulator), the FRB (the Holding Company's primary regulator) and the FDIC, as its deposit insurer. Such regulation limits the manner in which the Holding Company and Bank conduct business, undertake new investments and activities and obtain financing. This regulation is designed primarily for the protection of the deposit insurance funds and the Bank’s depositors, and not to benefit shareholders or creditors. The regulatory structure also provides the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to capital levels, the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes.  Failure to comply with applicable laws and regulations could subject the Holding Company and Bank to regulatory enforcement action that could result in the assessment of significant civil money penalties against the Holding Company and Bank.  For further information regarding the laws and regulations that affect the Holding Company and the Bank, see "Item 1. Business - Regulation - Regulation of New York State Chartered Savings Banks," and "Item 1. Business - Regulation - Regulation of Holding Company."

The fiscal and monetary policies of the federal government and its agencies could have a material adverse effect on the Company's results of operations. The FRB regulates the supply of money and credit in the United States.  Its policies determine in significant part the cost of funds for lending and investing and the return earned on those loans and investments, both of which affect the Company's net interest margin.  Government action can materially decrease the value of the Company's financial assets, such as debt securities, mortgages and MSR.  Governmental policies can also adversely affect borrowers, potentially increasing the risk that they may fail to repay their loans.  Changes in FRB or governmental policies are beyond the Company's control and difficult to predict; consequently, the impact of these changes on the Company's activities and results of operations is difficult to predict.
 
The federal government may make changes in tax legislation that would lower the federal corporate income tax rate from the current level of 35%.  These changes could result in an impairment of the Company’s deferred tax assets as future tax benefit deferrals would be measured at a lower tax rate. Any impairment identified would be recorded through the Company’s earnings and recognized in the quarter in which the lower rate is enacted. The Company’s net deferred tax asset as of December 31, 2016 was $22.3 million. See Note 12 to the consolidated financial statements for a discussion of deferred tax assets.
 
Financial institution regulation has been the subject of significant legislation in recent years, and may be the subject of further significant legislation in the future, none of which is within the control of the Holding Company or the Bank. In addition, recent political developments, including the change in administration in the United States, have added uncertainty to the implementation, scope and timing of regulatory reforms, including those relating to implementation of the Reform Act.  Significant new laws or changes in, or repeals of, existing laws may cause the Company's results of operations to differ materially. Further, federal monetary policy significantly affects credit conditions for the Company, primarily through open market operations in United States government securities, the discount rate for bank borrowings and reserve requirements for liquid assets. A material change in any of these conditions would have a material impact on the Bank, and therefore, on the Company’s results of operations.

Competition from other financial institutions in originating loans and attracting deposits may adversely affect profitability.

The Bank operates in a highly competitive industry that could become even more competitive as a result of legislative, regulatory and technological changes, and continued consolidation.

The Bank's retail banking and a significant portion of its lending business are concentrated in the NYC metropolitan area. The NYC banking environment is extremely competitive. The Bank’s competition for loans exists principally from savings banks, commercial banks, mortgage banks and insurance companies.  The Bank has faced sustained competition for the origination of multifamily residential and commercial real estate loans. Management anticipates that the current level of competition for multifamily residential and commercial real estate loans will continue for the foreseeable future, and this competition may inhibit the Bank’s ability to maintain its current level and pricing of such loans.

Clients could pursue alternatives to the Bank's deposits, causing the Bank to lose a historically less expensive source of funding.  The Bank gathers deposits in direct competition with commercial banks, savings banks and brokerage firms, many among the largest in the nation. In addition, it must also compete for deposit monies against the stock markets, mutual funds, and other securities.  Over the previous decade, consolidation in the financial services industry, coupled with the emergence of Internet banking, has altered the deposit gathering landscape and may increase competitive pressures on the Bank.
 
The Bank may not be able to meet the cash flow requirements of its depositors and borrowers or meet its operating cash needs.

Liquidity is the ability to meet cash flow needs on a timely basis at a reasonable cost. The liquidity of the Bank is used to make loans and repay deposit liabilities as they become due or are demanded by customers. Liquidity policies and limits are established by the board of directors. The Holding Company's overall liquidity position and the liquidity position of the Bank are regularly monitored to ensure that various alternative strategies exist to cover unanticipated events that could affect liquidity. Funding sources include deposits, repayments of loans and MBS, investment security maturities and redemptions, and advances from the FHLBNY. The Bank maintains a portfolio of securities that can be used as a secondary source of liquidity. The Bank also can borrow through the Federal Reserve Bank’s discount window. If the Bank was unable to access any of these funding sources when needed, it might be unable to meet customers’ needs, which could adversely impact the Company's financial condition, results of operations, cash flows, and level of regulatory capital.

The soundness of other financial institutions could adversely affect the Company.

The Company's ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions.  The Company has exposure to many different industries and counterparties.  As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by the Company or by other institutions.  There is no assurance that any such losses would not materially and adversely affect the Company's results of operations.

Negative public opinion could damage the Company's reputation and adversely impact its business and revenues.

As a financial institution, the Bank's earnings and capital are subject to risks associated with negative public opinion.  Negative public opinion could result from the Company's actual or alleged conduct in any number of activities, including lending practices, the failure of any product or service sold by the Bank to meet customers’ expectations or applicable regulatory requirements, corporate governance and acquisitions, or from actions taken by government regulators and community organizations in response to those activities.  Negative public opinion can adversely affect the Company's ability to attract and/or retain clients and can expose the Company to litigation and regulatory action.  Actual or alleged conduct by one of the Company's businesses can result in negative public opinion about its other businesses.  Negative public opinion could also affect the Company's credit ratings, which are important to its access to unsecured wholesale borrowings.  Significant changes in these ratings could change the cost and availability of these sources of funding.

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

The Reform Act creates minimum standards for the origination of mortgage loans.  The CFPB has adopted rules imposing extensive regulations governing an institution’s obligation to evaluate a borrower’s ability to repay a mortgage loan.  The rule applies to all consumer mortgages (except home equity lines of credit, timeshare plans, reverse mortgages or temporary loans). The rule also prohibits prepayment fees on certain types of mortgage loans.

Congress and various federal regulators also may significantly impact the financial services industry and the Company's business.  Complying with any new legislative or regulatory requirements could have an adverse impact on the Company's consolidated results of operations, its ability to fill positions with the most qualified candidates available, and the Holding Company's ability to maintain its dividend. Further, while the change in administration in the United States may ultimately roll back or modify certain of the regulatory reforms adopted since the financial crises, uncertainty about the timing and scope of any such changes as well as the cost of complying with a new regulatory regime, may negatively impact the Company’s businesses, at least in the short term.

Furthermore, the Federal Government may take action to transform the role of government in the U.S. housing market, such as reducing the size and scope of FNMA and FHLMC, or diminishing other government support to such markets. Congressional leaders have voiced similar plans for future legislation. It is too early to determine the nature and scope of any legislation that may develop along these lines, or the roles FNMA and FHLMC or the private sector will play in future housing markets. However, it is possible that legislation will be proposed over the near term that would considerably limit the nature of GSE guarantees relative to historical measurements, which could have broad adverse implications for the market and significant implications for the Company's business.
 
The Bank has recently become subject to more stringent capital requirements.

Effective January 1, 2015, the federal banking agencies have adopted the Basel III Capital Rules, which apply to both the Bank and Holding Company. These rules are subject to phase-in periods until January 1, 2019 for certain of their components.  The Basel III Capital Rules will result in significantly higher capital requirements and more restrictive leverage and liquidity ratios for the Bank than those previously in effect.  The Basel III Capital Rules will also apply to the Holding Company, which, as a savings and loan holding company, was not previously subject to consolidated risk-based capital requirements.

While the Bank expects to satisfy the requirements of the Basel III Capital Rules, inclusive of the capital conservation buffer, as phased in by the FRB, it may fail to do so. In addition, these requirements could have a negative impact on the Bank’s ability to lend, grow deposit balances, make acquisitions and make capital distributions in the form of increased dividends or share repurchases. Higher capital levels could also lower the Company’s consolidated return on equity.

The Company's accounting estimates and risk management processes rely on analytical and forecasting models.

The processes the Company uses to estimate its probable incurred loan losses and to measure the fair value of some financial instruments, as well as the processes used to estimate the effects of changing interest rates and other market measures on the Company’s financial condition and results of operations, depends upon the use of analytical and forecasting models. These models reflect assumptions that may not be accurate, particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are adequate, the models may prove to be inadequate or inaccurate because of other flaws in their design or their implementation. If the models the Company uses for interest rate risk and asset-liability management are inadequate, the Company may incur increased or unexpected losses upon changes in market interest rates or other market measures. If the models the Company uses for determining its probable incurred loan losses are inadequate, the allowance for loan losses may not be sufficient to support future charge-offs. If the model the Company uses to measure the fair value of financial instruments is inadequate, the fair value of such financial instruments may fluctuate unexpectedly or may not accurately reflect what the Company could realize upon sale or settlement of such financial instruments. Any such failure in the Company’s analytical or forecasting models could have a material adverse effect on the Company’s business, financial condition and results of operations.

The value of the Company’s goodwill and other intangible assets may decline in the future.

As of December 31, 2016, the Company had $55.6 million of goodwill and other intangible assets.  A significant decline in the Company’s expected future cash flows, a significant adverse change in the business climate, slower growth rates or a significant and sustained decline in the price of the Common Stock may necessitate taking charges in the future related to the impairment of the Company’s goodwill and other intangible assets. If the Company were to conclude that a future write-down of goodwill and other intangible assets is necessary, the Company would record the appropriate charge, which could have a material adverse effect on the Company’s business, financial condition and results of operations.

The Company’s controls and procedures may fail or be circumvented.

The Company's internal controls, disclosure controls and procedures, and corporate governance policies and procedures are based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are satisfied. Any failure or circumvention of the Company's controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on the Company's business, financial condition and results of operations.
 
The Company's risk management practices may not be effective in mitigating the risks to which it is subject or in reducing the potential for losses in connection with such risks.

As a financial institution, the Company is subject to a number of risks, including credit, interest rate, liquidity, market, operational, legal/compliance, reputational, and strategic. The Company's risk management framework is designed to minimize the risks to which it is subject, as well as any losses resulting from such risks. Although the Company seeks to identify, measure, monitor, report, and control the Company's exposure to such risks, and employ a broad and diversified set of risk monitoring and mitigation techniques in the process, those techniques are inherently limited because they cannot anticipate the existence or development of risks that are currently unknown and unanticipated.

For example, recent economic conditions, heightened legislative and regulatory scrutiny of the financial services industry, and increases in the overall complexity of the Company's operations, among other developments, have resulted in the creation of a variety of risks that were previously unknown and unanticipated, highlighting the intrinsic limitations of the Company's risk monitoring and mitigation techniques. As a result, the further development of previously unknown or unanticipated risks may result in the Company incurring losses in the future that could adversely impact its financial condition and results of operations.

The Company's operations rely on certain external vendors.

The Company relies on certain external vendors to provide products and services necessary to maintain its day-to-day operations.  Accordingly, the Company’s operations are exposed to risk that these vendors will not perform in accordance with the contracted arrangements. The failure of an external vendor to perform in accordance with the contracted arrangements because of changes in the vendor’s organizational structure, financial condition, support for existing products and services, or strategic focus, or for any other reason, could be disruptive to the Company’s operations, which could have a material adverse impact on the Company’s business and, in turn, the Company’s financial condition and results of operations.

The Company is subject to environmental liability risk associated with lending activities.

A significant portion of the Company’s loan portfolio is secured by real property. During the ordinary course of business, the Company may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, the Company may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require the Company to incur substantial expenses and may materially reduce the affected property’s value or limit the Company’s ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase the Company’s exposure to environmental liability. Environmental reviews of real property before initiating foreclosure may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on the Company’s business, financial condition and results of operations.

Severe weather, natural disasters, acts of war or terrorism and other external events could significantly impact the Company’s business.

Severe weather, natural disasters, acts of war or terrorism and other adverse external events could have a significant impact on the Company’s ability to conduct business. In addition, such events could affect the stability of the Company’s deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause the Company to incur additional expenses. The occurrence of any such event in the future could have a material adverse effect on the Company’s business, which, in turn, could have a material adverse effect on the Company’s financial condition and results of operations.
 
Credit risk stemming from held-for-investment lending activities may adversely impact on the Company's consolidated net income.

The loans originated by the Bank for investment are primarily multifamily residential loans and, to a lesser extent, commercial real estate loans. Such loans are generally larger, and have higher risk-adjusted returns and shorter maturities, than one-to four-family mortgage loans.  Credit risk would ordinarily be expected to increase with the growth of these loan portfolios.

Payments on multifamily residential and commercial real estate loans generally depend on the income produced by the underlying properties, which, in turn, depend on their successful operation and management. Accordingly, the ability of the Bank's borrowers to repay these loans may be impacted by adverse conditions in the local real estate market and the local economy.  While the Bank seeks to minimize these risks through its underwriting policies, which generally require that such loans be qualified on the basis of the collateral property’s cash flows, appraised value, and debt service coverage ratio, among other factors, there can be no assurance that the Bank's underwriting policies will protect it from credit-related losses or delinquencies.

Although the Bank's losses have been comparatively limited, despite the economic weakness in its market, it cannot guarantee that this record will be maintained in future periods. The ability of the Bank's borrowers to repay their loans could be adversely impacted by a further decline in real estate values and/or an increase in unemployment, which not only could result in an increase in charge-offs and/or the provision for loan losses.  Either of these events would have an adverse impact on the Company's consolidated net income.

Security measures may not be sufficient to mitigate the risk of a cyber attack.

Communications and information systems are essential to the conduct of the Company's business, as it uses such systems to manage its customer relationships, general ledger, deposits, and loans. The Company's operations rely on the secure processing, storage, and transmission of confidential and other information in its computer systems and networks. Although the Company takes protective measures and endeavors to modify them as circumstances warrant, the security of its computer systems, software, and networks may be vulnerable to breaches, unauthorized access, misuse, computer viruses, or other malicious code and cyber attacks that could have a security impact.

In addition, breaches of security may occur through intentional or unintentional acts by those having authorized or unauthorized access to the Company's confidential or other information or the confidential or other information of its customers, clients, or counterparties. If one or more of such events were to occur, the confidential and other information processed and stored in, and transmitted through, the Company's computer systems and networks could potentially be jeopardized, or the operations of the Company or its customers, clients, or counterparties could otherwise experience interruptions or malfunctions. This could cause the Company significant reputational damage or result in significant losses.

Furthermore, the Company may be required to expend significant additional resources to modify its protective measures or investigate and remediate vulnerabilities or other exposures arising from operational and security risks. Also, the Company may be subject to wholly or partially uninsured litigation and financial losses.

In addition, the Company routinely transmits and receives personal, confidential, and proprietary information by e-mail and other electronic means. The Company has discussed and worked with its appropriate customers and counterparties to develop secure transmission capabilities, however, it does not have, and may be unable to install, secure capabilities with all of these constituents, and may be unable to ensure that these third parties have appropriate controls in place to protect the confidentiality of such information.  Any interception, misuse, or mishandling of personal, confidential, or proprietary information transmitted to or received from a customer or counterparty could result in legal liability, regulatory action, and reputational harm, and could have a significant adverse effect on the Company's competitive position, financial condition, and results of operations.
 
Security measures may not protect the Company from systems failures or interruptions.

Communications and information systems are essential to the conduct of the Company's business, as it uses such systems to manage its customer relationships, general ledger, deposits, and loans. The Company's operations rely on the secure processing, storage, and transmission of confidential and other information in its computer systems and networks. The security of its computer systems, software, and networks may be vulnerable to breaches, unauthorized access, misuse, computer viruses, or other malicious code and cyber attacks that could have a security impact.

A failure in or breach of security may occur through intentional or unintentional acts by those having authorized or unauthorized access to the Company's confidential or other information or the confidential or other information of its customers, clients, or counterparties. If one or more of such events were to occur, the confidential and other information processed and stored in, and transmitted through, the Company's computer systems and networks could potentially be jeopardized, or the operations of the Company or its customers, clients, or counterparties could otherwise experience interruptions or malfunctions.  If this confidential or proprietary information were to be mishandled, misused or lost, the Company could additionally be exposed to significant regulatory consequences, reputational damage, civil litigation and financial loss.

Information security risks have generally increased in recent years because of the proliferation of new technologies and the increased sophistication and activities of perpetrators of cyber-attacks and mobile phishing.  Mobile phishing, a means for identity thieves to obtain sensitive personal information through fraudulent e-mail, text or voice mail, is an emerging threat targeting the customers of popular financial entities.

Furthermore, the Company may be required to expend significant additional resources to modify its protective measures or investigate and remediate vulnerabilities or other exposures arising from operational and security risks. Also, the Company may be subject to wholly or partially uninsured litigation and financial losses.

In addition, the Company routinely transmits and receives personal, confidential, and proprietary information by e-mail and other electronic means. The Company has discussed and worked with its appropriate customers and counterparties to develop secure transmission capabilities, however, it does not have, and may be unable to install, secure capabilities with all of these constituents, and may be unable to ensure that these third parties have appropriate controls in place to protect the confidentiality of such information.  Any interception, misuse, or mishandling of personal, confidential, or proprietary information transmitted to or received from a customer or counterparty could result in legal liability, regulatory action, and reputational harm, and could have a significant adverse effect on the Company's competitive position, financial condition, and results of operations.

The Company also outsources certain aspects of its data processing to select third-party providers. If these third-party providers encounter difficulties, or problems arise in communicating with them, the Company's ability to adequately process and account for customer transactions could be affected, and its business operations could be adversely impacted.

Although both the Company and all significant third party providers utilized to process, store and transmit confidential and other information employ a variety of physical, procedural and technological safeguards to protect this confidential and proprietary information from mishandling, these safeguards do not provide absolute assurance that mishandling, misuse or loss of the information will not occur, and that if mishandling, misuse or loss of the information did occur, those events will be promptly detected and addressed.

The trading volume in the Common Stock is less than that of other larger financial services companies.

Although the Common Stock is listed for trading on the Nasdaq National Exchange, the trading volume in its Common Stock is less than that of other, larger financial services companies. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of the Common Stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which the Holding Company has no control. Given the lower trading volume of the Common Stock, significant sales of the Common Stock, or the expectation of these sales, could, from time to time, cause the Holding Company's stock price to exhibit weakness unrelated to financial performance.
 
The Holding Company may reduce or eliminate dividends on its Common Stock in the future.

Holders of the Common Stock are entitled to receive only such dividends as its Board of Directors may declare out of funds legally available for such payments. Although the Holding Company has historically declared cash dividends on its Common Stock, it is not required to do so and may reduce or eliminate its Common Stock dividend in the future. This could adversely affect the market price of the Common Stock. In addition, the Holding Company is a savings and loan holding company, and its ability to declare and pay dividends is dependent on certain federal regulatory considerations, including the guidelines of the Federal Reserve Board regarding capital adequacy and dividends.

Item 1B. Unresolved Staff Comments

Not applicable.

Item 2.   Properties

The Holding Company neither owns nor leases any property, but instead uses the premises and equipment of the back office of the Bank.  The Bank leases commercial office space for its back office located at 300 Cadman Plaza West, 8th Floor, Brooklyn, New York 11201.  The principal office of the Bank is a fully owned building located at 209 Havemeyer Street, Brooklyn, New York 11211. During the year ended December 31, 2016, the Bank executed a contract of sale for its principal office, expected to close during the year ended December 31, 2017. As of December 31, 2016, the Bank conducted its business through twenty-five full-service retail banking offices located throughout Brooklyn, Queens, the Bronx and Nassau County, New York. The Bank owns eight of these offices, and leases seventeen. The Bank opened two additional branches located in Brooklyn, New York in February 2017, which are both leased.

Item 3.   Legal Proceedings

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

Item 4.   Mine Safety Disclosures

Not applicable.

PART II

Item 5.   Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The Common Stock is traded on the Nasdaq National Market and quoted under the symbol "DCOM."  Prior to June 15, 1998, the Common Stock was quoted under the symbol "DIME."

The following table indicates the high and low sales price for the Common Stock, and dividends declared, during the periods indicated.  The Common Stock began trading on June 26, 1996, the date of the initial public offering.

   
Twelve Months Ended
December 31, 2016
   
Twelve Months Ended
December 31, 2015
 
 
 
Quarter Ended
 
Dividends
Declared
   
High
Sales
Price
   
Low
Sales
Price
   
Dividends
Declared
   
High
Sales
Price
   
Low
Sales
Price
 
March 31st
 
$
0.14
   
$
17.96
   
$
15.61
   
$
0.14
   
$
16.49
   
$
14.73
 
June 30th
   
0.14
     
18.87
     
16.37
     
0.14
     
17.66
     
15.46
 
September 30th
   
0.14
     
18.27
     
16.53
     
0.14
     
18.00
     
16.04
 
December 31st
   
0.14
     
20.45
     
16.10
     
0.14
     
18.45
     
16.20
 
 
On December 30, 2016, the final trading date in the fiscal year, the Common Stock closed at $20.10.
 
Management estimates that the Holding Company had approximately 6,000 stockholders of record as of March 1, 2017, including persons or entities holding stock in nominee or street name through various brokers and banks. There were 37,445,853 shares of Common Stock outstanding at December 31, 2016.

The Holding Company is subject to the requirements of Delaware law, which generally limits dividends to an amount equal to the excess of net assets (i.e., the amount by which total assets exceed total liabilities) over statutory capital, or if no such excess exists, to net profits for the current and/or immediately preceding fiscal year.

During the year ended December 31, 2016, the Holding Company paid cash dividends totaling $20.6 million, representing $0.56 per outstanding common share.  During the year ended December 31, 2015, the Holding Company paid cash dividends totaling $20.3 million, representing $0.56 per outstanding common share.

As the principal asset of the Holding Company, the Bank is often called upon to provide funds for the Holding Company's payment of dividends (See "Item 1 – Business - Regulation – Regulation of New York State Chartered Savings Banks – Limitation on Capital Distributions").

In March 2004, the Holding Company issued $72.2 million in trust preferred debt, with a stated annual coupon rate of 7.0%. The Holding Company re-acquired and retired $1.5 million of this outstanding debt during 2009.  Pursuant to the provisions of the debt, the Holding Company is required to first satisfy the interest obligation on the debt, which currently approximates $5.0 million annually, prior to the authorization and payment of Common Stock cash dividends.  Management of the Holding Company does not presently believe that this requirement will materially affect its ability to pay dividends to its common stockholders.
ISSUER PURCHASES OF EQUITY SECURITIES

The following table summarizes information regarding purchases of Common Stock during the fourth quarter of 2016 in accordance with the approved stock repurchase plan:

 
 
 
Period
 
Total
Number
of Shares
Purchased
 
Average
Price Paid 
Per Share
 
Total Number of
Shares Purchased as
 Part of Publicly
Announced Programs (1)
 
Maximum Number of
Shares that May Yet be
Purchased Under the
Programs (1)
 
October 2016
 
  ‑
 
  ‑
 
  ‑
   
1,104,549
 
November 2016
 
  ‑
 
  ‑
 
  ‑
   
1,104,549
 
December 2016
 
  ‑
 
  ‑
 
  ‑
   
1,104,549
 
 
(1)
The twelfth stock repurchase program was publicly announced in June 2007, authorizing the purchase of up to 1,787,665 shares of the Common Stock, and has no expiration.
 
Performance Graph

Pursuant to regulations of the SEC, the graph below compares the Holding Company's stock performance with that of the total return for the U.S. Nasdaq Stock Market and an index of all thrift stocks as reported by SNL Securities L.C. from January 1, 2012 through December 31, 2016.  The graph assumes the reinvestment of dividends in additional shares of the same class of equity securities as those listed below.
 
 
 
Period Ending December 31,
Index
2011
2012
2013
2014
2015
2016
Dime Community Bancshares, Inc.
100.00
114.74
145.02
144.63
160.80
191.03
NASDAQ Composite
100.00
117.45
164.57
188.84
201.98
219.89
SNL Thrift
100.00
121.63
156.09
167.88
188.78
231.23
 
Item 6.   Selected Financial Data

Financial Highlights
(Dollars in Thousands, except per share data)

The consolidated financial and other data of the Company as of and for the years ended December 31, 2016, 2015, 2014, 2013 and 2012 set forth below is derived in part from, and should be read in conjunction with, the Company's audited Consolidated Financial Statements and Notes thereto.  Certain amounts as of and for the years ended December 31, 2014, 2013 and 2012 have been reclassified to conform to the December 31, 2016 and 2015 presentation.  These reclassifications were not material.

   
At or for the Year Ended December 31,
 
   
2016
   
2015
   
2014
   
2013
   
2012
 
Selected Financial Condition Data:
                             
Total assets
 
$
6,005,430
   
$
5,032,872
   
$
4,497,107
   
$
4,028,190
   
$
3,905,399
 
Loans and loans held for sale (net of deferred costs or fees and the allowance for loan losses)
   
5,615,886
     
4,678,262
     
4,100,747
     
3,679,366
     
3,485,818
 
MBS
   
3,558
     
431
     
26,409
     
31,543
     
49,021
 
Investment securities (including FHLBNY capital stock)
   
60,670
     
77,912
     
76,139
     
78,863
     
88,762
 
Federal funds sold and other short-term investments
   
-
     
-
     
250
     
-
     
-
 
Goodwill
   
55,638
     
55,638
     
55,638
     
55,638
     
55,638
 
Deposits
   
4,395,426
     
3,184,310
     
2,659,792
     
2,507,146
     
2,479,429
 
Borrowings
   
901,805
     
1,237,405
     
1,244,405
     
980,680
     
913,180
 
Stockholders' equity
   
565,868
     
493,947
     
459,725
     
435,506
     
391,574
 
Selected Operating Data:
                                       
Interest income
 
$
195,627
   
$
174,791
   
$
172,952
   
$
175,456
   
$
195,954
 
Interest expense
   
52,141
     
46,227
     
48,416
     
46,969
     
86,112
 
Net interest income
   
143,486
     
128,564
     
124,536
     
128,487
     
109,842
 
Provision (credit) for loan losses
   
2,118
     
(1,330
)
   
(1,872
)
   
369
     
3,921
 
Net interest income after provision (credit) for loan losses
   
141,368
     
129,894
     
126,408
     
128,118
     
105,921
 
Non-interest income
   
75,934
     
8,616
     
9,038
     
7,463
     
23,849
 
Non-interest expense
   
83,831
     
62,493
     
61,076
     
62,692
     
62,572
 
Income before income tax
   
133,471
     
76,017
     
74,370
     
72,889
     
67,198
 
Income tax expense
   
60,957
     
31,245
     
30,124
     
29,341
     
26,890
 
Net income
 
$
72,514
   
$
44,772
   
$
44,246
   
$
43,548
   
$
40,308
 
 
   
At or for the Year Ended December 31,
 
   
2016
   
2015
   
2014
   
2013
   
2012
 
SELECTED FINANCIAL RATIOS AND OTHER DATA (1):
                             
Return on average assets
   
1.31
%
   
0.96
%
   
1.03
%
   
1.09
%
   
1.02
%
Return on average stockholders' equity
   
13.40
     
9.40
     
9.83
     
10.58
     
10.73
 
Stockholders' equity to total assets at end of period
   
9.42
     
9.81
     
10.22
     
10.81
     
10.03
 
Loans to deposits at end of period
   
128.23
     
147.50
     
154.87
     
147.56
     
141.42
 
Loans to interest-earning assets at end of period
   
95.92
     
95.98
     
94.68
     
96.74
     
94.41
 
Net interest spread (2)
   
2.52
     
2.72
     
2.84
     
3.19
     
2.58
 
Net interest margin (3)
   
2.68
     
2.89
     
3.03
     
3.39
     
2.92
 
Average interest-earning assets to average interest-bearing liabilities
   
116.85
     
116.64
     
115.98
     
116.49
     
114.83
 
Non-interest expense to average assets
   
1.51
     
1.34
     
1.42
     
1.57
     
1.59
 
Efficiency ratio (4)
   
55.48
     
45.98
     
46.28
     
46.23
     
52.58
 
Effective tax rate
   
45.67
     
41.10
     
40.51
     
40.25
     
40.02
 
Dividend payout ratio
   
28.43
     
45.53
     
45.53
     
45.53
     
47.86
 
Per Share Data:
                                       
Diluted earnings per share
 
$
1.97
   
$
1.23
   
$
1.23
   
$
1.23
   
$
1.17
 
Cash dividends paid per share
   
0.56
     
0.56
     
0.56
     
0.56
     
0.56
 
Book value per share (5)
   
15.11
     
13.22
     
12.47
     
11.86
     
10.96
 
Asset Quality Ratios and Other Data(1):
                                       
Net charge-offs (recoveries)
 
$
97
   
$
(1,351
)
 
$
(212
)
 
$
766
   
$
3,707
 
Total non-performing loans (6)
   
4,237
     
1,611
     
6,198
     
12,549
     
8,888
 
OREO
   
-
     
148
     
18
     
18
     
-
 
Non-performing TRUP CDOs
   
1,270
     
1,236
     
904
     
898
     
892
 
Total non-performing assets
   
5,507
     
2,995
     
7,120
     
13,465
     
9,780
 
Non-performing loans to total loans
   
0.08
%
   
0.03
%
   
0.15
%
   
0.34
%
   
0.25
%
Non-performing assets to total assets
   
0.09
     
0.06
     
0.16
     
0.33
     
0.25
 
Allowance for Loan Losses to:
                                       
Non-performing loans
   
484.68
%
   
1,149.22
%
   
298.37
%
   
160.59
%
   
231.21
%
Total loans (7)
   
0.36
     
0.39
     
0.45
     
0.54
     
0.59
 
Regulatory Capital Ratios: (Bank only) (1)(8)
                                       
Common Equity Tier 1 Capital to Risk-Weighted Assets
   
11.60
%
   
11.55
%
   
12.33
%
   
N/A
     
N/A
 
Tier 1 Capital to Risk-Weighted Assets ("Tier 1 Capital Ratio")
   
11.60
     
11.55
     
12.33
     
N/A
     
N/A
 
Total Capital to Risk-Weighted Assets ("Total Capital Ratio")
   
12.05
     
12.03
     
12.89
     
N/A
     
N/A
 
Tier 1 Capital to Average Assets
   
8.95
     
9.17
     
9.64
     
N/A
     
N/A
 
Earnings to Fixed Charges Ratios (9):
                                       
Including interest on deposits
   
3.48x
 
   
2.60x
 
   
2.50x
 
   
2.51x
 
   
1.77x
 
Excluding interest on deposits
   
7.25
     
4.11
     
3.49
     
3.58
     
2.95
 
Full Service Branches
   
25
     
25
     
25
     
25
     
26
 

 (1)
With the exception of end of period ratios, all ratios are based on average daily balances during the indicated periods. Asset Quality Ratios and Regulatory Capital Ratios are end of period ratios.
 
(2)
The net interest spread represents the difference between the weighted-average yield on interest-earning assets and the weighted-average cost of interest-bearing liabilities.
 
(3)
The net interest margin represents net interest income as a percentage of average interest-earning assets.
 
(4)
The efficiency ratio represents non-interest expense as a percentage of the sum of net interest income and non-interest income, excluding any gains or losses on sales of assets.
 
(5)
Book value per share equals total stockholders' equity divided by shares outstanding at each period end.
 
(6)
Includes non-performing loans designated as held for sale at period end.
 
(7)
Total loans represent loans and loans held for sale, net of deferred fees and costs and unamortized premiums, and excluding (thus not reducing the aggregate balance by) the allowance for loan losses.
 
(8)
Regulatory capital ratios are calculated based upon the Basel III capital rules that became effective on January 1, 2015.  Pro forma ratios computed as of December 31, 2014 have been provided, however, periods prior to December 31, 2014 are not provided.
 
(9)
Earnings to fixed charges ratio is a non-GAAP measure. For purposes of computing the ratios of earnings to fixed charges, earnings represent income before taxes, extraordinary items and the cumulative effect of accounting changes plus fixed charges.  Fixed charges represent total interest expense, including and excluding interest on deposits.
 
Item 7.   Management's Discussion and Analysis of Financial Condition and Results of Operations

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, mortgage banking related income, and income associated with Bank Owned Life Insurance (“BOLI”).  Non-interest expense primarily consists of employee compensation and benefits, federal deposit insurance premiums, data processing costs, 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 recent years, particular emphasis has been placed upon growing individual and small business commercial checking account balances. The Bank also actively strives to obtain checking account balances affiliated with the operation of the collateral underlying its mortgage loans, as well as personal deposit accounts from its borrowers. The Bank additionally utilizes an internet banking initiative, "Dime Direct." To date, deposits gathered through Dime Direct have primarily been promotional money markets. Given their nature, the Dime Direct deposits are anticipated to carry lower administrative servicing costs than the Bank's traditional retail deposits. The Bank’s primary strategy additionally includes the origination of, and investment in, mortgage loans, with an emphasis on NYC multifamily residential and mixed-use real estate loans.  The Company believes that multifamily residential and mixed-use loans in and around NYC provide several 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 seeks to maintain the asset quality of its loans and other investments, and uses portfolio and asset/liability management techniques in an effort to manage the effects of interest rate volatility on its profitability and capital. The Bank may purchase investment grade securities to provide a source of liquidity and earnings,

 Critical Accounting Policies

The Company’s accounting and reporting policies are prepared in accordance with GAAP and conform to general practices within the banking industry. See Note 1 to the Company’s Consolidated Financial Statements for the year ended December 31, 2016, which contains the Company’s significant accounting policies.

The Company’s policies with respect to (1) the methodologies it uses to determine the allowance for loan losses (including reserves for loan commitments), and (2) 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 and Reserve for Loan Commitments

The allowance for loan losses is provided to reflect probable incurred losses inherent in the loan portfolio. Management reviews the adequacy of the allowance for loan losses by reviewing all impaired loans on an individual basis. The remaining portfolio is segmented and evaluated on a pooled basis.  Factors considered in determining the appropriateness of the allowance for loan losses include the Bank's past loan loss experience, known and inherent risks in the portfolio, existing adverse situations which may affect a borrower's ability to repay, the estimated value of underlying collateral and current economic conditions in the Bank's lending area.  Judgment is required to determine the appropriate historical loss experience period, as well as the manner in which to quantify probable losses associated with the additional factors noted above. This evaluation is inherently subjective, as estimates are susceptible to significant revisions as more information becomes available.

Although management uses available information to estimate losses on loans, future additions to, or reductions in, the allowance may be necessary based on changes in economic conditions or other factors beyond management's control. In addition, the Bank's regulators, as an integral part of their examination processes, periodically review the Bank's allowance for loan losses, and may require the Bank to recognize additions to, or reductions in, the allowance based upon judgments different from those of management.

The Bank's methods and assumptions utilized to periodically determine its allowance for loan losses are summarized in Note 5 to the Company's consolidated financial statements.

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 such 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. The Company provides the actuaries several key assumptions which have a significant impact on the pension benefits and other postretirement benefit obligations as well as benefits expense. These assumptions include the discount rate and the expected return on plan assets (for plans that own assets) which are regularly reviewed and evaluated for reasonableness in conjunction with current market interest rates and conditions. All assumptions impacting the Company's defined benefit plans are reviewed at least annually, and more frequently should circumstances warrant.
 
The discount rate is used to calculate the present value of the benefit obligations at the measurement date and the expense to be recorded in the next fiscal year. A lower discount rate assumption typically generates a higher benefit obligation and expense, while a higher discount rate assumption typically generates a lower benefit obligation and expense. Discount rate assumptions are determined by reference to the Citigroup Pension Discount Curve (a commonly utilized benchmark), adjusted for plan specific cash flows. These rates are reviewed for reasonableness and adjusted, as necessary, to reflect current market data and trends.
 
In order to determine the expected long-term return on plan assets, the Company reviews the long-term historical return information on plan assets, the mix of investments that comprise plan assets and the historical returns on indices comparable to the fund classes in which the plan invests.
 
While the Company's management utilizes available information to estimate these key assumptions, future fluctuations may occur based on changes in the underlying benchmark data or other factors beyond management's control.

The Company's methods and assumptions utilized for its accounting for defined benefit plans are discussed in Note 14 to the Company's consolidated financial statements.
 
Analysis of Net Interest Income

The Company's profitability, like that of most banking institutions, is dependent primarily upon net interest income.  Net interest income depends on the relative amounts of interest-earning assets and interest-bearing liabilities, and the interest rate earned or paid on them.  The following tables set forth certain information relating to the Company's consolidated statements of operations for the years ended December 31, 2016, 2015 and 2014, and reflect the average yield on interest-earning assets and average cost of interest-bearing liabilities for the periods indicated. Such yields and costs are derived by dividing interest income or expense by the average balance of interest-earning assets or interest-bearing liabilities, respectively, for the periods indicated. Average balances are derived from daily balances. The yields and costs include fees and charges that are considered adjustments to yields and costs.  All material changes in average balances and interest income or expense are discussed in the section entitled "Net Interest Income" in the comparisons of operating results commencing on page F-41.

   
For the Year Ended December 31,
 
         
2016
               
2015
               
2014
       
   
(Dollars in Thousands)
 
   
Average
Balance
   
Interest
   
Average
Yield/
Cost
   
Average
Balance
   
Interest
   
Average
Yield/
Cost
   
Average
Balance
   
Interest
   
Average
Yield/
Cost
 
Assets:
                                                     
Interest-earning assets:
                                                     
Real estate loans  (1)
 
$
5,210,984
   
$
191,856
     
3.68
%
 
$
4,327,415
   
$
171,347
     
3.96
%
 
$
3,962,566
   
$
169,208
     
4.27
%
Other loans
   
1,745
     
115
     
6.59
     
1,562
     
93
     
5.95
     
1,954
     
105
     
5.37
 
Investment securities
   
18,489
     
880
     
4.76
     
18,570
     
875
     
4.71
     
19,220
     
560
     
2.91
 
MBS
   
1,216
     
20
     
1.64
     
6,111
     
186
     
3.04
     
27,658
     
914
     
3.30
 
Federal funds sold and other short-term investments
   
118,576
     
2,756
     
2.32
     
89,837
     
2,290
     
2.55
     
92,609
     
2,165
     
2.34
 
Total interest-earning assets
   
5,351,010
   
$
195,627
     
3.66
%
   
4,443,495
   
$
174,791
     
3.93
%
   
4,104,007
   
$
172,952
     
4.21
%
Non-interest earning assets
   
203,758
                     
216,981
                     
190,627
                 
Total assets
 
$
5,554,768
                   
$
4,660,476
                   
$
4,294,634
                 
                                                                         
Liabilities and Stockholders' Equity:
                                                                       
Interest-bearing liabilities:
                                                                       
Interest bearing checking accounts
 
$
89,197
   
$
230
     
0.26
%
 
$
76,210
   
$
244
     
0.32
%
 
$
79,455
   
$
222
     
0.28
%
Money Market accounts
   
2,063,787
     
17,293
     
0.84
     
1,370,531
     
10,133
     
0.74
     
1,113,104
     
6,265
     
0.56
 
Savings accounts
   
367,311
     
182
     
0.05
     
370,439
     
183
     
0.05
     
377,930
     
188
     
0.05
 
CDs
   
1,015,615
     
14,669
     
1.44
     
902,600
     
12,445
     
1.38
     
858,526
     
12,916
     
1.50
 
Borrowed Funds (2)
   
1,043,515
     
19,767
     
1.89
     
1,089,700
     
23,222
     
2.13
     
1,109,532
     
28,825
     
2.60
 
Total interest-bearing liabilities
   
4,579,425
   
$
52,141
     
1.14
%
   
3,809,480
   
$
46,227
     
1.21
%
   
3,538,547
   
$
48,416
     
1.37
%
Non-interest bearing checking accounts
   
263,527
                     
220,134
                     
177,163
                 
Other non-interest-bearing liabilities
   
170,569
                     
154,809
                     
129,034
                 
Total liabilities
   
5,013,521
                     
4,184,423
                     
3,844,744
                 
Stockholders' equity
   
541,247
                     
476,053
                     
449,890
                 
Total liabilities and stockholders' equity
 
$
5,554,768
                   
$
4,660,476
                   
$
4,294,634
                 
Net interest income
         
$
143,486
                   
$
128,564
                   
$
124,536
         
Net interest spread (3)
                   
2.52
%
                   
2.72
%
                   
2.84
%
Net interest-earning assets
 
$
771,585
                   
$
634,015
                   
$
565,460
                 
Net interest margin (4)
                   
2.68
%
                   
2.89
%
                   
3.03
%
Ratio of interest-earning assets to interest-bearing liabilities
           
116.85
%
                   
116.64
%
                   
115.98
%
       
 
(1)
In computing the average balance of real estate loans, non-performing loans have been included.  Interest income on real estate loans includes loan fees.  Interest income on real estate loans also includes applicable prepayment fees and late charges totaling $9.0 million, $11.3  million and $12.5 million during the years ended December 31, 2016, 2015 and 2014, respectively.
 
(2)
Interest expense on borrowed funds includes $1.4 million of prepayment charge recognized during the year ended December 31, 2015.  There were no such fees during the years ended December 31, 2016 or 2014.  Absent the prepayment charge, the average cost of borrowings would have been 2.01% during the year ended December 31, 2015.
 
(3)
Net interest spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
 
(4)
Net interest margin represents net interest income as a percentage of average interest-earning assets.
 
Rate/Volume Analysis

The following table represents the extent to which variations in interest rates and the volume of interest-earning assets and interest-bearing liabilities have affected interest income and interest expense during the periods indicated. Information is provided in each category with respect to: (i) variances attributable to fluctuations in volume (change in volume multiplied by prior rate), (ii) variances attributable to rate (changes in rate multiplied by prior volume), and (iii) the net change. Variances attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.

   
Years Ended December 31,
 
   
2016 over 2015
Increase/ (Decrease) Due to
   
2015 over 2014
Increase/ (Decrease) Due to
 
   
Volume
   
Rate
   
Total
   
Volume
   
Rate
   
Total
 
Interest-earning assets:
 
(Dollars in Thousands)
 
Real Estate Loans
 
$
22,030
   
$
(1,521
)
 
$
20,509
   
$
15,002
   
$
(12,863
)
 
$
2,139
 
Other loans
   
11
     
11
     
22
     
(22
)
   
10
     
(12
)
Investment securities
   
(1
)
   
6
     
5
     
(25
)
   
340
     
315
 
MBS
   
(99
)
   
(67
)
   
(166
)
   
(684
)
   
(44
)
   
(728
)
Federal funds sold and other short-term investments
   
468
     
(2
)
   
466
     
(67
)
   
192
     
125
 
Total
 
$
22,409
   
$
(1,573
)
 
$
20,836
   
$
14,204
   
$
(12,365
)
 
$
1,839
 
Interest-bearing liabilities:
                                               
Interest bearing checking accounts
 
$
37
   
$
(51
)
 
$
(14
)
 
$
(10
)
 
$
32
   
$
22
 
Money market accounts
   
5,458
     
1,702
     
7,160
     
1,657
     
2,211
     
3,868
 
Savings accounts
   
(2
)
   
1
     
(1
)
   
(4
)
   
(1
)
   
(5
)
CDs
   
1,620
     
604
     
2,224
     
611
     
(1,082
)
   
(471
)
Borrowed funds
   
(912
)
   
(2,543
)
   
(3,455
)
   
(452
)
   
(5,151
)
   
(5,603
)
Total
 
$
6,201
   
$
(287
)
 
$
5,914
   
$
1,802
   
$
(3,991
)
 
$
(2,189
)
Net change in net interest income
 
$
16,208
   
$
(1,286
)
 
$
14,922
   
$
12,402
   
$
(8,374
)
 
$
4,028
 

Comparison of Operating Results for the Years Ended December 31, 2016, 2015, and 2014

Net income was $72.5 million in 2016, compared to $44.8 million in 2015, and $44.2 million in 2014.  During 2016, net interest income increased $14.9 million, the provision for loan losses increased by $3.4 million, non-interest income increased by $67.3 million and non-interest expense increased by $21.3 million.  Income tax expense increased $29.7 million in 2016, as a result of $57.5 million of additional pre-tax income. Net interest income increased $4.0 million in 2015.  Offsetting this increase, non-interest income declined $422,000, non-interest expense increased $1.4 million, and 2015 earnings experienced a $542,000 lower benefit from the credit (negative provision) for loan losses than was experienced in 2014. Income tax expense increased $1.1 million in 2015, primarily as a result of $1.6 million of additional pre-tax income.

Net Interest Income

The discussion of net interest income for 2016, 2015, and 2014 below should be read in conjunction with the tables presented on pages F-40 and F-41, which set forth certain information related to the consolidated statements of operations for those periods, and which also present the average yield on assets and average cost of liabilities for the periods indicated.

The Company’s net interest income and net interest margin during 2016, 2015, and 2014 were impacted by the following factors:

·
During the period January 1, 2009 through December 31, 2016, FOMC monetary policies resulted in the maintenance of the overnight federal funds rate in a range of 0.0% to 0.75%, resulting in deposit and borrowing costs at historically low levels.

·
Increased marketplace competition and refinancing activity on real estate loans, particularly during the period January 1, 2012 through December 31, 2016, resulted in an ongoing reduction in the average yield on real estate loans.
 
Interest income was $195.6 million in 2016, $174.8 million in 2015, and $173.0 in 2014. During 2016, interest income increased $20.8 million from 2015, primarily reflecting increases in interest income of $20.5 million on real estate loans and $466,000 on other short term investments. The increased interest income on real estate loans reflected growth of $883.6 million in their average balance during the comparative period, as new originations significantly exceeded amortization and satisfactions during 2016 in connection with the Company’s growth strategy. Partially offsetting the higher interest income on real estate loans from the growth in their average balance was a reduction of 28 basis points in their average yield, resulting from both continued low lending rates and heightened marketplace competition. The increase in interest income on other short-term investments reflected an increase of $28.7 million in their average balance as a result of increased cash from $75.9 million net proceeds from the sale of premises, offset by a 23 basis point decline in their average yield during the comparative period. During 2015, interest income increased $1.8 million from 2014, primarily reflecting increases in interest income of $2.1 million on real estate loans, $315,000 on investment securities and $125,000 on federal funds sold and other short term investments. The increased interest income on real estate loans reflected growth of $364.8 million in their average balance during the comparative period, as new originations significantly exceeded amortization and satisfactions during 2015. Partially offsetting the higher interest income on real estate loans from the growth in their average balance was a reduction of 31 basis points in their average yield, resulting from both continued low benchmark lending rates and heightened marketplace competition. Additional interest income (previously owed but not paid timely by the issuing companies) was received and recorded on the Bank's TRUP CDOs in 2015, generating the majority of the $315,000 increase in interest income on investment securities during the comparative period. The increase in interest income on federal funds sold and other short-term investments resulted from a more favorable yield earned on the Company’s investment in FHLBNY capital stock, reflecting higher discretionary dividends declared by the FHLBNY. Partially offsetting these increases was a reduction of $728,000 in interest income on MBS, primarily reflecting a decline of $21.5 million in their average balance during the comparative period, as the Company liquidated virtually its entire MBS portfolio in March 2015.

Interest expense was $52.1 million in 2016, $46.2 million in 2015, and $48.4 million in 2014. During 2016, interest expense increased $5.9 million from 2015, primarily reflecting increases in expense of $7.2 million on money market accounts and $2.2 million on CDs, offset by a reduction of $3.5 million in interest expense on borrowed funds. The increase of $7.2 million in interest expense on money market deposits reflected successful promotional activities in connection with the Company’s growth strategy that increased their average balance by $693.3 million and their average cost by 10 basis points in 2016.  The increase of $2.2 million in interest expense on CDs reflected an increase in their average balance by $113.0 million and their average cost by 6 basis points, as the Bank competed more aggressively for CDs during 2016 compared to 2015. Interest expense on borrowings declined $3.5 million due to a reduction of 24 basis points in their average cost (resulting from the re-pricing of higher interest rate borrowings), and a decrease in their average balance by $46.2 million during 2016 compared to 2015 as FHLBNY advances continued to mature. Interest expense decreased $2.2 million in 2015 from 2014, primarily due to reductions of $5.6 million in interest expense on borrowed funds and $471,000 on CDs during 2015, offset by an increase of $3.9 million in interest expense on money market deposits. Interest expense on borrowings declined $5.6 million due to a reduction of 47 basis points in their average cost, as higher-cost borrowings that matured during 2015 were not replaced. The reduction in interest expense on CDs reflected a decline of 12 basis points in their average cost, as the Bank competed less aggressively for CDs during 2015, instead emphasizing strategies aimed at growing money market and non-interest bearing checking deposits. The increase of $3.9 million in interest expense on money market deposits reflected successful promotional activities that increased their average balance by $257.4 million and their average cost by 18 basis points in 2015.

Provision (Credit) for Loan Losses

The Company recognized a provision for loan losses of $2.1 million in 2016, a credit (negative provision) for loan losses of $1.3 million in 2015, and a credit (negative provision) for loan losses of $1.9 million in 2014. The $2.1 million provision for loan losses recognized during 2016 resulted mainly from growth in the real estate portfolio in connection with the Company’s growth strategy, offset by continued improvement in the overall credit quality of the loan portfolio.  The credits recorded during the years ended both December 31, 2015 and 2014 reflected continued improvement in the overall credit quality of the loan portfolio from October 1, 2013 through December 31, 2015. The credit recorded during 2015 also reflected a $1.5 million recovery of previously charged-off amounts from the favorable resolution of the Bank's largest problem loan, offset by growth of $577.8 million in the real estate loan portfolio during 2015.
 
The following table sets forth activity in the Bank's allowance for loan losses at or for the dates indicated:

   
At or for the Year Ended December 31,
 
   
2016
   
2015
   
2014
   
2013
   
2012
 
Allowance for loan losses:
 
(Dollars in Thousands)
 
Balance at beginning of period
 
$
18,514
   
$
18,493
   
$
20,153
   
$
20,550
   
$
20,254
 
Provision (credit) for loan losses
   
2,118
     
(1,330
)
   
(1,872
)
   
369
     
3,921
 
Charge-offs
                                       
Multifamily residential
   
(92
)
   
(48
)
   
(87
)
   
(504
)
   
(2,478
)
Commercial real estate
   
(12
)
   
(44
)
   
(336
)
   
(400
)
   
(1,342
)
One- to four-family including condominium and  cooperative apartment
   
(79
)
   
(115
)
   
(46
)
   
(117
)
   
(777
)
Construction
   
-
     
-
     
-
     
-
     
(3
)
Consumer
   
(3
)
   
(2
)
   
(9
)
   
(21
)
   
(10
)
Total charge-offs
   
(186
)
   
(209
)
   
(478
)
   
(1,042
)
   
(4,610
)
Recoveries
   
90
     
1,560
     
690
     
276
     
903
 
Reserve for loan commitments transferred from other liabilities
   
-
     
-
     
-
     
-
     
82
 
Balance at end of period
 
$
20,536
   
$
18,514
   
$
18,493
   
$
20,153
   
$
20,550
 

Non-Interest Income

Total non-interest income was $75.9 million in 2016, $8.6 million in 2015, and $9.0 million in 2014. During 2016, non-interest income increased $67.3 million from 2015, due primarily to a gain of $68.2 million recognized on the sale of real estate and $329,000 of increased income from BOLI during the year ended December 31, 2016. Partially offsetting these increases were a $1.3 million gain on the sale of MBS in 2015, and a decline in service charges and other fees during the comparative period as a result of lower transaction volume. During 2015, non-interest income declined $422,000 from 2014, due primarily to a reduction of $328,000 in the net gain on the sale of securities and other assets during the comparative period, and a credit of $1.0 million recognized as additional mortgage banking income during 2014.  The $1.0 million credit eliminated the liability in relation to loans sold to FNMA on which the Bank retained an obligation (off-balance sheet contingent liability) to absorb losses  on loans that were re-acquired from FNMA during 2014.   Partially offsetting the reductions were the following increases during 2015: 1) $662,000 of income from BOLI, as the Company increased its investment in BOLI commencing in October 2014; 2) $194,000 of additional loan application fee income during the comparative period that reflected higher loan origination activity; and 3) $220,000 growth in inspection fee income reflecting the growth in the mortgage loan portfolio.

Non-Interest Expense

Non-interest expense was $83.8 million in 2016, $62.5 million in 2015, and $61.1 million in 2014. During 2016, non-interest expense increased $21.3 million from 2015. Contributing to the increase was a non-recurring $3.4 million reduction in salaries and employee benefits in 2015 from the curtailment of certain postretirement health benefits (“Curtailment Gain”). Excluding the impact of the Curtailment Gain, non-interest expense would have increased by $17.9 million during 2016. The increase was primarily the result of a one-time, non-cash, non-taxable expense of $11.3 million related to the prepayment of the outstanding balance of the Employee Stock Ownership Plan (“ESOP”) loan by the plan (“ESOP Charge”), in addition to increases of $1.6 million in occupancy and equipment expense, $1.4 million in marketing expense, $1.2 million in data processing expense, $734,000 in consulting expense, and $1.7 million in other operating expenses. The $1.6 million increase in occupancy expense was attributable to new leases related to de novo retail branches and a new corporate office.  The $1.4 million increase in marketing costs was related to deposit gathering initiatives in line with the Company’s growth strategy. The $1.2 million increase in data processing costs was the result of various technology enhancement initiatives related to customer banking services. The $734,000 increase in consulting expense was attributable to new consulting.  During 2015, non-interest expense increased $1.4 million from 2014. Excluding the impact of the Curtailment Gain, non-interest expense would have increased by $4.8 million during the comparative period as a result of higher salaries and employee benefits, increased occupancy and equipment expenses from the accelerated depreciation of some automated teller machine equipment that was expected to be replaced sooner than anticipated, additional marketing expenses tied to both brand recognition and deposit gathering initiatives, and heightened data processing costs associated with both higher loan and deposit processing activities and several technological upgrades.
 
Non-interest expense as a percentage of average assets was 1.31% in 2016, excluding the ESOP Charge, down from 1.41% during in 2015, excluding the Curtailment Gain, which was comparable to 1.42% in 2014.  The decrease during 2016 was primarily due to the $894.3 million of growth in average assets outweighing the growth in non-interest expense during 2016.  The decrease during 2015 was primarily due to the $365.8 million of growth in average assets during the year ended December 31, 2015.

Income Tax Expense

Income tax expense was $60.9 million in 2016, $31.2 million in 2015, and $30.1 million in 2014. During 2016, income tax expense increased $29.7 million from 2015, due primarily to an increase of $57.5 million in pre-tax income during the comparative period.  The $57.5 million increase in pre-tax income was attributable to the $68.2 million gain on sale of real estate, offset by the $11.3 million ESOP Charge that occurred during 2016.  During 2015, income tax expense increased $1.1 million from 2014, due primarily to an increase of $1.6 million in pre-tax income during 2015.

The Company's consolidated tax rate was 39.5% in 2016, excluding the impact of the gain from the sale of real estate and the ESOP Charge, up slightly from 41.1% in 2015 and 40.5% in 2014.

Comparison of Financial Condition at December 31, 2016 and December 31, 2015

Assets totaled $6.00 billion at December 31, 2016, $972.6 million above their level at December 31, 2015.

Real estate loans increased $937.8 million during the year ended December 31, 2016, primarily due to originations of $1.53 billion of real estate loans (including refinancing of existing loans) and purchased real estate loan participations totaling $157.8 million.  These additions exceeded the $754.6 million of aggregate amortization on such loans (also including refinancing of existing loans).

Cash and due from banks increased $49.3 million during the year ended December 31, 2016, due to the net proceeds of $75.9 million received from the sale of premises during the year, offset by approximately $26.6 million used to fund asset growth and reduce borrowed funds.  During the year ended December 31, 2016, the Bank completed the sale of premises held for sale with a book value of $8.8 million at December 31, 2015 and net proceeds of $75.9 million were realized on the sale.  During the year ended December 31, 2016, the Bank entered into a $12.3 million  agreement to sell Bank premises with an aggregate book value of $1.4 million, which was transferred to held for sale as of December 31, 2016. This sale is currently expected to close in April 2017.

Total liabilities increased $900.6 million during the year ended December 31, 2016.  Retail deposits (due to depositors) increased $1.21 billion and FHLBNY advances declined by $335.6 million during the period.  Please refer to "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 increase in retail deposits and decline in FHLBNY advances during the year ended December 31, 2016. Mortgagor escrow and other deposits increased by $25.9 million during 2016 as a result of growth of the real estate portfolio.

Stockholders' equity increased $71.9 million during the year ended December 31, 2016, due primarily to net income of $72.5 million, an $11.3 million increase related to the ESOP Charge, $3.6 million of equity added from stock option exercises, a $3.3 million aggregate increase related to expense amortization associated with stock benefit plans, and $2.9 million of comprehensive income, that added to the cumulative balance of stockholders' equity.  Partially offsetting these items were $20.6 million in cash dividends paid during the period and $1.8 million related to the distribution of benefit payments reducing the cumulative balance of stockholders’ equity. The decrease in accumulated other comprehensive loss due to $2.9 million of comprehensive income, net of tax, was primarily the result of $1.0 million from changes in pension obligations and $1.8 million from changes in unrealized loss on interest rate swap derivative assets.
 
Loan Portfolio Composition

The Bank’s loan portfolio totaled $5.62 billion at December 31, 2016, consisting primarily of mortgage loans secured by multifamily residential apartment buildings, including buildings organized under a cooperative form of ownership; commercial properties; and one- to four-family residences and individual condominium or cooperative apartments.  Within the loan portfolio, $4.59 billion, or 81.6%, were classified as multifamily residential loans; $958.5 million, or 17.0%, were classified as commercial real estate loans; and $74.0 million, or 1.3%, were classified as one- to four-family residential, including condominium or cooperative apartments.  At December 31, 2016, the Bank’s loan portfolio additionally included $3.4 million in consumer loans, composed of depositor, consumer installment and other loans.
 
The following table sets forth the composition of the Bank’s real estate and other loan portfolios (including loans held for sale) in dollar amounts and percentages at the dates indicated:

   
At December 31,
 
   
2016
   
Percent
of Total
   
2015
   
Percent
of Total
   
2014
   
Percent
of Total
   
2013
   
Percent
of Total
   
2012
   
Percent
of Total
 
Real Estate loans:
 
(Dollars in Thousands)
 
Multifamily residential
 
$
4,592,282
     
81.59
%
 
$
3,752,328
     
80.02
%
 
$
3,292,753
     
80.05
%
 
$
2,917,380
     
78.97
%
 
$
2,671,533
     
76.30
%
Commercial real estate
   
958,459
     
17.03
     
863,184
     
18.41
     
745,463
     
18.12
     
700,606
     
18.96
     
735,224
     
21.00
 
One- to four-family, including condominium and cooperative apartment
   
74,022
     
1.32
     
72,095
     
1.54
     
73,500
     
1.79
     
73,956
     
2.00
     
91,876
     
2.62
 
Construction and land acquisition
   
-
     
-
     
-
     
-
     
-
     
-
     
268
     
0.01
     
476
     
0.01
 
Total real estate loans
   
5,624,763
     
99.94
     
4,687,607
     
99.97
     
4,111,716
     
99.96
     
3,692,210
     
99.94
     
3,499,109
     
99.93
 
Consumer loans:
                                                                               
Depositor loans
   
445
     
0.01
     
557
     
0.01
     
677
     
0.01
     
763
     
0.02
     
712
     
0.02
 
Consumer installment and other
   
2,970
     
0.05
     
1,033
     
0.02
     
1,152
     
0.03
     
1,376
     
0.04
     
1,711
     
0.05
 
Total consumer loans
   
3,415
     
0.06
     
1,590
     
0.03
     
1,829
     
0.04
     
2,139
     
0.06
     
2,423
     
0.07
 
Gross loans
   
5,628,178
     
100.00
%
   
4,689,197
     
100.00
%
   
4,113,545
     
100.00
%
   
3,694,349
     
100.00
%
   
3,501,532
     
100.00
%
Net unearned costs
   
8,244
             
7,579
             
5,695
             
5,170
             
4,836
         
Allowance for loan losses
   
(20,536
)
           
(18,514
)
           
(18,493
)
           
(20,153
)
           
(20,550
)
       
Loans, net
 
$
5,615,886
           
$
4,678,262
           
$
4,100,747
           
$
3,679,366
           
$
3,485,818
         
Loans serviced for others:
                                                                               
One- to four-family, including condominium and cooperative apartment
 
$
3,453
           
$
4,374
           
$
5,215
           
$
6,746
           
$
8,786
         
Multifamily residential
   
17,625
             
18,735
             
19,038
             
240,517
             
353,034
         
Total loans serviced for others
 
$
21,079
           
$
23,109
           
$
24,253
           
$
247,263
           
$
361,820
         

Of the total mortgage loan portfolio outstanding on December 31, 2016, $4.75 billion, or 84.38%, were ARMs and $878.7 million, or 15.62%, were fixed-rate loans.

The following table sets forth the composition of the Bank’s loan portfolios (including loans held for sale) by ARM or fixed-rate repayment type:

   
For the Year Ended December 31,
       
   
2016
   
Percent of
Total
   
2015
   
Percent of
Total
   
2014
   
Percent of
Total
   
2013
   
Percent of
Total
   
2012
   
Percent of
Total
 
   
(Dollars in Thousands)
 
ARM
 
$
4,746,112
     
84.38
%
 
$
3,692,014
     
78.73
%
 
$
2,981,135
     
72.50
%
 
$
2,644,032
     
71.61
%
 
$
2,511,198
     
71.77
%
Fixed-rate
   
878,651
     
15.62
     
997,183
     
21.27
     
1,130,581
     
27.50
     
1,048,178
     
28.39
     
987,911
     
28.23
 
Total loans
 
$
5,624,763
     
100.00
%
 
$
4,687,607
     
100.00
%
 
$
4,111,716
     
100.00
%
 
$
3,692,210
     
100.00
%
 
$
3,499,109
     
100.00
%
 
At December 31, 2016, the Bank had $115.2 million of loan commitments that were accepted by the borrowers.  All of these commitments are expected to close during the year ending December 31, 2017.

At December 31, 2016, the Bank’s portfolio of whole loans or loan participations that it originated and sold to other financial institutions with servicing retained totaled $21.1 million, all of which were sold without recourse.

Loan Originations, Purchases, Sales and Servicing

For the year ended December 31, 2016, total loan originations were $1.53 billion.   The following table sets forth the Bank's loan originations (including loans held for sale), sales, purchases and principal repayments for the periods indicated:

   
For the Year Ended December 31,
 
   
2016
   
2015
   
2014
   
2013
   
2012
 
Gross loans:
 
(Dollars in Thousands)
 
At beginning of period
 
$
4,689,197
   
$
4,113,545
   
$
3,694,349
   
$
3,501,532
   
$
3,460,424
 
Real estate loans originated:
                                       
Multifamily residential
   
1,321,242
     
1,098,841
     
748,067
     
872,421
     
942,326
 
Commercial real estate
   
204,720
     
236,320
     
191,944
     
187,202
     
142,418
 
One- to four-family, including condominium and cooperative apartment (1)
   
2,468
     
5,316
     
2,302
     
5,896
     
12,184
 
Equity lines of credit on multifamily residential or commercial properties
   
5,547
     
3,389
     
4,657
     
7,578
     
2,764
 
Construction and land acquisition
   
-
     
-
     
-
     
-
     
-
 
Total mortgage loans originated
   
1,533,977
     
1,343,866
     
946,970
     
1,073,097
     
1,099,692
 
Other loans originated
   
3,073
     
1,334
     
1,263
     
1,354
     
1,414
 
Total loans originated
   
1,537,050
     
1,345,200
     
948,223
     
1,074,451
     
1,101,106
 
Loans purchased
   
157,782
     
99,745
     
225,604
     
52,031
     
30,425
 
Less:
                                       
Principal repayments (including satisfactions and refinances)
   
755,851
     
859,721
     
737,776
     
923,110
     
1,020,525
 
Loans sold (2)
   
-
     
9,572
     
16,865
     
8,087
     
67,593
 
Write down of principal balance for expected loss
   
-
     
-
     
-
     
1,685
     
2,305
 
Loans transferred to OREO
   
-
     
-
     
-
     
783
     
-
 
Gross loans at end of period
 
$
5,628,178
   
$
4,689,197
   
$
4,113,545
   
$
3,694,349
   
$
3,501,532
 
 
(1)
Includes one- to four-family home equity and home improvement loans.
(2)
Includes $9.6 million, $3.9 million, $6.1 million and $30.9 million of note sales on problem loans from portfolio during the years ended December 31, 2015, 2014, 2013 and 2012, respectively.

Loan Maturity and Repricing

As of December 31, 2016, $4.0 billion, or 70.24% of the loan portfolio was scheduled to mature or reprice within five years.  In addition at December 31, 2016, loans totaling $734.4 million were required to make only monthly interest payments on their outstanding principal balance.  The great majority of these loans commence principal amortization prior to their contractual maturity date.

The following table distributes the Bank's real estate and consumer loan portfolios at December 31, 2016 by the earlier of the maturity or next repricing date.  ARMs are included in the period during which their interest rates are next scheduled to adjust. The table does not include scheduled principal amortization.

   
Real Estate Loans
   
Consumer
Loans
   
Total
 
Amount due to Mature or Reprice During the Year Ending:
 
(Dollars in Thousands)
 
December 31, 2017
 
$
373,809
   
$
3,415
   
$
377,224
 
December 31, 2018
   
649,592
     
-
     
649,592
 
December 31, 2019
   
886,921
     
-
     
886,921
 
December 31, 2020