DIME BANCORP, INC.
[PHOTO APPEARS HERE]
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WITH YOU ALL THE WAY
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1995 ANNUAL REPORT
DIME.
CORPORATE PROFILE DIME BANCORP, INC. IS THE HOLDING COMPANY FOR THE DIME
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SAVINGS BANK OF NEW YORK, FSB. HEADQUARTERED IN NEW YORK CITY, THE DIME IS THE
FIFTH LARGEST PUBLICLY-TRADED THRIFT IN THE NATION AND, WITH 86 RETAIL BANKING
BRANCHES IN NEW YORK AND NEW JERSEY, IS ONE OF THE LARGEST CONSUMER-ORIENTED
BANKS IN THE GREATER NEW YORK AREA.
DIRECTLY, AND THROUGH A NETWORK OF MORTGAGE ORIGINATION OFFICES, DIME
ORIGINATES RESIDENTIAL LOANS IN ITS PRIMARY MARKET AREA AS WELL AS SELECTED
MARKETS ACROSS THE COUNTRY. CERTAIN OF ITS OFFICES ARE OPERATED UNDER THE NAMES
NATIONAL MORTGAGE INVESTMENTS CO. AND JAMES MADISON MORTGAGE COMPANY. DIME ALSO
MAKES COMMERCIAL REAL ESTATE, CONSUMER AND SMALL BUSINESS LOANS IN ITS PRIMARY
MARKET.
THE DIME'S GOAL IS TO BE THE PREEMINENT SUPER-COMMUNITY BANK IN THE
GREATER NEW YORK AREA AND A HIGH-PERFORMANCE MORTGAGE BANKING AND CONSUMER
FINANCIAL SERVICES COMPANY IN SELECT MARKETS THROUGHOUT THE UNITED STATES.
THE COMMON STOCK OF DIME BANCORP, INC. IS TRADED ON THE NEW YORK STOCK
EXCHANGE.
SELECTED FINANCIAL DATA
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(Dollars in thousands, except per share data)
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FOR THE YEARS ENDED DECEMBER 31, 1995 1994
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Net income $ 62,185 $ 27,954
Earnings per common share 0.57 0.26
Net interest income 409,626 429,077
Net interest margin 2.07% 2.36%
General and administrative expense $ 285,901 $ 294,474
General and administrative expense as a
percentage of average total assets 1.39% 1.56%
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AT DECEMBER 31,
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Total assets $20,326,620 $19,647,937
Securities available for sale 4,070,865 530,714
Securities held to maturity 5,085,736 8,609,897
Total loans receivable, net 9,702,018 9,181,239
Deposits 12,572,203 12,811,269
Total borrowed funds 6,614,552 5,758,734
Stockholders' equity 976,530 905,125
Book value per common share 9.03 8.43
Common stock price 11.625 7.75
Non-performing assets 315,800 415,866
Non-performing assets as a
percentage of total assets 1.55% 2.12%
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To Our Shareholders: On January 13, 1995, Dime and Anchor merged. We took that
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historic step in the belief that, by combining our operations, we could create a
new consumer banking capability that would make us a fully competitive player in
today's market while providing the foundation for a corporation that would, over
time, provide superior returns to its shareholders. In doing so, we undertook
the daunting task of a "merger of equals." Few have been able to claim an
unqualified success at this difficult endeavor. Certainly, and despite all of
our preparatory work, we were somewhat taken aback by both the emotional and
physical challenges of these last twelve months.
Nevertheless, as we write this report, we can say that the physical steps needed
to complete the merger are virtually finished. In addition, we have become one
team with a common vision and an enthusiasm for working together. Moreover, we
believe the franchise is every bit as exciting as we had expected, and as 1995
ended, its potential was evident in rapidly increasing loan volumes, solid loan
portfolio growth, stable deposit performance, and improving fee income.
[PICTURE OF CITY SKYLINE AT NIGHT]
During the year, we also achieved a marked reduction in non-performing loans,
met our cost reduction goals and, in the process, became one of the industry's
more efficient institutions. As the year closed, we restructured our balance
sheet in order to reduce our reliance on wholesale activities, improve our
ability to manage interest rate risk and increase earnings stability. That,
coupled with a planned modest stock buy-back of up to 2% of our outstanding
shares, should have a slightly positive effect on our returns on equity and
assets and our earnings per share.
Finally, we have nearly completed a major effort designed to produce a strategic
plan to lead us into the future. It has reaffirmed that most of what we do is
good, but it has also identified new opportunities for performance improvement.
In the comments that follow, we discuss these matters in more detail, but we
would also urge you to review the financial section of this report for a fuller
understanding of these events.
Financial Results
Our earnings for 1995 were $62.2 million, or $.57 per common share. While they
were disappointing, there was room for encouragement as, at year-end, our
margins had stabilized, fee income was growing, costs were under firm control
and merger-related expenses were all but behind us. If the charges related to
the fourth quarter restructuring
2
and merger-related expense were excluded, we would have earned $.74 per share
for the year.
As the year progressed, there was also a modest, but steady, increase in
pre-tax core income from $31.6 million to $38.9 million. Pre-tax core income
essentially reflects operating earnings and excludes non-recurring events. A few
observations on this important trend:
. Despite the effects of continued high levels of mortgage prepayments and
the flat yield curve, net interest income increased in the fourth quarter--the
first improvement of the year.
[PHOTO OF LAWRENCE J. TOAL AND JAMES M. LARGE, JR. APPEARS HERE]
. Loan loss provisions were lower in 1995 than the year before as a result
of the steady improvement in asset quality. For the same reason, quarterly
owned real estate expense was lower as 1995 progressed.
. Fee income improved somewhat during the year. Merger-related activities
held down our sales efforts during most of the year, and since we focused on
maintaining good customer relations during this period, we were flexible on
pricing and fee forgiveness. Most of these activities were behind us as we
entered the fourth quarter, and we were pleased to see fee income increase 4%
from the third quarter.
. We were also pleased with the way costs came down during the year, and we
will achieve our projected $50 million in merger cost savings. The ratio of
general and administrative expense to total assets was 1.31% in the last quarter
of 1995. That's among the best in the industry. You will note some increase in
expenses during the last quarter; however, this increase is almost all due to
costs associated with two mortgage origination businesses acquired during that
period. Please note that we cannot continue the significant loan volume
increases we are now experiencing without some accompanying upward impact on
costs. We would, nonetheless, expect a steady improvement in our efficiency
ratio, which stood at 56.4% in the 1995 fourth quarter.
Merger Progress
While it would be an exaggeration to claim that the merger has been completed,
the facts are encouraging. As of this writing, approximately 93% of the steps
necessary to complete the merger have been completed. All but a few of the rest
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are on schedule, with the delays, such as they are, expected to be brief and
without significant cost. On the human side, from Board to management to staff,
we have come together, and if our culture is not yet fully in place, we are
close. To quote one of our people who drew applause at a recent staff meeting,
"The merger is over and let's stop talking about it."
Franchise Performance
We undertook the merger because we believed that we could forge a powerful
franchise from the two institutions. Now, a year later, how are we doing? It is
still early, but the results are encouraging:
. Residential loan production stands out as a particular success. Volume for
the year was $1.8 billion, but most exciting was the quarterly trend--$180
million, $333 million, $555 million and $748 million in the fourth quarter. The
last quarter included some $240 million in loans originated by the two newly-
acquired mortgage origination businesses. We are all the more pleased because of
an accompanying significant increase in market share, which is an important
measure of our progress. We believe that, as the year closed, Dime ranked among
the top twenty-five residential loan originators in the country--a very
significant accomplishment considering that both Dime and Anchor were
essentially out of that business just a few short years ago. At the same time,
we continue to emphasize asset quality with the loans written since the
beginning of 1993 continuing to perform well.
1995 RESIDENTIAL LOAN
PRODUCTION
(in millions)
[GRAPH]
1Q 2Q 3Q 4Q
- ---- ---- ---- ----
$180 $333 $555 $748
. Commercial real estate originations totaled $233 million, despite a
management focus on improving the quality of the existing portfolio. But here
too, we have momentum, since more than $100 million of the new originations
came in the last 90 days.
. Consumer lending showed modest growth during the year, while our small
business lending activity has encouraged us to consider further expansion of
that profitable business. Both consumer and mall business banking will be the
focus of major development efforts beginning in 1996.
. Our improved lending activity bodes well for the balance sheet, and we are
delighted to note the increase in our loan portfolio of almost $500 million
during 1995. Here again, the momentum built over the year, with over $250
million of that growth coming in the last quarter, and we expect a favorable
impact on our future performance as, over time, higher-yielding loans replace
mortgage-backed securities.
4
. We are also pleased with our consumer banking franchise, as deposits, net
of branch sales, remained stable during 1995 even as we consolidated branches
and put our customers through the transition to a new bank and a new retail
banking computer system. Part of this success is due to the fact that service
levels, as measured by our surveys, actually grew in 1995 from their already
high levels. That was an unexpected bonus. It is a tribute to our staff's
commitment to service during this difficult period.
. Income from loan servicing, as well as fee income from our securities
brokerage and insurance operations, showed potential for improvement and will be
a 1996 focus.
NON-PERFORMING ASSETS
($ in millions)
[CHART]
$416
---- $389
---- $364
[+] 74 ---- $342
[+] 64 ---- $316
---- [+] 69 ----
---- [+] 68
[-] 342 ---- [+] 61
[-] 325 ----
[-] 295 ----
[-] 274
[-] 255
4Q '94 1Q '95 2Q '95 3Q '95 4Q '95
------ ------ ------ ------ ------
2.12% 1.97% 1.83% 1.71% 1.55%
Ratio of NPAs to total assets
[+] ORE, net [-] Non-Performing Loans
Asset Quality
We committed to improving asset quality even as we pushed for loan volume, and
so we were delighted that, during 1995, non-performing assets dropped from $416
million to $316 million, a 24% reduction. It is interesting to reflect that,
only four years ago, Dime's problem loans exceeded $1 billion. This performance
was driven by the highly effective collection skills that we put together during
prior years and, of course, the success of our recent underwriting, which should
stand us in good stead as loan volume increases or if the economy should worsen.
Balance Sheet Restructuring
At year-end, we announced a series of actions intended to improve future
performance. These include the downsizing of our balance sheet through the
planned sale of approximately $1.1 billion of mortgage-backed securities, with
the proceeds used to reduce wholesale borrowings. We also increased the
portfolio of securities "available for sale" by taking advantage of a one-time
accounting opportunity to transfer $3.6 billion of securities from "held to
maturity" to this category. This facilitated the sale, but it also enhanced our
ability to manage our investment portfolio, improved our ability to control
interest rate risk, and positioned us for further downsizing, if that is deemed
appropriate. However, a note of caution: The larger portfolio of available-for-
sale securities could increase the future volatility of stockholders' equity
because it must be adjusted to reflect changes in the market value of that
portfolio. These adjustments, as they occur, will not affect reported earnings
or regulatory capital.
Stock Buy-Back
The planned repurchase of up to 2% of our outstanding shares, while modest, is
intended to offset the increase in shares that occurs over time as a result of
employee stock option and benefit programs. We want to take this action (which
is still subject to certain administrative clearances), despite the fact that we
are not overly-endowed with
5
capital, because we now anticipate steady capital growth, which should exceed
the requirements of the Bank at its current size. Overall, the balance sheet
downsizing and the planned stock buy-back are expected to have only a minimal
effect on earnings per share.
Other Events
1995 was also marked by a number of other significant events:
. As previously noted, we acquired two mortgage origination businesses,
which add approximately $1 billion to our residential loan origination capacity
and give us access to new, dynamic markets at a reasonable cost. This does not
represent a change in the type of business that we do, only a geographical
expansion.
. In 1995, we also heeded our Board's admonition that we not rest on our
oars, and so we undertook a major strategic planning effort with the help of an
outside consultant. While we don't expect dramatic changes in our business
strategy, it has become clear that there are significant opportunities for
performance improvement. They will be addressed now that the all-consuming work
of the merger is behind us.
. As a result of improvements in the health of the banking industry, the
FDIC has virtually eliminated premiums for Bank Insurance Fund (BIF) deposits.
However, premiums for deposits insured by the Savings Association Insurance
Fund (SAIF) remain significantly higher than the BIF premiums, and since about
40% of our deposits are SAIF-insured, we are at something of a competitive
disadvantage (although better off than "pure" SAIF-insured institutions). We are
hopeful that this will soon come to an end since Congress is actively working on
a resolution of this disparity. As proposed, that solution will likely require
us to make a one-time pre-tax payment of between $30-$40 million, but we would
be more than satisfied with this trade-off.
[PICTURE OF AN AERIAL VIEW OF A MAP OF NEW YORK METROPOLITAN AREA BRANCHES]
. As many of you may know, we brought a "goodwill" lawsuit against the
Federal government in early 1995. During the past summer, we were pleased to see
that three other institutions, with claims generally similar to that of Dime,
won an important victory in the United States Court of Appeals for the Federal
Circuit. The government's appeal of these cases is before the Supreme Court as
we write this message, and an early decision is expected. While it is far too
early to speculate whether Dime will benefit from this litigation, we remain
excited about this part of our life and will try to keep you updated as
developments occur.
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Summary
No one can characterize our 1995 earnings as satisfactory. However, as we think
back on the year, we can feel some satisfaction and considerable optimism for
the future based on the fact that:
DIME MORTGAGE OPERATIONS
[PICTURE OF A MAP]
Dime Mortgage
National Mortgage/James Madison
. The merger is virtually complete.
. Our team is set and working well together.
. Our day-to-day operations are working smoothly.
. The power of our franchise is emerging, and we are excited about the
strength of our consumer banking performance and the growing momentum in
mortgage banking.
. Many of the basic elements of a profitable corporation--low costs,
improving asset quality, experienced management team and the like--are in
place. These things are terribly important and not easy to come by.
Thus, while we don't expect a home run in 1996 given the current interest rate
environment, we can envision steady progress in the months ahead and believe we
can look to the future with the confidence engendered by a truly impressive
franchise.
This has not been an easy year. There have been extraordinary physical and
mental strains on our people, which makes the growing sense of success that we
now feel all the more exciting. There was a time when Dime lived or died by the
adequacy of its financial capital. Today, it is human capital that counts, and
we are blessed in that regard.
Finally, our thanks to our shareholders. To quote one who we believe truly
understands: "We always knew this would take three years. You are well ahead of
the curve after the first twelve months. Keep it up and we will all be winners."
We will do that.
/S/ JAMES M. LARGE, JR. /S/ LAWRENCE J. TOAL
JAMES M. LARGE, JR. LAWRENCE J. TOAL
Chairman and Chief Executive Officer President and Chief Operating Officer
March 14, 1996
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The DIME--New York's Hometown Bank--and Much More Founded in Brooklyn in
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1859, The Dime Savings Bank of New York, FSB has been an integral part of the
fabric of the greater New York City metropolitan area for 137 years. While The
Dime enjoys its deserved reputation of being New York's "Hometown Bank," the
breadth, scope and value of The Dime's franchise is far greater. With activities
ranging from securities and insurance brokerage to small business banking, The
Dime is already moving beyond the role of a traditional thrift institution and
is well-positioned to become the preeminent super-community bank in the greater
New York area, as well as a high performance mortgage banking and consumer
financial services company in select markets throughout the United States.
[PICTURE CONTAINING A CAPTION - "Building Strength"]
Consumer Banking The Dime is one of the largest consumer banks headquartered
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in New York City. With $20 billion in total assets and a dedication to serving
the New York market, Dime compares favorably with other, much larger, New York
area competitors who also operate throughout the nation and the world. In fact,
Dime provides banking services to one out of ten households in the nine-county
New York metropolitan area. In addition, Dime's 18 branches in neighboring New
Jersey, with $1.8 billion in deposits, are fully integrated into Dime's branch
network. Even giving effect to recently-announced mergers and branch
acquisitions, The Dime has the second largest deposit franchise in Brooklyn and
the third largest share in Long Island's populous Nassau County. Over 435,000
households maintain more than 1.2 million deposit accounts at The Dime. The 86
retail banking branches in the greater New York area have an average size of
over $140 million--well above average--and Dime tellers perform
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approximately 60,000 transactions a day. Dime's automated Voice Response Unit
telephone banking system responds to 3,500 customer inquiries daily while the
DimeLine telephone banking and bank-by-mail units process approximately 6,500
banking transactions a day. Over 100 Dime-owned Automated Teller Machines
(ATMs) handle more than 50,000 transactions each day, and through participation
in six ATM networks, Dime customers have access to over 200,000 ATMs worldwide.
Dime customer service representatives routinely assist customers in more than
five languages, and its products are marketed through a variety of foreign
language promotional materials.
[PICTURE CONTAINING A CAPTION - "Building Dreams"]
Building on this broad-based consumer banking franchise, Dime intends to
create a multi-channel delivery system designed to meet changing customer
needs. While "brick and mortar" branches will continue to play a key role in the
distribution of products and services to the consumer, alternative delivery
channels--telephone banking, personal computer banking and ATMs--will
increasingly be used to meet the customer's need for diversified financial
products and services at a convenient time and place. Having pruned its branch
system as part of the merger-consolidation process, The Dime now has a strong
and efficient core branch network. With its newly-installed retail banking
computer system, Dime will be putting new technology to use to provide
customers with high quality, state-of-the-art banking services.
The Dime's consumer franchise will also be enhanced through the targeted
marketing of products and services and a vibrant "sales" culture focused on
identifying and satisfying customer needs. While savings accounts and time
deposits have traditionally been the principal sources of funds for thrift
institutions, Dime will further emphasize
9
DEPOSIT COMPOSITION
(at 12/31/95)
[GRAPHIC OF A PIE CHART]
17% 9% 21% 53%
------ ------ ------- ----
Money Demand Savings Time
Market
demand accounts, since such accounts are the main vehicle for strengthening
primary customer relationships. The focus in 1996, and beyond, is to build
profitability by doing more business with existing customers. Utilizing
marketing segmentation data, supported by sophisticated technology, Dime
customer service personnel will be able to pinpoint cross-selling opportunities
and then offer the services that the customer is most likely to want. Similarly,
Dime's telephone response unit is being expanded to include "out-bound"
telemarketing sales efforts as part of its daily operations. Overall, through
careful management, Dime will seek to maximize the inherent profitability of
its consumer banking franchise.
Securities Brokerage and Insurance Services As an important adjunct to its
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consumer banking franchise, Dime offers a variety of securities brokerage and
insurance services. Positioned as a lower-cost alternative to large securities
brokerage firms, Dime Securities of New York, Inc., a subsidiary of the bank,
generates fee income while helping to strengthen customer relationships by
offering products such as mutual funds and annuities as investment
alternatives to federally-insured deposits. In 1995, Dime Securities served
31,000 customers. Dime's Savings Bank Life Insurance (SBLI) department serves
60,000 households and is the largest in the New York SBLI system. At year-end
1995, Dime serviced 75,000 policies with over $3 billion of insurance in force.
In addition, another subsidiary, The Dime NJ Agency, Inc., offers a variety of
insurance products that supplement the SBLI
[PICTURE]
10
[PICTURE]
program, such as credit insurance, term and whole life insurance and single
premium life.
In 1996, recognizing the importance of being able to offer its customers
diversified financial services, Dime expects to continue to build this franchise
by introducing an expanded product line and targeted marketing initiatives.
Mortgage Banking Central to Dime's present and future business strategy is the
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origination, sale and servicing of one-to-four family mortgage loans and loans
on individual cooperative units. In 1995, past efforts to rebuild the mortgage
banking operation resulted in a steady increase in loan production. Through a
coordinated effort utilizing branch employees and mortgage account
representatives, Dime provides its mortgage banking customers with a wide
variety of products and superior service. Dime directly originates loans in New
York and in the neighboring states of Connecticut, New Jersey and Pennsylvania,
as well as through offices in Arizona. While these direct originations remain
key elements of the business, Dime has been strategically building a multi-
faceted residential loan origination franchise through a variety of initiatives.
Dime's Brokers' Preferred/SM/ program, which had expanded to 280 members by
year-end 1995, allows carefully-selected mortgage brokers to work directly with
clients to market Dime loans. Brokers and their clients benefit from Dime's
broad variety of loan plans and superior service, while Dime focuses on asset
quality through retention of all underwriting decisions and control of loan
closings.
Dime's affinity programs provide qualified organizations and corporations
the ability to meet specific needs, ranging from specialized relocation loans
to home loans for employees. Dime also expanded its first-time home buyer
program in 1995 with
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seminars and targeted outreach initiatives while expanding its business
opportunities by developing comprehensive loan marketing materials in Chinese,
Spanish and Russian.
Dime's Correspondent Preferred/SM/ network originates loans that meet Dime's
quality and profitability specifications through a limited number of mortgage
banking firms operating in geographic locations outside of Dime's direct
origination market area.
In the fourth quarter of 1995, Dime took a major step forward to build loan
origination volume through its acquisition of two established mortgage
origination businesses. National Mortgage Investments Co. operates through 24
retail offices in Georgia, Virginia, South Carolina and Maryland. James Madison
Mortgage Company generates loans through seven retail offices in Virginia,
Maryland, and South Carolina. The combined 1995 loan originations of these two
businesses, which are operated under their own names, totaled in excess of $1.1
billion.
[PICTURE CONTAINING A CAPTION - "New Products"]
Expansion to neighboring states and the acquisition of established operations in
vibrant markets is part of a strategy of controlled growth to expand Dime's
mortgage banking franchise beyond the mature, highly competitive New York
market. This growth contributes to a more diverse portfolio and reduces the risk
of geographically-concentrated lending activity. Moreover, the expertise of
National Mortgage and James Madison in FHA and VA lending allows Dime to expand
its product line to include these loans. At the same time, the resources of Dime
enable these operations to expand their product offerings to include a broad
array of adjustable-rate loans.
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Using this multi-channel, multi-state system, Dime, in 1995, produced over
9,000 residential property loans with total principal balances of $1.8 billion,
while its market share (an important measure of a loan origination franchise)
also expanded significantly. In the quarter ended September 30, 1995 (the most
recently available market data), Dime ranked fourth in the New York market and
second in the Connecticut market. In the highly competitive New Jersey market,
Dime's market share doubled during 1995, while loan production from Dime's
Arizona offices also grew sharply over the year as Dime emerged as a leading
originator of loans in that market. The mortgage origination operations acquired
by Dime in the 1995 fourth quarter also had leadership positions in their
markets. In 1995, National Mortgage and James Madison, respectively, were top
residential loan originators in the Atlanta and Washington, D.C. metropolitan
area markets.
[PICTURE CONTAINING TWO CAPTIONS -
"If You've Got the Dream, We've Got The Mortgage."
"New Horizons"]
With lending operations in a number of selected markets across the country
and with a product line ranging from Private Mortgage Banking for borrowers
seeking large loans to a broad range of innovative, affordable housing products
for low- and moderate-income borrowers, Dime is able to state: "If You've Got
the Dream, We've Got the Mortgage."
The increased loan volume enables Dime to selectively portfolio certain
loans to generate interest income while selling into the secondary market those
that do not meet internal risk and profitability criteria. The increased loan
production, together with purchases of mortgage servicing rights, also enables
Dime to expand its loan servicing operation--a significant contributor to the
value of Dime's franchise. From an efficient facility in upstate Albion, New
York, Dime services more than 189,000 loans with
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aggregate balances of over $15 billion, including almost 124,000 loans with
balances of over $9 billion for other investors. In a business where economies
of scale are an important factor in profitability, Dime's growing servicing
operation holds significant potential to contribute further to franchise value.
Commercial Real Estate Lending With a loan portfolio of $1.9 billion, Dime's
- ------------------------------
commercial real estate lending is a key element of Dime's franchise. With an
emphasis on strong underwriting controls, a focus on multifamily properties in
the nearby Tri-State area, and long-standing relationships with established
borrowers, Dime originated $233 million of new loans in 1995. During the year,
Dime also concentrated on reducing the level of non-performing commercial real
estate assets, which, as a result, declined 57% from $144 million at the end of
1994 to $62 million at year-end 1995. This progress allows additional resources
to be allocated to the origination of new loans, which portends well for future
increases in this activity. With a record of working successfully with a variety
of not-for-profit organizations and public agencies, Dime's commercial real
estate franchise offers important profit potential while helping the institution
meet its commitment to finance affordable housing.
Consumer Lending With a portfolio approaching $800 million, Dime views
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consumer lending as a vital part of its franchise. Focused heavily on home
equity lending indexed to the prime rate, Dime's consumer lending operation
contributes market-sensitive interest income. Dime intends to build its consumer
lending activities by aggressively marketing these products using data base and
market segment information. At the same time, through the enhanced use of
technology to streamline the application and underwriting process, Dime will
seek to further improve the profitability of this activity.
[PICTURE]
14
[PICTURE]
Small Business Banking Dime initiated its small business banking program in
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1994, and the results indicate that expansion offers an attractive opportunity
for augmenting Dime's franchise. By targeting businesses in the New York area
and offering a comprehensive package of loans and small business banking
services, Dime generates fee and interest-sensitive income while building highly
attractive deposit relationships. This activity can be an important contributor
to enhancing the value of Dime's franchise.
Community Commitment Overarching the value of Dime's franchise is its
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reputation for supporting the communities it serves. Although it views social
responsibility as part of its birthright, Dime also believes that serving the
needs of low- and moderate-income borrowers and communities is good business.
With dedicated resources in its mortgage banking and commercial real estate
lending operations, Dime has been an active participant in a number of projects
and initiatives aimed at revitalizing urban neighborhoods. Affordable housing
originations of residential property and multifamily loans totaled more than
$250 million in 1995.
Recognizing that lending is only one component of the community's economic
well-being, Dime complements its extensive affordable housing lending programs
with an affordable line of deposit and consumer loan products. In addition, its
marketing department targets advertising to low- and moderate-income areas, and
its purchasing department contracts with women- and minority-owned businesses
for goods and services, while Dime, directly and through The Dime Foundation,
supports
LOANS RECEIVABLE, NET
(in billions)
[GRAPH]
4Q '94 1Q '95 2Q '95 3Q '95 4Q '95
- ------ ------ ------ ------ ------
$9.18 $9.19 $9.31 $9.42 $9.70
15
[PICTURE]
a variety of not-for-profit organizations through an extensive program
of corporate grants and in-kind donations. Notable among Dime's contributions
is its donation of space for Neighborhood Housing Services's Homeownership
Center. The nation's first, this Center provides a full range of home-ownership
counseling, education, insurance services, and bank referrals for mortgages.
This institution-wide approach to community reinvestment has been recognized
time and again by civic and governmental groups, with Dime being one of very
few financial institutions to have been rated "Outstanding" by federal
regulators three consecutive times for compliance with the federal Community
Reinvestment Act. Even as it expands its franchise, The Dime will remain
committed to supporting and improving the communities it serves.
[PICTURE]
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FINANCIAL SECTION
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Management's Discussion and Analysis 18
Five Year Consolidated Summary 40
Report of Independent Auditors 42
Consolidated Statements of
Financial Condition 43
Consolidated Statements of Income 44
Consolidated Statements of Changes in
Stockholders' Equity 45
Consolidated Statements of Cash Flows 46
Notes to Consolidated Financial Statements 47
Board of Directors and Management 78
Corporate Information IBC
17
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------------------------------------
Overview
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Dime Bancorp, Inc. is the holding company ("Holding Company") for The Dime
Savings Bank of New York, FSB (the "Bank," and, together with the Holding
Company, the "Company" or "Dime"), a federally-chartered savings institution,
the deposits of which are insured up to applicable limits by the Federal Deposit
Insurance Corporation ("FDIC").
The year 1995 was highlighted by the merger, on January 13, 1995, of Anchor
Bancorp, Inc. ("Anchor Bancorp") and its savings bank subsidiary, Anchor Savings
Bank FSB ("Anchor Savings," and, together with Anchor Bancorp, "Anchor"), with
and into the Holding Company and the Bank, respectively, which were the
surviving corporations (the "Merger"). Because the Merger was accounted for
under the pooling-of-interests method of accounting, the consolidated financial
statements of the Company for periods prior to the Merger have been restated to
include Anchor. In recording the pooling-of-interests combination, Anchor's
results of operations for its fiscal year ended June 30, 1994 have been combined
with the Company's results of operations for its year ended December 31, 1993.
On August 12, 1994, Anchor had acquired The Lincoln Savings Bank, FSB
("Lincoln"), headquartered in New York, New York, for $80.0 million in cash in a
transaction that was accounted for using the purchase method of accounting (the
"Lincoln Acquisition"). Accordingly, the impact of the absorption of Lincoln's
operations is only reflected in the Company's consolidated financial statements
from the date of acquisition. At the time of acquisition, Lincoln had total
assets of $2.0 billion, loans receivable, net, of $1.2 billion and total
deposits in 14 branches of $1.8 billion.
On May 25, 1994, the Bank consummated a reorganization (the "Reorganization")
under which it became a subsidiary of the Holding Company, which was formed for
the purpose of becoming the holding company for the Bank. The corporate
existence of the Bank has continued unaffected by the Reorganization, except
that all of the outstanding common stock of the Bank is owned by the Holding
Company. In connection with the Reorganization, common shares of the Bank were
converted, on a one-for-one basis, into shares of common stock of the Holding
Company. The Holding Company is a savings and loan holding company by virtue of
its ownership of all of the outstanding common stock of the Bank.
The Company, in addition to the Merger, achieved several significant goals
during 1995. First, the Company improved its asset quality by reducing non-
performing assets by approximately $100 million, or 24%. Second, the Company
substantially completed the integration of operations following the Merger and
achieved a substantial portion of the aggregate reductions in general and
administrative ("G&A") expense of approximately $68 million anticipated as a
result of the Merger and the Lincoln Acquisition. Third, the Company experienced
14.4% growth in its production of one-to-four family first mortgage and
cooperative apartment loans ("residential property loans"). In addition, the
Company was able to offset the impact of its de-emphasis during 1995 of its
correspondent loan activities by increasing residential property loan
originations to $1.6 billion, which was 74.2% higher than in 1994. The Company's
loan origination capabilities were enhanced by its acquisitions of the
residential property loan origination businesses of two mortgage banking
companies during the final quarter of 1995 (see "Operating Strategies" below).
Lastly, the Company succeeded in expanding its loans serviced for others
portfolio despite the acceleration of loan prepayments as a result of the
declining interest rate environment during the year. The total portfolio of
loans serviced for others grew by 9.2% during the year and amounted to $9.5
billion at December 31, 1995.
At December 31, 1995, the Bank continued to satisfy the published standards for
a well-capitalized institution under the prompt corrective action ("PCA")
regulations of the Federal Deposit Insurance Improvement Act of 1991 ("FDICIA").
Operating Strategies
- --------------------
The Company's current operating strategies focus on improving net interest
income by reducing its reliance on mortgage-backed securities ("MBS"), which, in
general, provide lower yields than the Company's loans, and by reducing its
reliance on borrowings, which generally are more volatile than the Company's
retail funding sources. In December 1995, as a result of a decision in October
1995 by the Financial Accounting Standards Board (the "FASB") to allow entities
a one-time opportunity to reassess their security classifications made pursuant
to Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," the Company transferred
securities with an amortized cost of $3.6 billion, including $3.5 billion of
MBS, from its held to maturity portfolio to its available for sale portfolio, of
which $1.1 billion of such transferred MBS the Company has decided to sell in
order to reduce its outstanding borrowings, and accordingly, the size of its
balance sheet (the "1995 Balance Sheet Restructuring Plan"). The 1995 Balance
Sheet Restructuring Plan, in addition to reducing the Company's reliance on MBS
and borrowings, should: (i) enable the Company to improve its net interest
margin by eliminating from the MBS portfolio certain lower yielding securities;
(ii) provide the Company with greater flexibility in adjusting to varying
interest rate environments; and (iii) provide the Company with the opportunity
to further reduce its asset size, should that be deemed appropriate. The
Company anticipates that the sales of the $1.1 billion of MBS designated for
sale will be consummated during early
18
1996. As a result of the decision to sell these securities, the Company
recognized a pretax loss of $23.6 million in December 1995, reflecting the
write-down of those securities with unrealized losses to estimated fair value.
An additional element of the Company's strategy to improve net interest income
is the continued strengthening of its loan origination capabilities. The Company
focuses on increasing the level of residential property loan originations
through its existing operations. In addition, the Company has pursued a
strategy of controlled growth into markets outside of the Company's core
residential property lending areas of New York, New Jersey and Connecticut. In
accordance with this strategy, the Bank acquired the assets relating to the
residential property loan origination businesses of National Mortgage
Investments Co., Inc. ("National Mortgage"), headquartered in Griffin, Georgia,
and James Madison Mortgage Co. ("Madison Mortgage"), headquartered in Fairfax,
Virginia, during the fourth quarter of 1995. When acquired, National Mortgage
operated through 24 retail offices located in Georgia, Virginia, South Carolina,
and Maryland, while Madison Mortgage operated through five retail offices
located in Virginia and Maryland, as well as regional wholesale offices located
in South Carolina and Virginia.
Results of Operations
- ---------------------
General The Company's net income for 1995 amounted to $62.2 million, or $0.57
per fully diluted common share, as compared with net income of $28.0 million,
or $0.26 per fully diluted common share, for 1994 and net income of $87.6
million, or $0.90 per fully diluted common share, for 1993. Net income for 1995
was adversely affected by the loss of $23.6 million recognized in connection
with the 1995 Balance Sheet Restructuring Plan. The results for 1994 were
significantly affected by a charge of $92.9 million associated with the
cumulative effect on prior years of a change in accounting principle for
goodwill as well as by a $58.3 million restructuring charge relating to the
Merger. In addition, the results for 1994 included a $129.9 million reduction of
the Company's valuation allowance for deferred tax assets that was credited to
operations. The results for 1993 also included a reduction in the valuation
allowance for deferred tax assets, which amounted to $109.5 million, as well as
net gains on sales activities of $36.6 million.
Income before income taxes and the cumulative effect of a change in accounting
principle increased to $109.9 million during 1995 from $67.7 million and $19.9
million during 1994 and 1993, respectively. The 62.3% improvement in 1995 as
compared with 1994 was largely due to a decline in restructuring and Merger-
related expense of $42.9 million and, to a lesser extent, reductions in the
provision for loan losses and G&A expense of $16.1 million and $8.6 million,
respectively. The impact of these factors was partially offset by a decline in
net interest income of $19.5 million and the recognition of losses of $23.6
million during the 1995 fourth quarter in connection with the 1995 Balance Sheet
Restructuring Plan. The increase in 1994 as compared with 1993 of $47.8 million
was predominantly due to a rise in net interest income of $38.9 million combined
with reductions in the provision for loan losses of $39.7 million and other real
estate owned ("ORE") expense of $66.4 million. Mitigating the effect of such
factors was restructuring and Merger-related expense of $58.3 million incurred
during 1994, and a decline in net gains on sales activities of $33.7 million.
Net Interest Income Net interest income was $409.6 million for 1995 as compared
with $429.1 million for 1994 and $390.2 million for 1993. The Company's net
interest margin was 2.07% for 1995 as compared with 2.36% for 1994 and 2.47% for
1993.
The decline in net interest income in 1995 as compared with 1994 was due in part
to the exchange, in December 1994, of all of the then outstanding shares of the
Bank's 10 1/2% non-cumulative exchangeable preferred stock (the "Bank Preferred
Stock") for $100.0 million in principal amount of 10 1/2% senior notes due
November 15, 2005 issued by the Holding Company (the "10 1/2% Senior Notes").
Dividend payments on the Bank Preferred Stock for periods prior to the
consummation of this exchange are reflected in the Company's Consolidated
Statements of Income as "Minority interest-preferred stock dividend of
subsidiary," whereas interest expense on the 10 1/2% Senior Notes is reflected
as a component of "Interest expense on borrowed funds." If the dividends on the
Bank Preferred Stock for 1994 and 1993 were considered a component of net
interest income during those years, net interest income for 1995 as compared
with 1994 would have declined $8.0 million (versus an actual decline of $19.5
million) and for 1994 as compared with 1993 would have increased $28.8 million
(versus an actual increase of $38.9 million).
Net interest income was favorably affected in 1995 and 1994 as compared with the
respective prior years by growth in average interest-earning assets. The
Company's average interest-earning assets rose $1.6 billion, or 8.6%, in 1995
compared with 1994 after increasing $2.4 billion, or 15.0%, in 1994 as compared
with 1993, reflecting the Company's asset growth strategy during those years in
order to improve net interest income. The asset growth was accomplished
primarily by purchases of MBS, originations and purchases of loans and by the
Lincoln Acquisition, and has been funded primarily by short-term borrowings and
Lincoln's deposits.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------------------------------------
Contributing to the decline in the Company's net interest income in 1995 as
compared with 1994 was the relatively flat yield curve in existence during the
greater part of 1995. The Company's gross yield on interest-earning assets rose
62 basis points in 1995 as compared with 1994, due in part to the lagging nature
of a significant portion of the Company's adjustable-rate assets. However, such
growth was more than offset by the cost of deposits, which rose by 71 basis
points, and the cost of borrowings, which rose by 122 basis points.
During 1994, as compared with 1993, the Company's net interest income was
negatively affected by a 19 basis point increase in its cost of funds as
compared with an increase of only five basis points in the gross yield on
interest-earning assets. Despite the rising interest rate environment during
1994, the growth in the Company's gross yield on interest-earning assets was
mitigated by the lagging repricing characteristics of a large segment of its
portfolios of adjustable-rate assets. However, the gross yield on interest-
earning assets was favorably affected in 1994 as compared with 1993 by a
significant reduction in MBS premium amortization due largely to the declining
level of prepayments of the loans underlying the securities as a result of the
higher interest rate environment during 1994 as compared with 1993.
The Company's net interest income was also affected by its utilization of
certain derivative financial instruments in managing its interest rate risk
exposure. Such financial instruments resulted in an increase in net interest
income of $10.6 million in 1995 as compared with reductions in net interest
income of $14.4 million and $19.9 million in 1994 and 1993, respectively. For a
further discussion of the Company's hedging activities, see "Management of
Interest Rate Risk--Hedging Activities" below.
While the Company experienced declines in its net interest margin and net
interest income in each of the 1995 first, second and third quarters, as
compared with the respective preceding quarters, the net interest margin for the
fourth quarter of 1995 of 2.05% was unchanged from the preceding quarter's
level, and net interest income increased $1.7 million, or 1.8%, quarter-to-
quarter. Assuming a continuation of the existing interest rate environment, the
Company currently anticipates that net interest income and the net interest
margin during 1996 will benefit somewhat from the impact of the 1995 Balance
Sheet Restructuring Plan, but that net interest income and the net interest
margin will also be subject to downward pressure if the level of the Company's
MBS prepayments, which rose sharply during the second half of 1995 as compared
with the first half of the year, increase significantly from their current high
levels, resulting in accelerated premium amortization. However, it should be
noted that a significant portion of the MBS anticipated to be sold during 1996
in connection with the 1995 Balance Sheet Restructuring Plan had been acquired
at a premium and had been subject to high prepayment levels.
The following table sets forth the Company's consolidated average statement of
financial condition, net interest income, the average yield on interest-earning
assets and the average cost of interest-bearing liabilities for the years
indicated. Average balances are computed on a daily basis. Non-accrual loans are
included in average balances.
20
For the Years Ended December 31,
-----------------------------------------------------------------------------------------------------------
1995 1994 1993
Average Average Average
Average Yield/ Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Cost Balance Interest Cost Balance Interest Cost
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning
assets:
First mortgage loans $ 7,553,738 $ 556,395 7.37% $ 6,706,711 $ 459,086 6.85% $ 5,637,444 $395,040 7.01%
Cooperative
apartment loans 1,192,605 91,657 7.69 1,116,837 78,989 7.07 1,097,392 80,978 7.38
Consumer and
business loans 801,898 74,374 9.27 757,841 62,512 8.25 761,624 60,420 7.93
MBS 9,187,208 567,885 6.18 8,707,723 482,829 5.54 7,310,187 386,017 5.28
Investment securities 460,049 32,596 7.09 515,471 36,160 7.01 633,843 45,391 7.16
Money market
investments 583,510 34,224 5.87 405,266 17,286 4.27 387,824 12,265 3.16
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning
assets 19,779,008 $ 1,357,131 6.86% 18,209,849 $1,136,862 6.24% 15,828,314 $980,111 6.19%
Other assets 721,586 618,210 671,637
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $20,500,594 $18,828,059 $16,499,951
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES, PREFERRED
STOCK OF SUBSIDIARY
AND STOCKHOLDERS'
EQUITY
Interest-bearing
liabilities:
Deposits:
Demand $ 1,052,485 $ 10,849 1.03% $ 1,024,508 $ 10,953 1.07% $ 1,024,483 $ 11,019 1.08%
Savings 2,981,762 72,721 2.44 3,690,531 102,791 2.79 3,990,359 127,700 3.20
Money market 2,176,214 85,627 3.93 1,548,453 56,285 3.63 1,121,221 32,927 2.94
Time 6,410,394 355,255 5.54 5,461,662 234,540 4.29 5,570,954 239,829 4.30
- ----------------------------------------------------------------------------------------------------------------------------------
Total deposits 12,620,855 524,452 4.16 11,725,154 404,569 3.45 11,707,017 411,475 3.51
Borrowed funds 6,777,524 423,053 6.24 6,045,142 303,216 5.02 3,874,558 178,464 4.61
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 19,398,379 $ 947,505 4.88% 17,770,296 $ 707,785 3.98% 15,581,575 $589,939 3.79%
- ----------------------------------------------------------------------------------------------------------------------------------
Other liabilities 154,102 101,475 98,236
Preferred stock
of subsidiary -- 96,164 25,000
Stockholders' equity 948,113 860,124 795,140
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities,
preferred stock of
subsidiary and
stockholders equity $20,500,594 $18,828,059 $16,499,951
====================================================================================================================================
Net interest income $ 409,626 $ 429,077 $390,172
====================================================================================================================================
Excess of interest-
earning assets over
interest-bearing
liabilities $ 380,629 $ 439,553 $ 246,739
====================================================================================================================================
Interest rate spread 1.98% 2.26% 2.40%
====================================================================================================================================
Net interest margin 2.07% 2.36% 2.47%
====================================================================================================================================
21
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------------------------------------
The following table sets forth, for the years indicated, the changes in interest
income and expense for each major component of interest-earning assets and
interest-bearing liabilities and the amounts attributable to changes in average
balances (volume) and average interest rates (rate). The change in interest
income and interest expense attributable to changes in both volume and rate has
been allocated proportionately to the change due to volume and the change due to
rate.
For the Years Ended December 31,
- ----------------------------------------------------------------------------------------------------
1995 Versus 1994 1994 Versus 1993
Increase (Decrease) Increase (Decrease)
--------------------------------------------------------------------
Due to Due to Due to Due to
(In thousands) Volume Rate Total Volume Rate Total
- ----------------------------------------------------------------------------------------------------
Interest income:
First mortgage loans $ 60,733 $ 36,576 $ 97,309 $ 73,382 $ (9,336) $ 64,046
Cooperative apartment loans 5,563 7,105 12,668 1,417 (3,406) (1,989)
Consumer and business loans 3,778 8,084 11,862 (301) 2,393 2,092
MBS 27,576 57,480 85,056 76,725 20,087 96,812
Investment securities (3,924) 360 (3,564) (8,321) (910) (9,231)
Money market investments 9,142 7,796 16,938 574 4,447 5,021
- ----------------------------------------------------------------------------------------------------
Total interest income 102,868 117,401 220,269 143,476 13,275 156,751
- ----------------------------------------------------------------------------------------------------
Interest expense:
Deposits:
Demand 294 (398) (104) -- (66) (66)
Savings (18,251) (11,819) (30,070) (9,139) (15,770) (24,909)
Money market 24,382 4,960 29,342 14,383 8,975 23,358
Time 45,170 75,545 120,715 (4,695) (594) (5,289)
- ----------------------------------------------------------------------------------------------------
Total deposits 51,595 68,288 119,883 549 (7,455) (6,906)
Borrowed funds 39,711 80,126 119,837 107,654 17,098 124,752
- ----------------------------------------------------------------------------------------------------
Total interest expense 91,306 148,414 239,720 108,203 9,643 117,846
- ----------------------------------------------------------------------------------------------------
Net interest income $ 11,562 $(31,013) $(19,451) $ 35,273 $ 3,632 $ 38,905
====================================================================================================
Provision for Loan Losses The Company's provision for loan losses declined to
$39.7 million in 1995 from $55.8 million in 1994 and $95.5 million in 1993. The
provision for loan losses, as further discussed in "Management of Credit
Risk--Allowance for Loan Losses" below, is predicated upon the Company's
assessment of the adequacy of the allowance for loan losses. The year-to-year
reductions in the provision for loan losses were principally attributable to the
improving asset quality of the Company's loans receivable portfolio. The
provision for loan losses during 1995 and 1994 was substantially associated with
the Company's residential property loan portfolio originated in years prior to
1993. During 1994, the level of the Company's provision for loan losses was
significantly affected by the loss experience on certain non-performing
cooperative apartment loans and by residential first mortgage loans located in
certain New England states that were not included in the bulk sales of $264.6
million of non-performing assets during the 1994 first quarter (the "1994 Bulk
Sales"). The provision for loan losses in 1993 reflected, among other things,
assumptions with respect to the future performance of the loan portfolio in
light of the contracted 1994 Bulk Sales, which resulted in significant charge-
offs in 1993.
Non-Interest Income Non-interest income declined $13.1 million in 1995 and
$43.3 million in 1994 as compared with the corresponding prior years. The
following table reflects the components of the Company's non-interest income for
the years ended December 31:
(In thousands) 1995 1994 1993
- ------------------------------------------------------------
Net (losses) gains on
sales activities $(12,415) $ 2,925 $ 36,606
Fee and other
non-interest income:
Loan servicing fees, net 30,452 28,213 30,001
Securities and insurance
brokerage fees 15,532 16,885 22,336
Banking service
fees and other 32,598 31,244 33,582
- ------------------------------------------------------------
Total fee and other
non-interest income 78,582 76,342 85,919
- ------------------------------------------------------------
Total non-interest income $ 66,167 $79,267 $122,525
============================================================
22
Net (Losses) Gains on Sales Activities The following table summarizes the
components of net (losses) gains on sales activities for the years ended
December 31:
(In thousands) 1995 1994 1993
- --------------------------------------------------------------
Net gains (losses) on sales of
loans held for sale,
including securitized loans $ 2,344 $(3,457) $ 2,171
Net gains on sales of
loan servicing rights 738 1,823 4,841
Loan sale recourse expense (423) (2,742) (4,411)
Net (losses) gains on sales,
revaluations and calls
of securities (29,044) 2,909 14,619
Net gains on sales of branches 18,637 1,730 19,308
Other net (losses) gains (4,667) 2,662 78
- --------------------------------------------------------------
Net (losses) gains on
sales activities $(12,415) $ 2,925 $36,606
==============================================================
In connection with its mortgage banking operations, the Company recognized a net
gain on sales of loans of $2.3 million during 1995, as compared with a net loss
of $3.5 million during 1994 and a net gain of $2.2 million during 1993. Net
gains on sales of loans from the Company's held for sale portfolio during 1995
were positively affected by the Company's adoption of SFAS No. 122, "Accounting
for Mortgage Servicing Rights," on January 1, 1995 (see "Amortization of MSR"
below). The Company, from time-to-time, also sells loan servicing rights as part
of its mortgage banking operations, net gains on which amounted to $0.7 million,
$1.8 million and $4.8 million during 1995, 1994 and 1993, respectively.
In connection with the sale in prior years of certain residential property loans
and multifamily first mortgage loans with limited recourse, the Company
maintains an accrued liability for recourse-related expenses such as interest
previously advanced that may not be recovered upon disposition. Additions to
this reserve are reflected as loan sale recourse expense. Credit losses on the
principal amount of loans sold with limited recourse are provided for in the
Company's allowance for loan losses. Loan sale recourse expense declined to $0.4
million for 1995 from $2.7 million and $4.4 million for 1994 and 1993,
respectively, reflecting the improving performance of the related loans. For a
further discussion of loans sold with recourse, see "Management of Credit
Risk--Loans Sold with Recourse" below.
The Company recognized net losses on sales, revaluations and calls of securities
of $29.0 million during 1995 as compared with net gains of $2.9 million and
$14.6 million during 1994 and 1993, respectively. The net losses during 1995
were principally attributable to the loss of $23.6 million recognized on the
planned sales of approximately $1.1 billion of MBS in connection with the 1995
Balance Sheet Restructuring Plan. The net losses during 1995 also reflected $3.3
million of losses upon the recognition of other than temporary impairments in
value of certain MBS (see "Management of Credit Risk--MBS" below). The net gains
in 1994 were principally associated with sales of $311.4 million of MBS,
primarily those securities acquired in the Lincoln Acquisition. The net gains
in 1993 were largely due to sales of $1.4 billion of MBS and $191.3 million of
investment securities. Such sales were primarily made in connection with the
Company's downsizing efforts during a portion of 1993 and in anticipation of
future declines in value of certain MBS resulting from high prepayment levels of
the loans underlying the securities. Net gains during 1993 were adversely
affected by losses recognized on issuer calls of securities that were
transferred from 1983 to 1985 by the Company to trusts under agreements that
provided for a "put" of these securities back to the Company under certain
circumstances. When one of these securities is called by its issuer prior to
maturity, the difference between the current carrying value of the security and
the current related put fund liability (which is ordinarily amortized to
interest expense over the anticipated remaining life of the put fund liability)
is reflected in net (losses) gains on sales activities. During 1993, a
relatively large number of underlying securities were the subject of calls. In
light of both realized and anticipated calls, the Company recorded a $7.4
million net charge for 1993.
During 1995, the Company sold four Florida branches and one New York branch with
aggregate deposits at time of sale of approximately $283 million and recognized
a net gain of $18.6 million. The net gains on branch sales in 1994 of $1.7
million resulted from the sale of three branches in Florida and one branch in
New Jersey, which had aggregate deposits at time of sale of approximately $63
million. The Company recognized net gains on branch sales during 1993 of $19.3
million. The branches sold during 1993, which had aggregate deposits at time of
sale of approximately $1.2 billion, included 12 upstate New York branches, as
well as certain New Jersey and Florida branches.
Fee and Other Non-Interest Income Loan servicing fees, net, increased $2.2
million, or 7.9%, in 1995 as compared with 1994 after declining $1.8 million, or
6.0%, in 1994 as compared with 1993. The improvement in 1995, as compared with
1994, reflects in large part growth in the average level of the loans serviced
for others portfolio coupled with a decline in amortization of capitalized
excess servicing. The impact of these factors was partially offset by a decline
in the average loan servicing fee rate. The decrease in loan servicing fees,
net, in 1994, as compared with 1993, was principally due to a reduction in the
average level of the loans serviced for others portfolio. At December 31, 1995,
the Company serviced $9.5 billion of loans for others, which reflects growth of
$801.5 million, or 9.2%, from December 31, 1994. The Company expects the level
of the loans serviced for others portfolio to be favorably affected in the near
term by a high level of production of fixed-rate residential property loans, the
majority of which are sold into the secondary market with servicing retained, as
a result of the current relatively lower long-term interest rate environment.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------------------------------------
However, as a result of this lower interest rate environment, prepayments of the
existing loans underlying the loans serviced for others portfolio are also
expected to remain high.
Securities and insurance brokerage fee income declined $1.4 million, or 8.0%, in
1995 as compared with 1994 following a decline of $5.5 million, or 24.4%, in
1994 as compared with 1993. Such declines were principally attributable to a
lower volume of sales of annuities and mutual funds due to competitive
influences and a reduced number of sales outlets.
Banking service fees and other non-interest income rose $1.4 million in 1995 as
compared with 1994 after declining $2.3 million in 1994 as compared with 1993.
The level of the Company's income from banking service fees increased to $22.3
million in 1995 from $20.0 million in 1994 and from $19.3 million in 1993,
largely reflective of the Lincoln Acquisition, the effect of which was somewhat
mitigated by branch sale activities. Other non-interest income, consisting
primarily of loan-related fees, declined $1.0 million during 1995 as compared
with 1994 following a decline of $3.0 million during 1994 as compared with 1993.
Non-Interest Expense Total non-interest expense declined to $326.2 million for
1995 from $373.4 million for 1994 and $396.0 million for 1993. The following
table sets forth the components of non-interest expense for the years ended
December 31:
(In thousands) 1995 1994 1993
- ----------------------------------------------------------
G&A expense:
Compensation and
employee benefits $131,721 $136,786 $129,256
Occupancy and
equipment, net 58,285 56,447 54,227
Federal deposit
insurance premiums 21,373 31,214 35,474
Other 74,522 70,027 75,798
- ----------------------------------------------------------
Total G&A expense 285,901 294,474 294,755
ORE expense, net 12,892 11,013 77,393
Amortization of mortgage
servicing rights ("MSR") 12,107 9,664 19,884
Restructuring and
Merger-related expense 15,331 58,258 4,000
- ----------------------------------------------------------
Total non-interest expense $326,231 $373,409 $396,032
==========================================================
G&A Expense The largest component of non-interest expense is G&A expense, which
amounted to $285.9 million, or 1.39% of average assets, for 1995, as compared
with $294.5 million, or 1.56% of average assets, for 1994 and $294.8 million, or
1.79% of average assets, for 1993. The decline in G&A expense of $8.6 million in
1995 as compared with 1994 occurred despite the full year impact of the Lincoln
Acquisition and the acquisitions of the residential property loan origination
businesses of National Mortgage and Madison Mortgage during the fourth quarter
of 1995. This decline resulted principally from the effect of the reduced
assessment rate, effective June 1, 1995, on the portion of the Bank's deposits
that are insured by the Bank Insurance Fund ("BIF") of the FDIC (see further
discussion below) and the cost savings initiatives associated with the Merger.
The Company has achieved a substantial portion of the annual G&A expense
reductions relating to the Merger of $50 million, in addition to the $18 million
of such annualized expense reductions from the Lincoln Acquisition. The cost
savings associated with the Merger are being achieved principally through the
integration of operations, including a total reduction in the combined staff of
approximately 20%, elimination of excess space, and consolidation of data
processing and other operations. However, the effect of such cost savings
realized to date, and anticipated to be realized in the future, has been, and
will continue to be, partially offset by additional expenses incurred in the
normal course of the Company's operations, including from business expansion,
lease escalations, wage and benefit increases and similar factors.
Compensation and employee benefits expense declined $5.1 million in 1995 as
compared with 1994 following an increase of $7.5 million in 1994 as compared
with 1993. The 3.7% decline in 1995 as compared with 1994 was principally
attributable to the staff reductions associated with the Merger. These staff
reductions commenced near the end of the first quarter of 1995 and are expected
to continue into mid-1996. In connection with the Merger, approximately 600
positions were identified for elimination, of which, as of December 31, 1995,
approximately 50 remain to be eliminated. Related severance benefits in 1995
amounted to $18.9 million and have been charged to the Company's restructuring
accrual. The impact of the Merger-related staff reductions during 1995 was
mitigated by the effects of an increase in pension expense, the Lincoln
Acquisition and by the staff additions associated with the acquisitions during
the 1995 fourth quarter of the residential property loan origination businesses
of National Mortgage and Madison Mortgage. Principal factors contributing to the
5.8% rise in compensation and employee benefits expense in 1994 as compared with
1993 were increases in the employee complement associated primarily with the
Lincoln Acquisition and growth of the Company's mortgage banking operation in
1994 as well as the impact of a $1.4 million credit during 1993 related to the
curtailment of pension benefits attributable to reductions in staff. These
factors were partially offset by staff reductions associated with branch sales
and other strategies of the Company and a decline in securities and insurance
brokerage commissions commensurate with the lower sales volume of these services
in 1994 as compared with 1993. The Company's full-time equivalent employee
complement amounted to 2,697 at December 31, 1995, a decline of 15.0% from the
level at December 31, 1994.
Occupancy and equipment expense, net, rose $1.8 million in 1995 and $2.2 million
in 1994 as compared with the corresponding prior years. Such increases were
principally attributable to the effect of the Lincoln Acquisition, the impact of
which was mitigated by branch sales, and in 1995
24
as compared with 1994, branch consolidations and other Merger-related
efficiencies. Certain of the Company's occupancy and equipment Merger-related
savings were not achieved until the latter part of 1995, while other such
savings will continue to be realized during 1996. The level of occupancy and
equipment expense, net, during 1996 will also be affected by the acquisition of
the residential property loan origination businesses of National Mortgage and
Madison Mortgage.
Federal deposit insurance premiums expense declined $9.8 million and $4.3
million in 1995 and 1994, respectively, as compared with the corresponding prior
years as a result of lower average combined premium assessment rates, the impact
of which was mitigated by the additional premiums associated with the deposits
acquired in the Lincoln Acquisition. On August 8, 1995, the FDIC adopted a final
rule, effective as of June 1, 1995, changing the assessment rates on BIF-insured
deposits, which represent approximately 60% of the Bank's insured deposits, to a
range of between 4 to 31 basis points for each $100 of insured deposits from
the previous range of between 23 to 31 basis points. In addition, on November
14, 1995, the FDIC voted to further lower BIF-insured deposit assessment rates
for all assessment categories by 4 basis points for each $100 of insured
deposits effective for the first semi-annual assessment period of 1996, subject
to a statutory requirement that all institutions pay at least $2,000 annually.
The existing assessment rate schedule for deposits insured under the Savings
Association Insurance Fund ("SAIF") of the FDIC of between 23 and 31 basis
points for each $100 of SAIF-insured deposits was not affected by either of the
above actions. The actual assessment rate for both BIF- and SAIF-insured
deposits continues to depend on an institution's capital levels and regulatory
status. For a discussion of various legislative proposals regarding the
imbalance in deposit insurance premiums that has resulted from these actions,
see "Pending Legislation" below.
Other G&A expense increased $4.5 million for 1995 as compared with 1994 after
declining $5.8 million for 1994 as compared with 1993. The increase for 1995 as
compared with 1994 was principally due to an increase in legal expense. The
decline in 1994 as compared with 1993 was largely due to a reduction in
amortization of goodwill from $7.3 million for 1993 to $0.9 million for 1994
primarily reflecting the elimination of $92.9 million of goodwill on January 1,
1994 in connection with the Company's adoption on that date of a new accounting
principle for certain of the Company's goodwill (see "Cumulative Effect of a
Change in Accounting Principle" below).
ORE Expense, Net ORE expense, net, increased $1.9 million in 1995 as compared
with 1994 following a decline of $66.4 million in 1994 compared with 1993. The
85.8% decline in such expense in 1994 as compared with 1993 reflects, among
other factors, a decline in the level of ORE outstanding and the impact of the
1994 Bulk Sales. The following table sets forth the significant components of
ORE expense, net, for the years ended December 31:
(In thousands) 1995 1994 1993
- --------------------------------------------------------
Provision for losses $ 6,879 $ 4,665 $54,041
Net gains on sales (1,520) (4,165) (3,933)
Operating expense, net of
rental income 7,533 10,513 27,285
- --------------------------------------------------------
Total ORE expense, net $12,892 $11,013 $77,393
========================================================
The Company's provision for losses on ORE includes charges to maintain the
carrying value of ORE at the lower of cost or estimated fair value less selling
expenses, as well as charges for potential future declines in the estimated fair
value of ORE. Further provisions for losses on ORE may be required in the event
of future adverse changes in economic and other conditions that the Company is
unable to predict. See "Management of Credit Risk--Non-Performing Assets" for a
discussion of expected future levels of ORE expense, net.
Amortization of MSR Amortization of MSR increased $2.4 million, or 25.3%, for
1995 as compared with 1994 after declining $10.2 million, or 51.4%, for 1994 as
compared with 1993. These changes are principally reflective of the level of
long-term interest rates during those years, which declined during 1995 after
increasing during 1994, and the resultant impact on the actual and anticipated
level of prepayments of the loans underlying the MSR portfolio. A continuation
of the relatively lower long-term interest rate environment could result in
increased amortization of MSR in future periods. The level of amortization of
MSR in 1995 and 1994 as compared with the respective prior years also reflects
the growth in the Company's MSR asset. Amortization of MSR in 1995 was reduced
by $0.8 million as a result of the Company's utilization of interest rate floor
agreements to hedge certain of its MSR against the negative impact of high
prepayment levels of the underlying loans. These agreements did not have a
material effect upon the amortization of MSR in 1994 or 1993. The increase in
amortization of MSR in 1995 as compared with 1994 also reflects, as further
discussed below, the Company's adoption of SFAS No. 122.
SFAS No. 122, which amended SFAS No. 65, "Accounting for Certain Mortgage
Banking Activities," requires the recognition, as separate assets, of the
rights to service mortgage loans (which includes cooperative apartment loans)
sold, whether those rights are acquired through loan purchase or loan
origination activities. Prior to the adoption of SFAS No. 122, only those rights
to service mortgage loans acquired through purchase transactions were
recognized as assets by the Company. In addition, the previously existing
requirement in SFAS No. 65 to offset gains on the sales of loans against any
related servicing right assets was eliminated by SFAS No. 122. The initial
capitalization
25
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------------------------------------
of MSR is predicated upon an allocation of the total cost of the
related loans to the MSR and the loans (without the MSR) based on their relative
estimated fair values. MSR are amortized in proportion to and over the period of
estimated net servicing income.
SFAS No. 122 requires MSR to be assessed for impairment based upon their
estimated fair value. For the purpose of such assessment, an enterprise must
stratify its MSR based on one or more of the predominant risk characteristics of
the underlying loans. The Company stratifies its MSR, including those purchased
MSR capitalized prior to the adoption of SFAS No. 122, by interest rate and type
of loan (i.e., adjustable-rate and fixed-rate). As necessary, impairment of MSR
is recognized through a valuation allowance for each impaired stratum with a
corresponding charge to "Amortization of MSR," with such individual allowances
adjusted in subsequent periods to reflect changes in the measurement of
impairment. No valuation allowance for MSR impairment was required to be
maintained by the Company at December 31, 1995. The recognition of estimated
fair value in excess of the capitalized MSR, net of amortization, is prohibited.
Prior to the Company's adoption of SFAS No. 122, the recoverability and carrying
values of purchased MSR were determined through a discounted cash flow analysis
utilizing a discount rate equal to the higher of the current market rate or the
implicit rate at the time of acquisition.
Restructuring and Merger-Related Expense Total restructuring and Merger-related
expense recognized during 1995 amounted to $15.3 million and resulted from a
revision of the estimated remaining restructuring costs to be incurred in
connection with the Merger and the recognition of a variety of operating
expenses directly attributable to the Merger. The total amount of such costs
recognized during 1994 was $58.3 million and included various transaction fees,
such as legal, accounting and investment banking services, of $14.3 million,
severance and other personnel costs of $21.3 million, facilities and systems
restructuring costs of $18.8 million and other related costs of $3.9 million.
For a further discussion of restructuring expenses associated with the Merger,
see Note 2 of Notes to the Consolidated Financial Statements.
The Company recognized $4.0 million of restructuring expense during 1993 in
connection with the implementation of certain operational changes, including
those related to the 1994 Bulk Sales and the termination of an agreement to
lease additional space at the Bank's primary operations facility.
Minority Interest--Preferred Stock Dividend of Subsidiary Dividends declared
and paid by the Bank on the Bank Preferred Stock and reflected as "Minority
interest-preferred stock dividend of subsidiary" in the Company's Consolidated
Statements of Income amounted to $11.4 million and $1.3 million for 1994 and
1993, respectively. In the fourth quarter of 1994, each outstanding share of the
Bank Preferred Stock was exchanged for $1,000 principal amount of the 10 1/2%
Senior Notes. Interest expense on the 10 1/2% Senior Notes, which is reflected
in net interest income, is deductible for income tax purposes, while the
dividends on the Bank Preferred Stock were not deductible.
Income Taxes During 1995, the Company recorded income tax expense of $47.7
million as compared with an income tax benefit during 1994 and 1993 of $53.1
million and $69.0 million, respectively. As further discussed below, the income
tax benefit recognized during each of 1994 and 1993 resulted primarily from
reductions in the Company's valuation allowance for deferred tax assets during
those years.
During 1994, based primarily on the increased likelihood, in the Company's
judgment (giving consideration to, among other factors, anticipated benefits of
the Merger and improved asset quality), of the Company generating future taxable
income necessary to realize its deferred tax asset, the Company reversed its
remaining deferred tax asset valuation allowance, which resulted in the
recognition of $129.9 million of income tax benefits. Partial reductions in the
amount of $109.5 million in the valuation allowance offsetting the Company's
deferred tax asset had been recognized during 1993 as a result of several
factors that positively affected the Company's outlook for future earnings.
The Company also reconsidered certain tax planning strategies during 1994 in
order to maximize the realization of the deferred tax attributes. This resulted
in additional current income tax expense of $20.5 million during 1994 and a
reduction in the Company's gross deferred tax asset by $12.2 million.
Cumulative Effect of a Change in Accounting Principle Effective January 1,
1994, the Company adopted SFAS No. 72, "Accounting for Certain Acquisitions of
Banking or Thrift Institutions," for that portion of its goodwill not previously
being accounted for under the provisions of this statement. Such goodwill was
associated with a thrift acquisition initiated prior to the effective date of
SFAS No. 72. In connection therewith, the Company's method of amortizing such
goodwill was changed from the straight-line method to the interest method over
the expected remaining lives of the long-term interest-earning assets acquired.
The cumulative effect on prior years of this change in accounting principle was
$92.9 million, which was reflected as a charge to the 1994 first quarter's
operations.
In accordance with the provisions of SFAS No. 115, which the Company adopted
effective December 31, 1993, the Company changed its method of measuring
impairment for interest-only MBS from an undiscounted cash flow basis to
estimated fair value. This change resulted in the Company recognizing impairment
of interest-only MBS as of the date of adoption of SFAS No. 115 of $1.2 million,
net of the income tax effect.
26
Management of Interest Rate Risk
- --------------------------------
General Interest rate risk is managed by the Company through asset/liability
strategies designed to maintain acceptable levels of interest rate exposure
throughout a range of interest rate environments. These strategies are intended
not only to protect the Company from significant long-term declines in net
interest income as a result of unfavorable changes in the interest rate
environment, but also to mitigate the negative effect of such interest rate
changes upon the Company's mortgage banking operating results. The Company seeks
to contain its interest rate risk within a band that it believes is manageable
and prudent given the Company's capital and income generating capacity.
The Company's sensitivity to interest rates is driven by the mismatch between
the term to maturity or repricing of its interest-earning assets and that of its
interest-bearing liabilities. As is typical of most thrifts, the Company's
interest-bearing liabilities reprice or mature, on average, sooner than its
interest-earning assets. This difference is often referred to as duration gap.
The Company's duration gap can vary under alternative interest rate scenarios
due to changes in consumer preferences as they relate to product mix, incentives
to refinance loans that are directly related to interest rates and other
interest rate-related characteristics of specific assets and liabilities.
The Company is also exposed to interest rate risk arising from the "option risk"
embedded in many of the Company's interest-earning assets. Mortgages and MBS,
for example, may contain prepayment options, interim and lifetime interest rate
caps and other such features driven or otherwise influenced by changes in
interest rates. Prepayment option risk affects mortgage-related assets in both
rising and falling interest rates as the financial incentive to refinance
mortgages is directly related to the level of current mortgage interest rates
relative to the existing note rates.
Extension risk on mortgage-related assets is the risk that the duration of such
assets increases as a result of declining prepayments due to rising interest
rates. Certain mortgage-related assets are more sensitive to changes in interest
rates than others, resulting in a higher risk profile. Since the Company's
liabilities are not similarly affected, the Company's overall duration gap
generally increases as interest rates rise. In addition, in a rising interest
rate environment, adjustable-rate assets may reach interim or lifetime interest
rate caps, thereby limiting the amount of upward adjustment, which effectively
lengthens the duration of such assets. At December 31, 1995, approximately $10.6
billion of mortgage and mortgage-related assets were subject to such caps.
Lower interest rate environments may also present interest rate exposure.
Generally, lower interest rate environments tend to accelerate prepayment rates,
which both shorten the duration of mortgage and mortgage-related assets and
accelerate the amortization of premiums paid in the acquisition of these assets.
The recognition of premiums over a shorter than expected term causes yields on
assets with premiums to decline from anticipated levels.
The Company is also exposed to interest rate risks resulting from the change in
the shape of the yield curve (i.e. flattening, steepening and inversion; also
called "yield curve twist risk") and to differing indices upon which the yield
on the Company's assets and liabilities are based ("basis risk"). As discussed
above in "Results of Operations--Net Interest Income," the relatively flat yield
curve in existence during the greater part of 1995 negatively affected the
Company's net interest income as a result of the compression of the spread
between the pricing of the Company's interest-earning assets (particularly those
linked to the one-year Treasury and lagging cost of funds indices) and its
short-term borrowings. This negative effect on net interest income may continue
into 1996 if the yield curve remains relatively flat.
In order to reduce its sensitivity to interest rate risk, the Company's
investment strategy has emphasized adjustable-rate assets and fixed-rate medium-
term assets. Of the Company's total interest-earning assets of $19.5 billion at
December 31, 1995, approximately $12.7 billion, or 65%, were adjustable-rate. Of
such adjustable-rate assets, approximately 50% were linked to U.S. Treasury
instruments and approximately 40% were linked to various cost of funds indices,
which lag changes in market interest rates, including the National Median Cost
of Funds Index and the 11th District Cost of Funds Index. The Company also seeks
to extend the maturity of its short-term or frequently repricing liabilities
or, alternatively, to reduce the maturity or increase the repricing frequency of
its assets, by using derivative financial instruments.
In evaluating and managing its interest rate risk, the Company employs
simulation models to help assess its interest rate risk exposure and the impact
of alternative interest rate scenarios and the probability of occurrence. The
effect of adjustable-rate loan indices, periodic and lifetime interest rate
adjustment caps, estimated loan prepayments, anticipated deposit retention rates
and other dynamics of the Company's portfolios of interest-earning assets and
interest-bearing liabilities are considered in such projections.
Hedging Activities The Company utilizes a variety of derivative financial
instruments to assist in managing its interest rate risk exposure, but does not
utilize such instruments for speculative purposes. Derivative financial
instruments employed by the Company at December 31, 1995 were interest rate
swaps, caps and floors, forward contracts, and options. The Company has also
utilized interest rate futures, but had no such instruments outstanding at
December 31, 1995. The Company has not entered into derivative financial
instrument agreements containing embedded short-option positions.
At December 31, 1995, the notional amount of derivative financial instruments
utilized by the Company in managing net interest income amounted to $2.6 billion
as compared with $3.6 billion at the prior year end. The Company reduced its
reliance on such derivative financial instrument
27
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------------------------------------
agreements during 1995 primarily as a result of the significant decline in
interest rates during the year. In particular, as the declining interest rate
environment during 1995 resulted in an increase in prepayments of mortgage
loans, including those underlying the Company's MBS portfolio, the mismatch in
expected maturity between such assets and the interest-bearing liabilities
funding them was reduced. This decline in relative mismatch is a direct
reduction of the Company's interest rate risk.
With regard to its mortgage banking activities, the Company hedges its exposure
to changes in interest rates on commitments to originate loans for sale in the
secondary market. In addition, the Company utilizes interest rate floor
agreements to minimize the impact of the potential loss of net future servicing
revenues associated with certain of its MSR as a result of an increase in loan
prepayments, which is generally triggered by declining interest rates. The total
notional amount of derivative financial instruments utilized in connection with
the Company's mortgage banking activities amounted to $1.3 billion and $1.5
billion at December 31, 1995 and 1994, respectively.
The following table summarizes, by category of asset or liability hedged, the
notional amount and estimated fair value of the Company's outstanding derivative
financial instruments at December 31, 1995 and 1994.
Interest Interest Interest Interest
Rate Rate Forward Rate Rate
(In thousands) Swaps Futures Contracts Caps Floors Options Total
- -------------------------------------------------------------------------------------------------------------------
1995:
Notional amount:
Loans held for sale $ -- $ -- $ 69,676 $ -- $ -- $10,000 $ 79,676
MBS available for sale -- -- -- 877,118 -- -- 877,118
MBS held to maturity -- -- -- 366,061 -- -- 366,061
Loans receivable 212,747 -- -- -- -- -- 212,747
MSR -- -- -- -- 1,219,776 -- 1,219,776
Deposits 150,000 -- -- -- -- -- 150,000
Borrowings 928,000 -- -- -- -- 37,000 965,000
- -------------------------------------------------------------------------------------------------------------------
Total notional amount $1,290,747 $ -- $ 69,676 $1,243,179 $1,219,776 $47,000 $3,870,378
- -------------------------------------------------------------------------------------------------------------------
Estimated fair value $ (6,499) $ -- $ (709) $ 1,362 $ 1,026 $ 92 $ (4,728)
===================================================================================================================
1994:
Notional amount:
Loans held for sale $ -- $ -- $144,250 $ -- $ -- $ -- $ 144,250
MBS available for sale -- 154,000 107,000 -- -- -- 261,000
MBS held to maturity -- 465,100 -- -- -- -- 465,100
MSR -- -- -- -- 1,366,685 -- 1,366,685
Loans receivable 453,280 92,800 -- -- -- 300 546,380
Deposits 750,000 -- -- -- -- -- 750,000
Borrowings 500,000 1,065,000 -- -- -- 45,000 1,610,000
- -------------------------------------------------------------------------------------------------------------------
Total notional amount $ 1,703,280 $1,776,900 $251,250 $ -- $1,366,685 $45,300 $5,143,415
- -------------------------------------------------------------------------------------------------------------------
Estimated fair value $ 65,458 $ 7,478 $ (20) $ -- $ 53 $ 1,300 $ 74,269
===================================================================================================================
While the hedging activities engaged in by the Company have served to mitigate
the effects of unfavorable interest rate changes, the Company continues to be
susceptible to a significant level of interest rate risk. In addition, the
protection afforded by the Company's hedging activities is limited to the
remaining terms of the related derivative financial instruments.
The derivative financial instruments used by the Company, though chosen to
remedy specific risk conditions, may under certain circumstances behave in a
manner that is inconsistent with their intended purpose. Thus, such derivatives
possess market risk in their own right. The Company has established internal
policies that define the extent of historical correlation between a hedge and
hedged item prior to the use of the derivative financial instrument as a hedge.
The potential exists, however, that this relationship or "basis" may change due
to extraordinary circumstances. The Company, also by policy, monitors these
relationships at regular intervals to ensure that such correlation is
maintained. The Company cannot guarantee that such relationships as have been
historically observed will continue.
For additional information concerning the Company's derivative financial
instruments, see Note 1, Note 16 and Note 17 of Notes to Consolidated Financial
Statements.
Asset/Liability Repricing The measurement of differences (or "gaps") between
the Company's interest-earning assets and interest-bearing liabilities that
mature or reprice within a period of time is an indication of the Company's
sensitivity to changes in interest rates. A negative gap generally indicates
that, in a period of rising interest rates, deposit and borrowing costs will
increase more rapidly than the yield on loans and securities and, therefore,
reduce net interest income. The opposite effect will generally occur in a
declining interest rate environment. Low gap ratios generally indicate that an
institution is less sensitive
28
to the impact of changing interest rates. Although the Company has a large
portfolio of adjustable-rate assets, the protection afforded by such assets in
the event of substantial rises in interest rates for extended time periods is
limited due to interest rate reset delays, periodic and lifetime interest rate
caps, payment caps and the fact that indices used to reprice a portion of the
Company's adjustable-rate assets lag changes in market rates. Moreover, in
declining interest rate environments or certain shifts in the shape of the yield
curve, these assets may prepay at significantly faster rates than otherwise
anticipated. It should also be noted that the Company's gap measurement reflects
broad judgmental assumptions with regard to repricing intervals for certain
assets and liabilities.
At December 31, 1995, the Company had a one-year negative gap, including the
effect of hedging activities, of $2.1 billion, or 10.58% of total interest-
earning assets. The following table reflects the repricing of the Company's
interest-earning assets and interest-bearing liabilities at December 31, 1995.
The amount of each asset or liability is included in the table at the earlier of
the next repricing date or maturity. Loan and MBS prepayment assumptions
utilized in preparing the table are based upon industry standards as well as the
Company's historical experience and estimates. Non-performing loans have been
included in the "More Than One Through Three Years" category. Savings accounts
have been spread ratably over a 20 year period based on the assumption that such
accounts are essentially core deposits and in the aggregate have not been
generally sensitive to fluctuations in market interest rates. If all savings
accounts were included in the "One Year or Less" category, the Company would
have had a one-year negative gap at December 31, 1995 of $4.6 billion, or 23.70%
of total interest-earning assets.
==============================================================================================================
More Than
One Year One Through More Than
(Dollars in millions) or Less Three Years Three Years Total
- --------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Loans $ 5,320 $ 2,313 $2,337 $ 9,970
MBS 7,000 1,138 879 9,017
Other 33 28 416 477
- --------------------------------------------------------------------------------------------------------------
Total interest-earning assets 12,353 3,479 3,632 19,464
- --------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits 8,714 1,300 2,558 12,572
Borrowings 6,327 126 162 6,615
- --------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 15,041 1,426 2,720 19,187
- --------------------------------------------------------------------------------------------------------------
Impact of hedging activities (629) 478 151 --
- --------------------------------------------------------------------------------------------------------------
Gap (repricing difference) $ (2,059) $ 1,575 $ 761 $ 277
==============================================================================================================
Cumulative gap $ (2,059) $ (484) $ 277
==============================================================================================================
Cumulative ratio of gap to total interest-earning assets (10.58)% (2.49)% 1.42%
==============================================================================================================
Management of Credit Risk
- -------------------------
General The Company's major exposure to credit risk results from the
possibility that it will not recover amounts due from borrowers or issuers of
securities. During the period of 1988 through 1991, the Company experienced a
significant deterioration in the quality of its loan portfolio. In response
thereto, the Company strengthened its credit risk and related management
processes and implemented various strategies designed to reduce the level of
non-performing assets, as well as the costs associated with such assets, to
acceptable levels and to maintain those levels going forward. In addition to a
loan-by-loan/property-by-property disposition strategy, the strategies
undertaken by the Company in this regard also included the 1994 Bulk Sales, the
utilization of credit enhancements and the purchase and origination of loans
through correspondents in order to geographically diversify the loan portfolio.
While the Company's asset quality has improved as a result of the implementation
of these strategies, the Company cannot predict whether further improvement will
be realized in future periods.
MBS In general, the Company's MBS carry a significantly lower credit risk than
its loans receivable. Of the aggregate portfolio of MBS held to maturity and
available for sale at December 31, 1995 of $9.0 billion, which represented 46.3%
of total interest-earning assets at that date, approximately 15%, in total, were
issued by the Federal Home Loan Mortgage Corporation ("FHLMC"), the Federal
National Mortgage Association ("FNMA") and the Government National Mortgage
Association ("GNMA"). MBS issued by entities other than FHLMC, FNMA and GNMA
("Privately-Issued MBS") have generally been underwritten by large investment
banking firms, with the timely payment of principal and interest on these
securities supported ("credit enhanced") in varying degrees by either insurance
issued by a financial guarantee insurer, letters of credit or subordination
techniques. Substantially all of the $7.7 billion portfolio of Privately-Issued
MBS held by the Company at December 31, 1995 were rated "AA" or better by one or
more of the nationally recognized securities rating agencies. The Privately-
Issued MBS are subject to certain credit-related
29
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------------------------------------
risks normally not associated with MBS issued by FHLMC, FNMA, and GNMA,
including the limited loss protection generally provided by the various forms of
credit enhancements, as losses in excess of certain levels are not protected.
Furthermore, the credit enhancement itself is subject to the creditworthiness of
the provider. Thus, in the event that a provider of a credit enhancement does
not fulfill its obligations, the MBS holder could be subject to risk of loss
similar to a purchaser of a whole loan pool. The credit enhancements in place at
December 31, 1995 on the Privately-Issued MBS should protect the Company from
approximately $1.9 billion of possible losses.
During 1995, the Company recognized a $3.3 million loss associated with an
other than temporary impairment in value of certain Privately-Issued MBS, which
was necessitated by the erosion in the underlying credit enhancements associated
with these securities, coupled with the Company's projections of estimated
future losses on defaults of the loans underlying the securities. At December
31, 1995, these securities, all of which are classified as available for sale,
had a carrying value of $61.2 million and related credit enhancements of $1.6
million. No assurance can be given that future losses on these securities will
not be incurred due to a further erosion of the related credit enhancements
and/or due to changes in the Company's loss projections. Additionally, the
Company cannot predict whether losses will or will not be recognized on any
other Privately-Issued MBS currently held by the Company.
Non-Performing Assets Non-performing assets are comprised of non-accrual loans
and ORE, net. At December 31, 1993, this category of assets also included non-
performing assets held for bulk sale. Non-accrual loans are all loans 90 days or
more delinquent, as well as certain loans less than 90 days past due that have
been placed on non-accrual status due to concerns about the full collectability
of contractual principal and interest payments. When a loan is placed on non-
accrual status, any accrued but unpaid interest income on the loan is reversed
and future interest income on the loan is recognized only if actually received
by the Company and full collection of principal is not in doubt. Cash receipts
on non-accrual loans are applied to principal and interest in accordance with
their contractual terms unless full payment of principal is not expected, in
which case all cash receipts are applied as a reduction of the carrying value of
the loan. Loans are generally returned to accrual status when principal and
interest payments are current, full collectability of principal and interest is
reasonably assured and a consistent record of performance, generally six months,
has been demonstrated.
Non-performing assets amounted to $315.8 million, or 1.55% of total assets, at
December 31, 1995 as compared with $415.9 million, or 2.12% of total assets, at
December 31, 1994 and $641.7 million, or 3.55% of total assets, at December 31,
1993.
Effective January 1, 1995, the Company adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan," as well as the amendment thereof, SFAS No.
118, "Accounting by Creditors for Impairment of a Loan--Income Recognition and
Disclosures." SFAS No. 114, among other things, amended SFAS No. 15, "Accounting
by Debtors and Creditors for Troubled Debt Restructurings," to limit the
application of the concept of an in-substance foreclosure to those situations
where the creditor has obtained physical possession of the loan collateral,
regardless of whether formal foreclosure proceedings have occurred. Prior
thereto, loans deemed to be in-substance foreclosed by the Company were included
as a component of "ORE, net" in the Company's Consolidated Statements of
Financial Condition. It is not the Company's current policy, nor has it been its
policy in the past, to take possession of loan collateral until foreclosure has
occurred. In connection with its adoption of SFAS No. 114, the Company has, for
all periods prior to its adoption, reclassified (i) in-substance foreclosed
loans and any related allowance for losses from "ORE, net" to "Loans receivable"
and the "Allowance for loan losses," respectively, (ii) provisions for losses on
in-substance foreclosed loans from "ORE expense, net" to the "Provision for loan
losses," and (iii) charge-offs and recoveries of in-substance foreclosed loans
from the "Allowance for losses on ORE," which is netted against ORE, to the
"Allowance for loan losses". For a further discussion of impaired loans, see
"Impaired Loans" below.
The reduction in non-performing assets during 1995 as compared with 1994
reflects a decline in non-accrual loans of $86.7 million, or 25.4%, coupled with
a decline in ORE, net, of $13.3 million, or 18.0%. The significant decline in
non-accrual loans during 1995 was due in large part to a reduction in the
Company's commercial and multifamily non-accrual loans of $72.2 million, which,
as a percentage of total non-accrual loans, declined to 13.6% at December 31,
1995 from 31.2% at the prior year end.
Excluding the impact of the 1994 Bulk Sales, non-performing assets increased
$38.7 million, or 10.3%, from December 31, 1993 to December 31, 1994. This
increase was substantially attributable to the significant amount of non-
performing assets acquired in the Lincoln Acquisition.
30
The following table sets forth the components of non-performing assets at
December 31 for the years indicated. Loans modified in a troubled debt
restructuring ("TDR") that have demonstrated a sufficient payment history to
warrant return to performing status are not included within non-accrual loans.
(In thousands) 1995 1994 1993
- -----------------------------------------------------------------
Non-accrual loans:
Residential property loans $206,230 $214,222 $173,146
Commercial and multifamily
first mortgage loans 34,618 106,778 92,120
Construction loans 5,267 5,095 7,931
Consumer and business loans 9,004 15,769 17,719
- -----------------------------------------------------------------
Total non-accrual loans 255,119 341,864 290,916
- -----------------------------------------------------------------
ORE, net:
Residential property 38,799 43,881 67,638
Commercial and
multifamily property 24,952 37,368 26,127
Allowance for losses (3,070) (7,247) (7,538)
- -----------------------------------------------------------------
Total ORE, net 60,681 74,002 86,227
- -----------------------------------------------------------------
Non-performing assets
held for bulk sale:
Residential property loans -- -- 186,000
Residential ORE -- -- 78,600
- -----------------------------------------------------------------
Total non-performing assets
held for bulk sale(1) -- -- 264,600
- -----------------------------------------------------------------
Total non-performing assets $315,800 $415,866 $641,743
=================================================================
(1)The non-performing assets held for bulk sale were written-down to the amount
of the proceeds anticipated to be received from the sales.
The balance of non-performing assets is impacted by the length of the
foreclosure process as loans entering non-performing status often remain in such
status for an extended period of time due to contested foreclosure actions and
other circumstances. Furthermore, with regard to loans secured by properties in
certain New England states, the Company, starting in 1994, implemented
agreements that set forth, among other things, procedures for borrowers in those
states to seek opportunities to "workout" or restructure their loans. The Bank
has also, at times, voluntarily delayed or limited certain foreclosure
proceedings in order to address consumer and other concerns in these states.
Although these actions have delayed somewhat the exit of the affected loans from
non-performing status, the impact of such actions has not been material.
However, the Company anticipates that it will experience increased levels of
ORE and ORE expense, which are not currently expected to be material, as the
delays and limitations that the Company currently has in place lapse or are
otherwise terminated.
The level of loans delinquent less than 90 days may, to some degree, be a
leading indicator of future levels of non-performing assets. Such delinquent
loans, net of those already in non-performing status, were as follows at
December 31, 1995.
Delinquency Period
------------------
30-59 60-89
(In thousands) Days Days Total
- ------------------------------------------------------------
Residential property loans $ 38,825 $ 15,788 $54,613
Commercial and multifamily
first mortgage loans 14,967 2,635 17,602
Consumer and business loans 8,647 1,968 10,615
- ------------------------------------------------------------
Total $ 62,439 $ 20,391 $82,830
============================================================
Impaired Loans In accordance with SFAS No. 114, the Company considers a loan
impaired when, based upon current information and events, it is probable that
it will be unable to collect all amounts due, both principal and interest,
according to the contractual terms of the loan agreement. SFAS No. 114 does not
apply to those large groups of smaller-balance homogeneous loans that are
collectively evaluated for impairment, which, for the Company, include
residential property loans and consumer loans, other than those modified in a
TDR. In addition, the Company does not generally review for impairment business
loans and commercial and multifamily first mortgage loans that have
insignificant carrying values. Loans otherwise qualifying for impaired status
are generally not so classified by the Company when the delay in the timing of
payments or the shortfall in the amount of payments is deemed by the Company to
be insignificant.
In accordance with SFAS No. 114, a loan modified in a TDR subsequent to its
adoption is considered impaired and measured for impairment throughout the term
of the loan in accordance therewith. However, as provided for in SFAS No. 114,
if the restructuring agreement specifies an interest rate equal to or greater
than the rate the Company was willing to accept at the restructuring date for a
new loan with comparable risk and the loan is not impaired based on the terms of
the restructuring agreement, it will not be included in the Company's impaired
loan statistics in years following the restructuring. Loans that were modified
in a TDR prior to the adoption of SFAS No. 114 that are not considered impaired
based on the terms of the restructuring agreement continue to be accounted for
under SFAS No. 15 and are not included in impaired loan statistics.
The Company's impaired loan identification and measurement processes are
conducted in conjunction with the review of the adequacy of its allowance for
loan losses (see "Allowance for Loan Losses" below). Specific factors utilized
in the impaired loan identification process include, but are not limited to,
delinquency status, loan-to-value ratio, the condition of the underlying
collateral, credit history, and debt coverage. At a minimum, loans reviewed for
31
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------------------------------------
impairment are classified as impaired by the Company when delinquent more than
six months.
Loans reviewed for impairment by the Company are limited to loans modified in a
TDR and, except as previously discussed, all business loans and commercial and
multifamily first mortgage loans. An impaired loan must be measured utilizing
the present value of expected future cash flows discounted at the loan's
effective interest rate or, as a practical expedient, at the loan's observable
market price or the fair value of the collateral if the loan is collateral
dependent. At December 31, 1995, the measurement value of the Company's impaired
business loans was predicated upon the present value of expected future cash
flows discounted at the loans' effective interest rate, while the measurement
value of all other impaired loans was based upon the fair value of the
underlying collateral. The amount by which the recorded investment in an
impaired loan exceeds the measurement value is recognized by an increase in the
allowance for loan losses with a corresponding charge to the provision for loan
losses.
The following table summarizes information regarding the Company's impaired
loans at December 31, 1995. Related
Related
Allowance
Recorded for Loan Net
(In thousands) Investment Losses Investment
- ------------------------------------------------------------------------------------------------------------
Residential property loans:
With a related allowance $ 3,170 $ (198) $ 2,972
Without a related allowance 10,650 -- 10,650
- ------------------------------------------------------------------------------------------------------------
Total residential property loans 13,820 (198) 13,622
- ------------------------------------------------------------------------------------------------------------
Commercial and multifamily
first mortgage loans:
With a related allowance 66,648 (9,909) 56,739
Without a related allowance 7,575 -- 7,575
- ------------------------------------------------------------------------------------------------------------
Total commercial and multifamily
first mortgage loans 74,223 (9,909) 64,314
- ------------------------------------------------------------------------------------------------------------
Business loans with a
related allowance 741 (660) 81
- ------------------------------------------------------------------------------------------------------------
Total impaired loans $88,784 $(10,767) $78,017
============================================================================================================
The Company's average recorded investment in impaired loans for the year ended
December 31, 1995 was $83.6 million. Interest income recognized on impaired
loans, which was not materially different from cash-basis interest income,
amounted to $4.6 million during the year ended December 31, 1995. Cash receipts
on an impaired loan are applied to principal and interest in accordance with the
contractual terms of the loan unless full payment of principal is not expected,
in which case both principal and interest payments received are applied as a
reduction of the carrying value of the loan. For impaired loans not classified
as non-accrual by the Company, interest income is recognized on an accrual basis
as the Company anticipates the full payment of principal and interest due.
Interest income on non-accrual impaired loans is accounted for in the manner
discussed in "Non-Performing Assets" above.
Loans Modified in a TDR When borrowers encounter financial hardship but are
able to demonstrate to the Company's satisfaction an ability and willingness to
resume regular monthly payments, the Company often seeks to provide them with an
opportunity to restructure the terms of their loans. These arrangements, which
are individually negotiated, generally provide for interest rates that are lower
than those initially contracted for, but which may be higher or lower than
current market interest rates, and may in some instances include a reduction in
the principal amount of the loan. The Company evaluates the costs associated
with a particular restructuring arrangement and may enter into such an
arrangement if it believes it is economically beneficial for the Company to do
so.
Loans modified in a TDR, other than those classified as impaired loans and/or
non-accrual loans, amounted to $192.4 million and $188.6 million at December 31,
1995 and 1994, respectively.
Loans Sold with Recourse The Company, in the past, sold certain residential and
multifamily property loans with limited recourse, with the majority of these
loans having been securitized with FNMA. At December 31, 1995, the balance of
loans sold with recourse was $900.4 million with a related aggregate maximum
potential recourse exposure of approximately $223 million. Of these loans, $12.1
million were delinquent 90 days or more at December 31, 1995.
During the first quarter of 1994, an agreement was reached with FNMA whereby the
Company would no longer have any recourse obligations with respect to
approximately $664 million of residential property loans previously sold by the
Company with recourse. While the Company's maximum potential recourse liability
did not change as a result of this transaction, the Bank is no longer required
to hold capital, for risk-based capital purposes, against those loans released
from recourse obligations. The Company paid FNMA $1.7 million to eliminate the
recourse liability applicable to these loans, which was charged to the allowance
for loan losses during the first quarter of 1994.
Generally, it has been the Company's practice to repurchase from FNMA any loans
sold with recourse that become 90 days delinquent. By repurchasing these loans
prior to foreclosure, the Company derives the benefit of the savings between the
interest rate that must be paid monthly to FNMA, even if not received, and the
Company's own interest cost to fund the purchase of these loans. Additionally,
repurchases permit the Company to provide eligible borrowers with more flexible
loan workout options. During 1995, the Company repurchased from FNMA residential
and multifamily property loans sold with limited recourse totaling $24.5 million
as compared with $36.5 million during 1994.
Allowance for Loan Losses The Company's allowance for loan losses is intended
to be maintained at a level sufficient to absorb all estimable and probable
losses inherent in the loans receivable portfolio. In determining the
appropriate level of the allowance for loan losses and, accordingly, the
32
level of the provision for loan losses, the Company reviews its loans receivable
portfolio on a monthly basis, taking into account the size, composition and risk
profile of the portfolio, including delinquency levels, historical loss
experience, cure rates on delinquent loans, economic conditions and other
pertinent factors, such as assumptions and projections of future conditions.
While the Company believes that the allowance for loan losses is adequate,
additions to the allowance for loan losses may be necessary in the event of
future adverse changes in economic and other conditions that the Company is
unable to predict.
The Company's allowance for loan losses amounted to $128.3 million at December
31, 1995 as compared with $170.4 million and $157.5 million at December 31, 1994
and 1993, respectively. The following table sets forth the activity in the
Company's allowance for loan losses for the years ended December 31:
(Dollars in thousands) 1995 1994 1993
- ------------------------------------------------------------------
Balance at beginning of year $170,383 $157,515 $ 248,429
Merger adjustment -- (928) --
Allowance acquired in the
Lincoln Acquisition -- 32,579 --
Provision charged
to operations 39,650 55,799 95,489
Charge-offs:
Residential property loans (46,131) (43,910) (184,478)
Commercial and multifamily
first mortgage loans (37,759) (35,327) (9,085)
Consumer and
business loans (8,198) (5,547) (9,730)
- ------------------------------------------------------------------
Total charge-offs (92,088) (84,784) (203,293)
- ------------------------------------------------------------------
Recoveries:
Residential property loans 5,220 5,895 11,710
Commercial and multifamily
first mortgage loans 1,552 676 1,433
Consumer and business loans 3,578 3,631 3,747
- ------------------------------------------------------------------
Total recoveries 10,350 10,202 16,890
- ------------------------------------------------------------------
Net charge-offs (81,738) (74,582) (186,403)
- ------------------------------------------------------------------
Balance at end of year $128,295 $170,383 $ 157,515
==================================================================
Allowance for loan losses
as a percentage of:
Non-accrual loans 50.3% 49.8% 54.1%
- ------------------------------------------------------------------
Total loans receivable 1.3 1.8 2.0
==================================================================
The Company's net charge-offs rose $7.2 million in 1995 as compared with 1994
after declining $111.8 million in 1994 as compared with 1993. The significant
decline in net charge-offs in 1994 as compared with 1993 was largely
attributable to charge-offs during 1993 associated with loans included in the
1994 Bulk Sales.
Derivative Financial Instruments The credit risk from the Company's derivative
financial instruments arises from the possible default by a counterparty on its
contractual obligations. The level of credit risk associated with derivative
financial instruments depends on a variety of factors, including the estimated
fair value of the instrument, the collateral maintained, the utilization of
master netting arrangements, and the ability of the counterparty to comply with
its contractual obligations. The Company has established policies and procedures
limiting its credit exposure to counterparties of derivative financial
instrument agreements, which include consideration of credit ratings on a
continuous basis, collateral requirements, and exposure to any one counterparty,
among other issues. In addition, as deemed necessary, the Company may enter into
master netting agreements, under which it may offset payable and receivable
positions, to the extent they exist, with the same counterparty in the event of
default. At December 31, 1995 and 1994, there were no past due amounts related
to the Company's derivative financial instruments.
In connection with its utilization of interest rate swaps, to the extent a
counterparty defaults, the Company would be subject to an economic loss that
corresponds to the cost to replace the agreement. An added element of credit
risk is introduced when there exists a mismatch in the frequency of payment
exchanges (i.e., the Company makes a payment on a quarterly basis but receives a
payment on a different payment frequency). A counterparty default would expose
the Company to an economic loss equal to the lost payment. Forward contracts
create credit risk in a manner similar to that of interest rate swaps.
Counterparty credit risk relating to exchange traded interest rate futures
contracts and options on such contracts is mitigated in three ways: (i) there is
mark-to-market of the contract value on a daily basis and any change in value is
settled in cash at the end of each day, (ii) there is a margin requirement with
the broker that adjusts based on the change in value of the futures contracts
(if accumulated losses cause the margin account to fall beyond a specified
level, then additional margin will be required or the account is closed out),
and (iii) an exchange clearinghouse is the counterparty in futures transactions.
The interest rate futures contracts utilized by the Company are traded on
nationally recognized exchanges.
For interest rate floors, interest rate caps and over-the-counter option
agreements, the Company is subject to credit risk to the extent contractual
payments required under the agreements are not received.
33
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------------------------------------
Financial Condition
- -------------------
The Company's total assets amounted to $20.3 billion at December 31, 1995 as
compared with $19.6 billion at December 31, 1994. The 3.5% growth during 1995
was substantially attributable to increases in the Company's loans receivable
and loans held for sale. Upon consummation of the planned sales of MBS in
connection with the 1995 Balance Sheet Restructuring Plan, the Company's total
assets will decline by approximately $1.1 billion.
Securities The overall securities portfolio experienced only marginal growth
during the year as securities available for sale increased to $4.1 billion at
December 31, 1995 from $0.5 billion at December 31, 1994, while securities held
to maturity declined to $5.1 billion at December 31, 1995 from $8.6 billion at
year-end 1994. The significant changes in the securities portfolios were due
predominantly to the reclassification by the Company in December 1995 of
securities with an amortized cost of $3.6 billion from the held to maturity
portfolio to the available for sale portfolio in connection with the 1995
Balance Sheet Restructuring Plan. At December 31, 1995, MBS represented 96.7% of
the securities available for sale portfolio and substantially all of the held to
maturity portfolio.
Securities designated as available for sale are carried at estimated fair value
with unrealized gains and losses recorded in a valuation allowance that is
included, net of related income taxes, as a separate component of stockholders'
equity. At December 31, 1995, the Company's net unrealized loss on its
securities available for sale portfolio, net of related income taxes, was $5.5
million ($9.6 million on a pretax basis), compared with $12.6 million ($22.0
million on a pretax basis) at December 31, 1994. As a result of the Company's
decision to sell $1.1 billion of MBS in connection with the 1995 Balance Sheet
Restructuring Plan, the Company wrote down those securities with unrealized
losses to estimated fair value. Gross unrealized gains and losses on securities
available for sale amounted to $24.3 million and $33.9 million, respectively, at
December 31, 1995 as compared with gross unrealized gains and losses of $15.2
million and $37.2 million, respectively, at December 31, 1994.
At December 31, 1995, the Company's securities held to maturity portfolio had an
estimated fair value of $5.0 billion and gross unrealized gains and losses of
$3.9 million and $99.1 million, respectively. This compares with an estimated
fair value of $8.1 billion and gross unrealized gains and losses of $6.9 million
and $483.7 million, respectively, at December 31, 1994.
During 1995, the aggregate amount of MBS held to maturity and available for sale
purchased by the Company totaled $2.2 billion, consisting principally of
adjustable-rate securities. Sales of MBS available for sale during 1995 amounted
to $25.3 million. During the first quarter of 1995, as a result of the Merger,
the Company, for interest rate risk management purposes, sold MBS held to
maturity with an amortized cost of $188.1 million. Principal payments and
prepayments on MBS amounted to $1.9 billion during the year.
At December 31, 1995, approximately $6.5 billion, or 72%, of the aggregate $9.0
billion portfolios of MBS available for sale and held to maturity consisted of
adjustable-rate securities. Of these adjustable-rate securities, $3.7 billion
were tied to Treasury indices (primarily the one-year Treasury) with the
remaining $2.8 billion of securities tied to various cost of funds indices,
including $1.5 billion which reprice on a monthly basis and $1.1 billion which
reprice on a semi-annual basis.
The Company's aggregate purchases of investment securities available for sale or
held to maturity during 1995 were not material. There were no sales by the
Company of such securities during the year.
Loans Total loans receivable, exclusive of the allowance for loan losses,
amounted to $9.8 billion at December 31, 1995, an increase of $478.7 million
from the level at December 31, 1994.
The Company's first mortgage loans receivable portfolio during 1995 grew $451.7
million to $7.8 billion. At December 31, 1995, adjustable-rate loans comprised
approximately 61% of the first mortgage loans receivable portfolio. The
principal balances of residential first mortgage loans amounted to $5.9 billion
at December 31, 1995, an 8.0% increase over the level at December 31, 1994. This
increase reflects the expansion of the Company's residential loan origination
capabilities, the effect of which was partially offset by the relatively high
level of loan prepayments as a result of the declining interest rate
environment. The $1.1 billion of residential first mortgage loans receivable
produced for portfolio during 1995 consisted principally of adjustable-rate
loans. The Company's portfolio of commercial and multifamily first mortgage
loans receivable amounted to $1.8 billion at December 31, 1995, a marginal
decline from the previous year end.
The Company's cooperative apartment loans receivable portfolio increased $40.8
million during 1995. While the Company's production of such loans for portfolio
during 1995 amounted to $153.1 million, the growth in the portfolio was
mitigated by a high level of loan prepayments. Approximately 88% of the
cooperative apartment loans receivable portfolio at December 31, 1995 consisted
of adjustable-rate loans.
The decline in consumer and business loans of $13.8 million during 1995 was
primarily due to a reduction in the manufactured home loan portfolio.
Reductions in this portfolio, principal balances of which amounted to $78.3
million at December 31, 1995, will continue as this product line was
discontinued. The Company's home equity loan portfolio, which represents the
largest segment of the consumer and business loan portfolio, experienced a
decline in principal balances during 1995 of $8.7 million, or 1.7%.
34
During 1995, home equity loan originations amounted to $138.3 million and, at
year-end 1995, related unused lines of credit amounted to approximately $321
million. During 1995, the Company expanded its aggregate portfolio of automobile
loans and leases, which grew to $53.9 million at December 31, 1995 from $30.1
million at the end of 1994.
In addition to its loans receivable portfolio, the Company maintains a portfolio
of residential property loans held for sale in connection with its mortgage
banking activities. Such loans increased to $139.4 million at December 31, 1995
from $16.6 million at December 31, 1994.
The Company's total loan production increased to $2.4 billion during 1995 from
$2.1 billion during 1994 primarily due to a higher level of residential property
loan production. During 1995, on a quarter-to-quarter basis, the Company
experienced significant growth in its residential property loan production,
despite the Company's de-emphasis during the year of its correspondent loan
activities. Residential property loan production amounted to $747.9 million in
the 1995 fourth quarter, $555.4 million in the 1995 third quarter, $333.0
million in the 1995 second quarter and $180.1 million in the 1995 first quarter.
Of the production in the 1995 fourth quarter, approximately $240 million was
attributable to the residential property loan businesses of National Mortgage
and Madison Mortgage, which were acquired during the quarter.
The following table reflects the Company's loan production for the years ended
December 31:
(In thousands) 1995 1994
- --------------------------------------------------------------
Residential property loan production:
First mortgage loans originated $1,439,073 $ 838,748
First mortgage loans purchased 178,004 647,253
Cooperative apartment
loans originated 199,360 101,565
- --------------------------------------------------------------
Total residential property
loan production (1) 1,816,437 1,587,566
- --------------------------------------------------------------
Commercial and multifamily first
mortgage loan production 232,550 222,776
Consumer and business
loan production 323,080 311,510
- --------------------------------------------------------------
Total loan production $2,372,067 $2,121,852
==============================================================
(1) Includes production of loans for sale in the secondary market of $576.4
million and $583.9 million in 1995 and 1994, respectively.
Deposits At December 31, 1995, the Company operated 86 branches, comprised of
85 branches in the greater New York metropolitan area and one branch in Florida,
which the Company intends to dispose of. During 1995, the Company consummated
the sale of five branches with aggregate deposits at the time of sale of
approximately $283 million and consolidated 16 branches into eight branches.
Total deposits declined to $12.6 billion at December 31, 1995 from $12.8 billion
at December 31, 1994. However, exclusive of the effect of the aforementioned
branch sales, deposits would have increased approximately $43 million during the
year.
The following table sets forth a summarized composition of the deposit portfolio
at December 31:
1995 1994
Percent- Percent-
(Dollars in age of age of
thousands) Amount Total Amount Total
- ---------------------------------------------------------
Demand $ 1,084,966 8.6% $ 1,117,648 8.7%
Savings 2,689,343 21.4 3,552,943 27.8
Money market 2,160,161 17.2 2,040,124 15.9
Time 6,637,733 52.8 6,100,554 47.6
- ---------------------------------------------------------
Total
deposits $12,572,203 100.0% $12,811,269 100.0%
=========================================================
Borrowings The Company's total borrowed funds amounted to $6.6 billion at
December 31, 1995, an increase of 14.9% from the $5.8 billion level at December
31, 1994. During 1995, the Company significantly expanded its utilization of
securities sold under agreements to repurchase, generally with original
maturities of 30 days or less, resulting in an increase in such borrowings to
$1.6 billion at December 31, 1995 from $9.7 million one year earlier. The
Company's primary source of borrowings, however, continues to be Federal Home
Loan Bank of New York ("FHLBNY") advances, which declined to $4.6 billion, or
69.6% of total borrowed funds, at December 31, 1995, from $5.3 billion, or
92.4% of total borrowed funds, at December 31, 1994. As a result of the 1995
Balance Sheet Restructuring Plan, the Company anticipates a decline in the level
of outstanding FHLBNY advances of approximately $1.1 billion from their 1995
year end level. The outstanding FHLBNY advances as of December 31, 1995 had an
average remaining maturity of approximately two months.
Stockholders' Equity The Company's stockholders' equity amounted to $976.5
million at December 31, 1995 as compared with $905.1 million at December 31,
1994, an increase of $71.4 million, or 7.9%. At December 31, 1995 and 1994,
stockholders' equity represented 4.8% and 4.6% of total assets, respectively. As
a result of the significant increase in securities available for sale during
1995, the Company's stockholders' equity could be subject to increased
volatility.
35
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------------------------------------
In January 1996, the Holding Company announced its intention to repurchase up to
2% of its outstanding common stock, or approximately 2,000,000 shares. The
Holding Company intends to acquire the shares at prevailing prices in the open
market or in privately-negotiated transactions. No time limit has been
established to complete the repurchase program, which is still subject to
certain administrative clearances. Such shares will be placed in the corporate
treasury and are intended to be used in connection with the Company's employee
stock-based benefit plans.
In July 1993, in accordance with the terms of an agreement entered into with the
FDIC, Anchor Bancorp exchanged $157.0 million of its Class A cumulative
preferred stock for $71.0 million of its newly issued 8.9375% senior notes and
warrants to acquire, at an exercise price of $0.01 per share, 4,750,000 shares
of its common stock (the "FDIC Warrants"). In this exchange, the FDIC also
relinquished its claim to $47.2 million of accumulated but undeclared and unpaid
dividends with respect to the Class A cumulative preferred stock. The FDIC
Warrants were, upon consummation of the Merger, converted to warrants to acquire
8,407,500 shares of the Holding Company's common stock at $0.01 per share. In
February 1996, the Holding Company announced that it expects to file a
registration statement with the Securities and Exchange Commission in the second
quarter of 1996 in connection with the disposition by the FDIC of the common
shares underlying the FDIC Warrants. While the exercise of the FDIC Warrants
will result in an 8.4% increase in the Holding Company's outstanding common
shares based on the level outstanding at December 31, 1995, it will not have an
impact on the Company's earnings per share calculations because the FDIC
Warrants are considered common stock equivalents and, as such, have been
included in earnings per share calculations since their issuance.
Liquidity
- ---------
The Company manages its liquidity position in conjunction with its overall asset
and liability program in order to meet regulatory requirements and to ensure
that funds are available to meet deposit withdrawals, loan and investment
funding commitments, the repayment of borrowings and other obligations and
expenditures.
A principal source of liquidity for the Company is MBS and loan principal
amortization and prepayments. During 1995, the Company generated cash flows from
such payments of $3.0 billion as compared with $3.2 billion and $3.9 billion
during 1994 and 1993, respectively. While principal amortization on these assets
is a relatively predictable source of liquidity, principal prepayments on the
Company's MBS and loan portfolios have been, and will continue to be,
significantly affected by the interest rate environment. Assuming a continuation
of the existing lower interest rate environment, the Company anticipates a
relatively high level of principal prepayments on its MBS and loans receivable
portfolios during 1996.
The Company has also relied on wholesale borrowed funds, principally short-term
FHLBNY advances and, in 1995, securities sold under agreements to repurchase, to
provide liquidity. Net cash provided by borrowings amounted to $0.9 billion
during 1995 as compared with $0.3 billion during 1994 and $2.9 billion during
1993. In connection with the 1995 Balance Sheet Restructuring Plan and its
overall operating strategies, the Company, in the near term, is seeking to
reduce its reliance on such funding sources.
Other potential sources of funds for the Company include, but are not limited
to, net new deposits, sales of interest-earning assets and net cash provided by
operations. Additionally, the Company has access to the capital markets for
issuing debt or equity securities and has access to the discount window of the
Federal Reserve Bank of New York, if necessary, for the purpose of borrowing to
meet temporary liquidity needs, although it has not utilized this funding source
in the past.
The Company's principal uses of funds during 1995, 1994 and 1993 were the
origination or purchase of loans and the purchase of MBS (see "Financial
Condition--Securities" and "Financial Condition--Loans," respectively). Going
forward, the Company's primary focus will be the origination of loans, but it
also expects to continue utilizing excess available funds to purchase loans and
MBS.
At December 31, 1995, the total of the Company's borrowed funds maturing during
1996 amounted to $6.2 billion. The Company anticipates that certain of the
borrowings will be rolled-over and that the remaining maturing borrowings will
be repaid by the proceeds from the sales of MBS in connection with the 1995
Balance Sheet Restructuring Plan and from other sources of funds as described
above.
Pursuant to regulations promulgated by the Bank's primary regulator, the Office
of Thrift Supervision (the "OTS"), the Bank is required to maintain (i) a ratio
of average eligible assets for the month to the sum of average net withdrawable
accounts and short-term borrowings during the preceding month of at least 5.0%
and (ii) a ratio of average eligible short-term liquid assets for the month to
the sum of average net withdrawable accounts and short-term borrowings during
the preceding month of at least 1.0%. The Bank was in compliance with these
regulations for each month during 1995.
Excluding funds raised through the capital markets, the primary source of funds
of the Holding Company, on an unconsolidated basis, is dividends from the Bank,
whose ability to pay dividends is subject to OTS regulations.
36
Regulatory Capital
- ------------------
The following table illustrates the regulatory capital position of the Bank at
December 31, 1995 pursuant to OTS requirements promulgated under the Financial
Institutions Reform, Recovery and Enforcement Act of 1989. The information
contained in the table has been based upon the Bank's understanding of the laws,
regulations, rulings, interpretations and decisions that are now in effect, all
of which are subject to change and to subsequent interpretation, which may
differ from such understanding. Any such change or subsequent interpretation
could affect the information set forth in the table below.
=============================================================================================
Capital Requirement Bank Capital Capital in
-------------------- ------------------------ Excess of
(Dollars in thousands) Amount Percent(1) Amount Percent(1) Requirement
- ---------------------------------------------------------------------------------------------
Tangible capital $302,866 1.50% $1,042,736 5.16% $739,870
Leverage capital 605,731 3.00 1,042,736 5.16 437,005
Risk-based capital 775,082 8.00 1,163,931 12.01 388,849
=============================================================================================
(1) For tangible and leverage capital, the ratio is to adjusted total assets of
$20.2 billion. For risk-based capital, the ratio is to total risk-weighted
assets of $9.7 billion.
Pursuant to FDICIA, the OTS adopted PCA regulations, effective December 19,
1992, which established five capital categories ("well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," and
"critically undercapitalized"). Under these regulations, a well capitalized
institution must have a leverage capital ratio of at least 5.0%, a tier 1 risk-
based capital ratio (leverage capital to risk-weighted assets) of at least 6.0%,
and a total risk-based capital ratio of at least 10.0%, and must not be subject
to an order, written agreement, capital directive, or PCA directive to meet and
maintain a specific capital level for any capital measure. At December 31, 1995,
the Bank met the requirements for a well capitalized designation under the PCA
regulations with a leverage capital ratio of 5.16%, a tier 1 risk-based capital
ratio of 10.76% and a total risk-based capital ratio of 12.01%.
Prior to 1993, the regulatory capital ratios of the Bank, on a pre-Merger basis,
had declined to levels significantly below regulatory minimums. As a result, the
Bank was directed by the OTS to achieve higher capital ratios pursuant to a
capital directive (the "Capital Directive"). The Bank's strategy to achieve
these higher capital ratios included reducing total assets, largely through
sales of interest-earning assets and certain branches, and raising additional
outside capital. As a result of the successful achievement of this strategy by
the Bank, the OTS, during the fourth quarter of 1993, terminated the Capital
Directive and other regulatory enforcement documents that had been in place
regarding the Bank.
Pending Legislation
- -------------------
The Department of the Treasury, the federal banking regulatory agencies and
members of Congress have offered various proposals to address the imbalance with
respect to insurance premiums on SAIF-insured deposits that has resulted because
of certain actions by the FDIC to reduce deposit insurance premiums on BIF-
insured deposits, which represent approximately 60% of the Bank's deposits (see
"Results of Operations--Non-Interest Expense--G&A Expense" above). These
proposals have variously called for one or more of the following: a one-time
special assessment to recapitalize the SAIF; the merger of the BIF and the SAIF;
the elimination of the OTS; and the elimination of the federal thrift charter.
Certain of these proposals also would address to some extent the federal income
tax consequences of the elimination of the federal thrift charter. Certain of
these proposals were included in the balanced budget legislation approved by the
Congress but vetoed by the President (the "Balanced Budget Legislation").
Subsequently, the President and representatives of the Congress began
negotiations to reach agreement on revising the Balanced Budget Legislation, but
these negotiations have not yet been successfully concluded. The following
summary of the provisions of that legislation which could significantly affect
the Company are based solely on the Company's current understanding of the
pending legislation, which is subject to change and final action by Congress and
the President.
The Company is unable to predict whether or when any of the proposals will be
finally enacted or, because they are still subject to change, the ultimate
effect on the Company's operations of any of the proposals that may be adopted.
One-Time Assessment The Balanced Budget Legislation would impose a one-time
special assessment on SAIF-insured deposits in order to recapitalize the SAIF.
The amount of the special assessment, which will depend on the condition of the
SAIF at the time the special assessment is made, is currently expected to be in
the 75-80 basis points range. As proposed, the special assessment would have
been due on January 1, 1996. In addition, certain institutions, including
certain institutions that have engaged in so-called Oakar Transactions (relating
to the acquisition of SAIF-insured deposits by certain BIF-insured institutions)
and
37
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------------------------------------
certain savings banks, might have a portion of their special assessments
reduced by up to 20%. As currently proposed, it is believed that the Company
would benefit from any such reduction. Following recapitalization of the SAIF,
assessments to fund certain indebtedness of the SAIF resulting from earlier
efforts to support the thrift insurance funds would be made on all insured
depository institutions (banks and thrifts) in proportion to their insured
deposits.
If such a one-time assessment is enacted, the Company currently estimates that,
on a pretax basis, the special assessment for the Bank could range from
approximately $30 million to $40 million. Currently, the Company anticipates
that the Bank would maintain its well-capitalized status after the payment of
the assessment, but no assurances can be given in this regard. The Company also
anticipates that, following the one-time assessment, SAIF premiums would be
reduced to levels comparable to those of BIF.
Merger of Funds Currently, the Balanced Budget Legislation would require
merging the BIF and the SAIF on January 1, 1998. In addition, this legislation
generally would require the FDIC to rebate deposit insurance premiums if the
deposit insurance funds exceed the required reserve ratios of 1.25% of insured
liabilities.
Merger of Charters The Chairs of both the Senate and House Banking Committees
have expressed their intention to consider legislation in early 1996 that
generally would require federal thrift institutions to convert to a national
bank charter (or a state charter) prior to the merger of the deposit insurance
funds required by the provisions of the Balanced Budget Legislation. It is
uncertain to what extent, if at all, the existing branch and investment powers
of federal thrifts that are impermissible for national banks would be
grandfathered. In addition, the proposals express the intent that savings and
loan holding companies, such as the Holding Company, should convert to bank
holding companies. It is also uncertain to what extent, if at all, the existing
powers of savings and loan holding companies that are impermissible for national
banks would be grandfathered. Moreover, as a result of the delay in the
enactment of the Balanced Budget Legislation, the timetable of such
consideration is uncertain.
Tax Issues At least two significant tax issues are raised by the above
proposals. First, questions have been raised as to the deductibility for tax
purposes of the proposed special assessment. Treasury officials have informally
expressed the view that the special assessment should be fully deductible for
tax purposes.
The second issue relates to whether, or to what extent, the conversion to a
national bank charter would require the recapture of income tax deductions taken
in prior years resulting from certain methods of calculating bad debt reserves
that have been permitted for thrift institutions (but not for national banks).
Unless clarifying legislation is adopted, affected institutions could be
required to immediately record, for financial accounting purposes, a deferred
tax liability for the amount of recaptured taxes for which liabilities had not
been recorded (generally, with respect to pre-1988 reserves). The Company
currently estimates that its federal tax liability in the event of such
recapture might range from $60 million to $65 million, substantially all of
which would relate to pre-1988 reserves. However, provisions of the Balanced
Budget Legislation would virtually eliminate the Company's exposure to this
federal tax liability. This legislation would provide that all thrift
institutions would be required to change their method of computing deductions
for bad debts and would treat such change as a change in a method of accounting,
initiated by the taxpayer, and having been made with the consent of the
Secretary of the Treasury. Thrift institutions would no longer be able to
determine their deduction for bad debts based on a percentage of taxable income.
Further, thrift institutions with assets in excess of $500 million would no
longer maintain a reserve for bad debts, but would claim deductions for loan
losses as incurred. Any adjustment required to be taken into account with
respect to such change generally would be taken into taxable income ratably over
a six taxable year period, beginning with the first taxable year beginning after
1995. Importantly, for purposes of determining this adjustment, the balance of
the reserve for bad debts with respect to the taxpayer's base year (generally,
the balance of the reserve account as of the close of the last taxable year
beginning before January 1, 1988) would generally not be taken into account.
These pre-1988 reserves would continue to remain subject to current law which
mandates recapture upon a distribution by a thrift institution in excess of its
earnings or a payment in redemption of a thrift institution's stock. The six
year recapture of the post-1987 reserves would be suspended for up to two years
provided that the thrift meets a so-called "residential loan requirement." This
requirement would be based on the ratio of an institution's residential lending
in that year to an average of its residential lending in specified prior years.
The Company currently anticipates that its federal tax liability for recapture
of post-1987 reserves would not be material.
Recent Accounting Pronouncements
- --------------------------------
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of In March 1995, the FASB issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
SFAS No. 121, which must be adopted for fiscal years beginning after December
15, 1995, requires that long-lived assets and certain identifiable intangibles
to be held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not
be
38
recoverable. An asset deemed to be impaired would be adjusted to fair value
and a new cost basis established. In addition, SFAS No. 121 requires that long-
lived assets and certain identified intangibles intended to be disposed of be
reported at the lower of carrying amount or fair value less selling costs. The
Company does not anticipate that the implementation of SFAS No. 121 will have a
material impact on its consolidated financial statements.
Accounting for Stock Based Compensation In October 1995, the FASB issued SFAS
No. 123, "Accounting for Stock Based Compensation." SFAS No. 123 applies to all
transactions in which an entity acquires goods or services by issuing equity
instruments or by incurring liabilities where the payment amounts are based on
the entity's common stock price, except for employee stock ownership plans. SFAS
No. 123 covers transactions with both employees and non-employees.
SFAS No. 123 established a new method of accounting for stock based
compensation arrangements with employees. The new method is a fair value based
method (the "SFAS No. 123 Method") rather than the intrinsic value based method
that is contained in Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," (the "APB Opinion No. 25 Method").
However, SFAS No. 123 does not require an entity to adopt the new fair value
based method for purposes of preparing its basic financial statements. If an
entity elects to continue using the APB Opinion No. 25 Method for preparing its
basic financial statements, SFAS No. 123 requires the entity to disclose pro
forma net income and earnings per share information in the footnotes to its
financial statements as if the SFAS No. 123 Method had been adopted. The SFAS
No. 123 Method is considered by the FASB to be preferable to the APB Opinion No.
25 Method, and thus, once the SFAS No. 123 Method is adopted, an entity cannot
change back to the APB Opinion No. 25 Method. In addition, the selected method
applies to all of an entity's compensation plans and transactions.
The accounting requirements of SFAS No. 123 are effective for transactions
entered into during fiscal years that begin after December 15, 1995, although
they may be adopted on issuance. The disclosure requirements of SFAS No. 123 are
effective for financial statements for fiscal years beginning after December 15,
1995, or for an earlier fiscal year for which SFAS No. 123 is initially adopted
for recognizing compensation cost. Pro forma disclosures required for entities
that elect to continue to measure compensation cost using the APB Opinion No. 25
Method must include the effects of all awards granted in fiscal years that begin
after December 15, 1994. Pro forma disclosures for awards granted in the first
fiscal year beginning after December 15, 1994 need not be included in financial
statements for that fiscal year but should be presented subsequently whenever
financial statements for that fiscal year are presented for comparative purposes
with financial statements for a later fiscal year.
The Company has determined that it will continue to apply the APB Opinion No. 25
Method in preparing its consolidated financial statements.
Impact of Inflation
- -------------------
The consolidated financial statements and related notes presented elsewhere
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars, without considering changes in the
relative purchasing power of money over time due to inflation.
Unlike most commercial enterprises, virtually all of the assets and liabilities
of the Company are monetary in nature. As a result, interest rates have a more
significant impact on the Company's performance than do the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the price of goods and services.
39
FIVE YEAR CONSOLIDATED SUMMARY
- -----------------------------
(In thousands, except per share data)
- ---------------------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS DATA
Interest income $1,357,131 $1,136,862 $980,111 $1,243,664 $1,535,669
Interest expense 947,505 707,785 589,939 753,288 1,101,592
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income 409,626 429,077 390,172 490,376 434,077
Provision for loan losses 39,650 55,799 95,489 103,684 343,427
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 369,976 373,278 294,683 386,692 90,650
- ---------------------------------------------------------------------------------------------------------------------------------
Non-interest income:
Loan servicing fees, net 30,452 28,213 30,001 32,270 26,427
Securities and insurance brokerage fees 15,532 16,885 22,336 22,111 13,898
Net (losses) gains on sales activities (12,415) 2,925 36,606 28,544 55,356
Banking service fees and other 32,598 31,244 33,582 35,789 32,195
- ---------------------------------------------------------------------------------------------------------------------------------
Total non-interest income 66,167 79,267 122,525 118,714 127,876
- ---------------------------------------------------------------------------------------------------------------------------------
Non-interest expense:
General and administrative expense 285,901 294,474 294,755 323,122 323,165
Other real estate owned expense, net 12,892 11,013 77,393 50,204 40,961
Amortization of mortgage servicing rights 12,107 9,664 19,884 26,650 7,871
Restructuring and merger-related expense 15,331 58,258 4,000 3,000 9,718
- ---------------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 326,231 373,409 396,032 402,976 381,715
- ---------------------------------------------------------------------------------------------------------------------------------
Minority interest-preferred stock dividend of subsidiary -- 11,433 1,312 -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income tax expense (benefit),
extraordinary item and cumulative effect of a
change in accounting principle 109,912 67,703 19,864 102,430 (163,189)
Income tax expense (benefit) 47,727 (53,138) (68,959) 41,642 9,437
- ---------------------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item and cumulative
effect of a change in accounting principle 62,185 120,841 88,823 60,788 (172,626)
Extraordinary item-loss on early extinguishment of debt -- -- -- (2,760) --
Cumulative effect of a change in accounting principle for
goodwill, securities available for sale and mortgage
servicing rights, respectively -- (92,887) (1,187) (7,066) --
- ---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 62,185 $ 27,954 $ 87,636 $ 50,962 $ (172,626)
=================================================================================================================================
Net income (loss) attributable to common stock $ 62,185 $ 27,954 $ 87,636 $ 39,403 $ (185,304)
=================================================================================================================================
Primary and fully diluted earnings (loss) per common share:
Income (loss) before extraordinary item and cumulative
effect of a change in accounting principle $ 0.57 $ 1.12 $ 0.91 $ 0.89 $ (3.43)
Extraordinary item -- -- -- (0.05) --
Cumulative effect of a change in accounting principle -- (0.86) (0.01) (0.13) --
- ---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.57 $ 0.26 $ 0.90 $ 0.71 $ (3.43)
=================================================================================================================================
Pro forma amounts assuming the changes in accounting
principles for goodwill and mortgage
servicing rights were applied retroactively:
Income (loss) before extraordinary item and
cumulative effect of a change in accounting principle $ 120,841 $ 90,133 $ 52,120 $ (196,961)
Extraordinary item -- -- (2,760) --
Cumulative effect of a change in accounting
principle for securities available for sale,
net of income tax benefit -- (1,187) -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 120,841 $ 88,946 $ 49,360 $ (196,961)
=================================================================================================================================
Primary and fully diluted earnings (loss) per share:
Income (loss) before extraordinary item and
cumulative effect of a change in accounting principle $ 1.12 $ 0.93 $ 0.73 $ (3.88)
Extraordinary item -- -- (0.05) --
Cumulative effect of a change in accounting
principle for securities available for sale,
net of income tax benefit -- (0.01) -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 1.12 $ 0.92 $ 0.68 $ (3.88)
=================================================================================================================================
Primary average common shares outstanding 109,742 107,668 97,153 55,344 54,046
Fully diluted average common shares outstanding 109,862 107,700 97,367 55,386 54,046
=================================================================================================================================
40
FIVE YEAR CONSOLIDATED SUMMARY
- ------------------------------
(Dollars in thousands except per share data)
- -----------------------------------------------------------------------------------------------------------
At or for the Years Ended December 31, 1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------
FINANCIAL CONDITION DATA
Total assets $20,326,620 $19,647,937 $18,098,984 $16,680,405 $17,835,764
Securities available for sale 4,070,865 530,714 658,204 898,279 233,131
Securities held to maturity 5,085,736 8,609,897 8,159,747 6,678,036 6,804,023
Federal Home Loan Bank
of New York stock 318,690 265,586 273,551 187,075 144,402
Total loans receivable 9,830,313 9,351,622 7,906,573 7,629,100 9,101,959
Allowance for loan losses (128,295) (170,383) (157,515) (248,429) (329,899)
Deposits 12,572,203 12,811,269 11,091,362 13,039,885 14,569,605
Total borrowed funds 6,614,552 5,758,734 5,850,575 2,888,269 2,486,194
Total stockholders' equity 976,530 905,125 904,982 635,843 584,441
OTHER DATA
Book value per common share(1) $ 9.03 $ 8.43 $ 8.48 $ 8.79 $ 7.90
Interest rate spread for the year 1.98% 2.26% 2.40% 2.93% 2.43%
Net interest margin for the year 2.07 2.36 2.47 2.91 2.44
General and administrative expense as
a percentage of average total assets 1.39 1.56 1.79 1.83 1.74
Return on average assets 0.30 0.15 0.53 0.29 (0.93)
Return on average common
stockholders' equity 6.56 3.25 11.07 10.99 (28.96)
Common stockholders' equity as a
percentage of total assets 4.80 4.61 5.00 2.87 2.40
Total non-performing assets $ 315,800 $ 415,866 $ 641,743 $ 1,010,877 $ 1,184,840
Total non-performing assets as a
percentage of total assets 1.55% 2.12% 3.55% 6.06% 6.64%
Allowance for loan losses
as a percentage of:
Loans receivable 1.31 1.82 1.99 3.26 3.62
Non-accrual loans 50.29 49.84 54.14 31.97 33.71
Loans serviced for others $ 9,514,560 $ 8,713,047 $ 8,265,354 $ 9,039,183 $ 7,718,000
===========================================================================================================
(1) The computations for 1995, 1994 and 1993 assumes the warrants issued to the
Federal Deposit Insurance Corporation to acquire 8.4 million shares of Dime
Bancorp, Inc. common stock at $0.01 per share were exercised.
41
REPORT OF INDEPENDENT AUDITORS
- ------------------------------
The Board of Directors and Shareholders
Dime Bancorp, Inc.:
We have audited the accompanying consolidated statements of financial condition
of Dime Bancorp, Inc. and subsidiaries (Dime) as of December 31, 1995 and 1994,
and the related consolidated statements of income, changes in stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1995. These consolidated financial statements are the
responsibility of Dime's management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Dime
Bancorp, Inc. and subsidiaries as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, Dime adopted
the provisions of Statement of Financial Accounting Standards (SFAS) No. 106
("Employers' Accounting for Postretirement Benefits Other Than Pensions")
effective January 1, 1993, and of SFAS No. 115 ("Accounting for Certain
Investments in Debt and Equity Securities") effective December 31, 1993. In
addition, as discussed in Note 1 to the consolidated financial statements, Dime
changed its method of accounting for goodwill effective January 1, 1994.
/s/ KPMG Peat Marwick LLP
New York, New York
January 26, 1996
42
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- ----------------------------------------------
(In thousands, except share data)
- -------------------------------------------------------------------------------------------------------------------
December 31, 1995 1994
- -------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 216,532 $ 178,984
Money market investments 18,824 28,173
Loans held for sale 139,370 16,621
Securities available for sale 4,070,865 530,714
Securities held to maturity (estimated fair value of
$4,990,564 in 1995 and $8,133,137 in 1994) 5,085,736 8,609,897
Federal Home Loan Bank of New York stock 318,690 265,586
Loans receivable, net:
First mortgage loans 7,820,680 7,368,960
Cooperative apartment loans 1,217,030 1,176,252
Consumer and business loans 792,603 806,410
Allowance for loan losses (128,295) (170,383)
- -------------------------------------------------------------------------------------------------------------------
Total loans receivable, net 9,702,018 9,181,239
- -------------------------------------------------------------------------------------------------------------------
Other real estate owned, net 60,681 74,002
Accrued interest receivable 118,811 105,529
Premises and equipment, net 112,757 119,099
Capitalized excess servicing 32,604 40,976
Mortgage servicing rights 65,583 62,541
Deferred tax asset, net 223,463 271,736
Other assets 160,686 162,840
- -------------------------------------------------------------------------------------------------------------------
Total assets $20,326,620 $19,647,937
===================================================================================================================
LIABILITIES
Deposits $12,572,203 $12,811,269
Federal Home Loan Bank of New York advances 4,602,983 5,319,271
Securities sold under agreements to repurchase 1,632,453 9,741
Senior notes 197,384 197,200
Other borrowed funds 181,732 232,522
Other liabilities 163,335 172,809
- ------------------------------------------------------------------------------------------------------------------
Total liabilities 19,350,090 18,742,812
- -------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, par value $0.01 per share (200,000,000 shares authorized;
99,705,731 and 98,601,115 shares issued and outstanding in 1995
and 1994, respectively) 997 986
Additional paid-in capital 915,210 910,036
Common stock deferred incentive shares -- 2,994
Retained earnings 65,981 3,796
Net unrealized loss on securities available for sale, net of related income taxes (5,468) (12,612)
Unearned compensation (190) (75)
- -------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 976,530 905,125
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $20,326,620 $19,647,937
===================================================================================================================
See accompanying notes to the consolidated financial statements.
43
CONSOLIDATED STATEMENTS OF INCOME
- ---------------------------------
(In thousands, except per share data)
- -------------------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------
INTEREST INCOME
First mortgage loans $ 556,395 $ 459,086 $ 395,040
Cooperative apartment loans 91,657 78,989 80,978
Consumer and business loans 74,374 62,512 60,420
Mortgage-backed securities 567,885 482,829 386,017
Investment securities 32,596 36,160 45,391
Money market investments 34,224 17,286 12,265
- -------------------------------------------------------------------------------------------------------------
Total interest income 1,357,131 1,136,862 980,111
- -------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 524,452 404,569 411,475
Borrowed funds 423,053 303,216 178,464
- -------------------------------------------------------------------------------------------------------------
Total interest expense 947,505 707,785 589,939
- -------------------------------------------------------------------------------------------------------------
Net interest income 409,626 429,077 390,172
Provision for loan losses 39,650 55,799 95,489
- -------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 369,976 373,278 294,683
- -------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Loan servicing fees, net 30,452 28,213 30,001
Securities and insurance brokerage fees 15,532 16,885 22,336
Net (losses) gains on sales activities (12,415) 2,925 36,606
Banking service fees and other 32,598 31,244 33,582
- -------------------------------------------------------------------------------------------------------------
Total non-interest income 66,167 79,267 122,525
- -------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE
General and administrative expense:
Compensation and employee benefits 131,721 136,786 129,256
Occupancy and equipment, net 58,285 56,447 54,227
Federal deposit insurance premiums 21,373 31,214 35,474
Other 74,522 70,027 75,798
- -------------------------------------------------------------------------------------------------------------
Total general and administrative expense 285,901 294,474 294,755
Other real estate owned expense, net 12,892 11,013 77,393
Amortization of mortgage servicing rights 12,107 9,664 19,884
Restructuring and merger-related expense 15,331 58,258 4,000
- -------------------------------------------------------------------------------------------------------------
Total non-interest expense 326,231 373,409 396,032
- -------------------------------------------------------------------------------------------------------------
Minority interest-preferred stock dividend of subsidiary -- 11,433 1,312
- -------------------------------------------------------------------------------------------------------------
Income before income tax expense (benefit) and cumulative
effect of a change in accounting principle 109,912 67,703 19,864
Income tax expense (benefit) 47,727 (53,138) (68,959)
- -------------------------------------------------------------------------------------------------------------
Income before cumulative effect of a change in accounting principle 62,185 120,841 88,823
Cumulative effect of a change in accounting principle for goodwill -- (92,887) --
Cumulative effect of a change in accounting principle
for securities available for sale, net of income tax benefit -- -- (1,187)
- -------------------------------------------------------------------------------------------------------------
Net income $ 62,185 $ 27,954 $ 87,636
=============================================================================================================
Primary and Fully Diluted Earnings Per Common Share
- ---------------------------------------------------
Income before cumulative effect of a change in accounting principle $ 0.57 $ 1.12 $ 0.91
Cumulative effect of a change in accounting principle -- (0.86) (0.01)
- -------------------------------------------------------------------------------------------------------------
Net income $ 0.57 $ 0.26 $ 0.90
=============================================================================================================
PRO FORMA AMOUNTS ASSUMING THE CHANGE IN ACCOUNTING
PRINCIPLE FOR GOODWILL WAS APPLIED RETROACTIVELY
Income before cumulative effect of a change in accounting principle $ 120,841 $ 90,133
Cumulative effect of a change in accounting principle for securities
available for sale, net of income tax benefit (1,187)
- -------------------------------------------------------------------------------------------------------------
Net income $ 120,841 $ 88,946
=============================================================================================================
Primary and fully diluted earnings per common share:
Income before cumulative effect of a change in accounting principle $ 1.12 $ 0.93
Cumulative effect of a change in accounting principle -- (0.01)
- -------------------------------------------------------------------------------------------------------------
Net income $ 1.12 $ 0.92
=============================================================================================================
Primary average common shares outstanding 109,742 107,668 97,153
Fully diluted average common shares outstanding 109,862 107,700 97,367
=============================================================================================================
See accompanying notes to the consolidated financial statements.
44
CONSOLIDTED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- ---------------------------------------------------------
(In thousands, except share data)
- ---------------------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------
CLASS A CUMULATIVE PREFERRED STOCK
Balance at beginning of year $ $ $ 157,000
Exchange of Class A cumulative preferred stock for $71,000 in senior notes
and warrants to acquire 8,407,500 shares of common stock at $0.01 per share -- -- (157,000)
- ---------------------------------------------------------------------------------------------------------------
Balance at end of year -- -- --
- ---------------------------------------------------------------------------------------------------------------
COMMON STOCK
Balance at beginning of year 986 983 545
Merger adjustment -- (2) --
Issuance of stock through rights offering -- -- 331
Issuance of stock through public offering -- -- 102
Other issuances of stock 11 5 5
- ---------------------------------------------------------------------------------------------------------------
Balance at end of year 997 986 983
- ---------------------------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year 910,036 907,851 569,042
Merger adjustment -- (251) --
Restricted stock activity, net 205 41 116
Issuance costs of preferred stock offering of subsidiary -- -- (4,250)
Issuance of stock through rights offering -- -- 188,670
Issuance of stock through public offering -- -- 66,832
Other issuances of stock 4,969 2,385 1,441
Exchange of Class A cumulative preferred stock for $71,000 in senior notes
and warrants to acquire 8,407,500 shares of common stock at $0.01 per share -- -- 86,000
Other -- 10 --
- ---------------------------------------------------------------------------------------------------------------
Balance at end of year 915,210 910,036 907,851
- ---------------------------------------------------------------------------------------------------------------
COMMON STOCK DEFERRED INCENTIVE SHARES
Balance at beginning of year 2,994 -- --
Deferred incentive shares granted, net 33 2,994 --
Deferred incentive shares distributed (3,027) -- --
- ---------------------------------------------------------------------------------------------------------------
Balance at end of year -- 2,994 --
- ---------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS (DEFICIT)
Balance at beginning of year 3,796 (2,017) (89,653)
Merger adjustment -- (22,141) --
Net income 62,185 27,954 87,636
- ---------------------------------------------------------------------------------------------------------------
Balance at end of year 65,981 3,796 (2,017)
- ---------------------------------------------------------------------------------------------------------------
NET UNREALIZED LOSS ON SECURITIES AVAILABLE FOR SALE,
NET OF RELATED INCOME TAXES
Balance at beginning of year (12,612) (1,734) --
Merger adjustment -- 4,632 --
Change in net unrealized loss on securities available for sale, net of related
income taxes 7,144 (15,510) (1,734)
- ---------------------------------------------------------------------------------------------------------------
Balance at end of year (5,468) (12,612) (1,734)
- ---------------------------------------------------------------------------------------------------------------
NET UNREALIZED DEPRECIATION IN CERTAIN MARKETABLE EQUITY SECURITIES
Balance at beginning of year -- -- (737)
Change in net unrealized depreciation in certain marketable equity securities -- -- 737
- ---------------------------------------------------------------------------------------------------------------
Balance at end of year -- -- --
- ---------------------------------------------------------------------------------------------------------------
UNEARNED COMPENSATION
Balance at beginning of year (75) (101) (354)
Restricted stock activity (181) (47) (107)
Unearned compensation amortized to expense 66 73 360
- ---------------------------------------------------------------------------------------------------------------
Balance at end of year (190) (75) (101)
- ---------------------------------------------------------------------------------------------------------------
Total stockholders' equity $976,530 $905,125 $ 904,982
===============================================================================================================
See accompanying notes to the consolidated financial statements.
45
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------
(In thousands)
- --------------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 62,185 $ 27,954 $ 87,636
Adjustments to reconcile net income to net cash provided by operating activities:
Cumulative effect of a change in accounting principle -- 92,887 1,187
Provision for loan and real estate losses 46,529 60,464 149,530
Depreciation and amortization of premises and equipment 17,899 16,766 15,805
Other amortization and accretion, net 69,038 55,452 86,017
Provision for deferred income tax expense (benefit) 43,032 (92,266) (109,948)
Net (increase) decrease in loans held for sale (122,749) 117,743 52,144
Other, net (1,338) (43,241) (37,174)
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 114,596 235,759 245,197
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Loans receivable originated and purchased (1,795,620) (1,541,709) (2,267,465)
Proceeds from sales of loans receivable 42,344 6,562 15,765
Principal payments received on loans receivable 1,181,255 1,130,848 1,220,368
Purchases of mortgage-backed securities available for sale (55,052) (37,149) (238,845)
Purchases of mortgage-backed securities held to maturity (2,142,387) (3,038,518) (5,181,754)
Proceeds from sales of mortgage-backed securities available for sale 25,279 313,909 1,414,422
Proceeds from sales of mortgage-backed securities held to maturity 187,342 -- --
Principal payments received on mortgage-backed securities 1,858,845 2,100,439 2,654,922
Purchases of investment securities available for sale (339) (26,222) (10,137)
Purchases of investment securities held to maturity (2,088) (250) (151,749)
Proceeds from sales of investment securities available for sale -- 19,951 197,861
Proceeds from maturities and calls of investment securities 61,299 91,396 316,558
Net (purchases) redemptions of Federal Home Loan Bank of New York stock (53,104) 6,298 (86,476)
Acquisitions, net of cash and cash equivalents acquired (7,914) 374,870 --
Repurchases of assets sold with recourse (35,946) (62,753) (98,208)
Proceeds from bulk sales of non-performing assets -- 266,821 --
Proceeds from sales of other real estate owned 66,763 97,450 265,334
Purchases and originations of mortgage servicing rights (17,263) (35,037) (29,968)
Proceeds from sales of mortgage servicing rights 2,022 4,443 7,534
Other, net (40,261) (16,150) (5,839)
- --------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (724,825) (344,801) (1,977,677)
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits, exclusive of sales and purchases 42,678 (173,263) (665,015)
Net cash paid upon sale of deposits (262,512) (61,115) (1,243,884)
Net cash received upon purchase of deposits -- 52,112 --
Net increase in borrowings with original maturities of three months or less 300,797 2,237,631 1,786,594
Proceeds from other borrowings 1,365,000 485,000 1,687,419
Repayment of other borrowings (809,549) (2,454,158) (590,263)
Net proceeds from issuance of common stock 2,014 1,499 257,390
Net proceeds from issuance of preferred stock of subsidiary -- -- 95,750
Other, net -- (1,369) --
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 638,428 86,337 1,327,991
- --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 28,199 (22,705) (404,489)
Merger adjustment -- 17,406 --
Cash and cash equivalents at beginning of year 207,157 212,456 616,945
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 235,356 $ 207,157 $ 212,456
==========================================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid on deposits and borrowings $ 941,483 $ 694,976 $ 558,199
Net income tax (refunds) payments $ (11,758) $ 60,081 $ 53,131
SUPPLEMENTAL NON-CASH FLOW INFORMATION
Net transfers of loans receivable to other real estate owned $ 49,768 $ 64,232 $ 253,454
Securitization of loans receivable $ -- $ 66,041 $ 272,921
Transfers of securities from held to maturity to available for sale $ 3,616,445 $ -- $ 52,888
Exchange of Class A cumulative preferred stock for senior notes
and common stock warrants $ -- $ -- $ 71,000
Exchange of preferred stock of subsidiary for senior notes $ -- $ 100,000 $ --
In connection with acquisitions:
Fair value of assets acquired $ 2,435 $ 2,016,397 $ --
Cash paid $ 7,914 $ 80,000 $ --
Fair value of liabilities assumed $ 1,397 $ 1,936,397 $ --
==========================================================================================================================
See accompanying notes to the consolidated financial statements.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 1 -- Summary of Significant Accounting Policies
- ----------------------------------------------------
Dime Bancorp, Inc. (the "Holding Company") is the holding company for The Dime
Savings Bank of New York, FSB (the "Bank," and, together with the Holding
Company, the "Company" or "Dime"), which is engaged in banking operations. The
Bank has various subsidiaries that are principally engaged in banking-related
activities. The following are the significant accounting and reporting policies
applied by the Company, which conform with generally accepted accounting
principles and prevailing industry practices.
Basis of Presentation and Principles of Consolidation The accompanying
consolidated financial statements include the accounts of the Holding Company
and the Bank and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. Certain amounts in the
consolidated financial statements and accompanying notes for prior years have
been reclassified to conform with the current year presentation.
On January 13, 1995, Anchor Bancorp, Inc. ("Anchor Bancorp") and its wholly-
owned savings bank subsidiary, Anchor Savings Bank FSB ("Anchor Savings," and,
together with Anchor Bancorp, "Anchor"), merged with and into the Holding
Company and the Bank, respectively, which were the surviving corporations (the
"Merger"). The Merger was accounted for under the pooling-of-interests method of
accounting. Accordingly, the financial statements of the Company for periods
prior to the Merger have been restated to include Anchor. In recording the
pooling-of-interests combination, Anchor's results of operations for its
fiscal year ended June 30, 1994 have been combined with the Company's results of
operations for its year ended December 31, 1993.
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires the Company to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
statement of financial condition and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ significantly
from those estimates.
Consolidated Statements of Cash Flows For the purposes of the Consolidated
Statements of Cash Flows, cash and cash equivalents include cash and due from
banks and money market investments purchased with maturities of three months or
less.
Cash flows associated with derivative financial instruments are classified in
the Consolidated Statements of Cash Flows in the same category as the cash flows
from the asset or liability being hedged.
Securities Effective December 31, 1993, the Company adopted the Financial
Accounting Standards Board's (the "FASB") Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." SFAS No. 115 applies to investments in equity securities
that have readily determinable fair values and all investments in debt
securities, including mortgage-backed securities ("MBS"), and requires these
securities to be classified into one of three categories: (i) held to maturity
(applies to debt securities only), (ii) trading, or (iii) available for sale.
Securities which the Company has the positive intent and ability to hold to
maturity are classified as held to maturity and are carried at amortized cost.
Securities held for sale in the near term in connection with mortgage banking
activities are classified as trading securities and are carried at estimated
fair value with unrealized gains and losses recognized in operations. The
Company did not maintain a trading securities portfolio at December 31, 1995 or
1994. Securities not otherwise classified as held to maturity or trading are
classified as available for sale and are carried at estimated fair value with
unrealized gains and losses, including unrealized gains and losses on derivative
financial instruments hedging such assets, reported as a separate component of
stockholders' equity, net of the related income tax effect. Prior to the
adoption of SFAS No. 115, securities designated as available for sale were
carried at the lower of cost or estimated fair value, with net unrealized losses
on such securities recognized in operations, whereas net gains were not
recognized until sale.
The amortization of premiums and accretion of discounts on securities is
recognized in operations using the interest method over the lives of the
securities, adjusted, in the case of MBS, for actual prepayments. Gains and
losses on sales of securities are determined using the specific identification
method. In the event the Company determines that an other than temporary
impairment in value of a security has occurred, the security is written-down to
estimated fair value by a charge to operations and a new cost basis established.
Upon adoption of SFAS No. 115, and in accordance with the provisions therein,
the Company changed its method of measuring impairment for interest-only MBS
from an undiscounted cash flow basis to estimated fair value. This change
resulted in the recognition of impairment of such securities at December 31,
1993 of $1.2 million, net of the income tax effect, which is reflected as the
"Cumulative effect of a change in accounting principle for securities available
for sale, net of income tax benefit" in the Consolidated Statements of Income.
Loans Loans held for sale are carried at the lower of cost or estimated fair
value, as determined on an aggregate basis. Net unrealized losses are
recognized in a valuation allowance by charges to operations. Premiums,
discounts and deferred loan origination fees and costs on loans held for sale
are deferred and recognized as a component of the gain or loss on sale.
Loans receivable are generally carried at unpaid principal balances adjusted
for unamortized premiums, unearned discounts, deferred loan origination fees
and costs, and undisbursed funds on loans in process. Premiums are amortized
and discounts are accreted into income over the lives
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
of the loans using the interest method. Deferred loan origination fees and costs
are recognized as an adjustment of yield over the contractual lives of the
loans.
Troubled Debt Restructurings and Non-Accrual and Impaired Loans A loan is
deemed a troubled debt restructuring ("TDR") by the Company when modifications
of a concessionary nature, such as the reduction of the interest rate, are made
to the loan's original contractual terms due to a deterioration in the
borrower's financial condition.
Loans are placed on non-accrual status upon becoming 90 days contractually past
due as to principal or interest, or at an earlier date if the full
collectability of principal or interest is doubtful. Interest income previously
accrued but not collected at the date a loan is placed on non-accrual status is
reversed against interest income. Cash receipts on non-accrual loans are applied
to principal and interest in accordance with their contractual terms unless full
payment of principal is not expected, in which case cash receipts, whether
designated as principal or interest, are applied as a reduction of the carrying
value of the loan. Loans are generally returned to accrual status when principal
and interest payments are current, full collectability of principal and interest
is reasonably assured and a consistent record of performance, generally six
months, has been demonstrated.
Effective January 1, 1995, the Company adopted the FASB's SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," and the amendment thereof,
SFAS No. 118, "Accounting by Creditors for Impairment of a Loan--Income
Recognition and Disclosures." In accordance with SFAS No. 114, the Company
considers a loan impaired when, based upon current information and events, it is
probable that it will be unable to collect all amounts due, both principal and
interest, according to the contractual terms of the loan agreement. SFAS No. 114
does not apply to those large groups of smaller-balance homogeneous loans that
are collectively evaluated for impairment, which, for the Company, include one-
to-four family first mortgage and cooperative apartment loans ("residential
property loans") and consumer loans, other than those modified in a TDR. The
Company also does not generally review for impairment business loans and
commercial and multifamily first mortgage loans that have insignificant
carrying values. The Company generally does not consider a loan impaired when
the delay in the timing of payments or the shortfall in the amount of payments
is deemed insignificant.
Loans reviewed for impairment by the Company are limited to loans modified in a
TDR and, except as noted above, all business loans and commercial and
multifamily first mortgage loans. At December 31, 1995, the measurement value of
the Company's impaired business loans was based upon the present value of
expected future cash flows discounted at the loan's effective interest rate,
while the measurement values of all other impaired loans of the Company were
based upon the fair values of the underlying collateral. The amount by which the
recorded investment in an impaired loan exceeds the measurement value is
recognized by an increase in the allowance for loan losses with a corresponding
charge to the provision for loan losses. The Company's impaired loan
identification and measurement processes are conducted in conjunction with the
Company's review of the adequacy of its allowance for loan losses (see
"Allowance for Loan Losses" below). Specific factors utilized in the impaired
loan identification process include, but are not limited to, delinquency status,
loan-to-value ratio, the condition of the underlying collateral, credit history,
and debt coverage. At a minimum, loans reviewed for impairment by the Company
are classified as impaired when delinquent more than six months.
All loans modified in a TDR subsequent to the adoption of SFAS No. 114 are
considered impaired. However, while the required valuation allowance associated
with such a loan will continue to be measured in accordance with SFAS No. 114
throughout the loan term, if the restructuring agreement specifies an interest
rate equal to or greater than the rate the Company was willing to accept at the
restructuring date for a new loan with comparable risk and the loan is not
impaired based on the terms of the restructuring agreement, it will not be
included in the Company's impaired loan statistics in years following the
restructuring. Loans that were modified in a TDR prior to the Company's adoption
of SFAS No. 114 that are not considered impaired based on the terms of the
restructuring agreement continue to be accounted for under SFAS No. 15,
"Accounting by Debtors and Creditors for Troubled Debt Restructurings," and are
not included in the Company's impaired loan statistics.
Cash receipts on an impaired loan are applied to principal and interest in
accordance with the contractual terms of the loan unless full payment of
principal is not expected, in which case both principal and interest payments
received are applied as a reduction of the carrying value of the loan. For
impaired loans not classified as non-accrual, interest income is recognized on
an accrual basis as the Company anticipates the full payment of principal and
interest due. Interest income on impaired loans on non-accrual status is, as
discussed above, recognized to the extent received in cash and not otherwise
utilized to reduce the carrying value of the loan.
For a further discussion of SFAS No. 114, see "Other Real Estate Owned, Net"
below.
Allowance for Loan Losses An allowance for losses is maintained for estimated
losses in the Company's loans receivable portfolio. The allowance is increased
by loss provisions charged to operations and decreased by charge-offs (net of
recoveries). In determining the appropriate level of the allowance for loan
losses, the Company reviews its loans receivable portfolio on a monthly basis,
taking into account the size, composition and risk profile of the loan
portfolio, including delinquency levels, historical loss experience, cure rates
on delinquent loans, economic conditions and other pertinent factors, such as
assumptions and projections of future conditions.
48
While management considers the allowance for loan losses to be adequate based on
information currently available, additions to the allowance may be necessary due
to future events including changes in economic conditions in the Company's
lending areas. In addition, the Federal Deposit Insurance Corporation ("FDIC")
and the Office of Thrift Supervision ("OTS"), as an integral part of their
examination process, periodically review the Bank's allowance for loan losses.
Such agencies may require the Bank to recognize additions to the allowance based
on their judgments about information available to them at the time of their
examinations.
Other Real Estate Owned, Net Other real estate owned ("ORE"), which consists of
real estate acquired in satisfaction of loans, is carried at the date of
acquisition at the lower of cost or estimated fair value less estimated selling
costs. Write-downs required at time of acquisition are charged to the allowance
for loan losses. Subsequent to acquisition, the Company maintains an allowance
for actual and potential future declines in value. Provisions charged to the
allowance for losses on ORE, operating costs and revenues, and gains on sales in
excess of prior charge-offs are recognized in "ORE expense, net" in the
Consolidated Statements of Income. Expenditures related to the development and
improvement of ORE are capitalized to the extent realizable.
Prior to the Company's adoption of SFAS No. 114, loans deemed to be in-
substance foreclosed were included as a component of ORE, net. SFAS No. 114
amended SFAS No. 15 to limit the application of the concept of an in-
substance foreclosure to those situations where the creditor has obtained
physical possession of the loan collateral, regardless of whether formal
foreclosure proceedings have occurred. It is not the Company's current policy,
nor has it been its policy in the past, to take possession of loan collateral
until foreclosure has occurred. In connection with its adoption of SFAS No. 114,
the Company has, for all periods prior to its adoption, reclassified (i) in-
substance foreclosed loans and any related allowance for losses from "ORE, net"
to "Loans receivable" and the "Allowance for loan losses," respectively, (ii)
provisions for losses on in-substance foreclosed loans from "ORE expense, net"
to the "Provision for loan losses," and (iii) charge-offs and recoveries of in-
substance foreclosed loans from the "Allowance for losses on ORE," which is
netted against ORE, to the "Allowance for loan losses."
Premises and Equipment, Net Buildings, leasehold improvements and equipment are
carried at cost less accumulated depreciation and amortization. Land is carried
at cost. Buildings and equipment are depreciated using the straight-line method
over their estimated useful lives. Leasehold improvements are amortized using
the straight-line method over the lesser of the terms of their respective leases
or estimated useful lives. Maintenance, repairs, and minor improvements are
charged to operations in the period incurred, while major improvements are
capitalized.
Capitalized Excess Servicing Gains and losses resulting from sales of loans
with servicing retained, including those loans which have been securitized into
MBS, are adjusted to recognize the present value of differences between the
retained loan yield and the normal servicing fee over the estimated remaining
lives of the related loans. The amortization of capitalized excess servicing is
charged to operations over the remaining estimated lives of the loans and
reflected under the caption "Loan servicing fees, net" in the Consolidated
Statements of Income. The carrying value of the Company's capitalized excess
servicing and the related amortization is evaluated on a quarterly basis in
relation to estimated servicing values, including actual and anticipated
prepayment rates.
Mortgage Servicing Rights The Company adopted, effective January 1, 1995, SFAS
No. 122, "Accounting for Mortgage Servicing Rights." SFAS No. 122 amended SFAS
No. 65, "Accounting for Certain Mortgage Banking Activities," to require the
recognition, as separate assets, of the rights to service mortgage loans
(including cooperative apartment loans) sold, whether those rights are acquired
through loan purchase or loan origination activities. Prior to the adoption of
SFAS No. 122, only those rights to service mortgage loans acquired through
purchase transactions were recognized as assets by the Company. In addition, the
previously existing requirement in SFAS No. 65 to offset gains on the sales of
loans against any related servicing right assets was eliminated by SFAS No. 122.
The initial capitalization of mortgage servicing rights ("MSR") is predicated
upon an allocation of the total cost of the related mortgage loans to the MSR
and the loans (without the MSR) based on their relative estimated fair values.
MSR are amortized in proportion to and over the period of estimated net
servicing income, which is consistent with the Company's amortization of its
purchased MSR in periods prior to its adoption of SFAS No. 122.
In accordance with SFAS No. 122, MSR are assessed for impairment based upon
their estimated fair value. For purposes of such assessments, the Company
stratifies its MSR, including those MSR purchased prior to the adoption of SFAS
No. 122, by underlying loan type (i.e., adjustable-rate and fixed-rate) and
interest rate. MSR impairment is recognized through a valuation allowance for
each impaired stratum with a corresponding charge to "Amortization of MSR" in
the Consolidated Statements of Income. The individual allowances are adjusted in
subsequent periods to reflect changes in the measurement of impairment. The
recognition of estimated fair value in excess of the capitalized MSR, net of
amortization, is prohibited. The estimated fair value of each of the MSR strata
is determined through a discounted cash flow analysis of estimated net future
servicing income utilizing current market interest rates. At December 31, 1995,
the estimated fair value of each of the Company's MSR strata exceeded the
related MSR carrying value. In estimating the fair value of its MSR at December
31, 1995,
49
the Company, among other factors, used a weighted average prepayment
speed of 300%, a weighted average discount rate of 11.3%, a 3.5% annual
inflation rate in servicing costs, and a lifetime default rate of 1.30%. Prior
to the adoption of SFAS No. 122, the recoverability and carrying values of the
Company's purchased MSR were also determined through discounted cash flow
analysis. However, the discount rate utilized was equal to the higher of the
current market or the implicit rate at the time of acquisition.
The Company's consolidated financial statements were not materially impacted by
the adoption of SFAS No. 122 nor are they expected to be in the near term.
Change in Accounting Principle for Goodwill Effective January 1, 1994, the
Company adopted SFAS No. 72, "Accounting for Certain Acquisitions of Banking or
Thrift Institutions," for that portion of its goodwill not previously being
accounted for under the provisions thereof. Such goodwill was associated with a
thrift acquisition initiated prior to the effective date of SFAS No. 72. In
connection therewith, the Company's method of amortizing such goodwill was
changed from the straight-line method to the interest method over the expected
remaining lives of the long-term interest-earning assets acquired. The
cumulative effect on prior years of this change in accounting principle was
$92.9 million, or $0.86 per common share, which was reflected as a charge to the
1994 first quarter's operations.
Hedging Activities The Company utilizes a variety of derivative financial
instruments solely as part of its interest rate risk management strategy. Such
instruments may include interest rate swaps, interest rate futures, forward
contracts, interest rate caps and interest rate floors and options. The
Company's derivative financial instruments are typically classified as hedges.
In order to qualify for hedge accounting treatment (i) the asset or liability,
or a homogeneous pool thereof, being hedged must expose the Company to interest
rate risk, (ii) the derivative as a financial instrument or the interest rate
index to which it is tied must have a high degree of correlation to the hedged
balance sheet item, and (iii) the derivative must be effective and designated as
a hedge of a specific balance sheet item. Revenues and expenses associated with
derivative financial instruments that qualify for hedge accounting treatment are
accounted for on an accrual basis and reflected in the Consolidated Statements
of Income in the same categories as those associated with the related hedged
balance sheet items. The related hedged balance sheet item is generally a
specifically identified asset or liability or a homogeneous pool thereof.
Deferred realized gains and losses on closed derivative financial instrument
contracts are amortized over the duration of the related hedged balance sheet
item. Premiums paid for option contracts and interest rate cap and floor
agreements are amortized over the contractual terms of the agreements.
Income Taxes In accordance with SFAS No. 109, "Accounting for Income Taxes,"
deferred income tax expense or benefit is determined by recognizing deferred
tax assets and liabilities for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. The realization of deferred tax assets is assessed
and a valuation allowance provided for that portion of the asset for which it is
more likely than not that it will not be realized. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the
Consolidated Statements of Income in the period that includes the enactment
date.
Earnings Per Common Share Primary and fully diluted earnings per common share
are calculated by dividing income before the cumulative effect of a change in
accounting principle and net income by the weighted average number of shares of
common stock and dilutive common stock equivalents outstanding during the
period. Common stock equivalents consist of stock warrants and employee stock
options and are computed using the treasury stock method.
Note 2 -- Merger and Acquisition Activities
- -------------------------------------------
Merger of Dime and Anchor Upon consummation of the Merger on January 13, 1995,
41,760,503 newly issued shares of common stock of the Holding Company, par value
$0.01 per share, were exchanged for all of the shares of common stock of Anchor
Bancorp, par value $0.01 per share, outstanding at the time of the Merger, based
on an exchange ratio of 1.77 shares of Holding Company common stock for each
share of Anchor Bancorp common stock. In addition, 56,842,168 shares of newly
issued Holding Company common stock were exchanged on a one-for-one basis for
all the shares of the Holding Company's common stock, par value $0.01 per share,
outstanding at the time of the Merger.
50
The results of operations of Dime and Anchor on a separate company basis are as
follows for the years ended December 31:
===============================================================================
1994 1993
-------------------------------- -------------------------------
(In thousands) Dime Anchor Combined Dime Anchor Combined
- -------------------------------------------------------------------------------------------------------------------------
Interest income $614,321 $522,541 $1,136,862 $ 524,965 $455,146 $980,111
Interest expense 375,173 332,612 707,785 310,483 279,456 589,939
Provision for loan losses 49,049 6,750 55,799 85,739 9,750 95,489
Non-interest income 37,447 41,820 79,267 72,859 49,666 122,525
Restructuring and merger-related expense 34,327 23,931 58,258 4,000 -- 4,000
All other non-interest expense 183,455 131,696 315,151 258,129 133,903 392,032
Minority interest expense 11,433 -- 11,433 1,312 -- 1,312
Income tax expense (benefit) (85,476) 32,338 (53,138) (105,141) 36,182 (68,959)
- -------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of a
change in accounting principle 83,807 37,034 120,841 43,302 45,521 88,823
Cumulative effect of a change in accounting principle -- (92,887) (92,887) -- (1,187) (1,187)
- -------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 83,807 $(55,853) $ 27,954 $ 43,302 $ 44,334 $ 87,636
=========================================================================================================================
Effective January 1, 1993, Dime changed its method of accounting for purchased
MSR and recorded a charge of $8.6 million for the cumulative effect on prior
years of the change. Anchor, effective July 1, 1992, similarly changed its
method of accounting for purchased MSR. As Anchor's results of operations for
the fiscal year ended June 30, 1993 are reflected in the combined results of
operations for the year ended December 31, 1992, the historical amortization of
purchased MSR of Dime for the year ended December 31, 1992 has been restated to
apply the change in accounting principle in the earlier year.
In order to eliminate the effect of including Anchor's results of operations and
other activity for the six months ended June 30, 1994 in both the years ended
December 31, 1994 and 1993, total stockholders' equity has been reduced by $17.8
million, including a reduction in retained earnings of $22.1 million, which is
summarized in the following table.
=======================================================
Increase/(Decrease)
(In thousands) in Retained Earnings
- -------------------------------------------------------
Interest income $(230,329)
Interest expense 143,605
Provision for loan losses 3,750
Non-interest income (20,610)
Non-interest expense 63,597
Income tax expense 17,846
- -------------------------------------------------------
Net decrease in retained earnings $ (22,141)
=======================================================
The following table sets forth an analysis of the activity in the Company's
Merger-related restructuring accrual for the year ended December 31, 1995.
=====================================================================
Severance Facilities Transaction
and and Fees
Personnel Systems and Other
(In thousands) Costs Costs Costs Total
- ---------------------------------------------------------------------
Balance at
beginning of year $ 21,337 $18,785 $ 8,598 $ 48,720
Provision charged
to operations 2,532 3,004 892 6,428
Cash payments (18,947) (3,824) (9,490) (32,261)
Non-cash
adjustments (1) -- (6,196) -- (6,196)
- ---------------------------------------------------------------------
Balance at end of year $ 4,922 $11,769 $ -- $ 16,691
=====================================================================
(1)Primarily represents write-offs of systems and facilities.
Management identified and documented approximately 600 positions, 150 of which
were officer positions, that they expected would be eliminated in connection
with the Merger, with the most substantial reductions centered in the Bank's
Mortgage Banking Department (approximately 300 positions) and its Information
Technology Department (approximately 100 positions). As of December 31, 1995,
approximately 50 of such positions have yet to be eliminated. The Company
currently anticipates that it will have effected the elimination of
substantially all of the remaining identified positions by mid-1996. The
payment of severance benefits is expected to be largely completed by the end of
1996.
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Of the restructuring accrual at December 31, 1995 associated with facilities and
systems, approximately one-half represents pending write-offs of existing
assets, all of which are currently expected to be recognized by mid-1996, and
approximately one-half represents the net present value of lease obligations
associated with facilities which are no longer being, or which will cease to be
utilized in the Company's operations. Such lease obligations extend through the
year 2008.
Acquisition of Lincoln On August 12, 1994, prior to the Merger, The Lincoln
Savings Bank, FSB ("Lincoln"), headquartered in New York, New York, was acquired
by Anchor Savings for $80.0 million in cash (the "Lincoln Acquisition"). The
purchase price, which was funded by the excess liquidity position of Lincoln,
was equal to the net assets acquired. The Lincoln Acquisition is being accounted
for utilizing the purchase method of accounting. Accordingly, the impact of the
Lincoln Acquisition is only reflected in the Company's consolidated financial
statements from the date of acquisition. A summary of the net assets acquired in
the Lincoln Acquisition is set forth in the following table.
=========================================
(In thousands) Amount
- -----------------------------------------
Assets acquired:
Cash and cash equivalents $ 454,870
MBS 259,021
Federal Home Loan Bank of
New York ("FHLBNY") stock 10,833
Loans receivable, net 1,173,629
ORE, net 27,615
Premises and equipment 20,649
Deferred tax asset, net 47,705
Other 22,075
- -----------------------------------------
Total assets acquired 2,016,397
- -----------------------------------------
Liabilities assumed:
Deposits 1,829,267
Borrowed funds 76,114
Other 31,016
- -----------------------------------------
Total liabilities assumed 1,936,397
- -----------------------------------------
Net assets acquired $ 80,000
=========================================
Acquisition of Residential Property Loan Origination Businesses In October
1995, the Bank acquired the assets relating to the residential property loan
origination business of National Mortgage Investments Co., Inc. ("National
Mortgage"). At the time of the acquisition, National Mortgage, which was
headquartered in Griffin, Georgia, operated through 24 retail offices located in
Georgia, Virginia, South Carolina, and Maryland. In addition, in November 1995,
the Bank purchased the assets relating to the residential property loan
origination business of James Madison Mortgage Co. ("Madison Mortgage"). Madison
Mortgage, which was headquartered in Fairfax, Virginia, operated at the time of
the acquisition through five retail offices located in Virginia and Maryland, as
well as regional wholesale offices located in South Carolina and Virginia. The
residential property loan origination businesses of National Mortgage and
Madison Mortgage are being operated under their own names, through their
existing offices, as part of the Bank. The assets acquired and liabilities
assumed from National Mortgage and Madison Mortgage were not material. The
aggregate goodwill arising from such acquisitions amounted to $6.9 million and
is being amortized on a straight-line basis over a 15 year period.
Pursuant to the terms of the asset purchase agreement, dated September 15, 1995,
between the Bank and National Mortgage regarding certain assets related to the
residential loan origination business of National Mortgage, the Bank is
contingently liable for certain additional payments to National Mortgage on
specified dates through the third quarter of 1997 based on the attainment of
certain loan origination targets related to the purchased assets. The maximum
amount of the contingent payments to be made under the agreement is $3.7
million. If all or any portion of such payments are made by the Bank, they will
be recognized, at the time of payment, as additional goodwill associated with
the acquisition.
52
Note 3 -- Securities
- --------------------
The amortized cost and estimated fair value of securities available for sale, as
well as related gross unrealized gains and losses, are summarized as follows at
December 31:
====================================================================================================================================
1995 1994
Gross Gross Gross Gross
Amortized Unrealized Unrealized Estimated Amortized Unrealized Unrealized Estimated
thousands) Cost Gains Losses Fair Value Cost Gains Losses Fair Value
- ------------------------------------------------------------------------------------------------------------------------------------
MBS:
Pass-through securities:
Privately-issued $2,731,267 $ 10,571 $26,741 $2,715,097 $ 32,108 $ 60 $ 239 $ 31,929
Federal National Mortgage
Association ("FNMA") 736,614 11,074 499 747,189 88,838 4,100 7,114 85,824
Federal Home Loan Mortgage
Corporation ("FHLMC") 448,260 1,614 1,518 448,356 352,204 10,535 26,313 336,426
Government National Mortgage
Association ("GNMA") 22,625 546 646 22,525 5,930 311 53 6,188
Collateralized mortgage
obligations issued by
FHLMC -- -- -- -- 9,684 16 -- 9,700
Interest-only 2,187 -- 508 1,679 2,638 172 -- 2,810
- ------------------------------------------------------------------------------------------------------------------------------------
Total MBS 3,940,953 23,805 29,912 3,934,846 491,402 15,194 33,719 472,877
- ------------------------------------------------------------------------------------------------------------------------------------
Investment securities:
Debt securities:
U.S. government and
federal agency 28,048 37 40 28,045 35,333 5 1,205 34,133
State and municipal 80,763 270 2,980 78,053 -- -- -- --
Domestic corporate 17,274 20 45 17,249 450 -- 10 440
Equity securities 13,403 163 894 12,672 25,488 30 2,254 23,264
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities 139,488 490 3,959 136,019 61,271 35 3,469 57,837
- ------------------------------------------------------------------------------------------------------------------------------------
Total securities available for sale $4,080,441 $ 24,295 $33,871 $4,070,865 $552,673 $15,229 $ 37,188 $530,714
====================================================================================================================================
In connection with a decision by the FASB in October 1995 to allow entities a
one-time opportunity to reassess their security classifications made pursuant to
SFAS No. 115, the Company, in December 1995, transferred securities with an
amortized cost of $3.6 billion, including $3.5 billion of MBS, from the held to
maturity portfolio to the available for sale portfolio, of which $1.1 billion of
such transferred MBS the Company has decided to sell and use the sales proceeds
to reduce its outstanding borrowings (the "1995 Balance Sheet Restructuring
Plan"). As a result of the FASB's decision, the Company was permitted to make
this one-time transfer of securities without the risk, which existed prior
thereto, of being required to transfer certain other securities in its held to
maturity portfolio to its available for sale portfolio. As of December 31,
1995, the Company had not entered into commitments to sell any of the $1.1
billion of MBS designated for sale in connection with the 1995 Balance Sheet
Restructuring Plan, substantially all of which had unrealized losses at the time
of transfer, but anticipates that such sales will be consummated in early 1996.
As a result of the decision to sell the $1.1 billion of MBS, the Company wrote-
down those securities with unrealized losses to estimated fair value and
recognized a pretax loss of $23.6 million in December 1995, which is reflected
in "Net (losses) gains on sales activities" in the Company's Consolidated
Statements of Income. The estimated fair value of the remaining $2.5 billion of
securities transferred in connection with the 1995 Balance Sheet Restructuring
Plan approximated their carrying value at time of transfer. The Company has not
made any determination as to the timing or amount of the sale of any of the
remaining securities transferred.
Additionally, for interest rate risk management purposes following the Merger,
during the first quarter of 1995 the Company transferred MBS with an amortized
cost of $12.9 million from the held to maturity portfolio to the available for
sale portfolio and sold MBS held to maturity with an amortized cost of $188.1
million and realized a loss of $0.7 million. The $12.9 million of transferred
MBS were subsequently sold during the second quarter of 1995 at an immaterial
gain.
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
The amortized cost and estimated fair value of securities held to maturity, as
well as related gross unrealized gains and losses, are summarized as follows at
December 31:
1995 1994
Gross Gross Gross Gross
Amortized Unrealized Unrealized Estimated Amortized Unrealized Unrealized Estimated
(In thousands) Cost Gains Losses Fair Value Cost Gains Losses Fair Value
- -----------------------------------------------------------------------------------------------------------------------------------
MBS:
Pass-through securities:
Privately-issued $3,364,399 $ 3,607 $88,222 $3,279,784 $5,715,783 $ 272 $279,664 $5,436,391
FNMA -- -- -- -- 155,347 5 5,479 149,873
FHLMC -- -- -- -- 147,435 1 6,938 140,498
GNMA -- -- -- -- 209,373 -- 13,508 195,865
Collateralized mortgage
obligations:
Privately-issued 1,574,085 274 9,536 1,564,823 2,067,039 6,627 155,873 1,917,793
FNMA 94,636 -- 144 94,492 113,440 -- 9,144 104,296
FHLMC 49,330 -- 232 49,098 60,552 -- 3,682 56,870
- -----------------------------------------------------------------------------------------------------------------------------------
Total MBS 5,082,450 3,881 98,134 4,988,197 8,468,969 6,905 474,288 8,001,586
- -----------------------------------------------------------------------------------------------------------------------------------
Investment securities:
Debt securities:
U.S. government and
federal agency -- -- -- -- 65 -- 2 63
State and municipal -- -- -- -- 110,553 13 5,662 104,904
Domestic corporate -- -- -- -- 17,935 -- 1,043 16,892
Foreign governmental 505 -- -- 505 505 -- -- 505
Equity securities 2,781 -- 919 1,862 11,870 4 2,687 9,187
- -----------------------------------------------------------------------------------------------------------------------------------
Total investment securities 3,286 -- 919 2,367 140,928 17 9,394 131,551
- -----------------------------------------------------------------------------------------------------------------------------------
Total securities held to maturity $5,085,736 $ 3,881 $ 99,053 $4,990,564 $8,609,897 $ 6,922 $483,682 $8,133,137
===================================================================================================================================
The privately-issued MBS, which had an aggregate carrying value of $7.7 billion
at December 31, 1995, have generally been underwritten by large investment
banking firms, with the timely payment of principal and interest on these
securities supported ("credit enhanced") in varying degrees by either insurance
issued by a financial guarantee insurer, letters of credit or subordination
techniques. Substantially all of the privately-issued MBS held by the Company
at December 31, 1995 and 1994 were rated "AA" or better by one or more of the
nationally recognized securities rating agencies. The privately-issued MBS are
subject to certain credit-related risks normally not associated with MBS issued
by FNMA, GNMA and FHLMC, including the limited loss protection generally
provided by the various forms of credit enhancements, as losses in excess of
certain levels are not protected. Furthermore, the credit enhancement itself is
subject to the creditworthiness of the provider. Thus, in the event that a
provider of a credit enhancement does not fulfill its obligations, the MBS
holder could be subject to risk of loss similar to a purchaser of a whole loan
pool. The credit enhancements in place at December 31, 1995 on the privately-
issued MBS should protect the Company from approximately $1.9 billion of
possible losses.
During 1995, the Company recognized a $3.3 million loss associated with an
other than temporary impairment in value of certain privately-issued MBS as a
result of erosion in the underlying credit enhancements, coupled with the
Company's projections of estimated future losses on defaults of the loans
underlying the securities. At December 31, 1995, these securities, all of which
are classified as available for sale, had an estimated fair value of $61.2
million and carried related credit enhancements of $1.6 million. No assurance
can be given that future losses on these securities will not be incurred due to
a further erosion of the related credit enhancements and/or due to changes in
the Company's loss projections. Additionally, the Company cannot predict whether
losses will or will not be recognized on any other privately-issued MBS
currently held by the Company.
54
The following table summarizes the contractual maturities of the Company's
investment securities available for sale and held to marturity at
December 31, 1995.
Available for Sale Held to Maturity
Amortized Estimated Amortized Estimated
(In thousands) Cost air Value Cost Fair Value
- ------------------------------------------------------------------------------------------------------------------------------------
Due in one year or less $ 17,116 $ 17,118 $ 255 $ 255
Due after one through five years 26,103 26,116 -- --
Due after five through ten years 13,321 13,555 250 250
Due after ten years 69,545 66,558 -- --
Equity securities 13,403 12,672 2,781 1,862
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities $ 139,488 $ 136,019 $ 3,286 $ 2,367
====================================================================================================================================
Proceeds from sales of securities and related gross realized gains and losses
are summarized below for the years ended December 31:
(In thousands) 1995 1994 1993
- -----------------------------------------------------------------------
MBS available for sale:
Proceeds from sales $ 25,279 $ 313,909 $1,414,422
Gross realized gains 6 3,003 18,860
Gross realized losses 13 523 2,529
MBS held to maturity:
Proceeds from sales 187,342 -- --
Gross realized losses 717 -- --
Investment securities
available for sale:
Proceeds from sales -- 19,951 197,861
Gross realized gains -- -- 6,668
Gross realized losses -- 22 87
- -----------------------------------------------------------------------
Note 4 -- Loans Receivable, Net
- -------------------------------
A summary of loans receivable, net, is as follows at December 31:
(In thousands) 1995 1994
- -------------------------------------------------------------------
First mortgage loans:
Principal balances:
Residential $5,925,050 $5,485,648
Commercial and multifamily 1,813,344 1,834,114
Construction 68,901 45,835
- -------------------------------------------------------------------
Total principal balances 7,807,295 7,365,597
Undisbursed funds on
loans in process (24,369) (3,254)
Net deferred yield adjustments 37,754 6,617
- -------------------------------------------------------------------
Total first mortgage loans 7,820,680 7,368,960
- -------------------------------------------------------------------
Cooperative apartment loans:
Principal balances 1,214,812 1,174,287
Net deferred yield adjustments 2,218 1,965
- -------------------------------------------------------------------
Total cooperative
apartment loans 1,217,030 1,176,252
- -------------------------------------------------------------------
Consumer and business loans:
Principal balances:
Home equity 494,528 503,197
Manufactured home 78,319 98,354
Automobile 53,947 30,104
Loans secured by
deposit accounts 40,578 40,309
Other consumer 85,915 100,853
Business 35,189 31,817
- -------------------------------------------------------------------
Total principal balances 788,476 804,634
Net deferred yield adjustments 4,127 1,776
- -------------------------------------------------------------------
Total consumer and
business loans 792,603 806,410
- -------------------------------------------------------------------
Allowance for loan losses (128,295) (170,383)
- -------------------------------------------------------------------
Total loans receivable, net $9,702,018 $9,181,239
===================================================================
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Activity in the allowance for loan losses is summarized as follows for the years
ended December 31:
(In thousands) 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------
Balance at beginning of year $ 170,383 $ 157,515 $ 248,429
Merger adjustment -- (928) --
Allowance acquired in the
Lincoln Acquisition -- 32,579 --
Provision charged
to operations 39,650 55,799 95,489
Charge-offs:
Residential property loans (46,131) (43,910) (184,478)
Commercial and multifamily
first mortgage loans (37,759) (35,327) (9,085)
Consumer and business loans (8,198) (5,547) (9,730)
- -----------------------------------------------------------------------------------------------------------
Total charge-offs (92,088) (84,784) (203,293)
- -----------------------------------------------------------------------------------------------------------
Recoveries:
Residential property loans 5,220 5,895 11,710
Commercial and multifamily
first mortgage loans 1,552 676 1,433
Consumer and business loans 3,578 3,631 3,747
- -----------------------------------------------------------------------------------------------------------
Total recoveries 10,350 10,202 16,890
- -----------------------------------------------------------------------------------------------------------
Net charge-offs (81,738) (74,582) (186,403)
- -----------------------------------------------------------------------------------------------------------
Balance at end of year $ 128,295 $ 170,383 $ 157,515
===========================================================================================================
Non-accrual loans are summarized as follows at December 31:
===========================================================================================================
(In thousands) 1995 1994 1993(1)
- -----------------------------------------------------------------------------------------------------------
Residential property loans $ 206,230 $ 214,222 $ 173,146
Commercial and multifamily
first mortgage loans 34,618 106,778 92,120
Construction loans 5,267 5,095 7,931
Consumer and business loans 9,004 15,769 17,719
- -----------------------------------------------------------------------------------------------------------
Total non-accrual loans $ 255,119 $ 341,864 $ 290,916
- -----------------------------------------------------------------------------------------------------------
(1) Excludes $186.0 million of non-accrual residential property loans included
in "Non-performing assets held for bulk sale" in the Consolidated Statements
of Financial Condition.
The following table sets forth information regarding the Company's impaired
loans at December 31, 1995.
Related
Allowance
Recorded for Loan Net
(In thousands) Investment Losses Investment
- ------------------------------------------------------------------------------------------------------------
Residential property loans:
With a related allowance $ 3,170 $ (198) $ 2,972
Without a related allowance 10,650 -- 10,650
- ------------------------------------------------------------------------------------------------------------
Total residential property loans 13,820 (198) 13,622
- ------------------------------------------------------------------------------------------------------------
Commercial and multifamily
first mortgage loans:
With a related allowance 66,648 (9,909) 56,739
Without a related allowance 7,575 -- 7,575
- ------------------------------------------------------------------------------------------------------------
Total commercial and multifamily
first mortgage loans 74,223 (9,909) 64,314
- ------------------------------------------------------------------------------------------------------------
Business loans with a
related allowance 741 (660) 81
- ------------------------------------------------------------------------------------------------------------
Total impaired loans $88,784 $(10,767) $78,017
============================================================================================================
The Company's average recorded investment in impaired loans for the year ended
December 31, 1995 was $83.6 million. Interest income recognized on impaired
loans, which was not materially different from cash-basis interest income,
amounted to approximately $4.6 million for the year ended December 31, 1995.
Loans restructured in a TDR, other than those classified as impaired loans
and/or non-accrual loans, amounted to $192.4 million, $188.6 million and $214.8
million at December 31, 1995, 1994 and 1993, respectively.
The amount of interest income that would have been recorded on non-accrual loans
and loans modified in a TDR, if they had been current in accordance with their
original terms, was $40.2 million, $47.7 million and $73.5 million for the years
ended December 31, 1995, 1994 and 1993, respectively. The amount of interest
income that was recorded on these loans was $20.2 million, $21.3 million and
$26.0 million for the years ended December 31, 1995, 1994 and 1993,
respectively.
56
The following table sets forth, by geographical region and property type, the
principal balances, net of undisbursed funds on loans in process, of the
Company's first mortgage and cooperative apartment loans receivable portfolios,
as well as related non-accrual loans, at December 31, 1995.
First Mortgage Loans
----------------------------------------- Cooperative
Commercial and Apartment
(In thousands) Residential Multifamily Construction Loans Total
- --------------------------------------------------------------------------------------------------------------
New York:
Principal balance $2,193,904 $1,530,352 $10,408 $1,131,053 $4,865,717
Non-accrual loans $ 86,272 $ 31,795 $ 3,617 $ 15,905 $ 137,589
Connecticut:
Principal balance 847,518 38,113 1,650 6,406 893,687
Non-accrual loans 27,393 -- 1,650 121 29,164
New Jersey:
Principal balance 694,592 94,602 6,896 74,539 870,629
Non-accrual loans 27,918 2,180 -- 1,560 31,658
California:
Principal balance 524,376 3,164 -- -- 527,540
Non-accrual loans 4,917 -- -- -- 4,917
New England (excluding Connecticut):
Principal balance 272,789 15,045 -- 2,814 290,648
Non-accrual loans 25,915 -- -- 103 26,018
Florida:
Principal balance 229,053 15,996 -- -- 245,049
Non-accrual loans 5,119 643 -- -- 5,762
Other:
Principal balance 1,162,818 116,072 25,578 -- 1,304,468
Non-accrual loans 11,007 -- -- -- 11,007
- --------------------------------------------------------------------------------------------------------------
Total:
Principal balance $5,925,050 $1,813,344 $44,532 $1,214,812 $8,997,738
Non-accrual loans $ 188,541 $ 34,618 $ 5,267 $ 17,689 $ 246,115
==============================================================================================================
Note 5 -- Loan Servicing
- ------------------------
A summary of the unpaid principal balances of first mortgage loans and
cooperative apartment loans serviced for entities other than the Company is as
follows at December 31:
(In thousands) 1995 1994
- ----------------------------------------------------------------
Loans serviced for:
FNMA $5,542,436 $4,809,116
FHLMC 2,514,854 2,160,057
GNMA -- 182,155
Other 1,457,270 1,561,719
- ----------------------------------------------------------------
Total loans serviced for others $9,514,560 $8,713,047
================================================================
An analysis of the changes in the Company's MSR is as follows for the years
ended December 31:
(In thousands) 1995 1994 1993
- -----------------------------------------------------------------------------
Balance at beginning of year $ 62,541 $ 50,234 $ 40,300
Merger adjustment -- (13,194) --
Acquired in the
Lincoln Acquisition -- 1,368 --
Other additions 17,263 35,037 29,968
Sales (1,284) (1,382) (198)
Amortization(1) (12,937) (9,522) (19,836)
- -----------------------------------------------------------------------------
Balance at end of year $ 65,583 $ 62,541 $ 50,234
=============================================================================
(1) Does not reflect a reduction (increase) of $0.8 million, $(0.1) million and
$(0.1) million for the years ended December 31, 1995, 1994 and 1993,
respectively, associated with interest rate floor agreements utilized to
hedge certain MSR (see Note 16). Such amounts are reflected in "Amortization
of MSR" in the Consolidated Statements of Income.
The estimated fair value of the Company's MSR was $83.4 million at December 31,
1995. The Company was not required to maintain a valuation allowance for
impairment of its MSR at December 31, 1995 or at any time during the year.
An analysis of the changes in the Company's capitalized excess servicing is as
follows for the years ended December 31:
(In thousands) 1995 1994 1993
- -------------------------------------------------------------------------
Balance at beginning of year $ 40,976 $ 50,989 $ 58,685
Merger adjustment -- (2,852) --
Amounts capitalized upon
sales of loans and MBS 173 4,711 6,655
Sales -- (1,239) (2,495)
Amortization (8,545) (10,633) (11,856)
- -------------------------------------------------------------------------
Balance at end of year $ 32,604 $ 40,976 $ 50,989
=========================================================================
Note 6 -- ORE, Net
- ------------------
ORE, net, is summarized as follows at December 31:
(In thousands) 1995 1994
- -------------------------------------------------------------------
Residential real estate and
cooperative apartments $ 38,799 $ 43,881
Commercial and multifamily real estate 24,952 37,368
Allowance for losses (3,070) (7,247)
- -------------------------------------------------------------------
ORE, net $ 60,681 $ 74,002
===================================================================
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Activity in the allowance for losses on ORE is summarized as follows for the
years ended December 31:
(In thousands) 1995 1994 1993
- ---------------------------------------------------------------------------
Balance at beginning of year $ 7,247 $ 7,538 $ 9,294
Merger adjustment -- 36 --
Allowance acquired in the
Lincoln Acquisition -- 4,571 --
Provision charged to operations 6,879 4,665 54,041
Charge-offs (12,270) (11,234) (59,124)
Recoveries 1,214 1,671 3,327
- ---------------------------------------------------------------------------
Balance at end of year $ 3,070 $ 7,247 $ 7,538
===========================================================================
Note 7 -- Accrued Interest Receivable
- -------------------------------------
Accrued interest receivable is summarized as follows at December 31:
(In thousands) 1995 1994
- ---------------------------------------------------------------
Money market investments $ 2 $ 11
Securities held to maturity
and available for sale 54,975 47,772
Loans receivable and loans
held for sale 63,834 57,746
- ---------------------------------------------------------------
Total accrued interest receivable $ 118,811 $105,529
===============================================================
Note 8 -- Premises And Equipment, Net
- -------------------------------------
Premises and equipment, net, consisted of the following at December 31:
(In thousands) 1995 1994
- -----------------------------------------------------------
Land $ 8,594 $ 8,883
Buildings 70,966 72,327
Leasehold improvements 61,348 65,784
Furniture, fixtures and equipment 96,070 94,791
- -----------------------------------------------------------
Total premises and equipment 236,978 241,785
Accumulated depreciation
and amortization (124,221) (122,686)
- -----------------------------------------------------------
Premises and equipment, net $ 112,757 $ 119,099
===========================================================
At December 31, 1995 and 1994, $2.6 million and $2.7 million, respectively, of
the amount reported as premises and equipment, net, represented capitalized
lease facilities.
Depreciation and amortization of premises and equipment charged to expense
amounted to $17.9 million, $16.8 million and $15.8 million for the years ended
December 31, 1995, 1994 and 1993, respectively.
The Company has entered into non-cancelable operating lease agreements with
respect to Company premises and equipment. Certain of the leases contain
escalation clauses, which correspond with increased real estate taxes and other
operating expenses, and renewal options calling for increased rents as the
leases are renewed. There are no restrictions imposed by any lease agreement
regarding the payment of dividends, additional debt financing or entering into
further lease agreements. Net rent expense under operating leases was $20.0
million, $17.9 million, and $16.7 million for the years ended December 31, 1995,
1994 and 1993, respectively. The projected minimum rental payments under the
terms of operating leases at December 31, 1995, net of projected sublease
rentals, were $15.4 million in 1996, $13.3 million in 1997, $11.5 million in
1998, $10.2 million in 1999, $9.8 million in 2000, and an aggregate of $70.5
million in 2001 and years thereafter.
Note 9 -- Deposits
- ------------------
The following is a summary of deposits and the related weighted average interest
rates at December 31:
1995 1994
(Dollars in thousands) Amount Rate Amount Rate
- -----------------------------------------------------------------
Demand $ 1,084,966 0.74% $ 1,117,648 1.09%
Savings 2,689,343 2.51 3,552,943 2.50
Money market 2,160,161 3.83 2,040,124 4.42
Time 6,637,733 5.70 6,100,554 4.84
- -----------------------------------------------------------------
Total deposits $12,572,203 4.27% $12,811,269 3.80%
=================================================================
Time deposits with balances of $100,000 or more amounted to $491.5 million and
$377.9 million at December 31, 1995 and 1994, respectively. The scheduled
maturities of time deposits with balances of $100,000 or more at December 31,
1995 amounted to $128.5 million in three months or less, $126.2 million in over
three through six months, $148.0 million in over six months through one year,
and $88.8 million in over one year.
Scheduled maturities of total time deposits at December 31, 1995 are as follows:
Maturing During the Years Ending December 31,
------------------------------------------------------------------
(Dollars in thousands) 1996 1997 1998 1999 2000 Thereafter Total
- -----------------------------------------------------------------------------------------------------------------------------------
2.99% or less $ 32,870 $ 522 $ 61 $ 96 $ 16 $ 38 $ 33,603
3.00% to 3.99% 105,452 287 168 9 -- 290 106,206
4.00% to 4.99% 904,900 67,424 36,799 10,727 339 718 1,020,907
5.00% to 5.99% 2,407,414 550,110 132,059 86,023 41,743 7,259 3,224,608
6.00% to 6.99% 1,680,274 211,918 17,085 55,701 52,283 6,313 2,023,574
7.00% to 7.99% 194,343 3,880 3,617 456 617 1,940 204,853
8.00% and over 9,358 3,179 3,666 4,184 3,588 7 23,982
- -----------------------------------------------------------------------------------------------------------------------------------
Total time deposits $5,334,611 $837,320 $193,455 $157,196 $98,586 $16,565 $6,637,733
===================================================================================================================================
Weighted average interest rate 5.69% 5.73% 5.49% 5.91% 6.11% 6.00% 5.70%
===================================================================================================================================
58
Interest expense on deposits is summarized as follows for the years ended
December 31:
(In thousands) 1995 1994 1993
- -----------------------------------------------------------------------------------
Demand $ 10,849 $ 10,953 $ 11,019
Savings 72,721 102,791 127,700
Money market 85,627 56,285 32,927
Time 355,255 234,540 239,829
- -----------------------------------------------------------------------------------
Total interest expense
on deposits $ 524,452 $404,569 $411,475
===================================================================================
The Company sold deposits of approximately $283 million, $63 million, and $1.2
billion during the years ended December 31, 1995, 1994 and 1993, respectively.
In connection with the Lincoln Acquisition in August 1994, the Company acquired
$1.8 billion of deposits. In addition, during the year ended December 31, 1994,
the Company purchased $52.9 million of deposits in New York.
Note 10 -- Borrowed Funds
- -------------------------
FHLBNY Advances A summary of FHLBNY advances is as follows at December 31:
Stated Interest Rates
(Dollars in thousands) December 31, 1995 1995 1994
- ----------------------------------------------------------------------
Maturing in:
One month or less 5.72% - 5.97% $2,722,000 $2,385,000
Over one through
three months 5.65% - 5.96% 474,700 2,014,700
Over three through
six months 6.24% - 8.51% 1,175,000 30,000
Over six months
through
one year 5.83% - 8.80% 215,000 730,000
Over one through
two years 5.81% - 9.35% 15,000 125,000
Over two through
three years -- -- 15,000
Over five years 5.76% 88 88
Unamortized
premiums 1,195 19,483
- ----------------------------------------------------------------------
Total FHLBNY
advances $ 4,602,983 $5,319,271
- ----------------------------------------------------------------------
Weighted average
effective
interest rate 6.07% 6.12%
======================================================================
At December 31, 1995, FHLBNY advances were collateralized by the Bank's $318.7
million investment in FHLBNY stock by MBS of $4.0 billion, and by residential
property loans receivable of $2.3 billion.
Senior Notes Senior notes, which are unsecured general obligations of the
Holding Company, were comprised of the following at December 31:
(Dollars in thousands) 1995 1994
- ------------------------------------------------------------------
Due July 2003, net of unamortized
discounts of $1,334 (1995) and $1,446
(1994); 8.9375% stated interest rate and
9.18% effective interest rate $ 98,666 $ 98,554
Due November 2005, net of unamortized
discounts of $1,282 (1995) and $1,354
(1994); 10.50% stated interest rate and
10.71% effective interest rate 98,718 98,646
- ------------------------------------------------------------------
Total senior notes $197,384 $197,200
==================================================================
In July 1993, in accordance with the terms of an agreement entered into with the
FDIC, Anchor Bancorp exchanged $157.0 million of its Class A Cumulative
Preferred Stock, held by the FSLIC Resolution Fund, for $71.0 million of its
newly issued 8.9375% senior notes due July 9, 2003 (the "8.9375% Senior Notes")
and warrants to acquire, at an exercise price of $0.01 per share, 4,750,000
shares of its common stock. Such warrants (the "FDIC Warrants"), which expire in
July 2003, were, upon consummation of the Merger, converted to warrants to
acquire 8,407,500 shares of the Holding Company's common stock at $0.01 per
share (see Note 21 for a discussion of the pending exercise of the FDIC
Warrants). In this exchange, the FDIC also agreed to relinquish any claim to the
accumulated but undeclared and unpaid dividends with respect to the Class A
Cumulative Preferred Stock, which amounted to $47.2 million. In October 1993,
Anchor Bancorp concluded the public offering and sale of an additional $29.0
million of 8.9375% Senior Notes (as part of this public offering, the $71.0
million of senior notes held by the FDIC were also sold). The 8.9375% Senior
Notes, interest on which is payable semi-annually, are redeemable at the option
of the Holding Company, in whole or in part, at any time on or after July 9,
1998 at specified redemption prices.
In December 1994, the Holding Company consummated its offer to exchange $1,000
principal amount of its newly issued 10.50% senior notes due November 15, 2005
(the "10.50% Senior Notes") for each outstanding share of the Bank's 10.50%
Noncumulative Exchangeable Preferred Stock (the "Bank Preferred Stock"). The
Bank Preferred Stock, which was held by the Holding Company subsequent to the
exchange, was contributed to the capital of the Bank in June 1995. The 10.50%
Senior Notes, interest on which is payable quarterly, are redeemable at the
option of the Holding Company, in whole or in part, at any time on or after
November 15, 1998 at specified redemption prices.
The 8.9375% Senior Notes and the 10.50% Senior Notes were each issued pursuant
to an indenture which includes covenants with respect to limitations on, among
other things, (i) dividends and other distributions (see Note 11), (ii) funded
indebtedness, as defined, and (iii) mergers, consolidations and sales of assets
and subsidiary stock.
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Currently, the Holding Company's sole source of funds to make the interest
payments on and to repay the principal of the senior notes at maturity is the
Bank, whose ability to provide such funds is, as further discussed in Note 11,
subject to federal regulations.
Securities Sold Under Agreements to Repurchase Securities sold under agreements
to repurchase involve the delivery of MBS to the broker-dealers who arrange the
transactions. The broker-dealers may have sold, loaned, or otherwise disposed of
such securities and agreed to resell to the Company the identical or
substantially identical MBS at the specified maturities of the agreements.
Information concerning securities sold under agreements to repurchase is
summarized in the table below at or for the years ended December 31:
=======================================================================================================================
(Dollars in thousands) 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------
Securities sold under agreements to repurchase identical securities:
Balance at year end $1,632,453 $ -- $ 90,283
Accrued interest payable at year end 5,343 -- 322
Average balance during the year 1,397,427 188,319 109,747
Maximum month-end balance during the year 1,824,363 285,510 277,983
MBS pledged as collateral at year end:
Book value 1,674,181 -- 93,995
Estimated fair value 1,670,958 -- 92,740
Average interest rate at year end 5.82% --% 4.36%
Average interest rate during the year 6.03 4.71 3.59
Securities sold under agreements to repurchase substantially identical securities:
Balance at year end $ -- $ 9,741 $ --
Average balance during the year 614 5,411 2,038
Maximum month-end balance during the year -- 18,924 7,721
MBS pledged as collateral at year end:
Book value -- 10,941 --
Estimated fair value -- 9,796 --
Average interest rate at year end --% 4.50% --%
Average interest rate during the year 4.57 3.79 5.50
=======================================================================================================================
The securities sold under agreements to repurchase outstanding at December 31,
1995 had a weighted average remaining maturity of 13 days.
The following table sets forth the weighted average maturity and book value of
securities sold under agreements to repurchase with individual broker-dealers
which exceeded 10% of the Company's stockholders' equity at December 31, 1995 as
well as the amount at risk under the agreements at that date. The amount at risk
represents the excess of the higher of the book value or estimated fair value of
the securities over the book value of the repurchase obligation.
=============================================================================================
Securities Sold
Weighted ----------------------------------
Average Book Book Estimated Amount
(Dollars in thousands) Maturity Value Value Fair Value at Risk
- ---------------------------------------------------------------------------------------------
FHLBNY 8 days $952,465 $971,982 $966,017 $19,517
Goldman, Sachs & Co. 24 days 457,138 469,049 468,087 11,911
Dean Witter Reynolds Inc. 22 days 105,467 107,216 109,023 3,556
=============================================================================================
60
Other Borrowed Funds Other borrowed funds consisted of the following at
December 31:
==============================================================
(In thousands) 1995 1994
- --------------------------------------------------------------
Tax-exempt bonds and loans and preferred
stocks transferred in put transactions $ 94,537 $139,381
Collateralized Real Yield securities,
net of unamortized discount of
$667 (1995) and $719 (1994) 77,333 77,281
Other 9,862 15,860
- --------------------------------------------------------------
Total other borrowed funds $181,732 $232,522
==============================================================
From 1983 to 1985, the Bank had entered into various borrowing agreements under
which it transferred certain of its tax-exempt bonds, tax-exempt loans and
preferred stocks to certain unit investment trusts and others, accompanied by
put options. Such borrowings are due at various dates through June 2010 and had
a weighted average interest rate of 8.41% and 8.50% at December 31, 1995 and
1994, respectively. During the terms of the agreements, the holders are entitled
to return the assets to the Bank under various circumstances at specified
prices. A number of underlying securities were the subject of issuer calls
during 1993, resulting in a $7.4 million net charge which is included in "Net
(losses) gains on sales activities" in the Consolidated Statements of Income.
Such charges were not material during 1995 or 1994. The tax-exempt bonds, tax-
exempt loans and preferred stocks transferred in the put transactions had
aggregate carrying values of approximately $68 million, $14 million and $10
million, respectively, at December 31, 1995. The borrowing agreements were
further collateralized by MBS and investment securities at December 31, 1995 of
$179.1 million and $81.2 million, respectively.
In August 1988, the Bank issued $80.0 million of Collateralized Real Yield
securities (the "Reals") due August 2008. The Reals are not redeemable by the
Bank prior to their maturity. However, the holders of the Reals had the option
of electing early repayment, at par value, in August 1993, or may elect early
repayment, at par value, in August 1998 or 2003. In August 1993, holders of $2.0
million principal amount of Reals elected early repayment. Interest on the Reals
is payable quarterly at a rate reset quarterly based on the sum of 3.0% plus the
percentage change, if any, in the Consumer Price Index for all Urban Consumers
during the preceding twelve month period. The interest rate on the Reals was
5.76% and 5.96% at December 31, 1995 and 1994, respectively. The Bank is
required to maintain specified levels of eligible collateral, as defined. At
December 31, 1995, such collateral consisted of MBS of $121.6 million.
Borrowings included in "Other" in the above table had weighted average interest
rates at December 31, 1995 and 1994 of 5.80% and 5.87%, respectively. Certain of
such borrowings are collateralized at December 31, 1995 by MBS of $6.3 million.
The scheduled principal amounts of the Company's other borrowed funds maturing
during the five years subsequent to December 31, 1995 are $3.6 million in 1996,
$29.8 million in 1997, $0.9 million in 1998, $1.0 million in 1999, and $1.0
million in 2000. The scheduled principal amount of other borrowed funds
maturing in years after 2000 is $146.1 million.
Note 11 -- Stockholders' Equity
- -------------------------------
Common Stock During the second quarter of 1993, prior to the formation of the
Holding Company, the Bank completed a rights offering to holders of its common
stock and certain standby purchasers (the "Rights Offering"), issuing 33,117,332
common shares and raising $189.0 million of net new capital. During the third
quarter of 1993, Anchor Bancorp concluded the issuance and sale of 5,750,000
shares of its common stock (10,177,500 common shares as adjusted for the Merger)
in an underwritten public offering. Net proceeds of $66.9 million were received
from that transaction, of which all but $1.0 million was contributed to the
capital of Anchor Savings.
The following table summarizes the number of common shares reserved for future
issuance at December 31, 1995.
=======================================================================
Number of Shares
- -----------------------------------------------------------------------
Stock option and incentive plans 6,270,001
FDIC Warrants(1) 8,407,500
Employee stock purchase plan 775,855
- -----------------------------------------------------------------------
Total common shares reserved for future issuance 15,453,356
- -----------------------------------------------------------------------
(1) See Note 21 for a discussion of the pending exercise of the FDIC Warrants.
Dividend Restrictions The ability of the Bank to pay dividends to the Holding
Company is subject, as discussed below, to federal regulations and income tax
consequences.
Generally, the Bank may not make a capital distribution, which includes cash
dividends, payments to repurchase or otherwise acquire its shares, payments to
stockholders of another institution in a cash-out merger and other distributions
charged against capital, at any time when, after such distribution, its
regulatory capital would be below the regulatory capital requirements of the
OTS or below the standards established by the prompt corrective action ("PCA")
provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") for an institution to be deemed adequately capitalized (see Note 12).
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Under OTS regulations, an institution that exceeds its fully phased-in capital
requirements could, after prior notice to, but without the approval of, the OTS,
make capital distributions during a calendar year up to 100% of its current net
income plus the amount that would reduce by one-half its surplus capital ratio
(the excess capital over its fully phased-in capital requirements) at the
beginning of the calendar year.
Upon its conversion from mutual to stock form, the Bank was required to
establish a liquidation account for the benefit of certain account holders who
continued to maintain their savings accounts with the Bank after the
conversion, in an amount equal to its retained income prior to conversion. The
liquidation account is reduced annually in proportion to the reduction of
eligible savings account balances. Anchor Savings was similarly required to
establish a liquidation account upon its conversion from mutual to stock form.
The liquidation accounts were not changed in any respect by the Merger or the
formation of the Holding Company or Anchor Bancorp. The Bank may not declare or
pay a cash dividend on, or repurchase any of, its capital stock if the effect
thereof would be to cause its regulatory capital to be reduced below the minimum
amount required for the liquidation account.
In addition, to the extent that distributions by the Bank to the Holding
Company exceed the Bank's accumulated earnings and profits and current earnings
and profits (as computed for federal income tax purposes), such distributions
will be treated for tax purposes as being made out of the preferential portion
of the Bank's tax bad debt reserves to the extent of any such reserve balance
and thereby create taxable income to the Bank.
The Holding Company's ability to pay dividends on its common stock, while not
subject to the restrictions relating to the Bank, is limited by restrictions
imposed by Delaware law and by the indentures associated with the Holding
Company's outstanding senior notes. In general, dividends may be paid out of the
Holding Company's surplus, as defined by Delaware law, or in the absence of such
surplus, out of its net profits for the current and/or the preceding fiscal
year. While the 10.50% Senior Notes are outstanding, the related indenture
limits the amount of dividends the Holding Company can pay on its common stock,
in the aggregate, to the sum of (i) $5.0 million, plus (ii) 50% of the
Company's consolidated net income after December 16, 1994 (but reduced by 100%
of the losses incurred during that period), plus (iii) an amount equal to the
net proceeds received by the Holding Company from any sales of its capital
stock after December 16, 1994. While the 8.9375% Senior Notes are outstanding,
the related indenture limits the amount of dividends the Holding Company can
pay on its common stock, in the aggregate, to the sum of (i) $10.0 million, plus
(ii) 75% of the Company's consolidated net income for each fiscal quarter (but
reduced by 100% of the losses incurred in any quarter), plus (iii) an amount
equal to the net proceeds received by the Holding Company from any sales of its
capital stock after September 1, 1993. Currently, the Holding Company's
principal source of funds to pay dividends is the Bank.
Stockholder Protection Rights Plan On October 20, 1995, the board of directors
of the Holding Company (the "Board") adopted a Stockholder Protection Rights
Plan (the "Rights Plan"). Under the Rights Plan, which expires in November 2005,
the Board declared a dividend of one right on each outstanding share of the
Holding Company's common stock, which was paid on November 6, 1995 to
stockholders of record on that date (the "Rights"). Until it is announced that a
person or group has acquired 20% or more of the outstanding common stock of the
Holding Company (an "Acquiring Person") or has commenced a tender offer that
could result in their owning 20% or more of such common stock, the Rights will
be evidenced solely by the Holding Company's common stock certificates, will
automatically trade with the Holding Company's common stock and will not be
exercisable. Following any such announcement, separate Rights would be
distributed, with each Right entitling its owner to purchase participating
preferred stock of the Holding Company having economic and voting terms similar
to those of one share of the Holding Company's common stock for an exercise
price of $50.
Upon announcement that any person or group has become an Acquiring Person and
unless the Board acts to redeem the Rights, then ten business days thereafter
(or such earlier or later date, not beyond 30 days, as the Board may decide)
(the "Flip-in Date"), each Right (other than Rights beneficially owned by any
Acquiring Person or transferee thereof, which become void) will entitle the
holder to purchase, for the $50 exercise price, a number of shares of the
Holding Company's common stock having a market value of $100. In addition, if,
after an Acquiring Person gains control of the Board, the Holding Company is
involved in a merger or sells more than 50% of its assets or assets generating
more than 50% of its operating income or cash flow, or has entered into an
agreement to do any of the foregoing (or an Acquiring Person is to receive
different treatment than all other stockholders), each Right will entitle its
holder to purchase, for the $50 exercise price, a number of shares of common
stock of the Acquiring Person having a market value of $100. If any person or
group acquires between 20% and 50% of the outstanding common stock of the
Holding Company, the Board may, at its option, exchange one share of such common
stock for each Right. The Rights may also be redeemed by the Board for $0.01 per
Right prior to the Flip-in Date.
62
Note 12 -- Regulatory Capital
- -----------------------------
Under OTS regulations promulgated pursuant to the Financial Institutions Reform,
Recovery and Enforcement Act of 1989, the Bank is required to maintain tangible
capital of at least 1.5% of adjusted total assets, leverage capital of at least
3.0% of adjusted total assets and risk-based capital of at least 8.0% of risk-
weighted assets. At December 31, 1995, the Bank was in compliance with each of
the three capital adequacy requirements.
Pursuant to FDICIA, the OTS adopted PCA regulations which established five
capital categories ("well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized.") Under these regulations, to be well capitalized, an
institution must have a leverage capital ratio of at least 5.0%, a tier 1 risk-
based capital ratio (leverage capital to risk-weighted assets) of at least 6.0%,
and a total risk-based capital ratio of at least 10.0%, and must not be subject
to an order, written agreement, capital directive or PCA directive to meet and
maintain a specific capital level for any capital measure. An institution is
considered adequately capitalized if it has a leverage capital ratio of 4.0% or
greater (or 3.0% or greater if the institution is rated composite 1 in its most
recent report of examination subject to appropriate federal banking agency
guidelines), a tier 1 risk-based capital ratio of 4.0% or greater, and a total
risk-based capital ratio of 8.0% or greater, and does not meet the definition of
a well capitalized institution. At December 31, 1995, the Bank was deemed well
capitalized.
Note 13 -- Employee Retirement Benefit Plans
- --------------------------------------------
Pension Plans The Company currently maintains a non-contributory, qualified,
defined benefit pension plan covering substantially all salaried employees of
the Company who meet certain age and length of service requirements. Prior to
July 1, 1995, the Company also maintained a separate non-contributory,
qualified, defined benefit pension plan covering substantially all salaried
employees of the former Anchor who met certain age and length of service
requirements, continuing the plan previously maintained by Anchor. Effective
July 1, 1995, these plans were merged. (The above discussed plans are
collectively referred to as the "Qualified Plan.") Contributions are made to the
Qualified Plan to the extent deductible under federal income tax regulations.
The following table sets forth the funded status of the Qualified Plan and
amounts recognized in the Consolidated Statements of Financial Condition at
December 31:
================================================================
(In thousands) 1995 1994
- ----------------------------------------------------------------
Actuarial present value of
benefit obligations:
Accumulated benefit obligation:
Vested $126,308 $ 99,154
Non-vested 3,400 3,422
- ----------------------------------------------------------------
Accumulated benefit obligation $129,708 $102,576
================================================================
Projected benefit obligation for
service rendered to date $144,141 $114,454
Qualified Plan assets at fair value,
primarily listed stocks and bonds 142,635 121,139
- ----------------------------------------------------------------
Qualified Plan assets (less than) in
excess of projected benefit obligation (1,506) 6,685
Unrecognized net transition asset,
being amortized over
approximately 14 years (5,307) (6,233)
Unrecognized net loss from past
experience different from that
assumed and effects of changes
in assumptions 13,801 7,775
Unrecognized prior service cost 882 599
- ----------------------------------------------------------------
Prepaid pension cost - Qualified Plan $ 7,870 $ 8,826
================================================================
The following table summarizes the components of net pension expense associated
with the Qualified Plan for the years ended December 31:
================================================================
(In thousands) 1995 1994 1993
- ----------------------------------------------------------------
Service cost-benefits earned
during the year $ 3,809 $ 4,226 $ 3,698
Interest cost on projected
benefit obligation 9,568 8,228 7,421
Actual return on plan assets (28,659) 524 (10,639)
Net amortization and deferral 16,238 (11,305) 1,561
Curtailment gain -- -- (1,439)
- ----------------------------------------------------------------
Net pension expense -
Qualified Plan $ 956 $ 1,673 $ 602
================================================================
The curtailment gain of $1.4 million recognized during 1993 was attributable to
reductions in staff, including those associated with the sales of certain of the
Company's branches, during the year.
In developing the above pension benefit information, the weighted average
discount rate utilized was 7.25% in 1995, 8.5% in 1994, and 8.5% for the Anchor
plan and 7.5% for the Company plan in 1993. The expected long-term rate of
return on plan assets was 10.0% in 1995 and 10.0% for the Anchor plan and 9.0%
for the Company plan in both 1994 and 1993, while the rate of increase in future
compensation levels was 5.0% in 1995, 5.0% in 1994 and 5.5% for the Anchor plan
and 5.0% for the Company plan in 1993.
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Additionally, the Company maintained certain defined benefit, non-qualified,
unfunded retirement plans (the "Non-Qualified Plans") including: (i) a
retirement plan covering certain former Anchor directors; (ii) a retainer
continuation plan for its outside directors; (iii) a Supplemental Executive
Retirement Plan (the "SERP"); (iv) a Benefits Maintenance Plan, formerly
maintained by Anchor (the "BMP"); (v) a Benefit Restoration Plan (the "BRP");
(vi) supplemental retirement arrangements for senior executive officers of the
Company; and (vii) retirement plans for a retired Chairman of the Board and
certain retired senior executive officers of the Company. The SERP, the BMP, and
the BRP, as well as certain other non-qualified arrangements provide certain
designated employees of the Company with supplemental benefits in excess of
those amounts which are payable under the Qualified Plan and/or the Company's
savings plan. The retirement plan covering certain former Anchor directors has
been merged into the retainer continuation plan covering the Company's outside
directors and the BMP has been merged into the BRP.
The following table sets forth the funded status of the Non-Qualified Plans and
amounts recognized in the Consolidated Statements of Financial Condition at
December 31:
================================================================
(In thousands) 1995 1994
- ----------------------------------------------------------------
Actuarial present value of
benefit obligations:
Accumulated benefit obligation:
Vested $ 11,132 $ 6,936
Non-vested 882 676
- ----------------------------------------------------------------
Accumulated benefit obligation $ 12,014 $ 7,612
================================================================
Projected benefit obligation for
service rendered to date $(12,833) $(9,289)
Unrecognized net transition obligation 553 638
Unrecognized net loss from past
experience different from that assumed
and effects of changes in assumptions 221 95
Unrecognized prior service cost 2,679 2,071
Adjustment required to reflect additional
minimum liability (2,634) (1,278)
- ----------------------------------------------------------------
Accrued pension cost -
Non-Qualified Plans $(12,014) $(7,763)
================================================================
The components of net pension expense associated with the Non-Qualified Plans
are as follows for the years ended December 31:
========================================================
(In thousands) 1995 1994 1993
- --------------------------------------------------------
Service cost-benefits earned
during the year $ 730 $ 546 $ 384
Interest cost on projected
benefit obligation 869 533 472
Net amortization and deferral 809 303 313
Other 1,101 -- --
- --------------------------------------------------------
Net pension expense -
Non-Qualified Plans $3,509 $1,382 $1,169
========================================================
For purposes of developing pension benefit information for the Non-Qualified
Plans, the weighted average discount rate utilized was 7.25% in 1995 and 8.5%
and 6.0% for the Anchor plans and the Company plans, respectively, in 1994 and
1993. In addition, the rate of increase in future compensation levels was 5.0%
in 1995, 5.0% for the Anchor plans and 6.0% for the Company plans in 1994, and
6.0% for both the Anchor and Company plans in 1993.
Postretirement Health Care and Life Insurance Plans The Company currently
sponsors unfunded postretirement health care and life insurance plans covering
substantially all salaried employees of the Company who meet certain age and
length of service requirements. Prior to July 1, 1995, the Company also
maintained separate unfunded postretirement health care and life insurance plans
covering substantially all salaried employees of the former Anchor who met
certain age and length of service requirements, continuing arrangements
previously maintained by Anchor. Effective July 1, 1995, the former Anchor plans
were combined with the Company's plans. In accordance with SFAS No. 106,
"Employers" Accounting for Postretirement Benefits Other Than Pensions, the
estimated cost of providing postretirement health care and life insurance
benefits to an employee and the employee's beneficiaries and covered dependents
is accrued during the years that the employee renders the necessary service.
The following table sets forth the composition of the accrued postretirement
health care and life insurance benefits recognized in the Company's Consolidated
Statements of Financial Condition at December 31:
=========================================================
(In thousands) 1995 1994
- ---------------------------------------------------------
Accumulated postretirement
benefits obligation ("APBO"):
Retirees $44,494 $ 40,591
Fully eligible active
plan participants 4,476 6,380
Other active plan participants 5,308 3,669
- ---------------------------------------------------------
APBO 54,278 50,640
Unrecognized net loss (4,956) (1,700)
Unrecognized transition obligation
being amortized over 20 years (32,591) (36,011)
- ---------------------------------------------------------
Accrued postretirement health care
and life insurance benefits $ 16,731 $ 12,929
=========================================================
64
Net postretirement health care and life insurance benefits expense included the
following components for the years ended December 31:
=======================================================
(In thousands) 1995 1994 1993
- -------------------------------------------------------
Service cost-benefits
earned during the year $ 770 $ 910 $ 734
Interest cost on APBO 3,888 3,640 3,252
Amortization of
transition obligation 1,952 1,994 1,994
Amortization of unrecognized
prior service cost 50 -- --
Amortization of
unrecognized net loss -- 86 --
- -------------------------------------------------------
Net postretirement health
care and life insurance
benefits expense $6,660 $6,630 $5,980
=======================================================
For measurement purposes as of December 31, 1995, the average annual rate of
increase in the per capita cost of covered health care benefits was assumed, for
1996, to be 12.0% for participants less than 65 years old and 9.0% for all other
participants and, in each case, was assumed to decline 1.0% per year until a
floor of 5.0% was reached. Increasing the assumed health care cost trend rates
by 1.0% in each year would increase the APBO at December 31, 1995 by $2.3
million and would increase the aggregate of the service and interest cost
components of the net postretirement health care benefits expense for the year
ended December 31, 1995 by $0.2 million. In determining the APBO, the Company
utilized weighted average discount rates of 7.25% in 1995, 8.5% in 1994 and
8.5% for the Anchor plan and 7.5% for the Company plan in 1993. The annual rate
of increase in future compensation levels utilized in the calculation of the
APBO for the postretirement life insurance plan was 5.0% for 1995, and 5.5% for
the Anchor plan and 5.0% for the Company plan in each of 1994 and 1993.
Savings Plans At December 31, 1995, the Company maintained a savings plan, the
Retirement 401(k) Investment Plan (the 401(k) Plan), which is intended to
qualify under sections 401(k) and 401(a) of the Internal Revenue Code of 1986,
as amended (the "Code"). During 1995, two savings plans previously maintained by
Anchor and Lincoln were merged into the 401(k) Plan. Under the 401(k) Plan,
participants may contribute up to 15% of their base pay on a before or after-tax
basis. The Company currently makes matching contributions equal to 100% of the
first 6% of participant contributions. Participants vest immediately in their
own contributions and over a period of five years for the Company's
contributions. Each member's contributions and matching contributions are
invested, in accordance with the member's directions, in one or any combination
of available investment options, including in a fund that purchases the Holding
Company's common stock.
The aggregate expense of the savings plans was $3.4 million, $2.1 million and
$1.3 million for the years ended December 31, 1995, 1994 and 1993, respectively.
Note 14 -- Stock Plans
- ----------------------
Stock Option and Incentive Plans In 1986 and 1991, the Company adopted stock
incentive plans (the "1986 Stock Incentive Plan" and the "1991 Stock Incentive
Plan," respectively), reserving 1,950,000 and 975,000 common shares,
respectively, for issuance to eligible employees. In 1987, the Company adopted a
separate stock incentive plan for outside directors (the "1987 Stock Incentive
Plan" and, together with the 1986 and 1991 Stock Incentive Plans, the "Stock
Incentive Plans"), reserving 200,000 common shares for issuance to eligible
directors. In 1993, the common shares reserved for issuance under the 1986, 1987
and 1991 Stock Incentive Plans, were, as provided for in the plans, increased by
619,604, 357,605 and 77,409, respectively, following the consummation of the
Rights Offering. During 1994, an additional 1,400,000 common shares were
reserved for issuance under the 1991 Stock Incentive Plan. The Stock Incentive
Plans provide for the grant of options to purchase common stock of the Holding
Company, the grant of stock appreciation rights ("SARs"), the sale of restricted
stock, and, with respect to the 1991 Stock Incentive Plan, deferred stock
awards, certain loans and tax offset payments. Participants may be granted one
or more types of awards, which may be granted independently or in tandem. Stock
options and SARs that have been granted under the Stock Incentive Plans have an
exercise price equal to the fair market value of the stock at the date of grant
(as adjusted, to the extent appropriate, in light of the Rights Offering) and
may be exercised over a period not in excess of eleven years. Awards issued
under the Stock Incentive Plans vest over a pre-determined period of time.
Unvested stock options under the 1991 Stock Incentive Plan became fully vested
upon consummation of the Merger. The 1986 and 1987 Stock Incentive Plans
terminate in August 1996, while the 1991 Stock Incentive Plan terminates in
February 2004. Awards granted prior to the related plan termination date will
remain outstanding in accordance with their terms.
In connection with the Merger, the Holding Company assumed stock option plans
that had previously been adopted by Anchor in 1989, 1990 and 1992 (the 1989
Stock Option Plan, the 1990 Stock Option Plan, and the 1992 Stock Option Plan,
respectively, and together, the Stock Option Plans). Upon consummation of the
Merger, the number of outstanding options under the Stock Option Plans was
multiplied by, and the per share exercise price divided by, 1.77. The 1989 Stock
Option Plan granted options to a senior executive officer to acquire an
aggregate of 100,000 shares of Anchor Bancorp common stock, which was converted
to options to purchase 177,000 shares of the Holding Company's common stock in
connection with the Merger, at an adjusted price based on the price per share
equal to the fair market
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
value of Anchor Bancorp's common stock on the date of
grant. The stock options granted under the 1989 Stock Option Plan, none of which
have been exercised, vested one-fifth on the date of grant and one-fifth at the
end of each of the four years subsequent to the grant date, with the right to
exercise such stock options expiring no later than April 18, 1999. Under the
1990 Stock Option Plan, which previously authorized the issuance of up to
872,000 shares of Anchor Bancorp common stock, up to 893,263 shares of common
stock of the Holding Company could have been issued after the Merger. Under the
1992 Stock Option Plan, which also previously authorized the issuance of up to
872,000 shares of Anchor Bancorp common stock, 1,542,850 shares of common stock
of the Holding Company could be issued after the Merger. The 1990 Stock Option
Plan, which terminated by its terms during 1995, but with outstanding awards
continuing in effect, provides for key employees, while the 1992 Stock Option
Plan provides for all employees, options to purchase shares of the Holding
Company's common stock at a specified price, at least equal to, or in excess of
the fair market value of the stock at date of grant, over a period not in excess
of ten years, or in certain circumstances, ten years and one day. The rights to
purchase shares under the 1990 and 1992 Stock Option Plans vest over a pre-
determined period of time. Upon consummation of the Merger, all unvested options
outstanding under the 1990 Stock Option Plan and substantially all of the
unvested options outstanding under the 1992 Stock Option Plan became vested.
As of December 31, 1995, an aggregate 1,564,232 common shares were available for
future grant under the Stock Option Plans and the Stock Incentive Plans.
The following table summarizes stock option activity under the Stock Option
Plans and Stock Incentive Plans for the years indicated.
===================================================================
Number of Option Price
(Options in thousands) Options Per Share
- -------------------------------------------------------------------
Outstanding at December 31, 1992 4,645 $0.88 - $16.14
Granted 703 $5.96 - $ 7.88
Exercised (460) $1.13 - $ 7.63
Canceled (420) $0.88 - $16.14
- -------------------------------------------------
Outstanding at December 31, 1993 4,468 $0.88 - $16.14
Granted 758 $7.06 - $ 9.75
Exercised (248) $0.88 - $ 9.25
Canceled (344) $1.38 - $16.14
Merger adjustment 202
- -------------------------------------------------
Outstanding at December 31, 1994 4,836 $0.88 - $16.14
Granted 728 $8.75 - $11.38
Exercised (727) $0.88 - $ 9.39
Canceled (139) $1.40 - $16.14
- -------------------------------------------------
Outstanding at December 31, 1995 4,698 $1.13 - $16.14
===================================================================
Exercisable at December 31, 1995 3,719 $1.13 - $16.14
===================================================================
The outstanding number of SARs issued in connection with the Stock Incentive
Plans amounted to 2,154,532, 1,977,122 and 1,852,345 at December 31, 1995, 1994
and 1993, respectively. All SARs have been issued in tandem with stock options.
The exercise of SARs issued in tandem with stock options results in the
cancellation of the related stock options. Conversely, the exercise of stock
options issued in tandem with SARs results in the cancellation of the related
SARs. There were no SARs exercised during 1995, 1994 or 1993.
In connection with the Stock Incentive Plans, the Company has sold to certain
employees and outside directors common stock of the Holding Company that is
subject to certain restrictions ("Retention Restricted Stock") for $1.00 per
share. Restrictions on the shares granted to employees generally lapse at the
rate of one-third per year after each of the third, fourth and fifth years from
date of grant. For those shares granted to outside directors, restrictions lapse
after a five year vesting period. Restrictions also lapse upon the death,
retirement from the Company or, in certain instances, the disability of the
participant. The restrictions on Retention Restricted Stock granted under the
1991 Stock Incentive Plan lapsed upon consummation of the Merger. In connection
with a performance-based, long-term incentive program (the "Performance
Incentive Program") adopted by the Company in 1989 in conjunction with the Stock
Incentive Plans, the Company awarded certain senior officers the rights to
purchase shares of restricted stock at $1.00 per share (the "Performance
Restricted Stock"). Vesting in one-third of the award occurred on an annual
basis, and was dependent upon achievement of annual Company-wide performance
goals over a five year period. The difference between the fair market value of
the Holding Company's common stock at the date of grant of restricted stock and
the price paid is considered compensation expense which is amortized over the
applicable vesting period. The Company recognized compensation expense of $0.1
million, $0.1 million and $0.4 million related to the Performance Restricted
Stock and Retention Restricted Stock for the years ended December 31, 1995, 1994
and 1993, respectively.
The following table summarizes both Retention Restricted Stock and Performance
Restricted Stock activity (number of shares) for the years ended December 31:
===================================================
(In thousands) 1995 1994 1993
- ---------------------------------------------------
Balance at beginning of year 29 102 166
Granted and purchased 28 2 14
Repurchased -- (7) (5)
Lapsed restrictions (10) (68) (73)
- ---------------------------------------------------
Balance at end of year 47 29 102
===================================================
66
In connection with a modification of the Performance Incentive Program in
January 1994, 348,450 deferred shares were awarded to participants during 1994,
with actual shares of stock to be issued upon the Company's achievement of
performance goals over a three year period and with vesting over that three year
period. Upon consummation of the Merger, all deferred shares awarded under the
Performance Incentive Program became vested. The value of these deferred shares,
totaling $3.0 million, was reflected as a component of stockholders' equity at
December 31, 1994. During 1995, 1994 and 1993, 8,000, 9,000 and 92,005 shares of
deferred stock, respectively, were awarded under the 1991 Stock Incentive Plan,
separate and distinct from the Performance Incentive Program.
Employee Stock Purchase Plan In 1993, the Company adopted an employee stock
purchase plan (the "Employee Stock Purchase Plan"), effective in the first
quarter of 1994, reserving 1,000,000 shares of the Holding Company's common
stock for purchase by eligible employees of the Company. The price for each
share of common stock purchased under the plan was equal to 85% of its fair
market value on the first date of the purchase period. The purchase period, as
well as the number of shares made available to each eligible participant during
a specified purchase period, is established by the Compensation Committee of
the Board (the "Committee"). No shares were made available for purchase during
1995 under the Employee Stock Purchase Plan. During 1994, 224,145 shares of
common stock were purchased by employees under the Employee Stock Purchase
Plan.
The Employee Stock Purchase Plan was amended, effective January 1, 1996, to
permit a purchase price of between 85% and 100%, as established by the
Committee, of the fair market value on the first date of the purchase period.
Note 15 -- Income Taxes
- -----------------------
Total income tax expense (benefit) was allocated as follows for the years ended
December 31:
===========================================================================================================================
(In thousands) 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
Income tax expense (benefit) attributable to:
Operations $47,727 $ (53,138) $ (68,959)
Securities available for sale valuation allowance 5,239 (11,176) (1,214)
Cumulative effect of a change in accounting principle for securities available for sale -- -- (842)
- ---------------------------------------------------------------------------------------------------------------------------
Total income tax expense (benefit) $52,966 $ (64,314) $ (71,015)
===========================================================================================================================
Income tax expense (benefit) attributable to operations consisted of the
following for the years ended December 31:
==================================================================================================
(In thousands) 1995 1994 1993
- --------------------------------------------------------------------------------------------------
Current:
Federal $ 1,851 $ 26,460 $ 29,045
State and local 2,844 12,668 11,944
- --------------------------------------------------------------------------------------------------
Total current 4,695 39,128 40,989
- --------------------------------------------------------------------------------------------------
Deferred:
Federal 31,426 (107,623) (80,647)
State and local 11,606 15,357 (29,301)
- --------------------------------------------------------------------------------------------------
Total deferred 43,032 (92,266) (109,948)
- --------------------------------------------------------------------------------------------------
Total income tax expense (benefit) attributable to operations $47,727 $ (53,138) $ (68,959)
==================================================================================================
The following is a reconciliation of expected income tax expense attributable to
operations, computed at the statutory federal income tax rate of 35.0%, to the
actual income tax expense (benefit) attributable to operations for the years
ended December 31:
===================================================================
(In thousands) 1995 1994 1993
- -------------------------------------------------------------------
Expected federal income
tax expense at statutory rate $38,469 $ 23,696 $ 6,952
Reduction in federal, state and
local income taxes resulting
from change in the balance
of the valuation allowance
for deferred tax assets
allocated to income tax
expense during the year -- (129,930) (72,268)
State and local income taxes,
net of federal income tax
benefit (excluding effect of
change in the valuation
allowance for deferred
tax assets) 9,392 41,248 1,216
Non-deductible amortization
of goodwill 196 277 2,539
Non-deductible restructuring
and Merger-related expense -- 6,146 --
Non-deductible minority
interest-preferred stock
dividend of subsidiary -- 4,002 459
Adjustments of deferred tax
assets and liabilities for
changes in tax laws and rates -- -- (5,028)
Other, net (330) 1,423 (2,829)
- -------------------------------------------------------------------
Total income tax expense
(benefit) attributable to
operations $47,727 $ (53,138) $(68,959)
===================================================================
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
The significant components of deferred income tax expense (benefit) attributable
to operations are as follows for the years ended December 31:
============================================================================================
(In thousands) 1995 1994 1993
- --------------------------------------------------------------------------------------------
Deferred income tax expense
(benefit), exclusive of the
effects of other components
listed below $43,032 $ 37,664 $ (32,652)
Adjustments of deferred tax assets and liabilities for
changes in tax laws and rates -- -- (5,028)
Decrease in balance of the
valuation allowance for
deferred tax assets
during the year -- (129,930) (72,268)
- --------------------------------------------------------------------------------------------
Total deferred income tax
expense (benefit) $43,032 $ (92,266) $(109,948)
============================================================================================
The combined federal, state and local income tax effects of temporary
differences that gave rise to significant portions of the deferred tax assets
and deferred tax liabilities are as follows at December 31:
====================================================================
(In thousands) 1995 1994 1993
- --------------------------------------------------------------------
Deferred tax assets:
Net operating loss
carryforward $116,200 $161,647 $ --
Excess tax basis and
potential bad debt
reserve deductions
relating to non-
performing assets 74,186 71,320 243,027
Financial statement
reserves not yet realized
for tax purposes 11,602 23,427 7,400
Postretirement benefits
other than pensions 7,575 5,646 1,973
Federal alternative minimum
tax and general business
credit carryforwards 2,787 988 7,182
MSR -- 2,888 2,098
Premises and equipment 3,389 808 1,442
Securities 12,350 11,407 206
Other, net 4,012 4,141 3,421
- --------------------------------------------------------------------
Gross deferred tax assets 232,101 282,272 266,749
Valuation allowance -- -- (129,930)
- --------------------------------------------------------------------
Deferred tax assets, net of
valuation allowance 232,101 282,272 136,819
- --------------------------------------------------------------------
Deferred tax liabilities:
Capitalized excess servicing (7,432) (10,536) (12,356)
MSR (1,206) -- --
- --------------------------------------------------------------------
Gross deferred tax liabilities (8,638) (10,536) (12,356)
- --------------------------------------------------------------------
Net deferred tax assets $223,463 $271,736 $ 124,463
====================================================================
During 1994, an aggregate of $129.9 million of the deferred tax asset was
recognized through the elimination of the balance of the valuation allowance.
Factors considered included the improved earnings potential of the Company
resulting from the Merger, coupled with the continued strengthening of the
quality of assets. In addition, during 1994, the Company reconsidered certain
tax planning strategies in order to maximize the realization of the deferred
tax attributes. This resulted in the Company incurring additional current tax
expense of $20.5 million during 1994 and reducing its gross deferred tax asset
by approximately $12.2 million. Partial reductions in the valuation allowance
offsetting the Company's deferred tax asset in the amount of $109.5 million were
recognized during 1993 as a result of several factors that positively affected
the Company's outlook for future earnings.
The timing of the realization of a substantial portion of the Company's deferred
tax asset may be subject to significant limitation if the Holding Company
undergoes an ownership change ("Ownership Change") as defined in section 382
("Section 382") of the Code. Section 382 generally provides that, if a
corporation undergoes an Ownership Change, the amount of taxable income that the
corporation may offset with net operating loss carryforwards and certain net
unrealized built-in losses would be subject to an annual limitation. Based on
existing information, the Company has concluded that an Ownership Change did not
occur as a result of the Merger. If an Ownership Change were to occur through
January 13, 1998 and the Company were to become subject to an annual limitation
as discussed above, it might adversely impact the timing of the realization of a
substantial portion of the Company's deferred tax asset. However, if this were
to occur, certain tax planning strategies are available to help mitigate the
adverse effect of the recognition of the deferred tax asset.
At December 31, 1995, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $332 million, substantially all of
which are available to reduce future federal income taxes through the year 2009.
Of the net operating loss carryforwards, approximately $11 million were acquired
in connection with the Lincoln Acquisition. In accordance with Section 382, the
annual maximum utilization of these net operating loss carryforwards, all of
which expire on December 31, 2008, is limited to $4.8 million.
The Company has general business tax credit carryforwards for federal income tax
purposes of approximately $2.8 million at December 31, 1995. The availability to
utilize such carryforwards to reduce federal income taxes extends through the
year 2010, with the exception of $1.0 million of these carryforwards for which
such availability extends only through the year 2009.
68
At December 31, 1995, the Bank had approximately $146 million of bad debt
reserves for federal income tax purposes for which no provision for income tax
has been made, of which approximately $25 million are subject to recapture upon
distribution to shareholders of these tax reserves. Any charge to a bad debt
reserve for other than bad debts on loans would create income for tax purposes
only, which would be subject to the then current corporate tax rate. It is not
the Bank's intention to make any distributions to shareholders or use the
reserve in any manner which would create income tax liabilities for the Bank.
In order for the Bank to be permitted to maintain a federal tax bad debt
reserve, certain thrift definitional tests must be met, including maintaining at
least 60% of its assets in qualifying assets, as defined for tax purposes, and
maintaining a thrift charter. If the Bank failed to meet these definitional
tests, the transition from the reserve method to the direct charge-off method of
tax accounting for bad debts would result in a recapture of this reserve into
taxable income. The Bank's percentage of qualifying assets at December 31, 1995
was significantly in excess of the minimum threshold. The Bank does not
anticipate failing the thrift definitional tests for federal tax purposes.
The Company's most significant state and local taxes are those imposed by the
state of New York and New York City. State of New York taxing authorities have
examined the Company's combined New York state income tax returns through 1991
and have reached final settlement agreements with the Company. New York City
taxing authorities are currently in the process of examining the years 1985
through 1992 and the Company does not expect any material changes to its filed
income tax returns for those years as a result thereof.
Note 16 -- Derivative Financial Instruments And
- -----------------------------------------------
Financial Instruments With Off-Balance Sheet Credit Risk
- --------------------------------------------------------
In the normal course of business, the Company is a party to various derivative
and off-balance sheet financial instruments in order to reduce its exposure to
fluctuations in interest rates and to meet the financing needs of its customers.
These financial instruments include derivatives (such as forward contracts,
options, and interest rate futures swaps, caps and floors), loans sold with
recourse, and commitments to extend credit and purchase loans and securities and
involve, to varying degrees, elements of credit risk, market risk and interest
rate risk.
Derivative Financial Instruments The Company utilizes derivative financial
instruments as a means of hedging the interest rate risk associated with
certain of its interest-earning assets and interest-bearing liabilities as
well as certain of its MSR. Derivative financial instruments are not utilized by
the Company for trading activity purposes. With the exception of interest rate
floors hedging certain MSR, the derivative financial instruments used by the
Company provide protection from rising interest rates.
The following table summarizes the notional amounts, by category of asset or
liability being hedged, of the Company's outstanding derivative financial
instruments at December 31, 1995 and 1994. For a discussion of the estimated
fair values of these instruments, see Note 17.
=================================================================
(In thousands) 1995 1994
- -----------------------------------------------------------------
Interest rate swaps hedging:
Borrowings $ 928,000 $ 500,000
Loans receivable 212,747 453,280
Deposits 150,000 750,000
- -----------------------------------------------------------------
Total interest rate swaps 1,290,747 1,703,280
- -----------------------------------------------------------------
Interest rate caps hedging:
MBS available for sale 877,118 --
MBS held to maturity 366,061 --
- -----------------------------------------------------------------
Total interest rate caps 1,243,179 --
- -----------------------------------------------------------------
Interest rate floors hedging:
MSR 1,219,776 1,366,685
- -----------------------------------------------------------------
Total interest rate floors 1,219,776 1,366,685
- -----------------------------------------------------------------
Forward contracts hedging:
Loans held for sale 69,676 144,250
MBS available for sale -- 107,000
- -----------------------------------------------------------------
Total forward contracts 69,676 251,250
- -----------------------------------------------------------------
Options hedging:
Borrowings 37,000 45,000
Loans held for sale 10,000 --
Loans receivable -- 300
- -----------------------------------------------------------------
Total options 47,000 45,300
- -----------------------------------------------------------------
Interest rate futures hedging:
Borrowings -- 1,065,000
MBS held to maturity -- 465,100
MBS available for sale -- 154,000
Loans receivable -- 92,800
- -----------------------------------------------------------------
Total interest rate futures -- 1,776,900
- -----------------------------------------------------------------
Total derivative financial instruments $3,870,378 $5,143,415
=================================================================
Interest rate swaps are generally in the form where, based on an agreed-upon
notional amount, one party agrees to make periodic fixed-rate payments, while
the counterparty agrees to make periodic variable-rate payments that are tied to
a market rate. The notional amount is not indicative of principal to be
exchanged either at inception or maturity of the contract.
All of the Company's outstanding interest rate swap agreements at December 31,
1995 provide for the Company to be a fixed-rate payer and variable-rate
receiver, with the variable-rate based upon the one or three month London
Interbank Offered Rate ("LIBOR"). The utilization of these interest rate swaps
allows the Company to achieve interest income or expense similar to that which
would exist if it had changed the interest rate of designated assets from a
fixed-rate to a variable-rate and had changed the interest rate of designated
liabilities from a variable-rate to a fixed-rate.
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
The following table sets forth the contractual maturities of the Company's
interest rate swap agreements outstanding at December 31, 1995 by category of
asset or liability being hedged, as well as the related weighted average
interest rates receivable and payable at that date.
================================================================================================
Maturing in the Years Ending December 31,
(Dollars in thousands) 1996 1997 1998 1999 2000 Total
- ------------------------------------------------------------------------------------------------
Interest rate swaps hedging:
Loans receivable:
Notional amount $120,593 $ 50,244 $ -- $24,700 $17,210 $ 212,747
Variable-rate receivable 5.75% 5.75% --% 5.68% 5.81% 5.75%
Fixed-rate payable 4.58 4.92 -- 8.04 7.38 5.29
Deposits:
Notional amount $150,000 $ -- $ -- $ -- $ -- $ 150,000
Variable-rate receivable 5.68% --% --% --% --% 5.68%
Fixed-rate payable 4.73 -- -- -- -- 4.73
Borrowings:
Notional amount $450,000 $350,000 $98,000 $30,000 $ -- $ 928,000
Variable-rate receivable 5.88% 5.68% 5.86% 5.94% --% 5.80%
Fixed-rate payable 5.97 5.28 6.02 7.06 -- 5.75
- ------------------------------------------------------------------------------------------------
Total:
Notional amount $720,593 $400,244 $98,000 $54,700 $17,210 $1,290,747
Variable-rate receivable 5.81% 5.69% 5.86% 5.82% 5.81% 5.78%
Fixed-rate payable 5.48 5.23 6.02 7.50 7.38 5.56
================================================================================================
The following table summarizes the Company's interest rate swap activity
(notional amounts) for the years ended December 31:
==============================================================
(In thousands) 1995 1994 1993
- --------------------------------------------------------------
Balance at beginning
of year $1,703,280 $1,415,000 $ 400,000
New agreements 415,210 554,700 1,015,000
Matured agreements (800,000) (250,000) --
Reductions associated
with amortizing
agreements (27,743) (16,420) --
- --------------------------------------------------------------
Balance at end of year $1,290,747 $1,703,280 $1,415,000
==============================================================
During 1995, the Company began a program of entering into interest rate cap
agreements to hedge the periodic and lifetime interest rate caps embedded in
certain of its adjustable-rate MBS and, at December 31, 1995, had $1.2 billion
notional amount of such agreements outstanding. Each of the outstanding interest
rate cap agreements provides for the Company to receive cash payments, in
exchange for a premium paid to the issuing counterparty at inception, when the
weekly average yield of the one-year constant maturity Treasury index ("CMT")
rises above a specified interest rate. The one-year CMT was 5.18% at December
31, 1995 and the specified interest rates at that date were 7.50% and 8.50% and
averaged 8.00%. Unamortized premiums on the Company's outstanding interest rate
cap agreements amounted to $6.6 million at December 31, 1995. The Company's
outstanding interest rate cap agreements at December 31, 1995, all of which are
amortizing in nature, mature at intervals between June 1999 and May 2000.
The Company's interest rate floor agreements have been transacted for the
purpose of reducing the impact of the potential loss of net future servicing
revenues associated with a portion of its MSR that may result from an increase
in loan prepayments. Under each such agreement, the Company, in return for a
premium paid to the issuing counterparty at initiation of the agreement,
receives cash payments from the counterparty when either the five or ten year
CMT, which were 5.38% and 5.58%, respectively, at December 31, 1995, declines
below a designated interest rate. The designated interest rates at December 31,
1995 ranged from 5.33% to 5.65% and averaged 5.53%. The Company's $1.2 billion
of interest rate floor agreements outstanding at December 31, 1995, all of which
are amortizing in nature, mature at various dates from August 1998 through
October 1999. The unamortized premiums associated with these agreements amounted
to $1.0 million at December 31, 1995.
Interest rate swap, cap and floor agreements, although not as liquid as
exchange-traded interest rate futures and options, are readily priced and traded
by major fixed-income dealers.
Forward contracts, as executed by the Company, typically are in the form of
forward sales of MBS. These contracts represent firm commitments to deliver MBS
at a specified price and date. The Company must either deliver the MBS in
accordance with the requirements of the contracts or repurchase the commitments
and recognize the gain or loss based on the change in the price of the
underlying contract
70
(i.e., the specified price minus the repurchase price multiplied by the notional
amount). Principal is not exchanged. The $69.7 million of forward contracts
utilized by the Company at December 31, 1995 hedge its exposure to interest rate
changes on firm commitments to originate residential property loans for sale in
the secondary market. The Company does not defer realized gains or losses on
these types of hedges. In the past, the Company has also utilized forward
contracts to hedge the interest rate exposure associated with certain of its MBS
and residential property loans originated for portfolio. At December 31, 1995,
net unamortized, realized losses associated with the Company's utilization of
forward contracts to hedge these assets amounted to $14.5 million, of which $2.3
million was associated with MBS available for sale and $12.2 million with
residential property loans receivable, and are being amortized to operations
over the remaining life of the hedged assets.
Options give the holder the right, but not the obligation, to purchase from or
sell to the counterparty a designated financial instrument at a specified price
during an agreed upon period of time or on a specific date. The buyer of an
option pays a premium for this right. A put option gives the buyer the right to
sell the underlying financial instrument, while a call option gives the buyer
the right to purchase the underlying financial instrument, at a specified price
during a specified period of time or on a specified date. The buyer of a put
option benefits if the price of the underlying financial instrument declines by
an amount that is sufficient to cover the option premium. The buyer of a call
option benefits if the price of the underlying financial instrument rises above
the agreed upon sales price by an amount that is sufficient to cover the option
premium. At December 31, 1995, the Company had $37.0 million of options to enter
into interest rate swap agreements, where the Company would pay a fixed-rate and
receive a variable-rate, at specified rates on specified dates to hedge certain
borrowings and $10.0 million of put options to sell interest rate futures in
connection with its mortgage banking operations at a specified price by a
specified date. In addition, at that date, net unamortized, realized gains
associated with exercised option contracts, with cash settlement, amounted to
$1.6 million, all of which were associated with the hedging of certain of the
Company's borrowings.
Interest rate futures represent contractual obligations for the seller of such
contracts, for instance, to deliver the underlying financial instrument at
agreed-upon terms in a future period. Interest rate futures are standardized and
traded on organized exchanges. As a result, these contracts are highly liquid.
The Company has used interest rate futures to synthetically extend the duration
of short-term borrowings and to synthetically shorten the duration of certain
fixed-rate securities. Because of the decline in interest rates during 1995, and
the related increase in prepayment rates of mortgage loans and the loans
underlying the Company's MBS, interest rate futures positions were reduced by
the Company as the interest rate environment had effectively shortened the
duration of the assets. Net unamortized, realized losses associated with
closed interest rate futures contracts, which are being amortized to operations
over the remaining life of the hedged assets or liabilities, amounted to $22.5
million at December 31, 1995, consisting of $5.6 million associated with MBS
available for sale, $9.5 million with MBS held to maturity, $6.6 million with
loans receivable and $0.8 million with borrowings.
At December 31, 1995, the Company has pledged $8.2 million of MBS and $2.6
million of investment securities as collateral for certain of its outstanding
derivative financial instruments. The Company must maintain collateral with
dealers that will cover any negative market value in its position, subject to a
minimum call. In addition, if the Company is subject to an initial collateral
requirement, collateral must be maintained with the dealer, regardless of what
market value changes occur.
For a discussion of the credit risk and market risk associated with the
Company's derivative financial instruments, reference is made to the "Management
of Credit Risk--Derivative Financial Instruments" and a "Management of Interest
Rate Risk--Hedging Activities" sections, respectively, of the "Management's
Discussion and Analysis."
Financial Instruments with Off-Balance Sheet Credit Risk The Company had the
following commitments to extend credit and purchase loans at December 31:
===================================================================================================================================
(In thousands) 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
Commitments to purchase
or originate loans:
Residential property $422,356 $109,949
Commercial and multifamily 54,242 52,866
Consumer and business 13,655 11,674
- -----------------------------------------------------------------------------------------------------------------------------------
Total commitments to
purchase or originate loans 490,253 174,489
Commitments to extend credit
under existing lines of credit 374,376 389,217
- ------------------------------------------------------
Total commitments to extend
credit and purchase loans $864,629 $563,706
======================================================
Commitments to extend credit are agreements to lend to a customer provided
there is no violation of any condition established in the contract. Such
commitments generally have fixed expiration dates or termination clauses and may
require payment of a fee. Since certain of the commitments are expected to
expire without being drawn upon, the total commitment amounts may not represent
future cash requirements. The Company evaluates the creditworthiness of these
transactions through its lending policies. The amount of col-
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
lateral obtained, if deemed necessary by the Company upon extension of credit,
is based on the Company's credit evaluation of the borrower. The Company's
maximum exposure to credit loss for commitments to extend credit as a result of
non-performance by the counterparty is the contractual notional amount.
The Company is obligated under various recourse provisions associated with loans
sold. The principal balance of loans sold with limited recourse amounted to
$900.4 million at December 31, 1995 and $1.0 billion at December 31, 1994. The
Company's related maximum potential recourse exposure approximated $223 million
at December 31, 1995. The Company's exposure to credit loss on loans sold with
recourse is similar to the credit risk associated with the Company's on-balance
sheet loans receivable.
Commitments to sell MBS and loans in connection with the Company's mortgage
banking activities aggregated $71.7 million and $28.8 million at December 31,
1995 and 1994, respectively. Commitments to purchase MBS for portfolio amounted
to $352.1 million at December 31, 1994. There were no such outstanding
commitments at December 31, 1995.
NOTE 17 -- Fair Value of Financial Instruments
- ----------------------------------------------
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
the Company to disclose, where practicable, the fair value of its on- and off-
balance sheet financial instruments. Fair value estimates are made at a specific
point in time, based on relevant market information and information about the
financial instrument. These estimates do not reflect any possible tax
ramifications, estimated transaction costs, or any premium or discount that
could result from offering for sale at any one time the Company's entire
holdings of a particular financial instrument. Because no active market exists
for a certain portion of the Company's financial instruments, the fair value
estimates for such financial instruments are based on judgments regarding, among
other factors, future cash flows, future loss experience, current economic
conditions and risk characteristics. These estimates are subjective in nature
and involve uncertainties and matters of significant judgment and, therefore,
cannot be determined with precision. Changes in assumptions could significantly
affect these estimates. The Company has not included certain material items in
its disclosure as such items, which the Company believes have significant value,
are not considered financial instruments.
The following table summarizes the carrying values and estimated fair values of
the Company's financial instruments at December 31:
====================================================================================================
1995 1994
Carrying Estimated Carrying Estimated
(In thousands) Value Fair Value Value Fair Value
- ----------------------------------------------------------------------------------------------------
FINANCIAL ASSETS
- ----------------
Cash and cash equivalents $ 235,356 $ 235,356 $ 207,157 $ 207,157
Loans held for sale 139,370 140,243 16,621 16,621
Securities available for sale 4,070,865 4,070,865 530,714 530,714
Securities held to maturity 5,085,736 4,990,564 8,609,897 8,133,137
FHLBNY stock 318,690 318,690 265,586 265,586
Loans receivable, net 9,702,018 9,752,292 9,181,239 8,796,978
Accrued interest receivable 118,811 118,811 105,529 105,529
Capitalized excess servicing 32,604 32,604 40,976 40,976
FINANCIAL LIABILITIES
- ---------------------
Deposits 12,572,203 12,606,210 12,811,269 12,769,001
FHLBNY advances 4,602,983 4,606,047 5,319,271 5,297,963
Securities sold under agreements to repurchase 1,632,453 1,632,453 9,741 9,741
Senior notes 197,384 213,382 197,200 192,500
Other borrowed funds 181,732 178,205 232,522 225,409
Accrued interest payable 34,398 34,398 28,376 28,376
====================================================================================================
72
The following table summarizes the carrying amount, notional amount and
estimated fair value of the Company's derivative financial instruments, as well
as gross unrealized gains and gross unrealized losses thereon, at December 31:
===================================================================================================
Gross Gross
Carrying Notional Unrealized Unrealized Estimated
(In thousands) Value Amount Gains Losses Fair Value
- ---------------------------------------------------------------------------------------------------
1995:
Interest rate swaps hedging:
Borrowings $ 64 $ 928,000 $ 178 $5,015 $(4,837)
Loans receivable 23 212,747 973 3,168 (2,195)
Deposits 32 150,000 533 -- 533
- ---------------------------------------------------------------------------------------------------
Total interest rate swaps 119 1,290,747 1,684 8,183 (6,499)
- ---------------------------------------------------------------------------------------------------
Interest rate caps hedging:
MBS available for sale 961 877,118 961 -- 961
MBS held to maturity 3,061 366,061 401 -- 401
- ---------------------------------------------------------------------------------------------------
Total interest rate caps 4,022 1,243,179 1,362 -- 1,362
- ---------------------------------------------------------------------------------------------------
Interest rate floors hedging:
MSR 959 1,219,776 1,026 -- 1,026
- ---------------------------------------------------------------------------------------------------
Total interest rate floors 959 1,219,776 1,026 -- 1,026
- ---------------------------------------------------------------------------------------------------
Forward contracts hedging:
Loans held for sale -- 69,676 -- 709 (709)
- ---------------------------------------------------------------------------------------------------
Total forward contracts -- 69,676 -- 709 (709)
- ---------------------------------------------------------------------------------------------------
Options hedging:
Borrowings 215 37,000 70 -- 70
Loans held for sale 42 10,000 22 -- 22
- ---------------------------------------------------------------------------------------------------
Total options 257 47,000 92 -- 92
- ---------------------------------------------------------------------------------------------------
Total derivative financial instruments $ 5,357 $3,870,378 $ 4,164 $8,892 $(4,728)
===================================================================================================
1994:
Interest rate swaps hedging:
Borrowings $ 74 $ 500,000 $30,681 $ -- $30,681
Loans receivable 284 453,280 12,603 -- 12,603
Deposits 378 750,000 22,174 -- 22,174
- ---------------------------------------------------------------------------------------------------
Total interest rate swaps 736 1,703,280 65,458 -- 65,458
- ---------------------------------------------------------------------------------------------------
Interest rate floors hedging:
MSR 1,240 1,366,685 53 -- 53
- ---------------------------------------------------------------------------------------------------
Total interest rate floors 1,240 1,366,685 53 -- 53
- ---------------------------------------------------------------------------------------------------
Forward contracts hedging:
Loans held for sale -- 144,250 65 25 40
MBS available for sale (60) 107,000 -- 60 (60)
- ---------------------------------------------------------------------------------------------------
Total forward contracts (60) 251,250 65 85 (20)
- ---------------------------------------------------------------------------------------------------
Options hedging:
Borrowings 322 45,000 1,299 -- 1,299
Loans receivable 1 300 1 -- 1
- ---------------------------------------------------------------------------------------------------
Total options 323 45,300 1,300 -- 1,300
- ---------------------------------------------------------------------------------------------------
Interest rate futures hedging:
Borrowings (11,812) 1,065,000 7,023 -- 7,023
MBS held to maturity (233) 465,100 374 141 233
MBS available for sale 16 154,000 -- 16 (16)
Loans receivable (238) 92,800 243 5 238
- ---------------------------------------------------------------------------------------------------
Total interest rate futures (12,267) 1,776,900 7,640 162 7,478
- ---------------------------------------------------------------------------------------------------
Total derivative financial instruments $(10,028) $5,143,415 $74,516 $ 247 $74,269
===================================================================================================
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
For a further discussion of the Company's derivative financial instruments, see
Note 16.
The following methodologies and assumptions were utilized by the Company in
estimating the fair values of its financial instruments at December 31, 1995 and
1994.
Cash and Cash Equivalents The carrying value of cash and cash equivalents was
deemed to be a reasonable estimate of their fair value.
Loans Held for Sale The fair value of loans held for sale was determined by
outstanding investor commitments, or in the absence of such commitments, current
investor yield requirements.
Securities Available for Sale and Held to Maturity The estimated fair values
of securities, both available for sale and held to maturity, were determined by
use of quoted market prices or dealer quotes.
FHLBNY Stock The fair value of FHLBNY stock was estimated to be its carrying
value which is indicative of its redemption price.
Loans Receivable For purposes of computing the fair value of its loans
receivable, the Company grouped performing loans with similar characteristics
and applied prices available in the secondary market as a reference and adjusted
for differences in servicing and credit quality. When a secondary market rate
was not available, and for non-performing loans, fair value was estimated using
a discounted cash flow analysis which utilized a discount rate commensurate with
the credit quality and interest rate risk inherent in the loans.
Accrued Interest Receivable and Payable The estimated fair values of accrued
interest receivable and payable have been determined to equal their carrying
amounts as these amounts are generally due or payable within 90 days.
Capitalized Excess Servicing The fair value of capitalized excess servicing was
estimated by discounting the estimated future cash flows associated with the
excess servicing spread to a present value. The discount rates utilized were
based upon current market rates for similar loan servicing.
Deposits The estimated fair value of deposits without a specified maturity,
which includes demand, savings and money market deposits, was the amount payable
on the valuation date. For fixed-maturity time deposits, fair value was
estimated based on the discounted value of contractual cash flows using current
market interest rates offered for deposits with similar remaining maturities.
Borrowed Funds The estimated fair values of borrowed funds maturing or
repricing within 90 days were deemed to be equal to their carrying values. The
fair values of all other borrowed funds were generally estimated based on quoted
market prices or on the discounted value of contractual cash flows using current
market interest rates for borrowings with similar terms and remaining
maturities.
Derivative and Off-Balance Sheet Financial Instruments In regards to its loans
sold with recourse, the fair value of such recourse guarantees would be based on
fees currently charged to terminate them or otherwise settle the obligations
with the counterparties. The Company has determined that it is not practicable
to determine the fair value of such recourse arrangements.
The fair value of commitments to originate or purchase loans was estimated by
discounting the remaining contracted fees over the terms of the commitments
using fees currently charged to enter into similar agreements or the cost to
terminate the commitments. At December 31, 1995 and 1994, the carrying and
estimated fair values of these commitments were not significant.
The fair value of commitments to purchase MBS was estimated based on the
estimated cost to terminate them or otherwise settle the obligations with the
counterparties. The estimated fair value of commitments to purchase MBS at
December 31, 1994 resulted in an unrealized loss of $7.5 million.
The fair values of the Company's derivative financial instruments were based
upon quoted market prices, or in the absence thereof, on dealer quotes or
pricing models.
Note 18 -- Litigation
- ---------------------
The Holding Company and the Bank have been named in an action entitled Robert
and Dianne Salois, et. al. v. Dime Bancorp, Inc., et. al., filed in the United
States District Court for the District of Massachusetts. The complaint in that
case alleges that certain aspects of the Company's lending practices in
Massachusetts during the period from 1986 through 1989: violated federal and
state truth-in-lending, consumer protection and banking regulatory statutes;
comprised a violation of the Racketeer Influenced and Corrupt Organizations Act;
and constituted torts or breaches of contract. The named plaintiffs allege that
they would be appropriate representatives for all persons who obtained mortgage
loans in Massachusetts from the Company between July 1, 1986 and December 31,
1989 and seek certification of such a class. The Company believes that none of
these claims has any merit and has moved to dismiss the complaint on the grounds
that it fails to set forth any viable causes for action.
74
The Bank has been named in an action entitled Robert and Jennifer Grunbeck v.
The Dime Savings Bank of New York, FSB, in the United States District Court for
the District of New Hampshire. The Grunbecks' complaint claimed that the
Company's negative amortization loan product, as employed in New Hampshire
between 1987 and 1989, violated a provision of New Hampshire law requiring that
residential mortgage loans be limited to simple interest obligations. The
plaintiffs' theory is that the loans' negative amortization feature, which
permits borrowers to defer portions of their interest payments and add them to
the principal balance of the loan, caused a compounding of interest in violation
of the New Hampshire statute. The plaintiffs further claimed that they would be
appropriate representatives of a class to be comprised of all borrowers who had
received such loans secured by New Hampshire real estate.
The Company believes that its negative amortization loan product was in
conformity with the New Hampshire law and further that the application of that
law to any of its loans was preempted by federal laws prohibiting state
interference with certain forms of mortgage loans. The Bank moved to dismiss the
Grunbecks' complaint and the District Court agreed, ruling that the New
Hampshire requirement was absolutely preempted by the federal law limiting the
states' ability to prescribe rates of interest on first mortgage residential
loans. On January 23, 1996, however, the United States Court of Appeals for the
First Circuit reversed the absolute preemption ruling and remanded the case to
the District Court for further proceedings. It is anticipated that these
proceedings will involve resolution of the Bank's defenses that the law could
not be applied to these loans as actually issued, based upon separate federal
preemption laws, as well as its defense that, to the extent any of these loans
were not thus protected by supervening federal law, they did not violate the New
Hampshire statute.
Certain other claims, suits, complaints and investigations involving the
Company, arising in the ordinary course of business, have been filed or are
pending. The Company is of the opinion, after discussion with counsel
representing the Company in these proceedings, that all such matters are either
adequately covered by insurance, are without merit or are of such kind, or
involve such amounts, that any liability from an unfavorable disposition would
not have a material adverse effect on the Company.
Note 19 -- Parent Company Financial Information
- -----------------------------------------------
On May 25, 1994, the Bank consummated a reorganization under which it became a
wholly-owned subsidiary of the Holding Company. In connection therewith, shares
of the Holding Company's common stock, par value $0.01 per share, were issued in
exchange for all of the outstanding shares of common stock of the Bank, par
value $1.00 per share. On March 29, 1991, Anchor Savings reorganized into the
holding company form of organization and became a wholly-owned subsidiary of
Anchor Bancorp.
Condensed financial statements of the Holding Company (parent company only) are
set forth below. The condensed statement of income and condensed statement of
cash flows for the year ended December 31, 1993 reflect Anchor Bancorp only. The
condensed statement of income and condensed statement of cash flows for the year
ended December 31, 1994 reflect Anchor Bancorp for the year ended December 31,
1994 and Dime Bancorp, Inc. for the period of May 25, 1994 to December 31,
1994.
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
=================================================================================
Condensed Statements of Financial Condition
December 31,
(In thousands) 1995 1994
- ---------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 916 $ 1,899
Money market investments -- 323
MBS held to maturity 2,636 3,400
Investment in the Bank 1,159,941 1,114,430
Other assets 16,982 17
- ---------------------------------------------------------------------------------
Total assets $1,180,475 $1,120,069
=================================================================================
LIABILITIES AND
STOCKHOLDERS' EQUITY
Senior notes $ 197,384 $ 197,200
Other liabilities 6,561 17,744
- ---------------------------------------------------------------------------------
Total liabilities 203,945 214,944
- ---------------------------------------------------------------------------------
Total stockholders' equity 976,530 905,125
- ---------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $1,180,475 $1,120,069
=================================================================================
====================================================================================================
Condensed Statements of Income For the Years Ended December 31,
------------------------------------
(In thousands) 1995 1994 1993
- ----------------------------------------------------------------------------------------------------
INCOME
Interest income $ 213 $ 184 $ 147
Dividends received from the Bank 30,000 10,711 4,618
- ----------------------------------------------------------------------------------------------------
Total income 30,213 10,895 4,765
- ----------------------------------------------------------------------------------------------------
EXPENSE
Interest expense on senior notes 19,621 9,446 8,110
General and administrative expense 5,282 665 3
Restructuring and merger-related expense 254 22,095 --
Minority interest-preferred
stock dividend of subsidiary -- 11,433 --
- ----------------------------------------------------------------------------------------------------
Total expense 25,157 43,639 8,113
- ----------------------------------------------------------------------------------------------------
Income (loss) before income tax benefit and equity in
undistributed net income of the Bank 5,056 (32,744) (3,348)
Income tax benefit 10,762 5,584 3,120
- ----------------------------------------------------------------------------------------------------
Income (loss) before equity in undistributed net
income of the Bank 15,818 (27,160) (228)
Equity in undistributed net income of the Bank 46,367 29,484 44,562
- ----------------------------------------------------------------------------------------------------
Net income $ 62,185 $ 2,324 $44,334
====================================================================================================
====================================================================================================
Condensed Statements of Cash Flows For the Years Ended December 31,
------------------------------------
(In thousands) 1995 1994 1993
- ----------------------------------------------------------------------------------------------------
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income $ 62,185 $ 2,324 $ 44,334
Adjustments to reconcile net income to net cash
(used) provided by operating activities:
Equity in undistributed net income of the Bank (46,367) (29,484) (44,562)
Minority interest--preferred stock
dividend of subsidiary -- 11,433 --
Other, net (19,902) 16,967 1,983
- ----------------------------------------------------------------------------------------------------
Net cash (used) provided by operating activities (4,084) 1,240 1,755
- ----------------------------------------------------------------------------------------------------
CASH FLOWS FROM
INVESTING ACTIVITIES
Purchases of MBS -- (2,051) (3,286)
Principal payments received on MBS 764 811 701
Capital contributed to the Bank -- -- (94,268)
- ----------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities 764 (1,240) (96,853)
- ----------------------------------------------------------------------------------------------------
CASH FLOWS FROM
FINANCING ACTIVITIES
Proceeds from common stock issued 2,014 1,038 67,334
Proceeds from issuance of senior notes -- -- 27,419
Other -- (15) --
- ----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,014 1,023 94,753
- ----------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (1,306) 1,023 (345)
Merger adjustment -- 1,084 --
Cash and cash equivalents at beginning of year 2,222 115 460
- ----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 916 $ 2,222 $ 115
====================================================================================================
SUPPLEMENTAL NON-CASH
FLOW INFORMATION
Contribution of preferred stock of the Bank to the
capital of the Bank $ 100,000 $ -- $ --
Exchange of preferred stock of the Bank for
senior notes $ -- $ 100,000 $ --
Exchange of Class A cumulative preferred
stock for senior notes and common stock warrants $ -- $ -- $ 71,000
====================================================================================================
76
Note 20 -- Quarterly Operating Data (Unaudited)
- ----------------------------------------------
===================================================================================================================================
A summary of the Company's results of operations by quarter for the years ended December 31, 1995 and 1994 is as follows:
1995 1994
(In thousands, except per share data) Dec. 31 Sept. 30(1) June 30(1) Mar. 31(1) Dec. 31 Sept. 30 June 30 Mar. 31
- -----------------------------------------------------------------------------------------------------------------------------------
Interest income $344,127 $338,422 $342,033 $332,549 $316,480 $299,545 $267,339 $253,498
Interest expense 244,014 240,037 238,296 225,158 207,578 185,766 164,694 149,747
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 100,113 98,385 103,737 107,391 108,902 113,779 102,645 103,751
Provision for loan losses 9,900 9,900 9,900 9,950 22,668 12,622 8,553 11,956
Non-interest income:
Loan servicing fees, net 7,257 7,386 7,535 8,274 8,082 6,958 6,605 6,568
Securities and insurance
brokerage fees 3,930 3,887 4,275 3,440 3,588 3,971 4,921 4,405
Net (losses) gains on
sales activities (22,921) (384) 1,215 9,675 1,581 365 (121) 1,100
Banking service fees and other 8,688 7,771 7,933 8,206 8,243 7,660 7,866 7,475
- -----------------------------------------------------------------------------------------------------------------------------------
Total non-interest income (3,046) 18,660 20,958 29,595 21,494 18,954 19,271 19,548
- -----------------------------------------------------------------------------------------------------------------------------------
Non-interest expense:
General and administrative expense 67,906 64,038 75,064 78,893 79,030 72,630 71,906 70,908
ORE expense, net 2,475 3,401 3,340 3,676 903 2,193 3,664 4,253
Amortization of MSR 2,982 3,440 2,921 2,764 2,889 1,993 2,250 2,532
Restructuring and
merger-related expense 9,775 2,393 1,438 1,725 55,928 2,330 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 83,138 73,272 82,763 87,058 138,750 79,146 77,820 77,693
- -----------------------------------------------------------------------------------------------------------------------------------
Minority interest-preferred
stock dividend of subsidiary -- -- -- -- 3,558 2,625 2,625 2,625
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income tax
expense (benefit) and cumulative
effect of a change in
accounting principle 4,029 33,873 32,032 39,978 (34,580) 38,340 32,918 31,025
Income tax expense (benefit) 1,696 14,865 13,610 17,556 (50,741) 1,093 (3,393) (97)
- -----------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect
of a change in accounting principle 2,333 19,008 18,422 22,422 16,161 37,247 36,311 31,122
Cumulative effect of a change
in accounting principle for goodwill -- -- -- -- -- -- -- (92,887)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 2,333 $ 19,008 $ 18,422 $ 22,422 $ 16,161 $ 37,247 $ 36,311 $(61,765)
===================================================================================================================================
Primary and fully diluted earnings
(loss) per common share:
Income before cumulative
effect of a change in
accounting principle $ 0.02 $ 0.17 $ 0.17 $ 0.20 $ 0.15 $ 0.35 $ 0.34 $ 0.29
Net income (loss) $ 0.02 $ 0.17 $ 0.17 $ 0.20 $ 0.15 $ 0.35 $ 0.34 $ (0.57)
===================================================================================================================================
(1) The quarterly operating data has been restated to retroactively apply the
Company's adoption of SFAS No. 122 in the third quarter of 1995, effective
January 1, 1995.
Note 21 -- Subsequent Events
In February 1996, the Company announced that it expects to file a registration
statement with the Securities and Exchange Commission in the second quarter of
1996 in connection with the disposition by the FDIC of the common shares
underlying the FDIC Warrants.
In January 1996, the Holding Company announced its intention to repurchase up to
2% of its outstanding common stock, or approximately 2,000,000 shares. No time
limit has been established to complete the repurchase program, which is still
subject to certain administrative clearances. The Holding Company intends to
acquire the shares at prevailing prices in the open market or in privately-
negotiated transactions. Such shares will be placed in the corporate treasury
and are intended to be used in connection with the Company's stock-based
employee benefit plans.
77
BOARD OF DIRECTORS
- ------------------
James M. Large, Jr.
Chairman of the Board and Chief Executive
Officer, Dime Bancorp, Inc. and
The Dime Savings Bank of New York, FSB
Lawrence J. Toal
President and Chief Operating Officer,
Dime Bancorp, Inc. and The Dime
Savings Bank of New York, FSB
Derrick D. Cephas
Partner, Cadwalader, Wickersham & Taft
Frederick C. Chen
Retired Partner, KPMG Peat Marwick LLP
J. Barclay Collins II
Executive Vice President and General Counsel,
Amerada Hess Corporation
Richard W. Dalrymple
Former President and Chief Operating Officer,
Anchor Bancorp, Inc. and Anchor
Savings Bank FSB
E. Charlotte Fanta
Chairperson, Center for Lifelong Learning
James F. Fulton
President, Fulton + Partners, Inc.
Murray Handwerker
Former President and Chairman of the Board,
Nathan's Famous, Inc.
Virginia M. Kopp
Former Retailer
John Morning
President, John Morning Design, Inc.
Margaret G. Osmer-McQuade
President, Qualitas International
Sally Hernandez-Pinero
Of Counsel, Kalkines, Arky, Zall & Bernstein
Dr. Paul A. Qualben
Physician
Eugene G. Schulz, Jr.
Former Vice Chairman and General Counsel,
Anchor Savings Bank FSB
Howard Smith
President, Virginia Dare Extract Co., Inc.
Dr. Norman R. Smith
President, Wagner College
Ira T. Wender
Of Counsel, Patterson, Belknap, Webb & Tyler
MANAGEMENT
- ----------
Dime Bancorp, Inc. and
The Dime Savings Bank
of New York, FSB
James M. Large, Jr.
Chairman of the Board
and Chief Executive Officer
Lawrence J. Toal
President and Chief Operating Officer
Arthur C. Bennett
Chief Human Resources Officer
Jenne K. Britell
General Manager, Mortgage Banking
Gene C. Brooks
General Counsel
John V. Brull
Chief Accounting Executive
D. James Daras
Treasurer and Asset/Liability Executive
J. Edward Diamond*
Investment Services Executive
Joseph P. Hanley*
Asset Quality Review Executive
Brian W. Heuer*
Administrative Services Executive
John S. Lohmuller*
Corporate Auditor
Thomas G. Lucca*
General Manager, Consumer Lending
Murray F. Mascis*
General Manager,
Commercial Real Estate Lending
Carlos R. Munoz
Chief Credit Officer
Cody T Sickle
General Manager, Consumer Banking Services
David J. Totaro*
Chief Marketing Officer
Jack L. Wagner*
Chief Information Technology Officer
Franklin L. Wright
External Affairs
and Investor Relations Executive
Robert T. Zabawa*
General Manager, Commercial Lending
*Officers of The Dime Savings Bank of New York, FSB only
78
CORPORATE INFORMATION
- ---------------------
EXECUTIVE OFFICES
589 Fifth Avenue
New York, NY 10017-1977
COMMON STOCK
Dime's common stock is traded on the New York Stock Exchange under the symbol
DME. Newspaper stock listings: Dime NY or Dime Bcp.
SOURCES OF INFORMATION
For information relating to your stock holdings, stock transfer requirements,
lost certificates and related matters, call The Bank of Boston, c/o Boston
EquiServe, Dime's transfer agent, at 1(800)730-4001.
FINANCIAL INFORMATION
For information relating to annual and quarterly reports, reports filed on Forms
10-K or 10-Q and the annual meeting of stockholders, call Dime's Investor
Relations Department at (212) 326-6170.
MORTGAGE INFORMATION
For information relating to an existing Dime mortgage, call 1(800)222-0912.
For information relating to a mortgage application or mortgage rates, call
1(800)TRY-DIME.
BANKING SERVICES
If you would like to open an account or would like information relating to any
other banking matter, call 1(800)THE-DIME.
TDD customers call 1 (800) GET-DIME.
INDEPENDENT AUDITOR
KPMG Peat Marwick LLP
345 Park Avenue
New York, NY 10154
TRANSFER AGENT AND REGISTRAR
The Bank of Boston
c/o Boston EquiServe, L.P.
Mail Stop 45-02-64
P.O. Box 644
Boston, MA 02102-0644
1(800)730-4001
ANNUAL MEETING
The annual meeting of stockholders will be held on May 7, 1996 at 10:00 a.m. at
The Grand Hyatt New York, Park Avenue at Grand Central, New York, New York.
Designed by Curran & Connors, Inc.
DIME.