SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-13094
DIME BANCORP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 11-3197414
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
589 FIFTH AVENUE, NEW YORK, NEW YORK 10017
(Address of principal executive offices) (Zip Code)
(212) 326-6170 NOT APPLICABLE
(Registrant's telephone number, (Former name, former address
including area code) and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No _______
--------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common shares, $0.01 par value 106,340,750
- -------------------------------- ----------------------------------------
Class Outstanding shares as of July 31, 1996
1
DIME BANCORP, INC.
JUNE 30, 1996
FORM 10-Q
INDEX
PAGE NO.
--------
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition as of
June 30, 1996 and December 31, 1995 3
Consolidated Statements of Income for the three month
and six months ended June 30, 1996 and 1995 4
Consolidated Statement of Changes in Stockholders' Equity
for the six months ended June 30, 1996 5
Consolidated Statements of Cash Flows for the six months
ended June 30, 1996 and 1995 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Part II. Other Information
Item 1. Legal Proceedings 32
Item 4. Submission of Matters to a Vote of Security Holders 33
Item 5. Other Information 34
Item 6. Exhibits and Reports on Form 8-K 34
Signatures 35
2
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
(Unaudited)
June 30, December 31,
1996 1995
- --------------------------------------------------------------------
ASSETS
Cash and due from banks $ 161,926 $ 216,532
Money market investments 27,397 18,824
Loans held for sale 156,223 139,370
Securities available for sale 3,536,119 4,070,865
Securities held to maturity (estimated
fair value of $4,436,558 and $4,990,564
at June 30, 1996 and December 31, 4,555,205 5,085,736
1995, respectively)
Federal Home Loan Bank of New York stock 318,690 318,690
Loans receivable, net:
First mortgage loans 8,210,006 7,820,680
Cooperative apartment loans 1,229,396 1,217,030
Consumer and business loans 740,332 792,603
Allowance for loan losses (124,902) (128,295)
- --------------------------------------------------------------------
Total loans receivable, net 10,054,832 9,702,018
- --------------------------------------------------------------------
Other real estate owned, net 51,823 60,681
Accrued interest receivable 112,699 118,811
Premises and equipment, net 108,300 112,757
Capitalized excess servicing 28,538 32,604
Mortgage servicing rights 68,367 65,583
Deferred tax asset, net 204,405 223,463
Other assets 159,765 160,686
- --------------------------------------------------------------------
Total assets $19,544,289 $20,326,620
====================================================================
LIABILITIES
Deposits $12,661,587 $12,572,203
Federal Home Loan Bank of New York 2,304,380 4,602,983
advances
Securities sold under agreements to 3,058,870 1,632,453
repurchase
Senior notes 197,481 197,384
Other borrowed funds 169,290 181,732
Other liabilities 160,313 163,335
- --------------------------------------------------------------------
Total liabilities 18,551,921 19,350,090
- --------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, par value $0.01 per share
(200,000,000 shares authorized;
108,268,216 and 99,705,731 shares
issued at June 30, 1996 and
December 31, 1995, respectively) 1,083 997
Additional paid-in capital 914,445 915,210
Retained earnings 121,772 65,981
Treasury stock, at cost (1,959,734 (24,974) --
shares at June 30, 1996)
Net unrealized loss on securities (19,723) (5,468)
available for sale, net of related
income taxes
Unearned compensation (235) (190)
- --------------------------------------------------------------------
Total stockholders' equity 992,368 976,530
- --------------------------------------------------------------------
Total liabilities and stockholders' $19,544,289 $20,326,620
equity
====================================================================
See accompanying notes to the consolidated financial statements.
3
DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
For the Three Months Ended For the Six Months Ended
June 30, June 30,
--------------------------------------------------------
1996 1995 1996 1995
- ------------------------------------------------------------------------------------------------
INTEREST INCOME
First mortgage loans $152,042 $138,134 $301,614 $272,154
Cooperative apartment loans 24,279 22,623 48,317 44,331
Consumer and business loans 16,760 18,873 34,113 36,698
Mortgage-backed securities 124,384 145,512 261,754 287,826
Investment securities 8,667 7,821 17,087 16,698
Money market investments 6,683 9,070 13,458 16,875
- ------------------------------------------------------------------------------------------------
Total interest income 332,815 342,033 676,343 674,582
- ------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 130,714 131,970 263,511 254,913
Borrowed funds 88,023 106,326 184,419 208,541
- ------------------------------------------------------------------------------------------------
Total interest expense 218,737 238,296 447,930 463,454
- ------------------------------------------------------------------------------------------------
Net interest income 114,078 103,737 228,413 211,128
Provision for loan losses 10,250 9,900 20,750 19,850
- ------------------------------------------------------------------------------------------------
Net interest income after provision for 103,828 93,837 207,663 191,278
loan losses
- ------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Loan servicing fees, net 6,926 7,535 14,589 15,809
Securities and insurance brokerage fees 5,633 4,275 10,307 7,715
Net (losses) gains on sales activities (1,906) 1,215 (1,445) 10,890
Other 10,918 7,933 19,457 16,139
- ------------------------------------------------------------------------------------------------
Total non-interest income 21,571 20,958 42,908 50,553
- ------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE
General and administrative expense:
Compensation and employee benefits 31,815 33,552 65,791 70,965
Occupancy and equipment, net 13,434 15,043 26,209 30,453
Federal deposit insurance premiums 2,875 7,700 5,750 15,405
Other 22,709 18,769 43,277 37,134
- ------------------------------------------------------------------------------------------------
Total general and administrative expense 70,833 75,064 141,027 153,957
Other real estate owned expense, net 2,159 3,340 4,652 7,016
Amortization of mortgage servicing 2,879 2,921 6,073 5,685
rights
Restructuring and merger-related expense -- 1,438 3,504 3,163
- ------------------------------------------------------------------------------------------------
Total non-interest expense 75,871 82,763 155,256 169,821
- ------------------------------------------------------------------------------------------------
Income before income tax expense 49,528 32,032 95,315 72,010
Income tax expense 20,539 13,610 39,271 31,166
- ------------------------------------------------------------------------------------------------
Net income $ 28,989 $ 18,422 $ 56,044 $ 40,844
================================================================================================
Primary and fully diluted earnings per $0.27 $0.17 $0.51 $0.37
common share
================================================================================================
Primary average common shares 109,100 109,527 109,560 109,518
outstanding
Fully diluted average common shares 109,221 109,638 109,709 109,615
outstanding
================================================================================================
See accompanying notes to the consolidated financial statements.
4
DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS'
EQUITY
(In thousands)
(Unaudited)
For the Six
Months Ended
June 30,
1996
- ------------------------------------------------------
COMMON STOCK
Balance at beginning of period $ 997
Stock issued upon exercise of stock 84
warrant
Stock issued under employee benefit 2
plans
- ------------------------------------------------------
Balance at end of period 1,083
- ------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period 915,210
Costs of secondary public offering (1,913)
Stock issued under employee benefit 1,023
plans
Restricted stock activity 125
- ------------------------------------------------------
Balance at end of period 914,445
- ------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of period 65,981
Net income 56,044
Treasury stock issued under employee (253)
benefit plans
- ------------------------------------------------------
Balance at end of period 121,772
- ------------------------------------------------------
TREASURY STOCK, AT COST
Balance at beginning of period --
Treasury stock purchased (25,466)
Treasury stock issued under employee 492
benefit plans
- ------------------------------------------------------
Balance at end of period (24,974)
- ------------------------------------------------------
NET UNREALIZED LOSS ON SECURITIES
AVAILABLE FOR SALE,
NET OF RELATED INCOME TAXES
Balance at beginning of period (5,468)
Change in net unrealized loss on (14,255)
securities available for sale, net of
related income taxes
- ------------------------------------------------------
Balance at end of period (19,723)
- ------------------------------------------------------
UNEARNED COMPENSATION
Balance at beginning of period (190)
Restricted stock activity (115)
Unearned compensation amortized to 70
expense
- ------------------------------------------------------
Balance at end of period (235)
- ------------------------------------------------------
Total stockholders' equity $992,368
======================================================
See accompanying notes to the consolidated financial
statements.
5
DIME BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the Six Months Ended
June 30,
---------------------------
1996 1995
- -------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 56,044 $ 40,844
Adjustments to reconcile net income to
net cash provided
by operating activities:
Provision for loan and real estate 22,630 23,190
losses
Depreciation and amortization of 7,814 9,367
premises and equipment
Other amortization and accretion, 30,906 24,208
net
Provision for deferred income tax 29,710 23,030
expense
Net increase in loans held for sale (16,853) (31,097)
Other, net 5,957 (16,991)
- -------------------------------------------------------------------
Net cash provided by operating 136,208 72,551
activities
- -------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Loans receivable originated and (1,207,906) (656,770)
purchased
Principal payments received on loans 841,392 477,082
receivable
Purchases of securities available for (1,094,646) (339)
sale
Purchases of securities held to maturity (256) (1,018,100)
Proceeds from sales of securities 1,007,125 25,006
available for sale
Proceeds from sales of securities held -- 187,342
to maturity
Principal payments received on 1,081,532 613,285
mortgage-backed securities
Proceeds from maturities and calls of 29,230 13,512
investment securities
Net redemptions of Federal Home Loan -- 11,462
Bank of New York stock
Repurchases of assets sold with recourse (14,167) (20,833)
Proceeds from sales of other real 25,791 34,234
estate owned
Purchases and originations of mortgage (8,716) (7,295)
servicing rights
Proceeds from sales of mortgage -- 1,643
servicing rights
Other, net (20,602) 9,928
- -------------------------------------------------------------------
Net cash provided (used) by investing 638,777 (329,843)
activities
- -------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits, exclusive of 89,384 154,859
sales
Net cash paid upon sale of deposits -- (262,512)
Net decrease in borrowings with (162,616) (786,518)
original maturities of three months or
less
Proceeds from other borrowings 565,000 1,165,000
Repayments of other borrowings (1,286,767) (59,336)
Net proceeds from issuance of common 1,360 822
and treasury stock
Purchases of treasury stock (25,466) --
Other (1,913) --
- -------------------------------------------------------------------
Net cash (used) provided by financing (821,018) 212,315
activities
- -------------------------------------------------------------------
Net decrease in cash and cash (46,033) (44,977)
equivalents
Cash and cash equivalents at beginning 235,356 207,157
of period
- -------------------------------------------------------------------
Cash and cash equivalents at end of $ 189,323 $ 162,180
period
===================================================================
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid on deposits and borrowings $ 446,634 $ 439,471
Income tax refunds, net 7,145 7,881
SUPPLEMENTAL NON-CASH FLOW INFORMATION
Net transfers of loans receivable to $ 26,582 $ 46,768
other real estate owned
Transfers of securities from held to -- 12,942
maturity to available for sale
===================================================================
See accompanying notes to the consolidated financial statements.
6
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
- ------------------------------
The accompanying unaudited consolidated financial statements include the
accounts of Dime Bancorp, Inc. (the "Holding Company") and The Dime Savings Bank
of New York, FSB and its subsidiaries (together with the Holding Company, the
"Company"). All significant intercompany balances and transactions have been
eliminated in consolidation.
In the opinion of management, the accompanying unaudited consolidated financial
statements reflect all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the Company's financial condition
as of the dates indicated and results of operations and cash flows for the
periods shown. The unaudited consolidated financial statements presented herein
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Holding Company's Annual Report on Form 10-K/A for
the year ended December 31, 1995. Certain amounts in the prior period
consolidated financial statements have been reclassified to conform with the
presentation for the current period. In preparing the consolidated financial
statements, management is required to make estimates and assumptions that affect
the reported amounts. Actual results could differ significantly from those
estimates. The results for the three months and six months ended June 30, 1996
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1996.
NOTE 2 - EXERCISE OF COMMON STOCK WARRANT
- -----------------------------------------
In May 1996, the Federal Deposit Insurance Corporation (the "FDIC") exercised
its warrant to acquire 8,407,500 shares of common stock of the Holding Company
("Common Stock") at $0.01 per share. Upon exercise, the acquired shares were
sold by the FDIC in a secondary public offering. The Holding Company incurred
costs of $1.9 million in connection with the secondary public offering.
NOTE 3 - COMMON STOCK REPURCHASE PROGRAM
- ----------------------------------------
During the first six months of 1996, the Holding Company repurchased 2,000,000
shares of Common Stock at an average cost of $12.73 per share, completing a
repurchase program announced in January 1996. Repurchased shares have been, and
are expected to continue to be, utilized in connection with the Company's stock-
based employee benefit plans.
NOTE 4 - RECENT ACCOUNTING DEVELOPMENTS
- ---------------------------------------
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF
Effective January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" ("SFAS 121"). SFAS 121 established
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles and goodwill related to those assets to be held and
used and for long-lived assets and certain identifiable intangibles to be
disposed of. SFAS 121 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 an asset
may not be recoverable. An impairment loss, measured by the difference between
the carrying amount of the asset and its fair value, must be recognized in the
event the sum of the expected future cash flows (undiscounted and without
interest charges) from the use and eventual disposition of the asset are less
than the carrying value of the asset. In addition, SFAS 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. Since
the date of its adoption by the Company, SFAS 121 has not had a material impact
on the Company's consolidated financial statements.
7
ACCOUNTING FOR STOCK-BASED COMPENSATION
Effective January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS
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 123 covers transactions with both employees and non-
employees.
SFAS 123 established a fair value based method of accounting for stock-based
compensation arrangements with employees (the "SFAS 123 Method"), but permits an
entity to continue utilizing the intrinsic value based method prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (the "APB 25 Method"), in accounting for such arrangements. Under the
SFAS 123 Method, compensation cost associated with stock-based compensation
arrangements is measured at the grant date based on fair value, whereas, under
the APB 25 Method, compensation cost is measured by the excess, if any, of the
quoted market price of the stock at date of grant, or other measurement date,
over the amount an employee is required to pay to acquire the stock. An entity
electing to continue using the APB 25 Method must disclose pro forma net income
and earnings per share information in the notes to its financial statements as
if the SFAS 123 Method had been adopted. In adopting SFAS 123, the Company has
elected to continue applying the APB 25 Method in preparing its consolidated
financial statements.
The disclosure requirements of SFAS 123 are effective for financial statements
for fiscal years beginning after December 15, 1995. Pro forma disclosures
required for entities that elect to continue to measure compensation cost using
the APB 25 Method must include the effects of all awards granted in fiscal years
that begin after December 15, 1994.
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS
OF LIABILITIES
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" ("SFAS 125"). SFAS 125
establishes accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on consistent
application of a financial components approach that focuses on control. Under
this approach, an entity, subsequent to a transfer of financial assets, must
recognize the financial and servicing assets it controls and the liabilities it
has incurred, derecognize financial assets when control has been surrendered,
and derecognize liabilities when extinguished. Standards for distinguishing
transfers of financial assets that are sales from those that are secured
borrowings are provided in SFAS 125. A transfer not meeting the criteria for a
sale must be accounted for as a secured borrowing with pledge of collateral.
SFAS 125 requires that liabilities and derivatives incurred or obtained by
transferors as part of a transfer of financial assets be initially measured at
fair value, if practicable. It additionally requires that servicing assets and
other retained interests in transferred assets be measured by allocating the
previous carrying amount between the assets sold, if any, and retained
interests, if any, based on their relative fair values at the date of transfer.
Servicing assets and liabilities must be subsequently measured by amortization
in proportion to and over the period of estimated net servicing income or loss
and assessed for asset impairment, or increased obligation, based on their fair
value.
SFAS 125 requires that a liability be derecognized if, and only if, either the
debtor pays the creditor and is relieved of its obligation for the liability or
the debtor is legally released from being the primary obligor under the
liability, either judicially or by the creditor. Therefore, a liability is not
considered extinguished by an in-substance defeasance.
SFAS 125 provides implementation guidance for assessing isolation of transferred
assets and for accounting for transfers of partial interests, servicing of
financial assets, securitizations, transfers of sales-type and direct financing
lease receivables, securities lending transactions, repurchase agreements
including "dollar rolls," wash sales, loan syndications and participations, risk
participations in banker's acceptances, factoring agreements, transfers of
receivables with recourse, and extinguishments of liabilities.
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"), is amended by SFAS 125
to prohibit the classification of a debt security
8
as held to maturity if it can be prepaid or otherwise settled in such a way that
the holder of the security would not recover substantially all of its recorded
investment. It further requires that loans and other assets that can be prepaid
or otherwise settled in such a way that the holder would not recover
substantially all of its recorded investment shall be subsequently measured like
debt securities classified as available for sale or trading under SFAS 115, as
amended by SFAS 125. SFAS 125 also amends and extends to all servicing assets
and liabilities the accounting standards for mortgage servicing rights now in
Statement of Financial Accounting Standards No. 65, "Accounting for Certain
Mortgage Banking Activities," and supersedes Statement of Financial Accounting
Standards No. 122, "Accounting for Mortgage Servicing Rights."
SFAS 125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996 and is to be
applied prospectively. Earlier or retroactive application is not permitted.
The Company has not completed its evaluation of the impact that the adoption of
SFAS 125 will have on its consolidated financial statements.
9
DIME BANCORP, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
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"), a federally-chartered savings institution, the deposits
of which are insured up to applicable limits by the Federal Deposit Insurance
Corporation ("FDIC").
The Company's net income for the second quarter of 1996 amounted to $29.0
million, or $0.27 per fully diluted common share, an increase of $10.6 million,
or 57.4%, from the $18.4 million, or $0.17 per fully diluted common share,
reported for the second quarter of 1995. For the six months ended June 30, 1996,
the Company's net income amounted to $56.0 million, or $0.51 per fully diluted
common share, up $15.2 million, or 37.2%, from the $40.8 million, or $0.37 per
fully diluted common share, reported for the comparable period in 1995, which
included net gains of $12.5 million from the disposition of certain branches and
facilities. These improvements predominantly reflect increases in net interest
income, coupled with reductions in general and administrative ("G&A") expense.
The Company's annualized return on average stockholders' equity amounted to
11.72% for the second quarter of 1996, as compared with 7.84% for the second
quarter of 1995, and 11.32% for the first six months of 1996, as compared with
8.83% for the corresponding 1995 period. The Company's annualized return on
average assets improved to 0.59% and 0.56% for the three and six month periods
ended June 30, 1996 from 0.36% and 0.40% for the respective periods one year
earlier.
The Company's total assets declined to $19.5 billion at June 30, 1996 from $20.3
billion at year-end 1995, primarily due to the sale, during the 1996 first
quarter, of $1.0 billion of mortgage-backed securities ("MBS") that had been
designated for sale at December 31, 1995 in connection with a balance sheet
restructuring plan initiated by the Company during the fourth quarter of 1995
(the "Balance Sheet Restructuring Plan"). As a result of the decision to sell
the MBS, the Company recognized a pre-tax loss of $23.6 million in the 1995
fourth quarter, reflecting the write-down of certain of those securities to
estimated fair value. The MBS sold had been included in the transfer, in
accordance with the Balance Sheet Restructuring Plan, of securities with an
amortized cost of $3.6 billion from the Company's held to maturity portfolio to
its available for sale portfolio during December 1995. In accordance with the
Balance Sheet Restructuring Plan, the proceeds from the MBS sales were utilized
to reduce the Company's outstanding borrowings. In addition to reducing the
Company's reliance on MBS and borrowings, the Balance Sheet Restructuring Plan
has enabled the Company to improve its net interest margin and should provide
the Company with greater flexibility in adjusting to varying interest rate
environments and the opportunity to further reduce its asset size, should that
be deemed appropriate.
The number of shares of the Holding Company's common stock ("Common Stock")
outstanding increased to 106.3 million at June 30, 1996 from 99.7 million at
December 31, 1995. This increase was primarily attributable to the exercise by
the FDIC of a warrant to acquire approximately 8.4 million shares of Common
Stock at $0.01 per share (the "Warrant"), the effect of which was partially
offset by the repurchase by the Holding Company of 2.0 million shares of Common
Stock in connection with a repurchase program announced during the first quarter
of 1996 (see "Financial Condition -- Stockholders' Equity"). The issuance of
Common Stock in connection with the exercise of the Warrant has not impacted the
Company's earnings per share computations as the Warrant was considered a Common
Stock equivalent for such purposes.
The Company's total loan production, consisting of both originations and
purchases, amounted to $1.9 billion for the first six months of 1996, up $1.1
billion as compared with the corresponding 1995 period. Production of one-to-
four family first mortgage and cooperative apartment loans ("residential
property loans") amounted to $1.6 billion for the first six months of 1996, an
increase of 214% as compared with the same period one year ago.
10
The Company's asset quality improved as total non-performing assets declined to
$296.3 million, or 1.52% of total assets, at June 30, 1996 from $315.8 million,
or 1.55% of total assets, at December 31, 1995.
The Bank's leverage, tier 1 risk-based and total risk-based capital ratios
increased to 5.71%, 11.75% and 13.00%, respectively, at June 30, 1996 from
5.16%, 10.76% and 12.01%, respectively, at the end of 1995. These ratios
satisfied the published regulatory standards for a well capitalized institution.
RESULTS OF OPERATIONS
NET INTEREST INCOME
The Company's net interest income of $114.1 million for the second quarter of
1996 reflects growth of $10.3 million, or 10.0%, relative to the corresponding
quarter in 1995. For the six months ended June 30, 1996, net interest income
amounted to $228.4 million, an increase of $17.3 million, or 8.2%, as compared
with the same period one year ago. The Company's net interest margin rose to
2.39% and 2.37% for the three and six month periods ended June 30, 1996,
respectively, from 2.12% and 2.14% for the comparable 1995 periods. For the
three and six month periods ended June 30, 1996, as compared with the same
periods in 1995, total average interest-earning assets declined $589.0 million
and $381.3 million, respectively, while total average interest-bearing
liabilities declined $605.3 million and $425.9 million, respectively,
principally attributable to the MBS sales and repayments of borrowings in
connection with the Balance Sheet Restructuring Plan. Net interest income for
the second quarter of 1996 was down only slightly from the first quarter of
1996, despite a reduction in average interest-earning assets of $378.7 million
between the periods, while the net interest margin increased 4 basis points, the
second consecutive quarter-to-quarter improvement.
The gross yield on total average interest-earning assets increased to 6.97% for
the second quarter of 1996 from 6.95% for the second quarter of 1995 and to
7.02% for the six months ended June 30, 1996 from 6.86% in the corresponding
1995 period. These improvements were largely attributable to increases in the
yield on MBS of 9 basis points and 25 basis points for the three months and six
months ended June 30, 1996, respectively, as compared with the same periods one
year ago, resulting principally from the sales of relatively low-yielding MBS in
connection with the Balance Sheet Restructuring Plan. The level of the gross
yield on average interest-earning assets also reflects the repricing
characteristics of the adjustable-rate assets underlying a significant portion
of the Company's interest-earning asset portfolio (see "Management of Interest
Rate Risk -- General" below).
The average cost of the Company's interest-bearing liabilities was 4.68% for the
second quarter of 1996 and 4.74% for the first six months of 1996, down 24 basis
points and 7 basis points, respectively, from the corresponding 1995 periods.
The cost of deposits declined 5 basis points for the quarter ended June 30,
1996, as compared with the same quarter one year ago, while it rose 13 basis
points for the first six months of 1996, as compared with the corresponding
prior year period. These changes reflect, among other factors, the net effect of
competitive influences, market rate changes and a shifting of deposits from
lower-costing savings accounts to time deposits. The cost of borrowed funds
declined 51 basis points and 40 basis points for the three and six month periods
ending June 30, 1996, respectively, as compared with the same periods in 1995.
These declines were attributable to the lower short-term interest rate
environment during the 1996 periods as compared with the corresponding 1995
periods, together with the continuing shift by the Company from Federal Home
Loan Bank of New York ("FHLBNY") advances to generally lower-costing securities
sold under agreements to repurchase ("Reverse Repurchase Agreements").
The Company's net interest income also reflects its use of certain derivative
financial instruments in managing its interest rate risk exposure. These
derivative financial instruments resulted in reductions of net interest income
of $3.9 million and $7.4 million during the three and six month periods ended
June 30, 1996, respectively, as compared with increases in net interest income
during the comparable periods in 1995 of $3.1 million and $11.0 million,
respectively. For a further discussion of the Company's hedging activities, see
"Management of Interest Rate Risk -- Hedging Activities" below.
The following tables set forth, for the periods indicated, 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. Average balances are computed on a daily basis. Non-accrual
loans are included in average balances in the tables below.
11
=======================================================================================================
Three Months Ended June 30,
------------------------------------------------------------------
1996 1995
------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Cost Balance Interest Cost
- --------------------------------------------------------------------------------------------------------
Assets
- ------
Interest-earning assets:
First mortgage loans $ 8,248,821 $152,042 7.37% $ 7,430,281 $138,134 7.44%
Cooperative apartment loans 1,236,171 24,279 7.86 1,175,924 22,623 7.70
Consumer and business loans 751,041 16,760 8.97 805,756 18,873 9.39
MBS 7,769,279 124,384 6.40 9,225,345 145,512 6.31
Investment securities 579,763 8,667 6.00 441,710 7,821 7.09
Money market investments 507,332 6,683 5.21 602,415 9,070 5.96
- --------------------------------------------------------------------------------------------------------
Total interest-earning assets 19,092,407 $332,815 6.97% 19,681,431 $342,033 6.95%
Other assets 706,941 712,068
- --------------------------------------------------------------------------------------------------------
Total assets $19,799,348 $20,393,499
- --------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
- ------------------------------------
Interest-bearing liabilities:
Deposits:
Demand $ 1,108,924 $ 1,962 0.71% $ 1,055,168 $ 2,822 1.07%
Savings 2,611,096 16,328 2.52 3,021,920 18,112 2.40
Money market 2,109,065 20,477 3.90 2,185,464 23,019 4.22
Time 6,825,628 91,947 5.42 6,333,052 88,017 5.57
-------------------------------------------------------------------------------------------------------
Total deposits 12,654,713 130,714 4.15 12,595,604 131,970 4.20
Borrowed funds 6,037,688 88,023 5.77 6,702,068 106,326 6.28
- --------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 18,692,401 $218,737 4.68% 19,297,672 $238,296 4.92%
Other liabilities 117,518 155,783
Stockholders' equity 989,429 940,044
- --------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $19,799,348 $20,393,499
- --------------------------------------------------------------------------------------------------------
Net interest income $114,078 $103,737
- --------------------------------------------------------------------------------------------------------
Excess of interest-earning assets
over interest-bearing liabilities $ 400,006 $ 383,759
- --------------------------------------------------------------------------------------------------------
Interest rate spread 2.29% 2.03%
- --------------------------------------------------------------------------------------------------------
Net interest margin 2.39% 2.12%
========================================================================================================
12
========================================================================================================
Six Months Ended June 30,
------------------------------------------------------------------
1996 1995
------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Cost Balance Interest Cost
- --------------------------------------------------------------------------------------------------------
Assets
- ------
Interest-earning assets:
First mortgage loans $ 8,155,139 $301,614 7.40% $ 7,421,362 $272,154 7.33%
Cooperative apartment loans 1,232,796 48,317 7.84 1,173,823 44,331 7.55
Consumer and business loans 766,546 34,113 8.95 807,206 36,698 9.17
MBS 8,061,645 261,754 6.49 9,228,227 287,826 6.24
Investment securities 558,641 17,087 6.14 461,941 16,698 7.27
Money market investments 507,005 13,458 5.25 570,540 16,875 5.88
- --------------------------------------------------------------------------------------------------------
Total interest-earning assets 19,281,772 $676,343 7.02% 19,663,099 $674,582 6.86%
Other assets 717,679 722,953
- --------------------------------------------------------------------------------------------------------
Total assets $19,999,451 $20,386,052
- --------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
- ------------------------------------
Interest-bearing liabilities:
Deposits:
Demand $ 1,082,130 $ 4,171 0.78% $ 1,051,565 $ 5,716 1.10%
Savings 2,632,553 32,911 2.51 3,178,400 37,566 2.38
Money market 2,124,242 40,994 3.88 2,143,263 45,983 4.33
Time 6,769,689 185,435 5.51 6,262,845 165,648 5.33
-------------------------------------------------------------------------------------------------------
Total deposits 12,608,614 263,511 4.20 12,636,073 254,913 4.07
Borrowed funds 6,272,610 184,419 5.82 6,671,057 208,541 6.22
-------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 18,881,224 $447,930 4.74% 19,307,130 $463,454 4.81%
Other liabilities 128,306 154,080
Stockholders' equity 989,921 924,842
- --------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $19,999,451 $20,386,052
- --------------------------------------------------------------------------------------------------------
Net interest income $228,413 $211,128
- --------------------------------------------------------------------------------------------------------
Excess of interest-earning assets
over interest-bearing liabilities $ 400,548 $ 355,969
- --------------------------------------------------------------------------------------------------------
Interest rate spread 2.28% 2.05%
- --------------------------------------------------------------------------------------------------------
Net interest margin 2.37% 2.14%
========================================================================================================
13
The following table sets forth, for the periods indicated, the changes in
interest income and interest 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
changes in interest income and interest expense attributable to changes in both
volume and rate have been allocated proportionately to the changes due to volume
and the changes due to rate.
================================================================================================
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ------------------------------
1996 versus 1995 1996 versus 1995
----------------------------- -------------------------------
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 $ 15,097 $ (1,189) $ 13,908 $ 27,120 $ 2,340 $ 29,460
Cooperative apartment loans 1,176 480 1,656 2,275 1,711 3,986
Consumer and business loans (1,246) (867) (2,113) (1,821) (764) (2,585)
MBS (23,281) 2,153 (21,128) (37,512) 11,440 (26,072)
Investment securities 2,190 (1,344) 846 3,186 (2,797) 389
Money market investments (1,332) (1,055) (2,387) (1,779) (1,638) (3,417)
- ------------------------------------------------------------------------------------------------
Total interest income (7,396) (1,822) (9,218) (8,531) 10,292 1,761
- ------------------------------------------------------------------------------------------------
Interest expense:
Deposits:
Demand 137 (997) (860) 162 (1,707) (1,545)
Savings (2,543) 759 (1,784) (6,730) 2,075 (4,655)
Money market (785) (1,757) (2,542) (405) (4,584) (4,989)
Time 6,695 (2,765) 3,930 13,737 6,050 19,787
- -------------------------------------------------------------------------------------------------
Total deposits 3,504 (4,760) (1,256) 6,764 1,834 8,598
Borrowed funds (10,070) (8,233) (18,303) (12,084) (12,038) (24,122)
- -------------------------------------------------------------------------------------------------
Total interest expense (6,566) (12,993) (19,559) (5,320) (10,204) (15,524)
- ------------------------------------------------------------------------------------------------
Net interest income $ (830) $ 11,171 $ 10,341 $ (3,211) $ 20,496 $ 17,285
=================================================================================================
PROVISION FOR LOAN LOSSES
The Company's provision for loan losses was $10.3 million for the second quarter
of 1996, as compared with $9.9 million for the second quarter of 1995, and $20.8
million for the first six months of 1996, as compared with $19.9 million for the
corresponding prior year period. 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 its allowance for
loan losses, which reflects, among other factors, assumptions with respect to
projected future performance of the Company's loan portfolio in light of
economic conditions and then-current loss experience.
NON-INTEREST INCOME
The following table sets forth the components of non-interest income for the
three months and six months ended June 30, 1996 and 1995.
===============================================================================
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------
(In thousands) 1996 1995 1996 1995
- --------------------------------------------------------------------------------
Loan servicing fees, net $ 6,926 $ 7,535 $14,589 $15,809
Securities and insurance brokerage fees 5,633 4,275 10,307 7,715
Net (losses) gains on sales activities (1,906) 1,215 (1,445) 10,890
Other 10,918 7,933 19,457 16,139
- --------------------------------------------------------------------------------
Total non-interest income $21,571 $20,958 $42,908 $50,553
================================================================================
Loan servicing fees, net, amounted to $6.9 million for the second quarter of
1996 and $14.6 million for the first six months of 1996, representing declines
from the corresponding periods one year ago of $0.6 million and $1.2 million,
respectively. These declines were largely attributable to a reduction in the
average loan servicing fee, together with increases in certain loan servicing
expenses, which are reflected as a component of loan servicing fees, net. At
June 30, 1996, the loans serviced for others
14
portfolio was $9.2 billion, up from $9.0 billion one year earlier, but down from
$9.5 billion at December 31, 1995.
Securities and insurance brokerage fees amounted to $5.6 million for the second
quarter of 1996, an increase of $1.4 million, or 31.8%, relative to the first
quarter of 1995. For the first six months of 1996, securities and insurance
brokerage fees amounted to $10.3 million, up $2.6 million, or 33.6%, as compared
with the same period one year ago. New sales initiatives, together with an
expansion of the Company's sales force, were the predominant factors
contributing to the improvements.
The Company recognized net losses on sales activities of $1.9 million and $1.4
million for the three and six month periods ended June 30, 1996, respectively,
as compared with net gains for the three and six month periods ended June 30,
1995 of $1.2 million and $10.9 million, respectively. The change between the
first six months of 1996 and 1995 was principally attributable to net gains of
$18.7 million associated with branch sales during the 1995 period, substantially
all of which were recognized in the first quarter of 1995, the impact of which
was mitigated by $6.2 million of losses during the first quarter of 1995
resulting from the write-down of certain operating facilities. Included in the
net losses for the first six months of 1996 was a $0.6 million loss on sales of
$1.0 billion of MBS during the first quarter of 1996 in connection with the
Balance Sheet Restructuring Plan and a $1.2 million loss recognized during the
second quarter of 1996 associated with an other than temporary impairment in
value of certain MBS (see "Management of Credit Risk -- MBS" below). In
connection with its sales of loans into the secondary market as part of its
mortgage banking activities, the Company recognized net losses of $0.4 million
for the second quarter of 1996, as compared with net gains of $0.3 million for
the second quarter of 1995, and net gains of $1.5 million for the six months
ended June 30, 1996, as compared with net gains of $0.1 million for the
comparable period in 1995. Sales of loans into the secondary market amounted to
$275.7 million and $640.0 million during the three months and six months ended
June 30, 1996, respectively, as compared with $49.9 million and $93.9 million
during the respective prior year periods. The following table summarizes net
(losses) gains on sales activities for the three months and six months ended
June 30, 1996 and 1995.
=================================================================================
Three Months Ended Six Months Ended
June 30, June 30,
-----------------------------------------
(In thousands) 1996 1995 1996 1995
- ---------------------------------------------------------------------------------
Net (losses) gains on:
Sales of loans held for sale $ (432) $ 251 $ 1,463 $ 97
Sales, calls and revaluations of (1,164) (66) (1,836) (1,975)
securities
Sales of branches -- 616 -- 18,655
Sales of mortgage servicing rights -- 359 -- 359
Other (310) 55 (1,072) (6,246)
- ----------------------------------------------------------------------------------
Total net (losses) gains on sales $(1,906) $1,215 $(1,445) $10,890
activities
==================================================================================
Other non-interest income amounted to $10.9 million for the second quarter of
1996 and $19.5 million for the six months ended June 30, 1996, representing
increases of $3.0 million and $3.3 million, respectively, as compared with the
same periods one year ago. Contributing significantly to these improvements was
growth in banking service fees, largely due to changes in the fee structure, to
$6.5 million for the 1996 second quarter, an increase of $1.3 million as
compared with the 1995 second quarter, and to $13.2 million for the first six
months of 1996, an increase of $2.9 million as compared with the first six
months of 1995. In addition, the Company, during the second quarter of 1996,
recognized $1.0 million of income in connection with the settlement of certain
litigation.
15
NON-INTEREST EXPENSE
The following table sets forth the components of non-interest expense for the
three months and six months ended June 30, 1996 and 1995.
================================================================================
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------
(In thousands) 1996 1995 1996 1995
- --------------------------------------------------------------------------------
G&A expense:
Compensation and employee benefits $31,815 $33,552 $ 65,791 $ 70,965
Occupancy and equipment, net 13,434 15,043 26,209 30,453
Federal deposit insurance premiums 2,875 7,700 5,750 15,405
Other 22,709 18,769 43,277 37,134
- --------------------------------------------------------------------------------
Total G&A expense 70,833 75,064 141,027 153,957
Other real estate owned ("ORE") 2,159 3,340 4,652 7,016
expense, net
Amortization of mortgage servicing 2,879 2,921 6,073 5,685
rights ("MSR")
Restructuring and merger-related expense -- 1,438 3,504 3,163
- --------------------------------------------------------------------------------
Total non-interest expense $75,871 $82,763 $155,256 $169,821
================================================================================
G&A Expense
G&A expense amounted to $70.8 million for the second quarter of 1996, a decline
of $4.2 million, or 5.6%, as compared with the second quarter of 1995. For the
six months ended June 30, 1996, G&A expense amounted to $141.0 million, a
decline of $12.9 million, or 8.4%, as compared with the corresponding period in
1995. The declines in G&A expense primarily reflect the realization of cost
savings associated with the merger in January 1995 of Anchor Bancorp, Inc.
("Anchor") and its savings bank subsidiary, Anchor Savings Bank FSB ("Anchor
Savings"), with and into the Holding Company and the Bank, respectively (the
"Merger"), together with the impact of the reduced assessment rate on the
portion of the Bank's deposits insured by the Bank Insurance Fund ("BIF") of the
FDIC (see below). Limiting the effect of these factors were the additional
expenses associated with the expansion of the Company's residential property
loan origination capabilities, including through the acquisition, during the
fourth quarter of 1995, of the residential property loan origination businesses
of National Mortgage Investments Co., Inc., headquartered in Griffin, Georgia,
and James Madison Mortgage Co., headquartered in Fairfax, Virginia (the
"National and Madison Acquisitions"). G&A expense, as a percentage of total
average assets, improved to 1.43% for the second quarter of 1996 from 1.47% for
the second quarter of 1995 and to 1.41% for the first six months of 1996 from
1.51% for the comparable 1995 period. These improvements were limited by the
decline in total average assets, due to the Balance Sheet Restructuring, of
$594.2 million and $386.6 million for the three and six month periods ended June
30, 1996, respectively, as compared with the same periods one year ago.
Compensation and employee benefits expense amounted to $31.8 million for the
second quarter of 1996 and $65.8 million for the six months ended June 30, 1996,
representing reductions, as compared with the corresponding periods in 1995, of
$1.7 million, or 5.2%, and $5.2 million, or 7.3%, respectively. These declines
were principally attributable to the staff reductions associated with the Merger
and increased deferrals of the expense associated with loan originations due to
higher loan origination levels during the 1996 periods as compared with the 1995
periods. The impact of these factors was partially offset by additions to the
employee complement resulting from the National and Madison Acquisitions, a
higher level of securities and insurance brokerage commissions commensurate with
increased sales volume and a greater use of temporary employment services. The
Company's full-time equivalent employee complement was 2,903 at June 30, 1996,
as compared with 2,847 one year earlier and approximately 3,200 at the date of
the Merger.
Occupancy and equipment expense, net, declined to $13.4 million for the 1996
second quarter and to $26.2 million for the six months ended June 30, 1996 from
$15.0 million and $30.5 million for the three and six month periods ended June
30, 1995, respectively. The declines of $1.6 million, or 10.7%, and $4.2
million, or 13.9%, for the three and six month periods ended June 30, 1996,
respectively, as compared with the corresponding periods in 1995, were
substantially attributable to the sale of five of the Bank's branches, the
consolidation of 18 branches into nine branches, and other Merger-related cost
savings initiatives. The benefits derived from these Merger-related cost savings
were partially offset by the impact of the National and Madison Acquisitions.
16
Federal deposit insurance premiums expense totaled $2.9 million for the second
quarter of 1996, a decrease of $4.8 million as compared with the second quarter
of 1995. For the first six months of 1996, federal deposit insurance premiums
totaled $5.8 million, a decrease of $9.7 million as compared with the same
period one year earlier. In August 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. Additionally, in November 1995,
the FDIC further lowered 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.
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 the actions by the FDIC to reduce deposit insurance premiums on BIF-insured
deposits. 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 Office of Thrift Supervision
(the "OTS"); and the elimination of the federal thrift charter. 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. In a separate,
but related, action, Congress, in August 1996, approved and sent to the
President legislation that would, among other things, generally eliminate the
potential recapture of income tax deductions arising from commonly utilized
methods of calculating bad debt reserves for periods prior to 1988 arising from
a change from a thrift to a commercial bank charter. In addition, the
legislation would repeal the reserve method of tax accounting for bad debts by
large thrift institutions, such as the Bank, effective for taxable years
beginning after 1995. The legislation also contains provisions that would
require the recapture in future periods of tax reserves for periods after 1987,
but such provisions are not expected to have a material impact on the Company's
consolidated financial statements. The Company cannot predict if such
legislation will become law.
Other G&A expense increased to $22.7 million for the three months ended June 30,
1996 from $18.8 million for second quarter of 1995 and to $43.3 million for the
six months ended June 30, 1996 from $37.1 million for the comparable period in
1995. These increases were largely attributable to higher marketing and data
processing expense, offset in part by a reduction in legal expense. The
Company's marketing expense increased $2.0 million, or 74.6%, and $3.1 million,
or 62.7%, for the three and six month periods ended June 30, 1996, respectively,
as compared with the corresponding 1995 periods, due to a major television
advertising campaign during the first six months of 1996. Data processing
expense rose $1.2 million for the three months ended June 30, 1996 and $2.6
million for the first six months of 1996, as compared with the corresponding
1995 periods, due to the outsourcing, during the first quarter of 1996, of
additional aspects of the Company's data processing operations.
ORE Expense, Net
ORE expense, net, declined $1.2 million, or 35.4%, for the second quarter of
1996 and $2.4 million, or 33.7%, for the first six months of 1996, as compared
with the corresponding periods one year ago. The level of ORE, net, amounted to
$51.8 million at June 30, 1996, a decline of $16.9 million, or 24.6%, from June
30, 1995. The following table presents the significant components of ORE
expense, net, for the three and six month periods ended June 30, 1996 and 1995.
=================================================================================
Three Months Ended Six Months Ended
June 30, June 30,
-----------------------------------------
(In thousands) 1996 1995 1996 1995
- ---------------------------------------------------------------------------------
Provision for losses $ 990 $1,857 $ 1,880 $3,340
Net gains on sales (524) (246) (1,030) (511)
Operating expense, net of rental income 1,693 1,729 3,802 4,187
- ---------------------------------------------------------------------------------
Total ORE expense, net $2,159 $3,340 $ 4,652 $7,016
=================================================================================
17
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 and 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.
Amortization of MSR
Amortization of MSR amounted to $2.9 million for the second quarter of 1996,
relatively unchanged from the second quarter of 1995. For the six months ended
June 30, 1996, amortization of MSR amounted to $6.1 million, up from $5.7
million for the corresponding 1995 period. During the first six months of 1996,
additions to the MSR asset amounted to $8.7 million, including $5.0 million
attributable to purchases.
Restructuring and Merger-Related Expense
Restructuring expense associated with the Merger and other Merger-related
expense amounted to $3.5 million for the first six months of 1996, all of which
was incurred during the first quarter of the year, and was principally
associated with staff reductions, the final phase of the conversion of the
Bank's retail banking computer system, and certain computer data center costs.
For the three months and six months ended June 30, 1995, the Company incurred
Merger-related expense of $1.4 million and $3.2 million, respectively, which was
primarily comprised of costs associated with announcing and communicating the
Merger to the Company's customers and the communities it serves. The Company
does not currently anticipate the recognition of any further restructuring
expense associated with the Merger or other Merger-related expense.
INCOME TAX EXPENSE
The Company recorded income tax expense of $20.5 million for the second quarter
of 1996 and $39.3 million for the first six months of 1996, up from $13.6
million and $31.2 million for the three and six month periods ended June 30,
1995, respectively. The increases are primarily reflective of higher pre-tax
income in the 1996 periods relative to the 1995 periods. The level of income tax
expense for the 1996 periods includes the recognition, during each of the first
and second quarters of the year, of favorable settlements of local income tax
issues. The Company's effective income tax rate was 41.5% for the three months
ended June 30, 1996, as compared with 42.5% for the three months ended June 30,
1995, and 41.2% for the first six months of 1996, as compared with 43.3% for the
first six months of 1995.
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.
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 the
mortgages underlying 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 rate environments as
the financial incentive to refinance mortgages is directly related to the level
of current mortgage interest rates relative to the existing note rates.
18
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
interest-bearing 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.
Lower interest rate environments may also present interest rate exposure.
Generally, lower interest rate environments tend to accelerate mortgage
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 the related assets to decline from anticipated
levels. The Company is also subject to interest rate risk 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 interest-earning assets and the cost of its
interest-bearing liabilities are based ("basis risk").
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 $18.8 billion at
June 30, 1996, approximately $12.6 billion, or 68%, were adjustable-rate. Of
such adjustable-rate assets, approximately 47% 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 (see "Hedging Activities"
below).
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 June 30, 1996 and December 31, 1995 were interest rate swaps, caps
and floors, forward contracts, and options on certain of these instruments. With
the exception of interest rate floors hedging certain MSR, the derivative
financial instruments utilized by the Company provide protection from rising
interest rates.
19
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 June 30, 1996 and December 31, 1995.
=========================================================================================
June 30, 1996 December 31, 1995
-------------------------------------------------
Notional Estimated Notional Estimated
(In thousands) Amount Fair Value Amount Fair Value
- -----------------------------------------------------------------------------------------
Interest rate swaps hedging:
Loans receivable $ 195,601 $ (538) $ 212,747 $(2,195)
Deposits -- -- 150,000 533
Borrowings 923,000 3,106 928,000 (4,837)
- -----------------------------------------------------------------------------------------
Total interest rate swaps 1,118,601 2,568 1,290,747 (6,499)
- -----------------------------------------------------------------------------------------
Interest rate caps hedging:
Loans receivable 495,781 1,329 -- --
MBS available for sale 224,428 601 877,118 961
MBS held to maturity 299,917 804 366,061 401
Borrowings 250,000 3,596 -- --
- -----------------------------------------------------------------------------------------
Total interest rate caps 1,270,126 6,330 1,243,179 1,362
- -----------------------------------------------------------------------------------------
Interest rate floors hedging:
MSR 1,110,868 84 1,219,776 1,026
- -----------------------------------------------------------------------------------------
Total interest rate floors 1,110,868 84 1,219,776 1,026
- -----------------------------------------------------------------------------------------
Forward contracts hedging:
Loans held for sale 178,023 (1,174) 69,676 (709)
- ------------------------------------------------------------------------------------------
Total forward contracts 178,023 (1,174) 69,676 (709)
- -----------------------------------------------------------------------------------------
Options hedging:
Loans held for sale 12,500 43 10,000 22
Borrowings 20,000 206 37,000 70
- -----------------------------------------------------------------------------------------
Total options 32,500 249 47,000 92
- -----------------------------------------------------------------------------------------
Total derivative financial instruments $3,710,118 $ 8,057 $3,870,378 $(4,728)
=========================================================================================
All of the Company's outstanding interest rate swap agreements at June 30, 1996
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 following table sets forth the contractual
maturities of the Company's interest rate swap agreements outstanding at June
30, 1996 by category of asset or liability 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 $112,199 $ 43,202 $ 5,100 $24,700 $10,400 $ 195,601
Variable-rate receivable 5.47% 5.47% 5.54% 5.56% 5.54% 5.48%
Fixed-rate payable 4.59 5.01 7.38 8.04 7.38 5.34
Borrowings:
Notional amount $473,000 $390,000 $30,000 $30,000 $ -- $ 923,000
Variable-rate receivable 5.48% 5.56% 5.47% 5.50% --% 5.51%
Fixed-rate payable 5.96 5.35 6.24 7.06 -- 5.75
- -----------------------------------------------------------------------------------------------
Total:
Notional amount $585,199 $433,202 $35,100 $54,700 $10,400 $1,118,601
Variable-rate receivable 5.48% 5.55% 5.48% 5.53% 5.54% 5.51%
Fixed-rate payable 5.70 5.32 6.41 7.50 7.38 5.68
===============================================================================================
The Company has entered into interest rate cap agreements with a notional value
of $1.0 billion to hedge the periodic and lifetime interest rate caps embedded
in certain of its adjustable-rate loans and MBS. Each such agreement 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 5.70% at June 30, 1996, and the specified interest rates at
that date were 7.50% and 8.50% and averaged 8.00%. The Company has also entered
into interest rate cap agreements with a notional amount of $250.0 million to
hedge certain fixed-rate borrowings that mature on a monthly basis. These
agreements provide for the Company to receive cash payments, in exchange for a
premium paid to the issuing counterparty at inception, when the one-month LIBOR,
which was 5.50% at June 30, 1996, rises above 7.50%.
20
In connection with the Company's interest rate floor agreements, which 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, 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
6.47% and 6.73%, respectively, at June 30, 1996, declines below a designated
interest rate. The designated interest rates at June 30, 1996 ranged from 5.27%
to 5.65% and averaged 5.50%.
Unamortized net deferred losses on closed derivative financial instrument
contracts amounted to $29.1 million at June 30, 1996, as compared with $35.4
million at year-end 1995, and are being amortized to operations over the
duration of the related asset or liability being hedged. Unamortized premiums on
open derivative financial instrument contracts amounted to $10.8 million and
$7.8 million at June 30, 1996 and December 31, 1995, respectively. Such premiums
are amortized to operations over the terms of the related derivative financial
instruments.
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 instruments
possess market risk in their own right. The Company has established internal
policies that define the extent of historical correlation between a proposed
hedge and the item to be hedged prior to the use of a 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 a discussion of the credit risk associated with the Company's derivative
financial instruments, see "Management of Credit Risk -- Derivative Financial
Instruments" below.
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.
Positive or low negative gap ratios generally indicate that an institution is
less sensitive 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 June 30, 1996, the Company had a one-year negative gap, including the effect
of hedging activities, of $2.4 billion, or 12.6% of total interest-earning
assets, as compared with a negative gap of $2.1 billion, or 10.6% of total
interest-earning assets, at December 31, 1995. The following table reflects the
repricing of the Company's interest-earning assets and interest-bearing
liabilities at June 30, 1996. 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, despite a recent increase in their sensitivity to
changes in market interest rates, have been spread ratably over a 20-year period
based on the assumption that they are essentially core deposits and in the
aggregate have generally not been sensitive, on a historical basis, to
fluctuations in market interest rates. If all savings accounts were
21
included in the "One Year or Less" category, the Company would have had a one-
year negative gap at June 30, 1996 of $4.80 billion, or 25.7% of total interest-
earning assets.
===================================================================================
June 30, 1996
------------------------------------------------
More Than
One Year One Through More Than
(Dollars in millions) or Less Three Years Three Years Total
- ------------------------------------------------------------------------------------
Interest-earning assets:
Loans $ 5,502 $2,661 $2,173 $10,336
MBS 5,994 1,016 855 7,865
Other 26 37 509 572
- ------------------------------------------------------------------------------------
Total interest-earning assets 11,522 3,714 3,537 18,773
- ------------------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits 9,041 1,138 2,483 12,662
Borrowed funds 5,366 18 346 5,730
- ------------------------------------------------------------------------------------
Total interest-bearing liabilities 14,407 1,156 2,829 18,392
- ------------------------------------------------------------------------------------
Impact of hedging activities (515) 450 65 --
- ------------------------------------------------------------------------------------
Gap (repricing difference) $(2,370) $2,108 $ 643 $ 381
====================================================================================
Cumulative gap $(2,370) $ (262) $ 381
====================================================================================
Cumulative ratio of gap to total
interest-earning assets (12.6)% (1.4)% 2.0%
====================================================================================
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. The
Company is also subject to credit risk in connection with its utilization of
derivative financial instruments. The Company has a system of credit risk
controls and management processes by which it monitors and manages its level of
credit risk.
NON-PERFORMING ASSETS AND LOANS MODIFIED IN A TROUBLED DEBT RESTRUCTURING
("TDR")
Non-performing assets are comprised of non-accrual loans and ORE, net. Non-
accrual loans are all loans 90 days or more delinquent, as well as loans less
than 90 days past due for which there are concerns about the full collectability
of contractual principal and interest payments.
Non-performing assets amounted to $296.3 million at June 30, 1996, a decline of
$19.5 million, or 6.2%, as compared with December 31, 1995. At June 30, 1996,
non-performing assets represented 2.90% of the sum of loans receivable and ORE,
net, as compared with 3.19% at year-end 1995. Non-performing assets represented
1.52% of total assets at June 30, 1996, down from 1.55% at December 31, 1995.
The following table presents the components of non-performing assets at June 30,
1996 and December 31, 1995. Loans modified in a TDR that have demonstrated a
sufficient payment history to warrant return to performing status (generally six
months) are not included within non-accrual loans.
===================================================================
June 30, December 31,
(In thousands) 1996 1995
- --------------------------------------------------------------------
Non-accrual loans:
Residential property $205,539 $206,230
Commercial and multifamily first 26,635 34,618
mortgage
Construction 5,130 5,267
Consumer and business 7,140 9,004
- -----------------------------------------------------------------
Total non-accrual loans 244,444 255,119
- -----------------------------------------------------------------
ORE, net:
Residential property 32,538 38,799
Commercial and multifamily property 22,292 24,952
Allowance for losses (3,007) (3,070)
----------------------------------------------------------------
Total ORE, net 51,823 60,681
- -----------------------------------------------------------------
Total non-performing assets $296,267 $315,800
=================================================================
22
The balance of non-performing assets is affected 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
also, at times, has voluntarily delayed or limited certain foreclosure
proceedings in order to address consumer and other concerns in these states.
Although these actions delayed somewhat the exit of the affected loans from non-
performing status, the impact of such actions was not material. During the
second quarter of 1996, the Company resumed the scheduling and holding of
foreclosure auction sales in those states; however, the Company does not
currently anticipate that its level of ORE or results of operations will be
materially affected.
The table set forth below summarizes loans delinquent for less than 90 days,
other than those on non-accrual status, at June 30, 1996. Such loans may, to
some degree, be a leading indicator of future levels of non-performing assets.
=====================================================================
Delinquency Period
--------------------
30 - 59 60 - 89
(In thousands) Days Days Total
- ----------------------------------------------------------------------
Residential property loans $ 38,329 $ 19,310 $57,639
Commercial and multifamily first 16,246 10,218 26,464
mortgage loans
Consumer and business loans 5,399 1,765 7,164
- ----------------------------------------------------------------------
Total accruing delinquent loans $ 59,974 $ 31,293 $91,267
======================================================================
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 negotiated
individually, 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 any
particular restructuring arrangement and may enter into such an arrangement if
it believes it is economically beneficial for the Company to do so. The
following table sets forth the Company's loans that have been modified in a TDR,
excluding those classified as non-accrual loans, at June 30, 1996 and December
31, 1995.
===============================================================
June 30, December 31,
(In thousands) 1996 1995
- ----------------------------------------------------------------
Residential property loans $ 43,494 $ 43,090
Commercial and multifamily first 166,491 159,097
mortgage loans
- ----------------------------------------------------------------
Total loans modified in a TDR $209,985 $202,187
================================================================
IMPAIRED LOANS
In accordance with Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" ("SFAS 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. For a
further discussion of the Company's accounting policies associated with impaired
loans, see Note 1, Summary of Significant Accounting Policies, of Notes to
Consolidated Financial Statements in Part II, Item 8, "Financial Statements and
Supplementary Data," of the Company's Annual Report on Form 10-K/A for the year
ended December 31, 1995.
23
The following table summarizes information regarding the Company's impaired
loans at June 30, 1996 and December 31, 1995.
================================================================
June 30, December 31,
(In thousands) 1996 1995
- -----------------------------------------------------------------
Residential property loans (1):
Recorded investment:
Without a related allowance $11,854 $10,650
With a related allowance 1,345 3,170
Related allowance for loan losses (84) (198)
- -----------------------------------------------------------------
Total residential property loans 13,115 13,622
- -----------------------------------------------------------------
Commercial and multifamily first
mortgage loans (1):
Recorded investment:
Without a related allowance 8,365 7,575
With a related allowance 67,911 66,648
Related allowance for loan losses (9,259) (9,909)
- -----------------------------------------------------------------
Total commercial and multifamily first 67,017 64,314
mortgage loans
- -----------------------------------------------------------------
Business loans (2):
Recorded investment:
With a related allowance 798 741
Related allowance for loan losses (670) (660)
- -----------------------------------------------------------------
Total business loans 128 81
- -----------------------------------------------------------------
Total impaired loans, net $80,260 $78,017
=================================================================
(1) The measurement value is based upon the estimated fair value
of the underlying collateral.
(2) The measurement value is based upon the present value of
expected future cash flows.
The Company's average recorded investment in impaired loans amounted to $89.8
million and $89.3 million for the three months and six months ended June 30,
1996, respectively, as compared with $72.7 million and $75.6 million for the
three months and six months ended June 30, 1995, respectively. Interest income
recognized on impaired loans, which was not materially different from cash-basis
interest income, amounted to $0.9 million and $1.1 million for the three months
ended June 30, 1996 and 1995, respectively, and $2.0 million and $2.3 million
for the first six months of 1996 and 1995, 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 the Federal National Mortgage Association ("FNMA"). At June 30,
1996, the balance of loans sold with recourse amounted to $823.1 million, down
from $900.4 million at December 31, 1995. The Company's related maximum
potential recourse exposure was approximately $202 million at June 30, 1996, as
compared with approximately $223 million at the end of 1995. Of the loans sold
with recourse, $11.7 million were delinquent 90 days or more at June 30, 1996.
During the first six months of 1996, the Company repurchased loans sold with
recourse totaling $12.8 million.
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.
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 level of the provision for loan losses, the
Company reviews its loans receivable portfolio on at least a quarterly 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.
24
The Company's allowance for loan losses declined to $124.9 million at June 30,
1996 from $150.7 million at June 30, 1995, reflecting, in large part, a
reduction in the Company's non-accrual loans of $51.1 million during the interim
period. The allowance for loan losses represented 51.1% of non-accrual loans at
June 30, 1996, virtually unchanged from one year earlier. As a percentage of
total loans receivable, the allowance for loan losses declined to 1.23% at June
30, 1996 from 1.59% at June 30, 1995. Net charge-offs were $24.1 million for the
first six months of 1996, a reduction of $15.3 million, or 38.9%, from the
comparable 1995 period.
The following table sets forth the activity in the Company's allowance for loan
losses for the three and six month periods ended June 30, 1996 and 1995.
===================================================================================
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------------------
(In thousands) 1996 1995 1996 1995
- -----------------------------------------------------------------------------------
Balance at beginning of period $127,193 $164,669 $128,295 $170,383
Provision charged to operations 10,250 9,900 20,750 19,850
Charge-offs:
Residential property loans (10,572) (14,113) (20,439) (24,025)
Commercial and multifamily first (3,224) (10,358) (5,729) (16,736)
mortgage loans
Consumer and business loans (1,238) (2,008) (2,691) (3,691)
- -----------------------------------------------------------------------------------
Total charge-offs (15,034) (26,479) (28,859) (44,452)
- -----------------------------------------------------------------------------------
Recoveries:
Residential property loans 1,617 1,334 2,788 2,627
Commercial and multifamily first 180 680 492 730
mortgage loans
Consumer and business loans 696 640 1,436 1,606
- -----------------------------------------------------------------------------------
Total recoveries 2,493 2,654 4,716 4,963
- -----------------------------------------------------------------------------------
Net charge-offs (12,541) (23,825) (24,143) (39,489)
- -----------------------------------------------------------------------------------
Balance at end of period $124,902 $150,744 $124,902 $150,744
===================================================================================
MBS
In general, the Company's MBS carry a significantly lower credit risk than its
loans receivable. Of the aggregate carrying value of the Company's MBS held to
maturity and available for sale at June 30, 1996 of $7.9 billion, approximately
25%, in total, were issued by the Federal Home Loan Mortgage Corporation
("FHLMC"), the Government National Mortgage Association ("GNMA") and FNMA. MBS
issued by entities other than FHLMC, GNMA and FNMA ("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 $5.9 billion portfolio of Privately-Issued MBS held by the Company at
June 30, 1996 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 FHLMC,
GNMA and FNMA, 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.
During the second quarter of 1996, the Company recognized a $1.2 million loss
associated with an other than temporary impairment in value of certain
Privately-Issued MBS. The Company had incurred a $3.3 million loss associated
with an other than temporary impairment in value on the same securities during
the year ended December 31, 1995. The losses were 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 June 30, 1996, these securities, all of
which are classified as available for sale, had an estimated fair value of $53.3
million, an amortized cost of $61.8 million and an aggregate of approximately
$0.3 million in related credit enhancements. No assurance can be given that
future losses on these securities will not be incurred. Additionally, the
Company cannot predict whether losses will or will not be recognized on any
other Privately-Issued MBS currently held by the Company.
25
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. There were no past due amounts
related to the Company's derivative financial instruments at June 30, 1996 or
December 31, 1995.
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.
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.
FINANCIAL CONDITION
The Company's total assets amounted to $19.5 billion at June 30, 1996, a decline
of $0.8 billion, or 3.8%, from the level at December 31, 1995. This decline
primarily reflects a reduction in securities available for sale, largely due to
MBS sales during the first quarter of 1996 in connection with the Balance Sheet
Restructuring Plan, and securities held to maturity, the impact of which was
partially offset by growth in loans receivable.
SECURITIES
Securities available for sale, which declined from $4.1 billion at December 31,
1995 to $3.5 billion at June 30, 1996, 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
June 30, 1996, the Company's net unrealized loss on its securities available for
sale portfolio, net of related income taxes, was $19.7 million ($34.5 million on
a pre-tax basis), as compared with $5.5 million ($9.6 million on a pre-tax
basis) at December 31, 1995. During the first quarter of 1996, the Company sold
MBS available for sale with an amortized cost of $1.0 billion in connection with
the Balance Sheet Restructuring Plan. There were no other sales of securities
available for sale consummated during the six months ended June 30, 1996.
Purchases of MBS and investment securities available for sale amounted to $978.1
million and $116.5 million, respectively, during the first six months of 1996.
26
The following table summarizes the amortized cost and estimated fair value of
securities available for sale at June 30, 1996 and December 31,1995.
=======================================================================================
June 30, 1996 December 31, 1995
------------------------------------------------
Amortized Estimated Amortized Estimated
(In thousands) Cost Fair Value Cost Fair Value
- ----------------------------------------------------------------------------------------
MBS:
Pass-through securities:
Privately-issued $1,467,816 $1,447,580 $2,731,267 $2,715,097
FNMA 1,019,838 1,014,411 736,614 747,189
FHLMC 397,652 393,491 448,260 448,356
GNMA 456,341 456,986 22,625 22,525
Interest-only 2,007 1,561 2,187 1,679
- ----------------------------------------------------------------------------------------
Total MBS 3,343,654 3,314,029 3,940,953 3,934,846
- ----------------------------------------------------------------------------------------
Investment securities:
Debt securities:
U. S. government and federal agency 127,411 124,482 28,048 28,045
State and municipal 72,333 71,268 80,763 78,053
Domestic corporate 15,920 15,721 17,274 17,249
Equity securities 11,283 10,619 13,403 12,672
- ----------------------------------------------------------------------------------------
Total investment securities 226,947 222,090 139,488 136,019
- ----------------------------------------------------------------------------------------
Total securities available for sale $3,570,601 $3,536,119 $4,080,441 $4,070,865
========================================================================================
Securities held to maturity amounted to $4.6 billion at June 30, 1996, a decline
of $530.5 million from December 31, 1995. A summary of the amortized cost and
estimated fair value of securities held to maturity at June 30, 1996 and
December 31, 1995 is presented in the table below.
=======================================================================================
June 30, 1996 December 31, 1995
------------------------------------------------
Amortized Estimated Amortized Estimated
(In thousands) Cost Fair Value Cost Fair Value
- ----------------------------------------------------------------------------------------
MBS:
Privately-issued pass-through $2,778,916 $2,705,746 $3,071,166 $2,990,079
securities
Collateralized mortgage obligations:
Privately-issued 1,638,863 1,597,356 1,867,318 1,854,528
FNMA 94,433 92,487 94,636 94,492
FHLMC 39,230 38,495 49,330 49,098
- ----------------------------------------------------------------------------------------
Total MBS 4,551,442 4,434,084 5,082,450 4,988,197
- ----------------------------------------------------------------------------------------
Investment securities:
Foreign governmental debt securities 500 500 505 505
Equity securities 3,263 1,974 2,781 1,862
- ----------------------------------------------------------------------------------------
Total investment securities 3,763 2,474 3,286 2,367
- ----------------------------------------------------------------------------------------
Total securities held to maturity $4,555,205 $4,436,558 $5,085,736 $4,990,564
========================================================================================
LOANS
Total loans receivable, exclusive of the allowance for loan losses, amounted to
$10.2 billion at June 30, 1996, an increase of $349.4 million from December 31,
1995. This increase was primarily attributable to growth in the first mortgage
loans receivable portfolio to $8.2 billion at June 30, 1996 from $7.8 billion at
year-end 1995. At June 30, 1996, as compared with December 31, 1995, the
cooperative apartment loans receivable portfolio increased $12.4 million, while
the consumer and business loans receivable portfolio declined $52.3 million. The
consumer and business loan portfolio decline occurred, despite originations of
$164.9 million during the period, due to portfolio runoff.
27
The following table presents a summary of loans receivable at June 30, 1996 and
December 31, 1995.
====================================================================
June 30, December 31,
(In thousands) 1996 1995
- --------------------------------------------------------------------
First mortgage loans:
Principal balances:
Residential $ 6,341,560 $5,925,050
Commercial and multifamily 1,784,909 1,813,344
Construction 56,719 68,901
- --------------------------------------------------------------------
Total principal balances 8,183,188 7,807,295
Undisbursed funds on loans in process (19,760) (24,369)
Net deferred yield adjustments 46,578 37,754
- --------------------------------------------------------------------
Total first mortgage loans 8,210,006 7,820,680
- --------------------------------------------------------------------
Cooperative apartment loans:
Principal balances 1,226,557 1,214,812
Net deferred yield adjustments 2,839 2,218
- --------------------------------------------------------------------
Total cooperative apartment loans 1,229,396 1,217,030
- --------------------------------------------------------------------
Consumer and business loans:
Principal balances:
Home equity 461,830 494,528
Manufactured home 69,421 78,319
Automobile 49,159 53,947
Loans secured by deposit accounts 38,737 40,578
Other consumer 78,769 85,915
Business 33,531 35,189
-------------------------------------------------------------------
Total principal balances 731,447 788,476
Net deferred yield adjustments 8,885 4,127
- --------------------------------------------------------------------
Total consumer and business loans 740,332 792,603
- --------------------------------------------------------------------
Total loans receivable $10,179,734 $9,830,313
====================================================================
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 $156.2 million at June 30, 1996 from
$139.4 million at December 31, 1995.
The Company's total loan production increased $0.4 billion for the second
quarter of 1996 and $1.1 billion for the first six months of 1996, as compared
with the corresponding periods in 1995. Such increases were substantially
attributable to increased production of residential property loans due to, among
other factors, the expansion of the Company's loan production capabilities
during the fourth quarter of 1995 principally as a result of the National and
Madison Acquisitions. However, the level of residential loan production for the
second quarter of 1996 declined $198.1 million, or 21.9%, from the first quarter
of 1996, largely attributable to a reduction in refinancing activity as a result
of the interest rate environment.
The following table summarizes the Company's loan production, both for portfolio
and for sale in the secondary market, for the three months and six months ended
June 30, 1996 and 1995.
==================================================================================
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------------------
(In thousands) 1996 1995 1996 1995
- -----------------------------------------------------------------------------------
Residential property loan production:
First mortgage loans originated $609,989 $265,034 $1,326,787 $357,662
First mortgage loans purchased 21,369 22,915 152,485 78,142
Cooperative apartment loans originated 75,464 45,054 132,458 77,298
- -----------------------------------------------------------------------------------
Total residential property loan 706,822 333,003 1,611,730 513,102
production
- -----------------------------------------------------------------------------------
Commercial and multifamily first
mortgage loans originated 69,519 65,751 100,506 98,778
Consumer and business loans originated:
Home equity loans originated 44,832 31,906 78,585 59,922
Other consumer loans originated 36,620 41,187 76,206 79,101
Business loans originated 6,118 3,192 10,149 11,368
- -----------------------------------------------------------------------------------
Total consumer and business loans 87,570 76,285 164,940 150,391
originated
- -----------------------------------------------------------------------------------
Total loan production $863,911 $475,039 $1,877,176 $762,271
===================================================================================
28
DEPOSITS
At June 30, 1996, the Bank operated 86 branches, comprised of 85 branches in the
greater New York metropolitan area and one branch in Florida. The Bank opened
one new branch in Bronx, New York during the first quarter of 1996 and
consolidated two of its branches located in Brooklyn, New York during the second
quarter of 1996.
The following table sets forth a summary of deposits and the related weighted
average interest rates at June 30, 1996 and December 31, 1995.
===============================================================
June 30, 1996 December 31, 1995
---------------------------------------
(Dollars in thousands) Amount Rate Amount Rate
- ---------------------------------------------------------------
Deposits:
Demand $ 1,078,818 0.72% $ 1,084,966 0.74%
Savings 2,590,058 2.50 2,689,343 2.51
Money market 2,109,822 3.97 2,160,161 3.83
Time 6,882,889 5.37 6,637,733 5.70
- ---------------------------------------------------------------
Total deposits $12,661,587 4.15% $12,572,203 4.27%
===============================================================
BORROWINGS
The Company's total borrowed funds amounted to $5.7 billion at June 30, 1996,
down from $6.6 billion at December 31, 1995. The 13.4% decline was attributable
principally to the Balance Sheet Restructuring Plan.
FHLBNY advances represented 40.2% of total borrowed funds at June 30, 1996, as
compared with 69.6% of total borrowed funds at year-end 1995. The Company's
outstanding FHLBNY advances are summarized, by contractual maturity, in the
table below at June 30, 1996 and December 31, 1995.
==========================================================================================
Stated Interest Rates June 30, December 31,
(In thousands) June 30, 1996 1996 1995
- -------------------------------------------------------------------------------------------
Maturing in:
One month or less 5.50% -- 5.57% $1,138,000 $2,722,000
Over one through three months 5.48% -- 8.51% 579,700 474,700
Over three through six months 8.56% -- 8.80% 10,000 1,175,000
Over six months through one year 5.20% -- 9.35% 265,000 215,000
Over one through two years 5.76% 215,000 15,000
Over two through three years 5.85% 100,000 --
Over three years 5.76% 88 88
Net deferred rate adjustments (3,408) 1,195
- -------------------------------------------------------------------------------------------
Total FHLBNY advances $2,304,380 $4,602,983
- -------------------------------------------------------------------------------------------
Weighted average effective interest rate 5.70% 6.07%
===========================================================================================
During 1996, the Company expanded its utilization of Reverse Repurchase
Agreements as a funding source. Such borrowings increased to $3.1 billion at
June 30, 1996 from $1.6 billion at December 31, 1995. The weighted average
interest rate on the Company's Reverse Repurchase Agreements was 5.38% at June
30, 1996, as compared with 5.82% at December 31, 1995.
ACCRUED MERGER-RELATED RESTRUCTURING EXPENSE
At June 30, 1996, the Company's accrual for Merger-related restructuring expense
amounted to $5.7 million, as compared with $16.7 million at December 31, 1995.
The portion of the accrual related to severance and personnel costs declined
from $4.9 million at December 31, 1995 to $1.0 million at June 30, 1996,
reflecting a provision of $0.8 million charged to operations during the 1996
first quarter and cash payments of $4.7 million. The Company currently
anticipates that the payment of severance benefits will be largely completed by
the end of 1996.
The portion of the Merger-related restructuring accrual associated with
facilities, premises and equipment and lease obligations declined to $4.7
million at June 30, 1996 from $11.8 million at year-end 1995 as a
29
result of write-offs and cash payments. The remaining accrual balance primarily
represents the net present value of future lease obligations associated with
facilities no longer being utilized in the Company's operations. Such lease
obligations extend through the year 2008.
STOCKHOLDERS' EQUITY
The Company's stockholders' equity increased to $992.4 million, or 5.1% of total
assets, at June 30, 1996 from $976.5 million, or 4.8% of total assets, at
December 31, 1995. While the Company recorded net income of $56.0 million for
the first six months of 1996, the growth in stockholders' equity was limited
primarily by the $25.5 million cost of repurchasing shares of Common Stock (see
below) and an increase of $14.3 million in the net unrealized loss on securities
available for sale, net of related income taxes. Due to the Company's
significant balance of securities available for sale, its stockholders' equity
remains subject to volatility.
The Holding Company repurchased 2,000,000 shares of Common Stock, at an average
price of $12.73 per share, during the first six months of 1996, completing a
repurchase program announced in January 1996. As of June 30, 1996, 40,266 of the
repurchased shares had been issued in connection with the Company's stock-based
employee benefit plans, and it is expected that the remaining repurchased shares
will be also be utilized in connection with such plans.
In May 1996, the FDIC exercised the Warrant and sold the underlying 8,407,500
shares in a secondary public offering. The Holding Company incurred costs of
$1.9 million in connection with the public offering, all of which were charged
to additional paid-in-capital. The Warrant had been issued originally in July
1993 in accordance with the terms of an agreement between Anchor and the FDIC.
Pursuant to this agreement, Anchor exchanged $157.0 million of its Class A
cumulative preferred stock for $71.0 million of its newly issued 8.9375% senior
notes and a warrant to acquire, at an exercise price of $0.01 per share,
4,750,000 shares of Anchor's common stock (which was converted to a warrant to
acquire 8,407,500 shares of Common Stock at $0.01 per share upon consummation of
the Merger). 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. While the exercise of the Warrant by the
FDIC resulted in an increase in the outstanding shares of Common Stock, it did
not affect earnings per share calculations because the Warrant was considered a
Common Stock equivalent and, as such, was included in earnings per share
calculations during the period of time it was outstanding.
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.
The Company's primary sources of funds are principal payments on loans and MBS,
deposits, Reverse Repurchase Agreements, short-term borrowings from the FHLBNY,
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, as well as 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.
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 regulations of the OTS, the Bank's
primary regulator.
Pursuant to regulations promulgated by the OTS, the Bank is required to maintain
(i) a ratio of average eligible liquid 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%. For the month of
June 1996, the Bank's average liquidity ratio was 5.2% and its average short-
term liquidity ratio was 3.0%.
The following discussion pertains to the Company's Consolidated Statements of
Cash Flows.
30
The Company's cash and cash equivalents amounted to $189.3 million at June 30,
1996, down $46.0 million from December 31, 1995. For the first six months of
1996, net cash provided by operating activities and investing activities
amounted to $136.2 million and $638.8 million, respectively, while net cash used
by financing activities amounted to $821.0 million.
During the six months ended June 30, 1996, the Company's aggregate cash inflows
from loan and MBS principal repayments amounted to $1.9 billion, as compared
with $1.1 billion during the corresponding period in 1995. While principal
amortization on these assets is a relatively predictable source of liquidity,
principal prepayments on the Company's loan and MBS portfolios have been, and
will continue to be, significantly affected by the interest rate environment.
Principal uses of funds by the Company for the first six months of 1996 were the
origination or purchase of loans and the purchase of MBS (see "Financial
Condition -- Loans" and "Financial Condition -- Securities," respectively).
REGULATORY CAPITAL
The following table illustrates the regulatory capital position of the Bank at
June 30, 1996 pursuant to OTS requirements promulgated under the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA").
==================================================================================================================================
Capital in
Capital Requirement Bank Capital Excess of
----------------------------------------------------------------------------------
(Dollars in thousands) Amount Percentage (1) Amount Percentage (1) Requirement
- ----------------------------------------------------------------------------------------------------------------------------------
Tangible $292,030 1.50% $1,111,474 5.71% $819,444
Leverage 584,061 3.00 1,111,474 5.71 527,413
Risk-based 757,022 8.00 1,229,840 13.00 472,818
==================================================================================================================================
(1) For tangible and leverage capital, the percentage is to adjusted total assets of $19.5 billion. For risk-based capital, the
percentage is to total risk-weighted assets of $9.5 billion.
Under the prompt corrective action regulations adopted by the OTS pursuant to
the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), an
institution is considered well capitalized, the highest of five categories, if
it has 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 it is not subject to an order,
written agreement, capital directive, or prompt corrective action directive to
meet and maintain a specific capital level for any capital measure. At June 30,
1996, the Bank met the published standards for a well capitalized designation
under these regulations with a leverage capital ratio of 5.71%, a tier 1 risk-
based capital ratio of 11.75% and a total risk-based capital ratio of 13.00%.
31
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
For a discussion of a press release issued by the Holding Company announcing
that the Bank is no longer a target of an investigation by the United States
Attorney's Office for the District of New Hampshire and the New England Bank
Fraud Task Force of the United States Department of Justice, see "Part II. Other
Information -- Item 1. Legal Proceedings" in the Holding Company's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 1996.
For a discussion of the dismissal, with prejudice, pursuant to a settlement of
the action entitled Robert and Jennifer Grunbeck v. The Dime Savings Bank of
--------------------------------------------------------
N.Y., FSB, see "Part II. Other Information -- Item 1. Legal Proceedings" in the
- ---------
Holding Company's Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1996.
On January 13, 1995, Anchor Savings filed suit in the United States Court
of Federal Claims against the United States for breach of contract and taking of
property without compensation in contravention of the Fifth Amendment to the
United States Constitution. The action arose because the passage of FIRREA and
the regulations adopted by the OTS pursuant to FIRREA deprived Anchor Savings of
the ability to include supervisory goodwill and certain other assets for
purposes of computing its regulatory capital as the Federal Savings and Loan
Insurance Corporation ("FSLIC") had agreed it could. The direct effect was to
cause Anchor Savings to go from an institution that substantially exceeded its
regulatory capital requirements to one that was critically undercapitalized upon
the effectiveness of the FIRREA-mandated requirements.
From 1982 to 1985, Anchor Savings had acquired eight FSLIC-insured
institutions that were in danger of failing and causing a loss to the FSLIC.
Four institutions were acquired with some financial assistance from the FSLIC
and four were unassisted "supervisory" cases. In acquiring the institutions,
Anchor Savings assumed liabilities determined to exceed the assets it acquired
by over $600 million at the dates of the respective acquisitions. The
difference between the fair values of the assets acquired and the liabilities
assumed in the transactions was recorded on Anchor Savings' books as goodwill.
At the time of these acquisitions, the FSLIC had agreed that this supervisory
goodwill was to be amortized over periods of up to 40 years. Without that
agreement, Anchor Savings would not have made the acquisitions. When the
capital regulations imposed under FIRREA became effective, Anchor Savings still
had over $470 million of supervisory goodwill on its books and approximately 20
years remaining to amortize it under the agreements with the FSLIC. The FIRREA
capital requirements excluded all but approximately $124 million of Anchor
Savings' supervisory goodwill and also, until the formation of Anchor in 1991,
excluded $157 million associated with preferred stock issued to the FSLIC as a
result of one of the acquisitions. FIRREA also required the remaining
supervisory goodwill to be eliminated by December 31, 1994. The elimination of
the supervisory goodwill resulted in severe limitations on Anchor Savings'
activities and required the disposition of valuable assets under liquidation-
like circumstances, as a result of which Anchor Savings was damaged. The
complaint asks that the government make Anchor Savings whole for the effects of
the loss, which are estimated to exceed substantially the goodwill remaining at
the time FIRREA was enacted.
There are approximately 120 cases involving similar issues pending in the
United States Court of Federal Claims, which has entered summary judgment for
the plaintiffs as to liability, but not damages, in three of the cases. Those
cases, referred to as the Winstar cases, were appealed to the United States
Supreme Court, which, on July 1, 1996, affirmed the decision that the government
was liable for breach of contract.
The Anchor Savings claim had been stayed, pending the decision of the
United States Supreme Court in the three Winstar cases. Currently, all of the
Winstar-related cases are stayed while the Court of Federal Claims establishes
procedures to allow them to proceed. Although a hearing has been scheduled for
August 19, 1996 before the Chief Judge on the procedural matters, no assurance
can be given as to the schedule that will be followed in the action.
There have been no decisions determining damages in any of the supervisory
goodwill cases, and it is impossible to predict the measure of damages that will
be applied by the Court in cases in which liability is found.
32
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
The Holding Company's Annual Meeting of Stockholders was held on May 7, 1996
(the "Annual Meeting"). The following matters received the number of affirmative
votes, negative votes, withheld votes, abstentions, and broker non-votes set
forth below.
(a) Election of five directors:
The following individuals were duly elected as directors of the Holding Company
for three year terms:
Affirmative Withheld
Votes Votes
--------------------- -------------------
Derrick D. Cephas 83,968,140 1,502,041
Richard W. Dalrymple 83,996,775 1,473,406
Margaret G. Osmer-McQuade 83,956,605 1,513,576
Howard Smith 83,972,866 1,497,315
Ira T. Wender 83,954,377 1,515,804
(b) A proposal regarding certain amendments to the Holding Company's 1991 Stock
Incentive Plan was approved after receiving 70,058,027 affirmative votes,
which was more than a majority of the shares of Common Stock represented, in
person or by proxy, at the Annual Meeting. This proposal also received
14,124,118 negative votes and 0 withheld votes, with 1,288,035 abstentions
and 0 broker non-votes.
(c) The appointment of KPMG Peat Marwick LLP as independent public accountants
was ratified after receiving 84,549,514 affirmative votes, which was more
than a majority of the shares of Common Stock represented, in person or by
proxy, at the Annual Meeting. This proposal also received 575,100 negative
votes and 0 withheld votes, with 345,566 abstentions and 0 broker non-votes.
(d) A stockholder proposal regarding declassification of the Holding Company's
Board of Directors received 26,201,305 affirmative votes, which was less
than a majority of the shares of Common Stock represented, in person or by
proxy, at the Annual Meeting, and thus was not adopted. This proposal also
received 34,386,148 negative votes and 0 withheld votes, with 4,476,417
abstentions and 20,406,310 broker non-votes.
(e) A stockholder proposal regarding non-employee director retirement benefits
received 26,643,200 affirmative votes, which was less than a majority of the
shares of Common Stock represented, in person or by proxy, at the Annual
Meeting, and thus was not adopted. This proposal also received 34,485,558
negative votes and 0 withheld votes, with 3,935,112 abstentions and
20,406,310 broker non-votes.
33
ITEM 5. OTHER INFORMATION
-----------------
In June 1996, the Company announced the retirement, effective at the end of
1996, of James M. Large, Jr. as Chief Executive Officer of the Holding Company
and Chief Executive Officer and Chairman of the Board of the Bank. Mr. Large
will remain as Chairman of the Board of the Holding Company. Upon the
retirement of Mr. Large, the positions of Chief Executive Officer of each of the
Holding Company and the Bank and Chairman of the Board of the Bank will be
assumed by Lawrence J. Toal, who will retain his current positions of President
and Chief Operating Officer of each of the Holding Company and the Bank.
During the second quarter of 1996, the Company announced that, effective August
1, 1996, David E. Sparks was appointed Chief Financial Officer of the Holding
Company and the Bank.
During the second quarter of 1996, John V. Brull retired as the Principal
Financial Executive of the Company and Jenne K. Britell announced her
resignation, effective July 12, 1996, as the Company's General Manager of
Mortgage Banking. A successor to Ms. Britell has not yet been named.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
Exhibit 27 -- Financial Data Schedule
(b) Reports on Form 8-K
On April 26, 1996, the Holding Company filed with the Securities and
Exchange Commission a Current Report on Form 8-K, which reported that, on
April 25, 1996, it issued a press release announcing its preliminary
financial results for the first quarter of 1996.
On May 21, 1996, the Holding Company filed with the Securities and
Exchange Commission a Current Report on Form 8-K, which reported that, on
May 16, 1996, the Holding Company entered into a purchase agreement with
the FDIC and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated in connection with the exercise of the Warrant and sale of
the underlying shares of Common Stock by the FDIC in a secondary public
offering.
34
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIME BANCORP, INC.
(Registrant)
Dated: August 13, 1996 By: /s/ James M. Large, Jr.
--------------- -----------------------
James M. Large, Jr.
Chairman of the Board
and Chief Executive Officer
Dated: August 13, 1996 By: /s/ Harold E. Reynolds
--------------- ----------------------
Harold E. Reynolds
Senior Vice President
and Controller
(Chief Accounting Officer)
35
EXHIBIT INDEX
EXHIBIT
NUMBER IDENTIFICATION OF EXHIBIT
- ------ -------------------------
27 Financial Data Schedule (filed electronically only)
36